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 26, 2022 June 27, 2021 June 26, 2022 June 27, 2021 NET SALES $ 1,475,693 $ 1,019,953 $ 2,817,868 $ 1,870,436 Cost of goods sold 1,148,589 815,476 2,195,419 1,504,427 GROSS PROFIT 327,104 204,477 622,449 366,009 Operating Expenses: Warehouse and delivery 44,047 34,815 85,216 64,728 Selling, general and administrative 90,485 60,365 166,045 111,597 Amortization of intangible assets 18,545 14,031 35,406 25,937 Total operating expenses 153,077 109,211 286,667 202,262 OPERATING INCOME 174,027 95,266 335,782 163,747 Interest expense, net 14,802 14,580 29,688 25,759 Income before income taxes 159,225 80,686 306,094 137,988 Income taxes 42,701 21,701 76,897 31,490 NET INCOME $ 116,524 $ 58,985 $ 229,197 $ 106,498 BASIC NET INCOME PER COMMON SHARE $ 5.24 $ 2.57 $ 10.25 $ 4.66 DILUTED NET INCOME PER COMMON SHARE $ 4.79 $ 2.52 $ 9.33 $ 4.56 Weighted average shares outstanding – Basic 22,230 22,948 22,369 22,844 Weighted average shares outstanding – Diluted 24,444 23,435 24,655 23,360 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 26, 2022 June 27, 2021 June 26, 2022 June 27, 2021 NET INCOME $ 116,524 $ 58,985 $ 229,197 $ 106,498 Other comprehensive income, net of tax: Unrealized gain of hedge derivatives — 1,018 757 1,993 Other ( 75 ) ( 11 ) ( 46 ) ( 70 ) Total other comprehensive income ( 75 ) 1,007 711 1,923 COMPREHENSIVE INCOME $ 116,449 $ 59,992 $ 229,908 $ 108,421 See accompanying Notes to Condensed Consolidated Financial Statements. 4 PATRICK INDUSTRIES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) As of (thousands) June 26, 2022 December 31, 2021 ASSETS Current Assets Cash and cash equivalents $ 77,025 $ 122,849 Trade and other receivables, net 355,352 172,392 Inventories 738,908 614,356 Prepaid expenses and other 52,087 64,478 Total current assets 1,223,372 974,075 Property, plant and equipment, net 339,624 319,493 Operating lease right-of-use assets 165,631 158,183 Goodwill 605,086 551,377 Intangible assets, net 683,989 640,456 Other non-current assets 7,129 7,147 TOTAL ASSETS $ 3,024,831 $ 2,650,731 LIABILITIES AND SHAREHOLDERS’ EQUITY Current Liabilities Current maturities of long-term debt $ 7,500 $ 7,500 Current operating lease liabilities 43,211 40,301 Accounts payable 219,315 203,537 Accrued liabilities 203,385 181,439 Total current liabilities 473,411 432,777 Long-term debt, less current maturities, net 1,474,743 1,278,989 Long-term operating lease liabilities 125,198 120,161 Deferred tax liabilities, net 40,515 36,453 Other long-term liabilities 13,374 14,794 TOTAL LIABILITIES 2,127,241 1,883,174 SHAREHOLDERS’ EQUITY Common stock 191,295 196,383 Additional paid-in-capital — 59,668 Accumulated other comprehensive loss ( 1,517 ) ( 2,228 ) Retained earnings 707,812 513,734 TOTAL SHAREHOLDERS’ EQUITY 897,590 767,557 TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 3,024,831 $ 2,650,731 See accompanying Notes to Condensed Consolidated Financial Statements. 5 PATRICK INDUSTRIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Six Months Ended (thousands) June 26, 2022 June 27, 2021 CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 229,197 $ 106,498 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 62,975 48,715 Stock-based compensation expense 10,244 10,336 Amortization of convertible notes debt discount 924 3,643 Deferred income taxes — 8,534 (Gain) loss on sale of property, plant and equipment ( 5,548 ) 33 Other non-cash items 4,193 1,859 Change in operating assets and liabilities, net of acquisitions of businesses: Trade and other receivables, net ( 162,083 ) ( 116,625 ) Inventories ( 90,020 ) ( 54,646 ) Prepaid expenses and other assets 13,463 3,998 Accounts payable, accrued liabilities and other 10,951 66,400 Net cash provided by operating activities 74,296 78,745 CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures ( 44,467 ) ( 26,345 ) Proceeds from sale of property, plant and equipment 7,296 112 Business acquisitions, net of cash acquired ( 150,389 ) ( 252,660 ) Other — ( 2,000 ) Net cash used in investing activities ( 187,560 ) ( 280,893 ) CASH FLOWS FROM FINANCING ACTIVITIES Term debt borrowings — 58,750 Term debt repayments ( 1,875 ) ( 1,250 ) Borrowings on revolver 595,882 425,475 Repayments on revolver ( 455,882 ) ( 565,475 ) Proceeds from senior notes offering — 350,000 Stock repurchases under buyback program ( 40,385 ) ( 21,550 ) Cash dividends paid to shareholders ( 15,666 ) ( 13,061 ) Taxes paid for share-based payment arrangements ( 10,035 ) ( 14,885 ) Payment of deferred financing costs and other — ( 5,798 ) Payment of contingent consideration from a business acquisition ( 4,780 ) ( 1,000 ) Proceeds from exercise of common stock options 181 4,577 Net cash provided by financing activities 67,440 215,783 Increase (decrease) in cash and cash equivalents ( 45,824 ) 13,635 Cash and cash equivalents at beginning of year 122,849 44,767 Cash and cash equivalents at end of period $ 77,025 $ 58,402 See accompanying Notes to Condensed Consolidated Financial Statements. 