Generac Holdings Inc.
Summary
- Generac is a leading energy technology solutions company that provides backup and prime power generation systems for residential and commercial & industrial (C&I) applications
- Generac was founded in 1959 to commercialize a line of portable generators and is headquartered in Waukesha, Wisconsin.
- Generac operates with two distinct business segments: Domestic and International with three primary product classes namely Residential Products, Commercial & Industrial Products (C&I), and Other Products and Services.
- Yearly sales increased by approximately 22.05% from $3,737,184 thousands in 2021 to $4,564,737 thousands in 2022.
- Gross profit increased by 11.92% from $1,360,082 thousands in 2021 to $1,522,004 thousands in 2022.
- Operating income decreased by approximately 23.53% from $742,601 thousands in 2021 to $567,789 thousands in 2022.
- Net income also experienced a decrease of approximately 26.37%, dropping from $556,569 thousands in 2021 to $408,870 thousands in 2022.
Brief Company Overview
Generac Holdings Inc. (NYSE:GNRC), an energy technology solutions company, offers a wide range of power generation systems, products, and services for various applications primarily in North America, encompassing the United States and Canada. Their offerings include backup and prime power generation systems for residential and commercial & industrial (C&I) uses, solutions combining solar energy and battery storage, devices for smart home energy management, energy services, advanced software platforms for power grids, as well as engine- and battery-powered tools and equipment. The company's roots trace back to 1959 when it initially established for providing portable generators. Subsequently, Generac underwent an incorporation process and became a publicly traded entity through an initial public offering (IPO) in February 2010.
The company offers its products through various distribution channels, including independent residential dealers, industrial distributors and dealers, national and regional retailers, e-commerce partners, electrical/HVAC/solar wholesalers, solar installers, catalogs, equipment rental companies, and equipment distributors. They also have direct sales to specific national and regional account customers, such as utilities, telecommunications providers, original equipment manufacturers, as well as individual consumers or businesses who are the end users of their products. Generac operates with two distinct business segments: Domestic and International. These segments encompass three primary product classes, namely, Residential Products, Commercial & Industrial Products (C&I), and Other Products and Services.
As of June 2023, the company's stock price has fluctuated within a range of $86.29 to $282.62 over the past 52 weeks. The trailing price-to-earnings (P/E) ratio stands at 33.09 times, price-to-sales ratio (ttm) is 1.91 times, profit margin is 6.90%, operating margin (ttm) is 10.60%, return on assets (ttm) is 5.52%, return on equity stands at 12.96%, diluted earnings per share (ttm) is reported at 3.83. As of February 17, 2023, there were 61,887,460 shares of the company's common stock outstanding.
Recent Developments
- In 2022, Generac built out dedicated energy technology management team that with intention to fully integrate their energy technology investments under a common strategy.
- In October 2022, The Company advanced its C&I connectivity strategy with the acquisition of Blue Pillar, an industrial internet of things (IoT) platform developer.1
- In February 2023, Generac acquired REFU Storage Systems GmbH, a developer and supplier of battery storage hardware products, advanced software and platform services for the commercial and industrial market.2
- On June 30, 2022, the Company acquired EEC. Headquartered in Marlborough, Massachusetts, EEC is an industrial generator distributor as well as a provider of data center and telecom facility design, build, maintenance, and repair services.
Recent Financing Activities
- Capital expenditures for facilities and related improvements, technology, research & development, tooling, equipment, capacity expansion, were $86.2 million in the years ended December 31, 2022
- In June 2022, the company amended its interest rate swaps to align with the underlying debt and confirmed hedge effectiveness, while also documenting the relationships between hedging instruments and the related items. These cash flow hedges resulted in gains or losses reported in accumulated other comprehensive loss (AOCL), with the fair value of the interest rate swaps amounting to $49.3 million as of December 31, 2022.
Financial Performance Highlights
Q1 2023 Highlights
In the first quarters of 2023 ended March 31, sales experienced a decline from the first quarter of 2022. Sales decreased from $1,135,856 thousands in the first quarter of 2022 to $887,910 thousands in the first quarter of 2023, representing a decrease of $247,946 thousands or approximately 21.8%. The decline in sales was driven primarily by lower home standby and clean energy product shipments. Gross profit also showed a decrease between the two periods. In the first quarter of 2022, the gross profit was $360,748 thousands, which declined to $272,499 thousands in the first quarter of 2023. Margins declined primarily due to the significant impact of unfavorable sales mix, partially offset by the realization of previously implemented pricing actions and lower input costs. This decline amounted to $88,249 thousands or roughly 24.5%. In terms of diluted earnings per share (EPS), there was a difference between the first quarters of 2022 and 2023. The diluted EPS was $1.57 in the first quarter of 2022, but it dropped to $0.05 in the first quarter of 2023.
