Patrick Industries, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2015; filed March 14, 2016. The filing also reports fourth-quarter results. Amounts below are in U.S. dollars; financial statement figures are in millions unless otherwise stated.
Business context
Patrick manufactures component products and distributes building materials, primarily for recreational vehicle (RV) and manufactured housing (MH) markets, with additional industrial-market exposure. It reported Manufacturing and Distribution segments. In 2015, approximately 75% of sales were to RV, 14% to MH, and 11% to industrial markets. Two RV customers together represented 55% of consolidated sales.
Financial performance
| Metric | FY 2015 | FY 2014 | Change |
|---|---|---|---|
| Net sales | $920.3 | $735.7 | +25% |
| Gross profit / margin | $152.3 / 16.5% | $118.5 / 16.1% | +29% profit |
| Operating income / margin | $69.9 / 7.6% | $51.5 / 7.0% | +36% income |
| Net income / margin | $42.2 / 4.6% | $30.7 / 4.2% | +38% income |
| Diluted EPS | $2.72 | $1.91 | +42% |
| Cash provided by operations | $65.6 | $45.7 | +$19.9 |
| Capital expenditures | $8.0 | $6.5 | +$1.5 |
| Total debt at year-end | $204.5 | $101.1 | +$103.4 |
Fourth-quarter 2015 sales were $248.7 million versus $189.6 million a year earlier; net income was $12.0 million versus $7.3 million.
Operating cash flow rose alongside earnings. Investing used $147.4 million, principally for $140.2 million of acquisitions and $8.0 million of capital expenditures. Financing provided $81.7 million, including debt borrowings and $22.6 million of share repurchases. Cash on hand was $87,000 at year-end.
At December 31, debt comprised $137.5 million drawn on the revolver and $67.0 million on the term loan. The $300 million secured credit facility had $94.4 million of unused availability, including cash on hand. The company reported leverage covenant compliance: actual leverage ratio 1.95 versus a 3.00 maximum; fixed-charge coverage 3.42 versus a 1.50 minimum.
Material changes versus prior year
- Sales increased across RV (+26%), MH (+18%) and industrial (+27%) markets. The filing attributes $176.9 million of the $184.6 million sales increase to 2015 acquisitions and incremental contributions from 2014 acquisitions.
- Gross margin improved from 16.1% to 16.5%, supported by higher volume against fixed costs, acquired product lines, improved material yields and operating synergies. Warehouse and delivery expense fell as a share of sales, from 3.6% to 2.9%.
- Interest expense increased to $4.3 million from $2.4 million as borrowing rose to finance acquisitions and working capital. The effective tax rate declined to 35.6% from 37.5%, primarily reflecting approximately $1.0 million of R&D tax credits.
- Patrick completed three 2015 acquisitions for approximately $140 million: Better Way, SCI and North American. Year-end goodwill rose to $68.6 million from $31.6 million, and net intangible assets to $106.8 million from $49.5 million.
- Share repurchases totaled $22.6 million in 2015. The company paid no cash dividends. A three-for-two stock split took effect in May 2015; per-share comparisons in the filing reflect the split.
Outlook, commentary and risks
- Management expected year-over-year revenue growth in 2016, excluding revenue contributions from 2015 acquisitions. It anticipated higher 2016 gross margins than in 2015, subject to commodity prices, competitive pricing and other external factors.
- Industry forecasts cited were approximately 2% growth in 2016 RV wholesale shipments, approximately 10% growth in MH shipments, and approximately 9% growth in U.S. housing starts. Management described visibility into longer-term industry conditions as limited to about six months.
- Management expected raw-material costs for some commodities to rise with demand, while lower fuel prices could reduce certain petroleum-based input costs. The company generally passes commodity price changes through to customers, but timing and customer acceptance are uncertain.
- Key risks include dependence on cyclical, seasonal RV and housing markets; customer concentration and absence of long-term customer contracts; changes in customer demand and product mix; raw-material availability and pricing; skilled-labor constraints; acquisition integration and goodwill/intangible impairment; variable-rate debt and covenant compliance; and access to financing.
- A 100-basis-point increase in LIBOR and prime rates was estimated to add approximately $2.0 million in annual interest cost, based on year-end variable-rate borrowings.
- RV entry-level and lower-priced units gained mix during 2015, pressuring content-per-unit growth. One RV customer accounted for approximately 29% of sales and 33% of receivables at year-end; the second major customer accounted for approximately 26% of sales.
- Management said pending ordinary-course legal matters were not expected to have a material adverse effect. No goodwill or other intangible impairment was recorded in 2015. The inventory-obsolescence reserve increased to $3.5 million from $1.8 million.
- After year-end, Patrick acquired Parkland for approximately $25 million and Progressive for approximately $11 million. In January 2016 it completed the prior buyback authorization and approved a new $50 million repurchase program over 24 months.
Important facts for investors to verify
- How much future growth and margin performance comes from acquired businesses versus organic demand, and how acquisition integration performs.
- Whether RV production, dealer inventories and consumer demand remain aligned, particularly given the company’s 75% RV sales exposure and customer concentration.
- Debt reduction, revolver availability, interest-rate exposure and ongoing compliance with credit covenants after the 2015–2016 acquisitions and new repurchase authorization.
- Whether commodity-cost pass-throughs, lower fuel costs and operational efficiencies sustain gross-margin improvement.
- Whether acquired goodwill and intangible-asset values remain supportable; 2015 internal-control testing excluded businesses acquired during that year, although management and the auditor concluded controls were effective for the included scope.