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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED September 27, 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 October 23, 2020, there were 23,363,124 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 Third Quarter and Nine Months ended September 27, 2020 and September 29, 2019 | |
| |
Condensed Consolidated Statements of Comprehensive Income Third Quarter and Nine Months ended September 27, 2020 and September 29, 2019 | |
| |
Condensed Consolidated Statements of Financial Position September 27, 2020 and December 31, 2019 | |
| |
Condensed Consolidated Statements of Cash Flows Nine Months ended September 27, 2020 and September 29, 2019 | |
| |
Condensed Consolidated Statements of Shareholders' Equity Third Quarter and Nine Months ended September 27, 2020 and September 29, 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 1. LEGAL PROCEEDINGS | |
| |
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)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Third Quarter Ended | | Nine Months Ended |
(thousands except per share data) | | September 27, 2020 | | September 29, 2019 | | September 27, 2020 | | September 29, 2019 |
NET SALES | | $ | 700,707 | | | $ | 566,186 | | | $ | 1,713,984 | | | $ | 1,787,622 | |
Cost of goods sold | | 567,210 | | | 461,851 | | | 1,397,285 | | | 1,464,078 | |
GROSS PROFIT | | 133,497 | | | 104,335 | | | 316,699 | | | 323,544 | |
Operating Expenses: | | | | | | | | |
Warehouse and delivery | | 25,263 | | | 23,917 | | | 70,204 | | | 74,228 | |
Selling, general and administrative | | 38,184 | | | 33,817 | | | 105,681 | | | 104,403 | |
Amortization of intangible assets | | 10,221 | | | 9,191 | | | 29,600 | | | 26,448 | |
Total operating expenses | | 73,668 | | | 66,925 | | | 205,485 | | | 205,079 | |
OPERATING INCOME | | 59,829 | | | 37,410 | | | 111,214 | | | 118,465 | |
Interest expense, net | | 10,507 | | | 8,603 | | | 31,820 | | | 26,222 | |
Income before income taxes | | 49,322 | | | 28,807 | | | 79,394 | | | 92,243 | |
Income taxes | | 11,986 | | | 7,490 | | | 20,157 | | | 22,661 | |
NET INCOME | | $ | 37,336 | | | $ | 21,317 | | | $ | 59,237 | | | $ | 69,582 | |
| | | | | | | | |
BASIC NET INCOME PER COMMON SHARE | | $ | 1.65 | | | $ | 0.92 | | | $ | 2.60 | | | $ | 3.02 | |
DILUTED NET INCOME PER COMMON SHARE | | $ | 1.62 | | | $ | 0.92 | | | $ | 2.57 | | | $ | 2.99 | |
| | | | | | | | |
Weighted average shares outstanding – Basic | | 22,674 | | | 23,076 | | | 22,784 | | | 23,073 | |
Weighted average shares outstanding – Diluted | | 23,072 | | | 23,273 | | | 23,088 | | | 23,279 | |
| | | | | | | | |
See accompanying Notes to Condensed Consolidated Financial Statements. |
PATRICK INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Third Quarter Ended | | Nine Months Ended |
(thousands) | | September 27, 2020 | | September 29, 2019 | | September 27, 2020 | | September 29, 2019 |
NET INCOME | | $ | 37,336 | | | $ | 21,317 | | | $ | 59,237 | | | $ | 69,582 | |
Other comprehensive (loss) income, net of tax: | | | | | | | | |
Unrealized gain (loss) of hedge derivatives | | 989 | | | (240) | | | (1,553) | | | (3,225) | |
Other | | 60 | | | 19 | | | 8 | | | (48) | |
Total other comprehensive income (loss) | | 1,049 | | | (221) | | | (1,545) | | | (3,273) | |
COMPREHENSIVE INCOME | | $ | 38,385 | | | $ | 21,096 | | | $ | 57,692 | | | $ | 66,309 | |
See accompanying Notes to Condensed Consolidated Financial Statements.
