Patrick Industries, Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013; financial statements are unaudited. Unless otherwise noted, amounts below are in millions of dollars.
Business context
Patrick manufactures and distributes products primarily for recreational vehicles (RV), manufactured housing (MH), and industrial markets. RV represented about 74% of first-half sales, MH 15%, and industrial markets 11%. The four acquisitions completed in 2012 materially contributed to year-over-year growth.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net sales | $159.6 | $115.6 | $301.7 | $218.3 |
| Gross profit | $25.2 | $17.8 | $47.6 | $34.3 |
| Gross margin | 15.8% | 15.4% | 15.8% | 15.7% |
| Operating income | $12.9 | $7.6 | $23.3 | $15.1 |
| Operating margin | 8.1% | 6.6% | 7.7% | 6.9% |
| Net income | $7.6 | $13.3 | $13.6 | $18.3 |
| Diluted EPS | $0.70 | $1.22 | $1.25 | $1.70 |
Sales rose 38.0% in Q2 and 38.2% for the first half. Management estimated organic growth of approximately 20% in Q2 and 18% year to date; the balance of the increases reflected the 2012 acquisitions. First-half sales increased across RV, MH, and industrial markets. Manufacturing generated approximately 78% of first-half sales; Distribution generated 22%.
Net income fell despite higher sales and operating income, principally because 2012 included a $6.7 million noncash tax benefit from reversing a deferred-tax valuation allowance. Patrick recorded tax expense at an estimated 39% full-year effective rate in 2013. First-half 2013 also benefited from a $0.4 million gain on sale of fixed assets; 2012 included stock-warrant revaluation expense of $1.8 million for the first half.
Cash flow, balance sheet, and liquidity
- Operating cash flow was $15.0 million for the first half, versus $14.3 million in 2012. Capital expenditures were $3.5 million, compared with $2.2 million; investing activities used $2.5 million, including proceeds from asset sales.
- Financing activities used $7.5 million: Patrick paid down $3.7 million of debt and spent $6.1 million repurchasing shares, partly offset by a $2.4 million realized excess tax benefit on stock compensation.
- Cash was $5.4 million at June 30, up from $0.4 million at year-end. Receivables were $32.0 million and inventory $51.7 million. Current assets were $94.8 million and current liabilities $43.9 million.
- Long-term debt was $46.0 million, down from $49.7 million at December 31, 2012. The $80 million secured revolving facility matured October 24, 2017; unused availability was approximately $32.9 million. Borrowing rates were 3.75% under the base-rate option or 1.6875% under the LIBOR option, plus a 0.20% fee on unused commitments.
- Patrick reported compliance with its debt covenants: actual leverage ratio 1.00 versus a 3.50 maximum; interest coverage ratio 5.00 versus a 2.25 minimum. The annual capital-expenditure cap was amended to $8.0 million; first-half spending was $3.5 million.
Outlook, commentary, and risks
- Management expected quarter-over-quarter revenue growth to continue through the rest of 2013, but at a slower rate than the first half because the 2012 acquisition contribution will be less favorable in comparisons. It cited an approximately 8% RV shipment increase forecast for 2013, approximately 6% growth in MH shipments, and approximately 19% growth in housing starts based on the cited industry forecast.
- Management estimated full-year 2013 gross margin at 14%–16%. It expected third-quarter margins to decline from the first half due to seasonality, higher commodity costs, and competitive limits on passing costs through to customers.
- The company planned approximately $8.0 million of 2013 capital spending, including ERP-system replacement and equipment upgrades. Management said available cash, operating cash flow, and borrowing capacity should meet anticipated working-capital and capital needs for at least 12 months, excluding acquisitions; this depends on forecasts and continued covenant compliance.
- Principal exposures include economic and consumer-credit uncertainty, commodity-price volatility, seasonal demand, and customers’ ability to shift production in-house. One large MH customer’s vertical integration reduced certain sales. The filing also notes that covenant noncompliance could restrict borrowing or lead to refinancing on unfavorable terms.
- The ERP conversion was being implemented in phases and was expected to affect systems and internal controls as it proceeded. Management reported effective disclosure controls; no material changes to previously disclosed risk factors were reported.
- The board authorized up to $10 million of share repurchases over 12 months. By June 30, 407,330 shares had been repurchased for approximately $6.1 million; approximately $3.9 million remained available as of July 26, 2013.
Key facts for investors to verify
- How much of future sales and margin performance reflects underlying demand and share gains versus the 2012 acquisitions.
- Whether the expected second-half revenue growth and 14%–16% full-year gross-margin range are achieved, given commodity costs and pricing competition.
- Working-capital conversion, particularly the increase in receivables and inventory, and the company’s ability to sustain operating cash flow.
- Debt availability and covenant headroom as the company funds capital expenditures, any acquisitions, and remaining share repurchases.
- The effective tax rate and utilization of remaining state net operating losses; the filing says a significant majority was expected to be used by the end of 2014.