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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)
Indiana35-1057796
(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 classTrading SymbolName of each exchange on which registered
 Common Stock, no par value PATKNASDAQ
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 EndedNine Months Ended
(thousands except per share data)September 27, 2020September 29, 2019September 27, 2020September 29, 2019
NET SALES$700,707 $566,186 $1,713,984 $1,787,622 
Cost of goods sold567,210 461,851 1,397,285 1,464,078 
GROSS PROFIT133,497 104,335 316,699 323,544 
Operating Expenses:  
  Warehouse and delivery25,263 23,917 70,204 74,228 
  Selling, general and administrative38,184 33,817 105,681 104,403 
  Amortization of intangible assets10,221 9,191 29,600 26,448 
    Total operating expenses73,668 66,925 205,485 205,079 
OPERATING INCOME59,829 37,410 111,214 118,465 
Interest expense, net10,507 8,603 31,820 26,222 
Income before income taxes49,322 28,807 79,394 92,243 
Income taxes11,986 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.



3


PATRICK INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

Third Quarter EndedNine Months Ended
(thousands)September 27, 2020September 29, 2019September 27, 2020September 29, 2019
NET INCOME$37,336 $21,317 $59,237 $69,582 
Other comprehensive (loss) income, net of tax:
Unrealized gain (loss) of hedge derivatives989 (240)(1,553)(3,225)
Other60 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.

4


PATRICK INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (Unaudited)
 As of
(thousands)September 27, 2020December 31, 2019
ASSETS  
Current Assets  
    Cash and cash equivalents$62,347 $139,390 
    Trade and other receivables, net175,533 87,536 
    Inventories281,374 253,870 
    Prepaid expenses and other12,580 36,038 
        Total current assets531,834 516,834 
Property, plant and equipment, net197,415 180,849 
Operating lease right-of-use assets105,410 93,546 
Goodwill356,433 319,349 
Intangible assets, net380,919 357,014 
Deferred financing costs, net2,544 2,978 
Other non-current assets384 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 liabilities29,565 27,694 
    Accounts payable117,088 96,208 
    Accrued liabilities101,296 58,033 
        Total current liabilities252,949 186,935 
Long-term debt, less current maturities, net673,852 670,354 
Long-term operating lease liabilities76,873 66,467 
Deferred tax liabilities, net26,100 27,284 
Other long-term liabilities19,336 22,472 
        TOTAL LIABILITIES1,049,110 973,512 
SHAREHOLDERS’ EQUITY  
Common stock177,308 172,662 
Additional paid-in-capital24,440 25,014 
Accumulated other comprehensive loss(7,243)(5,698)
Retained earnings331,324 305,503 
        TOTAL SHAREHOLDERS’ EQUITY525,829 497,481 
        TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY$1,574,939 $1,470,993 

See accompanying Notes to Condensed Consolidated Financial Statements.

5


PATRICK INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

Nine Months Ended
(thousands)September 27, 2020September 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 amortization52,955 46,449 
Stock-based compensation expense11,177 12,039 
Amortization of convertible notes debt discount5,302 5,123 
Deferred income taxes(4,057)(794)
Other3,521 235 
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 assets23,787 4,319 
Accounts payable, accrued liabilities and other52,422 20,355 
Net cash provided by operating activities112,758 122,033 
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures(22,159)(22,227)
Proceeds from sale of property, equipment and other investing activities117 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 revolver8,198 648,460 
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 options642 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 year139,390 6,895 
Cash and cash equivalents at end of period$62,347 $116,712 
See accompanying Notes to Condensed Consolidated Financial Statements.
6


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 expense4,830    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 expense11,177    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 expense3,867 — — — 3,867 
Balance September 29, 2019$169,220 $25,020 $(5,953)$291,651 $479,938 
7


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 options6 — — — 6 
  Stock-based compensation expense12,039 — — — 12,039 
Balance September 29, 2019$169,220 $25,020 $(5,953)$291,651 $479,938 

See accompanying Notes to Condensed Consolidated Financial Statements



8



PATRICK INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
 
1.BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements of Patrick Industries, Inc. (“Patrick”, the “Company”, "we", "our") contain all adjustments (consisting of normal recurring adjustments) that we believe are necessary to present fairly the Company’s financial position as of September 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
9


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.

