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Item 2. Management’s Discussion and Analysis

2020-05-07 compared with 2019-11-07 · 127 added, 188 removed, 67 unchanged (82% of the section changed)

2 unchanged sentences

In addition, this MD&A contains certain statements relating to future results which are forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995.

See “Information Concerning Forward-Looking Statements” on pages 34 and 35 of this Report.

See “Information Concerning Forward-Looking Statements” on page 25 of this Report.

The Company undertakes no obligation to update these forward-looking statements.

The MD&A is divided into seven major sections:

OVERVIEW OF MARKETS AND RELATED INDUSTRY PERFORMANCE

REVIEW OF CONSOLIDATED OPERATING RESULTS

Third Quarter and Nine Months Ended September 29, 2019 Compared to 2018

Use of Financial Metrics

REVIEW BY BUSINESS SEGMENT

Third Quarter and Nine Months Ended September 29, 2019 Compared to 2018

LIQUIDITY AND CAPITAL RESOURCES

Summary of Liquidity and Capital Resources

CRITICAL ACCOUNTING POLICIES

Cyber Security Incident

INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS

OVERVIEW OF MARKETS AND RELATED INDUSTRY PERFORMANCE

The global spread of the novel coronavirus (COVID-19) in recent months has negatively impacted the global economy, disrupted global supply chains and created significant volatility and disruption in financial markets.

The impact of this pandemic has created significant uncertainty in the global economy and has had, and is expected to continue to have, a material adverse effect on our business, employees, suppliers, and customers.

Despite a strong start to the year, there was an abrupt decline in OEM production in the recreational vehicle and marine markets as well as a decrease in U.S.

housing starts during the second half of March 2020.

We also expect an adverse impact on the Company’s sales and profitability in future periods as a result of a decrease in activity in all of our end markets.

These impacts are expected to be material.

However, the duration and the magnitude of these impacts cannot be precisely estimated at this time, as they are affected by a number of factors, many of which are outside of our control, including those presented in Item 1A.

Risk Factors of this Quarterly Report.

However, we generally expect the second quarter of 2020 to be the most significantly impacted quarter during the 2020 fiscal year.

Sustained adverse impacts to the Company, certain suppliers, and customers may also affect the Company’s future valuation of certain assets and therefore may increase the likelihood of an impairment charge, write-off, or reserve associated with such assets, including goodwill, indefinite and finite-lived intangible assets, property and equipment, inventories, accounts receivable, tax assets, and other assets.

We believe that the combination of our financial position, our available liquidity, the flexibility of our highly variable cost operating model and the diversification of our end markets and the geographic regions in which we operate will help to lessen the impacts of COVID-19 on the Company's operations and financial results.

If the situation evolves into a more prolonged pandemic, we plan to continue to adjust mitigation measures as needed related to the health and safety of our employees as well as to operating efficiencies.

Those measures have included, and could continue to include in the future, temporarily suspending select plant operations, modifying workspaces, continuing social distancing policies, implementing new personal protective equipment or health screening policies at our facilities, or such other industry best practices needed to continue to maintain a healthy and safe environment for our employees during the pandemic.

While we have enhanced, and will continue to enhance, functionality and security of technology for off-site functions, we are planning for the eventual reintroduction of our on-site workforce to our facilities.

We have taken steps to reduce the impact of the COVID-19 pandemic on our operating results, including reducing working capital, postponing non-essential capital expenditures, reducing operating costs, aligning production with demand, initiating workforce reductions and furloughs, reducing salaries, and substantially reducing discretionary spending.

These countermeasures are expected to lessen the impacts of COVID-19 on our full year 2020 financial results.

As the impact of the COVID-19 pandemic on the economy and our markets evolves, we will continue to assess the impact on the Company and plan to continue to take actions to reduce such impact on our business and operating results.

First Quarter 2020 Financial Overview

Recreational Vehicle ("RV") Industry

The RV industry is our primary market and comprised 55% and 56% of the Company’s sales in the third quarter and first nine months of 2019, respectively.

Sales from the RV industry decreased 13% and 12% in the third quarter and first nine months of 2019 , respectively, compared to the prior year periods.

According to the Recreation Vehicle Industry Association (“RVIA”), wholesale shipments totaled 93,357 units in the third quarter of 2019, a decline of 13% compared to 107,130 units in the third quarter of 2018, while for the first nine months of 2019, wholesale unit shipments decreased 18% versus the prior year period.

Based on actual retail sales data through August, the Company estimates that retail unit shipments declined 6% and 7%, respectively, for the third quarter of 2019 and first nine months of 2019 versus the comparable prior year periods.

With estimated retail unit shipments outpacing wholesale unit shipments in the third quarter and first nine months of 2019, RV dealer inventories declined in both periods.

The RVIA’s latest published expectations for fiscal 2019 project wholesale unit shipments to be approximately 401,000 units, representing a decline of 17% from 2018.

On the retail side, the Company expects RV retail unit shipments to decline at a mid-to-high single digit rate in 2019.

For the full year 2019, RV dealer inventories are expected to decline by more than 50,000 units, positioning the industry to return to a more direct relationship between wholesale unit shipments and retail unit shipments for the upcoming 2020 selling season.

The RV industry is our primary market and comprised 55% and 56% of the Company’s sales in the first quarter ended March 29, 2020 and March 31, 2019, respectively.

Sales to the RV industry decreased 6% in the first quarter of 2020 compared to the prior year quarter.

According to the Recreation Vehicle Industry Association, wholesale shipments totaled 100,404 units in the first quarter of 2020, and were virtually flat compared to 99,976 units in the first quarter of 2019.

Retail unit sales in the first quarter of 2020 are estimated to have increased slightly despite the disruption to consumers related to COVID-19.

Additionally, based on our estimates, RV dealer inventories at the end of the first quarter of 2020 were at their lowest level since 2014.

Marine Industry

Sales to the marine industry, which represented approximately 13% and 14% of the Company's consolidated net sales in the third quarter and first nine months of 2019, respectively, decreased 7% and increased 34% compared to the third quarter and first nine months of 2018, respectively.