Annual Performance Highlights
In comparing the yearly financial performance between 2021 and 2022, there are notable differences and trends. Sales increased by approximately 22.05% from $3,737,184 thousands in 2021 to $4,564,737 thousands in 2022. Gross profit also saw growth, with an increase of around 11.92% from $1,360,082 thousands in 2021 to $1,522,004 thousands in 2022. However, there was a decline in operating income, which decreased by approximately 23.53% from $742,601 thousands in 2021 to $567,789 thousands in 2022. Net income also experienced a decrease of approximately 26.37%, dropping from $556,569 thousands in 2021 to $408,870 thousands in 2022. The diluted earnings per share (EPS) showed a decline of approximately 34.94%, with the EPS falling from $8.30 in 2021 to $5.42 in 2022.
The increase in sales for the year ended December 31, 2022 was primarily driven by growth in residential product sales, highlighted by a robust increase in home standby generator shipments in the first three quarters of the year. In addition, sales of clean energy products declined compared to the prior year in the second half of 2022 due to the loss of a key customer that filed for bankruptcy. C&I product sales also grew at a robust rate during the year with strength across all channels, including national rental equipment, telecom, and industrial distribution customers.
Gross profit margin for the year ended December 31, 2022 was 33.3% compared to 36.4% for the year ended December 31, 2021. The gross profit margin decrease was primarily driven by higher input costs resulting from supply chain challenges and the overall inflationary environment. These higher costs were partially offset by favorable price realization of previously implemented pricing actions.
Operating expenses increased $316.7 million, or 49.6%, as compared to the prior year. The increase includes pre-tax charges comprised of $17.9 million of provision for a credit loss related to a clean energy product customer that filed for bankruptcy, and $37.3 million of provision for clean energy product warranty-related matters, and a provision of $10.0 million for a specific pending and unresolved matter with the CPSC concerning the imposition of potential penalty fines for allegedly failing to timely submit a report under the CPSA. In addition, amortization of intangibles increased $53.4 million over the prior year. The remaining increase was primarily driven by the impact of recurring operating expenses from recent acquisitions, increased employee costs, and additional variable expenses from increased sales volumes.
Upon examining the sales and EBITDA figures across segments, it becomes apparent that the domestic segment outperformed the international segment in terms of sales growth. Specifically, sales in the domestic segment amounted to $3,867,866 thousands in 2022, representing an increase from $3,164,050 in 2021. This growth equates to a 22.2% rise, or $703,816 thousands. Conversely, EBITDA in the domestic segment experienced a decline, decreasing from $795,417 in 2021 to $716,302 thousands in 2022. This reduction amounts to a decrease of 9.9%, or $99,115 thousands. In contrast, the international segment witnessed an increase in sales, with figures rising from $573,134 in 2021 to $696,871 thousands in 2022. This growth represents a 21.6% surge, or $123,737 thousands. EBITDA in the international segment demonstrated a significant increase, ascending from $66,008 in 2021 to $109,065 thousands in 2022. This spike translates to a rise of 65.2%, or $43,057 thousands.
The increase in sales within the Domestic segment for the year ended December 31, 2022, was primarily due to the growth in residential product sales, particularly in home standby generators during the first three quarters. However, sales of home standby generators decreased in the fourth quarter due to higher inventories and lower orders from channel partners, mainly because of installation capacity constraints. The decline in clean energy product sales in the second half of 2022 was also a contributing factor, resulting from the loss of a key customer who filed for bankruptcy. Conversely, the International segment experienced strong sales growth across major regions, notably in Europe and Latin America, which offset the adverse impact of approximately $43 million from unfavorable foreign exchange rates. Furthermore, non-annualized acquisitions contributed a total of $271.6 million to the company's performance in 2022, with $213.7 million attributed to the domestic segment and $57.9 million to the international segment.
Net cash provided by operating activities in 2022 amounted to $58,516 thousands, exhibiting a decrease from the earlier period's figure of $411,156 thousands. Conversely, net cash used in investing activities showed an improvement, with the 2022 value being -$134,232 thousands compared to the previous year's figure of -$817,287 thousands. Net cash used in financing activities in 2022 amounted to $64,043 thousands, representing a substantial increase from the 2021 value of -$102,970 thousands.
Business Overview
Generac is a leading energy technology solutions company that offers a wide range of power generation systems. The company has a strong market position in North America and is expanding globally. Generac has been transitioning its business model to focus on energy technology products and services, with investments in residential clean energy storage, solar power electronics, and energy monitoring devices. The Company has two reportable segments for financial reporting purposes – Domestic and International.
