York Ragen
Chief Financial Officer at Generac
Thanks, Eric.
Looking at second-quarter 2023 results in more detail, overall net sales decreased 23% to $1 billion during the second-quarter of 2023 as compared to $1.29 billion in the prior year second-quarter. The combination of contributions from recent acquisitions and the favorable impact from foreign currency had an approximate 3% net favorable impact on revenue growth during the quarter.
Briefly looking at consolidated net sales for the second-quarter by-product class, residential product sales declined 44% to $499 million as compared to $896 million in the prior year. As Aaron to discuss in detail, lower shipments of home standby generators, power sell energy storage systems and chore products drove this decline in residential product sales. In particular for home standby, the Year-over-Year declines were due to a tough prior year comparison where we are working down excess backlog combined with the current year that is impacted by field inventory destocking. Commercial and industrial product sales for the second-quarter of 2023 increased 24%, the $384 million as compared to $309 million in the prior year quarter. Contributions from recent acquisitions and the favorable impact of foreign currency contributed approximately 2% revenue growth in the quarter. This very strong core sales growth was driven by broad-based growth across nearly all regions and channels, highlighted by an increase in domestic shipments two direct customers for beyond standby applications, industrial distributors and the national rental equipment channel. In addition, international shipments of C&I power generation products and controls and automation solutions also contributed to this growth.
Net sales for other products and services increased 37% to $117 million as compared to $86 million in the second-quarter 2022. This increase was primarily due to the acquisition of electronic environments, given their additional service capabilities, we called out that this acquisition closed last year on June 30th.
Gross profit margin was 32.8% compared to 35.4% in the prior year second-quarter due to the significant impact of unfavorable sales mix, given the sharp decline in-home standby mix compared to the prior year. This was partially offset by previously implemented pricing actions and lower input costs from improved commodities, logistics and plant efficiencies that are providing an important tailwind to margin trends that are expected to continue in the second-half of 2023.
Operating expenses increased $2 million or 1% as compared to the second-quarter 2022. This increase was primarily driven by increased employee costs to drive and support future growth, higher marketing and promotion spend and the impact of recurring operating expenses from recent acquisitions. This was mostly offset by lower variable operating expenses on the lower sales volumes. Adjusted EBITDA before deducting for non controlling interests as defined in our earnings release was $137 million or 13.6% of net sales in the second-quarter as compared to $271 million or 21% of net sales in the prior year.
This lower EBITDA percent was primarily driven by the higher operating expenses as a percent of sales given the lower sales volumes compared to prior year, and to a lesser extent, the lower gross margins.
I will now briefly discuss financial results for our two reporting segments. Domestic segment total sales including intersegment sales decreased 28% to $815 million in the quarter as compared to $1.13 billion in the prior year with the impact of acquisitions contributing approximately 3% revenue growth for the quarter. Adjusted EBITDA for the segment was $103 million, representing 12.7% of total sales, as compared to $242 million in the prior year 21.5% of total sales.
The lower domestic EBITDA margin in the quarter was primarily driven by the significant impact of unfavorable sales mix and reduce operating leverage on the lower shipments. The impact of acquisitions and continued investments in future growth also negatively affected margins during the quarter. These margin headwinds were partially offset by favorable pricing and cost benefits.
International segment, total sales including intersegment sales increased 10% to $224 million in the quarter as compared to $203 million in the prior year quarter. Core sales, which excludes the impact of acquisitions and currency, increased approximately 6% compared to the prior year. Adjusted EBITDA for the segment, before deducting for non controlling interest was $33 million or 14.9% of net sales as compared to $30 million or 14.5% of net sales in the prior year. This stronger margin performance was primarily driven by favorable price and cost benefits.
Now, switching back to our financial performance for the second-quarter of 2023 on a consolidated basis, as disclosed in our earnings release, GAAP net income for the company in the quarter was $45 million as compared to $156 million for the second-quarter of 2022. The current year net income includes approximately $15 million of additional interest expense compared to the prior year due to higher borrowings and interest rates. In addition, GAAP income taxes during the current year second-quarter was $16 million or an effective tax-rate of 25.9% as compared to $46 million or an effective tax-rate of 22.5% for the prior year.
The increase in effective tax-rate was primarily due to a lower benefit from equity compensation in the current year quarter. Diluted net income per share for the company on a GAAP basis was $0.70 in the second-quarter of 2023 compared to $2.21 in the prior year. Adjusted net income for the company, as defined in our earnings release was $68 million in the current year quarter or $1.8 per share. This compares to adjusted net income of $185 million in the prior year or $2.86 per share.
Cash flow from operations was $83 million as compared to $24 million in the prior year second-quarter and free-cash flow, as defined in our earnings release was $54 million as compared to $6 million in the same quarter last year. The increase in free-cash flow was primarily due to significantly lower working capital investment in the current year quarter as inventory levels have stabilized, partially offset by lower operating earnings, higher interest payments and higher CapEx.
Total debt outstanding at the end-of-the quarter was $1.62 billion, resulting in a gross debt leverage ratio at the end-of-the second-quarter of 2.8 times on an as-reported basis which is expected to moderate in the second-half of the year as LTM EBITDA begins increase.
