Generac (GNRC) - 2023 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements Generac's unaudited condensed consolidated financial statements, including balance sheets, income, equity, and cash flows, are presented with detailed notes Condensed Consolidated Balance Sheets | Metric | Sep 30, 2023 (in thousands) | Dec 31, 2022 (in thousands) | Change | | :-------------------------------- | :-------------------------- | :-------------------------- | :------- | | Total Assets | $5,166,341 | $5,169,462 | $(3,121) | | Cash and cash equivalents | $161,525 | $132,723 | $28,802 | | Accounts receivable, net | $589,226 | $522,458 | $66,768 | | Inventories | $1,311,129 | $1,405,384 | $(94,255) | | Total Current Assets | $2,167,049 | $2,182,348 | $(15,299) | | Property and equipment, net | $511,893 | $467,604 | $44,289 | | Goodwill | $1,417,564 | $1,400,880 | $16,684 | | Total Liabilities | $2,794,215 | $2,799,736 | $(5,521) | | Short-term borrowings | $74,346 | $48,990 | $25,356 | | Accounts payable | $394,168 | $446,050 | $(51,882) | | Total Current Liabilities | $900,094 | $992,044 | $(91,950) | | Long-term borrowings | $1,465,141 | $1,369,085 | $96,056 | | Total Stockholders' Equity | $2,366,487 | $2,259,255 | $107,232 | Condensed Consolidated Statements of Comprehensive Income | Metric (in thousands) | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | % Change | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | % Change | | :-------------------- | :-------------------------- | :-------------------------- | :------- | :-------------------------- | :-------------------------- | :------- | | Net sales | $1,070,667 | $1,088,258 | -1.6% | $2,958,997 | $3,515,505 | -15.8% | | Gross profit | $375,787 | $361,104 | 4.1% | $976,707 | $1,178,837 | -17.1% | | Income from operations| $104,776 | $87,523 | 19.7% | $235,231 | $459,102 | -48.8% | | Interest expense | $(24,707) | $(15,514) | -59.6% | $(72,862) | $(35,303) | -106.4% | | Net income attributable to Generac Holdings Inc. | $60,377 | $58,270 | 3.6% | $118,005 | $328,487 | -64.1% | | Diluted EPS | $0.97 | $0.83 | 16.9% | $1.72 | $4.61 | -62.7% | Condensed Consolidated Statements of Stockholders' Equity | Metric (in thousands) | Sep 30, 2023 | Jan 1, 2023 | Change | | :-------------------- | :----------- | :---------- | :----- | | Total Stockholders' Equity attributable to Generac Holdings Inc. | $2,363,908 | $2,257,381 | $106,527 | | Retained Earnings | $2,423,346 | $2,316,224 | $107,122 | | Treasury Stock (Amount) | $(880,858) | $(808,491) | $(72,367) | | Additional Paid-In Capital | $1,064,418 | $1,016,138 | $48,280 | Condensed Consolidated Statements of Cash Flows | Metric (in thousands) | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | Change | | :-------------------- | :-------------------------- | :-------------------------- | :----- | | Net cash provided by (used in) operating activities | $204,724 | $(42,352) | $247,076 | | Net cash used in investing activities | $(98,445) | $(85,082) | $(13,363) | | Net cash (used in) provided by financing activities | $(77,568) | $214,871 | $(292,439) | | Net increase in cash and cash equivalents | $28,802 | $82,572 | $(53,770) | | Cash and cash equivalents at end of period | $161,525 | $229,911 | $(68,386) | Notes to Condensed Consolidated Financial Statements Note 1. Description of Business and Basis of Presentation - Generac is a leading global designer and manufacturer of energy technology solutions, including power generation equipment, energy storage systems, and energy management devices for residential, light commercial, and industrial markets[23] - The financial statements are unaudited and prepared in accordance with GAAP, with management's estimates and assumptions affecting reported amounts[25][26] Note 2. Acquisitions - Acquired REFUstor (Germany) in February 2023, specializing in battery storage hardware and software for commercial and industrial energy storage[28][30] - Acquired Electronic Environments Co. LLC (EEC) in June 2022, an industrial generator distributor and data center/telecom facility service provider[28][32] - Acquired BPAC, Inc. (Blue Pillar) in October 2022, an industrial IoT platform developer for distributed energy generation monitoring and control[28][32] Note 3. Redeemable Noncontrolling Interest - Generac acquired the remaining 20% ownership interest in Pramac for $116,754 thousand in March 2023, bringing total ownership to 100%[35] | Metric (in thousands) | Sep 30, 2023 | Sep 30, 2022 | Jan 1, 2023 | Jan 1, 2022 | | :-------------------- | :----------- | :----------- | :---------- | :---------- | | Balance at beginning of period (9 Months) | $110,471 | $58,050 | N/A | N/A | | Purchase of additional ownership interest (9 Months) | $(116,754) | $(375) | N/A | N/A | | Balance at end of period (9 Months) | $5,639 | $86,936 | N/A | N/A | Note 4. Derivative Instruments and Hedging Activities - Generac uses interest rate swaps, commodity derivatives, and foreign currency contracts to manage market risks, not for trading purposes[38][39] - Interest rate swaps qualify as cash flow hedges, with effective portions of gains/losses reported as a component of Accumulated Other Comprehensive Loss (AOCL)[41] | Metric (in thousands) | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Unrealized gain on interest rate swaps, net of tax | $1,045 | $13,757 | $2,309 | $39,614 | Note 5. Fair Value Measurements - Fair value measurements are categorized into a three-tier hierarchy (Level 1, 2, 3) based on input observability[45] | Metric (in thousands) | Sep 30, 2023 | Dec 31, 2022 | | :-------------------- | :----------- | :----------- | | Term Loan B Fair Value | $530,000 | N/A | | Contingent Consideration (Level 3) | $38,746 | $81,533 | Note 6. Accumulated Other Comprehensive Loss | Metric (in thousands) | Sep 30, 2023 | Jan 1, 2023 | Change | | :-------------------- | :----------- | :---------- | :----- | | Ending Balance – Accumulated Other Comprehensive Loss | $(41,614) | $(65,102) | $23,488 | | Foreign Currency Translation Adjustments (9 Months) | $(80,366) | $(101,545) | $21,179 | | Unrealized Gain (Loss) on Cash Flow Hedges (9 Months) | $38,752 | $36,443 | $2,309 | - The favorable change in AOCL for the nine months ended September 30, 2023, was due to the weakening of the U.S. dollar against foreign currencies (Euro, British Pound, Mexican Peso) and unrealized gains on interest rate swaps[53] Note 7. Segment Reporting - Generac has two reportable segments: Domestic (U.S. and Canada) and International, both offering energy technology solutions and power products[54] | Metric (in thousands) | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | % Change | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | % Change | | :-------------------- | :-------------------------- | :-------------------------- | :------- | :-------------------------- | :-------------------------- | :------- | | Domestic Net Sales | $886,365 | $931,132 | -4.8% | $2,395,292 | $3,003,237 | -20.2% | | International Net Sales | $184,302 | $157,126 | 17.3% | $563,705 | $512,268 | 10.0% | | Residential products | $565,087 | $664,115 | -14.9% | $1,482,538 | $2,337,072 | -36.6% | | Commercial & industrial products | $384,533 | $311,186 | 23.6% | $1,131,876 | $899,263 | 25.9% | | Total Adjusted EBITDA | $188,602 | $183,816 | 2.6% | $425,222 | $651,691 | -34.8% | Note 8. Balance Sheet Details | Metric (in thousands) | Sep 30, 2023 | Dec 31, 2022 | Change | | :-------------------- | :----------- | :----------- | :----- | | Total Inventories | $1,311,129 | $1,405,384 | $(94,255) | | Raw material | $766,826 | $798,340 | $(31,514) | | Finished goods | $529,938 | $592,145 | $(62,207) | | Total Property and equipment, net | $511,893 | $467,604 | $44,289 | Note 9. Product Warranty Obligations | Metric (in thousands) | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------- | :-------------------------- | :-------------------------- | | Standard Product Warranty Liability (End of Period) | $119,561 | $145,308 | | Deferred Revenue related to Extended Warranties (End of Period) | $145,123 | $126,752 | - A specific warranty provision of $37,338 thousand was recorded during the third quarter of 2022 to address certain clean energy product warranty-related matters[65] Note 10. Contract Balances | Metric (in thousands) | Sep 30, 2023 | Dec 31, 2022 | | :-------------------- | :----------- | :----------- | | Customer Deposits | $17,871 | $33,551 | - Recognized $30,252 thousand in revenue from prior year customer deposits during the nine months ended September 30, 2023[68] Note 11. Credit Agreements | Metric (in thousands) | Sep 30, 2023 | Dec 31, 2022 | | :-------------------- | :----------- | :----------- | | Total Long-term borrowings | $1,502,478 | $1,381,818 | | Tranche A Term Loan | $750,000 | $750,000 | | Tranche B Term Loan | $530,000 | $530,000 | | Revolving Facility | $200,000 | $90,000 | - As of September 30, 2023, the