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Item 2. Management’s Discussion and Analysis

2023-05-11 compared with 2022-11-03 · 92 added, 156 removed, 89 unchanged (74% of the section changed)

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OVERVIEW OF MARKETS AND RELATED INDUSTRY PERFORMANCE

Third Quarter and Nine Months 2022 Financial Overview

First Quarter 2023 Financial Overview

Recreational Vehicle ("RV") Industry

The RV industry is our primary market and comprised 47% and 60% of the Company’s consolidated net sales in the third quarter ended September 25, 2022 and September 26, 2021, respectively, and 55% and 59% for the comparative nine month periods, respectively.

Net sales to the RV industry decreased 17% in the third quarter of 2022 and increased 26% in the first nine months of 2022, compared to the prior year periods.

According to the Recreation Vehicle Industry Association ("RVIA"), RV wholesale shipments decreased 40% in the third quarter of 2022 to approximately 91,800 units from approximately 152,400 units in the third quarter of 2021.

While we estimate RV retail unit sales for the third quarter of 2022 decreased 20% compared to the third quarter of 2021, retail sales still exceeded wholesale shipments in the third quarter of 2022 as a result of the significant reduction in RV OEM production.

RV wholesale unit shipments for the first nine months of 2022 totaled approximately 415,600 units, a decrease of 8% from approximately 452,600 units in the comparative prior year period.

We estimate that RV wholesale unit shipments exceeded RV retail unit sales in the first nine months of 2022, which we believe indicates a replenishment of RV dealer inventories in the first half of 2022 compared to the historically low levels experienced in the latter part of 2020 and 2021.

RV wholesale shipments for the first six months of 2022 totaled approximately 323,000 units.

We believe that the slowing of RV OEM production in the third quarter of 2022 following the replenishment of RV dealer inventories in the first half of 2022 can assist in ensuring that the health of the inventory channel is maintained.

The RV industry is our primary market and comprised 41% and 61% of the Company’s consolidated net sales in the first quarter ended April 2, 2023 and March 27, 2022, respectively.

Net sales to the RV industry decreased 55% in the first quarter of 2023 compared to the prior year period.

According to the Recreation Vehicle Industry Association ("RVIA"), RV wholesale shipments decreased 54% in the first quarter of 2023 to approximately 78,600 units from approximately 171,900 units in the first quarter of 2022.

While we estimate RV industry retail unit sales for the first quarter of 2023 decreased approximately 8% compared to the first quarter of 2022, industry retail sales still exceeded wholesale shipments in the first quarter of 2023 as RV OEMs reduced production to maintain a more balanced inventory channel in alignment with lower retail demand primarily related to macroeconomic conditions.

Marine Industry

Net sales to the marine industry, which represented approximately 24% and 16% of the Company's consolidated net sales in the third quarter ended September 25, 2022 and September 26, 2021, respectively, increased 57% in the third quarter of 2022 compared to the prior year quarter.

For the first nine months of 2022 and 2021, net sales to the marine industry represented 20% and 16% of our consolidated net sales, respectively, increasing 64% in 2022 compared to the prior year period.

Our marine revenue is generally correlated to marine wholesale powerboat unit shipments, which, according to Company estimates based on data published by the National Marine Manufacturers Association ("NMMA"), increased 5% for the third quarter of 2022 and increased 5% for the first nine months of 2022, compared to the prior year periods.We estimate that marine retail powerboat unit sales decreased an estimated 4% and 13% in the third quarter and first nine months of 2022, respectively, compared to the prior year periods, primarily as a result of a limited retail units available for purchase caused in part by shortages in motors and certain electronic components used in OEM production.

Estimated retail shipments continued to outpace wholesale shipments in the third quarter of 2022, and we estimate that marine dealer inventory levels continue to remain low.

Net sales to the marine industry, which represented approximately 31% and 16% of the Company's consolidated net sales in the first quarter ended April 2, 2023 and March 27, 2022, respectively, increased 25% in the first quarter of 2023 compared to the prior year period.

The increase in net sales beyond industry volumes is driven primarily by acquisitions completed in 2022, product mix, and market share gains.

Our marine revenue is generally correlated to marine industry wholesale powerboat unit shipments, which, according to Company estimates based on data published by the National Marine Manufacturers Association ("NMMA"), increased 14% for the first quarter of 2023 compared to the prior year period.

We estimate that marine industry retail powerboat unit sales decreased an estimated 19% in the first quarter of 2023 compared to the prior year period primarily due to the current macroeconomic environment faced by the end consumer.

Estimated wholesale shipments were higher than estimated retail unit sales as dealer inventories increased from recent historically low levels.

Manufactured Housing ("MH") Industry

Net sales to the MH industry, which represented 16% and 13% of the Company’s consolidated net sales in the third quarter of 2022 and 2021, respectively, increased 30% in the third quarter of 2022 compared to the third quarter of 2021.

