Table of Contents

 

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

(Mark One)

☑	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended March 31, 2018
	OR
☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from        to

 

Commission File Number 001-34627

 

GENERAC HOLDINGS INC.

(Exact name of registrant as specified in its charter)

 

Delaware	20-5654756
(State or other jurisdiction of	(IRS Employer
incorporation or organization)	Identification No.)
S45 W29290 Hwy 59, Waukesha, WI	53189
(Address of principal executive offices)	(Zip Code)

 

(262) 544-4811

(Registrant’s telephone number, including area code)

 

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☑	Accelerated filer ☐
Non-accelerated filer ☐ (Do not check if a smaller reporting company)	Smaller reporting company ☐
Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑

 

As of April 30, 2018, there were 61,953,296 shares of registrant’s common stock outstanding.

 

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GENERAC HOLDINGS INC.

TABLE OF CONTENTS

 

		Page
PART I. FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets as of March 31, 2018 and December 31, 2017	1
	Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2018 and 2017	2
	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2018 and 2017	3
	Notes to Condensed Consolidated Financial Statements	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	25
Item 4.	Controls and Procedures	25
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	25
Item 1A.	Risk Factors	25
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	26
Item 6.	Exhibits	26
	Signatures	27

 

 

PART I. FINANCIAL INFORMATION

 

Item 1.           Financial Statements

 

Generac Holdings Inc.

Condensed Consolidated Balance Sheets

(U.S. Dollars in Thousands, Except Share and Per Share Data)

(Unaudited)

 

 

See notes to consolidated financial statements.

 

 

Generac Holdings Inc.

Condensed Consolidated Statements of Comprehensive Income

(U.S. Dollars in Thousands, Except Share and Per Share Data)

(Unaudited)

 

 

See notes to consolidated financial statements.

 

 

Generac Holdings Inc.

Condensed Consolidated Statements of Cash Flows

(U.S. Dollars in Thousands)

(Unaudited)

 

 

See notes to consolidated financial statements

 

 

Generac Holdings Inc.
Notes to Condensed Consolidated Financial Statements

(U.S. Dollars in Thousands, Except Share and Per Share Data)

(Unaudited)

 

Item 2.          Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

This quarterly report contains forward-looking statements that are subject to risks and uncertainties. Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as “anticipate,” “estimate,” “expect,” “forecast,” “project,” “plan,” “intend,” “believe,” “confident,” “may,” “should,” “can have,” “likely,” “future,” “optimistic” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events.

 

The forward-looking statements contained in this quarterly report are based on assumptions that we have made in light of our industry experience and on our perceptions of historical trends, current conditions, expected future developments and other factors we believe are appropriate under the circumstances. As you read and consider this report, you should understand that these statements are not guarantees of performance or results. They involve risks, uncertainties (some of which are beyond our control) and assumptions. Although we believe that these forward-looking statements are based on reasonable assumptions, you should be aware that many factors could affect our actual financial results and cause them to differ materially from those anticipated in the forward-looking statements. The forward-looking statements contained in this quarterly report include estimates regarding:

 

●

our business, financial and operating results, and future economic performance;

●

proposed new product and service offerings; and

●

management's goals, expectations, objectives and other similar expressions concerning matters that are not historical facts.

 

Factors that could affect our actual financial results and cause them to differ materially from those anticipated in the forward-looking statements include:

 

●

frequency and duration of power outages impacting demand for our products;

●

availability, cost and quality of raw materials and key components used in producing our products;

●

the impact on our results of possible fluctuations in interest rates, foreign currency exchange rates, commodities and product mix;

●

the possibility that the expected synergies, efficiencies and cost savings of our acquisitions will not be realized, or will not be realized within the expected time period;

●

the risk that our acquisitions will not be integrated successfully;

●

difficulties we may encounter as our business expands globally;

●

our dependence on our distribution network;

●

our ability to invest in, develop or adapt to changing technologies and manufacturing techniques;

●

loss of our key management and employees;

●

increase in product and other liability claims or recalls; and

●

changes in environmental, health and safety laws and regulations.

 

Should one or more of these risks or uncertainties materialize, or should any of these assumptions prove incorrect, our actual results may vary in material respects from those projected in any forward-looking statements. A detailed discussion of these and other factors that may affect future results is contained in our filings with the Securities and Exchange Commission, including in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2017. Stockholders, potential investors and other readers should consider these factors carefully in evaluating the forward-looking statements.

 

 

Any forward-looking statement made by us in this report speaks only as of the date on which it is made. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law.

 

Overview

 

We are a leading global designer and manufacturer of a wide range of power generation equipment and other engine powered products serving the residential, light commercial and industrial markets. Power generation is our primary focus, which differentiates us from our main competitors that also have broad operations outside of the power equipment market. As the only significant market participant focused predominantly on these products, we have one of the leading market positions in the power equipment market in North America and an expanding presence internationally. We believe we have one of the widest ranges of products in the marketplace, including residential, commercial and industrial standby generators, as well as portable and mobile generators used in a variety of applications. Other engine powered products that we design and manufacture include light towers which provide temporary lighting for various end markets; commercial and industrial mobile heaters and pumps used in the oil & gas, construction and other industrial markets; and a broad product line of outdoor power equipment for residential and commercial use.

