Table of
Contents
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark
One)
x
|
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
|
For
the quarterly period ended March 31, 2010
|
|
OR
|
|
o
|
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
(Registrants
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
x
No
o
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 during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes
o
No
o
Indicate by check mark whether the Registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated
filer and large accelerated filer in Rule 12b-2 of the Exchange Act.
Large
accelerated filer
o
|
|
Accelerated
filer
o
|
|
|
|
Non-accelerated
filer
x
|
|
Smaller
reporting company
o
|
(Do not check if
a smaller reporting company)
|
|
|
Indicate by check mark whether the Registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes
o
No
x
As of May 14, 2010, there were 67,531,946 shares of the Registrants
common stock outstanding.
Table of
Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Generac Holdings Inc.
Condensed Consolidated
Balance Sheets
(Dollars
in Thousands, Except Share and Per Share Data)
|
|
March 31,
|
|
December 31,
|
|
|
|
2010
|
|
2009
|
|
|
|
(Unaudited)
|
|
|
|
Assets
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
66,371
|
|
$
|
161,307
|
|
Accounts and notes receivable, less allowance for
doubtful accounts
|
|
52,682
|
|
54,130
|
|
Inventories
|
|
107,089
|
|
123,700
|
|
Prepaid expenses and other assets
|
|
4,508
|
|
5,880
|
|
Total current assets
|
|
230,650
|
|
345,017
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
73,047
|
|
73,374
|
|
|
|
|
|
|
|
Customer lists, net
|
|
125,248
|
|
134,674
|
|
Patents, net
|
|
90,825
|
|
92,753
|
|
Other intangible assets, net
|
|
7,458
|
|
7,791
|
|
Deferred financing costs, net
|
|
8,151
|
|
13,070
|
|
Trade names
|
|
143,333
|
|
144,407
|
|
Goodwill
|
|
525,875
|
|
525,875
|
|
Other assets
|
|
135
|
|
282
|
|
Total assets
|
|
$
|
1,204,722
|
|
$
|
1,337,243
|
|
|
|
|
|
|
|
Liabilities and stockholders
equity
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
Accounts payable
|
|
$
|
27,739
|
|
$
|
33,639
|
|
Accrued wages and employee benefits
|
|
5,679
|
|
6,930
|
|
Other accrued liabilities
|
|
35,547
|
|
52,326
|
|
Current portion of long-term debt
|
|
|
|
39,076
|
|
Total current liabilities
|
|
68,965
|
|
131,971
|
|
|
|
|
|
|
|
Long-term debt
|
|
731,422
|
|
1,052,463
|
|
Other long-term liabilities
|
|
18,718
|
|
17,418
|
|
Total liabilities
|
|
819,105
|
|
1,201,852
|
|
|
|
|
|
|
|
Class B convertible voting common stock, par
value $0.01, 110,000 shares authorized, 0 and 24,018 shares issued at
March 31, 2010 and December 31, 2009, respectively
|
|
|
|
765,096
|
|
Series A convertible non-voting preferred
stock, par value $0.01, 30,000 shares authorized, 0 and 11,311 shares issued
at March 31, 2010 and December 31, 2009, respectively
|
|
|
|
113,109
|
|
|
|
|
|
|
|
Stockholders equity (deficit):
|
|
|
|
|
|
Common stock (formerly Class A common stock),
par value $0.01, 500,000,000 shares authorized, 67,529,290 and 1,617 shares
issued at March 31, 2010 and December 31, 2009, respectively
|
|
675
|
|
|
|
Additional paid-in capital
|
|
1,128,801
|
|
2,394
|
|
Excess purchase price over predecessor basis
|
|
(202,116
|
)
|
(202,116
|
)
|
Accumulated deficit
|
|
(536,103
|
)
|
(538,571
|
)
|
Accumulated other comprehensive loss
|
|
(5,640
|
)
|
(4,492
|
)
|
Stockholder notes receivable
|
|
|
|
(29
|
)
|
Total stockholders equity (deficit)
|
|
385,617
|
|
(742,814
|
)
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
1,204,722
|
|
$
|
1,337,243
|
|
See notes to condensed consolidated
financial statements.
1
Table of
Contents
Generac Holdings Inc.
Condensed Consolidated
Statements of Operations
(Dollars
in Thousands, Except Share and Per Share Data)
(Unaudited)
|
|
Three Months Ended March 31,
|
|
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
130,718
|
|
$
|
140,446
|
|
Costs of goods sold
|
|
79,300
|
|
92,919
|
|
Gross profit
|
|
51,418
|
|
47,527
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
Selling and service
|
|
14,312
|
|
14,390
|
|
Research and development
|
|
3,722
|
|
2,612
|
|
General and administrative
|
|
5,159
|
|
3,897
|
|
Amortization of intangibles
|
|
12,761
|
|
12,812
|
|
Total operating expenses
|
|
35,954
|
|
33,711
|
|
Income from operations
|
|
15,464
|
|
13,816
|
|
|
|
|
|
|
|
Other (expense) income:
|
|
|
|
|
|
Interest expense
|
|
(8,492
|
)
|
(17,966
|
)
|
Investment income
|
|
74
|
|
1,266
|
|
Gain on extinguishment of
debt
|
|
|
|
9,096
|
|
Write-off of deferred
financing costs related to debt extinguishment
|
|
(4,180
|
)
|
|
|
Other, net
|
|
(316
|
)
|
(313
|
)
|
Total other expense, net
|
|
(12,914
|
)
|
(7,917
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for
income taxes
|
|
2,550
|
|
5,899
|
|
Provision for income taxes
|
|
82
|
|
105
|
|
Net income
|
|
2,468
|
|
5,794
|
|
|
|
|
|
|
|
Preferential distribution
to:
|
|
|
|
|
|
Series A preferred
stockholders
|
|
(2,042
|
)
|
(2,792
|
)
|
Class B common
stockholders
|
|
(12,133
|
)
|
(24,128
|
)
|
Beneficial conversion - see
note 1
|
|
(140,690
|
)
|
|
|
Net loss attributable to
common stockholders
(formerly Class A common stockholders)
|
|
$
|
(152,397
|
)
|
$
|
(21,126
|
)
|
|
|
|
|
|
|
Net (loss) income per
common share - basic and diluted:
|
|
|
|
|
|
Common stock (formerly
Class A common stock)
|
|
$
|
(4.26
|
)
|
$
|
(12,169
|
)
|
Class B common stock
|
|
$
|
1,109
|
|
$
|
1,005
|
|
|
|
|
|
|
|
Weighted average common shares outstanding - basic and diluted:
|
|
|
|
|
|
Common stock (formerly
Class A common stock)
|
|
35,748,290
|
|
1,736
|
|
Class B common stock
|
|
10,941
|
|
24,018
|
|
See notes
to condensed consolidated financial statements.
2
Table of
Contents
Generac Holdings Inc.
Condensed Consolidated
Statements of Redeemable Stock and Stockholders Equity (Deficit)
(Dollars in Thousands, Except Share Data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excess
|
|
Retained
|
|
Other
|
|
|
|
|
|
|
|
|
|
Redeemable
|
|
Common
Stock (formerly
|
|
Additional
|
|
Purchase
Price
|
|
Earnings
|
|
Comprehensive
|
|
Stockholder
|
|
Total
|
|
Comprehensive
|
|
|
|
Series A
Preferred Stock
|
|
Class B
Common Stock
|
|
|
Class A
Common Stock)
|
|
Paid-In
|
|
Over
|
|
(Accumulated
|
|
(Loss)
|
|
Notes
|
|
Stockholders
|
|
Income
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Predecessor Basis
|
|
Deficit)
|
|
Income
|
|
Receivable
|
|
Equity
|
|
(Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
7,835
|
|
$
|
78,355
|
|
24,018
|
|
$
|
765,096
|
|
|
1,736
|
|
$
|
|
|
$
|
2,356
|
|
$
|
(202,116
|
)
|
$
|
(581,626
|
)
|
$
|
(28,650
|
)
|
$
|
(158
|
)
|
$
|
(810,194
|
)
|
|
|
Amortization of unrealized loss on interest rate
swaps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,222
|
|
|
|
24,222
|
|
$
|
24,222
|
|
Repayment of stockholder notes receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
129
|
|
129
|
|
|
|
Cancellation of stock
|
|
|
|
|
|
|
|
|
|
|
(118
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contribution of capital related to debt
extinguishment
|
|
1,476
|
|
14,754
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from shares issued to management and
directors
|
|
50
|
|
497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from shares issued to stockholders
|
|
1,950
|
|
19,503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43,055
|
|
|
|
|
|
43,055
|
|
43,055
|
|
Share based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38
|
|
|
|
|
|
|
|
|
|
38
|
|
|
|
Pension liability adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(64
|
)
|
|
|
(64
|
)
|
(64
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
67,213
|
|
Balance at December 31, 2009
|
|
11,311
|
|
$
|
113,109
|
|
24,018
|
|
$
|
765,096
|
|
|
1,617
|
|
$
|
|
|
$
|
2,394
|
|
$
|
(202,116
|
)
|
$
|
(538,571
|
)
|
$
|
(4,492
|
)
|
$
|
(29
|
)
|
$
|
(742,814
|
)
|
|
|
Unrealized loss on interest rate swaps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,148
|
)
|
|
|
(1,148
|
)
|
$
|
(1,148
|
)
|
Repayment of stockholder notes receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29
|
|
29
|
|
|
|
Corporate reorganization
|
|
(11,311
|
)
|
(113,109
|
)
|
(24,018
|
)
|
(765,096
|
)
|
|
28,368,587
|
|
284
|
|
877,921
|
|
|
|
|
|
|
|
|
|
878,205
|
|
|
|
Beneficial conversion related to Class B Common
and Series A Preferred stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(140,690
|
)
|
|
|
|
|
|
|
|
|
(140,690
|
)
|
|
|
Accumulated accretion related to Class B Common
and Series A Preferred stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(303,305
|
)
|
|
|
|
|
|
|
|
|
(303,305
|
)
|
|
|
Issuance of Common stock (formerly Class A
Common stock) resulting from the beneficial conversion and accumulated
accretion
|
|
|
|
|
|
|
|
|
|
|
18,002,337
|
|
180
|
|
443,815
|
|
|
|
|
|
|
|
|
|
443,995
|
|
|
|
Proceeds from public stock offering
|
|
|
|
|
|
|
|
|
|
|
20,700,500
|
|
207
|
|
247,424
|
|
|
|
|
|
|
|
|
|
247,631
|
|
|
|
Share based compensation
|
|
|
|
|
|
|
|
|
|
|
456,249
|
|
4
|
|
1,242
|
|
|
|
|
|
|
|
|
|
1,246
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,468
|
|
|
|
|
|
2,468
|
|
2,468
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,320
|
|
Balance at March 31, 2010
(unaudited)
|
|
|
|
$
|
|
|
|
|
$
|
|
|
|
67,529,290
|
|
$
|
675
|
|
$
|
1,128,801
|
|
$
|
(202,116
|
)
|
$
|
(536,103
|
)
|
$
|
(5,640
|
)
|
$
|
0
|
|
$
|
385,617
|
|
|
|
See notes to condensed consolidated financial
statements.
