PATRICK INDUSTRIES INC 10-Q

ITEM 1. FINANCIAL STATEMENTS PATRICK INDUSTRIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Second Quarter Ended Six Months Ended (thousands except per share data) June 28, 2020 June 30, 2019 June 28, 2020 June 30, 2019 NET SALES $ 424,045 $ 613,218 $ 1,013,277 $ 1,221,436 Cost of goods sold 350,324 500,557 830,075 1,002,227 GROSS PROFIT 73,721 112,661 183,202 219,209 Operating Expenses: Warehouse and delivery 20,209 26,270 44,941 50,311 Selling, general and administrative 31,628 32,894 67,497 70,586 Amortization of intangible assets 9,778 8,268 19,379 17,257 Total operating expenses 61,615 67,432 131,817 138,154 OPERATING INCOME 12,106 45,229 51,385 81,055 Interest expense, net 10,821 8,636 21,313 17,619 Income before income taxes 1,285 36,593 30,072 63,436 Income taxes 571 9,177 8,171 15,171 NET INCOME $ 714 $ 27,416 $ 21,901 $ 48,265 BASIC NET INCOME PER COMMON SHARE $ 0.03 $ 1.19 $ 0.96 $ 2.09 DILUTED NET INCOME PER COMMON SHARE $ 0.03 $ 1.18 $ 0.95 $ 2.07 Weighted average shares outstanding – Basic 22,667 23,102 22,840 23,071 Weighted average shares outstanding – Diluted 22,932 23,316 23,098 23,282 See accompanying Notes to Condensed Consolidated Financial Statements. 3 PATRICK INDUSTRIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) Second Quarter Ended Six Months Ended (thousands) June 28, 2020 June 30, 2019 June 28, 2020 June 30, 2019 NET INCOME $ 714 $ 27,416 $ 21,901 $ 48,265 Other comprehensive (loss) income, net of tax: Unrealized gain (loss) of hedge derivatives 464 ( 1,931 ) ( 2,542 ) ( 2,985 ) Other ( 15 ) ( 94 ) ( 52 ) ( 67 ) Total other comprehensive income (loss) 449 ( 2,025 ) ( 2,594 ) ( 3,052 ) COMPREHENSIVE INCOME $ 1,163 $ 25,391 $ 19,307 $ 45,213 See accompanying Notes to Condensed Consolidated Financial Statements. 4 PATRICK INDUSTRIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (Unaudited) As of (thousands) June 28, 2020 December 31, 2019 ASSETS Current Assets Cash and cash equivalents $ 111,062 $ 139,390 Trade and other receivables, net 143,614 87,536 Inventories 261,691 253,870 Prepaid expenses and other 21,086 36,038 Total current assets 537,453 516,834 Property, plant and equipment, net 184,797 180,849 Operating lease right-of-use assets 96,065 93,546 Goodwill 326,478 319,349 Intangible assets, net 344,905 357,014 Deferred financing costs, net 2,706 2,978 Other non-current assets 392 423 TOTAL ASSETS $ 1,492,796 $ 1,470,993 LIABILITIES AND SHAREHOLDERS’ EQUITY Current Liabilities Current maturities of long-term debt $ 5,000 $ 5,000 Current operating lease liabilities 28,567 27,694 Accounts payable 115,838 96,208 Accrued liabilities 69,132 58,033 Total current liabilities 218,537 186,935 Long-term debt, less current maturities, net 673,138 670,354 Long-term operating lease liabilities 68,318 66,467 Deferred tax liabilities, net 19,056 27,284 Other long-term liabilities 20,479 22,472 TOTAL LIABILITIES 999,528 973,512 SHAREHOLDERS’ EQUITY Common stock 173,178 172,662 Additional paid-in-capital 24,534 25,014 Accumulated other comprehensive loss ( 8,292 ) ( 5,698 ) Retained earnings 303,848 305,503 TOTAL SHAREHOLDERS’ EQUITY 493,268 497,481 TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 1,492,796 $ 1,470,993 See accompanying Notes to Condensed Consolidated Financial Statements. 5 PATRICK INDUSTRIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Six Months Ended (thousands) June 28, 2020 June 30, 2019 CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 21,901 $ 48,265 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 34,689 30,247 Stock-based compensation expense 6,347 8,172 Amortization of convertible notes debt discount 3,505 3,382 Deferred income taxes ( 7,346 ) 231 Other 3,016 ( 810 ) Change in operating assets and liabilities, net of acquisitions of businesses: Trade receivables ( 55,520 ) ( 31,514 ) Inventories ( 7,183 ) 13,699 Prepaid expenses and other assets 14,908 2,368 Accounts payable, accrued liabilities and other 25,055 19,774 Net cash provided by operating activities 39,372 93,814 CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures ( 11,305 ) ( 18,177 ) Proceeds from sale of property, equipment and other investing activities 126 4,357 Business acquisitions, net of cash acquired ( 23,838 ) ( 1,246 ) Net cash used in investing activities ( 35,017 ) ( 15,066 ) CASH FLOWS FROM FINANCING ACTIVITIES Term debt repayments ( 1,250 ) ( 3,750 ) Borrowings on revolver 8,022 389,294 Repayments on revolver ( 8,022 ) ( 439,627 ) Stock repurchases under buyback program ( 15,550 ) — Cash dividends paid to shareholders ( 11,607 ) — Payments related to vesting of stock-based awards, net of shares tendered for taxes ( 2,860 ) ( 3,303 ) Payment of deferred financing costs ( 58 ) ( 276 ) Proceeds from exercise of stock options 642 7 Payment of contingent consideration from a business acquisition ( 2,000 ) ( 4,416 ) Net cash used in financing activities ( 32,683 ) ( 62,071 ) Increase (decrease) in cash and cash equivalents ( 28,328 ) 16,677 Cash and cash equivalents at beginning of year 139,390 6,895 Cash and cash equivalents at end of period $ 111,062 $ 23,572 See accompanying Notes to Condensed Consolidated Financial Statements. 