Generac Holdings Inc. — Q1 2019 Form 10-Q
Business context and reporting period. Generac designs and manufactures power generation equipment and related products for residential, commercial and industrial markets. This unaudited filing covers the three months ended March 31, 2019; comparisons are with Q1 2018 unless noted. Dollar amounts below are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $470.4 | $400.1 | +17.6% |
| Gross profit / margin | $162.2 / 34.5% | $141.9 / 35.5% | Margin down 1.0 percentage point |
| Operating income / margin | $71.2 / 15.1% | $56.3 / 14.1% | Income +26.3% |
| Net income attributable to Generac | $44.9 | $33.6 | +33.3% |
| Diluted EPS | $0.76 | $0.42 | +$0.34 |
| Adjusted EBITDA | $87.1 | $71.8 | +21.4% |
| Operating cash flow | $14.6 | $29.0 | Down $14.4 |
- Sales rose in both segments: Domestic +18.7% to $359.2 million and International +14.1% to $111.1 million. Residential sales increased 14.4%; commercial and industrial sales increased 19.4%.
- Domestic Adjusted EBITDA increased 23.7% to $81.0 million; International Adjusted EBITDA declined 2.4% to $6.2 million. These are non-GAAP measures and should be considered alongside GAAP results.
- Cash and cash equivalents were $161.3 million at March 31, down from $224.5 million at year-end. Current assets were $1,062.8 million and current liabilities $516.0 million.
- Cash used in investing was $76.7 million, including $61.5 million for acquisitions and $15.9 million for property and equipment. Cash used in financing was $1.6 million. Cash declined by $63.2 million during the quarter.
- Reported current and long-term borrowings and finance lease obligations totaled approximately $929.9 million, including $45.2 million of short-term borrowings. The term loan matures in May 2023. The company reported a secured leverage ratio of 1.69x and compliance with credit agreement covenants. ABL availability was $284.6 million, net of letters of credit.
Material changes and unusual items
- Revenue growth reflected stronger home standby generator shipments, increased C&I stationary generator shipments, international market-share gains and acquisition contributions. Recent, non-annualized acquisitions contributed $14.3 million of sales, including $0.6 million to Domestic sales.
- Gross margin fell to 34.5% from 35.5%. Favorable product mix and pricing were more than offset by acquisition effects and higher input costs, including tariffs, logistics, labor and commodities.
- Operating cash flow declined, which management attributed to higher working-capital use and incentive compensation payments, partly offset by higher operating earnings.
- Generac acquired a majority interest in India-based Captiva in February and acquired Neurio, an energy data and analytics company, in March. Neurio’s purchase price was $60.4 million, net of cash acquired and including estimated deferred payments; it was funded with cash on hand. Pika Energy, an energy-storage company, was acquired on April 26, after quarter-end.
- Adoption of lease accounting on January 1, 2019 materially increased reported assets and liabilities through recognition of operating-lease right-of-use assets and liabilities; management said the adoption did not materially affect earnings or cash flows.
- Q1 2018 sales and gross profit were revised upward by $2.5 million and $1.9 million, respectively, to present extended-warranty revenue under the revenue standard. There was no impact to operating income or net income.
- Reported EPS reflects redemption-value adjustments for a redeemable noncontrolling interest: +$2.4 million in Q1 2019 versus $(7.7) million in Q1 2018 in the EPS numerator reconciliation.
Outlook, management commentary and risks
- The filing provides no specific quantitative revenue, earnings or cash-flow guidance. Management said it believes operating cash flow, ABL availability and tax attributes provide sufficient capital for future growth, while noting that further expansion may require capital for working capital, capital expenditures or acquisitions.
- Management sees opportunity from low home-standby-generator penetration, broader distribution and demand for energy management and storage solutions. It also noted that outage-driven demand is unpredictable and that residential and C&I markets are affected by consumer, construction and business investment cycles.
- Key risks include outage frequency and duration; raw-material, component and labor availability and costs; interest rates, foreign exchange, commodities and tariffs; acquisition integration and synergy realization; dependence on distributors; technology changes; product liability and recalls; cybersecurity; and regulatory changes.
- Management reported no pending litigation expected to materially affect financial condition or results and no material changes to the risk factors in the 2018 Form 10-K. Disclosure controls were reported effective at quarter-end.
- The company expects tax-deductible goodwill and intangible amortization to reduce cash taxes through 2021, assuming continued U.S. profitability; management estimated aggregate cash tax savings of approximately $90 million through 2021.
Important facts for investors to verify
- Whether sales growth and domestic margin gains persist, and whether higher input costs, tariffs and acquisition mix continue to pressure gross margin.
- Whether working-capital needs and acquisition spending continue to weigh on operating cash flow and cash balances.
- Debt, interest-rate exposure, covenant compliance and available ABL capacity; the filing reports $284.6 million of ABL availability and a May 2023 term-loan maturity.
- The contribution, integration costs and expected returns from Captiva, Neurio and the post-quarter Pika acquisition, including the preliminary nature of Neurio purchase accounting.
- The impact of unpredictable outage activity and broader economic and industry cycles on demand, as well as the assumptions underlying management’s projected tax savings.