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 27, 202026, 2021
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)
| | | | | |
Indiana | 35-1057796 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| | | | | | | | |
107 WEST FRANKLIN STREET, P.O. Box 638 | |
ELKHART, IN | IN | 46515 |
(Address(Address of principal executive offices) | (ZIP(ZIP Code) |
(574) 294-7511
(Registrant’s telephone number, including area code)
(Former(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 class | Trading Symbol | Name of each exchange on which registered |
Common Stock, no par value | PATK | NASDAQ |
As of October 23, 2020,22, 2021, there were 23,363,12423,656,016 shares of the registrant’s common stock outstanding.
PATRICK INDUSTRIES, INC.
TABLE OF CONTENTS
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| Page No. |
PART I. FINANCIAL INFORMATION | |
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ITEM 1. FINANCIAL STATEMENTS (Unaudited) | |
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Condensed Consolidated Statements of Income
Third Quarter and Nine Months ended September 27, 202026, 2021 and September 29, 201927, 2020 | |
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Condensed Consolidated Statements of Comprehensive Income
Third Quarter and Nine Months ended September 27, 202026, 2021 and September 29, 201927, 2020 | |
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Condensed Consolidated Statements of Financial Position
Balance Sheets September 27, 202026, 2021 and December 31, 20192020 | |
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Condensed Consolidated Statements of Cash Flows
Nine Months ended September 27, 202026, 2021 and September 29, 201927, 2020 | |
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Condensed Consolidated Statements of Shareholders' Equity
Third Quarter and Nine Months ended September 27, 202026, 2021 and September 29, 201927, 2020 | |
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Notes to Condensed Consolidated Financial Statements | |
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | |
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | |
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ITEM 4. CONTROLS AND PROCEDURES | |
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PART II. OTHER INFORMATION | |
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ITEM 1. LEGAL PROCEEDINGS | |
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ITEM 1A. RISK FACTORS | |
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS | |
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ITEM 6. EXHIBITS | |
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SIGNATURES | |
PART 1: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PATRICK INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
| | | Third Quarter Ended | | Nine Months Ended | | Third Quarter Ended | | Nine Months Ended |
(thousands except per share data) | (thousands except per share data) | | September 27, 2020 | | September 29, 2019 | | September 27, 2020 | | September 29, 2019 | (thousands except per share data) | | September 26, 2021 | | September 27, 2020 | | September 26, 2021 | | September 27, 2020 |
NET SALES | NET SALES | | $ | 700,707 | | | $ | 566,186 | | | $ | 1,713,984 | | | $ | 1,787,622 | | NET SALES | | $ | 1,060,177 | | | $ | 700,707 | | | $ | 2,930,613 | | | $ | 1,713,984 | |
Cost of goods sold | Cost of goods sold | | 567,210 | | | 461,851 | | | 1,397,285 | | | 1,464,078 | | Cost of goods sold | | 852,016 | | | 567,210 | | | 2,356,443 | | | 1,397,285 | |
GROSS PROFIT | GROSS PROFIT | | 133,497 | | | 104,335 | | | 316,699 | | | 323,544 | | GROSS PROFIT | | 208,161 | | | 133,497 | | | 574,170 | | | 316,699 | |
Operating Expenses: | Operating Expenses: | | | | | | | | | Operating Expenses: | | | | | | | | |
Warehouse and delivery | Warehouse and delivery | | 25,263 | | | 23,917 | | | 70,204 | | | 74,228 | | Warehouse and delivery | | 35,885 | | | 25,263 | | | 100,613 | | | 70,204 | |
Selling, general and administrative | Selling, general and administrative | | 38,184 | | | 33,817 | | | 105,681 | | | 104,403 | | Selling, general and administrative | | 64,245 | | | 38,184 | | | 175,842 | | | 105,681 | |
Amortization of intangible assets | Amortization of intangible assets | | 10,221 | | | 9,191 | | | 29,600 | | | 26,448 | | Amortization of intangible assets | | 14,758 | | | 10,221 | | | 40,695 | | | 29,600 | |
Total operating expenses | Total operating expenses | | 73,668 | | | 66,925 | | | 205,485 | | | 205,079 | | Total operating expenses | | 114,888 | | | 73,668 | | | 317,150 | | | 205,485 | |
OPERATING INCOME | OPERATING INCOME | | 59,829 | | | 37,410 | | | 111,214 | | | 118,465 | | OPERATING INCOME | | 93,273 | | | 59,829 | | | 257,020 | | | 111,214 | |
Interest expense, net | Interest expense, net | | 10,507 | | | 8,603 | | | 31,820 | | | 26,222 | | Interest expense, net | | 15,436 | | | 10,507 | | | 41,195 | | | 31,820 | |
Income before income taxes | Income before income taxes | | 49,322 | | | 28,807 | | | 79,394 | | | 92,243 | | Income before income taxes | | 77,837 | | | 49,322 | | | 215,825 | | | 79,394 | |
Income taxes | Income taxes | | 11,986 | | | 7,490 | | | 20,157 | | | 22,661 | | Income taxes | | 20,440 | | | 11,986 | | | 51,930 | | | 20,157 | |
NET INCOME | NET INCOME | | $ | 37,336 | | | $ | 21,317 | | | $ | 59,237 | | | $ | 69,582 | | NET INCOME | | $ | 57,397 | | | $ | 37,336 | | | $ | 163,895 | | | $ | 59,237 | |
| BASIC NET INCOME PER COMMON SHARE | BASIC NET INCOME PER COMMON SHARE | | $ | 1.65 | | | $ | 0.92 | | | $ | 2.60 | | | $ | 3.02 | | BASIC NET INCOME PER COMMON SHARE | | $ | 2.52 | | | $ | 1.65 | | | $ | 7.18 | | | $ | 2.60 | |
DILUTED NET INCOME PER COMMON SHARE | DILUTED NET INCOME PER COMMON SHARE | | $ | 1.62 | | | $ | 0.92 | | | $ | 2.57 | | | $ | 2.99 | | DILUTED NET INCOME PER COMMON SHARE | | $ | 2.45 | | | $ | 1.62 | | | $ | 7.01 | | | $ | 2.57 | |
| Weighted average shares outstanding – Basic | Weighted average shares outstanding – Basic | | 22,674 | | | 23,076 | | | 22,784 | | | 23,073 | | Weighted average shares outstanding – Basic | | 22,789 | | 22,674 | | 22,826 | | 22,784 |
Weighted average shares outstanding – Diluted | Weighted average shares outstanding – Diluted | | 23,072 | | | 23,273 | | | 23,088 | | | 23,279 | | Weighted average shares outstanding – Diluted | | 23,403 | | 23,072 | | 23,375 | | 23,088 |
| See accompanying Notes to Condensed Consolidated Financial Statements. | See accompanying Notes to Condensed Consolidated Financial Statements. | See accompanying Notes to Condensed Consolidated Financial Statements. | |
|
PATRICK INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
| | | Third Quarter Ended | | Nine Months Ended | | Third Quarter Ended | | Nine Months Ended |
(thousands) | (thousands) | | September 27, 2020 | | September 29, 2019 | | September 27, 2020 | | September 29, 2019 | (thousands) | | September 26, 2021 | | September 27, 2020 | | September 26, 2021 | | September 27, 2020 |
NET INCOME | NET INCOME | | $ | 37,336 | | | $ | 21,317 | | | $ | 59,237 | | | $ | 69,582 | | NET INCOME | | $ | 57,397 | | | $ | 37,336 | | | $ | 163,895 | | | $ | 59,237 | |
Other comprehensive (loss) income, net of tax: | | |
Other comprehensive income (loss), net of tax: | | Other comprehensive income (loss), net of tax: | |
Unrealized gain (loss) of hedge derivatives | Unrealized gain (loss) of hedge derivatives | | 989 | | | (240) | | | (1,553) | | | (3,225) | | Unrealized gain (loss) of hedge derivatives | | 1,031 | | | 989 | | | 3,024 | | | (1,553) | |
Other | Other | | 60 | | | 19 | | | 8 | | | (48) | | Other | | 74 | | | 60 | | | 4 | | | 8 | |
Total other comprehensive income (loss) | Total other comprehensive income (loss) | | 1,049 | | | (221) | | | (1,545) | | | (3,273) | | Total other comprehensive income (loss) | | 1,105 | | | 1,049 | | | 3,028 | | | (1,545) | |
COMPREHENSIVE INCOME | COMPREHENSIVE INCOME | | $ | 38,385 | | | $ | 21,096 | | | $ | 57,692 | | | $ | 66,309 | | COMPREHENSIVE INCOME | | $ | 58,502 | | | $ | 38,385 | | | $ | 166,923 | | | $ | 57,692 | |
|
See accompanying Notes to Condensed Consolidated Financial Statements.
PATRICK INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITIONBALANCE SHEETS (Unaudited)
| | | | As of | | As of |
(thousands) | (thousands) | | September 27, 2020 | | December 31, 2019 | (thousands) | | September 26, 2021 | | December 31, 2020 |
ASSETS | ASSETS | | | | | ASSETS | | | | |
Current Assets | Current Assets | | | | | Current Assets | |
Cash and cash equivalents | Cash and cash equivalents | | $ | 62,347 | | | $ | 139,390 | | Cash and cash equivalents | | $ | 44,882 | | | $ | 44,767 | |
Trade and other receivables, net | Trade and other receivables, net | | 175,533 | | | 87,536 | | Trade and other receivables, net | | 292,932 | | | 132,505 | |
Inventories | Inventories | | 281,374 | | | 253,870 | | Inventories | | 485,766 | | | 312,809 | |
Prepaid expenses and other | Prepaid expenses and other | | 12,580 | | | 36,038 | | Prepaid expenses and other | | 39,205 | | | 37,982 | |
Total current assets | Total current assets | | 531,834 | | | 516,834 | | Total current assets | | 862,785 | | | 528,063 | |
Property, plant and equipment, net | Property, plant and equipment, net | | 197,415 | | | 180,849 | | Property, plant and equipment, net | | 309,170 | | | 251,493 | |
Operating lease right-of-use assets | Operating lease right-of-use assets | | 105,410 | | | 93,546 | | Operating lease right-of-use assets | | 142,719 | | | 117,816 | |
Goodwill | Goodwill | | 356,433 | | | 319,349 | | Goodwill | | 478,955 | | | 395,800 | |
Intangible assets, net | Intangible assets, net | | 380,919 | | | 357,014 | | Intangible assets, net | | 558,040 | | | 456,276 | |
Deferred financing costs, net | | 2,544 | | | 2,978 | | |
Other non-current assets | Other non-current assets | | 384 | | | 423 | | Other non-current assets | | 6,789 | | | 3,987 | |
TOTAL ASSETS | TOTAL ASSETS | | $ | 1,574,939 | | | $ | 1,470,993 | | TOTAL ASSETS | | $ | 2,358,458 | | | $ | 1,753,435 | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | |
Current Liabilities | Current Liabilities | | | | | Current Liabilities | |
Current maturities of long-term debt | Current maturities of long-term debt | | $ | 5,000 | | | $ | 5,000 | | Current maturities of long-term debt | | $ | 7,500 | | | $ | 7,500 | |
Current operating lease liabilities | Current operating lease liabilities | | 29,565 | | | 27,694 | | Current operating lease liabilities | | 36,955 | | | 30,901 | |
Accounts payable | Accounts payable | | 117,088 | | | 96,208 | | Accounts payable | | 219,153 | | | 105,786 | |
Accrued liabilities | Accrued liabilities | | 101,296 | | | 58,033 | | Accrued liabilities | | 145,865 | | | 83,202 | |
Total current liabilities | Total current liabilities | | 252,949 | | | 186,935 | | Total current liabilities | | 409,473 | | | 227,389 | |
Long-term debt, less current maturities, net | Long-term debt, less current maturities, net | | 673,852 | | | 670,354 | | Long-term debt, less current maturities, net | | 1,077,664 | | | 810,907 | |
Long-term operating lease liabilities | Long-term operating lease liabilities | | 76,873 | | | 66,467 | | Long-term operating lease liabilities | | 107,753 | | | 88,175 | |
Deferred tax liabilities, net | Deferred tax liabilities, net | | 26,100 | | | 27,284 | | Deferred tax liabilities, net | | 49,344 | | | 39,516 | |
Other long-term liabilities | Other long-term liabilities | | 19,336 | | | 22,472 | | Other long-term liabilities | | 22,176 | | | 28,007 | |
TOTAL LIABILITIES | TOTAL LIABILITIES | | 1,049,110 | | | 973,512 | | TOTAL LIABILITIES | | 1,666,410 | | | 1,193,994 | |
SHAREHOLDERS’ EQUITY | SHAREHOLDERS’ EQUITY | | | | | SHAREHOLDERS’ EQUITY | | | | |
Common stock | Common stock | | 177,308 | | | 172,662 | | Common stock | | 195,402 | | | 180,892 | |
Additional paid-in-capital | Additional paid-in-capital | | 24,440 | | | 25,014 | | Additional paid-in-capital | | 23,981 | | | 24,387 | |
Accumulated other comprehensive loss | Accumulated other comprehensive loss | | (7,243) | | | (5,698) | | Accumulated other comprehensive loss | | (3,024) | | | (6,052) | |
Retained earnings | Retained earnings | | 331,324 | | | 305,503 | | Retained earnings | | 475,689 | | | 360,214 | |
TOTAL SHAREHOLDERS’ EQUITY | TOTAL SHAREHOLDERS’ EQUITY | | 525,829 | | | 497,481 | | TOTAL SHAREHOLDERS’ EQUITY | | 692,048 | | | 559,441 | |
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | | $ | 1,574,939 | | | $ | 1,470,993 | | TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | | $ | 2,358,458 | | | $ | 1,753,435 | |
See accompanying Notes to Condensed Consolidated Financial Statements.
PATRICK INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
| | | | | | | | | | | | | | |
| | Nine Months Ended |
(thousands) | | September 26, 2021 | | September 27, 2020 |
CASH FLOWS FROM OPERATING ACTIVITIES | | | | |
Net income | | $ | 163,895 | | | $ | 59,237 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | |
Depreciation and amortization | | 76,298 | | | 52,955 | |
Stock-based compensation expense | | 17,307 | | | 11,177 | |
Amortization of convertible notes debt discount | | 5,528 | | | 5,302 | |
Deferred income taxes | | 6,540 | | | (4,057) | |
Other non-cash items | | 1,644 | | | 3,521 | |
Change in operating assets and liabilities, net of acquisitions of businesses: | | | | |
Trade and other receivables, net | | (142,550) | | | (78,701) | |
Inventories | | (127,464) | | | (12,885) | |
Prepaid expenses and other assets | | (593) | | | 23,787 | |
Accounts payable, accrued liabilities and other | | 146,812 | | | 52,422 | |
Net cash provided by operating activities | | 147,417 | | | 112,758 | |
CASH FLOWS FROM INVESTING ACTIVITIES | | | | |
Capital expenditures | | (44,155) | | | (22,159) | |
Proceeds from sale of property, plant and equipment | | 140 | | | 117 | |
Business acquisitions, net of cash acquired | | (297,701) | | | (123,382) | |
Other | | (2,000) | | | — | |
Net cash used in investing activities | | (343,716) | | | (145,424) | |
CASH FLOWS FROM FINANCING ACTIVITIES | | | | |
Term debt borrowings | | 58,750 | | | — | |
Term debt repayments | | (3,125) | | | (2,500) | |
Borrowings on revolver | | 425,930 | | | 8,198 | |
Repayments on revolver | | (565,475) | | | (8,198) | |
Proceeds from senior notes offering | | 350,000 | | | — | |
Stock repurchases under buyback program | | (31,945) | | | (20,286) | |
Cash dividends paid to shareholders | | (19,487) | | | (17,265) | |
Taxes paid for share-based payment arrangements | | (14,898) | | | (2,910) | |
Payment of deferred financing costs and other | | (6,638) | | | (58) | |
Payment of contingent consideration from a business acquisition | | (1,600) | | | (2,000) | |
Proceeds from exercise of common stock options | | 4,902 | | | 642 | |
Net cash provided by (used in) financing activities | | 196,414 | | | (44,377) | |
Increase (decrease) in cash and cash equivalents | | 115 | | | (77,043) | |
Cash and cash equivalents at beginning of year | | 44,767 | | | 139,390 | |
Cash and cash equivalents at end of period | | $ | 44,882 | | | $ | 62,347 | |
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| | Nine Months Ended |
(thousands) | | September 27, 2020 | | September 29, 2019 |
CASH FLOWS FROM OPERATING ACTIVITIES | | | | |
Net income | | $ | 59,237 | | | $ | 69,582 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | |
Depreciation and amortization | | 52,955 | | | 46,449 | |
Stock-based compensation expense | | 11,177 | | | 12,039 | |
Amortization of convertible notes debt discount | | 5,302 | | | 5,123 | |
Deferred income taxes | | (4,057) | | | (794) | |
Other | | 3,521 | | | 235 | |
Change in operating assets and liabilities, net of acquisitions of businesses: | | | | |
Trade receivables | | (78,701) | | | (44,359) | |
Inventories | | (12,885) | | | 9,084 |
Prepaid expenses and other assets | | 23,787 | | | 4,319 | |
Accounts payable, accrued liabilities and other | | 52,422 | | | 20,355 | |
Net cash provided by operating activities | | 112,758 | | | 122,033 | |
CASH FLOWS FROM INVESTING ACTIVITIES | | | | |
Capital expenditures | | (22,159) | | | (22,227) | |
Proceeds from sale of property, equipment and other investing activities | | 117 | | | 4,509 |
Business acquisitions, net of cash acquired | | (123,382) | | | (22,350) | |
Net cash used in investing activities | | (145,424) | | | (40,068) | |
CASH FLOWS FROM FINANCING ACTIVITIES | | | | |
Term debt borrowings | | 0 | | | 7,500 | |
Term debt repayments | | (2,500) | | | (3,750) | |
Borrowings on revolver | | 8,198 | | | 648,460 | |
Repayments on revolver | | (8,198) | | | (905,792) | |
Stock repurchases under buyback program | | (20,286) | | | (3,583) | |
Proceeds from issuance of senior notes | | 0 | | | 300,000 | |
Cash dividends paid to shareholders | | (17,265) | | | 0 | |
Payments related to vesting of stock-based awards, net of shares tendered for taxes | | (2,910) | | | (3,359) | |
Payment of deferred financing costs | | (58) | | | (7,214) | |
Proceeds from exercise of stock options | | 642 | | | 6 |
Payment of contingent consideration from a business acquisition | | (2,000) | | | (4,416) | |
Net cash (used in) provided by financing activities | | (44,377) | | | 27,852 | |
Increase (decrease) in cash and cash equivalents | | (77,043) | | | 109,817 | |
Cash and cash equivalents at beginning of year | | 139,390 | | | 6,895 | |
Cash and cash equivalents at end of period | | $ | 62,347 | | | $ | 116,712 | |
See accompanying Notes to Condensed Consolidated Financial Statements.
