The American power grid is a key necessity for the vast majority of the nation's population, and many people have no alternative in the event of power outages. Generac Holdings (GNRC +1.22%) has sought to change that, with the goal of having backup power-generation systems become part of every home and business. When power outages strike, demand for Generac's products rises, but when the need for backup power isn't evident, the company can suffer through slumps.
Coming into Wednesday's second-quarter financial report, Generac investors were expecting solid but relatively uninspiring growth in the company's key financial measures. Yet the generator maker did better than most had expected, and it cited favorable conditions that spurred customers into action. Let's look more closely at Generac Holdings and what its latest results mean for the company's future.
Image source: Generac Holdings.
Generac comes to life
Generac's second-quarter results were strong. Revenue jumped 8% to $395.4 million, nearly doubling the pace of growth that investors had expected to see. Adjusted net income was up only slightly, rising 2% to $43.3 million. However, a substantial drop in shares outstanding lifted adjusted earnings to $0.69 per share, topping the consensus forecast among investors by $0.04 per share.
A closer look at Generac's results reveals that some of the generator manufacturer's sales gains came from acquisition activity. Generac completed its purchase of engine-control specialist Motortech early this year, and that added $9.5 million in sales to Generac's top-line total. Yet organic growth also played a key role in lifting Generac's numbers.
Generac saw relatively balanced performance across its geographical footprint. Domestic sales were up 7%, making up more than three-quarters of the total revenue that Generac brought in during the period. International sales climbed at a faster 11% pace, although those gains came almost entirely from the Motortech acquisition. Operating profit climbed in the U.S. but fell internationally, as higher commodity prices and adverse foreign currency impacts weighed on Generac's operations outside the U.S. market.
Generac also got roughly equal contributions from its two main groups of customers. Residential sales still make up a slight majority of the company's overall revenue, but the commercial and industrial segment has also remained important, and both product segments posted gains of 9%.
Minimal increases in expenses helped Generac boost its bottom line. Operating expenses were up less than 3% from year-ago levels, and interest expense was once again lower than in previous periods.
CEO Aaron Jagdfeld gave some details on what helped Generac. "Shipments of home standby generators in particular were very strong in the quarter," Jagdfeld said, "as higher power outage activity and targeted marketing in the first half drove increased activations as every region in the U.S. experienced solid double-digit growth year over year." The CEO also pointed to higher mobile product demand due to customers upgrading and replacing older equipment.
What's ahead for Generac?
Generac sees that mobile power generation demand continuing to improve for the rest of 2017, and a stronger euro against the U.S. dollar should help the international segment's financials do better. However, the impact on the bottom line won't necessarily be as favorable, because Generac's mix of sales appears to be moving toward less profitable products.
Generac adjusted its guidance for the full 2017 year accordingly. The company boosted its top-line growth estimates by a percentage point to a new range of 6% to 8%, with core organic growth of 2% to 3% at the upper end of Generac's previous guidance range. The generator maker cut its margin prediction by a half percentage point to 7% to 7.5%, reflecting both sales-mix issues and overall foreign exchange impacts.
Generac investors were generally pleased with the results, and the stock climbed more than 1% in morning trading following the announcement. The ups and downs of the weather will always have an effect on Generac, but the company also needs to keep finding ways to execute well regardless of weather impacts in order to make the most of opportunities throughout the business and residential markets.