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 3.REVENUE RECOGNITION
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)ManufacturingDistributionTotal
Market type:
Recreational Vehicle$290,326 $130,845 $421,171 
Manufactured Housing45,845 61,908 107,753 
Industrial69,242 9,090 78,332 
Marine88,861 4,590 93,451 
Total$494,274 $206,433 $700,707 

Nine Months Ended September 27, 2020
(thousands)ManufacturingDistributionTotal
Market type:
Recreational Vehicle$656,739 $288,778 $945,517 
Manufactured Housing127,857 182,579 310,436 
Industrial202,368 25,113 227,481 
Marine219,150 11,400 230,550 
Total$1,206,114 $507,870 $1,713,984 

Third Quarter Ended September 29, 2019
(thousands)ManufacturingDistributionTotal
Market type:
Recreational Vehicle$218,706 $91,313 $310,019 
Manufactured Housing44,159 64,959 109,118 
Industrial64,541 7,566 72,107 
Marine72,306 2,636 74,942 
Total$399,712 $166,474 $566,186 
`

Nine Months Ended September 29, 2019
(thousands)ManufacturingDistributionTotal
Market type:
Recreational Vehicle$694,261 $299,115 $993,376 
Manufactured Housing131,101 193,975 325,076 
Industrial188,292 25,149 213,441 
Marine246,017 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.

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4.INVENTORIES
Inventories consist of the following:
(thousands)September 27, 2020December 31, 2019
Raw materials$196,298 $162,238 
Work in process15,955 14,272 
Finished goods28,225 28,446 
Less: reserve for inventory obsolescence(13,301)(10,123)
  Total manufactured goods, net227,177 194,833 
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), net54,197 59,037 
Total inventories$281,374 $253,870 

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)ManufacturingDistributionTotal
Balance - December 31, 2019$268,402 $50,947 $319,349 
Acquisitions35,087 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 agreements15,231 16,202 
Patents16,555 16,495 
Trademarks101,426 88,524 
527,899 478,734 
Less: accumulated amortization(146,980)(121,720)
Intangible assets, net$380,919 $357,014 










12


Changes in the carrying value of intangible assets for the nine months ended September 27, 2020 by segment are as follows:
(thousands)ManufacturingDistributionTotal
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 allocations6,095 (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.

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6.ACQUISITIONS
 
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:
CompanyDescription
Maple City Woodworking CorporationManufacturer 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 CompanySupplier, 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 TransportTransportation and logistics service provider primarily for original equipment manufacturers and dealers in the RV market located in Goshen, Indiana
Front Range StoneFabricator 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
14


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:

(thousands)2020 Acquisitions2019 Acquisitions
Consideration
Cash, net of cash acquired$124,013 $53,307 
Contingent consideration(1)
1,813 1,160 
Total consideration125,826 54,467 
Assets Acquired
Trade receivables$9,785 $9,692 
Inventories16,073 5,803 
Prepaid expenses & other502 20 
Property, plant & equipment15,633 6,567 
Operating lease right-of-use assets6,222 5,653 
Identifiable intangible assets49,445 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 acquired81,759 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.






15



The following table presents our estimates of identifiable intangibles for the 2020 Acquisitions and the 2019 Acquisitions:

(thousands)
Estimated Useful Life (in years)2020 Acquisitions2019 Acquisitions
Customer relationships10$37,723 $18,112 
Non-compete agreements5492 150 
TrademarksIndefinite11,230 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 EndedNine Months Ended
(thousands except per share data)September 27, 2020September 29, 2019September 27, 2020September 29, 2019
Revenue$719,953 $621,936 $1,798,914 $1,961,263 
Net income38,412 24,914 65,392 80,077 
Basic net income per common share1.69 1.08 2.87 3.47 
Diluted net income per common share1.66 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.

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.
16



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.
 
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 EndedNine Months Ended
(thousands except per share data)September 27, 2020September 29, 2019September 27, 2020September 29, 2019
Net income for basic and diluted per share calculation$37,336 $21,317 $59,237 $69,582 
Weighted average common shares outstanding - basic22,674 23,076 22,784 23,073 
Effect of potentially dilutive securities398 197 304 206 
Weighted average common shares outstanding - diluted23,072 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.

17


9.DEBT
 
A summary of total debt outstanding at September 27, 2020 and December 31, 2019 is as follows:
(thousands)September 27, 2020December 31, 2019
Long-term debt:  
1.0% convertible notes due 2023
$172,500 $172,500 
Term loan due 202495,000 97,500 
Revolver due 2024135,000 135,000 
7.5% senior notes due 2027
300,000 300,000 
Total long-term debt702,500 705,000 
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.
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 hedgesBalance sheet locationSeptember 27, 2020December 31, 2019
Interest rate swapsOther 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 HedgesOtherForeign Currency ItemsTotal
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 HedgesOtherForeign Currency ItemsTotal
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 HedgesOtherForeign Currency ItemsTotal
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)

Nine Months Ended September 29, 2019
(thousands)Cash Flow HedgesOtherForeign Currency ItemsTotal
Balance at December 31, 2018$(