UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
 
( X ) ☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2019March 29, 2020
OR
( ) ☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ……………… to ………………
 
Commission file number 000-03922
 
PATRICK INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
INDIANAIndiana35-1057796
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
                                                             
107 WEST FRANKLIN STREET,P.O. Box 638
ELKHART, IN IN46515
(Address                  (Address of principal executive offices) (ZIP         (ZIP Code)
 ((574) 574)294-7511
(Registrant’s telephone number, including area code)
         (Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes [X]☒ No [ ]☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [X]☒ No [ ]☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.                             
Large accelerated filer [X]☒Accelerated filer [ ] 
☐
Non-accelerated filer [ ]
☐
Smaller reporting company [ ] ☐Emerging growth company [ ]☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).         Yes [ ]☐ No [X]☒
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading SymbolName of each exchange on which registered
 Common Stock, no par value PATK The NASDAQ Global Stock Market
As of April 26, 2019,24, 2020, there were 23,849,64423,504,223 shares of the registrant’s common stock outstanding. 



PATRICK INDUSTRIES, INC.

 TABLE OF CONTENTS 

 Page No.
PART I. FINANCIAL INFORMATION 
  
ITEM 1. FINANCIAL STATEMENTS (Unaudited) 
  
Condensed Consolidated Statements of Financial Position
    March 31, 2019 and December 31, 2018
3
Condensed Consolidated Statements of Income
    First Quarter Endedended March 29, 2020 and March 31, 2019 and April 1, 2018
43
  
Condensed Consolidated Statements of Comprehensive Income
    First Quarter Endedended March 29, 2020 and March 31, 2019
4
Condensed Consolidated Statements of Financial Position
    March 29, 2020 and April 1, 2018December 31, 2019
5
Condensed Consolidated Statements of Cash Flows
    First Quarter ended March 29, 2020 and March 31, 2019
6
  
Condensed Consolidated Statements of Shareholders' Equity
    First Quarter Endedended March 29, 2020 and March 31, 2019 and April 1, 2018
6
Condensed Consolidated Statements of Cash Flows
    First Quarter Ended March 31, 2019 and April 1, 2018
7
  
Notes to Condensed Consolidated Financial Statements
8
  
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
2618
  
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
3625
  
ITEM 4. CONTROLS AND PROCEDURES
3726
  
PART II. OTHER INFORMATION 
  
ITEM 1A. RISK FACTORS
3827
  
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
3828
  
ITEM 6. EXHIBITS
3929
  
SIGNATURES
4030


PART 1: FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS
PATRICK INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITIONINCOME (Unaudited)

 
As of
(thousands)
March 31, 2019
December 31, 2018
ASSETS
 
 
Current Assets
 
 
    Cash and cash equivalents
$8,454

$6,895
    Trade receivables, net
137,318

82,499
    Inventories
264,994

272,898
    Prepaid expenses and other
17,757

22,875
        Total current assets
428,523

385,167
Property, plant and equipment, net
180,331

177,145
Operating lease right-of-use assets 79,868
 —
Goodwill
292,113

281,734
Intangible assets, net
370,233

382,982
Deferred financing costs, net
3,617

3,688
Other non-current assets
499

515
        TOTAL ASSETS $1,355,184

$1,231,231
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
Current Liabilities
 
 
    Current maturities of long-term debt
$10,000

$8,750
    Current operating lease liabilities 25,874
 —
    Accounts payable
124,640

89,803
    Accrued liabilities
57,292

59,202
        Total current liabilities
217,806

157,755
Long-term debt, less current maturities, net
613,599

621,751
Long-term operating lease liabilities 54,309
 —
Deferred tax liabilities, net
23,624

22,699
Other long-term liabilities
16,757

20,272
        TOTAL LIABILITIES
926,095

822,477
SHAREHOLDERS’ EQUITY
 
 
Common stock
161,949

161,436
Additional paid-in-capital
25,124

25,124
Accumulated other comprehensive loss
(3,707)
(2,680)
Retained earnings
245,723

224,874
        TOTAL SHAREHOLDERS’ EQUITY
429,089

408,754
        TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
$1,355,184

$1,231,231


First Quarter Ended
(thousands except per share data)
March 29, 2020
March 31, 2019
NET SALES
$589,232

$608,218
Cost of goods sold
479,751

501,670
GROSS PROFIT
109,481

106,548
Operating Expenses:
 
 
  Warehouse and delivery
24,732

24,041
  Selling, general and administrative
35,869

37,692
  Amortization of intangible assets
9,601

8,989
    Total operating expenses
70,202

70,722
OPERATING INCOME
39,279

35,826
Interest expense, net
10,492

8,983
Income before income taxes
28,787

26,843
Income taxes
7,600

5,994
NET INCOME
$21,187

$20,849





 
BASIC NET INCOME PER COMMON SHARE
$0.92

$0.90
DILUTED NET INCOME PER COMMON SHARE
$0.91

$0.90





 
Weighted average shares outstanding – Basic
23,016

23,039
Weighted average shares outstanding – Diluted
23,267

23,248
     
See accompanying Notes to Condensed Consolidated Financial Statements.





PATRICK INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

  First Quarter Ended
(thousands) March 29, 2020 March 31, 2019
NET INCOME $21,187
 $20,849
Other comprehensive (loss) income, net of tax:    
Unrealized (loss) gain of hedge derivatives (3,006) (1,054)
Other (37) 27
Total other comprehensive loss (3,043) (1,027)
COMPREHENSIVE INCOME $18,144
 $19,822

See accompanying Notes to Condensed Consolidated Financial Statements.



PATRICK INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOMEFINANCIAL POSITION (Unaudited)



First Quarter Ended
(thousands except per share data)
March 31, 2019
April 1, 2018
NET SALES
$608,218

$551,832
Cost of goods sold
501,670

454,078
GROSS PROFIT
106,548

97,754
Operating Expenses:
 
 
  Warehouse and delivery
24,041

17,028
  Selling, general and administrative
37,692

31,841
  Amortization of intangible assets
8,989

7,127
    Total operating expenses
70,722

55,996
OPERATING INCOME
35,826

41,758
Interest expense, net
8,983

4,378
Income before income taxes
26,843

37,380
Income taxes
5,994

7,312
NET INCOME
$20,849

$30,068







BASIC NET INCOME PER COMMON SHARE
$0.90

$1.22
DILUTED NET INCOME PER COMMON SHARE
$0.90

$1.20







Weighted average shares outstanding - Basic
23,039

24,740
Weighted average shares outstanding - Diluted
23,248

25,110
     
See accompanying Notes to Condensed Consolidated Financial Statements.
 
As of
(thousands)
March 29, 2020
December 31, 2019
ASSETS
 
 
Current Assets
 
 
    Cash and cash equivalents
$94,523

$139,390
    Trade and other receivables, net
154,571

87,536
    Inventories
273,545

253,870
    Prepaid expenses and other
26,275

36,038
        Total current assets
548,914

516,834
Property, plant and equipment, net
189,129

180,849
Operating lease right-of-use assets 98,291
 93,546
Goodwill
325,916

319,349
Intangible assets, net
356,633

357,014
Deferred financing costs, net
2,868

2,978
Other non-current assets
407

423
        TOTAL ASSETS $1,522,158

$1,470,993
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
Current Liabilities
 
 
    Current maturities of long-term debt
$5,000

$5,000
    Current operating lease liabilities 28,168
 27,694
    Accounts payable
138,146

96,208
    Accrued liabilities
64,889

58,033
        Total current liabilities
236,203

186,935
Long-term debt, less current maturities, net
672,235

670,354
Long-term operating lease liabilities 70,831
 66,467
Deferred tax liabilities, net
26,546

27,284
Other long-term liabilities
20,967

22,472
        TOTAL LIABILITIES
1,026,782

973,512
SHAREHOLDERS’ EQUITY
 
 
Common stock
170,626

172,662
Additional paid-in-capital
24,534

25,014
Accumulated other comprehensive loss
(8,741)
(5,698)
Retained earnings
308,957

305,503
        TOTAL SHAREHOLDERS’ EQUITY
495,376

497,481
        TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
$1,522,158

$1,470,993


See accompanying Notes to Condensed Consolidated Financial Statements.



PATRICK INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOMECASH FLOWS (Unaudited)

  First Quarter Ended 
(thousands) March 31, 2019 April 1, 2018 
NET INCOME $20,849
 $30,068
 
Other comprehensive (loss) income, net of tax:     
Change in unrealized loss of hedge derivatives (1,054) —
 
Foreign currency translation gain 27
 28
 
Total other comprehensive (loss) income (1,027) 28
 
COMPREHENSIVE INCOME $19,822
 30,096
 
 
Three Months Ended
(thousands)
March 29, 2020
March 31, 2019
CASH FLOWS FROM OPERATING ACTIVITIES    
Net income
$21,187

$20,849
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
Depreciation and amortization
17,175

15,543
Stock-based compensation expense
4,311

3,947
Amortization of convertible notes debt discount
1,723

1,671
Other
750

1,048
Change in operating assets and liabilities, net of acquisitions of businesses:
 
 
Trade receivables
(66,453)
(54,188)
Inventories
(18,211)
1,224
Prepaid expenses and other assets
9,649

5,216
Accounts payable, accrued liabilities and other
43,033

32,574
Net cash provided by operating activities
13,164

27,884
CASH FLOWS FROM INVESTING ACTIVITIES
 
 
Capital expenditures
(7,580)
(10,005)
Proceeds from sale of property, equipment and other investing activities
21

1,372
Business acquisitions, net of cash acquired
(24,281)
(1,222)
Net cash used in investing activities
(31,840) (9,855)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
Term debt repayments
—

(1,250)
Borrowings on revolver
6,720

213,523
Repayments on revolver
(6,720)
(220,855)
Stock repurchases under buyback program
(15,550)
—
Cash dividends paid to shareholders (5,837) —
Payments related to vesting of stock-based awards, net of shares tendered for taxes
(2,747) (3,222)
Payment of deferred financing costs and other
(57) (250)
Payment of contingent consideration from a business acquisition (2,000) (4,416)
Net cash used in financing activities
(26,191) (16,470)
Increase (decrease) in cash and cash equivalents
(44,867) 1,559
Cash and cash equivalents at beginning of year
139,390
 6,895
Cash and cash equivalents at end of period
$94,523
 $8,454

See accompanying Notes to Condensed Consolidated Financial Statements.



PATRICK INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited)
First Quarter Ended March 29, 2020First Quarter Ended March 29, 2020
(thousands) 
Common
Stock

 
Additional
Paid-in-
Capital

 
Accumulated
Other
Comprehensive
Income (Loss)

 
Retained
Earnings

 Total
 
Common
Stock
 
Additional
Paid-in-
Capital
 
Accumulated
Other
Comprehensive
Loss
 
Retained
Earnings
 Total
First Quarter Ended April 1, 2018          
Balance December 31, 2017 $163,196
 $8,243
 $66
 $199,180
 $370,685
Balance December 31, 2019 $172,662
 $25,014
 $(5,698) $305,503
 $497,481
Net income —
 —
 —
 30,068
 30,068
 —
 —
 —
 21,187
 21,187
Other comprehensive income, net of tax —
 —
 28
 —
 28
Stock repurchases under buyback program (1,424) (72) —
 (11,974)��(13,470)
Dividends declared —
 —
 —
 (5,978) (5,978)
Other comprehensive loss, net of tax —
 —
 (3,043) —
 (3,043)
Share repurchases under buyback program (3,315) (480) —
 (11,755) (15,550)
Shares used to pay taxes on stock grants (2,843) —
 —
 —
 (2,843) (3,032) —
 —
 —
 (3,032)
Stock-based compensation expense 3,696
 —
 —
 —
 3,696
 4,311
 —
 —
 —
 4,311
Purchase of convertible notes hedges —
 (31,481) —
 —
 (31,481)
Proceeds from sale of warrants —
 18,147
 —
 —
 18,147
Equity component of convertible note issuance —
 30,948
 —
 —
 30,948
Balance April 1, 2018 $162,625
 $25,785
 $94
 $217,274
 $405,778
Balance March 29, 2020 $170,626
 $24,534
 $(8,741) $308,957
 $495,376
                    
First Quarter Ended March 31, 2019          
First Quarter Ended March 31, 2019

(thousands) 
Common
Stock
 
Additional
Paid-in-
Capital
 
Accumulated
Other
Comprehensive
Loss
 
Retained
Earnings
 Total
Balance December 31, 2018 $161,436
 $25,124
 $(2,680) $224,874
 $408,754
 $161,436
 $25,124
 $(2,680) $224,874
 $408,754
Net income —
 —
 —
 20,849
 20,849
 —
 —
 —
 20,849
 20,849
Other comprehensive loss, net of tax —
 —
 (1,027) —
 (1,027) —
 —
 (1,027) —
 (1,027)
Shares used to pay taxes on stock grants (3,437) —
 —
 —
 (3,437) (3,437) —
 —
 —
 (3,437)
Issuance of shares upon exercise of common stock options 3
 —
 —
 —
 3
 3
 —
 —
 —
 3
Stock-based compensation expense 3,947
 —
 —
 —
 3,947
 3,947
 —
 —
 —
 3,947
Balance March 31, 2019 $161,949
 $25,124
 $(3,707) $245,723
 $429,089
 $161,949
 $25,124
 $(3,707) $245,723
 $429,089

See accompanying Notes to Condensed Consolidated Financial Statements





PATRICK INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 
Three Months Ended
(thousands)
March 31, 2019
April 1, 2018
CASH FLOWS FROM OPERATING ACTIVITIES    
Net income
$20,849

$30,068
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
Depreciation and amortization
15,543

11,325
Stock-based compensation expense
3,947

3,696
Amortization of convertible notes debt discount
1,671

1,246
Deferred income taxes
1,281

1,410
Other
(233)
(1,304)
Change in operating assets and liabilities, net of acquisitions of businesses:
 
 
Trade receivables
(54,188)
(48,443)
Inventories
1,224

(8,557)
Prepaid expenses and other assets
5,216

2,136
Accounts payable, accrued liabilities and other
32,574

34,231
Net cash provided by operating activities
27,884

25,808
CASH FLOWS FROM INVESTING ACTIVITIES
 
 
Capital expenditures
(10,005)
(7,641)
Proceeds from sale of property, equipment and other investing activities
1,372

(6)
Business acquisitions, net of cash acquired
(1,222)
(95,861)
Net cash used in investing activities
(9,855)
(103,508)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
Term debt repayments
(1,250)
(3,941)
Borrowings on revolver
213,523

331,058
Repayments on revolver
(220,855)
(389,855)
Stock repurchases under buyback program
—

(13,470)
Proceeds from convertible notes offering
—

172,500
Purchase of convertible notes hedges
—

(31,481)
Proceeds from sale of warrants
—

18,147
Payments related to vesting of stock-based awards, net of shares tendered for taxes
(3,222)
(2,586)
Payment of deferred financing costs
(253)
(5,367)
Payment of contingent consideration from a business acquisition (4,416) —
Other financing activities
3

(1)
Net cash (used in) provided by financing activities
(16,470)
75,004
Increase (decrease) in cash and cash equivalents
1,559

(2,696)
Cash and cash equivalents at beginning of year
6,895

2,767
Cash and cash equivalents at end of period
$8,454

$71

See accompanying Notes to Condensed Consolidated Financial Statements.



PATRICK INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
 
1.BASIS OF PRESENTATION

In the opinionThe accompanying unaudited condensed consolidated financial statements of Patrick Industries, Inc. (“Patrick”, the “Company”, "we", "our"), the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of normal recurring adjustments) that we believe are necessary to present fairly the Company’s financial position as of March 31, 201929, 2020 and December 31, 2018,2019, and its results of operations and cash flows for the three months ended March 29, 2020 and March 31, 2019 and April 1, 2018.2019.
 
Patrick’s unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission and in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The preparation of the condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to those rules or regulations. Certain immaterial reclassifications have been made to the prior period presentation to conform to the current period presentation. For a description of significant accounting policies used by the Company in the preparation of its consolidated financial statements, please refer to Note 2 of1 to the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.2019. The December 31, 20182019 condensed consolidated statement of financial position data was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. Operating results for the first quarter ended March 31, 201929, 2020 are not necessarily indicative of the results to be expected for the full year ending December 31, 2019.2020.