For the third quarter and first nine months of 2019, overall marine retail unit shipments in the powerboat sector, which is the Company's primary marine market, increased approximately 2% and decreased approximately 5%, respectively, with aluminum fishing sales decreasing 5% and 11% in the third quarter and first nine months of 2019, respectively;

pontoon sales increasing 11% and decreasing 1%, respectively;

fiberglass sales decreasing 1% and 3%, respectively;

and ski and wake sales increasing 12% and 4%, respectively.

Adverse weather and flooding in certain regions of the country impacted marine retail unit shipments in the first half of 2019, particularly in the pontoon and aluminum fishing categories.

Reflecting this retail softness in the first half of 2019, we saw inventory recalibration by marine dealers in the third quarter of 2019, which we believe contributed to a decline in wholesale unit shipments in the quarter despite the increase in overall retail unit shipments.

Factoring in the impact of weather in the first half of 2019 and the related dealer inventory re-calibration, we anticipate that the powerboat sector of this market will experience a retail unit percentage decline in the low-to-mid single digits for fiscal 2019 and a wholesale unit percentage decline in the high-single digits.

Sales to the marine industry, which represented approximately 13% and 15% of the Company's consolidated net sales in the first quarter of 2020 and 2019, respectively, decreased 14% compared to the prior year quarter.

For the first quarter of 2020, overall marine retail unit shipments in the powerboat sector, which is the Company's primary marine market, decreased an estimated 5%, with aluminum fishing sales decreasing an estimated 5%;

pontoon sales

decreasing an estimated 2%;

fiberglass sales decreasing an estimated 7%;

and ski and wake sales decreasing an estimated 6%.

Inventory re-calibration continued in the first quarter of 2020, with wholesale unit shipments declining at an estimated mid-to-high teens percentage rate as OEMs continued to decrease production in alignment with lower dealer inventories.

Manufactured Housing ("MH") Industry

Sales to the MH industry, which represented 19% and 18% of the Company’s sales in the third quarter and first nine months of 2019, respectively, increased 61% and 62% compared to the respective prior year periods.

Based on industry

data from the Manufactured Housing Institute, MH wholesale unit shipments increased by approximately 2% and decreased by approximately 5% in the third quarter and first nine months of 2019, respectively.

Manufactured housing was negatively impacted in the first half of 2019 by wet weather conditions in certain regions of the country where moving inventory and setting foundations and houses were difficult, and as a result our current estimates indicate an overall percentage decline in MH wholesale unit shipments for fiscal 2019 in the low-to-mid single digits.

Sales to the MH industry, which represented 19% and 17% of the Company’s sales in the first quarter of 2020 and 2019, respectively, increased 6% in the first quarter of 2020 compared to the first quarter of 2019.

Based on industry data from the Manufactured Housing Institute, MH wholesale unit shipments increased by approximately 13% in the first quarter of 2020 compared to the prior year quarter.

MH wholesale unit shipments benefited from an improvement in weather conditions in the first quarter of 2020 compared to the first quarter of 2019, where wet weather conditions affected the moving of inventory and the setting of foundations and houses.

Industrial Market

The industrial market is comprised primarily of the kitchen cabinet industry, hospitality market, retail and commercial fixtures market, office and household furniture market and regional distributors.

Sales to this market represented 13% and 12% of our consolidated sales in the third quarter and first nine months of 2019, respectively, and were virtually unchanged in the third quarter and the first nine months of 2019 compared to prior year periods.

Sales to this market represented 13% and 12% of our sales in the first quarter of 2020 and 2019, respectively, and increased 14% in the first quarter of 2020 compared to the prior year quarter.

Overall, our revenues in these markets are focused on the residential housing, hospitality, high-rise housing and office, commercial construction and institutional furniture markets.

We estimate that approximately 60% of our industrial business is directly tied to the residential housing market, with the remaining 40% directly tied to the non-residential and commercial markets.

Combined new housing starts increased 4% in the third quarter of 2019 compared to the prior year quarter, with single family housing starts increasing 4% and multifamily residential starts increasing 6% for the same period.

For the first nine months of 2019, single family housing starts decreased 2%, while multifamily housing starts were virtually flat, with combined housing starts decreasing 1%.

Combined new housing starts increased 22% in the first quarter of 2020 compared to the prior year quarter, with single family housing starts increasing 12% and multifamily residential starts increasing 47% for the same period.

Our industrial products are generally among the last components installed in new unit construction and as such our related sales typically trail new housing starts by four to six months.

Because of this lag in the relationship between new housing starts and our sale of related industrial products, we expect our industrial sales to benefit in the next two quarters from recent growth in residential housing starts.

We expect a low-single digit growth rate in new housing starts overall for fiscal 2019.

REVIEW OF CONSOLIDATED OPERATING RESULTS

Third Quarter and Nine Months Ended September 29, 2019 Compared to 2018

First Quarter Ended March 29, 2020 Compared to 2019

The following table sets forth the percentage relationship to net sales of certain items on the Company’s Condensed Consolidated Statements of Income.

Third Quarter Ended

Nine Months Ended

September 29, 2019

September 30, 2018

September 29, 2019

September 30, 2018

First Quarter Ended

March 29, 2020

March 31, 2019

Cost of goods sold

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Interest expense, net

Net sales in the third quarter of 2019 decreased $8.9 million, or 2%, to $566.2 million from $575.1 million in the third quarter of 2018.

The Company's net sales decreased in two of its primary markets, with a decrease in RV market sales of 13% and a decrease in marine market sales of 7%, while industrial market sales were virtually flat and MH market sales increased 61% when compared to the prior year quarter.

Net sales in the first nine months of 2019 increased $55.8 million, or 3%, to $1.79 billion from $1.73 billion in the prior year period.

The Company's net sales increased in two of its primary markets in the first nine months of 2019 with increases of 62% in MH and 34% in marine, while industrial market sales were virtually unchanged and RV market sales decreased 12% compared to 2018.

