GENERAC HOLDINGS INC. quarterly report, Q1 FY2017

Full document

Business context and reporting period

Generac Holdings Inc. designs and manufactures power generation equipment and other engine-powered products for residential, commercial and industrial markets. This unaudited Form 10-Q covers the three months ended March 31, 2017; comparisons are with the three months ended March 31, 2016. Amounts below are U.S. dollars in millions unless noted.

Financial performance and position

  • Revenue: $331.8, up 15.8%. Domestic sales were essentially flat at $248.5; International sales rose 116.3% to $83.3.
  • Profit and margins: Gross profit was $110.5, up 12.7%; gross margin was 33.3% versus 34.2% reported in 2016 (35.2% excluding prior-year restructuring charges). Operating income was $31.8, up 18.1%, and operating margin was 9.6% versus 9.4%. Net income attributable to Generac was $12.8, up 25.8%; diluted EPS was $0.21 versus $0.15. The 2017 EPS numerator included a $0.6 redemption-value adjustment for redeemable noncontrolling interest.
  • Adjusted measures: Adjusted EBITDA was $47.7 versus $49.8, down 4.3%; Adjusted EBITDA attributable to Generac was $46.7 versus $49.1. Adjusted net income attributable to Generac was $25.8 versus $30.9, down 16.5%. These are non-GAAP measures and should be considered with GAAP results.
  • Cash flow: Operating activities used $4.5, versus providing $22.2 in the prior-year quarter, mainly reflecting working-capital investment and inventory replenishment. Investing activities used $1.9 versus $68.4, which included the Pramac acquisition in 2016. Financing activities used $4.8. Cash declined $9.8 to $57.5.
  • Liquidity and debt: At March 31, cash was $57.5 on the balance sheet; total current assets were $680.7 and current liabilities $315.9. Short-term borrowings were $28.1; long-term borrowings and capital lease obligations were $1,022.4, including current portions. The $250.0 ABL facility had $100.0 drawn and $138.1 available net of letters of credit. The Term Loan matures in 2023 and the ABL in 2020. The company reported covenant compliance; its Term Loan net debt leverage ratio was above 3.00x.

Material changes versus the prior comparable period

  • Commercial and industrial sales increased 47.0% to $151.4, while residential sales declined 2.6% to $154.9. Management attributed weaker home standby and portable generator shipments to excess field inventory entering the quarter.
  • International sales growth reflected the Pramac and Motortech acquisitions and organic commercial and industrial growth. Recent acquisitions contributed $40.5 of non-annualized sales in the quarter. Motortech was acquired in January 2017; its purchase was funded in late 2016.
  • Domestic Adjusted EBITDA fell 8.6% to $42.8, with margin declining to 17.2% from 18.9%, reflecting unfavorable mix and increased promotions, partly offset by pricing and lower costs. International Adjusted EBITDA rose to $4.8 from $2.9, although margin declined to 5.8% from 7.7%, primarily due to Pramac.
  • Operating expenses increased 10.6% to $78.6, largely due to recurring costs from acquisitions. Interest expense decreased modestly, while the effective tax rate rose to 39.1% from 35.9%, primarily due to nonrecurring discrete tax items.

Outlook, risks and unusual items

  • The filing provides no specific quarterly or full-year revenue or earnings guidance. Management said cash flow, ABL availability, relatively low capital expenditure requirements and tax attributes are expected to support growth, while noting possible needs for additional capital for working capital, capital expenditures or acquisitions.
  • Management highlighted demand sensitivity to power outages, residential and business investment cycles, weather, commodity and component costs, foreign exchange, interest rates, competition, distribution relationships, acquisition integration and global expansion. Major outage activity is unpredictable and can cause period-to-period sales and profitability fluctuations.
  • Tax attributes were expected to reduce cash taxes materially through 2026, subject to continued profitability. Management estimated approximately $231 of aggregate cash tax savings through 2021 from specified tax-deductible goodwill and intangible assets.
  • Product warranty liabilities were $32.0; extended-warranty deferred revenue was $31.5. Dealer floor-plan financing outstanding was approximately $33.8; Generac may repurchase repossessed products but does not indemnify the finance company for credit losses. Management did not expect ordinary-course litigation to materially affect financial position, results or cash flows.
  • No material changes to reported risk factors, contractual obligations or off-balance-sheet arrangements were disclosed. Management concluded disclosure controls were effective; review of Pramac’s internal controls remained ongoing.

Important facts for investors to verify

  1. Reconcile the cash disclosure: the balance sheet and cash-flow statement show $57.5 at March 31, while MD&A reports cash on hand of $54.4.
  2. Assess the quality and sustainability of sales growth, including the contribution from acquisitions, domestic residential weakness and rising inventories.
  3. Review margin pressure and the differences between GAAP earnings and non-GAAP Adjusted EBITDA and Adjusted Net Income, including the adjustments used.
  4. Evaluate leverage, variable-rate exposure, covenant terms and available ABL capacity; the exact net debt leverage ratio is not stated.
  5. Monitor working-capital conversion, warranty obligations, integration of acquisitions and the realization of expected tax savings.