York A. Ragen
Chief Financial Officer at Generac
Thanks, Aaron. Looking at fourth quarter and full year 2021 results in more detail. Net sales increased 40% to $1.07 billion during the fourth quarter of 2021, an all-time record as compared to $761 million in the prior year fourth quarter. The combination of contributions from the Deep Sea, Chilicon, Off Grid, Tank Utility, and Ecobee acquisitions, and the unfavorable impact from foreign currency had an approximate 5% impact on revenue growth during the quarter. Net sales for the full year 2021 increased 50% to approximately $3.74 billion, also an all-time record for the company. Briefly looking at consolidated net sales for the fourth quarter by product class, residential product sales grew to $706 million as compared to $499 million in the prior year, representing a 42% increase despite a strong prior-year comparable. Contributions from the Ecobee and Chilicon acquisitions and the impact of foreign currency contributed approximately 2% of revenue growth for the quarter. Home standby generator sales made up the majority of the residential product growth increasing by approximately 50% over the prior year as we continue to make significant progress in expanding production capacity for these products despite the challenging supply chain environment. Shipments of PWRcell energy storage systems also grew at a significant rate as compared to the prior year as overall solar market growth, rise in storage attachment rates, and our expanding distribution continue to drive growth for our clean energy solutions. An increase in shipments of portable generators and chore products also contributed to growth in the quarter.
Commercial and industrial product net sales for the fourth quarter of 2021 increased 43% to $284 million as compared to $199 million in the prior year quarter. Contributions from the Deep Sea and Off Grid acquisitions and the unfavorable impact of foreign currency had a combined impact of approximately 13% on net sales growth during the quarter. The very strong core revenue growth was driven by the impressive growth across all domestic C&I channels and all major regions internationally. While this growth rate was aided by the softer prior comparison impacted by the COVID 19 pandemic, our C&I revenue was up approximately 19% on a core basis as compared to 2019 levels, which highlights the strong demand that we are seeing across most C&I markets. Domestically, the C&I growth was driven by a significant increase in shipments to telecom national account customers resulting from the much higher capital spending as these customers continue to harden their wireless networks. We also experienced strong growth in mobile product shipments to our rental channel customers as they continue to invest in their fleets given strength in their end markets. Also contributing to the increase was solid growth with our industrial distributors as well as higher shipments of natural gas generators used in beyond standby applications. Internationally, the increase in C&I products was broad based from a geographic standpoint, with growth in all major regions as global C&I markets continue to experience a sharp increase in demand off the softer prior year comparison impacted by COVID, and add -- have recovered well above 2019 levels.
Net sales for other products and services increased 21% to $77 million as compared to $64 million in the fourth quarter of 2020. Recall this product category is primarily made up of aftermarket service parts, product accessories, extended warranty revenue, remote monitoring and grid services subscription revenue and other service offerings. Contributions from the Ecobee and Tank Utility acquisitions and the impact of foreign currency contributed approximately 4% of revenue growth during the quarter. Strength in aftermarket service parts continues to be a core driver of sales growth in the category as heightened power outage activity and a larger installed base is driving increased demand. We are also experiencing higher levels of extended warranty revenue on a larger and growing base of extended warranty contracts. Also contributing to the increase were higher levels of remote monitoring and grid services subscription revenue as well as increases in other services.
Gross profit margin was 34% compared to 39.4% in the prior year fourth quarter as a challenging supply chain and overall inflationary environment drove input cost significantly higher during the quarter. Specifically the lagging impact of rising steel prices, inbound logistics costs and labor rates, along with the Trenton plant start up, all pressured margins in the current-year quarter. The early realization of initial pricing actions partially offset these margin pressures. Importantly, our backlog as of the end of the year contains multiple rounds of additional price actions that will be increasingly realized in the coming quarters.
