Generac Holdings Inc. — Q1 2018 Form 10-Q
Business context and reporting period. Generac designs and manufactures power-generation equipment and other engine-powered products for residential, commercial and industrial markets. This unaudited filing covers the three months ended March 31, 2018; comparisons are with Q1 2017. Financial amounts below are in U.S. dollars and rounded to millions unless stated otherwise.
Financial performance and position
- Revenue: $397.6 million, up 20.3%. Domestic sales rose 21.5% to $300.2 million and International sales rose 16.9% to $97.4 million. Residential products grew 23.5%; commercial and industrial products grew 16.2%.
- Profitability: Gross profit was $140.0 million, with gross margin of 35.2% versus 32.9%. Operating income increased 82.4% to $56.3 million. Net income attributable to Generac was $33.6 million versus $12.2 million; diluted EPS was $0.42 versus $0.20. The reported EPS calculation includes a $7.7 million reduction for the redeemable noncontrolling-interest redemption-value adjustment.
- Adjusted measures: Adjusted EBITDA was $71.8 million versus $46.7 million; Adjusted Net Income attributable to Generac was $46.1 million versus $24.7 million. These are non-GAAP measures and should be considered alongside GAAP results.
- Cash flow: Operating activities provided $29.0 million, compared with $5.2 million used in Q1 2017. Investing activities used $6.0 million, including $6.5 million of property and equipment expenditures. Financing activities used $16.2 million, including $25.7 million for share repurchases. Cash increased $7.7 million to $146.2 million.
- Liquidity and debt: Current assets were $866.8 million and current liabilities $412.6 million. Long-term borrowings and capital lease obligations were $907.5 million, with $31.4 million of short-term borrowings. No amounts were drawn under the $250 million ABL facility; reported availability, net of letters of credit, was $234.2 million. Secured leverage was 2.47x, and the company reported compliance with credit-agreement covenants.
- Other balance-sheet items: Inventory increased to $439.7 million from $387.0 million at year-end. Product warranty liabilities were $36.3 million and deferred extended-warranty revenue was $60.1 million.
Material changes versus Q1 2017
- Revenue growth reflected strong home-standby and portable-generator shipments following recent power outages, continued strength in C&I mobile products and service parts, and international organic growth and favorable euro translation.
- Gross margin improved on favorable pricing and product mix and better fixed-cost absorption, partly offset by higher commodity prices. Adjusted EBITDA margin improved in both Domestic and International segments.
- The effective income-tax rate fell to 25.3% from 39.1%, primarily due to the lower U.S. federal corporate tax rate under the Tax Act.
- Operating cash flow improved from a use of cash to a source of cash, though inventory was a significant use of working capital. The company repurchased 560,000 shares for $25.7 million; there were no share repurchases in Q1 2017.
- Q1 2017 comparative financial statements were retrospectively adjusted following adoption of the new revenue-recognition standard. The company said adoption did not significantly affect its results, cash flows or financial position.
Outlook, commentary and risks
- Management said the elevated outage activity of recent quarters supported strong demand and increased product awareness; it cautioned that outages are unpredictable and can cause sales and profitability to fluctuate. The filing provides no formal revenue or earnings guidance.
- Management expected a 2018 combined federal and state effective tax rate of 25%–26%. It also cited favorable tax attributes expected to reduce cash taxes, subject to continued profitability and the company’s estimates and interpretations of the Tax Act.
- On February 13, 2018, Generac signed an agreement to acquire Selmec, a Mexico-based industrial-generator maker; closing was subject to required regulatory approval.
- Key risks cited include outage patterns, raw-material and component availability and costs, commodity and currency movements, interest rates, acquisition integration, distribution-network dependence, product liability or recalls, and changing economic conditions. Commodity, foreign-currency and interest-rate exposures are managed in part through derivatives.
- The company reported no litigation expected to have a material effect and no material changes to its previously disclosed risk factors. Management stated that disclosure controls were effective at quarter-end.
Important facts for investors to verify
- Whether outage-driven generator demand and the resulting favorable pricing and mix persist, and how sales develop as outage comparisons change.
- Whether the substantial inventory increase converts into sales and cash, and whether working-capital needs affect future cash flow.
- How commodity costs, foreign-exchange movements and interest rates affect margins and debt-service costs.
- Selmec’s regulatory approval, closing, integration and expected contribution to results.
- Debt, leverage and liquidity trends, including use of ABL availability and continued covenant compliance.
- Final Tax Act accounting and realized cash-tax savings; the filing notes that certain tax accounting remained incomplete.
- Warranty obligations, including the increase in extended-warranty deferred revenue and related service costs.