10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on November 7, 2019
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED September 29, 2019
OR
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)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
(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.
☒ |
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 |
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 |
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
|
ITEM 4. CONTROLS AND PROCEDURES |
|
PART II. OTHER INFORMATION |
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ITEM 1A. RISK FACTORS |
|
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
|
ITEM 6. EXHIBITS |
|
SIGNATURES |
|
2
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 |
$ |
$ |
||||||
Trade and other receivables, net |
||||||||
Inventories |
||||||||
Prepaid expenses and other |
||||||||
Total current assets |
||||||||
Property, plant and equipment, net |
||||||||
Operating lease right-of-use assets |
||||||||
Goodwill |
||||||||
Intangible assets, net |
||||||||
Deferred financing costs, net |
||||||||
Other non-current assets |
||||||||
TOTAL ASSETS |
$ |
$ |
||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY |
||||||||
Current Liabilities |
||||||||
Current maturities of long-term debt |
$ |
$ |
||||||
Current operating lease liabilities |
||||||||
Accounts payable |
||||||||
Accrued liabilities |
||||||||
Total current liabilities |
||||||||
Long-term debt, less current maturities, net |
||||||||
Long-term operating lease liabilities |
||||||||
Deferred tax liabilities, net |
||||||||
Other long-term liabilities |
||||||||
TOTAL LIABILITIES |
||||||||
SHAREHOLDERS’ EQUITY |
||||||||
Common stock |
||||||||
Additional paid-in-capital |
||||||||
Accumulated other comprehensive loss |
( |
) |
( |
) |
||||
Retained earnings |
||||||||
TOTAL SHAREHOLDERS’ EQUITY |
||||||||
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY |
$ |
$ |
||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
3
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 |
$ |
$ |
$ |
$ |
||||||||||||
Cost of goods sold |
||||||||||||||||
GROSS PROFIT |
||||||||||||||||
Operating Expenses: |
||||||||||||||||
Warehouse and delivery |
||||||||||||||||
Selling, general and administrative |
||||||||||||||||
Amortization of intangible assets |
||||||||||||||||
Total operating expenses |
||||||||||||||||
OPERATING INCOME |
||||||||||||||||
Interest expense, net |
||||||||||||||||
Income before income taxes |
||||||||||||||||
Income taxes |
||||||||||||||||
NET INCOME |
$ |
$ |
$ |
$ |
||||||||||||
BASIC NET INCOME PER COMMON SHARE |
$ |
$ |
$ |
$ |
||||||||||||
DILUTED NET INCOME PER COMMON SHARE |
$ |
$ |
$ |
$ |
||||||||||||
Weighted average shares outstanding – Basic |
||||||||||||||||
Weighted average shares outstanding – Diluted |
||||||||||||||||
See accompanying Notes to Condensed Consolidated Financial Statements. | ||||||||||||||||
4
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 |
$ |
$ |
$ |
$ |
||||||||||||
Other comprehensive (loss) income, net of tax: |
||||||||||||||||
Unrealized (loss) gain of hedge derivatives |
( |
) |
( |
) |
||||||||||||
Foreign currency translation gain (loss) |
( |
) |
( |
) |
( |
) |
||||||||||
Total other comprehensive (loss) gain |
( |
) |
( |
) |
||||||||||||
COMPREHENSIVE INCOME |
$ |
$ |
$ |
$ |
||||||||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
5
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 |
$ |
$ |
$ |
( |
) |
$ |
$ |
|||||||||||||
Net income |
— |
— |
— |
|||||||||||||||||
Other comprehensive loss, net of tax |
— |
— |
( |
) |
— |
( |
) |
|||||||||||||
Share repurchases under buyback program |
( |
) |
( |
) |
— |
( |
) |
( |
) |
|||||||||||
Shares used to pay taxes on stock grants |
( |
) |
— |
( |
) |
|||||||||||||||
Stock-based compensation expense |
— |
— |
— |
|||||||||||||||||
Balance September 29, 2019 |
$ |
$ |
$ |
( |
) |
$ |
$ |
|||||||||||||
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 |
$ |
$ |
$ |
( |
) |
$ |
$ |
|||||||||||||
Net income |
— |
— |
— |
|||||||||||||||||
Other comprehensive loss, net of tax |
— |
— |
( |
) |
— |
( |
) |
|||||||||||||
Share repurchases under buyback program |
( |
) |
( |
) |
— |
( |
) |
( |
) |
|||||||||||
Shares used to pay taxes on stock grants |
( |
) |
— |
— |
— |
( |
) |
|||||||||||||
Issuance of shares upon exercise of common stock options |
— |
— |
— |
|||||||||||||||||
Stock-based compensation expense |
— |
— |
— |
|||||||||||||||||
Balance September 29, 2019 |
$ |
$ |
$ |
( |
) |
$ |
$ |
|||||||||||||
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 |
$ |
$ |
$ |
$ |
$ |
|||||||||||||||
Net income |
— |
— |
||||||||||||||||||
Other comprehensive income, net of tax |
— |
— |
||||||||||||||||||
Stock repurchases under buyback program |
( |
) |
( |
) |
( |
) |
( |
) |
||||||||||||
Issuance of shares upon exercise of common stock options |
( |
) |
— |
— |
— |
( |
) |
|||||||||||||
Shares used to pay taxes on stock grants |
— |
— |
— |
|||||||||||||||||
Stock-based compensation expense |
— |
— |
— |
|||||||||||||||||
Equity component of convertible notes issuance |
— |
— |
— |
|||||||||||||||||
Balance September 30, 2018 |
$ |
$ |
$ |
$ |
$ |
|||||||||||||||
6
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 |
$ |
$ |
$ |
$ |
$ |
|||||||||||||||
Net income |
— |
— |
— |
|||||||||||||||||
Other comprehensive loss, net of tax |
— |
— |
— |
|||||||||||||||||
Stock repurchases under buyback program |
( |
) |
( |
) |
( |
) |
( |
) |
||||||||||||
Issuance of shares upon exercise of common stock options |
— |
— |
— |
|||||||||||||||||
Shares used to pay taxes on stock grants |
( |
) |
— |
— |
— |
( |
) |
|||||||||||||
Stock-based compensation expense |
— |
— |
— |
|||||||||||||||||
Purchase of convertible notes hedges |
— |
( |
) |
— |
— |
( |
) |
|||||||||||||
Proceeds from sale of warrants |
— |
— |
— |
|||||||||||||||||
Equity component of convertible notes issuance |
— |
— |
— |
|||||||||||||||||
Balance September 30, 2018 |
$ |
$ |
$ |
$ |
$ |
|||||||||||||||
See accompanying Notes to Condensed Consolidated Financial Statements
7
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 |
$ |
$ |
||||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Depreciation and amortization |
||||||||
Stock-based compensation expense |
||||||||
Amortization of convertible notes debt discount |
||||||||
Deferred income taxes |
( |
) |
( |
) |
||||
Other |
( |
) |
||||||
Change in operating assets and liabilities, net of acquisitions of businesses: |
||||||||
Trade receivables |
( |
) |
( |
) |
||||
Inventories |
( |
) |
||||||
Prepaid expenses and other assets |
||||||||
Accounts payable, accrued liabilities and other |
||||||||
Net cash provided by operating activities |
||||||||
CASH FLOWS FROM INVESTING ACTIVITIES |
||||||||
Capital expenditures |
( |
) |
( |
) |
||||
Proceeds from sale of property, equipment and other investing activities |
||||||||
Business acquisitions, net of cash acquired |
( |
) |
( |
) |
||||
Net cash used in investing activities |
( |
) |
( |
) |
||||
CASH FLOWS FROM FINANCING ACTIVITIES |
||||||||
Term debt borrowings |
||||||||
Term debt repayments |
( |
) |
( |
) |
||||
Borrowings on revolver |
||||||||
Repayments on revolver |
( |
) |
( |
) |
||||
Stock repurchases under buyback program |
( |
) |
( |
) |
||||
Proceeds from issuance of senior notes |
||||||||
Proceeds from convertible notes offering |
||||||||
Purchase of convertible notes hedges |
( |
) |
||||||
Proceeds from sale of warrants |
||||||||
Payments related to vesting of stock-based awards, net of shares tendered for taxes |
( |
) |
( |
) |
||||
Payment of deferred financing costs |
( |
) |
( |
) |
||||
Payment of contingent consideration from a business acquisition |
( |
) |
||||||
Other financing activities |
( |
) |
||||||
Net cash provided by financing activities |
||||||||
Increase (decrease) in cash and cash equivalents |
( |
) |
||||||
Cash and cash equivalents at beginning of year |
||||||||
Cash and cash equivalents at end of period |
$ |
$ |
||||||
8
PATRICK INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. |
BASIS OF PRESENTATION |
The accompanying unaudited condensed consolidated financial statements of Patrick Industries, Inc. (“Patrick”, the “Company”, "we", "our") contain all adjustments (consisting of normal recurring adjustments) that we believe are necessary to present fairly the Company’s financial position as of September 29, 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.
