UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2013
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ……………… to ………………
Commission file number 000-03922
PATRICK INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
INDIANA |
35-1057796 |
(State or other jurisdiction of |
(I.R.S. Employer |
incorporation or organization) |
Identification No.) |
107 WEST FRANKLIN STREET, P.O. Box 638, ELKHART, IN 46515 (Address of principal executive offices) (ZIP Code)
(574) 294-7511
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company [X]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
As of July 26, 2013, there were 10,566,430 shares of the registrant’s common stock outstanding.
PATRICK INDUSTRIES, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION |
|
Page No. | |
ITEM 1. FINANCIAL STATEMENTS |
|
Condensed Consolidated Statements of Financial Position |
|
June 30, 2013 (Unaudited) and December 31, 2012 |
3 |
Condensed Consolidated Statements of Income (Unaudited) |
|
Second Quarter and Six Months Ended June 30, 2013 and July 1, 2012 |
4 |
Condensed Consolidated Statements of Comprehensive Income (Unaudited) Second Quarter and Six Months Ended June 30, 2013 and July 1, 2012 |
5 |
Condensed Consolidated Statements of Cash Flows (Unaudited) |
|
Six Months Ended June 30, 2013 and July 1, 2012 |
6 |
Notes to Condensed Consolidated Financial Statements (Unaudited) |
7-18 |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
18-35 |
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
35 |
ITEM 4. CONTROLS AND PROCEDURES |
35 |
PART II. OTHER INFORMATION |
|
ITEM 1A. RISK FACTORS |
36 |
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
36 |
ITEM 6. EXHIBITS |
36-37 |
SIGNATURES |
38 |
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PATRICK INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
As of |
|||||||
(Unaudited) |
|||||||
(thousands) |
June 30, 2013 |
Dec. 31, 2012 |
|||||
ASSETS |
|||||||
Current Assets |
|||||||
Cash and cash equivalents |
$ | 5,378 | $ | 434 | |||
Trade receivables, net |
31,963 | 17,858 | |||||
Inventories |
51,674 | 46,992 | |||||
Deferred tax assets |
3,292 | 5,149 | |||||
Prepaid expenses and other |
2,473 | 3,237 | |||||
Total current assets |
94,780 | 73,670 | |||||
Property, plant and equipment, at cost |
95,031 | 94,470 | |||||
Less accumulated depreciation |
57,442 | 57,401 | |||||
Property, plant and equipment, net |
37,589 | 37,069 | |||||
Goodwill |
10,362 | 10,362 | |||||
Intangible assets, net of accumulated amortization (2013: $4,309; 2012: $3,269) |
18,179 | 19,219 | |||||
Deferred tax assets |
717 | 676 | |||||
Deferred financing costs, net of accumulated amortization (2013: $1,170; 2012: $975) |
1,513 | 1,612 | |||||
Other non-current assets |
828 | 861 | |||||
TOTAL ASSETS |
$ | 163,968 | $ | 143,469 | |||
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|||||||
Current Liabilities |
|||||||
Accounts payable |
$ | 32,112 | $ | 17,336 | |||
Accrued liabilities |
11,780 | 11,816 | |||||
Total current liabilities |
43,892 | 29,152 | |||||
Long-term debt |
46,008 | 49,716 | |||||
Deferred compensation and other |
3,026 | 3,193 | |||||
TOTAL LIABILITIES |
92,926 | 82,061 | |||||
SHAREHOLDERS’ EQUITY |
|||||||
Common stock |
49,148 | 55,501 | |||||
Additional-paid-in-capital |
6,716 | 4,305 | |||||
Accumulated other comprehensive income |
17 | 17 | |||||
Retained earnings |
15,161 | 1,585 | |||||
TOTAL SHAREHOLDERS’ EQUITY |
71,042 | 61,408 | |||||
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY |
$ | 163,968 | $ | 143,469 |
See accompanying Notes to Condensed Consolidated Financial Statements.
PATRICK INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Second Quarter Ended | Six Months Ended | |||||||||||||||
(thousands except per share data) |
June 30, 2013 |
July 1, 2012 |
June 30, 2013 |
July 1, 2012 |
||||||||||||
NET SALES |
$ | 159,576 | $ | 115,605 | $ | 301,696 | $ | 218,293 | ||||||||
Cost of goods sold |
134,416 | 97,766 | 254,100 | 184,020 | ||||||||||||
GROSS PROFIT |
25,160 | 17,839 | 47,596 | 34,273 | ||||||||||||
Operating expenses: |
||||||||||||||||
Warehouse and delivery |
4,710 | 3,981 | 9,246 | 7,655 | ||||||||||||
Selling, general and administrative |
7,441 | 5,940 | 14,410 | 10,858 | ||||||||||||
Amortization of intangible assets |
521 | 334 | 1,040 | 650 | ||||||||||||
Gain on sale of fixed assets |
(426 | ) | (3 | ) | (430 | ) | (3 | ) | ||||||||
Total operating expenses |
12,246 | 10,252 | 24,266 | 19,160 | ||||||||||||
OPERATING INCOME |
12,914 | 7,587 | 23,330 | 15,113 | ||||||||||||
Stock warrants revaluation |
- | 134 | - | 1,804 | ||||||||||||
Interest expense, net |
522 | 790 | 1,074 | 1,635 | ||||||||||||
Income before income taxes (credit) |
12,392 | 6,663 | 22,256 | 11,674 | ||||||||||||
Income taxes (credit) |
4,835 | (6,650 | ) | 8,680 | (6,650 | ) | ||||||||||
NET INCOME |
$ | 7,557 | $ | 13,313 | $ | 13,576 | $ | 18,324 | ||||||||
BASIC NET INCOME PER COMMON SHARE |
$ | 0.70 | $ | 1.26 | $ | 1.26 | $ | 1.77 | ||||||||
DILUTED NET INCOME PER COMMON SHARE |
$ | 0.70 | $ | 1.22 | $ | 1.25 | $ | 1.70 | ||||||||
Weighted average shares outstanding - Basic |
10,720 | 10,526 | 10,814 | 10,373 | ||||||||||||
- Diluted |
10,762 | 10,921 | 10,856 | 10,758 |
See accompanying Notes to Condensed Consolidated Financial Statements.
PATRICK INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
Second Quarter Ended |
Six Months Ended |
|||||||||||||||
(thousands) |
June 30, 2013 |
July 1, 2012 |
June 30, 2013 |
July 1, 2012 |
||||||||||||
Net income |
$ | 7,557 | $ | 13,313 | $ | 13,576 | $ | 18,324 | ||||||||
Other comprehensive income |
- | - | - | - | ||||||||||||
Comprehensive income |
$ | 7,557 | $ | 13,313 | $ | 13,576 | $ | 18,324 |
See accompanying Notes to Condensed Consolidated Financial Statements.
PATRICK INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six Months Ended |
||||||||
(thousands) |
June 30, 2013 |
July 1, 2012 |
||||||
CASH FLOWS FROM OPERATING ACTIVITIES |
||||||||
Net income |
$ | 13,576 | $ | 18,324 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Depreciation |
2,490 | 1,889 | ||||||
Amortization of intangible assets |
1,040 | 650 | ||||||
Stock-based compensation expense |
595 | 341 | ||||||
Deferred compensation expense |
117 | 117 | ||||||
Reversal of tax valuation allowance |
- | (6,650 | ) | |||||
Deferred income taxes |
1,816 | - | ||||||
Gain on sale of fixed assets |
(430 | ) | (3 | ) | ||||
Stock warrants revaluation |
- | 1,804 | ||||||
Decrease in cash surrender value of life insurance |
45 | 45 | ||||||
Deferred financing amortization |
195 | 295 | ||||||
Amortization of debt discount |
- | 98 | ||||||
Change in operating assets and liabilities, net of the effects of acquisitions: |
||||||||
Trade receivables |
(14,105 | ) | (10,221 | ) | ||||
Inventories |
(4,682 | ) | (5,628 | ) | ||||
Prepaid expenses and other |
719 | (54 | ) | |||||
Accounts payable and accrued liabilities |
13,858 | 13,499 | ||||||
Payments on deferred compensation obligations |
(200 | ) | (191 | ) | ||||
Net cash provided by operating activities |
15,034 | 14,315 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES |
||||||||
Capital expenditures |
(3,524 | ) | (2,193 | ) | ||||
Proceeds from sale of property, equipment and facility |
989 | 3 | ||||||
Business acquisitions |
- | (3,691 | ) | |||||
Other |
(12 | ) | (13 | ) | ||||
Net cash used in investing activities |
(2,547 | ) | (5,894 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES |
||||||||
Long-term debt payments, net |
(3,708 | ) | (7,679 | ) | ||||
Payment of deferred financing/debt issuance costs |
(96 | ) | (13 | ) | ||||
Stock repurchases |
(6,078 | ) | - | |||||
Realization of excess tax benefit on stock-based compensation |
2,363 | - | ||||||
Proceeds from exercise of stock options, including tax benefit |
60 | 116 | ||||||
Other |
(84 | ) | - | |||||
Net cash used in financing activities |
(7,543 | ) | (7,576 | ) | ||||
Increase in cash and cash equivalents |
4,944 | 845 | ||||||
Cash and cash equivalents at beginning of year |
434 | 550 | ||||||
Cash and cash equivalents at end of period |
$ | 5,378 | $ | 1,395 |
See accompanying Notes to Condensed Consolidated Financial Statements.
PATRICK INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. BASIS OF PRESENTATION
In the opinion of Patrick Industries, Inc. (“Patrick” or the “Company”), the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of normal recurring adjustments) necessary to present fairly the Company’s financial position as of June 30, 2013 and December 31, 2012, and its results of income, comprehensive income, and cash flows for the three and six months ended June 30, 2013 and July 1, 2012.
Patrick’s unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission and in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to those rules or regulations. For a description of significant accounting policies used by the Company in the preparation of its consolidated financial statements, please refer to Note 2 of the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012. Operating results for the second quarter and six months ended June 30, 2013 are not necessarily indicative of the results to be expected for the year ending December 31, 2013.
2. INVENTORIES
Inventories are stated at the lower of cost (First-In, First-Out (FIFO) Method) or market and consist of the following classes:
(thousands) |
June 30, 2013 |
Dec. 31, 2012 |
|||||
Raw materials |
$ | 26,509 | $ | 24,197 | |||
Work in process |
4,339 | 3,000 | |||||
Finished goods |
4,528 | 3,169 | |||||
Less: reserve for inventory obsolescence |
(812 | ) | (825 | ) | |||
Total manufactured goods, net |
34,564 | 29,541 | |||||
Materials purchased for resale (distribution products) |
17,447 | 17,732 | |||||
Less: reserve for inventory obsolescence |
(337 | ) | (281 | ) | |||
Total materials purchased for resale (distribution products), net |
17,110 | 17,451 | |||||
Total inventories |
$ | 51,674 | $ | 46,992 |
3. GOODWILL AND INTANGIBLE ASSETS
Goodwill and other intangible assets are allocated to the Company’s reporting units at the date they are initially recorded. Goodwill and indefinite-lived intangible assets are not amortized but are subject to an annual (or under certain circumstances more frequent) impairment test based on their estimated fair value. Goodwill impairment testing is performed at the reporting unit level, one level below the business segment. The Company’s Manufacturing segment includes goodwill originating from the acquisitions of Gravure Ink (acquired in the Adorn Holdings, Inc. (“Adorn”) acquisition), Quality Hardwoods Sales (“Quality Hardwoods”), A.I.A. Countertops, LLC (“AIA”), Infinity Graphics, Décor Mfg., LLC (“Décor”), Creative Wood Designs, Inc. (“Creative Wood”), and Middlebury Hardwood Products, Inc. (“Middlebury Hardwoods”). While Gravure Ink, AIA, Infinity Graphics, Décor, Creative Wood and Middlebury Hardwoods remain reporting units of the Company for which impairment is assessed, Quality Hardwoods is assessed for impairment as part of the Company’s hardwood door reporting unit. The Company’s Distribution segment includes goodwill originating from the acquisition of Blazon International Group (“Blazon”), which remains a reporting unit for which impairment is assessed.
Finite-lived intangible assets that meet certain criteria continue to be amortized over their useful lives and are also subject to an impairment test based on estimated undiscounted cash flows when impairment indicators exist. The Company performs the required impairment test of goodwill in the fourth quarter or more frequently if events or changes in circumstances indicate that the carrying value may exceed the fair value. No impairment was recognized during the second quarter and six months ended June 30, 2013. There have been no material changes to the method of evaluating goodwill impairment during the second quarter of 2013. The Company does not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions used to determine impairment in the foreseeable future.
Goodwill
As of June 30, 2013 and December 31, 2012, the $10.4 million carrying amount for goodwill is comprised of $10.3 million attributable to the Manufacturing segment and $0.1 million attributable to the Distribution segment.
Other Intangible Assets
As of June 30, 2013, the remaining intangible assets balance of $18.2 million is comprised of $3.5 million of trademarks which have an indefinite life, and therefore, no amortization expense has been recorded, and $14.7 million pertaining to customer relationships and non-compete agreements which are being amortized over periods ranging from 1 to 19 years.
Other intangible assets, net consist of the following as of June 30, 2013 and December 31, 2012:
(thousands) |
June 30, 2013 |
Dec. 31, 2012 |
|||||
Trademarks |
$ | 3,504 | $ | 3,504 | |||
Customer relationships |
17,228 | 17,228 | |||||
Non-compete agreements |
1,756 | 1,756 | |||||
22,488 | 22,488 | ||||||
Less: accumulated amortization |
(4,309 | ) | (3,269 | ) | |||
Other intangible assets, net |
$ | 18,179 | $ | 19,219 |
Changes in the carrying value of other intangible assets for the six months ended June 30, 2013 by segment are as follows:
(thousands) |
Manufacturing |
Distribution |
Total |
||||||||
Balance – December 31, 2012 |
$ | 18,242 | $ | 977 | $ | 19,219 | |||||
Amortization |
(884 | ) | (156 | ) | (1,040 | ) | |||||
Balance – June 30, 2013 |
$ | 17,358 | $ | 821 | $ | 18,179 |
4. ACQUISITIONS
2012 Acquisitions
Décor
In March 2012, the Company acquired certain assets of Tualatin, Oregon-based Décor, a manufacturer of laminated and wrapped products for the Northwestern U.S.-based RV industry, for a net purchase price of $4.3 million. This acquisition expanded the Company’s revenues to its existing customer base in the RV industry sector and significantly expanded the Company’s RV presence in the Northwest. The results of operations for Décor are included in the Company’s condensed consolidated financial statements and the Manufacturing operating segment from the date of acquisition. The excess of the purchase consideration over the fair value of the net assets acquired was recorded as goodwill, which represents the value of leveraging the Company’s existing purchasing, manufacturing, sales, and systems resources with the organizational talent and expertise of the Décor team to maximize efficiencies, revenue impact, market share growth, and net income.
The acquisition was funded through borrowings under the Company's 2011 Credit Facility (as defined herein), and the issuance of 100,000 shares or $0.6 million of Patrick common stock. The value of the common stock issued was based on the closing stock price of $6.42 per share on March 2, 2012.
Assets acquired and liabilities assumed in the acquisition were recorded on the Company’s condensed consolidated statements of financial position at their estimated fair values as of the date of the acquisition. The following summarizes the fair values of the assets acquired and the liabilities assumed as of the date of acquisition:
(thousands) |
|||
Trade receivables |
$ | 1,280 | |
Inventories |
903 | ||
Property, plant and equipment |
400 | ||
Prepaid expenses |
22 | ||
Accounts payable and accrued liabilities |
(1,375 | ) | |
Intangible assets |
1,663 | ||
Goodwill |
1,440 | ||
Total net purchase price |
$ | 4,333 |
Gustafson Lighting
In July 2012, the Company completed the acquisition of the business and certain assets of Elkhart, Indiana-based Gustafson Lighting (“Gustafson”), a distributor of interior and exterior lighting products, ceiling fans and accessories, including glass and glass pads, hardware and lampshades to the RV industry, for a net purchase price of $2.8 million. This acquisition provided opportunities for the Company to increase its market share and per unit content. The results of operations for Gustafson are included in the Company’s condensed consolidated financial statements and the Distribution operating segment from the date of acquisition. The fair value of the net assets acquired of $3.0 million exceeded the purchase consideration of $2.8 million. As a result, the Company recognized a gain of $0.2 million associated with the acquisition during the third quarter of 2012, with the gain included in the line item “Gain on sale of fixed assets and acquisition of business” in the condensed consolidated statements of income for the third quarter ended September 30, 2012.