 

Over the years, we have executed a number of acquisitions that support our strategic plan. A summary of the recent acquisitions can be found in Note 1, “Description of Business and Basis of Presentation,” to the condensed consolidated financial statements in Item 1 of this quarterly report on Form 10-Q, and in Item 8 (Note 1 “Description of Business”) of the Annual Report on Form 10-K for the year ended December 31, 2017.

 

Recent Developments

 

On February 13, 2018, we signed a purchase agreement to acquire Selmec Equipos Industriales, S.A. de C.V. (Selmec), which is headquartered in Mexico City, Mexico. Selmec, which has approximately 300 employees, is a designer and manufacturer of industrial generators ranging from 10 kW to 2,750 kW. Selmec offers a market-leading service platform and specialized engineering capabilities, together with robust integration, project management and remote monitoring services. The transaction is expected to close following receipt of required regulatory approval.

 

Business Drivers and Operational Factors

 

In operating our business and monitoring its performance, we pay attention to a number of business drivers and trends as well as operational factors. The statements in this section are based on our current expectations.

 

Business Drivers and Trends

 

Our performance is affected by the demand for reliable power generation products, mobile product solutions and other engine powered products by our customer base. This demand is influenced by several important drivers and trends affecting our industry, including the following:

 

Increasing penetration opportunity. Many potential customers are still not aware of the costs and benefits of automatic backup power solutions. We estimate that penetration rates for home standby generators are only approximately 4.0% of U.S. single-family detached, owner-occupied households with a home value of over $100,000, as defined by the U.S. Census Bureau's 2015 American Housing Survey for the United States. The decision to purchase backup power for many light-commercial buildings such as convenience stores, restaurants and gas stations is more return-on-investment driven and as a result, these applications have relatively lower penetration rates as compared to buildings used in code-driven or mission critical applications such as hospitals, wastewater treatment facilities, 911 call centers, data centers and certain industrial locations. The emergence of lower cost, cleaner burning natural gas-fueled generators has helped to increase the penetration of standby generators over the past decade in the light-commercial market. In addition, the installed base of backup power for telecommunications infrastructure is still increasing due to the growing importance for uninterrupted voice and data services. We believe by expanding our distribution network, continuing to develop our product line and targeting our marketing efforts, we can continue to build awareness and increase penetration for our standby generators for residential, commercial and industrial purposes.

 

 

Effect of large scale and baseline power disruptions. Power disruptions are an important driver of customer awareness and have historically influenced demand for generators, both in the United States and internationally. Increased frequency and duration of major power outage events, that have a broader impact beyond a localized level, increases product awareness and may drive consumers to accelerate their purchase of a standby or portable generator during the immediate and subsequent period, which we believe may last for six to twelve months following a major power outage event for standby generators. For example, the major outage events that occurred during the second half of 2017 drove strong demand for portable and home standby generators, and the increased awareness of these products contributed to strong revenue growth in 2017 and the first quarter of 2018. Major power disruptions are unpredictable by nature and, as a result, our sales levels and profitability may fluctuate from period to period. In addition, there are smaller, more localized power outages that occur frequently across the United States that drive the baseline level of demand for back-up power solutions. The level of baseline power outage activity occurring across the United States can also fluctuate, and may cause our financial results to fluctuate from year to year.

 

Impact of residential investment cycle. The market for residential generators is also affected by the residential investment cycle and overall consumer confidence and sentiment. When homeowners are confident of their household income, the value of their home and overall net worth, they are more likely to invest in their home. These trends can have an impact on demand for residential generators. Trends in the new housing market highlighted by residential housing starts can also impact demand for our residential generators. Demand for outdoor power equipment is also impacted by several of these factors, as well as weather precipitation patterns.

 

Impact of business capital investment cycles. The global market for our commercial and industrial products is affected by different capital investment cycles, which can vary across the numerous regions around the world in which we participate. These markets include non-residential building construction, durable goods and infrastructure spending as well as investments in the exploration and production of oil & gas, as businesses or organizations either add new locations or make investments to upgrade existing locations or equipment. These trends can have a material impact on demand for these products. The capital investment cycle may differ for the various commercial and industrial end markets that we serve including light commercial, retail, telecommunications, industrial, data centers, healthcare, construction, oil & gas and municipal infrastructure, among others. The market for these products is also affected by general economic and geopolitical conditions as well as credit availability in the geographic regions that we serve. In addition, we believe demand for our mobile power products will continue to benefit from a secular shift towards renting versus buying this type of equipment. We believe the passage of the Tax Act in late 2017 could have a favorable impact on future demand within many of the end markets that we serve, as the improved cash flow, liquidity and business sentiment may lead to further investments in equipment, facilities and infrastructure in the United States.

 

Factors Affecting Results of Operations

 

We are subject to various factors that can affect our results of operations, which we attempt to mitigate through factors we can control, including continued product development, expanded distribution, pricing, cost control and hedging. Certain operational and other factors that affect our business include the following:

 

Effect of commodity, currency and component price fluctuations.    Industry-wide price fluctuations of key commodities, such as steel, copper and aluminum, along with other components we use in our products, can have a material impact on our results of operations. Also, acquisitions in recent years have further expanded our commercial and operational presence outside of the United States. These acquisitions, along with our existing international presence and global supply chain, expose us to fluctuations in foreign currency exchange rates that can have a material impact on our results of operations.

