Generac Holdings Inc. — 2019 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2019; filed February 25, 2020. The filing also reports quarterly results, including fourth-quarter 2019. Generac designs and manufactures generators, energy storage systems, and related power and energy products for residential, commercial, and industrial markets.
Financial and operating performance
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Net sales | $2,204.3 million | $2,023.5 million | +8.9% |
| Gross profit / margin | $797.8 million / 36.2% | $725.0 million / 35.8% | Margin +0.4 percentage points |
| Operating income / margin | $372.2 million / 16.9% | $357.2 million / 17.7% | Income +4.2% |
| Net income attributable to Generac | $252.0 million | $238.3 million | +5.8% |
| Diluted EPS | $4.03 | $3.54 | +13.8% |
| Adjusted EBITDA attributable to Generac | $449.2 million | $416.8 million | +7.8% |
| Cash from operating activities | $308.9 million | $247.2 million | +24.9% |
| Capital expenditures | $60.8 million | $47.6 million | +$13.2 million |
Fourth-quarter 2019 sales were $590.9 million, versus $563.4 million in fourth-quarter 2018. Operating income was $104.5 million versus $108.8 million, and net income attributable to Generac was $69.6 million versus $75.6 million.
Cash and cash equivalents were $322.9 million at year-end. Current assets were $1,195.8 million and current liabilities $497.1 million. The company reported total indebtedness of $898.9 million; its balance sheet included $58.7 million of short-term borrowings and $837.8 million of long-term borrowings and finance lease obligations. The $300 million ABL facility had $30.96 million drawn and $268.6 million available, net of letters of credit. The secured leverage ratio was 1.50x, and the company reported compliance with credit-facility covenants.
Annual net sales increased across product classes: residential products $1,143.7 million (+9.7%), commercial and industrial products $871.6 million (+6.3%), and other products and services $189.0 million (+17.8%). Domestic sales grew 11.3%; International sales increased 1.0%. Domestic Adjusted EBITDA rose 10.3%, while International Adjusted EBITDA fell 29.4%.
Material changes and notable items
- Growth was driven chiefly by home standby generator shipments amid increased outage activity, including California utility public-safety shutoffs, and strong C&I stationary generator demand. Lower portable generator and C&I mobile shipments partly offset growth.
- Gross margin improved with favorable home-standby mix and pricing, partly offset by tariffs, logistics, labor, acquisition-related costs, and other input costs. Operating expenses rose 15.7%, including increased R&D, marketing, headcount, and acquisition costs; operating income grew more slowly than sales.
- International results faced unfavorable foreign currency and geopolitical conditions, weaker regional markets, unfavorable mix, and higher costs.
- Generac acquired Captiva, Neurio, and Pika in 2019. Neurio and Pika expanded its energy monitoring and battery-storage capabilities; the company began selling PWRcell and PWRview systems late in the year. Acquisitions contributed $112.0 million of cash outflows, net of cash acquired, and $36.1 million of non-annualized sales from recent acquisitions.
- A $10.9 million pre-tax pension settlement charge followed termination of the domestic pension plan; obligations were settled through annuities and lump-sum distributions.
- In December 2019, the term-loan amendment extended maturity to December 2026 and removed the LIBOR floor. The company made a $49.0 million voluntary term-loan prepayment and recorded a $0.9 million debt-extinguishment loss.
- Operating cash flow increased as prior working-capital investments were monetized and earnings grew. Investing outflows increased, primarily due to acquisitions and higher capital expenditures. No company share repurchases were made in 2019; withholding shares for employee taxes continued.
- The company adopted lease accounting (Topic 842), recognizing operating lease assets and liabilities; management said the adoption materially affected the balance sheet but not materially the income statement or cash flows. Segment results were recast to move legacy Latin American export operations to International; total company results were unchanged.
Outlook, risks, and contingencies
The filing provides no quantified 2020 revenue, earnings, or cash-flow guidance. Management’s stated strategy emphasizes expanding residential standby generator adoption, growing natural-gas power solutions, entering energy storage and monitoring markets, connecting products to customers, and extending international reach. Management estimated U.S. home-standby penetration at about 4.75% of its defined addressable market.
- Demand is exposed to unpredictable outage frequency and severity, consumer and business spending, construction and capital-investment cycles, and seasonality. Management noted that major outages can boost demand for six to twelve months, but quieter periods can weaken sales.
- Supply-chain risks include raw-material and component prices, foreign sourcing, tariffs, labor availability, single-source suppliers, and delivery interruptions. The filing cited supplier production delays following the coronavirus outbreak in China in December 2019, with the potential impact then uncertain.
- Other material risks include competition, distributor and dealer reliance, acquisition integration and realization of synergies, foreign exchange, interest rates, product liability and recalls, environmental and product regulation, and cybersecurity and information-technology disruptions.
- At year-end, goodwill and other indefinite-lived intangibles totaled $933.6 million. No impairment was recorded; the Latin America reporting unit’s estimated fair value exceeded carrying value by approximately 10%, but was sensitive to a 100-basis-point increase in the discount rate or reduction in growth assumptions.
- Management said no pending litigation was expected to materially affect results or financial condition. The company disclosed dealer floor-plan financing exposure: $49.6 million remained outstanding, and Generac may have to repurchase specified inventory if dealers default.
- The company does not plan to pay common dividends in the foreseeable future. Its credit facilities restrict certain actions, although the Term Loan has no financial maintenance covenants. A 100-basis-point LIBOR change was estimated to affect annual cash interest by approximately $4.0 million after swaps.
The auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded disclosure controls and internal controls were effective, excluding Neurio and Pika from its internal-control assessment for 2019.
Investor verification priorities
- Assess whether outage-driven residential generator demand and California demand can be sustained, and distinguish underlying growth from event-related demand.
- Track International segment profitability and the effect of currency, geopolitical conditions, mix, and acquisition integration.
- Compare operating-income and net-income growth with sales growth, and review the impact of rising selling, R&D, and other operating expenses.
- Reconcile reported indebtedness with balance-sheet borrowings and leases; monitor cash generation, debt repayment, ABL availability, and variable-rate exposure.
- Verify the commercial progress and economics of PWRcell/PWRview and the acquired Neurio and Pika businesses, including remaining purchase-accounting estimates.
- Monitor Latin America goodwill assumptions and the company’s exposure to supply interruptions, tariffs, commodity costs, and the coronavirus-related supplier disruption noted at year-end.