9
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.
3. |
REVENUE RECOGNITION |
In the following table, revenue from contracts with customers, net of intersegment sales, is disaggregated by market type and by reportable segments, 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 |
$ |
$ |
$ |
|||||||||
Manufactured Housing |
||||||||||||
Industrial |
||||||||||||
Marine |
||||||||||||
Total |
$ |
$ |
$ |
|||||||||
Nine Months Ended September 29, 2019 |
||||||||||||
(thousands) |
Manufacturing |
Distribution |
Total Reportable Segments |
|||||||||
Market type: |
||||||||||||
Recreational Vehicle |
$ |
$ |
$ |
|||||||||
Manufactured Housing |
||||||||||||
Industrial |
||||||||||||
Marine |
||||||||||||
Total |
$ |
$ |
$ |
|||||||||
10
Third Quarter Ended September 30, 2018 |
||||||||||||
(thousands) |
Manufacturing |
Distribution |
Total Reportable Segments |
|||||||||
Market type: |
||||||||||||
Recreational Vehicle |
$ |
$ |
$ |
|||||||||
Manufactured Housing |
||||||||||||
Industrial |
||||||||||||
Marine |
||||||||||||
Total |
$ |
$ |
$ |
|||||||||
Nine Months Ended September 30, 2018 |
||||||||||||
(thousands) |
Manufacturing |
Distribution |
Total Reportable Segments |
|||||||||
Market type: |
||||||||||||
Recreational Vehicle |
$ |
$ |
$ |
|||||||||
Manufactured Housing |
||||||||||||
Industrial |
||||||||||||
Marine |
||||||||||||
Total |
$ |
$ |
$ |
|||||||||
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 |
$ |
$ |
|||||
Contract liabilities |
$ |
$ |
|||||
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 |
$ |
( |
) |
|
Increases due to cash received, excluding amounts recognized as revenue during the period |
$ |
|||
4. |
INVENTORIES |
Inventories consist of the following:
11
(thousands) |
September 29, 2019 |
December 31, 2018 |
||||||
Raw materials |
$ |
$ |
||||||
Work in process |
||||||||
Finished goods |
||||||||
Less: reserve for inventory obsolescence |
( |
) |
( |
) |
||||
Total manufactured goods, net |
||||||||
Materials purchased for resale (distribution products) |
||||||||
Less: reserve for inventory obsolescence |
( |
) |
( |
) |
||||
Total materials purchased for resale (distribution products), net |
||||||||
Total inventories |
$ |
$ |
||||||
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 |
$ |
$ |
$ |
|||||||||
Acquisitions |
||||||||||||
Adjustments to preliminary purchase price allocations |
||||||||||||
Balance - September 29, 2019 |
$ |
$ |
$ |
|||||||||
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 |
$ |
$ |
||||||||||
Non-compete agreements |
||||||||||||
Patents |
||||||||||||
Trademarks |
Indefinite |
Indefinite |
||||||||||
Less: accumulated amortization |
( |
) |
( |
) |
||||||||
Intangible assets, net |
$ |
$ |
||||||||||
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 |
$ |
$ |
$ |
|||||||||
Acquisitions |
||||||||||||
Amortization |
( |
) |
( |
) |
( |
) |
||||||
Adjustments to preliminary purchase price allocations |
( |
) |
( |
) |
( |
) |
||||||
Balance - September 29, 2019 |
$ |
$ |
$ |
|||||||||
12
6. |
ACQUISITIONS |
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.
13
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.
14
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:
15
(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)
|
$ |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
||||||||||||||||||
2018 |
|||||||||||||||||||||||||||
MMC (2)
|
$ |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
||||||||||||||||||
AMC |
|||||||||||||||||||||||||||
IMP (3)
|
|||||||||||||||||||||||||||
Collins |
|||||||||||||||||||||||||||
Dehco |
|||||||||||||||||||||||||||
Dowco |
|||||||||||||||||||||||||||
MAC |
|||||||||||||||||||||||||||
EMC (4)
|
|||||||||||||||||||||||||||
LaSalle |
|||||||||||||||||||||||||||
Other |
|||||||||||||||||||||||||||
2018 Totals |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
||||||||||||||||||
(1) Total net assets acquired for the 2019 acquisitions reflect the preliminary estimated liability of $2.6 million pertaining to the fair value of contingent consideration based on future performance relating to the acquisition of G.G. Schmitt.
(2) Total net assets acquired for MMC reflect the preliminary estimated liability of $1.4 million pertaining to the fair value of the contingent consideration based on future performance.
(3) Total net assets acquired for IMP reflect the preliminary estimated liability of $7.9 million pertaining to the fair value of the contingent consideration based on future performance.
(4) Total net assets acquired for EMC reflect the preliminary estimated liability of $2.5 million pertaining to the fair value of the contingent consideration based on future performance.
The following pro forma information for the third quarter and first nine months ended September 29, 2019 and September 30, 2018 assumes the 2019 and 2018 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 2019 and 2018 acquisitions combined with the results prior to their respective acquisition dates, adjusted to reflect the pro forma impact of the acquisitions occurring as of the beginning of the year immediately preceding each such acquisition.
The pro forma information includes financing and interest expense charges based on incremental borrowings incurred in connection with each transaction. In addition, the pro forma information includes amortization expense, in the aggregate, related to intangible assets acquired in connection with the transactions of $0.2 million and $0.5 million for the third quarter and nine months ended September 29, 2019, respectively, and $0.7 million and $5.7 million for the third quarter and nine months ended September 30, 2018, respectively.
Third Quarter Ended |
Nine Months Ended |
|||||||||||||||
(thousands except per share data) |
September 29, 2019 |
September 30, 2018 |
September 29, 2019 |
September 30, 2018 |
||||||||||||
Revenue |
$ |
$ |
$ |
$ |
||||||||||||
Net income |
||||||||||||||||
Basic net income per common share |
||||||||||||||||
Diluted net income per common share |
||||||||||||||||
16
7. |
STOCK-BASED COMPENSATION |
The Company recorded expense of $3.8 million and $3.5 million for the third quarter ended September 29, 2019 and September 30, 2018, respectively, for its stock-based compensation plans in the condensed consolidated statements of income. For the first nine months of 2019 and 2018, the Company recorded $12.0 million and $10.9 million in stock-based compensation expense, respectively.
The Board approved various share grants under the Company’s 2009 Omnibus Incentive Plan in the first nine months of 2019 totaling 376,186 shares in the aggregate.
As of September 29, 2019, there was approximately $23.8 million of total unrecognized compensation cost related to stock-based compensation arrangements granted under incentive plans. That cost is expected to be recognized over a weighted-average period of 18.0 months.
8. |
NET INCOME PER COMMON SHARE |
Net income per common share calculated for the third quarter and nine months of 2019 and 2018 is as follows:
Third Quarter Ended |
Nine Months Ended |
|||||||||||||||
(thousands except per share data) |
September 29, 2019 |
September 30, 2018 |
September 29, 2019 |
September 30, 2018 |
||||||||||||
Net income for basic and diluted per share calculation |
$ |
$ |
$ |
$ |
||||||||||||
Weighted average common shares outstanding - basic |
||||||||||||||||
Effect of potentially dilutive securities |
||||||||||||||||
Weighted average common shares outstanding - diluted |
||||||||||||||||
Basic net income per common share |
$ |
$ |
$ |
$ |
||||||||||||
Diluted net income per common share |
$ |
$ |
$ |
$ |
||||||||||||
17
9. |
DEBT |
A summary of total debt outstanding at September 29, 2019 and December 31, 2018 is as follows:
(thousands) |
September 29, 2019 |
December 31, 2018 |
||||||
Long-term debt: |
||||||||
Revolver |
$ |
$ |
||||||
Term Loan |
||||||||
Senior Notes |
||||||||
Convertible Notes |
||||||||
Total long-term debt |
||||||||
Less: Convertible Notes debt discount, net |
( |
) |
( |
) |
||||
Less: Senior Notes deferred financing costs, net |
( |
) |
||||||
Less: current maturities of long-term debt |
( |
) |
( |
) |
||||
Less: Term Loan deferred financing costs, net |
( |
) |
( |
) |
||||
Total long-term debt, less current maturities, net |
$ |
$ |
||||||
Senior Notes
On September 17, 2019, the Company issued $300 million aggregate principal amount of 7.50 % Senior Notes due 2027 (the “Senior Notes”). The Senior Notes were not registered under the Securities Act of 1933, as amended (the "Securities Act") and were offered under Rule 144A under the Securities Act. The Senior Notes will mature on October 15, 2027. Interest on the Senior Notes will accrue from September 17, 2019 and is payable semi-annually in cash in arrears on April 15 and October 15 of each year, beginning on April 15, 2020. The effective interest rate on the Senior Notes, which includes debt issuance costs, was 7.83 %. In connection with the issuance of the Senior Notes, the Company incurred and capitalized as a reduction of the principal amount of the Senior Notes approximately $6.0 million in deferred financing costs which will be amortized using the effective interest rate over the term of the Senior Notes.
