Business context and reporting period
Generac Holdings Inc. designs and manufactures power-generation equipment and other energy products for residential, commercial and industrial markets. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2019; comparisons are with the corresponding 2018 periods. Unless noted otherwise, figures below are in U.S. dollars and millions.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $601.1 | $562.4 | $1,613.4 | $1,460.1 |
| Gross profit / margin | $217.5 / 36.2% | $200.3 / 35.6% | $575.5 / 35.7% | $520.7 / 35.7% |
| Operating income / margin | $105.6 / 17.6% | $106.5 / 18.9% | $267.7 / 16.6% | $248.3 / 17.0% |
| Net income attributable to Generac | $75.6 | $75.8 | $182.4 | $162.7 |
| Diluted EPS | $1.18 | $1.11 | $2.92 | $2.34 |
| Adjusted EBITDA | $126.0 | $124.5 | $325.0 | $298.5 |
For the nine months, operating cash flow was $133.8 versus $139.0 in 2018. Capital expenditures were $45.4, leaving operating cash flow less capital expenditures of approximately $88.4. Investing cash outflow was $164.2, including $120.9 for acquisitions. Cash declined $8.4 from year-end 2018 to $216.0.
At September 30, 2019, current assets were $1,137.4 and current liabilities $476.0 (current ratio approximately 2.4). Long-term borrowings and finance lease obligations were $884.3, with an additional $67.0 of short-term borrowings. The term loan principal was $879.0 and matures May 31, 2023. The ABL facility had $28.5 drawn and $271.2 available, net of letters of credit. The company reported a secured leverage ratio of 1.61x and compliance with credit covenants.
Material changes versus prior periods
- Q3 sales grew 6.9%; Domestic sales rose 9.2%, while International sales fell 3.1%. Domestic growth reflected home standby generators and C&I stationary generators; International core sales were approximately flat after excluding Captiva and currency effects.
- Q3 residential sales increased 7.4% and C&I sales 4.1%. Gross margin improved 0.6 percentage points, but operating expenses rose 19.3%; operating income fell 0.9% and Generac-attributable net income fell 0.3%.
- For the nine months, sales increased 10.5% and Generac-attributable net income 12.1%. Gross margin was unchanged at 35.7%. Domestic Adjusted EBITDA rose 12.3%, while International Adjusted EBITDA declined 27.9%.
- Recent acquisitions—Captiva, Neurio and Pika—contributed $32.0 of non-annualized sales in the nine-month period. Neurio and Pika expand the company into energy monitoring, management and storage.
Outlook, commentary, risks and unusual items
- The filing gives no quantified revenue, earnings or margin guidance. Management said operating cash flow, ABL availability and tax attributes provide sufficient capital for continued growth, while noting that expansion could require additional capital.
- Management cited pricing, favorable product mix and lower realized commodity and currency input costs as Q3 gross-margin benefits, partly offset by higher regulatory tariffs. For the nine months, tariffs, logistics, labor and commodity costs offset favorable mix and pricing.
- Key demand uncertainties include unpredictable major and localized power outages, residential investment and consumer confidence, and commercial capital-spending cycles. Other identified risks include raw-material, component and labor availability or costs; foreign exchange, interest rates and tariffs; acquisition integration and expected synergies; reliance on distribution; product liability or recalls; cybersecurity; and regulatory changes.
- The company is terminating its defined-benefit pension plan and expected to complete lump-sum payments and transfer remaining assets in Q4 2019. It had $10.5 of unrecognized pension losses in accumulated other comprehensive loss; settlement may result in recognition in earnings, with the amount dependent on participant elections and market conditions.
- Derivative fair value was a net liability of $12.5 at September 30, versus a net asset of $8.2 at year-end 2018, largely reflecting interest-rate swaps. Management said ordinary-course litigation was not expected to materially affect financial position, results or cash flows. No material changes to previously disclosed risk factors were reported.
- Operating lease accounting adoption materially increased balance-sheet assets and liabilities; management said it did not materially affect earnings or cash flows. The company also revised 2018 comparative sales and gross profit presentation for extended-warranty revenue, with no effect on operating income or net income.
Important facts for investors to verify
- Whether Domestic growth and home-standby demand persist, and whether International profitability recovers.
- How tariffs, labor, logistics and commodity costs affect margins, alongside the impact of pricing and product mix.
- Cash conversion and working-capital trends, particularly given operating cash flow below net income and acquisition-related investment.
- Debt, interest-rate exposure and available ABL capacity; confirm leverage and covenant compliance in subsequent filings.
- Final purchase-price allocations and integration outcomes for recent acquisitions, plus the pension-plan settlement charge and timing.
- Reconcile non-GAAP Adjusted EBITDA and Adjusted Net Income to GAAP results; the filing cautions that these measures are not substitutes for cash flow or GAAP earnings.