Business Context and Reporting Period
Company: Patrick Industries, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 27, 2010
Business Overview: The Company operates in two reportable segments: Manufacturing (producing furniture, shelving, wall, counter, and cabinet products for the RV, manufactured housing, and industrial markets) and Distribution (distributing wall/ceiling panels, drywall, electronics, and other building products). The Company serves primarily the Recreational Vehicle (RV) and Manufactured Housing (MH) industries.
Key Financial Metrics
| Metric (in thousands) | Q2 2010 | Q2 2009 | 6 Months 2010 | 6 Months 2009 |
|---|---|---|---|---|
| Net Sales | $83,865 | $55,878 | $147,365 | $100,793 |
| Gross Profit | $9,736 | $6,117 | $16,214 | $9,709 |
| Gross Margin % | 11.6% | 10.9% | 11.0% | 9.6% |
| Operating Income | $2,900 | $577 | $5,603 | $(2,250) |
| Net Income (Loss) | $1,884 | $(666) | $2,794 | $(4,812) |
| Diluted EPS | $0.19 | $(0.07) | $0.28 | $(0.53) |
| Cash and Equivalents | $352 | $900 (End of 2009) | $352 | $900 (End of 2009) |
| Total Debt (Current) | $41,043 | $23,859 | $41,043 | $23,859 |
| Working Capital | $(12,465) | $1,850 | $(12,465) | $1,850 |
Note: Total Debt includes Current maturities of long-term debt ($20,043) and Short-term borrowings ($21,000). Working Capital is negative due to the classification of all long-term debt as current pending refinancing.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 50.1% in Q2 2010 and 46.2% for the six months ended June 27, 2010, compared to the prior year. This growth is primarily driven by a recovery in the RV industry (wholesale unit shipments up ~80% in Q2 and ~87% YTD) and improved MH unit shipments.
- Profitability Turnaround: The Company returned to profitability, reporting Net Income of $1.9 million in Q2 2010 compared to a Net Loss of $0.7 million in Q2 2009. Operating income improved from $0.6 million to $2.9 million in Q2.
- Asset Sales: The Company sold its Oregon and California facilities in early 2010, recognizing a total pretax gain of approximately $3.5 million (partially deferred). Proceeds were used to pay down long-term debt.
- Acquisition: In January 2010, the Company acquired the cabinet door business of Quality Hardwoods for approximately $2.0 million, contributing to the Manufacturing segment's growth.
- Debt Classification: Due to the Credit Facility expiring on January 3, 2011, and the refinancing not being completed prior to the filing date, all long-term debt was reclassified as a current liability, resulting in a negative working capital position.
Guidance, Outlook, and Risks
- Market Outlook: Management anticipates continued improvement in the RV industry but expects softening market conditions in the latter half of 2010 due to lingering recession effects and consumer caution. The MH industry is expected to see modest growth (~1% for full year 2010). The industrial sector is expected to lag housing starts by 6-12 months.
- Strategic Focus: Key priorities include EBITDA improvement, cash flow maximization, debt reduction, and the renewal of the Credit Facility. The Company plans capital expenditures of up to $1.6 million for the full year 2010.
- Refinancing Risk: The Company intends to refinance its Credit Facility in the fourth quarter of 2010. Failure to refinance or comply with covenants could result in debt acceleration. Management believes it has the ability to refinance but notes no assurance of success.
- Covenants: The Company is subject to minimum quarterly Consolidated EBITDA covenants. It met the Q2 2010 requirement ($4.3 million actual vs. $2.2 million minimum).
- Discontinued Operations: Results from American Hardwoods and the aluminum extrusion operation are classified as discontinued operations and are not expected to recur.
Investor Verification Checklist
- Refinancing Status: Verify the status of the Credit Facility refinancing discussions and the likelihood of completion before the January 3, 2011 maturity.
- Working Capital Trends: Monitor the negative working capital position and the Company's ability to manage liquidity given the high level of current debt obligations.
- RV Market Sustainability: Assess whether the 80%+ growth in RV shipments is sustainable or if a correction is likely in the second half of 2010 as management cautions.
- Cabinet Door Margins: Review future quarters for margin recovery in the newly acquired cabinet door business, which faced inefficiencies in Q2 2010.
- Debt Service: Confirm the Company's ability to meet scheduled principal payments and interest obligations, including the "Payment-in-Kind" (PIK) interest component.