Business Context and Reporting Period
Company: Patrick Industries, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 28, 2009
Business Overview: Patrick Industries manufactures and distributes products for the recreational vehicle (RV), manufactured housing (MH), and residential housing markets. The company operates through three primary segments: Primary Manufactured Products, Distribution, and Other Component Manufactured Products. The reporting period reflects significant economic headwinds, including a 47% decline in RV unit shipments and a 44% decline in MH unit shipments year-to-date.
Key Financial Metrics
| Metric (in thousands) | Q2 2009 | Q2 2008 | 6 Months 2009 | 6 Months 2008 |
|---|---|---|---|---|
| Net Sales | $55,878 | $95,610 | $100,793 | $192,587 |
| Gross Profit | $6,117 | $11,328 | $9,709 | $21,855 |
| Gross Margin % | 11.0% | 11.8% | 9.6% | 11.3% |
| Operating Income (Loss) | $577 | $4,381 | $(2,250) | $3,115 |
| Net Income (Loss) | $(666) | $1,858 | $(4,812) | $(12) |
| Cash from Operations (6mo) | $871 (2009) vs $10,914 (2008) | |||
| Cash & Equivalents (End Period) | $900 | |||
| Total Debt (Current + Long-term) | $56,049 |
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 41.6% in Q2 2009 and 47.7% for the six months ended June 28, 2009, compared to the prior year. This was driven by severe downturns in the RV and MH industries.
- Profitability Shift: The company reported a net loss of $0.7 million for Q2 2009, compared to net income of $1.9 million in Q2 2008. For the six-month period, the net loss was $4.8 million versus a negligible loss of $12,000 in 2008.
- Discontinued Operations: The company completed the sale of the American Hardwoods business in January 2009 and the aluminum extrusion operation in July 2009 (subsequent to period end). Results for these units are classified as discontinued operations, contributing $0.8 million to net income in Q2 2009.
- Expense Reduction: Selling, General, and Administrative (SG&A) expenses dropped 50.9% in Q2 2009 due to headcount reductions and salary cuts, partially offsetting the revenue decline.
- One-Time Items: Q2 2008 included a $4.2 million gain on the sale of a California facility, which is not present in 2009. Conversely, 2009 includes a $0.5 million non-cash charge for stock warrant revaluation.
Guidance, Outlook, and Risks
- Market Outlook: Management expects depressed conditions in the RV, MH, and residential housing markets to continue through 2009 and potentially into 2010. Industry forecasts suggest a 42% decline in RV shipments and a 36% decline in MH shipments for the full year 2009.
- Strategic Focus: Key priorities for the remainder of 2009 include EBITDA improvement, cash flow generation, and debt reduction. The company plans to match costs with revenues and may close or consolidate additional facilities.
- Liquidity and Covenants: The company was in violation of its Consolidated EBITDA covenant as of March 1, 2009. A Third Amendment to the Credit Agreement was executed in April 2009, waiving the default and modifying covenants. The maximum borrowing limit on the revolving line of credit was reduced to $29.0 million.
- Capital Resources: Management believes cash from operations and available credit facilities are sufficient to fund operations for the next 12 months. Proceeds from the sale of the aluminum extrusion operation ($7.4 million) were used in Q3 2009 to pay down term loans and revenue bonds.
- Risks: Significant risks include the potential inability to refinance debt if market conditions persist, failure to meet amended financial covenants, and further deterioration in the macroeconomic environment affecting customer demand.
Investor Verification Checklist
- Covenant Compliance: Verify the company's ability to meet the new one-month and two-month Consolidated EBITDA covenants established in the April 2009 Credit Agreement amendment.
- Debt Structure: Review the terms of the Credit Agreement, specifically the reduced borrowing base ($29.0 million) and the impact of the "Payment in Kind" (PIK) interest option on the term loan principal.
- Discontinued Operations: Confirm the final accounting treatment and cash proceeds from the sale of the aluminum extrusion operation, which closed in July 2009.
- Warrant Liability: Monitor the fair value revaluation of the warrants issued to lenders, which are classified as a liability and impact net income periodically.
- Inventory Levels: Assess the adequacy of inventory reserves given the sharp decline in sales volumes and the risk of obsolescence in a depressed market.