6 PATRICK INDUSTRIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited) Second Quarter Ended June 26, 2022 (thousands) Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Loss Treasury Stock Retained Earnings Total Balance March 27, 2022 $ 188,433 $ — $ ( 1,442 ) $ — $ 612,981 $ 799,972 Net income — — — — 116,524 116,524 Dividends declared — — — — ( 7,579 ) ( 7,579 ) Other comprehensive loss, net of tax — — ( 75 ) — — ( 75 ) Stock repurchases under buyback program ( 2,416 ) — — — ( 14,114 ) ( 16,530 ) Repurchase of shares for tax payments related to the vesting and exercising of share-based grants ( 36 ) — — — — ( 36 ) Issuance of shares upon exercise of common stock options 181 — — — — 181 Stock-based compensation expense 5,133 — — — — 5,133 Balance June 26, 2022 $ 191,295 $ — $ ( 1,517 ) $ — $ 707,812 $ 897,590 Second Quarter Ended June 27, 2021 (thousands) Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Loss Treasury Stock Retained Earnings Total Balance March 28, 2021 $ 174,920 $ 24,387 $ ( 5,136 ) $ — $ 401,104 $ 595,275 Net income — — — — 58,985 58,985 Dividends declared — — — — ( 6,657 ) ( 6,657 ) Other comprehensive income, net of tax — — 1,007 — — 1,007 Share repurchases under buyback program — — — ( 21,550 ) — ( 21,550 ) Repurchases of shares for tax payments related to the vesting and exercise of share-based grants ( 421 ) — — — — ( 421 ) Issuance of shares in connection with a business combination 10,211 — — — — 10,211 Issuance of shares upon exercise of common stock options 383 — 383 Stock-based compensation expense 6,038 — — — — 6,038 Balance June 27, 2021 $ 191,131 $ 24,387 $ ( 4,129 ) $ ( 21,550 ) $ 453,432 $ 643,271 7 PATRICK INDUSTRIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited) Six Months Ended June 26, 2022 (thousands) Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Loss Treasury Stock Retained Earnings Total Balance December 31, 2021 $ 196,383 $ 59,668 $ ( 2,228 ) $ — $ 513,734 $ 767,557 Impact of adoption of ASU 2020-06 — ( 59,668 ) — — 15,975 ( 43,693 ) Net income — — — — 229,197 229,197 Dividends declared — — — — ( 15,263 ) ( 15,263 ) Other comprehensive income, net of tax — — 711 — — 711 Share repurchases under buyback program ( 5,478 ) — — — ( 35,831 ) ( 41,309 ) Repurchases of shares for tax payments related to the vesting and exercise of share-based grants ( 10,035 ) — — — — ( 10,035 ) Issuance of shares upon exercise of common stock options 181 — — — — 181 Stock-based compensation expense 10,244 — — — — 10,244 Balance June 26, 2022 $ 191,295 $ — $ ( 1,517 ) $ — $ 707,812 $ 897,590 Six Months Ended June 27, 2021 (thousands) Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Loss Treasury Stock Retained Earnings Total Balance December 31, 2020 $ 180,892 $ 24,387 $ ( 6,052 ) $ — $ 360,214 $ 559,441 Net income — — — — 106,498 106,498 Dividends declared — — — — ( 13,280 ) ( 13,280 ) Other comprehensive income, net of tax — — 1,923 — — 1,923 Share repurchases under buyback program — — — ( 21,550 ) — ( 21,550 ) Repurchases of shares for tax payments related to the vesting and exercise of share-based grants ( 14,885 ) — — — — ( 14,885 ) Issuance of shares in connection with a business combination 10,211 — — — — 10,211 Issuance of shares upon exercise of common stock options 4,577 — — — — 4,577 Stock-based compensation expense 10,336 — — — — 10,336 Balance June 27, 2021 $ 191,131 $ 24,387 $ ( 4,129 ) $ ( 21,550 ) $ 453,432 $ 643,271 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 26, 2022 and December 31, 2021, its results of operations for the second quarter and six months ended June 26, 2022 and June 27, 2021, and its cash flows for the six months ended June 26, 2022 and June 27, 2021. 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 condensed 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 of other non-cash items in the condensed consolidated statements of cash flows. 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, 2021. The December 31, 2021 condensed consolidated balance sheet 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 26, 2022 are not necessarily indicative of the results that we will realize or expect for the full year ending December 31, 2022. 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 2022 ended on June 26, 2022 and the second quarter of fiscal year 2021 ended on June 27, 2021. In preparation of Patrick’s condensed consolidated financial statements as of and for the second quarter and six months ended June 26, 2022, management evaluated all subsequent events and transactions that occurred after the balance sheet date through the date of issuance of the Form 10-Q that required recognition or disclosure in the condensed consolidated financial statements. 2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS Accounting for Convertible Instruments and Contracts in an Entity's Own Equity In August 2020, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2020-06, " Accounting for Convertible Instruments and Contracts in an Entity's Own Equity ", a new standard that simplifies certain accounting treatments for convertible debt instruments. The guidance eliminates certain requirements that require separate accounting for embedded conversion features and simplifies the settlement assessment that entities are required to perform to determine whether a contract qualifies for equity classification. In addition, the new guidance requires entities use the if-converted method for all convertible instruments in the diluted net income per share calculation and include the effect of potential share settlement for instruments that may be settled in cash or shares, with certain exceptions. Furthermore, the guidance requires new disclosures about events that occur during the reporting period that cause conversion contingencies to be met and about the fair value of convertible debt at the instrument level, among other things. The guidance is effective for fiscal years beginning after December 15, 2021, with early