The following pro forma information for the second quarter and six months ended June 28, 2020 and June 30, 2019 assumes the 20202021 Acquisitions and the 20192020 Acquisitions occurred as of the beginning of the year immediately preceding each such acquisition. The pro forma information contains the actual operating results of the 20202021 Acquisitions and 20192020 Acquisitions combined with the results prior to their respective acquisition dates, adjusted to reflect the pro forma impact of the acquisitions occurring as of the beginning of the year immediately preceding each such acquisition.
The pro forma information includes financing and interest expense charges based on 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 for the six months ended June 28, 2020 and $0.6 million and $1.2$3.1 million for the second quarter and six months ended June 30, 2019,27, 2021, respectively and $5.2 million and $10.5 million for the second quarter and six months ended June 28, 2020, respectively.
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.
The Board approved various stock-based grants under the Company’s 2009 Omnibus Incentive Plan in the first six months of 20202021 totaling 275,740230,073 shares in the aggregate at an average fair value of $53.78$73.53 at grant date for a total fair value at grant date of $14.8$16.9 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.
The Company's credit facility exposes the Company to risks 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. As of June 28, 2020,27, 2021, the Company had a combined notional principal amount of $200.0$200 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 Company's variable rate debt from variable interest rates to fixed interest rates and have maturities ranging from February 2022 to March 2022.
The following table summarizes the fair value of derivative contracts included in the condensed consolidated statements of financial positionbalance sheets (in thousands):
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 whichand are classified as Level 2 in the fair value hierarchy.
See Note 11 for information regarding accumulated other comprehensive loss on interest rate swaps.
The Company has 2 reportable segments, Manufacturing and Distribution, which are based on its method of internal reporting, which segregates its businesses based on the manner in which its chief 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. | | | | | | | | | | | | | | | | | | | | |
Second Quarter Ended June 27, 2021 | | | | | | |
(thousands) | | Manufacturing | | Distribution | | Total |
Net outside sales | | $ | 729,041 | | | $ | 290,912 | | | $ | 1,019,953 | |
Intersegment sales | | 16,042 | | | 1,517 | | | 17,559 | |
Total sales | | 745,083 | | | 292,429 | | | 1,037,512 | |
Operating income | | 99,428 | | | 31,201 | | | 130,629 | |
| | | | | | | | | | | | | | | | | | | | |
Second Quarter Ended June 28, 2020 | | | | | | |
(thousands) | | Manufacturing | | Distribution | | Total |
Net outside sales | | $ | 292,574 | | | $ | 131,471 | | | $ | 424,045 | |
Intersegment sales | | 5,114 | | | 1,085 | | | 6,199 | |
Total sales | | 297,688 | | | 132,556 | | | 430,244 | |
Operating income | | 22,410 | | | 6,938 | | | 29,348 | |
|
| | | | | | | | | | | | |
Second Quarter Ended June 30, 2019 | | | | | | |
(thousands) | | Manufacturing | | Distribution | | Total |
Net outside sales | | $ | 434,275 |
| | $ | 178,943 |
| | $ | 613,218 |
|
Intersegment sales | | 8,331 |
| | 1,118 |
| | 9,449 |
|
Total sales | | 442,606 |
| | 180,061 |
| | 622,667 |
|
Operating income | | 48,787 |
| | 10,800 |
| | 59,587 |
|
| | | | | | | | | | | | | | | | | | | | |
Six Months Ended June 27, 2021 | | | | | | |
(thousands) | | Manufacturing | | Distribution | | Total |
Net outside sales | | $ | 1,329,797 | | | $ | 540,639 | | | $ | 1,870,436 | |
Intersegment sales | | 29,850 | | | 2,920 | | | 32,770 | |
Total sales | | 1,359,647 | | | 543,559 | | | 1,903,206 | |
Operating income | | 177,857 | | | 52,376 | | | 230,233 | |
| | | | | | | | | | | | | | | | | | | | |
Six Months Ended June 28, 2020 | | | | | | |
(thousands) | | Manufacturing | | Distribution | | Total |
Net outside sales | | $ | 711,840 | | | $ | 301,437 | | | $ | 1,013,277 | |
Intersegment sales | | 12,687 | | | 2,385 | | | 15,072 | |
Total sales | | 724,527 | | | 303,822 | | | 1,028,349 | |
Operating income | | 68,114 | | | 16,906 | | | 85,020 | |
|
| | | | | | | | | | | | |
Six Months Ended June 30, 2019 | | | | | | |
(thousands) | | Manufacturing | | Distribution | | Total |
Net outside sales | | $ | 859,959 |
| | $ | 361,477 |
| | $ | 1,221,436 |
|
Intersegment sales | | 16,051 |
| | 2,283 |
| | 18,334 |
|
Total sales | | 876,010 |
| | 363,760 |
| | 1,239,770 |
|
Operating income | | 93,224 |
| | 19,091 |
| | 112,315 |
|
The following table presents a reconciliation of segment operating income to consolidated operating income:
|
| | | | | | | | | | | | | | | | |
| | Second Quarter Ended | | Six Months Ended |
(thousands) | | June 28, 2020 | | June 30, 2019 | | June 28, 2020 | | June 30, 2019 |
Operating income for reportable segments | | $ | 29,348 |
| | $ | 59,587 |
| | $ | 85,020 |
| | $ | 112,315 |
|
Unallocated corporate expenses | | (7,464 | ) | | (6,090 | ) | | (14,256 | ) | | (14,003 | ) |
Amortization | | (9,778 | ) | | (8,268 | ) | | (19,379 | ) | | (17,257 | ) |
Consolidated operating income | | $ | 12,106 |
| | $ | 45,229 |
| | $ | 51,385 |
| | $ | 81,055 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Second Quarter Ended | | Six Months Ended |
(thousands) | | June 27, 2021 | | June 28, 2020 | | June 27, 2021 | | June 28, 2020 |
Operating income for reportable segments | | $ | 130,629 | | | $ | 29,348 | | | $ | 230,233 | | | $ | 85,020 | |
Unallocated corporate expenses | | (21,332) | | | (7,464) | | | (40,549) | | | (14,256) | |
Amortization | | (14,031) | | | (9,778) | | | (25,937) | | | (19,379) | |
Consolidated operating income | | $ | 95,266 | | | $ | 12,106 | | | $ | 163,747 | | | $ | 51,385 | |
Unallocated corporate expenses include corporate general and administrative expenses comprised of wages, insurance, taxes, supplies, travel and entertainment, professional fees and other.
