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Generac Reports Q1 2011 Results

Commercial & Industrial sales drives continued confidence despite soft residential sales.


Generac Holdings Inc. (NYSE: GNRC), a leading designer and manufacturer of backup power generation products, today reported financial results for its first quarter ended March 31, 2011.

"Our first quarter 2011 results were impacted by headwinds in our residential markets, partially offset by improving demand in our Commercial & Industrial markets"

Highlights

Total net sales decreased year-over-year by 5.2% to $124.0 million as compared to $130.7 million in the first quarter of 2010. Continued strength in Commercial & Industrial product sales with 15.6% year-over-year growth. Difficult prior year comparisons with regards to severe power outages, resulting in 17.6% year-over-year reduction in Residential product sales.

Net income increased year-over-year to $4.8 million as compared to $2.5 million for the first quarter of 2010; Adjusted net income decreased 15.0% to $17.1 million from $20.2 million in the first quarter of 2010. Diluted net income per common share was $0.07 in the first quarter of 2011; Adjusted diluted net income per common share was $0.25 in the first quarter of 2011. Prior year earnings per share results are not comparable given our equity structure change in connection with our initial public offering (IPO) in February 2010. Continued disciplined capital allocation, including a $24.7 million debt pre-payment in April 2011. Over the last five months, we have pre-paid approximately $100 million of debt, bringing our total debt pay-down since our IPO to $459 million. Company remains optimistic about achieving moderate year-over-year sales growth overall in 2011.

"Our first quarter 2011 results were impacted by headwinds in our residential markets, partially offset by improving demand in our Commercial & Industrial markets," said Aaron Jagdfeld, President and Chief Executive Officer of Generac. "We continue to see strong year-over-year growth in our Commercial & Industrial (C&I) products. We have been able to improve our closure rates on sales of C&I products by offering cost effective, innovative back-up power solutions that continue to be adopted by specifying engineering firms and our national account customers. As capital spending for commercial projects further improves, we believe that demand for our C&I products will show continued strength."

"For our Residential product sales, the first quarter of 2011 was challenging given difficult prior year comparables with regards to severe power outages. The prior year first quarter had more severe power outage events as compared with the current year first quarter, impacting year-over-year sales growth for our lower kilowatt portable generators. Additionally, as mentioned last quarter, we saw an increase in seasonal stocking in the fourth quarter of 2010 by certain distribution partners in anticipation of an active winter storm season, which had a residual effect on first quarter 2011 residential generator sales. While the environment for U.S. residential investment continues to be challenging, we believe year-over-year sales trends for our residential products will accelerate from current levels as we execute on our growth initiatives. We are excited about our new licensing arrangement with Honeywell and the launch of our new line of power washers, both of which began shipping late in the first quarter of 2011."

"As we look forward, we are committed to our strategic growth initiatives and are confident in the strong cash flow generation of the business, which allowed us to pre-pay another $24.7 million of term loan debt in April 2011. Our disciplined capital allocation has strengthened our balance sheet, affording us the ability to invest in future growth."

Commercial & Industrial product sales for the first quarter of 2011 increased 15.6% to $44.3 million from $38.3 million for the comparable period in 2010, driven by strong shipments to industrial national account customers and strong demand for our larger industrial systems which benefit from innovative features and value price points. As our national account customers increase capital spending and contractors look to reduce the cost of their projects, Generac has been able to capitalize on these opportunities with our broad C&I product offering and dedicated customer service.

Residential product sales of $69.2 million for the first quarter of 2011 decreased 17.6% compared to $84.0 million in the first quarter of 2010. The majority of this year-over-year sales decline is attributable to a decline in portable generator sales as a result of less severe power outages versus prior year. To a lesser extent, home standby generator sales declined versus prior year due to higher levels of inventory in the channel coming into the year versus prior year.

Gross profit margin for the first quarter 2011 decreased to 38.1% from 39.3% in the same period last year, which was primarily attributable to increased commodity and material costs. We expect that selective price increases implemented during the first quarter of 2011 will begin to be fully realized during the second quarter as we work through quotes, backlog and pricing resets throughout our distribution channels.

Operating expenses for the first quarter of 2011 were essentially flat in comparison with the first quarter of 2010 at $36.0 million. Additional non-cash stock compensation expense of $0.8 million was offset by a $1.0 million reduction in amortization of intangibles. The remaining nominal year-over-year increase in operating expenses was primarily driven by additional infrastructure added to support the long-term strategic growth of the Company.

Adjusted EBITDA of $27.5 million in the first quarter 2011 decreased from $31.8 million in the same period last year as a result of the previously mentioned sales and margin declines.

Interest expense decreased in the first quarter of 2011 to $6.0 million, compared to $8.5 million in the same period last year, contributing to our improved net income compared to prior year. The decline in interest expense is attributable to the debt pre-payments that were made during 2010 that further decreased the leverage of the Company.

Net income for the first quarter 2011 increased to $4.8 million, compared to $2.5 million for the first quarter of 2010. Included in prior year net income was a $4.2 million non-cash write-off of deferred financing costs associated with debt pre-payments in the first quarter of 2010. Adjusted net income as defined in the accompanying reconciliation schedules, which excludes this write-off of deferred financing costs, decreased 15.0% to $17.1 million in the first quarter of 2011 compared to $20.2 million in the prior year.

Net cash provided by operating activities was $12.7 million in the first quarter of 2011, which was $5.8 million lower than the same period last year, as reduced profitability and increased working capital needs were partially offset by reduced cash interest paid during the current year quarter. From a seasonality standpoint, the first quarter of the year is typically the low point with regards to net sales and cash flows.

OUTLOOK

Mr. Jagdfeld continued, "As we stated last quarter, we remain optimistic that we can deliver moderate total sales growth overall in 2011 while maintaining attractive gross margins and continuing to invest prudently in our operating infrastructure to support our long-term strategic growth plans. Given first quarter 2011 results, we are seeing a sales mix shift towards more C&I products which we believe will continue throughout 2011. Given the headwinds experienced in our residential markets in the first quarter of 2011, assuming no U.S. residential investment recovery in 2011, and assuming no major power outage events in 2011, we anticipate that Residential product sales will be roughly flat with prior year for the remaining three quarters of 2011 and C&I product sales will continue double-digit year-over-year growth."

"From a margin standpoint, we expect higher commodity costs and the weaker U.S. dollar to continue to modestly impact margins. We have implemented price increases and cost reductions that we believe will mostly offset these higher input costs, realization of which will begin in Q2 and Q3, respectively. Additionally, we anticipate that the expected sales mix shift towards C&I products will have a slight unfavorable impact on our overall margins. Even with these margin challenges, we believe that we will still be able to deliver best-in-class EBITDA margins given our advantaged operating model."

"Looking forward, we expect to generate significant free cash flow in 2011 given our attractive margins, asset-light model, favorable tax attributes and low cost debt structure. This cash flow will continue to provide us operational flexibility and allow us to focus on our strategic initiatives to propel the future growth of the Company."

www.generac.com

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