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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED September 29, 2019
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 | 46515 |
(Address of principal executive offices) | (ZIP Code) |
(574) 294-7511
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
|
| | | | | | | | | |
Large accelerated filer | ☒ | Accelerated filer | ☐ | Non-accelerated filer | ☐ | Smaller reporting company | ☐ | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Securities registered pursuant to Section 12(b) of the Act:
|
| | |
Title of each class | Trading Symbol | Name of each exchange on which registered |
Common Stock, no par value | PATK | NASDAQ |
As of October 25, 2019, there were 23,764,458 shares of the registrant’s common stock outstanding.
PATRICK INDUSTRIES, INC.
TABLE OF CONTENTS
|
| |
| Page No. |
PART I. FINANCIAL INFORMATION | |
| |
ITEM 1. FINANCIAL STATEMENTS (Unaudited) | |
| |
Condensed Consolidated Statements of Financial Position September 29, 2019 and December 31, 2018 | |
| |
Condensed Consolidated Statements of Income Third Quarter and Nine Months Ended September 29, 2019 and September 30, 2018 | |
| |
Condensed Consolidated Statements of Comprehensive Income Third Quarter and Nine Months Ended September 29, 2019 and September 30, 2018 | |
| |
Condensed Consolidated Statements of Shareholders' Equity Third Quarter and Nine Months Ended September 29, 2019 and September 30, 2018 | |
| |
Condensed Consolidated Statements of Cash Flows Nine Months Ended September 29, 2019 and September 30, 2018 | |
| |
Notes to Condensed Consolidated Financial Statements | |
| |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | |
| |
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | |
| |
ITEM 4. CONTROLS AND PROCEDURES | |
| |
PART II. OTHER INFORMATION | |
| |
ITEM 1A. RISK FACTORS | |
| |
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS | |
| |
ITEM 6. EXHIBITS | |
| |
SIGNATURES | |
PART 1: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PATRICK INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (Unaudited)
|
| | | | | | | | |
|
| As of |
(thousands) |
| September 29, 2019 |
| December 31, 2018 |
ASSETS |
| |
| |
Current Assets |
| |
| |
Cash and cash equivalents |
| $ | 116,712 |
|
| $ | 6,895 |
|
Trade and other receivables, net |
| 129,837 |
|
| 82,499 |
|
Inventories |
| 262,558 |
|
| 272,898 |
|
Prepaid expenses and other |
| 18,897 |
|
| 22,875 |
|
Total current assets |
| 528,004 |
|
| 385,167 |
|
Property, plant and equipment, net |
| 179,884 |
|
| 177,145 |
|
Operating lease right-of-use assets | | 81,064 |
| | — |
|
Goodwill |
| 308,358 |
|
| 281,734 |
|
Intangible assets, net |
| 350,216 |
|
| 382,982 |
|
Deferred financing costs, net |
| 3,130 |
|
| 3,688 |
|
Other non-current assets |
| 474 |
|
| 515 |
|
TOTAL ASSETS | | $ | 1,451,130 |
|
| $ | 1,231,231 |
|
LIABILITIES AND SHAREHOLDERS’ EQUITY |
| |
| |
Current Liabilities |
| |
| |
Current maturities of long-term debt |
| $ | 5,000 |
|
| $ | 8,750 |
|
Current operating lease liabilities | | 25,990 |
| | — |
|
Accounts payable |
| 117,862 |
|
| 89,803 |
|
Accrued liabilities |
| 53,423 |
|
| 59,202 |
|
Total current liabilities |
| 202,275 |
|
| 157,755 |
|
Long-term debt, less current maturities, net |
| 670,928 |
|
| 621,751 |
|
Long-term operating lease liabilities | | 55,553 |
| | — |
|
Deferred tax liabilities, net |
| 19,735 |
|
| 22,699 |
|
Other long-term liabilities |
| 22,701 |
|
| 20,272 |
|
TOTAL LIABILITIES |
| 971,192 |
|
| 822,477 |
|
SHAREHOLDERS’ EQUITY |
| |
| |
Common stock |
| 169,220 |
|
| 161,436 |
|
Additional paid-in-capital |
| 25,020 |
|
| 25,124 |
|
Accumulated other comprehensive loss |
| (5,953 | ) |
| (2,680 | ) |
Retained earnings |
| 291,651 |
|
| 224,874 |
|
TOTAL SHAREHOLDERS’ EQUITY |
| 479,938 |
|
| 408,754 |
|
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY |
| $ | 1,451,130 |
|
| $ | 1,231,231 |
|
See accompanying Notes to Condensed Consolidated Financial Statements.