 

We have historically attempted to mitigate the impact of rising commodity, currency and component prices through improved product design and sourcing, manufacturing efficiencies, price increases and select hedging transactions. Our results are also influenced by changes in fuel prices in the form of freight rates, which in some cases are accepted by our customers and in other cases are paid by us.

 

Seasonality.    Although there is demand for our products throughout the year, in each of the past five years approximately 20% to 27% of our net sales occurred in the first quarter, 22% to 25% in the second quarter, 24% to 27% in the third quarter and 25% to 29% in the fourth quarter, with different seasonality depending on the occurrence, timing and severity of major power outage activity in each year. Major outage activity is unpredictable by nature and, as a result, our sales levels and profitability may fluctuate from period to period. The seasonality experienced during a major power outage, and for the subsequent quarters following the event, will vary relative to other periods when no major outage events occurred. We maintain a flexible production and supply chain infrastructure in order to respond to outage-driven peak demand.

 

Factors influencing interest expense and cash interest expense. Interest expense can be impacted by a variety of factors, including market fluctuations in LIBOR, interest rate election periods, interest rate swap agreements, repayments or borrowings of indebtedness, and amendments to our credit agreements. Cash interest expense decreased during the three months ended March 31, 2018 compared to the three months ended March 31, 2017, primarily due to lower interest rates resulting from the May and December 2017 Term Loan amendments and the repayment of $100 million of ABL Facility borrowings, partially offset by increased borrowings at other subsidiaries and an increase in the market LIBOR rate. Refer to Note 10, “Credit Agreements,” to the condensed consolidated financial statements included in Part 1, Item 1 of this Quarterly Report on Form 10-Q for further information.

 

 

Factors influencing provision for income taxes and cash income taxes paid.   The Tax Act significantly changes how the U.S. taxes corporations. The Tax Act requires complex computations to be performed that were not previously required in U.S. tax law, significant judgments to be made in interpretation of the provisions of the Tax Act and significant estimates in calculations, and the preparation and analysis of information not previously relevant or regularly produced. The U.S. Treasury Department, the IRS, and other standard-setting bodies could interpret or issue guidance on how provisions of the Tax Act will be applied or otherwise administered that is different from our interpretation.

 

As a result of the Tax Act, we recognized a one-time, non-cash benefit of $28.4 million in the fourth quarter of 2017 primarily from the impact of the revaluation of our net deferred tax liabilities. While the Company continues to assess the full impact of the Tax Act, the preliminary analysis suggests a meaningful benefit from the legislation. Specifically for 2018, the combined federal and state effective tax rate is expected to decline to between 25 to 26%, resulting in lower cash income taxes. As we complete our analysis of the Tax Act, collect and prepare necessary data, and interpret any additional guidance, we may make adjustments to provisional amounts that we have recorded that may materially impact our provision for income taxes in the period in which the adjustments are made. Refer to Note 13, “Income Taxes,” to the consolidated financial statements in Item 8 of the Annual Report on Form 10-K for the year ended December 31, 2017 for further information on the Tax Act and its impact.

 

Further, we had approximately $470 million of tax-deductible goodwill and intangible asset amortization remaining as of December 31, 2017 related to our acquisition by CCMP Capital Advisors, LLC in 2006 that we expect to generate aggregate cash tax savings of approximately $122 million through 2021, assuming continued profitability and a 26% combined federal and state tax rate. The aggregate cash tax savings reflects a decrease of $61 million from prior estimates due to a reduction in the assumed tax rate from 39% to 26% as a result of the Tax Act. The amortization of these assets for tax purposes is expected to be $122 million annually through 2020 and $102 million in 2021, which generates annual cash tax savings of $32 million through 2020 and $26 million in 2021, assuming profitability and a 26% combined federal and state tax rate. As a result of the asset acquisition of the Magnum business in the fourth quarter of 2011, we had approximately $34 million of incremental tax deductible goodwill and intangible assets remaining as of December 31, 2017. We expect these assets to generate aggregate cash tax savings of $9.0 million through 2026 assuming continued profitability and a 26% combined federal and state tax rate. The aggregate cash tax savings reflects a decrease of $4.5 million due to a reduction in the assumed tax rate from 39% to 26% as a result of the Tax Act. The amortization of these assets for tax purposes is expected to be $3.8 million annually through 2025 and $2.8 million in 2026, which generates an additional annual cash tax savings of $1.0 million through 2025 and $0.7 million in 2026, assuming profitability and a 26% combined federal and state tax rate. Based on current business plans, we believe that our cash tax obligations through 2026 will be significantly reduced by these tax attributes. Other domestic acquisitions have resulted in additional tax deductible goodwill and intangible assets that will generate tax savings, but are not material to the Company’s consolidated financial statements.

