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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED June 28, 2020
OR
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ……………… to ………………
Commission file number 000-03922
PATRICK INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
|
| |
Indiana | 35-1057796 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
|
| | |
107 WEST FRANKLIN STREET, P.O. Box 638 |
ELKHART, | IN | 46515 |
(Address of principal executive offices) | (ZIP Code) |
(574) 294-7511
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
|
| | | | | | | | | |
Large accelerated filer | ☒ | Accelerated filer | ☐ | Non-accelerated filer | ☐ | Smaller reporting company | ☐ | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Securities registered pursuant to Section 12(b) of the Act:
|
| | |
Title of each class | Trading Symbol | Name of each exchange on which registered |
Common Stock, no par value | PATK | NASDAQ |
As of July 24, 2020, there were 23,448,725 shares of the registrant’s common stock outstanding.
PATRICK INDUSTRIES, INC.
TABLE OF CONTENTS
|
| |
| Page No. |
PART I. FINANCIAL INFORMATION | |
| |
ITEM 1. FINANCIAL STATEMENTS (Unaudited) | |
| |
Condensed Consolidated Statements of Income Second Quarter and Six Months ended June 28, 2020 and June 30, 2019 | |
| |
Condensed Consolidated Statements of Comprehensive Income Second Quarter and Six Months ended June 28, 2020 and June 30, 2019 | |
| |
Condensed Consolidated Statements of Financial Position June 28, 2020 and December 31, 2019 | |
| |
Condensed Consolidated Statements of Cash Flows Six Months ended June 28, 2020 and June 30, 2019 | |
| |
Condensed Consolidated Statements of Shareholders' Equity Second Quarter and Six Months ended June 28, 2020 and June 30, 2019 | |
| |
Notes to Condensed Consolidated Financial Statements | |
| |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | |
| |
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | |
| |
ITEM 4. CONTROLS AND PROCEDURES | |
| |
PART II. OTHER INFORMATION | |
| |
ITEM 1A. RISK FACTORS | |
| |
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS | |
| |
ITEM 6. EXHIBITS | |
| |
SIGNATURES | |
PART 1: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PATRICK INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
|
| | | | | | | | | | | | | | | | |
|
| Second Quarter Ended | | Six Months Ended |
(thousands except per share data) |
| June 28, 2020 |
| June 30, 2019 | | June 28, 2020 | | June 30, 2019 |
NET SALES |
| $ | 424,045 |
|
| $ | 613,218 |
| | $ | 1,013,277 |
| | $ | 1,221,436 |
|
Cost of goods sold |
| 350,324 |
|
| 500,557 |
| | 830,075 |
| | 1,002,227 |
|
GROSS PROFIT |
| 73,721 |
|
| 112,661 |
| | 183,202 |
| | 219,209 |
|
Operating Expenses: |
| |
| | | | | |
Warehouse and delivery |
| 20,209 |
|
| 26,270 |
| | 44,941 |
| | 50,311 |
|
Selling, general and administrative |
| 31,628 |
|
| 32,894 |
| | 67,497 |
| | 70,586 |
|
Amortization of intangible assets |
| 9,778 |
|
| 8,268 |
| | 19,379 |
| | 17,257 |
|
Total operating expenses |
| 61,615 |
|
| 67,432 |
| | 131,817 |
| | 138,154 |
|
OPERATING INCOME |
| 12,106 |
|
| 45,229 |
| | 51,385 |
| | 81,055 |
|
Interest expense, net |
| 10,821 |
|
| 8,636 |
| | 21,313 |
| | 17,619 |
|
Income before income taxes |
| 1,285 |
|
| 36,593 |
| | 30,072 |
| | 63,436 |
|
Income taxes |
| 571 |
|
| 9,177 |
| | 8,171 |
| | 15,171 |
|
NET INCOME |
| $ | 714 |
|
| $ | 27,416 |
| | $ | 21,901 |
| | $ | 48,265 |
|
|
|
|
|
| | | | | |
BASIC NET INCOME PER COMMON SHARE |
| $ | 0.03 |
|
| $ | 1.19 |
| | $ | 0.96 |
| | $ | 2.09 |
|
DILUTED NET INCOME PER COMMON SHARE |
| $ | 0.03 |
|
| $ | 1.18 |
| | $ | 0.95 |
| | $ | 2.07 |
|
|
|
|
|
| | | | | |
Weighted average shares outstanding – Basic |
| 22,667 |
|
| 23,102 |
| | 22,840 |
| | 23,071 |
|
Weighted average shares outstanding – Diluted |
| 22,932 |
|
| 23,316 |
| | 23,098 |
| | 23,282 |
|
| | | | | | | | |
See accompanying Notes to Condensed Consolidated Financial Statements. |
PATRICK INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
|
| | | | | | | | | | | | | | | | |
| | Second Quarter Ended | | Six Months Ended |
(thousands) | | June 28, 2020 | | June 30, 2019 | | June 28, 2020 | | June 30, 2019 |
NET INCOME | | $ | 714 |
| | $ | 27,416 |
| | $ | 21,901 |
| | $ | 48,265 |
|
Other comprehensive (loss) income, net of tax: | | | | | | | | |
Unrealized gain (loss) of hedge derivatives | | 464 |
| | (1,931 | ) | | (2,542 | ) | | (2,985 | ) |
Other | | (15 | ) | | (94 | ) | | (52 | ) | | (67 | ) |
Total other comprehensive income (loss) | | 449 |
| | (2,025 | ) | | (2,594 | ) | | (3,052 | ) |
COMPREHENSIVE INCOME | | $ | 1,163 |
| | $ | 25,391 |
| | $ | 19,307 |
| | $ | 45,213 |
|
See accompanying Notes to Condensed Consolidated Financial Statements.