PATRICK INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
|
| | | | | | | | | | | | | | | | |
|
| Third Quarter Ended | | Nine Months Ended |
(thousands except per share data) |
| September 29, 2019 |
| September 30, 2018 | | September 29, 2019 | | September 30, 2018 |
NET SALES |
| $ | 566,186 |
|
| $ | 575,139 |
| | $ | 1,787,622 |
| | $ | 1,731,850 |
|
Cost of goods sold |
| 461,851 |
|
| 468,484 |
| | 1,464,078 |
| | 1,412,649 |
|
GROSS PROFIT |
| 104,335 |
|
| 106,655 |
| | 323,544 |
| | 319,201 |
|
Operating Expenses: |
| |
| | | | | |
Warehouse and delivery |
| 23,917 |
|
| 19,789 |
| | 74,228 |
| | 55,540 |
|
Selling, general and administrative |
| 33,817 |
|
| 33,284 |
| | 104,403 |
| | 98,999 |
|
Amortization of intangible assets |
| 9,191 |
|
| 8,873 |
| | 26,448 |
| | 25,140 |
|
Total operating expenses |
| 66,925 |
|
| 61,946 |
| | 205,079 |
| | 179,679 |
|
OPERATING INCOME |
| 37,410 |
|
| 44,709 |
| | 118,465 |
| | 139,522 |
|
Interest expense, net |
| 8,603 |
|
| 7,338 |
| | 26,222 |
| | 17,980 |
|
Income before income taxes |
| 28,807 |
|
| 37,371 |
| | 92,243 |
| | 121,542 |
|
Income taxes |
| 7,490 |
|
| 9,437 |
| | 22,661 |
| | 28,680 |
|
NET INCOME |
| $ | 21,317 |
|
| $ | 27,934 |
| | $ | 69,582 |
| | $ | 92,862 |
|
|
|
|
|
|
|
| | | | |
BASIC NET INCOME PER COMMON SHARE |
| $ | 0.92 |
|
| $ | 1.17 |
| | $ | 3.02 |
| | $ | 3.82 |
|
DILUTED NET INCOME PER COMMON SHARE |
| $ | 0.92 |
|
| $ | 1.15 |
| | $ | 2.99 |
| | $ | 3.77 |
|
|
|
|
|
|
|
| | | | |
Weighted average shares outstanding – Basic |
| 23,076 |
|
| 23,894 |
| | 23,073 |
| | 24,279 |
|
Weighted average shares outstanding – Diluted |
| 23,273 |
|
| 24,232 |
| | 23,279 |
| | 24,619 |
|
| | | | | | | | |
See accompanying Notes to Condensed Consolidated Financial Statements. |
PATRICK INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
|
| | | | | | | | | | | | | | | | |
| | Third Quarter Ended | | Nine Months Ended |
(thousands) | | September 29, 2019 | | September 30, 2018 | | September 29, 2019 | | September 30, 2018 |
NET INCOME | | $ | 21,317 |
| | $ | 27,934 |
| | $ | 69,582 |
| | $ | 92,862 |
|
Other comprehensive (loss) income, net of tax: | | | | | | | | |
Unrealized (loss) gain of hedge derivatives | | (240 | ) | | 80 |
| | (3,225 | ) | | 80 |
|
Foreign currency translation gain (loss) | | 19 |
| | (28 | ) | | (48 | ) | | (31 | ) |
Total other comprehensive (loss) gain | | (221 | ) | | 52 |
| | (3,273 | ) | | 49 |
|
COMPREHENSIVE INCOME | | $ | 21,096 |
| | $ | 27,986 |
| | $ | 66,309 |
| | $ | 92,911 |
|
See accompanying Notes to Condensed Consolidated Financial Statements.
