Patrick Industries, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 25, 2016; comparisons are to the periods ended September 27, 2015. Financial statements are unaudited. Patrick manufactures and distributes products serving recreational vehicle (RV), manufactured housing (MH), and industrial markets.
Financial performance
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Net sales | $304.2m | $214.8m | $898.0m | $671.7m |
| Gross profit / margin | $48.9m / 16.1% | $35.0m / 16.3% | $149.5m / 16.6% | $110.8m / 16.5% |
| Operating income / margin | $20.1m / 6.6% | $15.2m / 7.1% | $68.7m / 7.7% | $51.1m / 7.6% |
| Net income | $12.0m | $9.0m | $40.8m | $30.2m |
| Diluted EPS | $0.79 | $0.58 | $2.68 | $1.95 |
| Net interest expense | $1.9m | $1.2m | $5.2m | $2.9m |
- Q3 sales increased 42%; nine-month sales increased 34%. Management attributed growth to acquisitions, market penetration, higher RV and MH shipments, and stronger industrial sales. Acquisitions completed in 2016 contributed $32.9m of Q3 revenue and $52.9m for the nine-month period.
- Q3 gross margin declined 0.2 percentage points and operating margin declined 0.5 points year over year. Management cited unusually high RV shipments, model-year changeover complexity, capacity constraints, overtime, and employee turnover. Nine-month gross and operating margins improved slightly.
- Manufacturing remained the largest segment: nine-month sales were $749.2m, up 41%, with operating income of $81.0m. Distribution sales were $168.3m, up 9%, and operating income was $11.3m. Distribution margin gains reflected the exit of certain lower-margin product lines.
Cash, debt, and liquidity
- Nine-month operating cash flow was $49.7m, versus $25.3m. Investing used $122.7m, including $112.1m for acquisitions and $10.9m for capital expenditures. Financing provided $74.4m. Cash ended the period at $1.5m.
- At September 25, total borrowings were approximately $280.9m: $190.2m under the revolving facility and $90.6m under the term loan. Balance-sheet long-term debt, net of current maturities and term-loan financing costs, was $264.5m; current maturities were $15.8m.
- The credit facility was expanded in July to $360m and matures in 2020. Revolver availability, net of cash, was $76.3m. The company reported compliance with its covenants: leverage ratio 1.97 versus a 3.00 maximum; fixed-charge coverage 3.12 versus a 1.50 minimum.
- Management believes cash, operating cash flow, and available borrowing capacity will cover working capital and capital needs for at least 12 months, excluding acquisitions. A 100-basis-point increase in variable rates was estimated to add about $2.8m in annual interest expense.
Outlook, risks, and notable items
- Management expected continued growth across its three primary markets through the remainder of 2016, with seasonal patterns broadly tracking recent trends. It cited RVIA’s forecast for approximately 8% growth in 2016 RV shipments and projected approximately 14% growth in full-year MH shipments. The company expected 2016 gross margins to increase versus 2015, subject to commodity pricing, competition, and other factors.
- Management’s priorities included acquisitions, market-share and content-per-unit growth, cost control, manufacturing efficiency, and strategic investment. Full-year 2016 capital expenditures were forecast at up to approximately $15m, including a $4.5m program begun in Q3; about $1.5m of that program had been spent by quarter-end.
- Key risks discussed include RV/MH seasonality and shipment variability; lower-priced product mix affecting content per unit; raw-material cost volatility and uncertain timing or ability to pass cost increases to customers; variable-rate debt; and MH financing and credit constraints. The company said no material changes had occurred to previously disclosed risk factors.
- Six 2016 acquisitions were completed for an aggregate $112.1m. Purchase accounting allocations remained preliminary, with final adjustments expected in Q1 2017. Acquisition-related intangible amortization increased, and acquisition borrowing contributed to higher interest expense.
- The 2016 share repurchase authorization allows up to $50m over 24 months. The company repurchased $4.7m of shares in the first nine months; none were repurchased in Q3. $48.2m remained available as of October 21, 2016. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- How much reported growth and future earnings depend on acquisitions versus organic demand, and whether preliminary purchase allocations or integration affect results.
- Whether Q3 capacity, overtime, turnover, and model-year transition pressures ease, and whether gross margins recover as management anticipated.
- RV dealer inventory, shipments, product mix, content per unit, and the accuracy of industry shipment forecasts.
- Debt levels, variable-rate exposure, covenant headroom, and the extent to which acquisition spending or share repurchases use available liquidity.
- Capital spending against the stated plan, raw-material pricing and pass-through, and the sustainability of operating cash flow amid working-capital needs.