PATRICK INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (Unaudited)
|
| | | | | | | | |
|
| As of |
(thousands) |
| June 28, 2020 |
| December 31, 2019 |
ASSETS |
| |
| |
Current Assets |
| |
| |
Cash and cash equivalents |
| $ | 111,062 |
|
| $ | 139,390 |
|
Trade and other receivables, net |
| 143,614 |
|
| 87,536 |
|
Inventories |
| 261,691 |
|
| 253,870 |
|
Prepaid expenses and other |
| 21,086 |
|
| 36,038 |
|
Total current assets |
| 537,453 |
|
| 516,834 |
|
Property, plant and equipment, net |
| 184,797 |
|
| 180,849 |
|
Operating lease right-of-use assets | | 96,065 |
| | 93,546 |
|
Goodwill |
| 326,478 |
|
| 319,349 |
|
Intangible assets, net |
| 344,905 |
|
| 357,014 |
|
Deferred financing costs, net |
| 2,706 |
|
| 2,978 |
|
Other non-current assets |
| 392 |
|
| 423 |
|
TOTAL ASSETS | | $ | 1,492,796 |
|
| $ | 1,470,993 |
|
LIABILITIES AND SHAREHOLDERS’ EQUITY |
| |
| |
Current Liabilities |
| |
| |
Current maturities of long-term debt |
| $ | 5,000 |
|
| $ | 5,000 |
|
Current operating lease liabilities | | 28,567 |
| | 27,694 |
|
Accounts payable |
| 115,838 |
|
| 96,208 |
|
Accrued liabilities |
| 69,132 |
|
| 58,033 |
|
Total current liabilities |
| 218,537 |
|
| 186,935 |
|
Long-term debt, less current maturities, net |
| 673,138 |
|
| 670,354 |
|
Long-term operating lease liabilities | | 68,318 |
| | 66,467 |
|
Deferred tax liabilities, net |
| 19,056 |
|
| 27,284 |
|
Other long-term liabilities |
| 20,479 |
|
| 22,472 |
|
TOTAL LIABILITIES |
| 999,528 |
|
| 973,512 |
|
SHAREHOLDERS’ EQUITY |
| |
| |
Common stock |
| 173,178 |
|
| 172,662 |
|
Additional paid-in-capital |
| 24,534 |
|
| 25,014 |
|
Accumulated other comprehensive loss |
| (8,292 | ) |
| (5,698 | ) |
Retained earnings |
| 303,848 |
|
| 305,503 |
|
TOTAL SHAREHOLDERS’ EQUITY |
| 493,268 |
|
| 497,481 |
|
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY |
| $ | 1,492,796 |
|
| $ | 1,470,993 |
|
See accompanying Notes to Condensed Consolidated Financial Statements.
PATRICK INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
|
| | | | | | | | |
| | Six Months Ended |
(thousands) | | June 28, 2020 | | June 30, 2019 |
CASH FLOWS FROM OPERATING ACTIVITIES | | | | |
Net income | | $ | 21,901 |
| | $ | 48,265 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | | |
Depreciation and amortization | | 34,689 |
| | 30,247 |
|
Stock-based compensation expense | | 6,347 |
| | 8,172 |
|
Amortization of convertible notes debt discount | | 3,505 |
| | 3,382 |
|
Deferred income taxes | | (7,346 | ) | | 231 |
|
Other | | 3,016 |
| | (810 | ) |
Change in operating assets and liabilities, net of acquisitions of businesses: | | | | |
Trade receivables | | (55,520 | ) | | (31,514 | ) |
Inventories | | (7,183 | ) | | 13,699 |
|
Prepaid expenses and other assets | | 14,908 |
| | 2,368 |
|
Accounts payable, accrued liabilities and other | | 25,055 |
| | 19,774 |
|
Net cash provided by operating activities |
| 39,372 |
|
| 93,814 |
|
CASH FLOWS FROM INVESTING ACTIVITIES |
| |
| |
Capital expenditures |
| (11,305 | ) |
| (18,177 | ) |
Proceeds from sale of property, equipment and other investing activities |
| 126 |
|
| 4,357 |
|
Business acquisitions, net of cash acquired |
| (23,838 | ) |
| (1,246 | ) |
Net cash used in investing activities |
| (35,017 | ) | | (15,066 | ) |
CASH FLOWS FROM FINANCING ACTIVITIES |
| |
| |
Term debt repayments |
| (1,250 | ) |
| (3,750 | ) |
Borrowings on revolver |
| 8,022 |
|
| 389,294 |
|
Repayments on revolver |
| (8,022 | ) |
| (439,627 | ) |
Stock repurchases under buyback program |
| (15,550 | ) |
| — |
|
Cash dividends paid to shareholders | | (11,607 | ) | | — |
|
Payments related to vesting of stock-based awards, net of shares tendered for taxes |
| (2,860 | ) | | (3,303 | ) |
Payment of deferred financing costs |
| (58 | ) | | (276 | ) |
Proceeds from exercise of stock options | | 642 |
| | 7 |
|
Payment of contingent consideration from a business acquisition | | (2,000 | ) | | (4,416 | ) |
Net cash used in financing activities |
| (32,683 | ) | | (62,071 | ) |
Increase (decrease) in cash and cash equivalents |
| (28,328 | ) | | 16,677 |
|
Cash and cash equivalents at beginning of year |
| 139,390 |
| | 6,895 |
|
Cash and cash equivalents at end of period |
| $ | 111,062 |
| | $ | 23,572 |
|
See accompanying Notes to Condensed Consolidated Financial Statements.
