<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
----------------------------
COMMISSION FILE NUMBER 33-73247
GENERAC PORTABLE PRODUCTS, INC.
GENERAC PORTABLE PRODUCTS, LLC
GPPW, INC.
(EXACT NAME OF REGISTRANTS AS SPECIFIED IN THEIR RESPECTIVE CHARTERS)
----------------------------
DELAWARE 13-4006887
DELAWARE 39-1932782
WISCONSIN 13-4012695
(STATE OR OTHER JURISDICTION (I.R.S EMPLOYER
OF INCORPORATION OR IDENTIFICATION NUMBERS)
ORGANIZATION)
----------------------------
1 GENERAC WAY
JEFFERSON, WISCONSIN 53549
(920) 674-3750
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANTS' PRINCIPAL EXECUTIVE OFFICES)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [ ] No [X]
The number of shares of common stock of Generac Portable Products, Inc.
and GPPW, Inc. outstanding as of August 12, 1999 is as follows:
<TABLE>
<S> <C>
Generac Portable Products, Inc. 12,633,125
GPPW, Inc. 1,000
</TABLE>
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GENERAC PORTABLE PRODUCTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN 000'S)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
--------- ---------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,550 $ 1,528
Accounts receivable (less allowances of $287 and $242, respectively) 65,330 44,695
Inventories 63,347 46,651
Deferred income taxes 139 139
Prepaid expenses and other current assets 710 898
--------- ---------
Total current assets 132,076 93,911
Property, plant and equipment, net 24,768 19,437
Intangible assets, net 208,724 211,407
Deferred financing costs 6,806 6,985
Other 102 262
--------- ---------
Total assets $ 372,476 $ 332,002
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 6,998 $ 7,922
Trade accounts payable 31,794 12,839
Accrued employee compensation, benefits and payroll withholdings 2,510 1,185
Other accrued liabilities 19,297 14,424
--------- ---------
Total current liabilities 60,599 36,370
Long-term debt obligations 199,275 189,861
Other long-term obligations 1,024 999
Deferred income taxes 3,017 1,505
Commitments and contingencies (Note 4)
Stockholders equity:
Common stock, $.01 par value, 40,000 shares authorized; 12,633 shares
issued and outstanding 126 126
Additional paid-in capital 109,874 109,874
Retained earnings 10,927 4,202
Accumulated other comprehensive (loss) income (708) 723
Excess of purchase price over book value of net assets acquired
from entities partially under common control (11,658) (11,658)
--------- ---------
Total stockholders' equity 108,561 103,267
--------- ---------
Total liabilities and stockholders' equity $ 372,476 $ 332,002
========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
2
<PAGE> 3
GENERAC PORTABLE PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(AMOUNTS IN $000'S)
<TABLE>
<CAPTION>
FOR THE FOR THE
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 1999 JUNE 30, 1999
------------- -------------
<S> <C> <C>
Net sales $105,563 $198,450
Cost of sales 76,868 145,598
-------- --------
Gross profit 28,695 52,852
Operating expenses:
Selling and service 12,489 23,641
General and administrative 2,142 4,143
Intangible asset amortization 1,341 2,682
-------- --------
Income from operations 12,723 22,386
Other expense:
Interest expense 5,309 10,405
Deferred financing cost amortization 213 426
Expenses from withdrawn common stock offering (Note 9) 1,160 1,160
Other expenses, net 44 49
-------- --------
Income before income taxes 5,997 10,346
Provision for income taxes 2,097 3,621
-------- --------
Net income $ 3,900 $ 6,725
======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE> 4
GENERAC PORTABLE PRODUCTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(AMOUNTS IN $000'S)
<TABLE>
<CAPTION>
FOR THE
SIX MONTHS
ENDED
JUNE 30, 1999
--------------
<S> <C>
Operating activities:
Net income $ 6,725
Adjustments to reconcile net income to net cash used for operating activities
Depreciation 1,213
Amortization 3,108
Deferred income taxes 1,512
Loss on sale of fixed assets 4
Increase (decrease) in cash due to changes in:
Accounts receivable (21,202)
Inventories (17,581)
Other assets 143
Trade accounts payable 19,351
Accrued liabilities 6,165
--------
Net cash used for operating activities (562)
--------
Investing activities:
Capital expenditures (6,546)
Proceeds from sale of fixed assets 7
--------
Net cash used for investing activities (6,539)
--------
Financing activities:
Net borrowings under revolving loan facility 13,400
Payments on other long-term debt obligations (4,910)
Payment of deferred financing costs (247)
--------
Net cash provided by financing activities 8,243
--------
Effect of exchange rate changes on cash (120)
--------
Net increase in cash and cash equivalents 1,022
--------
Cash and cash equivalents:
Beginning of period $ 1,528
--------
End of period $ 2,550
========
Supplemental cash flow information:
Cash paid for interest $ 11,086
========
Cash paid for taxes $ 790
========
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE> 5
GENERAC PORTABLE PRODUCTS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(Dollar amounts in thousands unless indicated)
1. BASIS OF PRESENTATION
Generac Portable Products, Inc., (together with its subsidiaries,
including Generac Portable Products, LLC and GPPW, Inc. on a consolidated
basis, "Generac Portable Products" or the "company"), has domestic operations
located in Jefferson, Wisconsin and branch operations in the United Kingdom and
Germany, and is a leader in the design, manufacture and sale of portable
generators and pressure washers for use in both industrial and residential
applications. Generac Portable Products sells primarily to large home center
retailers throughout the United States, Canada and Europe.
