Patrick Industries, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 29, 2020; comparative period ended March 31, 2019. Financial statements are unaudited. Patrick supplies manufacturing and distribution products to the recreational vehicle (RV), manufactured housing (MH), marine, and industrial markets.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net sales | $589.2 million | $608.2 million | Down 3% |
| Gross profit / margin | $109.5 million / 18.6% | $106.5 million / 17.5% | Up $3.0 million; margin +1.1 percentage points |
| Operating income / margin | $39.3 million / 6.7% | $35.8 million / 5.9% | Up 10%; margin +0.8 points |
| Net income | $21.2 million | $20.8 million | Up 2% |
| Diluted EPS | $0.91 | $0.90 | Up $0.01 |
| Operating cash flow | $13.2 million | $27.9 million | Down $14.7 million |
Higher gross and operating margins reflected earlier cost reductions, acquisition synergies, and lower commodity costs. Interest expense increased 17% to $10.5 million, primarily due to acquisition-related borrowings and the 7.5% senior notes issued in 2019; the effective tax rate rose to 26.4% from 22.3%.
Markets, segments, liquidity, and debt
- Sales by end market: RV $320.2 million, down 6%; marine $78.1 million, down 14%; MH $112.4 million, up 6%; industrial $78.6 million, up 14%. COVID-19 disruptions and lost shipping days affected all four markets.
- Manufacturing segment sales were $426.8 million, down 2%, and operating income was $45.7 million, up 3%. Distribution sales were $171.3 million, down 7%, and operating income was $10.0 million, up 20%.
- Cash and cash equivalents were $94.5 million at quarter-end, versus $139.4 million at December 31, 2019. Working capital movements, including a $66.5 million increase in receivables and an $18.2 million increase in inventories, weighed on operating cash flow.
- Long-term debt before discounts and financing costs totaled $705.0 million, including $135.0 million drawn on the revolver, a $97.5 million term loan, $300.0 million of senior notes, and $172.5 million of convertible notes. Debt arrangements did not materially change during the quarter.
- Available credit-facility borrowing capacity was $410.2 million. Patrick reported compliance with its covenants: actual leverage ratio 2.32 against a maximum 4.00; fixed-charge coverage ratio 6.53 against a minimum 1.50. Management expected cash, operating cash flow, and available borrowing capacity to cover anticipated needs for at least 12 months, excluding acquisitions.
Outlook, material developments, and risks
- Management said COVID-19 disrupted operations beginning in late March and continued into April and May, with lower customer production and purchases. It expected Q2 2020 to be the most significantly affected quarter of the year and anticipated material adverse effects on sales and profitability; the duration and magnitude were uncertain. No quantified earnings or revenue guidance was provided.
- The company temporarily suspended operations at certain facilities, furloughed affected employees with benefits, and took steps including labor and salary reductions, lower discretionary spending, working-capital reduction, and postponement of nonessential capital expenditures. It paused its share-repurchase program in response to the pandemic.
- Three acquisitions were completed in Q1 for initial consideration of $24.9 million; their quarter sales and operating income were immaterial. Investing cash outflow included $24.3 million for acquisitions.
- Patrick repurchased 456,155 shares for $15.6 million and paid $5.8 million in dividends during Q1. A March authorization provided for up to $50 million of repurchases, with approximately $43.5 million remaining at quarter-end.
- Management found goodwill and trademarks were not impaired as of March 29, 2020, but said future interim impairment testing may be required as the pandemic’s effects develop. Other key risks include demand declines, supply-chain interruption, customer credit and collections, liquidity and covenant pressure, and possible asset impairments.
Important facts for investors to verify
- How Q2 and subsequent demand, customer production, and shipping levels compare with management’s expectation that Q2 would be the most affected quarter.
- Whether operating cash flow and working-capital requirements stabilize, and whether the company preserves access to its credit facility while complying with covenants.
- The effects of cost actions, facility suspensions, and any further restructuring on margins and operating capacity.
- Whether prolonged economic disruption leads to impairment charges, higher credit losses, or further inventory reserves.
- How acquisition integration, debt-related interest costs, and the paused repurchase program affect capital allocation and per-share results.