PATRICK INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | |
Second Quarter Ended June 28, 2020 |
(thousands) | | Common Stock | | Additional Paid-in- Capital | | Accumulated Other Comprehensive Loss | | Retained Earnings | | Total |
Balance March 29, 2020 | | $ | 170,626 |
| | $ | 24,534 |
| | $ | (8,741 | ) | | $ | 308,957 |
| | $ | 495,376 |
|
Net income | | — |
| | — |
| | — |
| | 714 |
| | 714 |
|
Dividends declared | | — |
| | — |
| | — |
| | (5,823 | ) | | (5,823 | ) |
Other comprehensive income, net of tax | | — |
| | — |
| | 449 |
| | — |
| | 449 |
|
Issuance of shares upon exercise of common stock options | | 642 |
| | — |
| | — |
| | — |
| | 642 |
|
Shares used to pay taxes on stock grants | | (126 | ) | | — |
| | — |
| | — |
| | (126 | ) |
Stock-based compensation expense | | 2,036 |
| | — |
| | — |
| | — |
| | 2,036 |
|
Balance June 28, 2020 | | $ | 173,178 |
| | $ | 24,534 |
| | $ | (8,292 | ) | | $ | 303,848 |
| | $ | 493,268 |
|
| | | | | | | | | | |
Six Months Ended June 28, 2020 |
(thousands) | | Common Stock | | Additional Paid-in- Capital | | Accumulated Other Comprehensive Loss | | Retained Earnings | | Total |
Balance December 31, 2019 | | $ | 172,662 |
| | $ | 25,014 |
| | $ | (5,698 | ) | | $ | 305,503 |
| | $ | 497,481 |
|
Net income | | — |
| | — |
| | — |
| | 21,901 |
| | 21,901 |
|
Dividends declared | | — |
| | — |
| | — |
| | (11,801 | ) | | (11,801 | ) |
Other comprehensive loss, net of tax | | — |
| | — |
| | (2,594 | ) | | — |
| | (2,594 | ) |
Share repurchases under buyback program | | (3,315 | ) | — |
| (480 | ) | — |
| — |
| — |
| (11,755 | ) | | (15,550 | ) |
Issuance of shares upon exercise of common stock options | | 642 |
| | — |
| | — |
| | — |
| | 642 |
|
Shares used to pay taxes on stock grants | | (3,158 | ) | | — |
| | — |
| | — |
| | (3,158 | ) |
Stock-based compensation expense | | 6,347 |
| | — |
| | — |
| | — |
| | 6,347 |
|
Balance June 28, 2020 | | $ | 173,178 |
| | $ | 24,534 |
| | $ | (8,292 | ) | | $ | 303,848 |
| | $ | 493,268 |
|
| | | | | | | | | | |
Second Quarter Ended June 30, 2019
|
(thousands) | | Common Stock | | Additional Paid-in- Capital | | Accumulated Other Comprehensive Loss | | Retained Earnings | | Total |
Balance March 31, 2019 | | $ | 161,949 |
| | $ | 25,124 |
| | $ | (3,707 | ) | | $ | 245,723 |
| | $ | 429,089 |
|
Net income | | — |
| | — |
| | — |
| | 27,416 |
| | 27,416 |
|
Other comprehensive loss, net of tax | | — |
| | — |
| | (2,025 | ) | | — |
| | (2,025 | ) |
Shares used to pay taxes on stock grants | | (91 | ) | | — |
| | — |
| | — |
| | (91 | ) |
Issuance of shares upon exercise of common stock options | | 3 |
| | — |
| | — |
| | — |
| | 3 |
|
Stock-based compensation expense | | 4,225 |
| | — |
| | — |
| | — |
| | 4,225 |
|
Balance June 30, 2019 | | $ | 166,086 |
| | $ | 25,124 |
| | $ | (5,732 | ) | | $ | 273,139 |
| | $ | 458,617 |
|
| | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
PATRICK INDUSTRIES, INC. |
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited) (cont.)
