PATRICK INDUSTRIES INC 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand the results of operations, financial condition and cash flows of Patrick Industries, Inc. This MD&A should be read in conjunction with the Company’s Condensed Consolidated Financial Statements and Notes thereto included in Item 1 of this Report. In addition, this MD&A contains certain statements relating to future results which are forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. See “Information Concerning Forward-Looking Statements” on page 25 of this Report. The Company undertakes no obligation to update these forward-looking statements. 18 OVERVIEW OF MARKETS AND RELATED INDUSTRY PERFORMANCE First Quarter 2024 Financial Overview Recreational Vehicle ("RV") Industry The RV industry is our primary market and comprised 45% and 41% of the Company’s consolidated net sales in the first quarter ended March 31, 2024 and April 2, 2023, respectively. Net sales to the RV industry increased 15% in the first quarter of 2024 compared to the prior year period. According to the RV Industry Association ("RVIA"), RV wholesale shipments increased 9% in the first quarter of 2024 to approximately 85,900 units compared to approximately 78,600 units in the first quarter of 2023. While we estimate RV industry retail unit sales for first quarter of 2024 decreased approximately 14% compared to the first quarter of 2023, we estimate that industry retail sales exceeded wholesale unit shipments in the first quarter of 2024 as RV OEMs maintained lower production volumes. Marine Industry Net sales to the marine industry, which represented approximately 17% and 26% of the Company's consolidated net sales in the first quarter ended March 31, 2024 and April 2, 2023, respectively, decreased 35% in the first quarter of 2024 compared to the prior year period. The decrease in net sales was in line with the decrease in wholesale powerboats volumes. Our marine revenue is generally correlated to marine industry wholesale powerboat unit shipments, which, according to Company estimates based on data published by the National Marine Manufacturers Association ("NMMA"), decreased 34% for the first quarter of 2024 compared to the prior year period. We estimate that marine industry retail powerboat unit sales decreased 10% in the first quarter of 2024 compared to the prior year period primarily due to the current macroeconomic environment faced by the end consumer, such as economic uncertainty and higher interest rates. Powersports Industry Through acquisitions the past two years, the Company entered the powersports end market. Powersports is a category of motorsports which includes vehicles such as motorcycles, all-terrain vehicles (ATV's), utility vehicles (UTV's), snowmobiles, scooters, golf carts and other personal transportation vehicles, and other related categories. Previously, our sales to the powersports end market were included in the Company’s marine end market sales. Effective with the first quarter of 2024, powersports net sales are being reported separately after the January 2024 acquisition of Sportech, LLC (“Sportech”), as discussed in Note 5 "Acquisitions" of the Notes to Condensed Consolidated Financial Statements. Net sales to the powersports industry increased 152% in the first quarter of 2024 compared to the prior year period, representing 9% and 4% of the Company's consolidated net sales in the respective periods. The increase in net sales is primarily attributable to the acquisition of Sportech. Manufactured Housing ("MH") Industry Net sales to the MH industry, which represented 16% and 15% of the Company’s consolidated net sales in the first quarter ended March 31, 2024 and April 2, 2023, respectively, increased 17% in the first quarter of 2024 compared to the prior year period. Based on industry data from the Manufactured Housing Institute, MH industry wholesale unit shipments increased 13% in the first quarter of 2024 compared to the prior year period primarily driven by OEMs increasing production from significantly reduced levels in 2023 in anticipation of a recovery in demand. Industrial Market The industrial market is comprised primarily of kitchen cabinet, countertop, hospitality, retail and commercial fixtures, and office and household furniture markets and regional distributors. Net sales to this market represented 13% of our consolidated net sales in the first quarter ended March 31, 2024 and April 2, 2023, and decreased 8% in the first quarter ended March 31, 2024 compared to the prior year period. Overall, our revenues in these markets are focused on residential and multifamily housing, hospitality, high-rise housing and office, commercial construction and institutional 19 furniture markets. We estimate that, in general, approximately 70% to 80% of our industrial business is directly tied to the residential housing market, with the remaining 20% to 30% tied to the non-residential and commercial markets. According to the U.S. Census Bureau, combined new housing starts increased 1% in the first quarter of 2024 compared to the prior year quarter, with single-family housing starts increasing 27%, and multifamily housing starts decreasing 37% for the same period. Our industrial products are generally