 

Results of Operations

 

Three months ended March 31, 2018 compared to the three months ended March 31, 2017

 

The following table sets forth our consolidated statement of operations data for the periods indicated:

 

		Three Months Ended March 31,
(U.S. Dollars in thousands)		2018				2017				$ Change				% Change
Net sales		$	397,634			$	330,485			$	67,149				20.3	%
Cost of goods sold			257,645				221,685				35,960				16.2	%
Gross profit			139,989				108,800				31,189				28.7	%
Operating expenses:
Selling and service			42,682				39,467				3,215				8.1	%
Research and development			11,853				10,287				1,566				15.2	%
General and administrative			23,475				20,973				2,502				11.9	%
Amortization of intangible assets			5,632				7,183				(1,551	)			-21.6	%
Total operating expenses			83,642				77,910				5,732				7.4	%
Income from operations			56,347				30,890				25,457				82.4	%
Total other income (expense), net			(11,161	)			(10,885	)			(276	)			2.5	%
Income before provision for income taxes			45,186				20,005				25,181				125.9	%
Provision for income taxes			11,416				7,823				3,593				45.9	%
Net income			33,770				12,182				21,588				177.2	%
Net income attributable to noncontrolling interests			125				7				118				1685.7	%
Net income attributable to Generac Holdings Inc.		$	33,645			$	12,175				21,470				176.3	%

 

 

The following table sets forth our reportable segment information for the periods indicated:

 

		Net Sales
		Three Months Ended March 31,
(U.S. Dollars in thousands)		2018				2017				$ Change				% Change
Domestic		$	300,219			$	247,168				53,051				21.5	%
International			97,415				83,317				14,098				16.9	%
Total net sales		$	397,634			$	330,485				67,149				20.3	%

 

		Adjusted EBITDA
		Three Months Ended March 31,
		2018				2017				$ Change				% Change
Domestic		$	65,475			$	41,891				23,584				56.3	%
International			6,306				4,812				1,494				31.0	%
Total Adjusted EBITDA		$	71,781			$	46,703				25,078				53.7	%

 

The following table sets forth our product class information for the periods indicated:

 

		Three Months Ended March 31,
(U.S. Dollars in thousands)		2018				2017				$ Change				% Change
Residential products		$	190,474			$	154,217				36,257				23.5	%
Commercial & industrial products			175,125				150,753				24,372				16.2	%
Other			32,035				25,515				6,520				25.6	%
Total net sales		$	397,634			$	330,485				67,149				20.3	%

 

Net sales.    The increase in Domestic sales for the three months ended March 31, 2018 was primarily due to strong growth in shipments of home standby and portable generators driven by increased power outage activity in recent quarters, along with the continuation of significant growth for C&I mobile products given the on-going replacement cycle for these products. Also contributing to the year-over-year sales growth were increases in service parts.

 

The increase in International sales for the three months ended March 31, 2018 was primarily due to the favorable impact of the stronger Euro along with some broad-based organic growth from the Pramac, Ottomotores and Motortech businesses.

 

Gross profit.    Gross profit margin for the first quarter of 2018 was 35.2% compared to 32.9% in the prior-year first quarter. The improvement was most notably due to favorable pricing and mix impacts along with improved leverage of fixed manufacturing costs on the significant increase in sales, which were partially offset by higher commodity prices.

 

Operating expenses.   The increase in operating expenses was primarily driven by an increase in employee costs including higher incentive compensation along with a stronger Euro, partially offset by lower promotional costs benefitting from the higher power outage environment as well as lower intangible asset amortization.

 

Other expense.    Other expense, net was roughly flat compared to prior year due to higher non-operating expenses mostly offset by a decrease in interest expense.

 

Provision for income taxes.    The effective income tax rates for the three months ended March 31, 2018 and 2017 were 25.3% and 39.1%, respectively. The decrease in the effective income tax rate in 2018 was primarily due to a reduction in the US federal corporate tax rate as a result of the Tax Act enacted on December 22, 2017.

 

Net income attributable to Generac Holdings Inc.    The increase was primarily driven by higher operating earnings as outlined above and a lower effective tax rate recorded during the current year quarter.

 

Adjusted EBITDA.   Adjusted EBITDA for the Domestic segment was $65.5 million, or 21.8% of net sales, as compared to $41.9 million in the prior year, or 16.9% of net sales. Adjusted EBITDA margin in the current year benefitted from a favorable pricing environment including lower promotional costs, favorable product mix and improved overall leverage of fixed operating costs on the higher organic sales volumes. These impacts were partially offset by higher commodity prices and an increase in employee costs including higher incentive compensation.

 

Adjusted EBITDA for the International segment, before deducting for non-controlling interests, improved to $6.3 million, or 6.5% of net sales, as compared to $4.8 million, or 5.8% of net sales, in the prior year. The improvement in adjusted EBITDA margin as compared to the prior year was primarily due to favorable sales mix and increased leverage of fixed operating costs on the increase in organic sales. These favorable impacts were partially offset by higher commodity prices along with the costs of expansion of certain branch operations.

 

 

Adjusted Net Income.    Adjusted Net Income of $46.1 million for the three months ended March 31, 2018 increased 86.6% from $24.7 million for the three months ended March 31, 2017, due to the factors outlined above partially offset by an increase in cash income tax expense.

 

See “Non-GAAP Measures” for a discussion of how we calculate Adjusted EBITDA and Adjusted Net Income and the limitations on their usefulness.