3
Table of
Contents
Generac Holdings Inc.
Condensed Consolidated
Statements of Cash Flows
(Dollars
in Thousands)
(Unaudited)
|
|
Three Months Ended March 31,
|
|
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
Operating activities
|
|
|
|
|
|
Net income
|
|
$
|
2,468
|
|
$
|
5,794
|
|
Adjustment to reconcile net income to net cash
provided by operating activities:
|
|
|
|
|
|
Depreciation
|
|
1,891
|
|
1,915
|
|
Amortization
|
|
12,761
|
|
12,812
|
|
Gain on extinguishment of debt
|
|
|
|
(9,096
|
)
|
Write-off of deferred financing costs related to
debt extinguishment
|
|
4,180
|
|
|
|
Amortization of deferred finance costs
|
|
739
|
|
856
|
|
Amortization of unrealized loss on interest rate
swaps
|
|
|
|
7,283
|
|
Provision for losses on accounts receivable
|
|
(27
|
)
|
(5
|
)
|
Gain on disposal of property and equipment
|
|
|
|
(43
|
)
|
Share-based compensation
|
|
1,246
|
|
9
|
|
Net changes in operating assets and liabilities:
|
|
|
|
|
|
Accounts receivable
|
|
1,475
|
|
13,427
|
|
Inventories
|
|
16,611
|
|
7,464
|
|
Other assets
|
|
841
|
|
1,411
|
|
Accounts payable
|
|
(5,900
|
)
|
(13,226
|
)
|
Accrued wages and employee benefits
|
|
(1,222
|
)
|
(347
|
)
|
Other accrued liabilities
|
|
(16,627
|
)
|
(28,143
|
)
|
Net cash provided by operating activities
|
|
18,436
|
|
111
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
Proceeds from sale of property and equipment
|
|
|
|
43
|
|
Expenditures for property and equipment
|
|
(1,564
|
)
|
(367
|
)
|
Net cash used in investing activities
|
|
(1,564
|
)
|
(324
|
)
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
Proceeds from issuance of common stock
|
|
248,309
|
|
|
|
Payment of long-term debt
|
|
(360,117
|
)
|
(9,500
|
)
|
Net cash used in financing activities
|
|
(111,808
|
)
|
(9,500
|
)
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
(94,936
|
)
|
(9,713
|
)
|
Cash and cash equivalents at beginning of period
|
|
161,307
|
|
81,229
|
|
Cash and cash equivalents at end of period
|
|
$
|
66,371
|
|
$
|
71,516
|
|
|
|
|
|
|
|
Supplemental disclosure of noncash
financing and investing activities
|
|
|
|
|
|
Contributions of capital related to debt
extinguishment
|
|
$
|
|
|
$
|
6,662
|
|
See notes to condensed consolidated
financial statements
4
Table of
Contents
Generac Holdings Inc.
Notes to Condensed
Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
Description
of Business
Generac Holdings Inc. (the Company) owns all of the
common stock of Generac Acquisition Corp., which in turn, owns all of the
common stock of Generac Power Systems, Inc. (the Subsidiary). The Company
designs, manufactures, and markets a complete line of backup power generation
products for residential, light-commercial, and industrial markets.
The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. All intercompany
amounts and transactions have been eliminated in consolidation.
The consolidated balance sheet as of March 31,
2010, the consolidated statement of redeemable stock and stockholders equity
(deficit) for the three months ended March 31, 2010, and the consolidated
statements of operations and cash flows for the three months ended March 31,
2010 and 2009 have been prepared by the Company and have not been audited. In
the opinion of management, all adjustments, consisting of only normal recurring
adjustments necessary for the fair presentation of the financial position,
results of operation and cash flows, have been made. The results of operations
for any interim period are not necessarily indicative of the results to be
expected for the full year.
Expenses are charged to operations in the year incurred.
However, for interim reporting purposes certain expenses are charged to
operations based on a proportionate share of annual amounts rather than as they
are actually incurred.
The preparation of the consolidated financial
statements in conformity with U.S. generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Certain information and footnote disclosure normally
included in consolidated financial statements prepared in accordance with U.S.
generally accepted accounting principles have been condensed or omitted. These
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in our Annual
Report on Form 10-K for the year ended December 31, 2009.
Initial Public Offering and Conversion of Class B
Common Stock and Series A preferred Stock
On February 17, 2010, we completed our initial
public offering (IPO) of 18,750,000 shares of our common stock at a price of
$13.00 per share. In addition, the underwriters exercised their over-allotment
option outlined in the underwriters agreement, and purchased an additional
1,950,500 shares of the Companys common stock on March 18, 2010. We
received approximately $269,100,000 in gross proceeds from the IPO and
over-allotment exercise, or approximately $247,631,000 in net proceeds after
deducting the underwriting discount and total expenses related to the
offering. Our capitalization prior to
the initial public offering consisted of Series A Preferred Stock, Class B
Common Stock and Class A Common Stock. Upon closing of the IPO, all shares
of convertible Class B Common stock and Series A Preferred stock were
automatically converted into 88,476,530 and 19,511,018 Class A Common
shares, respectively. The 88,476,530 shares of Class A Common stock were
subject to a 3.294 for 1 reverse stock split, resulting in 26,859,906 Class A
Common shares related to the Class B Common stock conversion, and the Class A
Common stock was re-designated as Common Stock. Subsequent to the IPO, the
Company has one class of common stock. The share and per share data used in
basic and diluted earnings per share has been retrospectively restated to
reflect the 3.294 for 1 reverse stock split immediately prior to the IPO.
5
Table of Contents
Capitalization
summary upon closing of initial public offering and underwriters option exercise:
Class A Common stock issued and outstanding
immediately prior to the IPO after the 3.294 for 1 reverse stock split
|
|
1,617
|
|
Conversion and 3.294 for 1 reverse stock split of
Class B Common stock into Common stock upon closing of IPO
|
|
26,859,906
|
|
Conversion of Series A Preferred stock into
Common stock upon closing of IPO
|
|
19,511,018
|
|
Sales of Common stock through IPO
|
|
18,750,000
|
|
Issuance of vested and non-vested Common stock upon
closing of IPO
|
|
456,249
|
|
Common stock issued and outstanding after IPO
|
|
65,578,790
|
|
Issuance of Common stock to underwriters due to
exercise of over-allotment
|
|
1,950,500
|
|
Total Common stock issued and outstanding as of
March 31, 2010
|
|
67,529,290
|
|
The
Company determined that the conversion features in the Class B Common
stock and Series A Preferred stock were in-the-money at the date of
issuance and therefore represented a beneficial conversion feature. Since the Class B
Common stock and Series A Preferred stock were convertible upon an initial
public offering, conversion was contingent upon a future event and therefore
the beneficial conversion feature had not been recorded in the consolidated
financial statements as of December 31, 2009. The beneficial conversion
feature at the IPO date was $140,690,000 and was recorded at the IPO date as a
return to Class B Common and Series A Preferred stockholders
analogous to a dividend, which was satisfied through the issuance of Class A
Common stock. The beneficial conversion was recorded within additional
paid-in-capital, as no retained earnings were available.
The Company used
$221,622,000 of proceeds from the initial closing of the IPO to pay down our
second lien credit facility in full and to repay a portion of our first lien
credit facility. Additionally, in March 2010, the Company used
$138,495,000 million of cash and cash equivalents on hand to further pay down
our first lien term loan principal. Repayments of our first and second lien
credit facilities during the three months ended March 31, 2010 totaled
$360,117,000.
The Company adopted an equity incentive plan on February 10,
2010 in connection with the IPO. At the time of the IPO, 4,341,504 stock
options and 456,249 shares of restricted stock and other stock awards were
granted to employees and Board members of the Company pursuant to the equity
incentive plan. The stock options have
an exercise price equal to the IPO price and vest in equal installments over
five years, subject to the grantees continued employment or service. The
restricted stock awards will vest in full on the third anniversary of the date
of grant, subject to the grantees continued employment. See further discussion
in note 11 Share Plans.
As a result of the
Corporate Reorganization (see Managements Discussion and Analysis of
Financial Condition and Results of Operations Corporate reorganization),
IPO, the underwriters option exercise and subsequent debt pay down, as of March 31,
2010, the Company had $731,422,000 of outstanding debt under its first lien
term loan, the second lien term loan was fully repaid and terminated, and
67,529,290 total shares of Common stock were outstanding.
Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) (OCI)
includes unrealized losses on certain cash flow hedges and the pension
liability. The components of OCI at March 31, 2010 and December 31,
2009 were (dollars in thousands):
|
|
March 31,
|
|
December 31,
|
|
|
|
2010
|
|
2009
|
|
Pension liability
|
|
$
|
(4,492
|
)
|
$
|
(4,492
|
)
|
Unrealized losses on cash flow hedges
|
|
(1,148
|
)
|
|
|
Accumulated other comprehensive loss
|
|
$
|
(5,640
|
)
|
$
|
(4,492
|
)
|
6
Table of Contents
New Accounting Standards to be Adopted
In February 2010,
the Financial Accounting Standards Board (FASB) issued a standards update
removing the requirement for an SEC filer to disclose a date through which
subsequent events have been evaluated in both issued and revised financial
statements. This update was effective upon issuance, and has been
incorporated in this report.