The Domestic segment comprises the original Generac business, excluding its traditional Latin American export operations, along with acquisitions in the U.S. and Canada that primarily generate revenue from these countries. On the other hand, the International segment includes the Latin American export operations of the original Generac business, as well as acquisitions outside the U.S. and Canada that generate revenue primarily from international markets. Both segments are involved in the design and manufacturing of diverse energy technology solutions and other power products. The Company has three major product classes namely Residential Products, Commercial & Industrial Products (C&I), and Other Products and Services.
Residential Products
Residential products consist primarily of automatic home standby generators ranging in output from 7.5kW to 150kW, portable generators, energy storage systems, energy management devices & solutions, and other outdoor power equipment. These products are predominantly sold through independent residential dealers, national and regional retailers, e-commerce merchants, electrical/HVAC/solar wholesalers, solar installers, and outdoor power equipment dealers. The residential products revenue consists of the sale of the product to distribution partners, who in turn sell or rent the product to the end consumer, including installation and maintenance services. In some cases, residential products are sold direct to the end consumer. Substantially all of the residential products revenues are transferred to the customer at a point in time.
Commercial & Industrial Products (C&I)
C&I products consist of larger output stationary generators used in C&I applications, with power outputs up to 3,250kW. Also included in C&I products are mobile generators, light towers, mobile energy storage systems, mobile heaters, mobile pumps, and related controllers for power generation equipment. These products are sold globally through industrial distributors and dealers, EPC companies, equipment rental companies, and equipment distributors. The C&I products revenue consists of the sale of the product to distribution partners, who in turn sell or rent the product to the end customer, including installation and maintenance services. In some cases, C&I products are sold direct to the end customer. Substantially all of the C&I products revenues are transferred to the customer at a point in time.
Other Products and Services
Other consists primarily of aftermarket service parts and product accessories sold to the customers, the amortization of extended warranty, remote monitoring and grid services subscription, as well as certain installation and maintenance service. The aftermarket service parts and product accessories are generally transferred to the customer at a point in time, while the extended warranty and subscription revenue are recognized over the life of the contract. Other service revenue is recognized when the service is performed.
Other Business Information
The residential investment cycle and consumer confidence greatly influence the market for Generac’s residential products. Homeowners' confidence in their income, home value, and net worth drives their willingness to invest in their homes, affecting the demand for residential generators and energy storage systems. Additionally, trends in the new housing market and factors such as weather patterns and renewable energy incentives further impact the demand for these products, including solar and energy storage systems.
Similarly, the demand for Generac’s commercial and industrial products is influenced by various capital investment cycles, which vary across different regions worldwide. These cycles encompass factors such as non-residential construction, durable goods spending, infrastructure development, and oil and gas exploration. The specific end markets including retail, telecommunications, healthcare, and construction, among others, are also affected by economic and geopolitical conditions, as well as credit availability in the respective countries. The market conditions and trends associated with these cycles have a significant impact on the demand for Generac’s products.
Company History
Generac, founded in 1959, initially focused on affordable portable generators with superior performance and features. They expanded into the industrial power generation market in 1980 with stationary generators. Residential standby generators were introduced in 1989, and the 1990s saw further expansion of industrial products and global distribution through alliances.
In the 2000s, Generac experienced accelerated growth by expanding their purpose-built line of residential and commercial automatic standby generators and implementing multi-layered, omni-channel distribution. Power outage events during this time increased the demand for backup power and home standby generators.
In 2006, Generac was sold to affiliates of CCMP Capital Advisors, LLC, and other investors. They completed their initial public offering (IPO) of common stock in February 2010. Following the IPO, Generac implemented their "Powering Ahead" enterprise strategy, transitioning from a primarily North America-focused emergency backup generator company to a diversified industrial technology company. This transformation involved acquisitions and expansion into new product categories and global markets.
Generac made strategic investments in recent years to expand into energy technology solutions. Acquisitions included Neurio Technology Inc., specializing in energy data and optimization, Pika Energy Inc., focusing on battery storage technologies, and Enbala Power Networks Inc., a provider of distributed energy optimization and control software.
In 2021, Generac expanded its clean energy portfolio with the acquisition of Chilicon Power LLC, offering grid-interactive rooftop power inversion devices and monitoring solutions for the solar market. They further strengthened their position in sustainable home technology solutions with the acquisition of ecobee Inc., known for smart home thermostatic controls and "Energy Services" programs.
Generac's energy technology solutions extended to C&I (commercial and industrial) and international markets. They acquired Deep Sea Electronics Limited, specializing in advanced controls for power generation and micro-grid applications, and Off Grid Energy Ltd., a manufacturer of industrial-grade mobile energy storage systems. The acquisition of Blue Pillar, an industrial IoT platform developer, supported Generac's C&I connectivity strategy.
In February 2023, Generac acquired REFU Storage Systems GmbH, a developer and supplier of battery storage hardware products, advanced software, and platform services for the commercial and industrial market. These acquisitions established Generac's presence in the clean energy market, focusing on solar, battery storage, and grid services applications.