Operating expenses increased 58 million or 44.8% as compared to the fourth quarter of 2020 but declined approximately 100 basis points as a percentage of revenue, excluding intangible amortization and transaction related costs. The overall increase in opex dollars was primarily driven by the impact of acquisitions and related transaction costs, higher employee and marketing spend, additional variable expenses from the significant increase in sales volumes, and increased amortization expense. Adjusted EBITDA before deducting for noncontrolling interests as defined in our earnings release was an all-time record of $220 million or 20.7% of net sales in the fourth quarter as compared to $196 million or 25.7% of net sales in the prior year. For the full year 2021, adjusted EBITDA before deducting for noncontrolling interest came in at an all-time record of $861 million resulting in a strong 23.1% margin that was similar to the 23.5% margin in the prior year despite the challenging operating environment and acquisitions that impacted margins during 2021.
I will now briefly discuss financial results for our two reporting segments. Domestic segment sales increased 39% to $896 million in the quarter as compared to $645 million in the prior year, with the impact of acquisitions contributing approximately 2% of the revenue growth for the quarter. Adjusted EBITDA for the segment was $197 million representing a 21.9% margin as compared to $188 million in the prior year or 29.1% of net sales. The lower domestic EBITDA margin in the quarter was primarily due to the significantly higher input costs and the impact of acquisitions, partially offset by the early realization of pricing actions implemented throughout the year. For the full year 2021, domestic segment sales increased 52% over the prior year to $3.16 billion. Adjusted EBITDA margins for the segment were 25.1% compared to 27.0% in the prior year.
International segment sales increased 47% to $171 million in the quarter as compared to $116 million in the prior year quarter. Core sales, which exclude the impact of acquisitions and currency, increased approximately 26% compared to the prior year. Adjusted EBITDA for the segment before deducting for noncontrolling interest was $23.7 million or 13.9% of net sales as compared to $7.8 million or 6.8% of net sales in the prior year. The significant expansion in international EBITDA margins was primarily due to strong margin contributions from the Deep Sea and Off Grid Energy acquisitions, improved overhead absorption and operating leverage, as well as the impact of pricing actions. For the full year 2021, International segment sales increased 45% over the prior year to $573 million. Adjusted EBITDA margins for the segment before deducting for noncontrolling interests were 11.5% of net sales during 2021, a 640 basis point increase compared to the 5.1% margin in the prior year.
Now switching back to our financial performance for the fourth quarter of 2021 on a consolidated basis. As disclosed in our earnings release, GAAP net income for the company in the quarter was $143 million as compared to $125 million for the fourth quarter of 2020. GAAP income taxes during the current year fourth quarter were $20.6 million or an effective tax rate of 12.4% as compared to $39 million or an effective tax rate of 23.8% in the prior year. The decline in effective tax rate was primarily due to certain discrete items related to acquisitions and a higher stock compensation deduction during the current year. Diluted net income per share for the company on a GAAP basis was $2.04 in the fourth quarter of 2021 compared to $1.97 in the prior year. Adjusted net income for the company, as defined in our earnings release was an all-time record $162 million in the current year quarter or $2.51 per share. This compares to adjusted net income of $136 million in the prior year or $2.12 per share.
Cash income taxes for the fourth quarter of 2021 were $29.7 million as compared to $34.9 million in the prior year quarter. The current year now reflects a cash income tax rate of approximately 19.7% for the full year 2021 compared to our previous expectation of approximately 20.0% to 20.5%, the decrease primarily driven by a higher level of stock compensation deduction than previously expected. This full year cash tax rate for 2021 compares to the prior year rate of 17.9%. The increase in the current year cash tax rate versus the prior year is primarily due to a significant increase in domestic pre-tax income which is taxed at a higher statutory rate along with an increase in non-deductible goodwill from acquisitions.
