Patrick Industries, Inc. — Q3 2022 Form 10-Q
Reporting period: Third quarter ended September 25, 2022; comparisons are with the quarter ended September 26, 2021. Financial figures below are in millions except per-share data.
Business context and results
Patrick Industries supplies products and components to recreational vehicle (RV), marine, manufactured housing (MH), and industrial markets through its Manufacturing and Distribution segments. The RV market remained its largest, representing 47% of Q3 sales, down from 60% a year earlier.
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $1,112.1 | $1,060.2 | $3,930.0 | $2,930.6 |
| Gross profit | $236.5 | $208.2 | $858.9 | $574.2 |
| Operating income | $92.8 | $93.3 | $428.5 | $257.0 |
| Net income | $58.8 | $57.4 | $288.0 | $163.9 |
| Diluted EPS | $2.43 | $2.45 | $11.78 | $7.01 |
| Gross margin | 21.3% | 19.6% | 21.9% | 19.6% |
| Operating margin | 8.3% | 8.8% | 10.9% | 8.8% |
Q3 sales increased 5%, but operating income declined 1%; higher gross margin was offset by increased operating expenses, including SG&A and amortization. Nine-month sales grew 34% and net income rose 76%, reflecting end-market demand, acquisitions, and improved gross margins. Basic EPS was $2.66 in Q3 versus $2.52; diluted EPS was lower year over year in part because adoption of the convertible-debt accounting standard increased diluted shares.
Markets, segments, and operating drivers
- Q3 sales by end market: RV decreased 17%; marine increased 57%; MH increased 30%; industrial increased 19%. Nine-month sales increased in all four markets: RV 26%, marine 64%, MH 39%, and industrial 26%.
- RV wholesale shipments fell 40% in Q3 year over year, which management associated with reduced OEM production following dealer inventory replenishment earlier in 2022. Marine retail sales also weakened, while dealer inventories were estimated to remain low.
- Q3 Manufacturing segment sales rose 7% and operating income rose 20%. Distribution sales declined 1% and operating income declined 13%, with supply constraints and material costs weighing on its gross margin.
- Management attributed improved gross margins principally to cost-reduction and automation efforts, better labor efficiency, and acquisition mix. Supply-chain constraints, commodity costs, and lower RV production remained offsets.
Cash flow, debt, and liquidity
- Nine-month operating cash flow was $229.8, versus $147.4 a year earlier. Capital expenditures were $63.4; acquisition spending was $152.9; investing cash outflow was $208.9.
- Cash declined to $53.3 from $122.8 at year-end 2021. At September 25, total debt was approximately $1,356.9 gross, including $172.5 of 1.00% convertible notes due 2023; reported debt net of discounts and financing costs was $1,341.0 including current maturities.
- Credit-facility availability was $432.1, after a temporary $202.5 reserve related to settlement of the 2023 convertible notes. The credit facility was amended to increase its size to $925 and extend maturity to 2027; borrowing rates transitioned from LIBOR to SOFR.
- Management said cash, operating cash generation, and available credit were expected to cover working capital, capital expenditures, and the 2023 notes obligation for at least 12 months, excluding acquisitions. The company reported compliance with its financial covenants.
- Nine-month financing cash outflow was $90.5, including $47.0 of buybacks and $23.0 of dividends. The company reported $62.9 remaining under its $100 buyback authorization.
Outlook, risks, and unusual items
The filing provides no quantified revenue or earnings guidance. Management emphasized that results depend on market demand, dealer inventories, production levels, and seasonal patterns; it also stated that quarterly results are not necessarily indicative of full-year results. Risks discussed include inflation and supply-chain disruption associated with the Russia-Ukraine war, commodity-price volatility, and the potential for variable-rate borrowing costs to rise. A 100-basis-point increase in SOFR was estimated to add approximately $2.8 of annual interest expense, based on period-end variable-rate borrowings.
- The company completed three acquisitions in the first nine months of 2022 for approximately $152.2 cash consideration. Those acquisitions contributed $38.0 of Q3 sales and $6.9 of Q3 operating income.
- A $5.5 pretax gain on the January 2022 sale of certain properties was recorded in SG&A. The properties were associated with a groundwater contamination matter; the purchaser agreed to indemnify the company concerning the divested properties. Management noted that the EPA had not selected a final remedy for the wider site.
- Acquisition-related contingent consideration had an estimated fair value of $10.7 at quarter-end. The company recorded $3.0 of non-cash increases to those liabilities during the nine months.
- Adoption of ASU 2020-06 increased diluted shares by approximately 2.1 million and reduced diluted EPS by $0.20 for Q3 and $1.01 for the nine-month period, as reported by the company.
- Management said RV customer recalls involving third-party products would result in the company bearing a portion of costs, but did not expect a material adverse effect. It also said other legal claims were not expected to materially affect results, while noting litigation outcomes are uncertain.
Key facts for investors to verify
- Whether RV production and dealer inventories stabilize, and how changes in RV demand compare with growth in marine, MH, and industrial markets.
- Whether gross-margin improvements from automation and labor efficiency persist amid material-cost, supply-chain, and overhead pressures.
- The company’s ability to manage debt and refinance or settle the 1.00% convertible notes due 2023, including the effect of SOFR rates and available revolver capacity.
- Acquisition integration, purchase-price allocation changes, contingent consideration payments, and the contribution of acquired businesses to earnings and cash flow.
- Developments in the Superfund Site matter and customer recall obligations, as well as any related changes to recorded estimates.