The Senior Notes are senior unsecured indebtedness of the Company and are guaranteed by each of the Company’s subsidiaries that guarantee the obligations of the Company under the 2019 Credit Facility (as defined herein). The Company may redeem the Senior Notes, in whole or in part, at any time (a) prior to October 15, 2022, at a price equal to 100 % of the principal amount thereof, plus the applicable premium described in the associated indenture and accrued and unpaid interest and (b) on or after October 15, 2022 at specified redemption prices set forth in the indenture, plus accrued and unpaid interest. In addition, prior to October 15, 2022, the Company may redeem, in one or more transactions, up to an aggregate of 40 % of the original principal amount of the Senior Notes at a redemption price equal to 107.5 % of the principal amount thereof, plus accrued and unpaid interest, with the net cash proceeds of one or more equity offerings. If the Company experiences specific kinds of changes of control, the Company must offer to repurchase all of the Senior Notes (unless otherwise redeemed) at a price equal to 101 % of the aggregate principal amount thereof, plus accrued and unpaid interest.
2019 Credit Facility
Simultaneously with the issuance of the Senior Notes, the Company entered into the Third Amended and Restated Credit Agreement (the “2019 Credit Agreement”). The 2019 Credit Agreement amended and extended the Company’s 2018 Credit Agreement (as defined herein) and consists of a $550 million senior secured revolver (the “2019 Revolver”) and a $100 million senior secured term loan (the “2019 Term Loan” and together with the 2019 Revolver, the “2019 Credit Facility”). The maturity date for borrowings under the 2019 Credit Agreement 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 2019 Credit Facility by up to $250 million.
Borrowings under the 2019 Credit Facility are secured by substantially all personal property assets of the Company and any domestic subsidiary guarantors. Pursuant to the 2019 Credit Agreement:
18
• |
The 2019 Term Loan is due in consecutive quarterly installments in the following amounts: (i) beginning September 30, 2019, through and including June 30, 2021, $ |
• |
The interest rates for borrowings under the 2019 Revolver and the 2019 Term Loan are the Prime Rate or LIBOR plus a margin, which ranges from |
• |
Covenants include requirements as to a maximum consolidated total net leverage ratio ( |
At September 29, 2019, the Company had $100.0 million outstanding under the 2019 Term Loan under the LIBOR-based option, and borrowings outstanding under the 2019 Revolver of $135.0 million under the LIBOR-based option. The interest rate for incremental borrowings at September 29, 2019 was LIBOR plus 1.5 % (or 3.54 %) for the LIBOR-based option. The fee payable on committed but unused portions of the 2019 Revolver was 0.20 % at September 29, 2019.
Total cash interest paid for the third quarter of 2019 and 2018 was $6.9 million and $6.6 million, respectively, and $19.7 million and $12.2 million for the comparative nine month periods, respectively.
2018 Credit Facility
See Note 9 of the Notes to Consolidated Financial Statements section of the Fiscal 2018 Form 10-K regarding the Company's previous credit agreement (the "2018 Credit Agreement") which established an $800 million revolving credit loan (the “2018 Revolver”) and a $100 million term loan (the “2018 Term Loan” and, together with the 2018 Revolver, the “2018 Credit Facility”). The 2018 Credit Agreement was amended by the 2019 Credit Agreement on September 17, 2019 as discussed above. The Company recorded a $0.7 million loss on extinguishment of debt in the third quarter of 2019 in connection with the replacement of the 2018 Credit Facility with the 2019 Credit Facility.
Convertible Senior Notes
10. |
DERIVATIVE FINANCIAL INSTRUMENTS |
Convertible Note Hedge Transactions and Warrant Transactions
In January 2018, in connection with the Convertible Notes offering, the Company entered into privately negotiated convertible note hedge transactions (together, the “Convertible Note Hedge Transactions”) with each of Bank of America, N.A. and Wells Fargo Bank, National Association (together, the “Hedge Counterparties”), pursuant to which the Company acquired options to purchase the same number of shares of its common stock initially underlying the Convertible Notes. See Note 10 of the Notes to Consolidated Financial Statements section of the Fiscal 2018 Form 10-K for information regarding the Convertible Note Hedge Transactions.
At the same time, the Company also entered into separate, privately negotiated warrant transactions (the “Warrant Transactions”) with each of the Hedge Counterparties, pursuant to which the Company sold warrants to purchase the same number of shares of its common stock initially underlying the Convertible Notes. See Note 10 of the Notes to Consolidated Financial Statements section of the Fiscal 2018 Form 10-K for further information regarding the Warrant Transactions.
19
There have been no material changes to the terms of the Convertible Note Hedge Transactions or the Warrant Transactions during the nine month period ended September 29, 2019.
As these transactions meet certain accounting criteria, the Convertible Note Hedges Transactions and Warrant Transactions are recorded in shareholders’ equity and are not accounted for as derivatives.
Interest Rate Swaps
The 2019 Credit Facility exposes the Company to risk associated with the variability in interest expense associated with fluctuations in LIBOR. To partially mitigate this risk, the Company entered into interest rate swaps on a portion of its 2018 Credit Facility, now amended by the 2019 Credit Facility. As of September 29, 2019, the Company had a combined notional principal amount of $200.0 million of interest rate swap agreements, all of which are designated as cash flow hedges. These swap agreements effectively convert the interest expense associated with a portion of the 2019 Term Loan and a portion of the 2019 Revolver from variable interest rates to fixed interest rates and have maturities ranging from February 2022 to March 2022.
Fair Value of Derivative Contracts
The following table summarizes the fair value of derivative contracts included in the condensed statement of financial position (in thousands):
Fair value of derivative instruments |
|||||||||
Derivatives accounted for as cash flow hedges |
Balance sheet location |
September 29, 2019 |
December 31, 2018 |
||||||
Interest rate swaps |
Other long-term liabilities |
$ |
$ |
||||||
The interest rate swaps are comprised of over-the-counter derivatives, which are valued using models that primarily rely on observable inputs such as yield curves, which are classified as Level 2 in the fair value hierarchy.
11. |
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) |
Accumulated other comprehensive income (loss) includes unrealized gains and losses on derivatives that qualify as hedges of cash flows, unrecognized pension-related costs and cumulative foreign currency translation adjustments. The activity in accumulated other comprehensive loss during the three and nine months ended September 29, 2019 and September 30, 2018 was as follows:
Third Quarter Ended September 29, 2019 | |||||||||||||||
(thousands) |
Cash Flow Hedges |
Defined Benefit Pension |
Foreign Currency Items |
Total |
|||||||||||
Balance at June 30, 2019 |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
|||
Other comprehensive income (loss) (net of tax of $83, $0 and $0) |
( |
) |
( |
) |
|||||||||||
Balance at September 29, 2019 |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
|||
20
Nine Months Ended September 29, 2019 | |||||||||||||||
(thousands) |
Cash Flow Hedges |
Defined Benefit Pension |
Foreign Currency Items |
Total |
|||||||||||
Balance at December 31, 2018 |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
|||
Other comprehensive loss (net of tax of $1,098, $0 and $0) |
( |
) |
( |
) |
( |
) |
|||||||||
Balance at September 29, 2019 |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
|||
Third Quarter Ended September 30, 2018 | |||||||||||||||
(thousands) |
Cash Flow Hedges |
Defined Benefit Pension |
Foreign Currency Items |
Total |
|||||||||||
Balance at July 1, 2018 |
$ |
$ |
$ |
( |
) |
$ |
|||||||||
Other comprehensive income (loss) (net of tax of $28, $0 and $0) |
( |
) |
|||||||||||||
Balance at September 30, 2018 |
$ |
$ |
$ |
( |
) |
$ |
|||||||||
Nine Months Ended September 30, 2018 | |||||||||||||||
(thousands) |
Cash Flow Hedges |
Defined Benefit Pension |
Foreign Currency Items |
Total |
|||||||||||
Balance at December 31, 2017 |
$ |
$ |
$ |
$ |
|||||||||||
Other comprehensive income (loss) (net of tax of $28, $0 and $0) |
( |
) |
|||||||||||||
Balance at September 30, 2018 |
$ |
$ |
$ |
( |
) |
$ |
|||||||||
12. |
LEASES |
As discussed in Note 2, the Company adopted the provisions of ASC 842 on January 1, 2019 using the modified retrospective approach as of the effective date of ASC 842 (the effective date method). Under the effective date method, financial results in periods reported prior to 2019 are unchanged.