6 PATRICK INDUSTRIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited) Second Quarter Ended June 28, 2020 (thousands) Common Stock Additional Paid-in- Capital Accumulated Other Comprehensive Loss Retained Earnings Total Balance March 29, 2020 $ 170,626 $ 24,534 $ ( 8,741 ) $ 308,957 $ 495,376 Net income — — — 714 714 Dividends declared — — — ( 5,823 ) ( 5,823 ) Other comprehensive income, net of tax — — 449 — 449 Issuance of shares upon exercise of common stock options 642 — — — 642 Shares used to pay taxes on stock grants ( 126 ) — — — ( 126 ) Stock-based compensation expense 2,036 — — — 2,036 Balance June 28, 2020 $ 173,178 $ 24,534 $ ( 8,292 ) $ 303,848 $ 493,268 Six Months Ended June 28, 2020 (thousands) Common Stock Additional Paid-in- Capital Accumulated Other Comprehensive Loss Retained Earnings Total Balance December 31, 2019 $ 172,662 $ 25,014 $ ( 5,698 ) $ 305,503 $ 497,481 Net income — — — 21,901 21,901 Dividends declared — — — ( 11,801 ) ( 11,801 ) Other comprehensive loss, net of tax — — ( 2,594 ) — ( 2,594 ) Share repurchases under buyback program ( 3,315 ) — ( 480 ) — — — ( 11,755 ) ( 15,550 ) Issuance of shares upon exercise of common stock options 642 — — — 642 Shares used to pay taxes on stock grants ( 3,158 ) — — — ( 3,158 ) Stock-based compensation expense 6,347 — — — 6,347 Balance June 28, 2020 $ 173,178 $ 24,534 $ ( 8,292 ) $ 303,848 $ 493,268 Second Quarter Ended June 30, 2019 (thousands) Common Stock Additional Paid-in- Capital Accumulated Other Comprehensive Loss Retained Earnings Total Balance March 31, 2019 $ 161,949 $ 25,124 $ ( 3,707 ) $ 245,723 $ 429,089 Net income — — — 27,416 27,416 Other comprehensive loss, net of tax — — ( 2,025 ) — ( 2,025 ) Shares used to pay taxes on stock grants ( 91 ) — — — ( 91 ) Issuance of shares upon exercise of common stock options 3 — — — 3 Stock-based compensation expense 4,225 — — — 4,225 Balance June 30, 2019 $ 166,086 $ 25,124 $ ( 5,732 ) $ 273,139 $ 458,617 7 PATRICK INDUSTRIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited) (cont.) Six Months Ended June 30, 2019 (thousands) Common Stock Additional Paid-in- Capital Accumulated Other Comprehensive Loss Retained Earnings Total Balance December 31, 2018 $ 161,436 $ 25,124 $ ( 2,680 ) $ 224,874 $ 408,754 Net income — — — 48,265 48,265 Other comprehensive loss, net of tax — — ( 3,052 ) — ( 3,052 ) Shares used to pay taxes on stock grants ( 3,528 ) — — — ( 3,528 ) Issuance of shares upon exercise of common stock options 6 — — — 6 Stock-based compensation expense 8,172 — — — 8,172 Balance June 30, 2019 $ 166,086 $ 25,124 $ ( 5,732 ) $ 273,139 $ 458,617 See accompanying Notes to Condensed Consolidated Financial Statements 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 June 28, 2020 and December 31, 2019 , and its results of operations and cash flows for the second quarter and six months ended June 28, 2020 and June 30, 2019 . Patrick’s unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission and in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The preparation of the condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to those rules or regulations. Certain immaterial reclassifications have been made to the prior period presentation to conform to the current period presentation. For a description of significant accounting policies used by the Company in the preparation of its consolidated financial statements, please refer to Note 1 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 . The December 31, 2019 condensed consolidated statement of financial position data was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. Operating results for the second quarter and six months ended June 28, 2020 are not necessarily indicative of the results to be expected for the full year ending December 31, 2020 . The Company maintains its financial records on the basis of a fiscal year ending on December 31, with the fiscal quarters spanning approximately thirteen weeks. The first quarter ends on the Sunday closest to the end of the first thirteen-week period. The second and third quarters are thirteen weeks in duration and the fourth quarter is the remainder of the year. The second quarter of fiscal year 2020 ended on June 28, 2020 and the second quarter of fiscal year 2019 ended on June 30, 2019. In preparation of Patrick’s condensed consolidated financial statements as of and for the second quarter and six months ended June 28, 2020 , management evaluated all subsequent events and transactions that occurred after the balance sheet date through the date of issuance of the Form 10-Q that required recognition or disclosure in the condensed consolidated financial statements. See Note 17 for more information. 