UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
 
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED September 29, 2019June 28, 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)
Indiana35-1057796
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
                                                             
107 WEST FRANKLIN STREET, P.O. Box 638
ELKHART,IN             46515
                  (Address of principal executive offices)          (ZIP Code)
 (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 ☒ 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 ☒ 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☒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 ☒
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 PATKNASDAQ
As of October 25, 2019,July 24, 2020, there were 23,764,45823,448,725 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 PositionIncome
    September 29,Second Quarter and Six Months ended June 28, 2020 and June 30, 2019 and December 31, 2018
3
  
Condensed Consolidated Statements of Comprehensive Income
     ThirdSecond Quarter and NineSix Months Ended September 29,ended June 28, 2020 and June 30, 2019 and September 30, 2018
4
  
Condensed Consolidated Statements of Comprehensive IncomeFinancial Position
    Third QuarterJune 28, 2020 and Nine Months Ended September 29,December 31, 2019 and September 30, 2018
5
  
Condensed Consolidated Statements of Shareholders' EquityCash Flows
    Third QuarterSix Months ended June 28, 2020 and Nine Months Ended September 29,June 30, 2019 and September 30, 2018
6
  
Condensed Consolidated Statements of Cash FlowsShareholders' Equity
    NineSecond Quarter and Six Months Ended September 29,ended June 28, 2020 and June 30, 2019 and September 30, 2018
87
  
Notes to Condensed Consolidated Financial Statements
9
  
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
2621
  
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
3529
  
ITEM 4. CONTROLS AND PROCEDURES
3630
  
PART II. OTHER INFORMATION 
  
ITEM 1A. RISK FACTORS
3731
  
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
3732
  
ITEM 6. EXHIBITS
3833
  
SIGNATURES
3934


PART 1: FINANCIAL INFORMATION

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

 
As of
(thousands)
September 29, 2019
December 31, 2018
ASSETS
 
 
Current Assets
 
 
    Cash and cash equivalents
$116,712

$6,895
    Trade and other receivables, net
129,837

82,499
    Inventories
262,558

272,898
    Prepaid expenses and other
18,897

22,875
        Total current assets
528,004

385,167
Property, plant and equipment, net
179,884

177,145
Operating lease right-of-use assets 81,064
 —
Goodwill
308,358

281,734
Intangible assets, net
350,216

382,982
Deferred financing costs, net
3,130

3,688
Other non-current assets
474

515
        TOTAL ASSETS $1,451,130

$1,231,231
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
Current Liabilities
 
 
    Current maturities of long-term debt
$5,000

$8,750
    Current operating lease liabilities 25,990
 —
    Accounts payable
117,862

89,803
    Accrued liabilities
53,423

59,202
        Total current liabilities
202,275

157,755
Long-term debt, less current maturities, net
670,928

621,751
Long-term operating lease liabilities 55,553
 —
Deferred tax liabilities, net
19,735

22,699
Other long-term liabilities
22,701

20,272
        TOTAL LIABILITIES
971,192

822,477
SHAREHOLDERS’ EQUITY
 
 
Common stock
169,220

161,436
Additional paid-in-capital
25,020

25,124
Accumulated other comprehensive loss
(5,953)
(2,680)
Retained earnings
291,651

224,874
        TOTAL SHAREHOLDERS’ EQUITY
479,938

408,754
        TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
$1,451,130

$1,231,231


Second Quarter Ended Six Months Ended
(thousands except per share data)
June 28, 2020
June 30, 2019 June 28, 2020 June 30, 2019
NET SALES
$424,045

$613,218
 $1,013,277
 $1,221,436
Cost of goods sold
350,324

500,557
 830,075
 1,002,227
GROSS PROFIT
73,721

112,661
 183,202
 219,209
Operating Expenses:
 
     
  Warehouse and delivery
20,209

26,270
 44,941
 50,311
  Selling, general and administrative
31,628

32,894
 67,497
 70,586
  Amortization of intangible assets
9,778

8,268
 19,379
 17,257
    Total operating expenses
61,615

67,432
 131,817
 138,154
OPERATING INCOME
12,106

45,229
 51,385
 81,055
Interest expense, net
10,821

8,636
 21,313
 17,619
Income before income taxes
1,285

36,593
 30,072
 63,436
Income taxes
571

9,177
 8,171
 15,171
NET INCOME
$714

$27,416
 $21,901
 $48,265





     
BASIC NET INCOME PER COMMON SHARE
$0.03

$1.19
 $0.96
 $2.09
DILUTED NET INCOME PER COMMON SHARE
$0.03

$1.18
 $0.95
 $2.07





     
Weighted average shares outstanding – Basic
22,667

23,102
 22,840
 23,071
Weighted average shares outstanding – Diluted
22,932

23,316
 23,098
 23,282
         
See accompanying Notes to Condensed Consolidated Financial Statements.





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

  Second Quarter Ended Six Months Ended
(thousands) June 28, 2020 June 30, 2019 June 28, 2020 June 30, 2019
NET INCOME $714
 $27,416
 $21,901
 $48,265
Other comprehensive (loss) income, net of tax:        
Unrealized gain (loss) of hedge derivatives 464
 (1,931) (2,542) (2,985)
Other (15) (94) (52) (67)
Total other comprehensive income (loss) 449
 (2,025) (2,594) (3,052)
COMPREHENSIVE INCOME $1,163
 $25,391
 $19,307
 $45,213

See accompanying Notes to Condensed Consolidated Financial Statements.



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



Third Quarter Ended Nine Months Ended
(thousands except per share data)
September 29, 2019
September 30, 2018 September 29, 2019 September 30, 2018
NET SALES
$566,186

$575,139
 $1,787,622
 $1,731,850
Cost of goods sold
461,851

468,484
 1,464,078
 1,412,649
GROSS PROFIT
104,335

106,655
 323,544
 319,201
Operating Expenses:
 
     
  Warehouse and delivery
23,917

19,789
 74,228
 55,540
  Selling, general and administrative
33,817

33,284
 104,403
 98,999
  Amortization of intangible assets
9,191

8,873
 26,448
 25,140
    Total operating expenses
66,925

61,946
 205,079
 179,679
OPERATING INCOME
37,410

44,709
 118,465
 139,522
Interest expense, net
8,603

7,338
 26,222
 17,980
Income before income taxes
28,807

37,371
 92,243
 121,542
Income taxes
7,490

9,437
 22,661
 28,680
NET INCOME
$21,317

$27,934
 $69,582
 $92,862







    
BASIC NET INCOME PER COMMON SHARE
$0.92

$1.17
 $3.02
 $3.82
DILUTED NET INCOME PER COMMON SHARE
$0.92

$1.15
 $2.99
 $3.77







    
Weighted average shares outstanding – Basic
23,076

23,894
 23,073
 24,279
Weighted average shares outstanding – Diluted
23,273

24,232
 23,279
 24,619
         
See accompanying Notes to Condensed Consolidated Financial Statements.
 
As of
(thousands)
June 28, 2020
December 31, 2019
ASSETS
 
 
Current Assets
 
 
    Cash and cash equivalents
$111,062

$139,390
    Trade and other receivables, net
143,614

87,536
    Inventories
261,691

253,870
    Prepaid expenses and other
21,086

36,038
        Total current assets
537,453

516,834
Property, plant and equipment, net
184,797

180,849
Operating lease right-of-use assets 96,065
 93,546
Goodwill
326,478

319,349
Intangible assets, net
344,905

357,014
Deferred financing costs, net
2,706

2,978
Other non-current assets
392

423
        TOTAL ASSETS $1,492,796

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

$5,000
    Current operating lease liabilities 28,567
 27,694
    Accounts payable
115,838

96,208
    Accrued liabilities
69,132

58,033
        Total current liabilities
218,537

186,935
Long-term debt, less current maturities, net
673,138

670,354
Long-term operating lease liabilities 68,318
 66,467
Deferred tax liabilities, net
19,056

27,284
Other long-term liabilities
20,479

22,472
        TOTAL LIABILITIES
999,528

973,512
SHAREHOLDERS’ EQUITY
 
 
Common stock
173,178

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

25,014
Accumulated other comprehensive loss
(8,292)
(5,698)
Retained earnings
303,848

305,503
        TOTAL SHAREHOLDERS’ EQUITY
493,268

497,481
        TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
$1,492,796

$1,470,993


See accompanying Notes to Condensed Consolidated Financial Statements.



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

  Third Quarter Ended Nine Months Ended
(thousands) September 29, 2019 September 30, 2018 September 29, 2019 September 30, 2018
NET INCOME $21,317
 $27,934
 $69,582
 $92,862
Other comprehensive (loss) income, net of tax:        
Unrealized (loss) gain of hedge derivatives (240) 80
 (3,225) 80
Foreign currency translation gain (loss) 19
 (28) (48) (31)
Total other comprehensive (loss) gain (221) 52
 (3,273) 49
COMPREHENSIVE INCOME $21,096
 $27,986
 $66,309
 $92,911
  Six Months Ended
(thousands) June 28, 2020 June 30, 2019
CASH FLOWS FROM OPERATING ACTIVITIES    
Net income $21,901
 $48,265
Adjustments to reconcile net income to net cash provided by operating activities:    
Depreciation and amortization 34,689
 30,247
Stock-based compensation expense 6,347
 8,172
Amortization of convertible notes debt discount 3,505
 3,382
Deferred income taxes (7,346) 231
Other 3,016
 (810)
Change in operating assets and liabilities, net of acquisitions of businesses:    
Trade receivables (55,520) (31,514)
Inventories (7,183) 13,699
Prepaid expenses and other assets 14,908
 2,368
Accounts payable, accrued liabilities and other 25,055
 19,774
Net cash provided by operating activities
39,372

93,814
CASH FLOWS FROM INVESTING ACTIVITIES
 
 
Capital expenditures
(11,305)
(18,177)
Proceeds from sale of property, equipment and other investing activities
126

4,357
Business acquisitions, net of cash acquired
(23,838)
(1,246)
Net cash used in investing activities
(35,017) (15,066)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
Term debt repayments
(1,250)
(3,750)
Borrowings on revolver
8,022

389,294
Repayments on revolver
(8,022)
(439,627)
Stock repurchases under buyback program
(15,550)
—
Cash dividends paid to shareholders (11,607) —
Payments related to vesting of stock-based awards, net of shares tendered for taxes
(2,860) (3,303)
Payment of deferred financing costs
(58) (276)
Proceeds from exercise of stock options 642
 7
Payment of contingent consideration from a business acquisition (2,000) (4,416)
Net cash used in financing activities
(32,683) (62,071)
Increase (decrease) in cash and cash equivalents
(28,328) 16,677
Cash and cash equivalents at beginning of year
139,390
 6,895
Cash and cash equivalents at end of period
$111,062
 $23,572

See accompanying Notes to Condensed Consolidated Financial Statements.



PATRICK INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited)
Third Quarter Ended September 29, 2019
Second Quarter Ended June 28, 2020Second Quarter Ended June 28, 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
Balance June 30, 2019 $166,086
 $25,124
 $(5,732) $273,139
 $458,617
Balance March 29, 2020 $170,626
 $24,534
 $(8,741) $308,957
 $495,376
Net income —
 —
 —
 714
 714
Dividends declared —
 —
 —
 (5,823) (5,823)
Other comprehensive income, net of tax —
 —
 449
 —
 449
Issuance of shares upon exercise of common stock options 642
 —
 —
 —
 642
Shares used to pay taxes on stock grants (126) —
 —
 —
 (126)
Stock-based compensation expense 2,036
 —
 —
 —
 2,036
Balance June 28, 2020 $173,178
 $24,534
 $(8,292) $303,848
 $493,268
          
Six Months Ended June 28, 2020Six Months Ended June 28, 2020
(thousands) 
Common
Stock
 
Additional
Paid-in-
Capital
 
Accumulated
Other
Comprehensive
Loss
 
Retained
Earnings
 Total
Balance December 31, 2019 $172,662
 $25,014
 $(5,698) $305,503
 $497,481
Net income —
 —
 —
 21,901
 21,901
Dividends declared —
 —
 —
 (11,801) (11,801)
Other comprehensive loss, net of tax —
 —
 (2,594) —
 (2,594)
Share repurchases under buyback program (3,315)—
(480)—
—
—
(11,755) (15,550)
Issuance of shares upon exercise of common stock options 642
 —
 —
 —
 642
Shares used to pay taxes on stock grants (3,158) —
 —
 —
 (3,158)
Stock-based compensation expense 6,347
 —
 —
 —
 6,347
Balance June 28, 2020 $173,178
 $24,534
 $(8,292) $303,848
 $493,268
          
