PATRICK INDUSTRIES INC - Quarter Report: 2015 September (Form 10-Q)

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 SEPTEMBER 27, 2015

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)

(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.

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 October 23, 2015, there were 15,553,338 shares of the registrant’s common stock outstanding.

 PATRICK INDUSTRIES, INC.

 TABLE OF CONTENTS 

PART 1: FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PATRICK INDUSTRIES, INC. 

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (Unaudited)

See accompanying Notes to Condensed Consolidated Financial Statements.

PATRICK INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(1) Net income per common share and weighted average shares outstanding, on both a basic and diluted basis, reflect the impact of the three-for-two common stock split paid on May 29, 2015.

See accompanying Notes to Condensed Consolidated Financial Statements.

PATRICK INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

See accompanying Notes to Condensed Consolidated Financial Statements.

                 PATRICK INDUSTRIES, INC.
                                     NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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 page 29 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

Third Quarter and Nine Months Ended September 27, 2015 Compared to 2014

REVIEW BY BUSINESS SEGMENT

Third Quarter and Nine Months Ended September 27, 2015 Compared to 2014

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 third quarter and first nine months of 2015 reflected a continuation of growth in the recreational vehicle (“RV”) market, which includes growth in both towables and motorized units, and improving conditions in the industrial markets, as evidenced by year over year growth in new housing starts. As anticipated, we also saw some normal seasonal softening in the third quarter of 2015 as RV dealers generally tend to delay purchases of new units until new product lines, patterns, and features are introduced at the original equipment manufacturers (“OEMs”) shows in the months of September and December. We expect that the positive sentiment exhibited by both RV dealers and OEMs during the September shows, which represent the start to the primary dealer show season, will be reflected in industry order levels consistent with recent seasonal trends as we move into the latter part of 2015 and into the first quarter of 2016.

The manufactured housing (“MH”) industry appears to have gained modest strength based on a year-over-year improvement in wholesale unit shipments in the third quarter and first nine months of 2015 as this industry experienced seasonally typical sales activity. Additionally, both our MH and industrial businesses continue to outperform the markets. Overall, we have continued to capture market share through strategic acquisitions, addition of new business, and the introduction of new and innovative products.

RV Industry

The RV industry, which is our primary market and comprised 75% of the Company’s nine months 2015 sales, continued to strengthen as evidenced by higher OEM production levels and wholesale unit shipments versus the prior year. According to the Recreational Vehicle Industry Association (“RVIA”), wholesale shipment levels reached 82,396 units in the third quarter of 2015, representing an increase of approximately 4% versus the prior year period, and resulted in year-over-year shipment increases in all but one quarter since the fourth quarter of 2009. In the first nine months of 2015, shipment levels reached 285,049 units, an increase of approximately 5% over 2014. Recent acquisitions, new products, market share gains, and the ongoing strength of retail RV sales, as evidenced by an approximate 11% combined increase in industry-wide retail sales of towables and motorized units in the first eight months of 2015, based on the most recent available survey data, have led to a significant increase in our net sales in both the third quarter and the first nine months of 2015.

In the second quarter of 2015, we started to see a shift in the RV industry towards a larger concentration of entry level and lower priced units, which has negatively impacted content per unit growth over the last two quarters. As a result of this mix shift, we may continue to see some content volatility in the short-term. Further, we believe this mix shift is reflective of younger and first-time consumers entering the market, as supported by recent dealer surveys, thus broadening the market’s foundation and extending the opportunity for future long-term industry growth. Additionally, we believe our commitment to quality customer service and our large complement of innovative product lines at various price points position us to address our customers’ changing needs and buying patterns.

As it relates to the correlation between retail inventories and overall production levels, industry reports and dealer surveys continue to indicate that RV dealer inventory levels are in line with retail demand with strong retail traffic on dealer lots expected for the first half of the 2016 retail selling season. Despite the RV industry approaching prior wholesale production peaks, we continue to believe the future looks promising for the RV industry based on a number of factors including: positive industry demographic trends with younger buyers and an increasing number of baby boomers reaching retirement age, readily available financing, new and innovative products coming to market, increasing strength in the overall economic environment, and the value of the RV lifestyle related to spending quality time with families. On a macroeconomic level, as consumer confidence has generally trended higher over the last five years, there has been a related consistent trend of a year-over-year increase in RV shipments for the same time period. The strong demographic indicators mentioned above point to a generally positive long-term outlook in the RV market, notwithstanding any major global events.

