Nearly every manufacturer has been dealing with supply chain challenges in recent months and Town of Genesee-based
Generac Power Systems is no different. However, the generator manufacturer is also dealing with another kind of problem and it is the kind that falls in the category of good problems to have.
“Even if we were able to produce at max capacity today, I fear that demand would be outstripping that,” said Aaron Jagdfeld, chairman, president and chief executive officer of Generac.
Generac reported a 34% increase in sales for the third quarter, reaching $942.7 million. Revenue is now up almost 55% for the year, nearly a $1 billion increase with a quarter to go.
The company ranked #845 on the 2021 Fortune 1000 list with $2.5 billion in annual revenue, so it will likely move way up on that list next year.
The main driver of the gains has been the company’s home standby generators, units that kick on when the power goes out. With people spending more time at home over the course of the COVID-19 pandemic the need for reliable power has become more important. There also have been more power outages. Across more than a decade of tracking power outages, four of the top 10 outage quarters have come since the middle of 2020, Jagdfeld said.
Generac has been rapidly expanding its dealer base, adding 1,100 in the past 12 months, many of them in California and Texas. The company has also seen in-home consolations for sales increase double-digits.
All of that comes on top of already heightened demand. The lead time for a home standby generator grew to 30 weeks in the most recent quarter, up from 28 previously. Generac now expects to enter 2022 with a $1 billion backlog for that product alone. Jagdfeld and his team had hoped to be able to work that backlog down to more normal levels by the end of next year. On Tuesday he said that is looking less likely.
It’s not for a lack of trying. Generac opened a new facility in South Carolina and has already announced plans to expand it. It also added capacity to operations in Wisconsin, including producing the home standby units at its Jefferson plant. That facility historically focused on portable generators, power washers and other chore products.
Jagdfeld said Jefferson will likely continue making home standby products for the foreseeable future and likely into 2023.
Generac is also betting on increased demand for its product.
“We’re maybe at a tipping point here with this category,” Jagdfeld said of home standby generators. “We could be entering a period here where we think about this as something every home has to have.”
Home standby units are currently in around 6% of U.S. households and Generac says it has around 75% market share. If the generators are going to become more ubiquitous, that math is pretty favorable for Generac’s continued growth.
The company had planned to increase its production capacity by 4x by mid-2022 compared to the start of 2020, but its plans now call for even more capacity in the future.
Jagdfeld said Generac recently made commitments on long lead time automation equipment, things that can take 60 or 70 weeks for delivery. It is a bet that the company will need the additional capacity in the coming years.
“We don’t even know where we’re going to put the tooling,” Jagdfeld said, suggesting the company could expand again in South Carolina, squeeze more equipment into its Whitewater plant, add it to the Jefferson facility or build another brand new facility somewhere. “We don’t know yet.”
The strong demand doesn’t save Generac from dealing with the same supply chain issues everyone else is facing. If anything it only exacerbates them as costs continue to rise.
The company’s gross profit margin in the third quarter fell to 35.6%, compared with 39.4% last year and 38.3% in the first half of this year.
"The amount of additional time to get things here, forget about the costs to get here, which is mind numbing as well, but the time, it’s really the time factor to get it here," Jagdfeld said.
Another part of the issue is the company’s backlog. Generac has put in four price increases this year, but will only start realizing them towards the end of this year and into the first half of 2022.
At the same time, the cost of material and expediting freight continues to climb, and the company is using more of it. In the past, it might have taken longer for the increased costs to hit, but now the company’s price increases can’t keep up.
“We’re burning through material so much quicker,” Jagdfeld said.
York Ragen, chief financial officer of Generac, said most of the drop in gross profit margin for the third quarter came from that price-cost relationship and the fourth quarter could see something similar.
Even with those challenges, the company reported net income of $131.6 million, up from $115 million last year. For the year, net income is up almost 81% to $407.6 million.
