Business context and reporting period
Generac Holdings Inc. designs and manufactures generators and other engine-powered products for residential, commercial, industrial and construction markets. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2012; comparisons are with the same periods in 2011. Unless otherwise noted, financial amounts below are in millions of dollars.
Financial results and key metrics
| Metric | Q2 2012 | Q2 2011 | First half 2012 | First half 2011 |
|---|---|---|---|---|
| Net sales | $239.1 | $161.4 | $533.7 | $285.3 |
| Gross profit | $87.4 | $60.4 | $198.4 | $107.5 |
| Gross margin | 36.6% | 37.4% | 37.2% | 37.7% |
| Operating income | $37.2 | $21.8 | $96.7 | $32.9 |
| Net income | $9.3 | $15.3 | $39.4 | $20.1 |
| Diluted EPS | $0.14 | $0.23 | $0.57 | $0.30 |
| Adjusted EBITDA (non-GAAP) | $54.6 | $37.6 | $130.4 | $65.1 |
- Sales grew 48.2% in Q2 and 87.0% in the first half. Residential sales were $123.4 million in Q2 and $298.5 million in the first half; industrial and commercial sales were $101.1 million and $206.1 million, respectively.
- Q2 net income declined despite higher sales and operating income, mainly as other expense rose to $21.5 million, including a $10.0 million debt-extinguishment loss, alongside higher interest expense and taxes. First-half net income increased year over year.
- First-half cash from operations was $59.7 million, compared with $28.0 million in 2011. Investing used $7.8 million, including capital expenditures of $5.5 million and acquisition spending of $2.3 million. Financing used $134.8 million, reflecting refinancing costs and the special dividend.
- At June 30, cash was $10.3 million, current assets $359.0 million and current liabilities $167.4 million. ABL availability was $129.2 million, net of borrowings and letters of credit.
- Borrowings were approximately $895.3 million, including $13.0 million of short-term ABL borrowings. Long-term borrowings were $882.3 million on the balance sheet. The filing describes $895.3 million as net indebtedness; the disclosed balance-sheet debt and cash figures should be checked against that characterization.
- The reported effective tax rate was 39.2% for the first half, versus 0.9% in 2011, after the company concluded in late 2011 that its deferred tax assets were realizable and began recording a normalized tax provision.
Material changes versus the prior comparable period
- Growth reflected elevated demand for home standby generators following major power outages in the second half of 2011, expanded retail placement of portable generators, and Magnum Products revenue. The Magnum acquisition also drove much of the industrial and commercial sales increase.
- Gross margin eased year over year, partly due to the sales mix from Magnum; price increases, improved overhead absorption and moderating commodity costs provided offsets.
- Operating expenses rose 30.4% in Q2 and 36.5% in the first half, reflecting Magnum, higher sales and support costs, and increased incentive compensation.
- Debt increased following a May refinancing and dividend recapitalization. The company paid a special $6.00-per-share dividend totaling $404.3 million on June 29, funded with refinancing proceeds and cash on hand.
Outlook, commentary, risks and unusual items
- No specific full-year revenue or earnings guidance is provided. Management expected 2012 revenue to be weighted toward the first half, assuming no major change in the macroeconomic environment and no additional major outages; it cautioned that outage activity is unpredictable and historical seasonality may not apply.
- Management said operating cash flow, revolving-credit availability, relatively low ongoing capital spending and tax attributes should provide sufficient capital for growth. It also warned that debt service will absorb cash otherwise available for working capital, investment and other purposes.
- The May 30 term loan is $900 million, matures in 2018 and initially bears interest at adjusted LIBOR plus 5.00%, subject to a 1.25% LIBOR floor, or base rate plus 4.00%. The ABL facility is $150 million and matures in 2017. The term loan has restrictive covenants but no financial maintenance covenants; the ABL has a conditional 1.0x fixed-charge coverage test.
- Key risks include substantial indebtedness and variable-rate interest exposure; demand and outage variability; raw-material and component availability, costs and quality; competition and reliance on distribution; successful integration and realization of Magnum synergies; product liability; and potential limits on using tax attributes following an ownership change.
- Four interest-rate swaps were outstanding. Following a change in the loan agreement’s terms on May 30, the company de-designated the swaps as cash-flow hedges; subsequent fair-value changes are recognized in interest expense. The filing reported $14.3 million of debt-extinguishment losses for the first half.
- Product warranty obligations were $41.4 million at June 30, up from $34.4 million at year-end. Dealer floor-plan financing outstanding under the company’s repurchase arrangement was $18.7 million. Management said ordinary-course lawsuits were not expected to have a material adverse effect; it reported no pending litigation believed to be material.
Important facts for investors to verify
- Reconcile the filing’s stated $895.3 million of net indebtedness with balance-sheet borrowings of approximately $895.3 million and cash of $10.3 million.
- Assess the ongoing interest cost, refinancing-related charges, covenant restrictions and debt-service burden after the dividend recapitalization.
- Evaluate whether outage-driven demand and Magnum-related growth persist, and whether sales mix, warranty costs and working-capital needs affect margins and cash generation.
- Review the assumptions underlying management’s expected use of tax attributes, including the risk of ownership changes that could limit their availability.
- Consider Adjusted EBITDA and Adjusted Net Income alongside GAAP results and cash flows; the filing notes these non-GAAP measures have limitations and are not substitutes for them.