adoption permitted. We adopted ASU 2020-06 on January 1, 2022 using a modified retrospective transition approach. The primary impact on our condensed consolidated financial statements as a result of the adoption of ASU 2020-06 was a reduction in non-cash interest expense for our 1.00 % Convertible Notes due 2023, an increase in diluted shares outstanding used to 9 calculate diluted net income per share and a resulting reduction in diluted net income per share for the second quarter and first six months of 2022 attributable to the application of the if-converted method for such convertible notes. In addition, the adoption resulted in the recognition of a $ 56.0 million increase to the carrying value of convertible notes payable through a decrease in the convertible notes debt discount, a $ 12.4 million decrease in "Deferred tax liabilities, net", and a $ 59.7 million decrease in "Additional paid-in-capital", resulting in a cumulative adjustment to the opening balance of retained earnings as an increase of $ 16.0 million as of January 1, 2022. In line with the adoption, our diluted share count increased by approximately 2.1 million shares for the second quarter and six months ended June 26, 2022, a 9 % increase. Net income used in the calculation of diluted net income per share increased $ 0.5 million and $ 0.9 million, respectively, for the second quarter and first six months of 2022 in relation to the effect of interest on potentially dilutive convertible notes, as shown in Note 8. The adoption resulted in an overall decrease of $ 0.41 and $ 0.81 , respectively, to diluted net income per share for the second quarter and first six months of 2022. There was no impact on the Company's condensed consolidated statement of cash flows upon adoption of ASU 2020-06. 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. The Company is currently evaluating the impact of this standard on our condensed 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 26, 2022 (thousands) Manufacturing Distribution Total Market type: Recreational Vehicle $ 575,338 $ 262,097 $ 837,435 Marine 272,996 17,327 290,323 Manufactured Housing 99,020 101,371 200,391 Industrial 136,621 10,923 147,544 Total $ 1,083,975 $ 391,718 $ 1,475,693 Second Quarter Ended June 27, 2021 (thousands) Manufacturing Distribution Total Market type: Recreational Vehicle $ 397,613 $ 197,818 $ 595,431 Marine 156,350 10,143 166,493 Manufactured Housing 68,367 70,724 139,091 Industrial 106,711 12,227 118,938 Total $ 729,041 $ 290,912 $ 1,019,953 10 Six Months Ended June 26, 2022 (thousands) Manufacturing Distribution Total Market Type: Recreational Vehicle $ 1,145,360 $ 512,679 $ 1,658,039 Marine 480,497 30,800 511,297 Manufactured Housing 184,006 189,949 373,955 Industrial 253,721 20,856 274,577 Total $ 2,063,584 $ 754,284 $ 2,817,868 Six Months Ended June 27, 2021 (thousands) Manufacturing Distribution Total Market type: Recreational Vehicle $ 727,225 $ 369,632 $ 1,096,857 Marine 288,688 14,614 303,302 Manufactured Housing 125,001 134,808 259,809 Industrial 188,883 21,585 210,468 Total $ 1,329,797 $ 540,639 $ 1,870,436 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. 4. INVENTORIES Inventories consist of the following: (thousands) June 26, 2022 December 31, 2021 Raw materials $ 384,459 $ 315,269 Work in process 28,718 30,801 Finished goods 123,806 101,763 Less: reserve for inventory obsolescence ( 13,884 ) ( 9,573 ) Total manufactured goods, net 523,099 438,260 Materials purchased for resale (distribution products) 221,717 181,921 Less: reserve for inventory obsolescence ( 5,908 ) ( 5,825 ) Total materials purchased for resale (distribution products), net 215,809 176,096 Total inventories $ 738,908 $ 614,356 11 5. GOODWILL AND INTANGIBLE ASSETS Changes in the carrying amount of goodwill for the six months ended June 26, 2022 by segment are as follows: (thousands) Manufacturing Distribution Total Balance - December 31, 2021 $ 481,906 $ 69,471 $ 551,377 Acquisitions 53,972 — 53,972 Adjustments to preliminary purchase price allocations ( 2,033 ) 1,770 ( 263 ) Balance - June 26, 2022 $ 533,845 $ 71,241 $ 605,086 Intangible assets, net consist of the following as of June 26, 2022 and December 31, 2021: (thousands) June 26, 2022 December 31, 2021 Customer relationships $ 667,003 $ 617,814 Non-compete agreements 23,212 21,284 Patents 61,100 50,038 Trademarks 182,657 165,897 933,972 855,033 Less: accumulated amortization ( 249,983 ) ( 214,577 ) Intangible assets, net $ 683,989 $ 640,456 Changes in the carrying value of intangible assets for the six months ended June 26, 2022 by segment are as follows: (thousands) Manufacturing Distribution Total Balance - December 31, 2021 $ 534,827 $ 105,629 $ 640,456 Acquisitions 78,560 — 78,560 Amortization ( 30,217 ) ( 5,189 ) ( 35,406 ) Adjustments to preliminary purchase price allocations ( 1,178 ) 1,557 379 Balance - June 26, 2022 $ 581,992 $ 101,997 $ 683,989 6. ACQUISITIONS General The Company completed two acquisitions in the second quarter of 2022 and completed three acquisitions in the six months ended June 26, 2022 (the "2022 Acquisitions"). For the second quarter and six months ended June 26, 2022, net sales included in the Company's condensed consolidated statements of income related to the 2022 Acquisitions were $ 40.8 million and $ 49.2 million, respectively, and operating income was $ 7.6 million and $ 9.0 million, respectively. Acquisition-related costs associated with the 2022 Acquisitions were immaterial. Assets acquired and liabilities