Patrick Industries, Inc. — Q1 2016 Form 10-Q
Business context and period: Unaudited results for the three months ended March 27, 2016, compared with the three months ended March 29, 2015. Patrick manufactures and distributes components and products primarily for recreational vehicles (RV), manufactured housing (MH), and industrial markets.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net sales | $278.6 million | $223.4 million | +25% |
| Gross profit / margin | $45.4 million / 16.3% | $35.4 million / 15.8% | +28%; +0.5 percentage points |
| Operating income / margin | $20.6 million / 7.4% | $15.6 million / 7.0% | +32%; +0.4 points |
| Net income | $12.0 million | $9.2 million | +32% |
| Diluted EPS | $0.80 | $0.59 | +36% |
| Operating cash flow | $14.0 million | $(2.8) million | Improved |
| Capital expenditures | $2.9 million | $1.9 million | Increased |
Figures are rounded. Cash flow from operations benefited from higher net income and increases in accounts payable and accrued liabilities, while receivables absorbed $25.1 million of cash, net of acquisition effects.
Balance sheet and liquidity
- At March 27, 2016, cash was $10.7 million, total debt was $242.2 million, and shareholders’ equity was $139.5 million. Debt included $175.2 million outstanding on the revolver and $67.0 million on the term loan.
- Reported revolver availability was $67.2 million, including cash on hand. The $300 million secured credit facility matures in April 2020 and bears variable interest rates.
- The company was within its debt covenants: actual leverage ratio was 2.00 versus a maximum 3.00; fixed-charge coverage was 4.82 versus a minimum 1.50.
- Management said existing cash, operating cash flow, and available facility borrowings should cover working capital and capital expenditures for at least 12 months, excluding acquisitions.
- Management estimated that a 100-basis-point increase in underlying rates would add approximately $2.4 million to annual interest cost, assuming the March 27 borrowing level.
Material changes and operating drivers
- Sales growth reflected acquisitions, higher market penetration, and stronger industry shipments. Revenue increased 25% in RV, 23% in MH, and 29% in industrial markets, according to management.
- Manufacturing sales rose 33% to $232.0 million; Distribution sales fell 3% to $52.4 million. Segment operating income increased to $26.2 million in Manufacturing and $3.6 million in Distribution.
- Gross margin improved with operating leverage, acquisitions, higher-margin products, and operating efficiencies. Lower fuel costs, direct-ship activity, and delivery efficiency reduced warehouse and delivery expense as a share of sales.
- Interest expense increased to $1.6 million from $0.8 million, primarily due to increased borrowings for acquisitions and working capital. Intangible amortization rose to $2.8 million from $1.7 million following acquisitions.
- Operating cash flow improved from the prior-year use of cash, but receivables and inventory remained significant uses of working capital as sales expanded.
Acquisitions, outlook, and risks
- Patrick acquired Parkland Plastics for approximately $25.4 million in February and The Progressive Group for approximately $11.0 million in March. Together, the businesses contributed about $3.8 million of revenue and $0.4 million of operating income in the quarter. Purchase price allocations were preliminary.
- Management expected continued growth in its three main markets for the rest of 2016, with seasonality broadly tracking the prior year. Industry forecasts cited included approximately 2% growth in full-year RV shipments, approximately 10% growth in MH shipments, and approximately 10% growth in U.S. housing starts. These are industry estimates, not company revenue or earnings guidance.
- Management anticipated higher full-year 2016 gross margins than in 2015, subject to commodity prices, competitive pricing, and acquisition mix. Planned 2016 capital expenditures were approximately $10 million.
- Risks include RV consumer and product mix shifting toward lower-priced units, commodity-cost volatility and the ability or timing of passing costs to customers, competitive pricing, dependence on cyclical end markets, and variable-rate debt. MH financing constraints were also identified as an industry challenge.
- Management reported no material change in previously disclosed risk factors, no impairment of goodwill or intangible assets in the quarter, and effective disclosure controls. The filing noted no material changes to internal control over financial reporting.
Most important facts for investors to verify
- How much of sales and earnings growth is organic versus acquisition-driven, and whether recent acquisitions meet expected performance and integration objectives.
- Receivables collection, inventory levels, and operating cash conversion as sales grow.
- Debt usage, remaining facility capacity, covenant headroom, and exposure to changes in interest rates.
- Whether improved margins persist amid lower-priced RV mix, commodity movements, and competitive pricing.
- Final purchase price allocations and resulting intangible amortization for the 2016 acquisitions.