2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS Goodwill Impairment In January 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2017-04, " Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment ". This ASU simplifies the accounting for goodwill impairments by eliminating step two from the goodwill impairment test. The standard requires that the impairment loss be measured as the excess of the reporting unit's carrying amount over its fair value. It eliminates the second step that requires the impairment to be measured between the implied value of a reporting unit's goodwill and its carrying value. The Company adopted ASU 2017-04 on January 1, 2020 and the adoption did not have a material impact on the condensed consolidated financial statements. Credit Losses In June 2016, the FASB issued ASU 2016-13, “ Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments ”, which amends certain provisions of Accounting Standards Codification ("ASC") 326, “Financial Instruments-Credit Loss”. The ASU changes the impairment model for most financial assets and certain other instruments. For trade and other receivables, held to maturity debt securities, loans and other instruments, entities are required to use a 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. 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: Second Quarter Ended June 28, 2020 (thousands) Manufacturing Distribution Total Reportable Segments Market type: Recreational Vehicle $ 139,628 $ 64,498 $ 204,126 Manufactured Housing 36,407 53,907 90,314 Industrial 61,679 8,878 70,557 Marine 54,860 4,188 59,048 Total $ 292,574 $ 131,471 $ 424,045 10 Six Months Ended June 28, 2020 (thousands) Manufacturing Distribution Total Reportable Segments Market type: Recreational Vehicle $ 366,413 $ 157,933 $ 524,346 Manufactured Housing 82,012 120,671 202,683 Industrial 133,126 16,023 149,149 Marine 130,289 6,810 137,099 Total $ 711,840 $ 301,437 $ 1,013,277 Second Quarter Ended June 30, 2019 (thousands) Manufacturing Distribution Total Reportable Segments Market type: Recreational Vehicle $ 240,677 $ 100,244 $ 340,921 Manufactured Housing 44,739 65,200 109,939 Industrial 62,823 9,534 72,357 Marine 86,036 3,965 90,001 Total $ 434,275 $ 178,943 $ 613,218 ` Six Months Ended June 30, 2019 (thousands) Manufacturing Distribution Total Reportable Segments Market type: Recreational Vehicle $ 475,555 $ 207,802 $ 683,357 Manufactured Housing 86,942 129,016 215,958 Industrial 123,751 17,583 141,334 Marine 173,711 7,076 180,787 Total $ 859,959 $ 361,477 $ 1,221,436 Contract Liabilities Contract liabilities, representing upfront payments from customers received prior to satisfying performance obligations, were immaterial as of the beginning and end of all periods presented and changes in contract liabilities were immaterial during all periods presented. 11 4. INVENTORIES Inventories consist of the following: (thousands) June 28, 2020 December 31, 2019 Raw materials $ 174,758 $ 162,238 Work in process 14,143 14,272 Finished goods 27,617 28,446 Less: reserve for inventory obsolescence ( 12,054 ) ( 10,123 ) Total manufactured goods, net 204,464 194,833 Materials purchased for resale (distribution products) 59,523 60,918 Less: reserve for inventory obsolescence ( 2,296 ) ( 1,881 ) Total materials purchased for resale (distribution products), net 57,227 59,037 Total inventories $ 261,691 $ 253,870 5. GOODWILL AND INTANGIBLE ASSETS Changes in the carrying amount of goodwill for the six months ended June 28, 2020 by segment are as follows: (thousands) Manufacturing Distribution Total Balance - December 31, 2019 $ 268,402 $ 50,947 $ 319,349 Acquisitions 6,008 — 6,008 Adjustments to preliminary purchase price allocations ( 603 ) 1,724 1,121 Balance - June 28, 2020 $ 273,807 $ 52,671 $ 326,478 Intangible assets, net consist of the following as of June 28, 2020 and December 31, 2019 : (thousands) June 28, 2020 Weighted Average Useful Life (in years) December 31, 2019 Weighted Average Useful Life (in years) Customer relationships $ 360,962 10.1 $ 357,513 10.1 Non-compete agreements 15,149 5.0 16,202 5.0 Patents 16,495 14.6 16,495 14.6 