MH Industry

The MH industry represented approximately 14% of the Company’s nine months 2015 sales. As estimated by the Company, wholesale unit shipments in the industry increased 8% in both the third quarter and first nine months of 2015 from the comparable prior year periods. Growth prospects in the MH industry remain tempered based on financing and regulatory constraints imposed on lenders. While we believe the MH industry has several hurdles to overcome related to the lack of financing alternatives, current credit standards and requirements, slow job growth, and limited access to the asset backed securities market, we are optimistic about the long-term potential in this industry as pent up demand continues to be created based on improving consumer credit, rising rents, and capacity constraints in multi-family housing.

We expect to see continued year over year improvement with limited risk in the near term and believe that there is the potential for this market to grow at a much higher rate in the future, especially given historical trends when compared to residential housing starts. We believe we are well positioned to capitalize on the upside potential of the MH market, especially given the combination of our nationwide geographic footprint, available capacity in our current MH concentrated locations, and our current content per unit levels.

Industrial Market

The industrial market, which accounted for 11% of our first nine months 2015 sales and is comprised primarily of the kitchen cabinet industry, retail and commercial fixture market, office and household furniture market and regional distributors, is primarily impacted by macroeconomic conditions and more specifically, conditions in the residential housing market. The Company’s industrial sales have increased over the last several years, reflecting both acquisition and organic growth, the addition of new sales territories over the past two years, and a focus on opportunities in the commercial markets. We estimate approximately half of our industrial revenue base was directly tied to the residential housing market in the first nine months of 2015 with the remaining half tied mainly to the retail fixture, office and commercial furnishings markets. New housing starts in the third quarter and first nine months of 2015 increased approximately 13% and 12%, respectively, compared to the prior year periods (as reported by the U.S. Department of Commerce). In addition, our sales in the first nine months of 2015 benefited primarily from continued market share gains, particularly in the office and institutional furniture markets, as well as improved sales to the retail and commercial fixtures markets. Our sales to the industrial 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 increased penetration into the commercial and multi-family housing markets with the addition of new sales territories and personnel. Additionally, we have targeted certain sales efforts towards market segments that are less directly tied to new single and multi-family home construction, including the marine, retail fixture, and office, furniture, and countertop markets. As a result, we have seen a shift in our product mix, which has had a positive impact on revenue from the industrial markets. In addition, we believe that projected continued low interest rates, overall expected economic improvement, and pent up demand are some of the drivers that will continue to positively impact the housing industry for the next several years.    

Fourth Quarter 2015 / Fiscal 2016 Outlook

In general, the three primary markets that we serve experienced improved growth in the first nine months of 2015, which we expect to continue throughout the remainder of the year with full year seasonal patterns tracking recent trends. While we may not see the same year over year strength in the fourth quarter of 2015 that we experienced in the fourth quarter of 2014, the market conditions, trends, retail sentiment and demand, and dealer inventory levels point towards slow and steady growth for the 2016 fiscal year. As the RV lifestyle continues to attract new buyers to the market, the RVIA currently forecasts that RV unit shipment levels in 2015 will increase approximately 5% when compared to the full year 2014. In addition, we anticipate a further increase in production levels in the MH industry in 2015, reflecting improvement in the overall economy and consistent with the improvement in single-family residential housing starts as projected by the National Association of Home Builders (the “NAHB”) for the full year 2015. Based on the industry’s current annualized run rates, the Company projects wholesale MH unit shipments for full year 2015 to increase by approximately 8% compared to 2014. We currently expect continued slow and steady growth in this market for 2016, with growth rates and seasonality consistent with prior years. New housing starts in 2015 are estimated to improve by approximately 10% year-over-year (as forecasted by the NAHB as of September 25, 2015) consistent with improving overall economic conditions.

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 in our existing businesses and similar markets, 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 remainder of 2015 and into 2016 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.

In conjunction with our organizational strategic agenda, we will continue to make targeted capital investments to support new business and leverage our operating platform. The current capital plan for full year 2015 includes expenditures approximating $8.0 million, and includes the strategic replacement and upgrading of production equipment to ensure that our facilities have the capacity, capabilities and technology to facilitate our growth plans, the ongoing replacement of our Enterprise Resource Planning (“ERP”) system at our operating divisions that have not yet been converted, which is progressing in accordance with plans, and other strategic capital and maintenance improvements.

