Patrick Industries, Inc. — Q3 2011 Form 10-Q
Reporting period: Third quarter and nine months ended September 25, 2011. Unless otherwise stated, amounts below are in millions of dollars. Comparative periods ended September 26, 2010.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $77.4 | $72.8 | $229.5 | $220.2 |
| Gross profit / margin | $13.2 / 17.0% | $7.8 / 10.7% | $33.1 / 14.4% | $24.0 / 10.9% |
| Operating income | $5.2 | $0.7 | $10.5 | $6.3 |
| Net income (loss) | $4.5 | $(0.6) | $7.0 | $2.2 |
| Diluted EPS | $0.44 | $(0.07) | $0.68 | $0.22 |
| Net interest expense | $0.8 | $1.5 | $3.6 | $4.3 |
Revenue increased 6.4% in Q3 and 4.3% year to date. Improved manufacturing efficiencies, lower scrap and returns, and higher material yields helped lift gross margins. Distribution sales benefited from the Blazon acquisition; acquisitions and stronger retail-fixture sales also contributed to growth. Results include no income-tax expense: the effective tax rate was zero due to tax-loss carryforwards and a valuation allowance. The allowance for deferred tax assets was approximately $19.1 million.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $9.5 million, versus $0.2 million in 2010. Investing used $7.9 million, including $6.2 million for acquisitions and $1.6 million for capital expenditures; financing used $3.4 million. Cash declined by $1.7 million to $0.24 million.
- At September 25, total debt was $33.0 million, compared with $36.2 million at year-end 2010. Debt included $24.2 million drawn on the revolver, $7.7 million of senior subordinated notes and a $2.0 million seller note. Current maturities were $1.0 million. The balance sheet reported $32.0 million of long-term debt, net of current maturities and discount.
- The new four-year, asset-secured revolving facility has a $50 million maximum and matures March 31, 2015. The reported borrowing base was $36.4 million; covenant excess availability plus qualified cash was $10.2 million. The company reported compliance with its covenants, including a 6.2 fixed-charge coverage ratio versus a 1.25 minimum.
- Management expected cash, operating cash flow and available revolver capacity to cover foreseeable needs for at least 12 months, excluding acquisitions. Liquidity depends in part on covenant compliance and borrowing-base availability.
Material changes, outlook and risks
- Operating income improved substantially year over year, while nine-month sales growth was partly acquisition-driven. Manufacturing segment sales fell 3.1% year to date, while Distribution segment sales rose 37.2%, mainly reflecting Blazon and Praxis.
- The March 2011 refinancing replaced the prior credit agreement. Subordinated notes carry interest of 10% rising to 13% for the March notes, and 13% for the September notes; the AIA seller note carries 10% interest. The company also terminated interest-rate swaps, paying $1.1 million; the 2011 results included a $0.6 million write-off of remaining swap losses and a $0.6 million write-off of prior financing costs.
- The September acquisition of AIA expanded countertop and related products. It contributed $0.4 million of reported revenue and little operating income during the period; purchase-price allocation remained subject to finalization. The company recognized $1.2 million of goodwill from AIA. Praxis generated a $0.2 million acquisition gain.
- Management anticipated softer RV and manufactured-housing conditions through the balance of 2011, citing seasonality and economic uncertainty. RV shipments rose 3% year to date but fell about 3% in Q3; manufactured-housing shipments fell 7% year to date. Risks include weak housing and credit markets, unemployment, fuel and freight costs, raw-material inflation, customer vertical integration, and variable-rate debt.
- Management’s near-term priorities included improving earnings, EBITDA and cash management; managing costs and inventory; and pursuing efficiencies, diversification and selected acquisitions. The 2011 capital plan was up to approximately $3.2 million, within the $4.0 million covenant cap. An ERP replacement project was expected to proceed in phases over 18–24 months beginning in Q3 2012.
Important facts for investors to verify
- Whether margin and earnings improvements are sustainable as RV and manufactured-housing demand softens and acquisition benefits normalize.
- Revolver availability under the borrowing base, covenant headroom, debt service and the cost of variable-rate and subordinated borrowing.
- Working-capital conversion: receivables rose $12.0 million and inventories $2.5 million during the first nine months, partly offset by higher payables and accruals.
- Final AIA purchase accounting, integration results and the expected contribution of recent acquisitions.
- Progress and costs of the ERP upgrade, and whether the tax valuation allowance or net operating losses change future cash taxes.