Generac Holdings Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Financial statements are unaudited; amounts below are in U.S. dollars. Millions are used unless otherwise noted.
Business context and reporting period
Generac designs and manufactures power generation equipment and related energy products for residential, commercial and industrial customers. It reports Domestic and International segments. In 2019, it acquired Captiva, Neurio and Pika; Neurio and Pika add energy monitoring, storage and management capabilities. Recent non-annualized acquisitions contributed $12.3 million of Q2 sales and $27.2 million of first-half sales.
Financial performance and position
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $541.9m | $497.6m | $1,012.3m | $897.7m |
| Gross profit | $195.8m | $178.5m | $358.0m | $320.4m |
| Gross margin | 36.1% | 35.9% | 35.4% | 35.7% |
| Operating income | $90.9m | $85.5m | $162.1m | $141.8m |
| Net income attributable to Generac | $62.0m | $53.3m | $106.8m | $86.9m |
| Diluted EPS | $0.98 | $0.82 | $1.74 | $1.24 |
| Adjusted EBITDA | $111.9m | $102.2m | $199.0m | $174.0m |
| Cash from operations | Not provided separately | Not provided separately | $22.6m | $79.7m |
At June 30, cash was $110.4 million, down from $224.5 million at December 31, 2018. The company had $57.0 million of short-term borrowings and $883.5 million of long-term borrowings and finance lease obligations on the balance sheet. The $879 million term loan matures in 2023. ABL borrowings were $26.4 million, with $273.2 million of availability net of letters of credit. Net secured leverage was 1.81x, and the company reported compliance with credit covenants. First-half capital expenditures were $34.4 million.
Material changes versus the prior comparable period
- Q2 sales increased 8.9%; first-half sales increased 12.8%. Domestic sales rose 11.0% in Q2 and 14.4% for the first half. International sales rose 1.8% in Q2 and 7.5% for the first half.
- Residential sales rose 8.9% in Q2 and 11.3% in the first half; commercial and industrial sales rose 6.9% and 12.5%, respectively.
- Q2 gross margin improved 0.2 percentage points, but first-half gross margin declined 0.3 points. Q2 Domestic Adjusted EBITDA increased 15.4%; International Adjusted EBITDA declined 36.7%. For the first half, Domestic Adjusted EBITDA rose 18.9%, while International fell 24.7%.
- First-half operating cash flow fell $57.0 million year over year. Management cited working-capital investment, tax-payment timing and higher incentive compensation, partly offset by stronger operating earnings. Investing cash outflow increased to $145.9 million, including $112.9 million for acquisitions.
- Comparative 2018 sales and gross profit were revised to reflect extended-warranty revenue presentation; the revision did not affect operating income, net income, EPS or cash flows.
Outlook, commentary, risks and unusual items
- The filing provides no specific full-year revenue, earnings or margin guidance. Management describes long-term demand opportunities in backup power, energy storage and management, and expects its acquisitions to support new offerings; these are forward-looking statements, not quantified guidance.
- Management attributed Q2 Domestic growth to home standby generator shipments and C&I stationary generators, particularly telecom demand. International core sales, excluding acquisitions and currency effects, declined approximately 3% in Q2 because of the timing of large project shipments.
- Higher input costs—including tariffs, logistics, labor and commodities—and unfavorable International mix and operating leverage pressured results. Demand is also exposed to unpredictable outage activity, seasonality, economic conditions, residential and business investment cycles, currencies, raw-material availability and distribution partners.
- The company began terminating its defined-benefit pension plan; it expects participant lump-sum or annuity elections and transfer of remaining assets within 12 months. Settlement will reclassify pension losses from accumulated other comprehensive loss into earnings; the amount is not specified.
- Product warranty liabilities were $45.3 million, versus $41.8 million at year-end. Dealer floor-plan financing outstanding was approximately $53.3 million; Generac may repurchase repossessed products but does not indemnify the finance company for credit losses. Management said pending litigation was not expected to materially affect results or financial condition.
- Adoption of lease accounting materially increased reported balance-sheet assets and liabilities. The company reported no material income-statement or cash-flow impact from adoption.
Most important facts for investors to verify
- Whether strong Domestic generator demand and the contribution from recent acquisitions continue, and how much growth is organic versus acquired.
- Whether International profitability recovers after declines in segment Adjusted EBITDA and margin.
- How working-capital requirements affect operating cash flow and liquidity, particularly alongside acquisition spending and capital expenditures.
- Debt service, leverage and available ABL capacity, including sensitivity to interest rates and the term loan’s 2023 maturity.
- The financial and earnings impact of pension-plan settlement, warranty claims, tariffs and other input-cost pressures.
- How management’s non-GAAP Adjusted EBITDA and Adjusted Net Income reconcile to GAAP results; these measures do not replace cash flow or GAAP earnings.