The acquisition was funded through borrowings under the Company’s 2011 Credit Facility and was completed pursuant to a foreclosure and private sale under the Uniform Commercial Code with Capital Source Finance, LLC.
Assets acquired and liabilities assumed in the acquisition were recorded on the Company’s condensed consolidated statements of financial position at their estimated fair values as of the date of the acquisition. The following summarizes the fair values of the assets acquired and the liabilities assumed as of the date of acquisition:
(thousands) |
|||
Trade receivables |
$ | 982 | |
Inventories |
1,262 | ||
Property, plant and equipment |
1,221 | ||
Prepaid expenses |
20 | ||
Accounts payable and accrued liabilities |
(816 | ) | |
Intangible assets |
337 | ||
Gain on acquisition of business |
(223 | ) | |
Total net purchase price |
$ | 2,783 |
Creative Wood
In September 2012, the Company completed the acquisition of the business and certain assets of Ligonier, Indiana-based Creative Wood, a manufacturer of hardwood furniture including interior hardwood tables, chairs, dinettes, trim, fascia, mouldings, and other miscellaneous products, for a net purchase price of $3.0 million,
which includes two subsequent contingent payments based on future performance. This acquisition expanded the Company’s revenues to its existing customer base in the RV industry sector. The results of operations for Creative Wood are included in the Company’s condensed consolidated financial statements and the Manufacturing operating segment from the date of acquisition. The fair value of the contingent consideration arrangement was estimated by applying the income approach and included assumptions related to the probability of future payments and discounted cash flows. The excess of the purchase consideration over the fair value of the net assets acquired was recorded as goodwill, which represents the value of leveraging the Company’s existing purchasing, manufacturing, sales, and systems resources with the organizational talent and expertise of the Creative Wood team to maximize efficiencies, revenue impact, market share growth, and net income.
The acquisition was funded through borrowings under the Company's 2011 Credit Facility. Assets acquired and liabilities assumed in the acquisition were recorded on the Company’s condensed consolidated statements of financial position at their estimated fair values as of the date of the acquisition. The purchase price allocation and all required purchase accounting adjustments were finalized in the first quarter of 2013. The following summarizes the fair values of the assets acquired and the liabilities assumed as of the date of acquisition:
(thousands) |
|||
Trade receivables |
$ | 927 | |
Inventories |
1,423 | ||
Property, plant and equipment |
1,429 | ||
Prepaid expenses |
24 | ||
Accounts payable and accrued liabilities |
(1,570 | ) | |
Other liabilities |
(958 | ) | |
Intangible assets |
757 | ||
Goodwill |
994 | ||
Total net purchase price |
$ | 3,026 |
Middlebury Hardwoods
In October 2012, the Company acquired the business and certain assets of Middlebury, Indiana-based Middlebury Hardwoods, a manufacturer of hardwood cabinet doors, components and other hardwood products for the RV, MH, and residential kitchen cabinet industries, for a net purchase price of $19.8 million. This acquisition provided the opportunity for the Company to increase its market share and per unit content in the cabinet door market. The results of operations for Middlebury Hardwoods are included in the Company’s condensed consolidated financial statements and the Manufacturing operating segment from the date of acquisition. The excess of the purchase consideration over the fair value of the net assets acquired was recorded as goodwill, which represents the value of leveraging the Company’s existing purchasing, manufacturing, sales, and systems resources with the organizational talent and expertise of the Middlebury Hardwoods’ team to maximize efficiencies, revenue impact, market share growth, and net income.
The acquisition was funded through borrowings under the Company’s 2012 Credit Facility (as defined herein) and includes the acquisition of accounts receivable, inventory, prepaid expenses, machinery, equipment and vehicles, and land and buildings.
Assets acquired and liabilities assumed in the acquisition were recorded on the Company’s condensed consolidated statements of financial position at their estimated fair values as of the date of the acquisition. The purchase price allocation and all required purchase accounting adjustments were finalized in the first quarter of 2013. The following summarizes the fair values of the assets acquired and the liabilities assumed as of the date of acquisition:
(thousands) |
|||
Trade receivables |
$ | 1,872 | |
Inventories |
1,719 | ||
Property, plant and equipment |
7,171 | ||
Prepaid expenses |
144 | ||
Accounts payable and accrued liabilities |
(1,223 | ) | |
Intangible assets |
6,470 | ||
Goodwill |
3,609 | ||
Total net purchase price |
$ | 19,762 |
Pro Forma Information
The following pro forma information for the second quarter and six months ended July 1, 2012 assumes the Décor, Creative Wood, and Middlebury Hardwoods acquisitions occurred as of the beginning of the year immediately preceding each such acquisition. The pro forma information contains the actual operating results of Décor, Creative Wood, and Middlebury Hardwoods, combined with the results prior to the acquisition dates in March 2012, September 2012, and October 2012, respectively, adjusted to reflect the pro forma impact of the acquisitions occurring as of the beginning of the year immediately preceding each such acquisition. In addition, the pro forma information includes amortization expense related to intangible assets acquired in the Décor, Creative Wood, and Middlebury Hardwoods acquisitions of approximately $0.2 million and $0.4 million, in the aggregate, for the second quarter and six months ended July 1, 2012, respectively. Pro forma information related to the Gustafson acquisition is not included in the table below, as its financial results were not considered to be significant to the Company’s operating results for the periods presented.
(thousands except per share data) |
Second Quarter Ended July 1, 2012 |
Six Months Ended July 1, 2012 |
|||||
Revenue |
$ | 123,228 | $ | 237,678 | |||
Net income |
13,345 | 18,652 | |||||
Income per share – basic |
1.27 | 1.80 | |||||
Income per share - diluted |
1.22 | 1.73 |
The pro forma information is presented for informational purposes only and is not necessarily indicative of the results of operations that actually would have been achieved had the acquisitions been consummated as of that time, nor is it intended to be a projection of future results.
For the second quarter and six months ended July 1, 2012, revenue of approximately $5.7 million and $8.2 million, respectively, was included in the Company’s condensed consolidated statements of income pertaining to Décor, which was acquired in March 2012. There were no businesses acquired in the second quarter of 2012. In addition, there were no businesses acquired in either the second quarter or first six months of 2013.
5. STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation in accordance with fair value recognition provisions. The Company recorded compensation expense of $0.3 million and $0.2 million for the second quarters ended June 30, 2013 and July 1, 2012, respectively, for its stock-based compensation plans on the condensed consolidated statements of income. For the comparable six months periods, the Company recorded $0.6 million and $0.3 million, respectively.
The Company estimates the fair value of (i) all stock grants as of the grant date using the closing price per share of the Company’s common stock on such date, and (ii) all stock option awards as of the grant date by applying the Black-Scholes option pricing model. The Board of Directors approved the following share grants in 2012 and 2013: 15,000 shares on February 16, 2012, 122,800 shares on March 12, 2012, 24,500 shares on May 24, 2012, 89,947 shares on March 4, 2013, 5,000 shares on March 11, 2013, and 19,480 shares on May 23, 2013.
As of June 30, 2013, there was approximately $2.2 million of total unrecognized compensation cost related to stock-based compensation arrangements granted under incentive plans. That cost is expected to be recognized over a weighted-average period of 20.1 months.
6. INCOME PER COMMON SHARE
Basic net income per common share is computed by dividing net income by the weighted-average number of common shares outstanding. Diluted net income per common share is computed by dividing net income by the weighted-average number of common shares outstanding, plus the dilutive effect of stock options and warrants. The dilutive effect of stock options and warrants is calculated under the treasury stock method using the average market price for the period.
Income per common share is calculated for the second quarter and six months periods as follows:
Second Quarter Ended |
Six Months Ended | ||||||||||||||
(thousands) |
June 30, 2013 |
July 1, 2012 |
June 30, 2013 |
July 1, 2012 |
|||||||||||
Net income for basic and diluted per share calculation |
$ | 7,557 | $ | 13,313 | $ | 13,576 | $ | 18,324 | |||||||
Weighted average common shares outstanding - basic |
10,720 | 10,526 | 10,814 | 10,373 | |||||||||||
Effect of potentially dilutive securities |
42 | 395 | 42 | 385 | |||||||||||
Weighted average common shares outstanding - diluted |
10,762 | 10,921 | 10,856 | 10,758 | |||||||||||
Basic net income per share |
$ | 0.70 | $ | 1.26 | $ | 1.26 | $ | 1.77 | |||||||
Diluted net income per share |
$ | 0.70 | $ | 1.22 | $ | 1.25 | $ | 1.70 |
7. OTHER NON-CURRENT ASSETS
As of June 30, 2013 and December 31, 2012, other non-current assets of $0.8 million and $0.9 million, respectively, were net of borrowings against the cash value of life insurance policies on certain of the Company’s officers and directors of approximately $2.7 million. These borrowings were entered into in March 2011 in connection with the refinancing of the Company’s then-existing credit facility established pursuant to the 2007 Credit Agreement (as defined herein) to provide an additional source of liquidity.
8. DEBT
Total long-term debt outstanding at June 30, 2013 and December 31, 2012 was $46.0 million and $49.7 million, respectively.
2011 Credit Facility
Prior to October 24, 2012, the Company’s debt financing was supported by its credit agreement, dated March 31, 2011, as amended, among the Company, Wells Fargo Capital Finance, LLC (“WFCF”), as the lender and agent, and Fifth-Third Bank (“Fifth-Third”) as participant (the “2011 Credit Agreement”), which consisted of a $50 million revolving secured senior credit facility (the “2011 Credit Facility”). The 2011 Credit Facility was scheduled to mature on March 31, 2015.
2012 Credit Facility
On October 24, 2012, the Company entered into a credit agreement (the “2012 Credit Agreement”) with Wells Fargo Bank, National Association as the agent and lender (“Wells Fargo”), and Fifth-Third as participant (collectively, the “Lenders”), to establish a five-year $80 million revolving secured senior credit facility (the “2012 Credit Facility”). The 2012 Credit Facility replaced the 2011 Credit Facility. Initial borrowings under the 2012 Credit Facility were used in part to repay in full the borrowings outstanding under the 2011 Credit Facility.
The 2012 Credit Agreement is secured by a pledge of substantially all of the assets of the Company pursuant to a Security Agreement, dated October 24, 2012, between the Company and Wells Fargo, as agent. The 2012 Credit Agreement includes certain definitions, terms and reporting requirements and includes the following provisions:
● |
The maturity date for the 2012 Credit Facility is October 24, 2017; |
● |
Borrowings under the revolving line of credit (the “Revolver”) are subject to a maximum borrowing limit of $80.0 million; |
● |
The Company has the option to increase the 2012 Credit Facility by an amount up to $20 million upon request to and subject to the approval of the Lenders; |
● |
The interest rates for borrowings under the Revolver are the Base Rate plus the Applicable Margin or the London Interbank Offer Rate (“LIBOR”) plus the Applicable Margin, with a fee payable by the Company on unused but committed portions of the Revolver; |
● |
The Revolver includes a sub-limit up to $5,000,000 for same day advances (“Swing Line”) which shall bear interest based upon the Base Rate plus the Applicable Margin; |
● |
Up to $20 million of the Revolver will be available as a sub facility for the issuance of standby letters of credit, which are subject to certain expiration dates. The Company’s existing standby letters of credit as of October 24, 2012 remained outstanding under the terms of the 2012 Credit Agreement; |
● |
The financial covenants include requirements as to a consolidated total leverage ratio and a consolidated interest coverage ratio, and other covenants include limitations on permitted acquisitions, capital expenditures, indebtedness, restricted payments and fundamental changes (see further details below); and |
● |
Customary prepayment provisions which require the prepayment of outstanding amounts under the Revolver based on predefined conditions. |
At June 30, 2013 and December 31, 2012, the Company had $46.0 million and $49.7 million, respectively, outstanding under its Revolver. The interest rate for borrowings under the Revolver for both periods was the Prime Rate plus 0.50% (or 3.75%), or LIBOR plus 1.50% (or 1.6875%), and the fee payable on committed but unused portions of the Revolver was 0.20%.
Pursuant to the 2012 Credit Agreement, the financial covenants include (a) a maximum consolidated total leverage ratio, measured on a quarter-end basis, not to exceed 3.50:1.00 for the 12 month period ending on such quarter-end; (b) a required minimum consolidated interest coverage ratio under the Revolver, measured on a quarter-end basis, of at least 2.25:1.00 for the 12 month period ending on such quarter-end; and (c) a limitation on annual capital expenditures of $8.0 million for 2012 and subsequent fiscal years. If the consolidated total leverage ratio is in excess of 3.00:1.00 and less than 3.50:1.00, the Company is considered to be in compliance with this financial covenant provided it maintains an asset coverage ratio of at least 1.00 to 1.00 as of the close of each period. For fiscal year 2013 and subsequent fiscal years, the limitation on annual capital expenditures was increased to $8.0 million from $7.0 million per the Second Amendment, dated June 28, 2013, to the 2012 Credit Agreement.
The consolidated total leverage ratio is the ratio for any period of (i) consolidated total indebtedness to (ii) earnings before interest, taxes, depreciation and amortization (“EBITDA”). Consolidated total indebtedness for any period is the sum of (i) total debt outstanding under the Revolver less available cash on hand, (ii) capital leases and letters of credit outstanding, and (iii) deferred payment obligations. The asset coverage ratio for any period is the ratio of (i) eligible amounts of the Company’s trade payables, inventory and fixed assets, minus certain reserves as defined under the 2012 Credit Agreement to (ii) the sum of outstanding obligations under the 2012 Credit Facility.
The consolidated interest coverage ratio for any period is the ratio of (i) EBITDA minus depreciation to (ii) the sum of consolidated interest expense plus restricted payments made by the Company.
For the six months ended June 30, 2013, the Company was in compliance with all three of these financial covenants at each reporting date. The required maximum total leverage ratio, minimum interest coverage ratio, and the annual capital expenditures limitation amounts compared to the actual amounts as of and for the fiscal period ended June 30, 2013 are as follows:
(thousands except ratios) |
Required |
Actual |
|||||
Consolidated leverage ratio (12-month period) |
3.50 | 1.00 | |||||
Consolidated interest coverage ratio (12-month period) |
2.25 | 5.00 | |||||
Annual capital expenditures limitation (actual year-to-date) |
$ | 8,000 | $ | 3,524 |
Secured Senior Subordinated Notes
March 2011 Notes
In connection with entering into the 2011 Credit Agreement, the Company issued $2.5 million principal amount of Secured Senior Subordinated Notes (the “March 2011 Notes”) to each of Tontine Capital Overseas Master Fund II, L.P., a Cayman Islands limited partnership (“TCOMF2”) and Northcreek Mezzanine Fund I, L.P. (“Northcreek”), or $5.0 million in the aggregate. The March 2011 Notes bore interest at a rate equal to 10% per annum until March 31, 2013 and 13% thereafter, and were scheduled to mature on March 31, 2016. The Company was permitted to prepay all or any portion of the March 2011 Notes at any time based on pre-defined percentages of the principal amount being prepaid.
In connection with the issuance of the March 2011 Notes, the Company issued warrants to purchase 125,000 shares of the Company’s common stock to each of TCOMF2 and Northcreek at an exercise price of $0.01 per share (the “March 2011 Warrants”). Northcreek and TCOMF2 exercised their individual warrants to purchase 125,000 shares of the Company’s common stock in April 2011 and June 2011, respectively. The debt discount of $0.7 million, which was equal to the fair value of the March 2011 Warrants as of March 31, 2011, was being amortized to interest expense over the life of the March 2011 Notes beginning in the second quarter of 2011. In the fourth quarter of 2012, in connection with the prepayment in full of the March 2011 Notes, the Company recorded a non-cash charge to interest expense to write-off the remaining unamortized portion of the debt discount.
September 2011 Notes
In connection with the financing of the acquisition of AIA, the 2011 Credit Agreement was amended to, among other things, allow for the issuance to Northcreek and an affiliate of Northcreek of Secured Senior Subordinated Notes in the aggregate principal amount of $2.7 million (the “September 2011 Notes”). The September 2011 Notes bore interest at 13% per annum and were scheduled to mature on March 31, 2016. The Company was permitted to prepay all or any portion of the September 2011 Notes at any time based on pre-defined percentages of the principal amount being prepaid.