 

Liquidity and Financial Condition

 

Our primary cash requirements include payment for our raw material and component supplies, salaries & benefits, facility and lease costs, operating expenses, interest and principal payments on our debt and capital expenditures. We finance our operations primarily through cash flow generated from operations and, if necessary, borrowings under our ABL Facility.

 

Our credit agreements originally provided for a $1.2 billion Term Loan and currently include a $300.0 million uncommitted incremental term loan facility that could be utilized in the future if needed. The Term Loan matures on May 31, 2023, and bears interest at rates based upon either a base rate plus an applicable margin of 1.00% or adjusted LIBOR rate plus an applicable margin of 2.00%, subject to a LIBOR floor of 0.75%. The Term Loan does not require an Excess Cash Flow payment if the Company’s secured leverage ratio is maintained below 3.75 to 1.00 times. As of March 31, 2018, the Company’s secured leverage ratio was 2.47 to 1.00 times, and the Company was in compliance with all covenants of the Term Loan. There are no financial maintenance covenants on the Term Loan.

 

Our credit agreements also provide for the $250.0 million ABL Facility. The maturity date of the ABL Facility is May 29, 2020. As of March 31, 2018, there were no borrowings outstanding and $234.2 million of availability under the ABL Facility, net of outstanding letters of credit. The Company is in compliance with all covenants of the ABL Facility.

 

In August 2015, our Board of Directors approved a $200.0 million stock repurchase program, which we completed in the third quarter of 2016. In October 2016, our Board of Directors approved another stock repurchase program, under which we may repurchase an additional $250.0 million of common stock over 24 months from time to time; in amounts and at prices we deem appropriate, subject to market conditions and other considerations. Since the inception of both programs, we have repurchased 8,676,706 shares of our common stock for $305.5 million, all funded with cash on hand. For the three months ended March 31, 2018, the Company repurchased 560,000 shares of its common stock for $25.7 million. There were no share repurchases during the three months ended March 31, 2017.

 

See Note 10, “Credit Agreements” to the condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

 

Long-term Liquidity

 

We believe that our cash flow from operations and availability under our ABL Facility and other short-term lines of credit, combined with relatively low ongoing capital expenditure requirements and favorable tax attributes (which result in a lower cash tax rate as compared to the U.S. statutory tax rate) provide us with sufficient capital to continue to grow our business in the future. We will use a portion of our cash flow to pay interest and principal on our outstanding debt as well as repurchase shares of our common stock, impacting the amount available for working capital, capital expenditures and other general corporate purposes. As we continue to expand our business, we may require additional capital to fund working capital, capital expenditures or acquisitions.

 

Cash Flow

 

Three months ended March 31, 2018 compared to the three months ended March 31, 2017

 

The following table summarizes our cash flows by category for the periods presented:

 

		Three Months Ended March 31,
(U.S. Dollars in thousands)		2018				2017				$ Change				% Change
Net cash (used in) provided by operating activities		$	28,968			$	(5,175	)		$	34,143				659.8	%
Net cash used in investing activities			(5,997	)			(1,274	)			(4,723	)			370.7	%
Net cash used in financing activities			(16,200	)			(4,764	)			(11,436	)			240.1	%

 

 

The increase in net cash from operating activities was driven by a variety of factors including the increase in operating earnings as compared to the prior year and lower working capital usage during the current year.

 

Net cash used in investing activities for the three months ended March 31, 2018 primarily represents cash payments for the purchase of property and equipment. Net cash used in investing activities for the three months ended March 31, 2017 primarily represents cash payments for the purchase of property and equipment partially offset by cash acquired in the acquisition of a business.

 

Net cash used in financing activities for the three months ended March 31, 2018 primarily represents $14.3 million of cash proceeds from short-term borrowings, partially offset by $4.3 million of debt repayments ($3.9 million of short-term borrowings and $0.4 million of long-term borrowings and capital lease obligations), as well as $25.7 million cash used for stock repurchases under previously announced stock repurchase programs.

 

Net cash used in financing activities for the three months ended March 31, 2017 primarily represents $36.2 million of debt repayments ($35.2 million of short-term borrowings and $1.0 million of long-term borrowings and capital lease obligations), partially offset by $32.3 million cash proceeds from borrowings ($31.0 million short-term and $1.3 million long-term).

 

Contractual Obligations

 

There have been no material changes to our contractual obligations since the February 26, 2018 filing of our Annual Report on Form 10-K for the year ended December 31, 2017.

 

Off-Balance Sheet Arrangements

 

There have been no material changes to off-balance sheet arrangements since the February 26, 2018 filing of our Annual Report on Form 10-K for the year ended December 31, 2017.

 

Critical Accounting Policies

 

There have been no material changes in our critical accounting policies since the February 26, 2018 filing of our Annual Report on Form 10-K for the year ended December 31, 2017.

 

As discussed in our Annual Report on Form 10-K for the year ended December 31, 2017, in preparing the financial statements in accordance with U.S. GAAP, management is required to make estimates and assumptions that have an impact on the asset, liability, revenue and expense amounts reported. These estimates can also affect supplemental information disclosures of the Company, including information about contingencies, risk and financial condition. The Company believes, given current facts and circumstances, its estimates and assumptions are reasonable, adhere to U.S. GAAP, and are consistently applied. Inherent in the nature of an estimate or assumption is the fact that actual results may differ from estimates and estimates may vary as new facts and circumstances arise. The Company makes routine estimates and judgments in determining net realizable value of accounts receivable, inventories, property and equipment, prepaid expenses, product warranties and other reserves. Management believes the Company’s most critical accounting estimates and assumptions are in the following areas: goodwill and other indefinite-lived intangible asset impairment assessment; business combinations and purchase accounting; defined benefit pension obligations and income taxes.

