Generac Holdings Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Unaudited results; financial amounts below are in U.S. dollars, generally millions. Generac designs and manufactures generators and other engine-powered products. It reports one operating segment.
Financial performance
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Net sales | $288.4 | $362.6 | $600.2 | $704.6 |
| Gross profit | $95.9 | $128.0 | $198.5 | $247.5 |
| Gross margin | 33.3% | 35.3% | 33.1% | 35.1% |
| Operating income | $39.5 | $78.2 | $84.4 | $143.5 |
| Net income | $14.8 | $54.0 | $34.5 | $88.7 |
| Diluted EPS | $0.21 | $0.77 | $0.49 | $1.27 |
| Adjusted EBITDA | $52.4 | $84.5 | $109.6 | $162.0 |
Q2 adjusted net income was $35.3 million versus $57.1 million; first-half adjusted net income was $69.7 million versus $107.8 million. These are non-GAAP measures and should be considered alongside GAAP results.
Cash flow, debt and liquidity
- First-half operating cash flow was $41.6 million, down from $85.3 million. Management attributed the decline to lower operating earnings and increased working capital, including higher finished-goods inventory.
- Investing activities used $13.9 million, primarily for capital expenditures. Financing activities used $59.8 million, mainly reflecting debt repayments, partly offset by new borrowings.
- Cash was $155.6 million at June 30, compared with $189.8 million at December 31, 2014. Inventory increased to $385.8 million from $319.4 million.
- Debt and capital lease obligations were about $1.04 billion on the balance sheet, versus $1.09 billion at year-end. This included $954.0 million of term-loan principal and $100.0 million outstanding under the ABL facility; term-loan carrying value was reduced by original issue discount.
- The amended ABL facility provides $250 million of capacity, with $133.1 million available at quarter-end, net of letters of credit. The term loan and ABL facility mature in 2020. The company reported compliance with their covenants.
Material changes and management commentary
- Sales fell 20.5% in Q2 and 14.8% in the first half year over year. Residential sales declined to $133.5 million in Q2 from $179.6 million; C&I sales declined to $134.6 million from $163.5 million.
- Management cited power-outage activity well below normalized levels, reducing home-standby and portable-generator demand. C&I weakness reflected lower oil and gas sales and reduced telecom customer capital spending. Industrial distribution, Latin America and recent acquisitions partly offset declines.
- Gross margin contracted by 2.0 percentage points in both Q2 and the first half. The filing cites weaker manufacturing overhead absorption, lower residential mix and acquisition effects; first-half factors also included west coast port-related costs and commodity-contract mark-to-market adjustments.
- First-half net income and adjusted EBITDA declined 61.1% and 32.4%, respectively. Comparisons were affected by a $16.0 million non-cash gain in 2014 from a contractual interest-rate change and a $4.9 million 2014 contingent-consideration gain. In 2015, voluntary term-loan prepayments generated a $4.8 million non-cash debt-extinguishment loss.
- In May 2015, Generac amended its ABL facility, increasing capacity from $150 million to $250 million, extending maturity to May 2020, and reducing pricing. It borrowed $100 million under the facility and used the proceeds to prepay term-loan debt. The term-loan leverage ratio was above 3.0x at June 30; management expected a 25-basis-point borrowing-cost increase beginning in Q3, with a related catch-up loss not expected to materially affect results.
- Management said operating cash flow, ABL availability, low ongoing capital needs and tax attributes were expected to provide sufficient capital for future growth, while noting that expansion may require additional capital. No specific financial guidance was provided.
Outlook, risks and unusual items
Demand remains exposed to unpredictable power outages, residential and business investment cycles, and oil and gas and telecom spending. Other stated risks include commodity and component costs, foreign-exchange and interest-rate movements, competition, reliance on distributors, acquisition integration and synergies, product liability and recalls, and regulatory changes. The company hedges certain commodity, currency and interest-rate exposures; derivative liabilities totaled $3.8 million at June 30.
After quarter-end, Generac acquired Country Home Products on August 1, 2015, expanding its residential engine-powered tools business. On August 5, the board approved a stock repurchase program of up to $200 million over 24 months, subject to market conditions, debt terms and management discretion; purchases may be funded with cash, borrowings or capital-markets proceeds. The filing states that pending litigation was not expected to have a material effect and identifies no material litigation at June 30.
Most important facts for investors to verify
- Whether outage activity and residential generator demand recover, and whether the revenue decline stabilizes.
- Whether elevated inventory converts to sales and operating cash flow improves without further margin pressure.
- Debt balances, borrowing costs, leverage and ABL availability after the term-loan prepayments and facility amendments.
- The financial impact and funding of the Country Home Products acquisition and the announced share-repurchase program.
- How much reported performance depends on non-GAAP adjustments and on tax attributes; the company’s stated cash-tax assumptions are estimates.