Patrick Industries, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 28, 2021, compared with the three months ended March 29, 2020. Patrick supplies products and services to recreational vehicle (RV), marine, manufactured housing (MH), and industrial markets through its Manufacturing and Distribution segments. Figures below are in millions of dollars unless noted.
Financial performance
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Net sales | $850.5 | $589.2 | +44.3% |
| Gross profit / margin | $161.5 / 19.0% | $109.5 / 18.6% | Margin +0.4 percentage points |
| Operating income / margin | $68.5 / 8.1% | $39.3 / 6.7% | +74.3% |
| Net income | $47.5 | $21.2 | +124.3% |
| Diluted EPS | $2.04 | $0.91 | More than doubled |
| Operating cash flow | $50.3 | $13.2 | +$37.1 |
| Capital expenditures | $14.2 | $7.6 | +$6.7 |
Sales growth was led by RV (+57%) and marine (+75%); industrial sales increased 16% in the MD&A comparison, and MH sales increased 7%. The prior-year quarter included COVID-19-related production shutdowns in end markets in the second half of March 2020. Segment sales rose 44% in Manufacturing and 47% in Distribution. Segment operating income was $78.4 million and $21.2 million, respectively; consolidated operating income also reflects $19.2 million of unallocated corporate expenses and $11.9 million of amortization.
Gross margin improved as a result of cost-reduction and automation efforts, production-volume efficiencies, and acquisition-related synergies, partly offset by higher labor and certain commodity costs. Operating expenses rose in dollars, but warehouse and delivery expenses fell to 3.5% of sales from 4.2%, while SG&A was 6.0% versus 6.1%.
Cash, debt, and liquidity
- Cash was $6.2 million at March 28, 2021, down from $44.8 million at year-end 2020. Operating cash flow was $50.3 million; investing used $45.0 million, including $28.9 million for acquisitions and $14.2 million for capital expenditures. Financing used $43.8 million, including $27.0 million of net revolver repayments and $6.6 million of dividends paid.
- Debt outstanding was $813.0 million before unamortized discounts and financing costs, versus $840.0 million at December 31, 2020. The balance sheet reported $793.3 million of current and long-term debt net of these items. Long-term debt includes $172.5 million of 1.0% convertible notes due 2023, a $92.5 million term loan, $248.0 million drawn on the revolver, and $300.0 million of 7.5% senior notes due 2027.
- Unused availability under the credit facility was $296.8 million. The company reported compliance with its financial covenants: actual leverage ratio 2.30 versus a maximum of 4.00, and fixed-charge coverage ratio 5.84 versus a minimum of 1.50. Management expected cash, operating cash flow, and available borrowings to cover anticipated working capital and capital expenditure needs for at least 12 months, excluding acquisitions.
- Receivables increased to $212.0 million from $132.5 million at year-end, and inventory increased to $345.2 million from $312.8 million, contributing to working-capital demands.
Outlook, risks, and notable items
- Management described positive momentum in RV and marine markets, citing strong consumer demand and dealer inventories it believed were historically low. It gave no numerical earnings or revenue guidance. The filing cautions that first-quarter results are not necessarily indicative of full-year results.
- Management identified possible exposure to commodity-price volatility, labor and input-cost increases, changing demand and dealer inventories, seasonality, and COVID-19-related changes in consumer patterns. The company said commodity volatility had not materially affected reported results, but cautioned that cost changes may not be passed through to customers fully or promptly. A 100-basis-point increase in benchmark rates was estimated to raise annual interest cost by about $1.4 million on the specified unhedged variable-rate borrowings.
- The effective tax rate was 17.1%, compared with 26.4% a year earlier. The 2021 rate included a $5.7 million benefit from excess tax benefits on share-based compensation, a significant contributor to the year-over-year earnings increase.
- Four acquisitions were completed in Q1, including Sea-Dog; they contributed $5.4 million of sales and immaterial operating income. Aggregate cash consideration was approximately $29.5 million. Estimated contingent consideration liabilities were $6.9 million, with potential aggregate payments capped at $14.5 million.
- After quarter-end, the company completed acquisitions of SeaDek and Alpha Systems. On April 20, 2021, it issued $350 million of 4.75% senior notes due 2029 and amended its credit facility to $700 million, including a $550 million revolver and $150 million term loan, maturing in April 2026. Proceeds were intended partly to repay existing borrowings and fund general purposes, including subsequent acquisitions.
- The board-authorized repurchase program was not used for open-market repurchases in Q1. Shares withheld to cover employee tax obligations were recorded separately; approximately $36.0 million remained under the authorization at quarter-end. The company reported no material changes to previously disclosed risk factors and stated that disclosure controls were effective.
Key facts for investors to verify
- Whether RV and marine demand, dealer inventory levels, and elevated sales growth persist beyond the unusually weak COVID-affected comparison quarter.
- How commodity, labor, and other input-cost inflation affects gross margins and the company’s ability and timing to pass through price changes.
- The cash-flow and leverage effects of acquisitions, including SeaDek and Alpha Systems, and the post-quarter debt issuance and credit-facility refinancing.
- How much of reported earnings growth is sustainable after considering the $5.7 million share-based compensation tax benefit and acquisition-related amortization and financing costs.
- Working-capital needs, particularly receivables and inventory, and continued compliance with credit-facility covenants.