These financial statements have been prepared by Generac Portable Products
pursuant to the rules and regulations of the Securities and Exchange Commission
(the "SEC") and, in the opinion of Generac Portable Products, include all
adjustments (all of which are normal and recurring in nature) necessary to
present fairly the financial position, results of operations and cash flows of
Generac Portable Products for the interim periods presented. These financial
statements include the accounts of Generac Portable Product's wholly-owned
subsidiaries, and all significant intercompany transactions have been
eliminated. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed and omitted pursuant to such rules and
regulations. These unaudited consolidated financial statements should be read in
conjunction with Generac Portable Products' financial statements for the period
July 10, 1998 through December 31, 1998, and the company's unaudited pro forma
consolidated financial information included in the company's Amendment No. 3 to
Form S-4 Registration Statement as filed with the SEC on July 26, 1999 and
declared effective on July 30, 1999.
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------- -----------------
<S> <C> <C>
Raw materials and sub-assemblies $35,964 $27,721
Finished goods 27,383 18,930
------- -------
$63,347 $46,651
======= =======
</TABLE>
3. INCOME TAXES
Generac Portable Products recorded an income tax provision by estimating
the annual effective income tax rate and applied that rate to pretax income. The
effective income tax rate for Generac Portable Products varies from the Federal
statutory tax rate due to state income taxes and other non-deductible expenses.
5
<PAGE> 6
4. COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS
In the normal course of business, Generac Portable Products is involved in
certain legal actions and claims. It is the opinion of management that such
litigation and claims will be resolved without material adverse effect on
Generac Portable Products' financial position, results of operations or cash
flows.
In connection with the purchase by Generac Portable Products, LLC of
substantially all of the assets of the Portable Products Division (the
"Predecessor") of Generac Corporation on July 9, 1998 (the "Acquisition"),
Generac Portable Products entered into an OEM engine supply agreement with
Generac Corporation to supply it with the engine used in certain of Generac
Portable Products' pressure washers and consumer portable generators. The engine
supply agreement allows for Generac Portable Products to make minimum purchases
of engines from Generac Corporation in each of the next nine years and gives
Generac Portable Products the right to increase the amount of purchases based
upon forecasted requirements. This agreement is an exclusive arrangement related
to such products subject to the minimum purchase requirements. As Generac
Portable Products maintains relationships with other major engine suppliers,
management believes that the minimum purchase quantities and unit prices under
this agreement will not have an adverse effect on Generac Portable Products.
Management also considers the provisions of the engine supply agreement to
reflect arms-length terms. For the three months and six months ended June 30,
1999, Generac Portable Products purchased products approximating $9.4 million
and $20.9 million, respectively, under this agreement. In addition, Generac
Portable Products also purchased other components from Generac Corporation
approximating $4.3 million and $9.9 million, respectively, for the three months
and six months ended June 30, 1999. Included in accounts payable are amounts due
to Generac Corporation of approximately $5.7 million and $4.7 million at June
30, 1999 and December 31, 1998, respectively.
5. COMPREHENSIVE INCOME
Total comprehensive income totaled $3,371 and $5,294 for the three months
and six months ended June 30, 1999, respectively. For the three months ended
June 30, 1999, total comprehensive income is comprised of net income of $3,900
and accumulated other comprehensive loss of $529. For the six months ended June
30, 1999, total comprehensive income is comprised of net income of $6,725 and
accumulated other comprehensive loss of $1,431. Accumulated other comprehensive
loss is comprised entirely of foreign currency translation adjustments.
6
<PAGE> 7
6. SEPARATE FINANCIAL INFORMATION OF CO-ISSUERS AND GUARANTOR OF THE NOTES
In connection with the Acquisition, Generac Portable Products, LLC and
GPPW, Inc. ("GPPW") co-issued $110 million of 11 1/4% senior subordinated notes
due 2006 (the "Notes") which are guaranteed by Generac Portable Products, Inc.