The following table presents an allocation of total assets to the reportable segments of the Company and a reconciliation to consolidated total assets:
| | | | | | | | | | | | | | |
(thousands) | | June 27, 2021 | | December 31, 2020 |
Manufacturing assets | | $ | 1,723,928 | | | $ | 1,337,920 | |
Distribution assets | | 419,551 | | | 343,170 | |
Assets for reportable segments | | 2,143,479 | | | 1,681,090 | |
Corporate assets unallocated to segments | | 22,826 | | | 27,578 | |
Cash and cash equivalents | | 58,402 | | | 44,767 | |
Consolidated total assets | | $ | 2,224,707 | | | $ | 1,753,435 | |
|
| | | | |
16. | STOCK REPURCHASE PROGRAMS |
In March 2020, the Board approved a new stock repurchase program for up to $50 million of its common stock, including amounts remaining under previous authorizations. Approximately $43.5$14.4 million remains in the amount of the Company's common stock that may be acquired under the current stock repurchase program as of June 28, 2020. NaN27, 2021. The Company repurchased 260,000 shares of its common stock repurchases were madeat an average price of $82.89 at an aggregate cost of $21.6 million in the second quarter of 2020.and six months ended June 27, 2021. In the firstsecond quarter and six months ended June 28, 2020, the Company repurchased 456,155 shares of its common stock at an average price of $34.09 per share at an aggregate cost of $15.6 million. The Company did not repurchase any of its common stock in the second quarter and first six months of 2019.
In August 2020,Previously, the Company announcedwould retire the completionshares upon repurchase. However, beginning in 2021, the Company has now elected to hold these shares in treasury stock. Accordingly, beginning in 2021, the Company has begun presenting stock repurchases within "Treasury Stock" on the condensed consolidated balance sheet and condensed consolidated statement of shareholders' equity. Prior periods have not been adjusted to reflect the acquisitioncurrent presentation 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 an additional facility located in Cocoa, Florida. The acquisition of Inland includes the acquisition of working capital, machinery and equipment, and real estate.stock repurchases.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the Company’s Condensed Consolidated Financial Statements and Notes thereto included in Item 1 of this Report. In addition, this MD&A contains certain statements relating to future results which are forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. See “Information Concerning Forward-Looking Statements” on page 2934 of this Report. The Company undertakes no obligation to update these forward-looking statements.
OVERVIEW OF MARKETS AND RELATED INDUSTRY PERFORMANCE
The 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
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 Six Months 20202021 Financial Overview
Recreational Vehicle ("RV") Industry
The RV industry is our largest market and comprised 48%58% and 56%48% of the Company’s sales in the second quarter ended June 27, 2021 and June 28, 2020, and June 30, 2019, respectively, and 52%59% and 56%52% for the comparative 20202021 and 20192020 six month periods. Sales to the RV industry decreased 40%increased 192% in the second quarter of 20202021 and 23%increased 109% in the first six months respectively,of 2021, compared to the prior year periods.
According to the Recreation Vehicle Industry Association ("RVIA"), wholesale shipments totaled 75,663approximately 151,800 units in the second quarter of 2020, decreasing 35%2021, an increase of 101% compared to 116,605approximately 75,700 units in the second quarter of 2019.2020. Wholesale unit shipments for the first six months of 2020 decreased 19% for the first six months2021 totaled approximately 300,300 units, an increase of 2020, totaling 176,067 units71% compared to 216,581approximately 176,100 units in the prior year period. Retailyear. The increase in wholesale unit sales are estimated to have decreased 17% and 13% during shipments in
the second quarter and first six months of 2020, respectively. Decreases2021 is attributed to an increase in wholesale and retail RV shipmentsdealer demand for RV units. In addition, the increase in the second quarter and first six months of 2021 reflects the comparison to the sharp decrease in wholesale unit shipments in the second quarter of 2020, are largely attributedwhich was a result of COVID-19-related production shutdowns at original equipment manufacturers' plants. This increase in dealer demand is correlated with consumer demand for RV units, which we believe reflects changes in consumer recreation patterns, which include an increased interest in outdoor recreation. According to COVID-19 market disruptions. Based on our estimates, RV dealer inventories are trending at historical lows relative to what we understand to be typical inventory levels of RV dealers. We believe that the supply-demand dynamics of historically low dealer inventory levels, combined with strong retail consumer demand, have resulted in positive momentum in our RV end ofmarket. We estimate RV retail unit sales increased 30-35% in the second quarter of 2020 were at their lowest level since 2014 due2021 and increased 37-40% for the first six months of 2021 compared to a combination of reduced wholesale shipments by the OEMs during the quarter and a recovery in retail sales in the latter part of May and throughout June 2020.prior year periods.
Marine Industry
Sales to the marine industry, which represented approximately 16% and 14% of the Company's consolidated net sales in the second quarter of 2021 and 2020, and 2019, decreased 34% in the second quarter of 2020respectively, increased 182% compared to the prior year quarter. For the first six months of 20202021 and 2019,2020, sales to the marine industry represented 13%16% and 15%13% of consolidated net sales, respectively, declining 24%increasing 121% in 20202021 compared to the prior year.
Our marine revenue is generally correlated to marine wholesale powerboat unit shipments, and according to National Marine Manufacturers Association ("NMMA") marine wholesale powerboat unit shipments increased an estimated 26% for the second quarter 2021 and increased an estimated 16% for the first six months of 2021 compared to the prior year period.
Forperiods. Marine retail powerboat unit sales were nearly unchanged in the second quarter of 2020, overall marine retail unit shipments in the powerboat sector, which is the Company's primary marine market, decreased an estimated 7%, with aluminum fishing sales decreasing an estimated 11%; pontoon sales decreasing an estimated 3%; fiberglass sales decreasing an estimated 10%;2021 and ski and wake sales increasing an estimated 1%. Wholesale unit shipments declined an estimated 39% during the quarter, reflecting the impact of COVID-19 OEM production shutdowns. Forincreased 8% for the first six months of 2020, overall2021 compared to the prior year periods. We estimate that marine retail sales substantially exceeded marine wholesale unit shipments in both the powerboat sector decreased an estimated 7%, with aluminum fishing sales decreasing an estimated 10%; pontoon sales decreasing an estimated 4%; fiberglass sales decreasing an estimated 9%;second quarter and ski and wake sales virtually flat. Wholesale unit shipments declined an estimated 27% during the first six months of 2020, due mostly to temporary OEM production shutdowns.