On September 16, 2011, in connection with the September 2011 Notes, the Company issued to Northcreek and the affiliate of Northcreek warrants to purchase, in the aggregate, 135,000 shares of the Company’s common stock at an exercise price of $0.01 per share (the “September 2011 Warrants”). Northcreek and the affiliate of Northcreek exercised their warrants to purchase in the aggregate 135,000 shares of the Company’s common stock in November 2011. The debt discount of $0.3 million, which was equal to the fair value of the September 2011 Warrants as of September 16, 2011, was being amortized to interest expense over the life of the September 2011 Notes beginning in the third quarter of 2011. In the fourth quarter of 2012, in connection with the prepayment in full of the September 2011 Notes, the Company recorded a non-cash charge to interest expense to write-off the remaining unamortized portion of the debt discount.
Repayments of March 2011 and September 2011 Notes
On March 30, 2012, the Company (i) exercised its option to prepay 10%, or $500,000 in the aggregate, of the original principal amount of its March 2011 Notes at a price of 101% of the principal amount being prepaid plus accrued interest and (ii) exercised its option to prepay 10%, or $270,000 in the aggregate, of the original principal amount of its September 2011 Notes at a price of 101% of the principal amount being prepaid plus accrued interest.
On June 29, 2012, the Company exercised its option to prepay 10%, or $770,000 in the aggregate, of the combined original principal amount of both its March 2011 Notes and September 2011 Notes, at a price of 101% of the principal amount being prepaid plus accrued interest.
On October 24, 2012, the Company used borrowings under the 2012 Credit Facility to prepay the remaining combined principal outstanding of $6.16 million of its March 2011 Notes and September 2011 Notes at a price of 104% of the principal amount prepaid plus accrued interest.
Subordinated Secured Promissory Note
Also in connection with the financing of the AIA acquisition, the 2011 Credit Agreement was amended to allow for the issuance of a 10% Promissory Note to the seller of AIA in the principal amount of $2.0 million. The Promissory Note was scheduled to mature on September 16, 2013 and was payable in eight quarterly installments of $250,000 plus quarterly interest payments beginning on December 16, 2011. On October 24, 2012, the Company used borrowings under the 2012 Credit Facility to prepay at par the $1.0 million remaining principal outstanding under the Promissory Note plus accrued interest.
9. DERIVATIVE FINANCIAL INSTRUMENTS
The Company at times enters into certain derivative financial instruments, on a cost-effective basis, to mitigate its risk associated with changes in interest rates. The Company does not use derivative financial instruments for speculative purposes. All derivatives are recognized on the condensed consolidated statements of financial position at their fair value. Changes in fair value are recognized periodically in earnings or accumulated other comprehensive income within shareholders' equity, depending on the intended use of the derivative and whether the derivative has been designated by management as an ineffective hedging instrument. Changes in fair value of derivative instruments not designated as effective hedging instruments are recognized in earnings in the current period.
Warrants Subject to Revaluation
2008 Warrants
In conjunction with the Second Amendment dated December 11, 2008 to the Company’s credit agreement, dated May 18, 2007 (the “2007 Credit Agreement), the Company issued a series of warrants (the “2008 Warrants”) to its then existing lenders. The Company accounted for the 2008 Warrants as derivative financial instruments. The calculated fair value of the 2008 Warrants was classified as a liability and was periodically remeasured with any changes in value recognized in the stock warrants revaluation line on the condensed consolidated statements of income.
As of January 1, 2012, there were in aggregate 328,169 shares of common stock issuable upon exercise of the then remaining 2008 Warrants. In the first quarter of 2012, 154,109 net shares of common stock were issued upon the cashless exercises of 2008 Warrants to purchase 179,531 shares in the aggregate of the Company’s common stock. The fair value of the shares of $1.1 million was reclassified to shareholders’ equity on the condensed consolidated statements of financial position.
In the second quarter of 2012, 69,106 net shares of common stock were issued upon the cashless exercise of 2008 Warrants to purchase 74,319 shares of the Company’s common stock. The fair value of these shares of $1.0 million was reclassified to shareholders’ equity on the condensed consolidated statements of financial position.
In the third quarter of 2012, 68,641 net shares of common stock were issued upon the cashless exercise of the remaining 2008 Warrants to purchase 74,319 shares of the Company’s common stock. The fair value of these shares of $0.8 million was reclassified to shareholders’ equity on the condensed consolidated statements of financial position.
The 2008 Warrants were measured until their exercise at fair value on a recurring basis using Level 2 valuation methodologies. The Company estimates the fair value of all stock warrants outstanding at the end of the period by applying the Black-Scholes model. The use of this valuation model involves assumptions that are judgmental
and highly sensitive in the determination of the fair value and include the dividend yield, exercise price and forfeiture rate. Expected volatilities are based on historical volatility of the Company stock. The expected term of the stock warrants represents the period of time that the warrants are expected to be outstanding. The risk free interest rate is based on the U.S. Treasury yield curve in effect at the time of the valuation for instruments of a similar term.
The following table presents assumptions used in the Black-Scholes model to determine the change in fair value of the 2008 Warrants as of and for the fiscal period ended July 1, 2012. There were no 2008 Warrants outstanding as of June 30, 2013.
July 1, 2012 |
|||
Stock trading value (1) |
$ | 12.75 | |
Risk-free interest rate |
1.47 | % | |
Expected warrant remaining life (in years) |
6.50 |
||
Price volatility |
80.92 | % |
(1) |
Represents the closing market price of the Company’s common stock on June 29, 2012 (last trading day of the period on the NASDAQ stock market). |
The Company utilized the same methodology to determine the fair value of the 2008 Warrants exercised in the six months ended July 1, 2012. The total fair value of the outstanding warrants as of and for the six month period ended July 1, 2012 is as follows:
(thousands) |
July 1, 2012 |
||
Balance at beginning of period |
$ | 1,191 | |
Reclassification of fair value of exercised warrants to shareholders’ equity |
(2,096 | ) | |
Change in fair value, included in earnings |
1,804 | ||
Balance at end of period |
$ | 899 |
10. FAIR VALUE MEASUREMENTS
The 2008 Warrants were included in Level 2 of the fair value hierarchy. Level 2 represents financial instruments lacking quoted prices (unadjusted) from active market exchanges, including over-the-counter exchange-traded financial instruments. The prices for the financial instruments are determined using prices for recently traded financial instruments with similar underlying terms as well as directly or indirectly observable inputs.
The carrying amounts of cash and cash equivalents, trade receivables, and accounts payable approximated fair value as of June 30, 2013 and December 31, 2012 because of the relatively short maturities of these financial instruments. The carrying amount of long-term debt approximated fair value as of June 30, 2013 and December 31, 2012 based upon terms and conditions available to the Company at those dates in comparison to the terms and conditions of its outstanding long-term debt.
11. COMPREHENSIVE INCOME (LOSS)
Accumulated other comprehensive income, net of tax, relating to changes in accumulated pension benefit was $17,000 at both June 30, 2013 and December 31, 2012.
12. INCOME TAXES
At December 31, 2011, the Company had a tax valuation allowance for deferred tax assets net of deferred tax liabilities not expected to be utilized of $15.6 million. No income tax expense or benefit was recorded during the first quarter ended March 31, 2012 because there was a full valuation allowance related to deferred tax assets.
In the second quarter of 2012, the Company determined that it was likely that the remaining net deferred tax assets would be realized based upon sustained profitability and forecasted future operating results. As a result, the Company reversed approximately $6.8 million of the valuation allowance in 2012, of which $6.7 million was reversed in the second quarter of 2012, with the reversal recorded as a non-cash income tax credit on the
Company’s condensed consolidated statement of income. In addition, the Company reversed the balance of its valuation allowance in 2012 to fully offset its 2012 tax provision of approximately $8.8 million.
In the second quarter and first six months of 2013, the Company recorded income taxes at an estimated full year effective tax rate of approximately 39%.
At December 31, 2012, the Company had a gross federal net operating loss (“NOL”) carry forward of approximately $9.8 million that was fully utilized in the first six months of 2013. In addition, the Company had various state NOLs of approximately $12.6 million at December 31, 2012, of which approximately $3.3 million were utilized in the first six months of 2013. The federal and state NOLs utilized in the first six months of 2013 were used to partially offset the cash portion of the income tax liability for 2013. The Company estimates that it will fully utilize a significant majority of the remaining state NOLs by the end of 2014.
13. SEGMENT INFORMATION
The Company has determined that its reportable segments are those based on its method of internal reporting, which segregates its businesses by product category and production/distribution process.
A description of the Company’s reportable segments is as follows:
Manufacturing - Utilizes various materials, such as lauan, MDF, gypsum, and particleboard, which are bonded by adhesives or a heating process to a number of products, including vinyl, paper, foil, and high-pressure laminate. These products are utilized to produce furniture, shelving, wall, counter, and cabinet products with a wide variety of finishes and textures. This segment also includes a cabinet door division, a hardwood furniture division, a vinyl printing division, a solid surface, granite, and quartz fabrication operation, and an exterior graphics division. Patrick’s major manufactured products also include wrapped vinyl, paper and hardwood profile mouldings, interior passage doors, and slotwall panels and components. The Manufacturing segment contributed approximately 78% and 77% of the Company’s net sales for the six months ended June 30, 2013 and July 1, 2012, respectively.
Distribution - Distributes pre-finished wall and ceiling panels, drywall and drywall finishing products, electronics, wiring, electrical and plumbing products, cement siding, interior passage doors, roofing products, laminate and ceramic flooring, shower doors, furniture, fireplaces and surrounds, interior and exterior lighting products, and other miscellaneous products. The Distribution segment contributed approximately 22% and 23% of the Company’s net sales for the six months ended June 30, 2013 and July 1, 2012, respectively.
The tables below present unaudited information about the sales and operating income of those segments.
Second Quarter Ended June 30, 2013: |
|||||||||||||
(thousands) |
Manufacturing |
Distribution |
Total |
||||||||||
Net outside sales |
$ | 125,027 | $ | 34,549 | $ | 159,576 | |||||||
Intersegment sales |
5,282 | 751 | 6,033 | ||||||||||
Operating income |
13,355 | 2,353 | 15,708 |
Second Quarter Ended July 1, 2012: |
|||||||||||||
(thousands) |
Manufacturing |
Distribution |
Total |
||||||||||
Net outside sales |
$ | 88,549 | $ | 27,056 | $ | 115,605 | |||||||
Intersegment sales |
4,146 | 501 | 4,647 | ||||||||||
Operating income |
8,684 | 1,376 | 10,060 |
Six Months Ended June 30, 2013: |
|||||||||||||
(thousands) |
Manufacturing |
Distribution |
Total |
||||||||||
Net outside sales |
$ | 236,490 | $ | 65,206 | $ | 301,696 | |||||||
Intersegment sales |
10,221 | 1,612 | 11,833 | ||||||||||
Operating income |
25,079 | 4,272 | 29,351 |
Six Months Ended July 1, 2012: |
|||||||||||||
(thousands) |
Manufacturing |
Distribution |
Total |
||||||||||
Net outside sales |
$ | 168,236 | $ | 50,057 | $ | 218,293 | |||||||
Intersegment sales |
8,137 | 896 | 9,033 | ||||||||||
Operating income |
16,777 | 2,711 | 19,488 |
The table below presents a reconciliation of segment operating income to consolidated operating income:
Second Quarter Ended |
Six Months Ended |
||||||||||||||
(thousands) |
June 30, 2013 |
July 1, 2012 |
June 30, 2013 |
July 1, 2012 |
|||||||||||
Operating income for reportable segments |
$ | 15,708 | $ | 10,060 | $ | 29,351 | $ | 19,488 | |||||||
Corporate incentive agreements |
(1 | ) | 45 | 44 | 90 | ||||||||||
Gain on sale of fixed assets |
426 | 3 | 430 | 3 | |||||||||||
Unallocated corporate expenses |
(2,698 | ) | (2,187 | ) | (5,455 | ) | (3,818 | ) | |||||||
Amortization of intangible assets |
(521 | ) | (334 | ) | (1,040 | ) | (650 | ) | |||||||
Consolidated operating income |
$ | 12,914 | $ | 7,587 | $ | 23,330 | $ | 15,113 |
14. STOCK REPURCHASE PROGRAM
On February 22, 2013, the Company’s Board of Directors authorized a stock repurchase program for purchasing up to $10 million of the Company’s common stock from time to time through open market or private transactions over the next 12 months. As of June 30, 2013, the Company had repurchased 407,330 shares at an average price of $14.92 for an aggregate purchase price of approximately $6.1 million.
Common Stock
The Company’s common stock does not have a stated par value. As a result, repurchases of common stock have been reflected as a reduction of common stock on the Company’s condensed consolidated statements of financial position.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the Company’s Condensed Consolidated Financial Statements and Notes thereto included in Item 1 of this Report. In addition, this MD&A contains certain statements relating to future results which are forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. See “Information Concerning Forward-Looking Statements” on pages 34 and 35 of this Report. The Company undertakes no obligation to update these forward-looking statements.
The MD&A is divided into seven major sections:
OVERVIEW OF MARKETS AND RELATED INDUSTRY PERFORMANCE
REVIEW OF CONSOLIDATED OPERATING RESULTS
Second Quarter and Six Months Ended June 30, 2013 Compared to 2012
REVIEW BY BUSINESS SEGMENT
Second Quarter and Six Months Ended June 30, 2013 Compared to 2012
Unallocated Corporate Expenses
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
Capital Resources
Summary of Liquidity and Capital Resources
CRITICAL ACCOUNTING POLICIES
OTHER
Seasonality
Inflation
INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS
OVERVIEW OF MARKETS AND RELATED INDUSTRY PERFORMANCE
Summary
The second quarter and first six months of 2013 reflected a continuation of solid growth in the recreational vehicle (“RV”) market and improving conditions in the industrial markets, evidenced by year over year growth in new housing starts. These two market sectors represented approximately 85% of our revenue base in the first six months of 2013. The manufactured housing (“MH”) market experienced seasonally typical sales activity in the first six months of 2013. Overall, we have continued to capture market share through our strategic acquisitions and new product initiatives which resulted in our six months 2013 sales levels increasing beyond the general industry results. While the uncertainty related to general domestic economic conditions and the continued restricted consumer credit conditions appear to be contributing to fluctuating consumer confidence levels and a general lack of confidence in the overall economy, we are seeing resilience, in particular in the RV market, with what we believe to be upside potential in the immediate future based on current indicators.
RV Industry
The RV industry, which is our primary market and comprised 74% of the Company’s six months 2013 sales, continued to strengthen as evidenced by higher production levels and wholesale unit shipments versus the prior year. According to the Recreational Vehicle Industry Association (“RVIA”), shipment levels reached 95,449 units in the second quarter of 2013, representing an increase of approximately 14% versus the prior year period, and resulted in 14 out of 15 quarter-over-quarter increases in shipments. In the first six months of 2013, shipment levels reached 174,871 units, an increase of approximately 13% over 2012.
We believe industry-wide retail sales and the related production levels of RVs will be dependent on the overall perception of the economy, consumer confidence levels, and conditions in the credit markets. Continued high or increased fuel prices have the potential to negatively impact RV retail unit sales in the short-term, however, we believe that the RV market has a “lifestyle” component to it that will continue to drive a solid base shipment level. The correlation between the indicators mentioned above lead us to believe that the RV industry has a positive longer-term outlook as overall economic conditions and consumer confidence improve. We are anticipating continued slow and steady growth in this market and further believe that RV dealers have the capacity to carry the additional inventory necessary to support this growth, which would maintain an overall balance in the industry from OEM wholesale shipments to dealer inventory levels to retail sales at this time. Additionally, the acquisitions completed in 2012 were primarily RV market-based, and contributed to an increase in our RV market sales concentration in the first six months of 2013 when compared to the prior year period.
Although some consumers still remain cautious when deciding whether to purchase discretionary items, such as RVs, long-term demographic trends favor RV industry growth fueled by the anticipated positive impact that aging baby boomers are expected to have on the industry. In particular, lifestyle trends continue to spur demand for RVs, and RV manufacturers in response have sized their products to provide a mix of space, amenities and price to fit a wide range of budget levels related to its general cost-conscious consumer base.