REVIEW OF CONSOLIDATED OPERATING RESULTS

Third Quarter and Nine Months Ended September 27, 2015 Compared to 2014

The following table sets forth the percentage relationship to net sales of certain items on the Company’s condensed consolidated statements of income.

Net Sales. Net sales in the third quarter of 2015 increased $26.7 million or 14.2%, to $214.8 million from $188.1 million in the third quarter of 2014. The increase was primarily attributable to a 13% increase in the Company’s revenue from the RV industry, a 14% increase in revenue from the MH industry, and a 26% increase in revenue from the industrial markets. There were some normal competitive pricing situations experienced in the markets in the third quarter of 2015 as a result of model year changeovers and reduced commodity prices on certain raw materials.

Net sales in the first nine months of 2015 increased $125.6 million or 23.0%, to $671.7 million from $546.1 million in the prior year period. The increase was primarily attributable to a 24% increase in the Company’s revenue from the RV industry, a 17% increase in revenue from the MH industry, and a 23% increase in revenue from the industrial markets.

The sales improvement in both the third quarter and first nine months of 2015 largely reflected the incremental contributions from acquisitions completed in 2014 and 2015 in addition to: (i) increased RV, MH, and industrial market penetration; (ii) improved office and institutional furnishings and retail and commercial fixtures sales in the industrial market; and (iii) an increase in wholesale unit shipments in the RV and MH industries. 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. Partially offsetting this revenue growth, particularly in the RV industry, in both the third quarter and first nine months of 2015, were the mix shift towards a larger concentration of entry level and lower priced units, which negatively impacted content per unit growth, and price declines in certain more commodity-oriented raw materials passed on to customers that we utilize in our manufacturing processes.   

The Company’s RV content per unit (on a trailing twelve-month basis) for the third quarter of 2015 increased approximately 17% to $1,739 from $1,488 for the third quarter of 2014. The MH content per unit (on a trailing twelve-month basis) increased approximately 13% to an estimated $1,817 from $1,614 for the comparable 2014 period.

The RV industry, which represented 72% and 75% of the Company’s sales in the third quarter and first nine months of 2015, respectively, saw wholesale unit shipments increase by approximately 4% and 5%, respectively, in those periods compared to 2014. The MH industry, which represented 16% and 14% of the Company’s sales in the third quarter and first nine months of 2015, respectively, experienced an estimated 8% increase in wholesale unit shipments in each of those periods compared to the prior year periods. The industrial market sector accounted for approximately 12% and 11% of the Company’s sales in the third quarter and first nine months 2015, respectively. We estimate that approximately half of our industrial revenue base is linked to the residential housing market, which experienced an increase in new housing starts of approximately 13% in the third quarter of 2015 and 12% in the first nine months of 2015 compared to the prior year periods (as reported by the U.S. Department of Commerce).

Cost of Goods Sold. Cost of goods sold increased $21.7 million or 13.7%, to $179.8 million in third quarter 2015 from $158.1 million in 2014. As a percentage of net sales, cost of goods sold decreased during the third quarter of 2015 to 83.7% from 84.0% in 2014. For the first nine months of 2015, cost of goods sold increased $103.7 million or 22.7%, to $560.8 million from $457.1 million in the prior year period. For the first nine months of 2015, cost of goods sold as a percentage of net sales decreased to 83.5% from 83.7% in the prior year period.

Cost of goods sold as a percentage of net sales was positively impacted during the third quarter and first nine months of 2015 by: (i) increased revenue relative to our overall fixed overhead costs; (ii) the impact of the timing of acquisitions completed during 2014 and 2015; and (iii) ongoing process changes that primarily improved material yields and resulted in the realization of operating synergies. In addition, demand changes in certain market sectors can result in fluctuating costs of certain more commodity-oriented raw materials and other products that we utilize and distribute from quarter-to-quarter.

Gross Profit. Gross profit increased $5.0 million or 16.7%, to $35.0 million in third quarter 2015 from $30.0 million in third quarter 2014. For the nine months periods, gross profit increased $21.8 million or 24.5%, to $110.8 million in 2015 from $89.0 million in 2014. As a percentage of net sales, gross profit increased to 16.3% in third quarter 2015 from 16.0% in the same period in 2014, and increased to 16.5% in the first nine months of 2015 from 16.3% in the prior year period. The improvement in gross profit dollars and as a percentage of net sales in the third quarter and first nine months of 2015 compared to 2014 reflected the positive impact of the factors discussed above under “Cost of Goods Sold,” including the positive contribution to gross profit of acquisition-related revenue growth as noted above.