As a result of the adoption of ASC 842, operating leases for certain warehouses, buildings, forklifts, trucks, trailers and other equipment are now recognized as right-of-use assets and corresponding short-term and long-term lease liabilities. The Company utilized a package of available practical expedients in the adoption of ASC 842, which, among them, does not require the reassessment of operating versus capital lease classification.
Leases with an initial term of 12 months or less are not recorded on the balance sheet and expense related to these short term leases is immaterial. Lease and non-lease components in the fixed base rent of facility and equipment leases are included as a single component and accounted for as a lease. Pursuant to ASC 842, the Company elected to use the remaining non-cancellable lease term as of January 1, 2019 in determining the lease term at the date of adoption and the corresponding incremental borrowing rate for such leases. Variable lease expense, principally related to trucks, forklifts, and index-related facility rent escalators, was immaterial for the third quarter and nine months ended September 29, 2019. Leases have remaining lease terms of one year to eleven years . Certain leases include options to renew for an additional term. Where there is reasonable certainty to utilize a renewal option, we include the renewal option in the lease term used to calculate operating lease right-of-use assets and lease liabilities.
21
Lease expense, supplemental cash flow information, and other information related to leases were as follows:
(thousands) |
Third Quarter Ended |
Nine Months Ended |
|||||
September 29, 2019 |
September 29, 2019 |
||||||
Operating lease cost |
$ |
$ |
|||||
Cash paid for amounts included in the measurement of lease liabilities: |
|||||||
Operating cash flows for operating leases |
$ |
$ |
|||||
Right-of-use assets obtained in exchange for lease obligations: |
|||||||
Operating leases |
$ |
$ |
|||||
Balance sheet information related to leases was as follows:
(thousands, except lease term and discount rate) |
September 29, 2019 |
||
Assets |
|||
Operating lease right-of-use assets |
$ |
||
Liabilities |
|||
Operating lease liabilities, current portion |
$ |
||
Long-term operating lease liabilities |
|||
Total lease liabilities |
$ |
||
Weighted average remaining lease term, operating leases (in years) |
||
Weighted average discount rate, operating leases |
% |
|
Maturities of lease liabilities were as follows at September 29, 2019:
(thousands) |
|||
2019 (excluding the nine months ended September 29, 2019) |
$ |
||
2020 |
|||
2021 |
|||
2022 |
|||
2023 |
|||
Thereafter |
|||
Total lease payments |
|||
Less imputed interest |
( |
) |
|
Total |
$ |
||
Disclosures related to periods prior to the adoption of ASC 842:
22
Maturities of lease liabilities were as follows at December 31, 2018:
(thousands) |
|||
2019 |
$ |
||
2020 |
|||
2021 |
|||
2022 |
|||
2023 |
|||
Thereafter |
|||
Total |
$ |
||
13. |
FAIR VALUE MEASUREMENTS |
The carrying amounts of cash equivalents, representing government and other money market funds traded in an active market, are reported on the condensed consolidated statements of financial position as a component of "Cash and cash equivalents". The carrying amount of cash equivalents at September 29, 2019 approximated fair value which was approximately $108.0 million, valued using level 1 inputs, with no corresponding amount at December 31, 2018. The carrying amount of the Senior Notes at September 29, 2019 approximated fair value given their recent issuance and based upon terms and conditions available to the Company, with no corresponding amount at December 31, 2018. The 2019 Term Loan and the 2019 Revolver, valued using level 2 inputs, approximated fair value as of September 29, 2019 and the 2018 Term Loan and the 2018 Revolver, valued using level 2 inputs, approximated fair value ss of December 31, 2018, respectively, based upon terms and conditions available to the Company at those dates in comparison to the terms and conditions of its outstanding debt. The estimated fair value of the Convertible Notes, calculated using Level 2 inputs, was approximately $152.1 million and $130.3 million as of September 29, 2019 and December 31, 2018, respectively. The estimated fair value of the Company's interest rate swaps is valued using Level 2 inputs and discussed in further detail in Note 10. The estimated fair value of the Company's contingent consideration is valued using Level 3 inputs and is discussed further in Note 6.
14. |
INCOME TAXES |
The effective tax rate in the third quarter of 2019 and 2018 was 26.0 % and 25.3 %, respectively, and the effective tax rate for the comparable nine month periods was 24.6 % and 23.6 %, respectively. The effective tax rate for the periods presented includes the impact of the recognition of excess tax benefits on share-based compensation that was recorded as a reduction to income tax expense upon realization in the amount of $0.9 million and $2.2 million for the nine months ended September 29, 2019 and September 30, 2018, respectively, with no corresponding amounts in the corresponding quarterly periods.
15. |
SEGMENT INFORMATION |
The Company has two reportable segments, Manufacturing and Distribution, which are those based on its method of internal reporting, which segregates its businesses based on the manner in which its Chief Operating Decision Maker allocates resources, evaluates financial results, and determines compensation.
The tables below present information about the sales and operating income of those segments.
23
Third Quarter Ended September 29, 2019 |
||||||||||||
(thousands) |
Manufacturing |
Distribution |
Total |
|||||||||
Net outside sales |
$ |
$ |
$ |
|||||||||
Intersegment sales |
||||||||||||
Total sales |
||||||||||||
Operating income |
||||||||||||
Third Quarter Ended September 30, 2018 |
||||||||||||
(thousands) |
Manufacturing |
Distribution |
Total |
|||||||||
Net outside sales |
$ |
$ |
$ |
|||||||||
Intersegment sales |
||||||||||||
Total sales |
||||||||||||
Operating income |
||||||||||||
Nine Months Ended September 29, 2019 |
||||||||||||
(thousands) |
Manufacturing |
Distribution |
Total |
|||||||||
Net outside sales |
$ |
$ |
$ |
|||||||||
Intersegment sales |
||||||||||||
Total sales |
||||||||||||
Operating income |
||||||||||||
Nine Months Ended September 30, 2018 |
||||||||||||
(thousands) |
Manufacturing |
Distribution |
Total |
|||||||||
Net outside sales |
$ |
$ |
$ |
|||||||||
Intersegment sales |
||||||||||||
Total sales |
||||||||||||
Operating income |
||||||||||||
The following table presents a reconciliation of segment operating income to consolidated operating income:
Third Quarter Ended |
Nine Months Ended |
|||||||||||||||
(thousands) |
September 29, 2019 |
September 30, 2018 |
September 29, 2019 |
September 30, 2018 |
||||||||||||
Operating income for reportable segments |
$ |
$ |
$ |
$ |
||||||||||||
Unallocated corporate expenses |
( |
) |
( |
) |
( |
) |
( |
) |
||||||||
Amortization |
( |
) |
( |
) |
( |
) |
( |
) |
||||||||
Consolidated operating income |
$ |
$ |
$ |
$ |
||||||||||||
Unallocated corporate expenses include corporate general and administrative expenses comprised of wages, insurance, taxes, supplies, travel and entertainment, professional fees and other.
24
16. |
STOCK REPURCHASE PROGRAMS
|
17. |
RELATED PARTY TRANSACTIONS |
25
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the Company’s Condensed Consolidated Financial Statements and Notes thereto included in Item 1 of this Report. In addition, this MD&A contains certain statements relating to future results which are forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. See “Information Concerning Forward-Looking Statements” on pages 34 and 35 of this Report. The Company undertakes no obligation to update these forward-looking statements.