Trademarks 89,058 Indefinite 88,524 Indefinite 481,664 478,734 Less: accumulated amortization ( 136,759 ) ( 121,720 ) Intangible assets, net $ 344,905 $ 357,014 Changes in the carrying value of intangible assets for the six months ended June 28, 2020 by segment are as follows: (thousands) Manufacturing Distribution Total Balance - December 31, 2019 $ 282,123 $ 74,891 $ 357,014 Acquisitions 9,220 — 9,220 Amortization ( 15,838 ) ( 3,541 ) ( 19,379 ) Impairment of intangible assets (1) ( 119 ) ( 1,831 ) ( 1,950 ) Adjustments to preliminary purchase price allocations 138 ( 138 ) — Balance - June 28, 2020 $ 275,524 $ 69,381 $ 344,905 12 (1) Certain immaterial operations permanently ceased activities during the second quarter of 2020. As a result, we recorded a $ 2.0 million pre-tax impairment of customer relationships and trademarks of these operations after determining the net carrying value of the assets was no longer recoverable. The impairment was calculated using our internal projections of discounted cash flows, which rely on Level 3 inputs in the fair value hierarchy based on the unobservable nature of the underlying data. The impairment was recorded in selling, general and administrative in our condensed consolidated statements of income for the second quarter and six months ended June 28, 2020. Valuation of Goodwill and Indefinite-Lived Intangibles We test goodwill and indefinite-lived intangible assets (trademarks) for impairment on an annual basis (as of September 30, 2019 for our most recent annual tests) and, if certain events or circumstances indicate that an impairment loss may have been incurred, on an interim basis. Our 2019 tests indicated that there was no impairment, as fair value exceeded carrying values, and we concluded that none of our reporting units or trademarks were at risk of failing the impairment test. Despite the excess fair value identified in our 2019 impairment tests, we assessed during the quarter and six months ended June 28, 2020 whether the impact of the COVID-19 pandemic on overall macroeconomic conditions and our operating income for the second quarter and six months ended June 28, 2020 indicated that at June 28, 2020 it was more likely than not that our goodwill and trademarks were impaired. We evaluated among other factors (i) the results of our 2019 impairment tests; (ii) our market capitalization at June 28, 2020 in relation to the carrying amount of shareholders’ equity at June 28, 2020 and to fair values determined during our 2019 impairment tests; (iii) the results of our operations during the second quarter and six months ended June 28, 2020 in relation to our projections; and (iv) our analysis of the impact on the fair values determined during our 2019 impairment tests using more recent projections and discount rates that account for various risks and uncertainties, including the duration and extent of impact to our business, related to the COVID-19 pandemic. Based on the results of our assessment, and other than immaterial impairments discussed above, we determined it was more likely than not that our goodwill and trademarks were not impaired as of June 28, 2020. However, we are unable to predict how long the COVID-19-related conditions will persist, what additional measures may be introduced by governments or private parties, or what effect any such additional measures may have on demand for our products or those of our customers in each of our end markets. As such, we may be required to perform quantitative impairment tests in future periods preceding our annual impairment test date, and the outcome of such tests could result in an impairment of our goodwill or our trademarks. 6. ACQUISITIONS General The Company did not make any acquisitions in the second quarter of 2020 and completed three acquisitions in the first six months of 2020 (the "2020 Acquisitions"). For the second quarter and six months ended June 28, 2020, net sales included in the Company's condensed consolidated statements of income related to the 2020 acquisitions were $ 3.3 million and $ 3.8 million , respectively. Acquisition-related costs incurred in the first six months of 2020 were immaterial. The Company made no acquisitions in the first six months of 2019. As of June 28, 2020 , the aggregate fair value of the estimated contingent consideration payments was $ 7.8 million, $ 5.9 million of which is included in the line item "Accrued liabilities" and $ 1.9 million is included in “Other long-term liabilities” on the condensed consolidated statement of financial position. At December 31, 2019, the aggregate fair value of the estimated contingent consideration payments was $ 9.6 million , $ 2.0 million of which was included in the line item "Accrued liabilities" and $ 7.6 million was included in "Other long-term liabilities". The liabilities for contingent consideration expire at various dates through December 2023. The contingent consideration arrangements are subject to a maximum payment amount of up to $ 12.3 million in the aggregate. In the first six months of 2020, the Company made cash payments of $ 2.0 million related to contingent consideration arrangements, recording a corresponding reduction to accrued liabilities. 