Cash flow from operations was $62 million as compared to $218 million in the prior year fourth quarter, and free cash flow as defined in our earnings release was $42 million as compared to $191 million in the same quarter last year. The decline in free cash flow was primarily due to a much higher working capital investment in the current year quarter, partially offset by an increase in operating earnings and lower capital expenditures relative to the prior year. The higher working capital investment was primarily driven by further elevated inventory levels at the end of the year, resulting from extended logistics and transit times, ongoing supply chain constraints, increase in production rates, and continued investments in the ramping of our new Trenton facility. We repurchased 350,000 shares of common stock during the fourth quarter for $126 million under our current share repurchase program, and we have approximately $124 million remaining under this authorization as of December the 31, 2021. At year-end, we had approximately $550 million of liquidity comprised of approximately $150 million of cash on hand and $400 million of availability on our ABL revolving credit facility which matures in May of 2026. Also, total debt outstanding for the -- at the end of the year was $980 million net of unamortized original issue discount and deferred financing costs. Our gross debt leverage ratio at the end of the fourth quarter was only 1.2 times on an as reported basis. In addition, our term loan doesn't mature until December 2026 and we do not have any required principal payments on this facility until the maturity date, and it has a low cost of debt of LIBOR plus 175 basis points. We also have interest rate swap arrangements that fix our interest rate exposure on approximately $500 million of this debt through the maturity date of December 2026. Further enhancing our overall liquidity is our strong cash flow profile. And for the full year 2021, free cash flow was $306 million. Uses of cash during 2021 included $744 million for acquisitions including earn out and non-controlling interest buyouts, $126 million for share repurchases and $110 million for capital expenditures. Our strong balance sheet and free cash flow generation give us the flexibility to grow our business, execute on our strategy, and invest in future shareholder value enhancing opportunities. With that, I will now provide further comments on our new outlook for 2022.
As Aaron previously highlighted, key demand metrics for most of our product categories continue to trend strongly during the fourth quarter leading to a further increase in backlog as we exit 2021. Looking into 2022, we expect significant growth in home standby generator shipments as we ramp capacity in our Trenton South Carolina plant. We also expect strong growth from our clean energy products as a solar plus storage market continues to grow rapidly and as we launched several important new products including PWRmicro throughout the first half of the year. We expect C&I products to continue to benefit from strong and broad-based global demand highlighted by domestic telecom, mobile and energy management customers and several key international markets. In addition, our 2021 energy technology acquisitions are expected to contribute meaningfully to our overall growth, in particular the Ecobee, Deep Sea electronics and Off Grid Energy acquisitions. In summary, we have tremendous momentum and significant visibility into our demand profile as we enter 2022.
As a result of this positive top-line outlook, we are initiating guidance for 2022 that anticipates significant revenue growth as compared to the prior-year. Net sales are expected to increase between 32% to 36% as compared to the prior year on an as reported basis, which includes an approximate 5% to 7% net impact from acquisitions and foreign currency. This revenue outlook assumes shipments of residential products increase at a low 40% rate during 2022, and revenue for C&I products is expected to grow at a high teens rate compared to the prior year. Importantly, this guidance assumes a level of power outage activity during the year in line with the longer-term baseline average. As a result, consistent with our historical approach, this outlook does not assume the benefit of a major power outage event during the year, such as a category three or higher landed hurricane. Given we are expected to be producing at capacity for home standby generators throughout the year, the upside of a major power outage event would be more limited to incremental portable generator shipments during 2022, meaning any extra lift for home standby generators from a major power outage event would most likely result in incremental revenue in 2023. As Aaron previously explained, we expect to significantly reduce our backlog and lead times for home standby generators during 2022, but given the strong demand for these products we still expect to carry a notable amount of home standby backlog into 2023. As we ramp capacity for home standby and clean energy products, we are expecting a certain level of quarterly seasonality during 2022 with net sales in the first half being approximately 47% weighted and sales in the second half being approximately 53% weighted. Specifically related to the first quarter, we expect first quarter 2022 shipments to be similar to fourth quarter 2021 levels with increasing residential shipments being offset by seasonal impacts for C&I products.
