Patrick Industries, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter ended June 28, 2020; six-month comparisons are against the periods ended June 30, 2019. Patrick supplies components and products to recreational vehicle (RV), marine, manufactured housing (MH), and industrial markets through Manufacturing and Distribution segments. Financial amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $424.0 | $613.2 | $1,013.3 | $1,221.4 |
| Gross profit / margin | $73.7 / 17.4% | $112.7 / 18.4% | $183.2 / 18.1% | $219.2 / 17.9% |
| Operating income / margin | $12.1 / 2.9% | $45.2 / 7.4% | $51.4 / 5.1% | $81.1 / 6.6% |
| Net income | $0.7 | $27.4 | $21.9 | $48.3 |
| Diluted earnings per share | $0.03 | $1.18 | $0.95 | $2.07 |
| Operating cash flow | Not presented quarterly | $39.4 | $93.8 |
Q2 sales fell 31%, operating income 73%, and net income about 97% year over year. Six-month sales declined 17% and net income 55%. Q2 gross margin fell 1.0 percentage point; six-month gross margin improved 0.2 point. Operating margin declined in both comparison periods. Interest expense rose 25% in Q2 and 21% for the half, reflecting acquisition-related borrowings and the 7.5% senior notes issued in 2019.
At June 28, cash was $111.1; gross debt was $703.8, including a $135.0 revolver, $96.3 term loan, $300.0 senior notes, and $172.5 convertible notes. The balance sheet reported $673.1 of long-term debt net of discounts, financing costs, and current maturities. Unused credit-facility availability was $410.2. The company was in covenant compliance: actual leverage ratio was 2.31 against a maximum of 4.00, and fixed-charge coverage was 5.65 against a minimum of 1.50.
Operating cash flow declined $54.4 year over year. Management cited lower earnings, receivable cash use associated mainly with quarter-end payment timing, higher inventory purchases as demand improved, and lower deferred tax liabilities. Investing cash use was $35.0, including $23.8 for acquisitions and $11.3 of capital expenditures. Financing cash use was $32.7, including $15.6 of share repurchases and $11.6 of dividends. Cash declined $28.3 from year-end.
Business trends and changes
- COVID-19 disruptions and OEM production cuts caused temporary production curtailments and lost production and shipping days. April was particularly weak; production began recovering in early May, with stronger demand in the latter half of May and June. Management said June RV and industrial revenue exceeded prior-year levels; marine and MH recovery was more gradual.
- Q2 sales by market changed year over year: RV down 40%, marine down 34%, MH down 18%, and industrial down 2%. For the first six months, RV fell 23%, marine 24%, and MH 6%, while industrial increased 6%.
- Both reportable segments contracted in Q2. Manufacturing sales decreased 33% and operating income 54%; Distribution sales decreased 26% and operating income 36%. Distribution gross margin improved, partly from acquisition synergies; Manufacturing margin weakened amid pandemic-related disruption and inefficiencies.
- Cost reductions, acquisition synergies, and lower commodity inputs helped six-month cost of goods sold as a share of sales, but COVID-related costs and inefficiencies weighed on Q2 profitability. A $2.0 pre-tax impairment of customer relationships and trademarks was recorded for permanently closed, immaterial operations.
- Patrick completed three acquisitions in the first half for total cash consideration of $25.0; acquired businesses contributed $3.8 of first-half sales. In August 2020, after the reporting date, it completed the Inland Plywood acquisition for a net initial purchase price of $46.0.
Outlook, risks, and unusual items
The filing gives no specific revenue or earnings guidance. Management expected existing cash, operating cash generation, and available credit to cover working capital and capital expenditures for at least 12 months, excluding acquisitions. After postponing non-essential capital spending in Q2, it expected to return to historical capital expenditure levels in the second half of 2020. Management viewed demand trends as encouraging but emphasized ongoing pandemic uncertainty and the potential for further volatility.
COVID-19 risks include renewed facility or customer disruptions, weaker consumer demand or credit availability, supply-chain constraints, customer payment difficulties, and adverse effects on liquidity, covenants, and asset valuations. Management found no material goodwill or trademark impairment at June 28 apart from the stated $2.0 impairment, but noted future impairment testing could produce charges. Other sensitivities include commodity-price volatility and variable-rate debt; $200.0 of debt was covered by interest-rate swaps, and a 100-basis-point rate increase was estimated to add about $0.3 of annual interest cost on unhedged variable-rate borrowings.
The Q2 effective tax rate was 44.4%, versus 25.1% a year earlier, and reflected $2.2 of permanent tax differences associated with CARES Act payroll tax credits. Cash income taxes paid in the first half were immaterial. The filing states that results for the first half are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether the May–June recovery in RV, marine, MH, and industrial demand persisted, and how subsequent wholesale production and dealer inventories evolved.
- Whether the sharp drop in operating cash flow and quarter-end receivable and inventory movements reversed in later periods.
- Debt, liquidity, and covenant headroom after the August Inland Plywood acquisition and planned second-half capital spending.
- Acquisition integration, realized synergies, contingent consideration, and any subsequent impairment charges.
- The persistence of pandemic-related operating costs, customer-credit risks, and effects on profitability and cash generation.