The MD&A is divided into seven major sections:
OVERVIEW OF MARKETS AND RELATED INDUSTRY PERFORMANCE
REVIEW OF CONSOLIDATED OPERATING RESULTS
Third Quarter and Nine Months Ended September 29, 2019 Compared to 2018
Use of Financial Metrics
REVIEW BY BUSINESS SEGMENT
Third Quarter and Nine Months Ended September 29, 2019 Compared to 2018
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
Summary of Liquidity and Capital Resources
CRITICAL ACCOUNTING POLICIES
OTHER
Seasonality
Cyber Security Incident
INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS
OVERVIEW OF MARKETS AND RELATED INDUSTRY PERFORMANCE
Recreational Vehicle ("RV") Industry
The RV industry is our primary market and comprised 55% and 56% of the Company’s sales in the third quarter and first nine months of 2019, respectively. Sales from the RV industry decreased 13% and 12% in the third quarter and first nine months of 2019, respectively, compared to the prior year periods.
According to the Recreation Vehicle Industry Association (“RVIA”), wholesale shipments totaled 93,357 units in the third quarter of 2019, a decline of 13% compared to 107,130 units in the third quarter of 2018, while for the first nine months of 2019, wholesale unit shipments decreased 18% versus the prior year period. Based on actual retail sales data through August, the Company estimates that retail unit shipments declined 6% and 7%, respectively, for the third quarter of 2019 and first nine months of 2019 versus the comparable prior year periods. With estimated retail unit shipments outpacing wholesale unit shipments in the third quarter and first nine months of 2019, RV dealer inventories declined in both periods. The RVIA’s latest published expectations for fiscal 2019 project wholesale unit shipments to be approximately 401,000 units, representing a decline of 17% from 2018. On the retail side, the Company expects RV retail unit shipments to decline at a mid-to-high single digit rate in 2019. For the full year 2019, RV dealer inventories are expected to decline by more than 50,000 units, positioning the industry to return to a more direct relationship between wholesale unit shipments and retail unit shipments for the upcoming 2020 selling season.
26
Marine Industry
Sales to the marine industry, which represented approximately 13% and 14% of the Company's consolidated net sales in the third quarter and first nine months of 2019, respectively, decreased 7% and increased 34% compared to the third quarter and first nine months of 2018, respectively. For the third quarter and first nine months of 2019, overall marine retail unit shipments in the powerboat sector, which is the Company's primary marine market, increased approximately 2% and decreased approximately 5%, respectively, with aluminum fishing sales decreasing 5% and 11% in the third quarter and first nine months of 2019, respectively; pontoon sales increasing 11% and decreasing 1%, respectively; fiberglass sales decreasing 1% and 3%, respectively; and ski and wake sales increasing 12% and 4%, respectively.
Adverse weather and flooding in certain regions of the country impacted marine retail unit shipments in the first half of 2019, particularly in the pontoon and aluminum fishing categories. Reflecting this retail softness in the first half of 2019, we saw inventory recalibration by marine dealers in the third quarter of 2019, which we believe contributed to a decline in wholesale unit shipments in the quarter despite the increase in overall retail unit shipments. Factoring in the impact of weather in the first half of 2019 and the related dealer inventory re-calibration, we anticipate that the powerboat sector of this market will experience a retail unit percentage decline in the low-to-mid single digits for fiscal 2019 and a wholesale unit percentage decline in the high-single digits.
Manufactured Housing ("MH") Industry
Sales to the MH industry, which represented 19% and 18% of the Company’s sales in the third quarter and first nine months of 2019, respectively, increased 61% and 62% compared to the respective prior year periods. Based on industry
data from the Manufactured Housing Institute, MH wholesale unit shipments increased by approximately 2% and decreased by approximately 5% in the third quarter and first nine months of 2019, respectively. Manufactured housing was negatively impacted in the first half of 2019 by wet weather conditions in certain regions of the country where moving inventory and setting foundations and houses were difficult, and as a result our current estimates indicate an overall percentage decline in MH wholesale unit shipments for fiscal 2019 in the low-to-mid single digits.
Industrial Market
The industrial market is comprised primarily of the kitchen cabinet industry, hospitality market, retail and commercial fixtures market, office and household furniture market and regional distributors. Sales to this market represented 13% and 12% of our consolidated sales in the third quarter and first nine months of 2019, respectively, and were virtually unchanged in the third quarter and the first nine months of 2019 compared to prior year periods. Overall, our revenues in these markets are focused on the residential housing, hospitality, high-rise housing and office, commercial construction and institutional furniture markets. We estimate that approximately 60% of our industrial business is directly tied to the residential housing market, with the remaining 40% directly tied to the non-residential and commercial markets.
Combined new housing starts increased 4% in the third quarter of 2019 compared to the prior year quarter, with single family housing starts increasing 4% and multifamily residential starts increasing 6% for the same period. For the first nine months of 2019, single family housing starts decreased 2%, while multifamily housing starts were virtually flat, with combined housing starts decreasing 1%. Our industrial products are generally among the last components installed in new unit construction and as such our related sales typically trail new housing starts by four to six months. Because of this lag in the relationship between new housing starts and our sale of related industrial products, we expect our industrial sales to benefit in the next two quarters from recent growth in residential housing starts. We expect a low-single digit growth rate in new housing starts overall for fiscal 2019.
27
REVIEW OF CONSOLIDATED OPERATING RESULTS
Third Quarter and Nine Months Ended September 29, 2019 Compared to 2018
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 |
|||||||||||
|
September 29, 2019
|
September 30, 2018
|
September 29, 2019
|
September 30, 2018
|
|||||||||
Net sales |
100.0 |
% |
100.0 |
% |
100.0 |
% |
100.0 |
% |
||||
Cost of goods sold |
81.6 |
81.5 |
81.9 |
81.6 |
||||||||
Gross profit |
18.4 |
18.5 |
18.1 |
18.4 |
||||||||
Warehouse and delivery expenses |
4.2 |
3.4 |
4.2 |
3.2 |
||||||||
Selling, general and administrative expenses |
6.0 |
5.8 |
5.8 |
5.7 |
||||||||
Amortization of intangible assets |
1.6 |
1.5 |
1.5 |
1.4 |
||||||||
Operating income |
6.6 |
7.8 |
6.6 |
8.1 |
||||||||
Interest expense, net |
1.5 |
1.3 |
1.5 |
1.0 |
||||||||
Income taxes |
1.3 |
1.6 |
1.3 |
1.7 |
||||||||
Net income |
3.8 |
4.9 |
3.9 |
5.4 |
||||||||
Net Sales. Net sales in the third quarter of 2019 decreased $8.9 million, or 2%, to $566.2 million from $575.1 million in the third quarter of 2018. The Company's net sales decreased in two of its primary markets, with a decrease in RV market sales of 13% and a decrease in marine market sales of 7%, while industrial market sales were virtually flat and MH market sales increased 61% when compared to the prior year quarter.
Net sales in the first nine months of 2019 increased $55.8 million, or 3%, to $1.79 billion from $1.73 billion in the prior year period. The Company's net sales increased in two of its primary markets in the first nine months of 2019 with increases of 62% in MH and 34% in marine, while industrial market sales were virtually unchanged and RV market sales decreased 12% compared to 2018.
The consolidated net sales decrease in the third quarter of 2019 primarily reflected decreases in OEM wholesale unit shipments in the RV and marine industries, partly offset by an increase in revenue from the acquisition of LaSalle Bristol ("LaSalle"), completed in the fourth quarter of 2018. The consolidated net sales increase in the first nine months of 2019 was mostly attributed to the contribution of revenue from LaSalle.
Revenue attributable to acquisitions completed in the first nine months of 2019 was immaterial for both the third quarter and first nine months of 2019. Revenue attributable to acquisitions completed in first nine months of 2018 was $82.4 million and $160.0 million for the third quarter and first nine months of 2018, respectively.
The Company’s RV content per wholesale unit (on a trailing twelve-month basis) for the third quarter of 2019 increased approximately 9% to $3,132 from $2,875 for the third quarter of 2018. Marine content per retail unit (on a trailing twelve-month basis) for the third quarter of 2019 increased approximately 54% to an estimated $1,624 from $1,054 for the third quarter of 2018. MH content per wholesale unit (on a trailing twelve-month basis) for the third quarter of 2019 increased approximately 65% to an estimated $4,327 from $2,628 for the third quarter of 2018.
Cost of Goods Sold. Cost of goods sold decreased $6.6 million, or 1%, to $461.9 million in the third quarter of 2019 from $468.5 million in 2018. As a percentage of net sales, cost of goods sold increased during the third quarter of 2019 to 81.6% from 81.5% in 2018. For the first nine months of 2019, cost of goods sold increased $51.4 million, or 4%, to $1,464.1 million from $1,412.6 million in 2018. As a percentage of net sales, cost of goods sold increased during the first nine months of 2019 to 81.9% from 81.6% in 2018.
