Generac Holdings Inc. — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. The filing also reports unaudited fourth-quarter results. Generac designs and manufactures generators and related engine-powered products for residential, commercial, industrial and construction markets.
Financial performance
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Net sales | $1,176.3 million | $792.0 million |
| Gross profit / margin | $440.4 million / 37.4% | $294.7 million / 37.2% |
| Operating income | $223.6 million | $113.0 million |
| Net income | $93.2 million | $324.6 million |
| Diluted EPS | $1.35 | $4.79 |
| Adjusted EBITDA | $289.8 million | $188.5 million |
| Adjusted net income | $220.8 million | $147.2 million |
| Cash from operating activities | $235.6 million | $169.7 million |
FY 2012 sales rose 48.5%. Residential sales increased 43.7% to $705.4 million; commercial and industrial sales increased 64.0% to $410.3 million, driven in part by the full-year contribution from Magnum. Gross margin edged up, reflecting pricing, manufacturing overhead absorption and commodity cost moderation, partly offset by product mix. Operating expenses rose to $216.8 million.
Reported FY 2011 net income included a $271.4 million tax benefit from reversal of the deferred-tax valuation allowance. This substantially distorts the year-over-year comparison of reported net income and EPS. FY 2012 interest expense was $49.1 million, up from $23.7 million, and included $14.3 million of debt-extinguishment losses.
Q4 2012: Sales were $342.0 million, gross profit $126.2 million, operating income $67.8 million and net income $28.3 million; diluted EPS was $0.41. Q4 2011 sales were $267.3 million and net income $267.1 million, the latter materially boosted by the tax valuation-allowance reversal.
Liquidity, debt and capital allocation
At December 31, 2012, cash and cash equivalents were $108.0 million; current assets were $522.6 million and current liabilities $294.9 million. The company reported $147.0 million of availability under its $150 million asset-based revolving facility, with no borrowings outstanding under that facility. Long-term borrowings were $881.3 million; total indebtedness was reported as $893.8 million including $12.5 million of local borrowings. The Term Loan’s effective interest rate, including swaps, was 6.5%.
In May 2012, Generac refinanced its facilities with a $900 million term loan, using remaining proceeds and cash on hand to fund a June special dividend of $6.00 per share, totaling $404.3 million. The term loan matures in 2018 and has no financial maintenance covenant; the ABL facility has a conditional fixed-charge coverage test. In February 2013, the company prepaid $80 million of term debt. Management said operating cash flow, revolver availability, relatively low ongoing capital needs and tax attributes should support liquidity, while noting debt service reduces cash available for other uses.
Operating cash flow increased to $235.6 million, partly offset by higher inventory investment. Investing cash outflow was $69.3 million, including $47.0 million for acquisitions and $22.4 million in capital expenditures. Financing cash outflow was $151.4 million, reflecting refinancing activity, fees and the dividend.
Material changes, outlook and risks
- Ottomotores was acquired in December 2012 for approximately $44.8 million net of cash at closing; its purchase-price allocation was preliminary. GenTran was acquired in February 2012. These transactions broadened industrial and international offerings.
- Management attributed 2012 demand growth partly to major power outages, including late-October/early-November outages on the U.S. East Coast, and expected near-term results to benefit from that activity. It cautioned that the impact was uncertain and outage-driven demand is unpredictable. No quantified full-year 2013 guidance is provided in the supplied filing text.
- Key risks include volatile outage-related demand and seasonality; macroeconomic and construction conditions; competition; dependence on dealers and distribution partners; commodity, component and foreign-sourcing costs; single-source supplier disruptions; regulation and product liability; and acquisition integration.
- High leverage and variable-rate debt expose cash flow to interest costs and refinancing risk. The company reported a $404.3 million special dividend funded substantially by refinancing proceeds and does not anticipate further dividends in the near term.
- Other notable items: warranty obligations rose to $49.6 million from $34.4 million; goodwill and indefinite-lived intangibles totaled approximately $711.8 million, with no 2012 impairment recorded. Management and the auditor reported effective internal controls, though controls at Ottomotores UK were excluded from management’s assessment. The financial statement audit opinion was unqualified.
Important facts for investors to verify
- How sustainable 2012’s outage-driven demand and sales growth are, and how order trends developed after the late-2012 storms.
- The quality of earnings: distinguish operating performance from the 2011 one-time tax benefit and compare GAAP results with the company’s non-GAAP adjustments.
- Debt, interest expense, covenant terms and the effect of the February 2013 $80 million prepayment on future maturities and cash needs.
- Ottomotores’ finalized purchase price, integration progress, contribution to results and expected synergies.
- Warranty reserve adequacy, inventory growth, and exposure to commodity prices and key suppliers.