While Generac Portable Products, LLC and GPPW are jointly and severally liable
for the obligations under the Notes, GPPW does not conduct any operations, or
have any assets of any kind other than its investment in Generac Portable
Products, LLC. The following unaudited condensed supplemental consolidating
financial information as of June 30, 1999 and for the three months and six
months ended June 30, 1999, reflects the investments of Generac Portable
Products, Inc., GPPW and GPPD, Inc. ("GPPD") in Generac Portable Products, LLC
using the equity method. Generac Portable Products, Inc., GPPW and GPPD are
dependent upon Generac Portable Products, LLC for cash flows to fund their
income tax liabilities arising from their respective investments. GPPW and GPPD
are wholly-owned subsidiaries of Generac Portable Products, Inc., and GPPW and
GPPD hold a 5% and 95% ownership interest in Generac Portable Products, LLC,
respectively.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1999
GENERAC PORTABLE GENERAC PORTABLE
PRODUCTS, INC. GPPW GPPD PRODUCTS, LLC ELIMINATIONS CONSOLIDATED
-------------- -------- -------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Current assets $ -- $ 7 $ 132 $ 131,937 $ -- $132,076
Investment in affiliates 119,429 6,262 118,968 -- (244,659) --
Noncurrent assets -- -- -- 240,400 -- 240,400
-------- -------- -------- --------- --------- --------
Total Assets $119,429 $ 6,269 $119,100 $ 372,337 $(244,659) $372,476
======== ======== ======== ========= ========= ========
Current liabilities $ -- $ 104 $ 1,983 $ 58,512 $ -- $ 60,599
Long-term debt -- -- -- 199,275 -- 199,275
Other long-term obligations -- 151 2,866 1,024 -- 4,041
Stockholders' equity 119,429 6,014 114,251 113,526 (244,659) 108,561
-------- -------- -------- --------- --------- --------
$119,429 $ 6,269 $119,100 $ 372,337 $(244,659) $372,476
======== ======== ======== ========= ========= ========
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED JUNE 30, 1999
GENERAC PORTABLE GENERAC PORTABLE
PRODUCTS, INC. GPPW GPPD PRODUCTS, LLC ELIMINATIONS CONSOLIDATED
-------------- -------- -------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net Sales $ -- $ -- $ -- $ 105,563 $ -- $105,563
Gross profit -- -- -- 28,695 -- 28,695
Operating expenses -- -- -- 15,972 -- 15,972
-------- -------- -------- --------- --------- --------
Operating income -- -- -- 12,723 -- 12,723
Interest expense -- -- -- 5,309 -- 5,309
Other expense, net -- -- -- 1,417 -- 1,417
Equity in earnings of affiliates 3,900 300 5,697 -- (9,897) --
-------- -------- -------- --------- --------- --------
Income before income taxes 3,900 300 5,697 5,997 (9,897) 5,997
Provision for income taxes -- 105 1,992 -- -- 2,097
-------- -------- -------- --------- --------- --------
Net income $ 3,900 $ 195 $ 3,705 $ 5,997 $ (9,897) $ 3,900
======== ======== ======== ========= ========= ========
</TABLE>
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30, 1999
GENERAC PORTABLE GENERAC PORTABLE
PRODUCTS, INC. GPPW GPPD PRODUCTS, LLC ELIMINATIONS CONSOLIDATED
-------------- -------- -------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net Sales $ -- $ -- $ -- $ 198,450 $ -- $198,450
Gross profit -- -- -- 52,852 -- 52,852
Operating expenses -- -- -- 30,466 -- 30,466
-------- -------- -------- --------- --------- --------
Operating income -- -- -- 22,386 -- 22,386
Interest expense -- -- -- 10,405 -- 10,405
Other expense, net -- -- -- 1,635 -- 1,635
Equity in earnings of affiliates 6,725 517 9,829 -- (17,071) --
-------- -------- -------- --------- --------- --------
Income before income taxes 6,725 517 9,829 10,346 (17,071) 10,346
Provision for income taxes -- 181 3,440 -- -- 3,621
-------- -------- -------- --------- --------- --------
Net income $ 6,725 $ 336 $ 6,389 $ 10,346 $ (17,071) $ 6,725
======== ======== ======== ========= ========= ========
</TABLE>
7
<PAGE> 8
7. STOCK SPLITS
On May 20, 1999, the company effected a 1,250 for one common stock split
and on May 28, 1999, the company effected a 1.189 for one common stock split.
All share information in these consolidated financial statements has been
retroactively adjusted to reflect these stock splits.
8. SEGMENT INFORMATION
Generac Portable Products is a leader in the design, manufacture and sale
of portable generators and pressure washers. Engineering, manufacturing,
marketing and administrative resources are generally not product specific and
Generac Portable Products evaluates operating performance based upon the
combined results of these product lines.