PATRICK INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited)
| Third Quarter Ended September 27, 2020 | |
Third Quarter Ended September 26, 2021 | | Third Quarter Ended September 26, 2021 |
(thousands) | (thousands) | | Common Stock | | Additional Paid-in- Capital | | Accumulated Other Comprehensive Loss | | Retained Earnings | | Total | (thousands) | | Common Stock | | Additional Paid-in Capital | | Accumulated Other Comprehensive Loss | | Treasury Stock | | Retained Earnings | | Total |
Balance June 28, 2020 | | $ | 173,178 | | | $ | 24,534 | | | $ | (8,292) | | | $ | 303,848 | | | $ | 493,268 | | |
Balance June 27, 2021 | | Balance June 27, 2021 | | $ | 191,131 | | | $ | 24,387 | | | $ | (4,129) | | | $ | (21,550) | | | $ | 453,432 | | | $ | 643,271 | |
Net income | Net income | | — | | | — | | | — | | | 37,336 | | | 37,336 | | Net income | | — | | | — | | | — | | | — | | | 57,397 | | | 57,397 | |
Dividends declared | Dividends declared | | — | | | — | | | — | | | (5,865) | | | (5,865) | | Dividends declared | | — | | | — | | | — | | | — | | | (6,613) | | | (6,613) | |
Other comprehensive income, net of tax | Other comprehensive income, net of tax | | — | | | — | | | 1,049 | | | — | | | 1,049 | | Other comprehensive income, net of tax | | — | | | — | | | 1,105 | | | — | | | — | | | 1,105 | |
Share repurchases under buyback program | Share repurchases under buyback program | | (647) | | | (94) | | | — | | | (3,995) | | | (4,736) | | Share repurchases under buyback program | | (999) | | | (135) | | | — | | | — | | | (9,261) | | | (10,395) | |
Shares used to pay taxes on stock grants | | (53) | | | — | | | — | | | — | | | (53) | | |
Retirement of treasury stock | | Retirement of treasury stock | | (2,013) | | | (271) | | | — | | | 21,550 | | | (19,266) | | | — | |
Repurchases of shares for tax payments related to the vesting and exercise of share-based grants | | Repurchases of shares for tax payments related to the vesting and exercise of share-based grants | | (13) | | | — | | | — | | | — | | | — | | | (13) | |
Issuance of shares upon exercise of common stock options | | Issuance of shares upon exercise of common stock options | | 325 | | | — | | | — | | | — | | | — | | | 325 | |
Stock-based compensation expense | Stock-based compensation expense | | 4,830 | | | — | | | — | | | — | | | 4,830 | | Stock-based compensation expense | | 6,971 | | | — | | | — | | | — | | | — | | | 6,971 | |
Balance September 27, 2020 | | $ | 177,308 | | | $ | 24,440 | | | $ | (7,243) | | | $ | 331,324 | | | $ | 525,829 | | |
Balance September 26, 2021 | | Balance September 26, 2021 | | $ | 195,402 | | | $ | 23,981 | | | $ | (3,024) | | | $ | — | | | $ | 475,689 | | | $ | 692,048 | |
| Nine Months Ended September 27, 2020 | |
Nine Months Ended September 26, 2021 | | Nine Months Ended September 26, 2021 |
(thousands) | (thousands) | | Common Stock | | Additional Paid-in- Capital | | Accumulated Other Comprehensive Loss | | Retained Earnings | | Total | (thousands) | | Common Stock | | Additional Paid-in Capital | | Accumulated Other Comprehensive Loss | | Treasury Stock | | Retained Earnings | | Total |
Balance December 31, 2019 | | $ | 172,662 | | | $ | 25,014 | | | $ | (5,698) | | | $ | 305,503 | | | $ | 497,481 | | |
Balance December 31, 2020 | | Balance December 31, 2020 | | $ | 180,892 | | | $ | 24,387 | | | $ | (6,052) | | | $ | — | | | $ | 360,214 | | | $ | 559,441 | |
Net income | Net income | | — | | | — | | | — | | | 59,237 | | | 59,237 | | Net income | | — | | | — | | | — | | | — | | | 163,895 | | | 163,895 | |
Dividends declared | Dividends declared | | — | | | — | | | — | | | (17,666) | | | (17,666) | | Dividends declared | | — | | | — | | | — | | | — | | | (19,893) | | | (19,893) | |
Other comprehensive loss, net of tax | | — | | | — | | | (1,545) | | | — | | | (1,545) | | |
Other comprehensive income, net of tax | | Other comprehensive income, net of tax | | — | | | — | | | 3,028 | | | — | | | — | | | 3,028 | |
Share repurchases under buyback program | Share repurchases under buyback program | | (3,962) | | | (574) | | | — | | | (15,750) | | | (20,286) | | Share repurchases under buyback program | | (999) | | | (135) | | | — | | | (21,550) | | | (9,261) | | | (31,945) | |
Retirement of Treasury Stock | | Retirement of Treasury Stock | | (2,013) | | | (271) | | | — | | | 21,550 | | | (19,266) | | | — | |
Repurchases of shares for tax payments related to the vesting and exercise of share-based grants | | Repurchases of shares for tax payments related to the vesting and exercise of share-based grants | | (14,898) | | | — | | | — | | | — | | | — | | | (14,898) | |
Issuance of shares in connection with a business combination | | Issuance of shares in connection with a business combination | | 10,211 | | | — | | | — | | | — | | | — | | | 10,211 | |
Issuance of shares upon exercise of common stock options | Issuance of shares upon exercise of common stock options | | 642 | | | — | | | — | | | — | | | 642 | | Issuance of shares upon exercise of common stock options | | 4,902 | | | — | | | — | | | — | | | — | | | 4,902 | |
Shares used to pay taxes on stock grants | | (3,211) | | | — | | | — | | | — | | | (3,211) | | |
Stock-based compensation expense | Stock-based compensation expense | | 11,177 | | | — | | | — | | | — | | | 11,177 | | Stock-based compensation expense | | 17,307 | | | — | | | — | | | — | | | — | | | 17,307 | |
Balance September 27, 2020 | | $ | 177,308 | | | $ | 24,440 | | | $ | (7,243) | | | $ | 331,324 | | | $ | 525,829 | | |
| Third Quarter Ended September 29, 2019
| |
(thousands) | | 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 | | |
Net income | | — | | | — | | | — | | | 21,317 | | | 21,317 | | |
Other comprehensive loss, net of tax | | — | | | — | | | (221) | | | — | | | (221) | | |
Stock 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 | | |
| Balance September 26, 2021 | | Balance September 26, 2021 | | $ | 195,402 | | | $ | 23,981 | | | $ | (3,024) | | | $ | — | | | $ | 475,689 | | | $ | 692,048 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
PATRICK INDUSTRIES, INC. |
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited) (cont.) |
Nine Months Ended September 29, 2019 |
(thousands) | | Common Stock | | Additional Paid-in- Capital | | Accumulated Other Comprehensive Loss | | Retained Earnings | | Total |
Balance December 31, 2018 | | $ | 161,436 | | | $ | 25,124 | | | $ | (2,680) | | | $ | 224,874 | | | $ | 408,754 | |
Net income | | — | | | — | | | — | | | 69,582 | | | 69,582 | |
Other comprehensive loss, net of tax | | — | | | — | | | (3,273) | | | — | | | (3,273) | |
Stock repurchases under buyback program | | (674) | | | (104) | | | — | | | (2,805) | | | (3,583) | |
Shares used to pay taxes on stock grants | | (3,587) | | | — | | | — | | | — | | | (3,587) | |
Issuance of shares upon exercise of common stock options | | 6 | | | — | | | — | | | — | | | 6 | |
Stock-based compensation expense | | 12,039 | | | — | | | — | | | — | | | 12,039 | |
Balance September 29, 2019 | | $ | 169,220 | | | $ | 25,020 | | | $ | (5,953) | | | $ | 291,651 | | | $ | 479,938 | |
PATRICK INDUSTRIES, INC.CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited) (cont.)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Third Quarter Ended September 27, 2020 |
(thousands) | | Common Stock | | Additional Paid-in Capital | | Accumulated Other Comprehensive Loss | | Treasury Stock | | Retained Earnings | | Total |
Balance June 28, 2020 | | $ | 173,178 | | | $ | 24,534 | | | $ | (8,292) | | | $ | — | | | $ | 303,848 | | | $ | 493,268 | |
Net income | | — | | | — | | | — | | | | | 37,336 | | | 37,336 | |
Dividends declared | | — | | | — | | | — | | | | | (5,865) | | | (5,865) | |
Other comprehensive income, net of tax | | — | | | — | | | 1,049 | | | | | — | | | 1,049 | |
Stock repurchases under buyback program | | (647) | | | (94) | | | — | | | | | (3,995) | | | (4,736) | |
Repurchases of shares for tax payments related to the vesting and exercise of share-based grants | | (53) | | | — | | | — | | | | | — | | | (53) | |
Stock-based compensation expense | | 4,830 | | | — | | | — | | | | | — | | | 4,830 | |
Balance September 27, 2020 | | $ | 177,308 | | | $ | 24,440 | | | $ | (7,243) | | | $ | — | | | $ | 331,324 | | | $ | 525,829 | |
| | | | | | | | | | | | |
Nine Months Ended September 27, 2020 |
(thousands) | | Common Stock | | Additional Paid-in Capital | | Accumulated Other Comprehensive Loss | | Treasury Stock | | Retained Earnings | | Total |
Balance December 31, 2019 | | $ | 172,662 | | | $ | 25,014 | | | $ | (5,698) | | | $ | — | | | $ | 305,503 | | | $ | 497,481 | |
Net income | | — | | | — | | | — | | | — | | | 59,237 | | | 59,237 | |
Dividends declared | | — | | | — | | | — | | | — | | | (17,666) | | | (17,666) | |
Other comprehensive loss, net of tax | | — | | | — | | | (1,545) | | | — | | | — | | | (1,545) | |
Stock repurchases under buyback program | | (3,962) | | | (574) | | | — | | | — | | | (15,750) | | | (20,286) | |
Issuance of shares upon exercise of common stock options | | 642 | | | — | | | — | | | — | | | — | | | 642 | |
Repurchases of shares for tax payments related to the vesting and exercise of share-based grants | | (3,211) | | | — | | | — | | | — | | | — | | | (3,211) | |
Stock-based compensation expense | | 11,177 | | | — | | | — | | | — | | | — | | | 11,177 | |
Balance September 27, 2020 | | $ | 177,308 | | | $ | 24,440 | | | $ | (7,243) | | | $ | — | | | $ | 331,324 | | | $ | 525,829 | |
See accompanying Notes to Condensed Consolidated Financial Statements
PATRICK INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
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 27, 202026, 2021 and December 31, 2019,2020, its results of operations for the third quarter and nine months ended September 26, 2021 and September 27, 2020, and September 29, 2019 and its statements of cash flows for the nine months ended September 27, 202026, 2021 and September 29, 2019.
27, 2020.
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 condensed 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 of other non-current assets in the condensed consolidated balance sheets and accumulated other comprehensive loss in Note 11. For a description of significant accounting policies used by the Company in the preparation of its consolidated financial statements, please refer to Note 1 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.2020. The December 31, 20192020 condensed consolidated statement of financial positionbalance sheet data was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. Operating results for the third quarter and nine months ended September 27, 202026, 2021 are not necessarily indicative of the results to be expectedthat we will realize or expect for the full year ending December 31, 2020.
2021.
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 third quarter of fiscal year 20202021 ended on September 27, 202026, 2021 and the third quarter of fiscal year 20192020 ended on September 29, 2019.27, 2020.
In preparation of Patrick’s condensed consolidated financial statements as of and for the third quarter and nine months ended September 27, 2020,26, 2021, management evaluated all subsequent events and 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 18 for further information.
| | | | | |
2. | RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS |
Goodwill Impairment
Income Taxes
In January 2017,December 2019, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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 Company adopted ASU 2017-04 on January 1, 2020 and the adoption did not have a material impact on the 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 Accounting 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 are required to use a
new forward-looking “expected loss” model that generally will result in the earlier recognition of allowances for losses. Additionally, entities are 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, 2020, with early adoption permitted. We are currently evaluatingThe Company adopted ASU 2019-12 on January 1, 2021 and the impact of this standardadoption did not have a material effect on ourits condensed 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 exceptions 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 through December 31, 2022. We areThe Company is currently evaluating the impact of this standard on our condensed consolidated financial statements.
Accounting for Convertible Instruments and Contracts in an Entity's Own Equity
In August 2020, the FASB issued ASU 2020-06, "Accounting for Convertible Instruments and Contracts in an Entity's Own Equity", a new standard that simplifies certain accounting treatments for convertible debt instruments. The guidance eliminates certain requirements that require separate accounting for embedded conversion features and simplifies the settlement assessment that entities are required to perform to determine whether a contract qualifies for equity classification. In addition, the new guidance requires entities use the if-converted method for all convertible instruments in the diluted EPSnet income per share calculation and include the effect of potential share settlement for instruments that may be settled in cash or shares, with certain exceptions. Furthermore, the guidance requires new disclosures about events that occur during the reporting period that cause conversion contingencies to be met and about the fair value of convertible debt at the instrument level, among other things. The guidance is effective for fiscal years beginning after December 15, 2021, with early adoption permitted. We areThe Company is currently evaluating the impact of this standard on our condensed consolidated financial statements.At this point in time, we anticipate the primary impact on our condensed consolidated financial statements as a result of the adoption of ASU 2020-06 will be a reduction in non-cash interest expense as well as a reduction in diluted net income per share attributable to the application of the if-converted method for our convertible notes referenced in Note 9.