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.

Exclusive of any commodity pricing fluctuations, competitive pricing dynamics, or other circumstances outside of our control, we anticipate full year gross margins in 2015 will improve from those in 2014 as a result of operating leverage from continued expected sales growth, partially offset by lower gross margins on certain acquisitions completed in 2014 when compared to historical consolidated gross margins.

Warehouse and Delivery Expenses. Warehouse and delivery expenses decreased $0.1 million or 2.5%, to $6.7 million in third quarter 2015 from $6.8 million in third quarter 2014. For the nine months, warehouse and delivery expenses increased $0.6 million or 2.8%, to $20.2 million in 2015 from $19.6 million in 2014. As a percentage of net sales, warehouse and delivery expenses were 3.1% in third quarter 2015 compared to 3.6% in third quarter 2014. For the comparable nine months periods, warehouse and delivery expenses were 3.0% and 3.6% of net sales for 2015 and 2014, respectively.

The decrease in warehouse and delivery expenses as a percentage of net sales in the third quarter of 2015 and first nine months of 2015 primarily reflected the impact of market share gains related to increased direct ship business in our Distribution segment, a reduction in fuel costs, the impact of acquisitions completed in 2014 and 2015 with lower delivery expenses as a percentage of net sales when compared to the consolidated percentage, and more efficient utilization per delivery truckload.

Selling, General and Administrative (SG&A) Expenses. SG&A expenses increased $1.5 million or 15.7%, to $10.8 million in third quarter 2015 from $9.3 million in third quarter 2014. For the nine months, SG&A expenses increased $6.9 million or 26.1%, to $33.5 million in 2015 from $26.6 million in 2014. The net increase in SG&A expenses in the third quarter and first nine months of 2015 compared to the prior year periods primarily reflected the impact of additional headcount and administrative expenses associated with recent acquisitions and increased stock-based and incentive compensation expense designed to attract and retain key employees. As a percentage of net sales, SG&A expenses were 5.0% in both the third quarter of 2015 and 2014. For the comparable nine months periods, SG&A expenses were 5.0% and 4.9% of net sales for 2015 and 2014, respectively.

Operating Income. Operating income increased $2.7 million or 21.7%, to $15.2 million in third quarter 2015 from $12.5 million in the prior year. For the nine months, operating income increased $11.3 million or 28.6%, to $51.1 million from $39.8 million in 2014. As a percentage of net sales, operating income increased to 7.1% in third quarter 2015 from 6.6% in the same period in 2014, and increased to 7.6% in the first nine months of 2015 from 7.3% in the prior year period. The change in operating income is primarily attributable to the items discussed above.

Interest expense, net. Interest expense increased $0.5 million to $1.2 million in third quarter 2015 from $0.7 million in the prior year. For the nine months, interest expense increased $1.1 million to $2.9 million from $1.8 million in  2014. The change in interest expense reflects increased borrowings primarily to fund acquisitions and increased working capital needs in the third quarter and first nine months of 2015.

Income Taxes. The Company recorded income taxes at an estimated effective rate of 36.3% and 37.5% in the third quarter and the first nine months of 2015, respectively. For both the comparable 2014 periods, the estimated effective tax rate was 38.5%. 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 remainder of 2015.

In both the first nine months of 2015 and 2014, the Company realized excess tax benefits of approximately $1.1 million related to stock-based compensation, which had not been recorded as deferred tax assets at December 31, 2014 and 2013. These tax benefits were recorded to shareholders’ equity upon realization in the first nine months of 2015 and 2014 at the then estimated combined federal and state statutory tax rate.

Net Income. Net income for third quarter 2015 was $9.0 million or $0.58 per diluted share compared to $7.3 million or $0.45 per diluted share for 2014. For the first nine months, net income was $30.2 million or $1.95 per diluted share in 2015 compared to $23.4 million or $1.45 per diluted share for 2014. The changes in net income for both the third quarter and first nine months of 2015 primarily reflect the impact of the items previously discussed.

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 – The Company’s lamination operations utilize various materials, such as lauan, medium-density fiberboard (“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 laminates. 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 the following divisions: cabinet doors, fiberglass bath fixtures, hardwood furniture, vinyl printing, solid surface, granite, and quartz countertop fabrication, exterior graphics, RV painting, fabricated aluminum products, simulated wood and stone products, fiberglass and plastic components, and the recently acquired softwoods lumber division (North American). Patrick’s major manufactured products also include wrapped vinyl, paper and hardwood profile mouldings, interior passage doors, and slotwall panels and components.