|
Six Months Ended June 30, 2019 |
(thousands) | | Common Stock | | Additional Paid-in- Capital | | Accumulated Other Comprehensive Loss | | Retained Earnings | | Total |
Balance December 31, 2018 | | $ | 161,436 |
| | $ | 25,124 |
| | $ | (2,680 | ) | | $ | 224,874 |
| | $ | 408,754 |
|
Net income | | — |
| | — |
| | — |
| | 48,265 |
| | 48,265 |
|
Other comprehensive loss, net of tax | | — |
| | — |
| | (3,052 | ) | | — |
| | (3,052 | ) |
Shares used to pay taxes on stock grants | | (3,528 | ) | | — |
| | — |
| | — |
| | (3,528 | ) |
Issuance of shares upon exercise of common stock options | | 6 |
| | — |
| | — |
| | — |
| | 6 |
|
Stock-based compensation expense | | 8,172 |
| | — |
| | — |
| | — |
| | 8,172 |
|
Balance June 30, 2019 | | $ | 166,086 |
| | $ | 25,124 |
| | $ | (5,732 | ) | | $ | 273,139 |
| | $ | 458,617 |
|
See accompanying Notes to Condensed Consolidated Financial Statements
PATRICK INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
The accompanying unaudited condensed consolidated financial statements of Patrick Industries, Inc. (“Patrick”, the “Company”, "we", "our") contain all adjustments (consisting of normal recurring adjustments) that we believe are necessary to present fairly the Company’s financial position as of June 28, 2020 and December 31, 2019, and its results of operations and cash flows for the second quarter and six months ended June 28, 2020 and June 30, 2019.
Patrick’s unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission and in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The preparation of the condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to those rules or regulations. Certain immaterial reclassifications have been made to the prior period presentation to conform to the current period presentation. For a description of significant accounting policies used by the Company in the preparation of its consolidated financial statements, please refer to Note 1 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. The December 31, 2019 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 second quarter and six months ended June 28, 2020 are not necessarily indicative of the results to be expected for the full year ending December 31, 2020.
The Company maintains its financial records on the basis of a fiscal year ending on December 31, with the fiscal quarters spanning approximately thirteen weeks. The first quarter ends on the Sunday closest to the end of the first thirteen-week period. The second and third quarters are thirteen weeks in duration and the fourth quarter is the remainder of the year. The second quarter of fiscal year 2020 ended on June 28, 2020 and the second quarter of fiscal year 2019 ended on June 30, 2019.
In preparation of Patrick’s condensed consolidated financial statements as of and for the second quarter and six months ended June 28, 2020, management evaluated all subsequent events and transactions that occurred after the balance sheet date through the date of issuance of the Form 10-Q that required recognition or disclosure in the condensed consolidated financial statements. See Note 17 for more information.
|
| |
2. | RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS |
Goodwill Impairment
In January 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2017-04, "Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment". This ASU simplifies the accounting for goodwill impairments by eliminating step two from the goodwill impairment test. The standard requires that the impairment loss be measured as the excess of the reporting unit's carrying amount over its fair value. It eliminates the second step that requires the impairment to be measured between the implied value of a reporting unit's goodwill and its carrying value. The Company adopted ASU 2017-04 on January 1, 2020 and the adoption did not have a material impact on the condensed consolidated financial statements.
Credit Losses
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments”, which amends certain provisions of Accounting Standards Codification ("ASC") 326, “Financial Instruments-Credit Loss”. The ASU changes the impairment model for most financial assets and certain other instruments. For trade and other receivables, held to maturity debt securities, loans and other instruments, entities are required to use a
new forward-looking “expected loss” model that generally will result in the earlier recognition of allowances for losses. Additionally, entities are required to disclose more information with respect to credit quality indicators, including information used to track credit quality by year of origination for most financing receivables. The Company adopted ASU 2016-13 on January 1, 2020 and the adoption did not have a material impact on the condensed consolidated financial statements.
Income Taxes
In December 2019, the FASB issued ASU 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes", a new standard to simplify the accounting for income taxes. The guidance eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences related to changes in ownership of equity method investments and foreign subsidiaries. The guidance also simplifies aspects of accounting for franchise taxes and enacted changes in tax laws or rates, and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The standard is effective for fiscal years beginning after December 15, 2020, with early adoption permitted. We are currently evaluating the impact of this standard on our consolidated financial statements.
Reference Rate Reform
In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848)", a new standard providing final guidance to provide temporary optional expedients and exceptions to the U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from LIBOR and other interbank offered rates to alternative reference rates, such as SOFR. Entities can elect not to apply certain modification accounting requirements to contracts affected by what the guidance calls reference rate reform, if certain criteria are met. An entity that makes this election would not have to remeasure the contracts at the modification date or reassess a previous accounting determination. Entities can elect various optional expedients that would allow them to continue applying hedge accounting for hedging relationships affected by reference rate reform, if certain criteria are met. The guidance is effective upon issuance and generally can be applied through December 31, 2022. We are currently evaluating the impact of this standard on our consolidated financial statements.