2020 Acquisitions Acquisitions completed in the first six months of 2020 include the previously announced acquisitions of Maple City Woodworking Corporation, a Goshen, Indiana-based manufacturer of hardwood cabinet doors and fascia for the recreational vehicle market, and SEI Manufacturing, Inc., a Cromwell, Indiana-based manufacturer of towers, T-Tops, 13 hardtops, rails, gates and other aluminum exterior products for the marine market. The total cash consideration for the 2020 Acquisitions was $ 25.0 million . The preliminary purchase price allocations are subject to valuation activities being finalized, and thus all required purchase accounting adjustments are subject to change within the measurement period as the Company finalizes its estimates. The 2020 Acquisitions are included in the Manufacturing segment. 2019 Acquisitions The Company completed three acquisitions in 2019 ( the "2019 Acquisitions"), including the previously announced acquisitions of Topline Counters, LLC, a Sumner, Washington-based designer and manufacturer of kitchen and bathroom countertops for residential and commercial markets, and G.G. Schmitt & Sons, Inc. ("G.G. Schmitt"), a Sarasota, Florida-based designer and manufacturer of customized hardware and structural components for the marine industry. The total cash consideration for the 2019 Acquisitions was $ 53.1 million , plus contingent consideration over a one -year period based on future performance in connection with the acquisition of G.G. Schmitt. The preliminary purchase price allocations are subject to valuation activities being finalized, and thus all required purchase accounting adjustments are subject to change within the measurement period as the Company finalizes its estimates. Changes to preliminary purchase accounting estimates recorded in the second quarter and first six months of 2020 related to the 2019 Acquisitions were immaterial. The 2019 Acquisitions are included in the Manufacturing segment. The following table summarizes the fair values of the assets acquired and the liabilities assumed as of the date of acquisition for the 2020 Acquisitions and the 2019 Acquisitions: (thousands) Trade receivables Inventories Property, plant and equipment Prepaid expenses & other Intangible assets Goodwill Less: Total liabilities Less: Deferred tax liability, net Total net assets acquired 2020 $ 962 $ 1,883 $ 7,913 $ 17 $ 9,220 $ 6,008 $ 1,005 $ — $ 24,998 2019 (1) $ 9,711 $ 6,012 $ 5,380 $ 104 $ 17,765 $ 25,205 $ 6,512 $ 1,922 $ 55,743 (1) Total net assets acquired for the 2019 Acquisitions reflect the preliminary estimated liability of $ 2.6 million pertaining to the fair value of contingent consideration based on future performance relating to the acquisition of G.G. Schmitt. Pro Forma Information The following pro forma information for the second quarter and six months ended June 28, 2020 and June 30, 2019 assumes the 2020 Acquisitions and the 2019 Acquisitions occurred as of the beginning of the year immediately preceding each such acquisition. The pro forma information contains the actual operating results of the 2020 Acquisitions and 2019 Acquisitions combined with the results prior to their respective acquisition dates, adjusted to reflect the pro forma impact of the acquisitions occurring as of the beginning of the year immediately preceding each such acquisition. The pro forma information includes financing and interest expense charges based on incremental borrowings incurred in connection with each transaction. In addition, the pro forma information includes amortization expense, in the aggregate, related to intangible assets acquired in connection with the transactions of $ 0.2 million for the six months ended June 28, 2020 and $ 0.6 million and $ 1.2 million for the second quarter and six months ended June 30, 2019, respectively. Second Quarter Ended Six Months Ended (thousands except per share data) June 28, 2020 June 30, 2019 June 28, 2020 June 30, 2019 Revenue $ 424,045 $ 636,454 $ 1,018,631 $ 1,267,907 Net income 714 28,949 22,480 51,140 Basic net income per common share 0.03 1.25 0.98 2.22 Diluted net income per common share 0.03 1.24 0.97 2.20 14 The pro forma information is presented for informational purposes only and is not indicative of the results of operations that actually would have been achieved had the acquisitions been consummated as of the periods indicated above. 