28
Cost of goods sold as a percentage of net sales was impacted during the third quarter and first nine months of 2019 by: (i) higher overall fixed overhead costs relative to RV and marine revenue; (ii) the lower margin profile of LaSalle, which was acquired in the fourth quarter of 2018 and (iii) a temporary disruption in operations and associated inefficiencies related to the cybersecurity incident, discussed below. In general, the Company's cost of goods sold percentage can be impacted from quarter-to-quarter by demand changes in certain market sectors that can result in fluctuating costs of certain raw materials and commodity-based components that are utilized in the production of our products.
Gross Profit. Gross profit decreased $2.4 million, or 2%, to $104.3 million in the third quarter of 2019 from $106.7 million in 2018. For the first nine months of 2019, gross profit increased $4.3 million, or 1%, to $323.5 million from $319.2 million in 2018. As a percentage of net sales, gross profit decreased to 18.4% in the third quarter of 2019 from 18.5% in the same period in 2018, and decreased to 18.1% for the first nine months of 2019 from 18.4% in the same period in 2018. The changes in gross profit as a percentage of net sales in the third quarter and first nine months of 2019 compared to the same periods in 2018 reflect the impact of the factors discussed above under “Cost of Goods Sold”.
Economic or industry-wide factors affecting the profitability of our RV, MH, marine and industrial businesses include the costs of commodities and the labor used to manufacture our products as well as the competitive environment that can cause gross margins to fluctuate from quarter-to-quarter and year-to-year.
Warehouse and Delivery Expenses. Warehouse and delivery expenses increased $4.1 million, or 21%, to $23.9 million in the third quarter of 2019 from $19.8 million in 2018. For the first nine months in 2019, warehouse and delivery expenses increased $18.7 million, or 34%, to $74.2 million from $55.5 million in 2018. As a percentage of net sales, warehouse and delivery expenses were 4.2% in the third quarter of 2019 compared to 3.4% in the third quarter of 2018 and 4.2% in the first nine months of 2019 compared to 3.2% the first nine months of 2018. The increase in expense in the third quarter and first nine months of 2019 compared to the prior year periods was primarily attributable to the impact of certain acquisitions completed in 2018 that had higher warehouse and delivery expenses as a percentage of net sales when compared to the consolidated percentage. For the first nine months of 2019 compared to the prior year period, increased sales volumes also contributed to the increase in warehouse and delivery expense. In addition, the Company's shipments to OEMs in the third quarter and first nine months of 2019 were generally lower volume and higher frequency, and as a result transportation costs relative to sales levels of products delivered increased as a percentage of net sales.
Selling, General and Administrative ("SG&A") Expenses. SG&A expenses increased $0.5 million, or 2%, to $33.8 million in the third quarter of 2019 from $33.3 million in 2018. For the first nine months of 2019, SG&A expenses increased $5.4 million, or 5%, to $104.4 million from $99.0 million in 2018. As a percentage of net sales, SG&A expenses were 6.0% in the third quarter of 2019 compared to 5.8% in the third quarter of 2018 and 5.8% in the first nine months of 2019 compared to 5.7% in 2018.
The increase in SG&A expenses in the third quarter and first nine months of 2019 compared to 2018 is primarily due to: (i) an increase in professional service fees and other costs associated with the cyber security event discussed below; (ii) a loss on extinguishment of debt associated with the amendment of the Company's credit facility and (iii) the impact of certain acquisitions completed in 2018 that had higher SG&A expenses as a percentage of net sales when compared to the consolidated percentage. Partially offsetting these factors was a decrease in incentive compensation and sales commissions.
Amortization of Intangible Assets. Amortization of intangible assets increased $0.3 million, or 4%, in the third quarter of 2019 compared to the prior year quarter, and increased $1.3 million, or 5%, in the first nine months of 2019 compared to the prior year period. The increase in the third quarter and first nine months of 2019 compared to the prior year periods primarily reflects the impact of businesses acquired in 2018, partly offset by purchase accounting adjustments to intangible assets and the associated impact to amortization expense.
Operating Income. Operating income decreased $7.3 million, or 16%, to $37.4 million in the third quarter of 2019 from $44.7 million in 2018. For the first nine months of 2019, operating income decreased $21.1 million, or 15%, to $118.5 million from $139.5 million in the prior year period. As a percentage of net sales, operating income was 6.6% in the third quarter of 2019 versus 7.8% in the same period in 2018 and 6.6% for the first nine months of 2019 versus 8.1% in the prior year period. Operating income in the third quarter and first nine months of 2019 attributable to acquisitions completed in the first nine months of 2019 was immaterial. Operating income in the third quarter and the first nine months of 2018 included $8.8 million and $17.3 million, respectively, attributable to acquisitions completed in the first nine months of 2018. The change in operating income and operating margin is primarily attributable to the items discussed above.
29
Interest Expense, Net. Interest expense increased $1.3 million, or 17%, to $8.6 million in the third quarter of 2019 from $7.3 million in the prior year. For the first nine months of 2019, interest expense increased $8.2 million, or 46%, to $26.2 million from $18.0 million in the prior year period. The increase in interest expense reflects: (i) increased borrowings related to 2018 acquisitions, (ii) increases in the average interest rate on the variable rate portion of the Company's debt, which reflects increases in LIBOR in the third quarter and first nine months of 2019 compared to the prior year periods and (iii) an increase in the Company's overall average interest rate resulting from the issuance of the Company's 7.5% Senior Notes due 2027 (the "Senior Notes") in the third quarter of 2019.
Income Taxes. Income tax expense decreased $1.9 million, or 21%, to $7.5 million from $9.4 million in the prior year period. For the first nine months of 2019, income tax expense decreased $6.0 million, or 21%, to $22.7 million from $28.7 million in the prior year period. For the third quarter of 2019, the effective tax rate was 26.0% compared to 25.3% in the comparable 2018 period. For the first nine months of 2019, the effective tax rate was 24.6% compared to 23.6% for the prior year period. The effective tax rate for the periods presented includes the impact of the recognition of excess tax benefits on share-based compensation that were recorded as a reduction to income tax expense upon realization. Amounts recorded include $0.9 million and $2.2 million for the nine-month 2019 and 2018 periods, respectively, with no amounts for the comparable quarterly periods.
The Company's combined effective income tax rate from period to period and for the full year 2019 could further fluctuate due to: (i) refinements in federal and state income tax estimates, which are impacted by the availability of tax credits; (ii) permanent differences impacting the effective tax rate; (iii) shifts in apportionment factors among states as a result of recent acquisition activity and other factors and (iv) the timing of the recognition of excess tax benefits related to the vesting of share-based payments awards as previously discussed.
Net Income. Net income for the third quarter of 2019 was $21.3 million, or $0.92 per diluted share, compared to $27.9 million, or $1.15 per diluted share for 2018. For the first nine months of 2019, net income was $69.6 million, or $2.99 per diluted share, compared to $92.9 million, or $3.77 per diluted share for 2018. The changes in net income for the third quarter and first nine months of 2019 compared to prior year periods reflect the impact of the items previously discussed.
Use of Financial Metrics
Our MD&A includes financial metrics, such as RV, marine and MH content per unit, which we believe are important measures of the Company's business performance. 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. You should not consider these metrics in isolation or as substitutes for an analysis of our results as reported under U.S. GAAP.
REVIEW BY BUSINESS SEGMENT
The Company has determined that its reportable segments are those 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 Company’s reportable business segments are as follows:
Manufacturing – This segment includes the following: laminated products that are utilized to produce furniture, shelving, walls, countertops, and cabinet products, cabinet doors, fiberglass bath fixtures and tile systems, hardwood furniture, vinyl printing, decorative vinyl and paper laminated panels, solid surface, granite, and quartz countertop fabrication, RV painting, fabricated aluminum products, fiberglass and plastic components, softwoods lumber, custom cabinetry, polymer-based flooring, electrical systems components including instrument and dash panels, wrapped vinyl, paper and hardwood profile mouldings, interior passage doors, air handling products, slide-out trim and fascia, thermoformed shower surrounds, specialty bath and closet building products, fiberglass and plastic helm systems and components products, wiring and wire harnesses, boat covers, towers, tops and frames, aluminum fuel tanks, CNC molds and composite parts, slotwall panels and components and other products.
Distribution – The Company distributes pre-finished wall and ceiling panels, drywall and drywall finishing products, electronics and audio systems components, appliances, wiring, electrical and plumbing products, fiber reinforced polyester products, cement siding, raw and processed lumber, interior passage doors, roofing products, laminate and ceramic
30
flooring, tile, shower doors, furniture, fireplaces and surrounds, interior and exterior lighting products, and other miscellaneous products, in addition to providing transportation and logistics services.
