Patrick Industries, Inc. — Q2 2016 Form 10-Q
Reporting period: Second quarter and six months ended June 26, 2016; comparisons are to periods ended June 28, 2015. Amounts below are in millions except per-share data. The statements are unaudited.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net sales | $315.2 | $233.5 | $593.8 | $456.9 |
| Gross profit | $55.3 | $40.4 | $100.6 | $75.8 |
| Operating income | $28.0 | $20.4 | $48.6 | $35.9 |
| Net income | $16.7 | $12.1 | $28.7 | $21.2 |
| Diluted EPS | $1.10 | $0.78 | $1.90 | $1.37 |
| Gross margin | 17.5% | 17.3% | 16.9% | 16.6% |
| Operating margin | 8.9% | 8.7% | 8.1% | 7.8% |
- Q2 sales rose 35% and six-month sales rose 30% year over year. Management attributed growth to acquisitions, increased market penetration, higher RV and manufactured-housing shipments, and stronger industrial-market sales.
- Manufacturing segment sales increased 42% in Q2 and 37% for the six months; Distribution sales increased 12% and 5%, respectively. Segment operating income was $31.3 million Manufacturing and $3.9 million Distribution in Q2; six-month amounts were $57.4 million and $7.5 million.
- Margins improved with higher sales against fixed overhead, new higher-margin products, acquisition contributions and operating efficiencies. SG&A declined as a share of sales, while amortization expense rose with acquired intangible assets.
Cash flow, balance sheet and debt
- Six-month cash from operations was $17.3 million, down from $27.4 million. Net income increased, but receivables absorbed $46.0 million of cash; the company cited sales growth, acquisition activity and customer-payment timing. It received $29.8 million of receivables payments the day after quarter-end.
- Investing used $72.9 million, including $67.0 million for acquisitions and $6.1 million of capital expenditures. Financing provided $55.6 million. Cash at June 26 was $35,000.
- At June 26, total debt was $261.7 million: $197.4 million on the revolver and $64.3 million on the term loan. Current maturities were $10.7 million. Debt was variable-rate; a 100-basis-point rate increase was estimated to add about $2.6 million to annual interest expense.
- Revolver availability at June 26 was $26.3 million, including cash. A July 26 amendment increased total facility capacity from $300 million to $360 million. Availability was reported as $82.4 million, including cash, on July 29, after two subsequent acquisitions.
- The company reported compliance with its debt covenants: leverage ratio 1.92 versus a maximum 3.00, and fixed-charge coverage 2.98 versus a minimum 1.50.
- Trade receivables were $91.3 million and inventories $102.1 million at June 26. Total assets were $496.5 million and shareholders’ equity $157.1 million.
Acquisitions, outlook and risks
- Four acquisitions were completed in the first half for aggregate net purchase consideration of approximately $67 million: Parkland Plastics, Progressive, Cana and Mishawaka Sheet Metal. Their reported first-half contribution was about $20.0 million of revenue and $2.3 million of operating income. Purchase-price allocations remained preliminary.
- After quarter-end, Patrick acquired LS Manufacturing on July 1 for approximately $11 million and BH Electronics on July 29 for approximately $35 million, both funded through the credit facility.
- Management expected the RV, manufactured-housing and industrial markets to continue growing year over year during the remainder of 2016, while anticipating normal sequential seasonal softening in Q3 as dealers awaited 2017 model-year products. Its 2016 capital-expenditure plan was approximately $10–$12 million.
- Management expected full-year gross margins to increase from 2015, subject to commodity prices, competitive pricing and other factors. It cited continued entry-level/lower-priced RV mix as a constraint on content-per-unit growth, and noted competitive pricing around model-year changes.
- Key exposures include variable interest rates, commodity-cost volatility and the possibility that cost increases cannot be passed through promptly or fully. Management said working-capital needs vary with production, delivery timing and customer payment cycles; liquidity estimates excluding acquisitions were expected to cover working capital and capital expenditures for at least 12 months.
- Management reported no material change in previously disclosed risk factors, no impairment of goodwill or intangible assets in the periods shown, and effective disclosure controls.
Important facts for investors to verify
- Whether the large receivables increase and lower operating cash flow convert to cash in subsequent periods.
- Post-acquisition leverage, revolver availability and covenant headroom after the July facility expansion and subsequent acquisitions.
- Whether market growth, acquisition integration and projected margin improvement persist amid seasonal demand, lower-priced product mix and commodity-price changes.
- Final purchase-price allocations and the resulting goodwill, intangible amortization and reported earnings impacts.