PATRICK INDUSTRIES INC annual report, FY2019

Patrick Industries, Inc. — FY 2019 Form 10-K

Reporting period: Fiscal year ended December 31, 2019. The filing also reports unaudited fourth-quarter results. Patrick manufactures and distributes components and building products, primarily for recreational vehicle (RV), manufactured housing (MH), marine and industrial markets.

Financial performance

MetricFY 2019FY 2018Change
Net sales$2,337.1 million$2,263.1 million+3%
Gross profit / margin$422.9 million / 18.1%$415.9 million / 18.4%Profit +2%; margin down 0.3 points
Operating income / margin$154.4 million / 6.6%$178.4 million / 7.9%-13%
Net income$89.6 million$119.8 million-25%
Diluted EPS$3.85$4.93-22%
Cash from operations$192.4 million$200.0 million-4%

Annual sales growth was led by MH (+59%), marine (+20%) and industrial (+2%), partly offset by RV sales (-10%). The contribution of the 2018 LaSalle acquisition was an important factor in the increase. RV remained the largest market, at 55% of sales, versus 63% in 2018; MH accounted for 19%, marine 14% and industrial 12%.

Fourth quarter: Sales were $549.5 million versus $531.2 million in Q4 2018 (+3%). Gross profit was $99.3 million versus $96.7 million. Net income was $20.0 million versus $27.0 million, and diluted EPS was $0.86 versus $1.15.

Cash, debt and liquidity

  • Cash and equivalents were $139.4 million at year-end, up from $6.9 million. Operating cash flow was $192.4 million; capital expenditures were $27.7 million.
  • Total debt was $705.0 million, compared with $661.1 million a year earlier. Cash less total debt implies net debt of approximately $565.6 million.
  • The debt structure included $300 million of 7.5% senior notes due 2027, $172.5 million of 1.0% convertible notes due 2023, and $232.5 million outstanding under the revolving facility and term loan. Net interest expense rose 39% to $36.6 million.
  • Management reported $411.1 million of unused availability under the credit facility. Year-end covenant ratios were 2.27x total leverage against a 4.00x maximum and 5.28x fixed-charge coverage against a 1.50x minimum. The company said it was in compliance.
  • Current assets were $516.8 million and current liabilities $186.9 million. The filing adopted lease accounting in 2019, recognizing $93.5 million of operating lease right-of-use assets and $94.2 million of lease liabilities.

Material changes and management commentary

  • RV wholesale shipments fell 16% and retail shipments fell 7% in 2019. Dealer inventories declined by more than 50,000 units; management said this could support a closer alignment of wholesale and retail shipments in the 2020 selling season.
  • Marine sales rose despite estimated powerboat wholesale shipments declining 13%; adverse weather and dealer inventory adjustments affected the market. MH sales increased while industry wholesale shipments fell 2%, reflecting higher company content per unit and acquisition effects.
  • Manufacturing segment sales fell 6% and operating income fell 19%; Distribution sales rose 34% and operating income rose 24%. LaSalle’s lower margin profile and higher warehouse and delivery costs weighed on consolidated margins. Higher fixed overhead relative to RV and marine revenue also pressured manufacturing profitability.
  • Patrick spent approximately $56 million on 2019 acquisitions, including Topline Counters and G.G. Schmitt, and approximately $651 million on acquisitions over the prior three years. The 2019 acquisitions contributed $8.3 million of sales and $0.9 million of operating income.
  • Management forecast approximately $30 million of capital expenditures for 2020 and an effective tax rate of 25%–26%. It expected industrial sales to benefit in 2020 from prior housing-start growth. Management said cash, operating cash flow and available credit should cover working capital and capital expenditure needs for at least 12 months, excluding acquisitions.
  • The board adopted a regular quarterly dividend policy in December 2019; 2019 dividends paid were $0.25 per share. The board declared a further $0.25-per-share dividend payable in March 2020.

Risks, contingencies and unusual items

  • Customer concentration is significant: Forest River and Thor together represented 40% of 2019 sales, versus 49% in 2018. The company has no long-term customer agreements.
  • At the end of Q3 2019, a sophisticated malware attack disrupted administrative and network operations for approximately two business days. Patrick reported that controls over financial reporting were effective; the 2019-acquired businesses were excluded from management’s controls assessment and represented approximately 5% of assets and less than 1% of sales.
  • Debt, variable interest rates, covenant compliance, cyclical end markets, customer financing, commodity and labor costs, and successful acquisition integration remain material risks. A 100-basis-point increase in relevant LIBOR rates was estimated to add about $0.3 million of annual interest cost after swaps.
  • A group of companies brought environmental claims against Patrick in 2019, with related cross-claims by another defendant. The company moved to dismiss and said it did not currently expect a material adverse impact; litigation outcomes remain uncertain.
  • Management recorded no goodwill or indefinite-lived intangible asset impairment in 2019. Goodwill was $319.3 million, and impairment testing relied on forecast cash flows, sales and operating income, growth rates and discount rates.
  • Patrick reported a $0.7 million loss on extinguishment of debt associated with its 2019 credit facility amendment. The effective tax rate increased to 24.0% from 21.2%, mainly due to lower excess tax benefits on share-based compensation.

Investor facts to verify

  • Whether RV shipments and dealer inventory levels recover as management anticipated, and how that affects Patrick’s largest market.
  • How much of sales growth and margin performance reflects acquisitions versus underlying demand, particularly for MH and Distribution.
  • Debt repayment capacity, interest expense, facility availability and covenant headroom under weaker market conditions.
  • Whether higher warehouse and delivery costs and lower manufacturing margins persist, and whether planned 2020 capital spending is achieved.
  • Developments in the cyber incident response and environmental litigation; the filing text does not quantify potential losses from either matter.