Third Quarter and Nine Months Ended September 29, 2019 Compared to 2018
General
In the discussion that follows, sales attributable to the Company’s operating 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 operating segments. A reconciliation of consolidated operating income is presented in Note 15 to the Notes to Condensed Consolidated Financial Statements.
Third Quarter Ended |
Nine Months Ended |
|||||||||||||||
(thousands) |
September 29, 2019
|
September 30, 2018 |
September 29, 2019
|
September 30, 2018 |
||||||||||||
Sales |
||||||||||||||||
Manufacturing |
$ |
407,814 |
$ |
453,396 |
$ |
1,283,824 |
$ |
1,371,552 |
||||||||
Distribution |
167,552 |
131,022 |
531,312 |
390,602 |
||||||||||||
Gross Profit |
||||||||||||||||
Manufacturing |
73,700 |
86,015 |
231,227 |
262,824 |
||||||||||||
Distribution |
27,965 |
21,974 |
87,738 |
63,668 |
||||||||||||
Operating Income |
||||||||||||||||
Manufacturing |
42,353 |
54,887 |
135,577 |
172,799 |
||||||||||||
Distribution |
9,041 |
7,606 |
28,132 |
25,092 |
||||||||||||
Manufacturing
Sales. Sales decreased $45.6 million, or 10%, to $407.8 million in the third quarter of 2019 from $453.4 million in 2018. For the first nine months of 2019, sales decreased $87.7 million, or 6%, to $1,283.8 million from $1,371.6 million in the prior year period. This segment accounted for approximately 71% and 70% of the Company’s consolidated net sales for the third quarter and first nine months of 2019 and 77% and 78% for the third quarter and first nine months of 2018. The sales decrease in the third quarter of 2019 largely reflected a decrease in wholesale unit shipments in the RV and marine industries, and in the RV, MH and marine industries in the first nine months of 2019.
Revenue in the third quarter and first nine months of 2019 was immaterial related to acquisitions completed in the first nine months of 2019. Revenue in the third quarter and first nine months of 2018 included $51.8 million and $99.0 million, respectively, related to acquisitions completed in the first nine months of 2018.
Gross Profit. Gross profit decreased $12.3 million, or 14%, to $73.7 million in the third quarter of 2019 from $86.0 million in the third quarter of 2018. For the first nine months of 2019, gross profit decreased $31.6 million, or 12%, to $231.2 million from $262.8 million in 2018. As a percentage of sales, gross profit decreased to 18.1% in the third quarter of 2019 from 19.0% in 2018 and decreased to 18.0% in the first nine months of 2019 from 19.2% in 2018.
Gross profit decreased during the third quarter and first nine months of 2019 compared to the corresponding prior year periods primarily due to decreased revenue relative to overall fixed overhead costs.
Operating Income. Operating income decreased $12.5 million, or 23%, to $42.4 million in the third quarter of 2019 from $54.9 million in the prior year. For the first nine months of 2019, operating income decreased $37.2 million, or 22%, to $135.6 million from $172.8 million in 2018. The overall decrease in operating income in the third quarter and first nine months of 2019 primarily reflects the items discussed above.
31
Operating income in the third quarter and first nine months of 2019 attributable to acquisitions completed in the first nine months of 2019 was immaterial, and operating income in the third quarter and first nine months of 2018 included $7.0 million and $12.9 million, respectively, attributable to acquisitions completed in the first nine months of 2018.
Distribution
Sales. Sales increased $36.5 million, or 28%, to $167.5 million in the third quarter of 2019 from $131.0 million in 2018. For the first nine months of 2019, sales increased $140.7 million, or 36%, to $531.3 million from $390.6 million in 2018. This segment accounted for approximately 29% and 30%, respectively, of the Company’s consolidated net sales for the third quarter and first nine months of 2019, and 23% and 22%, respectively, for the third quarter and first nine months of 2018. The sales increase in the third quarter and first nine months of 2019 compared to the prior year periods was largely attributed to the revenue contribution of LaSalle, which was acquired during the fourth quarter of 2018. Revenue in the third quarter and first nine months of 2018 included $30.6 million and $61.0 million, respectively, related to acquisitions completed in the first nine months of 2018.
Gross Profit. Gross profit increased $6.0 million, or 27%, to $28.0 million in the third quarter of 2019 from $22.0 million in the third quarter of 2018. For the first nine months of 2019, gross profit increased $24.0 million, or 38%, to $87.7 million from $63.7 million in 2018. As a percentage of sales, gross profit decreased to 16.7% in the third quarter of 2019 from 16.8% in the third quarter of 2018 and increased to 16.5% for the first nine months of 2019 from 16.3% for the first nine months of 2018. The decrease in gross profit margin in the third quarter of 2019 compared to the third quarter of 2018 is primarily attributed to higher overall fixed costs relative to RV and MH distribution product revenue. The increase in gross profit margin for the first nine months of 2019 compared to 2018 primarily reflects the impact of acquisitions completed during 2018.
Operating Income. Operating income increased $1.4 million, or 19%, to $9.0 million in the third quarter of 2019 from $7.6 million in the prior year. For the first nine months of 2019, operating income increased $3.0 million, or 12%, to $28.1 million from $25.1 million for the first nine months of 2018. Operating income in the third quarter and first nine months of 2018 included $1.8 million and $4.4 million, respectively, related to distribution acquisitions completed in the first nine months of 2018. The overall net improvement in operating income in the third quarter and first nine months of 2019 primarily reflects the items discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
Operating Activities
Cash flows from operating activities are one of the Company's primary sources of liquidity, representing the net income the Company earned in the reported periods, adjusted for non-cash items and changes in operating assets and liabilities.
Net cash provided by operating activities decreased $5.4 million to $122.0 million in the first nine months of 2019 from $127.4 million in the first nine months of 2018 primarily due to: a decrease in net income of $23.3 million, partly offset by (i) an increase of depreciation and amortization of $6.6 million, (ii) an increase in stock based compensation expense, amortization of debt discount, deferred income taxes and other operating items of $5.0 million and (iii) a net source of cash from changes in operating assets and liabilities of $6.3 million.
Investing Activities
Net cash used in investing activities decreased $270.9 million to $40.1 million in the first nine months of 2019 from $311.0 million in the first nine months of 2018 primarily due to: a decrease in cash used in business acquisitions of $267.7 million and a decrease in capital expenditures of $3.8 million.
The Company's current operating model forecasts capital expenditures for fiscal 2019 of approximately $30 million.
32
Financing Activities
Cash flows from financing activities are one of the Company's primary sources of liquidity through borrowings under the Company's credit facility as well as convertible and senior note issuances in 2018 and 2019, respectively.
Net cash flows provided by financing activities decreased $153.2 million to $27.9 million in the first nine months of 2019 from $181.1 million in the first nine months of 2018 primarily due to: (i) cash used for net repayments on the Company's credit facility of $253.6 million in the first nine months of 2019 compared to a source of cash from net borrowings on the Company's credit facility of $107.1 million in the first nine months of 2018; (ii) gross proceeds of $172.5 million from the third quarter 2018 issuance of 1% Convertible Senior Notes due 2023 (the "Convertible Notes") with no comparable amount in the first nine months of 2019; (iii) a source of cash in the first nine months of 2018 of $18.1 million from the related sale of warrants with no comparable amount in the first nine months of 2019 and (iv) a use of cash of $4.4 million in the first nine months of 2019 from payment of contingent consideration resulting from a business acquisition with no comparable amount in the first nine months of 2018. Partially offsetting these items were: (i) the issuance of $300 million of Senior Notes in the first nine months of 2019 with no comparable amount in the first nine months of 2018; (ii) a use of cash in the first nine months of 2018 of $31.5 million from the purchase of Convertible Notes hedges with no comparable amount in the first nine months of 2019 and (iii) a decrease in the use of cash for stock repurchases of $71.4 million in the first nine months of 2019 from the prior year period.
See Notes 9, 10 and 16 of the Notes to Condensed Consolidated Financial Statements for further information on the Company's indebtedness, derivative financial instruments and stock repurchases, respectively.
Summary of Liquidity and Capital Resources
The Company's existing cash and cash equivalents, cash generated from operations, and available borrowings under its current credit facility (the "2019 Credit Facility") are expected to be sufficient to meet anticipated cash needs for working capital and capital expenditures for at least the next 12 months, exclusive of any acquisitions, based on its current cash flow budgets and forecast of short-term and long-term liquidity needs.
