Patrick Industries, Inc. — Q3 2020 Form 10-Q
Reporting period: Third quarter ended September 27, 2020; nine-month comparison is with the period ended September 29, 2019. Patrick manufactures and distributes components and products serving recreational vehicle (RV), marine, manufactured housing (MH), and industrial markets. Unless noted, financial amounts below are in millions.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $700.7 | $566.2 | $1,714.0 | $1,787.6 |
| Gross profit / margin | $133.5 / 19.1% | $104.3 / 18.4% | $316.7 / 18.5% | $323.5 / 18.1% |
| Operating income / margin | $59.8 / 8.5% | $37.4 / 6.6% | $111.2 / 6.5% | $118.5 / 6.6% |
| Net income | $37.3 | $21.3 | $59.2 | $69.6 |
| Diluted EPS | $1.62 | $0.92 | $2.57 | $2.99 |
| Operating cash flow | Not provided quarterly | $112.8 | $122.0 |
- Q3 sales rose 24%, operating income 60%, and net income 75% year over year. Management reported the company’s highest quarterly sales to date. Stronger demand and volume, fixed-cost leverage, acquisition synergies, and lower commodity costs supported margins.
- Nine-month sales declined 4% and net income declined 15%; operating income was down 6%. COVID-19 disruptions, particularly second-quarter shutdowns and lost production and shipping days, weighed on the year-to-date results.
- Q3 sales by market: RV +36%, marine +25%, industrial +9%, and MH −1%. Nine-month sales: RV −5%, marine −10%, industrial +7%, and MH −5%.
- Q3 segment operating income was $63.3 million in Manufacturing and $16.4 million in Distribution, up from $42.4 million and $9.0 million, respectively. For nine months, Manufacturing operating income was $131.4 million versus $135.6 million; Distribution was $33.4 million versus $28.1 million.
Cash, debt, and liquidity
- Cash and cash equivalents were $62.3 million at September 27, 2020, down from $139.4 million at December 31, 2019. Nine-month operating cash flow of $112.8 million was below the prior-year $122.0 million.
- Investing used $145.4 million, primarily reflecting $123.4 million of acquisitions; capital expenditures were $22.2 million. Financing used $44.4 million, including $20.3 million of share repurchases and $17.3 million of dividends.
- Debt principal totaled $702.5 million before discounts and financing costs: $300 million of 7.5% senior notes, $172.5 million of 1.0% convertible notes, $135 million drawn on the revolver, and a $95 million term loan. Net carrying value of long-term debt, including current maturities, was approximately $678.9 million.
- Liquidity included $410.3 million of unused credit-facility availability. The company said available cash, operating cash flow, and borrowing capacity should meet anticipated working-capital and capital-expenditure needs for at least 12 months, excluding acquisitions. It was in covenant compliance: actual leverage ratio 2.24 versus a 4.00 maximum; fixed-charge coverage 5.76 versus a 1.50 minimum.
- $200 million of variable-rate borrowings were hedged through interest-rate swaps. A 100-basis-point rate increase was estimated to add about $0.3 million in annual interest cost on the remaining $30 million of variable-rate borrowings.
Acquisitions, outlook, and risks
- Patrick completed nine acquisitions in the first nine months of 2020, including six in Q3, for approximately $124 million in cash consideration, plus contingent consideration. The acquisitions contributed $19.6 million of Q3 revenue and $23.3 million for the nine-month period. Purchase-price allocations remained preliminary.
- Management described sharp Q3 recoveries in its end markets, driven by strong RV and marine dealer demand and low dealer inventories, as well as housing starts and home-improvement activity. It also cited MH OEM labor and supply constraints and marine OEM capacity constraints. Team members were working full production schedules with safety protocols in place.
- No quantified earnings or revenue guidance was provided. Management cautioned that COVID-19’s duration and effects remain uncertain. Risks include demand changes, supply-chain and shipping interruptions, production constraints, customer credit and collections, workforce disruption, and potential covenant or liquidity pressure if operations deteriorate.
- Management concluded no COVID-related trigger indicated goodwill or trademark impairment at quarter-end, but said its Q4 2020 annual impairment tests could result in impairment. Separately, $2.0 million of pre-tax intangible-asset impairment was recorded for certain immaterial operations that ceased activity.
- The company recorded $2.2 million of permanent tax differences related to CARES Act payroll tax credits in the first nine months. It also noted potential borrowing-cost effects from the planned transition away from LIBOR; the impact was not yet estimable.
- In an environmental case, the court dismissed claims against Patrick and a co-defendant’s cross-claims on August 21, 2020; the plaintiffs’ motion for reconsideration remained pending. Patrick did not believe the matter was likely to have a material adverse impact, while noting litigation uncertainty.
Important facts for investors to verify
- Whether Q3 demand strength and low RV and marine dealer inventories continued, and whether OEM capacity and labor constraints eased.
- How much of reported growth and future earnings comes from acquisitions versus organic performance, including final purchase-price allocations and contingent payments.
- Cash conversion, working-capital needs, debt levels, interest expense, and continued compliance with credit-facility covenants.
- Results of the Q4 2020 goodwill and trademark impairment tests, and developments in the pending environmental litigation.
- How COVID-19, commodity costs, and the LIBOR transition affect margins, demand, and financing costs.