The early part of winter late in 2015 was pleasantly warm for the eastern part of the country, but even though that was good news for many, it was bad news for generator manufacturer Generac Holdings (GNRC -1.09%). Just as road-salt specialist Compass Minerals (CMP -4.76%) saw its results take a hit in the fourth quarter due to warm weather, there were few major power outages to fuel demand for backup power sources. Generac investors came into Tuesday's fourth-quarter financial report expecting a hit to the top and bottom lines, and although both figures were better than most had expected, the tough conditions spurred Generac to take action on the acquisition front to try to bolster its global presence and get some diversification from its concentration on the U.S. market. Let's take a closer look at the latest from Generac Holdings and what its latest moves mean for its future.
Generac deals with the energy slowdown
Generac's fourth-quarter results were fairly lackluster. Sales dropped 11% to $357.8 million, beating the consensus forecast for $346.6 million, but including about $15 million in revenue from a recent acquisition. Adjusted net income eased downward by 5% to $65.3 million, and that produced adjusted earnings of $0.97 per share. That was down a penny from the year-ago figure, but it topped what investors were expecting by $0.08 per share.
Looking more closely at Generac's numbers, the residential product sales division posted a gain of nearly 2%, but if you took out acquisition-related sales, the unit's top line would have fallen by about 6%. Where Generac really suffered, though, was in the commercial and industrial products unit, where a 29% plunge in sales stemmed from weak demand from the oil and natural gas sector due to the big drop in energy prices and production activity.
Generac Holdings did manage to stop the bleeding on the margin front, improving its gross margins by more than two percentage points to 36.6%. Cost-cutting on general and administrative expenses helped keep expenses from rising, but an impairment charge of more than $40 million related to tradenames and the company's move to incorporate more brands under the Generac name led to a dramatic drop in GAAP operating income.
CEO Aaron Jagdfeld nevertheless celebrated Generac's performance. "Despite the ongoing low power outage environment," Jagdfeld said, "shipments of residential products improved organically on a sequential basis during the fourth quarter and exceeded our expectations." The CEO also noted that the company met its goals for the second half of the year in reducing inventory and improving its margins.
Can Generac recover in 2016?
What Generac seems most excited about, though, is its latest acquisition. The day before the earnings announcement, Generac said that it would take a majority stake in Italy's PR Industrial, which owns the Pramac brand of generators. "Acquiring a majority share of Pramac will be a great strategic fit for Generac as we build out our power generation business around the globe," Jagdfeld said, and Pramac's CEO said that the combination would create an even more important player in the power generation market globally.
Still, Generac isn't expecting a quick turnaround in all of its businesses. For its 2016 guidance, Generac said it expects sales to climb 10% to 12%, but that's based on the Pramac acquisition closing during the current quarter. On an organic basis, Generac is calling for a decline of 5% to 7% on a constant-currency basis, again with the energy industry being responsible for most of the losses.
One key question will be whether winter weather gets harsher for the remainder of the season. For its part, Compass Minerals hasn't seen much relief despite big winter snowstorms, and the return of milder weather could spell even more trouble for Compass going forward. Generac hasn't seen too much power-outage activity during the quarter, and that could hold it back just as much as Compass Minerals shares have remained stagnant.
Generac investors were pleased with the fact that profits were higher than expected, sending the stock up 13% in the opening minutes of trading following the announcement. More important, though, will be whether the generator maker's global expansion strategy will work. If it does, then Generac stock has a lot more ground to make up.