In the following table, revenue from contracts with customers, net of intersegment sales, is disaggregated by market type and by reportable 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 27, 2020 | | Third Quarter Ended September 26, 2021 |
(thousands) | (thousands) | | Manufacturing | | Distribution | | Total | (thousands) | | Manufacturing | | Distribution | | Total |
Market type: | Market type: | | Market type: | | | | | | |
Recreational Vehicle | Recreational Vehicle | | $ | 290,326 | | | $ | 130,845 | | | $ | 421,171 | | Recreational Vehicle | | $ | 434,029 | | | $ | 199,208 | | | $ | 633,237 | |
Marine | | Marine | | 164,535 | | | 8,491 | | | 173,026 | |
Manufactured Housing | Manufactured Housing | | 45,845 | | | 61,908 | | | 107,753 | | Manufactured Housing | | 65,785 | | | 68,840 | | | 134,625 | |
Industrial | Industrial | | 69,242 | | | 9,090 | | | 78,332 | | Industrial | | 107,886 | | | 11,403 | | | 119,289 | |
Marine | | 88,861 | | | 4,590 | | | 93,451 | | |
Total | Total | | $ | 494,274 | | | $ | 206,433 | | | $ | 700,707 | | Total | | $ | 772,235 | | | $ | 287,942 | | | $ | 1,060,177 | |
| | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 27, 2020 |
(thousands) | | Manufacturing | | Distribution | | Total |
Market type: | | | | | | |
Recreational Vehicle | | $ | 656,739 | | | $ | 288,778 | | | $ | 945,517 | |
Manufactured Housing | | 127,857 | | | 182,579 | | | 310,436 | |
Industrial | | 202,368 | | | 25,113 | | | 227,481 | |
Marine | | 219,150 | | | 11,400 | | | 230,550 | |
Total | | $ | 1,206,114 | | | $ | 507,870 | | | $ | 1,713,984 | |
| | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 26, 2021 |
(thousands) | | Manufacturing | | Distribution | | Total |
Market type: | | | | | | |
Recreational Vehicle | | $ | 1,161,254 | | | $ | 568,840 | | | $ | 1,730,094 | |
Marine | | 453,223 | | | 23,105 | | | 476,328 | |
Manufactured Housing | | 190,786 | | | 203,648 | | | 394,434 | |
Industrial | | 296,769 | | | 32,988 | | | 329,757 | |
Total | | $ | 2,102,032 | | | $ | 828,581 | | | $ | 2,930,613 | |
| | | | | | | | | | | | | | | | | | | | |
| | Third Quarter Ended September 29, 2019 |
(thousands) | | Manufacturing | | Distribution | | Total |
Market type: | | | | | | |
Recreational Vehicle | | $ | 218,706 | | | $ | 91,313 | | | $ | 310,019 | |
Manufactured Housing | | 44,159 | | | 64,959 | | | 109,118�� | |
Industrial | | 64,541 | | | 7,566 | | | 72,107 | |
Marine | | 72,306 | | | 2,636 | | | 74,942 | |
Total | | $ | 399,712 | | | $ | 166,474 | | | $ | 566,186 | |
` | | | | | | | | | | | | | | | | | | | | |
| | Third Quarter Ended September 27, 2020 |
(thousands) | | Manufacturing | | Distribution | | Total |
Market type: | | | | | | |
Recreational Vehicle | | $ | 290,326 | | | $ | 130,845 | | | $ | 421,171 | |
Marine | | 88,861 | | | 4,590 | | | 93,451 | |
Manufactured Housing | | 45,845 | | | 61,908 | | | 107,753 | |
Industrial | | 69,242 | | | 9,090 | | | 78,332 | |
Total | | $ | 494,274 | | | $ | 206,433 | | | $ | 700,707 | |
| | | Nine Months Ended September 29, 2019 | | Nine Months Ended September 27, 2020 |
(thousands) | (thousands) | | Manufacturing | | Distribution | | Total | (thousands) | | Manufacturing | | Distribution | | Total |
Market type: | Market type: | | Market type: | | | | | | |
Recreational Vehicle | Recreational Vehicle | | $ | 694,261 | | | $ | 299,115 | | | $ | 993,376 | | Recreational Vehicle | | $ | 656,739 | | | $ | 288,778 | | | $ | 945,517 | |
Marine | | Marine | | 219,150 | | | 11,400 | | | 230,550 | |
Manufactured Housing | Manufactured Housing | | 131,101 | | | 193,975 | | | 325,076 | | Manufactured Housing | | 127,857 | | | 182,579 | | | 310,436 | |
Industrial | Industrial | | 188,292 | | | 25,149 | | | 213,441 | | Industrial | | 202,368 | | | 25,113 | | | 227,481 | |
Marine | | 246,017 | | | 9,712 | | | 255,729 | | |
Total | Total | | $ | 1,259,671 | | | $ | 527,951 | | | $ | 1,787,622 | | Total | | $ | 1,206,114 | | | $ | 507,870 | | | $ | 1,713,984 | |
Contract Liabilities
Contract 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 liabilities were immaterial during all periods presented.
Inventories consist of the following:
| | | | | | | | | | | | | | |
(thousands) | | September 27, 2020 | | December 31, 2019 |
Raw materials | | $ | 196,298 | | | $ | 162,238 | |
Work in process | | 15,955 | | | 14,272 | |
Finished goods | | 28,225 | | | 28,446 | |
Less: reserve for inventory obsolescence | | (13,301) | | | (10,123) | |
Total manufactured goods, net | | 227,177 | | | 194,833 | |
Materials purchased for resale (distribution products) | | 56,676 | | | 60,918 | |
Less: reserve for inventory obsolescence | | (2,479) | | | (1,881) | |
Total materials purchased for resale (distribution products), net | | 54,197 | | | 59,037 | |
Total inventories | | $ | 281,374 | | | $ | 253,870 | |
| | | | | | | | | | | | | | |
(thousands) | | September 26, 2021 | | December 31, 2020 |
Raw materials | | $ | 261,775 | | | $ | 157,219 | |
Work in process | | 30,221 | | | 19,282 | |
Finished goods | | 66,189 | | | 37,632 | |
Less: reserve for inventory obsolescence | | (13,604) | | | (8,320) | |
Total manufactured goods, net | | 344,581 | | | 205,813 | |
Materials purchased for resale (distribution products) | | 147,502 | | | 112,158 | |
Less: reserve for inventory obsolescence | | (6,317) | | | (5,162) | |
Total materials purchased for resale (distribution products), net | | 141,185 | | | 106,996 | |
Total inventories | | $ | 485,766 | | | $ | 312,809 | |
| | | | | |
5. | GOODWILL AND INTANGIBLE ASSETS |
Changes in the carrying amount of goodwill for the nine months ended September 27, 202026, 2021 by segment are as follows: | | | | | | | | | | | | | | | | | | | | |
(thousands) | | Manufacturing | | Distribution | | Total |
Balance - December 31, 2019 | | $ | 268,402 | | | $ | 50,947 | | | $ | 319,349 | |
Acquisitions | | 35,087 | | | 8,980 | | | 44,067 | |
Adjustments to preliminary purchase price allocations | | (8,708) | | | 1,725 | | | (6,983) | |
Balance - September 27, 2020 | | $ | 294,781 | | | $ | 61,652 | | | $ | 356,433 | |
| | | | | | | | | | | | | | | | | | | | |
(thousands) | | Manufacturing | | Distribution | | Total |
Balance - December 31, 2020 | | $ | 338,045 | | | $ | 57,755 | | | $ | 395,800 | |
Acquisitions | | 64,312 | | | 11,458 | | | 75,770 | |
Adjustments to preliminary purchase price allocations | | 7,366 | | | 19 | | | 7,385 | |
Balance - September 26, 2021 | | $ | 409,723 | | | $ | 69,232 | | | $ | 478,955 | |
Intangible assets, net consist of the following as of September 27, 202026, 2021 and December 31, 2019:2020:
| (thousands) | (thousands) | | September 27, 2020 | | December 31, 2019 | (thousands) | | September 26, 2021 | | December 31, 2020 |
Customer relationships | Customer relationships | | $ | 394,687 | | | $ | 357,513 | | Customer relationships | | $ | 549,314 | | | $ | 461,754 | |
Non-compete agreements | Non-compete agreements | | 15,231 | | | 16,202 | | Non-compete agreements | | 19,144 | | | 15,949 | |
Patents | Patents | | 16,555 | | | 16,495 | | Patents | | 36,528 | | | 23,025 | |
Trademarks | | 101,426 | | | 88,524 | | |
Trademarks (non-amortizing, indefinite lived) | | Trademarks (non-amortizing, indefinite lived) | | 151,997 | | | 113,796 | |
| | 527,899 | | | 478,734 | | | 756,983 | | | 614,524 | |
Less: accumulated amortization | Less: accumulated amortization | | (146,980) | | | (121,720) | | Less: accumulated amortization | | (198,943) | | | (158,248) | |
Intangible assets, net | Intangible assets, net | | $ | 380,919 | | | $ | 357,014 | | Intangible assets, net | | $ | 558,040 | | | $ | 456,276 | |
Changes in the carrying value of intangible assets for the nine months ended September 27, 202026, 2021 by segment are as follows:
| | | | | | | | | | | | | | | | | | | | |
(thousands) | | Manufacturing | | Distribution | | Total |
Balance - December 31, 2019 | | $ | 282,123 | | | $ | 74,891 | | | $ | 357,014 | |
Acquisitions and other | | 36,409 | | | 13,096 | | | 49,505 | |
Amortization | | (24,313) | | | (5,287) | | | (29,600) | |
Impairment of intangible assets (1) | | (119) | | | (1,831) | | | (1,950) | |
Adjustments to preliminary purchase price allocations | | 6,095 | | | (145) | | | 5,950 | |
Balance - September 27, 2020 | | $ | 300,195 | | | $ | 80,724 | | | $ | 380,919 | |
(1) Certain immaterial operations permanently ceased activities during the nine months ended September 27, 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 nine months ended September 27, 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 nine months ended September 27, 2020 whether the impact of the COVID-19 pandemic on overall macroeconomic conditions and our results of operations for the third quarter and nine months ended September 27, 2020 indicated that at September 27, 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 September 27, 2020 in relation to the carrying amount of shareholders’ equity at September 27, 2020 and to fair values determined during our 2019 impairment tests; (iii) the results of our operations during the third quarter and nine months ended September 27, 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 concluded that no triggering events had occurred which would indicate the fair values of our goodwill and trademarks may be less than the carrying values at September 27, 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, the outcome of our 2020 impairment tests, which we will perform in the fourth quarter of 2020, could result in an impairment of our goodwill or our trademarks.
| | | | | | | | | | | | | | | | | | | | |
(thousands) | | Manufacturing | | Distribution | | Total |
Balance - December 31, 2020 | | $ | 373,717 | | | $ | 82,559 | | | $ | 456,276 | |
Acquisitions | | 114,833 | | | 32,715 | | | 147,548 | |
Amortization | | (33,543) | | | (7,152) | | | (40,695) | |
Adjustments to preliminary purchase price allocations | | (5,089) | | | — | | | (5,089) | |
Balance - September 26, 2021 | | $ | 449,918 | | | $ | 108,122 | | | $ | 558,040 | |
General
The Company completed 63 acquisitions in the third quarter of 20202021 and completed 910 acquisitions in the first nine months of 2020ended September 26, 2021 (the "2020"2021 Acquisitions"). For the third quarter and nine months ended September 27, 2020,26, 2021, net sales included in the Company's condensed consolidated statements of income related to the 20202021 Acquisitions were $19.6$84.0 million and $23.3$146.1 million, respectively. Operatingrespectively, and operating income relatedwas $6.6 million and $12.6 million, respectively, for each of these periods. One of the 2021 Acquisitions accounted for $53.5 million in net sales and $2.6 million in operating income for the third quarter of 2021 and $85.6 million in net sales and $4.5 million in operating income for the nine months ended September 26, 2021. Acquisition-related costs associated with the businesses acquired in the third quarter of 2021 and first nine months of 2021 were immaterial. Assets acquired and liabilities assumed in the individual acquisitions were recorded on the Company’s condensed consolidated balance sheet at their estimated fair values as of the respective dates of acquisition. For each acquisition, the Company completes its allocation of the purchase price to the fair value of acquired assets and liabilities within a one year measurement period. The Company completed 6 acquisitions in the third quarter of 2020 Acquisitions forand 9 acquisitions in the nine months ended September 27, 2020. Net sales included in the Company's condensed consolidated statements of income in the third quarter and nine months ended September 27, 2020 was approximately $2.1 million and $2.2 million, respectively. Acquisition-related costs incurredrelated to acquisitions completed in the first nine months of 2020 were immaterial. The Company completed 2 acquisitions in the first nine months of 2019. For the third quarter$19.6 million and first nine months ended September 29, 2019, revenue$23.3 million, respectively, and operating income included inwas $2.1 million and $2.2 million, respectively, for the Company's condensed consolidated statements of income were immaterial. Acquisition-related costs incurred in the first nine months of 2019 were immaterial.same periods.
For each acquisition, the excess of the purchase consideration over the fair value of the net assets acquired is recorded as goodwill, which generally represents the combined value of the Company’s existing purchasing, manufacturing, sales, and systems resources with the organizational talent and expertise of the acquired companies’ respective management teams to maximize efficiencies, market share growth and net income.
In connection with certain acquisitions, if certain financial results for the acquired businesses are achieved, the Company is required to pay additional cash consideration. The Company records a liability for the estimated 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 at the date of acquisition. As of September 27,26, 2021, the aggregate fair value of the estimated contingent consideration payments was $9.8 million, $3.7 million of which is included in "Accrued liabilities" and $6.1 million is included in “Other long-term liabilities” on the condensed consolidated balance sheet. At December 31, 2020, the aggregate fair value of the estimated contingent consideration payments was $8.0$6.9 million, $6.1 million of which is included in the line item "Accrued liabilities" and $1.9 million is included in “Other long-term liabilities” on the condensed consolidated statement of financial position. At December 31, 2019, the aggregate fair value of the estimated contingent consideration payments was $9.6 million, $2.0$1.6 million of which was included in the line item "Accrued liabilities" and $7.6$5.3 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 $14.8$19.6 million in the aggregate. In the firstthird quarter and nine months of 2020,ended September 26, 2021, the Company made $1.5 million and $2.5 million in cash payments, of $2.0 millionrespectively, related to contingent consideration arrangements, recordingliabilities. In connection with cash payments on contingent consideration, the Company recorded a corresponding reduction$0.9 million charge in selling general and administrative expense in the condensed consolidated statement of income for the nine months ended September 26, 2021, representing changes from the amounts initially expected to accrued liabilities.be paid to what was ultimately paid.
20202021 Acquisitions
AcquisitionsThe Company completed 10 acquisitions in the first nine months of 2020 includeended September 26, 2021, including the following 5 previously announced acquisitions:
| | | | | | | | | | | | | | |
Company | | Segment | | Description |
Sea-Dog Corporation & Sea-Lect Plastics (collectively, "Sea-Dog") | | Distribution & Manufacturing | | Distributor of a variety of marine and powersports hardware and accessories to distributors, wholesalers, retailers, and manufacturers that provides plastic injection molding, design, product development and expert tooling to companies and government entities, based in Everett, Washington |
Hyperform, Inc. | | Manufacturing | | Manufacturer of high-quality, non-slip foam flooring, operating under the SeaDek brand name, for the marine original equipment manufacturer ("OEM") market and aftermarket as well as serving the pool and spa, powersports and utility markets under the SwimDek and EndeavorDek brand names, with manufacturing facilities in Rockledge, Florida and Cocoa, Florida |
Alpha Systems, LLC | | Manufacturing & Distribution | | Manufacturer and distributor of component products and accessories for the recreational vehicle ("RV"), marine, manufactured housing and industrial end markets that includes adhesives, sealants, rubber roofing, roto/blow molding, injection molding, flooring, insulation, shutters, skylights, and various other products and accessories, operating out of 9 facilities in Elkhart, Indiana. |
Coyote Manufacturing Company | | Manufacturing | | Designer, fabricator, and manufacturer of a variety of steel and aluminum products, including boat trailers, towers, T-tops, leaning posts, and other custom components primarily for the marine OEM market, based in Nashville, Georgia. |
Tumacs Covers | | Manufacturing & Distribution | | Manufacturer of custom designed boat covers, canvas frames, and bimini tops, primary serving large marine OEMs and dealers, headquartered in Pittsburgh, Pennsylvania, with manufacturing facilities in Indiana and Pennsylvania, and a distribution/service center in Michigan. |
Inclusive of 5 acquisitions not discussed above, total cash consideration for the 2021 Acquisitions was approximately $298.4 million, plus contingent consideration over a one to three-year period based on future results in connection with certain acquisitions. One of the 2021 Acquisitions accounted for $149.3 million in cash and $10.2 million in common stock as consideration, $25.8 million in inventory, $28.4 million in fixed assets, $85.0 million in intangible assets, $18.1 million in accounts payable and accrued liabilities, $11.5 million in operating lease right-of-use assets and liabilities, and $33.6 million in goodwill. 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. Changes to preliminary purchase accounting estimates recorded in the third quarter and nine months ended September 26, 2021 related to the 2021 Acquisitions were immaterial and relate primarily to the valuation of intangible and fixed assets.
