Patrick Industries, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 25, 2017; comparisons are to the corresponding 2016 periods. Amounts are in U.S. dollars; financial statement amounts below are in millions unless stated otherwise.
Business context and reporting period
Patrick manufactures and distributes components and products serving recreational vehicles (RV), manufactured housing (MH), marine, and industrial markets. Manufacturing generated about 83% of first-half sales; Distribution generated about 17%. Management reported generally stronger activity across its principal markets and attributed growth to acquisitions, industry expansion, geographic and product growth, and market-share gains.
Financial performance
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Net sales | $407.1 | $315.2 | $752.6 | $593.8 |
| Gross profit | $71.5 | $55.3 | $129.0 | $100.6 |
| Gross margin | 17.6% | 17.5% | 17.1% | 16.9% |
| Operating income | $33.7 | $28.0 | $57.6 | $48.6 |
| Operating margin | 8.3% | 8.9% | 7.7% | 8.2% |
| Net income | $21.3 | $17.0 | $38.7 | $29.9 |
| Diluted EPS | $1.28 | $1.11 | $2.40 | $1.97 |
Sales increased 29% in Q2 and 27% in the first half. Net income rose 25% and 29%, respectively. Gross margin improved modestly, but operating margin contracted, reflecting higher SG&A, amortization, and corporate expenses. SG&A increased 48% in Q2 and 41% in the first half, including acquisition-related costs and additional leadership, staffing, and incentive compensation. Higher labor costs also partly offset manufacturing efficiency gains.
First-half net cash from operations was $19.4 million, versus $19.0 million a year earlier. Receivables absorbed $52.9 million of cash and inventories absorbed $5.4 million, reflecting higher activity and seasonal working-capital needs; management noted approximately $24.5 million of customer receivables were collected within two days after quarter-end. Capital expenditures were $8.8 million. Acquisitions used $83.6 million, and cash from investing activities totaled $92.3 million of outflow. Ending cash was $11.6 million.
Balance sheet, debt, and liquidity
At June 25, 2017, total debt was $260.7 million, comprising $181.9 million under the revolver and $78.8 million under the term loan; cash was $11.6 million. Current assets were $251.2 million and current liabilities $109.2 million. The company reported $195.5 million of revolver availability, net of cash on hand. The credit facility was expanded to $450 million and its maturity extended to March 2022. Borrowings bear variable rates; the filing estimates a 100-basis-point rate increase would add about $2.6 million in annual interest cost at the reported borrowings level.
Patrick was in compliance with its financial covenants: actual leverage ratio was 1.47 versus a maximum of 3.00, and fixed-charge coverage was 4.02 versus a minimum of 1.50. Management said cash, operating cash flow, and available borrowing capacity were expected to cover working capital and capital expenditures for at least 12 months, excluding acquisitions.
Material changes and notable items
- Two 2017 acquisitions, involving four businesses, were completed for aggregate net consideration of $83.6 million: LPE for approximately $73.5 million and Medallion for $10.1 million. They contributed $18.4 million of first-half revenue and about $2.0 million of operating income.
- A March common-stock offering of 1.35 million shares generated $93.6 million in net proceeds, used to reduce debt. Weighted-average shares increased, moderating per-share growth.
- Share-based compensation tax benefits reduced income-tax expense by $0.9 million in Q2 and $4.6 million in the first half. The first-half effective tax rate was 27.7%; excluding these share-based tax benefits, management anticipated a full-year 2017 rate of about 36.25%.
- In July 2017, after quarter-end, Patrick acquired Wire Design for $10.9 million, funded under its credit facility.
- For informational purposes, acquisition-adjusted pro forma first-half diluted EPS was $2.45 in 2017 versus $2.50 in 2016, despite higher pro forma revenue and net income. Management cautioned this pro forma presentation is not a projection.
Outlook, commentary, and risks
Management expected continued market growth through the remainder of 2017, with seasonal patterns broadly tracking the prior year. Its market outlook cited approximately 10% growth in RV wholesale shipments for full-year 2017 (industry forecast), 3%–5% growth in marine powerboat retail units, and approximately 15% growth in MH wholesale shipments. These are industry estimates, not company revenue or earnings guidance. Planned 2017 capital expenditures were up to approximately $20 million, including potential facility expansion.
Management highlighted consumer confidence, economic and political conditions, dealer inventories, seasonal demand, and housing activity as factors affecting markets. Other risks include tight labor markets, volatile commodity costs and uncertainty over passing cost increases to customers, variable-rate debt, working-capital demands, acquisition integration, and maintaining credit-covenant compliance. The company described its businesses as seasonal, with sales and profits historically strongest in the first half.
Important facts for investors to verify
- How much reported sales and earnings growth reflects organic demand versus acquired businesses, and how acquisition integration and purchase-price allocations progress.
- Whether operating margins recover as acquisition-related SG&A, amortization, labor costs, and corporate expenses evolve.
- Receivables, inventory, and operating cash-flow trends, including the timing of customer collections and seasonal working-capital needs.
- Debt, variable interest exposure, revolver availability, covenant headroom, and the funding of further acquisitions or capital spending.
- Whether RV, MH, marine, and industrial market assumptions—and the company’s stated outlook—remain consistent with shipment, retail-demand, and housing data.