Generac Holdings Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; quarterly figures below compare Q4 2018 with Q4 2017. Amounts are U.S. dollars unless otherwise noted.
Business context
Generac designs and manufactures generators and related power products for residential, commercial and industrial customers. Residential products generated 51.5% of FY 2018 sales, commercial and industrial products 40.6%, and other products 7.9%. The company cited demand following elevated power-outage activity, as well as growth in rental, telecom and healthcare markets. Its June 2018 acquisition of Selmec expanded its industrial generator presence and service capabilities in Latin America.
Financial performance and liquidity
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Net sales | $2,023.5 million | $1,679.4 million |
| Gross profit / margin | $725.0 million / 35.8% | $584.8 million / 34.8% |
| Operating income | $357.2 million | $250.6 million |
| Net income attributable to Generac | $238.3 million | $157.8 million |
| Diluted GAAP EPS | $3.54 | $2.53 |
| Adjusted EBITDA | $424.6 million | $317.3 million |
| Operating cash flow | $247.2 million | $257.3 million |
FY sales rose 20.5%; gross profit increased 24.0%, and Generac-attributable net income increased 51.0%. Adjusted EBITDA increased 33.8%. Operating cash flow declined 3.9%, principally because of higher working-capital investment, including inventory purchases ahead of expected tariff changes. Capital expenditures were $47.6 million, making operating cash flow less capital expenditures approximately $199.6 million.
In Q4, net sales were $563.4 million versus $493.0 million, gross profit $204.3 million versus $182.9 million, and operating income $108.8 million versus $95.4 million. Generac-attributable net income was $75.6 million versus $80.9 million; diluted EPS was $1.20 versus $1.30. The filing attributes the prior-year tax comparison in part to a one-time $28.4 million noncash tax benefit recognized in Q4 2017.
At December 31, 2018, cash and cash equivalents were $224.5 million and total current assets were $1,120.8 million, compared with current liabilities of $560.7 million. Total indebtedness was approximately $924.0 million. The company reported a secured leverage ratio of 1.66x, compliance with credit-facility covenants, and $276.6 million of ABL availability. The Term Loan and ABL Facility mature in 2023; the facilities have no financial maintenance covenants. Interest expense was $41.0 million, down from $42.7 million.
Changes, outlook and risks
- Domestic sales increased 21.2% and International sales increased 17.9%. Residential and C&I product sales grew approximately 19.8% and 19.9%, respectively.
- Management attributed improved annual gross margin to favorable home-standby mix, manufacturing leverage, pricing and margin initiatives, partly offset by commodity, currency, wage and logistics inflation.
- Cash used in investing activities increased to $108.9 million, including $65.4 million for acquisitions and $47.6 million of capital expenditures. The company repurchased $25.7 million of stock and made debt repayments during the year.
- No specific FY 2019 revenue or earnings guidance is provided in the filing. Management’s strategy emphasizes growing standby-generator adoption, gaining share, expanding gas-powered generation and developing connected products and services. It estimates U.S. home-standby penetration at approximately 4.5% of its defined addressable market.
- Key risks include unpredictable outage-driven demand and seasonality; economic and capital-spending cycles; input-cost, tariff and foreign-exchange exposure; reliance on dealers and distribution partners; product regulation and liability; manufacturing and supply-chain disruption; acquisition integration; cybersecurity; and variable-rate debt. Goodwill and other indefinite-lived intangibles totaled $891.8 million; annual impairment testing found no impairment.
- FY 2018 results include a $1.3 million debt-extinguishment loss associated with voluntary debt prepayment. The 2017 comparison includes the $28.4 million noncash Tax Act benefit. The company reported no litigation expected to materially affect its financial position or results.
Important facts for investors to verify
- Whether outage-driven residential demand and the associated favorable product mix persist, given the company’s stated demand sensitivity and seasonality.
- Whether inventory and working-capital investment convert into sales and cash flow; inventory rose to $544.8 million from $387.0 million.
- How tariffs, commodity prices, wages, logistics and currency movements affect margins and sourcing costs.
- Debt repayment capacity, ABL availability and sensitivity to rates: a 100-basis-point LIBOR change was estimated to affect annual cash interest expense by about $3.8 million after swaps.
- Selmec integration and acquisition returns, along with the future cash-tax profile as acquisition-related tax attributes are used.
- Accounting and control scope: auditors gave unqualified opinions on the financial statements and internal control, but Selmec was excluded from the 2018 internal-control assessment.