Company's net secured leverage ratio was 2.25 to 1.00, and its interest coverage ratio was 7.00 to 1.00, indicating compliance with all credit agreement covenants[72][75] Note 12. Stock Repurchase Program - Repurchased 875,580 shares of common stock for $100,267 thousand during Q3 2023[81] - A $500,000 thousand stock repurchase program was approved in July 2022, with $177,793 thousand remaining authorized as of September 30, 2023[81][206] - Since August 2015, Generac has repurchased 12,624,293 shares for $877,396 thousand, at an average cost of $69.50 per share[81] Note 13. Earnings Per Share | Metric | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :----- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Basic EPS | $0.98 | $0.84 | $1.74 | $4.69 | | Diluted EPS | $0.97 | $0.83 | $1.72 | $4.61 | Note 14. Income Taxes | Metric | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :----- | :-------------------------- | :-------------------------- | | Effective Income Tax Rate | 26.4% | 20.4% | - The increase in the effective tax rate was primarily due to a significantly lower benefit from equity compensation, lower year-over-year pre-tax book income, and the non-recurrence of certain favorable discrete tax items from the prior year[84] Note 15. Commitments and Contingencies - Facing multiple putative class action lawsuits concerning clean energy products, alleging breaches of warranty and tort-based claims[88][89][90] - Subject to a putative securities class action lawsuit and shareholder derivative actions related to disclosures on product quality, channel partners, and warranty reserves[91][92][93][94] - Received grand jury subpoenas from the U.S. Attorney for the Eastern District of Michigan and Wisconsin, indicating DOJ investigations related to emissions regulations and CPSA obligations[95][96] - Settled with the U.S. CPSC for a $15.8 million civil fine regarding alleged failure to timely report on portable generators subject to a voluntary recall[96] - Involved in patent infringement lawsuits against ecobee, with recent jury verdicts awarding $5.4 million and $11.5 million against ecobee in separate cases[97][98] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Generac, an energy technology solutions company, saw Q3 2023 sales decrease but gross profit improve, with year-to-date sales and income declining Overview - Generac is a leading energy technology solutions company providing backup and prime power generation, solar and battery storage, energy management, and advanced power grid software[105] - The company is evolving its business model to focus on an ecosystem of energy technology products and services for home and business, with significant investments in residential clean energy storage, solar MLPE, and energy monitoring/management[107] - Generac aims to participate in "Grid 2.0," a future decarbonized, digitized, and decentralized grid infrastructure, by leveraging its products as Distributed Energy Resources (DERs)[108] Mega-Trends, Strategic Growth Themes, and Additional Business Drivers - Key mega-trends driving Generac's strategy include increasing power quality issues, the evolution to "Grid 2.0" (decarbonization, digitization, decentralization), climate change impact, natural gas as a transition fuel, and the "Home as a Sanctuary" trend[113][116] - Significant opportunities exist in home standby generators (low penetration at ~5.75%), solar, storage, and energy management markets, supported by regulatory and legislative incentives like the Inflation Reduction Act[114][115] - Strategic growth themes include grid services and Energy-as-a-Service, natural gas generators (as a cleaner transition fuel), and improved network quality for 5G rollout requiring backup power[118][119][120] Factors Affecting Results of Operations - Results are affected by fluctuations in commodity prices (steel, copper, aluminum), labor costs, foreign currency exchange rates, and regulatory tariffs, mitigated by product design, sourcing, manufacturing efficiencies, price increases, and hedging[124][125] - Seasonality impacts sales and profitability, with major power outage activity being an unpredictable but significant driver of demand[126] - Interest expense increased due to higher interest rates and borrowings, with SOFR replacing LIBOR as the benchmark rate[128] - The effective income tax rate increased due to lower equity compensation benefits and reduced pre-tax income, with ongoing review