Distribution – The Company distributes pre-finished wall and ceiling panels, drywall and drywall finishing products, electronics, wiring, electrical and plumbing products, fiber reinforced polyester 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.

Third Quarter and Nine Months Ended September 27, 2015 Compared to 2014

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 11 to the Condensed Consolidated Financial Statements.

Manufacturing

Sales. Sales increased $30.3 million or 21.2%, to $173.7 million in third quarter 2015 from $143.4 million in 2014. In the first nine months of 2015, sales increased $107.8 million or 25.3%, to $533.1 million from $425.3 million in the first nine months of 2014. This segment accounted for approximately 79% and 77% of the Company’s consolidated net sales, respectively, for the third quarter and first nine months of 2015, and 74% and 75% for the third quarter and first nine months of 2014. In the third quarter of 2015, the sales increase reflected a 21% increase in the Company’s revenue from the RV industry, a 22% increase in revenue from the MH industry, and a 27% increase in revenue from the industrial markets. On a year-to-date basis, the sales increase reflected a 28%, 21% and 23% increase in the Company’s revenue from the RV industry, MH industry, and industrial markets, respectively.

The sales improvement in the third quarter and first nine months of 2015 was primarily attributable to the (i) incremental contribution of acquisitions completed in 2014 and 2015; (ii) increased RV, MH and industrial market penetration; (iii) an increase in wholesale unit shipments in the RV and MH industries of 4% and 8% in the third quarter of 2015, respectively, and 5% and 8% in the first nine months of 2015, respectively; and (iv) improved retail and commercial fixtures and furniture business in the industrial markets. Partially offsetting this revenue growth, particularly in the RV industry, in both the third quarter and first nine months of 2015, were the mix shift towards a larger concentration of entry level and lower priced units, which negatively impacted content per unit growth, and price declines in certain more commodity-oriented raw materials passed on to customers that we utilize in our manufacturing processes.

Gross Profit. Gross profit increased $5.4 million to $28.0 million in third quarter 2015 from $22.6 million in third quarter 2014. As a percentage of sales, gross profit increased to 16.1% in third quarter 2015 from 15.8% in 2014. Gross profit increased $19.9 million to $88.2 million in the first nine months of 2015 from $68.3 million in the prior year period. As a percentage of sales, gross profit increased to 16.5% in the first nine months of 2015 from 16.1% in 2014. Gross profit for the third quarter and first nine months of 2015 improved primarily as a result of: (i) ) the impact of acquisitions completed during 2014 and 2015; (ii) higher revenue relative to overall fixed overhead costs; and (iii) ongoing process changes that primarily increased material yields and resulted in the realization of operating synergies.

Operating Income. Operating income increased $3.6 million to $17.2 million in third quarter 2015 from $13.6 million in the prior year. For the first nine months of 2015, operating income increased by $13.7 million to $56.8 million from $43.1 million in 2014. The improvement in operating income primarily reflects the increase in gross profit mentioned above.

Distribution

Sales. Sales decreased $4.2 million or 8.2%, to $46.1 million in the third quarter of 2015 from $50.3 million in 2014. In the first nine months of 2015, sales increased $16.6 million or 12.1%, to $154.5 million from $137.9 million in the first nine months of 2014. This segment accounted for approximately 21% and 23% of the Company’s consolidated net sales, respectively, for the third quarter and first nine months of 2015, and 26% and 25% for the third quarter and first nine months of 2014. In the third quarter of 2015, the sales decrease primarily reflected a 13% decrease in the Company’s revenue from RV industry and a 2% decrease in revenue from the industrial markets that were partially offset by a 6% increase in revenue from the MH industry. On a year-to-date basis, the sales increase reflected a 12% increase in the Company’s revenue from both the RV and MH industries and a 14% increase in revenue from the industrial markets.

The sales decline in the third quarter of 2015 was primarily attributable to the mix shift towards a larger concentration of entry level and lower priced units, particularly in the RV industry, which negatively impacted content per unit growth. The sales improvement in the first nine months of 2015 was primarily attributable to the contribution of one of our acquisitions completed in 2014, and increased market penetration and revenue due to additional direct ship distribution business added in the latter half of 2014 in the MH market. Sales were also positively impacted during the first nine months of 2015 by an 8% increase in wholesale unit shipments in the MH industry. Partially offsetting this revenue growth, particularly in the RV industry, in the first nine months of 2015, was the mix shift towards a larger concentration of entry level and lower priced units.

