Generac Holdings Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Financial statements are unaudited. Unless otherwise noted, amounts are in millions of dollars.
Business context
Generac designs and manufactures generators and other engine-powered products for residential, commercial, industrial and construction markets. It reports one operating segment. U.S. sales represented approximately 90% of sales in the first half of 2013. Results benefited from strong generator demand following major power outages in 2012, expanded distribution and the Ottomotores acquisition.
Financial performance
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Net sales | $346.7 | $239.1 | $746.3 | $533.7 |
| Gross profit | $131.0 | $87.4 | $284.4 | $198.4 |
| Gross margin | 37.8% | 36.6% | 38.1% | 37.2% |
| Income from operations | $76.4 | $37.2 | $173.0 | $96.7 |
| Net income | $28.3 | $9.3 | $78.9 | $39.4 |
| Diluted EPS | $0.40 | $0.14 | $1.13 | $0.57 |
| Adjusted EBITDA (non-GAAP) | $90.1 | $54.6 | $198.9 | $130.4 |
- Q2 sales rose 45.0%; first-half sales rose 39.8%. Residential sales increased 59.3% in Q2 and 51.4% in the first half; commercial and industrial sales increased 32.0% and 26.4%, respectively.
- Management attributed improved gross margin to product mix, pricing, lower commodity costs and cost-reduction initiatives, partly offset by the lower-margin mix of Ottomotores sales.
- Interest expense rose to $14.3 million in Q2 and $29.9 million in the first half, primarily because of higher debt and borrowing costs. Q2 included a $13.5 million loss on extinguishment of debt related to refinancing.
- First-half effective tax rate was 37.5%, versus 39.2% in 2012; the filing cites a lower foreign subsidiary tax rate and reinstatement of the federal R&D credit.
Cash flow, liquidity and debt
- First-half operating cash flow was $74.3 million, compared with $59.7 million in 2012. Higher earnings were partly offset by working-capital investment, including a $62.6 million cash use from inventory and $36.9 million from receivables.
- Investing activities used $1.5 million; capital expenditures were $10.1 million. Financing activities used $54.2 million, including the special dividend and refinancing costs. Cash increased $18.6 million to $126.6 million.
- At June 30, current assets were $611.1 million and current liabilities $244.5 million. The company reported $146.5 million of availability under its revolving facility, net of letters of credit; no amounts were drawn on that facility.
- Following the May 31 refinancing, the term loan had $1.2 billion of principal, a May 2020 maturity and initial interest margins of 1.75% over base rate or 2.75% over adjusted LIBOR, subject to a 0.75% LIBOR floor. The balance sheet reported $1,177.3 million of long-term borrowings, net of discount, plus $24.0 million of short-term borrowings.
- The refinancing funded a $5.00-per-share special dividend totaling $340.8 million. The loan agreement restricts certain dividends and other actions; the term loan has no financial maintenance covenants. The ABL facility has a conditional minimum fixed-charge coverage test.
Changes, outlook and risks
- Compared with 2012, revenue, operating income and net income rose substantially, while gross margins improved. Higher debt increased interest costs and refinancing generated significant one-time expense.
- Management said operating cash flow, revolving-facility availability, relatively low capital spending needs and tax attributes should provide sufficient capital for growth. It also cautioned that debt service will use cash otherwise available for working capital, capital spending and other purposes. The filing provides no specific full-year earnings or revenue guidance.
- Demand may fluctuate with major power outages, residential and business investment, economic conditions and seasonality. Other cited risks include commodity and component costs, variable interest rates, competition, distribution dependence, acquisition integration and product-liability exposure.
- On August 1, 2013, the company acquired Tower Light, a mobile-light-tower supplier; the June 30 statements do not reflect the acquisition. Management reported no pending litigation expected to materially affect financial condition or results.
Important facts for investors to verify
- How post-quarter Tower Light funding affected cash, debt and liquidity.
- Debt-service capacity and exposure to variable interest rates after the dividend recapitalization.
- Whether outage-driven generator demand and improved margins persist as seasonality and commodity costs change.
- Working-capital conversion, especially the increase in inventory and receivables, and future product-warranty costs.
- Reconciliations and assumptions underlying non-GAAP Adjusted EBITDA and Adjusted Net Income; these measures are not substitutes for GAAP earnings or operating cash flow.