among the last components installed in new unit construction and as such our related sales typically trail new housing starts by four to six months. RESULTS OF OPERATIONS First Quarter Ended March 31, 2024 Compared to 2023 The following table sets forth the percentage relationship to net sales of certain items on the Company’s Condensed Consolidated Statements of Income. First Quarter Ended ($ in thousands) March 31, 2024 April 2, 2023 Amount Change % Change Net sales $ 933,492 100.0 % $ 900,100 100.0 % $ 33,392 4 % Cost of goods sold 728,637 78.1 % 705,856 78.4 % 22,781 3 % Gross profit 204,855 21.9 % 194,244 21.6 % 10,611 5 % Warehouse and delivery expenses 37,449 4.0 % 35,845 4.0 % 1,604 4 % Selling, general and administrative expenses 85,246 9.1 % 82,401 9.2 % 2,845 3 % Amortization of intangible assets 22,818 2.4 % 19,764 2.2 % 3,054 15 % Operating income 59,342 6.4 % 56,234 6.2 % 3,108 6 % Interest expense, net 20,090 2.2 % 18,484 2.1 % 1,606 9 % Income taxes 4,159 0.4 % 7,577 0.8 % (3,418) (45) % Net income $ 35,093 3.8 % $ 30,173 3.4 % $ 4,920 16 % Net Sales . Net sales in the first quarter of 2024 increased $33.4 million, or 4%, to $933.5 million compared to $900.1 million in the first quarter of 2023. Net sales in the first quarter of 2024 increased as a result of higher wholesale unit shipments in our RV and housing end markets and market share gains and the revenue contribution of acquisitions completed in the first quarter of 2024, partially offset by lower wholesale shipments in our marine end market and lower pricing passed on to our customers to reflect changes in certain commodity costs. The Company's RV market sales increased $54.0 million, or 15%, in the quarter resulting from an increase in production by our RV OEM customers. Marine market sales decreased $82.7 million, or 35%, attributable to a 34% wholesale shipment decline compared to the prior year quarter. Powersports market sales increased $49.9 million, or 152%, compared to the prior year period, primarily due to the acquisition of Sportech. MH market sales increased $22.7 million, or 17% compared to the prior year period, primarily due to a 13% increase in industry wholesale unit volumes. Industrial market sales decreased $10.6 million, or 8% when compared to the prior year quarter, which is in line with housing start trends in the prior two quarters given the timing at which our products are installed in relation to housing starts. Revenue attributable to acquisitions completed in the first three months of 2024 was $58.1 million in the first quarter of 2024. There were no acquisitions completed in the first three months of 2023. The Company’s RV content per wholesale unit (on a trailing twelve-month basis) for the first quarter of 2024 decreased approximately 9% to $4,859 compared to $5,349 for the first quarter of 2023 . Marine powerboat content per wholesale unit (on a trailing twelve-month basis) for the first quarter of 2024 decreased appro ximately 9% to an estim ated $4,049 compared to $4,433 for the first quarter of 2023. MH content per wholesale unit (on a trailing twelve-month b asis) for the first quarter of 2024 increased approximately 1% to $6,422 compared to $6,366 for the first quarter of 2023 . The decreases in content per wholesale unit in the RV market and in the marine powerboat primarily reflect the impact of lower pricing. The increase in content per wholesale unit in the MH markets primarily reflects product mix shifts by certain OEM customers, market share gains, and contributions from businesses acquired in 2022 and 2023. 20 Cost of Goods Sold. Cost of goods sold increased $22.7 million, or 3%, to $728.6 million in the first quarte r of 2024 compared to $705.9 million in the first quarter of 2023. As a percentage of net sales, cost of goods sold decreased 30 basis points during the first quarter of 2024 to 78.1% compared to 78.4% in the prior year period. Cost of goods sold as a percentage of net sales decreased in the first quarter of 2024 primarily as a result of a 70 basis point decrease in material costs as a percentage of net sales and a 50 basis point decrease in labor as a percentage of net sales, partially offset by a 80 basis point increase in overhead as a percentage of net sales. In general, the Company's cost of goods sold percentage can be impacted from quarter-to-quarter by demand changes in certain market sectors that can result in fluctuating costs of certain raw materials and commodity-based components that are utilized in production. Gross Profit. Gross profit increased $10.7 million, or 5%, to $204.9 million in the first quarter of 2024 compared to $194.2 million in the prior year period. As a percentage of net sales, gross profit increased 30 basis points to 21.9% in the first quarter of 2024 compared to 21.6% in the prior year period. The increase in gross profit as a percentage of net sales in the first quarter of 2024 compared to the same period in 2023 reflects the items discussed above in "Cost of Goods Sold". Warehouse and Delivery Expenses . Warehouse and delivery expenses increased $1.6 million, or 4%, to $37.4 million in the first quarter of 2024 compared to $35.8 million in the first quarter of 2023. As a percentage of net sales, warehouse and