The consolidated net sales decrease in the third quarter of 2019 primarily reflected decreases in OEM wholesale unit shipments in the RV and marine industries, partly offset by an increase in revenue from the acquisition of LaSalle Bristol ("LaSalle"), completed in the fourth quarter of 2018.

The consolidated net sales increase in the first nine months of 2019 was mostly attributed to the contribution of revenue from LaSalle.

Revenue attributable to acquisitions completed in the first nine months of 2019 was immaterial for both the third quarter and first nine months of 2019.

Revenue attributable to acquisitions completed in first nine months of 2018 was $82.4 million and $160.0 million for the third quarter and first nine months of 2018, respectively.

The Company’s RV content per wholesale unit (on a trailing twelve-month basis) for the third quarter of 2019 increased approximately 9% to $3,132 from $2,875 for the third quarter of 2018.

Marine content per retail unit (on a trailing twelve-month basis) for the third quarter of 2019 increased approximately 54% to an estimated $1,624 from $1,054 for the third quarter of 2018.

MH content per wholesale unit (on a trailing twelve-month basis) for the third quarter of 2019 increased approximately 65% to an estimated $4,327 from $2,628 for the third quarter of 2018.

Net sales in the first quarter of 2020 decreased $19.0 million, or 3%, to $589.2 million from $608.2 million in the first quarter of 2019.

The consolidated net sales decrease in the first quarter of 2020 was primarily attributed to sales decreases to the RV and marine markets, partially offset by sales increases to the MH and industrial markets.

The Company's RV market sales decreased 6% and marine market sales decreased 14%, while industrial market sales increased

14% and MH market sales increased 6% when compared to the prior year quarter.

All four of our end markets were impacted by business disruptions and associated lost shipping days due to the COVID-19 pandemic.

The Company’s RV content per wholesale unit (on a trailing twelve-month basis) for the first quarter of 2020 decreased approximately 1% to $3,112 from $3,131 for the first quarter of 2019.

Marine powerboat content per retail unit (on a trailing twelve-month basis) for the first quarter of 2020 increased approximately 3% to an estimated $1,531 from $1,484 for the first quarter of 2019.

MH content per wholesale unit (on a trailing twelve-month basis) for the first quarter of 2020 increased approximately 33% to an estimated $4,543 from $3,415 for the first quarter of 2019.

Cost of Goods Sold.

Cost of goods sold decreased $6.6 million, or 1%, to $461.9 million in the third quarter of 2019 from $468.5 million in 2018.

As a percentage of net sales, cost of goods sold increased during the third quarter of 2019 to 81.6% from 81.5% in 2018.

For the first nine months of 2019, cost of goods sold increased $51.4 million, or 4%, to $1,464.1 million from $1,412.6 million in 2018.

As a percentage of net sales, cost of goods sold increased during the first nine months of 2019 to 81.9% from 81.6% in 2018.

Cost of goods sold as a percentage of net sales was impacted during the third quarter and first nine months of 2019 by:

(i) higher overall fixed overhead costs relative to RV and marine revenue;

(ii) the lower margin profile of LaSalle, which was acquired in the fourth quarter of 2018 and (iii) a temporary disruption in operations and associated inefficiencies related to the cybersecurity incident, discussed below.

Cost of goods sold decreased $21.9 million, or 4%, to $479.8 million in the first quarter of 2020 from $501.7 million in 2019.

As a percentage of net sales, cost of goods sold decreased during the first quarter of 2020 to 81.4% from 82.5% in 2019.

Cost of goods sold as a percentage of net sales decreased primarily as a result of (i) cost reductions we initiated in the third quarter of 2019 which benefited our gross margins in the first quarter of 2020, (ii) synergies achieved and realized in the first quarter of 2020 from our 2018 and 2019 acquisitions and (iii) decreases in commodity cost inputs.

In general, the Company's cost of goods sold percentage can be impacted from quarter-to-quarter by demand changes in certain market sectors that can result in fluctuating costs of certain raw materials and commodity-based components that are utilized in the production of our products.

Gross Profit.

Gross profit decreased $2.4 million, or 2%, to $104.3 million in the third quarter of 2019 from $106.7 million in 2018.

For the first nine months of 2019, gross profit increased $4.3 million, or 1%, to $323.5 million from $319.2 million in 2018.

As a percentage of net sales, gross profit decreased to 18.4% in the third quarter of 2019 from 18.5% in the same period in 2018, and decreased to 18.1% for the first nine months of 2019 from 18.4% in the same period in 2018.

The changes in gross profit as a percentage of net sales in the third quarter and first nine months of 2019 compared to the same periods in 2018 reflect the impact of the factors discussed above under “Cost of Goods Sold”.

Economic or industry-wide factors affecting the profitability of our RV, MH, marine and industrial businesses include the costs of commodities and the labor used to manufacture our products as well as the competitive environment that can cause gross margins to fluctuate from quarter-to-quarter and year-to-year.

Gross profit increased $3.0 million, or 3%, to $109.5 million in the first quarter of 2020 from $106.5 million in 2019.

As a percentage of net sales, gross profit increased to 18.6% in the first quarter of 2020 from 17.5% in the same period in 2019.

The increase in gross profit as a percentage of net sales in the first quarter of 2020 compared to the same period in 2019 reflects the impact of the factors discussed above under “Cost of Goods Sold”.

Warehouse and Delivery Expenses .

Warehouse and delivery expenses increased $4.1 million, or 21%, to $23.9 million in the third quarter of 2019 from $19.8 million in 2018.

For the first nine months in 2019, warehouse and delivery expenses increased $18.7 million, or 34%, to $74.2 million from $55.5 million in 2018.

As a percentage of net sales, warehouse and delivery expenses were 4.2% in the third quarter of 2019 compared to 3.4% in the third quarter of 2018 and 4.2% in the first nine months of 2019 compared to 3.2% the first nine months of 2018.

The increase in expense in the third quarter and first nine months of 2019 compared to the prior year periods was primarily attributable to the impact of certain acquisitions completed in 2018 that had higher warehouse and delivery expenses as a percentage of net sales when compared to the consolidated percentage.