2021, resulting in marine dealer inventory levels that we believe are at their lowest in at least a decade.
Manufactured Housing ("MH") Industry
Sales to the MH industry, which represented 21%14% and 18%21% of the Company’s sales in the second quarter of 2021 and 2020, and 2019, respectively, decreased 18%increased 54% in the second quarter of 20202021 compared to the second quarter of 2019.2020. MH sales represented 14% and 20% of the Company's sales for the first six months of 2021 and 2020, representing 20%respectively, and 18% of the Company's sales for the 2020 and 2019 periods, decreased 6%increased 28% in the first six months of 20202021 compared to the prior year period. Based on industry data from the Manufactured Housing Institute, MH wholesale unit shipments decreased by approximately 14%increased 31% in the second quarter of 2020 compared to the prior year quarter2021 and decreased 1%increased 16% for the first six months of 20202021 compared to the prior year period. MH wholesale unit shipments were impacted due to temporary OEM plant shutdowns in the 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 and countertop industry, hospitality market, retail and commercial fixtures market, office and household furniture market and regional distributors. Sales to this market represented 17%12% and 12%17% of our sales in the second quarter of 20202021 and 2019,2020, respectively, and decreased 2%increased 69% in the second quarter of 20202021 compared to the prior year quarter. Sales to the industrial market represented 15%11% and 11%15% of our sales for the first six months of 20202021 and 2019,2020, respectively, and increased 6%41% in the first six months of 20202021 compared to the prior year period. Overall, our revenues in these markets are focused on the residential and multifamily housing, hospitality, high-rise housing and office, commercial construction and institutional furniture markets. We estimate that approximately 60%70% of our industrial business is directly tied to the residential housing market, with the remaining 40%30% directly tied to the non-residential and commercial markets.
CombinedAccording to the U.S. Census Bureau, combined new housing starts decreased 17%increased 43% in the second quarter of 20202021 compared to the prior year quarter, with single family housing starts decreasing 13%increasing 42% and multifamily residential starts decreasing 27%.increasing 48% for the same period. For the first six months of 2020,2021, combined new housing starts increased 1% compared to the prior year period,25%, with single family housing starts decreasing 1%increasing 31% and multifamily residentialhousing starts increasing 5%.14% compared to 2020. 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.
REVIEW OF CONSOLIDATED OPERATING RESULTS
SecondQuarter and Six Months EndedJune 28, 202027, 2021 Compared to 20192020
The following table sets forth the percentage relationship to net sales of certain items on the Company’s Condensed Consolidated Statements of Income.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Second Quarter Ended | | | |
($ in thousands) | | June 27, 2021 | | June 28, 2020 | | Change Amount | % Change |
Net sales | | $ | 1,019,953 | | 100.0 | % | | $ | 424,045 | | 100.0 | % | | $ | 595,908 | | 141 | % |
Cost of goods sold | | 815,476 | | 80.0 | % | | 350,324 | | 82.6 | % | | 465,152 | | 133 | % |
Gross profit | | 204,477 | | 20.0 | % | | 73,721 | | 17.4 | % | | 130,756 | | 177 | % |
Warehouse and delivery expenses | | 34,815 | | 3.4 | % | | 20,209 | | 4.8 | % | | 14,606 | | 72 | % |
Selling, general and administrative expenses | | 60,365 | | 5.9 | % | | 31,628 | | 7.5 | % | | 28,737 | | 91 | % |
Amortization of intangible assets | | 14,031 | | 1.4 | % | | 9,778 | | 2.3 | % | | 4,253 | | 43 | % |
Operating income | | 95,266 | | 9.3 | % | | 12,106 | | 2.9 | % | | 83,160 | | 687 | % |
Interest expense, net | | 14,580 | | 1.4 | % | | 10,821 | | 2.6 | % | | 3,759 | | 35 | % |
Income taxes | | 21,701 | | 2.1 | % | | 571 | | 0.1 | % | | 21,130 | | 3,701 | % |
Net income | | $ | 58,985 | | 5.8 | % | | $ | 714 | | 0.2 | % | | $ | 58,271 | | 8,161 | % |
|
| | | | | | | | | | | | |
|
| Second Quarter Ended | | Six Months Ended |
|
| June 28, 2020
|
| June 30, 2019
| | June 28, 2020
| | June 30, 2019
|
Net sales |
| 100.0 | % |
| 100.0 | % | | 100.0 | % | | 100.0 | % |
Cost of goods sold |
| 82.6 |
|
| 81.6 |
| | 81.9 |
| | 82.1 |
|
Gross profit | | 17.4 |
| | 18.4 |
| | 18.1 |
| | 17.9 |
|
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 |
| 2.3 |
|
| 1.3 |
| | 1.9 |
| | 1.4 |
|
Operating income |
| 2.9 |
|
| 7.4 |
| | 5.1 |
| | 6.6 |
|
Interest expense, net |
| 2.6 |
|
| 1.4 |
| | 2.1 |
| | 1.4 |
|
Income taxes |
| 0.1 |
|
| 1.5 |
| | 0.8 |
| | 1.2 |
|
Net income |
| 0.2 |
|
| 4.5 |
| | 2.2 |
| | 4.0 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended | | | |
($ in thousands) | | June 27, 2021 | | June 28, 2020 | | Change Amount | % Change |
Net sales | | $ | 1,870,436 | | 100.0 | % | | $ | 1,013,277 | | 100.0 | % | | $ | 857,159 | | 85 | % |
Cost of goods sold | | 1,504,427 | | 80.4 | % | | 830,075 | | 81.9 | % | | 674,352 | | 81 | % |
Gross profit | | 366,009 | | 19.6 | % | | 183,202 | | 18.1 | % | | 182,807 | | 100 | % |
Warehouse and delivery expenses | | 64,728 | | 3.5 | % | | 44,941 | | 4.4 | % | | 19,787 | | 44 | % |
Selling, general and administrative expenses | | 111,597 | | 6.0 | % | | 67,497 | | 6.7 | % | | 44,100 | | 65 | % |
Amortization of intangible assets | | 25,937 | | 1.4 | % | | 19,379 | | 1.9 | % | | 6,558 | | 34 | % |
Operating income | | 202,262 | | 10.8 | % | | 51,385 | | 5.1 | % | | 150,877 | | 294 | % |
Interest expense, net | | 25,759 | | 1.4 | % | | 21,313 | | 2.1 | % | | 4,446 | | 21 | % |
Income taxes | | 31,490 | | 1.7 | % | | 8,171 | | 0.8 | % | | 23,319 | | 285 | % |
Net income | | $ | 106,498 | | 5.7 | % | | $ | 21,901 | | 2.2 | % | | $ | 84,597 | | 386 | % |
Net Sales. Net sales in the second quarter of 2020 decreased $189.22021 increased $596.0 million, or 31%141%, to $424.0$1,020.0 million from $613.2$424.0 million in the second quarter of 2019.2020. The consolidated net sales decreaseincrease in the second quarter of 2021 reflects strong demand for our products across all end markets as well as the comparison to the second quarter of 2020, was attributedwhich reflects the impact to net sales decreases in all four of our end markets.COVID-19-related production shutdowns. The Company's RV market sales decreased 40%increased 192%, marine market sales decreased 34%increased 182%, industrial market sales decreased 2%increased 69% and MH market sales decreased 18%increased 54% when compared to the prior year quarter.