Gross Profit. Gross profit decreased $0.3 million to $7.1 million in third quarter 2015 from $7.4 million in 2014. As a percentage of sales, gross profit was 15.3% in third quarter 2015 compared to 14.8% in 2014.

For the first nine months of 2015, gross profit increased $2.3 million to $23.7 million in 2015 compared to $21.4 million in 2014. As a percentage of sales, gross profit was 15.4% in the first nine months of 2015 compared to 15.5% in 2014. The decrease in gross profit as a percentage of sales for the first nine months of 2015 is primarily attributable to the impact of one of our acquisitions completed in 2014 and an increase in sales of lower margin products primarily resulting from the increased direct ship distribution business added in the latter half of 2014 at certain of the Company’s distribution facilities.

Operating Income. Operating income in third quarter 2015 decreased $0.2 million to $2.5 million from $2.7 million in 2014. For the first nine months of 2015, operating income increased $1.9 million to $9.4 million from $7.5 million in the first nine months of 2014. The change in operating income is primarily attributable to the items discussed above.

Unallocated Corporate Expenses

Unallocated corporate expenses in the third quarter of 2015 decreased $0.2 million to $2.2 million from $2.4 million in the comparable prior year period. In the first nine months of 2015, unallocated corporate expenses increased $1.2 million to $9.0 million from $7.8 million in the first nine months of 2014. Unallocated corporate expenses in both the third quarter and first nine months of 2015 included the impact of an increase in administrative wages, incentives and payroll taxes, and additional headcount associated with the 2014 and 2015 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 and borrowings under our 2015 Credit Facility (as defined herein). Our principal uses of cash are to support working capital demands, meet debt service requirements and support our capital allocation strategy, which includes acquisitions, capital expenditures, and repurchases of the Company’s common stock, among others.

Net cash provided by operating activities was $25.3 million in the first nine months of 2015 compared to $23.2 million in the first nine months of 2014. Net income was $30.2 million in the first nine months of 2015 compared to $23.4 million in the 2014 period. Net of acquisitions, trade receivables increased $17.6 million in the first nine months of 2015 and $15.2 million in the same period of 2014 reflecting increased sales levels and seasonal trends in each of those periods including the post-acquisition sales increases of the acquisitions completed in 2015, 2014 and 2013. Due to the timing of the end of our fiscal quarters compared to the payment cycles of certain of our customers, cash flows from operating activities do not reflect the receipt of $16.7 million and $3.2 million in cash payments on trade receivables within two days following the end of our fiscal quarters ended September 27, 2015 and September 28, 2014, respectively.   

Net of acquisitions, inventories increased $3.7 million in the first nine months of 2015 and $8.3 million in the comparable 2014 period, primarily reflecting higher sales volumes and related higher inventory levels associated with acquisitions completed in 2015, 2014 and 2013. We will continue to drive increased inventory turn levels in the fourth quarter of 2015 and into the first quarter of 2016 as we continue to work together with key suppliers to match lead-time and minimum order requirements, although we may see fluctuations in inventory levels from quarter to quarter as a result of taking advantage of strategic buying opportunities.

The $0.6 million net increase in accounts payable and accrued liabilities in the first nine months of 2015 and the $11.9 million net increase in the comparable 2014 period primarily reflected the increased level of business activity and ongoing operating cash management, and the impact of acquisitions.    

The Company paid income taxes of $18.3 million and $16.0 million in the first nine months of 2015 and 2014, respectively.

Investing Activities 

Investing activities used cash of $143.1 million in the first nine months of 2015 primarily to fund the acquisitions of Better Way, SCI and North American for $139.2 million in the aggregate, and for capital expenditures of $4.7 million. Investing activities used cash of $66.8 million in the first nine months of 2014 primarily to fund the acquisitions of Precision, Foremost and PolyDyn3 for $62.6 million in the aggregate, and for capital expenditures of $4.2 million.

The capital plan for full year 2015 includes spending related to equipment replacement and upgrades to ensure that our facilities have the capacity, capabilities and technology to facilitate our growth plans, the ongoing replacement of our current ERP system which is progressing as planned, and other strategic capital and maintenance improvements. Our current operating model forecasts capital expenditures for fiscal 2015 of approximately $8.0 million.