MH Industry
The MH industry represented approximately 15% of the Company’s six months 2013 sales and continues to be negatively impacted by limited financing alternatives and credit availability, slow job growth, and in certain geographic areas, excess residential housing inventories. According to industry sources, wholesale unit shipments in the second quarter of 2013 and the first six months of 2013, which continue to trend well below historical levels, increased approximately 9% and 5%, respectively, from the comparable prior year periods. We believe that demand in the MH industry has reached the bottom of the cycle and we expect moderate growth assuming the availability of credit and recalibration of quality credit standards. Additionally, manufactured housing provides a cost effective alternative for those individuals and families seeking to establish, or re-establish home ownership, or whose credit ratings have been impacted by the economic and jobs environment over the past several years. We also believe manufactured housing to be an attractive option for those who have migrated to temporary housing alternatives. Factors that may favorably impact production levels further in this industry include quality credit standards in the residential housing market, job growth, favorable changes in financing laws, new tax credits for new homebuyers and other government incentives, higher interest rates on traditional residential housing loans, and improved conditions in the asset-backed securities markets for manufactured housing loans. While there is still overhang related to the overall economic environment and other conditions mentioned above, we believe that there is also longer term potential for this industry as residential housing demand recovers. Manufactured homes are a lower cost alternative to “stick-built” homes and an attractive entry point for many first-time home buyers and individuals and families looking to re-enter the home-ownership market.
Industrial Market
The industrial market, which comprises primarily the kitchen cabinet industry, retail and commercial fixture market, household furniture market and regional distributors, is primarily impacted by macroeconomic conditions, and more specifically, conditions in the residential housing market. The industrial market sector, which accounted for approximately 11% of the Company’s six months 2013 sales, saw new housing starts for the second quarter of 2013 and the first six months of 2013 increase by approximately 17% and 24%, respectively, from the comparable periods in 2012 (as reported by the U.S. Department of Commerce). We estimate approximately 60% of our industrial revenue base is directly tied to the residential housing market, and we believe there is a direct correlation between the demand for our products in this market and new residential housing construction and remodeling activities. Our sales to this market generally lag new residential housing starts by six to nine months. In order to offset some of the impacts of the weakness in the residential housing market in recent years, we have focused on diversification efforts, strategic acquisitions, and bringing new and innovative products to the market. Additionally, we have targeted certain sales efforts towards market segments that are less directly tied to new residential home construction, including the retail fixture, furniture, and countertop markets. As a result, we have seen a shift in our product mix, which has had a positive impact on revenues from the industrial markets.
We are encouraged by the improvement in market conditions in 2013 and in the long-term believe that there is upside potential as it relates to residential housing growth based on pent up demand, job growth, the availability of credit, and affordable interest rates.
Second Half 2013 Outlook
While there remains general uncertainty related to the strength of the overall economic recovery, the three primary markets that we serve have experienced steady growth in the first half of 2013, which we expect to continue during the remainder of 2013 with full year seasonal patterns tracking trends consistent with the prior year. The RVIA forecasts an 8% increase in RV unit shipment levels in 2013. In addition, although we anticipate an increase in production levels in the MH industry in 2013, wholesale unit shipments will continue to be well
below 2004-2007 sales levels, which averaged approximately 122,600 units during that period. Based on the industry’s current annualized run rates, the Company projects wholesale MH unit shipments for full year 2013 to increase by approximately 6% compared to 2012. New housing starts in 2013 are estimated to improve by approximately 19% year-over-year (as forecasted by the National Association of Home Builders as of August 5, 2013) consistent with improving overall economic conditions.
We believe we are well-positioned to increase revenues in all of the markets that we serve as the overall economic environment improves. While our visibility related to longer-term industry conditions is limited to approximately three to six months, we expect to continue to see quarter over quarter revenue growth for the remainder of fiscal 2013, exclusive of the revenue contribution of any potential acquisitions that may be completed in fiscal 2013. This growth will be at lower rates from the first six months of 2013 because the last two quarters of 2012 reflected a proportionally greater revenue contribution from the acquisitions completed in 2012 than the first six months of 2012 due to their acquisition dates. We will continue to review our operations on a regular basis, balance appropriate risks and opportunities, and maximize efficiencies to support the Company’s long-term strategic growth goals. Our team remains focused on strategic acquisitions, capturing market share and increasing our per unit content, keeping costs aligned with revenue, maximizing operating efficiencies, talent management, and the execution of our organizational strategic agenda. Key focus areas for the balance of 2013 include strategic revenue growth, improved operating income and net income, earnings per share, earnings before interest, taxes, depreciation, and amortization (“EBITDA”), and free cash flow. Additional focus areas include:
● |
sales into additional commercial/institutional markets to diversify revenue base; |
● |
further improvement of operating efficiencies in all manufacturing operations and corporate functions; |
● |
acquisition of businesses/product lines that meet established criteria; |
● |
aggressive management of inventory quantities and pricing, and the addition of select key commodity suppliers; and |
● |
ongoing development of existing product lines and the addition of new product lines. |
In conjunction with our organizational strategic agenda, we will continue to make targeted capital investments to support new business and leverage our operating platform, and we will work to more fully integrate sales efforts to strengthen and broaden customer relationships and meet customer demands with high quality service that exceeds our customers’ expectations. In the first six months of 2013, capital expenditures were approximately $3.5 million versus $2.2 million in the first six months of 2012. The capital plan for full year 2013 includes the continued replacement of our Enterprise Resource Planning (“ERP”) system, equipment upgrades to ensure that our facilities have the capacity, capabilities and technology to facilitate our growth plans, and other strategic capital and maintenance improvements. The current capital plan for fiscal year 2013 includes expenditures approximating $8.0 million. In June 2013, our 2012 Credit Agreement (as defined herein) was amended to increase the limitation on annual capital expenditures from $7.0 million to $8.0 million for the full year 2013 and for subsequent fiscal years in order to accommodate the forecasted increase in our capital expenditure needs as described above.
REVIEW OF CONSOLIDATED OPERATING RESULTS
Second Quarter and Six Months Ended June 30, 2013 Compared to 2012
The following table sets forth the percentage relationship to net sales of certain items on the Company’s condensed consolidated statements of income.
Second Quarter Ended |
Six Months Ended |
|||||||||||||||
June 30, 2013 |
July 1, 2012 |
June 30, 2013 |
July 1, 2012 |
|||||||||||||
Net sales |
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
Cost of goods sold |
84.2 | 84.6 | 84.2 | 84.3 | ||||||||||||
Gross profit |
15.8 | 15.4 | 15.8 | 15.7 | ||||||||||||
Warehouse and delivery expenses |
3.0 | 3.4 | 3.1 | 3.5 | ||||||||||||
Selling, general and administrative expenses |
4.7 | 5.1 | 4.8 | 5.0 | ||||||||||||
Amortization of intangible assets |
0.3 | 0.3 | 0.3 | 0.3 | ||||||||||||
Gain on sale of fixed assets |
(0.3 | ) | - | (0.1 | ) | - | ||||||||||
Operating income |
8.1 | 6.6 | 7.7 | 6.9 | ||||||||||||
Stock warrants revaluation |
- | 0.1 | - | 0.8 | ||||||||||||
Interest expense, net |
0.3 | 0.7 | 0.4 | 0.8 | ||||||||||||
Income taxes (credit) |
3.0 | (5.7 | ) | 2.9 | (3.1 | ) | ||||||||||
Net income |
4.8 | 11.5 | 4.4 | 8.4 |
Net Sales. Net sales in the second quarter of 2013 increased $44.0 million or 38.0%, to $159.6 million from $115.6 million in the second quarter of 2012. The increase was primarily attributable to a 46% increase in the Company’s revenue from the RV industry, a 13% increase in revenues from the MH industry, and a 33% increase in revenues from the industrial markets.
Excluding the revenue contributions of the four acquisitions completed in 2012, the Company estimates its organic growth in the second quarter of 2013 at approximately 20%, or $22.8 million of the total revenue increase, comprised of growth resulting from market share gains of approximately 7% and growth tied to overall industry improvement of approximately 13%. The remaining $21.2 million of the revenue increase in the second quarter of 2013 was attributable to the incremental contribution of the 2012 acquisitions (including related market share and industry growth), resulting in incremental growth of approximately 18% compared to the second quarter of 2012: an increase of $1.3 million from Décor Mfg., LLC (“Décor”), which was acquired in March 2012; an increase of $3.9 million from Gustafson Lighting (“Gustafson”), which was acquired in July 2012; an increase of $6.0 million from Creative Wood Designs, Inc. (“Creative Wood”), which was acquired in September 2012; and an increase of $10.0 million from Middlebury Hardwood Products, Inc. (“Middlebury Hardwoods”), which was acquired in October 2012.
For the six months ended June 30, 2013, net sales increased $83.4 million or 38.2%, to $301.7 million from $218.3 million in the prior year period. The increase was primarily attributable to a 48% increase in the Company’s revenue from the RV industry, a 10% increase in revenues from the MH industry, and a 25% increase in revenues from the industrial markets.
Excluding the revenue contributions of the four acquisitions completed in 2012, the Company estimates its organic growth in the first six months of 2013 at approximately 18%, or $40.2 million of the total revenue increase, comprised of growth resulting from market share gains of approximately 7% and growth tied to overall industry improvement of approximately 11%. The remaining $43.2 million of the revenue increase in the first six months of 2013 was attributable to the incremental contribution of the 2012 acquisitions (including related market share and industry growth), resulting in incremental growth of approximately 20% compared to the six months of 2012: an increase of $4.5 million from Décor; an increase of $7.5 million from Gustafson; an increase of $11.8 million from Creative Wood; and an increase of $19.4 million from Middlebury Hardwoods.
The sales increase in the second quarter and first six months of 2013 is also primarily attributable to: (i) increased RV market penetration, (ii) improved retail fixture and residential cabinet and furniture business in the industrial market, and (iii) an increase in wholesale unit shipments in the MH industry. The increase was partially offset by the impact of the vertical integration efforts of one of our larger customers in the MH market that is producing in-house one of the product lines for certain of its facilities that we had previously been supplying. In addition, that same customer has set up distribution centers that provide certain product lines to several of its own manufacturing facilities that we had previously been supplying. However, increased sales of other products to
this same customer helped to offset the overall impact from those vertical integration efforts. Our sales to the industrial market sector, which is primarily tied to the residential housing and commercial and retail fixture markets, generally lag new residential housing starts by approximately six to nine months.
The RV industry, which represented approximately 73% and 74% of the Company’s sales in the second quarter and first six months of 2013, respectively, saw wholesale unit shipments increase by approximately 14% and 13%, respectively, in those periods compared to 2012. The MH industry, which represented 16% of the Company’s second quarter 2013 sales, experienced a 9% increase in wholesale unit shipments compared to the prior year period. For the first six months of 2013, the MH industry represented approximately 15% of the Company’s sales. On a year-to-date basis, MH unit shipments increased approximately 5% from 2012. The industrial market sector accounted for approximately 11% of the Company’s sales in both the second quarter and first six months 2013. We estimate that approximately 60% of our industrial revenue base is linked to the residential housing market, which experienced an increase in new housing starts of approximately 17% in the second quarter of 2013 and 24% in the first six months of 2013 compared to the prior year periods (as reported by the U.S. Department of Commerce).
We expect to continue to see quarter over quarter revenue growth for the remainder of fiscal 2013, exclusive of the revenue contribution of any potential acquisitions that may be completed in fiscal 2013. This growth will be at lower rates from the first six months of 2013 because the last two quarters of 2012 reflect a proportionally greater revenue contribution from the acquisitions completed in 2012 than the first six months of 2012 due to their acquisition dates.
Cost of Goods Sold. Cost of goods sold increased $36.6 million or 37.5%, to $134.4 million in second quarter 2013 from $97.8 million in 2012. As a percentage of net sales, cost of goods sold decreased during the second quarter of 2013 to 84.2% from 84.6% in 2012. For the first six months of 2013, cost of goods sold increased $70.1 million or 38.1%, to $254.1 million from $184.0 million in the prior year period. For the first six months of 2013, cost of goods sold as a percentage of net sales decreased to 84.2 % from 84.3% in the prior year period.
Cost of goods sold as a percentage of net sales was positively impacted during the second quarter and first six months of 2013 by: (i) increased revenues relative to our overall fixed overhead cost, (ii) the impact of acquisitions completed during 2012, (iii) actions to reduce or eliminate negative margins on certain products, (iv) increased revenues from the Distribution segment which generally has a lower cost of goods sold percentage than the Manufacturing segment, and (v) ongoing organizational and process changes that enhanced labor efficiencies, reduced scrap and returns, and increased material yields. This decrease in cost of goods sold as a percentage of net sales was partially offset by general fluctuations in the costs of certain commodities used in the manufacture of our products during the second quarter and first six months of 2013 compared to 2012. We expect that cost of goods sold as a percentage of net sales for the third quarter of 2013 will increase compared to the first two quarters of 2013 as a result of seasonal factors and increased commodity pricing in certain raw materials combined with competitive market conditions that could limit our ability to increase prices on certain products consistent with the expected increased costs for this time frame.
In addition, higher energy costs and increased demand in certain market sectors can result in fluctuating costs of certain commodities of raw materials and other products that we utilize and distribute from quarter to quarter. The Company continues to explore alternative sources of raw materials and components, both domestically and from overseas.
Gross Profit. Gross profit increased $7.4 million or 41.0%, to $25.2 million in second quarter 2013 from $17.8 million in second quarter 2012. For the six months periods, gross profit increased $13.3 million or 38.9%, to $47.6 million in 2013 from $34.3 million in 2012. As a percentage of net sales, gross profit increased to 15.8% in second quarter 2013 from 15.4% in the same period in 2012, and increased to 15.8% in the first six months of 2013 from 15.7% in the prior year period. The improvement in gross profit dollars and percentage of net sales in the second quarter and first six months of 2013 compared to 2012 reflected the positive impact of the factors discussed above under “Cost of Goods Sold” including the positive contribution to gross profit of both organic and acquisition-related revenue growth noted above. We believe these acquisitions will provide positive contribution to our operating profitability going forward.
Economic or industry-wide factors affecting the profitability of our RV, MH, and industrial businesses include the costs of commodities used to manufacture our products and the competitive environment that can cause gross margins to fluctuate from quarter-to-quarter and year-to-year. We expect that gross profit as a percentage of net sales for the third quarter of 2013 will decrease compared to the first two quarters of 2013 as a result of seasonal factors and increased commodity pricing in certain raw materials combined with competitive market conditions that could limit our ability to increase prices on certain products consistent with the expected increased costs for this time frame. We currently estimate gross profit margins in the range of 14% to 16% for the full year 2013 subject to the above and other factors.
Warehouse and Delivery Expenses. Warehouse and delivery expenses increased $0.7 million or 18.3%, to $4.7 million in second quarter 2013 from $4.0 million in second quarter 2012. For the six months, warehouse and delivery expenses increased $1.6 million or 20.8%, to $9.2 million in 2013 from $7.6 million in 2012. The expense increase in both the second quarter and the first six months of 2013 was primarily attributable to increased sales volumes.
As a percentage of net sales, warehouse and delivery expenses were 3.0% and 3.4% in second quarter 2013 and 2012, respectively, and 3.1% and 3.5% for the comparable six months periods. The decrease as a percentage of net sales for both the second quarter and first six months of 2013 primarily reflected better utilization of our fleet and truckload delivery capacities as a result of higher sales volumes, and the impact of increased distribution sales volume compared to its associated fixed costs.
Selling, General and Administrative (SG&A) Expenses. SG&A expenses increased $1.5 million or 25.3%, to $7.4 million in second quarter 2013 from $5.9 million in second quarter 2012. For the six months, SG&A expenses increased $3.6 million or 32.7%, to $14.4 million in 2013 from $10.8 million in 2012. Additional headcount associated with recent acquisitions and an increase in accrued incentive compensation related to higher levels of operating profits contributed to a net increase in selling and administrative wages, incentives and payroll taxes in both the second quarter and first six months of 2013 compared to the prior year periods. As a percentage of net sales, SG&A expenses were 4.7% and 5.1% in second quarter 2013 and 2012, respectively, and were 4.8% in the first six months of 2013 compared to 5.0% in 2012.
Amortization of Intangible Assets. Amortization of intangible assets increased $0.2 million and $0.4 million in the second quarter and first six months of 2013, respectively, compared to the prior year periods, primarily reflecting the impact of businesses acquired in 2012 (Décor, Gustafson, Creative Wood and Middlebury Hardwoods). In the aggregate, in conjunction with these acquisitions, the Company recognized $7.8 million in certain finite-lived intangible assets that are being amortized over periods ranging from one to 10 years.
Gain on Sale of Fixed Assets. During the second quarter of 2013, the Company sold the facility that housed its distribution operation in Halstead, Kansas and recorded a pretax gain on sale of approximately $0.4 million for the second quarter and first six months of 2013.
