Generac Holdings Inc. — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016; filed February 24, 2017. Generac designs and manufactures generators and other engine-powered products for residential, commercial and industrial markets. The filing reports annual results and unaudited quarterly data, including fourth-quarter 2016.
Financial performance and position
| Metric | FY 2016 | FY 2015 | Change |
|---|---|---|---|
| Net sales | $1,444.5 million | $1,317.3 million | +9.7% |
| Gross profit / margin | $514.1 million / 35.6% | $460.0 million / 34.9% | Margin +0.7 percentage points |
| Operating income | $204.6 million | $179.6 million | +14.0% |
| Net income attributable to Generac | $98.8 million | $77.7 million | +27.1% |
| Diluted EPS | $1.50 | $1.12 | +33.9% |
| Operating cash flow | $253.4 million | $188.6 million | +34.3% |
| Capital expenditures | $30.5 million | $30.7 million | Approximately flat |
| Adjusted EBITDA attributable to Generac | $274.6 million | $270.8 million | +1.4% |
- Fourth-quarter 2016 sales were $417.4 million versus $357.8 million in Q4 2015; operating income was $77.2 million versus $27.3 million, and net income attributable to Generac was $41.5 million versus $9.2 million.
- Reported gross margin was 35.6%; management said it was 36.1% excluding $2.7 million of restructuring costs in cost of goods sold and $4.2 million of Pramac inventory step-up expense. The adjusted figure is management’s presentation.
- Cash and cash equivalents were $67.3 million. The company reported $145.6 million of availability under its revolving ABL facility, net of letters of credit. Current assets were $683.5 million and current liabilities $341.9 million.
- Total indebtedness was reported as $1,052.9 million. The Term Loan balance was $929.0 million before discounts and financing costs; $100.0 million was outstanding on the ABL facility, and short-term borrowings were $31.2 million. Interest expense was $44.6 million.
- Cash used in investing activities was $105.8 million, including acquisition payments and $30.5 million of capital spending. Cash used in financing was $195.7 million, including $149.9 million of share repurchases and $65.4 million of debt repayments, partly offset by borrowing proceeds. Cash ended the year at $67.3 million, down from $115.9 million.
Changes versus comparable periods
- Annual sales rose 9.7%, primarily reflecting acquisitions, including Pramac; the company cited $236.6 million of non-annualized contribution from recent acquisitions. Domestic sales declined 2.6%, while International sales increased 140.3%.
- Residential product sales grew 14.6% to $772.4 million; commercial and industrial sales grew 1.7% to $557.5 million; Other sales grew 20.4% to $114.5 million. Residential products represented 53.5% of sales, up from 51.2%.
- Domestic Adjusted EBITDA increased 2.6% to $261.4 million, with margin rising to 22.3% from 21.2%. International Adjusted EBITDA increased 6.4% to $17.0 million, but margin fell to 6.3% from 14.1%, due principally to weaker mobile product volumes and mix, foreign-exchange effects, and Pramac mix.
- Operating cash flow improved mainly because working-capital investment was lower than in 2015 and operating earnings increased. Net income also benefited from the absence of 2015’s $40.7 million non-cash tradename and goodwill impairment charge.
- For context, FY 2015 sales had declined 9.8% and net income 55.5% versus FY 2014, amid weaker outage activity and lower oil-and-gas and rental demand.
Outlook, commentary and risks
- No specific 2017 revenue, earnings or margin guidance is provided in the supplied filing text. Management’s stated priorities are expanding residential standby penetration, gaining commercial and industrial share, developing gas-powered products, and growing internationally while improving International margins through synergies and organic growth.
- Generac estimated U.S. home-standby generator penetration at approximately 4% of its defined addressable market. Demand is sensitive to unpredictable power outages, consumer and business spending, construction and capital-investment cycles, and oil-and-gas activity.
- FY 2016 included $7.1 million of pre-tax business-optimization and restructuring charges related to the prolonged oil-and-gas capital-spending downturn, including facility consolidation, headcount reductions, asset write-downs and product-related charges.
- Pramac was acquired in March 2016 for a 65% interest; its 35% noncontrolling interest has a holder put option. Generac acquired Motortech on January 1, 2017; a $15.3 million deposit was recorded before year-end.
- Key risks include substantial debt and floating-rate exposure, acquisition integration and execution, foreign currency and commodity costs, reliance on independent distribution and suppliers, product liability and regulatory requirements, and potential manufacturing or IT disruptions. A 100-basis-point LIBOR change was estimated to affect annual cash interest by approximately $6.3 million after swaps, or $9.3 million without swaps.
- The Term Loan was amended in November 2016 to extend maturity to May 2023; the ABL facility matures in May 2020. The company reported covenant compliance and no financial maintenance covenants under the Term Loan. It had no plans to pay common dividends in the foreseeable future and authorized a further $250 million repurchase program in October 2016.
- Goodwill and other indefinite-lived intangibles totaled $833.0 million. No impairment was identified in the 2016 annual test. Management reported effective disclosure controls and internal control over financial reporting; however, its assessment and the auditor’s attestation excluded Pramac, which represented 12.6% of consolidated revenue.
- The independent auditor issued an unqualified opinion on the 2016 financial statements and internal controls. Generac changed auditors from Ernst & Young to Deloitte in April 2016.
Important facts for investors to verify
- Separate organic growth from acquisition-driven growth, especially the contribution and post-acquisition performance of Pramac and Motortech.
- Track Domestic versus International profitability, including whether International margins recover from 6.3% and whether expected acquisition synergies materialize.
- Review debt, leverage, variable-rate exposure, covenant restrictions, liquidity availability and the impact of continued share repurchases on cash and balance-sheet flexibility.
- Reconcile GAAP results with Adjusted EBITDA and Adjusted Net Income, including the adjustments for restructuring, purchase accounting and noncontrolling interests.
- Monitor demand drivers—outage activity, oil-and-gas and rental markets, and consumer and business investment—and the effects of currency, commodities and supply availability.
- Assess the put-option terms for Pramac’s noncontrolling interest, impairment sensitivity of goodwill and intangibles, and the planned expansion of the ERP system beyond locations already implemented.