Patrick Industries, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with the three months ended April 1, 2018. Patrick manufactures component products and distributes building products to recreational vehicle (RV), manufactured housing (MH), marine and industrial markets.
Financial performance
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Net sales | $608.2 million | $551.8 million |
| Gross profit / margin | $106.5 million / 17.5% | $97.8 million / 17.7% |
| Operating income / margin | $35.8 million / 5.9% | $41.8 million / 7.6% |
| Net income | $20.8 million | $30.1 million |
| Diluted earnings per share | $0.90 | $1.20 |
| Operating cash flow | $27.9 million | $25.8 million |
| Capital expenditures | $10.0 million | $7.6 million |
Revenue rose 10%, while net income fell 31%. Cost of goods sold was 82.5% of sales, versus 82.3%; warehouse and delivery expense was 4.0% versus 3.1%, and SG&A was 6.2% versus 5.8%. Net interest expense increased to $9.0 million from $4.4 million. The effective tax rate was 22.3%, compared with 19.6%.
Balance sheet and liquidity
- At March 31, cash was $8.5 million, trade receivables $137.3 million, and inventory $265.0 million.
- Total debt principal was $652.5 million: $385.0 million on the revolver, $95.0 million on the term loan, and $172.5 million of 1% convertible notes due 2023. The balance-sheet carrying amount of long-term debt, net of current maturities and applicable discounts and costs, was $613.6 million.
- Operating lease liabilities were $80.2 million following adoption of ASC 842; the company recorded corresponding right-of-use assets of $79.9 million. Adoption had no material impact on earnings or cash flows.
- Unused credit-facility availability was $419.6 million. The company reported compliance with its debt covenants: actual leverage ratio 2.46 against a 3.00 maximum, and fixed-charge coverage 2.87 against a 1.50 minimum.
- Operating, investing and financing cash flows were $27.9 million provided, $9.9 million used and $16.5 million used, respectively. Cash increased $1.6 million during the quarter.
Changes and business trends
- Sales increased 10%, principally reflecting contributions from 2018 acquisitions and growth in marine and MH; no acquisitions were completed in Q1 2019. Distribution sales grew 58%, while manufacturing sales declined 3%.
- By end market, sales increased 99% in marine, 70% in MH and 5% in industrial, but declined 9% in RV. RV remained the largest market, at 56% of sales.
- Profitability weakened despite higher revenue. Management cited lower RV revenue relative to fixed costs, higher-cost inventory carried over from 2018, acquisition-related operating expenses and higher interest expense. Distribution margin improved, but manufacturing operating income declined.
- Operating cash flow improved modestly, while receivables increased substantially from year-end. Investing cash use fell sharply from Q1 2018, when acquisitions required $95.9 million; Q1 2019 capital expenditures were $10.0 million.
Outlook, risks and notable items
- Management expected RV dealer inventories to normalize during Q2 2019, with wholesale production aligning more closely with retail demand later in Q2 and into Q3. The filing cites RVIA’s 2019 forecast for wholesale shipments of approximately 445,000–476,000 units, a low-to-high-single-digit decline from 2018.
- Management anticipated low-to-mid-single-digit 2019 growth in marine powerboat retail shipments and MH wholesale shipments, and a low-single-digit increase in overall housing starts. These are market expectations, not company earnings guidance.
- The company forecast approximately $30 million of capital expenditures for full-year 2019 and an effective tax rate of 25%–26%, excluding specified share-based payment and one-time tax effects.
- Risks discussed include RV dealer inventory adjustments and shipment volatility, weather-related disruption, interest rates, tariffs, commodity and labor costs, and the timing or ability to pass input-cost increases to customers. A 100-basis-point rate increase was estimated to add about $2.8 million of annual interest cost on variable-rate borrowings, after excluding debt hedged by swaps.
- Contingent consideration liabilities totaled $9.4 million, with aggregate maximum potential payments of $13.7 million; $4.4 million was paid in Q1. The company reported no material change to previously disclosed risk factors and no impairment of goodwill or intangible assets in the quarter.
Investor verification priorities
- Assess whether RV dealer inventory normalization and production recovery occurred as management anticipated, and compare industry trends with Patrick’s RV sales.
- Separate acquisition-driven growth from organic growth, particularly in distribution and marine, and evaluate the sustainability of segment margins.
- Track receivables, operating cash conversion, borrowing levels, interest costs and covenant headroom as demand and working-capital needs change.
- Review commodity-cost pass-through timing, planned capital spending and contingent consideration payments against subsequent filings.