Patrick Industries, Inc. — Q2 2023 Form 10-Q
Reporting period: Second quarter and six months ended July 2, 2023; comparative periods ended June 26, 2022. Amounts below are in millions except per-share data.
Business context and results
Patrick supplies products and components through Manufacturing and Distribution segments, primarily to recreational vehicle (RV), marine, manufactured housing (MH), and industrial markets. The quarter’s results reflected sharply lower RV demand and declines in the other markets except for marine growth over the first six months.
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net sales | $920.7 (-38%) | $1,475.7 | $1,820.8 (-35%) | $2,817.9 |
| Gross profit / margin | $210.0 / 22.8% | $327.1 / 22.2% | $404.2 / 22.2% | $622.4 / 22.1% |
| Operating income / margin | $75.6 / 8.2% | $174.0 / 11.8% | $131.8 / 7.2% | $335.8 / 11.9% |
| Net income | $42.4 | $116.5 | $72.5 | $229.2 |
| Diluted EPS | $1.94 | $4.79 | $3.28 | $9.33 |
| Net interest expense | $18.3 | $14.8 | $36.7 | $29.7 |
Changes, cash flow, and financial position
- Q2 net sales fell across all four end markets: RV sales declined 54%, marine 8%, MH 28%, and industrial 15%. For the first six months, RV declined 55%, MH 26%, and industrial 9%, while marine increased 6%.
- RV wholesale shipments fell 44% in Q2 and 49% in the first half. Management said retail sales exceeded wholesale shipments in both periods, improving alignment of dealer inventories with retail demand. MH shipments fell 29% in both comparisons; marine wholesale powerboat shipments declined 19% in Q2 and were flat for the first half.
- Gross margin improved modestly year over year, supported by lower material costs, cost-reduction and automation efforts, and labor efficiencies. Lower volumes reduced fixed-cost absorption; operating margins contracted as sales fell and warehouse/delivery and SG&A costs rose as a share of sales.
- Operating cash flow was $178.4 versus $74.3 for the first half, reflecting a smaller working-capital cash use/source comparison and lower earnings. Investing used $65.5, including $26.8 for acquisitions and $36.5 in capital expenditures. Financing used $101.7, including repayment of $172.5 of 1.00% convertible notes at maturity, net revolver activity, $11.8 of buybacks, and $20.5 of dividends. Cash increased to $33.9 from $22.8 at year-end.
- At July 2, cash was $33.9 and unused credit-facility availability was $573.0. Debt was $1,236.9 gross, compared with $1,298.4 at December 31, 2022; the balance-sheet carrying value of long-term debt, net of discounts and costs and current maturities, was $1,215.9. Revolver borrowings were $195.0 versus $80.3 at year-end. Current assets were $833.9 and current liabilities $307.1.
- Management said cash, operating cash flow, and available borrowings were expected to meet working-capital and capital-expenditure needs for at least 12 months, excluding acquisitions. The company was in compliance with credit covenants; actual secured net leverage was 0.64 versus a 2.75 maximum, and fixed-charge coverage was 2.84 versus a 1.50 minimum.
Outlook, commentary, and risks
- The filing provides no specific revenue or earnings guidance. Management described demand headwinds from lower RV and MH production, inflation and elevated consumer financing rates, and housing-market weakness. Seasonality and dealer ordering patterns may also affect results.
- Higher variable borrowing rates contributed to interest expense growth. A 100-basis-point increase in SOFR was estimated to raise annual interest cost by approximately $3.3 million, based on the variable-rate borrowings outstanding at period-end.
- Management cited cost initiatives and market-share gains as offsets to volume declines. Content per wholesale unit increased year over year in RV, marine, and MH, reflecting market-share gains, acquisitions, and pricing.
- Three acquisitions were completed in the first half; their reported Q2 and first-half contribution was $2.3 of sales and $0.2 of operating income. Acquisition purchase-price allocations remain subject to finalization. A potential bargain-purchase gain from one acquisition was deferred pending completion of purchase accounting.
- Legal matters are described as ordinary-course matters not expected by management to have a material adverse effect. In the Lusher litigation, the court dismissed remaining claims without prejudice; a motion concerning contribution claims remains pending. The related EPA Superfund matter is stayed during negotiations, and the EPA has not selected a final remedy. Management noted that an adverse judgment or settlement could have a material adverse effect.
- Raw-material prices can be volatile, and the company cannot assure that cost changes can be passed through promptly or fully. Management reported no material effect from commodity volatility during the periods presented.
- A $5.5 pretax gain on property disposal benefited first-half 2022 SG&A, limiting comparability. The company had approximately $84.6 remaining under its stock repurchase authorization at July 2.
Important facts for investors to verify
- Whether RV production and dealer inventories continue to normalize, and whether retail demand supports a recovery in wholesale shipments.
- Whether gross-margin improvements can offset lower volumes, fixed-cost absorption, and elevated operating expenses.
- Debt, variable-rate exposure, covenant headroom, and credit-facility availability as borrowing needs change.
- Final purchase accounting, acquisition performance, and potential contingent consideration or bargain-purchase gain recognition.
- Developments in the Lusher litigation and EPA Superfund process, including any remedy, settlement, or material change in management’s assessment.