 

 

Non-GAAP Measures

 

Adjusted EBITDA

 

The computation of Adjusted EBITDA attributable to Generac Holdings Inc. is based on the definition of EBITDA contained in our credit agreement, as amended. To supplement our condensed consolidated financial statements presented in accordance with U.S. GAAP, we provide the computation of Adjusted EBITDA attributable to the Company, taking into account certain charges and gains that were recognized during the periods presented.

 

 

We view Adjusted EBITDA as a key measure of our performance. We present Adjusted EBITDA not only due to its importance for purposes of our credit agreements but also because it assists us in comparing our performance across reporting periods on a consistent basis as it excludes items that we do not believe are indicative of our core operating performance. Our management uses Adjusted EBITDA:

 

•

for planning purposes, including the preparation of our annual operating budget and developing and refining our internal projections for future periods;

•

to allocate resources to enhance the financial performance of our business;

•

as one component for the determination of bonus compensation for our senior executives under our management incentive plan, as described further in our 2018 Proxy Statement;

•

to evaluate the effectiveness of our business strategies and as a supplemental tool in evaluating our performance against our budget for each period; and

•

in communications with our Board of Directors and investors concerning our financial performance.

 

We believe Adjusted EBITDA is used by securities analysts, investors and other interested parties in the evaluation of the Company. Management believes the disclosure of Adjusted EBITDA offers an additional financial metric that, when coupled with U.S. GAAP results and the reconciliation to U.S. GAAP results, provides a more complete understanding of our results of operations and the factors and trends affecting our business. We believe Adjusted EBITDA is useful to investors for the following reasons:

 

•

Adjusted EBITDA and similar non-GAAP measures are widely used by investors to measure a company's operating performance without regard to items that can vary substantially from company to company depending upon financing and accounting methods, book values of assets, tax jurisdictions, capital structures and the methods by which assets were acquired;

•

investors can use Adjusted EBITDA as a supplemental measure to evaluate the overall operating performance of our company, including our ability to service our debt and other cash needs; and

•

by comparing our Adjusted EBITDA in different historical periods, our investors can evaluate our operating performance excluding the impact of items described below.

 

The adjustments included in the reconciliation table listed below are provided for under our Term Loan and ABL Facility, and also are presented to illustrate the operating performance of our business in a manner consistent with the presentation used by our management and Board of Directors. These adjustments eliminate the impact of a number of items that:

 

•

we do not consider indicative of our ongoing operating performance, such as non-cash write-downs and other charges, non-cash gains, write-offs relating to the retirement of debt, severance costs and other restructuring-related business optimization expenses;

•

we believe to be akin to, or associated with, interest expense, such as administrative agent fees, revolving credit facility commitment fees and letter of credit fees; or

•

are non-cash in nature, such as share-based compensation.

 

We explain in more detail in footnotes (a) through (d) below why we believe these adjustments are useful in calculating Adjusted EBITDA as a measure of our operating performance.

 

Adjusted EBITDA does not represent, and should not be a substitute for, net income or cash flows from operations as determined in accordance with U.S. GAAP. Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our results as reported under U.S. GAAP. Some of the limitations are:

 

•

Adjusted EBITDA does not reflect our cash expenditures, or future requirements for capital expenditures or contractual commitments;

•

Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

•

Adjusted EBITDA does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments on our debt;

•

although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements;

•

several of the adjustments that we use in calculating Adjusted EBITDA, such as non-cash write-downs and other charges, while not involving cash expense, do have a negative impact on the value of our assets as reflected in our consolidated balance sheet prepared in accordance with U.S. GAAP; and

•

other companies may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.

 

Furthermore, as noted above, one of our uses of Adjusted EBITDA is as a benchmark for determining elements of compensation for our senior executives. At the same time, some or all of these senior executives have responsibility for monitoring our financial results, generally including the adjustments in calculating Adjusted EBITDA (subject ultimately to review by our Board of Directors in the context of the Board's review of our quarterly financial statements). While many of the adjustments (for example, transaction costs and credit facility fees), involve mathematical application of items reflected in our financial statements, others involve a degree of judgment and discretion. While we believe all of these adjustments are appropriate, and while the quarterly calculations are subject to review by our Board of Directors in the context of the Board's review of our quarterly financial statements and certification by our Chief Financial Officer in a compliance certificate provided to the lenders under our Term Loan and ABL Facility credit agreements, this discretion may be viewed as an additional limitation on the use of Adjusted EBITDA as an analytical tool.

 

 

Because of these limitations, Adjusted EBITDA should not be considered as a measure of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our U.S. GAAP results and using Adjusted EBITDA only supplementally.