The Company maintains its financial records on the basis of a fiscal year ending on December 31, with the fiscal quarters spanning approximately thirteen weeks. The first quarter ends on the Sunday closest to the end of the first thirteen-week period. The second and third quarters are thirteen weeks in duration and the fourth quarter is the remainder of the year. The first quarter of fiscal year 2020 ended on March 29, 2020 and the first quarter of fiscal year 2019 ended on March 31, 2019.
In preparation of Patrick’s condensed consolidated financial statements as of and for the first quarterthree months ended March 31, 2019,29, 2020, management evaluated all material subsequent events orand transactions that occurred after the balance sheet date through the date of issuance of the Form 10-Q that required recognition or disclosure in the condensed consolidated financial statements. See Note 17 for more information.

2.RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

LeasesGoodwill Impairment

In February 2016,January 2017, the Financial Accounting Standards Board (“FASB”("FASB") issued Accounting Standards Update (“ASU”("ASU") 2016-02, "Leases (Topic 842)", which requires that an entity recognize lease assets and lease liabilities on its statement of financial position for leases that were previously classified as operating leases under U.S. GAAP. The standard also requires companies to disclose in the footnotes to the financial statements information about the amount and timing of lease payments. The standard is effective for financial statements issued for annual and interim periods beginning after December 15, 2018 on a modified retrospective basis and early adoption was permitted.

In July 2018, the FASB issued ASU 2018-11, "Leases (Topic 842): Targeted Improvements", which offered practical expedient alternatives to the modified retrospective adoption of Accounting Standards Codification (“ASC”) 842. Specifically, the practical expedients allow companies to recognize right of use lease assets and lease liabilities at the date of adoption only, rather than retrospectively for all periods presented, as well as practical expedients related to the presentation of lease components.

The Company adopted ASC 842 effective January 1, 2019, and recorded approximately $80 million in lease right-of-use assets and corresponding lease liabilities, with no material impact on the condensed consolidated statement of shareholders' equity, results of operations or cash flows. See Note 12 for further information.

Goodwill Impairment
In January 2017, the FASB issued ASU 2017-04, "Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment". This ASU simplifies the accounting for goodwill impairments by eliminating step two from the


goodwill impairment test. The standard requires that the impairment loss be measured as the excess of the reporting unit's carrying amount over its fair value. It eliminates the second step that requires the impairment to be measured between the implied value of a reporting unit's goodwill and its carrying value. The standard is effective for annualCompany adopted ASU 2017-04 on January 1, 2020 and any interim impairment tests for periods beginning after December 15, 2019 and earlythe adoption is permitted. The Company is currently evaluatingdid not have a material impact on the effect of adopting this new accounting standard and has not yet determined the impact that its implementation will have on its condensed consolidated financial statements.

Credit Losses

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments”, which amends certain provisions of ASC 326, “Financial Instruments-Credit Loss”. The ASU changes the impairment model for most financial assets and certain other instruments. For trade and other receivables, held to maturity debt securities, loans and other instruments, entities will be required to use a new forward-looking “expected loss” model that generally will result in the earlier recognition of allowances for losses. Additionally, entities will havebe


required to disclose more information with respect to credit quality indicators, including information used to track credit quality by year of origination for most financing receivables. The Company adopted ASU 2016-13 on January 1, 2020 and the adoption did not have a material impact on the condensed consolidated financial statements.

Income Taxes

In December 2019, the FASB issued ASU 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes", a new standard to simplify the accounting for income taxes. The guidance eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences related to changes in ownership of equity method investments and foreign subsidiaries. The guidance also simplifies aspects of accounting for franchise taxes and enacted changes in tax laws or rates, and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years2020, with early adoption permitted. We are currently evaluating the impact of this standard in our consolidated financial statements.

Reference Rate Reform

In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848)", a new standard providing final guidance to provide temporary optional expedients and willexceptions to the US GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from LIBOR and other interbank offered rates to alternative reference rates, such as SOFR. Entities can elect not to apply certain modification accounting requirements to contracts affected by what the guidance calls reference rate reform, if certain criteria are met. An entity that makes this election would not have to remeasure the contracts at the modification date or reassess a previous accounting determination. Entities can elect various optional expedients that would allow them to continue applying hedge accounting for hedging relationships affected by reference rate reform, if certain criteria are met. The guidance is effective upon issuance and generally can be applied as a cumulative effect adjustment to retained earnings asthrough December 31, 2022. We are currently evaluating the impact of the beginning of the first reporting period for which the guidance is effective. The Company does not expect that the adoption of the ASU will have a material effect on its condensedthis standard in our consolidated financial statements.
3.REVENUE RECOGNITION
Effective January 1, 2018, the Company adopted FASB ASU 2014-09, "
Revenue from Contracts with Customers" (commonly referred to as “Topic 606”), which requires a company to recognize revenue when it transfers goods or services to customers in an amount that reflects the consideration that the company expects to receive. The Company adopted Topic 606 using the modified retrospective method and applied it to those contracts which were not completed as of the adoption date. The adoption of the new revenue standard did not have a material impact on the Company’s condensed consolidated financial position, results of operations, or revenues as of the adoption date.
Revenue Recognition
Revenues are recognized when or as control of the promised goods or services transfers to the Company's customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services.

The transaction price for contracts may include forms of variable consideration, including reductions to the transaction price for volume discounts and rebates. To the extent a contract is deemed to have multiple performance obligations, the Company allocates the transaction price of the contract to each performance obligation using the standalone selling price of each distinct good or service in the contract.
Disaggregation of Revenue
In the following table, revenue from contracts with customers, net of intersegment sales, is disaggregated by market type and by reportable operating segments:segment, consistent with how the Company believes the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors:
 First Quarter Ended March 31, 2019 First Quarter Ended March 29, 2020
(thousands) Manufacturing Distribution Total Reportable Operating Segments Manufacturing Distribution Total Reportable Segments
Market type:            
Recreational Vehicle $234,878
 $107,558
 $342,436
 $226,785
 $93,435
 $320,220
Manufactured Housing 42,203
 63,816
 106,019
 45,605
 66,764
 112,369
Industrial 60,928
 8,049
 68,977
 71,447
 7,145
 78,592
Marine 87,675
 3,111
 90,786
 75,429
 2,622
 78,051
Total $425,684
 $182,534
 $608,218
 $419,266
 $169,966
 $589,232





 First Quarter Ended April 1, 2018 First Quarter Ended March 31, 2019
(thousands) Manufacturing Distribution Total Reportable Operating Segments Manufacturing Distribution Total Reportable Segments
Market type:            
Recreational Vehicle $293,225
 $85,066
 $378,291
 $234,878
 $107,558
 $342,436
Manufactured Housing 39,315
 22,941
 62,256
 42,203
 63,816
 106,019
Industrial 58,677
 7,018
 65,695
 60,928
 8,049
 68,977
Marine 44,696
 894
 45,590
 87,675
 3,111
 90,786
Total $435,913
 $115,919
 $551,832
 $425,684
 $182,534
 $608,218
`
Description of Products and Services
The Company is a major manufacturer of component products and a distributor of building products and materials serving original equipment manufacturers (“OEMs”). The following is a description of the principal activities, by reportable segments, from which the Company generates its revenue. See Note 15 for more detailed information about the Company's reportable operating segments.
Manufacturing
The Company’s Manufacturing segment revenue is primarily derived from the sale of laminated products that are utilized to produce furniture, shelving, walls, countertops, and cabinet products, cabinet doors, fiberglass bath fixtures and tile systems, hardwood furniture, vinyl printing, decorative vinyl and paper laminated panels, solid surface, granite, and quartz countertop fabrication, RV painting, fabricated aluminum products, fiberglass and plastic components, softwoods lumber, custom cabinetry, polymer-based flooring, electrical systems components (including instrument and dash panels), wrapped vinyl, paper and hardwood profile mouldings, interior passage doors, air handling products, slide-out trim and fascia, thermoformed shower surrounds, specialty bath and closet building products, fiberglass and plastic helm systems and components products, wiring and wire harnesses, boat covers, towers, tops and frames, aluminum fuel tanks, CNC molds and composite parts, slotwall panels and components and other products.
Manufacturing segment revenue is recognized when control of the product transfers to the customer which is the point when the customer gains the ability to direct the use of and obtain substantially all of the remaining benefits from the asset, which is generally upon delivery of goods. In limited circumstances, where the products are customer specific with no alternative use to the Company and the Company has a legally enforceable right to payment for performance to date with a reasonable margin, revenue is recognized over the contract term based on the cost-to-cost method. The Company uses this measure of progress because it best depicts the transfer of value to the customer and correlates with the amount of consideration to which the entity expects to be entitled in exchange for transferring the promised goods to the customer. However, revenue recognized based on the cost-to-cost method does not constitute a material amount of total Manufacturing segment revenue and consolidated net sales.
Distribution
The Company’s Distribution segment revenue is primarily derived from the resale of pre-finished wall and ceiling panels, drywall and drywall finishing products, electronics and audio systems components, appliances, wiring, electrical and plumbing products, fiber reinforced polyester products, cement siding, raw and processed lumber, interior passage doors, roofing products, laminate and ceramic flooring, tile, shower doors, furniture, fireplaces and surrounds, interior and exterior lighting products, and other miscellaneous products, in addition to providing transportation and logistics services.

The Company acts as a principal in such arrangements because it controls the promised goods before delivery to the customer. Distribution segment revenue from product sales is recognized on a gross basis upon delivery of goods at which point control transfers to the customer. The Distribution segment also generates revenue by providing marketing services for other manufacturers in exchange for agreed upon commissions. The commission revenue is recognized in the amount of expected commissions to be collected from the manufacturer upon delivery of goods to the customer. The overall commission business is not material to the Company’s consolidated net sales.


Significant Judgments and Practical Expedients Applied
Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods. Sales and other taxes collected concurrent with revenue-producing activities are excluded from revenue. Incidental items that are immaterial in the context of the contract are not recognized as separate performance obligations to which a portion of revenue would otherwise be allocated.
The Company records freight billed to customers in net sales. The corresponding costs incurred for shipping and handling related to these customer billed freight costs are recorded as costs to fulfill the contract and are included in warehouse and delivery expenses.
The Company’s contracts across each of its businesses typically do not result in situations where there is a time period greater than one year between performance under the contract and collection of the related consideration. The Company elected the practical expedient under Topic 606 related to significant financing components, where the Company expects, at contract inception, that the period between the entity’s transfer of a promised good or service to a customer and the customer’s payment for that good or service will be one year or less.
The Company also applies the practical expedient in Topic 606 related to costs to obtain a contract and recognizes the incremental costs of obtaining contracts as an expense when incurred if the amortization period of the incurred costs that the Company otherwise would have capitalized is one year or less. These costs are included in selling, general and administrative expenses.
Contract BalancesLiabilities
The Company typically invoices the customer after shipment of the promised goods, at which time it has an unconditional right to payment. In limited circumstances, the Company may receiveContract liabilities, representing upfront payments from customers received prior to satisfactionsatisfying performance obligations, were immaterial as of a performance obligation in both the manufacturingbeginning and distribution businesses, in which case a contract liability is recorded. The following table provides information about contract balances:
(thousands)March 31, 2019 December 31, 2018
Receivables, which are included in trade receivables, net$135,202
 $74,196
Contract liabilities$2,847
 $2,642

Significantend of all periods presented and changes in the contract liabilities balancewere immaterial during the three months ended March 31, 2019 are as follows:
(thousands) Contract Liabilities
Revenue recognized that was included in the contract liability balance at the beginning of the period $(910)
Increases due to cash received, excluding amounts recognized as revenue during the period $1,115

Transaction Price Allocated to the Remaining Performance Obligation
The Company applies the practical expedient in paragraph 606-10-50-14 and does not disclose information about remaining performance obligations that have original expected durations of one year or less.The Company does not have material contracts that have original expected durations of more than one year.all periods presented.








4.INVENTORIES
Inventories are stated at the lower of cost (First-In, First-Out (FIFO) Method) and net realizable value and consist of the following classes:following:
(thousands) March 31, 2019 December 31, 2018 March 29, 2020 December 31, 2019
Raw materials $166,369
 $164,408
 $179,804
 $162,238
Work in process 13,882
 12,829
 15,981
 14,272
Finished goods 25,003
 28,341
 31,033
 28,446
Less: reserve for inventory obsolescence (7,341) (5,354) (11,473) (10,123)
Total manufactured goods, net 197,913
 200,224
 215,345
 194,833
Materials purchased for resale (distribution products) 68,876
 74,914
 60,261
 60,918
Less: reserve for inventory obsolescence (1,795) (2,240) (2,061) (1,881)
Total materials purchased for resale (distribution products), net 67,081
 72,674
 58,200
 59,037
Total inventories $264,994
 $272,898
 $273,545
 $253,870


5.GOODWILL AND INTANGIBLE ASSETS
The Company acquired goodwill and intangible assets in various acquisitions in 2018 that were determined to be business combinations. No new intangible assets were acquired through business combination in the first quarter of 2019, but purchase accounting adjustments to previously reported estimated amounts were made in such quarter. See Note 6 for further details. Goodwill and intangible assets are allocated to the Company’s reporting units on the date they are initially recorded. Goodwill and indefinite-lived intangible assets are not amortized but are subject to an impairment test based on their estimated fair value performed annually (or under certain circumstances more frequently as warranted). Goodwill impairment testing is performed at the reporting unit level, one level below the business segment
.
Finite-lived intangible assets that meet certain criteria continue to be amortized over their useful lives and are also subject to an impairment test based on estimated undiscounted cash flows when impairment indicators exist. The Company assesses finite-lived intangible assets for impairment if events or changes in circumstances indicate that the carrying value may exceed the fair value.
No impairment was recognized during the three months ended March 31, 2019 and April 1, 2018, related to goodwill, indefinite-lived intangible assets or finite-lived intangible assets.
Goodwill
Changes in the carrying amount of goodwill for the three months ended March 31, 201929, 2020 by segment are as follows:
(thousands) Manufacturing Distribution Total
Balance - December 31, 2018 $235,345
 $46,389
 $281,734
Adjustments to prior year preliminary purchase price allocations 339
 10,040
 10,379
Balance - March 31, 2019 $235,684
 $56,429
 $292,113
(thousands) Manufacturing Distribution Total
Balance - December 31, 2019 $268,402
 $50,947
 $319,349
Acquisitions 5,787
 —
 5,787
Adjustments to preliminary purchase price allocations 780
 —
 780
Balance - March 29, 2020 $274,969
 $50,947
 $325,916

Intangible Assets
Intangible assets are comprised of customer relationships, non-compete agreements, trademarks and patents. Customer relationships and non-compete agreements represent finite-lived intangible assets that have been recorded in the Manufacturing and Distribution segments along with related amortization expense. As of March 31, 2019, the remaining intangible assets balance of $370.2 million is comprised of $85.2 million of trademarks which have an indefinite life, and therefore, no amortization expense has been recorded for trademarks, and $285.0 million pertaining to customer relationships, non-compete agreements and patents which are being amortized over periods ranging from three to 19 years.   

Amortization expense for the Company’s intangible assets in the aggregate was $9.0 million and $7.1 million for the three months ended March 31, 2019 and April 1, 2018, respectively.









