Oct 24, 2013
Operator
Good morning, ladies and gentlemen, and welcome to the Third Quarter 2013 Patrick Industries Incorporated Earnings Conference Call. My name is Richard and I'll be your operator for today's call.
Please note that there will not be a question-and-answer session following the prepared remarks.
Operator
I will now like to turn the call over to Julie Ann Kotowski from Investor Relations. Please go ahead Ms.
Kotowski.
Julie Ann Kotowski
Good morning, everyone, and welcome to Patrick Industries' 2013 Third Quarter Conference Call. I am Julie Ann Kotowski, Patrick's Director of Investor Relations, and I'm joined on the call today by Todd Cleveland, President and CEO; and Andy Nemeth, CFO.
Julie Ann Kotowski
Please note that this call is made available to all interested parties at www.patrickind.com under Investor Relations.
Julie Ann Kotowski
As you know, we published our earnings release earlier this morning. On the call today, we are going to discuss our third quarter and 9 months 2013 results, and provide an update on our business outlook in the markets that we serve.
However, before we do so, it is my responsibility to inform you that certain statements made in today's conference call regarding Patrick Industries and its operations may be considered forward-looking statements under the Securities laws. As a result, I must caution you that there are a number of factors, many of which are beyond the company's control, which could cause actual results and events to differ materially from those described in the forward-looking statements.
These factors are identified in our press releases, our Form 10-K for the year ended 2012 and in our other filings with the Securities and Exchange Commission. Also please note that certain financial measures we may use on this call, such as adjusted net income and the related diluted earnings per share amount our non-GAAP measures.
We undertake no obligation to update these statements after this call. Copies of documents filed with the SEC may be obtained from the SEC or by visiting the Investor Relations section of our website.
Julie Ann Kotowski
I would now like to turn the call over to Todd Cleveland.
Todd Cleveland
Thank you, Julie Ann, and welcome to Patrick's first earnings conference call in its 54-year history. This morning, I would like to briefly discuss the company's third quarter and year-to-date results for the period ending September 29, 2013.
Andy will then provide specific details on our financial performance and I will conclude by providing an update on our business outlook in the major markets we serve.
The company continued to perform well during the quarter with increased revenue, improved profitability and gains in earnings per share. On the top line, we achieved net sales of $147 million in the third quarter, an increase of $34 million or 30% over the prior year. Our sales growth came from a 35% increase in the revenue from the recreational vehicle or RV industry primarily in the core total RV market, which is our primary market and from increasing momentum we gained in the other 2 major markets we serve
manufactured housing, or MH market, and the industrial market. Year-to-date, we reported net sales of $448 million, an increase of $117 million or 35% from 2012.
We were pleased to report pre-tax income for the quarter improved by 29% or $1.8 million from $6.6 million in 2012 to $8.4 million in 2013 and for the year-to-date, pre-tax income increased 68% or $12.5 million from $18.2 million in 2012 to $30.7 million in 2013. Our reported net income per diluted share for the third quarter was $0.51 compared to $0.60 in 2012 when we benefited from the effective tax rate of 0.
For the first 9 months 2013, reported net income per diluted share was $1.76 compared to $2.32 in the prior year, which included a noncash income tax credit of $0.62 per diluted share. After adjusting for these tax items and certain special items that Andy will expand upon shortly, adjusted net income per diluted share would have been $0.49 in the third quarter of 2013, compared to $0.37 in the third quarter of '12.
For the 9-month period, adjusted net income per diluted share would've been $1.72 in 2013 versus $1.14 in 2012.
The company continued to perform well during the quarter with increased revenue, improved profitability and gains in earnings per share. On the top line, we achieved net sales of $147 million in the third quarter, an increase of $34 million or 30% over the prior year. Our sales growth came from a 35% increase in the revenue from the recreational vehicle or RV industry primarily in the core total RV market, which is our primary market and from increasing momentum we gained in the other 2 major markets we serve
Now I'll turn the call over to Andy, who will provide additional comments on our financial results. Andy?
Andy Nemeth
Thanks, Todd. I would also like to welcome everyone to this conference call and review our financial results for the third quarter and first 9 months of fiscal 2013.
