Patrick Industries, Inc. — FY2013 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended December 31, 2013; quarterly data is also provided. Patrick manufactures and distributes components and building products, primarily for recreational vehicle (RV) and manufactured housing (MH) customers, with additional industrial-market sales. Manufacturing contributed about 77% of 2013 sales and Distribution about 23%. The company completed three acquisitions in September 2013.
Financial performance
| Metric | FY2013 | FY2012 |
|---|---|---|
| Net sales | $594.9 million | $437.4 million |
| Gross profit / margin | $91.0 million / 15.3% | $65.7 million / 15.0% |
| Operating income / margin | $40.9 million / 6.9% | $27.0 million / 6.2% |
| Net income | $24.0 million | $28.1 million |
| Diluted EPS | $2.23 | $2.64 |
| Cash from operations | $22.4 million | $21.0 million |
| Capital expenditures | $8.7 million | $7.9 million |
| Total debt at year-end | $55.0 million | $49.7 million |
FY2013 revenue grew 36.0%; management estimates organic growth of approximately 19%, with the remainder largely reflecting acquisitions. Operating income rose 51.4%. Net income declined 14.4%, chiefly because FY2012 included a non-cash $6.8 million tax valuation-allowance credit; FY2013 had a $14.7 million tax provision and an estimated effective rate of about 38%. FY2013 operating cash flow less capital expenditures was approximately $13.8 million.
Fourth quarter: Net sales were $146.6 million, gross profit $21.6 million, net income $5.0 million and diluted EPS $0.47. Compared with Q4 2012, sales increased from $106.1 million and net income from $3.2 million. Quarterly results were unaudited.
Balance sheet, liquidity and debt
At December 31, 2013, cash was $34,000, current assets were $87.7 million, current liabilities were $32.4 million, and shareholders’ equity was $82.3 million. Inventory was $56.5 million, up from $47.0 million a year earlier. The company said the increase included acquisition-related inventory and deliberate stocking for anticipated demand.
Debt consisted of $55.0 million drawn on an $80 million secured revolving facility maturing October 24, 2017; reported unused availability was $22.9 million. The company was in compliance with its covenants: actual leverage ratio was 1.10 versus a 3.50 maximum, and interest coverage was 6.20 versus a 2.25 minimum. Management expected available cash, operating cash flow and borrowing capacity to meet anticipated needs for at least 12 months, excluding acquisitions. All debt was variable-rate LIBOR-based at year-end; a 100-basis-point LIBOR increase was estimated to add about $0.6 million in annual interest cost.
Changes, outlook and material considerations
- Sales rose in all major markets: RV revenue increased 44%, MH 13%, and industrial 33%. Industry wholesale shipments increased 12% for RVs and 10% for manufactured homes. Industrial sales benefited from improved housing-related and fixture demand.
- Manufacturing gross margin improved to 14.7% from 14.5%; Distribution gross margin was 16.6% versus 16.7%. Lower interest expense also supported pretax results.
- The 2013 acquisitions—Frontline, Premier Concepts and West Side Furniture—cost approximately $16.5 million in aggregate and contributed about $12 million of revenue in 2013. Their purchase-price allocations for Frontline and Premier remained preliminary at filing date.
- Management expected 2014 revenue growth even excluding revenue contributions from the 2013 acquisitions. Industry forecasts cited included RV shipments up approximately 6%, MH shipments up approximately 9%, and housing starts up 19%. Severe Midwest winter weather was expected to shift some RV shipments and production from Q1 to Q2.
- Management expected 2014 gross margin to increase, subject to commodity pricing and competitive conditions, while operating expenses as a percentage of sales could rise slightly. Planned 2014 capital expenditures were up to approximately $8 million, including continued ERP-system replacement.
- Major risks include cyclicality and seasonality, dependence on RV demand, commodity-price and supply volatility, customer concentration, financing conditions, acquisition integration, ERP implementation, labor availability, and debt-covenant compliance. Two RV customers represented 57% of consolidated sales in 2013; the largest alone represented approximately 34%. A significant MH customer’s vertical integration was also reducing some purchases.
- The company repurchased 407,330 shares for approximately $6.1 million in 2013 and increased its repurchase authorization to $20 million in February 2014. No cash dividends were paid in 2013. Management said pending ordinary-course legal matters were not expected to have a material adverse effect. Management and the auditor reported effective internal control over financial reporting.
Important facts for investors to verify
- Whether 2014 market forecasts and Patrick’s expectation of organic revenue growth materialized, particularly given weather-related shipment timing.
- How much reported growth and margin improvement came from acquisitions, organic volume, product mix and operating leverage, and whether acquired businesses delivered expected returns.
- Cash conversion and working-capital trends, especially rising inventory, alongside the very low year-end cash balance and $55 million of variable-rate debt.
- Customer concentration and the financial impact of continued vertical integration by the MH customer.
- Execution of the ERP replacement, 2014 capital spending, share repurchases, and continued compliance with credit-facility covenants.
- The final purchase accounting for Frontline and Premier and the assumptions underlying goodwill and acquired-intangible valuations.