Generac Holdings Inc. — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. Unaudited consolidated results. Generac designs and manufactures generators and other engine-powered products; it reports as one operating segment. Figures below are in U.S. dollars, generally millions unless stated otherwise.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $239.3 | $160.7 | $524.7 | $431.8 |
| Gross profit | $88.7 | $67.4 | $196.2 | $173.5 |
| Gross margin | 37.0% | 41.9% | 37.4% | 40.2% |
| Operating income | $44.2 | $29.8 | $77.1 | $64.1 |
| Net income | $37.4 | $23.0 | $57.5 | $38.3 |
| Diluted EPS | $0.55 | $0.34 | $0.85 | $(2.05) |
| Adjusted EBITDA (non-GAAP) | $61.6 | $45.7 | $126.7 | $113.5 |
Q3 sales rose 49.0%; nine-month sales rose 21.5%. Q3 residential sales were $162.1 million, industrial/commercial sales $63.1 million, and other sales $14.1 million. For the nine months, those categories were $323.5 million, $164.8 million, and $36.4 million, respectively.
Q3 gross margin declined 4.9 percentage points, and nine-month margin declined 2.8 points. Management attributed the pressure to a sales mix shift toward lower-kilowatt portable generators and higher commodity costs. Higher volume drove gross-profit growth. Selling/service expense rose with sales-related costs and strategic sales and marketing spending; G&A also increased, while lower intangible amortization partly offset expense growth.
Nine-month operating cash flow was $89.0 million, versus $83.1 million in 2010. Investing cash use was $4.5 million, primarily capital expenditures; financing cash use was $24.4 million, reflecting term-debt repayment. Cash increased $60.1 million to $138.7 million.
Financial position and liquidity
- At September 30, cash was $138.7 million, current assets $362.5 million, and current liabilities $99.5 million.
- Long-term debt was $632.5 million, down from $657.2 million at December 31, 2010. The company made a voluntary $24.7 million term-loan repayment in April. The second-lien facility had been fully repaid and terminated.
- Revolver availability was $146.3 million, net of letters of credit. Generac reported compliance with its credit-agreement covenants, including a 5.25 maximum leverage ratio for Q3.
- Management said operating cash flow, revolver availability, low ongoing capital expenditure needs, and tax attributes should provide sufficient capital for the next 12 months and beyond, while noting substantial cash flow is used to service debt.
Material developments, outlook, and risks
- Sales growth reflected widespread power outages that lifted demand for portable and home standby generators, as well as higher industrial/commercial shipments to national accounts. Management noted outage activity is unpredictable and can cause period-to-period volatility.
- On October 3, 2011, a subsidiary acquired substantially all assets and assumed certain liabilities of Magnum Products for approximately $80 million, before earn-out and other purchase-price adjustments, funded with cash. The acquisition adds light towers, mobile generators, pumps, and related products. Purchase-price allocation was incomplete; the reported quarter excludes acquisition results, apart from $0.6 million of transaction costs.
- Pro forma combined sales and net income, as if the acquisition had occurred at the start of the periods, were $281.0 million and $42.1 million for Q3 2011, and $630.6 million and $71.0 million for the nine months. These figures exclude amortization related to expected asset-value step-ups.
- No specific numerical earnings or sales guidance was provided. Management cited potential residential penetration growth, but demand depends on consumer and business investment, economic conditions, distribution, and outage activity.
- Risks include commodity and component costs, demand variability, competition, reliance on distribution, and integration challenges or unrealized synergies from Magnum. Five commodity contracts were outstanding at September 30; four interest-rate swaps were outstanding. Commodity-contract losses were $1.4 million for both Q3 and the nine-month period.
- Warranty obligations were $29.7 million at September 30, up from $22.5 million at year-end 2010. Dealer floor-plan financing outstanding was approximately $10.9 million; Generac’s repurchase commitment applies to repossessed products, not finance-company credit losses. Management did not expect ordinary-course litigation to have a material effect.
- The company recorded a full valuation allowance against net deferred tax assets because of its three-year cumulative loss position, which it attributed primarily to a 2008 impairment. Management anticipated no longer being in that cumulative-loss position at year-end and said it would reassess the allowance. It did not expect to pay federal cash income taxes for at least the next 12 months, subject to the stated assumptions and tax attributes.
Most important facts for investors to verify
- Whether outage-driven demand persists, and whether sales growth can continue without further gross-margin compression.
- Magnum’s final purchase accounting, integration costs, realized synergies, and effect on debt, cash, and earnings.
- Debt covenant headroom, interest-rate exposure, and cash remaining after the $80 million acquisition payment.
- Warranty claims and obligations, commodity-price effects, and realization or possible release of the deferred-tax valuation allowance.
- Adjusted EBITDA and adjusted net income are non-GAAP measures; assess their reconciliations and limitations alongside GAAP results and cash flows.