Second Quarter Ended June 30, 2019

Second Quarter Ended June 30, 2019

(thousands) 
Common
Stock
 
Additional
Paid-in-
Capital
 
Accumulated
Other
Comprehensive
Loss
 
Retained
Earnings
 Total
Balance March 31, 2019 $161,949
 $25,124
 $(3,707) $245,723
 $429,089
Net income —
 —
 —
 21,317
 21,317
 —
 —
 —
 27,416
 27,416
Other comprehensive loss, net of tax —
 —
 (221) —
 (221) —
 —
 (2,025) —
 (2,025)
Share repurchases under buyback program (674) (104) —
 (2,805) (3,583)
Shares used to pay taxes on stock grants (59) —
 —
 —
 (59)
Stock-based compensation expense 3,867
 —
 —
 —
 3,867
Balance September 29, 2019 $169,220
 $25,020
 $(5,953) $291,651
 $479,938
          
Nine Months Ended September 29, 2019
(thousands) 
Common
Stock
 
Additional
Paid-in-
Capital
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Retained
Earnings
 Total
Balance December 31, 2018 $161,436
 $25,124
 $(2,680) $224,874
 $408,754
Net income —
 —
 —
 69,582
 69,582
Other comprehensive loss, net of tax —
 —
 (3,273) —
 (3,273)
Share repurchases under buyback program (674) (104) —
 (2,805) (3,583)
Shares used to pay taxes on stock grants (3,587) —
 —
 —
 (3,587) (91) —
 —
 —
 (91)
Issuance of shares upon exercise of common stock options 6
 —
 —
 —
 6
 3
 —
 —
 —
 3
Stock-based compensation expense 12,039
 —
 —
 —
 12,039
 4,225
 —
 —
 —
 4,225
Balance September 29, 2019 $169,220
 $25,020
 $(5,953) $291,651
 $479,938
Balance June 30, 2019 $166,086
 $25,124
 $(5,732) $273,139
 $458,617
                    
Third Quarter Ended September 30, 2018
(thousands) Common Stock Additional Paid-in- Capital Accumulated Other Comprehensive Income (Loss) Retained Earnings Total
Balance July 1, 2018 $161,648
 $25,552
 $63
 $216,357
 $403,620
Net income —
 —
 —
 27,934
 27,934
Other comprehensive income, net of tax —
 —
 52
 —
 52
Stock repurchases under buyback program (2,237) (113) —
 (18,593) (20,943)
Issuance of shares upon exercise of common stock options (37) —
 —
 —
 (37)
Shares used to pay taxes on stock grants 9
 —
 —
 —
 9
Stock-based compensation expense 3,542
 —
 —
 —
 3,542
Equity component of convertible notes issuance —
 41
 —
 —
 41
Balance September 30, 2018 $162,925
 $25,480
 $115
 $225,698
 $414,218
          



PATRICK INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited) (cont.)CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited) (cont.)
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited) (cont.)

Nine Months Ended September 30, 2018
Six Months Ended June 30, 2019Six Months Ended June 30, 2019
(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
Balance December 31, 2017 $163,196
 $8,243
 $66
 $199,180
 $370,685
Balance December 31, 2018 $161,436
 $25,124
 $(2,680) $224,874
 $408,754
Net income —
 —
 —
 92,862
 92,862
 —
 —
 —
 48,265
 48,265
Other comprehensive loss, net of tax —
 —
 49
 —
 49
 —
 —
 (3,052) —
 (3,052)
Stock repurchases under buyback program (8,266) (418) —
 (66,344) (75,028)
Shares used to pay taxes on stock grants (3,528) —
 —
 —
 (3,528)
Issuance of shares upon exercise of common stock options 3
 —
 —
 —
 3
 6
 —
 —
 —
 6
Shares used to pay taxes on stock grants (2,919) —
 —
 —
 (2,919)
Stock-based compensation expense 10,911
 —
 —
 —
 10,911
 8,172
 —
 —
 —
 8,172
Purchase of convertible notes hedges —
 (31,481) —
 —
 (31,481)
Proceeds from sale of warrants —
 18,147
 —
 —
 18,147
Equity component of convertible notes issuance —
 30,989
 —
 —
 30,989
Balance September 30, 2018 $162,925
 $25,480
 $115
 $225,698
 $414,218
Balance June 30, 2019 $166,086
 $25,124
 $(5,732) $273,139
 $458,617

See accompanying Notes to Condensed Consolidated Financial Statements





PATRICK INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 
Nine Months Ended
(thousands)
September 29, 2019
September 30, 2018
CASH FLOWS FROM OPERATING ACTIVITIES    
Net income
$69,582

$92,862
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
Depreciation and amortization
46,449

39,893
Stock-based compensation expense
12,039

10,911
Amortization of convertible notes debt discount
5,123

4,495
Deferred income taxes
(794)
(1,088)
Other
235

(2,739)
Change in operating assets and liabilities, net of acquisitions of businesses:
 
 
Trade receivables
(44,359)
(29,295)
Inventories
9,084

(13,238)
Prepaid expenses and other assets
4,319

4,299
Accounts payable, accrued liabilities and other
20,355

21,313
Net cash provided by operating activities
122,033

127,413
CASH FLOWS FROM INVESTING ACTIVITIES
 
 
Capital expenditures
(22,227)
(26,073)
Proceeds from sale of property, equipment and other investing activities
4,509

5,125
Business acquisitions, net of cash acquired
(22,350)
(290,052)
Net cash used in investing activities
(40,068) (311,000)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
Term debt borrowings
7,500

36,981
Term debt repayments
(3,750)
(6,441)
Borrowings on revolver
648,460

954,535
Repayments on revolver
(905,792)
(877,931)
Stock repurchases under buyback program
(3,583)
(75,028)
Proceeds from issuance of senior notes 300,000
 —
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
(3,359) (2,659)
Payment of deferred financing costs
(7,214) (7,485)
Payment of contingent consideration from a business acquisition (4,416) —
Other financing activities
6
 (12)
Net cash provided by financing activities
27,852
 181,126
Increase (decrease) in cash and cash equivalents
109,817
 (2,461)
Cash and cash equivalents at beginning of year
6,895
 2,767
Cash and cash equivalents at end of period
$116,712
 $306
See accompanying Notes to Condensed Consolidated Financial Statements.




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

The accompanying unaudited condensed consolidated financial statements of Patrick Industries, Inc. (“Patrick”, the “Company”, "we", "our") contain all adjustments (consisting of normal recurring adjustments) that we believe are necessary to present fairly the Company’s financial position as of September 29, 2019June 28, 2020 and December 31, 2018,2019, and its results of operations for the three and nine months ended September 29, 2019 and September 30, 2018 and cash flows for the ninesecond quarter and six months ended September 29, 2019June 28, 2020 and SeptemberJune 30, 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 to Notes1 to the 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 thirdsecond quarter and ninesix months ended September 29, 2019June 28, 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 thirdsecond quarter of fiscal year 2020 ended on June 28, 2020 and the second quarter of fiscal year 2019 ended on September 29, 2019 and the third quarter of fiscal year 2018 ended on SeptemberJune 30, 2018.2019.
In preparation of Patrick’s condensed consolidated financial statements as of and for the threesecond quarter and ninesix months ended September 29, 2019,June 28, 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 in part 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.

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.

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, income, comprehensive income 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 evaluating the effect of adopting this new accounting standard, which will dependdid not have a material impact on the outcomes of future goodwill impairment tests.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 ASCAccounting Standards Codification ("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 beare 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 beare 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 on 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 U.S. 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 effectthis standard on its condensedour consolidated financial statements.
 3.REVENUE RECOGNITION

In the following table, revenue from contracts with customers, net of intersegment sales, is disaggregated by market type and by reportable segments,segment, consistent with how the Company believes the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors:
 Third Quarter Ended September 29, 2019 Second Quarter Ended June 28, 2020
(thousands) Manufacturing Distribution Total Reportable Segments Manufacturing Distribution Total Reportable Segments
Market type:            
Recreational Vehicle $218,706
 $91,313
 $310,019
 $139,628
 $64,498
 $204,126
Manufactured Housing 44,159
 64,959
 109,118
 36,407
 53,907
 90,314
Industrial 64,541
 7,566
 72,107
 61,679
 8,878
 70,557
Marine 72,306
 2,636
 74,942
 54,860
 4,188
 59,048
Total $399,712
 $166,474
 $566,186
 $292,574
 $131,471
 $424,045



  Nine Months Ended September 29, 2019
(thousands) Manufacturing Distribution Total Reportable Segments
Market type:      
Recreational Vehicle $694,261
 $299,115
 $993,376
Manufactured Housing 131,101
 193,975
 325,076
Industrial 188,292
 25,149
 213,441
Marine 246,017
 9,712
 255,729
Total $1,259,671
 $527,951
 $1,787,622

  Six Months Ended June 28, 2020
(thousands) Manufacturing Distribution Total Reportable Segments
Market type:      
Recreational Vehicle $366,413
 $157,933
 $524,346
Manufactured Housing 82,012
 120,671
 202,683
Industrial 133,126
 16,023
 149,149
Marine 130,289
 6,810
 137,099
Total $711,840
 $301,437
 $1,013,277

 Third Quarter Ended September 30, 2018 Second Quarter Ended June 30, 2019
(thousands) Manufacturing Distribution Total Reportable Segments Manufacturing Distribution Total Reportable Segments
Market type:            
Recreational Vehicle $262,936
 $91,637
 $354,573
 $240,677
 $100,244
 $340,921
Manufactured Housing 41,428
 26,334
 67,762
 44,739
 65,200
 109,939
Industrial 63,429
 8,906
 72,335
 62,823
 9,534
 72,357
Marine 77,421
 3,048
 80,469
 86,036
 3,965
 90,001
Total $445,214
 $129,925
 $575,139
 $434,275
 $178,943
 $613,218
`

 Nine Months Ended September 30, 2018 Six Months Ended June 30, 2019
(thousands) Manufacturing Distribution Total Reportable Segments Manufacturing Distribution Total Reportable Segments
Market type:            
Recreational Vehicle $847,944
 $280,082
 $1,128,026
 $475,555
 $207,802
 $683,357
Manufactured Housing 124,406
 75,946
 200,352
 86,942
 129,016
 215,958
Industrial 186,890
 25,701
 212,591
 123,751
 17,583
 141,334
Marine 184,848
 6,033
 190,881
 173,711
 7,076
 180,787
Total $1,344,088
 $387,762
 $1,731,850
 $859,959
 $361,477
 $1,221,436


Contract Liabilities
The following table provides information aboutContract liabilities, representing upfront payments from customers received prior to satisfying performance obligations, were immaterial as of the beginning and end of all periods presented and changes in contract balances:
(thousands)September 29, 2019 December 31, 2018
Receivables, which are included in trade and other receivables, net$128,672
 $74,196
Contract liabilities$2,692
 $2,642
liabilities were immaterial during all periods presented.

Significant changes in the contract liabilities balance during the nine months ended September 29, 2019 are as follows:
(thousands) Contract Liabilities
Revenue recognized that was included in the contract liability balance at the beginning of the period $(1,006)
Increases due to cash received, excluding amounts recognized as revenue during the period $1,056



4.INVENTORIES
Inventories consist of the following:


(thousands) September 29, 2019 December 31, 2018 June 28, 2020 December 31, 2019
Raw materials $172,775
 $164,408
 $174,758
 $162,238
Work in process 14,235
 12,829
 14,143
 14,272
Finished goods 25,403
 28,341
 27,617
 28,446
Less: reserve for inventory obsolescence (10,258) (5,354) (12,054) (10,123)
Total manufactured goods, net 202,155
 200,224
 204,464
 194,833
Materials purchased for resale (distribution products) 62,616
 74,914
 59,523
 60,918
Less: reserve for inventory obsolescence (2,213) (2,240) (2,296) (1,881)
Total materials purchased for resale (distribution products), net 60,403
 72,674
 57,227
 59,037
Total inventories $262,558
 $272,898
 $261,691
 $253,870


5.GOODWILL AND INTANGIBLE ASSETS

Changes in the carrying amount of goodwill for the ninesix months ended September 29, 2019June 28, 2020 by segment are as follows:
(thousands) Manufacturing Distribution Total Manufacturing Distribution Total
Balance - December 31, 2018 $235,345
 $46,389
 $281,734
Balance - December 31, 2019 $268,402
 $50,947
 $319,349
Acquisitions 7,177
 —
 7,177
 6,008
 —
 6,008
Adjustments to preliminary purchase price allocations 8,428
 11,019
 19,447
 (603) 1,724
 1,121
Balance - September 29, 2019 $250,950
 $57,408
 $308,358
Balance - June 28, 2020 $273,807
 $52,671
 $326,478

Intangible assets, net consist of the following as of September 29, 2019June 28, 2020 and December 31, 2018:2019:
(thousands)
September 29,
2019
Weighted Average Useful Life
(in years)
December 31,
2018
Weighted Average Useful Life
(in years)
June 28,
2020
Weighted Average Useful Life
(in years)
December 31,
2019
Weighted Average Useful Life
(in years)
Customer relationships
$348,947

