Generac Holdings Inc. — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011; unaudited. Generac designs, manufactures, and markets backup power products for residential, commercial, and industrial customers. Amounts below are in millions unless noted.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net sales | $161.4 | $140.5 | $285.3 | $271.2 |
| Gross profit | $60.4 | $54.7 | $107.5 | $106.2 |
| Gross margin | 37.4% | 39.0% | 37.7% | 39.1% |
| Operating income | $21.8 | $18.9 | $32.9 | $34.3 |
| Net income | $15.3 | $12.8 | $20.1 | $15.3 |
| Diluted EPS | $0.23 | $0.19 | $0.30 | $(2.71) |
| Adjusted EBITDA | $37.6 | $36.0 | $65.1 | $67.8 |
| Adjusted net income | $27.7 | $26.1 | $44.8 | $46.3 |
Q2 sales rose 14.9% year over year and net income rose 19.1%; first-half sales grew 5.2% and net income grew 31.6%. First-half diluted EPS is not directly comparable with 2010: the prior-year loss per share included preferred-stock distributions and a large beneficial-conversion charge associated with the pre-IPO capital structure.
Q2 revenue growth reflected industrial/commercial sales up 32.4% to $57.3 million and residential sales up 4.9% to $92.2 million. For the first half, industrial/commercial sales rose 24.5% to $101.6 million, while residential sales declined 6.1% to $161.4 million.
Cash flow, debt, and liquidity
- Six-month operating cash flow was $28.0 million, down from $46.6 million, primarily due to working-capital needs, including a $12.6 million inventory cash use and a $16.6 million increase in receivables.
- Capital expenditures were $3.4 million. Cash was $78.7 million at June 30, versus $78.6 million at year-end 2010.
- Long-term debt was $632.5 million, down from $657.2 million at year-end. The company made a voluntary $24.7 million term-loan repayment in April; no current debt portion was reported.
- Revolving-credit availability was $145.8 million, net of letters of credit. The company reported compliance with its credit agreement, including its 5.50 maximum leverage ratio requirement at June 30.
- Management said operating cash flow, revolver availability, low capital spending needs, and tax attributes should provide sufficient capital for the next 12 months and beyond, while noting that debt interest consumes cash available for other uses.
Changes, outlook, and risks
- Q2 gross margin fell to 37.4% from 39.0%, as higher steel, copper, and aluminum costs and a sales mix shift toward industrial products outweighed volume growth; selective price increases partly offset costs. First-half gross margin was 37.7%, down about 1.4 percentage points.
- First-half operating income declined despite higher sales, as operating expenses increased; selling and service costs rose with volume and strategic sales/marketing investment. Lower intangible amortization partly offset those increases.
- First-half Adjusted EBITDA declined 4.0% and adjusted net income declined 3.3%, despite higher GAAP net income. These are non-GAAP measures and the filing cautions they are not substitutes for GAAP results or cash flow.
- No specific revenue, earnings, or margin guidance was provided. Management cited demand, outage frequency, residential and business investment cycles, distribution dependence, raw-material/component costs, competition, technology, personnel, liability claims, and regulatory changes as risks. Outage-driven demand and seasonality can cause period-to-period volatility.
- The company had four interest-rate swaps and copper purchase hedges; unrealized swap losses increased accumulated other comprehensive loss. The filing reported a full valuation allowance against net deferred tax assets, while noting substantial tax attributes that may reduce future cash taxes if usable; ownership changes could limit use of federal NOLs.
- Warranty obligations were $24.5 million, up from $22.5 million at year-end. Dealer floor-plan financing outstanding was approximately $10.4 million; Generac has a repurchase commitment for repossessed products, but does not indemnify the finance company for credit losses.
- Management said ordinary-course litigation was not expected to have a material effect and reported no material change in risk factors. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether industrial/commercial growth can continue and residential demand recovers from the first-half decline.
- Whether pricing and cost actions offset commodity inflation and support gross margins.
- Whether working-capital investment, especially inventory and receivables, converts to operating cash flow.
- Debt repayment capacity, revolver availability, and continued compliance with tightening leverage covenants.
- Availability and potential limitations on tax attributes, and exposure under warranty and dealer repurchase commitments.