Business context and reporting period
Patrick Industries, Inc. filed this Form 10-K for the fiscal year ended December 31, 2011. The company manufactures components and distributes building products, primarily for recreational vehicle (RV) and manufactured housing (MH) customers, with additional industrial-market sales. Its reportable segments are Manufacturing and Distribution. Unless otherwise noted, amounts below are in U.S. dollars.
Financial performance and position
| Metric | 2011 | 2010 |
|---|---|---|
| Net sales | $307.8 million | $278.2 million |
| Gross profit / margin | $44.3 million / 14.4% | $29.6 million / 10.7% |
| Operating income / margin | $13.5 million / 4.3% | $6.4 million / 2.3% |
| Net income | $8.5 million | $1.2 million |
| Diluted earnings per share | $0.83 | $0.12 |
| Cash provided by operating activities | $11.8 million | $7.9 million |
| Capital expenditures | $2.4 million | $1.4 million |
Sales increased 10.6%. Management attributed growth to acquisitions, RV market penetration, stronger industrial/retail-fixture business, and commodity-related price increases. The RV market represented 61% of sales, MH 24%, and industrial and other markets 15%. Manufacturing generated about 76% of 2011 sales; Distribution about 24%.
At year-end, cash was $0.6 million and total debt was approximately $33.0 million, including $24.3 million drawn on the revolver, $7.7 million of secured senior subordinated notes, and $1.75 million outstanding on the AIA seller note. Current assets were $44.4 million and current liabilities $19.9 million. The 2010 balance sheet classified substantial debt as current because the prior facility was nearing maturity, so year-over-year working-capital comparisons are affected by the March 2011 refinancing. The new $50 million facility matures March 31, 2015; year-end borrowing base was $35.8 million. The company reported covenant compliance, with a 6.9 fixed-charge coverage ratio against a 1.25 minimum and $12.0 million of excess availability plus qualified cash against a $2.0 million minimum.
Interest expense declined to $4.5 million from $5.5 million, partly due to improved borrowing rates. Operating cash flow increased despite working-capital investment, including increases in receivables and inventory. Cash declined by $1.4 million during the year. The filing does not provide a clearly stated consolidated EBITDA value.
Material changes versus prior period
- Gross margin improved 3.7 percentage points, reflecting manufacturing efficiency and yield improvements, better margins, and acquired businesses.
- Net income rose substantially from 2010. Comparability is affected by $2.9 million of 2010 gains on asset sales versus $0.2 million of 2011 acquisition and asset-sale gains, as well as non-cash warrant revaluation and refinancing-related charges.
- Manufacturing sales increased 4.1%; segment operating income rose to $18.8 million from $7.9 million. Distribution sales grew 36.3%, substantially reflecting the Blazon acquisition, and segment operating income increased to $2.7 million from $1.4 million.
- Three acquisitions were completed in 2011: Praxis, AIA, and Performance Graphics. In March 2012, after year-end, the company acquired Décor for approximately $4.4 million, funded with facility borrowings and 100,000 shares.
- Total shareholders’ equity increased to $28.8 million from $18.1 million. Shares issued and outstanding at December 31, 2011 were approximately 10.0 million; warrant and equity awards also create potential dilution.
Outlook, risks, and unusual items
Management expected continued but uneven improvement in 2012 and cited an industry forecast of 5% growth in RV wholesale shipments and its own estimate of 0.2% growth in MH shipments. It also cited a forecast of approximately 17% growth in U.S. housing starts. These are forecasts, not company revenue or earnings guidance. Management prioritized acquisitions, margins, efficiency, cash management, liquidity, inventory discipline, and ERP implementation. ERP replacement was planned over 18–24 months, with approximately $1.7 million of ERP capital spending expected in 2012; total 2012 capital expenditures were limited to $4.0 million under the credit agreement.
Principal risks include cyclical RV, MH, and housing demand; restricted customer financing; fuel prices and consumer confidence; raw-material cost and supply volatility; competition and customers’ ability to vertically integrate; acquisition integration; and reliance on large customers. Two RV customers accounted for 49% of 2011 sales, and one customer alone accounted for 32% and 34% of year-end receivables. The five largest suppliers represented approximately 45% of purchases. Debt covenants, variable-rate borrowings, secured collateral, and subordinated debt carrying interest rates of 10% to 13% create financial and liquidity risks. The company stated that its cash, operating cash flow, and available facility capacity were expected to cover foreseeable needs for at least 12 months, excluding acquisitions.
Unusual or notable items include a $0.7 million non-cash warrant revaluation expense in 2011; $0.6 million of financing-cost write-offs and $0.6 million of interest-rate-swap loss write-offs within 2011 interest expense; and a $1.1 million cash settlement to terminate swaps. The company reported a $15.6 million deferred-tax valuation allowance and federal and state net operating loss carryforwards. Management reported no material pending legal matters and no goodwill or long-lived asset impairment for 2011. The auditor issued an unqualified opinion on the financial statements; management concluded internal control over financial reporting was effective, without an auditor attestation.
Most important facts for investors to verify
- How much of reported sales and earnings growth came from acquisitions, pricing, and underlying volume, and whether the 2011 margin gains are sustainable.
- Customer concentration, especially the largest RV customer’s share of sales and receivables, and the effect of any customer vertical integration or financial distress.
- Actual revolver availability, covenant headroom, debt service costs, and the company’s ability to refinance the facility due in 2015 and notes due in 2016.
- Working-capital and cash conversion trends, including receivables, inventory, and the very low year-end cash balance.
- Integration and return on investment for the 2011 acquisitions and Décor, alongside dilution from issued shares, warrants, and equity awards.