Generac Holdings Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020; filed November 3, 2020. Unaudited interim financial statements. Generac designs and manufactures power generation equipment, energy storage systems, and other power products for residential, commercial, and industrial markets. Unless noted otherwise, financial amounts below are in millions of U.S. dollars.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $701.4 | $601.1 | $1,724.1 | $1,613.4 |
| Gross profit | $276.1 | $217.5 | $657.5 | $575.5 |
| Gross margin | 39.4% | 36.2% | 38.1% | 35.7% |
| Operating income | $155.6 | $105.6 | $308.1 | $267.7 |
| Net income attributable to Generac | $115.0 | $75.6 | $225.6 | $182.4 |
| Diluted EPS | $1.82 | $1.18 | $3.51 | $2.92 |
| Adjusted EBITDA | $178.8 | $126.0 | $387.9 | $325.0 |
| Adjusted net income attributable to Generac | $132.9 | $90.0 | $276.5 | $221.4 |
Q3 Adjusted EBITDA was 25.5% of sales, compared with 21.0% a year earlier; nine-month Adjusted EBITDA was 22.5%, compared with 20.1%. These are non-GAAP measures and should be considered alongside GAAP results.
- Cash flow: Nine-month operating cash flow was $268.3, versus $133.8 in 2019. Investing activities used $54.7, including $33.9 of capital expenditures and $22.8 for acquisitions. Financing activities used $21.6. Cash increased $191.1 to $513.9.
- Liquidity and debt: Management reported $808.2 of liquidity, comprising $513.9 cash and $294.3 available under the ABL facility. The $830.0 term loan matures in December 2026; short-term borrowings were $44.8. The secured leverage ratio was 1.26x, and the company reported compliance with debt covenants. ABL availability was net of outstanding letters of credit.
- Balance sheet: Current assets were $1,480.3 and current liabilities $556.3 at September 30, 2020. Total assets were $2,974.1 and total liabilities $1,680.6.
Material changes and operating drivers
- Q3 sales rose 16.7%, while nine-month sales rose 6.9%. Generac attributed higher sales and earnings principally to residential product growth and favorable product mix.
- Residential sales increased 37.0% in Q3 and 28.8% for the nine-month period. Drivers included heightened backup-power awareness, power outages, increased time at home, and PWRcell energy storage shipments.
- Commercial and industrial sales fell 18.0% in Q3 and 23.1% for the nine months. COVID-19 disruption, lower oil prices, deferred rental-company spending, and weaker international demand weighed on this business.
- Domestic sales increased 22.6% in Q3 and 13.4% year to date. International sales declined 11.1% and 17.7%, respectively.
- Nine-month GAAP results included $12.5 of business optimization, restructuring, and other charges related to COVID-19 and lower oil prices: $6.6 in cost of goods sold and $5.9 in operating expenses. The company also cited lower LIBOR rates and lower borrowings as reducing interest expense.
Outlook, risks, and notable items
- The filing provides no specific revenue, earnings, or other quantitative guidance. Management said it believed cash, projected operating cash generation, and ABL availability supported its strategic plans and investment flexibility, while acknowledging substantial pandemic-related uncertainty.
- Management said substantially all operations remained open as an essential business and reported no significant COVID-related supply-chain interruptions to date. It cautioned that employee absences, supplier interruptions, logistics delays, or facility outbreaks could constrain production and customer deliveries.
- Management identified continuing weakness in C&I demand, particularly mobile products and international markets. Residential demand was described as more defensive and supported by outages and backup-power needs.
- Goodwill and indefinite-lived intangible assets were not impaired in the March 2020 interim assessment, and no impairment indicators were identified in Q2 or Q3. Management noted that the Latin America and Generac Mobile Products reporting units could be at risk if projections deteriorate or discount rates change.
- Other risks include power-outage variability, raw-material, component and labor availability and costs, foreign exchange, interest rates, tariffs, distribution-network dependence, acquisition integration, product liability or recalls, cybersecurity, and regulatory changes.
- The company acquired Energy Systems and Mean Green during Q3; combined consideration for certain 2020 acquisitions was $24.1. It acquired Enbala Power Networks on October 7, 2020, after quarter-end.
- A new $250 million share repurchase authorization was approved in September, to begin after the existing program expires. No program repurchases were made during the quarter or nine-month period; reported Q3 share withholding related to restricted-stock tax obligations.
- Management said ordinary-course lawsuits were not expected to have a material effect. No material changes to contractual obligations or off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Whether residential demand and favorable product mix persist, and whether C&I and international demand recover.
- How COVID-19, supply-chain constraints, employee availability, and logistics affect production and deliveries.
- Whether the company’s goodwill impairment assumptions remain supportable, particularly for Latin America and Generac Mobile Products.
- Debt and liquidity trends, including ABL availability, leverage, interest-rate exposure, and compliance with credit agreements.
- Acquisition performance and integration, including the post-quarter Enbala acquisition, and the company’s use of its new repurchase authorization.
- The composition and sustainability of reported results: Adjusted EBITDA and adjusted net income exclude specified items and are not substitutes for GAAP earnings or operating cash flow.