For the first nine months of 2019 compared to the prior year period, increased sales volumes also contributed to the increase in warehouse and delivery expense.

In addition, the Company's shipments to OEMs in the third quarter and first nine months of 2019 were generally lower volume and higher frequency, and as a result transportation costs relative to sales levels of products delivered increased as a percentage of net sales.

Warehouse and delivery expenses increased $0.7 million, or 3%, to $24.7 million in the first quarter of 2020 from $24.0 million in the first quarter of 2019.

As a percentage of net sales, warehouse and delivery expenses were 4.2% in the first quarter of 2020 compared to 4.0% in the first quarter of 2019.

Selling, General and Administrative ("SG&A") Expenses .

SG&A expenses increased $0.5 million, or 2%, to $33.8 million in the third quarter of 2019 from $33.3 million in 2018.

For the first nine months of 2019, SG&A expenses increased $5.4 million, or 5%, to $104.4 million from $99.0 million in 2018.

As a percentage of net sales, SG&A expenses were 6.0% in the third quarter of 2019 compared to 5.8% in the third quarter of 2018 and 5.8% in the first nine months of 2019 compared to 5.7% in 2018.

The increase in SG&A expenses in the third quarter and first nine months of 2019 compared to 2018 is primarily due to:

(i) an increase in professional service fees and other costs associated with the cyber security event discussed below;

(ii) a loss on extinguishment of debt associated with the amendment of the Company's credit facility and (iii) the impact of certain acquisitions completed in 2018 that had higher SG&A expenses as a percentage of net sales when compared to the consolidated percentage.

Partially offsetting these factors was a decrease in incentive compensation and sales commissions.

SG&A expenses decreased $1.8 million, or 5%, to $35.9 million in the first quarter of 2020 from $37.7 million in the prior year quarter.

As a percentage of net sales, SG&A expenses were 6.1% in the first quarter of 2020 compared to 6.2% in the first quarter of 2019.

The decrease in SG&A expenses in the first quarter of 2020 compared to 2019 is primarily due to the realization of cost reduction measures implemented in the third quarter of 2019 as well as reductions in certain SG&A spending associated with the decrease in net sales in the first quarter of 2020.

Amortization of Intangible Assets.

Amortization of intangible assets increased $0.3 million, or 4%, in the third quarter of 2019 compared to the prior year quarter, and increased $1.3 million, or 5%, in the first nine months of 2019 compared to the prior year period.

The increase in the third quarter and first nine months of 2019 compared to the prior year periods primarily reflects the impact of businesses acquired in 2018, partly offset by purchase accounting adjustments to intangible assets and the associated impact to amortization expense.

Amortization of intangible assets increased $0.6 million, or 7%, to $9.6 million in the first quarter of 2020 from $9.0 million in the prior year quarter.

The increase in the first quarter of 2020 compared to the prior year quarter primarily reflects the impact of businesses acquired in 2019.

Operating Income.

Operating income decreased $7.3 million, or 16%, to $37.4 million in the third quarter of 2019 from $44.7 million in 2018.

For the first nine months of 2019, operating income decreased $21.1 million, or 15%, to $118.5 million from $139.5 million in the prior year period.

As a percentage of net sales, operating income was 6.6% in the third quarter of 2019 versus 7.8% in the same period in 2018 and 6.6% for the first nine months of 2019 versus 8.1% in the prior year period.

Operating income in the third quarter and first nine months of 2019 attributable to acquisitions completed in the first nine months of 2019 was immaterial.

Operating income in the third quarter and the first nine months of 2018 included $8.8 million and $17.3 million, respectively, attributable to acquisitions completed in the first nine months of 2018.

Operating income increased $3.5 million, or 10%, to $39.3 million in the first quarter of 2020 from $35.8 million in 2019.

As a percentage of net sales, operating income was 6.7% in the first quarter of 2020 versus 5.9% in the same period in 2019.

The change in operating income and operating margin is primarily attributable to the items discussed above.

Interest Expense, Net.

Interest expense increased $1.3 million, or 17%, to $8.6 million in the third quarter of 2019 from $7.3 million in the prior year.

For the first nine months of 2019, interest expense increased $8.2 million, or 46%, to $26.2 million from $18.0 million in the prior year period.

The increase in interest expense reflects:

(i) increased borrowings related to 2018 acquisitions, (ii) increases in the average interest rate on the variable rate portion of the Company's debt, which reflects increases in LIBOR in the third quarter and first nine months of 2019 compared to the prior year periods and (iii) an increase in the Company's overall average interest rate resulting from the issuance of the Company's 7.5% Senior Notes due 2027 (the "Senior Notes") in the third quarter of 2019.

Interest expense increased $1.5 million, or 17%, to $10.5 million in the first quarter of 2020 from $9.0 million in the prior year.

The increase in interest expense reflects increased borrowings related to 2019 acquisitions and an increase in the Company's overall average interest rate resulting from the issuance of $300 million aggregate principal amount of 7.5% senior notes in the third quarter of 2019, partially offset by a decrease in variable interest rates on the Company's term loan and revolving credit facility.

Income Taxes.

Income tax expense decreased $1.9 million, or 21%, to $7.5 million from $9.4 million in the prior year period.

For the first nine months of 2019, income tax expense decreased $6.0 million, or 21%, to $22.7 million from $28.7 million in the prior year period.

For the third quarter of 2019, the effective tax rate was 26.0% compared to 25.3% in the comparable 2018 period.

For the first nine months of 2019, the effective tax rate was 24.6% compared to 23.6% for the prior year period.

The effective tax rate for the periods presented includes the impact of the recognition of excess tax benefits on share-based compensation that were recorded as a reduction to income tax expense upon realization.

Amounts recorded include $0.9 million and $2.2 million for the nine-month 2019 and 2018 periods, respectively, with no amounts for the comparable quarterly periods.

