Patrick Industries, Inc. — Q2 2021 Form 10-Q
Business context and reporting period. The unaudited filing covers the 13 weeks and six months ended June 27, 2021, compared with periods ended June 28, 2020. Patrick supplies manufacturing and distribution products to recreational vehicle (RV), marine, manufactured housing and industrial markets. The company said the prior-year quarter was affected by COVID-19-related production shutdowns, making year-over-year comparisons unusually strong.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net sales | $1,020.0 million | $424.0 million | $1,870.4 million | $1,013.3 million |
| Gross profit / margin | $204.5 million / 20.0% | $73.7 million / 17.4% | $366.0 million / 19.6% | $183.2 million / 18.1% |
| Operating income / margin | $95.3 million / 9.3% | $12.1 million / 2.9% | $163.7 million / 8.8% | $51.4 million / 5.1% |
| Net income | $59.0 million | $0.7 million | $106.5 million | $21.9 million |
| Diluted earnings per share | $2.52 | $0.03 | $4.56 | $0.95 |
Sales grew 141% in Q2 and 85% for the first six months. Q2 market sales increased 192% in RV, 182% in marine, 54% in manufactured housing and 69% in industrial. For the six-month period, the respective increases were 109%, 121%, 28% and 41%. Management attributed improved gross margin mainly to cost-reduction and automation work, higher production volumes and fixed-cost absorption, and acquisition-related synergies and cost profiles; higher labor and some commodity costs partly offset those benefits.
Segment operating income in Q2 was $99.4 million for Manufacturing and $31.2 million for Distribution, compared with $22.4 million and $6.9 million, respectively, in Q2 2020. Consolidated operating income is lower than the segment total after corporate expenses and intangible amortization.
Cash flow, liquidity and debt
- Six-month operating cash flow was $78.7 million, versus $39.4 million a year earlier. Working-capital investment was a significant use of cash, including higher receivables and inventory.
- Investing cash outflow was $280.9 million, including $252.7 million of acquisitions, net of cash acquired, and $26.3 million of capital expenditures. Operating cash flow less capital expenditures was approximately $52.4 million.
- Financing cash inflow was $215.8 million. The company issued $350 million of 4.75% senior notes due 2029 and amended its credit facility, extending its maturity to April 2026.
- At June 27, cash was $58.4 million, with $409.8 million available under the credit facility. Long-term debt carrying value, net of discounts and financing costs, was $1,076.9 million, plus $7.5 million of current maturities; total debt principal was $1,107.5 million.
- The company reported compliance with credit covenants. Its secured net leverage ratio was 0.43 against a maximum of 2.75, and fixed-charge coverage was 6.92 against a minimum of 1.50.
Material changes, outlook and risks
Patrick completed seven acquisitions in the first six months of 2021. They contributed $62.1 million of revenue and $6.0 million of operating income in that period. Cash consideration was approximately $253.3 million; preliminary purchase accounting included $50.6 million of goodwill. Acquisitions and related financing increased debt and intangible-asset amortization.
Management stated that existing cash, operating cash flow and available credit were expected to meet working-capital and capital-expenditure needs for at least 12 months, excluding acquisitions. The filing provides no specific earnings or revenue guidance. Management described strong end-market demand and historically low dealer inventories in RV and marine, while cautioning that demand, dealer orders and seasonality may vary.
Risks and uncertainties highlighted include volatile raw-material prices, labor and supply-chain conditions, the ability to pass cost changes to customers and variable-rate debt exposure. The company said commodity volatility had not materially affected reported net income, but future price changes and pass-through timing could affect results. A 100-basis-point rate increase was estimated to add about $0.9 million in annual interest cost on the then-unhedged variable-rate borrowings. Management also noted historical seasonality, with sales and profits generally highest in Q2 and lowest in Q4.
Important facts for investors to verify
- How much of reported growth reflects the depressed COVID-affected comparison, acquisitions, unit volumes and pricing or content per unit.
- Whether strong demand and low dealer inventories persist, particularly in RV and marine markets.
- Whether improved margins can withstand higher labor, commodity, freight and other supply-chain costs.
- Working-capital needs, acquisition spending and debt levels, including the company’s ability to maintain credit-covenant compliance.
- Acquisition integration, final purchase-price allocations and contingent consideration, estimated at $9.8 million at quarter-end.