In the following table, revenue from contracts with customers, net of intersegment sales, is disaggregated by market type and by reportable segment, consistent with how the Company believes the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors:
|
| | | | | | | | | | | | |
| | Second Quarter Ended June 28, 2020 |
(thousands) | | Manufacturing | | Distribution | | Total Reportable Segments |
Market type: | | | | | | |
Recreational Vehicle | | $ | 139,628 |
| | $ | 64,498 |
| | $ | 204,126 |
|
Manufactured Housing | | 36,407 |
| | 53,907 |
| | 90,314 |
|
Industrial | | 61,679 |
| | 8,878 |
| | 70,557 |
|
Marine | | 54,860 |
| | 4,188 |
| | 59,048 |
|
Total | | $ | 292,574 |
| | $ | 131,471 |
| | $ | 424,045 |
|
|
| | | | | | | | | | | | |
| | Six Months Ended June 28, 2020 |
(thousands) | | Manufacturing | | Distribution | | Total Reportable Segments |
Market type: | | | | | | |
Recreational Vehicle | | $ | 366,413 |
| | $ | 157,933 |
| | $ | 524,346 |
|
Manufactured Housing | | 82,012 |
| | 120,671 |
| | 202,683 |
|
Industrial | | 133,126 |
| | 16,023 |
| | 149,149 |
|
Marine | | 130,289 |
| | 6,810 |
| | 137,099 |
|
Total | | $ | 711,840 |
| | $ | 301,437 |
| | $ | 1,013,277 |
|
|
| | | | | | | | | | | | |
| | Second Quarter Ended June 30, 2019 |
(thousands) | | Manufacturing | | Distribution | | Total Reportable Segments |
Market type: | | | | | | |
Recreational Vehicle | | $ | 240,677 |
| | $ | 100,244 |
| | $ | 340,921 |
|
Manufactured Housing | | 44,739 |
| | 65,200 |
| | 109,939 |
|
Industrial | | 62,823 |
| | 9,534 |
| | 72,357 |
|
Marine | | 86,036 |
| | 3,965 |
| | 90,001 |
|
Total | | $ | 434,275 |
| | $ | 178,943 |
| | $ | 613,218 |
|
`
|
| | | | | | | | | | | | |
| | Six Months Ended June 30, 2019 |
(thousands) | | Manufacturing | | Distribution | | Total Reportable Segments |
Market type: | | | | | | |
Recreational Vehicle | | $ | 475,555 |
| | $ | 207,802 |
| | $ | 683,357 |
|
Manufactured Housing | | 86,942 |
| | 129,016 |
| | 215,958 |
|
Industrial | | 123,751 |
| | 17,583 |
| | 141,334 |
|
Marine | | 173,711 |
| | 7,076 |
| | 180,787 |
|
Total | | $ | 859,959 |
| | $ | 361,477 |
| | $ | 1,221,436 |
|
Contract Liabilities
Contract liabilities, representing upfront payments from customers received prior to satisfying performance obligations, were immaterial as of the beginning and end of all periods presented and changes in contract liabilities were immaterial during all periods presented.
Inventories consist of the following:
|
| | | | | | | | |
(thousands) | | June 28, 2020 | | December 31, 2019 |
Raw materials | | $ | 174,758 |
| | $ | 162,238 |
|
Work in process | | 14,143 |
| | 14,272 |
|
Finished goods | | 27,617 |
| | 28,446 |
|
Less: reserve for inventory obsolescence | | (12,054 | ) | | (10,123 | ) |
Total manufactured goods, net | | 204,464 |
| | 194,833 |
|
Materials purchased for resale (distribution products) | | 59,523 |
| | 60,918 |
|
Less: reserve for inventory obsolescence | | (2,296 | ) | | (1,881 | ) |
Total materials purchased for resale (distribution products), net | | 57,227 |
| | 59,037 |
|
Total inventories | | $ | 261,691 |
| | $ | 253,870 |
|
|
| |
5. | GOODWILL AND INTANGIBLE ASSETS |
Changes in the carrying amount of goodwill for the six months ended June 28, 2020 by segment are as follows: |
| | | | | | | | | | | | |
(thousands) | | Manufacturing | | Distribution | | Total |
Balance - December 31, 2019 | | $ | 268,402 |
| | $ | 50,947 |
| | $ | 319,349 |
|
Acquisitions | | 6,008 |
| | — |
| | 6,008 |
|
Adjustments to preliminary purchase price allocations | | (603 | ) | | 1,724 |
| | 1,121 |
|
Balance - June 28, 2020 | | $ | 273,807 |
| | $ | 52,671 |
| | $ | 326,478 |
|
Intangible assets, net consist of the following as of June 28, 2020 and December 31, 2019:
|
| | | | | | | | | | | | |
(thousands) |
| June 28, 2020 |
| Weighted Average Useful Life (in years) |
| December 31, 2019 |
| Weighted Average Useful Life (in years) |
Customer relationships |
| $ | 360,962 |
|
| 10.1 |
| $ | 357,513 |
|
| 10.1 |
Non-compete agreements |
| 15,149 |
|
| 5.0 |
| 16,202 |
|
| 5.0 |
Patents |
| 16,495 |
|
| 14.6 |
| 16,495 |
|
| 14.6 |
Trademarks | | 89,058 |
| | Indefinite | | 88,524 |
| | Indefinite |
|
| 481,664 |
|
| |
| 478,734 |
|
| |
Less: accumulated amortization |
| (136,759 | ) |
|
|
| (121,720 | ) |
| |
Intangible assets, net |
| $ | 344,905 |
|
| |
| $ | 357,014 |
|
| |
Changes in the carrying value of intangible assets for the six months ended June 28, 2020 by segment are as follows:
|
| | | | | | | | | | | | |
(thousands) |
| Manufacturing |
| Distribution |
| Total |
Balance - December 31, 2019 |
| $ | 282,123 |
| | $ | 74,891 |
|
| $ | 357,014 |
|
Acquisitions |
| 9,220 |
| | — |
|
| 9,220 |
|
Amortization |
| (15,838 | ) | | (3,541 | ) |
| (19,379 | ) |
Impairment of intangible assets (1) | | (119 | ) | | (1,831 | ) | | (1,950 | ) |
Adjustments to preliminary purchase price allocations
|
| 138 |
| | (138 | ) |
| — |
|
Balance - June 28, 2020 |
| $ | 275,524 |
| | $ | 69,381 |
|
| $ | 344,905 |
|
(1) Certain immaterial operations permanently ceased activities during the second quarter of 2020. As a result, we recorded a $2.0 million pre-tax impairment of customer relationships and trademarks of these operations after determining the net carrying value of the assets was no longer recoverable. The impairment was calculated using our internal projections of discounted cash flows, which rely on Level 3 inputs in the fair value hierarchy based on the unobservable nature of the underlying data. The impairment was recorded in selling, general and administrative in our condensed consolidated statements of income for the second quarter and six months ended June 28, 2020.