In August 2009,
the FASB issued a clarification on fair value measurements. This
clarification provides that in circumstances in which a quoted price in an
active market for the identical liability is not available, a reporting entity
is required to measure fair value using one or more of the techniques provided
for in this update. This clarification was effective in the first
reporting period following issuance (the Companys first quarter of fiscal
2010), and did not have a material impact on the Companys financial
statements.
2.
Derivative Instruments and Hedging Activities
The Company records all derivatives in accordance with
ASC 815,
Derivatives and Hedging
, which requires
all derivative instruments be reported on the consolidated balance sheets at
fair value and establishes criteria for designation and effectiveness of
hedging relationships. The Company is exposed to market risk such as changes in
commodity prices, foreign currencies, and interest rates. The Company does not
hold or issue derivative financial instruments for trading purposes.
Commodities
The primary objectives of the commodity risk
management activities are to understand and mitigate the impact of potential
price fluctuations on the Companys financial results and its economic
well-being. While the Companys risk management objectives and strategies will
be driven from an economic perspective, the Company attempts, where possible
and practical, to ensure that the hedging strategies it engages in can be
treated as hedges from an accounting perspective or otherwise result in
accounting treatment where the earnings effect of the hedging instrument
provides substantial offset (in the same period) to the earnings effect of the
hedged item. Generally, these risk management transactions will involve the use
of commodity derivatives to protect against exposure resulting from significant
price fluctuations.
The Company primarily utilizes commodity contracts
with maturities of less than 12 months. These are intended to offset the effect
of price fluctuations on actual inventory purchases. There were no outstanding
commodity contracts in place to hedge the Companys projected commodity
purchases at March 31, 2010. There was one outstanding commodity contract
in place to hedge the Companys projected commodity purchases at December 31,
2009. In October 2009, the Company entered into commodity swaps to
purchase a notional amount of $1,432,000 of copper. The swaps were effective from October 5,
2009, and terminated on March 31, 2010. Total gain recognized in the
consolidated statements of operations on commodity contracts was a gain of
$137,000 for the three months ended March 31, 2009. The loss recognized
during the three months ended March 31, 2010 was not material.
Foreign Currencies
The Company is exposed to foreign currency exchange
risk as a result of transactions in other currencies. The Company periodically
utilizes foreign currency forward purchase and sales contracts to manage the
volatility associated with foreign currency purchases in the normal course of
business. Contracts typically have maturities of one year or less.
On February 18, 2010, the Company entered into a
ten-month foreign currency average rate option transaction for Euros with a
total notional amount of $2,500,000. The primary objective of this transaction
is to mitigate the impact of potential currency fluctuations of the Euro on our
financial results. The impact on operations for the three months ended March 31,
2010 was not material.
There were no foreign currency hedge contracts
outstanding as of December 31, 2009.
Interest Rates
In 2006, the Company entered into various interest
rate swap agreements. The Company has formally documented all relationships
between interest rate hedging instruments and hedged items, as well as its
risk-management objectives and strategies for undertaking various hedge
transactions. From inception through December 31, 2008, the Companys
interest rate swap agreements qualified as cash flow hedges. For derivatives
that are designated and qualify as a cash flow hedge, the effective
7
Table of Contents
portion of the gain or loss on the derivative is
reported as a component of accumulated other comprehensive income (loss) and
reclassified into earnings in the same period or periods during which the
hedged transaction affects earnings. The ineffective portion of the derivatives
change in fair value, if any, is immediately recognized in earnings. The
Company assesses on an ongoing basis whether derivatives used in hedging
transactions are highly effective in offsetting changes in cash flows of hedged
items.
Effective January 3, 2009, the Company, within
the terms of the Credit Agreements (see note 7), changed the interest rate
election from three-month LIBOR to one-month LIBOR. Because of this change, the
Company concluded that as of January 3, 2009, the Swaps no longer met
hedge effectiveness tests and were therefore, no longer highly effective as a
hedge against the impact on interest payments of changes in the LIBOR interest
rate. In 2009, the effective portion of the swaps prior to the change was
amortized as interest expense over the period of the originally designated
hedged transactions. During 2009, changes in the fair value of the swaps were
immediately recognized in the consolidated statements of operations as interest
expense.
The Companys
interest rate swap agreements outstanding as of December 31, 2009,
totaling $675,000,000 notional amount of debt, terminated on January 4,
2010. The Company entered into a new interest rate swap agreement on January 21,
2010. The effective date of the swap is July 1, 2010 with a notional
amount of $200,000,000, a fixed LIBOR rate of 1.73% and an expiration date of July 1,
2012. We expect to maintain the swap as highly effective in accordance with ASC
815 (formerly SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities) and, therefore, any changes in the fair value of the swap
would be recorded in accumulated other comprehensive income (loss).
The following table presents, in thousands, the fair
value of the Companys derivatives:
|
|
March 31,
2010
|
|
December 31,
2009
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
(1,148
|
)
|
$
|
|
|
|
|
(1,148
|
)
|
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
Commodity contracts
|
|
60
|
|
208
|
|
Total derivatives (liability) asset
|
|
$
|
(1,088
|
)
|
$
|
208
|
|
As of March 31, 2010 and December 31, 2009, all derivatives
that are not designated as hedging instruments are included in other assets in
the consolidated balance sheet. All derivatives designated as hedging
instruments are included in other long-term liabilities in the consolidated
balance sheet at March 31, 2010. There were no derivatives that were
designated as hedging instruments at December 31, 2009.
The fair value of the derivative contracts of a $1,088,000 liability
and a $208,000 asset takes into account the Companys credit risk as of March 31,
2010 and December 31, 2009, respectively. Excluding the impact of credit
risk, the fair value of the derivatives at March 31, 2010 was a $1,127,000
liability, and represents the amount the Company would need to receive or pay
to exit the agreements on that date. The impact of credit risk on the fair
value of derivative contracts at December 31, 2009 was not material.
8
Table of
Contents
The following presents the impact of interest rate swaps and commodity
contracts on the consolidated statement of operations for the three months
ended March 31, 2010 and 2009 (dollars in thousands):
|
|
Amount of loss
recognized in AOCI
for
the three months
ended
March 31,
|
|
Location of gain
(loss)
reclassified from
AOCI
|
|
Amount of loss
reclassified from
AOCI
into net income (loss)
for
the three months
ended
March 31,
|
|
Amount of gain (loss)
recognized in net
income
(loss) on hedges
(ineffective portion)
for
the three months
ended
March 31,
|
|
|
|
2010
|
|
2009
|
|
into net income (loss)
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
Derivatives designated as hedging
instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
(1,148
|
)
|
$
|
|
|
Interest expense
|
|
$
|
|
|
$
|
(7,283
|
)
|
$
|
|
|
$
|
|
|
Derivatives not designated as
hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
|
$
|
|
|
$
|
|
|
Cost of goods
sold
|
|
$
|
|
|
$
|
|
|
$
|
(15
|
)
|
$
|
137
|
|
Interest rate swaps
|
|
$
|
|
|
$
|
|
|
Interest expense
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
6,608
|
|
3. Fair Value Measurements
ASC 820-10
Fair Value Measurements
and Disclosures
(formerly SFAS No. 157,
Fair Value Measurements
) among other things, defines fair
value, establishes a consistent framework for measuring fair value, and expands
disclosure for each major asset and liability category measured at fair value
on either a recurring basis or nonrecurring basis. ASC 820-10 clarifies that
fair value is an exit price, representing the amount that would be received to
sell an asset or paid to transfer a liability in an orderly transaction between
market participants. As such, fair value is a market-based measurement that
should be determined based on assumptions that market participants would use in
pricing an asset or liability. As a basis for considering such assumptions, the
pronouncement establishes a three-tier fair value hierarchy, which prioritizes
the inputs used in measuring fair value as follows: (Level 1) observable inputs
such as quoted prices in active markets; (Level 2) inputs, other than the
quoted prices in active markets, that are observable either directly or
indirectly; and (Level 3) unobservable inputs in which there is little or no
market data, which require the reporting entity to develop its own assumptions.
Assets and liabilities measured at fair value are
based on the market approach, which uses prices and other relevant information
generated by market transactions involving identical or comparable assets or
liabilities.
The Company believes the carrying amount of its
financial instruments (cash and cash equivalents, accounts receivable, notes
receivable, accounts payable, and accrued liabilities), excluding long-term
debt, approximates the fair value of these instruments based upon their short-term
nature. The fair value of long-term debt was approximately $694,851,000 at March 31,
2010, as calculated based on current quotations.
Assets and liabilities measured at fair value on a
recurring basis are as follows (dollars in thousands):
|
|
Fair Value Measurement Using
|
|
|
|
Total
March 31, 2010
|
|
Quoted Prices in Active
Markets for Identical
Contracts (Level 1)
|
|
Significant
Other Observable
Inputs
(Level 2)
|
|
|
|
|
|
|
|
|
|
Net derivative contracts
|
|
$
|
(1,088
|
)
|
$
|
|
|
$
|
(1,088
|
)
|
|
|
|
|
|
|
|
|
|
|
|
9
Table of
Contents
The fair value of derivative contracts above takes into account the
Companys credit risk in accordance with ASC 820-10. Excluding the impact of
credit risk, the fair value of derivatives at March 31, 2010 was a
$1,127,000 liability, and this represents the amount the Company would need to
receive or pay to exit the agreements on this date.
4. Segment Reporting
The Company operates in and reports as a single operating
segment, which is the manufacture and sale of power products. Net sales are
generated through the sale of generators and service parts to distributors and
retailers. The Company manages and evaluates its operations as one segment
primarily due to similarities in the nature of the products, production
processes and methods of distribution. All of the Companys identifiable assets
are located in the United States. The Companys sales outside North America are
not material, representing approximately 2% of net sales.