The ability to access unused borrowing capacity under the 2019 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 that established the 2019 Credit Facility (the "2019 Credit Agreement").
As of and for the September 29, 2019 reporting date, the Company was in compliance with its financial debt covenants as required under the terms of the 2019 Credit Agreement. The required maximum consolidated total leverage ratio and the required minimum consolidated fixed charge coverage ratio compared to the actual amounts as of September 29, 2019 and for the fiscal period then ended are as follows:
Required |
Actual |
|||||
Consolidated total leverage ratio (12-month period) |
4.00 |
2.30 |
||||
Consolidated fixed charge coverage ratio (12-month period) |
1.50 |
4.05 |
||||
The indenture associated with the Senior Notes places restrictions on the Company’s ability to, among other items, (i) incur additional indebtedness or issue certain preferred shares; (ii) pay dividends, redeem stock or make other distributions; (iii) make investments; (iv) transfer or sell assets; and (v) merge or consolidate. The Senior Note indenture also provides for customary events of default, which could require the Senior Notes to become due and payable immediately, and also contains customary covenant provisions with which the Company is in compliance as of September 29, 2019.
Working capital requirements vary from period to period depending on manufacturing volumes primarily related to the RV, MH and marine industries as well as the industrial markets we serve, the timing of deliveries, and the payment cycles of customers. In the event that operating cash flow is inadequate and one or more of the Company's capital resources were to become unavailable, the Company would seek to revise its operating strategies accordingly. The Company will continue to assess its liquidity position and potential sources of supplemental liquidity in view of operating performance, current economic and capital market conditions, and other relevant circumstances.
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Borrowings under the revolving credit loan (the "2019 Revolver") and the term loan (the "2019 Term Loan") comprising the 2019 Credit Facility, which are subject to variable rates of interest, are subject to a maximum total borrowing limit of $650.0 million (effective September 17, 2019). See Note 9 of the Notes to the Condensed Consolidated Financial Statements for further information. See Note 10 of the Notes to Condensed Consolidated Financial Statements for information on interest rate swaps used to partially hedge variable interest rates under the 2019 Revolver and 2019 Term Loan. The unused availability under the 2019 Credit Facility as of September 29, 2019 was $411.1 million.
CRITICAL ACCOUNTING POLICIES
There have been no material changes to our critical accounting policies which are summarized in the MD&A in our Annual Report on Form 10-K for the year ended December 31, 2018.
OTHER
Seasonality
Manufacturing operations in the RV, marine and MH industries historically have been seasonal and at their highest levels when the weather is moderate. Accordingly, the Company’s sales and profits had generally been the highest in the second quarter and lowest in the fourth quarter. Seasonal industry trends in the past several years have included the impact related to the addition of major RV manufacturer open houses for dealers in the August/September timeframe, resulting in dealers delaying certain restocking purchases until new product lines are introduced at these shows. In addition, current and future seasonal industry trends may be different than in prior years due to the impact of national and regional economic conditions and consumer confidence on retail sales of RVs and other products for which the Company sells its components, timing of dealer orders, fluctuations in dealer inventories, and from time to time, the impact of severe weather conditions on the timing of industry-wide wholesale shipments.
Cyber Security Incident
At the end of the third quarter of 2019, the Company experienced a highly-sophisticated third-party malware cyberattack that impacted certain of the Company's administrative and production servers and resulted in a disruption of administrative and network operations for approximately two business days. In response to the attack, the Company immediately took steps to ensure customer commitments were honored and to remediate the attack to minimize the disruption. Further, although the Company has programs in place to detect, contain and respond to data security incidents, the Company began an investigation of the attack, including engaging external forensic and other IT experts, and is in the process of implementing further security measures and processes designed to prevent unauthorized access to its information systems and mitigate cybersecurity related risks. Estimated after-tax costs incurred in the third quarter of 2019 related to the cyberattack were approximately $1.5 million, which included incremental consulting and professional fees, administrative, operating, and production inefficiencies, and equipment replacement and repair. No additional material costs are expected to be incurred in future quarters related to the cyber incident.
INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS
The Company makes forward-looking statements with respect to financial condition, results of operations, business strategies, operating efficiencies or synergies, competitive position, growth opportunities for existing products, plans and objectives of management, markets for the common stock of Patrick Industries, Inc. and other matters from time to time and desires to take advantage of the “safe harbor” which is afforded such statements under the Private Securities Litigation Reform Act of 1995 when they are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the forward-looking statements. The statements contained in the foregoing “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, as well as other statements contained in the 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
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actual results will not be significantly different from that set forth in such forward-looking statement. The Company does not undertake to publicly update or revise any forward-looking statements except as required by law. Information about certain risks that could affect our business and cause actual results to differ from those expressed or implied in the forward-looking statements are contained in the section entitled “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, and in the Company's Form 10-Qs for subsequent quarterly periods, which are filed with the SEC and are available on the SEC’s website at www.sec.gov.
ITEM 3. |
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Debt Obligations under Credit Agreement
At September 29, 2019, our total debt obligations under our 2019 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 $0.4 million, assuming average borrowings, including the 2019 Term Loan, subject to variable rates of $35.0 million, which was the amount of such borrowings outstanding at September 29, 2019 subject to variable rates. The $35.0 million excludes deferred financing costs related to the 2019 Term Loan and $200.0 million of borrowings outstanding under the 2019 Credit Facility that are hedged at a fixed interest rate through interest rate swaps.
Inflation
The prices of key raw materials, consisting primarily of lauan, gypsum, particleboard, aluminum, softwoods lumber, and petroleum-based products are influenced by demand and other factors specific to these commodities, such as the price of oil, rather than being directly affected by inflationary pressures. Prices of certain commodities have historically been volatile and continued to fluctuate in the first nine months of 2019. During periods of rising commodity prices, we have generally been able to pass the increased costs to our customers in the form of surcharges and price increases. However, there can be no assurance future cost increases, if any, can be partially or fully passed on to customers, or that the timing of such sales price increases will match raw material cost increases. We do not believe that inflation had a material effect on results of operations for the periods presented.
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ITEM 4. |
CONTROLS AND PROCEDURES |
Disclosure Controls and Procedures
The Company maintains “disclosure controls and procedures”, as such term is defined under Securities Exchange Act Rule 13a-15(e), that are designed to ensure that information required to be disclosed in our Securities Exchange Act of 1934, as amended (the “Exchange Act”) reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow for timely decisions regarding required disclosures. In designing and evaluating the disclosure controls and procedures, the Company’s management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and the Company’s management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Under the supervision and with the participation of our senior management, including our Chief Executive Officer and Chief Financial Officer, the Company conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this quarterly report (the “Evaluation Date”). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded as of the Evaluation Date that our disclosure controls and procedures were effective such that the information relating to the Company, including consolidated subsidiaries, required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and is accumulated and communicated to the Company’s management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in internal control over financial reporting
There have been no changes in our internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the third quarter ended September 29, 2019 or subsequent to the date the Company completed its evaluation, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II: OTHER INFORMATION
Items 1, 3, 4 and 5 of Part II are not applicable and have been omitted.
ITEM 1A. |
RISK FACTORS |
There have been no material changes to the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018.
ITEM 2. |
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
(a) None.
(b) None.
(c) Issuer Purchases of Equity Securities
Period |
Total Number of Shares Purchased (1)
|
Average Price Paid Per Share (1) |
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2)
|
Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (2)
|
||||||||||
July 1 - July 28, 2019 |
— |
$ |
— |
— |
$ |
30,306,041 |
||||||||
July 29 - September 1, 2019 |
69,399 |
37.00 |
68,122 |
27,794,558 |
||||||||||
September 2 - September 29, 2019 |
30,079 |
35.65 |
30,079 |
26,722,195 |
||||||||||
99,478 |
98,201 |
|||||||||||||
(1) Amount includes 1,277 shares of common stock purchased by the Company in August 2019 for the sole purpose of satisfying the minimum tax withholding obligations of employees upon the vesting of stock awards held by the employees.
(2) See Note 16 to the Notes to Condensed Consolidated Financial Statements for additional information about the Company's stock repurchase program.
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ITEM 6. |
EXHIBITS |
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) |
|
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
PATRICK INDUSTRIES, INC.
|
||
(Registrant) |
||
Date: November 7, 2019 |
By: |
/s/ Todd M. Cleveland |
Todd M. Cleveland |
||
Chief Executive Officer |
||
Date: November 7, 2019 |
By: |
/s/ Joshua A. Boone |
Joshua A. Boone |
||
Vice President-Finance and Chief Financial Officer |
||
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