assumed in the acquisitions were recorded on the Company’s condensed consolidated balance sheet at their estimated fair values as of the respective dates of acquisition. For each acquisition, the Company completes its allocation of the purchase price to the fair value of acquired assets and liabilities within a one year measurement period. The Company completed three acquisitions in the second quarter of 2021 and completed seven acquisitions in the six months ended June 27, 2021. For the second quarter and six months ended June 27, 2021, net sales included in the Company's condensed consolidated statements of income related to the acquisitions completed in the first six months of 2021 were $ 56.7 million and $ 62.1 million, respectively, and operating income relating to acquisitions was $ 6.0 million for each of these periods. 12 For each acquisition, the excess of the purchase consideration over the fair value of the net assets acquired is recorded as goodwill, which generally represents the combined value of the Company’s existing purchasing, manufacturing, sales, and systems resources with the organizational talent and expertise of the acquired companies’ respective management teams to maximize efficiencies, market share growth and net income. In connection with certain acquisitions, if certain financial results for the acquired businesses are achieved, the Company is required to pay additional cash consideration. The Company records a liability for the estimated fair value of the contingent consideration related to each of these acquisitions as part of the initial purchase price based on the present value of the expected future cash flows and the probability of future payments at the date of acquisition. As of June 26, 2022, the aggregate fair value of the estimated contingent consideration payments was $ 10.7 million, of which $ 7.2 million is included in "Accrued liabilities" and $ 3.5 million is included in “Other long-term liabilities” on the condensed consolidated balance sheet. At December 31, 2021, the fair value of the estimated contingent consideration payments was $ 12.3 million, of which $ 7.0 million was included in the line item "Accrued liabilities" and $ 5.3 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 $ 15.0 million in the aggregate as of June 26, 2022. In the second quarter and six months ended June 26, 2022, the Company recorded $ 1.9 million and $ 3.0 million, respectively, in non-cash increases to contingent consideration liabilities, which are reflected as charges within selling, general and administrative expense in the condensed consolidated statement of income, representing changes in the amount of consideration expected to be paid. These charges relate to changes in projected performance of certain acquisitions compared to the projected performance originally used in calculating the projected fair values of the contingent consideration of such acquisitions. In the second quarter and six months ended June 26, 2022, the Company made cash payments of approximately $ 1.0 million and $ 6.4 million, respectively, related to contingent consideration liabilities, recording a corresponding reduction to accrued liabilities. 2022 Acquisitions The Company completed three acquisitions in the six months ended June 26, 2022, including the following two previously announced acquisitions: Company Segment Description Rockford Corporation Manufacturing Designer and manufacturer of audio systems and components through its brand Rockford Fosgate®, primarily serving the powersports and automotive aftermarkets, based in Tempe, Arizona, acquired in March 2022 Diamondback Towers, LLC Manufacturing Manufacturer of wakeboard/ski towers and accessories for marine original equipment manufacturers ("OEMs"), based in Cocoa, Florida, acquired in May 2022 Inclusive of one acquisition not discussed above, total cash consideration for the 2022 Acquisitions was approximately $ 149.7 million. One of the 2022 Acquisitions, Rockford Corporation, accounted for $ 132.6 million in total consideration, $ 20.6 million in trade receivables, $ 32.7 million in inventory, $ 1.4 million in prepaid expenses, $ 5.3 million in fixed assets, $ 2.9 million in operating right-of-use assets, $ 70.0 million in intangible assets, $ 24.3 million in accounts payable and accrued liabilities, $ 2.9 million in operating right-of-use obligations, $ 16.7 million in deferred tax liabilities, and $ 43.5 million in goodwill. 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. 13 2021 Acquisitions The Company completed 13 acquisitions in the year ended December 31, 2021, including the following seven previously announced acquisitions (together, the "2021 Acquisitions"): Company Segment Description Sea-Dog Corporation & Sea-Lect Plastics (collectively, "Sea-Dog") Distribution & Manufacturing Distributor of a variety of marine and powersports hardware and accessories to distributors, wholesalers, retailers, and manufacturers and provider of plastic injection molding, design, product development and tooling to companies and government entities, based in Everett, Washington, acquired in March 2021. Hyperform, Inc. Manufacturing Manufacturer of high-quality, non-slip foam flooring, operating under the SeaDek brand name, for the marine OEM market and aftermarket as well as serving the pool and spa, powersports and utility markets under the SwimDek and EndeavorDek brand names, with manufacturing facilities in Rockledge, Florida and Cocoa, Florida, acquired in April 