10.1
$366,228

10.1
$360,962

10.1
$357,513

10.1
Non-compete agreements
16,405

4.9
19,159

4.9
15,149

5.0
16,202

5.0
Patents
16,338

14.6
1,048

8.9
16,495

14.6
16,495

14.6
Trademarks 80,786
 Indefinite 82,358
 Indefinite 89,058
 Indefinite 88,524
 Indefinite

462,476

 
468,793

 
481,664

 
478,734

 
Less: accumulated amortization
(112,260)
(85,811)
 
(136,759)
(121,720)
 
Intangible assets, net
$350,216

 
$382,982

 
$344,905

 
$357,014

 

Changes in the carrying value of intangible assets for the ninesix months ended September 29, 2019June 28, 2020 by segment are as follows:
(thousands)
Manufacturing
Distribution
Total
Manufacturing
Distribution
Total
Balance - December 31, 2018
$304,485

$78,497

$382,982
Balance - December 31, 2019
$282,123
 $74,891

$357,014
Acquisitions
8,329

—

8,329

9,220
 —

9,220
Amortization
(21,808)
(4,640)
(26,448)
(15,838) (3,541)
(19,379)
Impairment of intangible assets (1)
 (119) (1,831) (1,950)
Adjustments to preliminary purchase price allocations
(12,023)
(2,624)
(14,647)
138
 (138)
—
Balance - September 29, 2019
$278,983

$71,233

$350,216
Balance - June 28, 2020
$275,524
 $69,381

$344,905



(1) Certain immaterial operations permanently ceased activities during the second quarter of 2020. As a result, we recorded a $2.0 million pre-tax impairment of customer relationships and trademarks of these operations after determining the net carrying value of the assets was no longer recoverable. The impairment was calculated using our internal projections of discounted cash flows, which rely on Level 3 inputs in the fair value hierarchy based on the unobservable nature of the underlying data. The impairment was recorded in selling, general and administrative in our condensed consolidated statements of income for the second quarter and six months ended June 28, 2020.
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 and six months ended June 28, 2020 whether the impact of the COVID-19 pandemic on overall macroeconomic conditions and our operating income for the second quarter and six months ended June 28, 2020 indicated that at June 28, 2020 it was more likely than not that our goodwill and trademarks were impaired. We evaluated among other factors (i) the results of our 2019 impairment tests; (ii) our market capitalization at June 28, 2020 in relation to the carrying amount of shareholders’ equity at June 28, 2020 and to fair values determined during our 2019 impairment tests; (iii) the results of our operations during the second quarter and six months ended June 28, 2020 in relation to our projections; and (iv) 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, and other than immaterial impairments discussed above, we determined it was more likely than not that our goodwill and trademarks were not impaired as of June 28, 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 
In addition toThe Company did not make any acquisitions in the acquisitionssecond quarter of 2020 and completed in 2018 as discussed below, the Company completed 23 acquisitions in the first ninesix months of 2019.2020 (the "2020 Acquisitions"). For the thirdsecond quarter and first ninesix months ended September 29, 2019, revenue and operating incomeJune 28, 2020, net sales included in the Company's condensed consolidated statements of income related to the 20192020 acquisitions were immaterial. For the third quarter ended September 30, 2018, revenue and operating income of approximately $82.4$3.3 million and $8.8$3.8 million, respectively, were included in the Company’s condensed consolidated statements of income relating to the businesses acquiredrespectively. Acquisition-related costs incurred in the first ninesix months of 2018.2020 were immaterial. The first nine months of 2018 included revenue and operating income of approximately $160.0 million and $17.3 million, respectively, related to these acquisitions. Acquisition-related costs in the aggregate associated with the businesses acquiredCompany made no acquisitions in the first ninesix months of 2019 and 2018 were immaterial.

Contingent Consideration
In connection with certain acquisitions, if certain financial targets for 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 remeasured quarterly at fair value.2019.

As of September 29, 2019,June 28, 2020, the aggregate fair value of the estimated contingent consideration payments was $12.0$7.8 million, $4.5$5.9 million of which is included in the line item "Accrued liabilities" and $7.5$1.9 million is included in “Other long-term liabilities” on the condensed consolidated statement of financial position. At December 31, 2018,2019, the aggregate fair value of the estimated contingent consideration payments was $13.8$9.6 million, $4.4$2.0 million of which was included in the line item "Accrued liabilities" and $9.4$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 $17.2$12.3 million in the aggregate. In the first quartersix months of 2019,2020, the Company made cash payments of approximately $4.4$2.0 million related to contingent consideration liabilities,arrangements, recording a corresponding reduction to accrued liabilities.

2020 Acquisitions
Acquisitions completed in the first six months of 2020 include the previously announced acquisitions of Maple City Woodworking Corporation, a Goshen, Indiana-based manufacturer of hardwood cabinet doors and fascia for the recreational vehicle market, and SEI Manufacturing, Inc., a Cromwell, Indiana-based manufacturer of towers, T-Tops,


hardtops, rails, gates and other aluminum exterior products for the marine market. The total cash consideration for the 2020 Acquisitions was $25.0 million. The preliminary purchase price allocations are subject to valuation activities being finalized, and thus all required purchase accounting adjustments are subject to change within the measurement period as the Company finalizes its estimates. The 2020 Acquisitions are included in the Manufacturing segment.
2019 Acquisitions
The Company completed 23 acquisitions in 2019 ( the third quarter and first nine months ended September 29, 2019,"2019 Acquisitions"), including the previously announced acquisitionacquisitions 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 marine industry. The total initialcash consideration for these acquisitionsthe 2019 Acquisitions was $21.1$53.1 million, plus subsequent contingent consideration payments over a one-year period based on future performance in connection with the acquisition of 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 to preliminary purchase accounting estimates recorded in the second quarter and first six months of 2020 related to the 2019 Acquisitions were immaterial. The results of operations for these acquisitions2019 Acquisitions are included in the Company’s condensed consolidated financial statements and the Manufacturing operating segment from their respective dates of acquisition.segment.

2018 Acquisitions
Metal Moulding Corporation (“MMC”)
In February 2018, the Company 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 contingent consideration payments 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 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.
Collins & Company, Inc. (“Collins”)
In March 2018, the Company completed the acquisition of the business and certain assets of Bristol, Indiana-based Collins, a distributor of appliances, trim products, fuel systems, flooring, tile, 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. 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 period in which the purchase price allocation and all purchase accounting adjustments were finalized.
Dehco, Inc. (“Dehco”)
In April 2018, the Company completed the acquisition of Dehco, a distributor and manufacturer of flooring, kitchen and bath 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. 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 period in which the purchase price allocation and all purchase accounting adjustments were finalized.
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, 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. Changes from previously reported estimated amounts as of December 31, 2018 include a $2.7 million increase to property, plant and equipment and a $3.3 million increase to goodwill, offset by a $5.9 million decrease to intangible assets and a $0.1 million increase in accounts payable and accrued liabilities. There was no material impact to the condensed consolidated statement of income related to these changes in the period in which the purchase price allocation and all purchase accounting adjustments were finalized.


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 MAC are included in the Company’s condensed consolidated financial statements and the Manufacturing and Distribution operating segments from the date of acquisition. Changes from previously reported estimated amounts as of December 31, 2018 include a $6.5 million decrease to intangible assets and a $1.0 million decrease to property, plant and equipment, offset by a decrease in deferred taxes and other liabilities of $1.1 million and an increase to goodwill of $6.4 million. There was no material impact to the condensed consolidated statement of income related to these changes in the period in which the purchase price allocation and all purchase accounting adjustments were finalized.
Engineered Metals and Composites, Inc. (“EMC”)
In September 2018, the Company completed the acquisition of the business and certain assets 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 $25.3 million, plus contingent consideration over a three-month period based on future performance.
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. After adjusting for a $0.1 million increase to the estimated purchase price reported at December 31, 2018 due to a final working capital adjustment of $0.1 million, changes from previously reported estimated amounts as of December 31, 2018 include an increase to intangible assets of $1.6 million, an increase to inventory of $0.1 million, a decrease to property, plant and equipment of $0.8 million, a decrease to goodwill of $0.6 million and an increase to accounts payable of $0.2 million. There was no material impact to the condensed consolidated statement of income related to these changes in the period in which the purchase price allocation and all purchase accounting adjustments were finalized.
LaSalle Bristol (“LaSalle”)
In November 2018, 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 $51.1 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.
The results of operations for LaSalle 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.
After adjusting for a $1.1 million increase in the estimated purchase price reported at December 31, 2018 due to a final working capital adjustment of $1.1 million, changes from previously reported estimated amounts as of December 31, 2018 are related primarily to a $6.7 million decrease to inventory, offset partly by a $0.8 million increase to accounts receivable, a $0.3 million increase to prepaid expenses and a $6.7 million increase to goodwill. There was no material impact to the condensed consolidated statement of income related to these changes.
The following table summarizes the fair values of the assets acquired and the liabilities assumed as of the date of the acquisition for the 2020 Acquisitions and the 2019 and 2018 acquisitions:Acquisitions:


(thousands)Trade receivablesInventoriesProperty, plant and equipmentPrepaid expenses & otherIntangible assetsGoodwillLess: Total liabilitiesLess: Deferred tax liability, netTotal net assets acquired
          
2019 (1)
$2,245
$5,296
$1,650
$133
$8,329
$7,177
$1,135
$—
$23,695
          
2018








MMC (2)
$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 (3)
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
8,566
1,240
28,435
13,732
4,178
—
56,346
MAC3,054
6,815
7,003
284
26,190
25,669
4,226
7,767
57,022
EMC (4)
623
1,678
1,684
—
17,350
7,483
987
—
27,831
LaSalle9,002
39,344
8,500
6,547
5,885
10,441
28,601
41
51,077
Other473329
280
13
1,667
919
195
—
3,486
2018 Totals$32,154
$91,723
$46,845
$8,349
$139,917
$93,287
$50,385
$7,808
$354,082
(thousands)Trade receivablesInventoriesProperty, plant and equipmentPrepaid expenses & otherIntangible assetsGoodwillLess: Total liabilitiesLess: Deferred tax liability, netTotal net assets acquired
          
2020$962
$1,883
$7,913
$17
$9,220
$6,008
$1,005
$—
$24,998
          
2019 (1)
$9,711
$6,012
$5,380
$104
$17,765
$25,205
$6,512
$1,922
$55,743

(1) Total net assets acquired for the 2019 acquisitionsAcquisitions reflect the preliminary estimated liability of $2.6 million pertaining to the fair value of contingent consideration based on future performance relating to the acquisition of G.G. Schmitt.
(2) Total net assets acquired for MMC reflect the preliminary estimated liability of $1.4 million pertaining to the fair value of the contingent consideration based on future performance.
(3) 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.
(4) 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.
Pro Forma Information
The following pro forma information for the thirdsecond quarter and first ninesix months ended September 29,June 28, 2020 and June 30, 2019 and September 30, 2018 assumes the 2020 Acquisitions and the 2019 and 2018 acquisitionsAcquisitions occurred as of the beginning of the year immediately preceding each such acquisition. The pro forma information contains the actual operating results of the 2020 Acquisitions and 2019 and 2018 acquisitionsAcquisitions 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 incremental borrowings incurred in connection with each transaction. In addition, the pro forma information includes amortization expense, in the aggregate, related to intangible assets acquired in connection with the transactions of$0.2 million and $0.5 $0.2 million for the third quarter and ninesix months ended September 29, 2019, respectively,June 28, 2020 and$0.7 $0.6 million and $5.7$1.2 million for the thirdsecond quarter and ninesix months ended SeptemberJune 30, 2018,2019, respectively.

Third Quarter Ended Nine Months Ended Second Quarter Ended Six Months Ended
(thousands except per share data)
September 29, 2019 September 30, 2018 September 29, 2019 September 30, 2018 June 28, 2020 June 30, 2019 June 28, 2020 June 30, 2019
Revenue
$571,734
 $660,873
 $1,806,933
 $2,049,540
 $424,045
 $636,454
 $1,018,631
 $1,267,907
Net income
21,346
 30,377
 70,067
 103,502
 714
 28,949
 22,480
 51,140
Basic net income per common share
0.93
 1.27
 3.04
 4.26
 0.03
 1.25
 0.98
 2.22
Diluted net income per common share
0.92
 1.25
 3.01
 4.20
 0.03
 1.24
 0.97
 2.20




The pro forma information is presented for informational purposes only and is not indicative of the results of operations that actually would have been achieved had the acquisitions been consummated as of the periods indicated above.

7.STOCK-BASED COMPENSATION
 
The Company recorded expense of $3.8$2.0 million and $3.5$6.3 million for the thirdsecond quarter and six months ended September 29, 2019 and September 30, 2018,June 28, 2020, respectively, for its stock-based compensation plans in the condensed consolidated statements of income. Stock-based compensation expense for the second quarter and six months ended June 28, 2020 includes a reduction of expense due to certain forfeitures and adjustments in the amount of $2.4 million. For the first ninesecond quarter and six months ofended June 30, 2019, and 2018, the Company recorded $12.0 million and $10.9 million in stock-based compensation expense of $4.3 million and $8.2 million, respectively.

