Patrick Industries, Inc. — Form 10-Q Summary
Reporting period: Third quarter and nine months ended September 24, 2017; comparisons are to the corresponding 2016 periods. Financial figures are in U.S. dollars. The statements are unaudited.
Business context and performance
Patrick manufactures and distributes components and products serving recreational vehicles (RV), manufactured housing (MH), marine, and industrial markets. RV accounted for 69% of nine-month sales, MH 13%, industrial 12%, and marine 6%. Growth reflected industry demand, expanded market penetration, and acquisitions.
Key financial metrics
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $407.5 million | $304.2 million | $1,160.1 million | $898.0 million |
| Gross profit | $69.2 million | $48.9 million | $198.2 million | $149.5 million |
| Gross margin | 17.0% | 16.1% | 17.1% | 16.6% |
| Operating income | $30.2 million | $20.1 million | $87.8 million | $68.7 million |
| Operating margin | 7.4% | 6.6% | 7.6% | 7.7% |
| Net income | $17.9 million | $12.1 million | $56.7 million | $42.0 million |
| Diluted EPS | $1.08 | $0.79 | $3.47 | $2.76 |
Nine-month operating cash flow was $32.6 million, down from $51.5 million. Increased receivables and inventory absorbed cash, partly offset by higher payables and accruals. Capital expenditures were $13.2 million; acquisitions used $97.3 million. Cash was $6.4 million at September 24, 2017, versus $6.4 million at year-end 2016.
Total debt was approximately $260.3 million, compared with $273.2 million at December 31, 2016. The company had $186.7 million of revolver availability, net of cash, and reported compliance with debt covenants: leverage ratio 1.44 against a maximum 3.00; fixed-charge coverage ratio 4.16 against a minimum 1.50. Its $450 million secured credit facility matures in March 2022 and bears variable rates. Management estimated a 100-basis-point rate increase would add about $2.6 million in annual interest expense at the reported level of variable-rate debt.
Material changes versus the prior period
- Sales rose 34% in Q3 and 29% for the nine months. Management attributed growth to acquisitions, higher RV and MH shipments, stronger marine activity, industrial market improvement, and increased product and geographic penetration.
- Q3 and nine-month gross margins improved, supported by volume leverage, higher-margin acquired products, and efficiency investments. Tight labor markets and higher commodity costs partly offset these gains.
- Nine-month operating margin edged down to 7.6% from 7.7%, as higher SG&A, corporate costs, and acquired-intangible amortization partly offset gross-margin improvement. SG&A increased to 5.5% of sales from 5.0%.
- Four acquisitions involving six companies were completed in the first nine months for approximately $97.3 million in cash outlay. The March 2017 public offering raised $93.6 million net, used to repay debt; weighted-average shares increased.
Outlook, commentary, and risks
Management expected continued growth in its primary markets through the remainder of 2017 and into 2018, while noting normal seasonal patterns and no assurance that forecasts would be achieved. Industry estimates cited included 2017 RV wholesale shipments up approximately 11%, MH shipments up approximately 14%, marine powerboat retail growth of 3%–5%, and housing starts up approximately 2%. These are market expectations, not company revenue or earnings guidance. Planned 2017 capital expenditures were up to approximately $22 million. Management estimated a 36.25% full-year effective tax rate excluding the share-based compensation tax benefits realized in the first nine months and any further fourth-quarter impact.
Risks discussed include seasonal demand, changes in RV and other end markets, dealer inventories, labor availability and costs, commodity-price volatility, competition, variable-rate debt, and the ability to pass cost increases to customers. Management said available cash, operating cash flow, and credit capacity should meet working-capital and capital-expenditure needs for at least 12 months, excluding acquisitions, subject to covenant compliance. The company reported effective disclosure controls and no material changes to previously disclosed risk factors.
Subsequent event: On November 1, 2017, after quarter-end, Patrick acquired Indiana Transport for $59 million, funded under its credit facility. The business will be included in Distribution; purchase-price allocation was not yet complete.
Important facts for investors to verify
- How much of reported growth and profitability came from acquisitions versus comparable-business growth, and whether acquired operations deliver expected returns.
- Whether receivables and inventory growth normalize and operating cash flow improves; nine-month operating cash flow declined despite higher net income.
- Debt capacity, variable-rate exposure, covenant headroom, and the funding and integration effects of the Indiana Transport acquisition.
- Whether labor and commodity-cost pressures can be offset through pricing, productivity, and product mix, and whether industry demand and seasonal trends remain supportive.
- The final purchase accounting and contingent consideration for acquisitions, including Baymont’s estimated $5.1 million performance-based liability, and the tax-rate impact of share-based compensation benefits.