Generac Holdings Inc. — Q1 2015 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2015, compared with Q1 2014. Generac designs and manufactures power-generation equipment and other engine-powered products, including residential, commercial and industrial generators, mobile light towers and heaters. It reports one operating segment.
Financial performance
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Net sales | $311.8 million | $342.0 million | Down 8.8% |
| Gross profit / margin | $102.6 million / 32.9% | $119.5 million / 34.9% | Margin down 2.0 percentage points |
| Operating income / margin | $44.9 million / 14.4% | $65.3 million / 19.1% | Down 31.2% |
| Net income | $19.7 million | $34.7 million | Down 43.3% |
| Diluted EPS | $0.28 | $0.50 | Down 44.0% |
| Adjusted EBITDA (non-GAAP) | $57.1 million | $77.5 million | Down 26.3% |
| Adjusted net income (non-GAAP) | $34.1 million | $50.7 million | Down 32.7% |
| Operating cash flow | $25.3 million | $36.4 million | Down 30.5% |
Sales by product: Residential sales were $156.8 million, down 4.3%; commercial and industrial sales were $133.8 million, down 15.0%; other sales were $21.2 million, up 2.7%. U.S. sales represented approximately 86% of total sales.
Cash flow and investment: Investing activities used $6.1 million, mainly for property and equipment purchases of $6.5 million. Financing activities used $56.6 million, including $50.4 million of long-term debt repayments. Cash fell $39.7 million during the quarter to $150.1 million.
Balance sheet and liquidity (March 31, 2015): Total assets were $1.842 billion; current assets $704.5 million; current liabilities $234.6 million. Long-term borrowings and capital leases were $1.034 billion, with $3.1 million of short-term borrowings. The company reported $148.5 million of availability under its $150 million ABL facility, net of letters of credit, and no ABL borrowings outstanding. The Term Loan matures May 31, 2020; the ABL facility matures May 31, 2018. The company said it was in compliance with both facilities’ covenants.
Material changes and management commentary
- Management attributed lower residential sales primarily to below-normal power-outage severity, which reduced portable-generator shipments; severe winter weather also slowed home-standby installations despite approximately flat shipments.
- Commercial and industrial sales declined mainly because of reduced spending by certain telecom national-account customers and, to a lesser extent, weaker oil and gas sales. Recent acquisitions and Latin American growth partly offset declines.
- Gross margin contracted due to temporary west-coast port-related costs, unfavorable manufacturing-overhead absorption, commodity-contract mark-to-market adjustments and acquisition impacts; a more favorable residential mix partially offset these items.
- Operating expenses rose 6.4%, primarily from higher marketing and advertising costs and recurring expenses from recent acquisitions.
- The company made a voluntary $50 million Term Loan prepayment on March 30 and recorded a $1.4 million non-cash debt-extinguishment loss. Its reported net-debt leverage ratio was below 3.0 to 1.0, qualifying it for a 25-basis-point reduction in Term Loan margins.
- Management stated that cash from operations, ABL availability, relatively low capital-expenditure requirements and tax attributes should provide sufficient capital for future growth, while noting that expansion may require additional capital.
Outlook, risks and contingencies
The filing provides no specific earnings or revenue guidance. Management cautioned that interim results are not necessarily indicative of full-year results and highlighted the unpredictability of outage-driven demand and seasonal sales patterns. Principal risks cited include product demand and outage frequency, raw-material and component availability and cost, interest-rate and currency movements, acquisition integration and expected synergies, global expansion, competition, reliance on distribution partners, technology and manufacturing changes, product liability or recalls, and regulatory changes.
Commodity and foreign-currency contracts generated recognized losses of $1.0 million in Q1 2015; derivative liabilities totaled $4.4 million at quarter-end. Dealer floor-plan financing outstanding was approximately $30.5 million; Generac participates in financing costs and may repurchase repossessed products, but does not indemnify the finance company for credit losses. Management said ordinary-course litigation was not expected to have a material adverse effect. No material changes to risk factors were reported from the 2014 Form 10-K.
Key facts for investors to verify
- Whether outage activity, winter conditions and telecom/oil-and-gas customer spending recover, and how those trends affect product demand.
- Whether gross-margin pressure from port disruption, overhead absorption, commodity adjustments and acquisition effects persists or reverses.
- Integration progress and returns from recent acquisitions, including whether expected synergies and growth contributions materialize.
- Debt repayment capacity, interest costs, covenant compliance and continued ABL availability, given approximately $1.04 billion of borrowings and capital-lease obligations.
- Working-capital developments, especially inventory, which rose to $356.9 million from $319.4 million at year-end, and the effect on cash generation.
- Warranty estimates, dealer floor-plan repurchase exposure and the impact of commodity, currency and interest-rate hedges.
- Non-GAAP Adjusted EBITDA and Adjusted Net Income reconciliations and limitations; these measures are not substitutes for GAAP earnings or operating cash flow.