PATRICK INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (Unaudited)
| | | | | | | | | | | | | | |
| | As of |
(thousands) | | September 27, 2020 | | December 31, 2019 |
ASSETS | | | | |
Current Assets | | | | |
Cash and cash equivalents | | $ | 62,347 | | | $ | 139,390 | |
Trade and other receivables, net | | 175,533 | | | 87,536 | |
Inventories | | 281,374 | | | 253,870 | |
Prepaid expenses and other | | 12,580 | | | 36,038 | |
Total current assets | | 531,834 | | | 516,834 | |
Property, plant and equipment, net | | 197,415 | | | 180,849 | |
Operating lease right-of-use assets | | 105,410 | | | 93,546 | |
Goodwill | | 356,433 | | | 319,349 | |
Intangible assets, net | | 380,919 | | | 357,014 | |
Deferred financing costs, net | | 2,544 | | | 2,978 | |
Other non-current assets | | 384 | | | 423 | |
TOTAL ASSETS | | $ | 1,574,939 | | | $ | 1,470,993 | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | |
Current Liabilities | | | | |
Current maturities of long-term debt | | $ | 5,000 | | | $ | 5,000 | |
Current operating lease liabilities | | 29,565 | | | 27,694 | |
Accounts payable | | 117,088 | | | 96,208 | |
Accrued liabilities | | 101,296 | | | 58,033 | |
Total current liabilities | | 252,949 | | | 186,935 | |
Long-term debt, less current maturities, net | | 673,852 | | | 670,354 | |
Long-term operating lease liabilities | | 76,873 | | | 66,467 | |
Deferred tax liabilities, net | | 26,100 | | | 27,284 | |
Other long-term liabilities | | 19,336 | | | 22,472 | |
TOTAL LIABILITIES | | 1,049,110 | | | 973,512 | |
SHAREHOLDERS’ EQUITY | | | | |
Common stock | | 177,308 | | | 172,662 | |
Additional paid-in-capital | | 24,440 | | | 25,014 | |
Accumulated other comprehensive loss | | (7,243) | | | (5,698) | |
Retained earnings | | 331,324 | | | 305,503 | |
TOTAL SHAREHOLDERS’ EQUITY | | 525,829 | | | 497,481 | |
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | | $ | 1,574,939 | | | $ | 1,470,993 | |
See accompanying Notes to Condensed Consolidated Financial Statements.
PATRICK INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
| | | | | | | | | | | | | | |
| | Nine Months Ended |
(thousands) | | September 27, 2020 | | September 29, 2019 |
CASH FLOWS FROM OPERATING ACTIVITIES | | | | |
Net income | | $ | 59,237 | | | $ | 69,582 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | |
Depreciation and amortization | | 52,955 | | | 46,449 | |
Stock-based compensation expense | | 11,177 | | | 12,039 | |
Amortization of convertible notes debt discount | | 5,302 | | | 5,123 | |
Deferred income taxes | | (4,057) | | | (794) | |
Other | | 3,521 | | | 235 | |
Change in operating assets and liabilities, net of acquisitions of businesses: | | | | |
Trade receivables | | (78,701) | | | (44,359) | |
Inventories | | (12,885) | | | 9,084 |
Prepaid expenses and other assets | | 23,787 | | | 4,319 | |
Accounts payable, accrued liabilities and other | | 52,422 | | | 20,355 | |
Net cash provided by operating activities | | 112,758 | | | 122,033 | |
CASH FLOWS FROM INVESTING ACTIVITIES | | | | |
Capital expenditures | | (22,159) | | | (22,227) | |
Proceeds from sale of property, equipment and other investing activities | | 117 | | | 4,509 |
Business acquisitions, net of cash acquired | | (123,382) | | | (22,350) | |
Net cash used in investing activities | | (145,424) | | | (40,068) | |
CASH FLOWS FROM FINANCING ACTIVITIES | | | | |
Term debt borrowings | | — | | | 7,500 | |
Term debt repayments | | (2,500) | | | (3,750) | |
Borrowings on revolver | | 8,198 | | | 648,460 | |
Repayments on revolver | | (8,198) | | | (905,792) | |
Stock repurchases under buyback program | | (20,286) | | | (3,583) | |
Proceeds from issuance of senior notes | | — | | | 300,000 | |
Cash dividends paid to shareholders | | (17,265) | | | — | |
Payments related to vesting of stock-based awards, net of shares tendered for taxes | | (2,910) | | | (3,359) | |
Payment of deferred financing costs | | (58) | | | (7,214) | |
Proceeds from exercise of stock options | | 642 | | | 6 |
Payment of contingent consideration from a business acquisition | | (2,000) | | | (4,416) | |
Net cash (used in) provided by financing activities | | (44,377) | | | 27,852 | |
Increase (decrease) in cash and cash equivalents | | (77,043) | | | 109,817 | |
Cash and cash equivalents at beginning of year | | 139,390 | | | 6,895 | |
Cash and cash equivalents at end of period | | $ | 62,347 | | | $ | 116,712 | |
See accompanying Notes to Condensed Consolidated Financial Statements.