2021. Alpha Systems, LLC Manufacturing & Distribution Manufacturer and distributor of component products and accessories for the RV, marine, manufactured housing and industrial end markets including adhesives, sealants, rubber roofing, roto/blow molding and injection molding products, flooring, insulation, shutters, skylights, and various other products and accessories, operating out of nine facilities in Elkhart, Indiana, acquired in May 2021. Coyote Manufacturing Company Manufacturing Designer, fabricator, and manufacturer of a variety of steel and aluminum products, including boat trailers, towers, T-tops, leaning posts, and other custom components primarily for the marine OEM market, based in Nashville, Georgia, acquired in August 2021. Tumacs Covers Manufacturing Manufacturer of custom designed boat covers, canvas frames, and bimini tops, primarily serving large marine OEMs and dealers, headquartered in Pittsburgh, Pennsylvania, with manufacturing facilities in Indiana and Pennsylvania, and a distribution/service center in Michigan, acquired in August 2021. Wet Sounds, Inc. & Katalyst Industries LLC (collectively "Wet Sounds") Manufacturing Designer, engineer, and fabricator of innovative audio systems and accessories, including amplifiers, tower speakers, soundbars, and subwoofers sold directly to OEMs and consumers, and to dealers and retailers, primarily within the marine market as well as to the home audio and powersports markets and aftermarkets, based in Rosenburg, Texas, acquired in November 2021. Williamsburg Marine LLC & Williamsburg Furniture, Inc. (collectively "Williamsburg") Manufacturing Manufacturer of seating for the RV and marine end markets sold primarily to OEMs, based in Milford and Nappanee, Indiana, acquired in November 2021. Inclusive of six acquisitions not discussed above, total cash consideration for the 2021 Acquisitions was approximately $ 509.3 million, plus contingent consideration over a one to three-year period based on future performance in connection with certain acquisitions. The preliminary purchase price allocations are subject to valuation activities being finalized, primarily related to the valuation of property, plant, and equipment and intangible assets, and thus certain purchase accounting adjustments are subject to change within the measurement period as the Company finalizes its estimates. Purchase accounting adjustments are complete for all 2021 Acquisitions completed through June 27, 2021. Changes to preliminary purchase accounting estimates recorded in the second quarter ended June 26, 2022 related to the 2021 Acquisitions, individually and in the aggregate, were immaterial and relate primarily to the valuation of intangible and fixed assets. 14 The following table summarizes the fair values of the assets acquired and the liabilities assumed as of the date of acquisition for the 2022 Acquisitions and the 2021 Acquisitions: (thousands) 2022 Acquisitions 2021 Acquisitions Consideration Cash, net of cash acquired (1) $ 149,736 $ 509,339 Working capital holdback and other, net (2) 2,939 ( 279 ) Common stock issuance (3) — 10,211 Contingent consideration (4) 1,600 4,730 Total consideration 154,275 524,001 Assets Acquired Trade receivables $ 21,472 $ 26,218 Inventories 34,690 69,343 Prepaid expenses & other 1,395 13,740 Property, plant & equipment 6,813 55,470 Operating lease right-of-use assets 3,516 25,530 Identifiable intangible assets 77,890 245,924 Liabilities Assumed Current portion of operating lease obligations ( 785 ) ( 5,518 ) Accounts payable & accrued liabilities ( 25,282 ) ( 32,326 ) Operating lease obligations ( 2,731 ) ( 20,012 ) Deferred tax liabilities and other long-term liabilities ( 16,675 ) ( 1,996 ) Total fair value of net assets acquired 100,303 376,373 Goodwill (5) 53,972 147,628 $ 154,275 $ 524,001 (1) Amounts include cash used to pay off outstanding debt obligations at the time of acquisition. (2) Certain acquisitions contain working capital holdbacks which are typically settled after a 90 -day period following the close of the acquisition. This value represents the remaining amounts due to (from) sellers as of June 26, 2022. (3) In connection with one of the 2021 Acquisitions, the Company issued 113,961 shares of common stock at a closing price of $ 89.60 as of the acquisition date. (4) These amounts reflect the acquisition date fair value of contingent consideration based on expected future results relating to certain acquisitions. (5) Goodwill is tax-deductible for the 2022 Acquisitions, except Rockford Corporation (approximately $ 43.5 million), and for the 2021 Acquisitions, except Tumacs Covers (approximately $ 6.2 million). We estimate the value of acquired property, plant, and equipment using a combination of the income, cost, and market approaches, such as estimates of future income growth, capitalization rates, discount rates, and capital expenditure needs of the acquired businesses. We estimate the value of customer relationships using the multi-period excess earnings method, which is a variation on the income approach, calculating the present value of incremental after-tax cash flows attributable to the asset. Non-compete agreements are valued using a discounted cash flow approach, which is a variation of an income approach, with and without the individual counterparties to the non-compete agreements. Trademarks and patents are valued using the relief-from-royalty method, which applies an estimated royalty rate to forecasted future cash flows, discounted to present value. 