Generac Holdings Inc. — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013; quarterly figures include the three months ended December 31, 2013. Amounts are U.S. dollars.
Business context
Generac designs and manufactures generators and other engine-powered products for residential, commercial, industrial and construction markets. It reports one operating segment. Sales are primarily in the United States and Canada; the company reported 12% of 2013 net sales outside the United States in its MD&A. Residential products represented 56.8% of sales, commercial and industrial products 38.4%, and other products 4.8%.
Key financial metrics
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Net sales | $1,485.8 million | $1,176.3 million |
| Gross profit / margin | $569.6 million / 38.3% | $440.4 million / 37.4% |
| Operating income / margin | $351.5 million / 23.7% | $223.6 million / 19.0% |
| Net income | $174.5 million | $93.2 million |
| Diluted EPS | $2.51 | $1.35 |
| Adjusted EBITDA (non-GAAP) | $402.6 million | $289.8 million |
| Operating cash flow | $259.9 million | $235.6 million |
| Capital expenditures | $30.8 million | $22.4 million |
FY 2013 gross margin improved 0.9 percentage points. Management attributed the improvement to product mix, pricing, lower commodity costs and cost reductions, partly offset by acquisition-related mix. Interest expense was $54.4 million, up from $49.1 million, and income tax expense was $104.2 million. Cash taxes paid were $25.8 million.
In Q4 2013, net sales were $376.2 million versus $342.0 million in Q4 2012; operating income was $91.2 million versus $67.8 million, and net income was $48.5 million versus $28.3 million.
At year-end, cash and cash equivalents were $150.1 million, current assets $654.2 million and current liabilities $250.8 million. Reported total indebtedness was $1,187.8 million; the balance sheet also reported $9.6 million in short-term borrowings. The company had $147.5 million of availability under its $150 million asset-based revolving facility, with no borrowings outstanding under that facility.
Material changes versus prior periods
- Sales grew 26.3% year over year. Residential sales rose 19.6%, led by home standby generators; lower portable-generator shipments partly offset growth. Commercial and industrial sales rose 38.9%, reflecting acquisitions and organic growth.
- Net income rose to $174.5 million from $93.2 million. Adjusted EBITDA increased to $402.6 million from $289.8 million. The 2011 comparison is distorted by a $271.4 million tax benefit from reversing a deferred-tax valuation allowance.
- Acquisitions expanded the portfolio and geographic reach: Tower Light was acquired in August 2013 and Baldor Generators in November 2013; Ottomotores was acquired in December 2012. 2013 investing cash outflow included $122.4 million for Tower Light and Baldor Generators.
- Inventory increased to $300.3 million from $225.8 million, including higher finished goods, as the company supported higher production and replenished inventory. Operating cash flow rose 10.3% despite increased working-capital investment.
- In May 2013, Generac refinanced its term debt with a $1.2 billion term loan maturing in 2020 and used proceeds and cash on hand for a $5.00-per-share special dividend totaling $340.8 million. It reported a $15.3 million loss on extinguishment of debt for 2013.
Outlook, commentary and risks
The filing provides no specific numerical revenue or earnings guidance. Management cited potential growth from low home-standby-generator penetration, commercial and industrial market-share gains, broader product offerings and international expansion. It estimated U.S. addressable home-standby penetration at approximately 3%. Management also said operating cash flow, revolving-credit availability, relatively low ongoing capital needs and tax attributes were expected to support growth, while noting that debt service would consume a significant portion of cash flow.
- Demand is sensitive to unpredictable major power outages, consumer and business spending, construction, capital investment and credit conditions; sales are seasonal and can fluctuate materially.
- Steel, copper, aluminum, sourced components, foreign currency and supplier availability can pressure costs and margins. About 60% of materials and components were sourced outside the United States in 2013; some parts had single-source suppliers.
- High indebtedness and floating interest rates constrain financial flexibility. A 100-basis-point LIBOR change was estimated to affect annual cash interest expense by about $4.9 million after swaps, or $5.9 million without swaps.
- Acquisition integration, expected synergies, international expansion, competition, distribution-partner dependence, emissions regulation, product liability and manufacturing disruption are identified risks. Approximately $891.1 million of goodwill and indefinite-lived intangibles remained; no impairment was recorded in 2013.
- A favorable $17.6 million adjustment to warranty reserves, based on improved claims experience, reduced 2013 selling and service expense. The filing reported no pending litigation expected to materially affect financial condition or results.
Most important facts for investors to verify
- Whether strong organic demand and margin improvement persist apart from outage-driven demand and acquisition contributions.
- Debt balances, interest costs, covenant restrictions and the company’s ability to fund growth while servicing debt; confirm dividend policy, as no further near-term dividends were planned.
- Acquisition integration, realized performance and any subsequent changes to purchase accounting, earn-outs or goodwill assumptions.
- Inventory levels, working-capital conversion and the sustainability of warranty-reserve assumptions and the favorable 2013 adjustment.
- Management’s assessment of internal controls excluded Tower Light and Baldor Generators, acquired in 2013; the auditors likewise excluded those businesses from their controls audit. The company and auditor otherwise reported effective controls and issued unqualified opinions.