Patrick Industries, Inc. — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing also reports unaudited fourth-quarter results. Patrick manufactures and distributes components and building products, primarily for recreational vehicle (RV), manufactured housing (MH), marine and industrial markets.
Financial performance
| Metric | FY 2019 | FY 2018 | Change |
|---|---|---|---|
| Net sales | $2,337.1 million | $2,263.1 million | +3% |
| Gross profit / margin | $422.9 million / 18.1% | $415.9 million / 18.4% | Profit +2%; margin down 0.3 points |
| Operating income / margin | $154.4 million / 6.6% | $178.4 million / 7.9% | -13% |
| Net income | $89.6 million | $119.8 million | -25% |
| Diluted EPS | $3.85 | $4.93 | -22% |
| Cash from operations | $192.4 million | $200.0 million | -4% |
Annual sales growth was led by MH (+59%), marine (+20%) and industrial (+2%), partly offset by RV sales (-10%). The contribution of the 2018 LaSalle acquisition was an important factor in the increase. RV remained the largest market, at 55% of sales, versus 63% in 2018; MH accounted for 19%, marine 14% and industrial 12%.
Fourth quarter: Sales were $549.5 million versus $531.2 million in Q4 2018 (+3%). Gross profit was $99.3 million versus $96.7 million. Net income was $20.0 million versus $27.0 million, and diluted EPS was $0.86 versus $1.15.
Cash, debt and liquidity
- Cash and equivalents were $139.4 million at year-end, up from $6.9 million. Operating cash flow was $192.4 million; capital expenditures were $27.7 million.
- Total debt was $705.0 million, compared with $661.1 million a year earlier. Cash less total debt implies net debt of approximately $565.6 million.
- The debt structure included $300 million of 7.5% senior notes due 2027, $172.5 million of 1.0% convertible notes due 2023, and $232.5 million outstanding under the revolving facility and term loan. Net interest expense rose 39% to $36.6 million.
- Management reported $411.1 million of unused availability under the credit facility. Year-end covenant ratios were 2.27x total leverage against a 4.00x maximum and 5.28x fixed-charge coverage against a 1.50x minimum. The company said it was in compliance.
- Current assets were $516.8 million and current liabilities $186.9 million. The filing adopted lease accounting in 2019, recognizing $93.5 million of operating lease right-of-use assets and $94.2 million of lease liabilities.
Material changes and management commentary
- RV wholesale shipments fell 16% and retail shipments fell 7% in 2019. Dealer inventories declined by more than 50,000 units; management said this could support a closer alignment of wholesale and retail shipments in the 2020 selling season.
- Marine sales rose despite estimated powerboat wholesale shipments declining 13%; adverse weather and dealer inventory adjustments affected the market. MH sales increased while industry wholesale shipments fell 2%, reflecting higher company content per unit and acquisition effects.
- Manufacturing segment sales fell 6% and operating income fell 19%; Distribution sales rose 34% and operating income rose 24%. LaSalle’s lower margin profile and higher warehouse and delivery costs weighed on consolidated margins. Higher fixed overhead relative to RV and marine revenue also pressured manufacturing profitability.
- Patrick spent approximately $56 million on 2019 acquisitions, including Topline Counters and G.G. Schmitt, and approximately $651 million on acquisitions over the prior three years. The 2019 acquisitions contributed $8.3 million of sales and $0.9 million of operating income.
- Management forecast approximately $30 million of capital expenditures for 2020 and an effective tax rate of 25%–26%. It expected industrial sales to benefit in 2020 from prior housing-start growth. Management said cash, operating cash flow and available credit should cover working capital and capital expenditure needs for at least 12 months, excluding acquisitions.
- The board adopted a regular quarterly dividend policy in December 2019; 2019 dividends paid were $0.25 per share. The board declared a further $0.25-per-share dividend payable in March 2020.
Risks, contingencies and unusual items
- Customer concentration is significant: Forest River and Thor together represented 40% of 2019 sales, versus 49% in 2018. The company has no long-term customer agreements.
- At the end of Q3 2019, a sophisticated malware attack disrupted administrative and network operations for approximately two business days. Patrick reported that controls over financial reporting were effective; the 2019-acquired businesses were excluded from management’s controls assessment and represented approximately 5% of assets and less than 1% of sales.
- Debt, variable interest rates, covenant compliance, cyclical end markets, customer financing, commodity and labor costs, and successful acquisition integration remain material risks. A 100-basis-point increase in relevant LIBOR rates was estimated to add about $0.3 million of annual interest cost after swaps.
- A group of companies brought environmental claims against Patrick in 2019, with related cross-claims by another defendant. The company moved to dismiss and said it did not currently expect a material adverse impact; litigation outcomes remain uncertain.
- Management recorded no goodwill or indefinite-lived intangible asset impairment in 2019. Goodwill was $319.3 million, and impairment testing relied on forecast cash flows, sales and operating income, growth rates and discount rates.
- Patrick reported a $0.7 million loss on extinguishment of debt associated with its 2019 credit facility amendment. The effective tax rate increased to 24.0% from 21.2%, mainly due to lower excess tax benefits on share-based compensation.
Investor facts to verify
- Whether RV shipments and dealer inventory levels recover as management anticipated, and how that affects Patrick’s largest market.
- How much of sales growth and margin performance reflects acquisitions versus underlying demand, particularly for MH and Distribution.
- Debt repayment capacity, interest expense, facility availability and covenant headroom under weaker market conditions.
- Whether higher warehouse and delivery costs and lower manufacturing margins persist, and whether planned 2020 capital spending is achieved.
- Developments in the cyber incident response and environmental litigation; the filing text does not quantify potential losses from either matter.