Generac reports record 2Q results
Strong domestic end market demand continues; Potential California outages driving additional upside to 2019 outlook.
Generac Holdings Inc. (NYSE: GNRC) (“Generac” or the “Company”), a leading global designer and manufacturer of energy solutions and other power products, today reported financial results for its second quarter ended June 30, 2019.
Second quarter 2019 highlights
- Net sales increased 8.9% to $541.9 million during the second quarter of 2019 as compared to $497.6 million in the prior-year second quarter. Core sales growth, which excludes both the impact of acquisitions and foreign currency, was approximately 7%.
- Residential product sales increased 8.9% to $268.4 million as compared to $246.4 million last year, with core sales growth of approximately 8%.
- Commercial & Industrial (“C&I”) product sales increased 6.9% to $230.4 million as compared to $215.6 million in the prior year, with core sales growth of approximately 6%.
- Net income attributable to the Company during the second quarter was $62.0 million, or $0.98 per share, as compared to $53.3 million, or $0.82per share, for the same period of 2018.
- Adjusted net income attributable to the Company, as defined in the accompanying reconciliation schedules, was $74.9 million, or $1.20 per share, as compared to $68.9 million, or $1.11 per share, in the second quarter of 2018.
- Adjusted EBITDA before deducting for noncontrolling interests, as defined in the accompanying reconciliation schedules, was $111.9 million, or 20.6% of net sales, as compared to $102.2 million, or 20.5% of net sales, in the prior year.
“Domestic end market demand for both residential and C&I standby generators continued to be very favorable as our strong execution led to record sales and EBITDA in the second quarter,” says Aaron Jagdfeld, president and chief executive officer. “As we continue to drive the company’s strategy forward, we remain focused on a number of key macro growth themes, which include expanding awareness around the need for backup power, improving 5G network reliability, developing the global opportunity for natural gas power generation, and most recently entering the rapidly growing clean energy market. In addition, we stand ready to execute should a major power outage event occur anywhere in North America, be it a landed hurricane or a utility shutoff in California.”
Additional second quarter 2019 consolidated highlights
Gross profit margin was 36.1% compared to 35.9% in the prior-year second quarter. Favorable sales mix and pricing actions were partially offset by realization of higher input costs, including regulatory tariffs, logistics costs, labor rates and commodities.
Operating expenses increased $11.9 million, or 12.8%, as compared to the second quarter of 2018. The increase was primarily driven by recurring operating expenses from recent acquisitions, an increase in employee headcount related to strategic initiatives, higher intangible amortization expenses, and higher variable costs given the increased sales volumes.
Provision for income taxes for the current year quarter was $18.8 million, or an effective tax rate of 23.4%, as compared to $18.4 million, or a 25.3% effective tax rate, for the prior year. A higher mix of domestic pre-tax income and additional stock compensation deductions drove the year-over-year decline in effective tax rate.
Cash flow from operations was $8.0 million as compared to $50.7 million in the prior year quarter. Free cash flow, as defined in the accompanying reconciliation schedules, was ($9.8) million as compared to $45.9 million in the second quarter of 2018. Higher operating earnings in the current year quarter were more than offset by additional working capital investments, the timing of tax payments and higher levels of capital expenditures compared to prior year.
Business Segment Results
• Domestic Segment
Domestic segment sales increased 11.0% to $425.9 million as compared to $383.7 million in the prior-year quarter. Core sales growth, which excludes the impact of the Neurio and Pika acquisitions, was approximately 10.4%. The current-year quarter experienced strong growth in shipments of home standby generators given continued strong end market conditions.
In addition, C&I stationary generator shipments were also strong during the quarter, primarily related to our telecom customers. The overall Domestic segment growth was partially offset by lower shipments of portable generators as the prior year quarter benefitted from channel replenishment following elevated outage activity.
Adjusted EBITDA for the segment was $104.5 million, or 24.5% of net sales, as compared to $90.6 million in the prior year, or 23.6% of net sales. Favorable sales mix, pricing initiatives and fixed operating cost leverage were partially offset by the aforementioned higher input costs, as well as increased employee costs and recurring operating expenses from recent acquisitions.
• International Segment
International segment sales increased 1.8% to $116.0 million as compared to $113.9 million in the prior-year quarter. Core sales, which excludes the impact of the Selmec and Captiva acquisitions, as well as the unfavorable impact of currency, declined by approximately 3% due to the timing of certain large projects that shipped during the prior year quarter.
Adjusted EBITDA for the segment, before deducting for noncontrolling interests, was $7.4 million, or 6.3% of net sales, as compared to $11.6 million, or 10.2% of net sales, in the prior year. Unfavorable sales mix and decreased operating leverage contributed to the decline.
Updated 2019 Outlook
The Company is increasing its prior guidance for revenue growth for full-year 2019 reflecting stronger domestic end market demand. Assuming no “major” outage events and a baseline power outage severity level similar to the longer-term average, it is raising its full-year as reported net sales growth to approximately 6 to 7%, with core sales growth now expected to be approximately 4 to 5%. In addition, should the outage environment in the second half of 2019 be higher due to an active hurricane season and widespread utility shut-offs in California, we could expect approximately 5% of incremental revenue growth.
Net income margin, before deducting for noncontrolling interests, is now expected to be approximately 11.0% for the full-year 2019, with corresponding Adjusted EBITDA margin of approximately 20.0% for the year assuming baseline power outage levels. Should the outage environment in the second half of 2019 be higher as noted above, net income margin, before deducting for noncontrolling interests, could be approximately 12.0%, with corresponding Adjusted EBITDA margin of approximately 21.0% for the full-year 2019.
Despite the slower start to the year, Operating and Free Cash Flow generation is still expected to be strong, with the conversion of adjusted net income to free cash flow expected to be approximately 80 to 90%.
SOURCE: Generac Holdings Inc.
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