15 The following table presents our estimates of identifiable intangible assets for the 2022 Acquisitions and the 2021 Acquisitions: (thousands, except year data) Estimated Useful Life (in years) 2022 Acquisitions 2021 Acquisitions Customer relationships 10 $ 48,490 $ 161,652 Non-compete agreements 5 2,410 4,913 Patents 10 - 18 10,041 27,310 Trademarks Indefinite 16,949 52,049 $ 77,890 $ 245,924 For the acquisition of Rockford Corporation previously mentioned, the $ 70.0 million of identifiable intangible assets consists of $ 42.0 million for customer relationships, $ 2.1 million for non-compete agreements, $ 10.5 million for patents (estimated useful life of 15 years), and $ 15.4 million for trademarks. Pro Forma Information The following pro forma information for the second quarter and six months ended June 26, 2022 and June 27, 2021 assumes the 2022 Acquisitions and the 2021 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 2022 Acquisitions and 2021 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 $ 0.1 million and $ 1.1 million for the second quarter and six months ended June 26, 2022, respectively, and $ 4.6 million and $ 10.8 million for the second quarter and six months ended June 27, 2021, respectively. Second Quarter Ended Six Months Ended (thousands, except per share data) June 26, 2022 June 27, 2021 June 26, 2022 June 27, 2021 Revenue $ 1,478,392 $ 1,123,924 $ 2,852,364 $ 2,114,986 Net income 116,560 69,338 231,928 128,097 Basic net income per common share 5.24 3.02 10.37 5.61 Diluted net income per common share 4.79 2.96 9.44 5.48 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 approximately $ 5.1 million and $ 10.2 million in the second quarter and six months ended June 26, 2022, respectively, for its stock-based compensation plans in the condensed consolidated statements of income. Stock-based compensation expense of $ 6.0 million and $ 10.3 million was recorded in the second quarter and six months ended June 27, 2021, respectively. The Board approved various stock-based grants under the Company’s 2009 Omnibus Incentive Plan in the six months ended June 26, 2022 totaling 235,869 shares in the aggregate at an average fair value of $ 64.63 at grant date for a total fair value at grant date of $ 15.2 million. 16 As of June 26, 2022, there was approximately $ 30.9 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 18.7 months. 8. NET INCOME PER COMMON SHARE Net income per common share calculated for the second quarter and six months of 2022 and 2021 is as follows: Second Quarter Ended Six Months Ended (thousands except per share data) June 26, 2022 June 27, 2021 June 26, 2022 June 27, 2021 Numerator: Net income for basic per share calculation $ 116,524 $ 58,985 $ 229,197 $ 106,498 Effect of interest on potentially dilutive convertible notes, net of tax 481 — 939 — Net income for dilutive per share calculation $ 117,005 $ 58,985 $ 230,136 $ 106,498 Denominator: Weighted average common shares outstanding - basic 22,230 22,948 22,369 22,844 Weighted average impact of potentially dilutive convertible notes 2,052 — 2,047 — Weighted average impact of potentially dilutive securities 162 487 239 516 Weighted average common shares outstanding - diluted 24,444 23,435 24,655 23,360 Net income per common share: Basic net income per common share $ 5.24 $ 2.57 $ 10.25 $ 4.66 Diluted net income per common share $ 4.79 $ 2.52 $ 9.33 $ 4.56 An immaterial amount of securities was not included in the computation of diluted income per share as they are considered anti-dilutive under the treasury stock method for all periods presented. 17 9. DEBT A summary of total debt outstanding at June 26, 2022 and December 31, 2021 is as follows: (thousands) June 26, 2022 December 31, 2021 Long-term debt: 1.00 % convertible notes due 2023 $ 172,500 $ 172,500 Term loan due 2026 142,500 144,375 Revolver due 2026 275,000 135,000 7.50 % senior notes due 2027 300,000 300,000 1.75 % convertible notes due 2028 258,750 258,750 4.75 % senior notes due 2029 350,000 350,000 Total long-term debt 1,498,750 1,360,625 Less: convertible notes debt discount, net ( 7,275 ) ( 64,245 ) Less: term loan deferred financing costs, net ( 552 ) ( 624 ) Less: senior notes deferred financing costs, net ( 8,680 ) ( 9,267 ) Less: current maturities of long-term debt ( 7,500 ) ( 7,500 ) Total long-term debt, less current maturities, net $ 1,474,743 $ 1,278,989 There were no material changes to any of our debt arrangements during the second quarter and six months ended June 26, 2022. The decrease in the convertible notes debt discount reflects the impact of the adoption of ASU 2020-06 on the carrying value of the convertible notes. The interest rate for incremental borrowings under the Revolver due 2026 at June 26, 2022 was LIBOR plus 1.50 % (or 2.52 %) for the LIBOR-based option. The fee payable on committed but unused portions of the Revolver due 2026 was 0.20 % at June 26, 2022. Total cash interest paid for the second quarter of 2022 and 2021 was $ 23.9 million and $ 14.1 million, respectively, and $ 27.1 million and $ 17.4 million for the comparative six month periods, 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 previously entered into interest rate swaps, which matured in March 2022, and therefore have no further associated liability as of June 26, 2022. The following table summarizes the fair value of derivative contracts included in the condensed consolidated balance sheets (in thousands): Fair value of derivative instruments Derivatives accounted for as cash flow hedges Balance sheet location June 26, 2022 December 31, 2021 Interest rate swaps Accrued liabilities $ — $ 1,017 The interest rate swaps were comprised of over-the-counter derivatives, which are valued using models that primarily rely on observable inputs such as yield curves and are classified as Level 2 in the fair value hierarchy. 