Intangible assets, net consist of the following as of March 31, 201929, 2020 and December 31, 2018:2019:
(thousands)
March 31,
2019
Weighted Average Useful Life
(in years)
December 31,
2018
Weighted Average Useful Life
(in years)
March 29,
2020
Weighted Average Useful Life
(in years)
December 31,
2019
Weighted Average Useful Life
(in years)
Customer relationships
$361,308

10.1
$366,228

10.1
$365,693

10.1
$357,513

10.1
Non-compete agreements
17,499

5.0
19,159

4.9
16,262

5.0
16,202

5.0
Patents
1,048

9.0
1,048

8.9
16,495

14.6
16,495

14.6
Trademarks 85,178
 Indefinite 82,358
 Indefinite 89,504
 Indefinite 88,524
 Indefinite

465,033

 
468,793

 
487,954

 
478,734

 
Less: accumulated amortization
(94,800)
(85,811)
 
(131,321)
(121,720)
 
Intangible assets, net
$370,233

 
$382,982

 
$356,633

 
$357,014

 

Changes in the carrying value of intangible assets for the three months ended March 31, 201929, 2020 by segment are as follows:
(thousands)
Manufacturing
Distribution
Total
Balance - December 31, 2018
$304,485

$78,497

$382,982
Amortization
(7,715)
(1,274)
(8,989)
Adjustments to prior year preliminary purchase price allocations
(3,451)
(309)
(3,760)
Balance - March 31, 2019
$293,319

$76,914

$370,233
(thousands)
Manufacturing
Distribution
Total
Balance - December 31, 2019
$282,123

$74,891

$357,014
Acquisitions
9,220

—

9,220
Amortization
(7,833)
(1,768)
(9,601)
Adjustments to preliminary purchase price allocations
—

—

—
Balance - March 29, 2020
$283,510

$73,123

$356,633

Valuation of Goodwill and Indefinite-Lived Intangibles

We test goodwill and indefinite-lived intangible assets (trademarks) for impairment on an annual basis (as of September 30, 2019 for our most recent annual tests) and, if certain events or circumstances indicate that an impairment loss may have been incurred, on an interim basis. Our 2019 tests indicated that there was no impairment, as fair value exceeded carrying values, and we concluded that none of our reporting units or trademarks were at risk of failing the impairment test.

Despite the excess fair value identified in our 2019 impairment tests, we assessed during the quarter ended March 29, 2020 whether the impact of the COVID-19 pandemic on overall macroeconomic conditions and the global equity markets, which negatively affected the Company’s market capitalization, indicated that at March 29, 2020 it was more likely than not that our goodwill and trademarks were impaired. We evaluated amongst other factors (1) the results of our 2019 impairment tests; (2) our market capitalization at March 29, 2020 in relation to the carrying amount of shareholders’ equity at March 29, 2020 and to fair values determined during our 2019 impairment tests; (3) the results of our operations during the quarter ended March 29, 2020 in relation to our projections; and (4) our analysis of the impact on the fair values determined during our 2019 impairment tests using more recent projections and discount rates that account for various risks and uncertainties, including the duration and extent of impact to our business, related to the COVID-19 pandemic.

Based on the results of our assessment, we determined it was more likely than not that our goodwill and trademarks were not impaired as of March 29, 2020. However, we are unable to predict how long the COVID-19-related conditions will persist, what additional measures may be introduced by governments or private parties, or what effect any such additional measures may have on demand for our products or those of our customers in each of our end markets. As such, we may be required to perform quantitative impairment tests in future periods preceding our annual impairment test date, and the outcome of such tests could result in an impairment of our goodwill or our trademarks.



6.ACQUISITIONS
 
General 
The Company did not complete any acquisitions the first quarter of 2019 and completed nine acquisitions in 2018, including four3 acquisitions in the first quarter of 2018. Each of the 2018 acquisitions was funded through borrowings under the Company’s credit facility in effect at the time of acquisition. Assets acquired and liabilities assumed in the individual acquisitions were recorded on the Company’s condensed consolidated statements of financial position at their estimated fair values as of the respective dates of acquisition. For each acquisition, the Company completes its allocation of the purchase price to the fair value of acquired assets and liabilities within the one year measurement period.  For those acquisitions where the purchase price allocation has been noted as being provisional, the Company generally is still in the process of finalizing the fair values of acquired goodwill, intangible assets, fixed assets, and, if applicable, related deferred tax assets and liabilities. Historically, the impact of finalizing provisional purchase price allocations has not been significant.  In general, the acquisitions described below provided the opportunity for the Company to either establish a new presence in a particular market and/or expand its product offerings in an existing market and increase its market share and per unit content.

For each acquisition, the excess of the purchase consideration over the fair value of the net assets acquired was recorded as goodwill, which represents the combined value of the Company’s existing purchasing, manufacturing, sales, and systems resources with the organizational talent and expertise of the acquired companies’ respective management teams to maximize efficiencies, revenue impact, market share growth and net income. The goodwill recognized is expected to be deductible for income tax purposes for each of the 2018 acquisitions with the exception of the acquisition of Marine Accessories Corporation which is expected to be partially deductible for income tax purposes, and the acquisition of LaSalle Bristol which is not deductible for income tax purposes. Intangible asset values were estimated using income based valuation methodologies. See Note 5 for information regarding the amortization periods assigned to finite-lived intangible assets.



2020 (the "2020 Acquisitions"). For the first quarter ended April 1, 2018, revenueMarch 29, 2020, net sales and operating income of approximately $12.6 million and $1.3 million, respectively, was included in the Company’sCompany's condensed consolidated statements of income relatingrelated to the four businesses acquired in the first three months of 2018.2020 acquisitions were immaterial. Acquisition-related costs in the aggregate associated with the businesses acquired in the first three monthsquarter of 20182020 were immaterial. The Company made no acquisitions in the first quarter of 2019.

Contingent Consideration

In connection with certain 2018 and 2017 acquisitions, if certain financial targets forAs of March 29, 2020, the acquired businesses are achieved, the Company will be required to pay additional cash consideration. The Company has recorded a liability for the fair value of the contingent consideration related to each of these acquisitions as part of the initial purchase price based on the present value of the expected future cash flows and the probability of future payments. As required, the liabilities for the contingent consideration associated with each of these acquisitions will be measured quarterly at fair value and the Company could record adjustments in future periods.

The aggregate fair value of the estimated contingent consideration payments was $9.4$7.8 million, $4.9$5.9 million of which is included in the line item "Accrued liabilities" and $4.5$1.9 million is included in “Other long-term liabilities” on the condensed consolidated statement of financial position asposition. At December 31, 2019, the aggregate fair value of March 31, 2019.the estimated contingent consideration payments was $9.6 million, $2.0 million of which was included in the line item "Accrued liabilities" and $7.6 million was included in "Other long-term liabilities". The liabilities for contingent consideration expire at various dates through December 2023. The contingent consideration arrangements are subject to a maximum payment amount of up to $13.7$12.3 million in the aggregate. In the first quarter of 2019,2020, the Company made cash payments of approximately $4.4$2.0 million related to contingent consideration liabilities, recording a corresponding reduction to accrued liabilities.

20182020 Acquisitions

Metal Moulding Corporation (“MMC”)
In February 2018, the CompanyAcquisitions completed the acquisition of the business and certain assets of Madison, Tennessee-based MMC, a manufacturer of custom metal fabricated products, primarily for the marine market, including hinges, arm rests, brackets, panels and trim, as well as plastic products including boxes, inlay tables, steps, and related components, for a net initial purchase price of $19.9 million, plus subsequent contingent consideration over a one-year period based on future performance.
The results of operations for MMC are included in the Company’s condensed consolidated financial statements and the Manufacturing operating segment from the date of acquisition.
Aluminum Metals Company, LLC (“AMC”)
In February 2018, the Company completed the acquisition of the business and certain assets of Elkhart, Indiana-based AMC, a manufacturer of aluminum products including coil, fabricated sheets and extrusions, in addition to roofing products, primarily for the recreational vehicle (“RV”), industrial, and marine markets, for a net purchase price of $17.8 million.
The results of operations for AMC are included in the Company’s condensed consolidated financial statements and the Manufacturing operating segment from the date of acquisition.
IMP Holdings, LLC d/b/a Indiana Marine Products (“IMP”)
In March 2018, the Company completed the acquisition of the business and certain assets of Angola, Indiana-based IMP, a manufacturer of fully-assembled helm assemblies, including electrical wiring harnesses, dash panels, instrumentation and gauges, and other products primarily for the marine market, for a net initial purchase price of $18.6 million, plus subsequent contingent consideration payments over a three-year period based on future performance. The Company recorded a fair value estimate of the contingent consideration of $7.9 million at the time of acquisition.
The results of operations for IMP are included in the Company’s condensed consolidated financial statements and the Manufacturing operating segment from the date of acquisition. The purchase price allocation and all required purchase accounting adjustments were finalized in the first quarter of 2019. Net changes from2020 include the previously reported estimated amounts asannounced acquisitions of December 31, 2018 were immaterial.


Collins & Company,Maple City Woodworking Corporation, a Goshen, Indiana-based manufacturer of hardwood cabinet doors and fascia for the recreational vehicle market, and SEI Manufacturing, Inc. (“Collins”)
In March 2018, the Company completed the acquisition, a Cromwell, Indiana-based manufacturer of the business and certain assets of Bristol, Indiana-based Collins, a distributor of appliances, trim products, fuel systems, flooring, tile,towers, T-Tops, hardtops, rails, gates and other related building materials primarily to the RV market as well as the housing and industrial markets, for a net purchase price of $40.0 million.
The results of operations for Collins are included in the Company’s condensed consolidated financial statements and the Distribution operating segment from the date of acquisition. The purchase price allocation and all required purchase accounting adjustments were finalized in the first quarter of 2019. Changes from previously reported estimated amounts as of December 31, 2018 include a decrease to intangible assets of $3.6 million and a $3.6 million offsetting increase to goodwill. There was no material impact to the condensed consolidated statement of income related to these changes in the first quarter of 2019.
Dehco, Inc. (“Dehco”)
In April 2018, the Company completed the acquisition of Dehco, a distributor and manufacturer of flooring, kitchen and bathaluminum exterior products adhesives and sealants, electronics, appliances and accessories, LP tanks, and other related building materials, primarily for the RV market as well as the manufactured housing (“MH”), marine and other industrial markets, for a net purchase price of $52.8 million. Dehco has operating facilities in Indiana, Oregon, Pennsylvania and Alabama.
The results of operations for Dehco are included in the Company’s condensed consolidated financial statements and the Manufacturing and Distribution operating segments from the date of acquisition. The purchase price allocation and all required purchase accounting adjustments were finalized in the first quarter of 2019. Changes from previously reported estimated amounts as of December 31, 2018 include a decrease to intangible assets of $0.3 million and a $0.3 million offsetting increase to goodwill. There was no material impact to the condensed consolidated statement of income related to these changes in the first quarter of 2019.
Dowco, Inc. (“Dowco”)
In May 2018, the Company completed the acquisition of Dowco, a designer and manufacturer of custom designed boat covers and bimini tops, full boat enclosures, mounting hardware, and other accessories and components for the marine market,market. The total initial consideration for a net purchase price of $56.3 million, net of cash acquired. Dowco has operating facilities in Wisconsin, Missouri, Indiana, and Minnesota.
The results of operations for Dowco are included in the Company’s condensed consolidated financial statements and the Manufacturing operating segment from the date of acquisition.2020 Acquisitions was $24.9 million. The preliminary purchase price allocation isallocations are subject to final review and approval,valuation activities being finalized, and thus all required purchase accounting adjustments are subject to change within the measurement period as the Company finalizes its fair value estimates. Changes from previously reported estimated amounts as of December 31, 2018 were immaterial.
Marine Accessories Corporation (“MAC”)
In June 2018, the Company acquired 100% of the membership interests of Maryville, Tennessee-based MAC, a manufacturer, distributor and aftermarket supplier of custom tower and canvas products and other related accessories to OEMs, dealers, retailers and distributors within the marine market, as well as direct to consumers, for a net purchase price of $57.0 million, net of cash acquired.
The results of operations for MAC2020 Acquisitions are included in the Company’s condensed consolidated financial statementsManufacturing segment.

2019 Acquisitions
The Company completed 3 acquisitions in 2019 ( the "2019 Acquisitions"), including the previously announced acquisitions of Topline Counters, LLC, a Sumner, Washington-based designer and manufacturer of kitchen and bathroom countertops for residential and commercial markets, and G.G. Schmitt & Sons, Inc. ("G.G. Schmitt"), a Sarasota, Florida-based designer and manufacturer of customized hardware and structural components for the Manufacturing and Distribution operating segments frommarine industry. The total initial consideration for the date2019 Acquisitions was $53.7 million, plus contingent consideration over a one-year period based on future performance in connection with the acquisition of acquisition.G.G. Schmitt. The preliminary purchase price allocation isallocations are subject to final review and approval,valuation activities being finalized, and thus all required purchase accounting adjustments are subject to change within the measurement period as the Company finalizes its fair value estimates. Changes from previously reported estimated amounts as of December 31, 2018 were immaterial.
Engineered Metals and Composites, Inc. (“EMC”)
In September 2018, the Company completed the acquisition of West Columbia, South Carolina-based EMC, a designer and manufacturer of custom marine towers, frames, and other fabricated component products for OEMs in the marine industry, for a net initial purchase price of $24.9 million, plus subsequent contingent consideration over a three-month period based on future performance. The Company recorded a preliminary fair value estimate of the contingent consideration of $2.5 million.


The results of operations for EMC are included in the Company’s condensed consolidated financial statements and the Manufacturing operating segment from the date of acquisition. Theto preliminary purchase price allocation is subject to final review and approval, and thus all required purchase accounting adjustments are subject to change within the measurement period as the Company finalizes its fair value estimates. Changes from previously reported estimated amounts as of December 31, 2018 include a decrease to the estimated purchase price of $0.3 million based on a final working capital adjustment resulting from an increase to accounts payable in the same amount. There was no material impact to the condensed consolidated statement of income related to these changesestimates recorded in the first quarter of 2019.
LaSalle Bristol (“LaSalle”)
In November, 2018,2020 related to the Company completed the acquisition of LaSalle, a distributor and manufacturer of plumbing, flooring, tile, lighting, air handling and building products for the MH, RV, and industrial markets, for a net purchase price of $51.5 million, net of cash acquired. LaSalle is headquartered in Elkhart, Indiana and operates a total of 15 manufacturing and distribution centers located in North America.
2019 Acquisitions were immaterial. The results of operations for LaSalle2019 Acquisitions are included in the Company’s condensed consolidated financial statements and the Manufacturing and Distribution operating segments from the date of acquisition. The preliminary purchase price allocation is subject to final review and approval, and thus all required purchase accounting adjustments are subject to change within the measurement period as the Company finalizes its fair value estimates.segment.
After adjusting for a $1.5 million increase in the estimated purchase price reported at December 31, 2018 due to a final working capital adjustment of $1.4 million and other adjustments of $0.1 million, changes from previously reported estimated amounts as of December 31, 2018 include a $6.7 million decrease to inventory and a $6.8 million increase to goodwill. There was no material impact to the condensed consolidated statement of income related to these changes in the first quarter of 2019.
The following table summarizes the fair values of the assets acquired and the liabilities assumed as of the date of the acquisition for the 2018 acquisitions. The purchase price allocation in each acquisition is final except as noted in2020 Acquisitions and the discussions above:2019 Acquisitions:
(thousands)Trade receivablesInventoriesProperty, plant and equipmentPrepaid expenses & otherIntangible assetsGoodwillLess: Total liabilitiesLess: Deferred tax liability, netTotal net assets acquired
2018








MMC (1)
$1,463
$2,324
$2,085
$—
$8,540
$7,668
$827
$—
$21,253
AMC3,942
5,623
2,321
39
6,550
1,755
2,463
—
17,767
IMP (2)
1,943
4,286
1,463
13
12,920
8,803
2,930
—
26,498
Collins2,830
9,903
1,188
5
18,430
10,237
2,586
—
40,007
Dehco4,771
16,923
13,755
208
13,950
6,580
3,392
—
52,795
Dowco4,053
4,498
5,910
1,240
34,379
10,444
4,178
—
56,346
MAC3,054
6,815
8,000
284
32,733
19,264
4,290
8,839
57,021
EMC (3)
634
1,576
2,500
—
15,750
8,074
1,115
—
27,419
LaSalle8,888
39,318
8,500
6,548
5,885
10,497
28,128
41
51,467
Other473329
300
13
1,667
899
184
 3,497
2018 Totals$32,051
$91,595
$46,022
$8,350
$150,804
$84,221
$50,093
$8,880
$354,070
(thousands)Trade receivablesInventoriesProperty, plant and equipmentPrepaid expenses & otherIntangible assetsGoodwillLess: Total liabilitiesLess: Deferred tax liability, netTotal net assets acquired
          
2020$986
$1,882
$7,913
$—
$9,220
$5,787
$851
$—
$24,937
          
2019 (1)
$9,711
$6,837
$5,380
$20
$17,766
$24,869
$6,409
$1,922
$56,252

(1) Total net assets acquired for MMCthe 2019 Acquisitions reflect the preliminary estimated liability of $1.4$2.6 million pertaining to the fair value of the contingent consideration based on future performance. The actual net cash paid forperformance relating to the MMC acquisition of $19.9 million is included in “Cash Flows from Investing Activities - Business Acquisitions” on the consolidated statement of cash flows for the year ended December 31, 2018.G.G. Schmitt.
(2) Total net assets acquired for IMP reflect the preliminary estimated liability of $7.9 million pertaining to the fair value of the contingent consideration based on future performance. The actual net cash paid for the IMP acquisition of $18.6 million is included in “Cash Flows from Investing Activities - Business Acquisitions” on the consolidated statement of cash flows for the year ended December 31, 2018.



