Patrick Industries, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 29, 2019; unaudited. Comparisons are to the quarter and nine months ended September 30, 2018. Unless noted, amounts are USD millions.
Business context
Patrick manufactures and distributes components and building products serving recreational vehicle (RV), manufactured housing (MH), marine, and industrial markets. RV remained its largest market, representing 55% of third-quarter sales and 56% of nine-month sales. The filing reports two segments: Manufacturing and Distribution.
Financial results
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $566.2 | $575.1 | $1,787.6 | $1,731.9 |
| Gross profit | $104.3 | $106.7 | $323.5 | $319.2 |
| Gross margin | 18.4% | 18.5% | 18.1% | 18.4% |
| Operating income | $37.4 | $44.7 | $118.5 | $139.5 |
| Operating margin | 6.6% | 7.8% | 6.6% | 8.1% |
| Net income | $21.3 | $27.9 | $69.6 | $92.9 |
| Diluted EPS | $0.92 | $1.15 | $2.99 | $3.77 |
| Net interest expense | $8.6 | $7.3 | $26.2 | $18.0 |
- Operating cash flow for the first nine months was $122.0 million, versus $127.4 million. Capital expenditures were $22.2 million, and net cash used in investing activities was $40.1 million, including $22.4 million for acquisitions.
- Cash and cash equivalents were $116.7 million at September 29, 2019, compared with $6.9 million at December 31, 2018. Working capital was $325.7 million, calculated as current assets less current liabilities.
- Debt principal totaled $707.5 million: $135.0 million revolver, $100.0 million term loan, $300.0 million senior notes, and $172.5 million convertible notes. Revolver availability was $411.1 million. The company reported compliance with its debt covenants: leverage ratio 2.30 against a 4.00 maximum; fixed-charge coverage 4.05 against a 1.50 minimum.
Material changes and operating drivers
- Third-quarter sales declined 2% year over year, and net income declined 24%. For the first nine months, sales increased 3%, while net income decreased 25%.
- Third-quarter RV sales fell 13% and marine sales fell 7%; MH sales rose 61%, while industrial sales were virtually unchanged. For the first nine months, RV sales fell 12%, marine rose 34%, MH rose 62%, and industrial sales were virtually unchanged.
- Manufacturing segment sales declined 10% in Q3 and 6% year to date; segment operating income fell 23% and 22%, respectively. Distribution sales increased 28% in Q3 and 36% year to date, largely reflecting LaSalle Bristol, acquired in late 2018; segment operating income increased 19% and 12%.
- Profitability was pressured by lower RV and marine volumes relative to fixed overhead, higher warehouse and delivery costs, LaSalle’s lower margin profile, and costs and inefficiencies associated with a cybersecurity incident. Interest expense also rose, reflecting borrowings, variable-rate costs, and the new senior notes.
- Patrick issued $300 million of 7.50% senior notes due 2027 in September and amended and extended its credit facility, including a $550 million revolver and $100 million term loan maturing in 2024. The facility refinancing resulted in a $0.7 million debt-extinguishment loss.
- Two acquisitions were completed in the first nine months of 2019 for initial consideration of $21.1 million; their reported revenue and operating income were immaterial. Aggregate estimated contingent consideration was $12.0 million, with potential aggregate payments capped at $17.2 million.
Outlook, risks, and unusual items
- The company provided no specific consolidated revenue or earnings guidance. Management expected RV wholesale shipments to decline 17% for 2019 and retail shipments to decline at a mid-to-high single-digit rate; it expected RV dealer inventories to fall by more than 50,000 units. Management anticipated low-to-mid-single-digit declines in 2019 marine retail shipments and low-to-mid-single-digit declines in MH wholesale shipments. It expected low-single-digit growth in housing starts and said industrial sales could benefit with a four-to-six-month lag.
- Management said cash, operating cash flow, and available credit were expected to meet working-capital and capital-expenditure needs for at least 12 months, excluding acquisitions. Capital expenditures for fiscal 2019 were forecast at approximately $30 million.
- At quarter-end, a sophisticated third-party malware attack disrupted administrative and network operations for approximately two business days and affected some administrative and production servers. Estimated after-tax costs were approximately $1.5 million; management did not expect additional material costs in future quarters. The company was implementing additional security measures.
- Operating risks include cyclical and seasonal end markets, dealer inventory adjustments, weather, commodity and labor costs, and uncertainty about passing cost increases to customers. A 100-basis-point increase in benchmark rates was estimated to add approximately $0.4 million in annual interest cost on the variable-rate borrowings identified by the company; $200 million of borrowings were hedged through interest-rate swaps.
- Adoption of the lease accounting standard added approximately $80 million of right-of-use assets and corresponding liabilities, with no material impact on income or cash flows. The filing reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether RV and marine demand, dealer inventory levels, and shipment trends improve or weaken relative to management’s 2019 market expectations.
- Whether lower manufacturing volumes, distribution growth, delivery costs, and LaSalle’s margin profile continue to affect consolidated margins.
- Debt, interest expense, covenant headroom, and liquidity after the senior-notes issuance and credit-facility refinancing.
- Any further costs, operational effects, or disclosures arising from the cybersecurity incident.
- Final purchase-price allocations and contingent consideration for acquisitions, and the accuracy of the company’s capital-spending and liquidity expectations.