The Companys product offerings consist primarily of
power products with a range of power output. Residential power products and
industrial/commercial power products are each a similar class of products based
on similar power output and customer usage. The breakout of net sales between
residential, industrial/commercial, and other products is as follows (dollars
in thousands):
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
Residential power products
|
|
$
|
83,998
|
|
$
|
88,476
|
|
Industrial/Commercial power products
|
|
38,318
|
|
45,082
|
|
Other
|
|
8,402
|
|
6,888
|
|
Total
|
|
$
|
130,718
|
|
$
|
140,446
|
|
5. Balance Sheet Details
Inventories consist of the following (dollars in
thousands):
|
|
March 31,
|
|
December 31,
|
|
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
Raw material
|
|
$
|
64,911
|
|
$
|
74,136
|
|
Work-in-process
|
|
437
|
|
775
|
|
Finished goods
|
|
45,757
|
|
52,726
|
|
Reserves for excess and obsolescence
|
|
(4,016
|
)
|
(3,937
|
)
|
|
|
$
|
107,089
|
|
$
|
123,700
|
|
Property and equipment
consists of the following (dollars in thousands):
|
|
March 31,
|
|
December 31,
|
|
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
Land and improvements
|
|
$
|
3,913
|
|
$
|
3,913
|
|
Buildings and improvements
|
|
48,529
|
|
48,521
|
|
Machinery and equipment
|
|
27,558
|
|
26,500
|
|
Dies and tools
|
|
10,034
|
|
9,631
|
|
Vehicles
|
|
903
|
|
857
|
|
Office equipment
|
|
5,761
|
|
5,712
|
|
Gross property and equipment
|
|
96,698
|
|
95,134
|
|
Less accumulated depreciation
|
|
(23,651
|
)
|
(21,760
|
)
|
Property and equipment, net
|
|
$
|
73,047
|
|
$
|
73,374
|
|
10
Table of Contents
Other accrued liabilities
consist of the following (dollars in thousands):
|
|
March 31,
|
|
December 31,
|
|
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
Accrued commissions
|
|
$
|
3,857
|
|
$
|
4,211
|
|
Accrued interest
|
|
5,075
|
|
17,062
|
|
Accrued warranties short term
|
|
17,074
|
|
17,029
|
|
Other accrued liabilities
|
|
9,541
|
|
14,024
|
|
|
|
$
|
35,547
|
|
$
|
52,326
|
|
6.
Product Warranty Obligations
The Company records a liability for product warranty
obligations at the time of sale to a customer based upon historical warranty
experience. The Company also records a liability for specific warranty matters
when they become known and are reasonably estimable. The Companys product
warranty obligations are included in other accrued liabilities and other
long-term liabilities in the balance sheets.
Changes in product warranty obligations are as follows
(dollars in thousands):
|
|
For the three months ended March 31,
|
|
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
20,729
|
|
$
|
17,539
|
|
Payments
|
|
(3,326
|
)
|
(3,773
|
)
|
Charged to operations
|
|
3,371
|
|
3,438
|
|
Balance at end of period
|
|
$
|
20,774
|
|
$
|
17,204
|
|
The product warranty obligations are included in the
balance sheets as follows (dollars in thousands):
|
|
March 31,
|
|
December 31,
|
|
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
Other accrued liabilities
|
|
$
|
17,074
|
|
$
|
17,029
|
|
Other long-term liabilities
|
|
3,700
|
|
3,700
|
|
Balance at end of period
|
|
$
|
20,774
|
|
$
|
20,729
|
|
7.
Credit Agreements
Long-term debt consists of the following (dollars in
thousands):
|
|
March 31,
|
|
December 31,
|
|
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
First lien term loan
|
|
$
|
739,371
|
|
$
|
920,604
|
|
Second lien term loan
|
|
|
|
430,000
|
|
|
|
739,371
|
|
1,350,604
|
|
Less treasury debt first lien
|
|
7,949
|
|
9,898
|
|
Less treasury debt second lien
|
|
|
|
249,167
|
|
Less current portion
|
|
|
|
39,076
|
|
|
|
$
|
731,422
|
|
$
|
1,052,463
|
|
On February 17, 2010, we completed our initial
public offering. $221,622,000 of proceeds from the initial closing were used to
pay down our second lien credit facility in full and to repay a portion of our
first lien credit facility. Additionally, in March 2010,
11
Table of Contents
the Company used $138,495,000 million of cash and cash
equivalents on hand to further pay down our first lien term loan principal.
Repayments of our first and second lien credit facilities during the three
months ended March 31, 2010 totaled $360,117,000.
At March 31, 2010, the Company had a credit
agreement which provided for borrowings under a revolving credit facility (the
Revolving Credit Facility) and a first lien term loan (collectively, the Credit
Agreement). The Credit Agreement requires the Company, among other things, to
meet certain financial and nonfinancial covenants and maintain financial ratios
in such amounts and for such periods as set forth therein. The Company is
required to maintain a leverage ratio (net debt divided by EBITDA, as defined
in the Credit Agreement) of 6.75 as of March 31, 2010. The leverage ratio
decreases quarterly, and for 2010, the Company will be required to maintain a
leverage ratio of 6.75, 6.50, 6.25, and 5.75 for the first, second, third, and
fourth quarters, respectively. The Company was in compliance with all
requirements as of March 31, 2010 and December 31, 2009.
The Credit Agreement restricts the circumstances in
which distributions and dividends can be paid by the Subsidiary. Payments can
be made to the Company for certain expenses, and dividends can be used to
repurchase equity interests, subject to an annual limitation. Additionally, the
Credit Agreement restricts the aggregate amount of dividends and distributions
that can be paid.
During the three
months ended March 31, 2009, affiliates of CCMP Capital Advisors, LLC
(CCMP), majority shareholder of the Company, acquired $16,000,000 par value of
second lien term loans for approximately $6,662,000. CCMP exchanged this debt
for additional shares of Series A Preferred stock issued by the Company.
The Company subsequently contributed this debt to its Subsidiary. The fair
value of the shares exchanged was $6,662,000. These shares had beneficial
conversion features which were contingent upon a future event (see note 1). The
Company recorded this transaction as Series A Preferred stock of
$6,662,000 based on the fair value of the debt contributed by CCMP which
approximated the fair value of shares exchanged. The debt was held in treasury
at face value. Consequently, the Company recorded a gain on extinguishment of
debt of $9,096,000, which includes the write-off of deferred financing fees and
other closing costs, in the consolidated statement of operations for the three
months ended March 31, 2009.
In previous periods, the Company entered into various
interest rate swap agreements (the Swaps) with certain banks. The Swaps, which
were effective January 2, 2007, October 3, 2007, and January 3,
2008, had notional amounts totaling $825,000,000, $100,000,000, and
$275,000,000, respectively. The total notional amount of $1,200,000,000
declined to $1,100,000,000 at October 3, 2008, further declined to
$675,000,000 at January 3, 2009, and terminated January 4, 2010. The
Company swapped floating three-month LIBOR interest rates for fixed rates with
an aggregate weighted-average interest rate of 5.041% as of December 31,
2009.
The Company entered into a new interest rate swap
agreement on January 21, 2010. The effective date of the swap is July 1,
2010 with a notional amount of $200,000,000, a fixed LIBOR rate of 1.73% and an
expiration date of July 1, 2012. We expect to maintain the swap as highly
effective in accordance with ASC 815 (formerly SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities) and, therefore, any changes
in the fair value of the swap would be recorded in accumulated other
comprehensive income (loss).
The fair value of the interest rate swap agreements,
including the impact of credit risk, was a liability of $1,148,000 and $0 at March 31,
2010 and December 31, 2009, respectively.
8. Earnings Per Share
Our capitalization prior to the initial public
offering consisted of Series A Preferred Stock, Class B Common Stock
and Class A Common Stock. Upon closing of the IPO, all shares of
convertible Class B Common stock and Series A preferred stock were
automatically converted into 88,476,530 and 19,511,018 Class A Common
shares, respectively. The 88,476,530 shares of Class A Common stock were
subject to a 3.294 for 1 reverse stock split, resulting in 26,859,906 Class A
Common shares relative to the Class B Common stock conversion, and the Class A
Common stock was re-designated as Common Stock. Subsequent to the IPO, the
Company has one class of common stock. The share and per share data used in
basic and diluted earnings per share has been retrospectively restated to
reflect the 3.294 for 1 reverse stock split immediately prior to the IPO.
The Class B Common stock was considered a
participating stock security requiring use of the two-class method for the
computation of basic net income (loss) per share in accordance with provision
of ASC 260-10
Earnings per share
.
Losses were not allocated to the Class B Common stock in the computation
of basic earnings per share as the Class B Common stock was not obligated
to share in losses.
12
Table of Contents
Basic earnings per share excludes the effect of common
stock equivalents and is computed using the two-class computation method,
which subtracts earnings attributable to the Class B Common preference
from total earnings. In addition, earnings attributable to the Series A
Preferred preference and the Class B Common and Series A Preferred
beneficial conversion are subtracted from total earnings. Any remaining loss is
attributed to the Class A shares.
Diluted earnings per share are identical to basic
earnings per share because the impact of common stock equivalents on earnings
per share is anti-dilutive.
|
|
Three months ended March 31,
|
|
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,468
|
|
$
|
5,794
|
|
Less: accretion of Series A Preferred stock
|
|
(2,042
|
)
|
(2,792
|
)
|
Less: accretion of Class B Common stock
|
|
(12,133
|
)
|
(24,128
|
)
|
Less: beneficial conversion
|
|
(140,690
|
)
|
|
|
Net loss attributable to Common stock (formerly
Class A Common stock)
|
|
(152,397
|
)
|
(21,126
|
)
|
Income attributable to Class B Common stock
|
|
12,133
|
|
24,128
|
|
|
|
|
|
|
|
Net (loss) income per common share - basic and
diluted:
|
|
|
|
|
|
Common stock (formerly Class A Common stock)
|
|
$
|
(4.26
|
)
|
$
|
(12,169
|
)
|
Class B Common stock
|
|
$
|
1,109
|
|
$
|
1,005
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding
basic and diluted:
|
|
|
|
|
|
Common stock (formerly Class A Common stock)
|
|
35,748,290
|
|
1,736
|
|
Class B Common stock
|
|
10,941
|
|
24,018
|
|
The Series A
Preferred and Class B Common stock were only convertible to Class A
Common stock immediately prior to an initial public offering. The impact of the
conversion of Series A Preferred and Class B Common stock are
excluded from the diluted earnings per share calculation for the three months
ended March 31, 2009, as this contingent event had not yet occurred by the
end of this three month period. The number of shares of Class A Common
stock that were issued upon conversion of the Series A Preferred and Class B
Common stock was dependent upon the initial public offering price of the Class A
Common stock on the date of conversion of February 10, 2010 as well as the
unpaid priority return.
