Patrick Industries, Inc. — Q1 2022 Form 10-Q
Reporting period: Thirteen weeks ended March 27, 2022; comparable quarter ended March 28, 2021. Figures below are in U.S. dollars; financial amounts are rounded to millions unless otherwise noted.
Business context and results
Patrick supplies components and products to the recreational vehicle (RV), marine, manufactured housing (MH), and industrial markets through its Manufacturing and Distribution segments. Q1 results reflected strong sales growth across all four markets, contributions from acquisitions, and improved operating margins.
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Net sales | $1,342.2m | $850.5m | +58% |
| Gross profit / margin | $295.3m / 22.0% | $161.5m / 19.0% | +83%; +3.0 pts |
| Operating income / margin | $161.8m / 12.1% | $68.5m / 8.1% | +136%; +4.0 pts |
| Net income | $112.7m | $47.5m | +137% |
| Diluted EPS | $4.54 | $2.04 | +$2.50 |
| Net interest expense | $14.9m | $11.2m | +33% |
| Effective tax rate | 23.3% | 17.1% | +6.2 pts |
Revenue, segments, and margins
- Sales by end market increased year over year: RV +64%, marine +62%, MH +44%, and industrial +39%. These market growth rates include acquisition contributions.
- Manufacturing sales were $998.6m (+62%) and operating income was $170.5m (+117%). Distribution sales were $365.7m (+46%) and operating income was $46.0m (+117%). Segment operating income is before unallocated corporate expenses and intangible amortization.
- Management attributed margin expansion to cost-reduction and automation work, volume leverage, improved labor efficiency, and acquisition-related synergies and cost profiles. Higher material costs and supply-chain constraints partly offset these benefits.
- Acquisitions completed in Q1 2022 contributed $8.4m of sales and $1.4m of operating income. Patrick acquired Rockford Corporation for approximately $130.1m cash consideration. The filing’s illustrative pro forma Q1 2022 results, assuming the 2022 and 2021 acquisitions had occurred earlier, were revenue of $1,369.2m and net income of $114.7m; these are not actual reported results.
Cash flow, debt, and liquidity
- Operating cash flow was negative $23.0m, versus positive $50.3m a year earlier. Management cited a $140.3m increase in cash used for working capital, mainly receivables growth and inventory investment supporting customer needs and growth.
- Investing cash outflow was $143.1m, including $131.6m for business acquisitions and $18.7m of capital expenditures. Financing provided $107.2m, including $154.0m of net revolver borrowings.
- Cash declined to $63.8m from $122.8m at year-end. At March 27, the company reported $255.6m of available credit-facility capacity.
- Total debt before discounts and current maturities was $1,514.6m, including $289.0m drawn on the revolver; the balance-sheet carrying amount of long-term debt, net of stated adjustments and current maturities, was $1,489.8m. Debt includes convertible notes due 2023 and 2028, a term loan and revolver due 2026, and senior notes due 2027 and 2029.
- Patrick said available cash, operating cash generation, and credit availability were expected to meet working-capital and capital-expenditure needs for at least 12 months, excluding acquisitions. It was in compliance with credit covenants: secured net leverage ratio 0.54 versus a maximum 2.75, and fixed-charge coverage 6.73 versus a minimum 1.50.
Changes, outlook, and notable items
- Revenue and earnings rose substantially versus Q1 2021, alongside higher sales in every end market. Acquisitions completed in 2021 and 2022 contributed to growth; the filing does not quantify their total contribution to the year-over-year increase.
- Operating cash flow moved from positive to negative, primarily because of working-capital investment. Debt and net interest expense increased, reflecting acquisition-related borrowing and debt issued in 2021.
- Management provided no specific revenue or earnings guidance. It noted that quarterly results are not necessarily indicative of full-year results and described historical seasonality, while cautioning that recent demand and seasonal patterns may differ from prior years.
- Patrick adopted ASU 2020-06 for convertible-instrument accounting. Adoption increased the carrying value of convertible notes by $56.0m and diluted weighted-average shares by about 2.0m; it reduced Q1 diluted EPS by a net $0.39, according to the filing.
- The company recorded a $5.5m pretax gain from selling certain properties connected to the Lusher Street groundwater contamination matter; the gain reduced reported SG&A expense. Management said the remaining litigation and Superfund matter were not then expected to have a material adverse effect, but noted the EPA had not selected a final remedy and an adverse outcome could be material.
- Management identified the Russia-Ukraine war as a source of potential macroeconomic, commodity-price, supply-chain, cybersecurity, and capital-market risk. Raw-material cost volatility and the ability to pass cost changes on to customers also remain risks.
- Patrick repurchased 365,627 shares under its buyback program for $24.8m in Q1; approximately $86.8m remained authorized at quarter-end. Separately, it paid $8.3m in dividends.
Important facts for investors to verify
- Whether elevated demand, dealer inventory replenishment, and higher content per unit persist across RV, marine, MH, and industrial markets.
- How much reported growth and margin improvement is attributable to acquisitions, pricing, volume, and ongoing cost initiatives, and whether material-cost inflation or supply constraints reverse margin gains.
- Whether working-capital investment converts to operating cash flow and whether acquisition spending or shareholder returns require additional borrowing.
- Debt levels, variable-rate exposure, covenant headroom, and the impact of convertible-note dilution. A 100-basis-point rate increase was estimated to add approximately $4.3m in annual interest cost on the specified variable-rate borrowings.
- Developments in the Lusher Site/Superfund matter and the estimated liability for customer product recalls; the filing says a recall-related cost was accrued in Q4 2021 but provides no clear amount here.