2020 Acquisitions
The Company completed 11 acquisitions in the year ended December 31, 2020 (the "2020 Acquisitions"), including the following 7 previously announced acquisitions:
| | | | | | | | | | | | | | |
Company | | Segment | | Description |
Maple City Woodworking Corporation | | Manufacturing | | Manufacturer of hardwood cabinet doors and fascia for the recreational vehicle ("RV")RV market based in Goshen, Indiana |
SEI Manufacturing, Inc. | | Manufacturing | | Manufacturer of towers, T-Tops, hardtops, rails, gates and other aluminum exterior products for the marine market located in Cromwell, Indiana |
Inland Plywood Company | | Manufacturing | | 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 RV and industrial markets headquartered in Pontiac, Michigan with an additional facility in Cocoa, Florida |
Synergy RV Transport | | Distribution | | Transportation and logistics service provider primarily for original equipment manufacturersOEMs and dealers in the RV market located in Goshen, Indiana |
Front Range Stone | | Manufacturing | | Fabricator and installer of natural stone, quartz, solid surface, and laminate countertops, primarily serving big box home improvement retailers, home builders and commercial contractors in the industrial market based in Englewood, Colorado |
Geremarie Corporation | | Manufacturing | | Designer, manufacturer, and fabricator of a full suite of high-precision aluminum components serving the marine industry, in addition to the medical, aerospace, defense, commercial and industrial markets located in Lake Zurich, Illinois |
Taco Metals, LLC | | Manufacturing | | Manufacturer of boating products including rub rail systems, canvas and tower components, sport fishing and outrigger systems, helm chairs and pedestals, and specialty hardware for OEMs in the recreational boating industry and the related aftermarket headquartered in Miami, Florida, with manufacturing facilities in Tennessee and Florida, and distribution centers in Tennessee, Florida, South Carolina, and Massachusetts |
Inclusive of 4 immaterial acquisitions not discussed above, total cash consideration for the 2020 Acquisitions was approximately $124$306.3 million, plus contingent consideration over a maximum of a one-yearone to three-year period based on future performanceresults in connection with certain acquisitions. The preliminary purchase price allocations are subject to valuation activities being finalized,One of the 2020 Acquisitions accounted for $129.7 million in cash consideration, $2.9 million in inventory, $49.3 million in fixed assets, $49.1 million in intangible assets, $2.6 million in accounts payable and thus all required purchaseaccrued liabilities, $4.9 million in operating lease right-of-use assets and liabilities, and $32.6 million in goodwill. Purchase accounting adjustments are subject to change within the measurement period as the Company finalizes its estimates.complete on all 2020 Acquisitions. Changes to preliminary purchase accounting estimates recorded in the third quarter and first nine months of 2020ended September 26, 2021 related to the 2020 Acquisitions were immaterial. The 2020 Acquisitions are included inimmaterial and relate primarily to the Manufacturing segment except for Synergy RV Transport, which is included in the Distribution segment.
2019 Acquisitions
The Company completed 4 acquisitions in 2019 (the "2019 Acquisitions"), including the previously announced acquisitionsvaluation of Topline Counters, LLC ("Topline Counters"), a Sumner, Washington-based designerintangible and manufacturer offixed assets.
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 cash consideration for the 2019 Acquisitions was $53.1 million, plus contingent consideration over a one-year period based on future performance in connection with the acquisition of G.G. Schmitt. Valuation activities and purchase accounting adjustments have been finalized on all 2019 Acquisitions, except for the finalization of tangible assets for Topline Counters. Changes to preliminary purchase accounting estimates recorded in the third quarter and first nine months of 2020 related to the 2019 Acquisitions were immaterial. The 2019 Acquisitions are included in the Manufacturing segment.
The following table summarizes the fair values of the consideration paid, assets acquired and the liabilities assumed as of the date of acquisition for the 20202021 Acquisitions and the 20192020 Acquisitions: | | | | | | | | | | | | | | |
(thousands) | | 2021 Acquisitions | | 2020 Acquisitions |
Consideration | | | | |
Cash, net of cash acquired | | $ | 298,384 | | | $ | 306,319 | |
Working capital holdback and other, net(1) | | 1,189 | | | (37) | |
Common stock issuance(2) | | 10,211 | | | — | |
Contingent consideration(3) | | 4,540 | | | 4,763 | |
Total consideration | | $ | 314,324 | | | $ | 311,045 | |
| | | | |
Assets Acquired | | | | |
Trade receivables | | $ | 18,582 | | | $ | 15,320 | |
Inventories | | 46,099 | | | 25,395 | |
Prepaid expenses & other | | 975 | | | 725 | |
Property, plant & equipment | | 53,570 | | | 65,083 | |
Operating lease right-of-use assets | | 16,438 | | | 20,029 | |
Identifiable intangible assets | | 147,495 | | | 130,981 | |
Liabilities Assumed | | | | |
Current portion of operating lease obligations | | (3,984) | | | (2,721) | |
Accounts payable & accrued liabilities | | (26,171) | | | (12,405) | |
Operating lease obligations | | (12,454) | | | (17,308) | |
Deferred tax liabilities | | (1,996) | | | (4,576) | |
Total fair value of net assets acquired | | 238,554 | | | 220,523 | |
Goodwill(4) | | 75,770 | | | 90,522 | |
| | $ | 314,324 | | | $ | 311,045 | |
(1) Certain acquisitions contain working capital holdbacks which are typically settled after a 90-day period following the close of the acquisition. This value represents the remaining amounts due to (from) sellers as of September 26, 2021.
| | | | | | | | | | | | | | | | | | | | |
(thousands) | | 2020 Acquisitions | | 2019 Acquisitions |
Consideration | | | | |
| Cash, net of cash acquired | | $ | 124,013 | | | $ | 53,307 | |
| Contingent consideration(1) | | 1,813 | | | 1,160 | |
| | Total consideration | | 125,826 | | | 54,467 | |
| | | | | | |
Assets Acquired | | | | |
| Trade receivables | | $ | 9,785 | | | $ | 9,692 | |
| Inventories | | 16,073 | | | 5,803 | |
| Prepaid expenses & other | | 502 | | | 20 | |
| Property, plant & equipment | | 15,633 | | | 6,567 | |
| Operating lease right-of-use assets | | 6,222 | | | 5,653 | |
| Identifiable intangible assets | | 49,445 | | | 23,715 | |
Liabilities Assumed | | | | |
| Accounts payable & accrued liabilities | | (6,264) | | | (6,514) | |
| Operating lease obligations | | (6,222) | | | (5,653) | |
| Deferred tax liabilities, net | | (3,415) | | | (1,922) | |
| | Total fair value of net assets acquired | | 81,759 | | | 37,361 | |
| | Goodwill(2) | | 44,067 | | | 17,106 | |
| | | | $ | 125,826 | | | $ | 54,467 | |
(2) In connection with one acquisition, the Company issued 113,961 shares of common stock at a closing price of $89.60 as of the acquisition date.(1)(3) These amounts reflect the preliminary estimated liability pertaining to theacquisition date fair value of contingent consideration based on future performanceresults relating to certain acquisitions.
(2)(4) Goodwill is tax-deductible for the 2021 Acquisitions, except Tumacs Covers (approximately $6.2 million), and the 2020 Acquisitions, except Front Range Stone (approximately $14.1$11.0 million), and for the 2019 Acquisitions, except GG Schmitt (approximately $5.4 million). For acquisitions, the excess of purchase price consideration over the fair value of net assets acquired is recorded as goodwill, which generally represents the combined value of the Company's existing purchasing, manufacturing, sales, industry relationships, and systems resources with the organizational talent and expertise of the acquired companies' respective management teams to maximize efficiencies, revenue impact, market share growth, and net income.
We estimate the value of acquired property, plant, and equipment using a combination of the income, cost, and market approaches, such as estimates of future income growth, capitalization rates, discount rates, and capital expenditure needs of the acquired businesses.
The following table presents our estimates of identifiable intangibles for the 2020 Acquisitions and the 2019 Acquisitions:
| | | | | | | | | | | | | | | | | | | | |
| | | | (thousands) |
| | Estimated Useful Life (in years) | | 2020 Acquisitions | | 2019 Acquisitions |
Customer relationships | | 10 | | $ | 37,723 | | | $ | 18,112 | |
Non-compete agreements | | 5 | | 492 | | | 150 | |
Trademarks | | Indefinite | | 11,230 | | | 5,453 | |
| | | | $ | 49,445 | | | $ | 23,715 | |
We estimate the value of customer relationships using the multi-period excess earnings method, which is a variation on the income approach, calculating the present value of incremental after-tax cash flows attributable to the asset. Non-compete agreements are valued using a discounted cash flow approach, which is a variation of an income approach, with and without the individual counterparties to the non-compete agreements. Trademarks and patents are valued using the relief-from-royalty method, which applies an estimated royalty rate to forecasted future cash flows, discounted to present value.
The following table presents our estimates of identifiable intangible assets for the 2021 Acquisitions and the 2020 Acquisitions:
| | | | | | | | | | | | | | | | | | | | |
(thousands, except year info) | | Estimated Useful Life (in years) | | 2021 Acquisitions | | 2020 Acquisitions |
Customer relationships | | 10 | | $ | 92,453 | | | $ | 99,897 | |
Non-compete agreements | | 5 | | 3,255 | | | 1,150 | |
Patents | | 10 - 18 | | 13,450 | | | 6,470 | |
Trademarks | | Indefinite | | 38,337 | | | 23,464 | |
| | | | $ | 147,495 | | | $ | 130,981 | |
Pro Forma Information
The following pro forma information for the third quarter and nine months ended September 27, 2020 and September 29, 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 $0.5$0.2 million and $2.2$4.0 million for the third quarter and nine months ended September 26, 2021, respectively and $5.2 million and $16.3 million for the third quarter and nine months ended September 27, 2020, respectively, and $1.4 million and $4.0 million for the third quarter and nine months ended September 29, 2019, respectively.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Third Quarter Ended | | Nine Months Ended |
(thousands except per share data) | | September 27, 2020 | | September 29, 2019 | | September 27, 2020 | | September 29, 2019 |
Revenue | | $ | 719,953 | | | $ | 621,936 | | | $ | 1,798,914 | | | $ | 1,961,263 | |
Net income | | 38,412 | | | 24,914 | | | 65,392 | | | 80,077 | |
Basic net income per common share | | 1.69 | | | 1.08 | | | 2.87 | | | 3.47 | |
Diluted net income per common share | | 1.66 | | | 1.07 | | | 2.83 | | | 3.44 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Third Quarter Ended | | Nine Months Ended |
(thousands, except per share data) | | September 26, 2021 | | September 27, 2020 | | September 26, 2021 | | September 27, 2020 |
Revenue | | $ | 1,067,111 | | | $ | 802,753 | | | $ | 3,040,971 | | | $ | 2,049,211 | |
Net income | | 58,190 | | | 43,183 | | | 172,574 | | | 66,967 | |
Basic net income per common share | | 2.55 | | | 1.90 | | | 7.56 | | | 2.94 | |
Diluted net income per common share | | 2.49 | | | 1.87 | | | 7.38 | | | 2.90 | |
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 $4.9approximately $7.0 million and $11.2$17.3 million for the third quarter and nine months ended September 27, 2020,26, 2021, respectively, for its stock-based compensation plans in the condensed consolidated statements of income. Stock-based compensation expense for the nine months ended September 27, 2020 includes a reduction of expense due to certain forfeitures$4.9 million and adjustments$11.2 million was recorded in the amount of $2.3 million. For the third quarter and nine months ended September 29, 2019,27, 2020, which includes a $2.3 million reduction of expense in the Company recorded stock-based compensation expense of $3.8 millionnine month period due to certain forfeitures and $12.0 million, respectively.
adjustments.
The Board approved various stock-based grants under the Company’s 2009 Omnibus Incentive Plan in the first nine months of 20202021 totaling 275,740296,073 shares in the aggregate at an average fair value of $53.78 per share$73.31 at grant date for a total fair value at grant date of $14.8$21.7 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 27, 2020,26, 2021, there was approximately $25.5$31.5 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 17.418.5 months.
| | | | | |
8. | NET INCOME PER COMMON SHARE |
Net income per common share calculated for the third quarter and nine months of 20202021 and 20192020 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Third Quarter Ended | | Nine Months Ended |
(thousands except per share data) | | September 27, 2020 | | September 29, 2019 | | September 27, 2020 | | September 29, 2019 |
Net income for basic and diluted per share calculation | | $ | 37,336 | | | $ | 21,317 | | | $ | 59,237 | | | $ | 69,582 | |
Weighted average common shares outstanding - basic | | 22,674 | | | 23,076 | | | 22,784 | | | 23,073 | |
Effect of potentially dilutive securities | | 398 | | | 197 | | | 304 | | | 206 | |
Weighted average common shares outstanding - diluted | | 23,072 | | | 23,273 | | | 23,088 | | | 23,279 | |
Basic net income per common share | | $ | 1.65 | | | $ | 0.92 | | | $ | 2.60 | | | $ | 3.02 | |
Diluted net income per common share | | $ | 1.62 | | | $ | 0.92 | | | $ | 2.57 | | | $ | 2.99 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Third Quarter Ended | | Nine Months Ended |
(thousands except per share data) | | September 26, 2021 | | September 27, 2020 | | September 26, 2021 | | September 27, 2020 |
Net income for basic and diluted per share calculation | | $ | 57,397 | | | $ | 37,336 | | | $ | 163,895 | | | $ | 59,237 | |
Weighted average common shares outstanding - basic | | 22,789 | | | 22,674 | | | 22,826 | | | 22,784 | |
Effect of potentially dilutive securities | | 614 | | | 398 | | | 549 | | | 304 | |
Weighted average common shares outstanding - diluted | | 23,403 | | | 23,072 | | | 23,375 | | | 23,088 | |
Basic net income per common share | | $ | 2.52 | | | $ | 1.65 | | | $ | 7.18 | | | $ | 2.60 | |
Diluted net income per common share | | $ | 2.45 | | | $ | 1.62 | | | $ | 7.01 | | | $ | 2.57 | |
An immaterial amount of securities was not included in the computation of diluted income per share as they are considered anti-dilutive under the treasury stock method.method for all periods presented.
A summary of total debt outstanding at September 27, 202026, 2021 and December 31, 20192020 is as follows:
| (thousands) | (thousands) | | September 27, 2020 | | December 31, 2019 | (thousands) | | September 26, 2021 | | December 31, 2020 |
Long-term debt: | Long-term debt: | | | | | Long-term debt: | | | | |
1.0% convertible notes due 2023 | 1.0% convertible notes due 2023 | | $ | 172,500 | | | $ | 172,500 | | 1.0% convertible notes due 2023 | | $ | 172,500 | | | $ | 172,500 | |
Term loan due 2024 | | 95,000 | | | 97,500 | | |
Revolver due 2024 | | 135,000 | | | 135,000 | | |
7.5% senior notes due 2027 | | 300,000 | | | 300,000 | | |
Term loan due 2026 | | Term loan due 2026 | | 148,125 | | | 92,500 | |
Revolver due 2026 | | Revolver due 2026 | | 135,455 | | | 275,000 | |
7.50% senior notes due 2027 | | 7.50% senior notes due 2027 | | 300,000 | | | 300,000 | |
4.75% senior notes due 2029 | | 4.75% senior notes due 2029 | | 350,000 | | | — | |
Total long-term debt | Total long-term debt | | 702,500 | | | 705,000 | | Total long-term debt | | 1,106,080 | | | 840,000 | |
Less: convertible notes debt discount, net | Less: convertible notes debt discount, net | | (17,958) | | | (23,260) | | Less: convertible notes debt discount, net | | (10,545) | | | (16,072) | |
Less: term loan deferred financing costs, net | Less: term loan deferred financing costs, net | | (463) | | | (542) | | Less: term loan deferred financing costs, net | | (660) | | | (434) | |
Less: senior notes deferred financing costs, net | Less: senior notes deferred financing costs, net | | (5,227) | | | (5,844) | | Less: senior notes deferred financing costs, net | | (9,711) | | | (5,087) | |
Less: current maturities of long-term debt | Less: current maturities of long-term debt | | (5,000) | | | (5,000) | | Less: current maturities of long-term debt | | (7,500) | | | (7,500) | |
Total long-term debt, less current maturities, net | Total long-term debt, less current maturities, net | | $ | 673,852 | | | $ | 670,354 | | Total long-term debt, less current maturities, net | | $ | 1,077,664 | | | $ | 810,907 | |
4.75% Senior Notes due 2029
On April 20, 2021, the Company issued $350.0 million aggregate principal amount of 4.75% Senior Notes due 2029 (the "4.75% Senior Notes"). The 4.75% Senior Notes were not registered under the Securities Act of 1933, as amended (the "Securities Act") and were offered under rule 144A under the Securities Act. The 4.75% Senior Notes will mature on May 1, 2029. Interest on the 4.75% Senior Notes started accruing April 20, 2021 and is payable semi-annually in cash in arrears May 1 and November 1 of each year, beginning on November 1, 2021. The effective interest rate on the 4.75% Senior Notes, which includes debt issuance costs, is approximately 4.98%. In connection with the issuance of the 4.75% Senior Notes, the Company incurred and capitalized as a reduction of the principal amount of the 4.75% Senior Notes
approximately $5.3 million in deferred financing costs which are being amortized using the effective interest rate over the term of the 4.75% Senior Notes.
The 4.75% 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 2021 Credit Facility (as defined herein). The Company may redeem the 4.75% Senior Notes at any time according to the following timeframes with the respective restrictions and prices:
| | | | | | | | | | | | | | |
Timeframe | | Redemption Restrictions | | Redemption Prices |
Prior to May 1, 2024 | | Up to 40% of the notes | | 104.750% |
After May 1, 2024 | | In whole, or in part | | 102.375% |
After May 1, 2025 | | In whole, or in part | | 101.188% |
After May 1, 2026 | | In whole, or in part | | 100.000% |
2021 Credit Facility
Simultaneously with the issuance of the 4.75% Senior Notes, the Company entered into the Fourth Amended and Restated Credit Agreement (the "2021 Credit Agreement"). The 2021 Credit Agreement amended and extended the Company's 2019 Credit Agreement (as defined herein) and consists of a senior secured revolver (the "2021 Revolver") and a senior secured term loan (the "2021 Term Loan" and together with the 2021 Revolver, the "2021 Credit Facility"). The maturity date for borrowings under the 2021 Credit Agreement is April 20, 2026. 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 2021 Credit Facility by up to $250.0 million for acquisitions.
