Patrick Industries, Inc. — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing also reports unaudited fourth-quarter results. Patrick manufactures and distributes components and building products, primarily for recreational vehicle (RV) and manufactured housing (MH) manufacturers, with additional industrial-market exposure. Manufacturing generated about 82% of 2016 sales; Distribution generated 18%.
Financial performance
| Metric | FY 2016 | FY 2015 | Change |
|---|---|---|---|
| Net sales | $1,221.9 million | $920.3 million | +33% |
| Gross profit / margin | $202.5 million / 16.6% | $152.3 million / 16.5% | +33%; margin +0.1 percentage point |
| Operating income / margin | $90.8 million / 7.4% | $69.9 million / 7.6% | +30%; margin -0.2 percentage point |
| Net income | $55.6 million | $42.2 million | +32% |
| Diluted EPS | $3.64 | $2.72 | +34% |
| Cash from operating activities | $97.1 million | $66.9 million | +$30.3 million |
| Capital expenditures | $15.4 million | $8.0 million | +$7.4 million |
Net interest expense was $7.2 million, up from $4.3 million, as borrowings increased to fund acquisitions and working capital. The effective tax rate declined to 33.6% from 35.6%, including the effect of adopting share-based compensation accounting that moved $1.3 million of excess tax benefits into income tax expense.
At year-end, cash was $6.4 million, current assets were $172.8 million and current liabilities were $86.1 million, yielding working capital of about $86.7 million. Total debt was $273.2 million, versus $204.5 million a year earlier; shareholders’ equity was $185.4 million. The company reported $77.7 million of unused credit-facility availability and compliance with its covenants. Actual leverage was 1.99x against a 3.00x maximum; fixed-charge coverage was 3.68x against a 1.50x minimum.
Fourth-quarter results
| Metric | Q4 2016 | Q4 2015 | Change |
|---|---|---|---|
| Net sales | $323.9 million | $248.7 million | +30% |
| Gross profit / margin | $53.0 million / 16.4% | $41.5 million / 16.7% | +28% in dollars; margin lower |
| Net income | $13.6 million | $12.0 million | +13% |
| Diluted EPS | $0.89 | $0.78 | +14% |
Material changes and operating developments
- Sales growth reflected acquisitions, market-share gains, stronger RV and MH shipments, and improved housing starts. RV, MH and industrial revenues rose 32%, 26% and 44%, respectively.
- Industry wholesale shipments increased about 15% in both RV and MH. RVs represented 75% of company sales, MH 13%, and industrial markets 12%.
- Industrial sales grew 44%, aided by acquisitions, new product lines and geographic expansion. RV content per unit rose to $2,126 from $1,845; MH content per unit rose to $1,966 from $1,825.
- Patrick completed seven acquisitions involving eight companies for approximately $138.8 million. Acquired businesses contributed about $92.3 million of 2016 sales and $10.3 million of operating income from their acquisition dates.
- Gross margin improved slightly overall, but Manufacturing gross margin declined to 16.3% from 16.6%. Management cited unusually strong second-half RV shipments, model-year changeover complexity, capacity constraints, overtime, employee turnover and higher health costs. Operating margin declined to 7.4% from 7.6%.
- Investing cash outflow was $154.0 million, mainly for acquisitions and capital spending. Financing activities provided $63.2 million, including increased borrowings. Patrick repurchased $5.2 million of shares in 2016 and paid no cash dividends.
Outlook, risks and unusual items
Management expected continued growth across its three primary markets in 2017, but did not provide specific revenue or EPS guidance. It anticipated further MH production growth and cited an external forecast for approximately 6% growth in U.S. housing starts. Planned 2017 capital expenditures were approximately $16 million, principally for expansion, equipment upgrades, efficiency and maintenance. Plans included additional Texas softwoods and California fiberglass operations.
- Concentration and cyclicality: Two RV customers accounted for 60% of consolidated sales in 2016, and RV exposure was 75% of sales. Customer relationships generally lack long-term agreements. Demand is sensitive to consumer confidence, financing availability, interest rates, fuel prices, weather and economic conditions.
- Execution and costs: Labor shortages and capacity inefficiencies affected 2016 costs. Commodity prices and supply availability, inventory estimates, and successful integration of acquisitions remain important risks.
- Debt and liquidity: Borrowings carry variable interest rates; a 100-basis-point rate increase was estimated to add about $2.7 million in annual interest expense at year-end debt levels. The credit facility matures in April 2020 and is secured by substantially all personal property assets. Management believed available cash, operating cash flow and credit capacity would cover working capital and capital expenditures for at least 12 months, excluding acquisitions.
- Cybersecurity incident: On February 3, 2017, employee personally identifiable information for current and former employees for calendar 2016 was inadvertently disclosed to unauthorized individuals following a targeted phishing email. The company stated it carried insurance for this type of exposure; the filing does not quantify the incident’s financial impact.
- Other disclosures: Pending ordinary-course legal matters were not expected by management to have a material adverse effect. The company reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions. 2016 acquisition purchase-price allocations for certain businesses remained preliminary.
Investor facts to verify
- Whether RV and MH demand, dealer inventory levels and customer concentration remain supportive of sales, particularly given dependence on two RV customers.
- Whether capacity, labor and model-year transition pressures ease, and whether margins recover as production levels change.
- Acquisition integration, final purchase-price allocations and the returns generated on the $138.8 million invested in 2016.
- Debt levels, variable-rate exposure, covenant headroom, refinancing conditions and remaining credit availability.
- Any financial, legal or operational consequences arising from the February 2017 employee-information disclosure.