9.
Income Taxes
The Company is the
taxpaying entity and files a consolidated federal income tax return. Currently,
the Company is not under examination by any major taxing jurisdiction to which
the Company is subject, except for an open audit by Michigan Department of
Treasury, which began in March 2010. The Company believes the results of
this audit will not have a significant impact on our financial position or
results of operations. The statute of limitation for tax years 2009, 2008, 2007
and 2006 is open for federal and state income taxes. Additionally, tax year
2005 remains open for examination by certain state taxing authorities.
At December 31,
2009, the Company had federal net operating loss carry forwards of
approximately $161,700,000, which expire between 2026 and 2029, and various
state net operating loss carry forwards, which expire between 2016 and 2029.
As a result of ownership changes, Section 382 of
the Internal Revenue Code of 1986, as amended, and similar state provisions can
limit the annual deductions of net operating loss and tax credit carry
forwards. Such annual limitations could result in the expiration of net
operating loss and tax credit carry forwards before utilization. The Company
had no such limitation as of March 31, 2010; no limitation was triggered
by our initial public offering which was completed on February 17, 2010.
Future ownership changes may result in such a limitation.
13
Table of Contents
10.
Benefit Plans
Additional information related to the Pension Plans is
as follows (dollars in thousands):
|
|
Three months ended March 31,
|
|
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
Components of net periodic pension expense:
|
|
|
|
|
|
Service cost
|
|
$
|
|
|
$
|
|
|
Interest cost
|
|
590
|
|
585
|
|
Expected return on plan assets
|
|
(501
|
)
|
(451
|
)
|
Amortization of net loss
|
|
62
|
|
60
|
|
Net periodic pension expense
|
|
$
|
151
|
|
$
|
194
|
|
11.
Share Plans
On November 10, 2006, the Company adopted the
2006 Management Equity Incentive Plan (2006 Equity Incentive Plan). The 2006
Equity Incentive Plan provided for awards with respect to a maximum of
9,350.0098 shares of Common stock (formerly Class A Common stock) and
5,000 Class B Common shares, subject to certain adjustments. On November 10,
2006, and from time to time thereafter, certain members of management purchased
restricted shares of Class A Common stock under the 2006 Equity Incentive
Plan for $341 per share and pursuant to restricted stock agreements. One half
of the restricted shares vest over time (Time Vesting Shares), with 25% vesting
on November 10, 2007 and on the next three anniversaries thereafter, so
long as the participant was still employed by the Company or one of its
subsidiaries on the applicable vesting date. Upon the occurrence of a change of
control of the Company, any unvested Time Vesting Shares immediately vested in
full, so long as the participant was still employed by the Company or one of
its subsidiaries. The remaining restricted shares immediately vested
(performance-based vesting) in full, provided the participant was still then
employed by the Company or one of its subsidiaries, upon the occurrence of
either: (i) a change of control of the Company that provides CCMP with a
certain rate of return with respect to net proceeds received by CCMP from their
investment in the Company; or (ii) from and after the date of an IPO, the
achievement with respect to shares of the Common stock (formerly Class A
Common stock) of an average closing trading price exceeding, in any 60
consecutive trading day period starting prior to the later of (a) the
fifth year anniversary of the date of grant of the restricted shares, and (b) one
year after the IPO, a certain threshold with respect to net proceeds received
by CCMP from their investment in the Company. As a condition to the purchase of
restricted shares, members of management executed confidentiality,
non-competition and intellectual property agreements.
The fair value of the Class A common stock on the
date of issuance was estimated to be $390 per share. The Company has recorded $6,000 of
share-based compensation expense related to the Time Vesting Shares during the
three months ended March 31, 2010. As a
result of the IPO, the remaining unvested Performance-based Vesting Restricted
Shares became fully vested. As a result, the Company has recorded $159,000 of share-based
compensation expense related to the accelerated vesting during the three months
ended March 31, 2010.
The Company adopted an equity incentive plan on February 10,
2010 in connection with the IPO. At the time of the IPO, 4,341,504 stock
options and 456,249 shares of restricted stock and other stock awards were
granted to employees and Board members of the Company pursuant to the equity
incentive plan. Total share-based compensation cost related to the equity
incentive plan recognized in the condensed consolidated statement of operations
for the three months ended March 31, 2010 was $1,081,000, which is
recorded in operating expenses in the condensed consolidated statement of
operations.
Stock Options
- The stock options have an exercise price equal to
the IPO price of $13 per share, and vest in equal installments over five years,
subject to the grantees continued employment or service. The options expire 10
years after the date of grant.
The grant-date
fair value of each option grant is estimated using the Black-Scholes-Merton
option pricing model. The fair value is then amortized on a straight-line basis
over the requisite service period of the awards, which is generally the vesting
period. Use of a valuation model requires management to make certain
assumptions with respect to selected model inputs. Since there was no history
for the Companys stock, expected volatility was calculated based on an
analysis of historic and implied volatility measures for a set of peer
companies. The average expected life was based on the contractual term of the
option using the simplified method. The risk-free interest rate is based on
U.S. Treasury zero-coupon issues with a remaining term equal to the expected
life assumed at the date of grant. The compensation expense recognized is net
of estimated forfeitures. Forfeitures are
14
Table of
Contents
estimated based on
voluntary termination behavior, as there is no history of actual share option
forfeitures at this time. The weighted-average assumptions used in the
Black-Scholes-Merton option pricing model for 2010 are as follows:
|
|
2010
|
|
|
|
|
|
Expected stock price volatility
|
|
50
|
%
|
|
|
|
|
Risk free interest rate
|
|
2.94
|
%
|
|
|
|
|
Expected annual dividend per share
|
|
$
|
|
|
|
|
|
|
Expected life of options (years)
|
|
6.5
|
|
|
|
|
|
|
The
weighted-average grant-date fair value of options granted during 2010 was $6.84
per option. There were no options exercised during 2010.
A summary of
option activity as of March 31, 2010 and changes during the three months
then ended is presented below:
|
|
Shares
|
|
Weighted-
Average
Exercise
Price
|
|
Weighted-
Average
Remaining
Contractual
Term
(in years)
|
|
Aggregate
Intrinsic
Value
($ in
thousands)
|
|
Outstanding as of December 31, 2009
|
|
|
|
$
|
|
|
|
|
|
|
Granted
|
|
4,341,504
|
|
13.00
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of March 31, 2010
|
|
4,341,504
|
|
13.00
|
|
9.9
|
|
$
|
4,385
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable as of March 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2010, there was $24,889,000 of
total unrecognized compensation cost, net of expected forfeitures, related to
un-vested options. The cost is expected to be recognized over the remaining
service period, having a weighted-average period of 4.9 years. Total share-based
compensation cost related to the stock options for the three months ended March 31,
2010 was $638,000, which is recorded in operating expenses in the condensed
consolidated statement of operations.
15
Table of Contents
Restricted Stock
- The restricted stock awards will vest in full on
the third anniversary of the date of grant, subject to the grantees continued
employment. The fair market value of the award at the time of the grant is
amortized to expense over the period of vesting. The fair value of restricted
share awards is determined based on the market value of the Companys shares on
the grant date. The compensation expense recognized for restricted share awards
is net of estimated forfeitures.
A summary of the
status of the Companys restricted share awards as of March 31, 2010 and
changes during the three months then ended is presented in the table below:
Non-vested Restricted Share Awards
|
|
Shares
|
|
Weighted-Average
Grant-Date
Fair Value
|
|
|
|
|
|
|
|
|
Non-vested as of December 31, 2009
|
|
|
|
$
|
|
|
Granted
|
|
437,499
|
|
13.00
|
|
Vested
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested as of March 31, 2010
|
|
437,499
|
|
13.00
|
|
The weighted-average
grant-date fair value of restricted share awards granted during the three
months ended March 31, 2010 was $13.00 per share. No restricted share
awards vested during the three months ended March 31, 2010.
As of March 31, 2010, there was $4,583,000 of
total unrecognized compensation cost, net of expected forfeitures, related to
non-vested restricted share awards. That cost is expected to be recognized over
the remaining service period, having a weighted-average period of 2.9 years.
Total share-based compensation cost related to the restricted stock for the
three months ended March 31, 2010 was $199,000, which is recorded in
operating expenses in the condensed consolidated statement of operations.
During the three months ended March 31, 2010, 18,750
shares of fully vested stock were granted to certain members of the Companys
board of directors in exchange for their service on the board. Total
compensation cost for these share grants was $244,000, which is recorded in
operating expenses in the condensed consolidated statement of operations.
12.
Commitments and Contingencies
The Company had a previous arrangement with a finance
company to provide floor plan financing for selected dealers. The Company
received payment from the finance company within a few days of shipment of
product to the dealer. The Company participated in the cost of dealer financing
up to certain limits. The Company has agreed to repurchase products repossessed
by the finance company. The Companys financial exposure when repurchasing
product is limited to the difference between the outstanding balance due and
the amount received on the resale of the repossessed product. Under the
previous arrangement, in the event of default, the Company is liable for up to
50% of the financed balance. Effective February 27, 2009, the previous
arrangement between the Company and the finance company was terminated. The
amount financed by dealers which remained outstanding under this previous
arrangement at March 31, 2010 and December 31, 2009 was approximately
$257,000 and $427,000, respectively. Minimal losses have been incurred under
this agreement, and a minimal reserve for future losses has been recorded.
Effective May 29, 2009, the Company entered into
a new arrangement with a different finance company. This arrangement is similar
to the previous arrangement, however, the Company does not indemnify the
finance company for any credit losses it incurs. The amount financed by dealers
which remained outstanding under this new arrangement at March 31, 2010
and December 31, 2009 was approximately $7,251,000 and $6,966,000,
respectively.
In the normal course of business, the Company is named
as a defendant in various lawsuits in which claims are asserted against the
Company. In the opinion of management, the liabilities, if any, which may
result from such lawsuits are not expected to have a material adverse effect on
the financial position, results of operations, or cash flows of the Company.