7. STOCK-BASED COMPENSATION The Company recorded expense of $ 2.0 million and $ 6.3 million for the second quarter and six months ended June 28, 2020, respectively, for its stock-based compensation plans in the condensed consolidated statements of income. Stock-based compensation expense for the second quarter and six months ended June 28, 2020 includes a reduction of expense due to certain forfeitures and adjustments in the amount of $ 2.4 million. For the second quarter and six months ended June 30, 2019, the Company recorded stock-based compensation expense of $ 4.3 million and $ 8.2 million , respectively. The Board approved various stock-based grants under the Company’s 2009 Omnibus Incentive Plan in the first six months of 2020 totaling 275,740 shares in the aggregate at an average fair value of $ 53.78 at grant date for a total fair value at grant date of $ 14.8 million . In addition, in the second quarter of 2020, the Board approved stock option grants representing 465,000 shares in the aggregate at an exercise price of $ 41.33 per share. The total cost to be expensed over the three-year vesting period will be $ 6.6 million , or $ 14.25 per share, with an underlying volatility of 42 % under the Black Scholes option pricing model. As of June 28, 2020, there was approximately $ 30.3 million of total unrecognized compensation cost related to stock-based compensation arrangements granted under incentive plans. That cost is expected to be recognized over a weighted-average period of 19.9 months. 8. NET INCOME PER COMMON SHARE Net income per common share calculated for the second quarter and six months of 2020 and 2019 is as follows: Second Quarter Ended Six Months Ended (thousands except per share data) June 28, 2020 June 30, 2019 June 28, 2020 June 30, 2019 Net income for basic and diluted per share calculation $ 714 $ 27,416 $ 21,901 $ 48,265 Weighted average common shares outstanding - basic 22,667 23,102 22,840 23,071 Effect of potentially dilutive securities 265 214 258 211 Weighted average common shares outstanding - diluted 22,932 23,316 23,098 23,282 Basic net income per common share $ 0.03 $ 1.19 $ 0.96 $ 2.09 Diluted net income per common share $ 0.03 $ 1.18 $ 0.95 $ 2.07 15 9. DEBT A summary of total debt outstanding at June 28, 2020 and December 31, 2019 is as follows: (thousands) June 28, 2020 December 31, 2019 Long-term debt: Revolver due 2024 $ 135,000 $ 135,000 Term loan due 2024 96,250 97,500 7.5% senior notes due 2027 300,000 300,000 1.0% convertible notes due 2023 172,500 172,500 Total long-term debt 703,750 705,000 Less: convertible notes debt discount, net ( 19,755 ) ( 23,260 ) Less: senior notes deferred financing costs, net ( 5,365 ) ( 5,844 ) Less: current maturities of long-term debt ( 5,000 ) ( 5,000 ) Less: term loan deferred financing costs, net ( 492 ) ( 542 ) Total long-term debt, less current maturities, net $ 673,138 $ 670,354 There were no material changes to any of our debt arrangements during the second quarter and six months ended June 28, 2020. Interest rates for borrowings under the revolver and term loan are the prime rate or LIBOR plus a margin. At June 28, 2020 , all of the Company's borrowings under the revolver and term loan were under the LIBOR-based option. The interest rate for incremental borrowings at June 28, 2020 was LIBOR plus 1.5 % (or 1.69 % ) for the LIBOR-based option. The fee payable on committed but unused portions of the revolver was 0.20 % at June 28, 2020 . Total cash interest paid was $ 15.6 million and $ 6.3 million for the second quarter of 2020 and 2019, respectively, and $ 18.2 million and $ 12.8 million for the first six months of 2020 and 2019, respectively. 10. DERIVATIVE FINANCIAL INSTRUMENTS The Company's credit facility exposes the Company to risks associated with the variability in interest expense associated with fluctuations in LIBOR. To partially mitigate this risk, the Company has historically entered into interest rate swaps. As of June 28, 2020 , the Company had a combined notional principal amount of $ 200.0 million of interest rate swap agreements, all of which are designated as cash flow hedges. These swap agreements effectively convert the interest expense associated with a portion of the Company's variable rate debt from variable interest rates to fixed interest rates and have maturities ranging from February 2022 to March 2022. The following table summarizes the fair value of derivative contracts included in the condensed consolidated statements of financial position (in thousands): Fair value of derivative instruments Derivatives accounted for as cash flow hedges Balance sheet location June 28, 2020 December 31, 2019 Interest rate swaps Other long-term liabilities $ 9,292 $ 5,868 The interest rate swaps are comprised of over-the-counter derivatives, which are valued using models that primarily rely on observable inputs such as yield curves, which are classified as Level 2 in the fair value hierarchy. See Note 11 for information regarding accumulated other comprehensive loss on interest rate swaps. 