Generac Holdings Inc. — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013. Unaudited results; dollar amounts below are in millions unless otherwise stated. Generac designs and manufactures generators and other engine-powered products for residential, commercial, industrial, and construction markets.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $363.3 | $300.6 | $1,109.5 | $834.3 |
| Gross profit | $139.5 | $115.8 | $423.9 | $314.2 |
| Gross margin | 38.4% | 38.5% | 38.2% | 37.7% |
| Operating income | $87.3 | $59.1 | $260.2 | $155.8 |
| Net income | $47.1 | $25.5 | $126.0 | $64.9 |
| Diluted EPS | $0.67 | $0.37 | $1.81 | $0.94 |
| Adjusted EBITDA | $100.1 | $76.3 | $299.0 | $206.7 |
Revenue mix: Q3 residential sales were $192.7 million, up slightly year over year; commercial and industrial (C&I) sales were $151.5 million, up 61.8%. For the first nine months, residential sales rose 31.7% to $644.6 million and C&I sales rose 37.5% to $412.0 million.
Cash flow: Nine-month operating cash flow was $155.2 million, versus $129.2 million a year earlier. Investing activities used $85.9 million, including the Tower Light acquisition and $14.3 million of capital expenditures. Financing activities used $60.8 million, including the special dividend and debt-related payments. Cash and cash equivalents ended at $116.5 million.
Debt and liquidity: At September 30, the company had a $1.2 billion term loan, $18.0 million of short-term borrowings, and no borrowings under its $150 million ABL revolver. Revolver availability was $147.1 million, net of letters of credit. The term loan matures in May 2020; it is secured and subject to restrictive covenants, though it has no financial maintenance covenants. Current and long-term borrowings and capital lease obligations totaled approximately $1.2 billion on the balance sheet.
Changes and drivers
- Q3 sales increased 20.9%; nine-month sales increased 33.0%. Management attributed growth to home standby generator demand, expanded distribution and marketing, stronger C&I shipments, and acquisitions.
- Q3 gross margin was approximately flat year over year. For the nine-month period, margin improved 0.5 percentage point, supported by product mix, pricing, lower commodity costs, and cost reductions; acquisition and C&I mix partly offset gains.
- Net income increased substantially in both periods. Q3 operating expenses declined, in part because of a $5.6 million favorable warranty-reserve adjustment; the nine-month period benefited from a $12.3 million adjustment. Management cited improved warranty experience.
- May 2013 refinancing established the $1.2 billion term loan and funded a $5.00-per-share special dividend totaling $340.8 million. The nine-month results included a $15.3 million loss on extinguishment of debt. Q3 interest expense declined year over year following the refinancing, while nine-month interest expense rose because of higher debt levels and borrowing costs.
- Tower Light was acquired on August 1 for a stated purchase price of approximately $76.5 million, net of cash acquired and inclusive of estimated earn-outs. Its results are included from the acquisition date. The company subsequently completed the acquisition of Baldor’s generator products division on November 1, 2013; this was not reflected in the September 30 financial statements.
Outlook, risks, and notable items
The filing does not provide specific quantitative full-year 2013 revenue or earnings guidance. Management said cash from operations, revolver availability, relatively low ongoing capital expenditure needs, and tax attributes were expected to provide sufficient capital for growth, while noting that debt service would absorb significant cash and future growth could require additional capital.
Demand may fluctuate with major power outages, residential and commercial investment, and economic conditions. Other cited risks include raw-material and component costs, competition, distribution-network dependence, acquisition integration and realization of expected benefits, global expansion, product liability, and increased indebtedness and interest expense. Seasonality and unpredictable outage activity may affect quarterly results.
At September 30, inventories were $296.0 million, up from $225.8 million at year-end; management attributed working-capital investment partly to higher production and seasonal demand. Dealer floor-plan financing outstanding was approximately $25.1 million, up from $16.6 million at year-end. Management said pending litigation was not expected to have a material effect. Disclosure controls were assessed as effective.
Non-GAAP caution: Adjusted EBITDA and Adjusted Net Income are supplemental measures, not substitutes for GAAP results or cash flow. The detailed Adjusted Net Income reconciliation reports $73.7 million for Q3 and $224.1 million for nine months, while the narrative reports $76.0 million and $226.4 million, respectively; the filing text does not explain this difference.
Key facts for investors to verify
- Whether the strong sales and earnings growth is sustainable, particularly given outage-driven demand, seasonality, and the much faster growth in C&I sales.
- Cash conversion and working-capital needs, including the inventory increase, alongside cash available after debt service and acquisitions.
- Debt burden, refinancing terms, covenant restrictions, and the effect of the dividend recapitalization on future financial flexibility.
- Integration, performance, and expected benefits of Tower Light and Baldor, including acquisition-related costs and earn-out obligations.
- The favorable warranty-reserve adjustments and the discrepancy between the narrative and reconciliation for Adjusted Net Income.