of the Inflation Reduction Act's potential tax impacts[129] Results of Operations Consolidated Statements of Operations (Three Months Ended Sep 30, 2023 vs 2022) | Metric (in thousands) | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | $ Change | % Change | | :-------------------- | :-------------------------- | :-------------------------- | :------- | :------- | | Net sales | $1,070,667 | $1,088,258 | $(17,591) | -1.6% | | Gross profit | $375,787 | $361,104 | $14,683 | 4.1% | | Gross profit margin | 35.1% | 33.2% | 1.9 pp | | | Income from operations| $104,776 | $87,523 | $17,253 | 19.7% | | Net income attributable to Generac Holdings Inc. | $60,377 | $58,270 | $2,107 | 3.6% | - Domestic segment sales decreased by 4.8% in Q3 2023 due to lower residential product shipments, while International segment sales increased by 17.3% driven by C&I product growth[132][133] Consolidated Statements of Operations (Nine Months Ended Sep 30, 2023 vs 2022) | Metric (in thousands) | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | $ Change | % Change | | :-------------------- | :-------------------------- | :-------------------------- | :------- | :------- | | Net sales | $2,958,997 | $3,515,505 | $(556,508) | -15.8% | | Gross profit | $976,707 | $1,178,837 | $(202,130) | -17.1% | | Gross profit margin | 33.0% | 33.5% | -0.5 pp | | | Income from operations| $235,231 | $459,102 | $(223,871) | -48.8% | | Net income attributable to Generac Holdings Inc. | $118,005 | $328,487 | $(210,482) | -64.1% | - For the nine months, domestic sales declined 20.2% primarily from lower home standby and portable generator shipments, partially offset by strong C&I product sales. International sales increased 10.0% due to strength in most regions[144][145] - Operating expenses for the nine months included a $5.8 million provision for a CPSC regulatory matter and $22.1 million for patent litigation, compared to prior year's $37.3 million warranty provision and $17.9 million bad debt provision[148] Liquidity and Financial Condition - As of September 30, 2023, Generac had $1,211.4 million of available liquidity, including $161.5 million in cash and cash equivalents and $1,049.9 million available under its Revolving Facility[162] - The company was in compliance with all credit agreement covenants, with a net secured leverage ratio of 2.25 to 1.00 and an interest coverage ratio of 7.00 to 1.00[161] - Repurchased $100.3 million of common stock in Q3 2023 under a $500 million stock repurchase program[163][164] - Floor plan financing for dealers had $168.5 million outstanding as of September 30, 2023, providing liquidity to dealers and accounting for approximately 17% of net sales for the nine months ended September 30, 2023[166] Cash Flow | Metric (in thousands) | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | $ Change | % Change | | :-------------------- | :-------------------------- | :-------------------------- | :------- | :------- | | Net cash provided by (used in) operating activities | $204,724 | $(42,352) | $247,076 | 583.4% | | Net cash used in investing activities | $(98,445) | $(85,082) | $(13,363) | -15.7% | | Net cash (used in) provided by financing activities | $(77,568) | $214,871 | $(292,439) | -136.1% | - The increase in operating cash flow was primarily due to a significantly lower investment in working capital compared to the prior year[169] - Key financing activities included $345.4 million from long-term borrowings, $104.8 million cash payment for Pramac ownership, $100.3 million for stock repurchases, and $259.0 million in debt repayments[172] Contractual Obligations - No material changes to contractual obligations since the December 31, 2022, 10-K, other than changes in outstanding borrowings and interest rates[174] Critical Accounting Policies and Estimates - Critical accounting estimates include goodwill and other indefinite-lived intangible asset impairment assessment, business combinations and purchase accounting, and income taxes[175] - No material changes in critical accounting policies since the February 22, 2023, filing of the Annual Report on Form 10-K[176] Non-GAAP Measures - Generac uses Adjusted EBITDA and Adjusted Net Income as non-GAAP measures to supplement GAAP results, aiding management in planning and performance evaluation, and providing investors with a consistent view of core operating performance[177][178][191][192] Adjusted EBITDA Reconciliation | Metric (in