Patrick Industries, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; comparative quarter ended April 1, 2012. Unaudited consolidated financial statements. Amounts below are in U.S. dollars; financial figures are in millions unless noted.
Financial performance
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net sales | $142.1 | $102.7 | +38.4% |
| Gross profit | $22.4 | $16.4 | +36.6% |
| Operating income | $10.4 | $7.5 | +38.4% |
| Net income | $6.0 | $5.0 | +20.1% |
| Diluted EPS | $0.55 | $0.47 | Higher |
| Operating cash flow | $1.1 | $1.8 | Lower |
- Gross margin was 15.8%, down from 16.0%; operating margin was 7.3% in both periods; net margin was 4.2%, versus 4.9%.
- Cost of goods sold rose 38.7%, slightly faster than sales, reflecting commodity cost fluctuations. Warehouse and delivery expense declined as a share of sales, while SG&A rose to 4.9% of sales from 4.8%.
- Manufacturing generated $111.5 million of outside sales and $11.7 million of segment operating income; Distribution generated $30.7 million and $1.9 million, respectively. Each segment’s outside sales increased year over year.
Balance sheet, cash flow and capital
- At March 31, cash was $1.5 million, total assets $159.4 million, and shareholders’ equity $64.1 million. Cash increased from $0.4 million at year-end 2012.
- Trade receivables were $33.0 million, up from $17.9 million at year-end; inventory was $52.4 million, up from $47.0 million. Working-capital growth contributed to operating cash flow of only $1.1 million despite $6.0 million of net income.
- Capital expenditures were $1.3 million; investing activities used $0.8 million. Financing activities provided $0.7 million, including $4.4 million of net revolving borrowings and $3.6 million of stock repurchases.
- Long-term debt was $54.1 million, compared with $49.7 million at December 31, 2012. The secured $80 million revolving facility matures October 24, 2017; the company reported approximately $24.9 million of committed but unused capacity.
- The company reported compliance with its debt covenants: leverage ratio 1.40 versus a 3.50 maximum, interest coverage 6.50 versus a 2.25 minimum, and capital expenditures of $1.3 million against a $7.0 million annual limit.
- The board authorized up to $10 million of repurchases over 12 months. Through March 31, 258,933 shares had been repurchased for about $3.6 million; another 75,881 shares were repurchased through April 26.
Material changes and unusual items
- Sales growth reflected both organic expansion and acquisitions completed in 2012. Management estimated organic growth at approximately 17%; the acquisitions contributed approximately $22.0 million of the year-over-year sales increase.
- Q1 2012 included a $1.7 million non-cash stock-warrant revaluation expense; no warrants remained outstanding at March 31, 2013. This, along with lower borrowing costs in 2013, benefited the comparison.
- Q1 2013 tax expense was $3.8 million, at an estimated combined statutory rate of about 39%, versus no tax expense in Q1 2012 because of a full deferred-tax valuation allowance then in place. Federal and state net operating losses were expected to partially offset 2013 cash taxes.
- No acquisitions were completed in Q1 2013. Purchase-price allocations for two 2012 acquisitions were finalized during the quarter.
Outlook, commentary and risks
- Management expected continued quarter-over-quarter revenue growth for the rest of 2013, but at lower growth rates than Q1 due in part to the timing of prior-year acquisitions. It cited a limited visibility window of roughly three to six months.
- Management cited industry forecasts of 8% growth in 2013 RV shipments, approximately 5% growth in manufactured-housing shipments, and approximately 29% growth in housing starts. These are industry forecasts, not company revenue or earnings guidance.
- Management estimated full-year gross margins of 14%–16% and planned approximately $7.0 million in 2013 capital expenditures, including about $1.0 million for the phased ERP replacement.
- Key risks include commodity-price volatility, variable interest rates, consumer credit and confidence, seasonality, customer vertical integration, and the company’s dependence on the RV market (about 75% of Q1 sales). A major manufactured-housing customer’s in-house production and distribution changes reduced sales opportunities.
- Management expected available cash, operating cash flow, and credit-facility capacity to meet foreseeable needs for at least 12 months, excluding acquisitions. Access to unused capacity depends on covenant compliance; a breach could require refinancing on unfavorable terms. The company also noted that forced asset liquidation might not cover debt in full.
- Disclosure controls were deemed effective. The ERP implementation is expected to change systems and related internal controls in phases; management reported no other material Q1 changes to internal control over financial reporting. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether working-capital investment—especially receivables and inventory—converts into stronger operating cash flow in subsequent quarters.
- Whether organic sales growth and segment profitability persist as acquisition-related comparisons become less favorable.
- Commodity costs, gross-margin performance, and the effect of customer vertical integration on manufactured-housing sales.
- Revolver availability, covenant headroom, variable-rate exposure, and the impact of continued share repurchases on liquidity.
- Whether industry forecasts, management’s margin outlook, and the expected ERP spending and implementation schedule are achieved.