Patrick Industries, Inc. — Form 10-Q Summary
Reporting period: Second quarter and six months ended June 30, 2019; comparative periods ended July 1, 2018. Financial statements are unaudited. Patrick manufactures and distributes components and products serving recreational vehicle (RV), marine, manufactured housing (MH), and industrial markets.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $613.2m | $604.9m | $1,221.4m | $1,156.7m |
| Gross profit / margin | $112.7m / 18.4% | $114.8m / 19.0% | $219.2m / 17.9% | $212.5m / 18.4% |
| Operating income / margin | $45.2m / 7.4% | $53.1m / 8.8% | $81.1m / 6.6% | $94.8m / 8.2% |
| Net income | $27.4m | $34.9m | $48.3m | $64.9m |
| Diluted earnings per share | $1.18 | $1.42 | $2.07 | $2.62 |
- Revenue mix and change: Q2 sales rose 1%; first-half sales rose 6%. Q2 RV revenue fell 14% and industrial fell 3%, offset by marine growth of 39% and MH growth of 56%. First-half RV sales fell 12%, while marine rose 64%, MH rose 63%, and industrial rose 1%.
- Cash flow: First-half operating cash flow was $93.8m, compared with $91.2m. Capital expenditures were $18.2m; investing cash outflow was $15.1m, versus $278.4m in 2018, when acquisitions were a major use of cash. Financing activities used $62.1m. Cash at June 30 was $23.6m.
- Debt and liquidity: Principal debt outstanding was $607.0m: $342.0m revolver, $92.5m term loan, and $172.5m convertible notes. Unused credit-facility availability was $477.7m. The company reported compliance with debt covenants; actual leverage ratio was 2.46 against a maximum 3.00, and fixed-charge coverage was 3.18 against a minimum 1.50.
- Balance sheet: Total assets were $1,330.9m and shareholders’ equity $458.6m. Current assets were $411.7m and current liabilities $205.1m. Adoption of lease accounting added $82.5m of operating lease right-of-use assets and $82.8m of lease liabilities.
Material changes versus prior year
- Revenue growth did not translate into higher earnings: Q2 operating income fell 15% and net income fell 21%; first-half operating income fell 15% and net income fell 26%.
- Gross and operating margins contracted. Management cited lower RV revenue relative to fixed overhead, LaSalle Bristol’s lower-margin profile, prior-period higher input costs in inventory, and higher warehouse and delivery costs. Q2 warehouse and delivery expense rose 40% to $26.3m.
- Interest expense increased 38% in Q2 and 66% for the first half, reflecting acquisition-related borrowing and higher average rates. First-half cash interest paid was $12.8m, versus $5.6m.
- Distribution sales increased substantially, reflecting LaSalle Bristol, acquired in late 2018; Manufacturing sales and operating income declined. In Q2, Manufacturing operating income fell to $48.8m from $65.0m, while Distribution operating income rose to $10.8m from $10.2m.
- Inventory declined to $252.6m from $272.9m at year-end; the inventory-obsolescence reserve increased to $10.7m from $7.6m.
Outlook, commentary, and risks
- Management expected RV dealer inventories to normalize during the second half of 2019, supporting wholesale production more closely aligned with retail demand. The cited RVIA forecast for 2019 wholesale shipments was 396,000–431,000 units, down 11%–18% from 2018; management anticipated a mid-single-digit retail decline.
- Management forecast mid-single-digit declines in 2019 powerboat retail shipments, citing weather effects, while describing longer-term marine demand as favorable. For MH, it forecast low-to-mid-single-digit wholesale shipment growth. These are expectations, not guarantees.
- Planned 2019 capital expenditures were approximately $30m, primarily for capacity, equipment, geographic expansion, and efficiency investments. Management expected cash, operating cash flow, and available credit to cover working capital and capital expenditure needs for at least 12 months, excluding acquisitions.
- Management forecast a 24%–25% full-year 2019 effective tax rate; its stated 25%–26% rate excluding share-based payment and one-time tax effects is a non-GAAP measure.
- Principal risks and uncertainties include RV dealer inventory adjustments and OEM production changes; weather-related disruption; interest-rate and tariff uncertainty; volatile commodity, labor, and transportation costs; inability or delays in passing cost increases to customers; and dependence on credit-facility covenant compliance. A 100-basis-point rate increase was estimated to add approximately $2.3m in annual interest cost on the disclosed variable-rate exposure.
- Other notable items: the company paid $4.4m of acquisition-related contingent consideration in the first half and reported $9.4m of remaining estimated contingent consideration. It had $30.3m remaining under its stock repurchase authorization but made no program repurchases in the first half. The filing reported no material change in risk factors from the 2018 Form 10-K.
Important facts for investors to verify
- Whether RV dealer inventory normalization and the anticipated recovery in wholesale production occurred, and how actual shipments compared with management’s and RVIA’s expectations.
- Whether marine and MH growth and content-per-unit gains persisted, and how much reported growth reflected acquisitions rather than organic demand.
- Whether margin pressure from fixed costs, LaSalle’s product mix, freight, and input costs eased, and whether the company could pass cost changes through to customers.
- Debt, interest expense, variable-rate exposure, covenant headroom, and availability under the credit facility as operating conditions changed.
- Actual capital expenditures, cash conversion, contingent-consideration payments, and the assumptions behind the full-year tax-rate outlook.