delivery expenses were 4.0% in both periods presented. Selling, General and Administrative ("SG&A") Expenses . SG&A expenses increased $2.8 million, or 3%, to $85.2 million in the first quarter of 2024 compared to $82.4 million in the prior year quarter. As a percentage of net sales, SG&A expenses were 9.1% in the first quarter of 2024 compared to 9.2% in the first quarter of 2023. The increase in SG&A expenses in the first quarter of 2024 compared to 2023 is primarily attributed to the $5.0 million of transaction costs associated with the acquisition of Sportech, which more than offset a $2.2 million decrease in other SG&A expenses. Amortization of Intangible Assets. Amortization of intangible assets increased $3.0 million, or 15%, to $22.8 million in the first quarter of 2024 compared to $19.8 million in the prior year quarter. The increase in the first quarter of 2024 compared to the prior year period primarily reflects the impact of the Sportech acquisition as well as the acquisitions completed in 2023. Operating Income. Operating income increased $3.1 million, or 6%, to $59.3 million in the first quarter of 2024 compared to $56.2 million in 2023. As a percentage of net sales, operating income increased 20 basis points to 6.4% in the first quarter of 2024 compared to 6.2% in the same period in 2023. The increase in operating income and operating margin percentage is primarily attributable to the items discussed above. Interest Expense, Net. Interest expense increased $1.6 million, or 9%, to $20.1 million in the first quarter of 2024 compared to $18.5 million in the prior year period. This increase primarily reflects higher debt levels and higher interest rates on our term loan and revolver balances. Income Taxes. Income tax expense decreased $3.4 million in the first quarter of 2024 to $4.2 million compared to $7.6 million in the prior year period. The decrease in income tax expense is driven primarily by the impact of the recognition of excess tax benefits on share-based compensation that was recorded as a reduction to income tax expense in the amount of $6.0 million compared to $2.3 million excess tax benefits on share-based compensation in the first quarter of 2023. 21 Use of Financial Metrics Our MD&A includes financial metrics, such as RV, marine and MH content per unit, which we believe are important measures of the Company's business performance. Content per unit metrics are generally calculated using our market sales divided by Company estimates of industry unit volume, which are derived from third-party industry data. These metrics should not be considered alternatives to U.S. GAAP. Our computations of content per unit may differ from similarly titled measures used by others. These metrics should not be considered in isolation or as substitutes for an analysis of our results as reported under U.S. GAAP. SEGMENT REPORTING The Company's reportable segments, Manufacturing and Distribution, are based on its method of internal reporting. The Company regularly evaluates the performance of the Manufacturing and Distribution segments and allocates resources to them based on a variety of indicators including sales and operating income. The Company does not measure profitability at the customer end market (RV, marine, powersports, MH and industrial) level. First Quarter Ended March 31, 2024 Compared to 2023 General In the discussion that follows, sales attributable to the Company’s reportable segments include intersegment sales and gross profit includes the impact of intersegment operating activity. The table below presents information about the sales, gross profit and operating income of the Company’s reportable segments. A reconciliation of consolidated operating income is presented in Note 11 "Segment Information" of the Notes to Condensed Consolidated Financial Statements. First Quarter Ended ($ in thousands) March 31, 2024 April 2, 2023 Amount Change % Change Sales Manufacturing $ 714,510 $ 708,815 $ 5,695 1% Distribution $ 238,502 $ 210,159 $ 28,343 13% Gross Profit Manufacturing $ 156,664 $ 155,084 $ 1,580 1% Distribution $ 50,057 $ 44,077 $ 5,980 14% Operating Income Manufacturing $ 87,450 $ 87,165 $ 285 —% Distribution $ 23,720 $ 18,307 $ 5,413 30% Manufacturing Sales. Sales increased $5.7 million, or 1%, to $714.5 million in the first quarter of 2024 compared to $708.8 million in the prior year quarter. The manufacturing segment accounted for approximately 75% and 77% of the Company’s sales for the first quarter of 2024 and 2023, respectively. The sales increase in the first quarter of 2024 compared to 2023 was attributed to sales increases in the Company's RV, powersports and MH end markets, partially off by sales in the marine and industrial end markets. For the first quarter of 2024 compared to the same prior year period, the Company's RV end market sales increased 16%, the marine end market sales decreased 36%, the powersports end market sales increased 170%, the MH end market sales increased 8% and industrial end market sales decreased 7%. Net sales attributable to acquisitions completed in the first quarter of 2024 were approximately $58.1 million, and there were no acquisitions completed in the first quarter of 2023. 