Information regarding Generac Portable Products' geographic areas is summarized
below:
<TABLE>
<CAPTION>
UNITED
STATES EUROPE CONSOLIDATED
-------- ------- ------------
<S> <C> <C> <C>
Net sales - for the three months ended June 30, 1999 $ 96,397 $ 9,166 $105,563
Net sales - for the six months ended June 30, 1999 184,294 14,156 198,450
Income from operations - for the three months ended June 30, 1999 12,256 467 12,723
Income from operations - for the six months ended June 30, 1999 22,200 186 22,386
Long-lived assets - as of June 30, 1999 237,865 2,535 240,400
</TABLE>
Generac Portable Products sells primarily to large home center retailers.
Two customers accounted for approximately 61% and 63% of net sales for the three
months and six months ended June 30, 1999, respectively. Both customers
individually comprise more than 10% of Generac Portable Products' net sales.
Accounts receivable from these two customers approximated $34,007 and $24,202 at
June 30, 1999 and December 31, 1998, respectively.
9. EXPENSES FROM WITHDRAWN COMMON STOCK OFFERING
During the three months ended June 30, 1999, Generac Portable Products
incurred certain fees and expenses in conjunction with its efforts to complete
an initial public offering of its common stock. Generac Portable Products
decided to withdraw its initial public stock offering during July 1999. Expenses
related to this offering of approximately $1.2 million were recorded during the
three months ended June 30, 1999.
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations
included as part of the company's Amendment No. 3 to Form S-4 Registration
Statement as filed with the SEC on July 26, 1999 and declared effective on July
30, 1999. This report on Form 10-Q includes forward-looking statements based on
management's current expectations. Reference is made in particular to the
description of the company's plans and objectives for future operations,
assumptions underlying such plans and objectives and other forward-looking
statements in this report. Such forward-looking statements generally are
identifiable by words such as "believes," "intends," "estimates," "expects," and
similar expressions.
OVERVIEW
Generac Portable Products, Inc., (together with its subsidiaries, including
Generac Portable Products, LLC and GPPW, Inc. on a consolidated basis, "Generac
Portable Products" or the "company"), has domestic operations located in
Jefferson, Wisconsin and branch operations in the United Kingdom and Germany,
and is a leader in the design, manufacture and sale of portable generators and
pressure washers for use in both industrial and residential applications.
Generac Portable Products sells primarily to large home center retailers
throughout the United States, Canada and Europe. References to Generac Portable
Products means Generac Portable Products, Inc. and its subsidiaries, on a
consolidated basis and, as the context requires, Generac Portable Products'
Predecessor. The "Predecessor" refers to the Portable Products Division of
Generac Corporation.
The table below sets forth the company's results of operations for the
periods indicated. Included in the table is a presentation of EBITDA which
represents earnings before interest, taxes, depreciation, amortization and other
non-recurring charges. EBITDA is a widely recognized financial indicator of a
company's ability to service or incur debt. EBITDA is not a measure of operating
performance computed in accordance with generally accepted accounting principles
or as a substitute for operating income, net income, cash flows from operations,
or other statement of operations or cash flow data prepared in accordance with
generally accepted accounting principles, or as a measure of profitability or
liquidity. In addition, EBITDA may not be comparable to similarly titled
measures of other companies. EBITDA may not be indicative of the company's
historical operating results or of the company's predecessor, nor is it meant to
be predictive of future results of operations or cash flows. See also the
statement of cash flows contained within the financial statements included
elsewhere in this document.
9
<PAGE> 10
1. RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
(unaudited)
(in millions)
Generac Portable Products Predecessor
------------------------------ ------------------------------
Three Months Six Months Three Months Six Months
Ended Ended Ended Ended
June 30, 1999 June 30, 1999 June 30, 1998 June 30, 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales
Domestic $ 96.4 $ 184.3 $ 69.1 $ 123.9
International 9.2 14.2 5.7 10.5
-------- -------- ------- --------
Total net sales 105.6 198.5 74.8 134.4
Gross profit 28.7 52.9 19.7 34.8
Operating expenses 16.0 30.5 10.2 18.2
Operating income 12.7 22.4 9.5 16.6
Net income 3.9 6.7 8.7 15.3
EBITDA 14.7 26.2 9.9 17.3
</TABLE>
The Predecessor's results for the three months and six months ended June
30, 1998 do not include the effects of purchase accounting for the acquisition
of the Portable Products Division of Generac Corporation, which includes
increased goodwill and intangible asset amortization and increased interest
expense due to increased borrowings incurred in connection with the acquisition.
In addition, the Predecessor and its stockholders elected to be treated as an S
Corporation for federal and state income tax purposes. Therefore, no provision
for income taxes is included in the Predecessor financial statements.
Accordingly, the results of Generac Portable Products are not comparable with
those of the Predecessor in all material respects.