The Company's combined effective income tax rate from period to period and for the full year 2019 could further fluctuate due to:

(i) refinements in federal and state income tax estimates, which are impacted by the availability of tax credits;

(ii) permanent differences impacting the effective tax rate;

(iii) shifts in apportionment factors among states as a result of recent acquisition activity and other factors and (iv) the timing of the recognition of excess tax benefits related to the vesting of share-based payments awards as previously discussed.

Net income for the third quarter of 2019 was $21.3 million, or $0.92 per diluted share, compared to $27.9 million, or $1.15 per diluted share for 2018.

For the first nine months of 2019, net income was $69.6 million, or $2.99 per diluted share, compared to $92.9 million, or $3.77 per diluted share for 2018.

The changes in net income for the third quarter and first nine months of 2019 compared to prior year periods reflect the impact of the items previously discussed.

Income tax expense increased $1.6 million, or 27%, to $7.6 million from $6.0 million in the prior year period.

The increase in income tax expense is due primarily to an increase in pretax income as well as an increase in the effective tax rate in the first quarter of 2020 compared to the prior year quarter.

The effective tax rate in the first quarter of 2020 and 2019 was 26.4% and 22.3% , respectively.

The effective tax rate for the first quarter of 2019 includes the impact of the recognition of excess tax benefits on share-based compensation that was recorded as a reduction to income tax expense upon realization in the amount of $0.8 million .

Use of Financial Metrics

Our MD&A includes financial metrics, such as RV, marine and MH content per unit, which we believe are important measures of the Company's business performance.

Content per unit metrics are generally calculated using our market sales divided by third-party measures of industry volume.

These metrics should not be considered alternatives to U.S.

Our computations of content per unit may differ from similarly titled measures used by others.

You should not consider these metrics in isolation or as substitutes for an analysis of our results as reported under U.S.

These metrics should not be considered in isolation or as substitutes for an analysis of our results as reported under U.S.

REVIEW BY BUSINESS SEGMENT

The Company has determined that its reportable segments are those based on its method of internal reporting, which segregates its businesses based on the manner in which its Chief Operating Decision Maker allocates resources, evaluates financial results, and determines compensation.

The Company’s reportable business segments are as follows:

Manufacturing – This segment includes the following:

laminated products that are utilized to produce furniture, shelving, walls, countertops, and cabinet products, cabinet doors, fiberglass bath fixtures and tile systems, hardwood furniture, vinyl printing, decorative vinyl and paper laminated panels, solid surface, granite, and quartz countertop fabrication, RV painting, fabricated aluminum products, fiberglass and plastic components, softwoods lumber, custom cabinetry, polymer-based flooring, electrical systems components including instrument and dash panels, wrapped vinyl, paper and hardwood profile mouldings, interior passage doors, air handling products, slide-out trim and fascia, thermoformed shower surrounds, specialty bath and closet building products, fiberglass and plastic helm systems and components products, wiring and wire harnesses, boat covers, towers, tops and frames, aluminum fuel tanks, CNC molds and composite parts, slotwall panels and components and other products.

Distribution – The Company distributes pre-finished wall and ceiling panels, drywall and drywall finishing products, electronics and audio systems components, appliances, wiring, electrical and plumbing products, fiber reinforced polyester products, cement siding, raw and processed lumber, interior passage doors, roofing products, laminate and ceramic

flooring, tile, shower doors, furniture, fireplaces and surrounds, interior and exterior lighting products, and other miscellaneous products, in addition to providing transportation and logistics services.

Third Quarter and Nine Months Ended September 29, 2019 Compared to 2018

In the discussion that follows, sales attributable to the Company’s operating segments include intersegment sales and gross profit includes the impact of intersegment operating activity.

The table below presents information about the sales, gross profit and operating income of the Company’s operating segments.

The Company's reportable segments, Manufacturing and Distribution, are based on its method of internal reporting.

The Company regularly evaluates the performance of the Manufacturing and Distribution segments and allocates resources to them based on a variety of indicators including sales and operating income.

The Company does not measure profitability at the customer market (RV, marine, MH and industrial) level.

First Quarter Ended March 29, 2020 Compared to 2019

In the discussion that follows, sales attributable to the Company’s reportable segments include intersegment sales and gross profit includes the impact of intersegment operating activity.

The table below presents information about the sales, gross profit and operating income of the Company’s reportable segments.

A reconciliation of consolidated operating income is presented in Note 15 to the Notes to Condensed Consolidated Financial Statements.

Third Quarter Ended

Nine Months Ended

September 29, 2019

September 30, 2018

September 29, 2019

September 30, 2018

First Quarter Ended

March 29, 2020

March 31, 2019

Manufacturing

3 unchanged sentences

Manufacturing

Sales decreased $45.6 million, or 10%, to $407.8 million in the third quarter of 2019 from $453.4 million in 2018.

For the first nine months of 2019, sales decreased $87.7 million, or 6%, to $1,283.8 million from $1,371.6 million in the prior year period.

This segment accounted for approximately 71% and 70% of the Company’s consolidated net sales for the third quarter and first nine months of 2019 and 77% and 78% for the third quarter and first nine months of 2018.

The sales decrease in the third quarter of 2019 largely reflected a decrease in wholesale unit shipments in the RV and marine industries, and in the RV, MH and marine industries in the first nine months of 2019.

Revenue in the third quarter and first nine months of 2019 was immaterial related to acquisitions completed in the first nine months of 2019.

Revenue in the third quarter and first nine months of 2018 included $51.8 million and $99.0 million, respectively, related to acquisitions completed in the first nine months of 2018.

Sales decreased $6.6 million, or 2%, to $426.8 million in the first quarter of 2020 from $433.4 million in the prior year quarter.

This segment accounted for approximately 71% and 70% of the Company’s consolidated net sales for the first quarter of 2020 and 2019, respectively.

The sales decrease in the first quarter of 2020 was primarily attributed to sales decreases to the RV and marine markets as a result of business disruptions and lost shipping days due to the COVID-19 pandemic.

Gross Profit .

Gross profit decreased $12.3 million, or 14%, to $73.7 million in the third quarter of 2019 from $86.0 million in the third quarter of 2018.