(3) Total net assets acquired for EMC reflect the preliminary estimated liability of $2.5 million pertaining to the fair value of the contingent consideration based on future performance. The actual net cash paid for the EMC acquisition of $24.9 million included $25.2 million in “Cash Flows from Investing Activities - Business Acquisitions” on the consolidated statement of cash flows for the year ended December 31, 2018 as well as a decrease of $0.3 million in “Cash Flows from Investing Activities - Business Acquisitions” on the condensed consolidated statement of cash flows for the first quarter ended March 31, 2019.
Pro Forma Information
The following pro forma information for the first quarter ended April 1, 2018March 29, 2020 and March 31, 2019 assumes the MMC, AMC, IMP, Collins, Dehco, Dowco, MAC, EMC2020 Acquisitions and LaSalle acquisitions (which were completed in 2018)the 2019 Acquisitions occurred as of the beginning of the year immediately preceding each such acquisition. The pro forma information contains the actual operating results of the 2018 acquisitions2020 Acquisitions and 2019 Acquisitions combined with the results prior to their respective acquisition dates, adjusted to reflect the pro forma impact of the acquisitions occurring as of the beginning of the year immediately preceding each such acquisition.

The pro forma information includes financing and interest expense charges based on the actual incremental borrowings incurred in connection with each transaction as if it occurred as of the beginning of the year immediately preceding each such acquisition.transaction. In addition, the pro forma information includes amortization expense, in the aggregate, related to intangible assets acquired in connection with the transactions of$2.9 $0.2 million and $0.6 million for the first quarter ended April 1, 2018.March 29, 2020 and the first quarter ended March 31, 2019, respectively.

First Quarter Ended First Quarter Ended
(thousands except per share data)
April 1, 2018 March 29, 2020 March 31, 2019
Revenue
$690,482
 $594,586
 $631,265
Net income
34,375
 21,763
 22,338
Basic net income per common share
1.39
 0.95
 0.97
Diluted net income per common share
1.37
 0.94
 0.96


The pro forma information is presented for informational purposes only and is not necessarily indicative of the results of operations that actually would have been achieved had the acquisitions been consummated as of that time, nor is it intended to be a projection of future results.the periods indicated above.

7.STOCK-BASED COMPENSATION
 
The Company accounts for stock-based compensation in accordance with fair value recognition provisions. The Company recorded compensation expense of $3.9$4.3 million and $3.7$3.9 million for the first quarter ended March 29, 2020 and March 31, 2019, and April 1, 2018, respectively, for its stock-based compensation plans onin the condensed consolidated statements of income.
 
The Company estimates the fair value of (i) all stock grants as of the grant date using the closing price per share of the Company’s common stock on such date, and (ii) all stock option and stock appreciation rights awards as of the grant date by applying the Black-Scholes option pricing model.
For full year 2018, the Board of Directors (the “Board”) approved various sharestock-based grants under the Company’s 2009 Omnibus Incentive Plan (the “Plan”) totaling 181,808 shares in the aggregate, of which grants of 164,988 shares were approved in the first quarter of 2018.

The Board approved various share grants under the Plan in the first quarter of 20192020 totaling 356,017258,800 shares in the aggregate.aggregate at an average fair value of $54.60 at grant date for a total fair value at grant date of $14.1 million.
 
As of March 31, 2019,29, 2020, there was approximately $31.3$29.6 million of total unrecognized compensation cost related to stock-based compensation arrangements granted under incentive plans. That cost is expected to be recognized over a weighted-average period of 23.519.9 months.
 
















8.NET INCOME PER COMMON SHARE
Basic netNet income per common share is computed by dividing net income by the weighted-average number of common shares outstanding. Diluted net income per common share is computed by dividing net income by the weighted-average number of common shares outstanding, plus the dilutive effect of stock options, stock appreciation rights, and restricted stock units (collectively “Common Stock Equivalents”). The dilutive effect of Common Stock Equivalents is calculated under the treasury stock method using the average market price for the period. Certain Common Stock Equivalents were not included in the computation of diluted net income per common share because the exercise prices of those Common Stock Equivalents were greater than the average market price of the common shares.
Income per common share is calculated for the first quarter of 20192020 and 20182019 is as follows:
 First Quarter Ended  First Quarter Ended
(thousands except per share data) March 31, 2019 April 1, 2018  March 29, 2020 March 31, 2019
Net income for basic and diluted per share calculation $20,849
 $30,068
  $21,187
 $20,849
Weighted average common shares outstanding - basic 23,039
 24,740
  23,016
 23,039
Effect of potentially dilutive securities 209
 370
  251
 209
Weighted average common shares outstanding - diluted 23,248
 25,110
  23,267
 23,248
Basic net income per common share $0.90
 $1.22
  $0.92
 $0.90
Diluted net income per common share $0.90
 $1.20
  $0.91
 $0.90


9.DEBT
 
A summary of total debt outstanding at March 31, 201929, 2020 and December 31, 20182019 is as follows:
(thousands)
March 31, 2019
December 31, 2018
March 29, 2020
December 31, 2019
Long-term debt:
 
 
 
 
Revolver
$385,000

$392,332
Term Loan
95,000

96,250
Convertible Notes
172,500

172,500
Revolver due 2024
$135,000

$135,000
Term loan due 2024
97,500

97,500
7.5% senior notes due 2027 300,000
 300,000
1.0% convertible notes due 2023
172,500

172,500
Total long-term debt
652,500

661,082

705,000

705,000
Less: Convertible Notes debt discount
(28,454)
(30,125)
Less: convertible notes debt discount, net
(21,536)
(23,260)
Less: senior notes deferred financing costs, net (5,707) (5,844)
Less: current maturities of long-term debt
(10,000)
(8,750)
(5,000)
(5,000)
Less: net deferred financing costs related to Term Loan
(447)
(456)
Less: term loan deferred financing costs, net
(522)
(542)
Total long-term debt, less current maturities, net
$613,599

$621,751

$672,235

$670,354


2018 Credit Facility
The Company entered into a Second Amended and Restated Credit Agreement, dated asThere were no material changes to any of June 5, 2018, (the “2018 Credit Agreement”) by and amongour debt arrangements during the Company, the Lenders party thereto, and Wells Fargo, as Administrative Agent. The 2018 Credit Agreement amended and restated the Company’s 2015 Credit Agreement.quarter ended March 29, 2020.

The 2018 Credit Agreement established a credit facility comprised of an $800 million revolving credit loan (the “2018 Revolver”) and a $100 million term loan (the “2018 Term Loan” and, together with the 2018 Revolver, the “2018 Credit Facility”). Borrowings under the 2018 Credit Agreement mature on March 17, 2022.

The 2018 Credit Agreement is secured by substantially all personal property assets of the Company and any domestic subsidiary guarantors. The 2018 Credit Agreement includes certain definitions, terms and reporting requirements and includes the following additional provisions:



The 2018 Term Loan will be repaid in consecutive quarterly installments on the last business day of each of March, June, September and December in the following amounts: (i) beginning June 30, 2018, through and including March 31, 2019, $1,250,000, (ii) beginning June 30, 2019, through and including March 31, 2021, $2,500,000, and (iii) beginning June 30, 2021, and each quarter thereafter, $3,750,000, with the remaining balance due at maturity;
The interestInterest rates for borrowings under the 2018 Revolverrevolver and the 2018 Term Loanterm loan are the Base Rate plus the Applicable Marginprime rate or LIBOR plus the Applicable Margin, with a fee payable by the Company on unused but committed portionsmargin. At March 29, 2020, all of the Revolver;
The 2018 Revolver includes a $10.0 million limit for same day advances (“Swing Line”) which shall bear interest based upon the Base Rate plus the Applicable Margin;
Up to $10.0 million of the 2018 Revolver is available as a sub facility for the issuance of standby letters of credit, which are subject to certain expiration dates;
The financial covenants include requirements as to a consolidated total leverage ratio and a consolidated fixed charge coverage ratio, and other covenants include limitations and restrictions concerning permitted acquisitions, investments, sales of assets, liens on assets, dividends and other payments; and
Customary prepayment provisions, representations, warranties and covenants, and events of default.

At March 31, 2019, the Company had $95.0 million outstandingCompany's borrowings under the 2018 Term Loan under the LIBOR-based option,revolver and borrowings outstanding under the 2018 Revolver of $385.0 millionterm loan were under the LIBOR-based option. The interest rate for incremental borrowings at March 31, 201929, 2020 was the Prime Rate plus 1.00% (or 6.50%) for the Base Rate-based option, or LIBOR plus 2.00%1.5% (or 4.50%) for the LIBOR-based option. At December 31, 2018, the Company had $96.3 million outstanding under the 2018 Term Loan under the LIBOR-based option, and borrowings outstanding under the 2018 Revolver of: (i) $388.0 million under the LIBOR-based option and (ii) $4.3 million under the Base Rate-based option. The interest rate for incremental borrowings at December 31, 2018 was the Prime Rate plus 1.00% (or 6.50%) for the Base Rate-based option, or LIBOR plus 2.00% (or 4.56%3.13%) for the LIBOR-based option. The fee payable on committed but unused portions of the 2018 Revolverrevolver was 0.25%0.20% at March 31, 2019 and December 31, 2018.
Pursuant to the 2018 Credit Agreement, the financial covenants include: (a) a required maximum consolidated total leverage ratio, measured on a quarter-end basis, not to exceed 3.00:1.00 for the 12-month period ending on such quarter-end; and (b) a required minimum consolidated fixed charge coverage ratio, measured on a quarter-end basis, of at least 1.50:1.00 for the 12-month period ending on such quarter-end.

The consolidated total leverage ratio is the ratio for any period of consolidated total indebtedness (as measured as of the second day following the end of the immediately preceding fiscal quarter) to consolidated adjusted earnings before interest, taxes, depreciation and amortization (“EBITDA”). Consolidated total indebtedness for any period is the sum of: (i) total debt outstanding under the 2018 Revolver, the 2018 Term Loan and the Convertible Notes (as defined herein); (ii) capital leases and letters of credit outstanding; and (iii) deferred payment obligations. The consolidated fixed charge coverage ratio for any period is the ratio of consolidated EBITDA less restricted payments, taxes paid and capital expenditures as defined under the 2018 Credit Agreement to consolidated fixed charges. Consolidated fixed charges for any period is the sum of cash interest expense related to the 2018 Term Loan, 2018 Revolver and the Convertibles Notes, and scheduled principal payments on outstanding indebtedness under the 2018 Term Loan.

As of and for the March 31, 2019 reporting date, the Company was in compliance with both of these financial debt covenants as required under the terms of the 2018 Credit Agreement. The required maximum consolidated total leverage ratio and the required minimum consolidated fixed charge coverage ratio compared to the actual amounts as of March 31, 2019 and for the fiscal period then ended are as follows:  
 
Required

Actual
Consolidated total leverage ratio (12-month period)
3.00

2.46
Consolidated fixed charge coverage ratio (12-month period)
1.50

2.87

29, 2020.

Total cash interest paid for the first quarter of 2020 and 2019 and 2018 was $6.5$2.6 million and $2.9$6.5 million, respectively.



Interest Rate Swaps

In the third quarter of2018, the Company entered into $200.0 million notional amount of variable to fixed interest rate swaps to partially hedge risks associated with the variable LIBOR component of the 2018 Credit Facility. These interest rate swaps fix the LIBOR component of interest expense on $200.0 million of the debt outstanding under the 2018 Credit Facility at an average interest rate of 2.91%, with an all-in average rate of 4.91% with the current applicable margin, discussed above. See Note 10 for further details.
Convertible Senior Notes
In January 2018, the Company issued $172.5 million aggregate principal amount of 1.00% Convertible Senior Notes due 2023 (the “Convertible Notes”). The total debt discount of $36.0 million at issuance consisted of two components: (i) the conversion option component, recorded to shareholders' equity, in the amount of $31.9 million, representing the difference between the principal amount of the Convertible Notes upon issuance less the present value of the future cash flows of the Convertible Notes and (ii) debt issuance costs of $4.1 million. The unamortized portion of the total debt discount is being amortized to interest expense over the life of the Convertible Notes beginning in the first quarter of 2018. The effective interest rate on the Convertible Notes, which includes the non-cash interest expense of debt discount amortization and debt issuance costs, was 5.25% as of March 31, 2019 and December 31, 2018. The unamortized portion of the debt discount and debt issuance costs as of March 31, 2019 was $28.5 million.
The net proceeds from the issuance of the Convertible Notes were approximately $167.5 million, after deducting the initial purchasers’ discounts and commissions and offering expenses payable by the Company, but before deducting the net cost of the Convertible Note Hedge Transactions and the Warrant Transactions (each as defined herein) described in Note 10. The Convertible Notes are senior unsecured obligations of the Company and pay interest semi-annually in arrears on February 1 and August 1 of each year at an annual rate of 1.00% beginning August 1, 2018. The Convertible Notes will mature on February 1, 2023 unless earlier repurchased or converted in accordance with their terms. The Convertible Notes are convertible by the noteholders, in certain circumstances and subject to certain conditions, into cash, shares of common stock of the Company, or a combination thereof, at the Company’s election. The initial conversion rate for the Convertible Notes is 11.3785 shares of the Company's common stock per $1,000 principal amount of the Convertible Notes (or 1,962,790 shares in the aggregate) and is equal to an initial conversion price of approximately $87.89 per share. If an event of default on the Convertible Notes occurs, the principal amount of the Convertible Notes, plus accrued and unpaid interest (including additional interest, if any) may be declared immediately due and payable, subject to certain conditions.
Convertible Notes holders can convert their Convertibles Notes on or after August 1, 2022 at any time at their option. Holders may convert Convertible Notes prior to August 1, 2022, only under the following circumstances: (i) during any calendar quarter commencing after the calendar quarter ending on June 30, 2018, if the last reported sale price of the Company's common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day, (ii) during the five business day period after any five consecutive trading day period in which the trading price per $1,000 principal amount of notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate on each such trading day and (iii) upon the occurrence of certain specified distributions or corporate events.
10.DERIVATIVE FINANCIAL INSTRUMENTS
Convertible Note Hedge Transactions and Warrant Transactions
In January 2018, in connection with the Convertible Notes offering, the Company entered into privately negotiated convertible note hedge transactions (together, the “Convertible Note Hedge Transactions”) with each of Bank of America, N.A. and Wells Fargo Bank, National Association (together, the “Hedge Counterparties”). Pursuant to the Convertible Note Hedge Transactions, the Company acquired options to purchase the same number of shares of the Company's common stock (or 1,962,790 shares) initially underlying the Convertibles Notes at an initial strike price equal to the initial strike price of the Convertible Notes of approximately $87.89 per share, subject to customary anti-dilution adjustments. The options expire on February 1, 2023, subject to earlier exercise.


