Generac Holdings Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited. Comparisons are with Q1 2019 unless otherwise noted. Dollar figures below are in millions except per-share data.
Business context and results
Generac designs and manufactures power-generation equipment, energy-storage systems and related products for residential, commercial and industrial customers. It reports Domestic and International segments.
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net sales | $475.9 | $470.4 | +1.2% |
| Gross profit / margin | $172.3 / 36.2% | $162.2 / 34.5% | Margin +1.7 pts |
| Operating income / margin | $62.9 / 13.2% | $71.2 / 15.1% | Income −11.7% |
| Net income | $43.4 | $45.8 | −5.2% |
| Net income attributable to Generac | $44.5 | $44.9 | −0.9% |
| Generac diluted EPS | $0.68 | $0.76 | −10.5% |
| Adjusted EBITDA | $86.0 | $87.1 | −1.3% |
| Operating cash flow | $11.3 | $14.6 | −22.1% |
Reported consolidated net income and income attributable to Generac differ because of noncontrolling-interest accounting and redemption-value adjustments; the filing’s EPS calculation also reflects those adjustments. The effective tax rate was 17.9%, versus 24.7%, mainly due to an equity-compensation tax benefit and the geographic mix of earnings.
Revenue and material changes
- Domestic sales rose 5.5% to $376.0 million; International sales fell 12.3% to $99.9 million. Residential sales increased 18.3% to $257.6 million, while Commercial and Industrial (C&I) sales declined 17.7% to $172.1 million.
- Management cited strong home-standby generator shipments, including increased California demand, and new energy-storage shipments as Domestic growth drivers. Domestic core sales were flat excluding Neurio and Pika.
- International core sales declined approximately 10%, excluding currency effects and Captiva. Management attributed weakness to COVID-19, slower economic growth and geopolitical headwinds.
- Gross margin expanded on favorable sales mix, partly offset by acquisition mix. Operating expenses increased 20.3%, including acquisition-related costs, marketing, employee costs and intangible amortization; operating income consequently declined.
- Domestic Adjusted EBITDA increased 1.9% to $82.8 million; International Adjusted EBITDA declined 44.9% to $3.3 million. Consolidated Adjusted EBITDA margin was approximately 18.1%, versus 18.5%.
Cash flow, balance sheet and debt
- Cash and equivalents were $307.5 million at March 31, down from $322.9 million at year-end. Operating cash flow was $11.3 million; capital expenditures were $12.9 million, implying approximately $1.5 million of negative operating cash flow after capex.
- Investing cash use was $12.3 million, compared with $76.7 million in Q1 2019, which included $61.5 million for acquisitions. Financing cash use was $16.1 million, including debt repayments, equity-award tax payments and contingent acquisition consideration.
- Total assets were $2.65 billion and total liabilities $1.57 billion. Inventory increased to $559.7 million from $522.0 million at December 31, 2019.
- Borrowings and finance lease obligations totaled approximately $893.5 million at carrying value, including $49.9 million of short-term borrowings and $843.6 million of long-term borrowings before current-portion deductions. Term Loan principal was $830.0 million; its maturity is December 2026. ABL borrowings were $21.3 million.
- Cash plus available ABL capacity provided stated liquidity of $572.9 million: $307.5 million cash and $265.4 million undrawn availability, net of letters of credit. Net secured leverage was 1.48x; the company reported compliance with covenants.
- No open-market share repurchases occurred in the quarter. Shares withheld to cover taxes on restricted-stock awards are distinct from program repurchases.
Outlook, risks and unusual items
- The filing provides no numerical revenue or earnings guidance. Management said COVID-19 effects and their duration were uncertain, while expecting pressure on C&I demand, particularly mobile products affected by lower oil prices and rental customers deferring capital spending.
- Residential demand was viewed as comparatively defensive, supported by outage-related needs and California demand, but management noted that lower consumer spending could weigh on it. Cost-cutting measures were being implemented.
- Most operations remained open as an essential business. The company reported no significant supply-chain interruption to date, but cited employee absences, possible facility or supplier stoppages, and logistics delays as risks.
- Management performed an interim goodwill and indefinite-lived-asset impairment test as of March 31 and recorded no impairment. The Latin America and Generac Mobile reporting units each had estimated fair value about 15% above carrying value; management disclosed sensitivity to higher discount rates or lower growth assumptions.
- Comprehensive income attributable to Generac was negative $3.1 million, mainly reflecting foreign-currency translation losses and unrealized interest-rate-swap losses. The swap liability increased materially during the quarter as market conditions changed.
- Other risks include commodity, currency and interest-rate movements, raw-material and labor availability, distribution-network dependence, acquisition integration, product liability, cybersecurity, and regulatory changes. Management said pending ordinary-course litigation was not expected to have a material effect.
Important facts for investors to verify
- How COVID-19 and lower oil prices affect C&I demand, international sales, operations and cash generation in subsequent periods.
- Whether residential growth and gross-margin improvement persist, and how acquisition-related and other operating expenses develop.
- Inventory levels, working-capital needs, operating cash flow and the company’s ability to preserve stated liquidity.
- Goodwill impairment headroom and the assumptions underlying the Latin America and Generac Mobile valuations.
- Debt terms, covenant compliance, interest-rate exposure and the fair-value and cash-flow effects of interest-rate swaps.