For the third quarter, our net sales were $147 million, the highest third quarter sales level in the company's history, representing a 30% increase over the third quarter of 2012. The increase was primarily attributable to increased RV market penetration, improved retail fixture and residential cabinet and furniture business in the industrial market and an increase in wholesale unit shipments in the MH industry.
Additionally, the acquisitions completed in 2012 and most recently in 2013 were primarily RV market-based and contributed to an increase in our RV market sales concentration in both the third quarter and the first 9 months of 2013 compared to the prior period.
Andy Nemeth
In the third quarter of 2013, the company's revenue from the RV industry represented 70% of our sales compared to the third quarter of 2012 for our RV revenue concentration represented approximately 68% of total revenue.
Excluding the revenue contributions of the 4 acquisitions we completed in 2012
Decor Manufacturing, Gustafson Lighting, Creative Wood Designs and Middlebury Hardwoods and the 3 acquisitions we have completed thus far in fiscal 2013: Frontline Manufacturing, Premier Concepts and Westside Furniture, we estimate organic growth in the third quarter of 2013 at 16%, or approximately $18 million of the total revenue increase, which is comprised of growth resulting from market share gains of approximately 6% and growth tied to overall industry improvement of approximately 10%. The remaining $16 million of revenue increase in the third quarter was attributable to the incremental contribution of the 2012 and 2013 acquisitions, which resulted in incremental growth of approximately 14%.
Excluding the revenue contributions of the 4 acquisitions we completed in 2012
For the first 9 months, our revenues were up $117 million or 35%, from $331 million in 2012 to $448 million in 2013, primarily attributable to the factors previously mentioned.
Excluding the revenue contributions of the 4 acquisitions we completed in 2012
Turning to our gross margins for the quarter. Gross margins were 14.9% during the quarter compared to 15.0% in the third quarter of 2012.
Seasonal factors consistent with recent years including changing production schedules related to the fall dealer show season, competitive market conditions, and fluctuating commodity prices in certain raw materials, reduced our third quarter gross margin when compared to the second quarter.
Excluding the revenue contributions of the 4 acquisitions we completed in 2012
Year-to-date, the gross margin of 15.5% in 2013 was up slightly from a 15.4% reported in 2012, reflecting increased revenues relative to our fixed overhead costs, deposited contribution of margin management, the acquisitions completed in 2012 and 2013 and organic revenue growth.
Excluding the revenue contributions of the 4 acquisitions we completed in 2012
Consistent with prior year seasonal patterns, we expect our gross margins for the fourth quarter of 2013 to be lower than that reported in the third quarter and to increase compared to the margins reported in the fourth quarter 2012, primarily as a result of seasonal factors including generally lower organic sales levels, which primarily impact labor and overhead absorption cost including holiday shutdown schedules and physical inventories in our plants among others.
Excluding the revenue contributions of the 4 acquisitions we completed in 2012
Operating expenses were 8.8% of net sales in the third quarter of 2013 and 8.3% year-to-date. We expect that operating expenses in the fourth quarter of 2013 will trend as similar percentage to net sales in the first 9 months of 2013 accounting for seasonal factors.
Excluding the revenue contributions of the 4 acquisitions we completed in 2012
Operating income increased $1.7 million or 22.8% in the third quarter of 2013 compared to the prior year, primarily due to the positive contribution of both organic and acquisition-related revenue growth and ongoing organizational and process changes. A decrease in the operating margin to 6.1% in the current year quarter from 6.5% in the third quarter 2012 primarily reflected certain operating inefficiencies due to the impact of the seasonality factors I previously described.
On a year-to-date basis, operating income increased almost $10 million or 44% to $32 million in 2013 from $22 million in 2012. Operating margins for the year-to-date of 7.2% were up from 6.8% in the prior year.
Excluding the revenue contributions of the 4 acquisitions we completed in 2012
Net income comparison to year-over-year include adjustments for tax and special items. As reported under GAAP, net income in the third quarter of 2013 was $5.5 million or $0.51 per diluted share compared to $6.6 million or $0.60 per diluted share in the prior year.
Exclusive of the recovery of a receivable previously reserved for, adjusted net income in the third quarter 2013 would have been $5.3 million or $0.49 per diluted share. As Todd mentioned earlier, our effective tax rate in the third quarter of 2012 was 0.