PATRICK INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited)
|
| | | | | | | | | | | | | | | | | | | | |
Third Quarter Ended September 29, 2019 |
(thousands) | | Common Stock | | Additional Paid-in- Capital | | Accumulated Other Comprehensive Income (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 | ) |
Share repurchases under buyback program | | (674 | ) | | (104 | ) | | — |
| | (2,805 | ) | | (3,583 | ) |
Shares used to pay taxes on stock grants | | (59 | ) | | — |
| | — |
| | — |
| | (59 | ) |
Stock-based compensation expense | | 3,867 |
| | — |
| | — |
| | — |
| | 3,867 |
|
Balance September 29, 2019 | | $ | 169,220 |
| | $ | 25,020 |
| | $ | (5,953 | ) | | $ | 291,651 |
| | $ | 479,938 |
|
| | | | | | | | | | |
Nine Months Ended September 29, 2019 |
(thousands) | | Common Stock | | Additional Paid-in- Capital | | Accumulated Other Comprehensive Income (Loss) | | Retained Earnings | | Total |
Balance December 31, 2018 | | $ | 161,436 |
| | $ | 25,124 |
| | $ | (2,680 | ) | | $ | 224,874 |
| | $ | 408,754 |
|
Net income | | — |
| | — |
| | — |
| | 69,582 |
| | 69,582 |
|
Other comprehensive loss, net of tax | | — |
| | — |
| | (3,273 | ) | | — |
| | (3,273 | ) |
Share repurchases under buyback program | | (674 | ) | | (104 | ) | | — |
| | (2,805 | ) | | (3,583 | ) |
Shares used to pay taxes on stock grants | | (3,587 | ) | | — |
| | — |
| | — |
| | (3,587 | ) |
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 |
|
| | | | | | | | | | |
Third Quarter Ended September 30, 2018 |
(thousands) | | Common Stock | | Additional Paid-in- Capital | | Accumulated Other Comprehensive Income (Loss) | | Retained Earnings | | Total |
Balance July 1, 2018 | | $ | 161,648 |
| | $ | 25,552 |
| | $ | 63 |
| | $ | 216,357 |
| | $ | 403,620 |
|
Net income | | — |
| | — |
| | — |
| | 27,934 |
| | 27,934 |
|
Other comprehensive income, net of tax | | — |
| | — |
| | 52 |
| | — |
| | 52 |
|
Stock repurchases under buyback program | | (2,237 | ) | | (113 | ) | | — |
| | (18,593 | ) | | (20,943 | ) |
Issuance of shares upon exercise of common stock options | | (37 | ) | | — |
| | — |
| | — |
| | (37 | ) |
Shares used to pay taxes on stock grants | | 9 |
| | — |
| | — |
| | — |
| | 9 |
|
Stock-based compensation expense | | 3,542 |
| | — |
| | — |
| | — |
| | 3,542 |
|
Equity component of convertible notes issuance | | — |
| | 41 |
| | — |
| | — |
| | 41 |
|
Balance September 30, 2018 | | $ | 162,925 |
| | $ | 25,480 |
| | $ | 115 |
| | $ | 225,698 |
| | $ | 414,218 |
|
| | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | |
PATRICK INDUSTRIES, INC. |
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited) (cont.) |
Nine Months Ended September 30, 2018 |
(thousands) | | Common Stock | | Additional Paid-in- Capital | | Accumulated Other Comprehensive Income (Loss) | | Retained Earnings | | Total |
Balance December 31, 2017 | | $ | 163,196 |
| | $ | 8,243 |
| | $ | 66 |
| | $ | 199,180 |
| | $ | 370,685 |
|
Net income | | — |
| | — |
| | — |
| | 92,862 |
| | 92,862 |
|
Other comprehensive loss, net of tax | | — |
| | — |
| | 49 |
| | — |
| | 49 |
|
Stock repurchases under buyback program | | (8,266 | ) | | (418 | ) | | — |
| | (66,344 | ) | | (75,028 | ) |
Issuance of shares upon exercise of common stock options | | 3 |
| | — |
| | — |
| | — |
| | 3 |
|
Shares used to pay taxes on stock grants | | (2,919 | ) | | — |
| | — |
| | — |
| | (2,919 | ) |
Stock-based compensation expense | | 10,911 |
| | — |
| | — |
| | — |
| | 10,911 |
|
Purchase of convertible notes hedges | | — |
| | (31,481 | ) | | — |
| | — |
| | (31,481 | ) |
Proceeds from sale of warrants | | — |
| | 18,147 |
| | — |
| | — |
| | 18,147 |
|
Equity component of convertible notes issuance | | — |
| | 30,989 |
| | — |
| | — |
| | 30,989 |
|
Balance September 30, 2018 | | $ | 162,925 |
| | $ | 25,480 |
| | $ | 115 |
| | $ | 225,698 |
| | $ | 414,218 |
|
See accompanying Notes to Condensed Consolidated Financial Statements
PATRICK INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
|
| | | | | | | | |
|
| Nine Months Ended |
(thousands) |
| September 29, 2019 |
| September 30, 2018 |
CASH FLOWS FROM OPERATING ACTIVITIES | | | | |
Net income |
| $ | 69,582 |
|
| $ | 92,862 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
| |
| |
Depreciation and amortization |
| 46,449 |
|
| 39,893 |
|
Stock-based compensation expense |
| 12,039 |
|
| 10,911 |
|
Amortization of convertible notes debt discount |
| 5,123 |
|
| 4,495 |
|
Deferred income taxes |
| (794 | ) |
| (1,088 | ) |
Other |
| 235 |
|
| (2,739 | ) |
Change in operating assets and liabilities, net of acquisitions of businesses: |
| |
| |
Trade receivables |
| (44,359 | ) |
| (29,295 | ) |
Inventories |
| 9,084 |
|
| (13,238 | ) |
Prepaid expenses and other assets |
| 4,319 |
|
| 4,299 |
|
Accounts payable, accrued liabilities and other |
| 20,355 |
|
| 21,313 |
|
Net cash provided by operating activities |
| 122,033 |
|
| 127,413 |
|
CASH FLOWS FROM INVESTING ACTIVITIES |
| |
| |
Capital expenditures |
| (22,227 | ) |
| (26,073 | ) |
Proceeds from sale of property, equipment and other investing activities |