PATRICK INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Third Quarter Ended September 27, 2020 |
(thousands) | | Common Stock | | Additional Paid-in- Capital | | Accumulated Other Comprehensive Loss | | Retained Earnings | | Total |
Balance June 28, 2020 | | $ | 173,178 | | | $ | 24,534 | | | $ | (8,292) | | | $ | 303,848 | | | $ | 493,268 | |
Net income | | — | | | — | | | — | | | 37,336 | | | 37,336 | |
Dividends declared | | — | | | — | | | — | | | (5,865) | | | (5,865) | |
Other comprehensive income, net of tax | | — | | | — | | | 1,049 | | | — | | | 1,049 | |
Share repurchases under buyback program | | (647) | | | (94) | | | — | | | (3,995) | | | (4,736) | |
Shares used to pay taxes on stock grants | | (53) | | | — | | | — | | | — | | | (53) | |
Stock-based compensation expense | | 4,830 | | | — | | | — | | | — | | | 4,830 | |
Balance September 27, 2020 | | $ | 177,308 | | | $ | 24,440 | | | $ | (7,243) | | | $ | 331,324 | | | $ | 525,829 | |
| | | | | | | | | | |
Nine Months Ended September 27, 2020 |
(thousands) | | Common Stock | | Additional Paid-in- Capital | | Accumulated Other Comprehensive Loss | | Retained Earnings | | Total |
Balance December 31, 2019 | | $ | 172,662 | | | $ | 25,014 | | | $ | (5,698) | | | $ | 305,503 | | | $ | 497,481 | |
Net income | | — | | | — | | | — | | | 59,237 | | | 59,237 | |
Dividends declared | | — | | | — | | | — | | | (17,666) | | | (17,666) | |
Other comprehensive loss, net of tax | | — | | | — | | | (1,545) | | | — | | | (1,545) | |
Share repurchases under buyback program | | (3,962) | | | (574) | | | — | | | (15,750) | | | (20,286) | |
Issuance of shares upon exercise of common stock options | | 642 | | | — | | | — | | | — | | | 642 | |
Shares used to pay taxes on stock grants | | (3,211) | | | — | | | — | | | — | | | (3,211) | |
Stock-based compensation expense | | 11,177 | | | — | | | — | | | — | | | 11,177 | |
Balance September 27, 2020 | | $ | 177,308 | | | $ | 24,440 | | | $ | (7,243) | | | $ | 331,324 | | | $ | 525,829 | |
| | | | | | | | | | |
Third Quarter Ended September 29, 2019
|
(thousands) | | Common Stock | | Additional Paid-in- Capital | | Accumulated Other Comprehensive Loss | | Retained Earnings | | Total |
Balance June 30, 2019 | | $ | 166,086 | | | $ | 25,124 | | | $ | (5,732) | | | $ | 273,139 | | | $ | 458,617 | |
Net income | | — | | | — | | | — | | | 21,317 | | | 21,317 | |
Other comprehensive loss, net of tax | | — | | | — | | | (221) | | | — | | | (221) | |
Stock repurchases under buyback program | | (674) | | | (104) | | | — | | | (2,805) | | | (3,583) | |
Shares used to pay taxes on stock grants | | (59) | | | — | | | — | | | — | | | (59) | |
Stock-based compensation expense | | 3,867 | | | — | | | — | | | — | | | 3,867 | |
Balance September 29, 2019 | | $ | 169,220 | | | $ | 25,020 | | | $ | (5,953) | | | $ | 291,651 | | | $ | 479,938 | |
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PATRICK INDUSTRIES, INC. |
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited) (cont.) |
Nine Months Ended September 29, 2019 |
(thousands) | | Common Stock | | Additional Paid-in- Capital | | Accumulated Other Comprehensive Loss | | Retained Earnings | | Total |
Balance December 31, 2018 | | $ | 161,436 | | | $ | 25,124 | | | $ | (2,680) | | | $ | 224,874 | | | $ | 408,754 | |
Net income | | — | | | — | | | — | | | 69,582 | | | 69,582 | |
Other comprehensive loss, net of tax | | — | | | — | | | (3,273) | | | — | | | (3,273) | |
Stock repurchases under buyback program | | (674) | | | (104) | | | — | | | (2,805) | | | (3,583) | |
Shares used to pay taxes on stock grants | | (3,587) | | | — | | | — | | | — | | | (3,587) | |
Issuance of shares upon exercise of common stock options | | 6 | | | — | | | — | | | — | | | 6 | |
Stock-based compensation expense | | 12,039 | | | — | | | — | | | — | | | 12,039 | |
Balance September 29, 2019 | | $ | 169,220 | | | $ | 25,020 | | | $ | (5,953) | | | $ | 291,651 | | | $ | 479,938 | |
See accompanying Notes to Condensed Consolidated Financial Statements
PATRICK INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
The accompanying unaudited condensed consolidated financial statements of Patrick Industries, Inc. (“Patrick”, the “Company”, "we", "our") contain all adjustments (consisting of normal recurring adjustments) that we believe are necessary to present fairly the Company’s financial position as of September 27, 2020 and December 31, 2019, its results of operations for the third quarter and nine months ended September 27, 2020 and September 29, 2019 and its statements of cash flows for the nine months ended September 27, 2020 and September 29, 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. 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 third quarter and nine months ended September 27, 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 third quarter of fiscal year 2020 ended on September 27, 2020 and the third quarter of fiscal year 2019 ended on September 29, 2019.
