Generac Holdings Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; unaudited. Generac designs and manufactures generators and other engine-powered products. Comparisons are with Q1 2011 unless noted. Dollar amounts are in millions unless otherwise stated.
Financial performance
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Net sales | $294.6 | $124.0 |
| Gross profit / margin | $111.0 / 37.7% | $47.2 / 38.1% |
| Operating income | $59.5 | $11.1 |
| Net income | $30.1 | $4.8 |
| Diluted earnings per share | $0.44 | $0.07 |
| Adjusted EBITDA (non-GAAP) | $75.8 | $27.5 |
| Cash from operating activities | $38.6 | $12.7 |
Sales increased 137.6%. Residential sales rose to $175.1 million from $69.2 million; industrial and commercial sales rose to $105.0 million from $44.3 million. Gross margin eased 0.4 percentage points, primarily due to Magnum Products’ product mix and higher commodity costs, partly offset by pricing, overhead absorption, and a stronger home-standby mix. Operating expenses were $51.5 million, up from $36.0 million. Net income included $4.3 million of debt-extinguishment loss; the effective tax rate was 38.8%, versus 1.9%, following the 2011 determination that deferred tax assets were realizable.
Cash, debt, and liquidity
- Cash was $91.7 million at March 31, 2012, versus $93.1 million at year-end 2011. Operating cash flow was $38.6 million; investing cash flow was negative $4.4 million, including capital expenditures and an acquisition; financing cash flow was negative $35.6 million, largely reflecting refinancing activity and fees.
- Inventory increased to $200.1 million from $162.1 million at year-end, as the company built working capital to support higher production and seasonal demand.
- Long-term debt was $559.6 million and current debt $14.1 million. The February refinancing established $325 million of Tranche A loans, $250 million of Tranche B loans, and a $150 million revolver; term facilities mature in 2017 and 2019. The company reported $145.3 million of revolver availability, net of letters of credit, and compliance with covenants at quarter-end.
- The credit agreement is secured by substantially all borrower assets and imposes leverage and interest-coverage tests, as well as restrictions on distributions. Required principal payments are $9.4 million for the remainder of 2012.
Material changes, outlook, and risks
- Management attributed strong residential demand to major power outages in the second half of 2011, alongside distribution expansion, portable-generator share gains, and power-washer sales. Industrial and commercial growth reflected the Magnum Products business, stronger telecom, healthcare and data-center shipments, and resolution of a component-supply backlog.
- On February 1, 2012, Generac acquired substantially all assets and assumed certain liabilities of a transfer-switch and portable-generator-accessory manufacturer. The acquisition was described as not material to consolidated financial statements.
- Management expected 2012 revenue to be weighted toward the first half because of outage-driven demand, with the year-over-year growth effect expected to diminish in the second half if comparable major outages did not recur. Outage frequency is unpredictable; the filing gives no specific full-year revenue or earnings guidance.
- On May 8, 2012, after quarter-end, the company announced a proposed recapitalization involving approximately $650 million of additional debt and a special cash dividend of up to $10 per share. It expected roughly $1.2 billion of new financing to fund the dividend and refinance existing facilities, subject to market conditions and acceptable terms. Completion would materially increase debt and interest expense.
- Key risks include demand and outage variability, residential and business investment cycles, raw-material and component prices and availability, competition, distribution dependence, product liability and warranty costs, and the ability to integrate Magnum and realize expected benefits. Product warranty obligations were $39.1 million at quarter-end, versus $34.4 million at year-end 2011 and $22.3 million a year earlier.
- Management did not expect ordinary-course litigation to materially affect results or financial condition. Disclosure controls were reported effective, with no material change in internal controls during the quarter.
Important facts for investors to verify
- Whether outage-driven demand persists and how comparisons change in the second half of 2012.
- Terms, completion, dividend amount, and resulting leverage and interest costs of the proposed recapitalization.
- Gross-margin trends, particularly commodity costs and Magnum-related product mix.
- Working-capital and inventory conversion, warranty claims, and operating cash generation.
- Debt covenant headroom, repayment requirements, and available revolver capacity.
- Adjusted EBITDA and adjusted-income definitions and reconciliations; these are non-GAAP measures and are not substitutes for GAAP earnings or cash flows.