The Board approved various sharestock-based grants under the Company’s 2009 Omnibus Incentive Plan in the first ninesix months of 20192020 totaling 376,186275,740 shares in the aggregate.aggregate at an average fair value of $53.78 at grant date for a total fair value at grant date of $14.8 million. In addition, in the second quarter of 2020, the Board approved stock option grants representing 465,000 shares in the aggregate at an exercise price of $41.33 per share. The total cost to be expensed over the three-year vesting period will be $6.6 million, or $14.25 per share, with an underlying volatility of 42% under the Black Scholes option pricing model.
 
As of September 29, 2019,June 28, 2020, there was approximately $23.8$30.3 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 18.019.9 months.
 
8.NET INCOME PER COMMON SHARE

Net income per common share calculated for the thirdsecond quarter and ninesix months of 20192020 and 20182019 is as follows:
 Third Quarter Ended Nine Months Ended Second Quarter Ended Six Months Ended
(thousands except per share data) September 29, 2019 September 30, 2018 September 29, 2019 September 30, 2018 June 28, 2020 June 30, 2019 June 28, 2020 June 30, 2019
Net income for basic and diluted per share calculation $21,317
 $27,934
 $69,582
 $92,862
 $714
 $27,416
 $21,901
 $48,265
Weighted average common shares outstanding - basic 23,076
 23,894
 23,073
 24,279
 22,667
 23,102
 22,840
 23,071
Effect of potentially dilutive securities 197
 338
 206
 340
 265
 214
 258
 211
Weighted average common shares outstanding - diluted 23,273
 24,232
 23,279
 24,619
 22,932
 23,316
 23,098
 23,282
Basic net income per common share $0.92
 $1.17
 $3.02
 $3.82
 $0.03
 $1.19
 $0.96
 $2.09
Diluted net income per common share $0.92
 $1.15
 $2.99
 $3.77
 $0.03
 $1.18
 $0.95
 $2.07




9.DEBT
 
A summary of total debt outstanding at September 29, 2019June 28, 2020 and December 31, 20182019 is as follows:
(thousands)
September 29, 2019
December 31, 2018
Long-term debt:
 
 
Revolver
$135,000

$392,332
Term Loan
100,000

96,250
Senior Notes 300,000
 —
Convertible Notes
172,500

172,500
Total long-term debt
707,500

661,082
Less: Convertible Notes debt discount, net
(25,023)
(30,125)
Less: Senior Notes deferred financing costs, net (5,979) —
Less: current maturities of long-term debt
(5,000)
(8,750)
Less: Term Loan deferred financing costs, net
(570)
(456)
Total long-term debt, less current maturities, net
$670,928

$621,751
(thousands)
June 28, 2020
December 31, 2019
Long-term debt:
 
 
Revolver due 2024
$135,000

$135,000
Term loan due 2024
96,250

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
703,750

705,000
Less: convertible notes debt discount, net
(19,755)
(23,260)
Less: senior notes deferred financing costs, net (5,365) (5,844)
Less: current maturities of long-term debt
(5,000)
(5,000)
Less: term loan deferred financing costs, net
(492)
(542)
Total long-term debt, less current maturities, net
$673,138

$670,354


Senior Notes
On September 17, 2019,There were no material changes to any of our debt arrangements during the Company issued $300 million aggregate principal amount of 7.50% Senior Notes due 2027 (the “Senior Notes”). The Senior Notes were not registered under the Securities Act of 1933, as amended (the "Securities Act")second quarter and were offered under Rule 144A under the Securities Act. The Senior Notes will mature on October 15, 2027. Interest on the Senior Notes will accrue from September 17, 2019 and is payable semi-annually in cash in arrears on April 15 and October 15 of each year, beginning on April 15,six months ended June 28, 2020. The effective interest rate on the Senior Notes, which includes debt issuance costs, was 7.83%. In connection with the issuance of the Senior Notes, the Company incurred and capitalized as a reduction of the principal amount of the Senior Notes approximately $6.0 million in deferred financing costs which will be amortized using the effective interest rate over the term of the Senior Notes.

The Senior Notes are senior unsecured indebtedness of the Company and are guaranteed by each of the Company’s subsidiaries that guarantee the obligations of the Company under the 2019 Credit Facility (as defined herein). The Company may redeem the Senior Notes, in whole or in part, at any time (a) prior to October 15, 2022, at a price equal to 100% of the principal amount thereof, plus the applicable premium described in the associated indenture and accrued and unpaid interest and (b) on or after October 15, 2022 at specified redemption prices set forth in the indenture, plus accrued and unpaid interest. In addition, prior to October 15, 2022, the Company may redeem, in one or more transactions, up to an aggregate of 40% of the original principal amount of the Senior Notes at a redemption price equal to 107.5% of the principal amount thereof, plus accrued and unpaid interest, with the net cash proceeds of one or more equity offerings. If the Company experiences specific kinds of changes of control, the Company must offer to repurchase all of the Senior Notes (unless otherwise redeemed) at a price equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest.
2019 Credit Facility
Simultaneously with the issuance of the Senior Notes, the Company entered into the Third Amended and Restated Credit Agreement (the “2019 Credit Agreement”). The 2019 Credit Agreement amended and extended the Company’s 2018 Credit Agreement (as defined herein) and consists of a $550 million senior secured revolver (the “2019 Revolver”) and a $100 million senior secured term loan (the “2019 Term Loan” and together with the 2019 Revolver, the “2019 Credit Facility”). The maturity dateInterest rates for borrowings under the 2019 Credit Agreement is September 17, 2024. Uponrevolver and term loan are the satisfaction of certain conditions, and obtaining incremental commitments from its lenders, the Company may be able to increase the borrowing capacityprime rate or LIBOR plus a margin. At June 28, 2020, all of the 2019 Credit Facility by up to $250 million.

BorrowingsCompany's borrowings under the 2019 Credit Facility are secured by substantially all personal property assets of the Companyrevolver and any domestic subsidiary guarantors. Pursuant to the 2019 Credit Agreement:



•
The 2019 Term Loan is due in consecutive quarterly installments in the following amounts: (i) beginning September 30, 2019, 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 2019 Revolver and the 2019 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, as defined below. The Company is required to pay fees on unused but committed portions of the 2019 Revolver, which range from 0.15% to 0.225%; and

Covenants include requirements as to a maximum consolidated total net leverage ratio (4.00:1.00, increasing to 4.50:1.00 in certain circumstances in connection with Company acquisitions) and a minimum consolidated fixed charge coverage ratio (1.50 :1.00) that are tested on a quarterly basis, a minimum liquidity requirement applicable during the six-month period preceding the maturity of the Convertible Notes (as defined herein), and other customary covenants.

At September 29, 2019, the Company had $100.0 million outstanding under the 2019 Term Loan under the LIBOR-based option, and borrowings outstanding under the 2019 Revolver of $135.0 millionterm loan were under the LIBOR-based option. The interest rate for incremental borrowings at September 29, 2019June 28, 2020 was LIBOR plus 1.5% (or 3.54%1.69%) for the LIBOR-based option. The fee payable on committed but unused portions of the 2019 Revolverrevolver was 0.20% at September 29, 2019.June 28, 2020.

Total cash interest paid for the third quarter of 2019 and 2018 was $6.9$15.6 million and $6.6 million, respectively, and $19.7 million and $12.2$6.3 million for the comparative nine month periods,second quarter of 2020 and 2019, respectively, and $18.2 million and $12.8 million for the first six months of 2020 and 2019, respectively.
2018 Credit Facility
See Note 9 of the Notes to Consolidated Financial Statements section of the Fiscal 2018 Form 10-K regarding the Company's previous credit agreement (the "2018 Credit Agreement") which established 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”). The 2018 Credit Agreement was amended by the 2019 Credit Agreement on September 17, 2019 as discussed above. The Company recorded a $0.7 million loss on extinguishment of debt in the third quarter of 2019 in connection with the replacement of the 2018 Credit Facility with the 2019 Credit Facility.
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”). See Note 9 of the Notes to Consolidated Financial Statements section of the Fiscal 2018 Form 10-K for further information. 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 September 29, 2019 and December 31, 2018. The unamortized portion of the debt discount and debt issuance costs as of September 29, 2019 and December 31, 2018 was $25.0 million and $30.1 million, respectively.
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 which the Company acquired options to purchase the same number of shares of its common stock initially underlying the Convertible Notes. See Note 10 of the Notes to Consolidated Financial Statements section of the Fiscal 2018 Form 10-K for information regarding the Convertible Note Hedge Transactions.
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 its common stock initially underlying the Convertible Notes. See Note 10 of the Notes to Consolidated Financial Statements section of the Fiscal 2018 Form 10-K for further information regarding the Warrant Transactions.


There have been no material changes to the terms of the Convertible Note Hedge Transactions or the Warrant Transactions during the nine month period ended September 29, 2019.
As these transactions meet certain accounting criteria, the Convertible Note Hedges Transactions and Warrant Transactions are recorded in shareholders’ equity and are not accounted for as derivatives.
Interest Rate Swaps
The 2019 Credit FacilityCompany's credit 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 has historically entered into interest rate swaps on a portion of its 2018 Credit Facility, now amended by the 2019 Credit Facility.swaps. As of September 29, 2019,June 28, 2020, the Company had a combined notional principal amount of $200.0 million of interest rate swap agreements, all of which are designated as cash flow hedges. These swap agreements effectively convert the interest expense associated with a portion of the 2019 Term Loan and a portion of the 2019 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 condensed statementconsolidated statements of financial position (in thousands):
 Fair value of derivative instruments Fair value of derivative instruments
Derivatives accounted for as cash flow hedges Balance sheet locationSeptember 29, 2019 December 31, 2018 Balance sheet locationJune 28, 2020 December 31, 2019
Interest rate swaps Other long-term liabilities$6,974
 $2,652
 Other long-term liabilities$9,292
 $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, which are classified as Level 2 in the fair value hierarchy.

See Note 11 for information regarding accumulated other comprehensive loss on interest rate swaps.



11.ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)LOSS

Accumulated other comprehensive income (loss)loss includes unrealized gains and losses on derivatives that qualify as hedges of cash flows, unrecognized pension-related costs and cumulative foreign currency translation and other adjustments. The activity in accumulated other comprehensive loss during the threesecond quarter and ninesix months ended September 29,June 28, 2020 and June 30, 2019 and September 30, 2018 was as follows:
Second Quarter Ended June 28, 2020
(thousands)Cash Flow Hedges Other Foreign Currency Items Total
Balance at March 29, 2020$(7,380) $(1,270) $(91) $(8,741)
Other comprehensive income (loss) (net of tax (benefit) of ($158), $0 and $0)464
 —
 (15) 449
Balance at June 28, 2020$(6,916) $(1,270) $(106) $(8,292)

Third Quarter Ended September 29, 2019
(thousands)Cash Flow Hedges Defined Benefit Pension Foreign Currency Items Total
Balance at June 30, 2019$(4,958) $(675) $(99) $(5,732)
Other comprehensive income (loss) (net of tax of $83, $0 and $0)(240) —
 19
 (221)
Balance at September 29, 2019$(5,198) $(675) $(80) $(5,953)

Six Months Ended June 28, 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 $882, $0 and $0)(2,542) —
 (52) (2,594)
Balance at June 28, 2020$(6,916) $(1,270) $(106) $(8,292)

Second Quarter Ended June 30, 2019

(thousands)Cash Flow Hedges Other Foreign Currency Items Total
Balance at March 31, 2019$(3,027) $(675) $(5) $(3,707)
Other comprehensive loss (net of tax of $659, $0 and $0)(1,931) —
 (94) (2,025)
Balance at June 30, 2019$(4,958) $(675) $(99) $(5,732)
Nine Months Ended September 29, 2019
(thousands)Cash Flow Hedges Defined Benefit Pension Foreign Currency Items Total
Balance at December 31, 2018$(1,973) $(675) $(32) $(2,680)
Other comprehensive loss (net of tax of $1,098, $0 and $0)(3,225) —
 (48) (3,273)
Balance at September 29, 2019$(5,198) $(675) $(80) $(5,953)
Third Quarter Ended September 30, 2018
(thousands)Cash Flow Hedges Defined Benefit Pension Foreign Currency Items Total
Balance at July 1, 2018$—
 $66
 $(3) $63
Other comprehensive income (loss) (net of tax of $28, $0 and $0)80
 —
 (28) 52
Balance at September 30, 2018$80
 $66
 $(31) $115


Nine Months Ended September 30, 2018
(thousands)Cash Flow Hedges Defined Benefit Pension Foreign Currency Items Total
Balance at December 31, 2017$—
 $66
 $—
 $66
Other comprehensive income (loss) (net of tax of $28, $0 and $0)80
 —
 (31) 49
Balance at September 30, 2018$80
 $66
 $(31) $115
Six Months Ended June 30, 2019

(thousands)Cash Flow Hedges Other Foreign Currency Items Total
Balance at December 31, 2018$(1,973) $(675) $(32) $(2,680)
Other comprehensive loss (net of tax of $1,015, $0 and $0)(2,985) —
 (67) (3,052)
Balance at June 30, 2019$(4,958) $(675) $(99) $(5,732)


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






12.LEASES

As discussed in Note 2, the Company adopted the provisions of ASC 842 on January 1, 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 immaterial. 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 third quarter and nine months ended September 29, 2019. Leases have remaining lease terms of one year to eleven years. Certain leases include options to renew for an additional term. Where there is reasonable certainty to utilize a renewal option, we include the renewal option in the lease term used to calculate operating lease right-of-use assets and lease liabilities.