| 4,509 |
|
| 5,125 |
|
Business acquisitions, net of cash acquired |
| (22,350 | ) |
| (290,052 | ) |
Net cash used in investing activities |
| (40,068 | ) | | (311,000 | ) |
CASH FLOWS FROM FINANCING ACTIVITIES |
| |
| |
Term debt borrowings |
| 7,500 |
|
| 36,981 |
|
Term debt repayments |
| (3,750 | ) |
| (6,441 | ) |
Borrowings on revolver |
| 648,460 |
|
| 954,535 |
|
Repayments on revolver |
| (905,792 | ) |
| (877,931 | ) |
Stock repurchases under buyback program |
| (3,583 | ) |
| (75,028 | ) |
Proceeds from issuance of senior notes | | 300,000 |
| | — |
|
Proceeds from convertible notes offering |
| — |
| | 172,500 |
|
Purchase of convertible notes hedges |
| — |
| | (31,481 | ) |
Proceeds from sale of warrants |
| — |
| | 18,147 |
|
Payments related to vesting of stock-based awards, net of shares tendered for taxes |
| (3,359 | ) | | (2,659 | ) |
Payment of deferred financing costs |
| (7,214 | ) | | (7,485 | ) |
Payment of contingent consideration from a business acquisition | | (4,416 | ) | | — |
|
Other financing activities |
| 6 |
| | (12 | ) |
Net cash provided by financing activities |
| 27,852 |
| | 181,126 |
|
Increase (decrease) in cash and cash equivalents |
| 109,817 |
| | (2,461 | ) |
Cash and cash equivalents at beginning of year |
| 6,895 |
| | 2,767 |
|
Cash and cash equivalents at end of period |
| $ | 116,712 |
| | $ | 306 |
|
See accompanying Notes to Condensed Consolidated Financial Statements.
PATRICK INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
The accompanying unaudited condensed consolidated financial statements of Patrick Industries, Inc. (“Patrick”, the “Company”, "we", "our") contain all adjustments (consisting of normal recurring adjustments) that we believe are necessary to present fairly the Company’s financial position as of September 29, 2019 and December 31, 2018, and its results of operations for the three and nine months ended September 29, 2019 and September 30, 2018 and cash flows for the nine months ended September 29, 2019 and September 30, 2018.
Patrick’s unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission and in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The preparation of the condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to those rules or regulations. Certain immaterial reclassifications have been made to the prior period presentation to conform to the current period presentation. For a description of significant accounting policies used by the Company in the preparation of its consolidated financial statements, please refer to Note 2 to Notes to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. The December 31, 2018 condensed consolidated statement of financial position data was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. Operating results for the third quarter and nine months ended September 29, 2019 are not necessarily indicative of the results to be expected for the full year ending December 31, 2019.
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 2019 ended on September 29, 2019 and the third quarter of fiscal year 2018 ended on September 30, 2018.
In preparation of Patrick’s condensed consolidated financial statements as of and for the three and nine months ended September 29, 2019, management evaluated all material subsequent events or 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.
|
| |
2. | RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS |
Leases
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, "Leases (Topic 842)", which requires in part that an entity recognize lease assets and lease liabilities on its statement of financial position for leases that were previously classified as operating leases under U.S. GAAP.
In July 2018, the FASB issued ASU 2018-11, "Leases (Topic 842): Targeted Improvements", which offered practical expedient alternatives to the modified retrospective adoption of Accounting Standards Codification (“ASC”) 842.
The Company adopted ASC 842 effective January 1, 2019, and recorded approximately $80 million in lease right-of-use assets and corresponding lease liabilities, with no material impact on the condensed consolidated statement of shareholders' equity, income, comprehensive income or cash flows. See Note 12 for further information.
Goodwill Impairment
In January 2017, the FASB issued ASU 2017-04, "Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment". This ASU simplifies the accounting for goodwill impairments by eliminating step two from the goodwill impairment test. The standard requires that the impairment loss be measured as the excess of the reporting unit's carrying amount over its fair value. It eliminates the second step that requires the impairment to be measured between the implied value of a reporting unit's goodwill and its carrying value. The standard is effective for annual and any interim impairment tests for periods beginning after December 15, 2019 and early adoption is permitted. The Company is currently evaluating the effect of adopting this new accounting standard, which will depend on the outcomes of future goodwill impairment tests.