 

The following table presents a reconciliation of net income to Adjusted EBITDA attributable to Generac Holdings Inc.:

 

		Three Months Ended March 31,
(U.S. Dollars in thousands)		2018				2017
Net income attributable to Generac Holdings Inc.		$	33,645			$	12,175
Net income attributable to noncontrolling interests			125				7
Net income			33,770				12,182
Interest expense			10,113				10,788
Depreciation and amortization			11,683				12,597
Provision for income taxes			11,416				7,823
Non-cash write-down and other adjustments (a)			1,306				166
Non-cash share-based compensation expense (b)			3,106				2,632
Transaction costs and credit facility fees (c)			262				316
Business optimization expenses (d)			138				100
Other			(13	)			99
Adjusted EBITDA			71,781				46,703
Adjusted EBITDA attributable to noncontrolling interests			1,549				956
Adjusted EBITDA attributable to Generac Holdings Inc.		$	70,232			$	45,747

 

(a)   Represents the following non-cash charges: gains/losses on disposals of assets, unrealized mark-to-market adjustments on commodity contracts, transactional foreign currency gains/losses and certain purchase accounting related adjustments. We believe that adjusting net income for these non-cash charges is useful for the following reasons:

 

●

The gains/losses on disposals of assets result from the sale of assets that are no longer useful in our business and therefore represent gains or losses that are not from our core operations;

●

The adjustments for unrealized mark-to-market gains and losses on commodity contracts represent non-cash items to reflect changes in the fair value of forward contracts that have not been settled or terminated. We believe it is useful to adjust net income for these items because the charges do not represent a cash outlay in the period in which the charge is incurred, although Adjusted EBITDA must always be used together with our U.S. GAAP statements of comprehensive income and cash flows to capture the full effect of these contracts on our operating performance; and

●

The purchase accounting adjustments represent non-cash items to reflect fair value at the date of acquisition, and therefore do not reflect our ongoing operations.

 

(b)  Represents share-based compensation expense to account for stock options, restricted stock and other stock awards over their respective vesting period.

 

(c) Represents transaction costs incurred directly in connection with any investment, as defined in our credit agreement, equity issuance or debt issuance or refinancing, together with certain fees relating to our senior secured credit facilities, such as administrative agent fees and credit facility commitment fees under our Term Loan and ABL Facility, which we believe to be akin to, or associated with, interest expense and whose inclusion in Adjusted EBITDA is therefore similar to the inclusion of interest expense in that calculation.

 

(d) For the three months ended March 31, 2018, represents severance and other non-recurring restructuring charges. For the three months ended March 31, 2017, represents severance and other non-recurring restructuring charges related to the consolidation of certain of our facilities. These charges represent expenses that are not from our core operations and do not reflect our ongoing operations.

 

 

Adjusted Net Income

 

To further supplement our condensed consolidated financial statements in accordance with U.S. GAAP, we provide the computation of Adjusted Net Income attributable to the Company, which is defined as net income before noncontrolling interest and provision for income taxes adjusted for the following items: cash income tax expense, amortization of intangible assets, amortization of deferred financing costs and original issue discount related to our debt, intangible impairment charges, certain transaction costs and other purchase accounting adjustments, losses on extinguishment of debt, business optimization expenses, certain other non-cash gains and losses, and adjusted net income attributable to noncontrolling interests, as set forth in the reconciliation table below.

 

We believe Adjusted Net Income is used by securities analysts, investors and other interested parties in the evaluation of our company’s operations. Management believes the disclosure of Adjusted Net Income offers an additional financial metric that, when used in conjunction with U.S. GAAP results and the reconciliation to U.S. GAAP results, provides a more complete understanding of our ongoing results of operations, and the factors and trends affecting our business.

 

The adjustments included in the reconciliation table listed below are presented to illustrate the operating performance of our business in a manner consistent with the presentation used by investors and securities analysts. Similar to the Adjusted EBITDA reconciliation, these adjustments eliminate the impact of a number of items we do not consider indicative of our ongoing operating performance or cash flows, such as amortization costs, transaction costs and write-offs relating to the retirement of debt. We also make adjustments to present cash taxes paid as a result of our favorable tax attributes.

 

Similar to Adjusted EBITDA, Adjusted Net Income does not represent, and should not be a substitute for, net income or cash flows from operations as determined in accordance with U.S. GAAP. Adjusted Net Income has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our results as reported under U.S. GAAP. Some of the limitations are:

 

•

Adjusted Net Income does not reflect changes in, or cash requirements for, our working capital needs;

•

although amortization is a non-cash charge, the assets being amortized may have to be replaced in the future, and Adjusted Net Income does not reflect any cash requirements for such replacements; and

•

other companies may calculate Adjusted Net Income differently than we do, limiting its usefulness as a comparative measure.