For the first nine months of 2019, gross profit decreased $31.6 million, or 12%, to $231.2 million from $262.8 million in 2018.

As a percentage of sales, gross profit decreased to 18.1% in the third quarter of 2019 from 19.0% in 2018 and decreased to 18.0% in the first nine months of 2019 from 19.2% in 2018.

Gross profit decreased during the third quarter and first nine months of 2019 compared to the corresponding prior year periods primarily due to decreased revenue relative to overall fixed overhead costs.

Gross profit increased $2.1 million, or 3%, to $78.9 million in the first quarter of 2020 from $76.8 million in the first quarter of 2019.

As a percentage of sales, gross profit increased to 18.5% in the first quarter of 2020 from 17.7% in the first quarter of 2019.

Gross profit increased during the first quarter of 2020 compared to the prior year quarter primarily due to cost reduction initiatives implemented in the third quarter of 2019 as well as synergies we achieved from our 2018 and 2019 acquisitions.

Operating Income.

Operating income decreased $12.5 million, or 23%, to $42.4 million in the third quarter of 2019 from $54.9 million in the prior year.

For the first nine months of 2019, operating income decreased $37.2 million, or 22%, to $135.6 million from $172.8 million in 2018.

The overall decrease in operating income in the third quarter and first nine months of 2019 primarily reflects the items discussed above.

Operating income in the third quarter and first nine months of 2019 attributable to acquisitions completed in the first nine months of 2019 was immaterial, and operating income in the third quarter and first nine months of 2018 included $7.0 million and $12.9 million, respectively, attributable to acquisitions completed in the first nine months of 2018.

Sales increased $36.5 million, or 28%, to $167.5 million in the third quarter of 2019 from $131.0 million in 2018.

For the first nine months of 2019, sales increased $140.7 million, or 36%, to $531.3 million from $390.6 million in 2018.

This segment accounted for approximately 29% and 30%, respectively, of the Company’s consolidated net sales for the third quarter and first nine months of 2019, and 23% and 22%, respectively, for the third quarter and first nine months of 2018.

The sales increase in the third quarter and first nine months of 2019 compared to the prior year periods was largely attributed to the revenue contribution of LaSalle, which was acquired during the fourth quarter of 2018.

Revenue in the third quarter and first nine months of 2018 included $30.6 million and $61.0 million, respectively, related to acquisitions completed in the first nine months of 2018.

Operating income increased $1.3 million, or 3%, to $45.7 million in the first quarter of 2020 from $44.4 million in the prior year quarter.

The overall increase in operating income in the first quarter of 2020 primarily reflects the items discussed above.

Sales decreased $12.4 million, or 7%, to $171.3 million in the first quarter of 2020 from $183.7 million in the prior year quarter.

This segment accounted for approximately 29% and 30% of the Company’s consolidated net sales for the first quarter of 2020 and 2019, respectively.

The sales decrease was mostly attributed to a decrease in our RV end market sales in the first quarter of 2020 compared to the prior year quarter as a result of business disruptions and lost shipping days due to the COVID-19 pandemic.

Gross Profit.

Gross profit increased $6.0 million, or 27%, to $28.0 million in the third quarter of 2019 from $22.0 million in the third quarter of 2018.

For the first nine months of 2019, gross profit increased $24.0 million, or 38%, to $87.7 million from $63.7 million in 2018.

As a percentage of sales, gross profit decreased to 16.7% in the third quarter of 2019 from 16.8% in the third quarter of 2018 and increased to 16.5% for the first nine months of 2019 from 16.3% for the first nine months of 2018.

The decrease in gross profit margin in the third quarter of 2019 compared to the third quarter of 2018 is primarily attributed to higher overall fixed costs relative to RV and MH distribution product revenue.

The increase in gross profit margin for the first nine months of 2019 compared to 2018 primarily reflects the impact of acquisitions completed during 2018.

Gross profit increased $0.2 million, or 1%, to $29.2 million in the first quarter of 2020 from $29.0 million in the first quarter of 2019.

As a percentage of sales, gross profit increased to 17.0% in the first quarter of 2020 from 15.8% in the first quarter of 2019.

The increase in gross profit margin in the first quarter of 2020 compared to the first quarter of 2019 is primarily attributed to a reduction of overall fixed costs relative to RV and MH distribution product revenue.

Operating Income.

Operating income increased $1.4 million, or 19%, to $9.0 million in the third quarter of 2019 from $7.6 million in the prior year.

For the first nine months of 2019, operating income increased $3.0 million, or 12%, to $28.1 million from $25.1 million for the first nine months of 2018.

Operating income in the third quarter and first nine months of 2018 included $1.8 million and $4.4 million, respectively, related to distribution acquisitions completed in the first nine months of 2018.

The overall net improvement in operating income in the third quarter and first nine months of 2019 primarily reflects the items discussed above.

Operating income increased $1.7 million, or 20%, to $10.0 million in the first quarter of 2020 from $8.3 million in the prior year quarter.

The improvement in operating income in the first quarter of 2020 primarily reflects the items discussed above.

LIQUIDITY AND CAPITAL RESOURCES

As the impact of the COVID-19 pandemic on the economy, our markets and our operations evolves, we will continue to assess our liquidity needs.

The COVID-19 pandemic has materially adversely impacted the global economy, disrupted global supply chains and created significant volatility and disruption in financial markets.

An extended period of global supply chain and economic disruption could materially affect our business, results of operations, ability to meet debt covenants, access to sources of liquidity and financial condition.

Given the economic uncertainty as a result of the pandemic, we have taken actions to improve our current liquidity position, including reducing working capital, pausing our share repurchase program, postponing non-essential capital expenditures, reducing executive salaries, reducing operating costs by initiating workforce reductions and furloughs, and reducing discretionary spending.

Our liquidity at March 29, 2020 consisted of cash and cash equivalents of $94.5 million as well as $410.2 million of availability under our credit facility.

Operating Activities

Cash flows from operating activities are one of the Company's primary sources of liquidity, representing the net income the Company earned in the reported periods, adjusted for non-cash items and changes in operating assets and liabilities.