Valuation of Goodwill and Indefinite-Lived Intangibles
We test goodwill and indefinite-lived intangible assets (trademarks) for impairment on an annual basis (as of September 30, 2019 for our most recent annual tests) and, if certain events or circumstances indicate that an impairment loss may have been incurred, on an interim basis. Our 2019 tests indicated that there was no impairment, as fair value exceeded carrying values, and we concluded that none of our reporting units or trademarks were at risk of failing the impairment test.
Despite the excess fair value identified in our 2019 impairment tests, we assessed during the quarter and six months ended June 28, 2020 whether the impact of the COVID-19 pandemic on overall macroeconomic conditions and our operating income for the second quarter and six months ended June 28, 2020 indicated that at June 28, 2020 it was more likely than not that our goodwill and trademarks were impaired. We evaluated among other factors (i) the results of our 2019 impairment tests; (ii) our market capitalization at June 28, 2020 in relation to the carrying amount of shareholders’ equity at June 28, 2020 and to fair values determined during our 2019 impairment tests; (iii) the results of our operations during the second quarter and six months ended June 28, 2020 in relation to our projections; and (iv) our analysis of the impact on the fair values determined during our 2019 impairment tests using more recent projections and discount rates that account for various risks and uncertainties, including the duration and extent of impact to our business, related to the COVID-19 pandemic.
Based on the results of our assessment, and other than immaterial impairments discussed above, we determined it was more likely than not that our goodwill and trademarks were not impaired as of June 28, 2020. However, we are unable to predict how long the COVID-19-related conditions will persist, what additional measures may be introduced by governments or private parties, or what effect any such additional measures may have on demand for our products or those of our customers in each of our end markets. As such, we may be required to perform quantitative impairment tests in future periods preceding our annual impairment test date, and the outcome of such tests could result in an impairment of our goodwill or our trademarks.
General
The Company did not make any acquisitions in the second quarter of 2020 and completed three acquisitions in the first six months of 2020 (the "2020 Acquisitions"). For the second quarter and six months ended June 28, 2020, net sales included in the Company's condensed consolidated statements of income related to the 2020 acquisitions were $3.3 million and $3.8 million, respectively. Acquisition-related costs incurred in the first six months of 2020 were immaterial. The Company made no acquisitions in the first six months of 2019.
As of June 28, 2020, the aggregate fair value of the estimated contingent consideration payments was $7.8 million, $5.9 million of which is included in the line item "Accrued liabilities" and $1.9 million is included in “Other long-term liabilities” on the condensed consolidated statement of financial position. At December 31, 2019, the aggregate fair value of the estimated contingent consideration payments was $9.6 million, $2.0 million of which was included in the line item "Accrued liabilities" and $7.6 million was included in "Other long-term liabilities". The liabilities for contingent consideration expire at various dates through December 2023. The contingent consideration arrangements are subject to a maximum payment amount of up to $12.3 million in the aggregate. In the first six months of 2020, the Company made cash payments of $2.0 million related to contingent consideration arrangements, recording a corresponding reduction to accrued liabilities.
2020 Acquisitions
Acquisitions completed in the first six months of 2020 include the previously announced acquisitions of Maple City Woodworking Corporation, a Goshen, Indiana-based manufacturer of hardwood cabinet doors and fascia for the recreational vehicle market, and SEI Manufacturing, Inc., a Cromwell, Indiana-based manufacturer of towers, T-Tops,
hardtops, rails, gates and other aluminum exterior products for the marine market. The total cash consideration for the 2020 Acquisitions was $25.0 million. The preliminary purchase price allocations are subject to valuation activities being finalized, and thus all required purchase accounting adjustments are subject to change within the measurement period as the Company finalizes its estimates. The 2020 Acquisitions are included in the Manufacturing segment.
2019 Acquisitions
The Company completed three acquisitions in 2019 ( the "2019 Acquisitions"), including the previously announced acquisitions of Topline Counters, LLC, a Sumner, Washington-based designer and manufacturer of kitchen and bathroom countertops for residential and commercial markets, and G.G. Schmitt & Sons, Inc. ("G.G. Schmitt"), a Sarasota, Florida-based designer and manufacturer of customized hardware and structural components for the marine industry. The total cash consideration for the 2019 Acquisitions was $53.1 million, plus contingent consideration over a one-year period based on future performance in connection with the acquisition of G.G. Schmitt. The preliminary purchase price allocations are subject to valuation activities being finalized, and thus all required purchase accounting adjustments are subject to change within the measurement period as the Company finalizes its estimates. Changes to preliminary purchase accounting estimates recorded in the second quarter and first six months of 2020 related to the 2019 Acquisitions were immaterial. The 2019 Acquisitions are included in the Manufacturing segment.
