Patrick Industries, Inc. — Q3 2021 Form 10-Q
Reporting period: Third quarter ended September 26, 2021; year-to-date results cover the nine months ended that date. Comparatives are the corresponding 2020 periods. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Business context and results
Patrick manufactures and distributes components and products serving the recreational vehicle (RV), marine, manufactured housing (MH), and industrial markets. RV was its largest market, representing 60% of Q3 sales. Management attributed growth to strong demand across markets, acquisitions, and favorable year-over-year comparisons that included COVID-related production shutdowns in 2020.
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $1,060.2 | $700.7 | $2,930.6 | $1,714.0 |
| Gross profit / margin | $208.2 / 19.6% | $133.5 / 19.1% | $574.2 / 19.6% | $316.7 / 18.5% |
| Operating income / margin | $93.3 / 8.8% | $59.8 / 8.5% | $257.0 / 8.8% | $111.2 / 6.5% |
| Net income / net margin | $57.4 / 5.4% | $37.3 / 5.3% | $163.9 / 5.6% | $59.2 / 3.5% |
| Diluted EPS | $2.45 | $1.62 | $7.01 | $2.57 |
Material changes and management commentary
- Sales increased 51% in Q3 and 71% year to date. By market, Q3 sales growth was RV 50%, marine 85%, MH 25%, and industrial 52%; nine-month growth was 83%, 107%, 27%, and 45%, respectively.
- Gross margin improved 50 basis points in Q3 and 110 basis points year to date. Management cited cost reduction and automation, volume efficiencies, improved production efficiency, and acquisition mix; higher labor, supply-chain constraints, and commodity costs partly offset these benefits. Manufacturing gross margin fell to 18.8% in Q3 from 19.3%, principally because of higher material costs, while Distribution margin rose to 19.8% from 17.4%.
- Operating income rose 56% in Q3 and 131% year to date. Interest expense increased 47% and 29%, respectively, reflecting acquisition-related borrowing and the 2021 senior-note issuance.
- Ten acquisitions were completed in the first nine months of 2021. They contributed $84.0 million of Q3 sales and $146.1 million year to date; reported operating income from those acquisitions was $6.6 million and $12.6 million, respectively. Acquisition spending was approximately $298.4 million in cash, plus contingent consideration.
Cash flow, liquidity and debt
- Nine-month operating cash flow was $147.4 million, up from $112.8 million. Higher earnings were partly offset by a $108.4 million increase in net working-capital use, including investment in inventory and receivables.
- Investing cash outflow was $343.7 million, including $297.7 million of net acquisition spending and $44.2 million of capital expenditures. Financing cash inflow was $196.4 million; cash ended the period at $44.9 million.
- At September 26, 2021, total debt principal was $1,106.1 million, including $350 million of 4.75% senior notes due 2029, $300 million of 7.50% notes due 2027, $172.5 million of 1.0% convertible notes due 2023, term-loan principal of $148.1 million, and $135.5 million drawn on the revolver. Cash was $44.9 million. The amended credit facility matures in 2026 and provides a $550 million revolver and $150 million term loan.
- Management reported $409.3 million of credit-facility availability, covenant compliance, and expected existing cash, operating cash flow, and available borrowings to meet working-capital and capital-expenditure needs for at least 12 months, excluding acquisitions. Actual secured net leverage was 0.48 versus a 2.75 maximum; fixed-charge coverage was 6.84 versus a 1.50 minimum.
Outlook, risks and unusual items
- The filing gives no quantified earnings or revenue guidance. Management described positive RV-market momentum, citing strong consumer demand and historically low dealer inventories, but noted that supply constraints and low inventories weighed on estimated Q3 RV and marine retail unit sales. Marine dealer inventories were estimated to be at their lowest in at least a decade.
- Supply-chain constraints, labor and commodity-cost inflation, and the ability to pass cost changes through to customers could pressure margins. Management stated that commodity volatility had not materially affected reported-period results, while cautioning that pass-through timing and amounts are uncertain.
- Customers initiated recalls involving certain products sold by the Distribution segment. The company was evaluating the financial impact and said it could not reasonably estimate it. Management believed other ordinary-course legal matters would not have a material adverse effect.
- In November 2021, after quarter-end, the company completed its acquisition of Wet Sounds, a marine audio products manufacturer. The filing did not provide transaction consideration.
- Effective tax rates were 26.3% in Q3 2021 and 24.1% year to date; the year-to-date rate included $5.7 million of excess tax benefits from share-based compensation. The company reported no material change in previously disclosed risk factors.
Important facts for investors to verify
- How much of sales and earnings growth reflects organic demand versus acquisitions and the COVID-affected prior-year comparison.
- Whether supply constraints, dealer inventory levels, labor costs, and commodity prices affect production volumes and margins in subsequent periods.
- The financial and operational effects of Distribution-segment product recalls, which were not estimable in this filing.
- Acquisition integration, purchase-price allocation, contingent consideration, and the impact of additional borrowing on interest expense and covenant headroom.
- Whether operating cash flow can support working-capital needs and capital spending as receivables and inventory grow.