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Generac Holdings Inc. (GNRC - Snapshot Report) posted strong results for the third quarter of 2013, surpassing the year-ago earnings and revenues. The company grew organically as well as through acquisitions. The robust results encouraged Generac to increase its 2013 outlook. Driven by the upbeat results, Generac shares spiraled up 13.4% to close at $47.44 on Oct 24, 2013.

Adjusted earnings per share for third-quarter 2013 came in at $1.06, exceeding the year-ago figure by 35.9%. Results also surpassed the Zacks Consensus Estimate of 83 cents by 27.7%.

On a GAAP basis, Generac generated earnings per share of 67 cents, increasing 81.1% year over year.

Revenues

Generac generated net sales of $363.3 million, up 20.9% year over year led by increased demand from households for backup power. Acquisitions of Ottomotores and Tower Light Srl aided the rise in revenues.

Revenues from Residential products increased marginally year over year to $192.7 million benefitting from rising demand for home standby but was partially offset by fewer shipments of portable generators. The Commercial & Industrial product revenues recorded 61.8% year-over-year growth to $151.5 million, attributed to acquisitions of Ottomotores and Tower Light Slr and rise in sales of natural gas generators.

Costs/Margins

Cost of goods sold in the third quarter increased 21.1% year over year and represented 61.6% of total revenue, marginally up from 61.5% in the year-ago quarter. As a percentage of total revenue, selling and service, research and development, and general and administrative expenses together, stood at 12.4% versus 14.7% in the year-ago quarter. Adjusted earnings before interest, tax, depreciation and amortization (EBITDA) margin was 27.5%, registering an increase of 210 basis points (bps) year over year.

Balance Sheet

Exiting the third quarter of 2013, Generac’s cash and cash equivalents stood at $116.5 million versus $126.6 million in the preceding quarter. Long-term borrowings and capital lease obligations were roughly flat at $1,177.7 million compared with the previous quarter.

Cash Flow

In the third quarter, Generac generated roughly $80.9 million cash from operating activities up nearly 16.4% year over year. Capital spending dropped 46.9% year over year to $4.2 million. Accordingly, free cash flow of the company increased 24.5% to $76.7 million.

Subsequent Events

Subsequent to the quarter end, the company entered into an agreement with Baldor Electric Company to acquire the Baldor’s generator division. These assets will complement Generac’s existing line of business and enable deeper penetration into the North American and international markets. The completion of the transaction is anticipated in fourth-quarter 2013 and is expected to be accretive to sales immediately.

Outlook

Based on strong demand expectation, management of Generac has revised its guidance for the year 2013 upwards. The company now expects net sales growth in the low-to-mid 20% range, up from the low 20% range expected earlier.

Generac expects gross margin to increase by roughly 50 bps year over year in 2013, while operating expenses, as a percentage of sales, are anticipated to decline by 75 to 100 bps compared to flat expenses expected earlier. Adjusted EBITDA growth is expected to improve from a low 20% range to a low 30% range.

Generac carries a Zacks Rank #3 (Hold). Other stocks worth considering in the industry are Colfax Corp. (CFX - Analyst Report), IDEX Corp. (IEX - Analyst Report) and Parker-Hannifin Corp. (PH - Analyst Report), each carrying a Zacks Rank #2 (Buy).

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