13.
Subsequent Events
The Company evaluated its financial statements for
subsequent events through the date the financial statements were available to
be issued. The Company is not aware of any subsequent events which require
recognition or disclosure in the financial statements.
16
Table of
Contents
Item 2. Managements Discussion and
Analysis of Financial Condition and Results of Operation
This 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, project, plan, intend, believe,
may, should, can have, likely, future 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 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 report include estimates regarding:
·
our business, financial and operating
results and future economic performance;
·
proposed new product and service offerings;
and
·
managements goals, expectations and
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:
·
demand for our products;
·
frequency of major power outages;
·
availability of raw materials and key components used producing our
products;
·
competitive factors in the industry in which we operate;
·
our dependence on our distribution network;
·
our ability to invest in, develop or adapt to changing technologies and
manufacturing techniques;
·
our ability to adjust to operating as a public company;
·
loss of our key management and employees;
·
increase in liability claims; 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 these forward-looking statements.
A detailed discussion of these and other
factors that may affect future results is contained in Generacs filings with
the Securities and Exchange Commission, including in Item 1A of our Annual
Report on Form 10-K for the fiscal year ended December 31, 2009.
Any forward-looking statement made by us in
this report speaks only as of the date on which we make it. 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
designer and manufacturer of a wide range of standby generators for the
residential, industrial and commercial markets. As the only significant market
participant focused exclusively on these products, we have one of the leading
market positions in the standby generator market in the United States and
Canada. We design, engineer and manufacture generators with an output of between
800W and 9mW of power. We design, manufacture, source and modify engines,
alternators, automatic transfer switches and other components necessary for our
products. Our generators are fueled by natural gas, liquid propane,
17
Table of
Contents
gasoline, diesel
and Bi-Fuel. Our products are available through a broad network of independent
dealers, retailers and wholesalers.
Business
drivers and measures
In operating our
business and monitoring its performance, we pay attention to a number of
industry trends, performance measures and operational factors. The statements
in this section are based on our current expectations.
Industry trends
Our performance is
affected by the demand for reliable back-up power solutions by our customer
base. This demand is influenced by several important trends affecting our
industry, including the following:
Increasing
penetration opportunity.
Although there have been recent increases in
product costs for installed standby generators in the residential and
light-commercial markets (driven in the last two years by raw material costs),
these costs have declined overall over the last decade, and many potential
customers are not aware of the costs and benefits of backup power solutions. We
estimate that penetration rates for residential products are approximately 2%
of U.S. single-family detached, owner-occupied households with a home value of over
$100,000, as defined by the U.S. Census Bureaus 2007 American Housing Survey
for the United States, and penetration rates of many light-commercial outlets
such as restaurants, drug stores, and gas stations are significantly lower than
penetration of hospitals and industrial locations. We believe that 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.
Effect
of large scale power disruptions.
Power disruptions are an
important driver of consumer awareness and have historically influenced demand
for generators. Disruptions in the aging U.S. power grid and tropical and
winter storm activity increase 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 for standby generators. While there are power outages every year across
all regions of the country, major outage activity is unpredictable by nature
and, as a result, our sales levels and profitability may fluctuate from period
to period.
Impact
of business capital investment cycle.
The market for commercial and
industrial generators is affected by the capital investment cycle and overall
durable goods spending, as businesses either add new locations or make
investments to upgrade existing locations. These trends can have a material
impact on demand for industrial and commercial generators. However the capital
investment cycle may differ for the various industrial and commercial end
markets (industrial, telecommunications, distribution, retail health care
facilities and municipal infrastructure, among others). The market for
generators is also affected by general economic conditions, credit availability
and trends in durable goods spending by consumers and businesses.
Operational factors
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 and cost control. The operational
factors that affect our business include the following:
New
product start-up costs.
When we launch new products, we generally
experience an increase in start-up costs, including engineering expenses, air
freight expenses, testing expenses and marketing expenses, resulting in lower
gross margins during the initial launch of a new product. Margins on new
product introductions generally increase over the life of the product as these
start-up costs decline and we focus our engineering efforts on product cost
reduction.
Effect
of commodity and component price fluctuations.
Industry-wide price
fluctuations of key commodities, such as steel, copper and aluminum and other
components we use in our products, can have a material impact on our results of
operations. We have historically attempted to mitigate the impact of commodity
and component prices through improved product design, 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 borne by our
customers and in other cases are paid by us.
Other factors
Other factors that
affect our results of operations include the following:
Factors
influencing interest and amortization expense.
We anticipate that interest
expense will decrease in future periods because, during the three months ended March 31,
2010, we used the net proceeds from our initial public offering and available
18
Table of
Contents
cash on hand, to repay
a substantial portion of outstanding indebtedness. The expiration of certain
interest rate swap agreements in January 2010 will also decrease interest
expense in future periods.
Factors
influencing provision for income taxes.
Because we made a Section 338(h)(10) election
in connection with the 2006 CCMP transactions described below, we have
$1.4 billion of tax-deductible goodwill and intangible asset amortization
remaining as of December 31, 2009 that we expect to generate cash tax
savings of $557 million through 2021, assuming continued profitability and
a 38.5% tax rate. 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 $47 million through 2020 and
$39 million in 2021, assuming profitability and a 38.5% tax rate.
Additionally, we have federal net operating loss, or NOL, carry forwards of
$161.8 million as of December 31, 2009, which we expect to generate
an additional $57 million of federal cash tax savings at a 35% rate when
and if utilized. Based on current business plans, we believe that our cash tax
obligations through 2021 will be significantly reduced by these tax attributes.
However, any subsequent accumulations of common stock ownership leading to a
change of control under Section 382 of the U.S. Internal Revenue Code of
1986, including through sales of stock by large stockholders, all of which are
outside of our control, could limit and defer our ability to utilize our net
operating loss carry forwards to offset future federal income tax liabilities.
Seasonality.
Although there is
demand for our products throughout the year, in each of the past three years
approximately 20% to 25% of our net sales occurred in the first quarter, 22% to
25% in the second quarter, 25% to 29% in the third quarter and 25% to 30% in
the fourth quarter, with different seasonality depending on the timing of major
outage activity in each year. We maintain a flexible production schedule in order
to respond to outage-driven peak demand, but typically increase production
levels in the second and third quarters of each year.
Transactions
with CCMP
In November 2006,
affiliates of CCMP Capital Advisors, LLC, or CCMP, together with affiliates of
Unitas Capital Ltd., (Unitas), and members of our management, purchased an
aggregate of $689 million of our equity capital. In addition, on November 10,
2006, Generac Power Systems borrowed an aggregate of $1,380 million,
consisting of an initial drawdown of $950 million under a
$1.1 billion first lien secured credit facility and $430 million
under a $430 million second lien secured credit facility. With the
proceeds from these equity and debt financings, together with cash on hand at
Generac Power Systems, we (1) acquired all of the capital stock of Generac
Power Systems and repaid certain pre-transaction indebtedness of Generac Power
Systems for $2.0 billion, (2) paid $66 million in transaction
costs related to the transaction and (3) retained $3 million for general
corporate purposes. For additional information concerning these and other
historical transactions with CCMP, see Item 1BusinessHistoryCCMP
transactions in our Annual Report on Form 10-K for the fiscal year ended December 31,
2009.
During the three
months ended March 31, 2009, affiliates of CCMP acquired $16,000,000 par
value of Second Lien term loans for approximately $6,662,000. CCMP exchanged
this debt for additional shares of Series A Preferred stock issued by the
Company. The Company subsequently contributed this debt to its Subsidiary. The
fair value of the shares exchanged was $6,662,000. These shares had beneficial
conversion features which are contingent upon a future event (see note 1 to the
Condensed Consolidated Financial Statements). The Company recorded this
transaction as Series A Preferred stock of $6,662,000 based on the fair
value of the debt contributed by CCMP which approximated the fair value of
shares exchanged. The debt was held in treasury at face value. Consequently,
the Company recorded a gain on extinguishment of debt of $9,096,000, which
includes the write-off of deferred financing fees and other closing costs, in
the consolidated statement of operations for the three months ended March 31,
2009.
Corporate
reorganization
Our capitalization
prior to the initial public offering consisted of Series A Preferred
Stock, Class B Common Stock and Class A Common Stock. Our Series A
Preferred Stock was entitled to a priority return preference equal to a 14%
annual return on the amount originally paid for such shares and equity
participation equal to 24.3% of the remaining equity value of the Company. Our Class B
Common Stock was entitled to a priority return preference equal to a 10% annual
return on the amount originally paid for such shares. In connection with the
initial public offering, we undertook a corporate reorganization which gave
effect to the conversion of our Series A Preferred Stock and Class B
Common Stock into the same class of our common stock that was sold in our initial
public offering while taking into account the rights and preference of those
shares, including the priority returns of our Series A Preferred Stock and
our Class B Common Stock and the equity participation rights of the Series A
Preferred Stock. A reverse stock split was needed to reduce the number of
shares to be issued to holders of our Class A and Class B Common
Stock to the number that correctly reflected the proportionate interest of such
stockholders in the Company, taking into account the number of shares of common
stock to be issued upon the conversion of our Series A Preferred Stock and
the number and value of shares of common stock to be issued and sold to new
investors in the initial public offering. We refer to these transactions as the
Corporate Reorganization. For additional information about the Corporate
Reorganization, see Item 7Managementss
19
Table of Contents
Discussion and
Analysis of Financial Condition and Results of Operations in our 10K filed for
the fiscal year ended December 31, 2009.
Initial
public offering
On February 17,
2010, we completed our initial public offering of 18,750,000 shares of our
common stock at a price of $13.00 per share. In addition, the underwriters
exercised their option and purchased an additional 1,950,500 shares of our
common stock from us on March 18, 2010. We received a total of
approximately $247.6 million in net proceeds from the initial public
offering and underwriters option exercise, after deducting the underwriting
discounts and expenses.
The Company
adopted an equity incentive plan on February 10, 2010 in connection with
the IPO. A registration statement on Form S-8
was filed registering the 6,637,835 shares of common stock issuable under the
equity incentive plan. At the time of
the IPO, 4,341,504 stock options and 456,249 shares of restricted stock and
other stock awards were granted to employees and Board members of the Company
pursuant to the equity incentive plan.
