Business context and reporting period
Patrick Industries, Inc. filed its Form 10-K for the fiscal year ended December 31, 2012. The company manufactures components and distributes building products primarily to recreational vehicle (RV) and manufactured housing (MH) producers, as well as industrial customers. It reports Manufacturing and Distribution segments. Sales mix was approximately 69% RV, 19% MH, and 12% industrial; Manufacturing accounted for about 76% of consolidated sales.
Financial results and liquidity
| Metric | 2012 | 2011 |
|---|---|---|
| Net sales | $437.4 million | $307.8 million |
| Gross profit / margin | $65.7 million / 15.0% | $44.3 million / 14.4% |
| Operating income / margin | $27.0 million / 6.2% | $13.5 million / 4.4% |
| Net income | $28.1 million | $8.5 million |
| Diluted EPS | $2.64 | $0.83 |
| Cash from operations | $21.0 million | $11.8 million |
| Capital expenditures | $7.9 million | $2.4 million |
| Debt at year-end | $49.7 million | $33.0 million |
Revenue grew 42.1%; management reported 21% growth excluding the impact of acquisitions completed in 2011 and 2012. Higher volumes, acquisitions, market-share gains, pricing passed through for commodity costs, and improved operating efficiency contributed to results. Cash from operations less capital expenditures was approximately $13.1 million. Inventory increased $14.2 million during the year, using a substantial portion of operating cash flow. Year-end cash was $0.4 million; the company had $49.7 million drawn on its $80 million secured revolving facility, with nominal unused capacity of approximately $30.3 million before letters of credit and other borrowing conditions.
Material changes versus the prior period
- RV revenue rose 59% and MH revenue rose 16%; industrial sales increased 14%. Industry RV and MH wholesale shipments rose 13% and 6%, respectively, while U.S. housing starts increased approximately 28%.
- Gross margin improved by 0.6 percentage points, and operating margin rose from 4.4% to 6.2%, reflecting volume leverage, acquisition contributions, and operating improvements.
- The company completed four acquisitions for approximately $29 million: Décor, Gustafson Lighting, Creative Wood, and Middlebury Hardwoods. Approximately $29 million of acquired-business revenue was included in 2012 results; acquisitions’ stated annualized revenues were approximately $80 million.
- Patrick refinanced in October 2012 with a five-year, $80 million secured revolver maturing in 2017, replacing its prior facility, and repaid its subordinated notes and AIA seller note. Debt increased year over year, principally reflecting acquisitions and working-capital needs.
Outlook, risks, contingencies, and unusual items
Management expected continued, steady improvement across its markets into the first half of 2013 but noted limited visibility on sustained longer-term growth. Its industry expectations included an approximately 8% increase in 2013 RV shipments, approximately 12% growth in MH shipments, and a 24% increase in housing starts, based on cited industry forecasts. These are market estimates, not company revenue or earnings guidance. Patrick estimated 2013 gross margins of 14%–16% and capital expenditures of approximately $7 million, including about $1 million for ERP-system work.
- Reported 2012 net income included a $6.8 million non-cash tax benefit from reversing deferred-tax valuation allowances; the company reported a 0% effective tax rate. It expected to record taxes at an estimated combined statutory rate of approximately 39% beginning in 2013, with tax-loss carryforwards expected to partially offset cash taxes early in the year.
- Other unusual items included $1.7 million of non-cash warrant revaluation expense and fourth-quarter debt-prepayment charges, including a $0.7 million non-cash debt-discount write-off and $0.3 million in premiums. All outstanding 2008 warrants were exercised during 2012.
- Key risks include customer concentration (five customers represented approximately 64% of 2012 sales; two RV customers represented 54%), RV-market concentration, cyclical RV/MH and housing demand, customer credit and financing conditions, volatile raw-material costs and supply, competition, acquisition integration, inventory exposure, and compliance with credit covenants. The company had $49.7 million of debt outstanding and reported compliance with its covenants at year-end.
- The company reported no material adverse effect expected from pending ordinary-course legal proceedings. It reported effective disclosure controls and management concluded internal control over financial reporting was effective; the auditor did not attest to internal control effectiveness.
- After year-end, the board authorized a $10 million share-repurchase program. By March 15, 2013, 193,847 shares had been repurchased for approximately $2.6 million at an average $13.63 per share. No cash dividends were paid in 2012.
Important facts for investors to verify
- How much of sales and earnings growth is sustainable organic growth versus acquisition contribution, and whether the acquired businesses deliver expected returns.
- Whether the $6.8 million tax benefit is separated from recurring earnings in evaluating 2012 profitability, and the timing and cash impact of taxes in 2013.
- Working-capital and inventory trends, given the $14.2 million inventory increase and low year-end cash balance.
- Available revolver capacity after letters of credit and borrowing-base or covenant conditions, and the company’s ability to remain within leverage, interest-coverage, and capital-spending limits.
- Exposure to major RV customers and end markets, including any further customer vertical integration or changes in production and shipment forecasts.
- Execution and costs of the ERP implementation, expected acquisition synergies, and the financial impact of the share-repurchase program.