Patrick Industries, Inc. — Q3 2014 Form 10-Q
Reporting period: Third quarter and nine months ended September 28, 2014; comparisons are with the periods ended September 29, 2013. Patrick manufactures and distributes products serving the recreational vehicle (RV), manufactured housing (MH), and industrial markets. Amounts below are in millions except per-share data.
Financial results and position
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $188.1 | $146.6 | $546.1 | $448.3 |
| Gross profit | $30.0 | $21.8 | $89.0 | $69.4 |
| Gross margin | 16.0% | 14.9% | 16.3% | 15.5% |
| Operating income | $12.5 | $9.0 | $39.8 | $32.3 |
| Net income | $7.3 | $5.5 | $23.4 | $19.0 |
| Diluted EPS | $0.68 | $0.51 | $2.18 | $1.76 |
- Q3 sales rose 28.3%; nine-month sales rose 21.8%. Management estimated organic growth of approximately 7% in Q3 and 10% year to date; acquisitions accounted for the balance of the reported increase.
- Q3 revenue increased across RV (+34%), MH (+12%), and industrial markets (+19%). For nine months, the respective increases were 24%, 10%, and 22%.
- Nine-month segment sales were $425.3 million in Manufacturing and $137.9 million in Distribution. Segment operating income was $43.1 million and $7.5 million, respectively. Distribution gross margin declined to 14.8% in Q3 from 16.9%, and to 15.5% for nine months from 17.1%, largely due to greater sales of lower-margin products.
- Nine-month cash from operations was $23.2 million, versus $21.5 million. Investing used $66.8 million, including $62.6 million for acquisitions and $4.2 million of capital expenditures. Financing provided $46.2 million.
- At September 28, cash was $2.7 million, long-term debt was $107.3 million (up from $55.0 million at December 31, 2013), and shareholders’ equity was $101.7 million. The $125 million revolving facility had approximately $17 million of unused availability.
Material changes and notable items
- Patrick acquired Precision Painting Group, Foremost, and PolyDyn3 in 2014 for approximately $62.6 million in total. These acquisitions expanded RV-related painting, fabricated aluminum and laminated products, and simulated wood and stone offerings. Purchase accounting for Precision and Foremost remained preliminary.
- Higher sales relative to fixed overhead, acquisitions, cost controls, improved labor efficiency, and material yields supported gross-margin improvement. Warehouse and delivery costs rose as a share of nine-month sales, reflecting distribution growth, driver shortages, overtime, and freight costs. Intangible amortization also increased following acquisitions.
- Reported results included pretax gains totaling approximately $0.7 million in Q3 and $1.0 million for nine months from contingent acquisition payments determined not to be payable. Q3 and nine-month SG&A also included approximately $0.7 million of acquisition-related transaction expenses.
- Patrick repurchased 172,729 shares for approximately $6.9 million during the first nine months. The board had authorized a $20 million buyback program; approximately $8.2 million remained available as of October 24, 2014.
Outlook, risks, and contingencies
- Management expected year-over-year quarterly revenue growth in Q4 2014, excluding the contribution of acquisitions completed in 2014, and forecast steady growth across its primary markets through year-end. It cited an industry forecast of approximately 9% growth in full-year RV shipments and projected approximately 6% growth in MH shipments.
- Management expected full-year 2014 gross margin to increase from 2013, while noting that Q4 margin could be below Q3 because of seasonality, customer holiday shutdowns, and plant inventory counts. It planned approximately $8 million of 2014 capital expenditures; $4.2 million had been spent through September.
- Management said existing cash, operating cash flow, and available facility borrowings were expected to meet working-capital and capital-expenditure needs for at least 12 months, excluding acquisitions. The company was compliant with its debt covenants: reported leverage ratio 1.50 versus a 3.50 maximum, and interest coverage 7.30 versus a 2.25 minimum.
- Debt carries variable rates; a 100-basis-point increase in underlying rates was estimated to add approximately $1.1 million in annual interest expense at the period-end debt balance. Liquidity also depends on covenant compliance and the availability of borrowing capacity.
- Risks cited include changing consumer confidence and economic conditions, RV and MH production and seasonality, competition and pricing, commodity costs, labor and freight constraints, and the possibility of acquisition integration or expected synergies not meeting expectations. Management noted that equity-market volatility could affect consumer confidence and end-market sales.
- Tontine Capital and affiliates beneficially owned 22.1% of shares as of October 9, 2014, creating potential influence over shareholder matters and risk of share-price pressure from large-holder sales. Management reported disclosure controls were effective and no material change in internal control over financial reporting.
Important facts for investors to verify
- How much of reported sales and earnings growth reflects sustainable organic demand versus acquisition contributions, and how the 2014 acquisitions perform after integration.
- Whether improved consolidated gross margins persist, particularly given lower Distribution margins, competitive pricing, commodity fluctuations, and seasonal Q4 pressures.
- Working-capital conversion and cash generation, including the growth in receivables and inventory, against acquisition spending, buybacks, and debt levels.
- Remaining revolver availability, variable-rate exposure, and continued compliance with credit covenants as borrowing needs change.
- Actual year-end capital spending and market conditions relative to management’s outlook; the filing cautions that interim results are not necessarily indicative of full-year results.