Patrick Industries, Inc. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. Patrick manufactures components and distributes building products mainly for recreational vehicles (RV), manufactured housing (MH), marine and industrial markets. Manufacturing and Distribution represented 82% and 18% of 2017 sales, respectively.
Key financial results
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Net sales | $1,635.7 million | $1,221.9 million | +34% |
| Gross profit / margin | $278.9 million / 17.1% | $202.5 million / 16.6% | Margin +0.5 percentage points |
| Operating income / margin | $121.9 million / 7.4% | $90.8 million / 7.4% | +34%; margin unchanged |
| Net income | $85.7 million | $55.6 million | +54% |
| Diluted EPS | $3.48 | $2.43 | +43% |
| Operating cash flow | $99.9 million | $97.1 million | +$2.8 million |
| Capital expenditures | $22.5 million | $15.4 million | +$7.1 million |
| Year-end total debt | $354.4 million | $273.2 million | +$81.2 million |
Year-end cash was $2.8 million, down from $6.4 million. Working capital was supported by $81.2 million of unused credit-facility availability. The company said cash, operating cash flow and available borrowing capacity were expected to cover working capital and capital expenditures for at least 12 months, excluding acquisitions.
Fourth-quarter sales were $475.6 million versus $323.9 million in 2016; net income was $29.0 million versus $13.6 million. Annual results include a $7.4 million one-time net tax benefit from the Tax Cuts and Jobs Act (TCJA) and a $6.0 million tax benefit from share-based compensation accounting.
Drivers and changes versus prior year
- Revenue growth reflected acquisitions, market-share gains and higher industry volumes. RV revenue increased 28%, MH 29%, and industrial 27%; marine sales more than tripled. Marine was reported separately starting in the second quarter of 2017.
- RV industry wholesale shipments rose 17%; MH shipments rose about 14%. Marine powerboat retail unit sales were estimated to increase 4%. Residential housing starts increased about 2%.
- Seven acquisitions involving 13 companies were completed in 2017 for approximately $249 million. Acquired businesses contributed $109.7 million of reported 2017 revenue. Investing cash outflow for acquisitions was $251.9 million.
- Gross margin improved on higher sales relative to fixed costs, acquired and higher-margin product lines, and efficiency initiatives. Tight labor markets and higher commodity costs were offsets. SG&A rose to 5.6% of sales from 5.1%; operating margin remained 7.4%.
- Debt increased to fund acquisitions and working capital. A March 2017 stock offering generated $93.3 million net proceeds, used to reduce debt. The company issued no cash dividends in 2017.
Outlook, risks and unusual items
- For 2018, management cited expected RV shipment growth of approximately 3%, marine powerboat retail growth of 3%–5%, low-double-digit MH shipment growth, and mid-to-high-single-digit industrial growth. These are expectations, not guarantees. Planned 2018 capital expenditures were approximately $22–$25 million.
- Key risks include dependence on cyclical and seasonal end markets, especially RVs; two RV customers together accounted for 57% of 2017 sales, and there are no long-term customer agreements. Commodity availability and pricing, labor shortages, customer financing, competition and integration of acquisitions may affect results.
- At year-end, debt was $354.4 million under a secured, variable-rate credit facility. The company was compliant with covenants: leverage ratio 1.78 versus a 3.00 maximum, and fixed-charge coverage 4.39 versus a 1.50 minimum. A 100-basis-point rate increase was estimated to add about $3.5 million in annual interest cost.
- Subsequent to year-end, Patrick issued $172.5 million of 1.00% convertible notes due 2023 and used net proceeds to reduce revolver borrowings. The notes have an initial conversion price of approximately $87.89 per share; associated warrants could dilute shares above their strike price. The credit facility was expanded to $500 million in January 2018. Two February 2018 acquisitions cost approximately $36.5 million in total.
- The TCJA reduced the federal corporate tax rate to 21%; the company recorded a provisional $7.7 million deferred-tax remeasurement benefit, partly offset by a $0.3 million charge. Accounting for certain TCJA provisions was incomplete at filing. Management reported effective internal controls; the auditor issued unqualified opinions on the financial statements and internal controls. Pending ordinary-course legal matters were not expected by management to be material.
Important facts for investors to verify
- How much reported growth and future earnings depend on acquired businesses versus organic growth, and whether acquisitions deliver expected returns.
- Customer concentration, especially the two RV customers representing 57% of sales, and the sensitivity of demand to RV shipments, consumer financing and dealer inventories.
- Cash generation after working-capital investment: inventories increased $35.3 million, while operating cash flow was $99.9 million.
- Debt, borrowing availability, covenant headroom and interest-rate exposure, including the effects of the 2023 convertible notes and subsequent acquisitions.
- Whether labor and commodity cost pressures, the distribution segment’s lower-margin direct shipments, and acquisition-related amortization affect margins going forward.
- Final tax accounting under the TCJA and actual 2018 market performance relative to management’s outlook.