Credit Losses
In June 2016, the FASB issued ASU 2016-13 “Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments”, which amends certain provisions of ASC 326, “Financial Instruments-Credit Loss”. The ASU changes the impairment model for most financial assets and certain other instruments. For trade and other receivables, held to maturity debt securities, loans and other instruments, entities will be required to use a new forward-looking “expected loss” model that generally will result in the earlier recognition of allowances for losses. Additionally, entities will be 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 ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years and will be applied as a cumulative effect adjustment to retained earnings as of the beginning of the first reporting period for which the guidance is effective. The Company does not expect that the adoption of the ASU will have a material effect on its condensed consolidated financial statements.
In the following table, revenue from contracts with customers, net of intersegment sales, is disaggregated by market type and by reportable segments, consistent with how the Company believes the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors:
|
| | | | | | | | | | | | |
| | Third Quarter Ended September 29, 2019 |
(thousands) | | Manufacturing | | Distribution | | Total Reportable Segments |
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 |
|
|
| | | | | | | | | | | | |
| | Nine Months Ended September 29, 2019 |
(thousands) | | Manufacturing | | Distribution | | Total Reportable Segments |
Market type: | | | | | | |
Recreational Vehicle | | $ | 694,261 |
| | $ | 299,115 |
| | $ | 993,376 |
|
Manufactured Housing | | 131,101 |
| | 193,975 |
| | 325,076 |
|
Industrial | | 188,292 |
| | 25,149 |
| | 213,441 |
|
Marine | | 246,017 |
| | 9,712 |
| | 255,729 |
|
Total | | $ | 1,259,671 |
| | $ | 527,951 |
| | $ | 1,787,622 |
|
|
| | | | | | | | | | | | |
| | Third Quarter Ended September 30, 2018 |
(thousands) | | Manufacturing | | Distribution | | Total Reportable Segments |
Market type: | | | | | | |
Recreational Vehicle | | $ | 262,936 |
| | $ | 91,637 |
| | $ | 354,573 |
|
Manufactured Housing | | 41,428 |
| | 26,334 |
| | 67,762 |
|
Industrial | | 63,429 |
| | 8,906 |
| | 72,335 |
|
Marine | | 77,421 |
| | 3,048 |
| | 80,469 |
|
Total | | $ | 445,214 |
| | $ | 129,925 |
| | $ | 575,139 |
|
`
|
| | | | | | | | | | | | |
| | Nine Months Ended September 30, 2018 |
(thousands) | | Manufacturing | | Distribution | | Total Reportable Segments |
Market type: | | | | | | |
Recreational Vehicle | | $ | 847,944 |
| | $ | 280,082 |
| | $ | 1,128,026 |
|
Manufactured Housing | | 124,406 |
| | 75,946 |
| | 200,352 |
|
Industrial | | 186,890 |
| | 25,701 |
| | 212,591 |
|
Marine | | 184,848 |
| | 6,033 |
| | 190,881 |
|
Total | | $ | 1,344,088 |
| | $ | 387,762 |
| | $ | 1,731,850 |
|
The following table provides information about contract balances:
|
| | | | | | | |
(thousands) | September 29, 2019 | | December 31, 2018 |
Receivables, which are included in trade and other receivables, net | $ | 128,672 |
| | $ | 74,196 |
|
Contract liabilities | $ | 2,692 |
| | $ | 2,642 |
|
Significant changes in the contract liabilities balance during the nine months ended September 29, 2019 are as follows:
|
| | | | |
(thousands) | | Contract Liabilities |
Revenue recognized that was included in the contract liability balance at the beginning of the period | | $ | (1,006 | ) |
Increases due to cash received, excluding amounts recognized as revenue during the period | | $ | 1,056 |
|
Inventories consist of the following:
|
| | | | | | | | |
(thousands) | | September 29, 2019 | | December 31, 2018 |
Raw materials | | $ | 172,775 |
| | $ | 164,408 |
|
Work in process | | 14,235 |
| | 12,829 |
|
Finished goods | | 25,403 |
| | 28,341 |
|
Less: reserve for inventory obsolescence | | (10,258 | ) | | (5,354 | ) |
Total manufactured goods, net | | 202,155 |
| | 200,224 |
|
Materials purchased for resale (distribution products) | | 62,616 |
| | 74,914 |
|
Less: reserve for inventory obsolescence | | (2,213 | ) | | (2,240 | ) |
Total materials purchased for resale (distribution products), net | | 60,403 |
| | 72,674 |
|
Total inventories | | $ | 262,558 |
| | $ | 272,898 |
|
|
| |
5. | GOODWILL AND INTANGIBLE ASSETS |
Changes in the carrying amount of goodwill for the nine months ended September 29, 2019 by segment are as follows: |
| | | | | | | | | | | | |
(thousands) | | Manufacturing | | Distribution | | Total |
Balance - December 31, 2018 | | $ | 235,345 |
| | $ | 46,389 |
| | $ | 281,734 |
|
Acquisitions | | 7,177 |
| | — |
| | 7,177 |
|
Adjustments to preliminary purchase price allocations | | 8,428 |
| | 11,019 |
| | 19,447 |
|
Balance - September 29, 2019 | | $ | 250,950 |
| | $ | 57,408 |
| | $ | 308,358 |
|
Intangible assets, net consist of the following as of September 29, 2019 and December 31, 2018:
|
| | | | | | | | | | | | |
(thousands) |
| September 29, 2019 |
| Weighted Average Useful Life (in years) |
| December 31, 2018 |
