Generac Holdings Inc. — Q1 2014 10-Q
Reporting period: Three months ended March 31, 2014; unaudited. Generac designs and manufactures power generation equipment and other engine-powered products. U.S. sales were approximately 85% of revenue. Unless otherwise stated, amounts below are in U.S. dollars.
Financial results
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Net sales | $342.0 million | $399.6 million | Down 14.4% |
| Gross profit / margin | $119.5 million / 34.9% | $153.5 million / 38.4% | Margin down 3.5 percentage points |
| Operating income | $65.3 million | $96.5 million | Down 32.3% |
| Net income / diluted EPS | $34.7 million / $0.50 | $50.7 million / $0.73 | Down 31.5% / 31.5% |
| Adjusted EBITDA | $77.5 million | $108.8 million | Down 28.8% |
| Adjusted net income | $50.7 million | $83.9 million | Down 39.5% |
| Operating cash flow | $36.4 million | $38.3 million | Down 5.0% |
Net margin was approximately 10.1%, versus 12.7% a year earlier. Operating expenses fell 4.8% to $54.2 million, but excluding intangible amortization, expenses were 14.3% of sales versus 12.7%, reflecting lower sales and reduced operating leverage. Interest expense declined to $11.7 million from $15.7 million, mainly following the May 2013 refinancing. The effective tax rate was 36.0%, compared with 36.2%.
Cash and cash equivalents were $173.7 million at March 31, up from $150.1 million at year-end; restricted cash was $6.6 million. The company had $148.5 million of net availability under its $150 million revolving ABL facility and no ABL borrowings outstanding. Investing cash use was $4.9 million, primarily capital expenditures; financing cash use was $7.9 million. The filing reports $1.194 billion of term-loan principal and approximately $1.172 billion of long-term borrowings and capital lease obligations after discounts and current classifications; short-term borrowings were $7.0 million. On April 30, 2014, the company prepaid $12.0 million of term-loan principal.
Material changes and business drivers
- Residential product sales fell to $164.0 million from $255.2 million. The prior-year quarter included about $100 million of incremental shipments associated with post-Superstorm Sandy extended lead times. Excluding that benefit, residential sales increased, led by portable generators; cold temperatures and snow delayed home-standby installations and dampened demand.
- Commercial and industrial sales rose 23.8% to $157.4 million, supported by acquisitions and organic growth in stationary generators and light towers, including increased national-account shipments.
- Gross margin declined, principally because of a higher mix of commercial and industrial shipments, a lower mix of home-standby generators, and recent acquisitions.
- Operating cash flow was slightly lower, as reduced operating earnings were partly offset by less working-capital usage, including lower inventory in line with sales.
Outlook, risks, and other items
The filing provides no specific quarterly or full-year revenue or earnings guidance. Management said cash flow, revolving-credit availability, relatively low ongoing capital expenditures, and favorable tax attributes should provide sufficient capital to support future growth, while noting debt service reduces cash available for other uses. Management cited approximately $960 million of remaining tax-deductible goodwill and intangible amortization from the 2006 acquisition, expected to generate about $374 million of cash tax savings through 2021, assuming continued profitability and a 39% tax rate.
Key risks include unpredictable major power outages and resulting demand swings, residential and business investment cycles, competition, reliance on distribution, raw-material and component costs, foreign currency and interest-rate movements, acquisition integration and expected synergies, and substantial indebtedness. The term loan matures in 2020 and has restrictive covenants but no financial maintenance covenants; the ABL facility has a conditional minimum fixed-charge coverage test. Commodity forward contracts generated a $0.3 million loss recognized in cost of goods sold for Q1 2014. Dealer floor-plan financing outstanding was approximately $27 million; Generac may repurchase repossessed products but does not indemnify the finance company for credit losses. Management did not expect pending ordinary-course litigation to have a material effect. No material changes to risk factors, contractual obligations, or off-balance-sheet arrangements were reported; disclosure controls were deemed effective.
Warranty liability, excluding extended-warranty deferred revenue, was $31.9 million at quarter-end, down from $33.7 million at year-end. Extended-warranty deferred revenue was $24.6 million, up from $23.1 million.
Important facts for investors to verify
- Whether residential demand excluding the prior-year Sandy-related shipment benefit is strengthening, and whether weather-delayed installations recover.
- Whether commercial and industrial growth and acquisition contributions can offset residential weakness, and how product mix affects gross margin.
- Debt principal, interest-rate exposure, covenant headroom, and the effect of the April $12 million prepayment on liquidity and interest costs.
- Whether management’s tax-savings assumptions and expected cash-tax benefits are realized, given their dependence on profitability and tax rates.
- Changes in warranty claims and dealer floor-plan exposure; assess GAAP earnings and cash flow alongside management’s non-GAAP measures.