Generac Holdings Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Unaudited; dollar figures below are in millions unless noted. Generac designs and manufactures power generation equipment, energy storage systems and related products for residential, commercial and industrial markets.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $546.8 | $541.9 | $1,022.8 | $1,012.3 |
| Gross profit | $209.0 | $195.8 | $381.3 | $358.0 |
| Gross margin | 38.2% | 36.1% | 37.3% | 35.4% |
| Operating income | $89.6 | $90.9 | $152.4 | $162.1 |
| Net income attributable to Generac | $66.1 | $62.0 | $110.6 | $106.8 |
| Diluted EPS | $1.02 | $0.98 | $1.70 | $1.74 |
| Adjusted EBITDA | $123.1 | $111.9 | $209.2 | $199.0 |
| Operating cash flow | Not provided quarterly | Not provided quarterly | $113.1 | $22.6 |
- Q2 sales rose 0.9%; residential products increased 27.2% to $341.4 million, while commercial and industrial (C&I) products fell 32.8% to $154.9 million. Other products grew 17.4% to $50.6 million.
- Domestic sales increased 9.3% to $460.8 million; International sales declined 28.5% to $86.1 million. International adjusted EBITDA fell to $1.9 million from $8.2 million; Domestic adjusted EBITDA increased to $121.3 million from $103.7 million.
- Q2 gross margin improved on favorable product mix, led by home standby generators and a lower C&I mix. Operating income declined 1.5% as operating expenses increased 13.8%, including restructuring and business optimization costs.
- For the first half, sales rose 1.0% and gross margin improved, but operating income declined 6.0%. Adjusted EBITDA grew 5.1%. Company-attributable net income rose 3.5%, while diluted EPS declined from $1.74 to $1.70.
- First-half operating cash flow was $113.1 million, versus $22.6 million a year earlier; management attributed the increase mainly to a prior-year working-capital investment that did not recur. Investing cash outflow was $25.0 million, including $26.3 million of capital expenditures. Financing cash outflow was $13.0 million.
Balance sheet, debt and liquidity
- At June 30, cash and equivalents were $396.7 million; current assets were $1,297.1 million and current liabilities $486.7 million. The current ratio was approximately 2.7.
- Term loan principal was $830.0 million, with a December 2026 maturity. Short-term borrowings were $52.3 million; long-term borrowings and finance lease obligations were reported at $841.1 million, including the term loan net of financing costs and lease obligations.
- Available ABL facility capacity was $292.3 million, net of letters of credit; total reported liquidity was $689 million. Net secured leverage ratio was 1.41x, and the company reported compliance with credit covenants.
- Operating cash flow exceeded capital expenditures by approximately $86.8 million for the first half. Cash increased $73.9 million from year-end 2019.
Material changes, outlook and risks
- COVID-19 and the oil-price decline sharply weakened global C&I demand, particularly mobile products, and contributed to lower International sales. Conversely, home standby and portable generator demand benefited from elevated outage activity and stay-at-home conditions.
- The company recorded $11.5 million of Q2 pre-tax business optimization and restructuring charges, primarily severance and non-cash asset write-downs, to address pandemic and oil-price impacts. First-half charges were $12.0 million.
- Management said most operations remained open as an essential business and reported no significant supply-chain interruption to date, while noting possible employee absences, logistics delays, supplier disruption and work stoppages. It stated that uncertainty over the pandemic’s duration and economic effects limits predictability.
- No numerical full-year revenue or earnings guidance is provided in the supplied filing text. Management described liquidity as strong and said it expected residential and clean-energy growth drivers to help offset pressure, while monitoring C&I weakness and considering further cost actions.
- Goodwill and indefinite-lived intangibles were not impaired in the March interim assessment, and no Q2 impairment indicators were identified. Management nevertheless identified the Latin America and Generac Mobile Products reporting units as at risk if projections deteriorate or discount rates change.
- Other risks include outage-dependent demand, raw-material, component and labor availability and costs, foreign exchange, interest rates, tariffs, distribution-channel dependence, technology and cybersecurity risks, product liability and regulatory changes. The company reported no litigation expected to have a material effect and no material changes to contractual or off-balance-sheet obligations.
Most important facts for investors to verify
- Whether residential demand remains strong enough to offset continuing C&I and International weakness.
- Whether pandemic-related cost actions, including the $11.5 million Q2 charge, translate into sustained operating performance rather than masking ongoing pressures.
- Cash conversion and working-capital requirements, given inventory of $544.4 million and first-half operating cash flow’s sensitivity to working-capital movements.
- Debt, interest-rate exposure and liquidity availability, including the $830 million term loan and $292.3 million of undrawn ABL capacity.
- Whether updated forecasts or market conditions trigger impairment at the Latin America or Generac Mobile Products reporting units.