Patrick Industries, Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also reports fourth-quarter results; this is an annual report, not a standalone quarterly filing. Amounts are in U.S. dollars.
Business context
Patrick manufactures components and distributes building products primarily to recreational vehicle (RV), marine, manufactured housing (MH), and industrial markets. Manufacturing and Distribution represented 77% and 23% of 2018 sales, respectively. The company operated 107 manufacturing plants and 42 distribution facilities.
Market mix shifted from 2017: RV sales were 63% of 2018 revenue (69% in 2017), marine 12% (7%), MH 12% (13%), and industrial 13% (11%). RV wholesale shipments fell 4% industry-wide, while marine powerboat retail shipments rose 2%, MH wholesale shipments rose 4%, and U.S. housing starts rose 4%.
Financial results and key metrics
| Metric | FY 2018 | FY 2017 | Change |
|---|---|---|---|
| Net sales | $2,263.1 million | $1,635.7 million | +38% |
| Gross profit / margin | $415.9 million / 18.4% | $278.9 million / 17.1% | +49%; margin +1.3 pts |
| Operating income / margin | $178.4 million / 7.9% | $121.9 million / 7.4% | +46%; margin +0.5 pts |
| Net income / diluted EPS | $119.8 million / $4.93 | $85.7 million / $3.48 | +40% / +42% |
| Operating cash flow | $200.0 million | $99.9 million | +$100.1 million |
| Capital expenditures | $34.5 million | $22.5 million | +$12.0 million |
| Interest expense, net | $26.4 million | $8.8 million | +$17.6 million |
Revenue growth reflected acquisitions, market-share gains and expansion into products and geographies. Acquisitions completed in 2018 contributed $249.3 million of revenue from their respective acquisition dates. Operating cash flow less capital expenditures was approximately $165.5 million, a simple derived measure before acquisitions and financing.
Fourth quarter: Sales were $531.2 million versus $475.6 million in Q4 2017; gross profit was $96.7 million versus $80.7 million. Net income was $27.0 million versus $29.0 million, and diluted EPS was $1.15 versus $1.16.
Liquidity and debt: At year-end, cash was $6.9 million and total debt was $661.1 million, compared with $354.4 million of debt a year earlier. Unused availability under the $900 million credit facility was $411.7 million. Current assets were $385.2 million and current liabilities $157.8 million. The company reported compliance with its credit covenants: leverage ratio 2.42 versus a 3.00 maximum; fixed-charge coverage 3.31 versus a 1.50 minimum. The company stated available cash, operating cash flow and facility capacity should cover working capital and capital expenditures for at least 12 months, excluding acquisitions.
Long-term debt included $392.3 million outstanding on the revolver, $96.3 million on the term loan and $172.5 million of 1.00% convertible notes due 2023. Variable-rate debt exposes the company to higher interest costs; management estimated a 100-basis-point rate increase would add about $2.9 million of annual interest expense, based on year-end borrowings.
Material changes versus the prior year
- Sales rose 38%, with revenue increases across all four markets: RV +27%, marine +143%, MH +33%, and industrial +49%. Acquisitions were a substantial contributor to growth.
- Gross margin improved, attributed to product mix, acquisitions, volume leverage, efficiencies and labor initiatives. Operating margin also increased.
- Net income benefited from operating growth, but interest expense increased materially due to higher borrowings, rates and $5.9 million of non-cash convertible-note discount amortization.
- Operating cash flow doubled, while investing cash outflow increased to $371.4 million, including $343.3 million for acquisitions and $34.5 million of capital expenditures.
- The company repurchased $107.6 million of stock (1.98 million shares). Total debt increased by $306.7 million year over year.
- The effective tax rate was 21.2% in 2018 versus 24.2% in 2017. 2017 included a $7.4 million one-time net tax benefit from U.S. tax reform; share-based compensation tax benefits were $6.7 million in 2018 and $6.0 million in 2017.
Outlook, commentary and risks
Management expected continued growth in marine, MH and industrial markets in 2019, with RV production returning to a more normalized pattern aligned with retail demand. It forecast low-to-mid-single-digit declines in RV wholesale shipments, flat-to-low-single-digit growth in RV retail shipments, low-to-mid-single-digit marine retail growth, high-single-digit MH wholesale growth, and low-to-mid-single-digit growth in housing starts. Planned 2019 capital expenditures were approximately $30 million. These are management expectations, not guarantees.
Management cited favorable demographics, consumer credit, employment and leisure-lifestyle demand, while noting headwinds from market volatility, tariffs, political uncertainty and rising interest rates. Key risks include cyclicality and seasonality; dependence on discretionary purchases and RV production; concentration in two RV customers, which together accounted for 49% of sales; commodity, tariff and labor costs; customer and supplier financial health; acquisition integration and goodwill/intangible-asset exposure; and debt service and covenant compliance. The company reported no material pending legal proceeding expected to adversely affect its financial condition, results or cash flows.
Patrick completed nine acquisitions involving 13 companies in 2018, expanding especially in marine. It paid no cash dividends in 2018. The 2018 adoption of the revenue-recognition standard had no material impact. Adoption of the lease standard on January 1, 2019 was expected to add approximately $80 million of right-of-use assets and lease liabilities, with no material effect on earnings or cash flows. Management and the independent auditor reported effective internal control over financial reporting; acquired 2018 businesses were excluded from the control assessment.
Important facts for investors to verify
- How much of 2018’s 38% sales growth and margin improvement is sustainable organically versus attributable to acquisitions and acquired product mix.
- Whether RV dealer inventory rebalancing and the forecast wholesale declines affect Patrick’s sales, margins and working capital in 2019.
- Debt reduction capacity and covenant headroom given $661.1 million of debt, variable-rate exposure and acquisition-driven borrowing.
- Customer concentration, particularly the two RV customers accounting for 49% of sales, and the effect of any change in their production or sourcing.
- Integration results, contingent consideration and purchase accounting for the 2018 acquisitions; verify that expected synergies and returns materialize.
- Tariff and commodity-cost pass-through, labor availability, and whether customer-specific inventory creates obsolescence or cash-flow risk.