Net sales in the first six months of 2020 decreased $208.12021 increased $857.1 million, or 17%85%, to $1,013.3$1,870.4 million from $1,221.4$1,013.3 million in the first six months of 2019.2020. The consolidated net sales decreaseincrease in the first six months of 2021 reflects sales increases in all of our end markets, while sales in the first six months of 2020 also reflect the impact of COVID-19 as discussed above. The Company's RV market sales increased 109%, marine market sales increased 121%, MH market sales increased 28% and industrial market sales increased 41% when compared to the prior year period.
Revenue attributable to acquisitions completed in the first six months of 2021 was $56.7 million in the second quarter of 2021 and $62.1 million for the first six months of 2021. Revenue attributable to acquisitions completed in the first six months of 2020 was attributed to sales decreases in three of our end markets. The Company's RV market sales decreased 23%, marine market sales decreased 24% and MH market sales decreased 6% while industrial market sales increased 6% when compared to the prior year period.
During the second quarter and six months ended June 28, 2020, all four of 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$3.3 million in the second quarter of 2020 and $3.8 million for the first six months of 2020 was $3.3 million and $3.8 million, respectively.2020.
The Company’s RV content per wholesale unit (on a trailing twelve-month basis) for the second quarter of 2020 decreased2021 increased approximately 2%15% to $3,086$3,543 from $3,135$3,086 for the second quarter of 2019.2020. Marine powerboat content per retailwholesale unit (on a trailing twelve-month basis) for the second quarter of 2020 decreased approximately 13%2021 increased approximately 60% to an estimated $1,439$2,841 from $1,659$1,775 for the second quarter of 2019.2020. MH content per wholesale unit (on a trailing twelve-month basis) for the second quarter of 20202021 increased approximately 16%7% to an estimated$4,799 from $4,501 from $3,889 for the second quarter of 2019.
2020.
Cost of Goods Sold. Cost of goods sold decreased $150.3increased $465.2 million, or 30%133%, to $350.3$815.5 million in the second quarter of 20202021 from $500.6$350.3 million in 2019, primarily reflecting the decrease in net sales in the quarter. As a percentage of net sales, cost of goods sold increased during the second quarter of 2020 to 82.6% from 81.6% in 2019. 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 COVID-19 pandemic.
Cost of goods sold decreased $172.1 million, or 17%, to $830.1 million in the first six months of 2020 from $1,002.2 million in 2019, primarily reflecting the decrease in net sales in the period.2020. As a percentage of net sales, cost of goods sold decreased 260 basis points during the second quarter of 2021 to 80.0% from 82.6% in 2020.
Cost of goods sold in the first six months increased $674.3 million, or 81%, to $1,504.4 million from $830.1 million in 2020. As a percentage of net sales, cost of goods sold decreased 150 basis points during the first six months of 20202021 to 80.4% from 81.9% from 82.1% in 2019.
2020.
Cost of goods sold as a percentage of net sales decreased in the second quarter and first six months of 20202021 primarily as a result of (i) continued cost reductionsreduction and automation initiatives we initiateddeployed throughout 2020 and into 2021, (ii) volume-driven efficiencies as a result of leveraging fixed overhead, (iii) a recovery from the production inefficiencies experienced while operating in the third quarter of 2019, (ii)a COVID-19 environment, and (iv) synergies achieved and realized in the first six months of 2020different cost profiles from our 20182021 and 20192020 acquisitions, partially offset by an increase in labor and (iii) decreases incertain commodity cost inputs. These decreases inIn general, the Company's cost of goods sold were partially offsetpercentage can be impacted from quarter-to-quarter by additionaldemand changes in certain market sectors that can result in fluctuating costs incurredof certain raw materials and commodity-based components that are utilized in the production inefficiencies related to business disruption of our end markets as a result of the COVID-19 pandemic.products.
Gross Profit. Gross profit decreased $39.0increased $130.8 million, or 35%177%, to $73.7$204.5 million in the second quarter of 20202021 from $112.7$73.7 million in 2019. As a percentage of net sales, gross profit decreased to 17.4% in the second quarter of 2020 from 18.4% in the same period in 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 2019.2020. As a percentage of net sales, gross profit increased 260 basis points to 18.1%20.0% in the second quarter of 2021 from 17.4% in the same period in 2020.
Gross profit increased $182.8 million, or 100%, to $366.0 million in the first six months of 20202021 from 17.9%$183.2 million in 2020. As a percentage of net sales, gross profit increased 150 basis points to 19.6% in the second quarter of 2021 from 18.1% in the same period in 2019.
2020.
The changesincrease in gross profit as a percentage of net sales in the second quarter and first six months of 2020ended June 27, 2021 compared to the same periods in 2019 reflect2020 reflects the impact of the factors discussed above under “Cost of Goods Sold”.
Warehouse and Delivery Expenses. Warehouse and delivery expenses decreased $6.1increased $14.6 million, or 23%72%, to $34.8 million in the second quarter of 2021 from $20.2 million in the second quarter of 2020 from $26.3 million in the second quarter of 2019.2020. As a percentage of net sales, warehouse and delivery expenses wereimproved 140 basis points to 3.4% in the second quarter of 2021 compared to 4.8% in the second quarter of 2020 compared to 4.3% in the second quarter of 2019. 2020.