| Weighted Average Useful Life (in years) |
Customer relationships |
| $ | 348,947 |
|
| 10.1 |
| $ | 366,228 |
|
| 10.1 |
Non-compete agreements |
| 16,405 |
|
| 4.9 |
| 19,159 |
|
| 4.9 |
Patents |
| 16,338 |
|
| 14.6 |
| 1,048 |
|
| 8.9 |
Trademarks | | 80,786 |
| | Indefinite | | 82,358 |
| | Indefinite |
|
| 462,476 |
|
| |
| 468,793 |
|
| |
Less: accumulated amortization |
| (112,260 | ) |
|
|
| (85,811 | ) |
| |
Intangible assets, net |
| $ | 350,216 |
|
| |
| $ | 382,982 |
|
| |
Changes in the carrying value of intangible assets for the nine months ended September 29, 2019 by segment are as follows:
|
| | | | | | | | | | | | |
(thousands) |
| Manufacturing |
| Distribution |
| Total |
Balance - December 31, 2018 |
| $ | 304,485 |
|
| $ | 78,497 |
|
| $ | 382,982 |
|
Acquisitions |
| 8,329 |
|
| — |
|
| 8,329 |
|
Amortization |
| (21,808 | ) |
| (4,640 | ) |
| (26,448 | ) |
Adjustments to preliminary purchase price allocations |
| (12,023 | ) |
| (2,624 | ) |
| (14,647 | ) |
Balance - September 29, 2019 |
| $ | 278,983 |
|
| $ | 71,233 |
|
| $ | 350,216 |
|
General
In addition to the acquisitions completed in 2018 as discussed below, the Company completed two acquisitions in the first nine months of 2019. For the third quarter and first nine months ended September 29, 2019, revenue and operating income included in the Company's condensed consolidated statements of income related to the 2019 acquisitions were immaterial. For the third quarter ended September 30, 2018, revenue and operating income of approximately $82.4 million and $8.8 million, respectively, were included in the Company’s condensed consolidated statements of income relating to the businesses acquired in the first nine months of 2018. The first nine months of 2018 included revenue and operating income of approximately $160.0 million and $17.3 million, respectively, related to these acquisitions. Acquisition-related costs in the aggregate associated with the businesses acquired in the first nine months of 2019 and 2018 were immaterial.
Contingent Consideration
In connection with certain acquisitions, if certain financial targets for the acquired businesses are achieved, the Company will be required to pay additional cash consideration. The Company has recorded a liability for the fair value of the contingent consideration related to each of these acquisitions as part of the initial purchase price based on the present value of the expected future cash flows and the probability of future payments. As required, the liabilities for the contingent consideration associated with each of these acquisitions will be remeasured quarterly at fair value.
As of September 29, 2019, the aggregate fair value of the estimated contingent consideration payments was $12.0 million, $4.5 million of which is included in the line item "Accrued liabilities" and $7.5 million is included in “Other long-term liabilities” on the condensed consolidated statement of financial position. At December 31, 2018, the aggregate fair value of the estimated contingent consideration payments was $13.8 million, $4.4 million of which was included in the line item "Accrued liabilities" and $9.4 million was included in "Other long-term liabilities". The liabilities for contingent consideration expire at various dates through December 2023. The contingent consideration arrangements are subject to a maximum payment amount of up to $17.2 million in the aggregate. In the first quarter of 2019, the Company made cash payments of approximately $4.4 million related to contingent consideration liabilities, recording a corresponding reduction to accrued liabilities.
2019 Acquisitions
The Company completed two acquisitions in the third quarter and first nine months ended September 29, 2019, including the previously announced acquisition of 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 initial consideration for these acquisitions was $21.1 million, plus subsequent contingent consideration payments over a one-year period based on future performance in connection with the acquisition of G.G. Schmitt. The preliminary purchase price allocation is subject to final review and approval, and thus all required purchase accounting adjustments are subject to change within the measurement period as the Company finalizes its fair value estimates.
The results of operations for these acquisitions are included in the Company’s condensed consolidated financial statements and the Manufacturing operating segment from their respective dates of acquisition.
2018 Acquisitions
Metal Moulding Corporation (“MMC”)
In February 2018, the Company completed the acquisition of the business and certain assets of Madison, Tennessee-based MMC, a manufacturer of custom metal fabricated products, primarily for the marine market, including hinges, arm rests, brackets, panels and trim, as well as plastic products including boxes, inlay tables, steps, and related components, for a net initial purchase price of $19.9 million, plus contingent consideration payments over a one-year period based on future performance.