Looking at our gross margin profile as we enter 2022, we anticipate cost pressures from ongoing supply chain challenges, component shortages, higher logistics costs, and an overall inflationary environment to further impact gross margins in the first quarter, resulting in a sequential decline in gross margins from fourth quarter 2021 to first quarter 2022. We expect many of these inflationary pressures to progressively ease as we move through 2022 for a variety of reasons. Steel prices have come off the recent peaks and we expect freight cost will recede during the year as supply chain bottlenecks improve. Also, the realization of multiple pricing actions that we took in 2021 will have a meaningfully positive impact on gross margins, particularly in the second half supported by our significant backlogs that contain higher pricing levels. In addition, the impact of plant start-up costs will continue to lessen as production at the new Trenton South Carolina facility further ramps. Also, we expect to realize certain cost reduction initiatives that began in 2021 to combat the significant increase in input costs including important projects to improve the cost structure for certain high volume product lines. These tailwinds should be increasingly realized on a quarterly basis as we progress through 2022. For the full year 2022, we expect pricing, easing input cost pressures during the second half and cost reduction initiatives to more than offset the continuation of inflationary cost pressures during the first half. As a result, we expect gross margins for full year 2022 to increase modestly compared to 2021 with sequential improvements throughout the year. Specifically from a seasonality perspective, we expect price cost headwinds to hit peak levels in the first quarter of 2022 leading to trough gross margins that are expected to be approximately 100 basis points below fourth quarter 2021 levels. We expect quarterly improvement throughout the year ultimately leading to fourth quarter 2022 gross margins recovering back to first quarter 2021 levels. In addition, we continue to make significant operating expense investments to scale the business, support innovation, and drive future revenue growth in new and existing markets. These energy technology investments and the impact of acquisitions completed in 2021 are expected to result in moderately higher operating expense as a percentage of revenue for the full year 2022 when compared to full year 2021. As a result of these factors and our gross margin expectations, adjusted EBITDA margins before deducting for noncontrolling interests are expected to be approximately 22.0% to 23.0% compared to 23.1% reported for the full year 2021. This includes the combined impact from recent acquisitions that is expected to dilute adjusted EBITDA margins by approximately 150 basis points during 2022. From a seasonality perspective, we expect adjusted EBITDA margins to improve significantly as we move through the year primarily driven by improving gross margins throughout the year as previously discussed in detail and to a lesser extent improved leverage of operating expenses on the expected higher sales volumes. Specifically regarding the first quarter, adjusted EBITDA margins are expected to bottom in the first quarter at approximately 250 basis points to 300 basis points below fourth quarter 2021 levels, and then improve sequentially throughout the year returning to the mid 20% range in the fourth quarter of 2022 even when including the impact of recent acquisitions. As is our normal practice, we're also providing additional guidance details to assist with modeling adjusted earnings per share and free cash flow for 2022. As a reminder, our approximate $30 million per year tax shield that originated from the LBO transaction in 2006 fully expired at the end of 2021. As a result, 2021 was the last year that adjusted earnings will benefit from a notably lower cash income tax rate relative to the GAAP tax rate. Given that our cash tax rate is now expected to be more in line with the GAAP tax rate, we are now only going to guide to the GAAP tax rate going forward. For 2022, our GAAP effective tax rate is expected to be between 24% to 25% as compared to the 19.7% full year cash tax rate for 2021. This increase is driven primarily by the expiration of the previously mentioned tax shield as well as lower expected share-based compensation deductions in 2022 when compared to the prior year. In 2022, we expect interest expense to be approximately $41 million to $43 million, assuming no additional term loan principal payments during the year and assuming increasing LIBOR rates throughout 2022.
Our capital expenditures are projected to be approximately 2.5% to 3% of our forecasted net sales for the year, and depreciation expense is forecast to be approximately $56 million to $58 million in 2022 given our assumed capex guidance. GAAP intangible amortization expense in 2022 is expected to be approximately $95 million to $100 million during the year. This is an increase compared to $50 million of amortization expense in 2021 due to the impact of acquisitions completed during 2021 that resulted in a significant increase in finite life intangible assets such as trade names, customer lists, patents, and technology. Stock compensation expense is expected to be between $31 million to $34 million for the year. For full year 2022, operating and free cash flow generation is once again expected to follow historical seasonality of being disproportionately weighted for the second half of the year. Given the very strong organic sales growth expected during 2022, we expect the conversion of adjusted net income to free cash flow to be approximately 70% to 80% for the year as a portion of cash flows will be invested in working capital to support this growth. Our full-year weighted average diluted share count is expected to increase and be approximately 65.3 million shares to 65.5 million shares as compared to 64.3 million shares in 2021. Finally, this point to outlook does not reflect potential additional acquisitions or share repurchases that could drive incremental shareholder value. This concludes our prepared remarks. At this time, we'd like to open up the call for questions.