At the same time, the Company also entered into separate, privately negotiated warrant transactions (the “Warrant Transactions”) with each of the Hedge Counterparties, pursuant to which the Company sold warrants to purchase the same number of shares of the Company’s common stock (or 1,962,790 shares) underlying the Convertible Notes, at an initial strike price of approximately $113.93 per share, subject to customary anti-dilution adjustments. The warrants have a final expiration date of September 20, 2023.
The Company paid $31.5 million associated with the cost of the Convertible Note Hedge Transactions and received proceeds of $18.1 million related to the Warrant Transactions. The Convertible Note Hedge Transactions are expected generally to reduce potential dilution to the Company’s common stock upon any conversion of the Convertible Notes and/or offset any cash payments the Company is required to make in excess of the principal amount of converted Convertible Notes. However, the Warrant Transactions, could separately have a dilutive effect on the Company's common stock to the extent that the market price per share of the common stock exceeds the strike price of the warrants.
As these transactions meet certain accounting criteria, the Convertible Note Hedges Transactions and Warrant Transactions are recorded in stockholders’ equity and are not accounted for as derivatives.
Interest Rate Swaps
The 2018 Credit Facilitycredit facility exposes the Company to riskrisks associated with the variability in interest expense associated with fluctuations in LIBOR. To partially mitigate this risk, the Company entered into interest rate swaps on a portion of its 2018 Credit Facility.swaps. As of March 31, 2019,29, 2020, the Company had a combined notional principal amount of $200.0 million of variable to fixed interest rate swap agreements, all of which wereare designated as cash flow hedges. These swap agreements effectively convert the interest expense associated with a portion of the 2018 Term Loan and a portion of the 2018 RevolverCompany's variable rate debt from variable interest rates to fixed interest rates and have maturities ranging from February 2022 to March 2022.
Fair Value of Derivative Contracts


The following table summarizes the fair value of derivative contracts included in the accompanying condensed consolidated balance sheetstatements of financial position (in thousands):
 Fair value of derivative liabilities Fair value of derivative instruments
Derivatives accounted for as cash flow hedges Balance sheet locationMarch 31, 2019 December 31, 2018 Balance sheet locationMarch 29, 2020 December 31, 2019
Interest rate swap agreements Other long-term liabilities$4,062
 $2,652
Interest rate swaps Other long-term liabilities$9,914
 $5,868


The interest rate swaps are comprised of over-the-counter derivatives, which are valued using models that primarily rely on observable inputs such as yield curves, andwhich are classified as Level 2 in the fair value hierarchy.

AOCI Recognition

The following table presents the amount of gains and losses that have been recognized inSee Note 11 for information regarding accumulated other comprehensive ("AOCI") from changes in the unrealized gainloss on the interest rate swaps, net of tax (in thousands):
Unrealized Loss Recognized in AOCI
First Quarter Ended 
March 31, 2019 April 1, 2018 
$3,027
 $—
 


swaps.






11.ACCUMULATED OTHER COMPREHENSIVE LOSS

The Company incurs activity in AOCI forAccumulated other comprehensive loss includes unrealized gains and losses on derivatives that qualify as hedges of cash flows, unrecognized pension costs and cumulative foreign currency translation and other adjustments. The activity in AOCI isaccumulated other comprehensive loss during the three months ended March 29, 2020 and March 31, 2019 was as follows:
(thousands)Cash Flow Hedges Defined Benefit Pension Foreign Currency Items Total
Balance at December 31, 2018$(1,973) $(675) $(32) $(2,680)
Other comprehensive income (loss) (net of tax of $356, $0 and $0)(1,054) —
 27
 (1,027)
Balance at March 31, 2019$(3,027) $(675) $(5) $(3,707)
First Quarter Ended March 29, 2020
(thousands)Cash Flow Hedges Other Foreign Currency Items Total
Balance at December 31, 2019$(4,374) $(1,270) $(54) $(5,698)
Other comprehensive loss (net of tax of $1,040, $0 and $0)(3,006) —
 (37) (3,043)
Balance at March 29, 2020$(7,380) $(1,270) $(91) $(8,741)

(thousands)Defined Benefit Pension Foreign Currency Items Total
Balance at December 31, 2017$66
 $—
 $66
Other comprehensive income (net of tax of $0 and $0)—
 28
 28
Balance at April 1, 2018$66
 $28
 $94
First Quarter Ended March 31, 2019

(thousands)Cash Flow Hedges Other Foreign Currency Items Total
Balance at December 31, 2018$(1,973) $(675) $(32) $(2,680)
Other comprehensive income (loss) (net of tax of $356, $0 and $0)(1,054) —
 27
 (1,027)
Balance at March 31, 2019$(3,027) $(675) $(5) $(3,707)


Reclassification adjustments out of accumulated other comprehensive loss were immaterial for all periods presented.












12.LEASES

The Company adopted the provisions of ASC 842 in January of 2019 using the modified retrospective approach as of the effective date of ASC 842 (the effective date method). Under the effective date method, financial results in periods reported prior to 2019 are unchanged.

As a result of the adoption of ASC 842, operating leases for certain warehouses, buildings, forklifts, trucks, trailers and other equipment are now recognized as right-of-use assets and corresponding short-term and long-term lease liabilities. The Company utilized a package of available practical expedients in the adoption of ASC 842, which, among them, does not require the reassessment of operating versus capital lease classification.

Leases with an initial term of 12 months or less are not recorded on the balance sheet and expense related to these short term leases is included in total operating lease cost and not separately disclosed due to immateriality. Lease and non-lease components in the fixed base rent of facility and equipment leases are included as a single component and accounted for as a lease. Pursuant to ASC 842, the Company elected to use the remaining non-cancellable lease term as of January 1, 2019 in determining the lease term at the date of adoption and the corresponding incremental borrowing rate for such leases. Variable lease expense, principally related to trucks, forklifts, and index-related facility rent escalators, was immaterial for the quarter ended March 31, 2019 and is expected to be immaterial for 2019. Leases have remaining lease terms of one year to ten years. Certain leases include options to renew for an additional term. Where there is reasonable certainty to utilize a renewal option, we would include the renewal option in the lease term used to calculate operating lease right-of-use assets and liabilities.













Lease expense, supplemental cash flow information, and other information related to leases were as follows:
First Quarter Ended First Quarter Ended
(thousands)First Quarter EndedMarch 29, 2020 March 31, 2019
March 31, 2019
Operating lease cost$7,787
$8,176
 $7,787
    
Cash paid for amounts included in the measurement of lease liabilities:    
Operating cash flows for operating leases$6,724
$8,084
 $6,724
    
Right-of-use assets obtained in exchange for lease obligations:    
Operating leases$577
$12,428
 $577


Balance sheet information related to leases was as follows:
(thousands, except lease term and discount rate)March 31, 2019
Assets 
Operating lease right-of-use assets$79,868
Liabilities 
Operating lease liabilities, current portion$25,874
Long-term operating lease liabilities54,309
Total lease liabilities$80,183
Weighted average remaining lease term, operating leases (in years)3.86
Weighted average discount rate, operating leases4.01%
(thousands, except lease term and discount rate)March 29, 2020December 31, 2019
Assets  
Operating lease right-of-use assets$98,291
$93,546
Liabilities  
Operating lease liabilities, current portion$28,168
$27,694
Long-term operating lease liabilities70,831
66,467
Total lease liabilities$98,999
$94,161

Weighted average remaining lease term, operating leases (in years)4.2
4.2
Weighted average discount rate, operating leases3.6%3.7%

Maturities of lease liabilities were as follows at March 31, 2019:29, 2020:
(thousands)  
2019 (excluding the three months ended March 31, 2019)$21,884
202024,314
2020 (excluding the three months ended March 29, 2020)$23,746
202117,542
27,394
202210,910
21,665
20236,864
15,987
202410,453
Thereafter5,211
7,581
Total lease payments86,725
106,826
Less imputed interest(6,542)(7,827)
Total$80,183
$98,999


As of March 31, 2019, weLeases have additional operating leases, primarily for facilities and equipment, that have not yet commenced of $1.5 million in future cash payments under the non-cancellable terms of the leases. These operating leases will commence in fiscal year 2019 withremaining lease terms of 4 yearsone year to 7ten years.











Disclosures related to periods prior to the adoption of ASC 842:

Maturities of lease liabilities were as follows at December 31, 2018:
(thousands) 
2019$29,345
202023,344
202116,165
20229,602
20235,357
Thereafter4,883
Total$88,696


Operating lease expense for the first quarter of 2018 was approximately $6 million.
13.FAIR VALUE MEASUREMENTS
 
The carrying amounts of cash equivalents, representing government and other money market funds traded in an active market, are reported on the condensed consolidated statements of financial position as a component of "Cash and cash equivalents". The carrying amount of cash equivalents, trade receivables,valued using level 1 inputs and accounts payableapproximating fair value because of their relatively short maturities, was approximately $83.9 million and $132.6 million at March 29, 2020 and December 31, 2019, respectively. The estimated fair value of our senior notes, calculated using level 2 inputs, was approximately $309.5 million and $320.3 million at March 29, 2020 and December 31, 2019, respectively. The carrying amounts of our term loan and our revolver, valued using level 2 inputs, approximated fair value as of March 31, 201929, 2020 and December 31, 2018 because of the relatively short maturities of these financial instruments. The carrying amounts of the 2018 Term Loan and the 2018 Revolver approximated fair value as of March 31, 2019 and December 31, 2018, respectively, based upon terms and conditions available to the Company at those dates in comparison to the terms and conditions of its outstanding debt. The estimated fair value of the Convertible Notes,our convertible notes, calculated using Levellevel 2 inputs, was approximately $154.8$134.6 million and $162.5 million as of March 29, 2020 and December 31, 2019. As discussed in Note 10, the Convertible Note Hedges Transactions and Warrant Transactions are recorded in shareholders’ equity, are not accounted for as derivatives and are presented at carrying value, which does not approximate fair value at March 31, 2019. The estimated fair value of the Company's interest rate swaps are valued using Level 2 inputs and discussed in further detail in Note 10. The estimated fair value of the Company's contingent consideration is valued using Level 3 inputs and is discussed further in Note 6.2019, respectively.
14.INCOME TAXES
 
The effective tax rate in the first quarter of 2020 and 2019 was 26.4% and 2018 was 22.3% and 19.6%, respectively. The effective tax rate for the periods presentedfirst quarter of 2019 includes the impact of the recognition of excess tax benefits on share-based compensation that was recorded as a reduction to income tax expense upon realization in the amount of $0.8 million and$2.1 millionmillion.
The Company made 0 income tax payments in the first quarter of 20192020 and 2018, respectively.
The Company paid$1.5 million in income taxes of $1.5 milliontax payments in the first quarter of 2019 and an immaterial amount in the first quarter of 2018. Due to the timing of tax payments, the Company paid an additional $10.2 million in April 2019 (the beginning of the 2019 second fiscal quarter) and $3.7 million in April 2018 (the beginning of the 2018 second fiscal quarter).2019.
15.SEGMENT INFORMATION
 
The Company has determined that its2 reportable segments, Manufacturing and Distribution, which are those based on its method of internal reporting, which segregates its businesses by product categorybased on the manner in which its chief operating decision maker allocates resources, evaluates financial results, and production/distribution process.
A description of the Company’s reportable segments is as follows:
Manufacturing – Products in this segment include: laminated products that are utilized to produce furniture, shelving, walls, countertops, and cabinet products, cabinet doors, fiberglass bath fixtures and tile systems, hardwood furniture, vinyl printing, decorative vinyl and paper laminated panels, solid surface, granite, and quartz countertop fabrication, RV painting, fabricated aluminum products, fiberglass and plastic components, softwoods lumber, custom cabinetry, polymer-based flooring, electrical systems components (including instrument and dash panels), wrapped vinyl, paper and hardwood


profile mouldings, interior passage doors, air handling products, slide-out trim and fascia, thermoformed shower surrounds, specialty bath and closet building products, fiberglass and plastic helm systems and components products, wiring and wire harnesses, boat covers, towers, tops and frames, aluminum fuel tanks, CNC molds and composite parts, slotwall panels and components and other products. The Manufacturing segment contributed approximately 70% and 79% of the Company’s net sales for the first three months ended March 31, 2019 and April 1, 2018, respectively.

Distribution – The Company distributes pre-finished wall and ceiling panels, drywall and drywall finishing products, electronics and audio systems components, appliances, wiring, electrical and plumbing products, fiber reinforced polyester products, cement siding, raw and processed lumber, interior passage doors, roofing products, laminate and ceramic flooring, tile, shower doors, furniture, fireplaces and surrounds, interior and exterior lighting products, and other miscellaneous products, in addition to providing transportation and logistics services. The Distribution segment contributed approximately 30% and 21% of the Company’s net sales for the three months ended March 31, 2019 and April 1, 2018, respectively.determines compensation.
 
The tables below present unaudited information about the sales and operating income of those segments.
 
First Quarter Ended March 31, 2019  
  
  
First Quarter Ended March 29, 2020  
  
  
(thousands) Manufacturing Distribution Total Manufacturing Distribution Total
Net outside sales $425,684
 $182,534
 $608,218
 $419,266
 $169,966
 $589,232
Intersegment sales 7,720
 1,165
 8,885
 7,573
 1,300
 8,873
Total sales 433,404
 183,699
 617,103
 426,839
 171,266
 598,105
Operating income 44,437
 8,291
 52,728
 45,704
 9,968
 55,672

First Quarter Ended April 1, 2018      
First Quarter Ended March 31, 2019      
(thousands) Manufacturing Distribution Total Manufacturing Distribution Total
Net outside sales $435,913
 $115,919
 $551,832
 $425,684
 $182,534
 $608,218
Intersegment sales 9,369
 669
 10,038
 7,720
 1,165
 8,885
Total sales 445,282
 116,588
 561,870
 433,404
 183,699
 617,103
Operating income 52,923
 7,290
 60,213
 44,437
 8,291
 52,728








The following table presents a reconciliation of segment operating income to consolidated operating income:
 First Quarter Ended  First Quarter Ended
(thousands) 
March 31,
2019
 
April 1,
2018
  March 29, 2020 March 31, 2019
Operating income for reportable segments $52,728
 $60,213
  $55,672
 $52,728
Unallocated corporate expenses (7,913) (11,328)  (6,792) (7,913)
Amortization (8,989) (7,127)  (9,601) (8,989)
Consolidated operating income $35,826
 $41,758
  $39,279
 $35,826

Unallocated corporate expenses include corporate general and administrative expenses comprised of wages, insurance, taxes, supplies, travel and entertainment, professional fees and other.
 


16.
STOCK REPURCHASE PROGRAMS 
 
In 2018,March 2020, the Board approved a new stock repurchase program for up to $50 million of its common stock, as well as two additions totaling $87.9 million to this program.including amounts remaining under previous authorizations. Approximately $30.3$43.5 million remains in the amount of the Company's common stock that may be acquired under the current stock repurchase program.program as of March 29, 2020. In the first quarter ended March 29, 2020, the Company repurchased 456,155 shares of its common stock at an average price of $34.09 per share at an aggregate cost of $15.6 million. The Company did not repurchase any of its common stock in the first quarter of 2019. In the first quarter of 2018, the Company repurchased 221,095 of its common stock at an average price of $60.93 per share at an aggregate cost of $13.5 million.

Common Stock
The Company’s common stock does not have a stated par value. As a result, repurchases of common stock have been reflected, using an average cost method, as a reduction of common stock, additional paid-in-capital, and retained earnings on the Company’s condensed consolidated statements of financial position.
17.RELATED PARTY TRANSACTIONSSUBSEQUENT EVENTS

The COVID-19 pandemic caused a disruption to our business beginning in late March 2020 and continuing throughout April and into May 2020, as many of the Company's customers reduced production levels and purchases of our products. In the first three months of 2019,response, the Company entered into transactionstemporarily suspended operations at certain facilities in late March and through the month of April 2020 and furloughed affected team members with companies affiliated with twobenefits, in addition to taking various cost containment and financial management measures.

In April 2020, the Company implemented certain actions to reduce its fixed cost structure, primarily in the form of its independent Board members. The Company purchased approximately $0.2 million of corrugated packaging materialslabor cost reductions. We continue to analyze our cost structure and may implement additional measures as necessary due to the ongoing economic conditions resulting from Welch Packaging Group, an independently owned company established by M. Scott Welch who serves as its Presidentthe COVID-19 pandemic and CEO. The Company also sold approximately $0.2 million of RV component products to DNA Enterprises, Inc. ("DNA"). Walter E. Wells' son serves as the President of DNA.related impact on demand levels within our market sectors.


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”) 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 3525 of this Report. The Company undertakes no obligation to update these forward-looking statements.
 