In preparation of Patrick’s condensed consolidated financial statements as of and for the third quarter and nine months ended September 27, 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.
| | | | | |
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.
Accounting for Convertible Instruments and Contracts in an Entity's Own Equity
In August 2020, the FASB issued ASU 2020-06, "Accounting for Convertible Instruments and Contracts in an Entity's Own Equity", a new standard that simplifies certain accounting treatments for convertible debt instruments. The guidance eliminates certain requirements that require separate accounting for embedded conversion features and simplifies the settlement assessment that entities are required to perform to determine whether a contract qualifies for equity classification. In addition, the new guidance requires entities use the if-converted method for all convertible instruments in the diluted EPS calculation and include the effect of potential share settlement for instruments that may be settled in cash or shares, with certain exceptions. Furthermore, the guidance requires new disclosures about events that occur during the reporting period that cause conversion contingencies to be met and about the fair value of convertible debt at the instrument level, among other things. The guidance is effective for fiscal years beginning after December 15, 2021, with early adoption permitted. We 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:
| | | | | | | | | | | | | | | | | | | | |
| | Third Quarter Ended September 27, 2020 |
(thousands) | | Manufacturing | | Distribution | | Total |
Market type: | | | | | | |
Recreational Vehicle | | $ | 290,326 | | | $ | 130,845 | | | $ | 421,171 | |
Manufactured Housing | | 45,845 | | | 61,908 | | | 107,753 | |
Industrial | | 69,242 | | | 9,090 | | | 78,332 | |
Marine | | 88,861 | | | 4,590 | | | 93,451 | |
Total | | $ | 494,274 | | | $ | 206,433 | | | $ | 700,707 | |
| | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 27, 2020 |
(thousands) | | Manufacturing | | Distribution | | Total |
Market type: | | | | | | |
Recreational Vehicle | | $ | 656,739 | | | $ | 288,778 | | | $ | 945,517 | |
Manufactured Housing | | 127,857 | | | 182,579 | | | 310,436 | |
Industrial | | 202,368 | | | 25,113 | | | 227,481 | |
Marine | | 219,150 | | | 11,400 | | | 230,550 | |
Total | | $ | 1,206,114 | | | $ | 507,870 | | | $ | 1,713,984 | |
| | | | | | | | | | | | | | | | | | | | |
| | Third Quarter Ended September 29, 2019 |
(thousands) | | Manufacturing | | Distribution | | Total |
Market type: | | | | | | |
Recreational Vehicle | | $ | 218,706 | | | $ | 91,313 | | | $ | 310,019 | |
Manufactured Housing | | 44,159 | | | 64,959 | | | 109,118 | |
Industrial | | 64,541 | | | 7,566 | | | 72,107 | |
Marine | | 72,306 | | | 2,636 | | | 74,942 | |
Total | | $ | 399,712 | | | $ | 166,474 | | | $ | 566,186 | |
`
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| | Nine Months Ended September 29, 2019 |
(thousands) | | Manufacturing | | Distribution | | Total |
Market type: | | | | | | |
Recreational Vehicle | | $ | 694,261 | | | $ | 299,115 | | | $ | 993,376 | |
Manufactured Housing | | 131,101 | | | 193,975 | | | 325,076 | |
Industrial | | 188,292 | | | 25,149 | | | 213,441 | |
Marine | | 246,017 | | | 9,712 | | | 255,729 | |
Total | | $ | 1,259,671 | | | $ | 527,951 | | | $ | 1,787,622 | |
Contract Liabilities
Contract liabilities, representing upfront payments from customers received prior to satisfying performance obligations, were immaterial as of the beginning and end of all periods presented and changes in contract liabilities were immaterial during all periods presented.