ThereThe Company determined that the terms of the 2021 Credit Agreement were no material changesnot substantially different from the terms of the Company’s 2019 Credit Agreement. Accordingly, debt modification accounting treatment was applied and the related impacts were immaterial.
Borrowings under the 2021 Credit Facility are secured by substantially all personal property assets of the Company and any domestic subsidiary guarantors. Pursuant to any of our debt arrangements during the third quarter and nine months ended September 27, 2020.2021 Credit Agreement:
•The 2021 Term Loan is due in consecutive quarterly installments in the following amounts: (i) beginning June 30, 2021, through and including March 31, 2024, $1,875,000 and (ii) beginning June 30, 2024, and each quarter thereafter, $3,750,000, with the remaining balance due at maturity;
Interest•The interest rates for borrowings under the revolver2021 Revolver and term loanthe 2021 Term Loan are the prime ratePrime Rate or LIBOR plus a margin. At September 27, 2020, allmargin, 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 2021 Revolver, which range from 0.15% to 0.225%; and
•Covenants include requirements as to a maximum consolidated secured net leverage ratio (2.75:1.00, increasing to 3.25:1.00 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 Company's borrowings1.00% Convertible Notes due 2023, and other customary covenants.
The total face value of the 2021 Term Loan is $150.0 million. Total available borrowing capacity under the revolver2021 Revolver is $550.0 million. At September 26, 2021, the Company had $148.1 million outstanding under the 2021 Term Loan under the LIBOR-based option, and term loan wereborrowings outstanding under the 2021 Revolver of $135.5 million under the LIBOR-based option. The interest rate for incremental borrowings at September 27, 202026, 2021 was LIBOR plus 1.5%1.50% (or 1.69%1.63%) for the LIBOR-based option. The fee payable on committed but unused portions of the revolver2021 Revolver was 0.20% at September 27, 2020.26, 2021.
Total cash interest paid was $3.2 million and $6.9 million for the third quarter of 2021 and 2020 was $3.7 million and 2019,$3.2 million, respectively, and $21.2 million and $21.4 million and $19.7 million for the firstcomparative nine monthsmonth periods, respectively.
2019 Credit Facility
See Note 8 of the Notes to Consolidated Financial Statements section of the Fiscal 2020 Form 10-K regarding the Company's previous credit agreement (the "2019 Credit Agreement") which established a $550 million revolving credit loan (the "2019 Revolver") and a $100 million term loan (the "2019 Term Loan" and, together with 2019 respectively.Revolver, the "2019 Credit Facility"). The 2019 Credit Agreement was amended by the 2021 Credit Agreement on April 20, 2021 as discussed above.
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10. | DERIVATIVE FINANCIAL INSTRUMENTS |
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 September 27, 2020,26, 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):
| | | | | | | | | | | | | | | | | |
| | Fair value of derivative instruments |
Derivatives accounted for as cash flow hedges | | Balance sheet location | September 27, 2020 | | December 31, 2019 |
Interest rate swaps | | Other long-term liabilities | $ | 7,964 | | | $ | 5,868 | |
| | | | | | | | | | | | | | | | | | | | |
| | Fair value of derivative instruments |
Derivatives accounted for as cash flow hedges | | Balance sheet location | | September 26, 2021 | | December 31, 2020 |
Interest rate swaps | | Accrued liabilities | | $ | 2,506 | | | $ | — | |
Interest rate swaps | | Other long-term liabilities | | $ | — | | | $ | 6,567 | |
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.swaps, which qualify as cash flow hedges.
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11. | ACCUMULATED OTHER COMPREHENSIVE LOSS |
Accumulated other comprehensive loss includes unrealized gains and losses on derivatives that qualify as hedges of cash flows,flow hedges, cumulative foreign currency translation and other adjustments. The activity in accumulated other comprehensive loss during the third quarter and nine months ended September 27, 202026, 2021 and September 29, 201927, 2020 was as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
Third Quarter Ended September 27, 2020 |
(thousands) | Cash Flow Hedges | | Other | | Foreign Currency Items | | Total |
Balance at June 28, 2020 | $ | (6,916) | | | $ | (1,270) | | | $ | (106) | | | $ | (8,292) | |
Other comprehensive income (net of tax of $340, $0 and $0) | 989 | | | 0 | | | 60 | | | 1,049 | |
Balance at September 27, 2020 | $ | (5,927) | | | $ | (1,270) | | | $ | (46) | | | $ | (7,243) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Third Quarter Ended September 26, 2021 |
(thousands) | | Cash Flow Hedges | | Other | | Foreign Currency Translation | | Total |
Balance at June 27, 2021 | | $ | (2,896) | | | $ | (1,263) | | | $ | 30 | | | $ | (4,129) | |
Other comprehensive income (loss) before reclassifications, net of tax | | (19) | | | — | | | 74 | | | 55 | |
Amounts reclassified from accumulated other comprehensive loss, net of tax | | 1,050 | | | — | | | — | | | 1,050 | |
Other comprehensive income | | 1,031 | | | — | | | 74 | | | 1,105 | |
Balance at September 26, 2021 | | $ | (1,865) | | | $ | (1,263) | | | $ | 104 | | | $ | (3,024) | |
| | | | | | | | | | | | | | | | | | | | | | | |
Nine Months Ended September 27, 2020 |
(thousands) | Cash Flow Hedges | | Other | | Foreign Currency Items | | Total |
Balance at December 31, 2019 | $ | (4,374) | | | $ | (1,270) | | | $ | (54) | | | $ | (5,698) | |
Other comprehensive income (loss) (net of tax benefit of $542, $0 and $0) | (1,553) | | | 0 | | | 8 | | | (1,545) | |
Balance at September 27, 2020 | $ | (5,927) | | | $ | (1,270) | | | $ | (46) | | | $ | (7,243) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Nine Months Ended September 26, 2021 |
(thousands) | | Cash Flow Hedges | | Other | | Foreign Currency Translation | | Total |
Balance at December 31, 2020 | | $ | (4,889) | | | $ | (1,263) | | | $ | 100 | | | $ | (6,052) | |
Other comprehensive income (loss) before reclassifications, net of tax | | (70) | | | — | | | 4 | | | (66) | |
Amounts reclassified from accumulated other comprehensive loss, net of tax | | 3,094 | | | — | | | — | | | 3,094 | |
Other comprehensive income | | 3,024 | | | — | | | 4 | | | 3,028 | |
Balance at September 26, 2021 | | $ | (1,865) | | | $ | (1,263) | | | $ | 104 | | | $ | (3,024) | |
| | | | | | | | | | | | | | | | | | | | | | | |
Third Quarter Ended September 29, 2019 |
(thousands) | Cash Flow Hedges | | Other | | Foreign Currency Items | | Total |
Balance at June 30, 2019 | $ | (4,958) | | | $ | (675) | | | $ | (99) | | | $ | (5,732) | |
Other comprehensive income (loss) (net of tax benefit of $83, $0 and $0) | (240) | | | 0 | | | 19 | | | (221) | |
Balance at September 29, 2019 | $ | (5,198) | | | $ | (675) | | | $ | (80) | | | $ | (5,953) | |
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Third Quarter Ended September 27, 2020 |
(thousands) | | Cash Flow Hedges | | Other | | Foreign Currency Translation | | Total |
Balance at June 28, 2020 | | $ | (6,916) | | | $ | (1,270) | | | $ | (106) | | | $ | (8,292) | |
Other comprehensive income (loss) before reclassifications, net of tax | | (38) | | | — | | | 60 | | | 22 | |
Amounts reclassified from accumulated other comprehensive loss, net of tax | | 1,027 | | | — | | | — | | | 1,027 | |
Other comprehensive income | | 989 | | | — | | | 60 | | | 1,049 | |
Balance at September 27, 2020 | | $ | (5,927) | | | $ | (1,270) | | | $ | (46) | | | $ | (7,243) | |
| | | | | | | | | | | | | | | | | | | | | | | |
Nine Months Ended September 29, 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 benefit of $1,098, $0 and $0) | (3,225) | | | 0 | | | (48) | | | (3,273) | |
Balance at September 29, 2019 | $ | (5,198) | | | $ | (675) | | | $ | (80) | | | $ | (5,953) | |
Reclassification adjustments out of accumulated other comprehensive loss were immaterial for all periods presented.
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Nine Months Ended September 27, 2020 |
(thousands) | | Cash Flow Hedges | | Other | | Foreign Currency Translation | | Total |
Balance at December 31, 2019 | | $ | (4,374) | | | $ | (1,270) | | | $ | (54) | | | $ | (5,698) | |
Other comprehensive income (loss) before reclassifications, net of tax | | (3,940) | | | — | | | 8 | | | (3,932) | |
Amounts reclassified from accumulated other comprehensive loss, net of tax | | 2,387 | | | — | | | — | | | 2,387 | |
Other comprehensive income (loss) | | (1,553) | | | — | | | 8 | | | (1,545) | |
Balance at September 27, 2020 | | $ | (5,927) | | | $ | (1,270) | | | $ | (46) | | | $ | (7,243) | |
Lease expense, supplemental cash flow information, and other information related to leases were as follows: | | | Third Quarter Ended | | Third Quarter Ended |
(thousands) | (thousands) | September 27, 2020 | | September 29, 2019 | (thousands) | | September 26, 2021 | | September 27, 2020 |
Operating lease cost | Operating lease cost | $ | 8,525 | | | $ | 7,848 | | Operating lease cost | | $ | 10,760 | | | $ | 8,525 | |
| Cash paid for amounts included in the measurement of lease liabilities: | Cash paid for amounts included in the measurement of lease liabilities: | | Cash paid for amounts included in the measurement of lease liabilities: | |
Operating cash flows for operating leases | Operating cash flows for operating leases | $ | 8,317 | | | $ | 6,946 | | Operating cash flows for operating leases | | $ | 10,440 | | | $ | 8,317 | |
| Right-of-use assets obtained in exchange for lease obligations: | Right-of-use assets obtained in exchange for lease obligations: | | Right-of-use assets obtained in exchange for lease obligations: | |
Operating leases | Operating leases | $ | 17,091 | | | $ | 5,522 | | Operating leases | | $ | 12,573 | | | $ | 17,091 | |
| | | | | | | | | | | |
| Nine Months Ended |
(thousands) | September 27, 2020 | | September 29, 2019 |
Operating lease cost | $ | 25,093 | | | $ | 23,536 | |
| | | |
Cash paid for amounts included in the measurement of lease liabilities: | | | |
Operating cash flows for operating leases | $ | 24,680 | | | $ | 20,545 | |
| | | |
Right-of-use assets obtained in exchange for lease obligations: | | | |
Operating leases | $ | 34,993 | | | $ | 14,767 | |
| | | | | | | | | | | | | | |
| | Nine Months Ended |
(thousands) | | September 26, 2021 | | September 27, 2020 |
Operating lease cost | | $ | 30,697 | | | $ | 25,093 | |
| | | | |
Cash paid for amounts included in the measurement of lease liabilities: | | | | |
Operating cash flows for operating leases | | $ | 29,945 | | | $ | 24,680 | |
| | | | |
Right-of-use assets obtained in exchange for lease obligations: | | | | |
Operating leases | | $ | 52,564 | | | $ | 34,993 | |
Balance sheet information related to leases was as follows:
| (thousands, except lease term and discount rate) | (thousands, except lease term and discount rate) | September 27, 2020 | | December 31, 2019 | (thousands, except lease term and discount rate) | | September 26, 2021 | | December 31, 2020 |
Assets | Assets | | | | Assets | | | | |
Operating lease right-of-use assets | Operating lease right-of-use assets | $ | 105,410 | | | $ | 93,546 | | Operating lease right-of-use assets | | $ | 142,719 | | | $ | 117,816 | |
Liabilities | Liabilities | | | | Liabilities | | | | |
Operating lease liabilities, current portion | Operating lease liabilities, current portion | $ | 29,565 | | | $ | 27,694 | | Operating lease liabilities, current portion | | $ | 36,955 | | | $ | 30,901 | |
Long-term operating lease liabilities | Long-term operating lease liabilities | 76,873 | | | 66,467 | | Long-term operating lease liabilities | | 107,753 | | | 88,175 | |
Total lease liabilities | Total lease liabilities | $ | 106,438 | | | $ | 94,161 | | Total lease liabilities | | $ | 144,708 | | | $ | 119,076 | |
| | | | | | | | | | | |
| | | |
Weighted average remaining lease term, operating leases (in years) | 4.2 | | 4.2 |
Weighted average discount rate, operating leases | 3.9 | % | | 3.7 | % |
| | | | | | | | | | | | | | |
Weighted average remaining lease term, operating leases (in years) | | 5.1 | | 5.3 |
Weighted average discount rate, operating leases | | 3.9 | % | | 4.1 | % |
Maturities of lease liabilities were as follows at September 27, 2020:26, 2021:
| (thousands) | (thousands) | | (thousands) | |
2020 (excluding the nine months ended September 27, 2020) | $ | 8,561 | | |
2021 | 31,924 | | |
2021 (excluding the nine months ended September 26, 2021) | | 2021 (excluding the nine months ended September 26, 2021) | $ | 10,617 | |
2022 | 2022 | 26,328 | | 2022 | 41,015 | |
2023 | 2023 | 20,593 | | 2023 | 35,238 | |
2024 | 2024 | 14,552 | | 2024 | 27,629 | |
2025 | | 2025 | 18,787 | |
Thereafter | Thereafter | 14,283 | | Thereafter | 27,681 | |
Total lease payments | Total lease payments | 116,241 | | Total lease payments | 160,967 | |
Less imputed interest | Less imputed interest | (9,803) | | Less imputed interest | (16,259) | |
Total | Total | $ | 106,438 | | Total | $ | 144,708 | |
LeasesAs of September 26, 2021, outstanding leases have remaining lease terms of oneranging from 1 year to ten18 years. The Company has additional operating leases that have not yet commenced as of September 26, 2021 and, therefore, were not included as operating lease right-of-use assets and corresponding operating lease liabilities on our balance sheet at September 26, 2021. These operating leases will commence between the fourth quarter of fiscal 2021 and the second quarter of fiscal 2022 with lease terms of 5 years to 10 years. The estimated fair value of these operating lease right-of-use assets and corresponding operating lease liabilities to be recorded on our balance sheet upon lease commencement is approximately $5.8 million.
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13. | FAIR VALUE MEASUREMENTS |
The following table presents fair values of certain assets and liabilities at September 26, 2021 and December 31, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 26, 2021 | | December 31, 2020 |
(in millions) | | Level 1 | | Level 2 | | Level 3 | | Level 1 | | Level 2 | | Level 3 |
Cash equivalents(1) | | $ | 41.0 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
7.50% senior notes due 2027(2) | | — | | | 326.3 | | | — | | | — | | | 329.0 | | | — | |
4.75% senior notes due 2029(2) | | — | | | 359.7 | | | — | | | — | | | — | | | — | |
Convertible note(2) | | — | | | 193.0 | | | — | | | — | | | 180.0 | | | — | |
Term loan due 2026(3) | | — | | | 148.1 | | | — | | | — | | | 92.5 | | | — | |
Revolver due 2026(3) | | — | | | 135.5 | | | — | | | — | | | 275.0 | | | — | |
Interest rate swaps(4) | | — | | | 2.5 | | | — | | | — | | | 6.6 | | | — | |
Contingent consideration(5) | | — | | | — | | | 9.8 | | | — | | | — | | | 6.9 | |
(1) The carrying amounts of cash equivalents, representing government and other money market funds traded in an active market with relatively short maturities, are reported on the condensed consolidated statementsbalance sheet as of financial positionSeptember 26, 2021 as a component of "Cash and cash equivalents". The carrying amount ofCompany held no cash equivalents valued using Level 1 inputs and approximating fair value becauseas of their relatively short maturities, was approximately $31.0 million and $132.6 million at September 27, 2020 and December 31, 2019, respectively.2020.
(2) The estimatedamounts of these notes listed above are the current fair value of our senior notes, calculatedvalues for disclosure purposes only, valued using Level 2 inputs, was approximately $326.1 million and $320.3 million atthey are recorded in the Company's condensed consolidated balance sheets as of September 27, 202026, 2021 and December 31, 2019, respectively.2020 using the interest rate method as described in Note 9.
(3) The carrying amounts of our term loan and our revolver, valued using Level 2 inputs, approximatedapproximate fair value as of September 27, 202026, 2021 and December 31, 20192020 based upon their terms and conditions available to the Company at those dates in comparison to the terms and conditions of its outstanding debt.available at those dates.
(4) The interest rate swaps are classified as Level 2 in the fair value hierarchy and discussed further in Note 10.
(5) The estimated fair value of our convertible notes, calculatedthe Company's contingent consideration is valued using Level 23 inputs was approximately $166.9 million and $162.5 million as of September 27, 2020 and December 31, 2019, respectively.is discussed further in Note 6.