The following table summarizes the fair values of the assets acquired and the liabilities assumed as of the date of acquisition for the 2020 Acquisitions and the 2019 Acquisitions:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
(thousands) | Trade receivables | Inventories | Property, plant and equipment | Prepaid expenses & other | Intangible assets | Goodwill | Less: Total liabilities | Less: Deferred tax liability, net | Total net assets acquired |
| | | | | | | | | |
2020 | $ | 962 |
| $ | 1,883 |
| $ | 7,913 |
| $ | 17 |
| $ | 9,220 |
| $ | 6,008 |
| $ | 1,005 |
| $ | — |
| $ | 24,998 |
|
| | | | | | | | | |
2019 (1) | $ | 9,711 |
| $ | 6,012 |
| $ | 5,380 |
| $ | 104 |
| $ | 17,765 |
| $ | 25,205 |
| $ | 6,512 |
| $ | 1,922 |
| $ | 55,743 |
|
(1) Total net assets acquired for the 2019 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.
Pro Forma Information
The following pro forma information for the second quarter and six months ended June 28, 2020 and June 30, 2019 assumes the 2020 Acquisitions and the 2019 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 2020 Acquisitions and 2019 Acquisitions combined with the results prior to their respective acquisition dates, adjusted to reflect the pro forma impact of the acquisitions occurring as of the beginning of the year immediately preceding each such acquisition.
The pro forma information includes financing and interest expense charges based on incremental borrowings incurred in connection with each transaction. In addition, the pro forma information includes amortization expense, in the aggregate, related to intangible assets acquired in connection with the transactions of $0.2 million for the six months ended June 28, 2020 and $0.6 million and $1.2 million for the second quarter and six months ended June 30, 2019, respectively.
|
| | | | | | | | | | | | | | | | |
| | Second Quarter Ended | | Six Months Ended |
(thousands except per share data) | | June 28, 2020 | | June 30, 2019 | | June 28, 2020 | | June 30, 2019 |
Revenue | | $ | 424,045 |
| | $ | 636,454 |
| | $ | 1,018,631 |
| | $ | 1,267,907 |
|
Net income | | 714 |
| | 28,949 |
| | 22,480 |
| | 51,140 |
|
Basic net income per common share | | 0.03 |
| | 1.25 |
| | 0.98 |
| | 2.22 |
|
Diluted net income per common share | | 0.03 |
| | 1.24 |
| | 0.97 |
| | 2.20 |
|
The pro forma information is presented for informational purposes only and is not indicative of the results of operations that actually would have been achieved had the acquisitions been consummated as of the periods indicated above.
|
| |
7. | STOCK-BASED COMPENSATION |
The Company recorded expense of $2.0 million and $6.3 million for the second quarter and six months ended June 28, 2020, respectively, for its stock-based compensation plans in the condensed consolidated statements of income. Stock-based compensation expense for the second quarter and six months ended June 28, 2020 includes a reduction of expense due to certain forfeitures and adjustments in the amount of $2.4 million. For the second quarter and six months ended June 30, 2019, the Company recorded stock-based compensation expense of $4.3 million and $8.2 million, respectively.
The Board approved various stock-based grants under the Company’s 2009 Omnibus Incentive Plan in the first six months of 2020 totaling 275,740 shares in the aggregate at an average fair value of $53.78 at grant date for a total fair value at grant date of $14.8 million. In addition, in the second quarter of 2020, the Board approved stock option grants representing 465,000 shares in the aggregate at an exercise price of $41.33 per share. The total cost to be expensed over the three-year vesting period will be $6.6 million, or $14.25 per share, with an underlying volatility of 42% under the Black Scholes option pricing model.
As of June 28, 2020, there was approximately $30.3 million of total unrecognized compensation cost related to stock-based compensation arrangements granted under incentive plans. That cost is expected to be recognized over a weighted-average period of 19.9 months.
|
| |
8. | NET INCOME PER COMMON SHARE |
Net income per common share calculated for the second quarter and six months of 2020 and 2019 is as follows:
|
| | | | | | | | | | | | | | | | |
| | Second Quarter Ended | | Six Months Ended |
(thousands except per share data) | | June 28, 2020 | | June 30, 2019 | | June 28, 2020 | | June 30, 2019 |
Net income for basic and diluted per share calculation | | $ | 714 |
| | $ | 27,416 |
| | $ | 21,901 |
| | $ | 48,265 |
|
Weighted average common shares outstanding - basic | | 22,667 |
| | 23,102 |
| | 22,840 |
| | 23,071 |
|
Effect of potentially dilutive securities | | 265 |
| | 214 |
| | 258 |
| | 211 |
|
Weighted average common shares outstanding - diluted | | 22,932 |
| | 23,316 |
| | 23,098 |
| | 23,282 |
|
Basic net income per common share | | $ | 0.03 |
| | $ | 1.19 |
| | $ | 0.96 |
| | $ | 2.09 |
|
Diluted net income per common share | | $ | 0.03 |
| | $ | 1.18 |
| | $ | 0.95 |
| | $ | 2.07 |
|
A summary of total debt outstanding at June 28, 2020 and December 31, 2019 is as follows:
|
| | | | | | | | |
(thousands) |
| June 28, 2020 |
| December 31, 2019 |
Long-term debt: |
| |
| |
Revolver due 2024 |
| $ | 135,000 |
|
| $ | 135,000 |
|
Term loan due 2024 |
| 96,250 |
|
| 97,500 |
|
7.5% senior notes due 2027 | | 300,000 |
| | 300,000 |
|
1.0% convertible notes due 2023 |
| 172,500 |
|
| 172,500 |
|
Total long-term debt |
| 703,750 |
|
| 705,000 |
|
Less: convertible notes debt discount, net |
| (19,755 | ) |
| (23,260 | ) |
Less: senior notes deferred financing costs, net | | (5,365 | ) | | (5,844 | ) |
Less: current maturities of long-term debt |
| (5,000 | ) |
| (5,000 | ) |
Less: term loan deferred financing costs, net |
| (492 | ) |
| (542 | ) |
Total long-term debt, less current maturities, net |
| $ | 673,138 |
|
| $ | 670,354 |
|
There were no material changes to any of our debt arrangements during the second quarter and six months ended June 28, 2020.