Inventories consist of the following:
| | | | | | | | | | | | | | |
(thousands) | | September 27, 2020 | | December 31, 2019 |
Raw materials | | $ | 196,298 | | | $ | 162,238 | |
Work in process | | 15,955 | | | 14,272 | |
Finished goods | | 28,225 | | | 28,446 | |
Less: reserve for inventory obsolescence | | (13,301) | | | (10,123) | |
Total manufactured goods, net | | 227,177 | | | 194,833 | |
Materials purchased for resale (distribution products) | | 56,676 | | | 60,918 | |
Less: reserve for inventory obsolescence | | (2,479) | | | (1,881) | |
Total materials purchased for resale (distribution products), net | | 54,197 | | | 59,037 | |
Total inventories | | $ | 281,374 | | | $ | 253,870 | |
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5. | GOODWILL AND INTANGIBLE ASSETS |
Changes in the carrying amount of goodwill for the nine months ended September 27, 2020 by segment are as follows: | | | | | | | | | | | | | | | | | | | | |
(thousands) | | Manufacturing | | Distribution | | Total |
Balance - December 31, 2019 | | $ | 268,402 | | | $ | 50,947 | | | $ | 319,349 | |
Acquisitions | | 35,087 | | | 8,980 | | | 44,067 | |
Adjustments to preliminary purchase price allocations | | (8,708) | | | 1,725 | | | (6,983) | |
Balance - September 27, 2020 | | $ | 294,781 | | | $ | 61,652 | | | $ | 356,433 | |
Intangible assets, net consist of the following as of September 27, 2020 and December 31, 2019:
| | | | | | | | | | | | | | |
(thousands) | | September 27, 2020 | | December 31, 2019 |
Customer relationships | | $ | 394,687 | | | $ | 357,513 | |
Non-compete agreements | | 15,231 | | | 16,202 | |
Patents | | 16,555 | | | 16,495 | |
Trademarks | | 101,426 | | | 88,524 | |
| | 527,899 | | | 478,734 | |
Less: accumulated amortization | | (146,980) | | | (121,720) | |
Intangible assets, net | | $ | 380,919 | | | $ | 357,014 | |
Changes in the carrying value of intangible assets for the nine months ended September 27, 2020 by segment are as follows:
| | | | | | | | | | | | | | | | | | | | |
(thousands) | | Manufacturing | | Distribution | | Total |
Balance - December 31, 2019 | | $ | 282,123 | | | $ | 74,891 | | | $ | 357,014 | |
Acquisitions and other | | 36,409 | | | 13,096 | | | 49,505 | |
Amortization | | (24,313) | | | (5,287) | | | (29,600) | |
Impairment of intangible assets (1) | | (119) | | | (1,831) | | | (1,950) | |
Adjustments to preliminary purchase price allocations | | 6,095 | | | (145) | | | 5,950 | |
Balance - September 27, 2020 | | $ | 300,195 | | | $ | 80,724 | | | $ | 380,919 | |
(1) Certain immaterial operations permanently ceased activities during the nine months ended September 27, 2020. As a result, we recorded a $2.0 million pre-tax impairment of customer relationships and trademarks of these operations after determining the net carrying value of the assets was no longer recoverable. The impairment was calculated using our internal projections of discounted cash flows, which rely on Level 3 inputs in the fair value hierarchy based on the unobservable nature of the underlying data. The impairment was recorded in selling, general and administrative in our condensed consolidated statements of income for the nine months ended September 27, 2020.
Valuation of Goodwill and Indefinite-Lived Intangibles
We test goodwill and indefinite-lived intangible assets (trademarks) for impairment on an annual basis (as of September 30, 2019 for our most recent annual tests) and, if certain events or circumstances indicate that an impairment loss may have been incurred, on an interim basis. Our 2019 tests indicated that there was no impairment, as fair value exceeded carrying values, and we concluded that none of our reporting units or trademarks were at risk of failing the impairment test.
Despite the excess fair value identified in our 2019 impairment tests, we assessed during the quarter and nine months ended September 27, 2020 whether the impact of the COVID-19 pandemic on overall macroeconomic conditions and our results of operations for the third quarter and nine months ended September 27, 2020 indicated that at September 27, 2020 it was more likely than not that our goodwill and trademarks were impaired. We evaluated among other factors (i) the results of our 2019 impairment tests; (ii) our market capitalization at September 27, 2020 in relation to the carrying amount of shareholders’ equity at September 27, 2020 and to fair values determined during our 2019 impairment tests; (iii) the results of our operations during the third quarter and nine months ended September 27, 2020 in relation to our projections; and (iv) our analysis of the impact on the fair values determined during our 2019 impairment tests using more recent projections and discount rates that account for various risks and uncertainties, including the duration and extent of impact to our business, related to the COVID-19 pandemic.
Based on the results of our assessment, and other than immaterial impairments discussed above, we concluded that no triggering events had occurred which would indicate the fair values of our goodwill and trademarks may be less than the carrying values at September 27, 2020. However, we are unable to predict how long the COVID-19-related conditions will persist, what additional measures may be introduced by governments or private parties, or what effect any such additional measures may have on demand for our products or those of our customers in each of our end markets. As such, the outcome of our 2020 impairment tests, which we will perform in the fourth quarter of 2020, could result in an impairment of our goodwill or our trademarks.