Warehouse and delivery expenses decreased $5.4increased $19.8 million, or 11%44%, to $64.7 million in the first six months of 2021 from $44.9 million in the first six months of 2020 from $50.3 million in the first six months of 2019.2020. As a percentage of net sales, warehouse and delivery expenses were 4.4%improved 110 basis points to 3.5% in the first six months of 20202021 compared to 4.1%4.4% in the same period in 2019.
prior year period.
The increaseincreases in warehouse and delivery expenses are attributable to the significant increases in sales. However, the decreases as a percentage of sales are primarily attributable to leveraging certain fixed warehousing costs and the lower proportion of MH sales in the second quarter and first six months of 2021 as compared to 2020, which have higher warehouse and delivery costs as a percentage of net sales forsales. In addition, the second quarter and first six months of 2020 primarily reflects the fixed nature of certain of these expenses andreflect operating inefficiencies as net sales declined.
associated with COVID-19 disruptions.
Selling, General and Administrative ("SG&A") Expenses. SG&A expenses decreased $1.3increased $28.8 million, or 4%91%, to $31.6$60.4 million in the second quarter of 20202021 from $32.9$31.6 million in the prior year quarter. As a percentage of net sales, SG&A expenses were 7.4%5.9% in the second quarter of 20202021 compared to 5.4%7.5% in the second quarter of 2019.2020.
SG&A expenses decreased $3.1increased $44.1 million, or 4%63%, to $111.6 million in the first six months of 2021 from $67.5 million in the first six months of 2020 from $70.6 million in the prior year period.2020. As a percentage of net sales, SG&A expenses were 5.9% in the first six months of 2021 compared to 6.7% in the first six months of 2020 compared to 5.8% in the prior year period.
2020.
The decreaseincrease in SG&A expenses in the second quarter and six months of 20202021 compared to 20192020 is primarily due to (i) the realizationincrease in net sales; (ii) increases in the breadth and depth of corporate resources to support the size and growth of the Company and (iii) the comparison to the prior year, which includes SG&A cost reduction measures implemented in the third quarter of 2019 and the first quarter of 2020 as well as reductions in certain SG&A spending associated with the decrease in net sales in the second quarter of 2020. As a percentage of sales, SG&A expenses decreased 160 basis points for the second quarter of 2021 compared to the second quarter of 2020 and decreased 70 basis points for the first six months of 2020. The increase in2021 when compared to the prior year period. These improvements are attributable to the fixed nature of certain SG&A expenses as a percentage of net sales in the second quarter and first six months of 2020 compared to prior year periods is attributed to the decline in net sales from the impact of COVID-19, discussed above.
costs.
Amortization of Intangible Assets. Amortization of intangible assets increased $1.5$4.2 million, or 18%44%, to $9.8$14.0 million in the second quarter of 20202021 from $8.3$9.8 million in the prior year quarter andquarter. Amortization of intangible assets increased $2.1$6.5 million, or 12%34%, to $25.9 million in the first six months of 2021 from $19.4 million in the first six months of 2020 from $17.3 million in the prior year period.2020. The increaseincreases in the second quarter and first six months of 20202021 compared to the prior year periods primarily reflects the impact of businesses acquired in 20192020 and 2020.2021.
Operating Income. Operating income decreased $33.1increased $83.2 million, or 73%687%, to $12.1$95.3 million in the second quarter of 20202021 from $45.2$12.1 million in 2019.2020. As a percentage of net sales, operating income was 2.9%increased 640 basis points to 9.3% in the second quarter of 20202021 versus 7.4%2.9% in the same period in 2019.2020. Operating income decreased $29.7increased $150.9 million, or 37%294%, to $51.4$202.3 million in the first six months of 20202021 from $81.1$51.4 million in 2019.2020. As a percentage of net sales, operating income was 5.1%increased 570 basis points to 10.8% in the first six months of 20202021 versus 6.6%5.1% in the same period in 2019.2020. The change in operating income and operating income percentagemargin is primarily attributable to the items discussed above.
Interest Expense, Net. Interest expense increased $2.2$3.8 million, or 25%35%, to $10.8$14.6 million in the second quarter of 20202021 from $8.6$10.8 million in the prior year. ForInterest expense increased $4.5 million, or 21%, to $25.8 million in the first six months of 2020,2021 from $21.3 million in the prior year.
The increase in interest expense reflects (i) increased $3.7borrowings related to 2020 and 2021 acquisitions and (ii) the Company's issuance of its 4.75% Senior Notes due 2029 (the "4.75% Senior Notes") in April 2021 (as described in Note 9 in the Notes to Condensed Consolidated Financial Statements), partially offset by a decrease in variable interest rates on the unhedged portions of the Company's term loan and revolving credit facility.
Income Taxes. Income tax expense increased $21.1 million or 21%,in the second quarter of 2021 to $21.3$21.7 million from $17.6$0.6 million in the prior year period. Income tax expense increased $23.3 million in the first six months of 2021, to $31.5 million from $8.2 million in the prior year period.
The increase in interestincome tax expense in the second quarter and first six months of 2020 reflects increased borrowings relatedis due primarily to 2019 and 2020 acquisitions and an increase in the Company's overall average interest rate resulting from the issuance of $300 million aggregate principal amount of 7.5% senior notes in the third quarter of 2019.
Income Taxes. Income tax expense decreased $8.6 million, or 94%, to $0.6 million in the second quarter of 2020 from $9.2 million in the prior year period. For the first six months of 2020, income tax expense decreased $7.0 million, or 46%, to $8.2 million for the first six months of 2020 from $15.2 million in the prior year period. The decrease in both the second quarter and first six months of 2020 is attributed to the decrease in taxable income for both periods.
pretax income. The effective tax rate in the second quarter of 2021 and 2020 was 26.9% and 2019 was 44.4% and 25.1%, respectively, and the effective tax rate for the comparable six month periods was 27.2% and 23.9%, respectively. The effective taxhigher 2020 rate for the second quarter and six months of 2020primarily reflects the impact of $2.2 million ofin permanent tax differences due to certain Coronavirus Aid Relief and Economic Security Act payroll tax credits. In addition, theThe effective tax rate forrates in the first six months of 20192021 and 2020 were 22.8% and 27.2%, respectively. The 2021 rate 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.
$5.7 million, while the 2020 rate reflects the impact of the permanent tax differences mentioned above.
