Acquisitions Powered Generac Holdings Inc.'s Earnings

By Markets Fool.com

Image source: Generac Holdings.

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Generac Holdings (NYSE: GNRC) delivered robust second-quarter results powered by its most recent acquisitions. In fact, the acquisition-driven growth more than doubled the company's international revenue. That said, some of its end markets remain under pressure, especially the oil and gas market, which has it dialing back its full-year expectations.

Generac Holdings Inc. results: The raw numbers

Metric

Q2 2016 Actuals

Q2 2015 Actuals

Growth (YOY)

Net sales

$367.4 million

$288.4 million

27.4%

Adjusted net income

$42.7 million

$35.3 million

21%

EPS

$0.64

$0.50

28%

Data source: Generac Holdings Inc.

What happened with Generac Holdings Inc. this quarter?

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Acquisitions-powered growth:

  • Generac's domestic segment's sales rose 11.1% to $286.7 million. This was primarily due to the purchase of Country Home Products, as well as increased shipments of residential products, which offset weaker sales of mobile products into the oil and gas market.
  • International sales surged 167.2% to $80.7 million due to the recent acquisition of Pramac. That transaction led the company to change how it reports results going forward, with it now reporting domestic and international sales separately due to the company's strategic plan to expand overseas.
  • Overall, acquisitions provided $88.1 million in incremental revenue, more than offsetting a $9.1 million decline in revenue from its legacy business.
  • Net income jumped due to the acquisition-driven sales boost, as well as a 50-basis-point improvement in its gross profit margin to 33.8%, thanks in part to lower commodity prices.
  • Meanwhile, earnings growth was even stronger on a per-share basis as a result of the company's share repurchase program. The company has now repurchased 4.2 million shares for $135 million, including $34.6 million spent during the quarter.

What management had to say

CEO Aaron Jagdfeld,commenting on the company's results, said:

We are pleased with our overall financial results for the quarter as residential product organic sales grew solidly over the prior year. This performance helped to offset weaker sales of mobile products within domestic and international markets. We have made encouraging progress on the integration of our recent Country Home Products and Pramac acquisitions, as the addition of these companies are an important element to diversifying the business and expanding internationally. We also generated a strong level of operating and free cash flow during the quarter and resumed activity on our share repurchase program.

As Jagdfeld points out, Generac's two most recent acquisitions were the primary drivers of its second-quarter results. However, the company has also done a good job in boosting free cash flow generation, which surged more than 500% to $52.2 million during the quarter. Powering that surging cash flow was a notable reduction in working capital, as well as an overall improvement in the company's operating earnings. Because cash flow generation was robust, the company was able to restart its share buyback program, which led to a meaningful reduction in the share count, and further boosted earnings per share.

Looking forward

While the company's second-quarter results were solid, it continues to experience weakness in sales to oil and gas customers as well as some of its other end markets. This is causing it to be more cautious on its full-year. As a result, the company now expects net sales to only increase by 6% to 8%, which is below its prior expectation for a 10% to 12% increase in net sales. Furthermore, it also sees margins coming in a little weaker than initially anticipated. That said, the company did note that a major power outage would recharge sales and likely power the company to expectation-beating results.

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Matt DiLallo has no position in any stocks mentioned. The Motley Fool recommends Generac Holdings. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.