Patrick Industries, Inc. — Q1 2018 Form 10-Q
Reporting period: First quarter ended April 1, 2018; comparative quarter ended March 26, 2017. Figures are unaudited. Patrick manufactures components and distributes building products primarily to recreational vehicle (RV), manufactured housing (MH), marine and industrial markets.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net sales | $551.8 million | $345.4 million | +60% |
| Gross profit / margin | $97.8 million / 17.7% | $57.5 million / 16.7% | Margin +1.0 percentage point |
| Operating income / margin | $41.8 million / 7.6% | $23.9 million / 6.9% | Margin +0.7 percentage point |
| Net income | $30.1 million | $17.5 million | +72% |
| Diluted earnings per share | $1.20 | $0.75 | +60% |
| Operating cash flow | $25.8 million | $(10.9) million | Improved by $36.7 million |
| Capital expenditures | $7.6 million | $3.5 million | |
| Business acquisitions, cash paid | $95.9 million | $10.1 million |
Sales growth reflected contributions from recent acquisitions and organic growth; management attributed approximately half of the consolidated sales increase to acquisitions and half to market penetration, unit shipment growth and improved housing starts. Sales rose in all four primary markets: RV +53%, marine +225%, MH +43% and industrial +64%. These figures include acquisition effects.
Manufacturing segment sales were $445.3 million and operating income was $52.9 million; Distribution segment sales were $116.6 million and operating income was $7.3 million. Distribution gross margin declined to 15.3% from 17.0%, primarily because a greater share of sales were direct shipments with lower margins. Segment operating income is before corporate expenses and amortization; consolidated operating income was $41.8 million.
At April 1, 2018, cash was $0.1 million, total assets $1.03 billion, current assets $360.7 million and current liabilities $179.4 million. Total debt was $464.1 million, comprising $228.6 million drawn on the revolver, $63.0 million on the term loan and $172.5 million of convertible notes. The revolver had $186.5 million of unused availability, net of cash. Management said cash, operating cash flow and available credit were expected to cover working capital and capital expenditure needs for at least 12 months, excluding acquisitions.
Operating cash flow benefited from net income and higher payables and accrued liabilities, but was partly offset by a $48.4 million increase in receivables and an $8.6 million increase in inventories, net of acquisitions. Cash used in investing activities was $103.5 million. Cash and cash equivalents fell by $2.7 million during the quarter to $0.1 million.
Material changes and significant transactions
- Four acquisitions closed in Q1 for approximately $95.9 million in cash: Metal Moulding Corporation, Aluminum Metals Company, Indiana Marine Products and Collins & Company. Their reported Q1 contribution was approximately $12.6 million in revenue and $1.3 million in operating income. Preliminary purchase accounting and contingent consideration estimates may change.
- In January, Patrick issued $172.5 million of 1.00% convertible senior notes due 2023. Net proceeds before hedge and warrant transaction costs were approximately $167.5 million. The notes are convertible under specified conditions; hedges are intended to reduce dilution, while warrants could dilute shares above their $113.925 initial strike price.
- Long-term debt increased from $354.4 million at year-end 2017 to $464.1 million at quarter-end, including the new convertible notes. Net interest expense rose to $4.4 million from $2.0 million. Variable-rate borrowings were $291.6 million; management estimated a 100-basis-point rate increase would add approximately $2.9 million in annual interest cost.
- Patrick repurchased 221,095 shares under its new $50 million, 24-month buyback authorization for $13.5 million during the quarter. Through April 27, 2018, it had repurchased 720,695 shares for $41.5 million. The company also acquired Dehco for approximately $53 million in April, funded through the credit facility.
- The company was in compliance with its credit covenants: actual leverage ratio was 1.96 versus a 3.00 maximum; fixed-charge coverage was 3.90 versus a 1.50 minimum. The credit facility matures March 2022 and is secured by substantially all personal property of the company and domestic subsidiary guarantors.
Outlook, commentary and risks
Management expected continued growth in its primary markets through 2018, with seasonal patterns broadly consistent with the prior year. It cited positive RV and marine demand, improving MH conditions and industrial-market expansion. Industry forecasts cited in the filing included approximately 7% growth in 2018 RV wholesale shipments, low-double-digit growth in MH wholesale shipments, 3%–5% growth in powerboat retail units and approximately 5% growth in housing starts. These are market forecasts, not company revenue or earnings guidance.
Management planned 2018 capital expenditures of up to approximately $25 million, principally for equipment, efficiency and capacity projects, facility expansion and maintenance. It anticipated a full-year effective tax rate of approximately 25%, excluding the impact of excess tax benefits from share-based compensation; the Q1 effective rate was 19.6% and included a $2.1 million tax benefit from share-based compensation.
Key risks and uncertainties include seasonal demand and changes in dealer inventories; reliance on RV and other cyclical markets; labor availability and cost, especially in the Midwest; volatility in commodity costs and the ability to pass cost increases to customers; variable interest rates; acquisition integration, purchase-price allocation and contingent consideration; and the possibility that actual demand differs from industry forecasts. Management noted that Q1 results are not necessarily indicative of full-year results. No material change to previously disclosed risk factors was reported.
Topic 606 revenue recognition was adopted January 1, 2018; management reported no material effect. The filing also states that lease accounting changes expected to take effect in 2019 would materially affect reported lease assets and liabilities, but were not expected to materially affect overall financial position, earnings or cash flows.
Important facts for investors to verify
- How much of sales and earnings growth came from acquired businesses versus organic growth, and how the acquired businesses perform after integration.
- Whether working-capital needs, especially receivables and inventory, continue to absorb cash despite higher reported earnings.
- Debt levels, revolver availability, covenant headroom and interest-rate exposure following the Dehco acquisition and additional share repurchases.
- The final purchase accounting and contingent consideration for recent acquisitions, along with the effects of convertible-note hedges and warrants on potential dilution.
- Whether market demand and management’s stated industry expectations translate into sustained company growth and margins, particularly given seasonality and cost pressures.