Patrick Industries, Inc. — Q2 2022 Form 10-Q
Business context and period. Patrick Industries manufactures and distributes components and products for recreational vehicles (RV), marine, manufactured housing and industrial markets. The unaudited quarter ended June 26, 2022; comparisons are with the quarter ended June 27, 2021. Six-month figures cover the first half of 2022 and 2021.
Financial performance
| Metric | Q2 2022 | Q2 2021 | First half 2022 | First half 2021 |
|---|---|---|---|---|
| Net sales | $1,475.7 million | $1,020.0 million | $2,817.9 million | $1,870.4 million |
| Gross profit / margin | $327.1 million / 22.2% | $204.5 million / 20.0% | $622.4 million / 22.1% | $366.0 million / 19.6% |
| Operating income / margin | $174.0 million / 11.8% | $95.3 million / 9.3% | $335.8 million / 11.9% | $163.7 million / 8.8% |
| Net income | $116.5 million | $59.0 million | $229.2 million | $106.5 million |
| Diluted EPS | $4.79 | $2.52 | $9.33 | $4.56 |
| Net interest expense | $14.8 million | $14.6 million | $29.7 million | $25.8 million |
Sales rose 45% in Q2 and 51% in the first half; net income rose 98% and 115%, respectively. All four end markets grew year over year in both periods. Q2 sales by end market increased 41% in RV, 74% in marine, 44% in manufactured housing and 24% in industrial.
For the first six months, cash provided by operations was $74.3 million versus $78.7 million a year earlier. Capital expenditures were $44.5 million, cash used for acquisitions was $150.4 million, and cash used in investing activities totaled $187.6 million. Cash declined $45.8 million to $77.0 million.
Liquidity, debt and financial position
At June 26, 2022, total assets were $3.025 billion and shareholders’ equity was $897.6 million. Total debt principal was approximately $1.499 billion, compared with $1.361 billion at December 31, 2021; reported long-term debt, net of discounts and current maturities, was $1.475 billion. The company also reported $269.4 million of available credit-facility capacity. Management stated that cash, operating cash generation and available borrowings were expected to meet working-capital and capital-expenditure needs for at least 12 months, excluding acquisitions.
Working-capital investment was a significant cash use: receivables and inventory increased, with management attributing the operating-cash-flow decline primarily to $126.8 million of increased net working-capital use. The company was compliant with credit-facility covenants; actual secured net leverage was 0.41 against a maximum of 2.75, and fixed-charge coverage was 6.42 against a minimum of 1.50.
Material changes and management commentary
- Margins improved as cost-reduction and automation efforts, higher production volumes and labor efficiencies helped offset supply constraints, higher commodity/material costs and acquisition-related inventory step-up charges. Gross margin expanded 220 basis points in Q2 and 250 basis points in the first half.
- Manufacturing segment sales increased 49% in Q2 and 55% in the first half; Distribution sales increased 35% and 40%, respectively. Manufacturing operating income rose 82% in Q2 and 97% in the first half; Distribution operating income rose 40% and 71%.
- The company completed three acquisitions in the first half, including Rockford Corporation and Diamondback Towers. First-half revenue from 2022 acquisitions was $49.2 million. Acquisition spending was lower than in the prior-year first half, which included $252.7 million of acquisition cash outflows.
- The company repurchased $41.3 million of stock and paid $15.7 million of dividends in the first half. Approximately $70.3 million remained under its repurchase authorization at June 26.
- Adoption of ASU 2020-06 increased diluted shares by about 2.1 million and reduced diluted EPS by $0.41 for Q2 and $0.81 for the first half, as reported by the company. Adoption also changed the carrying value of convertible notes and opening equity; it did not affect cash flows.
Outlook, risks and unusual items
The filing gives no quantified full-year revenue or earnings guidance. Management noted RV wholesale shipments exceeded estimated retail sales in the first half, suggesting dealer-inventory replenishment, while estimated RV retail sales declined 29% in Q2 year over year. Marine retail powerboat sales were also estimated down 17% in Q2 and the first half, with limited product availability linked partly to shortages of motors and electronic components. Management highlighted inflation, supply-chain disruption, commodity volatility, changing dealer inventories, consumer demand and the Russia-Ukraine war as factors to monitor.
Variable-rate credit-facility borrowings were $417.5 million at period-end; a 100-basis-point rate increase was estimated to add approximately $4.2 million to annual interest cost, assuming average borrowings. Interest-rate swaps had matured in March 2022.
Unusual items included a $5.5 million pretax gain on the January sale of certain properties associated with the Lusher Street groundwater matter, recorded within SG&A. The buyer indemnified the company for liabilities related to those properties. The company nevertheless cautioned that EPA remedy selection and litigation outcomes remain uncertain. It also recorded an additional immaterial estimate for possible costs related to customer product recalls and $3.0 million of first-half noncash charges for changes in acquisition contingent-consideration estimates. Management did not expect the recall matter to have a material adverse effect.
Important facts for investors to verify
- How much of sales growth reflects organic demand, pricing, acquisitions and higher content per unit, and whether end-market demand and dealer inventories remain supportive.
- Whether improved manufacturing margins persist despite material-cost inflation, supply constraints and acquisition-related costs.
- Whether working-capital needs convert into stronger operating cash flow, given first-half cash generation and inventory/receivables growth.
- Debt levels, variable-rate exposure, refinancing needs and continued covenant headroom, particularly if rates rise or performance weakens.
- Final acquisition purchase-price allocations and contingent consideration, as well as developments in the EPA matter and customer recall obligations.