Financing Activities

Net cash flows provided by financing activities were $119.1 million in the first nine months of 2015 compared to $46.2 million in the comparable 2014 period. As of September 27, 2015, availability under the revolving line of credit was approximately $75.4 million (including cash on hand of $1.4 million).

The increase in net borrowings of $126.4 million in the first nine months of 2015 primarily reflected the funding of the Better Way, SCI and North American acquisitions, stock repurchases and capital expenditures, totaling $149.5 million in the aggregate, partially offset by debt repayments on the 2015 Revolver (as defined herein). In accordance with its scheduled debt service requirements, the Company paid down $2.7 million in principal on its Term Loan (as defined herein) in the first nine months of 2015, and $2.7 million in principal on September 30, 2015 (beginning of fiscal fourth quarter 2015). For the first nine months of 2014, net long-term debt payments were approximately $52.3 million.

In the first nine months of 2015, the Company repurchased 195,750 shares of common stock for a total cost of $5.7 million. In the first nine months of 2014, the Company used cash to repurchase 259,094 shares of common stock for a total cost of $6.9 million.

From the beginning of the Company’s fiscal fourth quarter through October 23, 2015, the Company repurchased an additional 25,000 shares of common stock for a total cost of approximately $1.0 million.

Cash flows related to financing activities in both the first nine months of 2015 and 2014 also included $1.1 million related to the realization of excess tax benefits on stock-based compensation, which had not been recorded as deferred tax assets at December 31, 2014 and 2013. These tax benefits were recorded to shareholders’ equity upon realization in the first nine months of 2015 and 2014 at the then estimated combined federal and state statutory tax rate. In addition, cash flows from financing activities included $1.9 million of proceeds received from the exercise of stock options in the first nine months of 2015.

Capital Resources

2012 Credit Facility

Prior to April 28, 2015, the Company’s debt financing was supported by its credit agreement, dated October 24, 2012, as amended (the “2012 Credit Agreement”), among the Company, Wells Fargo Bank, National Association, as the agent and lender (“Wells Fargo”), and Fifth Third Bank (“Fifth Third”) and Key Bank National Association (“Key Bank”), as participants.  The 2012 Credit Agreement consisted of a $185.0 million revolving secured senior credit facility (the “2012 Credit Facility”).  The 2012 Credit Facility, which was scheduled to mature on October 24, 2017, was replaced by the 2015 Credit Facility discussed below.

2015 Credit Facility

The Company entered into an Amended and Restated Credit Agreement, dated as of April 28, 2015 (the “2015 Credit Agreement”), with Wells Fargo, as Administrative Agent and a lender, and Fifth Third, Key Bank, Bank of America, N.A., and Lake City Bank as participants, to expand its senior secured credit facility to $250.0 million and extend its maturity to 2020 (the “2015 Credit Facility”). The 2015 Credit Facility is comprised of a $175.0 million revolving credit loan (the “2015 Revolver”) and a $75.0 million term loan (the “Term Loan”). The 2015 Credit Agreement amends and restates the Company’s 2012 Credit Agreement. The 2015 Credit Agreement is secured by substantially all personal property assets of the Company and any domestic subsidiary guarantors.

On August 31, 2015, the Company entered into a first amendment to the 2015 Credit Agreement to expand the 2015 Credit Facility to $300.0 million from $250.0 million by expanding the 2015 Revolver to $225.0 million.

At September 27, 2015, the Company had $72.3 million outstanding under the Term Loan and $152.5 million outstanding under its 2015 Revolver.

Pursuant to the 2015 Credit Agreement, the financial covenants include (a) a maximum consolidated total leverage ratio, measured on a quarter-end basis, not to exceed 3.00:1.00 for the 12 month period ending on such quarter-end; and (b) a required minimum consolidated fixed charge coverage ratio, measured on a quarter-end basis, of at least 1.50:1.00 for the 12 month period ending on such quarter-end.

As of and for the September 27, 2015 reporting date, the Company was in compliance with both of these financial covenants. The required maximum consolidated total leverage ratio and the minimum consolidated fixed charge coverage ratio compared to the actual amounts as of September 27, 2015 and for the fiscal 12-month period then ended are as follows:

Additional information regarding (1) certain definitions, terms and reporting requirements included in the 2015 Credit Agreement; (2) the interest rates for borrowings at September 27, 2015; and (3) the composition of the calculation of both the consolidated total leverage ratio and the consolidated fixed charge coverage ratio is included in Note 8 to the Notes to the Condensed Consolidated Financial Statements.