thousands) | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | % Change | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | % Change | | :-------------------- | :-------------------------- | :-------------------------- | :------- | :-------------------------- | :-------------------------- | :------- | | Adjusted EBITDA | $188,602 | $183,816 | 2.6% | $425,222 | $651,691 | -34.8% | | Adjusted EBITDA attributable to Generac Holdings Inc. | $188,109 | $180,184 | 4.4% | $421,076 | $640,892 | -34.3% | Adjusted Net Income Reconciliation | Metric (in thousands) | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | % Change | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | % Change | | :-------------------- | :-------------------------- | :-------------------------- | :------- | :-------------------------- | :-------------------------- | :------- | | Adjusted net income attributable to Generac Holdings Inc. | $101,949 | $112,189 | -9.1% | $209,053 | $425,314 | -50.8% | | Diluted Adjusted EPS | $1.64 | $1.75 | -6.4% | $3.35 | $6.58 | -49.1% | New Accounting Standards - New ASUs have been assessed and are either already adopted, not applicable, or not expected to have a material impact on the financial statements[29][199] Item 3. Quantitative and Qualitative Disclosures About Market Risk No material changes in market risk since the 2022 10-K, with details on commodity, currency, and interest rate risks in Note 4 - No material changes in market risk since the December 31, 2022, 10-K[200] - Refer to Note 4 for details on commodity, currency, and interest rate risks and hedging activities[200] Item 4. Controls and Procedures Generac's disclosure controls and procedures were effective as of September 30, 2023, with no material changes in internal control over financial reporting Disclosure Controls and Procedures - Disclosure controls and procedures were evaluated and deemed effective as of September 30, 2023[201] Changes in Internal Control Over Financial Reporting - No material changes in internal control over financial reporting during the three months ended September 30, 2023[202] PART II. OTHER INFORMATION This section covers legal proceedings, risk factors, equity sales, and other disclosures, including exhibits and signatures Item 1. Legal Proceedings Detailed information on legal proceedings, including class actions, government investigations, and patent cases, is in Note 15 - Legal proceedings information is detailed in Note 15, "Commitments and Contingencies," of the financial statements[204] Item 1A. Risk Factors No material changes in Generac's risk factors since the December 31, 2022, 10-K filing - No material changes in risk factors since the December 31, 2022, 10-K filing[205] Item 2. Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities Generac repurchased 881,075 shares for $114.52 average per share in Q3 2023, with $177.8 million remaining authorized | Period | Total Number of Shares Purchased | Average Price Paid per Share | Approximate Dollar Value Of Shares That May Yet Be Purchased Under The Plans Or Programs | | :----- | :------------------------------- | :--------------------------- | :--------------------------------------------------------------------------------------- | | 07/01/2023 – 07/31/2023 | 29 | $148.94 | $278,059,869 | | 08/01/2023 – 08/31/2023 | 664,485 | $113.06 | $202,945,634 | | 09/01/2023 – 09/30/2023 | 216,561 | $119.02 | $177,793,103 | | Total (Q3 2023) | 881,075 | $114.52 | N/A | Item 3. Defaults Upon Senior Securities No defaults upon senior securities were reported for the period - No defaults upon senior securities[207] Item 4. Mine Safety Disclosures No mine safety disclosures were reported for the period - No mine safety disclosures[208] Item 5. Other Information No director or officer adopted, modified, or terminated a Rule 10b5-1 or non-Rule 10b5-1 trading arrangement in Q3 2023 - No director or officer adopted, modified, or terminated a Rule 10b5-1 or non-Rule 10b5-1 trading arrangement during Q3 2023[209] Item 6. Exhibits This section lists Form 10-Q exhibits, including CEO/CFO certifications and iXBRL-formatted financial statements - Includes certifications from the CEO and CFO (Exhibits 31.1, 31.2, 32.1, 32.2) and financial statements in iXBRL format (Exhibits 101, 104)[210] SIGNATURES The report was signed by York A. Ragen, CFO of Generac Holdings Inc., on November 7, 2023 - The report was signed by York A. Ragen, Chief Financial Officer, on November 7, 2023[216]