Operating Income. Operating income increased $5.3 million to $12.9 million in second quarter 2013 from $7.6 million in the prior year. For the six months, operating income increased $8.2 million to $23.3 million from $15.1 million in 2012. The change in operating income is primarily attributable to the items discussed above.
Stock Warrants Revaluation. The stock warrants revaluation expense of $0.1 million and $1.8 million in the second quarter and first six months of 2012, respectively, represents non-cash charges related to mark-to-market accounting for common stock warrants issued to the Company’s former senior lenders in conjunction with the December 2008 amendment to the 2007 Credit Agreement (as defined herein) (the “2008 Warrants”).
In the first quarter of 2012, 154,109 net shares of common stock were issued upon the cashless exercise of 2008 Warrants to purchase 179,531 shares in the aggregate of the Company’s common stock. The fair value of these shares of $1.1 million was reclassified to shareholders’ equity on the condensed consolidated statements of financial position.
In the second quarter of 2012, 69,106 net shares of common stock were issued upon the cashless exercise of 2008 Warrants to purchase 74,319 shares of the Company’s common stock. The fair value of these shares of $0.8 million was reclassified to shareholders’ equity on the condensed consolidated statements of financial position.
As of July 1, 2012, there were in aggregate 74,319 shares of common stock issuable upon exercise of the then remaining 2008 Warrants, which were exercised in full during the third quarter of 2012. See Note 9 to the Condensed Consolidated Financial Statements (“Warrants Subject to Revaluation”) for further details.
Interest Expense, Net. Interest expense decreased $0.3 million to $0.5 million in the second quarter of 2013 from $0.8 million in 2012. For the six months, interest expense decreased $0.5 million to $1.1 million from $1.6 million in 2012. In the second quarter and first six months of 2013, borrowing rates under the 2012 Credit Facility (as defined herein) were lower than the interest rates under the 2011 Credit Facility (as defined herein) in the comparable periods in 2012, as well as the interest rates on the March 2011 Notes (as defined herein), the September 2011 Notes (as defined herein), and the 10% Promissory Note issued in September 2011, all of which were outstanding during the second quarter and first six months of 2012. These notes were repaid in full in the fourth quarter of fiscal 2012.
Income Taxes. In the second quarter and first six months of 2013, the Company recorded income taxes at an estimated full year effective tax rate of approximately 39% compared to a 0% effective tax rate in the comparable periods in 2012. As we continue to refine our state income tax estimates, which are impacted by shifts in apportionment factors among states as a result of recent acquisition activity and other factors, we could experience fluctuations in our combined effective income tax rate from period to period and for the full year of 2013. At January 1, 2012, the Company carried a full valuation allowance against its deferred tax assets. In the second quarter of 2012, the Company determined that it was likely that the remaining net deferred tax assets would be realized based upon sustained profitability and forecasted future operating results. As a result of this determination, the Company reversed approximately $6.8 million of the valuation allowance in 2012, of which $6.7 million was reversed in the second quarter of 2012, with the reversal recorded as a non-cash income tax credit on the Company’s condensed consolidated statement of income. In addition, the Company reversed the balance of its valuation allowance in 2012 to fully offset its 2012 tax provision of approximately $8.8 million, resulting in the 0% effective tax rate described above for the second quarter and first six months of 2012.
At December 31, 2012, the Company had a gross federal net operating loss (“NOL”) carry forward of approximately $9.8 million that was fully utilized in the first six months of 2013. In addition, the Company had various state NOLs of approximately $12.6 million at December 31, 2012, of which approximately $3.3 million were utilized in the first six months of 2013. The Company estimates that it will fully utilize a significant majority of the remaining state NOLs by the end of 2014. As of December 31, 2012, both the federal and state NOLs included approximately $3.7 million of taxable deductions related to unrealized excess benefits on stock-based compensation, which had not been recorded as deferred tax assets. In the first six months of 2013, the Company realized approximately $2.3 million of additional taxable deductions related to excess benefits on stock-based compensation, which had also not been recorded as deferred tax assets. In the first six months of 2013, based on the utilization of the federal NOL and a portion of the state NOLs, the Company realized a tax benefit of approximately $2.4 million related to excess benefits from stock-based compensation at its estimated effective combined 39% federal and state tax rate. The tax benefit was recorded to shareholders’ equity upon realization in the second quarter of 2013.
Since the Company began to record income taxes at an estimated full year effective tax rate of 39% in the first quarter of 2013, the federal and state NOLs discussed above were used to partially offset the cash portion of the income tax provision for 2013. In 2013, the Company is making quarterly estimated tax payments consistent with its expected annual 2013 federal and state income tax liability.
Net Income. Net income for second quarter 2013 was $7.6 million or $0.70 per diluted share compared to $13.3 million or $1.22 per diluted share for 2012. For the first six months, net income was $13.6 million or $1.25 per diluted share in 2013 compared to $18.3 million or $1.70 per diluted share for 2012. The changes in net income for both the second quarter and first six months of 2013 reflect the impact of the items previously discussed,
including (i) income tax provisions of $4.8 million and $8.7 million in the second quarter and first six months of 2013, respectively, or $0.45 and $0.80 per diluted share, respectively, and (ii) the reversal of the tax valuation allowance in the second quarter of 2012, which increased net income by $6.7 million in both the second quarter and first six months of 2012, or $0.61 and $0.62 per diluted share, respectively.
REVIEW BY BUSINESS SEGMENT
The Company has determined that its reportable segments are those based on its method of internal reporting, which segregates its businesses by product category and production/distribution process.
The Company’s reportable business segments are as follows:
Manufacturing – Utilizes various materials, such as lauan, MDF, gypsum, and particleboard, which are bonded by adhesives or a heating process to a number of products, including vinyl, paper, foil, and high-pressure laminate. These products are utilized to produce furniture, shelving, wall, counter, and cabinet products with a wide variety of finishes and textures. This segment also includes a cabinet door division, a hardwood furniture division, a vinyl printing division, a solid surface, granite, and quartz fabrication operation, and an exterior graphics division. Patrick’s major manufactured products also include wrapped vinyl, paper and hardwood profile mouldings, interior passage doors, and slotwall and slotwall components.
Distribution - Distributes pre-finished wall and ceiling panels, drywall and drywall finishing products, electronics, wiring, electrical and plumbing products, cement siding, interior passage doors, roofing products, laminate flooring, shower doors, furniture, fireplace and slide-out surrounds and fascia, interior and exterior lighting products, and other miscellaneous products.
Second Quarter and Six Months Ended June 30, 2013 Compared to 2012
General
Sales pertaining to the Manufacturing and Distribution segments as stated in the following discussions include intersegment sales. Gross profit includes the impact of intersegment operating activity.
The table below presents information about the sales, gross profit and operating income of the Company’s operating segments. A reconciliation to consolidated operating income is presented in Note 13 to the Condensed Consolidated Financial Statements.
Second Quarter Ended |
Six Months Ended |
|||||||||||||||
(thousands) |
June 30, 2013 |
July 1, 2012 |
June 30, 2013 |
July 1, 2012 |
||||||||||||
Sales |
||||||||||||||||
Manufacturing |
$ | 130,309 | $ | 92,695 | $ | 246,711 | $ | 176,373 | ||||||||
Distribution |
35,300 | 27,557 | 66,818 | 50,953 | ||||||||||||
Gross Profit |
||||||||||||||||
Manufacturing |
19,827 | 13,782 | 37,567 | 26,433 | ||||||||||||
Distribution |
5,696 | 4,283 | 11,508 | 8,367 | ||||||||||||
Operating Income |
||||||||||||||||
Manufacturing |
13,355 | 8,684 | 25,079 | 16,777 | ||||||||||||
Distribution |
2,353 | 1,376 | 4,272 | 2,711 |
Manufacturing
Sales. Sales increased $37.6 million or 40.6%, to $130.3 million in second quarter 2013 from $92.7 million in 2012. In the first six months of 2013, sales increased $70.3 million or 39.9%, to $246.7 million from $176.4 million in the first six months of 2012. This segment accounted for approximately 78% of the Company’s consolidated net sales for both the second quarter and first six months of 2013, and 77% for both the second quarter and first six months of 2012. In the second quarter of 2013, the sales increase reflected a 32% increase in the Company’s revenue from the RV industry, a 10% increase from the MH industry, and a 26% increase in revenue from the industrial markets. On a year-to-date basis, the sales increase reflected a 40%, 8% and 24% increase in the Company’s revenue from the RV industry, MH industry, and industrial markets, respectively. The increase in revenue from the MH market was partially offset by the impact of the vertical integration efforts of one of the Company’s larger MH customers that is now producing in-house one of the product lines for certain of its facilities that the Company had previously been supplying. However, increased sales of other manufactured products to this same customer helped to offset the overall impact from those vertical integration efforts.
Approximately $17.3 million and $35.7 million of the revenue improvement in the second quarter and first six months of 2013, respectively, was attributable to the incremental contribution of acquisitions completed in 2012 (including related market share and industry growth): an increase of $1.3 million and $4.5 million, respectively, from Décor; $6.0 million and $11.8 million, respectively, from Creative Wood; and $10.0 million and $19.4 million, respectively, from Middlebury Hardwoods. The remaining sales increase of $20.3 million and $34.6 million in the second quarter and first six months of 2013, respectively, is primarily attributable to: (i) increased RV market penetration, (ii) an increase in wholesale unit shipments in the RV and MH industries of 14% and 9% in the second quarter of 2013, respectively, and 13% and 5% in the first six months of 2013, respectively, and (iii) improved sales in the industrial markets primarily related to increased residential housing starts as well as improved retail fixture and residential furniture business resulting from our diversification efforts.
Excluding the revenue contributions of the 2012 acquisitions, the Company estimates its organic revenue growth in the Manufacturing segment in the second quarter and first six months of 2013 at approximately 23% and 21%, respectively. We expect to continue to see overall quarter over quarter revenue growth for the remainder of fiscal 2013, exclusive of the revenue contribution of any potential acquisitions that may be completed in fiscal 2013, although at declining growth rates from the first six months of 2013 because the last two quarters of 2012 reflect a proportionally greater revenue contribution from the acquisitions completed in 2012 than the first six months of 2012 due to their acquisition dates.
Gross Profit. Gross profit increased $6.0 million to $19.8 million in second quarter 2013 from $13.8 million in second quarter 2012. As a percentage of sales, gross profit increased to 15.2% in second quarter 2013 from 14.9% in 2012.
Gross profit increased $11.2 million to $37.6 million in the first six months of 2013 from $26.4 million in the prior year period. As a percentage of sales, gross profit increased to 15.2% in the first six months of 2013 from 15.0% in 2012. Gross profit for the second quarter and first six months of 2013 improved primarily as a result of: (i) higher revenues, (ii) the impact of acquisitions completed during 2012, (iii) increased profitability at our Midwest manufacturing divisions, which benefited from actions to reduce or eliminate negative margins on certain products, and (iv) ongoing organizational and process changes that enhanced labor efficiencies, reduced scrap and returns, and increased material yields. We expect that gross profit as a percentage of net sales in the Manufacturing segment for the third quarter of 2013 will decrease compared to the first two quarters of 2013 as a result of seasonal factors and increased commodity pricing in certain raw materials combined with competitive market conditions that could limit our ability to increase prices on certain products consistent with the expected increased costs for this time frame.
Operating Income. Operating income increased $4.7 million to $13.4 million in second quarter 2013 from $8.7 million in the prior year. For the first six months of 2013, operating income increased by $8.3 million to $25.1 million from $16.8 million in 2012. The improvement in operating income primarily reflects the increase in gross profit mentioned above and, to a lesser extent, lower warehouse and delivery expenses as a percentage of sales.
Distribution
Sales. Sales increased $7.7 million or 28.1%, to $35.3 million in the second quarter of 2013 from $27.6 million in 2012. In the first six months of 2013, sales increased $15.8 million or 31.1%, to $66.8 million from $51.0 million in the first six months of 2012. This segment accounted for approximately 22% of the Company’s consolidated net sales for the second quarter and first six months of 2013, and 23% for the second quarter and first six months of 2012. In the second quarter of 2013, the sales increase reflected a 39% increase in the Company’s revenue from the RV industry and a 17% increase in revenue from the MH industry. On a year-to-date basis, the sales increase primarily reflected a 47% and a 12% increase in the Company’s revenue from the RV and MH industries, respectively.
The acquisition of Gustafson in the third quarter of 2012 accounted for approximately $3.9 million and $7.5 million of the revenue increase in the second quarter and first six months of 2013, respectively. Sales were also positively impacted during the second quarter and first six months of 2013 by a 9% and 5% increase, respectively, in wholesale unit shipments in the MH industry, which is the primary market this segment serves. Excluding the revenue contribution of the Gustafson acquisition, the Company estimates its organic revenue growth in the Distribution segment at approximately 14% and 16% in the second quarter and first six months of 2013, respectively.
Gross Profit. Gross profit increased $1.4 million to $5.7 million in second quarter 2013 from $4.3 million in 2012. As a percentage of sales, gross profit was 16.1% in second quarter 2013 compared to 15.5% in 2012.
For the first six months of 2013, gross profit increased $3.1 million to $11.5 million in 2013 compared to $8.4 million in 2012. As a percentage of sales, gross profit was 17.2% in the first six months of 2013 compared to 16.4% in 2012. The increase in gross profit as a percentage of sales for the second quarter and first six months of 2013 is primarily attributable to the impact of increased Distribution segment revenues relative to fixed costs, and a mix shift to a lower percentage of direct shipment sales from the Company’s vendors to its customers, which generally carry lower gross margins than distribution products sold and delivered by the Company.
Operating Income. Operating income in second quarter 2013 increased $1.0 million to $2.4 million from $1.4 million in the prior year period. For the first six months of 2013, operating income increased $1.6 million to $4.3 million from $2.7 million in the first six months of 2012. The overall increase in revenues, as well as the acquisition of several new product lines during 2012 and 2013, in particular the Gustafson distribution business acquired in the third quarter of 2012, made a positive contribution to operating income during the second quarter and first six months of 2013.
Unallocated Corporate Expenses
Unallocated corporate expenses in the second quarter of 2013 increased $0.5 million to $2.7 million from $2.2 million in the comparable prior year period. In the first six months of 2013, unallocated corporate expenses increased $1.6 million to $5.4 million from $3.8 million in the first six months of 2012 primarily reflecting an increase in administrative wages, incentives and payroll taxes, and additional headcount associated with recent acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
Operating Activities
Cash flows from operations represent the net income earned in the reported periods adjusted for non-cash items and changes in operating assets and liabilities. Our primary sources of liquidity have been cash flows from operating activities, cash reserves and borrowings under our 2012 Credit Facility. Our principal uses of cash in 2013 are to support working capital demands, support our acquisition and capital expenditure plans, and the repurchase of the Company’s common stock.
Net cash provided by operating activities was $15.0 million in the first six months of 2013 compared to $14.3 million in the first six months of 2012. Net income increased to $13.6 million in the first six months of 2013 from
$11.7 million in the 2012 period, net of the $6.7 million non-cash income tax credit related to the reversal of the deferred tax valuation allowance in the second quarter of 2012. Trade receivables increased $14.1 million and $10.2 million in the first six months of 2013 and 2012, respectively, reflecting increased sales levels in each of those periods, including the post-acquisition sales increases of the acquisitions completed in 2012. Inventories increased $4.7 million in the first six months of 2013 compared to a $5.6 million increase in the comparable 2012 period, primarily reflecting an increase in sales volumes and the Company’s efforts to continue to be able to meet anticipated rising customer demand, as well as the post-acquisition sales increases of the 2012 acquisitions. While the Company continues to aggressively manage inventory turns by closely following customer sales levels and increasing or reducing purchases accordingly, we made certain strategic decisions in the first half of 2013 to increase our inventory levels to be able to meet anticipated demand, thus resulting in lower inventory turn levels. We expect our inventory turn levels to increase as we enter the second half of 2013 based on the expected seasonality of our business, and we will work together with key suppliers to match lead-time and minimum order requirements and to take advantage of strategic buying opportunities.