THREE MONTHS ENDED JUNE 30, 1999 (NEW BASIS) COMPARED TO THE THREE MONTHS
ENDED JUNE 30, 1998 (PREDECESSOR BASIS)
Net sales. Net sales increased $30.8 million or 41.2%, to $105.6 million
for the three months ended June 30, 1999 from $74.8 million for the three months
ended June 30, 1998.
Domestic sales increased $27.3 million, or 39.5%, to $96.4 million for the
three months ended June 30, 1999 from $69.1 million for the three months ended
June 30, 1998. This increase was primarily reflective of increased sales of
generators and related accessories to existing customers resulting from new
store additions and sales to new customers. Additionally, a portion of the
increased generator demand may relate to consumer concerns relating to possible
Year 2000 power outages.
International sales increased $3.5 million, or 61.4%, to $9.2 million for
the three months ended June 30, 1999 from $5.7 million for the three months
ended June 30, 1998. This increase was reflective of increased generator sales
by the company's branch in the United Kingdom to existing domestic customers.
Gross profit. Gross profit increased $9.0 million, or 45.7%, to $28.7
million for the three months ended June 30, 1999 from $19.7 million for the
three months ended June 30, 1998. This increase was reflective of
10
<PAGE> 11
increased overall sales as described above and improved gross margins due to a
greater sales mix of higher margin generators. Gross profit margin increased to
27.2% for the three months ended June 30, 1999 from 26.3% for the three months
ended June 30, 1998.
Operating expenses. Operating expenses increased $5.8 million, or 56.9%, to
$16.0 million for the three months ended June 30, 1999 from $10.2 million for
the three months ended June 30, 1998. The increase was due to increases in
selling and service expenses, general and administrative expenses and intangible
asset amortization. Selling and service expenses increased due to selling and
distribution costs that are impacted by sales volume, increases in sales force
personnel, promotional expenses for new pressure washer product offerings and
certain sales incentives offered to new domestic customers. The increase in
general and administrative expenses was reflective of increases in personnel to
support certain finance, accounting and human resource functions which had
previously been shared with Generac Corporation. Additionally, during the three
months ended June 30, 1999, Generac Portable Products recognized $1.3 million in
intangible asset amortization, resulting from the effects of the acquisition of
the Portable Products Division of Generac Corporation. No amortization expense
was recognized during the three months ended June 30, 1998. As a percentage of
sales, operating expenses increased to 15.2% for the three months ended June 30,
1999 from 13.6% for the three months ended June 30, 1998.
Net income. Net income decreased $4.8 million, or 55.2%, to $3.9 million
for the three months ended June 30, 1999 from $8.7 million for the three months
ended June 30, 1998. This decrease in net income was primarily due to increases
in certain expenses resulting from the effects of the acquisition of the
Portable Products Division of Generac Corporation, including an increase in
interest expense of $4.5 million, intangible asset and deferred financing cost
amortization totaling $1.6 million and a provision for income tax of $2.1
million. Furthermore, Generac Portable Products recognized approximately $1.2
million in costs incurred in conjunction with the company's planned initial
public offering of its common stock, which was withdrawn in July 1999. The
decrease was partially offset by an increase in operating income, net of
intangible asset amortization, of $4.5 million, resulting primarily from the
increase in sales volume. As a percentage of sales, net income decreased to 3.7%
for the three months ended June 30, 1999 from 11.6% for the three months ended
June 30, 1998.
EBITDA. EBITDA increased $4.8 million, or 48.5%, to $14.7 million for the
three months ended June 30, 1999 from $9.9 million for the three months ended
June 30, 1998. This increase was due to increased sales volume and improved
gross margins as described above. As a percentage of sales, EBITDA increased to
13.9% for the three months ended June 30, 1999 from 13.2% for the three months
ended June 30, 1998.
SIX MONTHS ENDED JUNE 30, 1999 (NEW BASIS) COMPARED TO THE SIX MONTHS ENDED
JUNE 30, 1998 (PREDECESSOR BASIS)
Net sales. Net sales increased $64.1 million or 47.7%, to $198.5 million
for the six months ended June 30, 1999 from $134.4 million for the six months
ended June 30, 1998.
Domestic sales increased $60.4 million or 48.7%, to $184.3 million for the
six months ended June 30, 1999 from $123.9 million for the six months ended June
30, 1998. This increase was reflective of continued strong demand for generators
through increased sales to existing customers resulting from new store additions
and sales to new customers, sales of new generator accessories and expanded
pressure washer product offerings by Sears. Additionally, a portion of the
increased demand for generators may relate to consumer concerns relating to
possible Year 2000 power outages.
