Patrick Industries, Inc. — Q1 2017 Form 10-Q
Reporting period: First quarter ended March 26, 2017. Financial statements are unaudited and compare with the quarter ended March 27, 2016. Patrick manufactures and distributes components and products for recreational vehicle (RV), manufactured housing (MH), industrial, marine, and related markets.
Financial results and liquidity
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Net sales | $345.4 million | $278.6 million |
| Gross profit / margin | $57.5 million / 16.7% | $45.4 million / 16.3% |
| Operating income / margin | $23.9 million / 6.9% | $20.6 million / 7.4% |
| Net income | $17.5 million | $13.0 million |
| Diluted earnings per share | $1.12 | $0.85 |
| Operating cash flow | $(10.9) million | $15.5 million |
- Sales increased 24%; net income increased 35%. Gross margin improved, while operating margin declined as operating expenses—including SG&A and intangible amortization—grew faster than sales.
- Q1 2017 net income included a $3.7 million income-tax benefit from excess tax deductions on share-based compensation; the comparable 2016 period included a $0.9 million benefit. Management’s approximate 36.5% full-year tax-rate expectation excludes these share-based payment effects.
- Operating cash flow was negative mainly because trade receivables increased $53.1 million, reflecting sales growth, seasonality, and payment timing. The company reported that approximately $23.5 million of quarter-end receivables were collected within two days after quarter-end.
- Cash was $10.9 million at March 26, 2017. Gross debt was $212.5 million, comprising $129.8 million on the revolver and $82.7 million on the term loan. Net of cash, reported revolver availability was $247.1 million.
- Capital expenditures were $3.5 million in the quarter. The company forecast up to approximately $16.0 million for full-year 2017.
Material changes and notable items
- Revenue growth reflected acquisitions completed in 2016 as well as higher market activity, product and geographic expansion, and increased market penetration. The filing does not quantify organic growth separately.
- Manufacturing sales rose 26% to $291.5 million; Distribution sales rose 18% to $61.5 million. Manufacturing represented about 82% of sales.
- On March 14, Patrick issued 1.35 million shares at $73 per share, receiving $93.6 million net of expenses; proceeds were used to reduce debt. The credit facility was expanded to $450 million and its maturity extended to March 17, 2022.
- Debt covenants were met: the 12-month leverage ratio was 1.31 versus a maximum of 3.00, and fixed-charge coverage was 4.04 versus a minimum of 1.50.
- Medallion Plastics was acquired in March for $10.1 million; its Q1 contribution was approximately $0.3 million of revenue. In May, after quarter-end, Patrick acquired Leisure Product Enterprises for approximately $73.5 million, funded under the credit facility.
Outlook, commentary, and risks
- Management expected continued growth in its three primary markets during the remainder of 2017, with seasonal patterns broadly similar to the prior year. Its cited forecasts included approximately 3.5% growth in RV industry shipments, 10% growth in MH shipments, and 5% growth in housing starts.
- Management highlighted ongoing acquisition, market-share, product-content, efficiency, capacity, and cost-control priorities. It noted that a shift toward smaller, lower-priced RVs could temper near-term dollar content per unit.
- Key exposures include cyclical RV, MH, housing, and industrial demand; consumer confidence; commodity-price volatility and the ability to pass cost increases through to customers; and variable-rate debt. A 100-basis-point rise in benchmark rates was estimated to add approximately $2.1 million in annual interest cost at quarter-end borrowings.
- The LPE acquisition was expected to generate approximately $0.3 million of one-time pretax transaction-specific charges in Q2 2017. Management stated that existing cash, operating cash flows, and credit availability should meet anticipated working-capital and capital-expenditure needs for at least 12 months, excluding acquisitions.
Important facts for investors to verify
- How much of sales and earnings growth is organic versus attributable to acquisitions, and whether operating-margin pressure persists.
- Whether receivables convert to cash as expected and operating cash flow recovers after seasonal working-capital demands.
- The effect of the LPE acquisition and its financing on debt, covenant headroom, and future results.
- How much reported earnings growth depends on share-based compensation tax benefits, which management said may cause the effective tax rate to fluctuate.
- Whether market forecasts, commodity-cost recovery, and the company’s capital-spending plans remain consistent with management’s outlook.