 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 our 2015 Credit Facility. Our principal uses of cash are to support working capital demands, meet debt service requirements and support our capital allocation strategy, which includes acquisitions, capital expenditures, and repurchases of the Company’s common stock, among others.

Borrowings under the 2015 Revolver and the Term Loan under the 2015 Credit Facility are subject to a maximum total borrowing limit of $300.0 million (effective as of August 31, 2015) and are subject to variable rates of interest. The unused availability under the Credit Facility as of September 27, 2015 was $75.4 million, including cash on hand. For the first nine months of 2015 and for the fiscal year ended December 31, 2014, we were in compliance with all of our debt covenants under the terms of the credit agreement in effect at each reporting date.

We believe that our existing cash and cash equivalents, cash generated from operations, and available borrowings under our 2015 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.

Our ability to access unused borrowing capacity under the 2015 Credit Facility as a source of liquidity is dependent on our maintaining compliance with the financial covenants as specified under the terms of the 2015 Credit Agreement. In 2015, our management team is focused on increasing market share, maintaining margins, keeping costs aligned with revenue, further improving operating efficiencies, managing inventory levels and pricing, acquiring businesses and product lines that meet established criteria, and the ongoing implementation of our new ERP system at our operating divisions that have not yet been converted, 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.

Our working capital requirements vary from period to period depending on manufacturing volumes primarily 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, 2014.

OTHER

Seasonality

Manufacturing operations in the RV and MH industries historically have been seasonal and generally have been 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. Seasonal industry trends in the past several years have included the impact related to the addition of major RV manufacturer open houses for dealers to the September timeframe, whereby dealers are delaying purchases until new product lines are introduced at these shows. This has resulted in seasonal softening in the RV industry beginning in the third quarter and extending through October, and when combined with our increased concentration in the RV industry, led to a seasonal trend pattern in which the Company achieves its strongest sales and profit levels in the first half of the year.

Inflation

The prices of key raw materials, consisting primarily of lauan, gypsum, particleboard, fiberglass and aluminum 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 in 2014 and 2015. 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. However, there can be no assurance future cost increases, if any, can be partially or fully passed on to customers, or that the timing of such sales price increases will match raw material cost 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”), publicly disseminated press releases, quarterly earnings conference calls, 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, 2014, 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

We are subject to market risk primarily in relation to our cash and short-term investments. The interest rate we may earn on the cash we invest in short-term investments is subject to market fluctuations. We utilize a mix of investment maturities based on our anticipated cash needs and evaluation of existing interest rates and market conditions. While we attempt to minimize market risk and maximize return, changes in market conditions may significantly affect the income we earn on our cash and cash equivalents and short-term investments.

At September 27, 2015, our total debt obligations under the 2015 Credit Agreement were under the LIBOR-based and prime rate-based interest rates. A 100 basis point increase in the underlying LIBOR and prime rates would result in additional annual interest cost of approximately $2.2 million, assuming average related revolving debt subject to variable rates of $224.8 million, which was the total amount of related borrowings at September 27, 2015 subject to variable rates.

ITEM 4. CONTROLS AND PROCEDURES

 Disclosure Controls and Procedures

The Company maintains “disclosure controls and procedures”, as such term is defined under Securities Exchange Act Rule 13a-15(e), that are designed to ensure that information required to be disclosed in our Securities Exchange Act of 1934, as amended (the “Exchange Act”) reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow for timely decisions regarding required disclosures. In designing and evaluating the disclosure controls and procedures, the Company’s management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and the Company’s management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Under the supervision and with the participation of our senior management, including our Chief Executive Officer and Chief Financial Officer, the Company conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures 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 reports filed under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and 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

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 third quarter ended September 27, 2015 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, 2014.

ITEM 2.     UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

In the period from September 28, 2015 (the beginning of the Company’s fourth fiscal quarter) through October 23, 2015, the Company repurchased 25,000 shares of common stock at an average price of $38.94 per share for a total cost of approximately $974,000. Since the inception of the stock repurchase program in February 2013 through October 23, 2015, the Company has repurchased in the aggregate 1,348,870 shares at an average price of $19.74 per share for a total cost of approximately $26.6 million. As of October 23, 2015, there was $19.0 million available to be repurchased under the authorized stock repurchase program.

ITEM 6.     EXHIBITS

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.

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