16 11. ACCUMULATED OTHER COMPREHENSIVE LOSS Accumulated other comprehensive loss includes unrealized gains and losses on derivatives that qualify as hedges of cash flows, cumulative foreign currency translation and other adjustments. The activity in accumulated other comprehensive loss during the second quarter and six months ended June 28, 2020 and June 30, 2019 was as follows: Second Quarter Ended June 28, 2020 (thousands) Cash Flow Hedges Other Foreign Currency Items Total Balance at March 29, 2020 $ ( 7,380 ) $ ( 1,270 ) $ ( 91 ) $ ( 8,741 ) Other comprehensive income (loss) (net of tax (benefit) of ($158), $0 and $0) 464 — ( 15 ) 449 Balance at June 28, 2020 $ ( 6,916 ) $ ( 1,270 ) $ ( 106 ) $ ( 8,292 ) Six Months Ended June 28, 2020 (thousands) Cash Flow Hedges Other Foreign Currency Items Total Balance at December 31, 2019 $ ( 4,374 ) $ ( 1,270 ) $ ( 54 ) $ ( 5,698 ) Other comprehensive loss (net of tax of $882, $0 and $0) ( 2,542 ) — ( 52 ) ( 2,594 ) Balance at June 28, 2020 $ ( 6,916 ) $ ( 1,270 ) $ ( 106 ) $ ( 8,292 ) Second Quarter Ended June 30, 2019 (thousands) Cash Flow Hedges Other Foreign Currency Items Total Balance at March 31, 2019 $ ( 3,027 ) $ ( 675 ) $ ( 5 ) $ ( 3,707 ) Other comprehensive loss (net of tax of $659, $0 and $0) ( 1,931 ) — ( 94 ) ( 2,025 ) Balance at June 30, 2019 $ ( 4,958 ) $ ( 675 ) $ ( 99 ) $ ( 5,732 ) Six Months Ended June 30, 2019 (thousands) Cash Flow Hedges Other Foreign Currency Items Total Balance at December 31, 2018 $ ( 1,973 ) $ ( 675 ) $ ( 32 ) $ ( 2,680 ) Other comprehensive loss (net of tax of $1,015, $0 and $0) ( 2,985 ) — ( 67 ) ( 3,052 ) Balance at June 30, 2019 $ ( 4,958 ) $ ( 675 ) $ ( 99 ) $ ( 5,732 ) Reclassification adjustments out of accumulated other comprehensive loss were immaterial for all periods presented. 17 12. LEASES Lease expense, supplemental cash flow information, and other information related to leases were as follows: Second Quarter Ended (thousands) June 28, 2020 June 30, 2019 Operating lease cost $ 8,399 $ 7,901 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows for operating leases $ 8,279 $ 6,875 Right-of-use assets obtained in exchange for lease obligations: Operating leases $ 5,474 $ 8,668 Six Months Ended (thousands) June 28, 2020 June 30, 2019 Operating lease cost $ 16,568 $ 15,688 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows for operating leases $ 16,362 $ 13,599 Right-of-use assets obtained in exchange for lease obligations: Operating leases $ 17,902 $ 9,245 Balance sheet information related to leases was as follows: (thousands, except lease term and discount rate) June 28, 2020 December 31, 2019 Assets Operating lease right-of-use assets $ 96,065 $ 93,546 Liabilities Operating lease liabilities, current portion $ 28,567 $ 27,694 Long-term operating lease liabilities 68,318 66,467 Total lease liabilities $ 96,885 $ 94,161 Weighted average remaining lease term, operating leases (in years) 4.1 4.2 Weighted average discount rate, operating leases 3.7 % 3.7 % 18 Maturities of lease liabilities were as follows at June 28, 2020: (thousands) 2020 (excluding the six months ended June 28, 2020) $ 16,235 2021 28,873 2022 22,920 2023 17,072 2024 11,341 Thereafter 7,955 Total lease payments 104,396 Less imputed interest ( 7,511 ) Total $ 96,885 Leases have remaining lease terms of one year to ten years . 13. FAIR VALUE MEASUREMENTS The carrying amounts of cash equivalents, representing government and other money market funds traded in an active market, are reported on the condensed consolidated statements of financial position as a component of "Cash and cash equivalents". The carrying amount of cash equivalents, valued using Level 1 inputs and approximating fair value because of their relatively short maturities, was approximately $ 90.0 million and $ 132.6 million at June 28, 2020 and December 31, 2019, respectively. The estimated fair value of our senior notes, calculated using Level 2 inputs, was approximately $ 306.2 million and $ 320.3 million at June 28, 2020 and December 31, 2019, respectively. The carrying amounts of our term loan and our revolver, valued using Level 2 inputs, approximated fair value as of June 28, 2020 and December 31, 2019 based upon terms and conditions available to the Company at those dates in comparison to the terms and conditions of its outstanding debt. The estimated fair value of our convertible notes, calculated using Level 2 inputs, was approximately $ 166.6 million and $ 162.5 million as of June 28, 2020 and December 31, 2019, respectively. 