11
<PAGE> 12
International sales increased $3.7 million, or 35.2%, to $14.2 million for
the six months ended June 30, 1999 from $10.5 million for the six months ended
June 30, 1998. This increase was reflective of increased generator sales by the
company's branch in the United Kingdom to existing domestic customers.
Gross profit. Gross profit increased $18.1 million, or 52.0%, to $52.9
million for the six months ended June 30, 1999 from $34.8 million for the six
months ended June 30, 1998. This increase was reflective of increased overall
sales as described above and improved gross margins due to a greater sales mix
of higher margin generators, partially offset by higher costs incurred for
certain engines. Gross profit margin increased slightly to 26.6% for the six
months ended June 30, 1999 from 25.9% for the six months ended June 30, 1998.
Operating expenses. Operating expenses increased $12.3 million, or 67.6%,
to $30.5 million for the six months ended June 30, 1999 from $18.2 million for
the six months ended June 30, 1998. The increase was due to increases in selling
and service expenses, general and administrative expenses and intangible asset
amortization. Selling and service expenses increased due to selling and
distribution costs that are impacted by sales volume and increases in sales
force personnel, promotional expenses for new pressure washer product offerings
and incentives for sales into home centers in Germany. The increase in general
and administrative expenses was reflective of increased training and support
costs related to the company's new business software implementation and
increases in personnel to support certain finance, accounting and human resource
functions which had previously been shared with Generac Corporation.
Additionally, during the six months ended June 30, 1999, Generac Portable
Products recognized $2.7 million in intangible asset amortization, resulting
from the effects of the acquisition of the Portable Products Division of Generac
Corporation. No amortization expense was recognized during the six months ended
June 30, 1998. As a percentage of sales, operating expenses increased to 15.4%
for the six months ended June 30, 1999 from 13.6% for the six months ended June
30, 1998.
Net income. Net income decreased $8.6 million, or 56.2%, to $6.7 million
for the six months ended June 30, 1999 from $15.3 million for the six months
ended June 30, 1998. This decrease in net income was primarily due to increases
in certain expenses resulting from the effects of the acquisition of the
Portable Products Division of Generac Corporation, including an increase in
interest expense of $9.1 million, intangible asset and deferred financing cost
amortization totaling $3.1 million and a provision for income tax of $3.6
million. Furthermore, Generac Portable Products recognized approximately $1.2
million in costs incurred in conjunction with the company's planned initial
public offering of its common stock, which was withdrawn in July 1999. The
decrease was partially offset by an increase in operating income, net of
intangible asset amortization, of $8.5 million, resulting primarily from the
increase in sales volume. As a percentage of sales, net income decreased to 3.4%
for the six months ended June 30, 1999 from 11.4% for the six months ended June
30, 1998.
EBITDA. EBITDA increased $8.9 million, or 51.4%, to $26.2 million for the
six months ended June 30, 1999 from $17.3 million for the six months ended June
30, 1998. This increase was due to increased sales volume and improved gross
margins as described above. As a percentage of sales, EBITDA increased to 13.2%
for the six months ended June 30, 1999 from 12.9% for the six months ended June
30, 1998.
2. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES AT JUNE 30, 1999
To finance its capital expenditure program and fund its operational and
liquidity needs, Generac Portable Products has relied principally on cash flow
generated from operations and borrowings under the company's $115 million credit
facility between it and its lenders, with Bankers Trust Company as
administrative agent. Generac Portable Products' principal uses of liquidity are
to meet debt service requirements, finance its capital expenditures and provide
working capital. Based on current levels of operations and anticipated growth,
the management of Generac Portable Products expects that net cash from
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<PAGE> 13
operations and available amounts under its credit facility will be sufficient to
fund the company's debt obligations, permit anticipated capital expenditures and
fund its liquidity needs.
At June 30, 1999, Generac Portable Products had approximately $206.3
million of outstanding debt, including $110.0 million of senior notes payable,
$94.1 million under its credit facility (including $14.0 million under the $30.0
million revolving credit portion of the credit facility) and $2.2 million under
capital lease obligations. In addition, as of June 30, 1999, Generac Portable
Products had available cash of approximately $2.6 million.
Generac Portable Product's ability to make scheduled payments of principal,
or to pay the interest on its indebtedness, or to fund planned capital
expenditures, will depend on its future performance, which in turn, is subject
to general economic, financial, competitive and other factors that are beyond
its control. Based upon the current level of operations and anticipated growth,
Generac Portable Products believes that future cash flow from operations,
together with available borrowings under the credit facility will be adequate to
meet Generac Portable Products' anticipated requirements for capital
expenditures, working capital, interest payments and scheduled principal
payments. There can be no assurance, however, that Generac Portable Products'
business will continue to generate sufficient cash flow from operations in the
future to service its debt and make necessary capital expenditures after
satisfying certain liabilities arising in the ordinary course of business. If
unable to generate sufficient cash flow, Generac Portable Products may be
required to delay necessary capital expenditures, refinance all or a portion of
its existing debt, to sell assets or to obtain additional financing. There can
be no assurance that any such refinancing would be available or that any such
sales of assets or additional financing could be obtained.