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. These metrics should not be considered in isolation or as substitutes for an analysis of our results as reported under U.S. GAAP.
REVIEW BY BUSINESS SEGMENT
The Company's reportable segments, Manufacturing and Distribution, are based on its method of internal reporting. The Company regularly evaluates the performance of the Manufacturing and Distribution segments and allocates resources to them based on a variety of indicators including sales and operating income. The Company does not measure profitability at the customer market (RV, marine, MH and industrial) level.
SecondQuarter and Six Months EndedJune 28, 202027, 2021 Compared to 20192020
General
In the discussion that follows, sales attributable to the Company’s reportable segments include intersegment sales and gross profit includes the impact of intersegment operating activity.
The table below presents information about the sales, gross profit and operating income of the Company’s reportable segments. A reconciliation of consolidated operating income is presented in Note 15 of the Notes to Condensed Consolidated Financial Statements.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Second Quarter Ended | | | | |
(thousands) | | June 27, 2021 | | June 28, 2020 | | Amount Change | | % Change |
Sales | | | | | | | | |
Manufacturing | | $ | 745,083 | | | $ | 297,688 | | | $ | 447,395 | | | 150% |
Distribution | | 292,429 | | | 132,556 | | | 159,873 | | | 121% |
Gross Profit | | | | | | | | |
Manufacturing | | 150,560 | | | 48,957 | | | 101,603 | | | 208% |
Distribution | | 56,548 | | | 23,192 | | | 33,356 | | | 142% |
Operating Income | | | | | | | | |
Manufacturing | | 99,428 | | | 22,410 | | | 77,018 | | | 344% |
Distribution | | 31,201 | | | 6,938 | | | 24,263 | | | 346% |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended | | | | |
(thousands) | | June 27, 2021 | | June 28, 2020 | | Amount Change | | % Change |
Sales | | | | | | | | |
Manufacturing | | $ | 1,359,647 | | | $ | 724,527 | | | $ | 635,120 | | | 88% |
Distribution | | 543,559 | | | 303,822 | | | 239,737 | | | 79% |
Gross Profit | | | | | | | | |
Manufacturing | | 271,486 | | | 127,904 | | | 143,582 | | | 113% |
Distribution | | 100,698 | | | 52,388 | | | 48,310 | | | 92% |
Operating Income | | | | | | | | |
Manufacturing | | 177,857 | | | 68,114 | | | 109,743 | | | 161% |
Distribution | | 52,376 | | | 16,906 | | | 35,470 | | | 207% |
|
| | | | | | | | | | | | | | | | |
| | Second Quarter Ended | | Six Months Ended |
(thousands) | | June 28, 2020 | | June 30, 2019 | | June 28, 2020 | | June 30, 2019 |
Sales | | |
| | |
| | | | |
Manufacturing | | $ | 297,688 |
| | $ | 442,606 |
| | $ | 724,527 |
| | $ | 876,010 |
|
Distribution | | 132,556 |
| | 180,061 |
| | 303,822 |
| | 363,760 |
|
Gross Profit | | | | | | | | |
Manufacturing | | 48,957 |
| | 80,700 |
| | 127,904 |
| | 157,527 |
|
Distribution | | 23,192 |
| | 30,800 |
| | 52,388 |
| | 59,773 |
|
Operating Income | | | | | | | | |
Manufacturing | | 22,410 |
| | 48,787 |
| | 68,114 |
| | 93,224 |
|
Distribution | | 6,938 |
| | 10,800 |
| | 16,906 |
| | 19,091 |
|
Manufacturing
Sales. Sales decreased $144.9increased $447.4 million, or 33%150%, to $297.7$745.1 million in the second quarter of 20202021 from $442.6$297.7 million in the prior year quarter. For the first six months of 2020,2021, sales decreased $151.5increased $635.1 million, or 17%88%, to $724.5$1,359.6 million from $876.0$724.5 million in the prior year period. This segment accounted for approximately 69%72% and 71%69% of the Company’s consolidated net sales for the second quarter of 20202021 and 2019,2020, respectively, and 71% and 70% of the Company's consolidated net sales for the first six months of 2021 and 2020, and 2019.respectively. The sales decreaseincrease in the second quarter of 2021 compared to 2020 was attributed to sales increases in all four of the Company's end markets, where sales to each of the RV and marine end markets increased 185%, MH increased 88% and industrial increased 73%. The sales increase for the first six months of 2021 compared to the prior year period was also attributed to sales increases in all four end markets, where RV end market sales increased 98%, marine increased 122%, MH increased 52% and industrial increased 42%. Net sales in the second quarter and first six months of 2021 attributable to acquisitions completed in the first six months of 2021 were approximately $41.9 million and $46.7 million, respectively, and net sales in the second quarter and first six months of 2020 was primarily attributedattributable to sales decreasesacquisitions completed in our primary end markets as a resultthe first six months of business disruptions2020 were $3.3 million and lost production and shipping days due to the COVID-19 pandemic.$3.8 million, respectively.
Gross Profit. Gross profit decreased $31.7increased $101.6 million, or 39%208%, to $150.6 million in the second quarter of 2021 from $49.0 million in the second quarter of 2020 from $80.7 million in the second quarter of 2019.2020. For the first six months of 2020,2021, gross profit decreased $29.6increased $143.6 million, or 19%113%, to $271.5 million from $127.9 million from $157.5 million in 2019.the prior year period. As a percentage of sales, gross profit decreasedincreased to 16.5%20.2% in the second quarter of 2021 from 16.4% in the second quarter of 2020 from 18.2% in the second quarter of 2019 and decreasedincreased to 17.7%20.0% in the first six months of 20202021 from 18.0%17.7% in the prior year period.
Gross profit margin increased during the second quarter of 2021 compared to second quarter of 2020 primarily due to (i) a 550 basis point improvement in manufacturing overhead expense as a percentage of sales, as certain of these costs are fixed in nature and (ii) a 60 basis point improvement in direct labor as a percentage of sales. These two improvements as a percentage of net sales decreasedwere partially offset by a 220 basis point increase in materials as a percentage of sales.
Gross profit margin increased during the second quarter and first six months of 20202021 compared to the prior year periodssame period in 2020 primarily due to additional costs and operational inefficiencies(i) a 350 basis point improvement in manufacturing overhead expense as a resultpercentage of business disruptions from the COVID-19 pandemic.
sales, as certain of these costs are fixed in nature and (ii) a 70 basis point improvement in direct labor as a percentage of sales. These two improvements as a percentage of net sales were partially offset by a 180 basis point increase in materials as a percentage of sales.
