Business Context and Reporting Period
Company: Patrick Industries, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2006
Industry: Manufacturer and supplier of building products and materials for the Manufactured Housing, Recreational Vehicle (RV), and Industrial markets.
The Company operates through four reportable segments: Primary Manufactured Products, Distribution, Other Component Manufactured Products, and Engineered Solutions. In 2006, sales were derived approximately 44% from Manufactured Housing, 28% from the RV industry, and 28% from Industrial and Other markets. The Company closed a manufacturing plant in Nevada in December 2006 and subsequently purchased the assets of American Hardwoods, Inc. in January 2007.
Key Financial Metrics
| Metric (in thousands, except per share) | 2006 | 2005 |
|---|---|---|
| Net Sales | $347,629 | $323,400 |
| Gross Profit | $42,063 | $38,140 |
| Gross Margin | 12.1% | 11.8% |
| Operating Income | $6,154 | $3,836 |
| Net Income | $2,629 | $1,424 |
| Diluted EPS | $0.53 | $0.30 |
| Working Capital | $37,105 | $39,447 |
| Total Assets | $109,149 | $99,730 |
| Long-Term Debt | $14,006 | $16,472 |
| Shareholders' Equity | $66,076 | $62,680 |
Liquidity: The Company maintains a $15.0 million secured revolving credit agreement with $10.0 million outstanding as of December 31, 2006. Cash generated from operations and borrowings are deemed sufficient to fund working capital and capital expenditures.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 7.5% ($24.2 million) to $347.6 million. Approximately 81% of this increase was attributed to raw material price increases (averaging 11%) passed on to customers.
- Profitability: Operating income increased 60% ($2.3 million) and Net Income increased 84% ($1.2 million). Gross margin improved to 12.1% from 11.8% due to price increases and improved labor efficiencies.
- Inventory: Inventory levels increased by $9.4 million to $43.3 million, driven by strategic purchasing, raw material price hikes, and supply chain uncertainties regarding overseas shipping.
- Segment Performance:
- Primary Manufactured Products: Sales up 6.3%; Operating income up 28.5%.
- Distribution: Sales up 5.3%; Operating income up 69% (driven by price increases and new product lines).
- Other Component Manufactured Products: Sales down 1.3%; Operating income declined due to inefficiencies in the cabinet door division.
- Engineered Solutions: Sales up 15.9% primarily due to a 33% increase in aluminum market prices.
Outlook, Risks, and Management Commentary
Outlook: Management expects industry conditions to remain soft through the first and second quarters of 2007. Key focus areas for 2007 include executing strategic acquisitions, capturing market share, implementing lean manufacturing, and controlling costs. Capital expenditures for 2007 are projected at approximately $7.5 million.
Risks and Contingencies:
- Market Cyclicality: The Manufactured Housing industry experienced a 20% decline in shipments in 2006, reaching 45-year lows. The RV industry showed signs of softening in the latter half of 2006.
- Raw Materials: Prices for commodities (gypsum, aluminum, particleboard) are volatile. Supply constraints and allocation risks exist.
- Customer Concentration: Three customers accounted for 23% of total sales in 2006.
- Acquisition Integration: Risks associated with integrating new acquisitions, such as American Hardwoods, Inc., to realize synergies.
Unusual Items: Operating income included approximately $0.5 million in incremental legal and professional fees related to strategic acquisition efforts. The Company adopted SFAS 123(R) for share-based payments in 2006, reducing net income by $89,000 compared to prior accounting methods.
Investor Verification Checklist
- Inventory Valuation: Verify the adequacy of reserves for the $9.4 million increase in inventory, given the softening demand in the Manufactured Housing sector.
- Debt Covenants: Confirm continued compliance with debt service coverage and tangible net worth covenants under the $15 million revolving credit facility and term notes.
- Customer Concentration: Assess the financial stability of the top three customers representing 23% of sales.
- Acquisition Synergies: Monitor the integration and performance of the American Hardwoods, Inc. acquisition completed in January 2007.
- Raw Material Pricing: Evaluate the ability to pass on future raw material cost increases to customers in a softening market environment.