Generac Earnings See the Lights Go Out

Image: Generac Holdings

What's good news for most people is bad news for Generac Holdings , which typically sees demand for its backup power generator systems soar after major storms that knock out power to wide areas for days. Coming into Thursday morning's second-quarter financial report, Generac investors had prepared to face falling revenue and earnings as a result of a relatively calm weather pattern throughout the spring and early summer. Yet even taking those factors into account, Generac did even more poorly than most had anticipated, and it identified some other issues that had a negative impact on its results. Let's take a closer look at Generac Holdings and whether investors should have longer-term concerns about the generator maker.

Generac suffers from clear blue skies Generac's second-quarter results continued a troubling trend of bad performance from the company. Sales dropped 20% to $288.4 million, and while investors had expected a decline, the pace of the plunge was nearly double what they'd thought it would be. Earnings took an even bigger hit, with adjusted net income falling 38% to $35.3 million and working out to $0.50 per share, nearly a dime per share less than the consensus estimate among investors.

Looking more closely at Generac's numbers, the biggest reason for the shortfall was what the company called "a power-outage severity environment that continues to remain challenging." Without major power outages, customers didn't see the need to buy Generac power systems. Residential product sales fell by more than a quarter compared to the year-ago period. Yet in the commercial and industrial division, Generac saw sales fall 18%, as the company dealt with fallout from a drop in demand from its customers in the oil and gas industry. Reduced shipments to telecommunications-company customers also weighed on the segment's sales.

Generac Holdings also faced other challenges. Gross margins once again declined by two percentage points from the year-ago quarter, with a less favorable mix of product sales and higher manufacturing overhead costs hurting the generator maker's internal performance. Inventory levels increased and weighed on Generac's free cash flow, which plunged by nearly four-fifths.

CEO Aaron Jagdfeld explained how much of an outlier Generac's recent experience has been. "The record-low outage environment, coupled with excess field inventory levels exiting the first quarter, dampened demand for home standby generators more than expected," Jagdfeld said. The CEO also note the rapid decline in oil and gas investment as a big factor eating into its commercial business.

Can Generac turn the lights back on?As expected, Generac once again had to cut its guidance for the full 2015 year, given the adverse conditions among its end-customers. Without improvement from current low levels of power outages, Generac believes that sales could fall as much as 10% for the year. Generac held out hope that things could get better if more normal weather prevails during the second half of the year.

On the positive side, though, Generac has high hopes for its recent acquisition of Country Home Products. Announced earlier this month, the purchase will give Generac greater exposure to the engine-powered equipment industry, boosting its potential to cross-sell items that will spur more users to obtain generator systems to utilize them. With Country Home seeing solid demand for lawn mowers, log splitters, leaf vacuums, and wood chippers, Generac expects some cost-reducing synergies from the transaction even as Country Home's current management will stay in place.

Generac also has confidence in its stock, with a new $200 million stock repurchase program coming into effect earlier this week. Jagdfeld believes that the timing for a buyback is good right now, as "we view the current down-cycles in certain of our end markets to be temporary in nature and remain optimistic on the long-term growth prospects for the company."

Generac Holdings investors nevertheless responded negative to its results, as the stock fell another 7% in the first two hours of premarket trading following the announcement. Unless the weather starts cooperating with the company as the hurricane season continues, Generac could have trouble restarting its growth engines in the near future.

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