Patrick Industries, Inc. — Q3 2015 Form 10-Q
Reporting period: Third quarter and nine months ended September 27, 2015; compared with periods ended September 28, 2014. Amounts below are in millions, except per-share data.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $214.8 | $188.1 | $671.7 | $546.1 |
| Gross profit | $35.0 | $30.0 | $110.8 | $89.0 |
| Operating income | $15.2 | $12.5 | $51.1 | $39.8 |
| Net income | $9.0 | $7.3 | $30.2 | $23.4 |
| Diluted EPS | $0.58 | $0.45 | $1.95 | $1.45 |
- Sales grew 14.2% in Q3 and 23.0% year to date; net income increased approximately 23.5% and 29.1%, respectively.
- Gross margin improved to 16.3% from 16.0% in Q3 and to 16.5% from 16.3% year to date. Operating margin increased to 7.1% from 6.6% and to 7.6% from 7.3%, respectively.
- Q3 Manufacturing segment sales rose 21.2% to $173.7 million; Distribution sales fell 8.2% to $46.1 million. Year-to-date segment sales increased 25.3% to $533.1 million in Manufacturing and 12.1% to $154.5 million in Distribution.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $25.3 million, versus $23.2 million. Capital expenditures were $4.7 million; operating cash flow less capital expenditures was $20.6 million. Investing cash outflow was $143.1 million, chiefly reflecting $139.2 million spent on acquisitions.
- Cash was $1.4 million at September 27. Trade receivables were $63.3 million and inventory was $96.2 million. Management noted $16.7 million of customer receivable payments arrived within two days after quarter-end.
- Total debt was $224.8 million, compared with $101.1 million at year-end 2014. The company had $152.5 million outstanding on its revolver and $72.3 million on its term loan. Credit-facility availability was approximately $75.4 million, including cash.
- The amended secured credit facility totals $300 million and matures in 2020. The company reported compliance with covenants: leverage ratio 2.05 against a 3.00 maximum, and fixed-charge coverage 4.75 against a 1.50 minimum. All borrowings were variable-rate; management estimated a 100-basis-point rate increase would add about $2.2 million in annual interest expense.
- Management said existing cash, operating cash flow and available borrowing capacity should cover working capital and capital expenditures for at least 12 months, excluding acquisitions.
Material changes and unusual items
- Patrick completed three Manufacturing acquisitions—Better Way, SCI and North American—for aggregate net consideration of approximately $139.2 million. They contributed approximately $26.1 million of Q3 revenue and $2.9 million of operating income; year-to-date contributions were $46.4 million and $5.9 million. Purchase-price allocations remained preliminary.
- Acquisitions and related borrowing increased goodwill to $78.3 million from $31.6 million and net intangible assets to $100.4 million from $49.5 million. Amortization expense also increased. No impairment was recorded.
- Acquisition funding and working-capital needs contributed to higher interest expense: $1.2 million in Q3 and $2.9 million year to date. Nine-month SG&A increased 26.1%, primarily from acquired-business headcount and higher incentive and stock-based compensation.
- On April 28, the company replaced its prior credit agreement with an expanded facility; it increased the facility to $300 million on August 31. A three-for-two stock split was paid May 29. Nine-month repurchases under the buyback program totaled $5.7 million.
Outlook, management commentary and risks
- Management described RV, manufactured housing and industrial markets as generally improving, while noting normal seasonal softening in Q3. It expected slow, steady market growth into 2016 and anticipated 2015 gross margins would improve from 2014, subject to commodity prices, competitive pricing and other factors.
- Industry estimates cited by the company projected 2015 RV shipments up approximately 5%, manufactured-housing shipments up approximately 8%, and housing starts up approximately 10%. These are market estimates, not company earnings guidance.
- A shift toward entry-level, lower-priced RVs was pressuring content-per-unit growth and may cause near-term volatility. Distribution sales declined in Q3, particularly in RV-related business.
- Key risks include seasonality and exposure to RV and housing cycles; volatile commodity costs and uncertain ability or timing of passing cost changes to customers; variable-rate debt and covenant compliance; acquisition integration and final purchase accounting; and working-capital fluctuations. Management identified approximately $8 million of planned 2015 capital expenditures.
- The filing reported no material changes to previously disclosed risk factors and no material change in internal control over financial reporting.
Investor verification priorities
- Verify how much of reported growth and margin improvement reflects acquired businesses versus organic sales, and track the acquired businesses’ subsequent contribution.
- Monitor receivables, inventory and cash conversion, including the significance and timing of post-quarter-end customer payments.
- Track debt, borrowing availability, variable-rate exposure and covenant headroom as acquisition funding and working-capital needs evolve.
- Assess whether lower-priced product mix, commodity costs and competitive pricing affect content per unit and gross margins.
- Confirm final acquisition purchase-price allocations, amortization implications and progress against the stated market outlook and capital plan.