Generac Holdings Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; unaudited results compared with Q1 2015. Unless noted, dollar amounts are U.S. dollars. The company designs and manufactures generators and other engine-powered products for residential, commercial, industrial, oil and gas, and construction markets.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net sales | $286.5 million | $311.8 million | Down 8.1% |
| Gross profit / gross margin | $98.1 million / 34.2% | $102.6 million / 32.9% | Margin up 1.3 percentage points |
| Operating income | $27.0 million | $44.9 million | Down 40.0% |
| Net income attributable to Generac | $10.2 million | $19.7 million | Down 48.1% |
| Diluted EPS | $0.15 | $0.28 | Down |
| Operating cash flow | $22.2 million | $25.3 million | Down 12.3% |
| Adjusted EBITDA attributable to Generac | $49.1 million | $57.1 million | Down 14.0% |
| Adjusted net income attributable to Generac | $30.9 million | $34.1 million | Down 8.2% |
Gross margin was 35.2% excluding $2.7 million of business-optimization and restructuring charges in cost of goods sold, compared with 32.9% a year earlier. Management cited favorable product mix, lower commodity costs, stronger-dollar sourcing benefits, and prior-year port-congestion and overhead costs that did not recur. GAAP operating margin was approximately 9.4%, versus 14.4% in Q1 2015.
Residential sales rose 1.4% to $159.0 million, with acquisition contributions largely offset by lower home-standby generator shipments. Commercial and industrial sales fell 23.0% to $103.0 million, mainly due to reduced mobile-product shipments to oil and gas and rental markets and continued Latin American softness. Other sales increased 15.8% to $24.6 million. Recent acquisitions contributed $37.2 million of non-annualized sales in the quarter.
Cash, debt, and liquidity
- Cash and equivalents were $69.4 million at March 31, down from $115.9 million at year-end. Cash flow from operations was $22.2 million; investing used $68.4 million, including $61.3 million for Pramac; financing used $1.1 million. Ending cash declined $46.5 million.
- Cash capital expenditures were $7.1 million. Working-capital movements included a $10.8 million inventory cash use; inventories were $374.7 million at quarter-end, versus $325.4 million at year-end.
- Borrowings totaled approximately $1.09 billion, including $34.1 million of short-term borrowings, $11.0 million of current long-term borrowings and lease obligations, and $1,047.1 million of long-term borrowings and lease obligations. Cash and ABL availability partly offset debt; net debt was approximately $1.02 billion using reported cash.
- The company had $100.0 million drawn on its $250.0 million ABL facility and $148.5 million available, net of letters of credit. It reported compliance with credit-agreement covenants; the term loan has no financial maintenance covenants. Term loan maturity is May 2020, as is the ABL maturity.
Material changes, outlook, and risks
- On March 1, Generac acquired 65% of Pramac for $61.3 million, funded from cash. Pramac operates internationally and sells products in more than 150 countries. Its 35% noncontrolling interest, carried at $34.3 million, is redeemable at the holder’s option. The preliminary allocation included $53.7 million of goodwill, which is not tax-deductible. The acquired business also brought short- and long-term debt and lease obligations.
- Q1 included $7.1 million of business-optimization and restructuring charges tied to the prolonged oil and gas capital-spending downturn, including facility consolidation, workforce reductions, asset write-downs, and product-related charges. The charges comprised $2.7 million in cost of goods sold and $4.4 million in operating expenses.
- Management provided no specific financial guidance in the supplied filing text. It said operating cash flow, ABL availability, relatively low capital-expenditure needs, and tax attributes were expected to provide sufficient capital for growth, while noting potential needs for additional capital as the business expands.
- Management identified demand sensitivity to major and baseline power outages, residential and business investment cycles, commodity and component costs, foreign exchange and interest rates, acquisition integration and expected synergies, competition, distribution-network dependence, product liability and recalls, and regulatory changes. The company uses derivatives for certain commodity, currency, and interest-rate exposures; derivative liabilities were $4.8 million at March 31.
- Dealer floor-plan financing outstanding was approximately $30.9 million; Generac participates in financing costs up to limits and may repurchase repossessed products, but does not indemnify the finance company for credit losses. Management said ordinary-course litigation was not expected to have a material adverse effect and reported no pending litigation believed material to results or financial condition.
- The company adopted new balance-sheet presentation rules for debt issuance costs and deferred taxes retrospectively. Management was assessing the impact of forthcoming revenue-recognition, lease, and share-based-payment standards.
Important facts for investors to verify
- Whether the sharp C&I sales decline and reduced oil-and-gas and rental shipments persist, and how much of reported sales and margin performance reflects acquisitions.
- Progress integrating Pramac, final purchase-price accounting, the redeemable noncontrolling-interest terms, and the acquired business’s debt and operating contribution.
- Whether restructuring actions produce sustained savings, and how recurring acquisition costs and amortization affect GAAP earnings relative to adjusted measures.
- Debt levels, interest-rate exposure, covenant compliance, ABL availability, and liquidity needs for working capital, acquisitions, and capital returns.
- Working-capital and inventory trends, cash conversion, warranty obligations, and the company’s assumptions behind cash-tax savings and adjusted earnings.
- Exposure to unpredictable outage-driven demand, commodity and currency movements, acquisition execution, and product-liability or recall claims.