The effective tax rate in the third quarter of 2021 and 2020 was 26.3% and 2019 was 24.3% and 26.0%, respectively, and the effective tax rate for the comparable nine month periods was 25.4%24.1% and 24.6%25.4%, respectively. The effective tax rate for the third quarter of 2020 reflects the impact of certain federal and state income tax benefits and the first nine 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 nine months of 20192021 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$5.7 million.
Cash paid for income taxes, net of refunds, was $19.7 million and $43.9 million, respectively, in the third quarter and first nine months of 2021 and $1.8 million and $1.6 million, for the third quarter and nine months of 2020, respectively, and $7.4 million and $30.0 million in the third quarter and nine months of 2019, respectively.
2020.
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. | | | | | | | | | | | | | | | | | | | | |
Third Quarter Ended September 26, 2021 | | | | | | |
(thousands) | | Manufacturing | | Distribution | | Total |
Net outside sales | | $ | 772,235 | | | $ | 287,942 | | | $ | 1,060,177 | |
Intersegment sales | | 20,064 | | | 1,880 | | | 21,944 | |
Total sales | | 792,299 | | | 289,822 | | | 1,082,121 | |
Operating income | | 91,370 | | | 31,187 | | | 122,557 | |
| | | | | | | | | | | | | | | | | | | | |
Third Quarter Ended September 27, 2020 | | | | | | |
(thousands) | | Manufacturing | | Distribution | | Total |
Net outside sales | | $ | 494,274 | | | $ | 206,433 | | | $ | 700,707 | |
Intersegment sales | | 12,004 | | | 1,640 | | | 13,644 | |
Total sales | | 506,278 | | | 208,073 | | | 714,351 | |
Operating income | | 63,312 | | | 16,444 | | | 79,756 | |
| | | | | | | | | | | | | | | | | | | | |
Third Quarter Ended September 29, 2019 | | | | | | |
(thousands) | | Manufacturing | | Distribution | | Total |
Net outside sales | | $ | 399,712 | | | $ | 166,474 | | | $ | 566,186 | |
Intersegment sales | | 8,102 | | | 1,078 | | | 9,180 | |
Total sales | | 407,814 | | | 167,552 | | | 575,366 | |
Operating income | | 42,353 | | | 9,041 | | | 51,394 | |
| | | | | | | | | | | | | | | | | | | | |
Nine Months Ended September 26, 2021 | | | | | | |
(thousands) | | Manufacturing | | Distribution | | Total |
Net outside sales | | $ | 2,102,032 | | | $ | 828,581 | | | $ | 2,930,613 | |
Intersegment sales | | 49,914 | | | 4,800 | | | 54,714 | |
Total sales | | 2,151,946 | | | 833,381 | | | 2,985,327 | |
Operating income | | 269,227 | | | 83,563 | | | 352,790 | |
| | | | | | | | | | | | | | | | | | | | |
Nine Months Ended September 27, 2020 | | | | | | |
(thousands) | | Manufacturing | | Distribution | | Total |
Net outside sales | | $ | 1,206,114 | | | $ | 507,870 | | | $ | 1,713,984 | |
Intersegment sales | | 24,691 | | | 4,025 | | | 28,716 | |
Total sales | | 1,230,805 | | | 511,895 | | | 1,742,700 | |
Operating income | | 131,426 | | | 33,350 | | | 164,776 | |
| | | | | | | | | | | | | | | | | | | | |
Nine Months Ended September 29, 2019 | | | | | | |
(thousands) | | Manufacturing | | Distribution | | Total |
Net outside sales | | $ | 1,259,671 | | | $ | 527,951 | | | $ | 1,787,622 | |
Intersegment sales | | 24,153 | | | 3,361 | | | 27,514 | |
Total sales | | 1,283,824 | | | 531,312 | | | 1,815,136 | |
Operating income | | 135,577 | | | 28,132 | | | 163,709 | |
The following table presents a reconciliation of segment operating income to consolidated operating income:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Third Quarter Ended | | Nine Months Ended |
(thousands) | | September 27, 2020 | | September 29, 2019 | | September 27, 2020 | | September 29, 2019 |
Operating income for reportable segments | | $ | 79,756 | | | $ | 51,394 | | | $ | 164,776 | | | $ | 163,709 | |
Unallocated corporate expenses | | (9,706) | | | (4,793) | | | (23,962) | | | (18,796) | |
Amortization | | (10,221) | | | (9,191) | | | (29,600) | | | (26,448) | |
Consolidated operating income | | $ | 59,829 | | | $ | 37,410 | | | $ | 111,214 | | | $ | 118,465 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Third Quarter Ended | | Nine Months Ended |
(thousands) | | September 26, 2021 | | September 27, 2020 | | September 26, 2021 | | September 27, 2020 |
Operating income for reportable segments | | $ | 122,557 | | | $ | 79,756 | | | $ | 352,790 | | | $ | 164,776 | |
Unallocated corporate expenses | | (14,526) | | | (9,706) | | | (55,075) | | | (23,962) | |
Amortization | | (14,758) | | | (10,221) | | | (40,695) | | | (29,600) | |
Consolidated operating income | | $ | 93,273 | | | $ | 59,829 | | | $ | 257,020 | | | $ | 111,214 | |
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) | | September 26, 2021 | | December 31, 2020 |
Manufacturing assets | | $ | 1,838,583 | | | $ | 1,337,920 | |
Distribution assets | | 453,839 | | | 343,170 | |
Assets for reportable segments | | 2,292,422 | | | 1,681,090 | |
Corporate assets unallocated to segments | | 21,154 | | | 27,578 | |
Cash and cash equivalents | | 44,882 | | | 44,767 | |
Consolidated total assets | | $ | 2,358,458 | | | $ | 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. In August 2021, the Company's Board authorized an increase in the amount of the Company's common stock that may be acquired over the next 24 months under the current stock repurchase program to $50 million, including the $14.4 million remaining under the previous authorization. Approximately $38.8$39.6 million remains available in the amount of the Company's common stock that may be acquired under the current stock repurchase program as of September 27, 2020.26, 2021. The Company repurchased 128,929 shares of its common stock at an average price of $80.62 for an aggregate cost of $10.4 million in the third quarter ended September 26, 2021 and repurchased 388,929 shares of its common stock at an average price of $82.14 for an aggregate cost of $31.9 million in the nine months ended September 26, 2021. Prior to 2021, the Company retired shares as repurchased. Beginning in 2021, the Company elected not to retire shares as repurchased and the shares repurchased in the first six months of 2021 were instead held as "Treasury Stock." However, the Company retired these shares during the third quarter ended September 26, 2021 and has elected to retire shares immediately upon repurchase going forward. In the third quarter ofended September 27, 2020, the Company repurchased 88,950 shares of its common stock at an average price of $53.24 per share for an aggregate cost of approximately $4.7 million. In the first nine months ofended September 27, 2020, the Company repurchased 545,105 shares of its common stock at an average price of $37.22 per share for an aggregate cost of approximately $20.3 million. During
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17. | COMMITMENTS AND CONTINGENCIES |
The Company is subject to proceedings, lawsuits, audits, and other claims arising in the third quarternormal course of business. All such matters are subject to uncertainties and first nine monthsoutcomes that are not predictable with assurance. Accruals for these items, when applicable, have been provided to the extent that losses are deemed probable and are reasonably estimable. These accruals are adjusted from time to time as developments warrant.
Although the ultimate outcome of 2019,these matters cannot be ascertained, on the Company repurchased 98,201 shares at an average pricebasis of $36.50 per sharepresent information, amounts already provided, availability of insurance coverage and legal advice received, it is the opinion of management that the ultimate resolution of these proceedings, lawsuits, and other claims will not have a material adverse effect on the Company’s consolidated financial position, results of operations, or cash flows.
Certain of our customers in the RV end market recently have initiated recalls involving certain products which are sold by our Distribution segment. We are currently evaluating the extent to which this matter will impact our consolidated financial statements. At this time, we are unable to reasonably estimate any such impact.
In November 2021, we completed the acquisition of Wet Sounds, Inc., a manufacturer of premium audio products and accessories for an aggregate cost of approximately $3.6 million.the marine OEM market and aftermarket as well as other adjacent OEM markets and aftermarkets. Products include speakers, subwoofers, amplifiers, soundbars, and media units. Wet Sounds, Inc. is headquartered in Rosenberg, Texas.
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 PrivatePrivate Securities Litigation Reform Act of 1995. See “Information Concerning Forward-Looking Statements” on page 3134 of this Report. The Company undertakes no obligation to update these forward-looking statements.
OVERVIEW OF MARKETS AND RELATED INDUSTRY PERFORMANCE
Our four primary end markets each experienced sharp recoveries in the third quarter of 2020 following the production disruptions related to the COVID-19 pandemic in the second quarter of 2020. In aggregate, we achieved our highest quarterly sales in the Company's history in the third quarter of 2020, with revenue from the RV, marine and industrial end markets increasing in the third quarter of 2020 compared to the prior year. RV and marine original equipment manufacturers ("OEMs") experienced a strong increase in dealer demand in the third quarter of 2020, when compared to the prior year quarter, driven by increases in RV and marine retail sales against a background of low RV and marine dealer inventories. Our industrial end market benefited in the third quarter of 2020 from increases in housing starts and an increase in home improvement activity. Our MH end market recovered in the third quarter of 2020 from COVID-19 production disruptions in the second quarter of 2020, and OEM demand in this end market is strong despite short-term OEM labor and supply constraints experienced in the third quarter of 2020. In addition, our team members are currently working full production schedules, having adopted CDC, state, and local best practice safety protocols.
Third Quarter and Nine Months 20202021 Financial Overview
Recreational Vehicle ("RV") Industry
The RV industry is our largest market and comprised 60% and 55% of the Company’s sales in the third quarter ended September 26, 2021 and September 27, 2020, and September 29, 2019, respectively, and 55%59% and 56%55% for the comparative 20202021 and 20192020 nine month periods. Sales to the RV industry increased 36%50% in the third quarter of 20202021 and decreased 5%increased 83% in the first nine months of 2020,2021, compared to the prior year periods.
According to the Recreation Vehicle Industry Association ("RVIA"), wholesale shipments totaled 124,033 units in the third quarter of 2020, increasing 33% compared to 93,357approximately 152,400 units in the third quarter of 2019. Towable and motorized wholesale unit shipments increased 37% and 5%, respectively, for2021, an increase of 23% compared to approximately 124,100 units in the third quarter of 2020 compared to the prior year quarter. Wholesale2020. RVIA indicated that wholesale unit shipments for the first nine months of 2020 decreased 3%, totaling 300,1002021 totaled approximately 452,600 units, an increase of 51% compared to 309,938approximately 300,200 units in the
prior year period. Towable and motorizedyear. The increase in wholesale unit shipments decreased 1% and 20%, respectively, for the first nine months of 2020 compared to the prior year period. Retail unit sales are estimated to have increased between 25%-30% and between 4%-6% duringin the third quarter and first nine months of 2020, respectively. The2021 is attributed to a continued increase in RV dealer demand for RV units. In addition, the increase in the first nine months of 2021 reflects the comparison to the sharp decrease in wholesale unit shipments in the second quarter of 2020, which 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 our estimates, RV dealer inventories are trending at historical lows relative to what we understand to be historical customary 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 market. We estimate RV retail unit sales decreased 15-20% in the third quarter of 2021 in comparison to the third quarter of 2020 as a result of supply-chain constraints and low dealer inventory levels as well as particularly strong retail RV shipmentssales in the third quarter of 2020 was attributed to an increase in consumer demand inas leisure lifestyle activities recovered following the COVID-19-related slowdown. We estimate RV industry against a background of low dealer inventory. The decrease in wholesale shipments in the first nine months of 2020 is largely attributed to COVID-19 market disruptions. The increase in retail unit sales increased 15% for the first nine months of 2020 is largely due2021 compared to the increase in consumer demand in the RV industry, partially offset by COVID-19 market disruptions. Based on our estimates, RV dealer inventories at the end of the third quarter of 2020 were at their lowest level since 2014.prior year period.
Marine Industry
Sales to the marine industry, which represented approximately 14%16% and 13%14% of the Company's consolidated net sales in the third quarter of 2021 and 2020, respectively, increased 85% compared to the prior year quarter. For the first nine months of 2021 and 2020, sales to the marine industry represented 16% and 14% of consolidated net sales, respectively, increasing 107% in 2021 compared to the prior year period.
Our marine revenue is generally correlated to marine wholesale powerboat unit shipments which, according to National Marine Manufacturers Association ("NMMA"), increased an estimated 15% for the third quarter 2021 and increased an estimated 16% for the first nine months of 2021 compared to the prior year periods. Marine retail powerboat unit sales decreased 31% in the third quarter of 2021 and decreased 6% for the first nine months of 2021 compared to the prior year periods as a result of supply-chain constraints and low dealer inventory levels as well as particularly strong retail sales in the third quarter of 2020 and 2019, respectively, increased 25% inas leisure lifestyle activities recovered following the third quarter of 2020 compared to the prior year quarter. Sales to theCOVID-19-related slowdown. We estimate that, despite these decreases, marine industry, representing 14% ofretail sales in the first nine months of 2020 and 2019, decreased 10% in the 2020 period compared to the prior year period.
For the third quarter of 2020, overallexceeded marine wholesale unit shipments in the powerboat sector, which is the Company's primary marine market, decreased an estimated 4%, with aluminum fishing sales decreasing an estimated 7%; pontoon sales decreasing an estimated 2%; fiberglass sales decreasing an estimated 4% and ski and wake sales decreasing an estimated 2%. The decrease in wholesale marine shipments inboth the third quarter of 2020 was attributed to marine OEM capacity constraints that were the result of an rapid transition from production shutdowns related to the COVID-19 pandemic in the late first
quarter and early second quarter of 2020 to production acceleration in response to a sharp increase in consumer demand in the third quarter of 2020. For the first nine months of 2020, overall2021, resulting in marine wholesale unit shipmentsdealer inventory levels that we believe are at their lowest in the powerboat sector decreased an estimated 19%, with aluminum fishing sales decreasing an estimated 11%; pontoon sales decreasing an estimated 25%; fiberglass sales decreasing an estimated 22% and ski and wake sales decreasing an estimated 20%. The decrease in wholesale unit shipments during the first nine months of 2020 is primarily attributed to temporary OEM production shutdowns during the late first quarter and early second quarter of 2020 in addition to OEM capacity constraints in the third quarter of 2020, discussed above.
at least a decade.
Manufactured Housing ("MH") Industry
Sales to the MH industry, which represented 15%13% and 19%15% of the Company’s sales in the third quarter of 2021 and 2020, and 2019, respectively, decreased 1%increased 25% in the third quarter of 20202021 compared to the third quarter of 2019.2020. MH sales represented 14% and 18% of the Company's sales for the first nine months of 2021 and 2020, respectively, and 2019 and decreased 5%increased 27% in the first nine months of 20202021 compared to the priorprior year period. Based on industry data from the Manufactured Housing Institute, MH wholesale unit shipments decreased by approximately 2%increased 9% in the third quarter of 2020 compared to the prior year quarter2021 and decreased 2% increased 14% for the first nine months of 20202021 compared to the prior year period. MH wholesale unit shipments were impacted by OEM labor and supply constraints in the third quarter of 2020 and temporary OEM plant shutdowns in the first nine months of 2020 related to the COVID-19 pandemic.
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 11% and 13% of our sales in the third quarter of 2021 and 2020, and 2019, respectively, and increased 9%52% in the third quarter of 20202021 compared to the prior year quarter. Sales to the industrial market represented 13%11% and 12%13% of our sales for the first nine months of 20202021 and 2019,2020, respectively, and increased 7%45% in the first nine 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 increased 11%9% in the third quarter of 20202021 compared to the prior year quarter, with single family housing starts increasing 17%5% and multifamily residentialhousing starts decreasing 1%. Forincreasing 19% for the same period. The U.S. Census Bureau also indicated that for the first nine months of 2020,2021, combined new housing starts increased 5% compared to the prior year period,20%, with single family housing starts increasing 6%20% and multifamily residentialhousing starts increasing 4%.18% 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 ninesix months.
