Patrick Industries, Inc. — FY2014 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2014; quarterly figures below include the fourth quarter. Patrick manufactures components and distributes building products, primarily for recreational vehicles (RV) and manufactured housing (MH), with additional industrial-market sales. Manufacturing represented about 75% of 2014 sales and Distribution about 25%.
Financial performance
Amounts are in U.S. dollars; annual figures are for the year ended December 31.
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Net sales | $735.7 million | $594.9 million | +23.7% |
| Gross profit / margin | $118.5 million / 16.1% | $91.0 million / 15.3% | Margin +0.8 percentage points |
| Operating income / margin | $51.5 million / 7.0% | $40.9 million / 6.9% | +25.7% |
| Net income | $30.7 million | $24.0 million | +27.6% |
| Diluted earnings per share | $2.87 | $2.23 | +28.7% |
| Cash from operating activities | $45.7 million | $22.4 million | +104.0% |
| Capital expenditures | $6.5 million | $8.7 million | Lower by $2.1 million |
| Total debt at year-end | $101.1 million | $55.0 million | +$46.1 million |
Revenue growth reflected higher industry shipments, market-share gains, product introductions, and acquisitions. Management estimated organic growth at approximately 11%; acquired businesses contributed about $78.0 million of the year-over-year sales increase. Gross-margin improvement reflected operating leverage, product mix, and efficiency initiatives. Net income also benefited from higher operating income; the effective tax rate was approximately 37.5% in 2014 versus 38% in 2013.
Fourth-quarter 2014 sales were $189.6 million versus $146.6 million in Q4 2013; gross profit was $29.5 million versus $21.6 million; and net income was $7.3 million versus $5.0 million. Quarterly diluted EPS was $0.69 versus $0.47.
Year-end cash and cash equivalents were $0.1 million, inventories $71.0 million, current assets $114.8 million, and current liabilities $45.1 million. The resulting current ratio was approximately 2.5. The revolving credit facility had $101.1 million drawn and $63.1 million of unused availability at year-end, excluding cash. The facility was expanded to $185 million in February 2015. Net cash used in investing activities was $78.6 million, principally $72.1 million for acquisitions. Financing activities provided $33.0 million.
Material changes and unusual items
- RV sales were 74% of 2014 revenue, up from 72% in 2013; MH was 15% and industrial markets 11%. Sales increased 27% in RV, 13% in MH, and 16% in industrial markets.
- Patrick completed four acquisitions in 2014 for approximately $72 million, adding RV painting, fabricated aluminum, simulated wood and stone, and fiberglass/plastic component businesses. The acquired businesses contributed approximately $56 million of 2014 revenue after acquisition. In February 2015, Patrick acquired Better Way Products for approximately $40 million.
- Debt rose to $101.1 million, principally to finance acquisitions, repurchases, and capital spending. The company repurchased 344,750 shares for $13.9 million during 2014 and paid no cash dividends.
- Operating costs included higher warehouse and delivery expense, partly related to driver shortages and severe winter weather, and higher stock-based compensation. Amortization of acquired intangibles increased to $4.5 million from $2.4 million.
- The 2012 tax valuation allowance reversal had increased 2012 net income by $6.8 million; accordingly, 2012 net income is not directly comparable with 2013–2014. The 2014 results included approximately $1.0 million of gains from contingent acquisition payments not becoming payable.
Outlook, risks, and contingencies
Management expected year-over-year revenue growth in 2015, excluding revenue from acquisitions completed in 2014, but did not provide a specific company revenue or earnings forecast. Industry forecasts cited were approximately 6% growth in RV shipments, 10% growth in MH shipments, and 11% growth in housing starts. Management expected 2015 gross margins to be generally consistent with 2014, with potential operating leverage offset in part by lower margins at certain acquired businesses. Planned 2015 capital expenditures were up to approximately $8 million. The company expected to maintain credit-covenant compliance and stated that available cash, operating cash flow, and borrowing capacity should cover anticipated needs for at least 12 months.
- Key exposures include cyclical and seasonal RV, MH, and housing demand; consumer confidence, financing availability, interest rates, and fuel prices; commodity costs and supply; labor availability; and competitive pricing.
- Customer concentration is significant: two RV customers accounted for 58% of 2014 sales, and the top five customers accounted for approximately 67%. One customer represented about 41% of year-end receivables. Customers generally have no long-term supply contracts.
- Debt carries variable interest rates and financial covenants; a 100-basis-point rate increase was estimated to add approximately $1.0 million in annual interest expense. The company reported compliance with its covenants at year-end.
- Acquisition integration, inventory obsolescence, ERP-system implementation, goodwill and intangible-asset recoverability, and environmental and regulatory compliance remain risks. No goodwill or long-lived-asset impairment was recorded for 2014.
- Management said ordinary-course legal claims were not expected to have a material adverse effect. The auditor issued an unqualified opinion on the financial statements and internal controls; the 2014 acquired operations were excluded from management’s internal-control assessment.
Important facts for investors to verify
- Whether 2015 organic growth and margins met management’s expectations, separating acquired revenue from underlying growth.
- Post-acquisition performance, integration, and profitability of the 2014 acquisitions and Better Way.
- Customer concentration, receivables exposure, and any changes in major customer demand or sourcing.
- Debt, borrowing availability, covenant headroom, variable-rate exposure, and funding needs for buybacks and acquisitions.
- Working-capital and inventory trends, cash conversion, and the costs and progress of the ERP-system replacement.