Patrick Industries, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended April 1, 2012; comparative quarter ended March 27, 2011. Financial statements are unaudited. Patrick supplies manufactured and distributed products to the recreational vehicle (RV), manufactured housing (MH), and industrial markets.
Financial performance
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Net sales | $102.7 million | $69.5 million |
| Gross profit / margin | $16.4 million / 16.0% | $7.9 million / 11.4% |
| Operating income / margin | $7.5 million / 7.3% | $0.8 million / 1.1% |
| Net income (loss) | $5.0 million | $(1.2) million |
| Diluted earnings (loss) per share | $0.47 | $(0.13) |
| Net cash from operating activities | $1.8 million | $1.0 million |
Sales rose 47.8%. Management attributed approximately $11.6 million of the increase to acquisitions completed since June 2011, with the remainder primarily from improved RV market penetration, stronger industrial-market business, and higher RV shipments. RV represented 69% of Q1 sales, MH 18%, and industrial markets 13%.
Both segments improved: Manufacturing sales were $83.7 million and operating income $8.1 million, versus $56.4 million and $2.3 million; Distribution sales were $23.4 million and operating income $1.3 million, versus $16.2 million and $0.2 million. Reported consolidated operating income is $7.5 million after corporate and other reconciling items.
Balance sheet, debt, and liquidity
- At April 1, 2012, cash was $1.2 million, current assets $63.4 million, and current liabilities $30.7 million. Current assets included $30.6 million in receivables and $29.6 million in inventory.
- Total debt was $36.4 million, including $28.8 million drawn on the revolver; the revolver had a $50 million maximum commitment and a reported $42.5 million borrowing base. The company reported $14.9 million of excess availability plus qualified cash for covenant purposes.
- Debt increased from $33.0 million at year-end 2011. The quarter’s financing included $4.4 million of net revolver borrowings, partly offset by $0.8 million of note prepayments and scheduled principal repayment.
- Operating cash flow was $1.8 million, while investing activities used $4.5 million, including $3.7 million for the Decor acquisition and $0.8 million of capital expenditures. Financing activities provided $3.5 million. Cash increased by $0.7 million to $1.2 million.
- Receivables absorbed $15.2 million of operating cash during the quarter, partly offset by a $9.5 million increase in accounts payable and accrued liabilities. Management cited higher sales and acquisition effects among the drivers.
- The company reported compliance with its credit covenants: fixed-charge coverage of 6.7 against a 1.25 minimum, and excess availability plus qualified cash of $14.9 million against a $2.0 million minimum. Fiscal 2012 capital expenditures are capped at $4.0 million under the facility; $0.8 million had been spent year to date.
Changes, outlook, and risks
- Gross margin increased 4.6 percentage points, reflecting higher volume against fixed costs, acquisitions, product-margin actions, and improved labor efficiency, scrap, returns, and material yields. Warehouse/delivery and SG&A costs rose in dollars but declined as a share of sales.
- Net income benefited from stronger operations and lower interest expense versus the prior-year quarter, which included financing-cost and interest-rate-swap write-offs. Q1 2012 also included a $1.7 million noncash stock-warrant revaluation expense, compared with $0.3 million in Q1 2011.
- The effective tax rate was zero in both periods, due to tax-loss carryforwards and a valuation allowance on deferred tax assets. The company reported a $15.6 million valuation allowance and did not expect significant 2012 cash income-tax outflows.
- In March 2012, Patrick acquired Decor for approximately $4.3 million, funded with $3.7 million of revolver borrowings and 100,000 shares valued at $0.6 million. The purchase-price allocation remained preliminary and was to be finalized in Q2 2012.
- Management forecast a 6% increase in 2012 wholesale RV shipments, in line with RVIA guidance, and a 3% increase in MH shipments. It cited an approximately 18% forecast increase in housing starts. Management expected moderate, relatively steady market improvement, but noted limited visibility and uncertainty around economic conditions, fuel prices, credit availability, seasonality, dealer-show timing, and the mild winter.
- Management expected liquidity from operations, cash, and revolver capacity to cover foreseeable needs for at least 12 months, excluding acquisitions. Variable interest rates, working-capital needs, covenant compliance, and the possibility of debt acceleration or less favorable refinancing if covenants are breached are material considerations.
- The company planned approximately $4.0 million of 2012 capital spending, including $1.2 million for an ERP replacement. Implementation was expected in phases over 18–24 months beginning in Q3 2012; management said the project would involve changes to systems and internal controls.
- Patrick disclosed that Tontine Capital and affiliates beneficially owned 45.9% of outstanding shares as of April 2, 2012, and could significantly influence shareholder matters. This concentration may affect governance and control transactions.
Important facts for investors to verify
- Whether operating cash generation can keep pace with receivables and inventory as sales grow, and whether collections and working-capital levels normalize.
- Final purchase accounting and the acquired businesses’ actual contribution to revenue, margins, and cash flow, especially for Decor.
- Revolver borrowing-base availability, covenant headroom, debt-service costs, and the effect of variable rates and subordinated debt.
- The recurring versus noncash effects of warrant revaluation and potential dilution from outstanding warrants, options, and share issuances.
- Whether stated RV, MH, and housing-market forecasts materialize, given seasonality and the disclosed economic, financing, fuel-cost, and customer-concentration risks.
- ERP implementation cost, timing, and effects on internal controls, along with Tontine’s continuing ownership and influence.