The stock options have an exercise price equal to the IPO price and vest
in equal installments over five years, subject to the grantees continued
employment or service. The restricted stock awards will vest in full on the
third anniversary of the date of grant, subject to the grantees continued
employment.
Following the
Corporate Reorganization, the IPO and underwriters option exercise, we had
67,529,290 shares of common stock outstanding.
Subsequent repayment of debt
In February 2010,
we used $221.6 million in net proceeds from the initial closing of the IPO
to pay down our second lien term loan in full and to pay down a portion of our
first lien term loan. In addition, in March 2010, we used
$138.5 million of cash and cash equivalents on hand to further pay down
our first lien term loan. As a result of these pay downs, at March 19,
2010, the outstanding balance on the first lien credit facility had been
reduced to $731.4 million, and our second lien credit facility had been
repaid in full and terminated. This reduction in debt will have a significant
impact on cash flows as a result of lower debt service costs in future periods,
based on current LIBOR rates.
20
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Results
of operations
Quarter ended March 31, 2010 compared to quarter ended March 31,
2009
The following
table sets forth our consolidated statement of operations data for the periods
indicated:
|
|
Three months ended March 31,
|
|
(Dollars in thousands)
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
130,718
|
|
$
|
140,446
|
|
|
|
|
|
|
|
Costs of goods sold
|
|
79,300
|
|
92,919
|
|
|
|
|
|
|
|
Gross profit
|
|
51,418
|
|
47,527
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Selling and service
|
|
14,312
|
|
14,390
|
|
|
|
|
|
|
|
Research and development
|
|
3,722
|
|
2,612
|
|
|
|
|
|
|
|
General and administrative
|
|
5,159
|
|
3,897
|
|
|
|
|
|
|
|
Amortization of intangibles
|
|
12,761
|
|
12,812
|
|
|
|
|
|
|
|
Total operating expenses
|
|
35,954
|
|
33,711
|
|
|
|
|
|
|
|
Income from operations
|
|
15,464
|
|
13,816
|
|
|
|
|
|
|
|
Total other expense, net
|
|
(12,914
|
)
|
(7,917
|
)
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
2,550
|
|
5,899
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
82
|
|
105
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,468
|
|
$
|
5,794
|
|
|
|
|
|
|
|
Residential power products
|
|
$
|
83,998
|
|
$
|
88,476
|
|
|
|
|
|
|
|
Industrial & Commercial power products
|
|
38,318
|
|
45,082
|
|
|
|
|
|
|
|
Other
|
|
8,402
|
|
6,888
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
130,718
|
|
$
|
140,446
|
|
Net
sales.
Net
sales decreased $9.7 million, or 6.9%, to $130.7 million for the three
months ended March 31, 2010 from $140.4 million for the three months
ended March 31, 2009. This decrease was driven by a $4.5 million, or
5.1%, decrease in sales of residential products due to a weaker winter ice
storm season during the first quarter of 2010 compared to 2009 which impacted
portable generator volume during the current quarter. In addition, industrial and commercial
product sales declined $6.8 million, or 15.0%, due to continued
declines in
sales to industrial and commercial national account customers. Additionally, as a late cycle business,
further weakness in U.S. non-residential construction activity has also had a
negative impact on the market demand for commercial and industrial standby
generators
.
Costs
of goods sold.
Costs
of goods sold decreased $13.6 million, or 14.7%, to $79.3 million for
the three months ended March 31, 2010 from $92.9 million for the
three months ended March 31, 2009. Materials cost decreased $11.3 million
year-over-year due to a decrease in sales volume, lower commodity costs,
primarily steel, copper and aluminum, as well as engineering and
21
Table of Contents
sourcing cost
reductions implemented during 2009. Freight cost and labor and overhead
costs also decreased $0.7 million and $1.6 million, respectively,
year over year.
Gross
profit.
Gross
profit increased $3.9 million, or 8.2%, to $51.4 million for the
three months ended March 31, 2010 from $47.5 million for the three
months ended March 31, 2009, primarily due to the factors affecting cost
of goods sold described above. As a percentage of net sales, gross profit
increased to 39.3% for the three months ended March 31, 2010 from 33.8%
for the three months ended March 31, 2009. Gross profit margin increased
as
our first quarter 2010 gross margin benefited from lower commodity
costs versus the prior year quarter. In
addition, gross profit margins improved year-over-year due to price increases
implemented during first quarter 2009 and cost reductions implemented
throughout 2009
.
Operating
expenses.
Operating
expenses increased $2.2 million, or 6.7%, to $36.0 million for the
three months ended March 31, 2010 from $33.7 million for the three
months ended March 31, 2009. Selling and service expenses remained
relatively flat due to lower variable expenses related to our decrease in net
sales, such as warranty and commission, offset by higher advertising
investment. Research and development expenses increased year over year
$1.1 million from increased product development and engineering resource
investment. General and administrative expenses increased $1.3 million
mainly due to $1.2 million of stock based compensation expense recorded during
the three months ended March 31, 2010 to account for the stock option,
restricted stock and other stock awards issued in connection with our IPO. In addition, general and administrative
expenses increased due to additional public company administrative costs
incurred during the current year period.
Other
expense.
Other
expense increased $5.0 million, or 63.1%, to $12.9 million for the three
months ended March 31, 2010 from $7.9 million for the three months
ended March 31, 2009. This increase was caused by a number of
factors. As a result of the previously
discussed CCMP debt buy-backs during the three months ended March 31,
2009, we realized a $9.1 million gain on the extinguishment of debt during the
first quarter of 2009, which did not recur in 2010. In addition, the subsequent repayment of debt
following our IPO in the first quarter of 2010 resulted in an acceleration of
deferred financing cost amortization of $4.2 million that did not occur in
2009. Lastly, a reduction in interest
expense of $9.5 million was the result of (i) debt buy-backs in 2009, (ii) the
subsequent repayment of debt post IPO in 2010, (iii) lower LIBOR rates
year-over-year, and (iv) the expiration of interest rate swap contracts in
January 2010.
Provision
for income taxes.
Income
tax expense was $0.1 million for the three months ended March 31,
2010 and 2009. Income tax expense primarily relates to certain state income
taxes based on profitability measures other than net income.
Net
income.
As
a result of the factors identified above, we generated net income of
$2.5 million for the three months ended March 31, 2010 compared to
$5.8 million for the three months ended March 31, 2009.
Adjusted
EBITDA.
Non-GAAP
adjusted EBITDA improved to $31.8 million
for the three months ended March 31, 2010
from $28.9
million
for the three
months ended March 31, 2009
. The previously mentioned improvements in
gross profit are the primary drivers of this increase. See Non-GAAP measures for a discussion of
how we calculate this non-GAAP measure and limitations on its usefulness.
Liquidity
and financial condition
Our primary cash
requirements include the payment of our raw material and components suppliers,
salaries and benefits, operating expenses, interest and principal payments
on our debt, and capital expenditures. We finance our operations primarily
through cash flow from operations and borrowings under our revolving credit
facility, if any.
In November 2006,
Generac Power Systems entered into a seven-year $950.0 million first lien
term loan (at LIBOR + 2.5%), a seven-and-a-half year $430.0 million second
lien term loan (at LIBOR + 6%), and a six-year $150.0 million revolving
credit facility (at LIBOR + 2.5%). On February 17, 2010, we used
approximately $221.6 million of the net proceeds of our initial public
offering to pay down our second lien term loan in full and to repay a portion
of our first lien term loan. In March 2010, we used a substantial portion
of our cash and cash equivalents on hand to repay an additional
$138.5 million of our first lien term loan. As a result of these pay
downs, previous payments of principal and prior repurchases of debt by our
affiliates, at March 31, 2010, the outstanding balance on the first lien
credit facility had been reduced to $731.4 million, and our second lien
credit facility had been repaid in full and terminated.
At March 31,
2010, we had cash and cash equivalents of $66.4 million and
$146 million of availability under our revolving credit facility, net of
outstanding letters of credit.
22
Table of
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Long-term
liquidity
We believe that
our cash flows from operations and our availability under our revolving credit
facility, combined with our low capital expenditure requirements, our favorable
tax attributes, and reduced debt service costs, will provide us with sufficient
capital to continue to grow our business in the next twelve months and beyond.
However, even with our reduced leverage, we will continue to use a significant
portion of our cash flow to pay interest on our outstanding debt, limiting the
amount available for working capital, capital expenditures and other general
corporate purposes. As we continue to expand our business, we may in the future
require additional capital to fund working capital, capital expenditures, or
acquisitions.
Cash
flow
Quarter ended March 31, 2010 compared to quarter ended March 31,
2009
The following
table summarizes our cash flows by category for the periods presented:
|
|
Three months ended
March 31,
|
|
|
|
|
|
(Dollars in thousands)
|
|
2010
|
|
2009
|
|
$ Change
|
|
% Change
|
|
Net cash provided by operating activities
|
|
$
|
18,436
|
|
$
|
111
|
|
$
|
18,325
|
|
16509
|
%
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
$
|
(1,564
|
)
|
$
|
(324
|
)
|
$
|
(1,240
|
)
|
383
|
%
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
$
|
(111,808
|
)
|
$
|
(9,500
|
)
|
$
|
(102,308
|
)
|
1077
|
%
|
Net cash provided
by operating activities was $18.4 million for the three months ended March 31,
2010 compared to $0.1 million for the three months ended March 31, 2009. I
mprovements in
operating income, reductions in cash interest and reductions in inventory
levels attributed to this increase in cash flows from operating activities.
Net cash used in
investing activities for the three months ended March 31, 2010 was
$1.6 million, all related to the purchase of property and equipment. Net
cash used in investing activities for the three months ended March 31,
2009 was $0.3 million and included $0.4 million used for the purchase
of property and equipment.
Net cash used in
financing activities was $111.8 million for the three months ended March 31,
2010, due to the net impact of our IPO and subsequent repayment of debt. As previously discussed, during the three
months ended March 31, 2010, we received approximately $248.3 million of
net proceeds from our IPO, which was offset by a $360.1 million subsequent
repayment of our term loans. Net cash used in financing activities was
$9.5 million for the three months ended March 31, 2009, representing
principal payments on our credit facilities.