Lease expense, supplemental cash flow information, and other information related to leases were as follows:
Second Quarter Ended
(thousands)Third Quarter Ended Nine Months EndedJune 28, 2020 June 30, 2019
September 29, 2019 September 29, 2019
Operating lease cost$7,848
 $23,536
$8,399
 $7,901
      
Cash paid for amounts included in the measurement of lease liabilities:      
Operating cash flows for operating leases$6,946
 $20,545
$8,279
 $6,875
      
Right-of-use assets obtained in exchange for lease obligations:      
Operating leases$5,522
 $14,767
$5,474
 $8,668

 Six Months Ended
(thousands)June 28, 2020 June 30, 2019
Operating lease cost$16,568
 $15,688
    
Cash paid for amounts included in the measurement of lease liabilities:   
Operating cash flows for operating leases$16,362
 $13,599
    
Right-of-use assets obtained in exchange for lease obligations:   
Operating leases$17,902
 $9,245

Balance sheet information related to leases was as follows:
(thousands, except lease term and discount rate)September 29, 2019
Assets 
Operating lease right-of-use assets$81,064
Liabilities 
Operating lease liabilities, current portion$25,990
Long-term operating lease liabilities55,553
Total lease liabilities$81,543
Weighted average remaining lease term, operating leases (in years)4.04
Weighted average discount rate, operating leases3.83%
(thousands, except lease term and discount rate)June 28, 2020 December 31, 2019
Assets   
Operating lease right-of-use assets$96,065
 $93,546
Liabilities   
Operating lease liabilities, current portion$28,567
 $27,694
Long-term operating lease liabilities68,318
 66,467
Total lease liabilities$96,885
 $94,161

Weighted average remaining lease term, operating leases (in years)4.1
 4.2
Weighted average discount rate, operating leases3.7% 3.7%














Maturities of lease liabilities were as follows at September 29, 2019:June 28, 2020:
(thousands)  
2019 (excluding the nine months ended September 29, 2019)$8,150
202026,916
2020 (excluding the six months ended June 28, 2020)$16,235
202120,512
28,873
202213,556
22,920
20238,954
17,072
202411,341
Thereafter10,158
7,955
Total lease payments88,246
104,396
Less imputed interest(6,703)(7,511)
Total$81,543
$96,885


Disclosures relatedLeases have remaining lease terms of one year 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

ten years.

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, at September 29, 2019 approximatedvalued using Level 1 inputs and approximating fair value whichbecause of their relatively short maturities, was approximately $108.0$90.0 million and $132.6 million at June 28, 2020 and December 31, 2019, respectively. The estimated fair value of our senior notes, calculated using Level 2 inputs, was approximately $306.2 million and $320.3 million at June 28, 2020 and December 31, 2019, respectively. The carrying amounts of our term loan and our revolver, valued using level 1 inputs, with no corresponding amount at December 31, 2018. The carrying amount of the Senior Notes at September 29, 2019 approximated fair value given their recent issuance and based upon terms and conditions available to the Company, with no corresponding amount at December 31, 2018. The 2019 Term Loan and the 2019 Revolver, valued using levelLevel 2 inputs, approximated fair value as of September 29, 2019June 28, 2020 and the 2018 Term Loan and the 2018 Revolver, valued using level 2 inputs, approximated fair value ss of December 31, 2018, respectively,2019 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 Level 2 inputs, was approximately $152.1$166.6 million and $130.3$162.5 million as of September 29, 2019June 28, 2020 and December 31, 2018,2019, respectively. The estimated fair value of the Company's interest rate swaps is 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.
14.INCOME TAXES

The effective tax rate in the thirdsecond quarter of 2020 and 2019 was 44.4% and 2018 was 26.0% and 25.3%25.1%, respectively, and the effective tax rate for the comparable ninesix month periods was 24.6%27.2% and 23.6%23.9%, respectively. The effective tax rate for the periods presentedsecond quarter and six months of 2020 reflects the impact of $2.2 million of permanent tax differences due to certain Coronavirus Aid, Relief, and Economic Security Act payroll tax credits. In addition, the effective tax rate for the first six months 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 $0.9 million and $2.2 million for the nine months ended September 29, 2019 and September 30, 2018, respectively, with no corresponding amounts in the corresponding quarterly periods.million.
 
Cash paid for income taxes for the second quarter and six months of 2020 was immaterial. The Company madepaid income tax paymentstaxes of $7.4$21.1 million and $5.6$22.6 million in the thirdsecond quarter of 2019 and 2018, respectively, and $30.0 million and $21.0 million in the first ninesix months of 2019, and 2018, respectively.


15.SEGMENT INFORMATION
 
The Company has 2 reportable segments, Manufacturing and Distribution, which are those based on its method of internal reporting, which segregates its businesses based on the manner in which its Chief Operating Decision Makerchief operating decision maker allocates resources, evaluates financial results, and determines compensation.
The tables below present information about the sales and operating income of those segments.


 
Third Quarter Ended September 29, 2019  
  
  
Second Quarter Ended June 28, 2020  
  
  
(thousands) Manufacturing Distribution Total Manufacturing Distribution Total
Net outside sales $399,712
 $166,474
 $566,186
 $292,574
 $131,471
 $424,045
Intersegment sales 8,102
 1,078
 9,180
 5,114
 1,085
 6,199
Total sales 407,814
 167,552
 575,366
 297,688
 132,556
 430,244
Operating income 42,353
 9,041
 51,394
 22,410
 6,938
 29,348

Third Quarter Ended September 30, 2018      
Second Quarter Ended June 30, 2019      
(thousands) Manufacturing Distribution Total Manufacturing Distribution Total
Net outside sales $445,214
 $129,925
 $575,139
 $434,275
 $178,943
 $613,218
Intersegment sales 8,182
 1,097
 9,279
 8,331
 1,118
 9,449
Total sales 453,396
 131,022
 584,418
 442,606
 180,061
 622,667
Operating income 54,887
 7,606
 62,493
 48,787
 10,800
 59,587

Nine Months Ended September 29, 2019  
  
  
Six Months Ended June 28, 2020      
(thousands) Manufacturing Distribution Total Manufacturing Distribution Total
Net outside sales $1,259,671
 $527,951
 $1,787,622
 $711,840
 $301,437
 $1,013,277
Intersegment sales 24,153
 3,361
 27,514
 12,687
 2,385
 15,072
Total sales 1,283,824
 531,312
 1,815,136
 724,527
 303,822
 1,028,349
Operating income 135,577
 28,132
 163,709
 68,114
 16,906
 85,020

Nine Months Ended September 30, 2018      
Six Months Ended June 30, 2019      
(thousands) Manufacturing Distribution Total Manufacturing Distribution Total
Net outside sales $1,344,088
 $387,762
 $1,731,850
 $859,959
 $361,477
 $1,221,436
Intersegment sales 27,464
 2,840
 30,304
 16,051
 2,283
 18,334
Total sales 1,371,552
 390,602
 1,762,154
 876,010
 363,760
 1,239,770
Operating income 172,799
 25,092
 197,891
 93,224
 19,091
 112,315















The following table presents a reconciliation of segment operating income to consolidated operating income:
 Third Quarter Ended Nine Months Ended Second Quarter Ended Six Months Ended
(thousands) September 29, 2019 September 30, 2018 September 29, 2019 September 30, 2018 June 28, 2020 June 30, 2019 June 28, 2020 June 30, 2019
Operating income for reportable segments $51,394
 $62,493
 $163,709
 $197,891
 $29,348
 $59,587
 $85,020
 $112,315
Unallocated corporate expenses (4,793) (8,911) (18,796) (33,229) (7,464) (6,090) (14,256) (14,003)
Amortization (9,191) (8,873) (26,448) (25,140) (9,778) (8,268) (19,379) (17,257)
Consolidated operating income $37,410
 $44,709
 $118,465
 $139,522
 $12,106
 $45,229
 $51,385
 $81,055

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 $26.7$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 June 28, 2020. NaN stock repurchases were made in the second quarter of 2020. In the third quarter and first ninesix months ended September 29, 2019,2020, the Company repurchased 98,201456,155 shares of its common stock at an average price of $36.50$34.09 per share at an aggregate cost of $3.6$15.6 million. In the third quarter of 2018, theThe Company repurchased 347,235 sharesdid not repurchase any of its common stock at an average price of $60.32 per share at an aggregate cost of $20.9 million. Inin the second quarter and first ninesix months of 2018, the Company repurchased 1,282,930 shares of its common stock at an average price of $58.48 per share at an aggregate cost of $75.0 million.2019.

17.RELATED PARTY TRANSACTIONSSUBSEQUENT EVENT

In the first nine months of 2019,August 2020, the Company entered into transactionsannounced the completion of the acquisition of Inland Plywood Company (“Inland”), a supplier, laminator and wholesale distributor of treated, untreated, and laminated plywood, medium density overlay panels, and other specialty products, primarily serving the marine market as well as the recreational vehicle and industrial markets for a net initial purchase price of $46.0 million. Inland is headquartered in Pontiac, Michigan with companies affiliated with 2an additional facility located in Cocoa, Florida. The acquisition of its independent Board members. The Company purchased approximately $0.8 millionInland includes the acquisition of corrugated packaging materials from Welch Packaging Group, an independently owned company established by M. Scott Welch who serves as its Presidentworking capital, machinery and CEO. The Company also sold approximately $0.4 million of RV component products to DNA Enterprises, Inc. ("DNA") in the first six months of 2019. After June 30, 2019, sales to DNA no longer qualified as related party transactions, as Walter E. Wells, whose son is affiliated with DNA, retired from Patrick's Board on May 15, 2019.equipment, and real estate.



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 pages 34 and 35page 29 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 CONSOLIDATEDOPERATINGRESULTSThe second quarter of 2020 exhibited distinct trends in each month of April, May and June, which are historically among our strongest sales months, as we responded to COVID-19 market volatility. Beginning in late March and early April of 2020, we temporarily curtailed production in certain of our facilities in alignment with reductions in OEM customer production levels, which resulted in a significant decline in revenue during April from each of our end markets. Cost reduction measures implemented at the end of the first quarter of 2020, in order to more closely align our direct and indirect labor costs with the decreased level of business activities, helped to mitigate the financial impact of the revenue
Third

decline in April. These cost reduction measures also positively impacted the rest of the second quarter of 2020. In early May 2020 our facilities started to incrementally increase production levels as demand began to recover in our end markets, and the majority of our direct labor force, many of whom had been furloughed with benefits in April, returned to work in our RV, marine, MH and industrial facilities. While the first half of May 2020 was impacted by the temporary shutdowns in operations, the second half of May 2020 experienced a strong increase in end market demand compared to the first half of the month. This momentum continued in June 2020, where our revenues from the RV and industrial markets increased from the prior year, while revenues from the marine and MH markets recovered more gradually but still exhibited a positive trajectory.

While current trends in our end markets are encouraging, we believe the combination of our strong financial position, our available liquidity, the flexibility of our highly variable cost operating model, and the diversification of our end markets and the geographic regions in which we operate will help us to manage through any future volatility in our business caused by the pandemic, while allowing us to take advantage of opportunities that may arise in our markets.

The safety and well-being of our team members continue to be a key priority during the COVID-19 pandemic. We have successfully implemented extensive safety measures to adapt to this new environment. Those measures have included modifying workspaces, continuing social distancing policies, implementing new personal protective equipment or health screening policies at our facilities, and other industry best practices needed to continue to maintain a healthy and safe environment for our employees during the pandemic.

Second Quarter and NineSix Months Ended September 29, 2019 Compared to 2018
Use of2020 Financial Metrics
REVIEW BY BUSINESS SEGMENT
Third Quarter and Nine Months Ended September 29, 2019 Compared to 2018
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
Summary of Liquidity and Capital Resources
CRITICAL ACCOUNTING POLICIES
OTHER
Seasonality
Cyber Security Incident
INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS

OVERVIEW OF MARKETS AND RELATED INDUSTRY PERFORMANCEOverview

Recreational Vehicle ("RV") Industry 
The RV industry is our primarylargest market and comprised 55%48% and 56% of the Company’s sales in the thirdsecond quarter ended June 28, 2020 and first nine months ofJune 30, 2019, respectively.respectively, and 52% and 56% for the comparative 2020 and 2019 six month periods. Sales fromto the RV industry decreased 13% and 12%40% in the thirdsecond quarter of 2020 and 23% in the first ninesix months, of 2019, respectively, compared to the prior year periods.