General
The Company completed six acquisitions in the third quarter of 2020 and completed nine acquisitions in the first nine months of 2020 (the "2020 Acquisitions"). For the third quarter and nine months ended September 27, 2020, net sales included in the Company's condensed consolidated statements of income related to the 2020 Acquisitions were $19.6 million and $23.3 million, respectively. Operating income related to the 2020 Acquisitions for the third quarter and nine months ended September 27, 2020 was approximately $2.1 million and $2.2 million, respectively. Acquisition-related costs incurred in the first nine months of 2020 were immaterial. 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 were immaterial. Acquisition-related costs incurred in the first nine months of 2019 were immaterial.
As of September 27, 2020, the aggregate fair value of the estimated contingent consideration payments was $8.0 million, $6.1 million of which is included in the line item "Accrued liabilities" and $1.9 million is included in “Other long-term liabilities” on the condensed consolidated statement of financial position. At December 31, 2019, the aggregate fair value of the estimated contingent consideration payments was $9.6 million, $2.0 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 $14.8 million in the aggregate. In the first nine 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 nine months of 2020 include the following previously announced acquisitions:
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Company | Description |
Maple City Woodworking Corporation | Manufacturer of hardwood cabinet doors and fascia for the recreational vehicle ("RV") market based in Goshen, Indiana |
SEI Manufacturing, Inc. | Manufacturer of towers, T-Tops, hardtops, rails, gates and other aluminum exterior products for the marine market located in Cromwell, Indiana |
Inland Plywood Company | Supplier, laminator, and wholesale distributor of treated, untreated, and laminated plywood, medium density overlay panels, and other specialty products, primarily serving the marine market as well as the RV and industrial markets headquartered in Pontiac, Michigan with an additional facility in Cocoa, Florida |
Synergy RV Transport | Transportation and logistics service provider primarily for original equipment manufacturers and dealers in the RV market located in Goshen, Indiana |
Front Range Stone | Fabricator and installer of natural stone, quartz, solid surface, and laminate countertops, primarily serving big box home improvement retailers, home builders and commercial contractors in the industrial market based in Englewood, Colorado |
Inclusive of four immaterial acquisitions not discussed above, total cash consideration for the 2020 Acquisitions was approximately $124 million, plus contingent consideration over a maximum of a one-year period based on future performance in connection with certain acquisitions. The preliminary purchase price allocations are subject to valuation activities being finalized, and thus all required purchase accounting adjustments are subject to change within the measurement period as the Company finalizes its estimates. Changes to preliminary purchase accounting estimates recorded in the third quarter and first nine months of 2020 related to the 2020 Acquisitions were immaterial. The 2020 Acquisitions are included in the Manufacturing segment except for Synergy RV Transport, which is included in the Distribution segment.
2019 Acquisitions
The Company completed four acquisitions in 2019 (the "2019 Acquisitions"), including the previously announced acquisitions of Topline Counters, LLC ("Topline Counters"), 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. Valuation activities and purchase accounting adjustments have been finalized on all 2019 Acquisitions, except for the finalization of tangible assets for Topline Counters. Changes to preliminary purchase accounting estimates recorded in the third quarter and first nine months of 2020 related to the 2019 Acquisitions were immaterial. The 2019 Acquisitions are included in the Manufacturing segment.
The following table summarizes the fair values of the consideration paid, assets acquired, and the liabilities assumed as of the date of acquisition for the 2020 Acquisitions and the 2019 Acquisitions:
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(thousands) | | 2020 Acquisitions | | 2019 Acquisitions |
Consideration | | | | |
| Cash, net of cash acquired | | $ | 124,013 | | | $ | 53,307 | |
| Contingent consideration(1) | | 1,813 | | | 1,160 | |
| | Total consideration | | 125,826 | | | 54,467 | |
| | | | | | |
Assets Acquired | | | | |
| Trade receivables | | $ | 9,785 | | | $ | 9,692 | |
| Inventories | | 16,073 | | | 5,803 | |
| Prepaid expenses & other | | 502 | | | 20 | |
| Property, plant & equipment | | 15,633 | | | 6,567 | |
| Operating lease right-of-use assets | | 6,222 | | | 5,653 | |
| Identifiable intangible assets | | 49,445 | | | 23,715 | |
Liabilities Assumed | | | | |
| Accounts payable & accrued liabilities | | (6,264) | | | (6,514) | |
| Operating lease obligations | | (6,222) | | | (5,653) | |
| Deferred tax liabilities, net | | (3,415) | | | (1,922) | |
| | Total fair value of net assets acquired | | 81,759 | | | 37,361 | |
| | Goodwill(2) | | 44,067 | | | 17,106 | |
| | | | $ | 125,826 | | | $ | 54,467 | |
(1) These amounts reflect the preliminary estimated liability pertaining to the fair value of contingent consideration based on future performance relating to certain acquisitions.