 

The following table presents a reconciliation of net income to Adjusted Net Income attributable to Generac Holdings Inc.:

 

		Three Months Ended March 31,
(U.S. Dollars in thousands, except share and per share data)		2018				2017
Net income attributable to Generac Holdings Inc.		$	33,645			$	12,175
Net income attributable to noncontrolling interests			125				7
Net income			33,770				12,182
Provision for income taxes			11,416				7,823
Income before provision for income taxes			45,186				20,005
Amortization of intangible assets			5,632				7,183
Amortization of deferred finance costs and original issue discount			1,177				490
Transaction costs and other purchase accounting adjustments (a)			20				585
Business optimization expenses			138				100
Adjusted net income before provision for income taxes			52,153				28,363
Cash income tax expense (b)			(5,410	)			(3,087	)
Adjusted net income			46,743				25,276
Adjusted net income attributable to noncontrolling interests			661				582
Adjusted net income attributable to Generac Holdings Inc.		$	46,082			$	24,694
Adjusted net income per common share attributable to Generac Holdings Inc. - diluted:		$	0.74			$	0.39
Weighted average common shares outstanding - diluted:			62,474,936				62,936,126

 

(a) Represents transaction costs incurred directly in connection with any investment, as defined in our credit agreement, equity issuance or debt issuance or refinancing, and certain purchase accounting adjustments.

 

(b) Amount for the three months ended March 31, 2018 is based on an anticipated cash income tax rate at that time of approximately 13% for the full year ended 2018. Amount for the three months ended March 31, 2017 is based on an anticipated cash income tax rate at that time of approximately 15% for the full year ended 2017. Cash income tax expense for the respective periods is based on the projected taxable income and corresponding cash tax rate for the full year after considering the effects of current and deferred income tax items, and is calculated for each respective period by applying the derived cash tax rate to the period’s pretax income.

 

 

New Accounting Standards

 

Refer to Note 1, “Description of Business and Basis of Presentation,” to the condensed consolidated financial statements for further information on the new accounting standards applicable to the Company.

 

Item 3.           Quantitative and Qualitative Disclosures about Market Risk

 

Refer to Note 4, “Derivative Instruments and Hedging Activities,” to the condensed consolidated financial statements for a discussion of changes in commodity, currency and interest rate related risks and hedging activities. Otherwise, there have been no material changes in market risk from the information provided in Item 7A (Quantitative and Qualitative Disclosures About Market Risk) of our Annual Report on Form 10-K for the year ended December 31, 2017.

 

Item 4.           Controls and Procedures

 

Disclosure Controls and Procedures

 

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) or 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended, or the Exchange Act. Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

 

Changes in Internal Control Over Financial Reporting

 

Beginning January 1, 2018, we implemented ASU 2014-09 Revenue from Contracts with Customers (Topic 606) and ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of Effective Date. Although the adoption of the new revenue standard did not have a significant impact on our results of operations, cash flows, or financial position, we did implement changes to our controls related to revenue. These included the development of new policies based on the five-step model provided in the new revenue standard, enhanced contract review requirements, and other ongoing monitoring activities. These controls were designed to provide assurance at a reasonable level of the fair presentation of our condensed consolidated financial statements and related disclosures.

 

There have been no other changes during the three months ended March 31, 2018 in our internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II. OTHER INFORMATION

 

Item 1.          Legal Proceedings

 

From time to time, we are involved in legal proceedings primarily involving product liability, employment matters and general commercial disputes arising in the ordinary course of our business. As of March 31, 2018, we believe that there is no litigation pending that would have a material effect on our results of operations or financial condition.

 

Item 1A.       Risk Factors

 

There have been no material changes in our risk factors since the February 26, 2018 filing of our Annual Report on Form 10-K for the year ended December 31, 2017.

 

 

Item 2.          Unregistered Sales of Equity Securities and Use of Proceeds

 

The following table summarizes our stock repurchase activity for the three months ended March 31, 2018, which consisted of the withholding of shares upon the vesting of restricted stock awards to pay related withholding taxes on behalf of the recipient, as well as stock repurchases made as authorized under previously announced stock repurchase programs:

 

		Total Number of Shares Purchased				Average Price Paid per Share				Total Number Of Shares Purchased As Part Of Publicly Announced Plans Or Programs				Approximate Dollar Value Of Shares That May Yet Be Purchased Under The Plans Or Programs
01/01/2018 – 01/31/2018			-				-				-			$	170,108,876
02/01/2018 – 02/28/2018			218,338			$	45.79				200,000				160,961,733
03/01/2018 – 03/31/2018			371,690				45.80				360,000			$	144,453,228
Total			590,028			$	45.79

 

For equity compensation plan information, please refer to our Annual Report on Form 10-K for the year ended December 31, 2017.

 

Item 6.           Exhibits

 

See “Exhibit Index” for documents filed herewith and incorporated herein by reference.

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

	Generac Holdings Inc.
	By:	/s/ York A. Ragen
		York A. Ragen
		Chief Financial Officer (Duly Authorized Officer and Principal Financial and Accounting Officer)

 

Dated: May 7, 2018

 

 

Item 6.

EXHIBIT INDEX

                                      

Exhibits Number

Description

 

31.1*		Certification of Chief Executive Officer pursuant to Rule 13a-14 Securities Exchange Act Rules 13a-14(a) and 15d-14(a), pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
31.2*		Certification of Chief Financial Officer pursuant to Rule 13a-14 Securities Exchange Act Rules 13a-14(a) and 15d-14(a), pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
32.1**		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002.
32.2**		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002.
101*		The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2018 formatted in Extensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Comprehensive Income, (iii) the Condensed Consolidated Statements of Cash Flows, and (iv) related Notes to Condensed Consolidated Financial Statements.

 

 

*     Filed herewith.

**   Furnished herewith.

 

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