According to the Recreation Vehicle Industry Association, (“RVIA”), wholesale shipments totaled 93,35775,663 units in the thirdsecond quarter of 2019, a decline of 13%2020, decreasing 35% compared to 107,130116,605 units in the thirdsecond quarter of 2018, while2019. Wholesale unit shipments for the first ninesix months of 2019, wholesale unit shipments2020 decreased 18% versus19% for the first six months of 2020, totaling 176,067 units compared to 216,581 units in the prior year period. Based on actual retailRetail unit sales data through August,are estimated to have decreased 17% and 13% during the Company estimates that retail unit shipments declined 6% and 7%, respectively, for the thirdsecond quarter of 2019 and first ninesix months of 2019 versus the comparable prior year periods. With estimated2020, respectively. Decreases in wholesale and retail unit shipments outpacing wholesale unitRV shipments in the thirdsecond quarter and first ninesix months of 2019,2020 are largely attributed to COVID-19 market disruptions. Based on our estimates, RV dealer inventories declined in both periods. The RVIA’s latest published expectations for fiscal 2019 project wholesale unit shipments to be approximately 401,000 units, representing a declineat the end of 17% from 2018. On the retail side, the Company expects RV retail unit shipments to declinesecond quarter of 2020 were at a mid-to-high single digit rate in 2019. For the full year 2019, RV dealer inventories are expected to decline by more than 50,000 units, positioning the industry to returntheir lowest level since 2014 due to a more direct relationship betweencombination of reduced wholesale unit shipments by the OEMs during the quarter and a recovery in retail unit shipments forsales in the upcoming 2020 selling season.




latter part of May and throughout June 2020.
Marine Industry
Sales to the marine industry, which represented approximately 13% and 14% of the Company's consolidated net sales in the thirdsecond quarter of 2020 and first nine months2019, decreased 34% in the second quarter of 2019, respectively, decreased 7% and increased 34%2020 compared to the third quarter andprior year quarter. For the first ninesix months of 2018, respectively. 2020 and 2019, sales to the marine industry represented 13% and 15% of consolidated net sales, respectively, declining 24% in 2020 compared to the prior year period.

For the thirdsecond quarter and first nine months of 2019,2020, overall marine retail unit shipments in the powerboat sector, which is the Company's primary marine market, increased approximately 2% and decreased approximately 5%an estimated 7%, respectively, with aluminum fishing sales decreasing 5% andan estimated 11% in the third quarter and first nine months of 2019, respectively;; pontoon sales increasing 11% and decreasing 1%, respectively;an estimated 3%; fiberglass sales decreasing 1% and 3%, respectively;an estimated 10%; and ski and wake sales increasing 12% and 4%, respectively.

Adverse weather and flooding in certain regionsan estimated 1%. Wholesale unit shipments declined an estimated 39% during the quarter, reflecting the impact of COVID-19 OEM production shutdowns. For the country impactedfirst six months of 2020, overall marine retail unit shipments in the first half of 2019, particularly in the pontoon andpowerboat sector decreased an estimated 7%, with aluminum fishing categories. Reflecting this retail softness insales decreasing an estimated 10%; pontoon sales decreasing an estimated 4%; fiberglass sales decreasing an estimated 9%; and ski and wake sales virtually flat. Wholesale unit shipments declined an estimated 27% during the first halfsix months of 2019, we saw inventory recalibration by marine dealers in the third quarter of 2019, which we believe contributed2020, due mostly to a decline in wholesale unit shipments in the quarter despite the increase in overall retail unit shipments. Factoring in the impact of weather in the first half of 2019 and the related dealer inventory re-calibration, we anticipate that the powerboat sector of this market will experience a retail unit percentage decline in the low-to-mid single digits for fiscal 2019 and a wholesale unit percentage decline in the high-single digits.temporary OEM production shutdowns.



Manufactured Housing ("MH") Industry
Sales to the MH industry, which represented 19%21% and 18% of the Company’s sales in the thirdsecond quarter of 2020 and first nine months of 2019, respectively, increased 61% and 62%decreased 18% in the second quarter of 2020 compared to the respectivesecond quarter of 2019. MH sales for the first six months of 2020, representing 20% and 18% of the Company's sales for the 2020 and 2019 periods, decreased 6% in the first six months of 2020 compared to the prior year periods.period. Based on industry
data from the Manufactured Housing Institute, MH wholesale unit shipments increased by approximately 2% and decreased by approximately 5%14% in the thirdsecond quarter of 2020 compared to the prior year quarter and decreased 1% for the first ninesix months of 2019, respectively. Manufactured housing was negatively impacted in2020 compared to the first half of 2019 by wet weather conditions in certain regions of the country where moving inventory and setting foundations and houses were difficult, and as a result our current estimates indicate an overall percentage decline inprior year period. MH wholesale unit shipments for fiscal 2019were impacted due to temporary OEM plant shutdowns in the low-to-mid single digits.second quarter and first six months of 2020 as well as COVID-19 related construction delays during these periods.

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%17% and 12% of our consolidated sales in the thirdsecond quarter of 2020 and first nine months of 2019, respectively, and were virtually unchangeddecreased 2% in the thirdsecond quarter of 2020 compared to the prior year quarter. Sales to the industrial market represented 15% and 11% of our sales for the first ninesix months of 2020 and 2019, respectively, and increased 6% in the first six months of 2020 compared to the prior year periods.period. Overall, our revenues in these markets are focused on the residential housing, hospitality, high-rise housing and office, commercial construction and institutional furniture markets. 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.
Combined new housing starts increased 4%decreased 17% in the thirdsecond quarter of 20192020 compared to the prior year quarter, with single family housing starts increasing 4%decreasing 13% and multifamily residential starts decreasing 27%. For the first six months of 2020, combined new housing starts increased 1% compared to the prior year period, with single family housing starts decreasing 1% and multifamily residential starts increasing 6% for the same period. For the first nine months of 2019, single family housing starts decreased 2%, while multifamily housing starts were virtually flat, with combined housing starts decreasing 1%5%. Our industrial products are generally among the last components installed in new unit construction and as such our related sales typically trail new housing starts by four to six months. Because of this lag in the relationship between new housing starts and our sale of related industrial products, we expect our industrial sales to benefit in the next two quarters from recent growth in residential housing starts. We expect a low-single digit growth rate in new housing starts overall for fiscal 2019.






REVIEW OF CONSOLIDATED OPERATING RESULTS
ThirdSecond Quarter and NineSix Months Ended September 29, 2019June 28, 2020 Compared to 20182019 
The following table sets forth the percentage relationship to net sales of certain items on the Company’s Condensed Consolidated Statements of Income.

Third Quarter Ended Nine Months Ended
Second Quarter Ended Six Months Ended

September 29, 2019


September 30, 2018

 
September 29, 2019

 
September 30, 2018


June 28, 2020


June 30, 2019

 
June 28, 2020

 
June 30, 2019

Net sales
100.0%
100.0% 100.0% 100.0%
100.0%
100.0% 100.0% 100.0%
Cost of goods sold
81.6

81.5
 81.9
 81.6

82.6

81.6
 81.9
 82.1
Gross profit 18.4
 18.5
 18.1
 18.4
 17.4
 18.4
 18.1
 17.9
Warehouse and delivery expenses
4.2

3.4
 4.2
 3.2
Selling, general and administrative expenses
6.0

5.8
 5.8
 5.7
Warehouse and delivery
4.8

4.3
 4.4
 4.1
Selling, general and administrative
7.4

5.4
 6.7
 5.8
Amortization of intangible assets
1.6

1.5
 1.5
 1.4

2.3

1.3
 1.9
 1.4
Operating income
6.6

7.8
 6.6
 8.1

2.9

7.4
 5.1
 6.6
Interest expense, net
1.5

1.3
 1.5
 1.0

2.6

1.4
 2.1
 1.4
Income taxes
1.3

1.6
 1.3
 1.7

0.1

1.5
 0.8
 1.2
Net income
3.8

4.9
 3.9
 5.4

0.2

4.5
 2.2
 4.0

Net Sales. Net sales in the thirdsecond quarter of 20192020 decreased $8.9$189.2 million, or 2%31%, to $566.2$424.0 million from $575.1$613.2 million in the thirdsecond quarter of 2018.2019. The Company'sconsolidated net sales decreaseddecrease in twothe second quarter of its primary markets, with a decrease2020 was attributed to sales decreases in all four of our end markets. The Company's RV market sales of 13% and a decrease indecreased 40%, marine market sales of 7%decreased 34%, while industrial market sales were virtually flatdecreased 2% and MH market sales increased 61%decreased 18% when compared to the prior year quarter.



Net sales in the first ninesix months of 2019 increased $55.82020 decreased $208.1 million, or 3%17%, to $1.79 billion$1,013.3 million from $1.73 billion in the prior year period. The Company's net sales increased in two of its primary markets$1,221.4 million in the first ninesix months of 2019 with increases of 62% in MH and 34% in marine, while industrial market sales were virtually unchanged and RV market sales decreased 12% compared to 2018.

2019. The consolidated net sales decrease in the third quarterfirst six months of 2019 primarily reflected2020 was attributed to sales decreases in OEM wholesale unit shipments in thethree of our end markets. The Company's RV market sales decreased 23%, marine market sales decreased 24% and marine industries, partly offset by an increase in revenue from the acquisition of LaSalle Bristol ("LaSalle"), completed in the fourth quarter of 2018. The consolidated netMH market sales increase in the first nine months of 2019 was mostly attributeddecreased 6% while industrial market sales increased 6% when compared to the contributionprior year period.

During the second quarter and six months ended June 28, 2020, all four of revenue from LaSalle.our end markets were impacted by business disruptions and associated lost production and shipping days due to the COVID-19 pandemic.

Revenue attributable to acquisitions completed in the first nine months of 2019 was immaterial for both the thirdsecond quarter and first ninesix months of 2019. Revenue attributable to acquisitions completed in first nine months of 20182020 was $82.4$3.3 million and $160.0$3.8 million, for the third quarter and first nine months of 2018, respectively.

The Company’s RV content per wholesale unit (on a trailing twelve-month basis) for the thirdsecond quarter of 2019 increased2020 decreased approximately 9%2% to $3,132$3,086 from $2,875$3,135 for the thirdsecond quarter of 2018.2019. Marine powerboat content per retail unit (on a trailing twelve-month basis) for the thirdsecond quarter of 2019 increased2020 decreased approximately 54%13% to an estimated $1,624$1,439 from $1,054$1,659 for the thirdsecond quarter of 2018.2019. MH content per wholesale unit (on a trailing twelve-month basis) for the thirdsecond quarter of 20192020 increased approximately 65%16% to an estimated $4,327$4,501 from $2,628$3,889 for the thirdsecond quarter of 2018.2019.

Cost of Goods Sold. Cost of goods sold decreased $6.6$150.3 million, or 1%30%, to $461.9$350.3 million in the thirdsecond quarter of 20192020 from $468.5$500.6 million in 2018.2019, primarily reflecting the decrease in net sales in the quarter. As a percentage of net sales, cost of goods sold increased during the thirdsecond quarter of 20192020 to 82.6% from 81.6% from 81.5% in 2018. For2019. This percentage increase is largely attributed to additional costs incurred and production inefficiencies related to business disruption of our end markets as a result of the first nine months of 2019, costCOVID-19 pandemic.

Cost of goods sold increased $51.4decreased $172.1 million, or 4%17%, to $1,464.1 million from $1,412.6$830.1 million in 2018.the first six months of 2020 from $1,002.2 million in 2019, primarily reflecting the decrease in net sales in the period. As a percentage of net sales, cost of goods sold increaseddecreased during the first ninesix months of 20192020 to 81.9% from 81.6%82.1% in 2018.


2019.

Cost of goods sold as a percentage of net sales was impacted duringdecreased in the first six months of 2020 primarily as a result of (i) cost reductions we initiated in the third quarter of 2019, (ii) synergies achieved and realized in the first ninesix months of 2019 by: (i) higher overall fixed overhead costs relative to RV and marine revenue; (ii) the lower margin profile of LaSalle, which was acquired in the fourth quarter of2020 from our 2018 and 2019 acquisitions and (iii) a temporary disruptiondecreases in operations and associated inefficiencies related to the cybersecurity incident, discussed below. In general, the Company'scommodity cost inputs. These decreases in cost of goods sold percentage can be impacted from quarter-to-quarterwere partially offset by demand changes in certain market sectors that can result in fluctuatingadditional costs of certain raw materialsincurred and commodity-based components that are utilized in the production inefficiencies related to business disruption of our products.end markets as a result of the COVID-19 pandemic.
Gross Profit. Gross profit decreased $2.4$39.0 million, or 2%35%, to $104.3$73.7 million in the thirdsecond quarter of 20192020 from $106.7$112.7 million in 2018. For the first nine months of 2019, gross profit increased $4.3 million, or 1%, to $323.5 million from $319.2 million in 2018.2019. As a percentage of net sales, gross profit decreased to 18.4%17.4% in the thirdsecond quarter of 2019 from 18.5% in the same period in 2018, and decreased to 18.1% for the first nine months of 20192020 from 18.4% in the same period in 2018. 2019. Gross profit decreased $36.0 million, or 16%, to $183.2 million in the first six months of 2020 from $219.2 million in 2019. As a percentage of net sales, gross profit increased to 18.1% in the first six months of 2020 from 17.9% in the same period in 2019.

