Generac Holdings Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. The interim financial statements are unaudited. Generac designs and manufactures power generation, energy storage, energy management, and related products and services. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Net sales | $887.9 | $1,135.9 | Down 21.8% |
| Gross profit / margin | $272.5 / 30.7% | $360.7 / 31.8% | Margin down 1.1 percentage points |
| Operating income / margin | $44.5 / 5.0% | $154.7 / 13.6% | Income down 71.3% |
| Net income | $14.2 | $116.9 | Down 87.9% |
| Net income attributable to Generac | $12.4 | $113.9 | Down 89.1% |
| Basic / diluted EPS attributable to Generac | $0.06 / $0.05 | $1.61 / $1.57 | Substantial decline |
| Adjusted EBITDA | $100.1 | $196.4 | Down 49.0% |
| Adjusted net income attributable to Generac | $39.4 | $128.2 | Down 69.2% |
| Operating cash flow | $(18.6) | $(10.1) | Greater cash use |
Reported EPS reflects a $9.0 million adjustment for the redemption value of redeemable noncontrolling interests: the EPS reconciliation shows $3.4 million of net income attributable to common shareholders before dividing by weighted-average shares. Adjusted EBITDA and adjusted net income are non-GAAP measures and should be considered alongside GAAP results, not as substitutes.
Business and segment trends
- Domestic sales fell 27.0% to $704.4 million; Domestic adjusted EBITDA fell 60.3% to $67.7 million. Lower home standby and clean-energy shipments drove the decline, partly offset by C&I growth.
- International sales rose 7.2% to $183.5 million; International adjusted EBITDA increased 24.7% to $32.4 million. Management cited strength in Europe, favorable price/cost dynamics, and improved operating leverage.
- Residential product sales declined 46.1% to $418.9 million. C&I product sales increased 30.2% to $363.0 million, and Other sales increased 32.3% to $106.1 million.
- Management attributed the lower gross margin mainly to unfavorable sales mix, partly offset by prior pricing actions and lower input costs. Domestic adjusted EBITDA margin was 9.4%, versus 17.5% a year earlier; International margin improved to 15.0% from 14.0%.
Cash flow, balance sheet, and liquidity
- Cash and cash equivalents were $137.4 million at quarter-end, versus $132.7 million at year-end 2022. Cash increased $4.6 million during the quarter.
- Operating activities used $18.6 million; investing activities used $41.3 million, including $24.0 million of capital expenditures and $16.2 million for REFUstor. Financing activities provided $63.7 million. Management cited lower operating earnings and a one-time $36 million cash tax payment related to tax planning for a recent acquisition as factors in operating cash use.
- Total assets were $5.21 billion; inventory was $1.44 billion, up from $1.41 billion at year-end.
- At March 31, principal outstanding was $750 million on the Tranche A term loan, $530 million on the Tranche B term loan, and $250 million on the revolving facility. Foreign subsidiary short-term borrowings were $64.1 million. The balance sheet also included finance lease obligations.
- Revolver availability, net of letters of credit, was $998.6 million; together with cash, reported available liquidity was $1.136 billion. The company reported compliance with its debt covenants: total leverage ratio 2.22x, net secured leverage ratio 2.13x, and interest coverage ratio 30.99x. Loan rates at quarter-end ranged from 6.27% to 6.52%.
Outlook, risks, and unusual items
- The filing provides no specific full-year revenue or earnings guidance. Management said higher field inventories of home standby generators, linked to installation-capacity constraints at distribution partners and lower channel orders, are expected to be a headwind that moderates in the second half of 2023.
- Management’s longer-term strategy emphasizes backup power, clean-energy storage, energy management, grid services, and C&I applications. It identifies demand, outage activity, consumer and business investment, channel inventory, supply-chain availability, input costs, interest rates, currencies, and acquisition execution as risks or drivers.
- Interest expense increased to $23.0 million from $9.6 million, primarily due to higher borrowings and interest rates. The effective tax rate rose to 35.7% from 19.7%, mainly because equity compensation provided a smaller tax benefit against lower pretax earnings.
- Operating expenses included a $5.8 million provision for a CPSC matter concerning alleged late reporting related to previously recalled portable generators. On May 3, 2023, after quarter-end, the CPSC provisionally accepted settlement terms that would require a $15.8 million civil fine and specified compliance commitments. The company said the proposed settlement would not materially adversely affect its financial condition, results, or cash flows; it is for settlement purposes and is not an admission or agency determination of a violation.
- The filing describes clean-energy product-related customer and putative class actions, a securities class action, shareholder derivative actions, and a DOJ investigation concerning emissions compliance for approximately 1,850 portable generators produced in 2019–2020 and sold in 2020. The company disputes the claims and says it intends to defend the litigation; it is cooperating with the DOJ, EPA, and CARB inquiries. Management considers a material adverse effect from pending proceedings presently unlikely but notes loss estimates are uncertain and actual losses could exceed reserves.
- Generac acquired the remaining 20% of Pramac for stated consideration of $116.8 million, including $104.8 million cash and $11.5 million contingent deferred consideration subject to earnings targets. It also acquired REFUstor in February 2023. No public-program share repurchases were made during the quarter.
Key facts for investors to verify
- Whether residential channel inventories and installation constraints ease as management expects in the second half of 2023.
- Whether residential demand stabilizes and C&I and International growth can offset the continued home standby and clean-energy sales decline.
- The final CPSC settlement terms, payment timing, and any additional costs or consequences from product-related legal and regulatory matters.
- Future operating cash generation, working-capital and inventory trends, and the effect of higher borrowing costs on earnings and liquidity.
- Progress on debt reduction and covenant headroom, and the earnings-target conditions attached to Pramac’s contingent consideration.