22 Gross Profit . Gross profit increased $1.6 million, or 1%, to $156.7 million in the first quarter of 2024 compared to $155.1 million in the first quarter of 2023. As a percentage of sales, gross profit was 21.9% in the first quarter of 2024 and 2023. Gross profit as a percentage of sales was unchanged in the first quarter of 2024 compared to the same period in 2023 due to a decrease in manufacturing material cost as a percentage of sales, substantially offset by increases in manufacturing overhead and labor costs as a percentage of sales. Operating Income. Operating income increased $0.3 million to $87.5 million in the first quarter of 2024 compared to $87.2 million in the prior year quarter. The overall increase in operating income in the first quarter of 2024 primarily reflects the items discussed above. Distribution Sales. Sales increased $28.3 million, or 13%, to $238.5 million in the first quarter of 2024 compared to $210.2 million in the prior year quarter. This segment accounted for approximately 25% and 23% of the Company’s sales for the first quarter of 2024 and 2023, respectively. The sales increase in the first quarter of 2024 compared to the first quarter of 2023 was attributed to a 13% increase in our RV end market sales and a 25% increase in MH end market sales as a result of increases in industry wholesale unit shipments in the respective industries, partially offset by a 19% decrease in industrial end market sales, and a 14% decrease in marine end market sales. Gross Profit. Gross profit increased $6.0 million, or 14%, to $50.1 million in the first quarter of 2024 compared to $44.1 million in the first quarter of 2023. As a percentage of sales, gross profit was 21.0% in both periods presented, as a decrease in distribution labor as a percentage of sales, attributable to a decrease in utilization of outsourced labor, was substantially offset by increased material costs. Operating Income. Operating income increased $5.4 million, or 30%, to $23.7 million in the first quarter of 2024 compared to $18.3 million in the prior year quarter. The increase in operating income in the first quarter of 2024 primarily reflects the impact of increased sales and the items discussed above. LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of liquidity are cash flows from operations, which includes selling its products and collecting receivables, available cash reserves and borrowing capacity available under the 2021 Credit Facility as discussed in Note 8 "Debt" of the Notes to Condensed Consolidated Financial Statements. Our liquidity at March 31, 2024 consisted of cash and cash equivalents of $17.6 million and $395.0 million of availability under the 2021 Credit Facility. As of March 31, 2024, the Company's existing cash and cash equivalents, cash generated from operations, and available borrowings under its 2021 Credit Facility are expected to be sufficient to meet anticipated cash needs for working capital and capital expenditures for at least the next 12 months, exclusive of any acquisitions, based on its current cash flow budgets and forecast of short-term and long-term liquidity needs. Principal uses of cash are to support working capital demands, meet debt service requirements and support the Company's capital allocation strategy, which includes acquisitions, capital expenditures, dividends and repurchases of the Company’s common stock, among others. Working capital requirements vary from period to period depending on manufacturing volumes primarily related to the RV, marine, powersports, MH and industrial markets we serve, the timing of deliveries, and the payment cycles of customers. In the event that operating cash flow is inadequate and one or more of the Company's capital resources were to become unavailable, the Company would seek to revise its operating strategies accordingly. The Company will continue to assess its liquidity position and potential sources of supplemental liquidity in view of operating performance, current economic and capital market conditions, and other relevant circumstances. 23 In January 2024, the Company utilized available borrowing capacity under the Revolver due 2027 and cash on hand to fund its acquisition of Sportech, as discussed in Note 5 "Acquisitions" of the Notes to Condensed Consolidated Financial Statements. As of and for the reporting period ended March 31, 2024, the Company was in compliance with its financial covenants as required under the terms of its 2021 Credit Agreement. The required maximum consolidated secured net leverage ratio and the required minimum consolidated fixed charge coverage ratio, as such ratios are defined in the 2021 Credit Agreement, compared to the actual amounts as of March 31, 2024 and for the fiscal period then ended are as follows: Required Actual Consolidated secured net leverage ratio (12-month period) 2.75 0.95 Consolidated fixed charge coverage ratio (12-month period) 1.50 3.10 In addition, as of March 31, 2024, the Company's consolidated total net leverage ratio (12-month period) was 2.81, which is used to determine the applicable borrowing margin under the 2021 Credit Agreement. Cash Flows Operating Activities Cash flows from operating activities are one of the Company's primary sources of liquidity, representing the net