The changes in gross profit as a percentage of net sales in the thirdsecond quarter and first ninesix months of 20192020 compared to the same periods in 20182019 reflect 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.
 
Warehouse and Delivery Expenses. Warehouse and delivery expenses increased $4.1decreased $6.1 million, or 21%23%, to $23.9$20.2 million in the thirdsecond quarter of 20192020 from $19.8$26.3 million in 2018. For the first nine months in 2019, warehouse and delivery expenses increased $18.7 million, or 34%, to $74.2 million from $55.5 million in 2018.second quarter of 2019. As a percentage of net sales, warehouse and delivery expenses were 4.2%4.8% in the thirdsecond quarter of 20192020 compared to 3.4%4.3% in the thirdsecond quarter of 20182019. Warehouse and 4.2%delivery expenses decreased $5.4 million, or 11%, to $44.9 million in the first ninesix months of 20192020 from $50.3 million in the first six months of 2019. As a percentage of net sales, warehouse and delivery expenses were 4.4% in the first six months of 2020 compared to 3.2%4.1% in the first nine months of 2018. same period in 2019.

The increase in expense in the third quarter and first nine months of 2019 compared to the prior year periods was primarily attributable to the impact of certain acquisitions completed in 2018 that had higher warehouse and delivery expenses as a percentage of net sales when compared tofor the consolidated percentage. For the first nine months of 2019 compared to the prior year period, increased sales volumes also contributed to the increase in warehouse and delivery expense. In addition, the Company's shipments to OEMs in the thirdsecond quarter and first ninesix months of 2019 were generally lower volume2020 primarily reflects the fixed nature of certain of these expenses and higher frequency, andoperating inefficiencies as a result transportation costs relative tonet sales levels of products delivered increased as a percentage of net sales.declined.
 


Selling, General and Administrative ("SG&A") Expenses. SG&A expenses increased $0.5decreased $1.3 million, or 2%4%, to $33.8$31.6 million in the thirdsecond quarter of 20192020 from $33.3$32.9 million in 2018. For the first nine months of 2019, SG&A expenses increased $5.4 million, or 5%, to $104.4 million from $99.0 million in 2018.prior year quarter. As a percentage of net sales, SG&A expenses were 6.0%7.4% in the second quarter of 2020 compared to 5.4% in the second quarter of 2019.

SG&A expenses decreased $3.1 million, or 4%, to $67.5 million in the first six months of 2020 from $70.6 million in the prior year period. As a percentage of net sales, SG&A expenses were 6.7% in the first six months of 2020 compared to 5.8% in the prior year period.

The decrease in SG&A expenses in the second quarter of 2020 compared to 2019 is primarily due to the realization of cost reduction measures implemented in the third quarter of 2019 compared to 5.8%and the first quarter of 2020 as well as reductions in certain SG&A spending associated with the decrease in net sales in the third quarter of 2018 and 5.8% in the first nine months of 2019 compared to 5.7% in 2018.

The increase in SG&A expenses in the thirdsecond quarter and first ninesix months of 2019 compared to 2018 is primarily due to: (i) an2020. The increase in professional service fees and other costs associated with the cyber security event discussed below; (ii) a loss on extinguishment of debt associated with the amendment of the Company's credit facility and (iii) the impact of certain acquisitions completed in 2018 that had higher SG&A expenses as a percentage of net sales whenin the second quarter and first six months of 2020 compared to prior year periods is attributed to the consolidated percentage. Partially offsetting these factors was a decreasedecline in incentive compensation andnet sales commissions.from the impact of COVID-19, discussed above.

Amortization of Intangible Assets. Amortization of intangible assets increased $0.3$1.5 million, or 4%18%, to $9.8 million in the thirdsecond quarter of 2019 compared to2020 from $8.3 million in the prior year quarter and increased $1.3$2.1 million, or 5%12%, to $19.4 million in the first ninesix months of 2019 compared to2020 from $17.3 million in the prior year period. The increase in the thirdsecond quarter and first ninesix months of 20192020 compared to the prior year periods primarily reflects the impact of businesses acquired in 2018, partly offset by purchase accounting adjustments to intangible assets2019 and the associated impact to amortization expense.2020.

Operating Income. Operating income decreased $7.3$33.1 million, or 16%73%, to $37.4$12.1 million in the thirdsecond quarter of 20192020 from $44.7$45.2 million in 2018. For the first nine months of 2019, operating income decreased $21.1 million, or 15%, to $118.5 million from $139.5 million in the prior year period.2019. As a percentage of net sales, operating income was 6.6%2.9% in the thirdsecond quarter of 20192020 versus 7.8%7.4% in the same period in 2018 and 6.6% for the first nine months of 2019 versus 8.1% in the prior year period.2019. Operating income in the third quarter and first nine months of 2019 attributabledecreased $29.7 million, or 37%, to acquisitions completed$51.4 million in the first ninesix months of 20192020 from $81.1 million in 2019. As a percentage of net sales, operating income was immaterial. Operating income in the third quarter and the first nine months of 2018 included $8.8 million and $17.3 million, respectively, attributable to acquisitions completed5.1% in the first ninesix months of 2018.2020 versus 6.6% in the same period in 2019. The change in operating income and operating marginincome percentage is primarily attributable to the items discussed above.



Interest Expense, Net. Interest expense increased $1.3$2.2 million, or 17%25%, to $8.6$10.8 million in the thirdsecond quarter of 20192020 from $7.3$8.6 million in the prior year. For the first ninesix months of 2019,2020, interest expense increased $8.2$3.7 million, or 46%21%, to $26.2$21.3 million from $18.0$17.6 million in the prior year period.

The increase in interest expense reflects: (i)in the second quarter and first six months of 2020 reflects increased borrowings related to 20182019 and 2020 acquisitions (ii) increases in the average interest rate on the variable rate portion of the Company's debt, which reflects increases in LIBOR in the third quarter and first nine months of 2019 compared to the prior year periods and (iii) an increase in the Company's overall average interest rate resulting from the issuance of the Company's$300 million aggregate principal amount of 7.5% Senior Notes due 2027 (the "Senior Notes")senior notes in the third quarter of 2019.
 
Income Taxes. Income tax expense decreased $1.9$8.6 million, or 21%94%, to $7.5$0.6 million in the second quarter of 2020 from $9.4$9.2 million in the prior year period. For the first ninesix months of 2019,2020, income tax expense decreased $6.0$7.0 million, or 21%46%, to $22.7$8.2 million for the first six months of 2020 from $28.7$15.2 million in the prior year period. ForThe decrease in both the thirdsecond quarter and first six months of 2020 is attributed to the decrease in taxable income for both periods.

The effective tax rate in the second quarter of 2020 and 2019 was 44.4% and 25.1%, respectively, and the effective tax rate was 26.0% compared to 25.3% infor the comparable 2018 period. For the first nine months of 2019, the effective tax ratesix month periods was 24.6% compared to 23.6% for the prior year period.27.2% and 23.9%, respectively. The effective tax rate for the periods presentedsecond quarter and six months of 2020 reflects the impact of $2.2 million of permanent tax differences due to certain Coronavirus Aid, Relief, and Economic Security Act payroll tax credits. In addition, the effective tax rate for the first six months 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 includerealization in the amount of $0.9 million and $2.2 million for the nine-month 2019 and 2018 periods, respectively, with no amounts for the comparable quarterly periods.million.

The Company's combined effective income tax rate from period to period and for the full year 2019 could further fluctuate due to: (i) refinements in federal and state income tax estimates, which 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 timing of the recognition of excess tax benefits related to the vesting of share-based payments awards as previously discussed.

Net Income. Net income for the third quarter of 2019 was $21.3 million, or $0.92 per diluted share, compared to $27.9 million, or $1.15 per diluted share for 2018. For the first nine months of 2019, net income was $69.6 million, or $2.99 per diluted share, compared to $92.9 million, or $3.77 per diluted share for 2018. The changes in net income for the third quarter and first nine months of 2019 compared to prior year periods reflect the impact of the items previously discussed.
Use of Financial Metrics
Our MD&A includes financial metrics, such as RV, marine and MH content per unit, which we believe are important measures of the Company's business performance. Content per unit metrics are generally calculated using our market sales divided by third-party measures of industry volume. These metrics should not be considered alternatives to U.S. GAAP. Our computations of content per unit may differ from similarly titled measures used by others. YouThese metrics should not consider these metricsbe considered in isolation or as substitutes for an analysis of our results as reported under U.S. GAAP.



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 businessesreporting. The Company regularly evaluates the performance of the Manufacturing and Distribution segments and allocates resources to them based on the manner in which its Chief Operating Decision Maker allocates resources, evaluates financial results,a variety of indicators including sales and determines compensation.

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 –operating income. The Company distributes pre-finished walldoes not measure profitability at the customer market (RV, marine, MH 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.industrial) level.

ThirdSecond Quarter and NineSix Months Ended September 29, 2019June 28, 2020 Compared to 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 toof the Notes to Condensed Consolidated Financial Statements.
 
 Third Quarter Ended Nine Months Ended Second Quarter Ended Six Months Ended
(thousands) 
September 29, 2019

 September 30, 2018 
September 29, 2019

 September 30, 2018 June 28, 2020 June 30, 2019 June 28, 2020 June 30, 2019
Sales  
  
      
  
    
Manufacturing $407,814
 $453,396
 $1,283,824
 $1,371,552
 $297,688
 $442,606
 $724,527
 $876,010
Distribution 167,552
 131,022
 531,312
 390,602
 132,556
 180,061
 303,822
 363,760
Gross Profit  
  
            
Manufacturing 73,700

86,015
 231,227
 262,824
 48,957
 80,700
 127,904
 157,527
Distribution 27,965

21,974
 87,738
 63,668
 23,192
 30,800
 52,388
 59,773
Operating Income  
  
            
Manufacturing 42,353
 54,887
 135,577
 172,799
 22,410
 48,787
 68,114
 93,224
Distribution 9,041
 7,606
 28,132
 25,092
 6,938
 10,800
 16,906
 19,091

Manufacturing
 
Sales. Sales decreased $45.6$144.9 million, or 10%33%, to $407.8$297.7 million in the thirdsecond quarter of 20192020 from $453.4$442.6 million in 2018.the prior year quarter. For the first ninesix months of 2019,2020, sales decreased $87.7$151.5 million, or 6%17%, to $1,283.8$724.5 million from $1,371.6$876.0 million in the prior year period. This segment accounted for approximately 71%69% and 70%71% of the Company’s consolidated net sales for the thirdsecond quarter of 2020 and 2019, respectively, and 70% of the Company's consolidated net sales for the first ninesix months of 20192020 and 77% and 78% for the third quarter and first nine months of 2018.2019. The sales decrease in the third quarter of 2019 largely reflected a decrease in wholesale unit shipments in the RV and marine industries, and in the RV, MH and marine industries in the first nine months of 2019.

Revenue in the thirdsecond quarter and first ninesix months of 20192020 was immaterial relatedprimarily attributed to acquisitions completedsales decreases in our primary end markets as a result of business disruptions and lost production and shipping days due to the first nine months of 2019. Revenue in the third quarter and first nine months of 2018 included $51.8 million and $99.0 million, respectively, related to acquisitions completed in the first nine months of 2018.COVID-19 pandemic.

Gross Profit. Gross profit decreased $12.3$31.7 million, or 14%39%, to $73.7$49.0 million in the thirdsecond quarter of 20192020 from $86.0$80.7 million in the thirdsecond quarter of 2018.2019. For the first ninesix months of 2019,2020, gross profit decreased $31.6$29.6 million, or 12%19%, to $231.2$127.9 million from $262.8$157.5 million in 2018.2019. As a percentage of sales, gross profit decreased to 18.1%16.5% in the thirdsecond quarter of 2020 from 18.2% in the second quarter of 2019 from 19.0% in 2018 and decreased to 17.7% in the first six months of 2020 from 18.0% in the first nine monthsprior year period. Gross profit as a percentage of 2019 from 19.2% in 2018.

Gross profitnet sales decreased during the thirdsecond quarter and first ninesix months of 20192020 compared to the corresponding prior year periods primarily due to decreased revenue relative to overall fixed overhead costs.additional costs and operational inefficiencies as a result of business disruptions from the COVID-19 pandemic.