The results of operations for MMC are included in the Company’s condensed consolidated financial statements and the Manufacturing operating segment from the date of acquisition.
Aluminum Metals Company, LLC (“AMC”)
In February 2018, the Company completed the acquisition of the business and certain assets of Elkhart, Indiana-based AMC, a manufacturer of aluminum products including coil, fabricated sheets and extrusions, in addition to roofing products, primarily for the recreational vehicle (“RV”), industrial, and marine markets, for a net purchase price of $17.8 million.
The results of operations for AMC are included in the Company’s condensed consolidated financial statements and the Manufacturing operating segment from the date of acquisition.
IMP Holdings, LLC d/b/a Indiana Marine Products (“IMP”)
In March 2018, the Company completed the acquisition of the business and certain assets of Angola, Indiana-based IMP, a manufacturer of fully-assembled helm assemblies, including electrical wiring harnesses, dash panels, instrumentation and gauges, and other products primarily for the marine market, for a net initial purchase price of $18.6 million, plus subsequent contingent consideration payments over a three-year period based on future performance.
The results of operations for IMP are included in the Company’s condensed consolidated financial statements and the Manufacturing operating segment from the date of acquisition.
Collins & Company, Inc. (“Collins”)
In March 2018, the Company completed the acquisition of the business and certain assets of Bristol, Indiana-based Collins, a distributor of appliances, trim products, fuel systems, flooring, tile, and other related building materials primarily to the RV market as well as the housing and industrial markets, for a net purchase price of $40.0 million.
The results of operations for Collins are included in the Company’s condensed consolidated financial statements and the Distribution operating segment from the date of acquisition. Changes from previously reported estimated amounts as of December 31, 2018 include a decrease to intangible assets of $3.6 million and a $3.6 million offsetting increase to goodwill. There was no material impact to the condensed consolidated statement of income related to these changes in the period in which the purchase price allocation and all purchase accounting adjustments were finalized.
Dehco, Inc. (“Dehco”)
In April 2018, the Company completed the acquisition of Dehco, a distributor and manufacturer of flooring, kitchen and bath products, adhesives and sealants, electronics, appliances and accessories, LP tanks, and other related building materials, primarily for the RV market as well as the manufactured housing (“MH”), marine and other industrial markets, for a net purchase price of $52.8 million. Dehco has operating facilities in Indiana, Oregon, Pennsylvania and Alabama.
The results of operations for Dehco are included in the Company’s condensed consolidated financial statements and the Manufacturing and Distribution operating segments from the date of acquisition. Changes from previously reported estimated amounts as of December 31, 2018 include a decrease to intangible assets of $0.3 million and a $0.3 million offsetting increase to goodwill. There was no material impact to the condensed consolidated statement of income related to these changes in the period in which the purchase price allocation and all purchase accounting adjustments were finalized.
Dowco, Inc. (“Dowco”)
In May 2018, the Company completed the acquisition of Dowco, a designer and manufacturer of custom designed boat covers and bimini tops, full boat enclosures, mounting hardware, and other accessories and components for the marine market, for a net purchase price of $56.3 million, net of cash acquired. Dowco has operating facilities in Wisconsin, Missouri, Indiana, and Minnesota.
The results of operations for Dowco are included in the Company’s condensed consolidated financial statements and the Manufacturing operating segment from the date of acquisition. Changes from previously reported estimated amounts as of December 31, 2018 include a $2.7 million increase to property, plant and equipment and a $3.3 million increase to goodwill, offset by a $5.9 million decrease to intangible assets and a $0.1 million increase in accounts payable and accrued liabilities. There was no material impact to the condensed consolidated statement of income related to these changes in the period in which the purchase price allocation and all purchase accounting adjustments were finalized.
Marine Accessories Corporation (“MAC”)
In June 2018, the Company acquired 100% of the membership interests of Maryville, Tennessee-based MAC, a manufacturer, distributor and aftermarket supplier of custom tower and canvas products and other related accessories to OEMs, dealers, retailers and distributors within the marine market, as well as direct to consumers, for a net purchase price of $57.0 million, net of cash acquired.
The results of operations for MAC are included in the Company’s condensed consolidated financial statements and the Manufacturing and Distribution operating segments from the date of acquisition. Changes from previously reported estimated amounts as of December 31, 2018 include a $6.5 million decrease to intangible assets and a $1.0 million decrease to property, plant and equipment, offset by a decrease in deferred taxes and other liabilities of $1.1 million and an increase to goodwill of $6.4 million. There was no material impact to the condensed consolidated statement of income related to these changes in the period in which the purchase price allocation and all purchase accounting adjustments were finalized.