Cash used in operating activities for the six months ended June 30, 1999
totaled $.6 million. The activity in operating cash flows was primarily a result
of a buildup of inventory and receivables to support increased sales activity.
The increase was partially offset by an increase in trade accounts payable and
other accrued liabilities.
Capital expenditures for the six months ended June 30, 1999 totaled $6.5
million. The capital expenditures related primarily to plant expansions at the
company's facilities, production machinery and software. In an economic
downturn, Generac Portable Products believes it will be able to adjust the
amount spent on capital expenditures without compromising the base requirements
of its operations. Generac Portable Products expects to spend approximately
$12.0 million in 1999 for various capital projects, including increased capacity
through plant expansion, cost improvement and quality enhancement initiatives,
administrative offices expansion, and updating management information systems.
Generac Portable Products spent approximately $1.2 million on research and
development during the six months ended June 30, 1999.
3. INITIAL PUBLIC OFFERING COSTS
During the three months ended June 30, 1999, Generac Portable Products
incurred approximately $1.2 million of expenses in conjunction with its efforts
to complete an initial public offering of its common stock. Generac Portable
Products decided to withdraw its initial public stock offering during July 1999
as it did not believe that the price at which the stock could be sold adequately
represented the value of the company. Consequently, these costs were expensed
during the three months ended June 30, 1999.
4. EURO CONVERSION
On January 1, 1999, member countries of the European Monetary Union (EMU)
began a three-year transition from their national currencies to a new common
currency, the "Euro". In the first phase, the permanent rates of exchange
between the members' national currency and the Euro were established and
13
<PAGE> 14
monetary, capital, foreign exchange and interbank markets were converted to the
Euro. National currencies will continue to exist as legal tender and may
continue to be used in commercial transactions. By January 2002, Euro currency
will be issued and by July 2002, the respective national currencies will be
withdrawn. Generac Portable Products has operations in member countries of the
EMU and, accordingly, has established action plans that are continuing to be
implemented to address the Euro's impact on information systems, currency
exchange rate risk, taxation, contracts, competition and pricing. Based on its
current assessment, management believes that the costs of the Euro conversion
will not have a material impact on the operations, cash flows or financial
conditions of Generac Portable Products.
5. FUTURE ACCOUNTING CHANGES
The Financial Accounting Standards Board has issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities" which is
effective for periods beginning after June 15, 2000. Due to the company's
limited use of derivative instruments, the adoption of this statement is not
expected to have a material effect on the company's financial condition or
results of operations.
6. YEAR 2000 STRATEGY
Many currently installed computer systems and software products use two
digits rather than four to define the applicable year. For example, date
sensitive software may recognize a date using "00" as the year 1900 rather than
the year 2000. This could result in systems failures or miscalculations causing
disruptions of the company's operations. Generac Portable Products is continuing
a process of making all necessary software changes to ensure that it does not
experience any loss of critical business functionality due to the Year 2000
issue. Generac Portable Products has adopted and is implementing a three-phase
approach of assessment, correction and testing. The scope of the project
includes all internal software, hardware, operating systems, non-information
technology systems, products and assessment of risk to the business from vendors
and other parties' Year 2000 issues. Generac Portable Products has completed the
assessment phase relating to its internal software, hardware and other operating
systems and is currently in the correction and testing phases. Generac Portable
Products continues its assessment of the non-information technology systems and
the risk to the business from vendors and other parties. Furthermore, Generac
Portable Products has completed the assessment of its products, noting that the
Year 2000 will not impact its products as the products do not contain date
sensitive sub-systems. Generac Portable Products believes that this formal
assessment (including prioritization of business risk), correction (including
conversions to new software), and testing of necessary changes will minimize the
business risk of Year 2000 from internal systems.
Although Generac Portable Products has not yet fully completed its Year
2000 project, management estimates that assessment, correction and testing has
been completed for approximately 75% of the company's information sub-systems
and consequently, these sub-systems are Year 2000 ready. The balance of the
company's systems are currently being modified or replaced, with all significant
systems targeted for Year 2000 readiness by October 1, 1999. The need for
contingency plans will be evaluated as this target date approaches. In most
instances, Generac Portable Products has replaced, or is in the process of
replacing, older software with new programs and systems, rather than modifying
existing systems solely to become Year 2000 ready. Replacing these systems
results in a significant upgrade in systems and capabilities, as well as
providing the ability to properly interpret Year 2000 data. Although the timing
of the system replacements is influenced by the Year 2000, in most instances
these systems would have been replaced in the normal course of business.