Net cash provided by operating activities decreased $5.4 million to $122.0 million in the first nine months of 2019 from $127.4 million in the first nine months of 2018 primarily due to:

a decrease in net income of $23.3 million, partly offset by (i) an increase of depreciation and amortization of $6.6 million, (ii) an increase in stock based compensation expense, amortization of debt discount, deferred income taxes and other operating items of $5.0 million and (iii) a net source of cash from changes in operating assets and liabilities of $6.3 million.

Net cash provided by operating activities decreased $14.7 million to $13.2 million in the first quarter of 2020 from $27.9 million in the first quarter of 2019 primarily as a result of an increase in the use of cash from trade receivables of $12.3 million, primarily reflecting the timing of cash receipts from one large customer, and an increase in the use of cash from inventories of $19.4 million, due mostly to purchases of raw materials in anticipation of potential supply chain disruptions related to COVID-19.

These decreases in operating cash flows were partially offset by an increase of cash flows from prepaid expenses and other assets of $4.4 million, accounts payable of $10.5 million, and other items of $2.1 million, mostly due to the timing of prepaid expenditures and accounts payable disbursements.

Investing Activities

Net cash used in investing activities decreased $270.9 million to $40.1 million in the first nine months of 2019 from $311.0 million in the first nine months of 2018 primarily due to:

a decrease in cash used in business acquisitions of $267.7 million and a decrease in capital expenditures of $3.8 million.

The Company's current operating model forecasts capital expenditures for fiscal 2019 of approximately $30 million.

Net cash used in investing activities increased $21.9 million to $31.8 million in the first quarter 2020 from $9.9 million in the first quarter of 2019 primarily due to an increase in cash used in business acquisitions of $23.1 million, partially offset by a decrease in capital expenditures and other investing activities of $1.2 million.

Financing Activities

Cash flows from financing activities are one of the Company's primary sources of liquidity through borrowings under the Company's credit facility as well as convertible and senior note issuances in 2018 and 2019, respectively.

Net cash flows provided by financing activities decreased $153.2 million to $27.9 million in the first nine months of 2019 from $181.1 million in the first nine months of 2018 primarily due to:

(i) cash used for net repayments on the Company's credit facility of $253.6 million in the first nine months of 2019 compared to a source of cash from net borrowings on the Company's credit facility of $107.1 million in the first nine months of 2018;

(ii) gross proceeds of $172.5 million from the third quarter 2018 issuance of 1% Convertible Senior Notes due 2023 (the "Convertible Notes") with no comparable amount in the first nine months of 2019;

(iii) a source of cash in the first nine months of 2018 of $18.1 million from the related sale of warrants with no comparable amount in the first nine months of 2019 and (iv) a use of cash of $4.4 million in the first nine months of 2019 from payment of contingent consideration resulting from a business acquisition with no comparable amount in the first nine months of 2018.

Partially offsetting these items were:

(i) the issuance of $300 million of Senior Notes in the first nine months of 2019 with no comparable amount in the first nine months of 2018;

(ii) a use of cash in the first nine months of 2018 of $31.5 million from the purchase of Convertible Notes hedges with no comparable amount in the first nine months of 2019 and (iii) a decrease in the use of cash for stock repurchases of $71.4 million in the first nine months of 2019 from the prior year period.

See Notes 9, 10 and 16 of the Notes to Condensed Consolidated Financial Statements for further information on the Company's indebtedness, derivative financial instruments and stock repurchases, respectively.

Net cash flows used by financing activities increased $9.7 million to $26.2 million in the first quarter of 2020 from $16.5 million in the first quarter of 2019 primarily due to stock repurchases under our buyback program of $15.6 million with no corresponding amount in the prior year quarter and cash dividends paid to shareholders of $5.8 million with no corresponding amount in the prior year quarter.

These increases in use of cash from financing activities were partially offset by a decrease in the payment of contingent consideration from a business acquisition of $2.4 million and a decrease in net repayments on our credit facility of $8.6 million and other financing activities of $0.7 million.

Summary of Liquidity and Capital Resources

The Company's existing cash and cash equivalents, cash generated from operations, and available borrowings under its current credit facility (the "2019 Credit Facility") are expected to be sufficient to meet anticipated cash needs for working capital and capital expenditures for at least the next 12 months, exclusive of any acquisitions, based on its current cash flow budgets and forecast of short-term and long-term liquidity needs.

The ability to access unused borrowing capacity under the 2019 Credit Facility as a source of liquidity is dependent on maintaining compliance with the financial covenants as specified under the terms of the credit agreement that established the 2019 Credit Facility (the "2019 Credit Agreement").

As of and for the September 29, 2019 reporting date, the Company was in compliance with its financial debt covenants as required under the terms of the 2019 Credit Agreement.

The required maximum consolidated total leverage ratio and the required minimum consolidated fixed charge coverage ratio compared to the actual amounts as of September 29, 2019 and for the fiscal period then ended are as follows:

The Company's existing cash and cash equivalents, cash generated from operations, and available borrowings under its credit facility are expected to be sufficient to meet anticipated cash needs for working capital and capital expenditures for at least the next 12 months, exclusive of any acquisitions, based on its current cash flow budgets and forecast of short-term and long-term liquidity needs.

The Company's credit facility consists of a $550 million senior secured revolver and a $100 million senior secured term loan.

The maturity date for borrowings under the credit agreement that established the credit facility is September 17, 2024.

Upon the satisfaction of certain conditions, and obtaining incremental commitments from its lenders, the Company may be able to increase the borrowing capacity of the credit facility by up to $250 million.

Borrowings under the credit facility are secured by substantially all personal property assets of the Company and any domestic subsidiary guarantors.

Pursuant to the credit agreement:

The term loan is due in consecutive quarterly installments in the following amounts:

(i) through and including June 30, 2021, $1,250,000 and (ii) beginning September 30, 2021, and each quarter thereafter, $2,500,000, with the remaining balance due at maturity;

The interest rates for borrowings under the revolver and the term loan are the Prime Rate or LIBOR

plus a margin, which ranges from 0.00% to 0.75% for Prime Rate loans and from 1.00% to 1.75% for LIBOR

loans depending on the Company’s consolidated total leverage ratio.

