Business context and reporting period
Patrick Industries, Inc. filed this unaudited Form 10-Q for the first quarter ended March 30, 2014. The company manufactures and distributes products primarily for recreational vehicle (RV), manufactured housing (MH), and industrial markets. Comparisons are with the quarter ended March 31, 2013; balance-sheet comparisons are with December 31, 2013. Dollar amounts below are in millions unless otherwise stated.
Financial performance
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Net sales | $170.2 | $142.1 |
| Gross profit / margin | $27.1 / 16.0% | $22.4 / 15.8% |
| Operating income / margin | $11.8 / 6.9% | $10.4 / 7.3% |
| Net income | $6.9 | $6.0 |
| Diluted EPS | $0.64 | $0.55 |
| Operating cash flow | $7.5 | $1.1 |
| Capital expenditures | $0.9 | $1.3 |
Sales rose 19.7%; net income increased about 14.6%. Gross margin improved 0.2 percentage points, while operating margin declined 0.4 points as warehouse and delivery, SG&A, and amortization expenses grew faster than sales. Management attributed gross-margin improvement to higher volume, acquisitions, and operating efficiencies, partly offset by product mix, labor and freight costs, and commodity fluctuations.
- Manufacturing segment sales, including intersegment sales, were $133.7 million versus $116.4 million; operating income was $13.1 million versus $11.7 million.
- Distribution segment sales, including intersegment sales, were $42.1 million versus $31.5 million; operating income was $2.3 million versus $1.9 million. Distribution gross margin fell to 16.3% from 18.4%, reflecting lower-margin product mix and higher labor costs.
- Management estimated organic consolidated growth at approximately 13%; the remaining $10.5 million of sales growth was attributed to the incremental contribution of 2013 acquisitions. RV, MH, and industrial market revenues increased 21%, 12%, and 24%, respectively.
Financial position, liquidity, and debt
At March 30, 2014, total assets were $192.9 million, current assets $107.7 million, and current liabilities $50.7 million. Cash was $23,000. Trade receivables were $42.8 million and inventories $59.7 million. Long-term debt was $47.4 million, down from $55.0 million at year-end. The $80 million secured revolving facility had $30.7 million of availability; the company reported compliance with its debt covenants, with a 0.90 leverage ratio versus a 3.50 maximum and 11.90 interest coverage versus a 2.25 minimum.
Operating cash flow benefited from a $17.7 million increase in accounts payable and accrued liabilities, partly offset by a $20.2 million increase in receivables and $3.2 million increase in inventory. Financing activities used $6.6 million, including $7.6 million of net debt repayments. Management said existing cash, operating cash flow, and available borrowing capacity were expected to meet needs for at least 12 months, excluding acquisitions.
Outlook, risks, and notable items
- Management expected continued year-over-year quarterly revenue growth for the remainder of 2014, excluding contributions from 2013 and potential future acquisitions. It anticipated stronger seasonal patterns in Q2 and Q3.
- Industry forecasts cited by management called for 2014 RV shipments to increase approximately 6%, MH shipments approximately 8%, and housing starts approximately 17% versus 2013. These are industry forecasts, not company earnings guidance.
- The 2014 capital plan contemplated up to approximately $8 million, including ERP-system replacement, equipment upgrades, and maintenance and strategic investments.
- Risks discussed include economic and consumer-confidence uncertainty, market and credit conditions, severe winter weather and related operating delays, a shortage of qualified transport drivers, freight and commodity cost volatility, competitive pricing, and MH financing constraints. Management reported no material changes to the risk factors in its 2013 Form 10-K.
- A roughly $1.0 million excess tax benefit from stock-based compensation was recorded in shareholders’ equity and reflected in financing cash flows. The effective tax rate was 38.5%, versus 39% a year earlier.
- The board increased the stock repurchase authorization to $20 million in February 2014; no shares were repurchased in Q1. Through April 30, the company repurchased 23,011 shares for approximately $0.9 million.
- Purchase-price allocations for the 2013 Frontline and Premier acquisitions remained preliminary, with finalization expected in the first half of 2014. No goodwill impairment was recorded in Q1.
Important facts for investors to verify
- Whether receivables and inventory growth convert to cash as seasonal sales rise, given the very low reported cash balance.
- Whether margins recover or remain pressured by freight, driver availability, product mix, labor, and commodity costs.
- Actual organic growth and acquired contributions by segment, including integration and performance of the 2013 acquisitions.
- Progress against the 2014 outlook and capital plan, and continued covenant compliance and borrowing availability.
- Final acquisition accounting, the impact of stock-based compensation awards, and subsequent share repurchases.