Interest rates for borrowings under the revolver and term loan are the prime rate or LIBOR plus a margin. At June 28, 2020, all of the Company's borrowings under the revolver and term loan were under the LIBOR-based option. The interest rate for incremental borrowings at June 28, 2020 was LIBOR plus 1.5% (or 1.69%) for the LIBOR-based option. The fee payable on committed but unused portions of the revolver was 0.20% at June 28, 2020.
Total cash interest paid was $15.6 million and $6.3 million for the second quarter of 2020 and 2019, respectively, and $18.2 million and $12.8 million for the first six months of 2020 and 2019, respectively.
|
| |
10. | DERIVATIVE FINANCIAL INSTRUMENTS |
The Company's credit facility exposes the Company to risks associated with the variability in interest expense associated with fluctuations in LIBOR. To partially mitigate this risk, the Company has historically entered into interest rate swaps. As of June 28, 2020, the Company had a combined notional principal amount of $200.0 million of interest rate swap agreements, all of which are designated as cash flow hedges. These swap agreements effectively convert the interest expense associated with a portion of the Company's variable rate debt from variable interest rates to fixed interest rates and have maturities ranging from February 2022 to March 2022.
The following table summarizes the fair value of derivative contracts included in the condensed consolidated statements of financial position (in thousands):
|
| | | | | | | | | |
| | Fair value of derivative instruments |
Derivatives accounted for as cash flow hedges | | Balance sheet location | June 28, 2020 | | December 31, 2019 |
Interest rate swaps | | Other long-term liabilities | $ | 9,292 |
| | $ | 5,868 |
|
The interest rate swaps are comprised of over-the-counter derivatives, which are valued using models that primarily rely on observable inputs such as yield curves, which are classified as Level 2 in the fair value hierarchy.
See Note 11 for information regarding accumulated other comprehensive loss on interest rate swaps.
|
| |
11. | ACCUMULATED OTHER COMPREHENSIVE LOSS |
Accumulated other comprehensive loss includes unrealized gains and losses on derivatives that qualify as hedges of cash flows, cumulative foreign currency translation and other adjustments. The activity in accumulated other comprehensive loss during the second quarter and six months ended June 28, 2020 and June 30, 2019 was as follows:
|
| | | | | | | | | | | | | | | |
Second Quarter Ended June 28, 2020 |
(thousands) | Cash Flow Hedges | | Other | | Foreign Currency Items | | Total |
Balance at March 29, 2020 | $ | (7,380 | ) | | $ | (1,270 | ) | | $ | (91 | ) | | $ | (8,741 | ) |
Other comprehensive income (loss) (net of tax (benefit) of ($158), $0 and $0) | 464 |
| | — |
| | (15 | ) | | 449 |
|
Balance at June 28, 2020 | $ | (6,916 | ) | | $ | (1,270 | ) | | $ | (106 | ) | | $ | (8,292 | ) |
|
| | | | | | | | | | | | | | | |
Six Months Ended June 28, 2020 |
(thousands) | Cash Flow Hedges | | Other | | Foreign Currency Items | | Total |
Balance at December 31, 2019 | $ | (4,374 | ) | | $ | (1,270 | ) | | $ | (54 | ) | | $ | (5,698 | ) |
Other comprehensive loss (net of tax of $882, $0 and $0) | (2,542 | ) | | — |
| | (52 | ) | | (2,594 | ) |
Balance at June 28, 2020 | $ | (6,916 | ) | | $ | (1,270 | ) | | $ | (106 | ) | | $ | (8,292 | ) |
|
| | | | | | | | | | | | | | | |
Second Quarter Ended June 30, 2019
|
(thousands) | Cash Flow Hedges | | Other | | Foreign Currency Items | | Total |
Balance at March 31, 2019 | $ | (3,027 | ) | | $ | (675 | ) | | $ | (5 | ) | | $ | (3,707 | ) |
Other comprehensive loss (net of tax of $659, $0 and $0) | (1,931 | ) | | — |
| | (94 | ) | | (2,025 | ) |
Balance at June 30, 2019 | $ | (4,958 | ) | | $ | (675 | ) | | $ | (99 | ) | | |