Assuming the same effective tax rate in the 2012 quarter as was recorded in the third quarter of 2013 and adjusting 2012 to exclude a gain related to mark-to-market accounting for common stock warrants and a gain on sale of fixed assets, adjusted net income in the third quarter 2012 would have been $4.0 million or $0.37 per diluted share. For the first 9 months of 2013, net income was $19.0 million or $1.76 per diluted share.
Exclusive of the receivable recovery and a gain on sale of fixed assets, adjusted net income would have been $18.6 million or $1.72 per diluted share. In the 2012 9-month period, net income of $24.9 million or $2.32 per diluted share included the positive impact of a noncash income tax credit of $6.7 million or $0.62 per diluted share related to the reversal of the valuation allowance against our deferred tax assets.
Exclusive of this noncash tax credit as well as a noncash charge related to stock warrant accounting and a gain on sale of fixed assets and the acquisition of a business and assuming the same effective tax rate in the 2012 period, as was reported in the 9 months of 2013, adjusted net income in the 9 months of 2012 would have been $12.2 million or $1.14 per diluted share.
Excluding the revenue contributions of the 4 acquisitions we completed in 2012
In the first two quarters of 2013, we fully utilized the remaining gross federal tax net operating loss carryforward we had at the end of 2012 of $9.8 million. In addition, at September 29, 2013, the state NOLs remaining were approximately $5.5 million compared to the $12.6 million of state NOLs remaining at December 31, 2012.
While the company recorded income taxes at an estimated full year effective tax rate of 38% in the first 9 months of 2013, the federal and state NOLs were used to partially offset the cash portion of the income tax provision for 2013. In 2013, as a result of fully utilizing the federal NOL carryforward, the company once again resume making quarterly estimated tax payments consistent with this expected annual 2013 federal and state income tax liability.
Excluding the revenue contributions of the 4 acquisitions we completed in 2012
I am now going to shift gears and briefly discuss our balance sheet and cash flows. To meet our current and projected operating needs as well as to improve operating efficiencies, our capital expenditures for the first 9 months of 2013 were $5.2 million, which includes costs related to the continued replacement of our 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.
In October 2013, we completed the purchase of one of our distribution facilities that had previously been operating under a lease agreement for approximately $1.7 million. The current capital plan for fiscal year 2013 include expenditures approximating as much as $10 million.
Excluding the revenue contributions of the 4 acquisitions we completed in 2012
The year-over-year increase in inventory levels is attributable to the acquisitions completed in the fourth quarter of 2012 and those completed in fiscal 2013 as well as increased demand levels in our end markets.
Excluding the revenue contributions of the 4 acquisitions we completed in 2012
In terms of our debt, we are in compliance with all 3 other financial covenants included in our credit agreement for the first 9 months of 2013 and the unused availability under our credit facility, as of the end of the third quarter including cash on hand was approximately $26.1 million. A $17 million increase in our total debt level to $63 million to September 29, 2013 from $46 million at June 30, 2013, primarily reflected borrowings to finance the purchase of 3 businesses we acquired in the month of September as well as the timing difference between customer cash collections at the end of the quarter and application of this cash to repay our revolver.
Assuming this cash amount of $10.5 million had been applied to reduce our revolver, adjusted net debt at September 29, 2013 was approximately $52.5 million.
Excluding the revenue contributions of the 4 acquisitions we completed in 2012
The refinancing of our credit facility in October 2012 has continue to result in a decline in our effective interest rate and we have treasury management targets in place to minimize our interest expense in 2013, net of the impact of any acquisitions.
Excluding the revenue contributions of the 4 acquisitions we completed in 2012
And finally, as you recall in February of this year, our Board of Directors authorized a stock repurchase program for purchasing up to $10 million of the company's common stock over the following 12-month period. As of October 23, 2013, we have repurchased 407,330 shares at an average price of $14.92 per share, for a total cost of approximately $6.1 million.
We may continue to repurchase shares from time to time in the open market based on market conditions.
Excluding the revenue contributions of the 4 acquisitions we completed in 2012
That completes my remarks. Todd?
Todd Cleveland
Thanks, Andy. Turning to our outlook for the fourth quarter of 2013 for our markets.