The MD&A is divided into seven major sections:

OVERVIEW OF MARKETS AND RELATED INDUSTRY PERFORMANCE
REVIEW OF CONSOLIDATEDOPERATINGRESULTS
First Quarter Ended March 31, 2019 Compared to April 1, 2018
REVIEW BY BUSINESS SEGMENT
First Quarter Ended March 31, 2019 Compared to April 1, 2018
Unallocated Corporate Expenses
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
Capital Resources
Summary of Liquidity and Capital Resources
CRITICAL ACCOUNTING POLICIES
OTHER
Seasonality


INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS

OVERVIEW OF MARKETS AND RELATED INDUSTRY PERFORMANCE

Summary 
The first quarterglobal spread of 2019 reflected a continuationthe novel coronavirus (COVID-19) in recent months has negatively impacted the global economy, disrupted global supply chains and created significant volatility and disruption in financial markets. The impact of planned end market diversification and the execution of our organic and strategic growth initiatives as the gap continued to widenthis pandemic has created significant uncertainty in the first quarter of 2019 between wholesaleglobal economy and has had, and is expected to continue to have, a material adverse effect on our business, employees, suppliers, and customers. Despite a strong start to the year, there was an abrupt decline in OEM production and retail shipments in the recreational vehicle ("RV") market. As RV dealers continuedand marine markets as well as a decrease in U.S. housing starts during the second half of March 2020. We also expect an adverse impact on the Company’s sales and profitability in future periods as a result of a decrease in activity in all of our end markets. These impacts are expected to manage inventorybe material. However, the duration and the magnitude of these impacts cannot be precisely estimated at this time, as they are affected by a number of factors, many of which are outside of our control, including those presented in Item 1A. Risk Factors of this Quarterly Report. However, we generally expect the second quarter of 2020 to returnbe the most significantly impacted quarter during the 2020 fiscal year.

Sustained adverse impacts to more normalized levels, RV originalthe Company, certain suppliers, and customers may also affect the Company’s future valuation of certain assets and therefore may increase the likelihood of an impairment charge, write-off, or reserve associated with such assets, including goodwill, indefinite and finite-lived intangible assets, property and equipment, manufacturers ("OEMs") continued to adjust production levels,inventories, accounts receivable, tax assets, and we expect OEM production to align with retail demand once normalized inventory levels are established among the dealers. other assets.

We believe that overall dealer sentiment at recent RV shows thus far in 2019 has been positivethe combination of our financial position, our available liquidity, the flexibility of our highly variable cost operating model and retail traffic and sales are off to a solid start to the year.
The Company has been able to continue to increase its content per unit in all markets despite the additional headwinds related to inclement weather in many parts of the country, uncertainty regarding the near-term direction of interest rates, uncertainty around tariffs, and commodity cost volatility. Industry fundamentals and demographics within eachdiversification of our end markets remain strong. In addition,and the geographic regions in which we carriedoperate will help to lessen the impacts of COVID-19 on the Company's operations and financial results. If the situation evolves into a higher operating cost structure comparedmore prolonged pandemic, we plan to revenues throughcontinue to adjust mitigation measures as needed related to the first quarter of 2019 in anticipation of expected improving retail demand in all fourhealth and safety of our primary marketsemployees as well as to operating efficiencies. Those measures have included, and could continue to include in the future, temporarily suspending select plant operations, modifying workspaces, continuing social distancing policies, implementing new personal protective equipment or health screening policies at our facilities, or such other industry best practices needed to continue to maintain a healthy and safe environment for our employees during the pandemic. While we enterhave enhanced, and will continue to enhance, functionality and security of technology for off-site functions, we are planning for the traditionally stronger spring and summer selling seasons.eventual reintroduction of our on-site workforce to our facilities.

Our diversified market penetration inWe have taken steps to reduce the marineimpact of the COVID-19 pandemic on our operating results, including reducing working capital, postponing non-essential capital expenditures, reducing operating costs, aligning production with demand, initiating workforce reductions and furloughs, reducing salaries, and substantially reducing discretionary spending. These countermeasures are expected to lessen the impacts of COVID-19 on our full year 2020 financial results. As the impact of the COVID-19 pandemic on the economy and our residentialmarkets evolves, we will continue to assess the impact on the Company and commercial industrial markets, which we have been strategically targeting, has helpedplan to offset wholesale shipment declines in the first quarter of 2019 incontinue to take actions to reduce such impact on our two largest market sectors, RVbusiness and manufactured housing ("MH"). At the same time, we achieved organic revenue growth in the first quarter of 2019 and realized savings related to synergistic opportunities resulting from acquisitions we have made in the last two years.operating results.

First Quarter 2020 Financial Overview

RVRecreational Vehicle ("RV") Industry 
The RV industry is our primary market and comprised 55% and 56% of the Company’s sales in the first quarter of 2019.ended March 29, 2020 and March 31, 2019, respectively. Sales fromto the RV industry decreased 9%6% in the first quarter of 20192020 compared to the prior year quarter.

According to the Recreation Vehicle Industry Association, (“RVIA”), wholesale shipments totaled 100,404 units in the first quarter of 2020, and were virtually flat compared to 99,976 units in the first quarter of 2019, a decline of 27% compared to 137,086 units2019. Retail unit sales in the first quarter of 2018. Both towable units and motorized units, which accounted for 87% and 13%, respectively, of first quarter 2019 wholesale units, were down 27% compared2020 are estimated to have increased slightly despite the prior year quarter.

We continuedisruption to believe that the future retail demand trajectory remains positiveconsumers related to COVID-19. Additionally, based on new and younger buyers and the emergence of incremental repeat buyers in the channel, increased participation by millennials, the continued shift to smaller travel trailers, and overall economic conditions. In addition, used RV inventory levels remain generally low with rising prices, supporting the demand for new RVs in the long-term.

The RVIA’s latest published expectations for 2019 project wholesale unit shipments to range from approximately 445,000 units to 476,000 units, representing low-to-high-single digit percentage declines from 2018. We currently anticipate thatour estimates, RV dealer inventories will continue to normalize as we progress throughat the secondend of the first quarter of 2019 and will support a return to wholesale shipment levels aligned more closely with retail demand in the latter half of the second quarter and into the third quarter of 2019.

We have continued to capture market share through our strategic acquisitions, line extensions, and the introduction of new and innovative products and have a favorable view of growth for the RV industry based on a number of factors including:
Attractive industry demographic trends with new and younger buyers entering the market and baby boomers reaching retirement age;
Readily available financing and improving consumer credit;
New and innovative products coming to market;
Consumer confidence;
Increased strength in the overall economic environment, including lower unemployment rates, improving trends in wages and improving consumer confidence levels; and


The value of the travel and leisure lifestyle related to spending quality time with families.2020 were at their lowest level since 2014.
Marine Industry
Sales to the marine industry, which represented approximately 13% and 15% of the Company's consolidated net sales in the first quarter of 2020 and 2019, increased 99%respectively, decreased 14% compared to the first quarter of 2018.

We anticipate that the marine market is poised to continue its recovery with the potential for a long runway of slow and steady growth as OEMs in this market continue to offer more value-added content and increased comfort and convenience on boats, consistent with the marine leisure lifestyle experience. Our marine portfolio companies are comprised of a high quality brand platform that is generating significant organic growth opportunities. The Company's combination of design, engineering, manufacturing and fabrication capabilities, along with its growing geographic footprint and comprehensive product offerings to its customers in the marine market, provides continuing opportunities for fully integrated solutions and additional content for the marine OEMs.

All indicators currently point toward another solidprior year in the marine industry with a growth rate in powerboat retail unit shipments for fiscal 2019 of low-to-mid-single digits based on long-term fundamental demand, aging boats in service, and the related replacement cycle, and positive consumer economic metrics.quarter.

For the first quarter of 2019,2020, overall marine retail unit shipments in the powerboat sector, which is the Company's primary marine market, decreased approximately 7%an estimated 5%, with aluminum andfishing sales decreasing an estimated 5%; pontoon sales


decreasing 14% and 3%, respectively,an estimated 2%; fiberglass sales decreasing 4%,an estimated 7%; and ski and wake sales increasing 13%decreasing an estimated 6%. Retail sales andInventory re-calibration continued in the first quarter of 2020, with wholesale unit shipments declining at an estimated mid-to-high teens percentage rate as OEMs continued to decrease production in this market are seasonal and are traditionally strongest in the second and third quarters. This market continues to make a steady recovery,alignment with single-digit annual average growth rates since 2010. Moreover, according to industry sources, the average age of boats in service is approximately 24 to 25 years compared to a 30-year estimated useful life, and approximately one million boats are expected to be retired over the next four years. The increased age of boats in service, low channel inventories, and continued positive demographics all point to anticipated growth in the marine market.lower dealer inventories.

MHManufactured Housing ("MH") Industry
Sales to the MH industry, which represented 19% and 17% of the Company’s sales in the first quarter of 2020 and 2019, respectively, increased 70%6% in the first quarter of 2020 compared to the prior year.first quarter of 2019. Based on industry data from the Manufactured Housing Institute, and the Company's estimate for the month of March, MH wholesale unit shipments decreasedincreased by approximately 10%13% in the first quarter of 2019. Similar2020 compared to the fourthprior year quarter. MH wholesale unit shipments benefited from an improvement in weather conditions in the first quarter of 2018, manufactured housing continues2020 compared to be negatively impacted bythe first quarter of 2019, where wet weather conditions in certain regionsaffected the moving of the country where moving inventory and the setting of foundations and houses have been difficult. Nevertheless, demographic trends within the MH market indicate strong expected demand patterns related to first time home buyers and those looking to downsize.houses.

The Company believes it is well-positioned to capitalize on pent up demand and the significant upside potential of the MH market in the long-term, especially given the increasing attractiveness of the single-family manufactured housing option and the combination of its nationwide geographic footprint, available capacity in current MH concentrated locations, and current content per unit levels.
Factors that may favorably impact production levels further in this industry include improving quality credit standards in the residential housing market, new jobs growth, consumer confidence, favorable changes in financing regulations, a narrowing spread in interest rates on MH loans and mortgages on traditional residential "stick-built" housing, and any improvement in conditions in the asset-backed securities markets for manufactured housing loans.
Industrial Market
The industrial market is comprised primarily of the kitchen cabinet industry, hospitality market, retail and commercial fixtures market, office and household furniture market and regional distributors. Sales to this market represented 13% and 12% of our consolidated sales in the first quarter of 2020 and 2019, respectively, and increased 5%14% in the first quarter of 20192020 compared to the prior year period.
quarter. Overall, our revenues in these markets are focused on the residential housing, hospitality, high-rise housing and office, commercial construction and institutional furniture markets. Single and multifamily residential housing starts declined 5% and 19%, respectively, for the first quarter of 2019, with combined new housing starts down 10% in the quarter. Interest rate


increases and tariffs in the past year have created some headwinds, but potential demand remains strong given the lack of affordable housing capacity and inventories. We believe these factors present opportunities for continued pent up demand along with improving consumer credit, strong jobs and wage growth, and demographic trends related to new buyers and those looking to downsize, and are aligned well with our core housing and industrial market model.
The industrial market is primarily impacted by macroeconomic conditions and more specifically, conditions in the residential housing market. We estimate that approximately 60% of our industrial business is directly tied to the residential housing market, with the remaining 40% directly tied to the non-residential and commercial markets. The Company believes there is a direct correlation between the demand for its products
Combined new housing starts increased 22% in the first quarter of 2020 compared to the prior year quarter, with single family housing starts increasing 12% and multifamily residential housing market andstarts increasing 47% for the same period. Our industrial products are generally among the last components installed in new residential housingunit construction and remodeling activities. Sales to the industrial market generally lagas such our related sales typically trail new residential housing starts by four to six to nine months.
Fiscal Year 2019 Outlook
The 16 acquisitions we completed in total in 2017 and 2018 continue to present organic growth opportunities and synergies to further increase market share gains, expand geographically, establish best practices across all of our brands, and service our customers at the highest level. We continue to expect a return to a more normalized pattern of RV wholesale unit production in alignment with retail demand for fiscal year 2019.
Based on its most recent forecast, the RVIA expects the percentage decline in RV wholesale unit shipments for fiscal 2019 to range from low-single digits to high-single digits compared to full year 2018 reflecting the continued recalibration of dealer inventory levels. On the retail side, the Company expects RV retail unit shipments to be in the range of flat to a low-single digit percentage decline in 2019 with potential upside based on subsiding headwinds related to interest rates, tariffs, commodity prices, consumer confidence, and equity market volatility.

In the marine market, we anticipate that the retail unit growth rate in the powerboat sector of this market will be in the range of low-to-mid single digits in 2019 based on the increasing age of boats in service, balanced channel inventories, and continued positive demographics.

On the MH side, we are currently forecasting low-to-mid single digit growth rates in wholesale unit shipments for 2019, and a low single-digit growth rate in new housing starts overall, and expect to continue to increase our content and market share in both of these market sectors beyond the general industry expectations as a result of increasing market penetration, strategic geographic expansions, and cross selling opportunities.

Our team remains focused on strategic acquisitions in our existing, similar or complementary businesses, expanding operations in targeted regional territories, capturing market share and increasing our per unit content, keeping costs aligned with revenue, maximizing operating efficiencies, focusing on strategic capital expenditures to achieve cost reductions, labor efficiencies and increased capacity, talent management, engagement and retention, and the execution of our organizational strategic agenda.
In conjunction with our organizational strategic agenda, we plan to continue to make targeted capital investments to support new business and leverage our operating platform. The current capital plan for full year 2019 includes expenditures of approximately $30 million related primarily to strategic investments in geographic expansions, the strategic replacement and upgrading of production equipment to improve efficiencies and increase capacity, new process and product development, and other strategic capital and maintenance improvements.


REVIEW OF CONSOLIDATED OPERATING RESULTS
FirstQuarter EndedMarch 31, 201929, 2020 Compared to First Quarter Ended April 1, 2018 2019 
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
First Quarter Ended

March 31, 2019
April 1, 2018
March 29, 2020


March 31, 2019

Net sales
100.0%
100.0%
100.0%
100.0%
Cost of goods sold
82.5

82.3

81.4

82.5
Gross profit 17.5
 17.7
 18.6
 17.5
Warehouse and delivery expenses
4.0

3.1

4.2

4.0
Selling, general and administrative expenses
6.2

5.8

6.1

6.2
Amortization of intangible assets
1.5

1.3

1.6

1.5
Operating income
5.9

7.6

6.7

5.9
Interest expense, net
1.5

0.8

1.8

1.5
Income taxes
1.0

1.3

1.3

1.0
Net income
3.4

5.4

3.6

3.4

Net Sales. Net sales in the first quarter of 2019 increased $56.42020 decreased $19.0 million, or 10%3%, to $608.2$589.2 million from $551.8$608.2 million in the first quarter of 2018.2019. The Company'sconsolidated net sales increased in three of its primary marketsdecrease in the first quarter of 2019 with2020 was primarily attributed to sales decreases to the RV and marine markets, partially offset by sales increases of 99% in marine, 70% into the MH and 5% in industrial partly offset by a decline of 9% inmarkets. The Company's RV market sales.sales decreased 6% and marine market sales decreased 14%, while industrial market sales increased


The consolidated net14% and MH market sales increase in the first quarter of 2019 primarily reflected revenue from nine acquisitions completed in fiscal year 2018, with no acquisitions completed in the first quarter of 2019. In additionincreased 6% when compared to the contributionsprior year quarter. All four of our end markets were impacted by business disruptions and associated lost shipping days due to the 2018 acquisitions, increases in sales reflected increased penetration through geographic and product expansion efforts in the marine and MH markets. In the first quarter of 2018, we acquired Metal Moulding Corporation, Aluminum Metals Company, LLC, IMP Holdings, LLC d/b/a/ Indiana Marine Products, and Collins & Company, Inc. The revenue attributable to these four acquisitions in the first quarter of 2018 was $12.6 million.COVID-19 pandemic.

The Company’s RV content per wholesale unit (on a trailing twelve-month basis) for the first quarter of 2019 increased2020 decreased approximately 30%1% to $3,131$3,112 from $2,414$3,131 for the first quarter of 2018. The marine2019. Marine powerboat content per retail unit (on a trailing twelve-month basis) for the first quarter of 20192020 increased approximately 118%3% to an estimated $1,490$1,531 from $683$1,484 for the first quarter of 2018.2019. MH content per wholesale unit (on a trailing twelve-month basis) for the first quarter of 20192020 increased approximately 42%33% to an estimated $3,389$4,543 from $2,382$3,415 for the first quarter of 2018.2019.

Cost of Goods Sold. Cost of goods sold increased $47.6decreased $21.9 million, or 10%4%, to $501.7$479.8 million in the first quarter of 20192020 from $454.1$501.7 million in 2018.2019. As a percentage of net sales, cost of goods sold increaseddecreased during the first quarter of 20192020 to 81.4% from 82.5% from 82.3% in 2018.2019.

