This excerpt taken from the PATK 10-Q filed May 13, 2009.
OVERVIEW OF MARKETS AND RELATED INDUSTRY PERFORMANCE / FUTURE OUTLOOK
The continuation of the deterioration in macroeconomic conditions in all sectors of the economy in the first quarter of 2009, including restricted capacity and availability of capital, high unemployment, low consumer confidence levels, a decline in discretionary spending, and liquidity concerns, had a negative impact on the Companys sales and a major impact on all three of the major markets the Company serves. The Company expects the depressed conditions in the RV, MH and residential housing markets to continue through 2009 and possibly into 2010 as certain customers of the Company are closing and consolidating facilities, reducing workforce, reducing inventory levels, and reducing costs. In addition, the Companys sales will continue to be negatively impacted as RV dealers are expected to continue to lower their inventory levels as a result of weak consumer demand and restricted floor plan and consumer financing availability which in turn may negatively impact the sales of our products.
According to industry sources, the RV industry, which represents approximately 34% of the Companys first quarter 2009 sales, experienced unit shipment declines of approximately 63% versus the comparable prior year period. Long-term demographic trends favor RV market growth and the anticipated positive impact that aging baby boomers will have on the industry once the industry recovers from the current economic crisis. In addition, Federal economic credit and stimulus packages, which include provisions to stimulate RV lending and provide favorable tax treatment for new RV purchases, may help promote sales and aid in the RV industrys economic recovery. While demographic trends point to positive conditions for this particular market sector in the long-term, the Recreational Vehicle Industry Associations chief economist currently forecasts a 45% decline for full year 2009 unit shipments compared to the full year 2008 level.
According to industry sources, the MH industry, which represents approximately 40% of the Companys first quarter 2009 sales, experienced unit shipment declines of approximately 45% versus the comparable prior year period. Factors that may favorably impact production levels in this industry include favorable changes in financing laws, rising interest rates, quality credit standards in the residential housing market, mild inflation and improved job growth.
Both the RV and MH industries as a whole continue to run at rates that reflect significant contraction on an annualized basis. Pricing on gypsum related commodity products that the Company sells into the MH industry rose approximately 14% in the first quarter of 2009 on both manufactured and distribution products. Annual RV and MH unit shipments are expected to be lower in 2009 as high credit standards, increasing food and volatile fuel prices, employment downturns, and continued declines in household wealth and home prices continue to negatively impact the global economy.
The industrial and other markets represent approximately 26% of the Companys first quarter 2009 sales. Approximately 70% of the Companys industrial revenue base is linked to the residential housing market which continued to be impacted by depressed conditions as new housing starts for the first three months of 2009 were down approximately 48% from the March 2008 seasonally adjusted rate (as reported by the U.S. Department of Commerce). There is a direct correlation between the demand for our products in this market and new residential
housing production. Demand for existing homes is forecast to begin a modest recovery late in 2009 with new home sales declining overall in 2009 but beginning to recover in 2010.
The weak conditions in the MH industry dramatically impacted the Companys Distribution Segment, which saw first quarter 2009 sales decline from the prior year by approximately $8.1 million or 44% and operating profits decline approximately $0.8 million to a loss of $0.5 million, as approximately 71% of the Companys sales in this segment are associated with the MH Industry.
In addition, higher energy costs continue to affect the costs of raw materials. The Company continues to explore alternative sources of raw materials and components, both domestically and from overseas, and evaluate and implement sales price increases to customers where needed to offset the effect of cost increases. In first quarter 2009, we have seen cost increases softening somewhat and expect that to continue until the general economy improves. While the Company has historically been able to obtain sales price increases to offset raw material cost increases, there can be no assurance that future cost increases can be passed on to customers.