Patrick Industries, Inc. — Form 10-Q Summary
Reporting period: Third quarter and nine months ended September 29, 2013. Dollar amounts are in millions unless stated otherwise. The company manufactures and distributes products primarily for the recreational vehicle (RV), manufactured housing (MH), and industrial markets.
Financial performance
| Metric | Third quarter 2013 | Third quarter 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $146.6 | $112.9 | $448.3 | $331.2 |
| Gross profit / margin | $21.8 / 14.9% | $16.9 / 15.0% | $69.4 / 15.5% | $51.2 / 15.4% |
| Operating income / margin | $9.0 / 6.1% | $7.3 / 6.5% | $32.3 / 7.2% | $22.4 / 6.8% |
| Net income | $5.5 | $6.6 | $19.0 | $24.9 |
| Diluted earnings per share | $0.51 | $0.60 | $1.76 | $2.32 |
- Sales rose 29.8% in the quarter and 35.3% year to date. Management estimated organic growth, excluding acquisition contributions, at approximately 16% and 17%, respectively; it attributed organic gains to market-share growth and stronger end markets. Acquisitions completed in 2012 and 2013 contributed materially to reported growth.
- Quarterly gross margin was slightly lower year over year; nine-month gross margin improved modestly. Cost efficiencies, higher volumes, product mix and margin-management actions helped, while commodity-cost fluctuations pressured results. Distribution margins improved; Manufacturing’s quarterly margin declined.
- Net income declined despite higher sales and operating income, principally because 2012 included a $6.7 million noncash tax valuation-allowance reversal, while 2013 recorded income-tax expense. The company estimated a 38% full-year 2013 effective tax rate; nine-month tax expense was $11.7 million.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $21.5 million, versus $14.6 million in 2012. Receivables and inventories absorbed cash, partly offset by increased payables and accrued liabilities.
- Investing activities used $20.8 million, including $16.5 million for the Frontline, Premier and West Side acquisitions and $5.2 million of capital expenditures. Financing activities provided $9.4 million, including $13.3 million of net debt borrowings and $6.1 million of share repurchases.
- At September 29, cash was $10.5 million and long-term debt was $63.0 million, compared with $0.4 million and $49.7 million, respectively, at December 31, 2012. The company reported approximately $15.6 million of unused revolving capacity under its $80 million secured facility, which matures in October 2017.
- The company was in compliance with its debt covenants: actual leverage ratio was 1.10 against a 3.50 maximum; interest coverage was 5.80 against a 2.25 minimum. Year-to-date capital expenditures were $5.2 million against an $8.0 million covenant limit.
- Current assets were $108.6 million and current liabilities $51.0 million at quarter-end. Management said existing cash, operating cash flow and available borrowings should meet anticipated working-capital and capital-expenditure needs for at least 12 months, excluding acquisitions.
Material changes and notable items
- In September, the company acquired Frontline, a fiberglass bath-fixture maker; Premier, a countertop fabricator; and West Side, an RV furniture distributor, for combined net purchase prices of approximately $16.5 million. Initial purchase-price allocations were preliminary and expected to be finalized in the fourth quarter of 2013.
- The company repurchased 407,330 shares for approximately $6.1 million during the first nine months under a $10 million authorization; no shares were repurchased in the third quarter. Approximately $3.9 million remained authorized at quarter-end.
- In October, after quarter-end, the company bought a previously leased distribution facility for approximately $1.7 million.
- The RV market represented about 73% of nine-month sales. Segment sales and operating income increased in both Manufacturing and Distribution. One major MH customer’s vertical integration reduced demand for certain products, partly offset by sales of other products to that customer.
Outlook, management commentary and risks
- Management expected steady growth in its markets to continue through the rest of 2013 and anticipated year-over-year fourth-quarter revenue growth, excluding contributions from the September acquisitions. It cautioned that fourth-quarter growth would be below the first-nine-month pace due partly to acquisition timing in the prior-year comparison.
- Industry outlook cited by management included approximately 12% projected 2013 RV shipment growth, approximately 7% MH shipment growth, and an estimated 18% increase in housing starts. Management noted limited longer-term visibility, generally three to six months, and uncertainty about the economic recovery and the October federal government shutdown.
- Management expected fourth-quarter gross margin as a percentage of sales to be below the third quarter because of seasonality, customer shutdowns and inventory counts, with commodity prices and competitive conditions potentially limiting price increases. The company’s 2013 capital plan called for spending of up to approximately $10 million, above the $8 million credit-agreement limit; management said it might seek a further lender amendment if needed.
- Principal operating risks discussed include dependence on RV and other cyclical markets, consumer confidence and credit availability, volatile commodity costs, seasonality, customer vertical integration, and execution of acquisitions and the phased ERP-system replacement. A large shareholder, Tontine Capital and affiliates, held approximately 31.3% of shares as of October 1, 2013 and could significantly influence shareholder matters.
- Disclosure controls were judged effective. The filing reported no material changes to previously disclosed risk factors other than the discussion of concentrated ownership.
Important facts for investors to verify
- Whether post-quarter acquisition integration and final purchase-price allocations affect reported earnings, cash flow or goodwill.
- Whether the company obtains any needed increase to the $8 million capital-expenditure covenant limit and completes the ERP project as planned.
- Whether end-market growth, particularly in RVs, continues and whether customer vertical integration or commodity costs pressure sales and margins.
- How cash conversion and working-capital levels develop, given increased receivables and inventory, and whether debt and liquidity remain within covenant limits.
- How tax expense and remaining state net operating loss utilization affect cash taxes and full-year results; the filing cautions that interim results are not necessarily indicative of full-year performance.