Generac Holdings Inc. — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014. Financial statements are unaudited. Amounts below are in millions of dollars except per-share data, percentages, and where noted.
Business context
Generac designs and manufactures power-generation equipment and other engine-powered products for residential, commercial and industrial, oil and gas, construction, and other markets. It reports as one operating segment. U.S. sales represented 86% of third-quarter and 85% of nine-month sales.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $352.3 | $363.3 | $1,056.9 | $1,109.5 |
| Gross profit | $130.3 | $139.5 | $377.8 | $423.9 |
| Gross margin | 37.0% | 38.4% | 35.7% | 38.2% |
| Operating income | $70.8 | $87.3 | $214.3 | $260.2 |
| Net income | $36.5 | $47.1 | $125.2 | $126.0 |
| Diluted EPS | $0.52 | $0.67 | $1.79 | $1.81 |
| Adjusted EBITDA | $83.1 | $100.1 | $245.1 | $299.0 |
| Adjusted net income | $57.9 | $73.7 | $165.7 | $224.1 |
Operating cash flow for the first nine months was $142.5 million, versus $155.2 million a year earlier. Capital expenditures were $22.7 million; investing cash outflow was $28.0 million. Cash increased by $23.0 million from year-end to $173.2 million.
At September 30, cash was $173.2 million and net availability under the $150 million ABL facility was $148.5 million, with no ABL borrowings outstanding. Term-loan principal was $1.129 billion; total reported borrowings and capital leases were approximately $1.112 billion, including $5.5 million of short-term borrowings. The company made $62 million of voluntary term-loan prepayments during the nine months. The term loan matures in 2020; the ABL facility matures in 2018.
Changes versus prior comparable periods
- Third-quarter sales declined 3.0%; nine-month sales declined 4.7%. Residential sales fell 4.7% in Q3 and 18.2% year to date. Management attributed the weakness to lower-than-normal outage activity and comparison with 2013 demand following Superstorm Sandy, including approximately $140 million of incremental residential shipments in the prior-year nine-month period.
- Commercial and industrial sales fell 3.4% in Q3 but rose 13.4% for the nine months, supported by acquisitions and oil and gas demand; lower telecom spending and Latin American weakness offset some growth.
- Gross margin contracted in both periods, which management attributed to greater promotional activity and acquisition-related product mix. Third-quarter operating expenses rose 14%, partly because a favorable $5.6 million warranty-reserve adjustment in Q3 2013 did not recur.
- Adjusted EBITDA declined 17.0% in Q3 and 18.0% year to date. Net income was down 22.5% in Q3 and nearly flat for the nine months; year-to-date results included a $16.0 million non-cash gain from reduced loan pricing.
Outlook, risks, and unusual items
- The filing provides no numerical revenue or earnings guidance. Management said operating cash flow, cash, ABL availability, relatively low capital expenditure needs, and tax attributes were expected to provide sufficient capital for future growth, while noting that expansion may require additional capital.
- Management highlighted uncertain outage frequency and severity, demand and economic cycles, commodity and component costs, foreign exchange and interest rates, competition, reliance on distribution channels, acquisition integration and synergies, and product liability and regulatory risks.
- Acquisitions: Pramac America was acquired September 2, 2014, expanding the portable-generator offering and adding the Powermate trade name and rights to license DeWalt for certain products. MAC, a mobile-heater manufacturer, was acquired October 1, after quarter-end; purchase price and financial impact are not clearly provided in the filing text.
- A $50 million term-loan prepayment in September resulted in a $1.8 million debt-extinguishment loss. The second-quarter 25-basis-point loan-margin reduction produced a $16.0 million non-cash gain. A $4.9 million gain from remeasurement of acquisition contingent consideration also benefited nine-month operating expenses.
- Product warranty liability was $32.5 million at quarter-end; extended-warranty deferred revenue was $26.1 million. Dealer floor-plan financing outstanding was approximately $32.4 million, and the company had agreed to repurchase certain repossessed products. Management did not expect ordinary-course litigation to have a material adverse effect.
- The company reported effective disclosure controls and no material changes in internal control over financial reporting. The term loan has restrictive covenants but no financial maintenance covenants; the ABL has a conditional fixed-charge coverage test.
Important facts for investors to verify
- Whether residential demand and margins recover if outage activity normalizes, and how promotional spending evolves.
- Whether commercial and industrial growth can offset residential weakness, including the effects of telecom spending, oil and gas markets, and Latin America.
- Acquisition purchase accounting, integration costs, and realized benefits from Pramac and post-quarter MAC.
- Debt paydown, interest expense, leverage, and continued compliance with credit-agreement requirements.
- Cash conversion and working-capital needs, especially receivables, inventories, warranty obligations, and dealer financing exposure.
- How management’s non-GAAP measures reconcile to GAAP results and cash flows; Adjusted EBITDA and adjusted net income are not substitutes for GAAP earnings or operating cash flow.