Cost of goods sold as a percentage of net sales was impacted duringdecreased primarily as a result of (i) cost reductions we initiated in the firstthird quarter of 2019 by: (i) decreased RV revenue relative to overall fixed overhead costs; (ii) the lower distribution margin sales profile of LaSalle Bristol ("LaSalle"), which was acquired in the fourth quarter of 2018 and (iii) inventory soldbenefited our gross margins in the first quarter of 2019 which reflected higher input costs incurred2020, (ii) synergies achieved and realized in the latter partfirst quarter of 2020 from our 2018 relative to the current commodities market. Part of the increaseand 2019 acquisitions and (iii) decreases in thecommodity cost of goods sold percentage was offset by leveraging fixed costs in the marine and industrial sectors and by the Company's acquisitions over the last 18 to 24 months that have a lower cost of goods sold percentage profile.inputs. 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 and distributed. The timingin the production of the Company's pass through of input cost increases and decreases to its customers may not coincide with the period in which such costs are incurred in inventory.


our products.
Gross Profit. Gross profit increased $8.7$3.0 million, or 9%3%, to $106.5$109.5 million in the first quarter of 20192020 from $97.8$106.5 million in 2018.2019. As a percentage of net sales, gross profit decreasedincreased to 17.5%18.6% in the first quarter of 20192020 from 17.7%17.5% in the same period in 2018.2019. The improvementincrease in gross profit dollars and the impact to theas a percentage of net sales in the first quarter of 20192020 compared to 2018 reflectedthe same period in 2019 reflects the impact of the factors discussed above under “Cost of Goods Sold”.
 
Economic or industry-wide factors affecting the profitability of our RV, MH, marine and industrial businesses include the costs of commodities and the labor used to manufacture our products as well as the competitive environment that can cause gross margins to fluctuate from quarter-to-quarter and year-to-year. Material and labor costs are the primary factors determining our cost of products sold, and any future increases in raw material or labor costs would impact our profit margins negatively if we were unable to raise the selling prices to our customers for our products by corresponding amounts. Historically, we have generally been able to pass along cost increases to customers.
Warehouse and Delivery Expenses. Warehouse and delivery expenses increased $7.0$0.7 million, or 41%3%, to $24.7 million in the first quarter of 2020 from $24.0 million in the first quarter of 2019 from $17.0 million in 2018.2019. As a percentage of net sales, warehouse and delivery expenses were 4.2% in the first quarter of 2020 compared to 4.0% in the first quarter of 2019 compared to 3.1% in the first quarter of 2018. The expense increase in the first quarter of 2019 compared to the prior year period was primarily attributable to increased sales volumes and to the impact of certain acquisitions completed in 2018 that had higher warehouse and delivery expenses as a percentage of net sales when compared to the consolidated percentage. In addition, the Company's shipments to the OEMs in the first quarter of 2019 were generally in lower volume, and as a result transportation costs relative to sales levels of products delivered increased as a percentage of net sales.2019.
 
Selling, General and Administrative (SG&A)("SG&A") Expenses. SG&A expenses increased $5.9decreased $1.8 million, or 18%5%, to $37.7$35.9 million in the first quarter of 20192020 from $31.8$37.7 million in 2018.the prior year quarter. As a percentage of net sales, SG&A expenses were 6.1% in the first quarter of 2020 compared to 6.2% in the first quarter of 2019 compared to 5.8%2019.

The decrease in SG&A expenses in the first quarter of 2018.

The increase2020 compared to 2019 is primarily due to the realization of cost reduction measures implemented in the third quarter of 2019 as well as reductions in certain SG&A expenses as a percentage ofspending associated with the decrease in net sales in the first quarter of 2019 compared to the prior year period primarily reflected: (i) the impact of additional headcount and administrative expenses associated with recent acquisitions; (ii) the additional investment in and costs related to an expansion of certain leadership roles to support our continued strategic growth plans in 2019 and beyond and (iii) the impact of certain acquisitions completed in 2018 that had higher SG&A expenses as a percentage of net sales when compared to the consolidated percentage.2020.

Amortization of Intangible Assets. Amortization of intangible assets increased $1.9$0.6 million, or 7%, to $9.6 million in the first quarter of 20192020 from $9.0 million in the prior year quarter. The increase in the first quarter of 2020 compared to the prior year quarter primarily reflectingreflects the impact of businesses acquired in 2018. In the aggregate, in conjunction with the 2018 acquisitions, the Company recognized an estimated $121.9 million in certain finite-lived intangible assets that are being amortized over periods ranging from three to 10 years.2019.

Operating Income. Operating income decreased $6.0increased $3.5 million, or 14%10%, to $35.8$39.3 million in the first quarter of 20192020 from $41.8$35.8 million in 2018.2019. As a percentage of net sales, operating income was 5.9%6.7% in the first quarter of 20192020 versus 7.6%5.9% in the same period in 2018. Operating income in the first quarter of 2018 included $1.3 million attributable to the acquisitions completed in that period.2019. The change in operating income and operating margin is primarily attributable to the items discussed above.

Interest Expense, Net. Interest expense increased $4.6$1.5 million, or 17%, to $9.0$10.5 million in the first quarter of 20192020 from $4.4$9.0 million in the prior year. The increase in interest expense reflects: (i)reflects increased borrowings related to 20182019 acquisitions and (ii) increasesan increase in the Company's overall average interest rate onresulting from the variable rate portionissuance of the Company's debt, which reflects increases in LIBOR$300 million aggregate principal amount of 7.5% senior notes in the firstthird quarter of 2019, compared topartially offset by a decrease in variable interest rates on the prior year.Company's term loan and revolving credit facility.
 
Income Taxes. ForIncome tax expense increased $1.6 million, or 27%, to $7.6 million from $6.0 million in the prior year period.



The increase in income tax expense is due primarily to an increase in pretax income as well as an increase in the effective tax rate in the first quarter of 2019,2020 compared to the prior year quarter. The effective tax rate was 22.3% compared to 19.6% in the comparable 2018 period.first quarter of 2020 and 2019 was 26.4% and 22.3%, respectively. The effective tax rate for the periods presentedfirst quarter of 2019 includes the impact of the recognition of excess tax benefits on share-based compensation that werewas recorded as a reduction to income tax expense upon realization. Amounts recorded include $0.8 millionrealization in the first quarteramount of 2019 and $2.1 million in the first quarter of 2018. Excluding the impact relating to the share-based payment awards in the first quarter of 2019 and any additional impact in the remainder of 2019, and excluding the impact of one-time tax items, we anticipate our full year 2019 effective tax rate to be between 25% and 26%.$0.8 million.

The Company's combined effective income tax rate from period to periodUse of Financial Metrics
Our MD&A includes financial metrics, such as RV, marine and for the full year 2019 could further fluctuate due to: (i) refinements in federal and state income tax estimates,MH content per unit, which we believe are impacted by the availability of tax credits; (ii)


permanent differences impacting the effective tax rate; (iii) shifts in apportionment factors among states as a result of recent acquisition activity and other factors and (iv) the timingimportant measures of the recognitionCompany's business performance. Content per unit metrics are generally calculated using our market sales divided by third-party measures of excess tax benefits relatedindustry volume. These metrics should not be considered alternatives to the vestingU.S. GAAP. Our computations of share-based payments awardscontent per unit may differ from similarly titled measures used by others. These metrics should not be considered in isolation or as previously discussed.substitutes for an analysis of our results as reported under U.S. GAAP.

Net Income. Net income for the first quarter of 2019 was $20.8 million, or $0.90 per diluted share, compared to $30.1 million, or $1.20 per diluted share for 2018. The changes in net income for the first quarter of 2019 reflect the impact of the items previously discussed.
REVIEW BY BUSINESS SEGMENT
The Company has determined that itsCompany's reportable segments, Manufacturing and Distribution, are those based on its method of internal reporting, which segregates its businesses by product category and production/distribution process.
The Company’s reportable business segments are as follows:
Manufacturing – This segment includes the following: laminated products that are utilized to produce furniture, shelving, walls, countertops, and cabinet products, cabinet doors, fiberglass bath fixtures and tile systems, hardwood furniture, vinyl printing, decorative vinyl and paper laminated panels, solid surface, granite, and quartz countertop fabrication, RV painting, fabricated aluminum products, fiberglass and plastic components, softwoods lumber, custom cabinetry, polymer-based flooring, electrical systems components including instrument and dash panels, wrapped vinyl, paper and hardwood profile mouldings, interior passage doors, air handling products, slide-out trim and fascia, thermoformed shower surrounds, specialty bath and closet building products, fiberglass and plastic helm systems and components products, wiring and wire harnesses, boat covers, towers, tops and frames, aluminum fuel tanks, CNC molds and composite parts, slotwall panels and components and other products.
Distribution –reporting. The Company distributes pre-finished wallregularly evaluates the performance of the Manufacturing and ceiling panels, drywallDistribution segments and drywall finishing products, electronicsallocates resources to them based on a variety of indicators including sales and audio systems components, appliances, wiring, electricaloperating income. The Company does not measure profitability at the customer market (RV, marine, MH and plumbing products, fiber reinforced polyester products, cement siding, raw and processed lumber, interior passage doors, roofing products, laminate and ceramic flooring, tile, shower doors, furniture, fireplaces and surrounds, interior and exterior lighting products, and other miscellaneous products, in addition to providing transportation and logistics services.industrial) level.

FirstQuarter EndedMarch 31, 201929, 2020 Compared to First Quarter Ended April 1, 20182019
General
 
In the discussion that follows, sales attributable to the Company’s operatingreportable 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 operatingreportable segments. A reconciliation of consolidated operating income is presented in Note 15 to the Notes to Condensed Consolidated Financial Statements.
 
  First Quarter Ended
(thousands) March 31, 2019 April 1, 2018
Sales  
  
Manufacturing $433,404
 $445,282
Distribution 183,699
 116,588
Gross Profit  
  
Manufacturing 76,827

81,587
Distribution 28,973

17,875
Operating Income  
  
Manufacturing 44,437
 52,923
Distribution 8,291
 7,290


  First Quarter Ended
(thousands) 
                                 March 29, 2020

 March 31, 2019
Sales  
  
Manufacturing $426,839
 $433,404
Distribution 171,266
 183,699
Gross Profit  
  
Manufacturing 78,947
 76,827
Distribution 29,196
 28,973
Operating Income  
  
Manufacturing 45,704
 44,437
Distribution 9,968
 8,291

Manufacturing
 
Sales. Sales decreased $11.9$6.6 million, or 3%2%, to $433.4$426.8 million in the first quarter of 20192020 from $445.3$433.4 million in 2018.the prior year quarter. This segment accounted for approximately 71% and 70% of the Company’s consolidated net sales for the first quarter of 2020 and 2019, and 79% the first quarter of 2018.respectively. The sales decrease in the first quarter of 2019 largely reflected a decrease in wholesale unit shipments in2020 was primarily attributed to sales decreases to the RV and MH industriesmarine markets as a result of business disruptions and in retail shipments inlost shipping days due to the marine industry. Revenue in the first quarter of 2018 included $10.3 million related to acquisitions completed in the first three months of 2018.COVID-19 pandemic.



Gross Profit. Gross profit decreased $4.8increased $2.1 million, or 6%3%, to $76.8 in the first quarter of 2019 from $81.6$78.9 million in the first quarter of 2018.2020 from $76.8 million in the first quarter of 2019. As a percentage of sales, gross profit decreasedincreased to 18.5% in the first quarter of 2020 from 17.7% in the first quarter of 2019 from 18.3% in 2018.2019.

Gross profit decreasedincreased during the first quarter of 20192020 compared to the prior year quarter primarily due to: (i) decreased revenue relative to overall fixed overhead costs and (ii) inventory soldcost reduction initiatives implemented in the firstthird quarter of 2019 which reflected higher input costs incurred in the latter part ofas well as synergies we achieved from our 2018 relative to the current commodities market.and 2019 acquisitions.

Operating Income. Operating income decreased 16%increased $1.3 million, or 3%, to $44.4$45.7 million in the first quarter of 20192020 from $52.9$44.4 million in the prior year. In addition to the gross profit decline discussed above, operating expenses increased $3.7 million in the first quarter of 2019, mostly attributed to anyear quarter. The overall increase in SG&A expense due to an increase in head count. Operatingoperating income in the first quarter of 2018 included $1.2 million attributable to three manufacturing acquisitions completed in2020 primarily reflects the first quarter of 2018.items discussed above.

Distribution
 
Sales. Sales increased $67.1decreased $12.4 million, or 58%7%, to $183.7$171.3 million in the first quarter of 20192020 from $116.6$183.7 million in 2018.the prior year quarter. This segment accounted for approximately 30%29% and 21%, respectively,30% of the Company’s consolidated net sales for the first quarter of 2020 and 2019, and 2018.respectively. The sales increasedecrease was mostly attributed to a decrease in our RV end market sales in the first quarter of 20192020 compared to the prior periodyear quarter was largely attributedas a result of business disruptions and lost shipping days due to the revenue contribution of the distribution business acquired during the fourth quarter of 2018. Revenue in the first quarter of 2018 included $2.3 million related to the one distribution acquisition completed in the first quarter of 2018.COVID-19 pandemic.

Gross Profit. Gross profit increased $11.1$0.2 million, or 1%, to $29.2 million in the first quarter of 2020 from $29.0 million in the first quarter of 2019 from $17.9 million in the first quarter of 2018.2019. As a percentage of sales, gross profit increased to 17.0% in the first quarter of 2020 from 15.8% in the first quarter of 2019 from 15.3%2019. The increase in gross profit margin in the first quarter of 2018,2020 compared to the first quarter of 2019 is primarily reflecting the impactattributed to a reduction of acquisitions completed during 2018 which had higher marginoverall fixed costs relative to RV and MH distribution product lines.revenue.

Operating Income. Operating income increased $1.0$1.7 million, or 20%, to $8.3$10.0 million in the first quarter of 20192020 from $7.3$8.3 million in the prior year. Operating income in the first quarter of 2018 included $0.1 million related to the one distribution acquisition completed in thatyear quarter. The overall net improvement in operating income in the first quarter of 20192020 primarily reflects the items discussed above.

Unallocated Corporate Expenses
Unallocated corporate expenses in the first quarter of 2019 decreased $3.4 million to $7.9 million from $11.3 million in the prior year period. The decrease in unallocated corporate expenses in the first quarter of 2019 compared to the first quarter of 2018 was largely attributable to a decrease in accrued incentive compensation.
LIQUIDITY AND CAPITAL RESOURCES
 
As the impact of the COVID-19 pandemic on the economy, our markets and our operations evolves, we will continue to assess our liquidity needs. The COVID-19 pandemic has materially adversely impacted the global economy, disrupted global supply chains and created significant volatility and disruption in financial markets. An extended period of global supply chain and economic disruption could materially affect our business, results of operations, ability to meet debt covenants, access to sources of liquidity and financial condition. Given the economic uncertainty as a result of the pandemic, we have taken actions to improve our current liquidity position, including reducing working capital, pausing our share repurchase program, postponing non-essential capital expenditures, reducing executive salaries, reducing operating costs by initiating workforce reductions and furloughs, and reducing discretionary spending.

Our liquidity at March 29, 2020 consisted of cash and cash equivalents of $94.5 million as well as $410.2 million of availability under our credit facility.

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 increased $2.1decreased $14.7 million to $13.2 million in the first quarter of 2020 from $27.9 million in the first quarter of 2019 from $25.8 million in the first quarterprimarily as a result of 2018 primarily due to: (i) an increase in depreciation and amortization of $4.2 million; (ii) an increase in non-cash interest expense from the amortization of convertible notes debt discount of $0.4 million; (iii) an increase in stock-based compensation expense of $0.3 million; (iv) a decrease in use of cash from other operating cash flows of $1.1 million, and (vi) a decrease in the use of cash from changestrade receivables of $12.3 million, primarily reflecting the timing of cash receipts from one large customer, and an increase in the use of cash from inventories of $19.4 million, due mostly to purchases of raw materials in anticipation of potential supply chain disruptions related to COVID-19. These decreases in operating assets and liabilities, net of acquisitions of businesses, of $5.5 million,cash flows were partially offset by a decrease in net incomean increase of $9.2 million.cash flows from prepaid expenses and other assets of $4.4 million, accounts payable of $10.5 million, and other items of $2.1 million, mostly due to the timing of prepaid expenditures and accounts payable disbursements.