14. INCOME TAXES The effective tax rate in the second quarter of 2020 and 2019 was 44.4 % and 25.1 % , respectively, and the effective tax rate for the comparable six month periods was 27.2 % and 23.9 % , respectively. The effective tax rate for the second quarter and six months of 2020 reflects the impact of $ 2.2 million of permanent tax differences due to certain Coronavirus Aid, Relief, and Economic Security Act payroll tax credits. In addition, the effective tax rate for the first six months 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 $ 0.9 million. Cash paid for income taxes for the second quarter and six months of 2020 was immaterial. The Company paid income taxes of $ 21.1 million and $ 22.6 million in the second quarter and six months of 2019, respectively. 19 15. SEGMENT INFORMATION The Company has two reportable segments, Manufacturing and Distribution, which are based on its method of internal reporting, which segregates its businesses based on the manner in which its chief operating decision maker allocates resources, evaluates financial results, and determines compensation. The tables below present information about the sales and operating income of those segments. Second Quarter Ended June 28, 2020 (thousands) Manufacturing Distribution Total Net outside sales $ 292,574 $ 131,471 $ 424,045 Intersegment sales 5,114 1,085 6,199 Total sales 297,688 132,556 430,244 Operating income 22,410 6,938 29,348 Second Quarter Ended June 30, 2019 (thousands) Manufacturing Distribution Total Net outside sales $ 434,275 $ 178,943 $ 613,218 Intersegment sales 8,331 1,118 9,449 Total sales 442,606 180,061 622,667 Operating income 48,787 10,800 59,587 Six Months Ended June 28, 2020 (thousands) Manufacturing Distribution Total Net outside sales $ 711,840 $ 301,437 $ 1,013,277 Intersegment sales 12,687 2,385 15,072 Total sales 724,527 303,822 1,028,349 Operating income 68,114 16,906 85,020 Six Months Ended June 30, 2019 (thousands) Manufacturing Distribution Total Net outside sales $ 859,959 $ 361,477 $ 1,221,436 Intersegment sales 16,051 2,283 18,334 Total sales 876,010 363,760 1,239,770 Operating income 93,224 19,091 112,315 20 The following table presents a reconciliation of segment operating income to consolidated operating income: Second Quarter Ended Six Months Ended (thousands) June 28, 2020 June 30, 2019 June 28, 2020 June 30, 2019 Operating income for reportable segments $ 29,348 $ 59,587 $ 85,020 $ 112,315 Unallocated corporate expenses ( 7,464 ) ( 6,090 ) ( 14,256 ) ( 14,003 ) Amortization ( 9,778 ) ( 8,268 ) ( 19,379 ) ( 17,257 ) Consolidated operating income $ 12,106 $ 45,229 $ 51,385 $ 81,055 Unallocated corporate expenses include corporate general and administrative expenses comprised of wages, insurance, taxes, supplies, travel and entertainment, professional fees and other. 16. STOCK REPURCHASE PROGRAMS In March 2020, the Board approved a new stock repurchase program for up to $ 50 million of its common stock, including amounts remaining under previous authorizations. Approximately $ 43.5 million remains in the amount of the Company's common stock that may be acquired under the current stock repurchase program as of June 28, 2020. No stock repurchases were made in the second quarter of 2020. In the first six months 2020, the Company repurchased 456,155 shares of its common stock at an average price of $ 34.09 per share at an aggregate cost of $ 15.6 million. The Company did not repurchase any of its common stock in the second quarter and first six months of 2019. 17. SUBSEQUENT EVENT In August 2020, the Company announced the completion of the acquisition of Inland Plywood Company (“Inland”), a supplier, laminator and wholesale distributor of treated, untreated, and laminated plywood, medium density overlay panels, and other specialty products, primarily serving the marine market as well as the recreational vehicle and industrial markets for a net initial purchase price of $ 46.0 million. Inland is headquartered in Pontiac, Michigan with an additional facility located in Cocoa, Florida. The acquisition of Inland includes the acquisition of working capital, machinery and equipment, and real estate.