income the Company earned in the reported periods, adjusted for non-cash items and changes in operating assets and liabilities. Net cash provided by operating activities was $35.2 million in the first three months of 2024 compared to a $1.0 million use of cash in the first three months of 2023. The change in operating cash flows is primarily attributable to a $27.4 million decrease in cash used for working capital compared to the prior year period and a $4.9 million increase in net income compared to the first quarter of 2023. Investing Activities Net cash used in investing activities increased $347.1 million to $370.7 million in the first quarter of 2024 compared to $23.6 million in the first quarter of 2023 due to an increase in cash used in business acquisitions, which were $329.6 million in the first quarter of 2024, primarily due to the acquisition of Sportech compared to $0.5 million in the first quarter of 2023. Financing Activities Net cash provided by financing activities increased $309.2 million to $341.7 million in the first quarter of 2024 compared to $32.5 million the first quarter of 2023 primarily due to an increase in cash provided from net borrowings of $317.8 million under the Revolver due 2027 to fund the acquisition of Sportech. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS See Note 1, “Basis of Presentation and Significant Accounting Policies” to the accompanying Condensed Consolidated Financial Statements in Item 1. CRITICAL ACCOUNTING POLICIES There have been no material changes to our critical accounting policies which are summarized in the MD&A in our Annual Report on Form 10-K for the year ended December 31, 2023 filed with the SEC on February 29, 2024. OTHER Seasonality Manufacturing operations in the RV, marine and MH industries historically have been seasonal and at their highest levels when the weather is moderate. Accordingly, the Company’s sales and profits had generally been the highest in the 24 second quarter and lowest in the fourth quarter. Seasonal industry trends in the past several years have included the impact related to the addition of major RV manufacturer open houses for dealers in the August-September timeframe and marine open houses in the December-February timeframe, resulting in dealers delaying certain restocking purchases until new product lines are introduced at these shows. In addition, recent seasonal industry trends have been, and future trends may be, different than in prior years due to volatile economic conditions, interest rates, access to financing, cost of fuel, national and regional economic conditions and consumer confidence on retail sales of RVs and marine units and other products for which the Company sells its components, as well as fluctuations in RV and marine dealer inventories, increased volatility in demand from RV and marine dealers, the timing of dealer orders, and from time to time, the impact of severe weather conditions on the timing of industry-wide wholesale shipments. INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS The Company makes forward-looking statements with respect to financial condition, results of operations, business strategies, operating efficiencies or synergies, competitive position, growth opportunities for existing products, plans and objectives of management, markets for the common stock of Patrick Industries, Inc. and other matters from time to time and desires to take advantage of the “safe harbor” which is afforded such statements under the Private Securities Litigation Reform Act of 1995 when they are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the forward-looking statements. The statements contained in the foregoing “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, as well as other statements contained in this quarterly report and statements contained in future filings with the Securities and Exchange Commission (“SEC”), publicly disseminated press releases, quarterly earnings conference calls, and statements which may be made from time to time in the future by management of the Company in presentations to shareholders, prospective investors, and others interested in the business and financial affairs of the Company, which are not historical facts, are forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those set forth in the forward-looking statements. Any projections of financial performance or statements concerning expectations as to future developments should not be construed in any manner as a guarantee that such results or developments will, in fact, occur. There can be no assurance that any forward-looking statement will be realized or that actual results will not be significantly different from those set forth in such forward-looking statement. The Company does not undertake to publicly update or revise any forward-looking statements. Information about certain risks that could affect our business and cause actual results to differ from those expressed or implied in the forward-looking statements are contained in the section entitled “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, and in the Company's Forms 10-Q for subsequent quarterly periods, which are filed with the SEC and are available on the SEC’s website at www.sec.gov.