Patrick Industries, Inc. — Q2 2015 Form 10-Q
Reporting period: Second quarter and six months ended June 28, 2015; comparisons are with the periods ended June 29, 2014. Dollar amounts below are in millions unless noted. Unaudited results; the company cautions that interim results are not necessarily indicative of full-year results.
Business context and performance
Patrick manufactures and distributes components and products for recreational vehicles (RV), manufactured housing (MH), and industrial markets. RV represented 75% of Q2 and 77% of six-month sales. Growth reflected acquisitions, market-share gains, higher RV and MH shipments, and improved industrial demand.
Key financial metrics
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net sales | $233.5 | $187.9 | $456.9 | $358.0 |
| Gross profit | $40.4 | $31.8 | $75.8 | $59.0 |
| Gross margin | 17.3% | 16.9% | 16.6% | 16.5% |
| Operating income | $20.4 | $15.5 | $35.9 | $27.3 |
| Net income | $12.1 | $9.2 | $21.2 | $16.1 |
| Diluted EPS | $0.78 | $0.57 | $1.37 | $1.00 |
| Operating cash flow | Not provided by quarter | Not provided by quarter | $27.4 | $16.7 |
Q2 sales rose 24.3% and six-month sales rose 27.6%; net income increased 30.8% and 31.6%, respectively. Six-month cash flow from operations improved, while cash used in investing was $63.7 million, mainly for $60.5 million of acquisitions and $3.2 million of capital expenditures. Cash ended the period at $6.6 million.
At June 28, 2015, total debt was $150.0 million: $75.0 million under the revolver and $75.0 million under the term loan. The new credit facility provides $250.0 million of capacity and matures April 28, 2020. Reported borrowing availability was $105.4 million, including cash on hand. The company reported covenant compliance: leverage ratio 1.64 versus a 3.00 maximum, and fixed-charge coverage 3.57 versus a 1.50 minimum. A 100-basis-point increase in benchmark rates was estimated to add about $1.5 million in annual interest cost at period-end borrowings.
Current assets were $138.9 million and current liabilities were $64.3 million. The filing does not provide a defined EBITDA amount in the supplied text.
Material changes and unusual items
- Acquired Better Way in February for approximately $40.4 million and SCI in May for approximately $20.1 million. Together, the businesses contributed about $13.8 million of Q2 revenue and $2.2 million of Q2 operating income. Purchase-price allocations remained preliminary.
- Debt increased from $101.1 million at year-end 2014 to $150.0 million, principally reflecting acquisition financing. The company also refinanced and expanded its credit facility in April.
- Intangible assets and goodwill rose with the acquisitions; amortization expense increased to $2.0 million in Q2 and $3.6 million for six months, versus $0.8 million and $1.6 million.
- Q2 and six-month diluted EPS comparisons reflect the May 29 three-for-two stock split. The company repurchased 195,750 shares for $5.7 million in the first half; no repurchases occurred in Q2.
Outlook, management commentary, and risks
Management expected the three primary markets to continue year-over-year growth through the rest of 2015, while anticipating normal seasonal softening in Q3 as RV dealers await new model introductions. The filing cites industry forecasts of approximately 7% growth in full-year RV shipments, approximately 10% growth in MH shipments, and approximately 7% growth in housing starts. Management anticipated 2015 gross margins would improve over 2014, subject to commodity prices, competitive pricing, and other factors. Planned 2015 capital expenditures were approximately $8.0 million.
Management said RV demand remained positive but noted a shift toward entry-level, lower-priced units that could cause short-term content-per-unit volatility. MH growth is constrained by financing availability, credit standards, job growth, and access to securitization markets. Results are also exposed to seasonal demand, volatile commodity costs, competitive pricing, variable interest rates, acquisition integration and execution, and working-capital needs. The company stated that available cash, operating cash flow, and credit capacity should cover anticipated working capital and capital expenditures for at least 12 months, excluding acquisitions.
The company reported no material change to previously disclosed risk factors, no impairment of goodwill or intangible assets, and effective disclosure controls and procedures. Its estimate of the full-year effective tax rate was 38.0%, compared with 38.5% in the comparable 2014 periods.
Important facts for investors to verify
- How much of reported growth and earnings improvement is organic versus attributable to acquisitions, and how the acquired businesses perform after integration.
- Final purchase accounting for Better Way and SCI, including acquired intangible values, amortization, and any subsequent adjustments.
- Whether RV/MH demand, product mix, content per unit, and management’s market and gross-margin expectations develop as anticipated.
- Debt levels, borrowing availability, variable-rate exposure, and continued compliance with credit-facility covenants as acquisition and working-capital needs evolve.
- Cash conversion, receivables and inventory trends, planned capital spending, and the use of remaining stock-repurchase authorization.