The Company is required to pay fees on unused but committed portions of the revolver, which range from 0.15% to 0.225%.

At March 29, 2020, the Company had $410.2 million of unused borrowing availability under its credit facility.

The ability to access unused borrowing capacity under the credit facility as a source of liquidity is dependent on maintaining compliance with the financial covenants as specified under the terms of the credit agreement.

As of and for the March 29, 2020 reporting date, the Company was in compliance with its financial covenants as required under the terms of its credit agreement.

The required maximum consolidated total leverage ratio and the required minimum consolidated fixed charge coverage ratio, as such ratios are defined in the credit agreement, compared to the actual amounts as of March 29, 2020 and for the fiscal period then ended are as follows:

Consolidated total leverage ratio (12-month period)

Consolidated fixed charge coverage ratio (12-month period)

The indenture associated with the Senior Notes places restrictions on the Company’s ability to, among other items, (i) incur additional indebtedness or issue certain preferred shares;

(ii) pay dividends, redeem stock or make other distributions;

(iii) make investments;

(iv) transfer or sell assets;

and (v) merge or consolidate.

The Senior Note indenture also provides for customary events of default, which could require the Senior Notes to become due and payable immediately, and also contains customary covenant provisions with which the Company is in compliance as of September 29, 2019.

Working capital requirements vary from period to period depending on manufacturing volumes primarily related to the RV, MH and marine industries as well as the industrial markets we serve, the timing of deliveries, and the payment cycles of customers.

In the event that operating cash flow is inadequate and one or more of the Company's capital resources were to become unavailable, the Company would seek to revise its operating strategies accordingly.

The Company will continue to assess its liquidity position and potential sources of supplemental liquidity in view of operating performance, current economic and capital market conditions, and other relevant circumstances.

Borrowings under the revolving credit loan (the "2019 Revolver") and the term loan (the "2019 Term Loan") comprising the 2019 Credit Facility, which are subject to variable rates of interest, are subject to a maximum total borrowing limit of $650.0 million (effective September 17, 2019).

See Note 9 of the Notes to the Condensed Consolidated Financial Statements for further information.

See Note 10 of the Notes to Condensed Consolidated Financial Statements for information on interest rate swaps used to partially hedge variable interest rates under the 2019 Revolver and 2019 Term Loan.

The unused availability under the 2019 Credit Facility as of September 29, 2019 was $411.1 million.

The Company will continue to

assess its liquidity position and potential sources of supplemental liquidity in view of operating performance, current economic and capital market conditions, and other relevant circumstances.

CRITICAL ACCOUNTING POLICIES

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Accordingly, the Company’s sales and profits had generally been the highest in the second quarter and lowest in the fourth quarter.

Seasonal industry trends in the past several years have included the impact related to the addition of major RV manufacturer open houses for dealers in the August/September timeframe, resulting in dealers delaying certain restocking purchases until new product lines are introduced at these shows.

Seasonal industry trends in the past several years have included the impact related to the addition of major RV manufacturer open houses for dealers in the August/September timeframe as well as marine open houses in the January/February timeframe, resulting in dealers delaying certain restocking purchases until new product lines are introduced at these shows.

In addition, current and future seasonal industry trends may be different than in prior years due to the impact of national and regional economic conditions and consumer confidence on retail sales of RVs and other products for which the Company sells its components, timing of dealer orders, fluctuations in dealer inventories, and from time to time, the impact of severe weather conditions on the timing of industry-wide wholesale shipments.

Cyber Security Incident

At the end of the third quarter of 2019, the Company experienced a highly-sophisticated third-party malware cyberattack that impacted certain of the Company's administrative and production servers and resulted in a disruption of administrative and network operations for approximately two business days.

In response to the attack, the Company immediately took steps to ensure customer commitments were honored and to remediate the attack to minimize the disruption.

Further, although the Company has programs in place to detect, contain and respond to data security incidents, the Company began an investigation of the attack, including engaging external forensic and other IT experts, and is in the process of implementing further security measures and processes designed to prevent unauthorized access to its information systems and mitigate cybersecurity related risks.

Estimated after-tax costs incurred in the third quarter of 2019 related to the cyberattack were approximately $1.5 million, which included incremental consulting and professional fees, administrative, operating, and production inefficiencies, and equipment replacement and repair.

No additional material costs are expected to be incurred in future quarters related to the cyber incident.

INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS

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and other matters from time to time and desires to take advantage of the “safe harbor” which is afforded such statements under the Private Securities Litigation Reform Act of 1995 when they are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the forward-looking statements.

The statements contained in the foregoing “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, as well as other statements contained in the quarterly report and statements contained in future filings with the Securities and Exchange Commission (“SEC”), publicly disseminated press releases, quarterly earnings conference calls, and statements which may be made from time to time in the future by management of the Company in presentations to shareholders, prospective investors, and others interested in the business and financial affairs of the Company, which are not historical facts, are forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those set forth in the forward-looking statements.

The statements contained in the foregoing “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, as well as other statements contained in this quarterly report and statements contained in future filings with the Securities and Exchange Commission (“SEC”), publicly disseminated press releases, quarterly earnings conference calls, and statements which may be made from time to time in the future by management of the Company in presentations to shareholders, prospective investors, and others interested in the business and financial affairs of the Company, which are not historical facts, are forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those set forth in the forward-looking statements.

Any projections of financial performance or statements concerning expectations as to future developments should not be construed in any manner as a guarantee that such results or developments will, in fact, occur.

There can be no assurance that any forward-looking statement will be realized or that

actual results will not be significantly different from that set forth in such forward-looking statement.

There can be no assurance that any forward-looking statement will be realized or that actual results will not be significantly different from that set forth in such forward-looking statement.

The Company does not undertake to publicly update or revise any forward-looking statements except as required by law.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis