Founded in 1959, Generac Holdings Inc. is a leading global designer, manufacturer, and provider of a wide range of energy technology solutions. The company's product portfolio includes power generation equipment, energy storage systems, energy management devices and solutions, and other power products serving the residential, light commercial, and industrial markets.
Generac has a rich history of innovation, introducing the first affordable backup generator and later pioneering the automatic home standby generator category. Over the years, the company has continuously expanded its energy technology offerings, evolving to meet the changing needs of its customers and the broader shift towards more resilient, efficient, and sustainable energy solutions.
With a strong presence in North America and a growing international footprint, Generac maintains one of the leading market positions in the power equipment markets. The company boasts one of the widest ranges of products in the power generation marketplace, including residential, commercial, and industrial standby generators, as well as portable and mobile generators used across a variety of applications.
In recent years, Generac has been actively diversifying its product portfolio, investing heavily in the development of residential and commercial/industrial energy storage systems, solar module-level power electronics, energy monitoring and management devices, and electric vehicle (EV) charging solutions. This strategic shift has enabled the company to capitalize on the evolving energy landscape, characterized by the transition towards a more decarbonized, digitized, and decentralized grid infrastructure.
Throughout its history, Generac has faced various challenges, including industry-wide price fluctuations of key commodities and components, as well as regulatory changes. The company has also had to manage the seasonality of demand for its products, with historical data showing that approximately 19-25% of net sales occurred in the first quarter, 22-28% in the second quarter, 24-28% in the third quarter, and 23-31% in the fourth quarter over the past five years. Despite these challenges, Generac has demonstrated resilience and adaptability in its operations.
Financials
Generac's financial performance has been resilient, even in the face of macroeconomic and industry-specific challenges. For the full year 2023, the company reported net sales of $4.02 billion and net income of $203.09 million. Operating cash flow for the year totaled $521.67 million, while free cash flow reached $392.61 million. These figures demonstrate Generac's ability to generate strong and consistent cash flows, which provide the company with the financial flexibility to execute its strategic initiatives and create long-term shareholder value.
In the most recent quarter (Q3 2024), Generac reported revenue of $1.17 billion, net income of $113.74 million, operating cash flow of $212.29 million, and free cash flow of $267.06 million. Revenue increased 9.6% year-over-year, driven by a 28% increase in residential product sales partially offset by a 15% decline in commercial & industrial (C&I) product sales. The increase in residential sales was due to accelerating demand for home standby and portable generators amid elevated power outage activity. The decline in C&I sales was due to weaker demand from the telecom, rental, and "beyond standby" markets, partially offset by growth in shipments to domestic industrial distributors.
Generac's financial ratios paint a picture of a well-managed and financially sound organization. The company's current ratio stood at 2.03, indicative of its ability to meet short-term obligations, while its quick ratio of 0.96 suggests a healthy level of liquidity. The return on assets (ROA) and return on equity (ROE) ratios, at 5.6% and 12.3% respectively, demonstrate Generac's effectiveness in utilizing its assets and capital to generate profits.
Liquidity
The company's liquidity position remains robust, with $214.18 million in cash and cash equivalents as of Q3 2024, and $1.10 billion in available borrowing capacity under its $1.25 billion revolving credit facility, for total liquidity of $1.31 billion. Generac's balance sheet is further strengthened by a manageable debt load, with a debt-to-equity ratio of 0.61 as of Q3 2024.
Looking ahead, Generac remains cautiously optimistic about the future, despite facing some near-term headwinds. The company has provided updated guidance for the full year 2024, expecting overall net sales growth of approximately 5% to 9% compared to the prior year, with residential product sales growth in the high teens range and C&I product sales expected to be down high single digits. Generac anticipates gross margin to improve by approximately 450 basis points over the full year 2023, with adjusted EBITDA margins before deducting for non-controlling interests to be approximately 17.5% to 18.5%. The company expects a GAAP effective tax rate of approximately 24% to 25%, gross interest expense of approximately $91 million to $93 million, and stock compensation expense of $50 million to $52 million. Capital expenditures are projected to be approximately 3% of sales, with free cash flow conversion expected to be well above 100%, resulting in free cash flow of approximately $500 million for the full year 2024.
To address the evolving needs of its customers, Generac continues to invest heavily in research and development, with a focus on expanding its energy technology solutions portfolio. In September 2024, the company introduced its next-generation PWRcell 2 energy storage system, which boasts improved capacity, power output, and integration capabilities with its ecobee smart home platform. This product launch represents a key milestone in Generac's strategy to build a comprehensive energy management ecosystem for residential and commercial customers.
The company's international expansion efforts have also gained traction, with notable growth in Latin America offsetting some of the softness experienced in the European market. Generac remains committed to diversifying its geographic footprint and leveraging its global reach to capitalize on the worldwide demand for resilient and sustainable energy solutions.
Generac operates through two reportable segments: Domestic and International. The Domestic segment includes the legacy Generac business and all historical acquisitions based in the U.S. and Canada, with revenues substantially derived from these markets. This segment designs and manufactures a wide range of energy technology solutions and other power products, including residential products such as automatic home standby generators, portable generators, and energy storage systems, as well as commercial and industrial products like larger output stationary generators, mobile generators, and light towers.
The International segment includes all historical acquisitions not based in the U.S. and Canada, with revenues substantially derived from outside these markets. This segment also designs and manufactures a wide range of energy technology solutions and other power products similar to the Domestic segment.
For the nine months ended September 30, 2024, the Domestic segment had net sales of $2.54 billion, representing approximately 79% of the company's total net sales, with an Adjusted EBITDA of $450.42 million, or 17.5% of its total sales. The International segment had net sales of $519.79 million, representing approximately 21% of total net sales, with an Adjusted EBITDA of $73.37 million, or 13.6% of its total sales.
Despite the near-term volatility, Generac's long-term outlook remains positive. The company's strong brand recognition, extensive distribution network, and innovative product pipeline position it well to capitalize on the growing demand for backup power, energy storage, and energy management solutions driven by the ongoing transition towards a more decarbonized, digitized, and decentralized energy landscape.
Risks facing Generac include potential macroeconomic headwinds, supply chain disruptions, regulatory changes, and the company's ability to successfully execute its strategic initiatives and integrate acquired businesses. In October 2022, Generac received a grand jury subpoena from the U.S. Attorney for the Eastern District of Michigan related to an investigation by the U.S. Department of Justice (DOJ) into the company's compliance with emissions regulations for certain portable generators. Additionally, in November 2022, the Consumer Product Safety Commission (CPSC) notified Generac of its intention to recommend a civil penalty for failing to timely submit a report related to a previous portable generator recall. In May 2023, Generac settled this matter by paying a $15.8 million civil fine. The company is also facing several ongoing lawsuits related to the performance of certain clean energy products, including a putative securities class action lawsuit.
However, Generac's financial strength, operational flexibility, and proven track record of innovation suggest that the company is well-equipped to navigate these challenges and continue delivering value to its shareholders over the long term.
Overall, Generac's diversified product offerings, strong brand equity, and robust financial position make it a compelling investment opportunity for those seeking exposure to the growing power and energy technology sectors.