REVIEW OF CONSOLIDATED OPERATING RESULTS
Third Quarter and Nine Months Ended September 27, 202026, 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.
| | | | Third Quarter Ended | | Nine Months Ended | | | Third Quarter Ended | | |
| | September 27, 2020 | | September 29, 2019 | | September 27, 2020 | | September 29, 2019 | |
($ in thousands) | | ($ in thousands) | | September 26, 2021 | | September 27, 2020 | | Amount Change | % Change |
Net sales | Net sales | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | Net sales | | $ | 1,060,177 | | 100.0 | % | | $ | 700,707 | | 100.0 | % | | $ | 359,470 | | 51 | % |
Cost of goods sold | Cost of goods sold | | 80.9 | | | 81.6 | | | 81.5 | | | 81.9 | | Cost of goods sold | | 852,016 | | 80.4 | % | | 567,210 | | 80.9 | % | | 284,806 | | 50 | % |
Gross profit | Gross profit | | 19.1 | | | 18.4 | | | 18.5 | | | 18.1 | | Gross profit | | 208,161 | | 19.6 | % | | 133,497 | | 19.1 | % | | 74,664 | | 56 | % |
Warehouse and delivery | | 3.6 | | | 4.2 | | | 4.1 | | | 4.2 | | |
Selling, general and administrative | | 5.4 | | | 6.0 | | | 6.2 | | | 5.8 | | |
Warehouse and delivery expenses | | Warehouse and delivery expenses | | 35,885 | | 3.4 | % | | 25,263 | | 3.6 | % | | 10,622 | | 42 | % |
Selling, general and administrative expenses | | Selling, general and administrative expenses | | 64,245 | | 6.1 | % | | 38,184 | | 5.4 | % | | 26,061 | | 68 | % |
Amortization of intangible assets | Amortization of intangible assets | | 1.5 | | | 1.6 | | | 1.7 | | | 1.5 | | Amortization of intangible assets | | 14,758 | | 1.4 | % | | 10,221 | | 1.5 | % | | 4,537 | | 44 | % |
Operating income | Operating income | | 8.5 | | | 6.6 | | | 6.5 | | | 6.6 | | Operating income | | 93,273 | | 8.8 | % | | 59,829 | | 8.5 | % | | 33,444 | | 56 | % |
Interest expense, net | Interest expense, net | | 1.5 | | | 1.5 | | | 1.9 | | | 1.5 | | Interest expense, net | | 15,436 | | 1.5 | % | | 10,507 | | 1.5 | % | | 4,929 | | 47 | % |
Income taxes | Income taxes | | 1.7 | | | 1.3 | | | 1.2 | | | 1.3 | | Income taxes | | 20,440 | | 1.9 | % | | 11,986 | | 1.7 | % | | 8,454 | | 71 | % |
Net income | Net income | | 5.3 | | | 3.8 | | | 3.5 | | | 3.9 | | Net income | | $ | 57,397 | | 5.4 | % | | $ | 37,336 | | 5.3 | % | | $ | 20,061 | | 54 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended | | | |
($ in thousands) | | September 26, 2021 | | September 27, 2020 | | Amount Change | % Change |
Net sales | | $ | 2,930,613 | | 100.0 | % | | $ | 1,713,984 | | 100.0 | % | | $ | 1,216,629 | | 71 | % |
Cost of goods sold | | 2,356,443 | | 80.4 | % | | 1,397,285 | | 81.5 | % | | 959,158 | | 69 | % |
Gross profit | | 574,170 | | 19.6 | % | | 316,699 | | 18.5 | % | | 257,471 | | 81 | % |
Warehouse and delivery expenses | | 100,613 | | 3.4 | % | | 70,204 | | 4.1 | % | | 30,409 | | 43 | % |
Selling, general and administrative expenses | | 175,842 | | 6.0 | % | | 105,681 | | 6.2 | % | | 70,161 | | 66 | % |
Amortization of intangible assets | | 40,695 | | 1.4 | % | | 29,600 | | 1.7 | % | | 11,095 | | 37 | % |
Operating income | | 257,020 | | 8.8 | % | | 111,214 | | 6.5 | % | | 145,806 | | 131 | % |
Interest expense, net | | 41,195 | | 1.4 | % | | 31,820 | | 1.9 | % | | 9,375 | | 29 | % |
Income taxes | | 51,930 | | 1.8 | % | | 20,157 | | 1.2 | % | | 31,773 | | 158 | % |
Net income | | $ | 163,895 | | 5.6 | % | | $ | 59,237 | | 3.5 | % | | $ | 104,658 | | 177 | % |
Net Sales. Net sales in the third quarter of 20202021 increased $134.5$359.5 million, or 24%51%, to $700.7$1,060.2 million from $566.2$700.7 million in the third quarter of 2019.2020. The consolidated net sales increase in the third quarter of 2020 was attributed to sales increases in three of2021 reflects strong demand for our products across all end markets. The Company's RV market sales increased 36%50%, marine market sales increased 85%, MH market sales increased 25%, and industrial market sales increased 9% and MH market sales decreased 1%52% when compared to the prior year quarter.
Net sales in the first nine months of 2020 decreased $73.62021 increased $1,216.6 million, or 4%71%, to $1,714.0$2,930.6 million from $1,787.6$1,714.0 million in the first nine months of 2019.2020. The consolidated net sales decreaseincrease in the first nine months of 2021 reflects sales increases in all of our end markets, while sales in the first nine months of 2020 was attributed to sales decreases in threealso reflect the impact of our end markets.COVID-19-related production shutdowns during the second quarter of 2020. The Company's RV market sales decreased 5%increased 83%, marine market sales decreased 10% andincreased 107%, MH market sales decreased 5% whileincreased 27% and industrial market sales increased 7%45% in the first nine months of 2021 when compared to the prior year period.
During the nine months ended September 27, 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, which primarily affected our end markets in the second quarter of 2020.
Revenue attributable to acquisitions completed in 2020 was $19.6 million and $23.3 million for the third quarter and first nine months of 2020, respectively. Revenue attributable to acquisitions completed in the first nine months of 20192021 was immaterial$84.0 million in the third quarter of 2021 and $146.1 million for both the third quarter and first nine months of 2019.2021. Revenue attributable to acquisitions completed in the first nine months of 2020 was $19.6 million in the third quarter of 2020 and $23.3 million for the first nine months of 2020.
The Company’s RV content per wholesale unit (on a trailing twelve-month basis) for the third quarter of 2020 was relative1y flat at $3,140 versus $3,1322021 increased approximately 19% to $3,735 from $3,139 for the third quarter of 2019. Estimated marine2020. Marine powerboat content per wholesale powerboat unit (on a trailing twelve-month basis) for the third quarter of 20202021 increased 16%approximately 66% to $1,915an estimated $3,166 from $1,909 for the third quarter of 2020 from $1,651 for the third quarter of 2019. Beginning in the third quarter of 2020, we calculate marine content per unit based on estimated wholesale powerboat unit shipments, which we believe better represents the relationship between our sales and marine OEM production, rather than based on estimated retail powerboat unit sales. Estimated2020. MH content per wholesale unit (on a trailing twelve-month basis) for the third quarter of 20202021 increased 4%approximately 10% to $4,503$4,961 from $4,327$4,497 for the third quarter of 2019.
2020.
Cost of Goods Sold. Cost of goods sold increased $105.3$284.8 million, or 23%50%, to $567.2$852.0 million in the third quarterquarter of 20202021 from $461.9$567.2 million in 2019, primarily reflecting the increase in net sales in the quarter.2020. As a percentage of net sales, cost of goods sold decreased 50 basis points during the third quarter of 20202021 to 80.4% from 80.9% from 81.6% in 2019. This percentage decrease is largely attributed to an increase in sales relative to certain fixed components of cost of goods sold, synergies achieved and realized in the first quarter of 2020 from acquisitions completed in 2018 and 2019 and a decrease in commodity cost inputs.
2020.
Cost of goods sold decreased $66.8 million, or 5%, to $1,397.3 million in the first nine months of 2020increased $959.1 million, or 69%, to $2,356.4 million from $1,464.1$1,397.3 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 110 basis points during the first nine months of 20202021 to 80.4% from 81.5% from 81.9% in 2019.
2020.
Cost of goods sold as a percentage of net sales decreased in the third quarter and first nine 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 nine months of 2020different cost profiles from our 20182021 and 20192020 acquisitions, partially offset by an increase in labor, supply-chain constraints, and (iii) decreasesan increase in certain 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 and labor inefficiencies related to business disruption of our end markets as a result of the COVID-19 pandemic.products.
Gross Profit. Gross profit increased $29.2$74.7 million, or 28%56%, to $133.5$208.2 million in the third quarter of 20202021 from $104.3$133.5 million in 2019.2020. As a percentage of net sales, gross profit increased 50 basis points to 19.1%19.6% in the third quarter of 20202021 from 18.4%19.1% in the same period in 2019. 2020.
Gross profit decreased $6.8increased $257.5 million, or 2%81%, to $316.7$574.2 million in the first nine months of 20202021 from $323.5$316.7 million in 2019.2020. As a percentage of net sales, gross profit increased 110 basis points to 18.5%19.6% in the first nine months of 20202021 from 18.1%18.5% in the same period in 2019.
2020.
The changesincrease in gross profit as a percentage of net sales in the third quarter and first nine months of 2020ended September 26, 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 increased $1.4$10.6 million, or 6%42%, to $35.9 million in the third quarter of 2021 from $25.3 million in the third quarter of 2020 from $23.9 million in the third quarter of 2019, primarily reflecting the increase in net sales in the quarter.2020. As a percentage of net sales, warehouse and delivery expenses weredecreased 20 basis points to 3.4% in the third quarter of 2021 compared to 3.6% in the third quarter of 2020 compared to 4.2% in the third quarter of 2019. 2020.
Warehouse and delivery expenses decreased $4.0increased $30.4 million, or 5%43%, to $100.6 million in the first nine months of 2021 from $70.2 million in the first nine months of 2020 from $74.2 million in the first nine months of 2019, primarily reflecting the decrease in net sales in the period.2020. As a percentage of net sales, warehouse and delivery expenses were 4.1%decreased 70 basis points to 3.4% in the first nine months of 20202021 compared to 4.2%4.1% in the same period in 2019.
prior year period.
The decreaseincreases in warehouse and delivery expenses are attributable to the significant increases in sales. However, the decreases as a percentage of net sales forare primarily attributable to leveraging certain fixed warehousing costs and the lower proportion of MH sales in the third quarter and first nine months of 2021 as compared to 2020, primarily reflectswhich have higher warehouse and delivery costs as a percentage of net sales. In addition, the fixed nature of certain of these expenses and operating efficiencies as net sales increased in the third quarterfirst nine months of 2020 compared to the prior year period.
reflect operating inefficiencies associated with COVID-19.
Selling, General and Administrative ("SG&A") Expenses. SG&A expenses increased $4.4$26.0 million, or 13%68%, to $38.2$64.2 million in the third quarter of 20202021 from $33.8$38.2 million in the prior year quarter. As a percentage of net sales, SG&A expenses were 6.1% in the third quarter of 2021 compared to 5.4% in the third quarter of 2020 compared to 6.0% in the third quarter of 2019.
2020.
SG&A expenses increased $1.3$70.1 million, or 1%66%, to $175.8 million in the first nine months of 2021 from $105.7 million in the first nine months of 2020 from $104.4 million in the prior year period.2020. As a percentage of net sales, SG&A expenses were 6.0% in the first nine months of 2021 compared to 6.2% in the first nine months of 2020 compared to 5.8% in the prior year period.
2020.
The increaseincreases in SG&A expenses in the third quarter and first nine months of 2021 compared to 2020 are primarily due to (i) the increase in net sales; (ii) increases in the breadth and depth of corporate resources, specifically our investments in human capital and other initiatives 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 second quarter of 2020 compared to 2019 is primarily due an increase in general and administrative expenses as the Company expanded resources to support end market demand. The decrease in SG&A expenses as a percentage of net sales inthat continued into the third quarter of 20202020. As a percentage of sales, SG&A expenses increased 70 basis points for the third quarter of 2021 compared to the third quarter of 2020. This increase is primarily attributeda result of the aforementioned investment in human capital in order to further support the increase in netsize and growth of the Company. As a percentage of sales, SG&A expenses decreased 20 basis points for the first nine months of 2021 when compared to the prior year period.
The increase inperiod, primarily reflecting the fixed nature of certain SG&A expenses in the first nine months of 2020 as a percentage of revenue is attributed to the decline in net sales from the impact ofcosts and operating inefficiencies associated with COVID-19 discussed above.
during 2020.
Amortization of Intangible Assets. Amortization of intangible assets increased $1.0$4.6 million, or 11%44%, to $10.2$14.8 million in the third quarter of 20202021 from $9.2$10.2 million in the prior year quarter andquarter. Amortization of intangible assets increased $3.2$11.1 million, or 12%37%, to $40.7 million in the first nine months of 2021 from $29.6 million in the first nine months of 2020 from $26.4 million in the prior year period.2020. The increaseincreases in the third quarter and first nine months of 20202021 compared to the prior year periods primarily reflectsreflect the impact of businesses acquired in 20192020 and 2020.
2021.
Operating Income. Operating income increased $22.4$33.5 million, or 60%56%, to $59.8$93.3 million in the third quarter of 20202021 from $37.4$59.8 million in 2019.2020. As a percentage of net sales, operating income was 8.5%increased 30 basis points to 8.8% in the third quarter of 20202021 versus 6.6%8.5% in the same period in 2019.2020. Operating income decreased $7.3increased $145.8 million, or 6%131%, to $111.2$257.0 million in the first nine months of
2020 2021 from $118.5$111.2 million in 2019.2020. As a percentage of net sales, operating income was 6.5%
increased 230 basis points to 8.8% in the first nine months of 20202021 versus 6.6%6.5% in the same period in 2019. Operating income related to the 2020 acquisitions for the third quarter and nine months ended September 27, 2020 was approximately $2.1 million and $2.2 million, respectively.2020. The change in operating income and operating income percentagemargin is primarily attributable to the items discussed above.
Interest Expense, Net. Interest expense increased $1.9$4.9 million, or 22%47%, to $10.5$15.4 million in the third quarter of 20202021 from $8.6$10.5 million in the prior year. ForInterest expense increased $9.4 million, or 29%, to $41.2 million in the first nine months of 2020, interest expense increased $5.6 million, or 21%, to2021 from $31.8 million from $26.2 million in the prior year period.
year.
The increase in interest expense in the third quarter and first nine months of 2020 reflects (i) increased borrowings related to 20192020 and 20202021 acquisitions and an increase(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 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.
Notes to Condensed Consolidated Financial Statements).
Income Taxes. Income tax expense increased $4.5 million, or 60%, to $12.0$8.4 million in the third quarter of 20202021 to $20.4 million from $7.5$12.0 million in the prior year period. ForIncome tax expense increased $31.7 million in the first nine months of 2020, income tax expense decreased $2.52021, to $51.9 million or 11%, tofrom $20.2 million for the first nine months of 2020 from $22.7 million in the prior year period.
The increase in income tax expense is due primarily to an increase in pretax income. The effective tax rate in the third quarter of 2021 and 2020 was 26.3% and 2019 was 24.3% and 26.0%, respectively, and the effective tax rate for the comparable nine month periods was 25.4% and 24.6%, respectively. The effective tax rate in the third quarter of 2020 reflects the impact of certain federal and state income tax benefits, and the effective tax raterates in the first nine months of 2021 and 2020 reflects $2.2 million of permanent tax differences due to certain Coronavirus Aid, Relief,were 24.1% and Economic Security Act payroll tax credits. In addition, the effective tax25.4%, respectively. The 2021 rate for the first nine 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.
$5.7 million, while the 2020 rate reflects the impact of $2.2 million in permanent tax differences due to certain Coronavirus Aid Relief and Economic Security Act payroll tax credits.
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.