Engineered Metals and Composites, Inc. (“EMC”)
In September 2018, the Company completed the acquisition of the business and certain assets of West Columbia, South Carolina-based EMC, a designer and manufacturer of custom marine towers, frames, and other fabricated component products for OEMs in the marine industry, for a net initial purchase price of $25.3 million, plus contingent consideration over a three-month period based on future performance.
The results of operations for EMC are included in the Company’s condensed consolidated financial statements and the Manufacturing operating segment from the date of acquisition. After adjusting for a $0.1 million increase to the estimated purchase price reported at December 31, 2018 due to a final working capital adjustment of $0.1 million, changes from previously reported estimated amounts as of December 31, 2018 include an increase to intangible assets of $1.6 million, an increase to inventory of $0.1 million, a decrease to property, plant and equipment of $0.8 million, a decrease to goodwill of $0.6 million and an increase to accounts payable of $0.2 million. There was no material impact to the condensed consolidated statement of income related to these changes in the period in which the purchase price allocation and all purchase accounting adjustments were finalized.
LaSalle Bristol (“LaSalle”)
In November 2018, the Company completed the acquisition of LaSalle, a distributor and manufacturer of plumbing, flooring, tile, lighting, air handling and building products for the MH, RV, and industrial markets, for a net purchase price of $51.1 million, net of cash acquired. LaSalle is headquartered in Elkhart, Indiana and operates a total of 15 manufacturing and distribution centers located in North America.
The results of operations for LaSalle are included in the Company’s condensed consolidated financial statements and the Manufacturing and Distribution operating segments from the date of acquisition. The preliminary purchase price allocation is subject to final review and approval, and thus all required purchase accounting adjustments are subject to change within the measurement period as the Company finalizes its fair value estimates.
After adjusting for a $1.1 million increase in the estimated purchase price reported at December 31, 2018 due to a final working capital adjustment of $1.1 million, changes from previously reported estimated amounts as of December 31, 2018 are related primarily to a $6.7 million decrease to inventory, offset partly by a $0.8 million increase to accounts receivable, a $0.3 million increase to prepaid expenses and a $6.7 million increase to goodwill. There was no material impact to the condensed consolidated statement of income related to these changes.
The following table summarizes the fair values of the assets acquired and the liabilities assumed as of the date of the acquisition for the 2019 and 2018 acquisitions:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
(thousands) | Trade receivables | Inventories | Property, plant and equipment | Prepaid expenses & other | Intangible assets | Goodwill | Less: Total liabilities | Less: Deferred tax liability, net | Total net assets acquired |
| | | | | | | | | |
2019 (1) | $ | 2,245 |
| $ | 5,296 |
| $ | 1,650 |
| $ | 133 |
| $ | 8,329 |
| $ | 7,177 |
| $ | 1,135 |
| $ | — |
| $ | 23,695 |
|
| | | | | | | | | |
2018 |
|
|
|
|
|
|
|
|
|
MMC (2) | $ | 1,463 |
| $ | 2,324 |
| $ | 2,085 |
| $ | — |
| $ | 8,540 |
| $ | 7,668 |
| $ | 827 |
| $ | — |
| $ | 21,253 |
|
AMC | 3,942 |
| 5,623 |
| 2,321 |
| 39 |
| 6,550 |
| 1,755 |
| 2,463 |
| — |
| 17,767 |
|
IMP (3) | 1,943 |
| 4,286 |
| 1,463 |
| 13 |
| 12,920 |
| 8,803 |
| 2,930 |
| — |
| 26,498 |
|
Collins | 2,830 |
| 9,903 |
| 1,188 |
| 5 |
| 18,430 |
| 10,237 |
| 2,586 |
| — |
| 40,007 |
|
Dehco | 4,771 |
| 16,923 |
| 13,755 |
| 208 |
| 13,950 |
| 6,580 |
| 3,392 |
| — |
| 52,795 |
|
Dowco | 4,053 |
| 4,498 |
| 8,566 |
| 1,240 |
| 28,435 |
| 13,732 |
| 4,178 |
| — |
| 56,346 |
|
MAC | 3,054 |
| 6,815 |
| 7,003 |
| 284 |
| 26,190 |
| 25,669 |
| 4,226 |
| 7,767 |
| 57,022 |
|
EMC (4) | 623 |
| 1,678 |
| 1,684 |
| — |
| 17,350 |
| 7,483 |
| 987 |
| — |
| 27,831 |
|
LaSalle | 9,002 |
| 39,344 |
| 8,500 |
| 6,547 |
| 5,885 |
| 10,441 |
| 28,601 |
| 41 |
| 51,077 |
|
Other | 473 | 329 |
| 280 |
| 13 |
| 1,667 |
| 919 |
| 195 |
| — |
| 3,486 |
|
2018 Totals | $ | 32,154 |
| $ | 91,723 |
| $ | 46,845 |
| $ | 8,349 |
| $ | 139,917 |
| $ |
|