Operating Income. Operating income decreased $26.4increased $77.0 million, or 54%344%, to $22.4$99.4 million in the second quarter of 20202021 from $48.8$22.4 million in the prior year quarter. For the first six months of 2020,2021, operating income decreased $25.1increased $109.8 million, or 27%161%, to $177.9 million from $68.1 million from $93.2 million in the prior year.year period. The overall decreaseincrease in operating income in the second quarter and first six months of 20202021 primarily reflects the items discussed above.
Distribution
Sales. Sales decreased $47.5increased $159.8 million, or 26%121%, to $132.6$292.4 million in the second quarter of 20202021 from $180.1$132.6 million in the prior year quarter. For the first six months of 2020,2021, sales decreased $60.0increased $239.8 million, or 16%79%, to $303.8$543.6 million from $363.8$303.8 million in the prior year period. This segment accounted for approximately 31%28% and 29%31% of the Company’s consolidated net sales for the second quarter of 20202021 and 2019,2020, respectively, and 29% and 30% of consolidated net sales for the first six months of 20202021 and 2019.2020. The sales decreaseincrease in the second quarter of 2021 compared to the second quarter of 2020 was attributed to a 207% increase in our RV market sales, a 142% increase in marine market sales, a 38% increase in industrial market sales, and a 31% increase in MH market sales. The sales increase in the first six months of 2021 compared to the same period in 2020 was attributed to a 134% increase in RV market sales, a 115% increase in marine market sales, a 12% increase in MH market sales and a 35% increase in industrial market sales. Net sales in the second quarter and first six months of 2021 attributable to acquisitions completed in the first six months of 2021 were approximately $14.8 million and $15.4 million, respectively, with no corresponding amount of net sales in the second quarter or first six months of 2020 was primarily attributedattributable to sales decreasesacquisitions completed in our primary end markets as a resultthe first six months of business disruptions and lost production and shipping days due to the COVID-19 pandemic.2020.
Gross Profit. Gross profit decreased $7.6increased $33.4 million, or 25%142%, to $56.6 million in the second quarter of 2021 from $23.2 million in the second quarter of 2020 from $30.8 million in the second quarter of 2019.2020. For the first six months of 2020,2021, gross profit decreased $7.4increased $48.3 million, or 12%92%, to $100.7 million from $52.4 million from $59.8 million in 2019.the prior year period. As a percentage of sales, gross profit increased to 19.3% in the
second quarter of 2021 from 17.5% in the second quarter of 2020, and to 18.5% from 17.1%17.2% for the comparable six month periods. The increase in gross profit margin in the second quarter of 2019 and increased to 17.2% in the first six months of 2020 from 16.4% in the prior year period.
As a percentage of sales, gross profit increased during2021 compared to the second quarter and first six months of 2020 comparedis primarily attributed to the prior year periods primarily due to realized synergies from certain 2018 and 2019 acquisitions, partially offset by additional costs and operational inefficiencies ashigher margin profile of a result of business disruptions from the COVID-19 pandemic.
2020 acquisition.
Operating Income. Operating income decreased $3.9increased $24.3 million, or 36%346%, to $6.9$31.2 million in the second quarter of 20202021 from $10.8$6.9 million in the prior year quarter. For the first six months of 2020,2021, operating income decreased $2.2increased $35.5 million or 11%207%, to $52.4 million from $16.9 million from $19.1 million in the prior year.year period. The overall decreaseimprovement in operating income in the second quarter and first six months of 20202021 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, 202027, 2021 consisted of cash and cash equivalents of $111.1$58.4 million and $410.2as well as $409.8 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 $54.4increased $39.0 million to $78.4 million in the first six months of 2021 from $39.4 million in the first six months of 2020 from $93.8 million in the first six months of 20192020. The increase is primarily dueattributable to (i) a decrease ofan $86.9 million increase in net income, of $26.4(ii) a $14.0 million due to disruptions in our end markets as a result of the COVID-19 pandemic; (ii) an increase in the usedepreciation and amortization, and (iii) $15.9 million increase in deferred income taxes. These increases in sources 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 flowsoperations were partially offset by an increase in use of cash flows from prepaid expenses and other assetsfor net working capital of $12.5$78.1 million, andassociated primarily with investments in inventory to support customer needs, growth of accounts payable of $5.2 millionreceivable in line with net sales, and an increaseacceleration of depreciation and amortization of $4.4 million.payments for certain inventory-related payables to maintain or enhance vendor prioritization in a dynamic supply chain environment.
Investing Activities
Net cash used in investing activities increased $19.9$245.9 million to $280.9 million in the first six months of 2021 from $35.0 million in the first six months of 2020 from $15.1 million in the first six months of 2019 primarily due to an increase in cash used in business acquisitions of $22.6$228.8 million
and a decrease in proceeds from sale of property, plant, and equipment and other investing activities of $4.2$15.1 million partially offset by a decreaseincrease in capital expenditures of $6.9 million.expenditures.
Financing Activities
Net cash flows usedprovided by financing activities decreased $29.4increased $248.5 million to $32.7 million in first six months of 2020 from $62.1$215.8 million in the first six months of 20192021 from a $32.7 million use of cash in the first six months of 2020. The increase is primarily due to a net decrease(i) proceeds of $350.0 million from the Company's issuance of its 4.75% Senior Notes, (ii) an additional $58.8 million in repayments on our revolving credit facility and term loan borrowings and (iii) $3.9 million in additional proceeds from the exercise of $52.8 million and other financing activitiesstock options. These sources of $3.8 million,cash were partially offset by (i) an additional $140.0 million in net revolver repayments, (ii) a $12.0 million increase in taxes paid for share-based payment arrangements, (iii) a $7.5 million increase in stock repurchases under our buyback program of $15.6 million with no corresponding amount in the prior year period and cash dividends paid to shareholders and (iv) $5.7 million increase in payments of $11.6 million with no corresponding amount in the prior year period.deferred financing costs.
Summary of Liquidity and Capital Resources
TheAt June 27, 2021, the Company's existing cash and cash equivalents, cash generated from operations, and available borrowings under its credit facility2021 Credit Facility (as defined herein) 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 credit facility2021 Credit Facility as a source of liquidity is dependent on maintaining compliance with the financial covenants as specified under the terms of the credit agreement.agreement that established the 2021 Credit Facility (the "2021 Credit Agreement").