From a tax perspective, the Company had federal and state NOLs for the past several years resulting in virtually no cash taxes being paid other than franchise taxes and various state filing taxes. At December 31, 2012, the Company had a gross federal NOL of approximately $9.8 million that it fully utilized in the first six months of 2013, and various state NOLs of approximately $12.6 million, of which approximately $3.3 million were utilized in the first six months of 2013. The Company expects to utilize a significant majority of the remaining $9.3 million of state NOLs by the end of 2014. As of December 31, 2012, both the federal and state NOLs included approximately $3.7 million of taxable deductions related to unrealized excess benefits on stock-based compensation, which had not been recorded as deferred tax assets. In the first six months of 2013, the Company realized approximately $2.3 million of additional taxable deductions related to excess benefits on stock-based compensation, which had also not been recorded as deferred tax assets. In the first six months of 2013, based on the utilization of the federal NOL and a portion of the state NOLs, the Company realized a tax benefit of approximately $2.4 million related to excess benefits from stock-based compensation, at its estimated effective combined 39% federal and state tax rate. The tax benefit was recorded to shareholders’ equity upon realization in the second quarter of 2013.
Since the Company began to record income taxes at an estimated full year effective tax rate of 39% in the first quarter of 2013, the federal and state NOLs discussed above were used to partially offset the cash portion of the income tax provision for 2013. In 2013, the Company is making quarterly estimated tax payments consistent with its expected annual 2013 federal and state income tax liability. As we continue to refine our state income tax estimates, which are impacted by shifts in apportionment factors among states as a result of recent acquisition activity and other factors, we could experience fluctuations in our combined effective income tax rate from period to period and for the full year of 2013.
Investing Activities
Investing activities used cash of $2.5 million in the first six months of 2013 primarily reflecting capital expenditures of $3.5 million, net of $1.0 million of net proceeds from the sale of the Kansas distribution facility and the sale of various machinery and equipment. Cash used in investing activities of $5.9 million in the first six months of 2012 was primarily to fund the Décor acquisition for $3.7 million and to fund capital expenditures of $2.2 million.
The capital plan for full year 2013 includes spending related to the replacement of our current ERP system, equipment upgrades to ensure that our facilities have the capacity, capabilities and technology to facilitate our growth plans, and other strategic capital and maintenance improvements. Our current operating model forecasts capital expenditures for 2013 to be approximately $8.0 million.
During the fourth quarter of 2011, the Company commenced a project to replace and upgrade its existing ERP system. The ERP system replacement and related process improvements are expected to result in modifications to our internal controls and supporting financial, manufacturing, and distribution transaction processing and reporting. The implementation of these changes to software and systems is expected to be executed in phases over a period of 18 to 24 months which began in the fourth quarter of 2012. Total capital expenditures on the ERP project are projected to be $1.0 million in 2013.
Financing Activities
Net cash flows used in financing activities were $7.5 million in the first six months of 2013 compared to $7.6 million in the comparable 2012 period.
For the first six months of 2013, net long-term debt payments consisted of net payments on the 2012 Credit Facility of $3.7 million. As of June 30, 2013, the committed but unused portion of the revolving line of credit was approximately $32.9 million.
For the first six months of 2012, net long-term debt payments of $7.7 million consisted of: (i) net payments on the 2011 Credit Facility of $5.6 million; (ii) the repayment of $0.5 million principal amount of the 10% Promissory Note issued in September 2011 to the seller of AIA; and (iii) the optional prepayment on each of March 30, 2012 and June 29, 2012 of $770,000 or 10% of the combined $7.7 million original principal amount of the Company’s March 2011 Notes and September 2011 Notes, that were issued in connection with the March 2011 refinancing of the Company’s previous credit facility and the financing of the AIA acquisition in September 2011, respectively.
In the first six months of 2013, the Company also used cash to repurchase 407,330 shares of common stock, for an aggregate purchase price of $6.1 million, under the $10 million stock repurchase program authorized by the Company’s Board of Directors in February 2013. In the period from July 1, 2013 to July 26, 2013 (during the Company’s third fiscal quarter), there were no additional repurchases made of the Company’s common stock. As of July 26, 2013, there was approximately $3.9 million available to be purchased under the authorized stock repurchase program. Partially offsetting cash used in financing activities in the first six months of 2013 was $2.4 million related to the realization of the excess tax benefit on stock-based compensation with no comparable amount in the prior year. See the related discussion above under “Cash Flows – Operating Activities” for additional details.
Capital Resources
2008 Warrants
In conjunction with the Second Amendment dated December 11, 2008 to the Company’s credit agreement, dated May 18, 2007 (the “2007 Credit Agreement”), the Company issued the 2008 Warrants to its then existing lenders. The Company accounted for the 2008 Warrants as derivative financial instruments. The calculated fair value of the 2008 Warrants was classified as a liability and was periodically remeasured with any changes in value recognized in the stock warrants revaluation line on the condensed consolidated statements of income.
As of January 1, 2012, there were in aggregate 328,169 shares of common stock issuable upon exercise of the then remaining 2008 Warrants. In the first quarter of 2012, 154,109 net shares of common stock were issued upon the cashless exercises of 2008 Warrants to purchase 179,531 shares in the aggregate of the Company’s common stock. The fair value of these shares of $1.1 million was reclassified to shareholders’ equity on the condensed consolidated statements of financial position.
In the second quarter of 2012, 69,106 net shares of common stock were issued upon the cashless exercise of 2008 Warrants to purchase 74,319 shares of the Company’s common stock. The fair value of these shares of $1.0 million was reclassified to shareholders’ equity on the condensed consolidated statements of financial position.
In the third quarter of 2012, 68,641 net shares were issued upon the cashless exercise of the remaining 2008 Warrants to purchase 74,319 shares of the Company’s common stock. The fair value of these shares of $0.8 million was reclassified to shareholders’ equity on the condensed consolidated statements of financial position.
2011 Credit Facility
Prior to October 24, 2012, the Company’s debt financing was supported by its credit agreement, dated March 31, 2011, as amended, among the Company, Wells Fargo Capital Finance, LLC (“WFCF”), as the lender and agent, and Fifth-Third Bank (“Fifth-Third”) as participant (the “2011 Credit Agreement”), which consisted of a $50 million
revolving secured senior credit facility (the “2011 Credit Facility”). The 2011 Credit Facility was scheduled to mature on March 31, 2015.
2012 Credit Facility
On October 24, 2012, the Company entered into a credit agreement (the “2012 Credit Agreement”) with Wells Fargo Bank, National Association as the agent and lender (“Wells Fargo”), and Fifth-Third as participant (collectively, the “Lenders”), to establish a five-year $80 million revolving secured senior credit facility (the “2012 Credit Facility”). The 2012 Credit Facility replaced the 2011 Credit Facility. Initial borrowings under the 2012 Credit Facility were used in part to repay in full the borrowings outstanding under the 2011 Credit Facility.
The 2012 Credit Agreement is secured by a pledge of substantially all of the assets of the Company pursuant to a Security Agreement, dated October 24, 2012, between the Company and Wells Fargo, as agent. The 2012 Credit Agreement includes certain definitions, terms and reporting requirements and includes the following provisions:
● |
The maturity date for the 2012 Credit Facility is October 24, 2017; |
● |
Borrowings under the revolving line of credit (the “Revolver”) are subject to a maximum borrowing limit of $80.0 million; |
● |
The Company has the option to increase the 2012 Credit Facility by an amount up to $20 million upon request to and subject to the approval of the Lenders; |
● |
The interest rates for borrowings under the Revolver are the Base Rate plus the Applicable Margin or the London Interbank Offer Rate (“LIBOR”) plus the Applicable Margin, with a fee payable by the Company on unused but committed portions of the Revolver; |
● |
The Revolver includes a sub-limit up to $5,000,000 for same day advances (“Swing Line”) which shall bear interest based upon the Base Rate plus the Applicable Margin; |
● |
Up to $20 million of the Revolver will be available as a sub facility for the issuance of standby letters of credit, which are subject to certain expiration dates. The Company’s existing standby letters of credit as of October 24, 2012 remained outstanding under the terms of the 2012 Credit Agreement; |
● |
The financial covenants include requirements as to a consolidated total leverage ratio and a consolidated interest coverage ratio, and other covenants include limitations on permitted acquisitions, capital expenditures, indebtedness, restricted payments and fundamental changes (see further details below); and |
● |
Customary prepayment provisions which require the prepayment of outstanding amounts under the Revolver based on predefined conditions. |
At June 30, 2013 and December 31, 2012, the Company had $46.0 million and $49.7 million, respectively, outstanding under its Revolver. The interest rate for borrowings under the Revolver for both periods was the Prime Rate plus 0.50% (or 3.75%), or LIBOR plus 1.50% (or 1.6875%), and the fee payable on committed but unused portions of the Revolver was 0.20%.
Pursuant to the 2012 Credit Agreement, the financial covenants include (a) a maximum consolidated total leverage ratio, measured on a quarter-end basis, not to exceed 3.50:1.00 for the 12 month period ending on such quarter-end; (b) a required minimum consolidated interest coverage ratio under the Revolver, measured on a quarter-end basis, of at least 2.25:1.00 for the 12 month period ending on such quarter-end; and (c) a limitation on annual capital expenditures of $8.0 million for 2012 and subsequent fiscal years. If the consolidated total leverage ratio is in excess of 3.00:1.00 and less than 3.50:1.00, the Company is considered to be in compliance with this financial covenant provided it maintains an asset coverage ratio of at least 1.00 to 1.00 as of the close of each period. For fiscal year 2013 and subsequent fiscal years, the limitation on annual capital expenditures was increased to $8.0 million from $7.0 million per the Second Amendment, dated June 28, 2013, to the 2012 Credit Agreement.
The consolidated total leverage ratio is the ratio for any period of (i) consolidated total indebtedness to (ii) EBITDA. Consolidated total indebtedness for any period is the sum of (i) total debt outstanding under the Revolver less available cash on hand, (ii) capital leases and letters of credit outstanding, and (iii) deferred
payment obligations. The asset coverage ratio for any period is the ratio of (i) eligible amounts of the Company’s trade payables, inventory and fixed assets, minus certain reserves as defined under the 2012 Credit Agreement to (ii) the sum of outstanding obligations under the 2012 Credit Facility.
The consolidated interest coverage ratio for any period is the ratio of (i) EBITDA minus depreciation to (ii) the sum of consolidated interest expense plus restricted payments made by the Company.
For the six months ended June 30, 2013, the Company was in compliance with all three of these financial covenants at each reporting date. The required maximum total leverage ratio, minimum interest coverage ratio, and the annual capital expenditures limitation amounts compared to the actual amounts as of and for the fiscal period ended June 30, 2013 are as follows:
(thousands except ratios) |
Required |
Actual |
|||||
Consolidated leverage ratio (12-month period) |
3.50 | 1.00 | |||||
Consolidated interest coverage ratio (12-month period) |
2.25 | 5.00 | |||||
Annual capital expenditures limitation |
$ | 8,000 | $ | 3,524 |
Secured Senior Subordinated Notes
March 2011 Notes
In connection with entering into the 2011 Credit Agreement, the Company issued $2.5 million principal amount of Secured Senior Subordinated Notes (the “March 2011 Notes”) to each of Tontine Capital Overseas Master Fund II, L.P., a Cayman Islands limited partnership (“TCOMF2”) and Northcreek Mezzanine Fund I, L.P. (“Northcreek”), or $5.0 million in the aggregate. The March 2011 Notes bore interest at a rate equal to 10% per annum until March 31, 2013 and 13% thereafter, and were scheduled to mature on March 31, 2016. The Company was permitted to prepay all or any portion of the March 2011 Notes at any time based on pre-defined percentages of the principal amount being prepaid.
In connection with the issuance of the March 2011 Notes, the Company issued warrants to purchase 125,000 shares of the Company’s common stock to each of TCOMF2 and Northcreek at an exercise price of $0.01 per share (the ““March 2011 Warrants”). Northcreek and TCOMF2 exercised their individual warrants to purchase 125,000 shares of the Company’s common stock in April 2011 and June 2011, respectively. The debt discount of $0.7 million, which was equal to the fair value of the March 2011 Warrants as of March 31, 2011, was being amortized to interest expense over the life of the March 2011 Notes beginning in the second quarter of 2011. In the fourth quarter of 2012, in connection with the prepayment in full of the March 2011 Notes, the Company recorded a non-cash charge to interest expense to write-off the remaining unamortized portion of the debt discount.
September 2011 Notes
In connection with the financing of the acquisition of AIA, the 2011 Credit Agreement was amended to, among other things, allow for the issuance to Northcreek and an affiliate of Northcreek of Secured Senior Subordinated Notes in the aggregate principal amount of $2.7 million (the “September 2011 Notes”). The September 2011 Notes bore interest at 13% per annum and were scheduled to mature on March 31, 2016. The Company was permitted to prepay all or any portion of the September 2011 Notes at any time based on pre-defined percentages of the principal amount being prepaid.
In connection with the issuance of the September 2011 Notes, the Company issued to Northcreek and the affiliate of Northcreek warrants to purchase, in the aggregate, 135,000 shares of the Company’s common stock at an exercise price of $0.01 per share (the “September 2011 Warrants”). Northcreek and the affiliate of Northcreek exercised their warrants to purchase in the aggregate 135,000 shares of the Company’s common stock in November 2011. The debt discount of $0.3 million, which was equal to the fair value of the September 2011 Warrants as of September 16, 2011, was being amortized to interest expense over the life of the September 2011 Notes beginning in the third quarter of 2011. In the fourth quarter of 2012, in connection with the prepayment in full of the September 2011 Notes, the Company recorded a non-cash charge to interest expense to write-off the remaining unamortized portion of the debt discount.
Repayments of March 2011 and September 2011 Notes
On March 30, 2012, the Company (i) exercised its option to prepay 10%, or $500,000 in the aggregate, of the original principal amount of its March 2011 Notes at a price of 101% of the principal amount being prepaid plus accrued interest, and (ii) exercised its option to prepay 10%, or $270,000 in the aggregate, of the original principal amount of its September 2011 Notes at a price of 101% of the principal amount being prepaid plus accrued interest.
On June 29, 2012, the Company exercised its option to prepay 10%, or $770,000 in the aggregate, of the combined original principal amount of both its March 2011 Notes and September 2011 Notes, at a price of 101% of the principal amount being prepaid plus accrued interest.
On October 24, 2012, the Company used borrowings under the 2012 Credit Facility to prepay the remaining combined principal outstanding of $6.16 million of its March 2011 Notes and September 2011 Notes at a price of 104% of the principal amount prepaid plus accrued interest.
Subordinated Secured Promissory Note
Also in connection with the financing of the AIA acquisition, the 2011 Credit Agreement was further amended to allow for the issuance of a 10% Promissory Note to the seller of AIA in the principal amount of $2.0 million. The Promissory Note was scheduled to mature on September 16, 2013 and was payable in eight quarterly installments of $250,000 plus quarterly interest payments beginning on December 16, 2011. On October 24, 2012, the Company used borrowings under the 2012 Credit Facility to prepay at par the $1.0 million remaining principal outstanding under the Promissory Note plus accrued interest.
Summary of Liquidity and Capital Resources
Our primary sources of liquidity are cash flow from operations, which includes selling our products and collecting receivables, available cash reserves and borrowing capacity available under the 2012 Credit Facility. Our primary uses of cash are to meet working capital demands, support our acquisition and capital expenditure plans, and the repurchase of the Company’s common stock. We also have a substantial asset collateral base, which we believe, if sold in the normal course, is sufficient to cover our outstanding debt.
Borrowings under the revolving line of credit under the 2012 Credit Facility are subject to a maximum borrowing limit of $80.0 million and are subject to variable rates of interest. Based on certain circumstances, the Company has the option to increase the revolving credit in an amount of up to $20.0 million upon request to and subject to the approval of the Lenders. The unused availability under the 2012 Credit Facility as of June 30, 2013 was $32.9 million. In addition, the Company had cash and cash equivalents of $5.4 million as of June 30, 2013. We believe that our existing cash, cash equivalents, cash generated from operations, and available borrowings under our 2012 Credit Facility will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next 12 months, exclusive of any acquisitions, based on our current cash flow budgets and forecasts of our short-term and long-term liquidity needs. We cannot assure you that this will be the case or that our assumptions regarding revenues and expenses underlying this belief will be accurate. If, in the future, we require more liquidity than is available to us under our 2012 Credit Facility, we may need to raise additional funds through debt or equity offerings. Adequate funds may not be available when needed or may not be available on terms favorable to us.
Our ability to access unused borrowing capacity under the 2012 Credit Facility as a source of liquidity is dependent on our maintaining compliance with the financial covenants as specified under the terms of the 2012 Credit Agreement. In the first six months of 2013 and for the fiscal period ended December 31, 2012, we were in compliance with all of our debt covenants at each reporting date as required under the terms of the 2012 Credit Agreement. Based on our 2013 operating plan, we expect to continue to maintain compliance with the financial covenants under our 2012 Credit Agreement.
