Generac Holdings Inc. — Q3 2021 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and nine months ended September 30, 2021, compared with the corresponding 2020 periods. Generac designs and sells power generation equipment, energy storage systems, grid services and other products. Its reportable segments are Domestic and International. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $942.7 | $701.4 | $2,670.1 | $1,724.1 |
| Gross profit | $336.0 | $276.1 | $997.5 | $657.5 |
| Gross margin | 35.6% | 39.4% | 37.4% | 38.1% |
| Operating income | $173.6 | $155.6 | $545.7 | $308.1 |
| Net income attributable to Generac | $131.6 | $115.0 | $407.6 | $225.6 |
| Diluted EPS | $1.93 | $1.82 | $6.27 | $3.51 |
| Adjusted EBITDA | $209.2 | $178.8 | $641.1 | $387.9 |
- Revenue and profit: Q3 sales rose 34.4% year over year and net income attributable to Generac rose 14.4%. For the first nine months, sales increased 54.9% and attributable net income increased 80.7%.
- Sales mix: Q3 residential sales grew 32.7%, C&I sales 46.6%, and International segment sales 60.8%. Nine-month residential sales grew 65.5%, C&I sales 42.1%, and International sales 43.5%.
- Margins: Q3 gross margin contracted to 35.6% from 39.4%, as commodity, labor and logistics costs and plant start-up costs outpaced the early benefit from pricing. Nine-month margin eased to 37.4% from 38.1%. Domestic adjusted EBITDA margin was 23.7% in Q3 versus 28.2%; International margin improved to 14.1% from 7.9%.
- Cash flow: Nine-month operating cash flow was $349.4, up from $268.3. Investing used $546.8, primarily for acquisitions ($465.9) and capital expenditures ($87.5). Financing used $33.4. Cash declined $231.4 from year-end 2020 to $423.7, with higher inventory and acquisition spending among the drivers.
- Liquidity and debt: Cash was $423.7 at September 30. A $500.0 million ABL facility had $50.0 outstanding and $449.3 available after letters of credit; management reported total liquidity of $873.0. The Term Loan had $780.0 outstanding and matures in December 2026; the ABL matures in May 2026. The company reported a 0.77-to-1.00 secured leverage ratio and compliance with covenants. Balance-sheet long-term borrowings and finance lease obligations were $843.4; short-term borrowings were $61.5.
- Other metrics: Inventories rose to $934.9 from $603.3 at year-end 2020. The standard product warranty liability increased to $83.0 from $59.2 at year-end.
Material changes and management commentary
- Growth reflected strong residential demand, including home standby generators and PWRcell energy storage, and a recovery in C&I and international markets from prior-year pandemic lows. Acquisitions and foreign currency contributed to reported International growth.
- Management said elevated demand and extended lead times were expected to make 2021 sales more evenly distributed through the year than historical seasonal patterns. The filing provides no specific full-year revenue or earnings guidance.
- Generac cited significant 2021 raw-material and component cost pressures, labor and logistics challenges, and supply constraints. It described operations as functioning but noted employee absences, logistics delays and the possibility that supplier or facility disruptions could affect its ability to meet demand. Pricing actions were beginning to offset cost increases.
- During 2021, the company acquired Deep Sea, Chilicon, Apricity Code and Off Grid Energy. Cash paid for acquisitions was $465.9 for the nine-month period; acquisition accounting added substantial goodwill and intangible assets. At September 30, contingent consideration liabilities totaled $70.2.
- After quarter-end, Generac agreed to acquire ecobee for consideration valued at up to $770 million, including cash, stock and contingent stock consideration; closing was expected in Q4 2021, subject to customary conditions. It also acquired Tank Utility on October 1.
- Two putative federal securities class actions filed in August 2021 allege misleading statements about exposure to liability relating to a portable-generator recall. Generac is defending the actions and stated it did not expect a material adverse effect. The company also reported no other pending legal proceedings it believed would materially affect results or financial condition.
- Additional risks include unpredictable outage-driven demand and seasonality, COVID-19 impacts, supply-chain and input-cost pressures, foreign exchange and interest-rate movements, acquisition integration and ecobee closing risks, product liability or recalls, and cybersecurity or connected-product failures. Management said there were no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether pricing and operating efficiencies can offset higher input, labor and logistics costs without further gross-margin deterioration.
- Whether supply constraints, extended lead times and elevated inventory convert into timely shipments and cash generation.
- The contribution and integration performance of recent acquisitions, including the assumptions underlying acquired goodwill and the $70.2 million contingent-consideration liability.
- Developments in the portable-generator recall-related class actions and any related regulatory, warranty or product-liability exposure.
- The funding, closing conditions, dilution and contingent stock terms for the ecobee transaction, and the subsequent contribution from Tank Utility.
- That adjusted EBITDA and adjusted net income are non-GAAP measures; assess them alongside GAAP earnings, working-capital needs, capital spending and debt service.