Investing Activities  
Net cash used in investing activities decreased $93.7increased $21.9 million to $9.8$31.8 million in the first quarter 2020 from $9.9 million in the first quarter of 2019 from $103.5 million in the first quarter of 2018 primarily due to: (i) a decreaseto an increase in cash used in business acquisitions of $94.6$23.1 million, and (ii) an increasepartially offset by a decrease in proceeds from the sale of property, equipmentcapital expenditures and other investing activities of $1.4 million, partially offset by an increase in capital expenditures of $2.4$1.2 million.
The Company's current operating model forecasts capital expenditures for fiscal 2019 of approximately $30 million related primarily to strategic investments in geographic expansions, the strategic replacement and upgrading of production equipment to improve efficiencies and increase capacity, new process and product development, and other strategic capital and maintenance improvements.
Financing Activities 
Cash flows from financing activities are one of the Company's primary sources of liquidity through borrowings, effective June 5, 2018 under a credit facility (the "2018 Credit Facility") consisting of a revolving credit loan (the "2018 Revolver") and a term loan (the "2018 Term Loan").
Net cash flows used by financing activities increased $91.5$9.7 million to $26.2 million in the first quarter of 2020 from $16.5 million in the first quarter of 2019 from a source of cash of $75.0 million in the first quarter of 2018 primarily due to: (i) gross proceedsto stock repurchases under our buyback program of $172.5$15.6 million from the first quarter 2018 issuance of 1% Convertible Senior Notes due 2023 (the "Convertible Notes") with no comparablecorresponding amount in the firstprior year quarter and cash dividends paid to shareholders of 2019; (ii) a source of cash in the first quarter of 2018 of $18.1$5.8 million from the related sale of warrants with no comparablecorresponding amount in the first quarter of 2019; (iii) aprior year quarter. These increases in use of cash of $4.4 millionfrom financing activities were partially offset by a decrease in the first quarter of 2019 from payment of contingent consideration from a business acquisition with no comparable amount in the first quarter of 2018;$2.4 million and (iv) an increase in cash used for the vesting of stock-based awards, net of shares tendered for taxes of $0.6 million. Partially offsetting these items were: (i) a decrease in use of cash from net repayments under the 2018 Credit Facilityon our credit facility of $54.2 million; (ii) a use$8.6 million and other financing activities of cash in the first quarter of 2018 of $31.5 million from the purchase of Convertible Notes hedges with no comparable amount in the first quarter of 2019; (iii) a use of cash from stock repurchases under stock buyback program of $13.5 million in the first quarter of 2018 with no comparable amount in the first quarter of 2019, and (iv) a decrease in the use of cash for deferred financing payments of $5.1$0.7 million.
See Notes 9, 10, 14 and 16 of the Notes to Condensed Consolidated Financial Statements for further information on the Company's indebtedness, derivative financial instruments, income taxes, and stock repurchases, respectively.
Summary of Liquidity and Capital Resources
The Company's existing cash and cash equivalents, cash generated from operations, and available borrowings under its 2018 Credit Facilitycredit 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.
The Company's credit facility consists of a $550 million senior secured revolver and a $100 million senior secured term loan. The maturity date for borrowings under the credit agreement that established the credit facility is September 17, 2024. Upon the satisfaction of certain conditions, and obtaining incremental commitments from its lenders, the Company may be able to increase the borrowing capacity of the credit facility by up to $250 million. Borrowings under the credit facility are secured by substantially all personal property assets of the Company and any domestic subsidiary guarantors. Pursuant to the credit agreement:

The term loan is due in consecutive quarterly installments in the following amounts: (i) through and including June 30, 2021, $1,250,000 and (ii) beginning September 30, 2021, and each quarter thereafter, $2,500,000, with the remaining balance due at maturity;

The interest rates for borrowings under the revolver and the term loan are the Prime Rate or LIBOR
plus a margin, which ranges from 0.00% to 0.75% for Prime Rate loans and from 1.00% to 1.75% for LIBOR
loans depending on the Company’s consolidated total leverage ratio. The Company is required to pay fees on unused but committed portions of the revolver, which range from 0.15% to 0.225%.

At March 29, 2020, the Company had $410.2 million of unused borrowing availability under its credit facility. The ability to access unused borrowing capacity under the 2018 Credit Facilitycredit facility as a source of liquidity is dependent on maintaining compliance with the financial covenants as specified under the terms of the credit agreement that establishedagreement.

As of and for the 2018 Credit Agreement. In the first quarter of 2019,March 29, 2020 reporting date, the Company was in compliance with its financial debt covenants as required under the terms of its credit agreement. The required maximum consolidated total leverage ratio and the 2018 Credit Agreement. See Note 9required minimum consolidated fixed charge coverage ratio, as such ratios are defined in the credit agreement, compared to the actual amounts as of March 29, 2020 and for the Notes to Condensed Consolidated Financial Statements for additional information.fiscal period then ended are as follows:  
 
Required

Actual
Consolidated total leverage ratio (12-month period)
4.00

2.32
Consolidated fixed charge coverage ratio (12-month period)
1.50

6.53

Working capital requirements vary from period to period depending on manufacturing volumes primarily related to the RV, MH and marine industries as well as the 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.

Borrowings under the 2018 Revolver and the 2018 Term Loan, which are subject to variable rates of interest, were subject to a maximum total borrowing limit of $900.0 million (effective June 5, 2018). See Note 10 of the Notes to Condensed Consolidated Financial Statements for information on interest rate swaps used to partially hedge variable interest rates under the 2018 Revolver and 2018 Term Loan. The unused availability under the 2018 Credit Facility as of March 31, 2019 was $419.6 million.
CRITICAL ACCOUNTING POLICIES
 
In the first quarter of 2019, we adopted Accounting Standards Update 2016-02, "Leases (Topic 842)". See Note 12 to the Notes to Condensed Consolidated Financial Statements for further information. There have been no other material changes to our significantcritical accounting policies which are summarized in the MD&A and Notes to the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2018. 2019. 
 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 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 as well as marine open houses in the January/February timeframe, resulting in dealers delaying certain restocking purchases until new product lines are introduced at these shows. In addition, current and future seasonal industry trends may be different than in prior years due to the impact of national and regional economic conditions and consumer confidence on retail sales of RVs and other products for which the Company sells its components, timing of dealer orders, fluctuations in dealer inventories, 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 thethis 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 that set forth in such forward-looking statement. The Company does not undertake to publicly update or revise any forward-looking statements except as required by law. FactorsInformation about certain risks that maycould affect our business and cause actual results to differ from those expressed or implied in the Company’s operations and prospectsforward-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, 2018,2019, and in the Company's Form 10-Qs for subsequent quarterly periods, which are filed with the SEC and are available on the SEC’s website at www.sec.gov.



ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Debt Obligations under Credit Agreement
At March 31, 2019,29, 2020, our total debt obligations under our 2018 Credit Agreementcredit agreement were under LIBOR-based interest rates. A 100 basis100-basis point increase in the underlying LIBOR and prime rates would result in additional annual interest cost of approximately $2.8$0.3 million, assuming average borrowings, including the 2018 Term Loan,our term loan, subject to variable rates of $280.0$33.0 million, which was the amount of such borrowings outstanding at March 31, 201929, 2020 subject to variable rates. The $280.0$33.0 million excludes the reclassification of deferred financing costs related to the 2018 Term Loanterm loan and $200.0 million of borrowings outstanding under the 2018 Credit Facilityrevolver and term loan that are hedged at a fixed interest rate through interest rate swaps.


Inflation Commodity Volatility
The prices of key raw materials, consisting primarily of lauan, gypsum, particleboard, aluminum, softwoods lumber, and petroleum-based products are influenced by demand and other factors specific to these commodities, such as the price of oil, rather than being directly affected by inflationary pressures. Prices of certain commodities have historically been volatile and continued to fluctuate in the first three months of 2019.2020. During periods of risingvolatile commodity prices, we have generally been able to pass the increased costsboth price increases and decreases to our customers in the form of surcharges and price increases. However,adjustments. We are exposed to risks during periods of commodity volatility because there can be no assurance future cost increases or decreases, if any, can be partially or fully passed on to customers, or that the timing of such sales price increases or decreases will match raw material cost increases.increases or decreases. We do not believe that inflationcommodity price volatility had a material effect on results of operations for the periods presented.


ITEM 4.CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Company maintains “disclosure controls and procedures”, as such term is defined under Securities Exchange Act Rule 13a-15(e), that are designed to ensure that information required to be disclosed in our Securities Exchange Act of 1934, as amended (the “Exchange Act”) reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow for timely decisions regarding required disclosures. In designing and evaluating the disclosure controls and procedures, the Company’s management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and the Company’s management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
 
Under the supervision and with the participation of our senior management, including our Chief Executive Officer and Chief Financial Officer, the Company conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this quarterly report (the “Evaluation Date”). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded as of the Evaluation Date that our disclosure controls and procedures were effective such that the information relating to the Company, including consolidated subsidiaries, required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and is accumulated and communicated to the Company’s management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in internal control over financial reporting
There have been no changes in our internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the first quarter ended March 31, 2019 or subsequent to the date the Company completed its evaluation,29, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.      


PART II: OTHER INFORMATION
 
Items 1, 3, 4 and 5 of Part II are not applicable and have been omitted.

ITEM 1A.RISK FACTORS
 
There have been no material changes to“Item 1A. Risk Factors” of our Form 10-K includes a discussion of our risk factors. The information presented below updates, and should be read in conjunction with, the risk factors previouslyand information disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018.2019. Except as presented below, there have been no material changes from the risk factors described in our Form 10-K for the year ended December 31, 2019.

The global spread of the COVID-19 virus and measures implemented to combat it have had, and are expected in the future to continue to have, a material adverse effect on our business.

The global spread of the novel coronavirus (COVID-19) in recent months has negatively impacted the global economy, disrupted global supply chains and created significant volatility and disruption in financial markets. The impact of this pandemic has created significant uncertainty in the global economy and has had, and is expected to continue to have, a material adverse effect on our business, employees, suppliers, and customers. The duration and the magnitude of the impact of the COVID-19 pandemic cannot be precisely estimated at this time, as they are affected by a number of factors, many of which are outside of our control. As a result of the COVID-19 pandemic and potential future pandemic outbreaks, we face significant risks including, but not limited to:

Decreases in consumer confidence and disposable income and increases in unemployment could reduce demand for our products by our customers in all of our end markets.
Tightening credit standards could negatively impact credit availability to consumers which could have an adverse effect on all of our end markets.
Supply chain and shipping interruptions and constraints, volatility in demand for our products caused by sudden and significant changes in production levels by our customers or other restrictions affecting our business could adversely impact our planning and forecasting, our revenues and our operations.
Disruptions in our manufacturing and supply arrangements caused by the loss or disruption of essential manufacturing and supply elements such as raw materials or other finished product components, transportation, workforce, or other manufacturing and distribution capabilities could result in our inability to meet our end market customer needs and achieve cost targets.
Significant changes in the conditions in markets in which we manufacture, sell or distribute our products, including additional or expanded quarantines or "stay at home" orders, governmental or regulatory actions, closures or other restrictions that further limit or close our operating and manufacturing facilities, restrict our employees’ ability to travel or perform necessary business functions, restrict or prevent consumers from having access to our products, or otherwise prevent our suppliers or customers from sufficiently staffing operations, could adversely impact operations necessary for the production, distribution, sale, and support of our products.
Failure of third parties on which we rely, including our customers, suppliers, distributors, commercial banks, and other external business partners, to meet their obligations to the Company or to timely meet those obligations, or significant disruptions in their ability to do so, which may be caused by their own financial or operational difficulties, may adversely impact our operations.
Certain of our customers may experience financial difficulties, including bankruptcy or insolvency, as a result of the impact of COVID-19. If any of our customers suffer significant financial difficulties, they may be unable to pay amounts due to us timely or at all. Further, we may have to negotiate significant discounts and/or extended financing terms with these customers in such a situation. If we are unable to collect our accounts receivable as they come due, there may be a material adverse effect on our financial condition, results of operations and cash flows.
If the Company is unable to resume normal operations in a timely fashion, its cash flows could be adversely affected, making it difficult to maintain adequate liquidity or meet debt covenants. As a result, the Company may


be required to pursue additional sources of financing to meet its financial obligations and fund its operations and obtaining such financing is not guaranteed and is largely dependent upon market conditions and other factors.
Disruptions to our operations related to COVID-19 as a result of absenteeism by infected or ill members of management or other employees, or absenteeism by members of management and other employees who elect not to come to work due to the illness affecting others at our facilities, or due to quarantines.
The COVID-19 pandemic has led to and could continue to lead to severe disruption and volatility in the United States and global capital markets, which could increase our cost of capital and adversely affect our ability to access the capital markets in the future. In addition, trading prices in the public equity markets, including prices of our common stock, have been highly volatile as a result of the COVID-19 pandemic.
Sustained adverse impacts to the Company, certain suppliers, and customers may also affect the Company’s future valuation of certain assets and therefore may increase the likelihood of an impairment charge, write-off, or reserve associated with such assets, including goodwill, indefinite and finite-lived intangible assets, property and equipment, inventories, accounts receivable, tax assets, and other assets.

The ultimate impact of the COVID-19 pandemic on our business, results of operations, financial condition and cash flows is highly uncertain and cannot be accurately predicted and is dependent on future developments, including the duration of the pandemic and the length of its impact on the global economy, as well as any new information that may emerge concerning the COVID-19 pandemic and the actions taken to contain it or mitigate its impact. The continued impact on our business as a result of the COVID-19 pandemic could materially adversely affect our business, results of operations, financial condition, cash flows, prospects and the trading prices of our securities in the near-term and beyond 2020.


   
ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
(a) None.
(b) None. 
(c) Issuer Purchases of Equity Securities

Period 
Total Number of Shares Purchased (1)
 
Average Price
Paid Per Share (1) 
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2)
 
Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (2)
January 1 - January 27, 2019 54,817
 $36.46
 —
 $30,306,041
January 28 - March 3, 2019 25,246
 47.64
 —
 30,306,041
March 4 - March 31, 2019 —
 —
 —
 30,306,041
  80,063
   —
  
Period 
Total Number of Shares Purchased (1)
 
Average Price
Paid Per Share (1) 
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2)
 
Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (2)
January 1 - January 26, 2020 51,973
 $52.83
 —
 $26,491,262
January 27 - March 1, 2020 10,000
 51.54
 10,000
 25,975,877
March 2 - March 29, 2020 446,155
 33.70
 446,155
 43,515,568
  508,128
   456,155
  
(1) RepresentsAmount includes 51,973 shares of common stock purchased by the Company in January 2020 for the sole purpose of satisfying the minimum tax withholding obligations of employees upon the vesting of stock awards held by the employees.
(2) See Note 16 to the Notes to Condensed Consolidated Financial Statements for additional information about the Company's stock repurchase program.program, including information related to an increase in shares authorized for repurchase in March 2020.









ITEM 6.EXHIBITS
 
Exhibits (1)Description
31.1
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Chief Executive Officer
31.2
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Chief Financial Officer
32
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Chief Executive Officer and Chief Financial Officer
101Interactive Data Files. The following materials are filed electronically with this Quarterly Report on Form 10-Q:
 101.INSXBRL Instance Document
 101.SCHXBRL Taxonomy Schema Document
 101.CALXBRL Taxonomy Calculation Linkbase Document
 101.DEFXBRL Taxonomy Definition Linkbase Document
 101.LABXBRL Taxonomy Label Linkbase Document
 101.PREXBRL Taxonomy Presentation Linkbase Document

104Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)



SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
PATRICK INDUSTRIES, INC.
 (Registrant)
   
Date: May 9, 20197, 2020By:/s/ Todd M. ClevelandAndy L. Nemeth
  Todd M. Cleveland
Andy L. Nemeth

  President and Chief Executive Officer
 
 
   
Date: May 9, 20197, 2020By:/s/ Joshua A. Boone
  Joshua A. Boone
  Vice President-Finance and Chief Financial Officer


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