(2) Goodwill is tax-deductible for the 2020 Acquisitions, except Front Range Stone (approximately $14.1 million), and for the 2019 Acquisitions, except GG Schmitt (approximately $5.4 million). For acquisitions, the excess of purchase price consideration over the fair value of net assets acquired is recorded as goodwill, which generally represents the combined value of the Company's existing purchasing, manufacturing, sales, industry relationships, and systems resources with the organizational talent and expertise of the acquired companies' respective management teams to maximize efficiencies, revenue impact, market share growth, and net income.
We estimate the value of acquired property, plant, and equipment using a combination of the income, cost, and market approaches, such as estimates of future income growth, capitalization rates, discount rates, and capital expenditure needs of the acquired businesses.
The following table presents our estimates of identifiable intangibles for the 2020 Acquisitions and the 2019 Acquisitions:
| | | | | | | | | | | | | | | | | | | | |
| | | | (thousands) |
| | Estimated Useful Life (in years) | | 2020 Acquisitions | | 2019 Acquisitions |
Customer relationships | | 10 | | $ | 37,723 | | | $ | 18,112 | |
Non-compete agreements | | 5 | | 492 | | | 150 | |
Trademarks | | Indefinite | | 11,230 | | | 5,453 | |
| | | | $ | 49,445 | | | $ | 23,715 | |
We estimate the value of customer relationships using the multi-period excess earnings method, which is a variation on the income approach, calculating the present value of incremental after-tax cash flows attributable to the asset. Non-compete agreements are valued using a discounted cash flow approach, which is a variation of an income approach, with and without the individual counterparties to the non-compete agreements. Trademarks are valued using the relief-from-royalty method, which applies an estimated royalty rate to forecasted future cash flows, discounted to present value.
Pro Forma Information
The following pro forma information for the third quarter and nine months ended September 27, 2020 and September 29, 2019 assumes the 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 $0.5 million and $2.2 million for the third quarter and nine months ended September 27, 2020, respectively, and $1.4 million and $4.0 million for the third quarter and nine months ended September 29, 2019, respectively.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Third Quarter Ended | | Nine Months Ended |
(thousands except per share data) | | September 27, 2020 | | September 29, 2019 | | September 27, 2020 | | September 29, 2019 |
Revenue | | $ | 719,953 | | | $ | 621,936 | | | $ | 1,798,914 | | | $ | 1,961,263 | |
Net income | | 38,412 | | | 24,914 | | | 65,392 | | | 80,077 | |
Basic net income per common share | | 1.69 | | | 1.08 | | | 2.87 | | | 3.47 | |
Diluted net income per common share | | 1.66 | | | 1.07 | | | 2.83 | | | 3.44 | |
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.
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7. | STOCK-BASED COMPENSATION |
The Company recorded expense of $4.9 million and $11.2 million for the third quarter and nine months ended September 27, 2020, respectively, for its stock-based compensation plans in the condensed consolidated statements of income. Stock-based compensation expense for the nine months ended September 27, 2020 includes a reduction of expense due to certain forfeitures and adjustments in the amount of $2.3 million. For the third quarter and nine months ended September 29, 2019, the Company recorded stock-based compensation expense of $3.8 million and $12.0 million, respectively.
The Board approved various stock-based grants under the Company’s 2009 Omnibus Incentive Plan in the first nine months of 2020 totaling 275,740 shares in the aggregate at an average fair value of $53.78 per share 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 September 27, 2020, there was approximately $25.5 million of total unrecognized compensation cost related to stock-based compensation arrangements granted under incentive plans. That cost is expected to be recognized over a weighted-average period of 17.4 months.
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8. | NET INCOME PER COMMON SHARE |
Net income per common share calculated for the third quarter and nine months of 2020 and 2019 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Third Quarter Ended | | Nine Months Ended |
(thousands except per share data) | | September 27, 2020 | | September 29, 2019 | | September 27, 2020 | | September 29, 2019 |
Net income for basic and diluted per share calculation | | $ | 37,336 | | | $ | 21,317 | | | $ | 59,237 | | | $ | 69,582 | |
Weighted average common shares outstanding - basic | | 22,674 | | | 23,076 | | | 22,784 | | | 23,073 | |
Effect of potentially dilutive securities | | 398 | | | 197 | | | 304 | | | 206 | |
Weighted average common shares outstanding - diluted | | 23,072 | | | 23,273 | | | 23,088 | | | 23,279 | |
Basic net income per common share | | $ | 1.65 | | | $ | 0.92 | | | $ | 2.60 | | | $ | 3.02 | |
Diluted net income per common share | | $ | 1.62 | | | $ | 0.92 | | | $ | 2.57 | | | $ | 2.99 | |
An immaterial amount of securities was not included in the computation of diluted income per share as they are considered anti-dilutive under the treasury stock method.
