Generac Holdings Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Unaudited results; comparisons are to the corresponding 2020 periods. Generac designs and manufactures power generation, energy storage, grid-service and related products for residential, commercial and industrial markets. All dollar amounts below are in U.S. dollars.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net sales | $920.0 million | $546.8 million | $1,727.4 million | $1,022.8 million |
| Gross profit | $339.7 million | $209.0 million | $661.5 million | $381.3 million |
| Gross margin | 36.9% | 38.2% | 38.3% | 37.3% |
| Operating income | $183.0 million | $89.6 million | $372.1 million | $152.4 million |
| Net income attributable to Generac | $127.0 million | $66.1 million | $276.0 million | $110.6 million |
| Diluted GAAP EPS | $2.01 | $1.02 | $4.34 | $1.70 |
| Adjusted EBITDA | $217.7 million | $123.1 million | $431.9 million | $209.2 million |
| Operating cash flow | Not separately provided | Not separately provided | $275.0 million | $113.1 million |
- Q2 sales rose 68.2%; six-month sales rose 68.9%. Q2 residential sales increased 75.8% and commercial and industrial (C&I) sales increased 64.2%. For the first half, residential sales rose 90.7% and C&I sales 39.7%.
- Domestic sales increased 70.2% in Q2 and 76.5% in the first half. International sales rose 57.8% and 34.7%, respectively. Management cited strong residential demand, growth in PWRcell energy storage, telecom and mobile C&I products, and recovering international markets.
- Q2 gross margin fell 1.3 percentage points year over year as higher raw-material, labor, logistics and plant start-up costs outweighed pricing and volume benefits. First-half margin improved 1.0 percentage point, supported by residential mix, pricing and overhead absorption.
- Q2 attributable net income increased 92.1%; first-half attributable net income increased 149.6%. First-half effective tax rate was 22.7%, versus 20.7% in 2020, including a $7.0 million deferred-tax charge from a foreign tax-rate change.
Cash, liquidity and debt
- Cash and cash equivalents were $390.1 million at June 30, 2021, down from $655.1 million at year-end 2020. Current assets were $1,692.5 million and current liabilities $836.2 million.
- First-half operating cash flow was $275.0 million. Investing used $467.1 million, primarily including $419.0 million for acquisitions and $54.2 million of capital expenditures. Financing used $72.7 million. Cash declined by $265.0 million during the period.
- Reported liquidity was $829.6 million: $390.1 million cash plus $439.5 million of remaining availability under the ABL facility. The company reported a net secured leverage ratio of 0.79x and compliance with credit-agreement covenants.
- At quarter end, the Term Loan balance was $780.0 million and ABL borrowings were $50.0 million; the ABL facility had been expanded to $500.0 million and extended to May 2026. The Term Loan matures in December 2026. Balance-sheet long-term borrowings and finance-lease obligations were $842.6 million, with $4.2 million current; short-term borrowings were $23.8 million.
Material changes, outlook and risks
- Generac acquired Deep Sea Electronics on June 1 for $420.7 million, funded with cash. The preliminary allocation included $265.0 million of goodwill; the acquired business contributed from the acquisition date. The company also bought an additional 15% of Pramac for $27.2 million, increasing its ownership to 80%.
- Management said elevated demand and extended lead times are expected to make 2021 sales more level-loaded through the year than the company’s historical seasonal pattern. The filing provides no specific full-year revenue or earnings guidance.
- Management reported significant 2021 input-cost pressure, logistics challenges and supply constraints. Pricing and operating efficiencies were identified as partial mitigants. COVID-19-related absences or supplier and production disruptions could affect the ability to meet demand.
- Key demand factors include outage frequency and duration, residential investment, infrastructure and telecom spending, and development of energy storage and grid services. Risks include raw-material, component and labor availability and cost; foreign exchange, interest rates and tariffs; acquisition integration and synergies; distribution dependence; product liability; cybersecurity; and regulatory changes.
- Unusual items included the $0.8 million noncash debt-extinguishment charge associated with a $50.0 million Term Loan prepayment, a $3.9 million gain on sale of an investment in Q1, and the $7.0 million tax charge. The company reported no pending litigation expected to materially affect its financial position or results. On July 2, 2021, after quarter end, it acquired Chilicon Power; the filing does not provide purchase-price details in the supplied text.
Important facts for investors to verify
- Whether demand, extended lead times and the expected less-seasonal 2021 sales pattern persist, and whether supply constraints limit shipments.
- Whether pricing can offset continued input-cost, labor and logistics inflation without further pressure on gross margins.
- Deep Sea’s contribution and integration, the final purchase-price allocation, and the terms and potential exercise of Generac’s remaining Pramac call rights.
- Cash conversion and working-capital needs: receivables and inventory increased, and the first-half cash decline included acquisition spending.
- Debt, interest-rate exposure and liquidity, including the $50.0 million ABL borrowing and remaining ABL availability; also note that management’s Adjusted EBITDA is non-GAAP and has limitations as a proxy for cash available.
- Warranty obligations increased to $74.8 million from $59.2 million at year-end 2020; dealer floor-plan financing outstanding was approximately $93.7 million. Review associated warranty and repurchase exposure.