Operating Income. Operating income decreased $12.5$26.4 million, or 23%54%, to $42.4$22.4 million in the thirdsecond quarter of 20192020 from $54.9$48.8 million in the prior year.year quarter. For the first ninesix months of 2019,2020, operating income decreased $37.2$25.1 million, or 22%27%, to $135.6$68.1 million from $172.8$93.2 million in 2018.the prior year. The overall decrease in operating income in the thirdsecond quarter and first ninesix months of 20192020 primarily reflects the items discussed above.



Operating income in the third quarter and first nine months of 2019 attributable to acquisitions completed in the first nine months of 2019 was immaterial, and operating income in the third quarter and first nine months of 2018 included $7.0 million and $12.9 million, respectively, attributable to acquisitions completed in the first nine months of 2018.

Distribution
 
Sales. Sales increased $36.5decreased $47.5 million, or 28%26%, to $167.5$132.6 million in the thirdsecond quarter of 20192020 from $131.0$180.1 million in 2018.the prior year quarter. For the first ninesix months of 2019,2020, sales increased $140.7decreased $60.0 million, or 36%16%, to $531.3$303.8 million from $390.6$363.8 million in 2018.the prior year period. This segment accounted for approximately 29%31% and 30%, respectively,29% of the Company’s consolidated net sales for the thirdsecond quarter of 2020 and 2019, respectively, and 30% of consolidated net sales for the first six months of 2020 and 2019. The sales decrease in the second quarter and first ninesix months of 2019,2020 was primarily attributed to sales decreases in our primary end markets as a result of business disruptions and 23%lost production and 22%, respectively, for the third quarter and first nine months of 2018. The sales increase in the third quarter and first nine months of 2019 comparedshipping days due to the prior year periods was largely attributed to the revenue contribution of LaSalle, which was acquired during the fourth quarter of 2018. Revenue in the third quarter and first nine months of 2018 included $30.6 million and $61.0 million, respectively, related to acquisitions completed in the first nine months of 2018.COVID-19 pandemic.

Gross Profit. Gross profit increased $6.0decreased $7.6 million, or 27%25%, to $28.0$23.2 million in the thirdsecond quarter of 20192020 from $22.0$30.8 million in the thirdsecond quarter of 2018.2019. For the first ninesix months of 2019,2020, gross profit increased $24.0decreased $7.4 million, or 38%12%, to $87.7$52.4 million from $63.7$59.8 million in 2018.2019. As a percentage of sales, gross profit decreasedincreased to 16.7%17.5% in the thirdsecond quarter of 2020 from 17.1% in the second quarter of 2019 from 16.8% in the third quarter of 2018 and increased to 16.5% for17.2% in the first ninesix months of 20192020 from 16.3% for16.4% in the prior year period.

As a percentage of sales, gross profit increased during the second quarter and first ninesix months of 2018. The decrease in gross profit margin in the third quarter of 20192020 compared to the third quarterprior year periods primarily due to realized synergies from certain 2018 and 2019 acquisitions, partially offset by additional costs and operational inefficiencies as a result of 2018 is primarily attributed to higher overall fixed costs relative to RV and MH distribution product revenue. The increase in gross profit margin forbusiness disruptions from the first nine months of 2019 compared to 2018 primarily reflects the impact of acquisitions completed during 2018.COVID-19 pandemic.

Operating Income. Operating income increased $1.4decreased $3.9 million, or 19%36%, to $9.0$6.9 million in the thirdsecond quarter of 20192020 from $7.6$10.8 million in the prior year quarter. For the first six months of 2020, operating income decreased $2.2 million, or 11%, to $16.9 million from $19.1 million in the prior year. For the first nine months of 2019, operating income increased $3.0 million, or 12%, to $28.1 million from $25.1 million for the first nine months of 2018. Operating income in the third quarter and first nine months of 2018 included $1.8 million and $4.4 million, respectively, related to distribution acquisitions completed in the first nine months of 2018. The overall net improvementdecrease in operating income in the thirdsecond quarter and first ninesix months of 20192020 primarily reflects the items discussed above.

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. After a postponement of non-essential capital expenditures in the second quarter of 2020, the Company expects to return to its historical levels of capital expenditures in the second half of 2020 reflecting the anticipated recovery of our end markets.

Our liquidity at June 28, 2020 consisted of cash and cash equivalents of $111.1 million and $410.2 million of unused borrowing 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 decreased $5.4$54.4 million to $122.0$39.4 million in the first ninesix months of 20192020 from $127.4$93.8 million in the first ninesix months of 20182019 primarily due to:to (i) a decrease inof net income of $23.3$26.4 million partlydue to disruptions in our end markets as a result of the COVID-19 pandemic; (ii) an increase in the use of cash from trade receivables of $24.0 million, primarily due to the timing of customer cash payments at the end of our fiscal second quarter; (iii) an increase in the use of cash from inventories of $20.8 million, due mostly to purchases of inventory in June 2020 as a result of an increase in demand in our end markets; and (iv) a decrease of deferred income tax liabilities of $7.6 million. These decreases in operating cash flows were partially offset by (i)an increase of cash flows from prepaid expenses and other assets of $12.5 million and accounts payable of $5.2 million and an increase of depreciation and amortization of $6.6 million, (ii) an increase in stock based compensation expense, amortization of debt discount, deferred income taxes and other operating items of $5.0 million and (iii) a net source of cash from changes in operating assets and liabilities of $6.3$4.4 million.
Investing Activities  
Net cash used in investing activities decreased $270.9increased $19.9 million to $40.1$35.0 million in the first ninesix months of 20192020 from $311.0$15.1 million in the first ninesix months of 20182019 primarily due to: a decreaseto an increase in cash used in business acquisitions of $267.7$22.6 million


and a decrease in proceeds from sale of property, plant, and equipment and other investing activities of $4.2 million, partially offset by a decrease in capital expenditures of $3.8$6.9 million.
The Company's current operating model forecasts capital expenditures for fiscal 2019 of approximately $30 million.


Financing Activities 
Cash flows from financing activities are one of the Company's primary sources of liquidity through borrowings under the Company's credit facility as well as convertible and senior note issuances in 2018 and 2019, respectively.
Net cash flows providedused by financing activities decreased $153.2$29.4 million to $27.9$32.7 million in first six months of 2020 from $62.1 million in the first ninesix months of 2019 from $181.1 million in the first nine months of 2018 primarily due to: (i) cash used forto a net decrease in repayments on the Company'sour revolving credit facility and term loan of $253.6$52.8 million in the first nine monthsand other financing activities of 2019 compared to a source$3.8 million, partially offset by stock repurchases under our buyback program of cash from net borrowings on the Company's credit facility of $107.1$15.6 million in the first nine months of 2018; (ii) gross proceeds of $172.5 million from the third quarter 2018 issuance of 1% Convertible Senior Notes due 2023 (the "Convertible Notes") with no comparablecorresponding amount in the first nine monthsprior year period and cash dividends paid to shareholders of 2019; (iii) a source of cash in the first nine months of 2018 of $18.1$11.6 million from the related sale of warrants with no comparablecorresponding amount in the first nine months of 2019 and (iv) a use of cash of $4.4 million in the first nine months of 2019 from payment of contingent consideration resulting from a business acquisition with no comparable amount in the first nine months of 2018. Partially offsetting these items were: (i) the issuance of $300 million of Senior Notes in the first nine months of 2019 with no comparable amount in the first nine months of 2018; (ii) a use of cash in the first nine months of 2018 of $31.5 million from the purchase of Convertible Notes hedges with no comparable amount in the first nine months of 2019 and (iii) a decrease in the use of cash for stock repurchases of $71.4 million in the first nine months of 2019 from the prior year period.
See Notes 9, 10 and 16 of the Notes to Condensed Consolidated Financial Statements for further information on the Company's indebtedness, derivative financial instruments 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 current credit facility (the "2019 Credit Facility") are expected to be sufficient to meet anticipated cash needs for working capital and capital expenditures for at least the next 12 months, exclusive of any acquisitions, based on its current cash flow budgets and forecast of short-term and long-term liquidity needs.
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 June 28, 2020, the Company had $410.2 million of unused borrowing availability under its credit facility. The ability to access unused borrowing capacity under the 2019 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 established the 2019 Credit Facility (the "2019 Credit Agreement").agreement.

As of and for the September 29, 2019June 28, 2020 reporting date, the Company was in compliance with its financial debt covenants as required under the terms of the 2019 Credit Agreement.its credit agreement. The required maximum consolidated total leverage ratio and the required minimum consolidated fixed charge coverage ratio, as such ratios are defined in the credit agreement, compared to the actual amounts as of September 29, 2019June 28, 2020 and for the fiscal period then ended are as follows:  
 
Required

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

2.30
Consolidated fixed charge coverage ratio (12-month period)
1.50

4.05

The indenture associated with the Senior Notes places restrictions on the Company’s ability to, among other items, (i) incur additional indebtedness or issue certain preferred shares; (ii) pay dividends, redeem stock or make other distributions; (iii) make investments; (iv) transfer or sell assets; and (v) merge or consolidate. The Senior Note indenture also provides for customary events of default, which could require the Senior Notes to become due and payable immediately, and also contains customary covenant provisions with which the Company is in compliance as of September 29, 2019.
 
Required

Actual
Maximum consolidated total leverage ratio (12-month period)
4.00

2.31
Minimum consolidated fixed charge coverage ratio (12-month period)
1.50

5.65

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 revolving credit loan (the "2019 Revolver") and the term loan (the "2019 Term Loan") comprising the 2019 Credit Facility, which are subject to variable rates of interest, are subject to a maximum total borrowing limit of $650.0 million (effective September 17, 2019). See Note 9 of the Notes to the Condensed Consolidated Financial Statements for further information. 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 2019 Revolver and 2019 Term Loan. The unused availability under the 2019 Credit Facility as of September 29, 2019 was $411.1 million.


CRITICAL ACCOUNTING POLICIES
 
There have been no material changes to our critical accounting policies which are summarized in the MD&A in our Annual Report on Form 10-K for the year ended December 31, 2018.2019. 
 OTHER
Seasonality
Manufacturing operationsOperations 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.
Cyber Security Incident
At the end of the third quarter of 2019, the Company experienced a highly-sophisticated third-party malware cyberattack that impacted certain of the Company's administrative and production servers and resulted in a disruption of administrative and network operations for approximately two business days. In response to the attack, the Company immediately took steps to ensure customer commitments were honored and to remediate the attack to minimize the disruption. Further, although the Company has programs in place to detect, contain and respond to data security incidents, the Company began an investigation of the attack, including engaging external forensic and other IT experts, and is in the process of implementing further security measures and processes designed to prevent unauthorized access to its information systems and mitigate cybersecurity related risks. Estimated after-tax costs incurred in the third quarter of 2019 related to the cyberattack were approximately $1.5 million, which included incremental consulting and professional fees, administrative, operating, and production inefficiencies, and equipment replacement and repair. No additional material costs are expected to be incurred in future quarters related to the cyber incident.

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. Information about certain risks that could affect our business and cause actual results to differ from those expressed or implied in the forward-looking statements are contained in the section entitled “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 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 September 29, 2019,June 28, 2020, our total debt obligations under our 2019 Credit Agreementcredit agreement were under LIBOR-based interest rates. A 100-basis point increase in the underlying LIBOR and prime rates would result in additional annual interest cost of approximately $0.4$0.3 million, assuming average borrowings, including the 2019 Term Loan,our term loan, subject to variable rates of $35.0$31.3 million, which was the amount of such borrowings outstanding at September 29, 2019June 28, 2020 subject to variable rates. The $35.0$31.3 million excludes deferred financing costs related to the 2019 Term Loanterm loan and $200.0 million of borrowings outstanding under the 2019 Credit Facilityrevolver and term loan that are hedged at a fixed interest rate through interest rate swaps.

Inflation Commodity Price 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 second quarter and first ninesix 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 thirdsecond quarter ended September 29, 2019 or subsequent to the date the Company completed its evaluation,June 28, 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 maintain normal operations, or subsequently 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)
July 1 - July 28, 2019 —
 $—
 —
 $30,306,041
July 29 - September 1, 2019 69,399
 37.00
 68,122
 27,794,558
September 2 - September 29, 2019 30,079
 35.65
 30,079
 26,722,195
  99,478
   98,201
  
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)
March 30 - April 26, 2020 —
 $—
 —
 43,515,568
April 27 - May 31, 2020 2,383
 43.43
 —
 43,515,568
June 1 - June 28, 2020 143
 62.37
 —
 43,515,568
  2,526
   —
  
(1) Amount includes 1,277Represents shares of common stock purchased by the Company in August 2019 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 toof the Notes to Condensed Consolidated Financial Statements for additional information about the Company's stock repurchase program.









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: November 7, 2019August 6, 2020By:/s/ Todd M. ClevelandAndy L. Nemeth
  Todd M. Cleveland
Andy L. Nemeth

  President and Chief Executive Officer
 
 
   
Date: November 7, 2019August 6, 2020By:/s/ JoshuaJohn A. BooneForbes
  Joshua
John A. BooneForbes

  Vice President-Finance andInterim Chief Financial Officer


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