A summary of total debt outstanding at September 27, 2020 and December 31, 2019 is as follows:
| | | | | | | | | | | | | | |
(thousands) | | September 27, 2020 | | December 31, 2019 |
Long-term debt: | | | | |
1.0% convertible notes due 2023 | | $ | 172,500 | | | $ | 172,500 | |
Term loan due 2024 | | 95,000 | | | 97,500 | |
Revolver due 2024 | | 135,000 | | | 135,000 | |
7.5% senior notes due 2027 | | 300,000 | | | 300,000 | |
Total long-term debt | | 702,500 | | | 705,000 | |
Less: convertible notes debt discount, net | | (17,958) | | | (23,260) | |
Less: term loan deferred financing costs, net | | (463) | | | (542) | |
Less: senior notes deferred financing costs, net | | (5,227) | | | (5,844) | |
Less: current maturities of long-term debt | | (5,000) | | | (5,000) | |
Total long-term debt, less current maturities, net | | $ | 673,852 | | | $ | 670,354 | |
There were no material changes to any of our debt arrangements during the third quarter and nine months ended September 27, 2020.
Interest rates for borrowings under the revolver and term loan are the prime rate or LIBOR plus a margin. At September 27, 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 September 27, 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 September 27, 2020.
Total cash interest paid was $3.2 million and $6.9 million for the third quarter of 2020 and 2019, respectively, and $21.4 million and $19.7 million for the first nine months of 2020 and 2019, respectively.
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10. | DERIVATIVE FINANCIAL INSTRUMENTS |
The Company's credit facility exposes the Company to risks associated with the variability in interest expense associated with fluctuations in LIBOR. To partially mitigate this risk, the Company has historically entered into interest rate swaps. As of September 27, 2020, 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 | September 27, 2020 | | December 31, 2019 |
Interest rate swaps | | Other long-term liabilities | $ | 7,964 | | | $ | 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.
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11. | ACCUMULATED OTHER COMPREHENSIVE LOSS |
Accumulated other comprehensive loss includes unrealized gains and losses on derivatives that qualify as hedges of cash flows, cumulative foreign currency translation and other adjustments. The activity in accumulated other comprehensive loss during the third quarter and nine months ended September 27, 2020 and September 29, 2019 was as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
Third Quarter Ended September 27, 2020 |
(thousands) | Cash Flow Hedges | | Other | | Foreign Currency Items | | Total |
Balance at June 28, 2020 | $ | (6,916) | | | $ | (1,270) | | | $ | (106) | | | $ | (8,292) | |
Other comprehensive income (net of tax of $340, $0 and $0) | 989 | | | — | | | 60 | | | 1,049 | |
Balance at September 27, 2020 | $ | (5,927) | | | $ | (1,270) | | | $ | (46) | | | $ | (7,243) | |
| | | | | | | | | | | | | | | | | | | | | | | |
Nine Months Ended September 27, 2020 |
(thousands) | Cash Flow Hedges | | Other | | Foreign Currency Items | | Total |
Balance at December 31, 2019 | $ | (4,374) | | | $ | (1,270) | | | $ | (54) | | | $ | (5,698) | |
Other comprehensive income (loss) (net of tax benefit of $542, $0 and $0) | (1,553) | | | — | | | 8 | | | (1,545) | |
Balance at September 27, 2020 | $ | (5,927) | | | $ | (1,270) | | | $ | (46) | | | $ | (7,243) | |
| | | | | | | | | | | | | | | | | | | | | | | |
Third Quarter Ended September 29, 2019 |
(thousands) | Cash Flow Hedges | | Other | | Foreign Currency Items | | Total |
Balance at June 30, 2019 | $ | (4,958) | | | $ | (675) | | | $ | (99) | | | $ | (5,732) | |
Other comprehensive income (loss) (net of tax benefit of $83, $0 and $0) | (240) | | | — | | | 19 | | | (221) | |
Balance at September 29, 2019 | $ | (5,198) | | | $ | (675) | | | $ | (80) | | | $ | (5,953) | |
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Nine Months Ended September 29, 2019 |
(thousands) | Cash Flow Hedges | | Other | | Foreign Currency Items | | Total |
Balance at December 31, 2018 | $ | ( |