Generac Holdings Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Unaudited results; dollar amounts below are in millions unless stated otherwise. Generac designs and manufactures power-generation equipment and other engine-powered products. In March 2016, it acquired a 65% interest in international generator maker Pramac.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net sales | $367.4 | $288.4 | $653.9 | $600.2 |
| Gross profit | $124.1 | $95.9 | $222.2 | $198.5 |
| Operating income | $44.1 | $39.5 | $71.0 | $84.4 |
| Net income attributable to Generac | $20.9 | $14.8 | $31.1 | $34.5 |
| Diluted EPS | $0.31 | $0.21 | $0.47 | $0.49 |
| Adjusted EBITDA | $63.9 | $52.4 | $113.7 | $109.6 |
- Q2 sales increased 27.4%, while Generac-attributable net income rose 40.7%. Gross margin was 33.8%, versus 33.3%; excluding a $3.4 million Pramac inventory step-up charge, management reported a 34.7% margin.
- Six-month sales rose 9.0%, but operating income fell 15.8% and Generac-attributable net income fell 9.9%. Reported gross margin increased to 34.0% from 33.1%; excluding specified business-optimization and acquisition inventory charges, management reported 34.9%.
- Q2 domestic sales increased 11.1% and international sales 166.7%. For the first half, domestic sales declined 2.0% while international sales rose 118.9%. Acquisition contributions were $88.1 million in Q2 and $125.3 million in the first half, so reported growth includes substantial acquired revenue.
- Residential product sales rose 36.2% in Q2 and 17.4% for the first half. Commercial and industrial sales rose 16.5% in Q2 but declined 3.2% for the first half.
- Management attributed domestic growth to CHP acquisition contributions and home-standby shipments, partly offset by lower mobile-product shipments to oil-and-gas and rental markets. International growth mainly reflected Pramac; organic shipments declined in the U.K. and Latin America. International adjusted EBITDA margin weakened, to 8.2% in Q2 from 13.1% and 8.0% for the first half from 12.2%.
Cash flow, debt and liquidity
- First-half operating cash flow was $81.2 million, up from $41.6 million, primarily reflecting a more favorable working-capital movement. Investing cash outflow was $74.8 million, including $60.9 million for Pramac; financing cash outflow was $46.7 million, including $34.6 million of share repurchases.
- Cash was $75.6 million at June 30, down from $115.9 million at year-end. Current assets were $698.6 million and current liabilities $324.0 million.
- Borrowings and capital-lease obligations totaled approximately $1.08 billion, including $954.0 million of term-loan principal, $100.0 million outstanding on the ABL facility and $33.6 million of foreign short-term borrowings. The term loan matures May 2020. ABL availability, net of letters of credit, was $142.1 million.
- The company reported compliance with its credit-agreement covenants; the term loan has no financial maintenance covenants. Its net debt leverage ratio was above 3.00:1.00, the threshold relevant to reduced term-loan interest margins.
- Generac repurchased 935,000 shares for $34.6 million in Q2. Since the program began, it had repurchased 4.24 million shares for $134.5 million under a $200 million authorization.
Outlook, risks and notable items
- The filing provides no specific numeric earnings or sales guidance. Management said operating cash flow, ABL availability, relatively low capital-expenditure needs and tax attributes were expected to provide sufficient capital for future growth, while noting that expansion could require additional capital.
- Management identified unpredictable power-outage activity, residential and business investment cycles, commodity and component costs, foreign exchange and interest rates, competition, distribution dependence, product liability, and acquisition integration and execution as risks to results.
- First-half results included $7.1 million of pre-tax business-optimization and restructuring charges tied to the prolonged oil-and-gas capital-spending downturn, including facility consolidation, workforce reductions, asset write-downs and other product-related charges. Q2 also included the $3.4 million Pramac inventory step-up expense.
- Pramac’s 35% noncontrolling interest is redeemable at the holder’s option within five years under specified pricing terms; the balance sheet recorded $35.7 million of redeemable noncontrolling interests. Pramac’s purchase-price allocation was preliminary, and acquisition goodwill was not tax-deductible.
- Management stated that ordinary-course litigation was not expected to have a material adverse effect. Disclosure controls were assessed as effective; Pramac was excluded from the scope of the company’s 2016 internal-control management report while integration review continued.
Important facts for investors to verify
- How much future sales and earnings growth is organic versus attributable to Pramac and other recent acquisitions.
- Whether weakness in oil-and-gas and rental markets continues, and how it affects commercial and industrial sales, margins and restructuring costs.
- Debt, leverage, interest expense, ABL availability and cash levels, including the implications of the net-debt leverage ratio above 3.00:1.00.
- The final Pramac purchase accounting, performance, integration, and potential cash requirements under the noncontrolling-interest put option.
- The sustainability of reported cash-flow improvement and adjusted results; the filing cautions that non-GAAP measures are not substitutes for GAAP earnings or operating cash flow.