We expect to continue to see overall quarter-over-quarter revenue growth for the remainder of the year, exclusive of revenue contributions of the acquisitions completed in September of this year. This growth will be lower than the rates for the first 9 months of 2013 because the last quarter of 2012 reflected a proportionally greater revenue contribution from acquisitions completed in 2012.
One of the means by which we measure growth in the RV industry is by number of wholesale units that the industry ships to dealers. Based on the actual RV shipments for the months of July and August and the company's estimate for the month of September, we estimate that RV shipments rose 10% in the third quarter over the prior period and 12% for the first 9 months.
We're anticipating continued steady growth in this market and further believe that RV dealers have the capacity to carry additional inventory necessary to support the growth. The manufactured housing, or MH market, experienced typically sales activity in the first 9 months of 2013.
We estimate that wholesale unit shipments rose approximately 9% in the third quarter and 6% in the 9 months. While we do not anticipate significant growth in these markets, there is an opportunity for moderate growth with a limited downside risk in the near-term.
Todd Cleveland
Our sales to the industrial market sector, which is primarily tied to the residential housing and commercials and retail fixture markets accounted for approximately 12% and 11% of our third quarter and 9 months 2013 sales, respectively. We believe the housing industry is poised for future growth.
Our sales to these markets generally lag new residential housing starts by approximately 6 to 9 months. While there remains general uncertainty related to the strength of the overall economic recovery, particularly in a light of the U.S.
government shutdown, the 3 primary markets that we serve have experienced steady growth in the first 9 months of 2013, which we expect to continue during the remainder of 2013 for the full year -- seasonal patterns tracking trends consistent with prior year. On a seasonal basis, we saw some softening in the third quarter as we expected.
While our sales to the RV industry have historically been the strongest in the second and third quarters, in recent years we have seen change of seasonal patterns in the RV industry with sales activity shifting from the third to the fourth quarter. This is primarily due to the addition of major RV manufacturer open houses for dealers occurring in September and October timeframe whereby dealers or delaying purchases until new product lines are introduced at these shows.
The strong momentum created in the RV industry during the RV manufacturer open house held recently in the surrounding area Elkhart County area providing great indication to us and our customers of continued strong industry demand.
Todd Cleveland
In conjunction with our strategic initiatives, we acquired 3 new businesses in 2013, namely Frontline Manufacturing, Premier Concepts and Westside Furniture. The acquisitions of these businesses have allowed us to expand our presence and market share particularly in the RV industrial markets and provide a channel for us to introduce new innovative product lines to complement our core competencies.
For example, Westside Furniture started its [ph] back in 1959 as a family-owned business and has been through several generations of leadership. The current owners were looking to retire and we're excited to partner with Patrick as they felt our industry expertise and customer-first approach was a great fit to continue on the legacy they had built in the wholesale Furniture business.
Consistent with our acquisition strategy, we are excited to allow the entrepreneurial spirit of each of our acquired businesses to continue to thrive while we provide the capital and administrative support and operational support where needed, to allow each business owner to concentrate on the high quality product lines, customer and supplier relationships and bring new innovative ideas to market.
Todd Cleveland
As for future acquisitions, we will continue to look for companies with high-quality product lines, strong customer relationships and solid management teams. Our goal is to increase our content per unit and capitalize on the opportunities to cross-sell our products to our customer base.
Todd Cleveland
On a final note, I would like to sincerely thank our customers, who we are privileged to serve and also all Patrick's team members, whose hard work and dedication continue to support the company's long-term strategic growth goals.
Todd Cleveland
Thank you for your time today. This is the end of our prepared remarks.
Now I would like to turn the call back over to Julie Ann for the closing remarks. Julie Ann?
Julie Ann Kotowski
Thanks, Todd. On behalf of Todd and Andy, and all of our team members of Patrick Industries, I would like to thank you for listing to this call and for your continued interest in and support of our company.
A replay of today's call will be archived on Patrick's website, www.patrickind.com under Investor Relations. In addition, a transcript of this call will be filed with the Securities and Exchange Commission in a Form 8-K.
As in the past, analysts and investors who would like to speak further with either Andy Nemeth or myself, should feel free to contact either of us at the corporate office in Elkhart, Indiana.
Julie Ann Kotowski
I will now turn the call over to our operator, Richard.
Operator
Thank you, ladies and gentlemen. This concludes today's conference.
Thank you for participating. You may now disconnect.