Generac Holdings Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Financial statements are unaudited. Generac designs and manufactures power generation equipment and other engine-powered products for residential, commercial and industrial markets.
Financial performance
Amounts below are in millions of U.S. dollars, except per-share data and percentages.
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $373.1 | $359.3 | $1,027.0 | $959.5 |
| Gross profit / margin | $137.8 / 36.9% | $130.3 / 36.3% | $360.0 / 35.1% | $328.8 / 34.3% |
| Operating income / margin | $56.3 / 15.1% | $67.9 / 18.9% | $127.4 / 12.4% | $152.2 / 15.9% |
| Net income attributable to Generac | $26.2 | $34.0 | $57.3 | $68.6 |
| Diluted EPS | $0.40 | $0.49 | $0.87 | $0.98 |
| Adjusted EBITDA | $72.8 | $81.2 | $186.6 | $190.7 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $129.5 | $76.9 |
Cash flow and liquidity: Nine-month investing cash outflow was $80.9 million, principally including $60.9 million for Pramac and $20.8 million of capital expenditures. Financing cash outflow was $110.7 million, including $99.9 million of share repurchases. Cash declined to $54.2 million from $115.9 million at year-end 2015. Current assets were $671.4 million and current liabilities $333.6 million at September 30.
Debt: Balance-sheet borrowings and capital lease obligations totaled $1,052.4 million, including $35.5 million of short-term borrowings; long-term borrowings and leases were $1,013.7 million. The company had $100.0 million drawn on its $250.0 million ABL facility and $144.9 million of availability, net of letters of credit. Term Loan net debt leverage was above 3.0x, increasing borrowing costs under the credit agreement. The company reported compliance with credit covenants.
Changes versus comparable periods
- Q3 sales grew 3.8%, but income attributable to Generac fell 23.1% and Adjusted EBITDA fell 10.3%. Operating expenses rose 30.4%, primarily reflecting acquisition-related recurring costs and higher amortization.
- For the nine months, sales increased 7.0%, while income attributable to Generac declined 16.5% and Adjusted EBITDA declined 2.2%. Higher sales did not translate into higher operating income.
- International sales increased sharply, largely from the March 2016 acquisition of a 65% interest in Pramac. Domestic sales fell 10.0% in Q3 and 5.0% for the nine-month period, reflecting weaker mobile product shipments to oil and gas and general rental markets and modestly lower home standby generator shipments.
- Residential product sales increased 4.3% in Q3 and 12.3% year to date. Nine-month commercial and industrial product sales declined 1.7%.
- Gross margin improved year over year, aided by lower commodity costs, stronger-dollar sourcing benefits and favorable organic product mix. These benefits were partly offset by acquisition mix. Nine-month results included $7.1 million of business optimization charges and $4.2 million of Pramac inventory purchase-accounting expense.
Outlook, commentary and risks
- The filing provides no quantified financial guidance. Management said cash flow from operations, ABL availability, relatively low ongoing capital expenditure needs and tax attributes were expected to provide sufficient capital for continued growth, while noting potential future capital needs for working capital, capital expenditures or acquisitions.
- Management cited unpredictable power outages, seasonality, residential and business investment cycles, raw-material and component costs, foreign exchange and interest rates, competition, distribution-channel dependence, acquisition integration and product liability or recalls as factors that could affect results.
- Business optimization and restructuring charges of $7.1 million for the first nine months addressed the prolonged oil and gas capital-spending downturn and included facility consolidation, headcount reductions, asset write-downs and product-related charges.
- Pramac’s 35% noncontrolling owner has a put option exercisable within five years; the interest is classified as redeemable noncontrolling interest. Its September 30 carrying amount was $36.3 million.
- Subsequent events: on October 24, the board authorized a new $250 million repurchase program for 24 months. On November 2, Generac prepaid $25 million of Term Loan debt and extended the loan maturity from May 2020 to May 2023.
- Management reported effective disclosure controls. Pramac was excluded from the scope of the company’s 2016 internal-control assessment while its control structure was being reviewed. Management said there were no material changes in risk factors from the 2015 Form 10-K and no pending litigation expected to materially affect financial condition or results.
Important facts for investors to verify
- Whether domestic demand and margins stabilize, particularly in oil and gas, rental and home standby generator markets.
- Pramac’s contribution to organic growth and profitability, including acquisition-related costs, foreign-exchange exposure and integration progress.
- Debt leverage, the resulting borrowing-cost step-up, ABL availability and the impact of planned repurchases on cash and liquidity.
- The scale and duration of restructuring charges, and whether reported or adjusted earnings better reflect ongoing performance.
- Terms and potential cost of the Pramac minority-holder put option, as well as the execution and funding of the new repurchase authorization.