If we fail to comply with the covenants under the 2012 Credit Agreement, there can be no assurance that the Lenders will consent to an amendment or waiver of the 2012 Credit Agreement. In this event, it could result in the Company having to refinance its indebtedness under unfavorable terms. If our debt were accelerated, our
assets might not be sufficient to repay our debt in full should they be required to be sold outside of the normal course of business, such as through forced liquidation or bankruptcy proceedings.
In 2013, our management team is focused on increasing market share, maintaining margins, the implementation of our new ERP system, keeping costs aligned with revenue, further improving operating efficiencies, managing inventory levels and pricing, and acquiring businesses/product lines that meet established criteria, all of which may impact our sources and uses of cash from period to period and impact our liquidity levels. In addition, future liquidity and capital resources may be impacted as we continue to make targeted capital investments to support new business and leverage our operating platform and to repurchase common stock in conjunction with the Company’s previously announced stock buyback program. In the fourth quarter of 2011, the Company commenced a project to replace and upgrade its ERP system that will require upgrades to and/or the replacement of existing hardware and software in addition to costs incurred from the services provided by third party consultants. The implementation of these changes to software and systems is expected to be executed in phases over a period of 18 to 24 months which began in the fourth quarter of 2012.
Our working capital requirements vary from period to period depending on manufacturing volumes related to the RV and MH industries, the timing of deliveries, and the payment cycles of our customers. In the event that our operating cash flow is inadequate and one or more of our capital resources were to become unavailable, we would seek to revise our operating strategies accordingly. We will continue to assess our liquidity position and potential sources of supplemental liquidity in view of our operating performance, current economic and capital market conditions, and other relevant circumstances.
CRITICAL ACCOUNTING POLICIES
There have been no material changes to our significant accounting policies which are summarized in the MD&A and Notes to the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2012.
OTHER
Seasonality
Manufacturing operations in the RV and MH industries historically have been seasonal and are generally at the highest levels when the climate is moderate. Accordingly, the Company’s sales and profits had generally been the highest in the second and third quarters. However, seasonal industry trends in the past several years have been different from prior years, primarily reflecting fluctuations in RV dealer inventories and more importantly changing dealer show schedules which have migrated from the fourth quarter to the September/October timeframes by the two largest original equipment manufacturers in the industry. Consequently, and as a result of our increasing concentration in the RV industry, the seasonal trend pattern has shifted with the strongest sales and profit being reported generally in the first and second quarters of the fiscal year.
Inflation
The prices of key raw materials, consisting primarily of lauan, gypsum, and particleboard, and components used by the Company that are made from these raw materials, are influenced by demand and other factors specific to these commodities, such as the price of oil, rather than being directly affected by inflationary pressures. Prices of certain commodities have historically been volatile and have continued to fluctuate since late 2012. During periods of rising commodity prices, we have generally been able to pass the increased costs to our customers in the form of surcharges and price increases. We do not believe that inflation had a material effect on results of operations for the periods presented.
INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS
The Company makes forward-looking statements with respect to financial condition, results of operations, business strategies, operating efficiencies or synergies, competitive position, growth opportunities for existing products, plans and objectives of management, markets for the common stock of Patrick Industries, Inc. and other matters from time to time and desires to take advantage of the “safe harbor” which is afforded such
statements under the Private Securities Litigation Reform Act of 1995 when they are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the forward-looking statements. The statements contained in the foregoing “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, as well as other statements contained in the quarterly report and statements contained in future filings with the Securities and Exchange Commission (“SEC”) and publicly disseminated press releases, and statements which may be made from time to time in the future by management of the Company in presentations to shareholders, prospective investors, and others interested in the business and financial affairs of the Company, which are not historical facts, are forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those set forth in the forward-looking statements. Any projections of financial performance or statements concerning expectations as to future developments should not be construed in any manner as a guarantee that such results or developments will, in fact, occur. There can be no assurance that any forward-looking statement will be realized or that actual results will not be significantly different from that set forth in such forward-looking statement. The Company does not undertake to publicly update or revise any forward-looking statements except as required by law. Factors that may affect the Company’s operations and prospects are contained in the section entitled “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012, and in the Company's Form 10-Qs for subsequent quarterly periods, which are filed with the SEC and are available on the SEC’s website at www.sec.gov.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures. Under the supervision and with the participation of our senior management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this quarterly report (the “Evaluation Date”). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded as of the Evaluation Date that our disclosure controls and procedures were effective such that the information relating to the Company, including consolidated subsidiaries, required to be disclosed in our SEC reports (i) is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to the Company’s management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in internal control over financial reporting. In the fourth quarter of 2011, the Company commenced a project to replace and upgrade its ERP system that will require upgrades to and/or the replacement of existing hardware and software. As a result, certain internal controls have been incrementally strengthened, and will continue to be strengthened, due both to the installation of ERP system and business process changes. Implementation of additional functions of the ERP system and business process changes are expected to be executed in phases over a period of 18 to 24 months which began in the fourth quarter of 2012 to further strengthen the Company’s internal control. In addition, the Company plans to convert systems used by recently acquired businesses to the new ERP system based on a pre-defined timeline.
Other than the changes above, there have been no changes in our internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the second quarter ended June 30, 2013 or subsequent to the date the Company completed its evaluation, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II: OTHER INFORMATION
Items 1, 3, 4 and 5 of Part II are not applicable and have been omitted.
ITEM 1A. RISK FACTORS
There have been no material changes to the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2012.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a) |
None. |
(b) |
None. |
(c) |
Issuer Purchases of Equity Securities |
Period |
Total Number of Shares Purchased |
Average Price Paid Per Share (2) |
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (2) (3) |
|||||||||||
April 1-April 28, 2013 |
75,881 | $ | 14.32 | 75,881 | $ | 5,346,930 | |||||||||
April 29-June 2, 2013 (1) |
38,704 | 21.85 | - | 5,346,930 | |||||||||||
June 3-June 30, 2013 |
72,516 | 19.66 | 72,516 | 3,921,518 | |||||||||||
Total |
187,101 | 17.95 | 148,397 |
(1) |
In May 2013, the Company purchased a total of 38,704 shares of common stock at a purchase price of $21.85 per share for the sole purpose of satisfying the minimum tax withholding obligations of employees upon the vesting of stock awards held by the employees. |
(2) |
Includes commissions paid to repurchase shares as part of a publicly announced plan or program during the periods of April 1 to April 28, 2013 and June 3 to June 30, 2013. |
(3) |
On February 22, 2013, the Company’s Board of Directors authorized a stock repurchase program for purchasing up to $10 million of the Company’s common stock from time to time through open market or private transactions over the next 12 months. The timing and amount of purchases under the program will be determined by management based upon market conditions and other factors. In the second quarter and first six months of 2013, the Company repurchased 148,397 shares and 407,330 shares, respectively, through this program through the open market or in privately negotiated transactions for an aggregate purchase price of approximately $2.5 million and $6.1 million, respectively. |
In the period from July 1, 2013 to July 26, 2013 (during the Company’s third fiscal quarter), there were no additional repurchases made of the Company’s common stock. As of July 26, 2013, there was approximately $3.9 million available to be repurchased under the authorized stock repurchase program.
ITEM 6. EXHIBITS
Exhibits | Description |
10.1 |
Second Amendment, dated June 28, 2013, to the Credit Agreement, dated as of October 24, 2012, between Patrick Industries, Inc., the lenders party thereto and Wells Fargo Bank, National Association, as the Agent. |
31.1 |
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Chief Executive Officer |
31.2 |
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Chief Financial Officer |
32 |
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Chief Executive Officer and Chief Financial Officer |
101 |
Interactive Data Files. The following materials are filed electronically with this Quarterly Report on Form 10-Q: |
101.INS XBRL Instance Document 101.SCH XBRL Taxonomy Schema Document 101.CAL XBRL Taxonomy Calculation Linkbase Document 101.DEF XBRL Taxonomy Definition Linkbase Document 101.LAB XBRL Taxonomy Label Linkbase Document 101.PRE XBRL Taxonomy Presentation Linkbase Document |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
PATRICK INDUSTRIES, INC.
(Registrant) |
|||
Date: August 13, 2013 | By: | /s/ Todd M. Cleveland | |
Todd M. Cleveland
Chief Executive Officer |
Date: August 13, 2013 | By: | /s/ Andy L. Nemeth | |
Andy L. Nemeth
Executive Vice President-Finance and Chief Financial Officer |
|||
38
Exhibit 10.1
SECOND AMENDMENT TO CREDIT AGREEMENT
THIS SECOND AMENDMENT TO CREDIT AGREEMENT (this "Second Amendment") is dated and effective as of June 28, 2013 (the "Second Amendment Effective Date") between FIFTH THIRD BANK and WELLS FARGO BANK, NATIONAL ASSOCIATION, as Lenders, and WELLS FARGO BANK, NATIONAL ASSOCIATION as Administrative Agent for the Lenders, and PATRICK INDUSTRIES, INC., as Borrower.
Recitals
A. Borrower, Lenders and Administrative Agent are parties to that certain Credit Agreement, dated October 24, 2012 (as amended by that certain First Amendment to Credit Agreement dated November 16, 2012, the "Credit Agreement").
B. Borrower has requested that Lenders and Administrative Agent amend and modify the Credit Agreement.
C. Subject to the terms and conditions stated in this Second Amendment, Lenders, Borrower and Administrative Agent are willing to modify and amend the Credit Agreement, as provided in this Second Amendment.
Agreement
NOW, THEREFORE, in consideration of the premises, the mutual covenants and agreements herein, and each act performed and to be performed hereunder, Lenders, Borrower and Administrative Agent agree as follows:
1. Definitions. Except as otherwise expressly stated in this Second Amendment, all terms used in the Recitals and in this Second Amendment that are defined in the Credit Agreement, and that are not otherwise defined herein, shall have the same meanings in this Second Amendment as are ascribed to them in the Credit Agreement.
2. Amendments.
(a) Amendment of Section 1.1; Definition of Eligible Accounts. The definition of "Eligible Accounts" set forth in Section 1.1 of the Credit Agreement is amended to:
(i) |
delete ",or" from the end of subparagraph (f) and replace the same with ";" |
(ii) |
delete "." from the end of subparagraph (g) and replace the same with "; or" |
(iii) |
add a new subparagraph (h) as follows: |
"(h) Accounts with respect to an Account Debtor whose total obligations owing to Borrower exceed 10% (or, with respect to Forest River, Inc., 60%; with respect to Thor Industries, Inc. and its direct and indirect subsidiaries, 30%; with respect to Champion Home Builders, Inc., 15%; and with respect to Clayton Homes, Inc., 25% (such percentage, as applied to a particular Account Debtor, being subject to reduction by Administrative Agent in its Permitted Discretion if the creditworthiness of such Account Debtor deteriorates) of all Eligible Accounts, to the extent of the obligations owing by such Account Debtor in excess of such percentage; provided, however, that, in each case, the amount of Eligible Accounts that are excluded because they exceed the foregoing percentage shall be determined by Administrative Agent based on all of the otherwise Eligible Accounts prior to giving effect to any eliminations based upon the foregoing concentration limit."
(b) Amendment of Section 1.1; Definition of Consolidated Interest Coverage Ratio. The definition of "Consolidated Interest Coverage Ratio" set forth in Section 1.1 of the Credit Agreement is amended and restated as of the Second Amendment Effective Date to read as follows:
"Consolidated Interest Coverage Ratio" means, as of any date of determination, the ratio of (a) Consolidated Adjusted EBITDA less depreciation for the period of four (4) consecutive fiscal quarters ending on or immediately prior to such date to (b) the sum of Consolidated Interest Expense plus Restricted Payments made by the Borrower and its Subsidiaries for the period of four (4) consecutive fiscal quarters ending on or immediately prior to such date. Notwithstanding anything to the contrary contained herein, (i) the sum of Consolidated Interest Expense plus Restricted Payments shall be deemed to be $435,900, $401,900 and $468,100 for the fiscal quarters ended on or about March 31, 2012, June 30, 2012 and September 30, 2012, respectively, and $176,700 for the fiscal month ending on or about October 31, 2012, (ii) Restricted Payments made by the Borrower and its subsidiaries during the period commencing January 1, 2013 through March 31, 2014 in excess of $10,000,000 but not greater than $17,500,000 shall be excluded from the calculation in clause (b); (iii) Restricted Payments made by the Borrower and its subsidiaries during the period commencing April 1, 2014 and December 31, 2014 in excess of $10,000,000 but not greater than $17,500,000 shall be excluded from the calculation in clause (b); (iv) Restricted Payments made by the Borrower and its subsidiaries during any fiscal year beginning after December 31, 2014 in excess of $2,500,000 but not greater than $10,000,000 shall be excluded from the calculation in clause (b), and (v) for purposes of the calculation in clause (b), Restricted Payments made during the relevant period specified in each of clauses (i) through (iv) above shall be deemed to be made in equal amounts across the fiscal quarters of such relevant period, and the exclusion likewise will be applied equally over such period when applicable.
(c) Amendment of Section 9.3(c). Section 9.3(c) of the Credit Agreement is amended and restated as of the Second Amendment Effective Date to read as follows:
"(c) Investments by the Borrower or any of its Subsidiaries in the form of Capital Expenditures not to exceed $8,000,000 during any Fiscal Year;"
(d) Amendment of Section 9.6(d). Section 9.6(d) of the Credit Agreement is amended and restated as of the Second Amendment Effective Date to read as follows:
"(d) so long as no Event of Default has occurred and is continuing or would result therefrom, the Borrower shall be permitted to make other Restricted Payments up to a maximum of $17,500,000 from January 1, 2013 through March 31, 2014, $17,500,000 from March 31, 2014 to December 31, 2014, and $10,000,000 in any Fiscal Year thereafter, provided that, the sum of the amount of all Restricted Payments made pursuant to this clause (d) in any Fiscal Year plus the amount of Permitted Acquisition Consideration for all Permitted Acquisitions consummated during the same Fiscal Year period may not exceed $35,000,000 in each of Fiscal Year 2013 and Fiscal Year 2014, and $27,500,000 in any Fiscal Year thereafter, and provided further, that prior to making a Restricted Payment the Administrative Agent and the Lenders shall have received from the Borrower an Officer’s Compliance Certificate demonstrating that the Borrower will be in compliance on a Pro Forma Basis with the financial covenants set forth in Section 9.15 both before and after giving effect to a Restricted Payment."
3. Representations of Borrower. Borrower represents and warrants to Lenders and Administrative Agent as follows:
(a) The execution, delivery and performance of this Second Amendment and all agreements and documents delivered pursuant hereto by Borrower has been duly authorized by all necessary corporate action and do not and will not violate any provision of any law, rule, regulation, order, judgment, injunction, or writ presently in effect applying to Borrower, or its articles of incorporation or bylaws, as applicable, or result in a breach of or constitute a default under any material agreement, lease or instrument to which Borrower is a party or by which Borrower or any of its properties may be bound or affected; (ii) no authorization, consent, approval, license, exemption or filing of a registration with any court or governmental department, agency or instrumentality is or will be necessary to the valid execution, delivery or performance by Borrower of this Second Amendment and all agreements and documents delivered pursuant hereto; and (iii) this Second Amendment and all agreements and documents delivered pursuant hereto by Borrower are the legal, valid and binding obligations of Borrower, as a signatory thereto, and enforceable against Borrower in accordance with the terms thereof.
(b) After giving effect to the amendments contained in this Second Amendment, the representations and warranties contained in Article VII of the Credit Agreement are true and correct in all material respects on and as of the Second Amendment Effective Date with the same force and effect as if made on and as of the Second Amendment Effective Date, except that the representation in Section 7.15 of the Credit Agreement shall be deemed to refer to the financial statements of Borrower most recently delivered to Lenders and Administrative Agent prior to the Second Amendment Effective Date.
(c) No Event of Default or, to the knowledge of Borrower, Default shall have occurred and be continuing under the Credit Agreement as of the Second Amendment Effective Date.
4. Conditions. The obligation of Lenders and Administrative Agent to execute and to perform this Second Amendment shall be subject to full satisfaction of the following conditions precedent on or before the Second Amendment Effective Date:
(a) There shall exist no Event of Default or, to the knowledge of Borrower, Default.
(b) All liens in favor of Lenders shall be in full force and effect with the required priority.
(c) This Second Amendment shall have been duly executed and delivered by Borrower to Lenders and Administrative Agent.
