Generac Holdings Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; comparisons are with Q1 2012 unless otherwise noted. The interim financial statements are unaudited. Generac designs and manufactures generators and other engine-powered products; it reports as one operating segment. The United States accounted for approximately 91% of Q1 2013 sales.
Financial performance
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net sales | $399.6 million | $294.6 million | +35.7% |
| Gross profit / margin | $153.5 million / 38.4% | $111.0 million / 37.7% | Margin +0.7 percentage points |
| Operating income | $96.5 million | $59.5 million | +62.2% |
| Net income | $50.7 million | $30.1 million | +68.6% |
| Diluted EPS | $0.73 | $0.44 | +$0.29 |
| Operating cash flow | $38.3 million | $38.6 million | Down $0.3 million |
Residential product sales rose 45.8% to $255.2 million; commercial and industrial sales rose 21.0% to $127.1 million; other sales were $17.2 million. Management attributed residential growth to outage-driven demand and awareness, expanded distribution, marketing, and execution. Commercial and industrial growth reflected the Ottomotores acquisition, national-account shipments, and organic growth in natural-gas generators.
Gross margin improved with cost-reduction initiatives, pricing, and moderated commodity costs, partly offset by the sales mix associated with Ottomotores. Operating expenses increased 10.5% to $56.9 million, reflecting acquisition-related costs and investment in sales, engineering, and administrative infrastructure, partly offset by lower intangible amortization. Interest expense rose $10.0 million year over year, principally due to higher debt and its cost following the May 2012 refinancing. Net income also benefited from a lower effective tax rate: 36.2%, versus 38.8%.
Adjusted EBITDA, a non-GAAP measure, was $108.8 million versus $75.8 million; adjusted net income was $83.9 million versus $66.1 million. The filing cautions that these measures are supplemental and do not substitute for GAAP earnings or cash flows; Adjusted EBITDA does not reflect working-capital needs, capital spending, or debt service.
Cash flow, liquidity, and debt
- Operating cash flow was $38.3 million. Working-capital investment, including increases in accounts receivable and inventory, largely offset strong earnings.
- Investing cash outflow was $4.3 million, primarily capital expenditures. Financing cash outflow was $87.6 million, primarily debt repayments, plus equity-award tax payments and cash payments associated with restricted stock.
- Cash fell to $54.3 million from $108.0 million at December 31, 2012. At March 31, the company reported $147.2 million of availability under its ABL revolver, net of letters of credit; there were no ABL borrowings.
- Long-term borrowings, net of debt discount, were $800.7 million at March 31, compared with $881.3 million at year-end. Separately, short-term borrowings were $12.5 million, primarily at foreign subsidiaries. The company made an $80 million voluntary term-loan prepayment in February and recorded a $1.8 million debt-extinguishment loss from writing off discount and financing costs.
- The term loan matures in May 2018 and is secured; its covenants restrict, among other matters, additional debt, liens, investments, and distributions. It has no financial maintenance covenants. The ABL facility includes a conditional minimum fixed-charge coverage test based on availability.
Management said operating cash flow, revolver availability, relatively low ongoing capital requirements, and tax attributes should provide sufficient liquidity for the next twelve months and beyond, while noting that debt service reduces funds available for other uses.
Outlook, risks, and unusual items
- Proposed recapitalization: Announced May 2, 2013, the company planned, subject to market and other conditions, to incur approximately $335 million of additional debt to fund a special dividend of up to $5 per share and refinance existing term facilities. It expected approximately $1.15 billion of new senior secured term financing and a $150 million ABL revolver, expected to be undrawn at closing. The dividend was conditional on obtaining financing on acceptable terms; management expected payment before the end of Q2 2013. The filing identifies increased debt and interest expense as risks.
- Subsequent debt payment: On May 2, 2013, the company prepaid another $30 million of term-loan principal.
- Demand and seasonality: Management said outages in 2012 contributed to strong Q1 2013 generator demand, but major outage activity is unpredictable. Historical quarterly sales seasonality may not apply in 2013; sales and profitability can fluctuate.
- Other business risks: Demand and economic conditions, commodity and component availability and costs, distribution dependence, competition, product liability, integration and realization of acquisition benefits, and execution of product and manufacturing initiatives. The company uses commodity and interest-rate derivatives; it reported a $292,000 Q1 loss on commodity contracts and a $1.8 million net derivative liability at March 31.
- Contingencies: Management said ordinary-course litigation was not expected to have a material adverse effect. Outstanding dealer floor-plan financing under a repurchase arrangement was approximately $21.6 million; the company does not indemnify the finance company for credit losses. Product warranty obligations increased to $55.2 million from $49.6 million at year-end.
Most important facts for investors to verify
- Whether the proposed recapitalization and special dividend were completed, and the final debt, interest-rate, covenant, and dividend terms.
- How much of Q1 sales growth was sustainable absent further major outages, and the subsequent trajectory of residential and commercial demand.
- Whether working-capital investment, especially receivables and inventory, converts to cash as sales growth continues.
- Debt balances, cash, revolver availability, and the effect of required and voluntary principal payments on liquidity and interest expense.
- Warranty reserve development, acquisition integration and returns, and exposure to commodity, component, and product-liability risks.