As of and for the June 28, 202027, 2021 reporting date, the Company was in compliance with its financial covenants as required under the terms of its credit agreement.2021 Credit Agreement. The required maximum consolidated totalsecured net leverage ratio and the required minimum consolidated fixed charge coverage ratio, as such ratios are defined in the credit agreement,2021 Credit Agreement, compared to the actual amounts as of June 28, 202027, 2021 and for the fiscal period then ended are as follows:
| | | | | | | | | | | | | | |
| | Required | | Actual |
Consolidated secured net leverage ratio (12-month period) | | 2.75 | | | 0.43 | |
Consolidated fixed charge coverage ratio (12-month period) | | 1.50 | | | 6.92 | |
|
| | | | | | |
|
| 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 |
|
In addition, as of June 27, 2021, the Company's consolidated total net leverage ratio (12-month period) was 2.26. While this ratio was a covenant under the Company’s previous credit agreement and is not a covenant under the 2021 Credit Agreement, it is used in the determination of the applicable borrowing margin under the 2021 Credit Agreement.
Working capital requirements vary from period to period depending on manufacturing volumes primarily related to the RV, MH, marine and industrial markets we serve, the timing of deliveries, and the payment cycles of customers. In the event that operating cash flow is inadequate and one or more of the Company's capital resources were to become unavailable, the Company would seek to revise its operating strategies accordingly. The Company will continue to assess its liquidity position and potential sources of supplemental liquidity in view of operating performance, current economic and capital market conditions, and other relevant circumstances.
On April 20, 2021, we completed the issuance of $350 million aggregate principal amount of our 4.75% Senior Notes in a private placement exempt from registration under the Securities Act of 1933, as amended. The 4.75% Senior Notes, which were issued at par, carry an interest rate of 4.75%. Following the completion of the offering, the Company amended and restated the credit agreement governing its then-existing $650 million senior secured credit facility to establish a new $700 million senior secured credit facility consisting of a $550 million revolving credit facility and a $150 million term loan facility (the "2021 Credit Facility"). The maturity date for borrowings under the 2021 Credit Facility was extended to April 2026. The 2021 Credit Facility replaced the Company’s previously existing credit facility that was due to mature in September 2024.
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, 2019.2020.
OTHER
Seasonality
OperationsManufacturing operations in the RV, marine and MH industries historically have been seasonal and at their highest levels when the weather is moderate. Accordingly, the Company’s sales and profits hadhave 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, the impact of the COVID-19 pandemic on consumer buying patterns, and from time to time, the impact of severe weather conditions on the timing of industry-wide wholesale shipments.
Subsequent Events
We evaluated all subsequent events and transactions that occurred after the balance sheet date through the date of issuance of the Form 10-Q, and there were none that required recognition or disclosure in the condensed consolidated financial statements.
INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS
The Company makes forward-looking statements with respect to financial condition, results of operations, business strategies, operating efficiencies or synergies, competitive position, growth opportunities for existing products, plans and objectives of management, markets for the common stock of Patrick Industries, Inc. and other matters from time to time and desires to take advantage of the “safe harbor” which is afforded such statements under the Private Securities Litigation Reform Act of 1995 when they are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the forward-looking statements. The statements contained in the foregoing “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, as well as other statements contained in this quarterly report and statements contained in future filings with the Securities and Exchange Commission (“SEC”), publicly disseminated press releases, quarterly earnings conference calls, and statements which may be made from time to time in the future by management of the Company in presentations to shareholders, prospective investors, and others interested in the business and financial affairs of the Company, which are not historical facts, are forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those set forth in the forward-looking statements. Any projections of financial performance or statements concerning expectations as to future developments should not be construed in any manner as a guarantee that such results or developments will, in fact, occur. There can be no assurance that any forward-looking statement will be realized or that actual results will not be significantly different from that set forth in such forward-looking statement. The Company does not undertake to publicly update or revise any forward-looking statements. Information about certain risks that could affect our business and cause actual results to differ from those expressed or implied in the forward-looking statements are contained in the section entitled “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019,2020, and in the Company's Form 10-QsForms 10-Q for subsequent quarterly periods, which are filed with the SEC and are available on the SEC’s website at www.sec.gov.
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ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Debt Obligations under Credit Agreement
At June 28, 2020,27, 2021, our total debt obligations under our credit 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 $0.3$0.9 million, assuming average borrowings, including our term loan, subject to variable rates of $31.3$85.0 million, which was the amount of such borrowings outstanding at June 28, 202027, 2021 subject to variable rates. The $31.3$85.0 million excludes deferred financing costs related to the term loan and $200.0 million of borrowings outstanding under the revolver and term loan that are hedged at a fixed interest rate through interest rate swaps.
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 six months of 2020.2021. During periods of volatile commodity prices, we have generally been able to pass both price increases and decreases to our customers in the form of price 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 or decreases. We do not believe that commodity price volatility had a material effect on results of operationsour net income for the periods presented.
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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 second quarter ended June 28, 202027, 2021 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” 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 and information disclosed in our Form 10-K for the year ended December 31, 2019. Except as presented below, thereThere have been no material changes from the risk factors describedpreviously disclosed in our Annual Report on 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.
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ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
(a) None.
(b) None.
(c) Issuer Purchases of Equity Securities
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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 |
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April 27 - May 31, 2020 | | 2,383 |
| | 43.43 |
| | — |
| | 43,515,568 |
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June 1 - June 28, 2020 | | 143 |
| | 62.37 |
| | — |
| | 43,515,568 |
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| | 2,526 |
| | | | — |
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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 29 - April 25, 2021 | | 98 | | | $ | 78.93 | | | — | | | $ | 35,960,557 | |
April 26 - May 30, 2021 | | 89,546 | | | 89.62 | | | 85,388 | | | 28,338,024 | |
May 31 - June 27, 2021 | | 174,909 | | | 79.77 | | | 174,612 | | | 14,410,258 | |
| | 264,553 | | | | | 260,000 | | | |
(1) RepresentsAmount includes 4,553 shares of common stock purchased by the Company in April through June 2021 for the sole purpose of satisfying the minimum tax withholding obligations of employees upon the vesting of stock awards and the exercise of stock appreciation rights held by the employees.
(2) See Note 16 of the Notes to Condensed Consolidated Financial Statements for additional information about the Company's stock repurchase program.