Generac Portable Products is currently unable to predict the extent to
which Year 2000 issues will affect vendors with which Generac Portable Products
does a material amount of business, or the extent to which Generac Portable
Products would be vulnerable to the failure of any of these vendors to convert
their systems on a timely basis. Generac Portable Products could face a material
financial risk if its customers or suppliers are unable to complete critical
Year 2000 readiness efforts in a timely manner. Generac Portable Products is
14
<PAGE> 15
continuing to work with its customers and suppliers to evaluate their Year 2000
readiness, identify material business risks, and develop solutions so that all
critical processes needed to conduct its business are Year 2000 ready. As part
of the evaluation of the Year 2000 readiness of the company's customers and
suppliers, Generac Portable Products has requested that its customers and
suppliers complete a Year 2000 questionnaire which has facilitated the company's
assessment of the Year 2000 readiness of relevant third parties. Although
Generac Portable Products believes that customer and supplier representations
have been made in good faith, there is no assurance that such representations
would be legally binding. In addition, the company's exposure to these external
risks is partially mitigated by the size and sophistication of its primary
customers, as well as by the diversity of its suppliers and geographic
locations.
Generac Portable Products spent approximately $.9 million during 1998 to
upgrade and replace its systems to ensure Year 2000 readiness. Generac Portable
Products estimates it will incur additional costs of approximately $2.8 million
to upgrade and replace its systems, the majority of which will be incurred in
fiscal 1999. Generac Portable Products believes it continues to appropriately
reduce the risks of not being Year 2000 ready through the identification and
remediation process described above. During 1999, Generac Portable Products will
continue to evaluate the need for contingency planning as it relates to the
readiness for each business related software and hardware item.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Generac Portable Products is exposed to market risk from changes in
interest rates and, to a lesser extent, foreign exchange rates and commodities.
To reduce such risks, Generac Portable Products selectively uses financial
instruments. All hedging transactions are authorized and executed pursuant to
clearly defined policies and procedures, which strictly prohibit the use of
financial instruments for trading purposes. There have been no material changes
in the company's market risk exposures as compared to those discussed in the
company's Amendment No. 3 to Form S-4 Registration Statement as filed with the
SEC on July 26, 1999 and declared effective on July 30, 1999.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, Generac Portable Products is subject to legal
proceedings and other claims arising in the ordinary course of its business.
Generac Portable Products maintains insurance coverage against claims in the
amount which it believes to be adequate. Generac Portable Products believes that
it is not presently a party to any litigation the outcome of which would have a
material adverse effect on its financial condition or the results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On May 20, 1999, the company effected a 1,250 for one common stock split
and on May 28, 1999, the company effected a 1.189 for one common stock split.
15
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrants have duly caused this report to be signed on their behalf by the
undersigned thereunto duly authorized.
GENERAC PORTABLE PRODUCTS, INC.
(Registrant)
Date August 11, 1999 By /s/ ERIC R. WILKINSON
--------------------------------------
Eric R. Wilkinson
PRESIDENT
GENERAC PORTABLE PRODUCTS, LLC
(Registrant)
Date August 11, 1999 By /s/ DORRANCE J. NOONAN, JR.
--------------------------------------
Dorrance J. Noonan, Jr.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
GPPW, INC.
(Registrant)
Date August 11, 1999 By /s/ FAITH ROSENFELD
--------------------------------------
Faith Rosenfeld
PRESIDENT
16
<PAGE> 17
GENERAC PORTABLE PRODUCTS, INC.
EXHIBIT INDEX TO FORM 10-Q
FOR QUARTERLY PERIOD ENDED
JUNE 30, 1999
Exhibit No. Description
- ----------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED INTERIM FINANCIAL STATEMENTS.
</LEGEND>
<NAME> GENERAC PORTABLE PRODUCTS INC.
<CIK> 0001080892
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 2,550
<SECURITIES> 0
<RECEIVABLES> 65,617
<ALLOWANCES> 287
<INVENTORY> 63,347
<CURRENT-ASSETS> 132,076
<PP&E> 26,978
<DEPRECIATION> 2,210
<TOTAL-ASSETS> 372,476
<CURRENT-LIABILITIES> 60,599
<BONDS> 110,000
0
0
<COMMON> 126
<OTHER-SE> 108,435
<TOTAL-LIABILITY-AND-EQUITY> 372,476
<SALES> 198,450
<TOTAL-REVENUES> 198,450
<CGS> 145,598
<TOTAL-COSTS> 30,466
<OTHER-EXPENSES> 7,635
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,405
<INCOME-PRETAX> 10,345
<INCOME-TAX> 3,621
<INCOME-CONTINUING> 6,725
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,725
<EPS-BASIC> 0.00
<EPS-DILUTED> 0.00
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