Third Quarter and Nine Months Ended September 27, 202026, 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.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Third Quarter Ended | | | | |
(thousands) | | September 26, 2021 | | September 27, 2020 | | Amount Change | | % Change |
Sales | | | | | | | | |
Manufacturing | | $ | 792,299 | | | $ | 506,278 | | | $ | 286,021 | | | 56% |
Distribution | | 289,822 | | | 208,073 | | | 81,749 | | | 39% |
Gross Profit | | | | | | | | |
Manufacturing | | 149,139 | | | 97,543 | | | 51,596 | | | 53% |
Distribution | | 57,349 | | | 36,293 | | | 21,056 | | | 58% |
Operating Income | | | | | | | | |
Manufacturing | | 91,370 | | | 63,312 | | | 28,058 | | | 44% |
Distribution | | 31,187 | | | 16,444 | | | 14,743 | | | 90% |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Third Quarter Ended | | Nine Months Ended |
(thousands) | | September 27, 2020 | | September 29, 2019 | | September 27, 2020 | | September 29, 2019 |
Sales | | | | | | | | |
Manufacturing | | $ | 506,278 | | | $ | 407,814 | | | $ | 1,230,805 | | | $ | 1,283,824 | |
Distribution | | 208,073 | | | 167,552 | | | 511,895 | | | 531,312 | |
Gross Profit | | | | | | | | |
Manufacturing | | 97,543 | | | 73,700 | | | 225,447 | | | 231,227 | |
Distribution | | 36,293 | | | 27,965 | | | 88,627 | | | 87,738 | |
Operating Income | | | | | | | | |
Manufacturing | | 63,312 | | | 42,353 | | | 131,426 | | | 135,577 | |
Distribution | | 16,444 | | | 9,041 | | | 33,350 | | | 28,132 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended | | | | |
(thousands) | | September 26, 2021 | | September 27, 2020 | | Amount Change | | % Change |
Sales | | | | | | | | |
Manufacturing | | $ | 2,151,946 | | | $ | 1,230,805 | | | $ | 921,141 | | | 75% |
Distribution | | 833,381 | | | 511,895 | | | 321,486 | | | 63% |
Gross Profit | | | | | | | | |
Manufacturing | | 420,625 | | | 225,447 | | | 195,178 | | | 87% |
Distribution | | 158,047 | | | 88,627 | | | 69,420 | | | 78% |
Operating Income | | | | | | | | |
Manufacturing | | 269,227 | | | 131,426 | | | 137,801 | | | 105% |
Distribution | | 83,563 | | | 33,350 | | | 50,213 | | | 151% |
Manufacturing
Sales. Sales increased $98.5$286.0 million, or 24%56%, to $506.3$792.3 million in the third quarter of 20202021 from $407.8$506.3 million in the prior year quarter. For the first nine months of 2020,2021, sales decreased $53.0increased $921.1 million, or 4%75%, to $1,230.8$2,151.9 million from $1,283.8$1,230.8 million in the prior year period. This segment accounted for approximately 73% and 71% of the Company’s consolidated net sales for the third quarter of 2021 and 2020, respectively, and 2019,72% and 70% of the Company's consolidated net sales71% for the first nine months of 2021 and 2020, and 2019.respectively. The sales increase in the third quarter of 2021 compared to 2020 largely reflectedwas attributed to sales increases in all four of the Company's end markets, where sales to the RV end market increased 49%, marine increased 85%, MH increased 43% and industrial markets compared to the prior year quarter.increased 56%. The sales decreaseincrease for the first nine months of 20202021 compared to the prior year period was primarilyalso attributed to sales decreasesincreases in our primaryall four end markets, as a result of business disruptionswhere RV end market sales increased 77%, marine increased 107%, MH increased 49% and lost production and shipping days due to the COVID-19 pandemic that occurred primarilyindustrial increased 47%. Net sales in the secondthird quarter and first nine months of 2020.2021 attributable to acquisitions completed in the first nine months of 2021 were approximately $63.4 million and
$110.1 million, respectively, and net sales in the third quarter and first nine months of 2020 attributable to acquisitions completed in the first nine months of 2020 were $13.2 million and $17.0 million, respectively.
Gross Profit. Gross profit increased $23.8$51.6 million, or 32%53%, to $149.1 million in the third quarter of 2021 from $97.5 million in the third quarter of 2020 from $73.7 million in the third quarter of 2019.2020. For the first nine months of 2020,2021, gross profit decreased $5.8increased $195.2 million, or 2%87%, to $420.6 million from $225.4 million from $231.2 million in 2019.the prior year period. As a percentage of sales, gross profit increaseddecreased to 18.8% in the third quarter of 2021 from 19.3% in the third quarter of 2020 from 18.1% in the third quarter of 2019 and increased to 18.3%19.5% in the first nine months of 20202021 from 18.0%18.3% in the prior year period.
Gross profit as a percentagemargin decreased during the third quarter of net sales increased during the2021 compared to third quarter of 2020 primarily due to ana 250 basis point increase in net sales relative to certain fixed components of costs of goods sold as wellmanufacturing material expense as a decreasepercentage of sales due to the impacts of supply chain constraints and increased material costs, partially offset by an improvement of 90 basis points in commodity cost inputs. manufacturing labor and 120 basis points in manufacturing overhead as a percentage of sales.
Gross profit margin increased during the first nine months of 2021 compared to the same period in 2020 primarily due to (i) a 250 basis point improvement in manufacturing overhead expense as a percentage of net sales, increasedand (ii) an 80 basis point improvement in first nine monthsdirect labor as a percentage of 2020 compared to the prior year period primarily due to a decrease in commodity cost inputs,net sales, partially offset by operational and labor inefficienciesa 200 basis point increase in material costs as a resultpercentage of business disruptions from the COVID-19 pandemic incurred in the second quarter of 2020.
sales.
Operating Income. Operating income increased $20.9$28.1 million, or 49%44%, to $63.3$91.4 million in the third quarter of 20202021 from $42.4$63.3 million in the prior year quarter. For the first nine months of 2020,2021, operating income decreased $4.2increased $137.8 million, or 3%105%, to $131.4$269.2 million from $135.6$131.4 million in the prior year. The overall increase in operating income in the third quarter of 2020 and the overall decrease in operating income in the first nine months of 2020 primarily reflects the items discussed above.
Distribution
Sales. Sales increased $40.6 million, or 24%, to $208.1 million in the third quarter of 2020 from $167.5 million in the prior year quarter. For the first nine months of 2020, sales decreased $19.4 million, or 4%, to $511.9 million from $531.3 million in the prior year period. This segment accounted for approximately 29% of the Company’s consolidated net sales for the third quarter of 2020 and 2019, and 30% of consolidated net sales for the first nine months of 2020 and 2019. The sales increase in the third quarter of 2020 was primarily attributed to sales increases in our RV, marine, and industrial markets. The decrease in sales in the first nine months of 2020 was primarily attributed to sales decreases in our primary end
markets as a result of business disruptions and lost production and shipping days due to the COVID-19 pandemic, primarily in the second quarter of 2020.
Gross Profit. Gross profit increased $8.3 million, or 30%, to $36.3 million in the third quarter of 2020 from $28.0 million in the third quarter of 2019. For the first nine months of 2020, gross profit increased $0.9 million, or 1%, to $88.6 million from $87.7 million in 2019. As a percentage of sales, gross profit increased to 17.4% in the third quarter of 2020 from 16.7% in the third quarter of 2019 and increased to 17.3% in the first nine months of 2020 from 16.5% in the prior year period.
As a percentage of sales, gross profit increased during the third quarter of 2020 compared to the prior year quarter primarily due to realized synergies from certain 2018 and 2019 acquisitions. For the first nine months of 2020, gross profit as a percentage of sales increased primarily due to realized synergies from certain 2018 and 2019 acquisitions, partially offset by additional costs and operational inefficiencies as a result of business disruptions from the COVID-19 pandemic primarily in the second quarter of 2020.
Operating Income. Operating income increased $7.4 million, or 82%, to $16.4 million in the third quarter of 2020 from $9.0 million in the prior year quarter. For the first nine months of 2020, operating income increased $5.2 million, or 19%, to $33.3 million from $28.1 million in the prior year. The overall increase in operating income in the third quarter and first nine months of 20202021 primarily reflects the items discussed above.
Distribution
Sales. Sales increased $81.7 million, or 39%, to $289.8 million in the third quarter of 2021 from $208.1 million in the prior year quarter. For the first nine months of 2021, sales increased $321.5 million, or 63%, to $833.4 million from $511.9 million in the prior year period. This segment accounted for approximately 27% and 29% of the Company’s sales for the third quarter of 2021 and 2020, respectively, and 28% and 29% of sales for the first nine months of 2021 and 2020, respectively. The sales increase in the third quarter of 2021 compared to the third quarter of 2020 was attributed to a 52% increase in our RV market sales, an 85% increase in marine market sales, an 11% increase in MH market sales, and a 25% increase in industrial market sales. The sales increase in the first nine months of 2021 compared to the same period in 2020 was attributed to a 97% increase in RV market sales, a 103% increase in marine market sales, a 12% increase in MH market sales and a 31% increase in industrial market sales. Net sales in the third quarter and first nine months of 2021 attributable to acquisitions completed in the first nine months of 2021 were approximately $20.6 million and $36.0 million, respectively, and net sales in the third quarter and first nine months of 2020 attributable to acquisitions completed in the first nine months of 2020 was approximately $6.5 million.
Gross Profit. Gross profit increased $21.0 million, or 58%, to $57.3 million in the third quarter of 2021 from $36.3 million in the third quarter of 2020. For the first nine months of 2021, gross profit increased $69.4 million, or 78%, to $158.0 million from $88.6 million the prior year period. As a percentage of sales, gross profit increased to 19.8% in the third quarter of 2021 from 17.4% in the third quarter of 2020, and increased to 19.0% for the first nine months of 2021 from 17.3% for the prior year period. The increase in gross profit margin in the third quarter and first nine months of 2021 compared to the third quarter and first nine months of 2020 is primarily attributed to the higher margin profiles of certain 2020 and 2021 acquisitions and leveraging of certain fixed costs.
Operating Income. Operating income increased $14.8 million, or 90%, to $31.2 million in the third quarter of 2021 from $16.4 million in the prior year quarter. For the first nine months of 2021, operating income increased $50.2 million or 151%, to $83.6 million from $33.4 million the prior year period. The improvement in operating income in the third quarter and first nine months of 2021 primarily reflects the items discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Our liquidity at September 27, 202026, 2021 consisted of cash and cash equivalents of $62.3$44.9 million and $410.3as well as $409.3 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 $9.2increased $34.6 million to $147.4 million in the first nine months of 2021 from $112.8 million in the first nine months of 2020 from $122.0 million in the first nine months of 20192020. The increase is primarily dueattributable to (i) a decrease of$104.7 million increase in net income of $10.4and (ii) a $23.3 million due to disruptions in our end markets as a result of the COVID-19 pandemic; (ii) an increase in the usedepreciation and amortization. These increases in sources of cash from working capital of $4.8 million and (iii) a decrease of deferred income tax liabilities of $3.3 million. These decreases in operating cash flowsoperations were partially offset by an increase in use of depreciationcash for net working capital of $108.4 million, associated primarily with investments in inventory to support customer needs and amortizationgrowth of $6.5 million and other items of $2.8 million.accounts receivable in line with net sales.
Investing Activities
Net cash used in investing activities increased $105.3$198.3 million to $343.7 million in the first nine months of 2021 from $145.4 million in the first nine months of 2020 from $40.1 million in the first nine months of 2019 primarily due to an increase in cash used in business acquisitions of $101.0$174.3 million and a decrease$22.0 million increase in proceeds from sale of property, plant, and equipment and other investing activities of $4.4 million.capital expenditures.
Financing Activities
Net cash flows usedprovided by financing activities increased $72.2$240.8 million to $44.4 million in first nine months of 2020 from a source of cash of $27.8$196.4 million in the first nine months of 2019 primarily due to (i) the issuance2021 from a $44.4 million use of $300 million of senior notescash in the first nine months of 2019 with no comparable amount in2020. The increase is primarily due to (i) proceeds of $350.0 million from the first nine monthsCompany's issuance of 2020;its 4.75% Senior Notes and (ii) cash dividends paid to shareholders of $17.3an additional $58.8 million in the first nine monthsterm loan borrowings. These sources of 2020 with no corresponding amount in the prior year period and (iii) an increase in stock repurchases under our buyback program of $16.7 million. These increases in cash used in financing activities were partially offset by (i) a decreasean additional $139.6 million in net revolver repayments, on our revolving credit facility and term loan of $251.1 million; (ii) a decrease$12.0 million increase in taxes paid for share-based payment of deferred financing costs of $7.2 millionarrangements and (iii) a decrease$13.8 million increase in the payment of contingent consideration from a business acquisitionstock repurchases and other financing activities of $3.5 million.
dividends to shareholders.Summary of Liquidity and Capital Resources
TheAt September 26, 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%.
On July 27, 2017, the Financial Conduct Authority, which regulates the London Interbank Offered Rate ("LIBOR"), announced that it intends to phase out LIBOR by the end of 2021. We expect that widespread use of LIBOR as a reference borrowing rate will transition to alternative interest rates in the near future. Since interest rates on loans made under our credit facility may be based on LIBOR based loans, the phasing out of LIBOR may adversely affect interest rates under our credit facility and result in higher borrowing costs. The Company is currently evaluating its options under our credit facility, but at this time we cannot reasonably estimate the impact to our financial statements from the phasing out of LIBOR.
At September 27, 2020, the Company had $410.3 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 September
27, 202026, 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 September
27, 202026, 2021 and for the fiscal period then ended are as follows:
| | | | | | | | | | | | | | |
| | Required | | Actual |
Consolidated secured net leverage ratio (12-month period) | | 2.75 | | | 0.48 | |
Consolidated fixed charge coverage ratio (12-month period) | | 1.50 | | | 6.84 | |
| | | | | | | | | | | | | | |
| | Required | | Actual |
Maximum consolidated total leverage ratio (12-month period) | | 4.00 | | | 2.24 | |
Minimum consolidated fixed charge coverage ratio (12-month period) | | 1.50 | | | 5.76 | |
In addition, as of September 26, 2021, the Company's consolidated total net leverage ratio (12-month period) was 2.20. 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 had generally been the highest in the thirdsecond 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 that required recognition or disclosure in the condensed consolidated financial statements.
See Note 18 of the Notes to Condensed Consolidated Financial Statements for further discussion of events occurring after September 26, 2021 until the filing date of this Form 10-Q.
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 Forms 10-Q for subsequent quarterly periods, which are filed with the SEC and are available on the SEC’s website at www.sec.gov.
| | | | | |
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Debt Obligations under Credit Agreement
At September 27, 2020,26, 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$0.8 million, assuming average borrowings, including our term loan, subject to variable rates of $30.0$83.6 million, which was the amount of such borrowings outstanding at September 27, 202026, 2021 subject to variable rates. The $30.0$83.6 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 third quarter and first nine 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 that 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 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, requiredrequired 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 third quarter ended September 27, 202026, 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 1. LEGAL PROCEEDINGS
In August 2019, a group of companies calling itself the Lusher Site Remediation Group (the “Group”) commenced litigation against the Company in Lusher Site Remediation Group v. Sturgis Iron & Metal Co., Inc., et al., Case Number 3:18-cv-00506, pending in the U.S. District Court for the Northern District of Indiana. The Group’s Second Amended Complaint, which was the first to assert claims against Patrick, asserted claims under the federal Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”), 42 U.S.C. § 9601 et seq., an Indiana state environmental statute and Indiana common law. One defendant in the case, Sturgis Iron & Metal Co., Inc. (“Sturgis”) subsequently filed two cross claims against Patrick, asserting against the Company a claim for (i) contribution under CERCLA and (ii) contractual indemnity. The Company moved to dismiss the Group’s claims and also moved to dismiss Sturgis’s cross claims. On August 21, 2020, the court granted Patrick’s two motions to dismiss. The Group subsequently moved for reconsideration of the court’s decision. That reconsideration motion is still pending. The Company does not currently believe that this matter is likely to have a material adverse impact on its financial condition, results of operations, or cash flows. However, any litigation is inherently uncertain, and any judgment or injunctive relief entered against us or any adverse settlement could materially and adversely impact our business, results of operations, financial condition, and prospects.
“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 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 magnitude of the impact of the COVID-19 pandemic cannot be precisely estimated at this time, as each is 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 fully, partially, or timely. 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 we are unable to maintain normal operations, or subsequently are unable to resume normal operations in a timely fashion, our 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 our financial obligations and fund our 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
| | | | | | | | | | | | | | | | | | | | | | | | | | |
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) |
June 29 - July 26, 2020 | | 857 | | | $ | 59.00 | | | — | | | $ | 43,515,568 | |
July 27 - August 30, 2020 | | 5,000 | | | 58.84 | | | 5,000 | | | 43,221,354 | |
August 31 - September 27, 2020 | | 83,950 | | | 52.91 | | | 83,950 | | | 38,779,489 | |
| | 89,807 | | | | | 88,950 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Period | | Total Number of Shares Purchased | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) | | Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (1) |
June 28 - July 25 | | — | | | $ | — | | | — | | | $ | 14,410,258 | |
July 26 - August 29 | | 45,000 | | | 82.37 | | | 45,000 | | | 46,293,551 | |
August 30 - September 26 | | 83,929 | | | 79.69 | | | 83,929 | | | 39,605,258 | |
| | 128,929 | | | | | 128,929 | | | |
(1) Includes 857 shares of common stock purchased by the Company in July 2020 for the sole purpose of satisfying the minimum tax withholding obligations of employees upon the vesting of stock awards held by the employees.
(2) See Note 16 of the Notes to Condensed Consolidated Financial Statements for additional information about the Company's stock repurchase program.
| | | | | |
Exhibits (1) | Description |
31.1 | |
31.2 | |
32 | |
101 | Interactive Data Files. The following materials are filed electronically with this Quarterly Report on Form 10-Q: |
| | | | | | | | |
| 101.INS | XBRL Instance Document |
| 101.SCH | XBRL Taxonomy Schema Document |
| 101.CAL | XBRL Taxonomy Calculation Linkbase Document |
| 101.DEF | XBRL Taxonomy Definition Linkbase Document |
| 101.LAB | XBRL Taxonomy Label Linkbase Document |
| 101.PRE | XBRL Taxonomy Presentation Linkbase Document |
| | | | | | | | |
104 | Cover 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 5, 20204, 2021 | By: | /s/ Andy L. Nemeth |
| | Andy L. Nemeth
|
| | President and Chief Executive Officer |
| | | | | | | | |
| | |
Date: November 5, 20204, 2021 | By: | /s/ John A. ForbesJacob R. Petkovich |
| | John A. Forbes
Jacob R. Petkovich |
| | InterimExecutive Vice President-Finance and Chief Financial Officer |
| | | | | | | | |
| | |
Date: November 4, 2021 | By: | /s/ James E. Rose |
| | James E. Rose |
| | Principal Accounting Officer |