5. Fees. Borrower shall promptly pay all costs and expenses incurred by Lenders and Administrative Agent in connection with the negotiation, preparation and closing of this Second Amendment and the other documents and agreements delivered pursuant hereto, including the reasonable and documented fees and out-of-pocket expenses of Faegre Baker Daniels LLP, special counsel to Administrative Agent.
6. Waiver of Defenses and Claims. In consideration of the financial accommodations provided to Borrower by Lenders as contemplated by this Second Amendment, Borrower hereby waives, releases, and forever discharges Lenders from and against any and all rights, claims or causes of actions of Borrower against Lenders arising from any Lender's actions or inactions with respect to the Loan Documents or any security interest, lien or collateral in connection therewith as well as any and all rights of set off, defenses, claims, causes of action and any other bar to the enforcement of the Loan Documents which exist as of the Second Amendment Effective Date.
7. Binding on Successors and Assigns. All of the terms and provisions of this Second Amendment shall be binding upon and inure to the benefit of the parties hereto, their respective successors, assigns and legal representatives.
8. Governing Law/Entire Agreement/Survival/Miscellaneous. This Second Amendment is a contract made under, and shall be governed by and construed in accordance with, the laws of the State of Illinois applicable to contracts made and to be performed entirely within such state and without giving effect to the choice or conflicts of laws principles of any other jurisdiction. This Second Amendment constitutes and expresses the entire understanding between the parties with respect to the subject matter hereof, and supersedes all prior agreements and understandings, commitments, inducements or conditions, whether expressed or implied, oral or written. All covenants, agreements, undertakings, representations and warranties made in this Second Amendment shall survive the execution and delivery of this Second Amendment, and shall not be affected by any investigation made by any person. The Credit Agreement, as amended hereby, remains in full force and effect in accordance with its terms and provisions.
9. Amendment of Other Loan Documents. All references to the Credit Agreement in the other Loan Documents shall mean the Credit Agreement, as modified and amended by this Second Amendment and as it may be further amended, modified, extended, renewed, supplemented and/or restated from time to time and at any time. The other Loan Documents are hereby modified and amended to the extent necessary to conform them to, or to cause them to accurately reflect, the terms of the Credit Agreement, as modified by this Second Amendment. Except as otherwise expressly provided herein, all of the terms and provisions of the Credit Agreement and the other Loan Documents, as modified and amended by this Second Amendment, remain in full force and effect, and fully binding on the parties thereto and their respective successors and assigns.
10. Further Assurances. The parties shall duly execute and deliver, or cause to be executed and delivered, such further instruments and perform or cause to be performed such further acts as may be necessary or proper in the reasonable opinion of any other party to carry out the provisions and purposes of this Second Amendment.
11. Counterparts. This Second Amendment may be executed in two or more counterparts, each of which shall constitute an original, but all of which when taken together shall constitute but one agreement. In the event any party executes and delivers this Second Amendment via facsimile, such party hereby agrees that for the purposes of enforcement and all applicable statutes, laws and rules, including, without limitation, the Uniform Commercial Code, rules of evidence and statutes of fraud: (i) the facsimile signature of such party shall constitute a binding signature of such party as a symbol and mark executed and adopted by such party with a present intention to authenticate this Second Amendment; (ii) the facsimile of this Second Amendment shall constitute a writing signed by such party; and (iii) the facsimile of this Second Amendment shall constitute an original of and best evidence of this Second Amendment.
[Signatures on following page]
IN WITNESS WHEREOF, the parties hereto have caused this Second Amendment to be duly executed and delivered by their respective authorized signatories.
PATRICK INDUSTRIES, INC., as Borrower By: /s/ Andy L. Nemeth Andy L. Nemeth, Executive Vice President-Finance, Chief Financial Officer, Secretary and Treasurer WELLS FARGO BANK, NATIONAL ASSOCIATION, as Administrative Agent and Lender By: /s/ David W. O’Neal David W. O'Neal, Senior Vice President FIFTH THIRD BANK, as Lender By: /s/ Craig Ellis Printed: Craig Ellis Title: Vice President
6
Exhibit 31.1
CERTIFICATIONS
I, Todd M. Cleveland, certify that:
1. |
I have reviewed this quarterly report on Form 10-Q of Patrick Industries, Inc. (the “registrant”); |
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. |
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a) |
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) |
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) |
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) |
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. |
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
a) |
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
b) |
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: August 13, 2013 |
/s/ Todd M. Cleveland |
Todd M. Cleveland Chief Executive Officer |
Exhibit 31.2
CERTIFICATIONS
I, Andy L. Nemeth, certify that:
1. |
I have reviewed this quarterly report on Form 10-Q of Patrick Industries, Inc. (the “registrant”); |
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. |
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a) |
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) |
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) |
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) |
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the company’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. |
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
a) |
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
b) |
any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal control over financial reporting. |
Date: August 13, 2013 |
/s/ Andy L. Nemeth |
Andy L. Nemeth | |
Executive Vice President - Finance and | |
Chief Financial Officer |
Exhibit 32
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of Patrick Industries, Inc. (the “Company”) on Form 10-Q for the quarter ended June 30, 2013, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned Chief Executive Officer and Chief Financial Officer of the Company hereby certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002 that: 1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2) the information contained in the Report fairly represents, in all material respects, the financial condition and results of operations of the Company as of and for the periods covered in the Report.
/s/ Todd M. Cleveland
Todd M. Cleveland
Chief Executive Officer
/s/ Andy L. Nemeth
Andy L. Nemeth
Executive Vice President – Finance and
Chief Financial Officer
August 13, 2013
Note 11 - Comprehensive Income (Loss)
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6 Months Ended |
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Jun. 30, 2013
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Disclosure Text Block [Abstract] | |
Comprehensive Income (Loss) Note [Text Block] | 11. COMPREHENSIVE INCOME (LOSS) Accumulated other comprehensive income, net of tax, relating to changes in accumulated pension benefit was $17,000 at both June 30, 2013 and December 31, 2012. |
Condensed Consolidated Statements of Income (Unaudited) (USD $)
In Thousands, except Per Share data, unless otherwise specified |
3 Months Ended | 6 Months Ended | ||
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Jun. 30, 2013
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Jul. 01, 2012
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Jun. 30, 2013
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Jul. 01, 2012
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NET SALES | $ 159,576 | $ 115,605 | $ 301,696 | $ 218,293 |
Cost of goods sold | 134,416 | 97,766 | 254,100 | 184,020 |
GROSS PROFIT | 25,160 | 17,839 | 47,596 | 34,273 |
Operating expenses: | ||||
Warehouse and delivery | 4,710 | 3,981 | 9,246 | 7,655 |
Selling, general and administrative | 7,441 | 5,940 | 14,410 | 10,858 |
Amortization of intangible assets | 521 | 334 | 1,040 | 650 |
Gain on sale of fixed assets | (426) | (3) | (430) | (3) |
Total operating expenses | 12,246 | 10,252 | 24,266 | 19,160 |
OPERATING INCOME | 12,914 | 7,587 | 23,330 | 15,113 |
Stock warrants revaluation | 0 | 134 | 0 | 1,804 |
Interest expense, net | 522 | 790 | 1,074 | 1,635 |
Income before income taxes (credit) | 12,392 | 6,663 | 22,256 | 11,674 |
Income taxes (credit) | 4,835 | (6,650) | 8,680 | (6,650) |
NET INCOME | $ 7,557 | $ 13,313 | $ 13,576 | $ 18,324 |
BASIC NET INCOME PER COMMON SHARE (in Dollars per share) | $ 0.70 | $ 1.26 | $ 1.26 | $ 1.77 |
DILUTED NET INCOME PER COMMON SHARE (in Dollars per share) | $ 0.70 | $ 1.22 | $ 1.25 | $ 1.70 |
Weighted average shares outstanding - Basic (in Shares) | 10,720 | 10,526 | 10,814 | 10,373 |
- Diluted (in Shares) | 10,762 | 10,921 | 10,856 | 10,758 |
Note 4 - Acquisitions
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Jun. 30, 2013
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Business Combinations [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Business Combination Disclosure [Text Block] | 4. ACQUISITIONS 2012 Acquisitions Décor In March 2012, the Company acquired certain assets of Tualatin, Oregon-based Décor, a manufacturer of laminated and wrapped products for the Northwestern U.S.-based RV industry, for a net purchase price of $4.3 million. This acquisition expanded the Company’s revenues to its existing customer base in the RV industry sector and significantly expanded the Company’s RV presence in the Northwest. The results of operations for Décor are included in the Company’s condensed consolidated financial statements and the Manufacturing operating segment from the date of acquisition. The excess of the purchase consideration over the fair value of the net assets acquired was recorded as goodwill, which represents the value of leveraging the Company’s existing purchasing, manufacturing, sales, and systems resources with the organizational talent and expertise of the Décor team to maximize efficiencies, revenue impact, market share growth, and net income. The acquisition was funded through borrowings under the Company's 2011 Credit Facility (as defined herein), and the issuance of 100,000 shares or $0.6 million of Patrick common stock. The value of the common stock issued was based on the closing stock price of $6.42 per share on March 2, 2012. Assets acquired and liabilities assumed in the acquisition were recorded on the Company’s condensed consolidated statements of financial position at their estimated fair values as of the date of the acquisition. The following summarizes the fair values of the assets acquired and the liabilities assumed as of the date of acquisition:
Gustafson Lighting In July 2012, the Company completed the acquisition of the business and certain assets of Elkhart, Indiana-based Gustafson Lighting (“Gustafson”), a distributor of interior and exterior lighting products, ceiling fans and accessories, including glass and glass pads, hardware and lampshades to the RV industry, for a net purchase price of $2.8 million. This acquisition provided opportunities for the Company to increase its market share and per unit content. The results of operations for Gustafson are included in the Company’s condensed consolidated financial statements and the Distribution operating segment from the date of acquisition. The fair value of the net assets acquired of $3.0 million exceeded the purchase consideration of $2.8 million. As a result, the Company recognized a gain of $0.2 million associated with the acquisition during the third quarter of 2012, with the gain included in the line item “Gain on sale of fixed assets and acquisition of business” in the condensed consolidated statements of income for the third quarter ended September 30, 2012. The acquisition was funded through borrowings under the Company’s 2011 Credit Facility and was completed pursuant to a foreclosure and private sale under the Uniform Commercial Code with Capital Source Finance, LLC. Assets acquired and liabilities assumed in the acquisition were recorded on the Company’s condensed consolidated statements of financial position at their estimated fair values as of the date of the acquisition. The following summarizes the fair values of the assets acquired and the liabilities assumed as of the date of acquisition:
Creative Wood In September 2012, the Company completed the acquisition of the business and certain assets of Ligonier, Indiana-based Creative Wood, a manufacturer of hardwood furniture including interior hardwood tables, chairs, dinettes, trim, fascia, mouldings, and other miscellaneous products, for a net purchase price of $3.0 million, which includes two subsequent contingent payments based on future performance. This acquisition expanded the Company’s revenues to its existing customer base in the RV industry sector. The results of operations for Creative Wood are included in the Company’s condensed consolidated financial statements and the Manufacturing operating segment from the date of acquisition. The fair value of the contingent consideration arrangement was estimated by applying the income approach and included assumptions related to the probability of future payments and discounted cash flows. The excess of the purchase consideration over the fair value of the net assets acquired was recorded as goodwill, which represents the value of leveraging the Company’s existing purchasing, manufacturing, sales, and systems resources with the organizational talent and expertise of the Creative Wood team to maximize efficiencies, revenue impact, market share growth, and net income. The acquisition was funded through borrowings under the Company's 2011 Credit Facility. Assets acquired and liabilities assumed in the acquisition were recorded on the Company’s condensed consolidated statements of financial position at their estimated fair values as of the date of the acquisition. The purchase price allocation and all required purchase accounting adjustments were finalized in the first quarter of 2013. The following summarizes the fair values of the assets acquired and the liabilities assumed as of the date of acquisition:
Middlebury Hardwoods In October 2012, the Company acquired the business and certain assets of Middlebury, Indiana-based Middlebury Hardwoods, a manufacturer of hardwood cabinet doors, components and other hardwood products for the RV, MH, and residential kitchen cabinet industries, for a net purchase price of $19.8 million. This acquisition provided the opportunity for the Company to increase its market share and per unit content in the cabinet door market. The results of operations for Middlebury Hardwoods are included in the Company’s condensed consolidated financial statements and the Manufacturing operating segment from the date of acquisition. The excess of the purchase consideration over the fair value of the net assets acquired was recorded as goodwill, which represents the value of leveraging the Company’s existing purchasing, manufacturing, sales, and systems resources with the organizational talent and expertise of the Middlebury Hardwoods’ team to maximize efficiencies, revenue impact, market share growth, and net income. The acquisition was funded through borrowings under the Company’s 2012 Credit Facility (as defined herein) and includes the acquisition of accounts receivable, inventory, prepaid expenses, machinery, equipment and vehicles, and land and buildings. Assets acquired and liabilities assumed in the acquisition were recorded on the Company’s condensed consolidated statements of financial position at their estimated fair values as of the date of the acquisition. The purchase price allocation and all required purchase accounting adjustments were finalized in the first quarter of 2013. The following summarizes the fair values of the assets acquired and the liabilities assumed as of the date of acquisition:
Pro Forma Information The following pro forma information for the second quarter and six months ended July 1, 2012 assumes the Décor, Creative Wood, and Middlebury Hardwoods acquisitions occurred as of the beginning of the year immediately preceding each such acquisition. The pro forma information contains the actual operating results of Décor, Creative Wood, and Middlebury Hardwoods, combined with the results prior to the acquisition dates in March 2012, September 2012, and October 2012, respectively, adjusted to reflect the pro forma impact of the acquisitions occurring as of the beginning of the year immediately preceding each such acquisition. In addition, the pro forma information includes amortization expense related to intangible assets acquired in the Décor, Creative Wood, and Middlebury Hardwoods acquisitions of approximately $0.2 million and $0.4 million, in the aggregate, for the second quarter and six months ended July 1, 2012, respectively. Pro forma information related to the Gustafson acquisition is not included in the table below, as its financial results were not considered to be significant to the Company’s operating results for the periods presented.
The pro forma information is presented for informational purposes only and is not necessarily indicative of the results of operations that actually would have been achieved had the acquisitions been consummated as of that time, nor is it intended to be a projection of future results. For the second quarter and six months ended July 1, 2012, revenue of approximately $5.7 million and $8.2 million, respectively, was included in the Company’s condensed consolidated statements of income pertaining to Décor, which was acquired in March 2012. There were no businesses acquired in the second quarter of 2012. In addition, there were no businesses acquired in either the second quarter or first six months of 2013. |
Note 6 - Income Per Common Share (Tables)
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6 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jun. 30, 2013
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Earnings Per Share [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Earnings Per Share, Basic and Diluted [Table Text Block] |
|
Note 12 - Income Taxes
|
6 Months Ended |
---|---|
Jun. 30, 2013
|
|
Income Tax Disclosure [Abstract] | |
Income Tax Disclosure [Text Block] | 12. INCOME TAXES At December 31, 2011, the Company had a tax valuation allowance for deferred tax assets net of deferred tax liabilities not expected to be utilized of $15.6 million. No income tax expense or benefit was recorded during the first quarter ended March 31, 2012 because there was a full valuation allowance related to deferred tax assets. In the second quarter of 2012, the Company determined that it was likely that the remaining net deferred tax assets would be realized based upon sustained profitability and forecasted future operating results. As a result, the Company reversed approximately $6.8 million of the valuation allowance in 2012, of which $6.7 million was reversed in the second quarter of 2012, with the reversal recorded as a non-cash income tax credit on the Company’s condensed consolidated statement of income. In addition, the Company reversed the balance of its valuation allowance in 2012 to fully offset its 2012 tax provision of approximately $8.8 million. In the second quarter and first six months of 2013, the Company recorded income taxes at an estimated full year effective tax rate of approximately 39%. At December 31, 2012, the Company had a gross federal net operating loss (“NOL”) carry forward of approximately $9.8 million that was fully utilized in the first six months of 2013. In addition, the Company had various state NOLs of approximately $12.6 million at December 31, 2012, of which approximately $3.3 million were utilized in the first six months of 2013. The federal and state NOLs utilized in the first six months of 2013 were used to partially offset the cash portion of the income tax liability for 2013. The Company estimates that it will fully utilize a significant majority of the remaining state NOLs by the end of 2014. |
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