Patrick Industries, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 29, 2015; comparison is with the three months ended March 30, 2014. Financial amounts below are in millions unless otherwise stated. Statements are unaudited.
Business context and results
Patrick manufactures and distributes products serving recreational vehicle (RV), manufactured housing (MH), and industrial markets. RV represented 78% of Q1 sales, MH 12%, and industrial markets 10%. The Manufacturing and Distribution segments accounted for approximately 76% and 24% of sales, respectively.
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Net sales | $223.4 | $170.2 | +31.3% |
| Gross profit / margin | $35.4 / 15.8% | $27.1 / 16.0% | Profit +30.4%; margin -0.2 pp |
| Operating income / margin | $15.6 / 7.0% | $11.8 / 6.9% | Income +32.3% |
| Net income | $9.2 | $6.9 | +32.7% |
| Diluted EPS | $0.89 | $0.64 | +39.1% |
| Net cash from operating activities | $(2.8) | $7.5 | Down $10.3 |
Sales growth reflected approximately 9% organic growth ($15.5 million) and $37.8 million from acquisitions, including Better Way and businesses acquired in 2014. Revenue increased across all three end markets. Manufacturing operating income rose to $18.3 million from $13.1 million; Distribution operating income rose to $3.3 million from $2.3 million. Manufacturing gross margin improved to 16.2% from 15.6%, while Distribution gross margin declined to 15.2% from 16.3%.
Financial position, cash flow, and liquidity
- At March 29, 2015, cash was $0.1 million, current assets $149.4 million, and current liabilities $59.4 million. Trade receivables were $68.7 million versus $32.6 million at year-end 2014; the filing attributes the increase mainly to higher sales and acquisition-related activity.
- Long-term debt was $149.8 million, up from $101.1 million at December 31, 2014. The company had $34.0 million of availability under its then-current $185 million revolver, excluding cash.
- Operating cash flow was negative despite higher earnings, principally reflecting a $31.7 million increase in receivables, partly offset by increases in accounts payable and accrued liabilities. Investing cash outflow was $41.4 million, including $39.6 million for Better Way and $1.9 million of capital expenditures.
- Financing activities provided $44.2 million, including $48.7 million of net debt borrowings and $5.7 million of share repurchases. Cash declined by $54,000 to $69,000.
- The company reported compliance with its existing debt covenants: 12-month leverage ratio of 1.80 versus a stated maximum of 3.50 (with a 3.00 threshold applicable to an additional asset-coverage condition), interest coverage of 3.32 versus a 2.25 minimum, and year-to-date capital expenditures of $1.9 million versus a $10.0 million annual limit.
Material changes and unusual items
- In February 2015, Patrick acquired Better Way for approximately $39.6 million, funded through the credit facility. Better Way contributed approximately $6.5 million in revenue and $0.8 million in operating income during the quarter. Its preliminary purchase-price allocation included $15.5 million of goodwill and $15.9 million of intangible assets; final purchase accounting was expected in Q2 2015.
- Gross margin declined slightly company-wide, reflecting the lower margins of certain acquired businesses, integration timing, and a higher mix of lower-margin direct-ship distribution sales. Higher amortization and SG&A also reflected acquisitions and increased staffing and compensation.
- The Board increased the stock repurchase authorization to $20 million over the following 12 months. Patrick repurchased 130,500 shares at an average $43.29 per share for approximately $5.7 million in Q1.
- After quarter-end, on April 28, 2015, the company entered a new $250 million secured credit facility—$175 million revolving and a $75 million term loan—with maturity extended to April 2020. The term loan requires quarterly installments of approximately $2.7 million beginning June 30, 2015.
- Other subsequent events: a three-for-two stock split was declared April 27, 2015, for shareholders of record May 15 and payable May 29; the shareholder rights agreement terminated April 16.
Outlook, management commentary, and risks
Management expected steady growth in its three primary markets through the remainder of 2015. It cited industry forecasts of approximately 6% full-year RV shipment growth, projected MH shipment growth of approximately 10%, and housing-start growth of approximately 10%. Patrick expected year-over-year quarterly revenue growth for the rest of 2015 excluding acquisition contributions. It expected full-year gross margins generally consistent with 2014, with potential operating-leverage benefits partly offset by acquired businesses’ lower margins. The 2015 capital expenditure plan was approximately $8 million.
Management highlighted limited visibility beyond approximately six months, seasonality, commodity-price volatility, competitive pricing, integration and margin risks from acquisitions, and sensitivity to consumer confidence and end-market conditions. Variable-rate debt creates interest-rate exposure: a 100-basis-point increase in LIBOR and prime rates was estimated to add approximately $1.5 million in annual interest cost at the quarter-end debt level. Management stated liquidity was expected to cover working capital and capital expenditures for at least 12 months, excluding acquisitions, subject to covenant compliance and operating conditions. No material change to previously disclosed risk factors was reported.
Controls and procedures were reported effective, with no material changes to internal control over financial reporting during the quarter. The filing says first-quarter results are not necessarily indicative of full-year results.
Important facts for investors to verify
- How much of ongoing sales and earnings growth is organic versus acquisition-driven, and whether acquired operations achieve expected margins.
- Receivables collection and cash conversion, given the large increase in receivables and negative operating cash flow.
- Debt levels, borrowing availability, interest-rate sensitivity, and compliance with the new credit facility’s covenants and repayment terms.
- Whether end-market forecasts, commodity costs, and seasonal patterns support management’s 2015 outlook.
- Final Better Way purchase accounting and the resulting goodwill, intangible amortization, and reported earnings effects.