Contractual
Obligations
There have been no
material changes to our contractual obligations, except for the reduction in
long-term debt and related interest obligations as a result of the debt
repayments made in the three months ended March 31, 2010 discussed above.
Off-balance
sheet arrangements
There have been no
material changes since the March 30, 2010 filing of our Annual Report on Form 10-K
for the fiscal year ended December 31, 2009.
Critical
accounting policies
There have been no material changes in the Companys critical
accounting policies since the March 30, 2010 filing of our Annual Report
on Form 10-K, except for the adoption of share-based compensation
accounting in accordance with Accounting Standards Codification (ASC) section
718. Under the fair value recognition provisions of ASC 718, share-based
compensation cost is measured at the grant date based on the fair value of the
award and is recognized as expense over the requisite service period.
Determining the fair value of share-based awards at the grant date requires
judgment, including estimating expected dividends and market volatility of our
stock. In addition, judgment is also required in estimating the amount of
share-based
23
Table of Contents
awards that are
expected to be forfeited. If actual results differ significantly from these
estimates, share-based compensation expense and our results of operations could
be impacted.
As discussed in
the annual report, in preparing the financial statements in accordance with
accounting principles generally accepted in the U.S., 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, that its estimates and assumptions are
reasonable, adhere to accounting principles generally accepted in the U.S., 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, plant and equipment, and prepaid expenses. The Company
believes that its most critical accounting estimates and assumptions are in the
following areas: goodwill and other indefinite-lived intangible asset
impairment assessment, defined benefit pension obligations, estimates of
allowance for doubtful accounts, excess and obsolete inventory reserves,
product warranty, other contingencies, derivative accounting, income taxes, and
share-based compensation.
Non-GAAP
measures
Adjusted EBITDA
represents net income before interest expense, taxes, depreciation and
amortization, as further adjusted for the other items reflected in the
reconciliation table set forth below. This presentation is substantially
consistent with the presentation used in our senior secured credit facilities (Covenant
EBITDA), except that we do not give effect to certain additional adjustments
that are permitted under those facilities which, if included, would increase
the amount reflected in this table.
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 senior secured credit facilities but
also because it assists us in comparing our performance across reporting
periods on a consistent basis because 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 a benchmark for the determination of the bonus
component of compensation for our senior executives under our management
incentive plan, as described further in our 2010 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 our company. Management believes that 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 companys 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.
24
Table of
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The adjustments
included in the reconciliation table listed below are provided for under our
senior secured credit facilities (except where noted in footnote (j) below)
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 impairment and other charges, transaction costs
relating to the CCMP Transactions and to repurchases of our debt by affiliates
of CCMP, non-cash gains and 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;
·
are non-cash in nature, such as share-based compensation
; or
·
were eliminated following the consummation of our
initial public offering, such as sponsor fees.
We explain in more
detail in footnotes (a) through (j) 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 impairment 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;
·
the adjustments for business optimization expenses,
which we believe are appropriate for the reasons set out in note (f) below,
represent costs associated with severance and other items which are reflected
in operating expenses and income (loss) from continuing operations in our
condensed consolidated statements of operations 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 items that are included as
adjustments in calculating Adjusted EBITDA (subject ultimately to review by our
board of directors in the context of the boards review of our quarterly
financial statements). While many of the adjustments (for example, transaction
costs and credit facility fees and sponsor fees), involve mathematical
application of items reflected in our financial statements, others (such as
business optimization adjustments) involve a degree of judgment and discretion.
While we believe that 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 boards review of our quarterly financial statements and
certification by our chief financial officer in a compliance certificate
provided to the lenders under our senior secured credit facilities, this
discretion may be viewed as an additional limitation on the use of Adjusted
EBITDA as an analytical tool.
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Table of
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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.
Our senior secured
credit facility requires Generac Power Systems, Inc. to maintain a
leverage ratio of consolidated total debt, net of unrestricted cash and
marketable securities, to Covenant EBITDA at a level that varies over time. As
of March 31, 2010, Generac Power Systems, Inc.s ratio was 4.40 to
1.00, which was below the covenant requirement of 6.75 to 1.00. Generac
Holdings Inc. net debt to adjusted EBITDA as of March 31, 2010 was
4.1x. Our credit agreement does not
permit us to net cash and cash equivalents held by the Generac Holdings Inc.
entity against our debt balance for covenant purposes. Failure to comply with
this covenant would result in an event of default under our senior secured
credit facility unless waived by our lenders. An event of default under our
senior secured credit facility could result in the acceleration of our
indebtedness under the facility, and we may be unable to repay the amounts due.
The following
table presents a reconciliation of net income to Adjusted EBITDA:
|
|
Three months ended March 31,
|
|
(Dollars in thousands)
|
|
2010
|
|
2009
|
|
Net income
|
|
$
|
2,468
|
|
$
|
5,794
|
|
Interest Expense
|
|
8,492
|
|
17,966
|
|
Depreciation and amortization
|
|
14,652
|
|
14,727
|
|
Income taxes provision
|
|
82
|
|
105
|
|
Non-cash impairment and other charges (a)
|
|
149
|
|
(1,197
|
)
|
Non-cash share-based compensation expense (b)
|
|
1,246
|
|
|
|
Write-off of deferred financing costs related to
debt extinguishment (c)
|
|
4,180
|
|
|
|
Transaction costs and credit facility fees (d)
|
|
362
|
|
399
|
|
Non-cash gains (e)
|
|
|
|
(9,096
|
)
|
Business optimization expenses (f)
|
|
108
|
|
|
|
Sponsor fees (g)
|
|
56
|
|
125
|
|
Letter of credit fees (h)
|
|
2
|
|
25
|
|
Other state franchise taxes (i)
|
|
61
|
|
27
|
|
Holding company interest income (j)
|
|
(26
|
)
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
31,832
|
|
$
|
28,875
|
|
(a) Represents the following non-cash charges:
·
for the three months ended March 31,
2010, settled mark-to-market gains on copper forward contracts;
·
for the three
months ended March 31, 2009, unsettled mark-to-market gains on copper
forward contracts and a gain on disposal of assets;
We believe that adjusting net income for these non-cash charges is
useful for the following reasons:
·
The gain on
disposals of assets described above result from the sale of assets that are no
longer useful in our business and therefore represent losses that are not from
our core operations;
·
The charges for
unsettled mark-to-market gains and losses on copper forward contracts represent
non-cash items to reflect changes in the fair value of forward contracts that
have not been settled or terminated. We believe that 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 operations and
cash flows to capture the full effect of these contracts on our operating
performance;
(b) Represents share-based compensation expense to
account for stock options, restricted stock and other stock awards over their
vesting period, issued in connection our initial public offering;
(c) Represents the write-off of a portion of deferred
financing costs related to the repayment of debt after our initial public
offering;
(d) Represents the following transaction costs and fees
relating to our senior secured credit facilities:
·
administrative
agent fees and revolving credit facility commitment fees under our senior
secured credit facilities, 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;
·
transaction costs relating
to repurchases of debt under our first and second lien credit facilities by
affiliates of CCMP, which CCMPs affiliates contributed to our company in
exchange for the issuances of securities, which repurchases we do not expect to
recur;
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Table of
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(e) Represents non-cash gains on the extinguishment of
debt repurchased by affiliates of CCMP, as described in note (d) above,
which we do not expect to recur.
(f) Represents severance costs incurred from
restructuring-related activities. We do not believe the charges for
restructuring-related activities in the three months ended March 31, 2010
reflect our ongoing operations. Although we have incurred severance costs in
the past, it is difficult to predict the amounts of similar costs in the
future, and we believe that adjusting for these costs aids in measuring the
performance of our ongoing operations. We believe that these costs will tend to
be immaterial to our results of operations in future periods.
(g) Represents management, consulting, monitoring,
transaction and advisory fees and related expenses paid or accrued to
affiliates of CCMP and affiliates of Unitas (related parties) under an advisory
services and monitoring agreement. This agreement automatically terminated upon
consummation of our initial public offering, and, accordingly, we believe that
these expenses do not reflect the expenses of our ongoing operations.
(h) Represents fees on letters of credit outstanding
under our senior secured credit facilities, 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.
(i) Represents franchise and business activity taxes
paid at the state level. We believe that the inclusion of these taxes in
calculating Adjusted EBITDA is similar to the inclusion of income taxes, as set
forth in the table above.
(j) Represents interest earned on cash held at Generac
Holdings Inc. We exclude these amounts because we do not include them in
the calculation of Covenant EBITDA under and as defined in our senior secured
credit facilities.
New
Accounting Standards
There have been no
material changes since the March 30, 2010 filing of our 2009 Annual Report
on Form 10-K for the fiscal year ended December 31, 2009.
A discussion of
new accounting pronouncements is included in the Notes to Condensed
Consolidated Financial Statements of this Form 10-Q under the heading New
Accounting Standards to be Adopted and is incorporated herein by reference.
Item 3. Quantitative and Qualitative Disclosures about
Market Risk
There has been no
material change in market risk from the information provided in Item 7A.
(Quantitative and Qualitative Disclosures About Market Risk) of our 2009 Annual
Report on Form 10-K for the fiscal year ended December 31, 2009.
Item 4. Controls and Procedures
Disclosure
Controls and Procedures
Under the supervision and
with the participation of our management, including our principal executive
officer and principal 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
There have been no
changes during the three months ended March 31, 2010 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.
27
Table of Contents
PART II.
OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we are involved in legal proceedings primarily
involving product liability and employment matters and general commercial
disputes arising in the ordinary course of our business. As of March 31,
2010, 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 since the March 30, 2010 filing of our 2009 Annual Report
on Form 10-K for the fiscal year ended December 31, 2009.
Item 6. Exhibits
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.
|
*
|
Filed herewith.
|
**
|
Furnished herewith.
|
28
Table of Contents
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:
|
|
|
|
YORK A. RAGEN
|
|
|
Chief
Financial Officer
(Duly Authorized Officer and Principal Financial and Accounting Officer)
|
Dated: May 14, 2010
29
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