Patrick Industries, Inc. — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 26, 2011; unaudited. Comparisons are to the periods ended June 27, 2010. Amounts below are in millions of dollars except per-share data.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net sales | $82.6 | $83.9 | $152.1 | $147.4 |
| Gross profit | $12.0 | $9.7 | $19.9 | $16.2 |
| Gross margin | 14.6% | 11.6% | 13.1% | 11.0% |
| Operating income | $4.5 | $2.9 | $5.3 | $5.6 |
| Net income | $3.7 | $1.9 | $2.5 | $2.8 |
| Diluted EPS | $0.36 | $0.19 | $0.24 | $0.28 |
Q2 sales declined 1.5%, while first-half sales grew 3.2%. Profitability improved substantially in Q2 as manufacturing efficiency and product mix lifted gross margin; first-half operating income and net income remained below prior-year levels. The six-month net income figure is lower than Q2 net income, indicating a first-quarter loss; the filing reports six-month net income of $2.462 million.
For the first six months, operating cash flow was negative $1.3 million, improved from negative $3.5 million. Investing used $1.7 million and financing provided $1.8 million. Cash ended at $0.7 million, versus $2.0 million at year-end 2010. Receivables rose $15.6 million, largely reflecting seasonality. Capital expenditures were $1.2 million.
At June 26, total assets were $88.8 million, total liabilities $66.7 million, and shareholders’ equity $22.1 million. Long-term debt, less current maturities and discount, was $38.2 million; no current debt maturities or short-term borrowings were reported. The filing says cash, operating cash flow, and facility availability should cover known needs for at least 12 months, excluding acquisitions.
Material changes and business drivers
- Q2 Manufacturing sales fell 10.3% to $65.8 million, while Distribution sales rose 39.9% to $20.1 million, including sales from the 2010 Blazon acquisition. First-half segment sales were $122.1 million and $36.3 million, respectively.
- RV industry shipments increased 4% in Q2 and 6% year to date; RVs represented about 62% of first-half company sales. Manufactured housing shipments fell 12% in Q2 and 13% year to date, and the company projected a roughly 12% full-year industry decline. Industrial sales faced weak housing conditions, partly offset by diversification.
- Gross margin gains reflected improved labor efficiency, reduced scrap and returns, better material yields, and cost controls. Freight, fuel, and raw-material cost pressures remained.
- Management changed internal segment cost allocations effective January 1, 2011; prior-period segment results were reclassified for comparability.
Outlook, financing, and risks
- The company cited RVIA’s forecast of approximately 7% growth in 2011 RV shipments and said RV shipments could continue improving over the next 24–26 months if consumer confidence improves. This is industry commentary, not company revenue or earnings guidance.
- Management estimated 2011 capital expenditures of about $3.8 million, including management information system replacement; the credit agreement caps 2011 capital expenditures at $4.0 million. Priorities include profitability, EBITDA, cash management, efficiencies, diversification, and selective acquisitions.
- On March 31, 2011, Patrick replaced its prior financing with a four-year, asset-secured revolving facility of up to $50 million, maturing March 31, 2015. At quarter-end, the fixed-charge coverage ratio was 3.4:1 against a 1.25:1 minimum; excess availability plus qualified cash was $5.755 million against a $2.0 million minimum.
- The company also issued $5 million of secured subordinated notes bearing 10% interest through March 2013 and 13% thereafter, due March 2016. Debt is subject to variable rates under the revolver and restrictive covenants; covenant failure could accelerate debt or require refinancing.
- First-half interest expense included write-offs of about $0.6 million of prior facility financing costs and $0.6 million of unamortized swap losses. The interest-rate swaps were terminated in March for a $1.1 million cash settlement. The Praxis acquisition generated a reported $0.2 million gain; 2010 comparisons included significant facility-sale gains.
- The effective tax rate was zero due to tax-loss carryforwards and a valuation allowance; deferred tax assets remain subject to realization uncertainty. Other key risks include cyclical RV and manufactured housing demand, credit availability, fuel and raw-material costs, and seasonal working-capital needs. Management reported effective disclosure controls and no material change in internal control during the quarter.
Investor verification points
- Reconcile the reported six-month net income of $2.462 million with Q2 net income of $3.697 million and the implied first-quarter loss; assess the drivers of the first-half result.
- Review receivables, operating cash use, and seasonal working-capital needs, along with actual revolver borrowing-base availability and covenant headroom.
- Confirm the debt balance and financing costs following the refinancing, including the subordinated notes’ escalating interest rate and collateral terms.
- Assess whether manufacturing margin improvements can persist amid weak manufactured housing demand, freight and fuel costs, and raw-material inflation.
- Track dilution from outstanding warrants and shares issued, and monitor progress and spending on the planned information-system replacement.