Generac Holdings Inc. — 2011 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2011; the filing was signed March 9, 2012. Unless otherwise noted, financial amounts are in U.S. dollars. Generac designs and manufactures generators and related engine-powered products for residential, commercial, industrial and construction markets, primarily in North America.
Financial performance and liquidity
| Metric | 2011 | 2010 |
|---|---|---|
| Net sales | $792.0 million | $592.9 million |
| Gross profit / gross margin | $294.7 million / 37.2% | $237.4 million / 40.0% |
| Operating income | $113.0 million | $90.3 million |
| Net income | $324.6 million | $56.9 million |
| Adjusted EBITDA | $188.5 million | $156.2 million |
| Cash from operating activities | $169.7 million | $114.5 million |
- Sales rose 33.6%. Residential sales were $491.0 million, commercial and industrial sales $250.3 million, and other sales $50.7 million.
- Gross margin fell 2.8 percentage points, primarily from increased portable-generator sales and the Magnum acquisition’s product mix; higher commodity costs also contributed.
- Net income included a $237.7 million income tax benefit, mainly from reversing a $271.4 million valuation allowance on deferred tax assets. The tax benefit substantially inflates reported earnings; it is not a measure of recurring operating profit.
- Cash and cash equivalents were $93.1 million at year-end; current assets were $383.3 million and current liabilities $165.4 million. The former revolving facility had $144.2 million of availability and no borrowings.
- Year-end debt was approximately $597.9 million. Interest expense was $23.7 million, down from $27.4 million, mainly following debt repayments. Capital expenditures were $12.1 million. Investing cash outflow of $96.0 million included $83.9 million for Magnum.
Material changes and unusual items
- Third- and fourth-quarter 2011 power outages drove increased demand and awareness. Fourth-quarter sales were $267.3 million, versus $161.0 million in fourth-quarter 2010; fourth-quarter net income was $267.1 million, largely reflecting the tax valuation-allowance reversal.
- Generac acquired substantially all of Magnum Products’ assets on October 3, 2011, for approximately $85.5 million, including estimated contingent consideration. Magnum contributed $38.8 million of sales and $3.4 million of net income from acquisition through year-end. Integration, realization of synergies and final working-capital purchase-price adjustments remained relevant.
- A $9.4 million non-cash trade-name write-down was recorded as Generac shifted certain products to the Generac brand. The annual goodwill impairment test indicated no goodwill impairment.
- Generac repaid debt during 2011. On February 9, 2012, after year-end, it refinanced the former facilities, repaid a further $22.9 million, and reported total debt of $575.0 million. The new facilities include a $150 million revolver, a $325 million Term Loan A and a $250 million Term Loan B, with maturities in 2017 and 2019.
- Operating cash flow increased, helped by higher sales and working-capital inflows. Inventory rose to $162.1 million from $127.1 million, while accounts receivable rose to $109.7 million from $63.2 million.
Outlook, risks and contingencies
- The filing provides no formal revenue or earnings guidance. Management expected 2012 growth rates to be weighted toward the first half, based on outage-driven demand in late 2011, assuming no comparable outage events and no material improvement in macroeconomic conditions. Management cautioned that historical seasonality may not apply.
- Demand is exposed to unpredictable power outages, consumer and business spending, residential investment, non-residential construction and capital spending. A lack of major outages can reduce awareness and demand.
- Key risks include competition and pricing pressure; raw-material, component and foreign-sourcing costs; reliance on dealers and distribution partners; acquisition integration; product liability; increasingly stringent emissions regulation; and operational concentration, with most manufacturing facilities located in Wisconsin.
- Debt creates interest, refinancing, covenant and cash-flow risks. The new credit agreement imposes leverage and interest-coverage tests and restricts additional debt, acquisitions, dividends and other actions. A 100-basis-point LIBOR change was estimated to affect annual cash interest by about $3.0 million after swaps, or $6.0 million without swaps.
- Other matters to monitor include possible future impairment of goodwill or trade names, limits on use of $127.1 million of federal net operating loss carryforwards if ownership changes trigger Section 382, and dealer floor-plan financing: approximately $10.0 million remained outstanding at year-end and Generac may have to repurchase certain repossessed inventory.
- Management reported no litigation expected to have a material adverse effect. The independent auditor issued unqualified opinions on the financial statements and internal controls; the internal-control assessment excluded Magnum, acquired in the fourth quarter.
Important facts for investors to verify
- How much of 2011’s demand increase was outage-driven, and whether sales and margins held up after the late-2011 surge.
- The recurring earnings and cash-tax implications of the $271.4 million valuation-allowance reversal and the company’s tax assets, including any ownership-change limitations.
- Magnum’s integration progress, realized synergies, contingent consideration and final purchase-price adjustments.
- Debt balances, interest costs, liquidity availability and compliance with the new facility’s financial covenants.
- Working-capital quality, particularly the increases in receivables and inventory, and trends in warranty obligations.
- How much gross-margin pressure comes from product mix and commodities, and whether pricing or productivity can offset it.