With that, I will now provide further comments on our outlook for 2023.
As disclosed in our press release this morning, we are updating our outlook for the full-year 2023, the softer than previously expected consumer spending environment for home-improvement has impacted our outlook for residential products, most notably for shipments of home standby generators. As a result of the softer consumer, we are seeing lower close rates and activations relative to prior expectations, which is causing higher field inventories and lower distributor sentiment compared to our previous guidance commentary.
As a result of these factors, we now expect residential product sales for the full-year 2023 to decline in the mid 20% range compared to the prior year which compares to our prior expectation for the client in the high-teens range. Partially offsetting this incremental weakness in residential products, we are raising our outlook for C&I product sales, which are now expected to grow at a mid-teens rates during the year as compared to our prior guidance of a mid to-high single-digit rate.
Overall net sales for the full-year are now expected to decline between minus 10 to minus 12% as compared to the prior year which includes approximately 2% net favorable impact from acquisitions and foreign currency. This compares to the previous guidance range of a decline between minus six to minus 10%.to 15. From a quarterly pacing perspective, we now expect a slight Year-over-Year decline in overall net sales for the third-quarter with the return to Year-over-Year growth in the fourth-quarter. This guidance assumes a level of power outage activity during the remainder of the year, that is in-line with the long-term baseline average, in consistent with our historical approaches outlook does not assume the benefit of a major power outage event during the year.
Looking at our gross margin expectations for the full-year of 2023, we now anticipate approximately 100 basis-points of gross margin improvement over 2022 levels. We still expect sequential quarterly improvements in gross margins in the third and fourth quarters with third-quarter gross margin is projected to be approximately 150 to 200 basis-points higher than the second-quarter of 2023. The anticipated sequential improvement in gross margins in the second-half is expected to be driven by improved sales mix with higher shipments of home standby generators, lower input costs and the realization of cost-reduction initiatives, as compared to the first-half of the year.
Given the significant mega-trends that support our long-term growth opportunities, we remain focused on driving innovation, executing our strategic initiatives and investing for the future. As a result of these ongoing investments, we expect operating expenses as a percentage of net sales to be approximately 20% to 21% for the full-year 2023. Given these gross margin and operating expense expectations, adjusted EBITDA margins before deducting for non controlling interests are now expected to be approximately 15.5 to 16.5% for the full-year of 2023 compared to the previous guidance range of 17% to 18%.
From a quarterly pacing perspective, we still expect adjusted EBITDA margins to improve throughout the remainder of the year, primarily driven by sequentially improving gross margins as previously discussed and to a lesser extent, improved leverage of operating expenses, unexpected higher sales volumes. Accordingly, we now expect third-quarter adjusted EBITDA margins to be approximately 300 to 350 basis-points higher than the second-quarter of 2023 and exit EBITDA margins for the fourth-quarter of 2023 are expected to be in the low 20% range. Additionally, as Aaron discussed, we continue to make significant operating expense investments in our residential energy technology, products and solutions to capitalize on the significant opportunities presented by the rapidly-growing solar, storage and energy management markets. As a result, we currently expect these investments to unfavorably impact our EBITDA margins by approximately 400 basis-points for the full-year 2023. We continue to expect operating and free-cash flow generation to follow historical seasonality are being disproportionately weighted towards the second-half of the year in 2023. For the full-year, we expect adjusted net income to free-cash flow conversion to be strong, a well over 100% as working capital moderates off a peak levels, we are also providing updated guidance details to assist with modeling adjusted earnings per share and free-cash flow for the full-year 2023, importantly to arrive at appropriate estimates for adjusted net income and adjusted earnings per share add-back items should be reflected net of tax, using the expected effective tax-rate. For 2023, our GAAP effective tax-rate is still expected to be approximately 25% as compared to the 19.6% full-year GAAP tax-rate for 2022. The Year-over-Year increase was driven primarily by expectations for lower share-based compensation deductions, increased mix of income and higher tax jurisdictions, higher tax on foreign income 2023 compared to 2022. Interest expense is now expected to be approximately $93 million compared to the prior guidance of approximately $90 million, assuming no additional term-loan principal prepayments during the year and current expectations for SOFR rates throughout 2023.
Interest expense is expected to moderate in the third and fourth quarters as cash, as cash flows on our interest-rate swaps become more favorable and as we expect to pay-down a portion of our outstanding revolver indebtedness. Our capital expenditures are still projected to be approximately 3% of our forecasted net sales for the year. Depreciation expense is now forecast to be approximately $62 million compared to the previous guidance of approximately $60 million in 2023. GAAP intangible amortization expense is now expected to be approximately $102 million during the year as compared to previous guidance of approximately $100 million. Stock-compensation expense is still expected to be between $40 million to $43 million for the year. And our full-year weighted-average diluted share count is still expected to approach 63 million shares as compared to 64.7 million shares in 2022, which reflects the share repurchases that were completed in 2022.
Finally, this 2023 outlook does not reflect potential additional acquisitions or share repurchases that could drive incremental shareholder value. As a reminder, we have 78 million of authorization remaining on our current share repurchase program. This concludes our prepared remarks. At this time, we'd like to open up the call for questions.