18 11. LEASES Lease expense, supplemental cash flow information, and other information related to leases were as follows: Second Quarter Ended (thousands) June 26, 2022 June 27, 2021 Operating lease cost $ 12,563 $ 10,353 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows for operating leases $ 12,308 $ 10,117 Right-of-use assets obtained in exchange for lease obligations: Operating leases $ 6,007 $ 24,806 Six Months Ended (thousands) June 26, 2022 June 27, 2021 Operating lease cost $ 24,727 $ 19,938 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows for operating leases $ 24,235 $ 19,504 Right-of-use assets obtained in exchange for lease obligations: Operating leases $ 29,732 $ 39,991 Balance sheet information related to leases was as follows: (thousands, except lease term and discount rate) June 26, 2022 December 31, 2021 Assets Operating lease right-of-use assets $ 165,631 $ 158,183 Liabilities Operating lease liabilities, current portion $ 43,211 $ 40,301 Long-term operating lease liabilities 125,198 120,161 Total lease liabilities $ 168,409 $ 160,462 Weighted average remaining lease term, operating leases (in years) 5.2 5.1 Weighted average discount rate, operating leases 3.8 % 3.8 % 19 Maturities of lease liabilities were as follows at June 26, 2022: (thousands) 2022 (excluding the six months ended June 26, 2022) $ 24,868 2023 46,133 2024 38,068 2025 28,319 2026 18,379 Thereafter 31,741 Total lease payments 187,508 Less imputed interest ( 19,099 ) Total $ 168,409 As of June 26, 2022, outstanding leases have remaining lease terms ranging from 1 year to 17 years. 12. FAIR VALUE MEASUREMENTS The following table presents fair values of certain assets and liabilities at June 26, 2022 and December 31, 2021: June 26, 2022 December 31, 2021 (in millions) Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 Cash equivalents (1) $ 38.0 $ — $ — $ 118.4 $ — $ — 7.50 % senior notes due 2027 (2) — 286.1 — — 319.5 — 4.75 % senior notes due 2029 (2) — 273.8 — — 350.6 — 1.75 % convertible notes due 2028 (2) — 209.9 — — 269.8 — 1.00 % convertible notes due 2023 (2) — 170.2 — — 194.1 — Term loan due 2026 (3) — 142.5 — — 144.4 — Revolver due 2026 (3) — 275.0 — — 135.0 — Interest rate swaps (4) — — — — 1.0 — Contingent consideration (5) — — 10.7 — — 12.3 (1) The carrying amounts of cash equivalents, representing government and other money market funds traded in an active market with relatively short maturities, are reported on the condensed consolidated balance sheet as of June 26, 2022 and December 31, 2021 as a component of "Cash and cash equivalents". (2) The amounts of these notes listed above are the current fair values for disclosure purposes only, and they are recorded in the Company's condensed consolidated balance sheets as of June 26, 2022 and December 31, 2021 using the interest rate method. (3) The carrying amounts of our term loan and revolver approximate fair value as of June 26, 2022 and December 31, 2021 based upon their terms and conditions in comparison to the terms and conditions of debt instruments with similar terms and conditions available at those dates. (4) The interest rate swaps are discussed further in Note 10. (5) The estimated fair value of the Company's contingent consideration is discussed further in Note 6. 13. INCOME TAXES The effective tax rate in the second quarter of 2022 and 2021 was 26.8 % and 26.9 %, respectively, and the effective tax rate for the comparable six month periods was 25.1 % and 22.8 %, respectively. The first six months of 2022 and 2021 rates include the impact of the recognition of excess tax benefits on share-based compensation that was recorded as a reduction to income tax expense in the amount of $ 4.0 million and $ 5.7 million, respectively. 20 Cash paid for income taxes, net of refunds, was $ 58.1 million and $ 76.5 million, respectively, in the second quarter and first six months of 2022 and $ 24.0 million and $ 24.1 million, respectively, in the second quarter and first six months of 2021. 14. 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 26, 2022 (thousands) Manufacturing Distribution Total Net outside sales $ 1,083,975 $ 391,718 $ 1,475,693 Intersegment sales 24,969 1,916 26,885 Total sales 1,108,944 393,634 1,502,578 Operating income 180,685 43,641 224,326 Second Quarter Ended June 27, 2021 (thousands) Manufacturing Distribution Total Net outside sales $ 729,041 $ 290,912 $ 1,019,953 Intersegment sales 16,042 1,517 17,559 Total sales 745,083 292,429 1,037,512 Operating income 99,428 31,201 130,629 Six Months Ended June 26, 2022 (thousands) Manufacturing Distribution Total Net outside sales $ 2,063,584 $ 754,284 $ 2,817,868 Intersegment sales 43,945 5,084 49,029 Total sales 2,107,529 759,368 2,866,897 Operating income 351,229 89,607 440,836 Six Months Ended June 27, 2021 (thousands) Manufacturing Distribution Total Net outside sales $ 1,329,797 $ 540,639 $ 1,870,436 Intersegment sales 29,850 2,920 32,770 Total sales 1,359,647 543,559 1,903,206 Operating income 177,857 52,376 230,233 21 The following table presents a reconciliation of segment operating income to consolidated operating income: Second Quarter Ended Six Months Ended (thousands) June 26, 2022 June 27, 2021 June 26, 2022 June 27, 2021 Operating income for reportable segments $ 224,326 $ 130,629 $ 440,836 $ 230,233 Unallocated corporate expenses ( 31,754 ) ( 21,332 ) ( 69,648 ) ( 40,549 ) Amortization ( 18,545 ) ( 14,031 ) ( 35,406 ) ( 25,937 ) Consolidated operating income $ 174,027 $ 95,266 $ 335,782 $ 163,747 Unallocated corporate expenses include corporate general and administrative expenses comprised of wages and other compensation, insurance, taxes, supplies, travel and entertainment, professional fees, amortization of inventory step-up adjustments, and other. The following table presents an allocation of total assets to the reportable segments of the Company and a reconciliation to consolidated total assets: (thousands) June 26, 2022 December 31, 2021 Manufacturing assets $ 2,392,993 $ 2,031,465 Distribution assets 522,227 464,575 Assets for reportable segments 2,915,220 2,496,040 Corporate assets unallocated to segments 32,586 31,842 Cash and cash equivalents 77,025 122,849 Consolidated total assets $ 3,024,831 $ 2,650,731 15. STOCK REPURCHASE PROGRAMS In January 2022, the Company's Board authorized an increase in the amount of the Company's common stock that may be acquired over the next 24 months under the current stock repurchase program to $ 100 million, including the $ 11.0 million remaining under the previous authorization. Approximately $ 70.3 million remains in the amount of the Company's common stock that may be acquired under the current stock repurchase program as of June 26, 2022. The Company repurchased 288,627 shares of its common stock at an average price of $ 57.28 for an aggregate cost of $ 16.5 million in the second quarter ended June 26, 2022, and 654,254 shares of its common stock at an average price of $ 63.14 for an aggregate cost of $ 41.3 million in the six months ended June 26, 2022. The Company repurchased 260,000 shares of its common stock at an average price of $ 82.89 for an aggregate cost of $ 21.6 million in the second quarter and six months ended June 27, 2021. 16. COMMITMENTS AND CONTINGENCIES The Company is subject to proceedings, lawsuits, audits, and other claims arising in the normal course of business. All such matters are subject to uncertainties and outcomes that are not predictable with assurance. Accruals for these items, when applicable, have been provided to the extent that losses are deemed probable and are reasonably estimable. These accruals are adjusted from time to time as developments warrant. Although the ultimate outcome of these matters cannot be ascertained, on the basis of present information, amounts already provided, availability of insurance coverage and legal advice received, it is the opinion of management that the ultimate resolution of these proceedings, lawsuits, and other claims will not have a material adverse effect on the Company’s financial position, results of operations, or cash flows. The Company disclosed litigation concerning the Lusher Site Remediation Group in the Company's 2021 Form 10-K. The Company has also been named as a potentially responsible party for the related Lusher Street Groundwater Contamination Superfund Site (the "Superfund Site") by the U.S. Environmental Protection Agency (the "EPA"). The 22 Company sold certain parcels of real property that the EPA contends are connected to the Superfund Site (the "Divested Properties") in January 2022 for a pretax gain on disposal of $ 5.5 million that is included in Selling, general and administrative expenses in the Company's condensed consolidated statements of income for the first six months of 2022. The purchaser agreed to indemnify, defend and hold the Company harmless for all liability and exposure, both private and to all EPA claims, concerning and relating to the Divested Properties. No further proceedings have occurred in the first six months of 2022. As to the real properties that were not among the Divested Properties but remain the subject of the litigation, the Company does not currently believe that the litigation or the Superfund Site matter are likely to have a material adverse impact on its financial condition, results of operations, or cash flows. However, any litigation is inherently uncertain, the EPA has yet to select a final remedy for the Superfund Site, and any judgment or injunctive relief entered against us or any adverse settlement could materially and adversely impact our business, results of operations, financial condition, and prospects. Certain of our customers in the RV end market initiated recalls in 2021 involving certain products that were produced by a third party and sold by our Distribution segment. Although we do not believe we are legally responsible for costs related to the product recall, based on discussions with our customers and other developments subsequent to when these recalls were initiated, we believe it is probable that the Company will bear a portion of the total cost of the recalls. In the fourth quarter of 2021, we recorded an estimate of the Company's cost related to this matter, and have further reached agreements with certain customers in the second quarter of 2022 on the maximum financial obligation we may face. We have recorded an additional immaterial estimate of the Company's costs related to these agreements in the second quarter of 2022. We do not expect this matter to have a material adverse effect on our financial position, results of operations, or cash flows.