MH sales represented 14% of the Company’s consolidated net sales in each of the first nine months of 2022 and 2021, respectively, and increased 39% in the first nine months of 2022 compared to the first nine months of 2021.

Based on industry data from the Manufactured Housing Institute, MH wholesale unit shipments increased 10% in the third quarter of 2022 and increased 13% in the first nine months of 2022 compared to the prior year periods.

Net sales to the MH industry, which represented 15% and 13% of the Company’s consolidated net sales in the first quarter of 2023 and 2022, respectively, decreased 23% in the first quarter of 2023 compared to the prior year period.

Based on industry data from the Manufactured Housing Institute, MH industry wholesale unit shipments decreased 29% in the first quarter of 2023 compared to the prior year period primarily driven by persistent inflation and elevated interest rates that caused OEMs to adjust production based on anticipated lower consumer demand.

Industrial Market

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

Net sales to this market represented 13% and 11% of our consolidated net sales in the third quarter of 2022 and 2021, respectively, and increased 19% in the third quarter of 2022 compared to the prior year quarter.

Industrial net sales represented 11% of the Company’s sales in each of the first nine months of 2022 and 2021, respectively, and increased 26% in the first nine months of 2022 compared to the first nine months of 2021.

Net sales to this market represented 13% and 10% of our consolidated net sales in the first quarter of 2023 and 2022, respectively, and decreased 3% in the first quarter of 2023 compared to the prior year period.

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

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According to the U.S.

Census Bureau, combined new housing starts decreased 7% in the third quarter of 2022 compared to the prior year quarter, with single family housing starts decreasing 18% and multifamily housing starts increasing 19% for the same period.

For the first nine months of 2022, combined new housing starts increased 1%, with single family housing starts decreasing 6% and multifamily housing starts increasing 18% for the same period.

Census Bureau, combined new housing starts decreased 18% in the first quarter of 2023 compared to the prior year quarter, due to industry headwinds from elevated interest rates, persistent inflation and decreased housing affordability, particularly in the single-family market.

Single-family housing starts decreased 29% compared to the prior year period, while multifamily housing starts increased 5% 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.

REVIEW OF CONSOLIDATED OPERATING RESULTS

Third Quarter and Nine Months Ended September 25, 2022 Compared to 2021

First Quarter Ended April 2, 2023 Compared to 2022

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

($ in thousands) September 25, 2022 September 26, 2021 Amount Change % Change

Net sales $ 1,112,089 100.0 % $ 1,060,177 100.0 % $ 51,912 5 %

Cost of goods sold 875,638 78.7 % 852,016 80.4 % 23,622 3 %

Gross profit 236,451 21.3 % 208,161 19.6 % 28,290 14 %

Warehouse and delivery expenses 39,997 3.6 % 35,885 3.4 % 4,112 11 %

Selling, general and administrative expenses 84,924 7.6 % 64,245 6.1 % 20,679 32 %

Amortization of intangible assets 18,769 1.7 % 14,758 1.4 % 4,011 27 %

Operating income 92,761 8.3 % 93,273 8.8 % (512) (1) %

Interest expense, net 15,302 1.4 % 15,436 1.5 % (134) (1) %

Income taxes 18,640 1.7 % 20,440 1.9 % (1,800) (9) %

Net income $ 58,819 5.3 % $ 57,397 5.4 % $ 1,422 2 %

Nine Months Ended

($ in thousands) September 25, 2022 September 26, 2021 Amount Change % Change

First Quarter Ended

($ in thousands) April 2, 2023 March 27, 2022 Amount Change % Change

Net sales $ 900,100 100.0 % $ 1,342,175 100.0 % $ (442,075) (33) %

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Net income $ 30,173 3.4 % $ 112,673 8.4 % $ (82,500) (73) %

Net sales in the third quarter of 2022 increased $51.9 million, or 5%, to $1,112.1 million from $1,060.2 million in the third quarter of 2021.

The net sales increase in the third quarter of 2022 reflects continued demand for our products in the marine, MH and industrial markets, as well as the contribution of acquisitions completed in 2021 and 2022, partially offset by a decline in RV market sales resulting from a reduction in RV OEM production.

The Company's RV market sales decreased 17%, marine market sales increased 57%, MH market sales increased 30% and industrial market sales increased 19% when compared to the prior year quarter.

Net sales in the fi rst nine months of 2022 increased $999.4 million, or 34%, to $3,930.0 million from $2,930.6 million in the fi rst nine months of 2021.

The net sales increase in the fi rst nine months of 2022 reflects continued demand for our products across all our end markets, as well as the contribution of acquisitions completed in 2021 and 2022.

The Company's RV market sales increased 26%, marine market sales increased 64%, MH market sales increased 39% and industrial market sales increased 26% when compared to the prior year period.

Revenue attributable to acquisitions completed in the first nine months of 2022 was $38.0 million in the third quarter of 2022 and $87.3 million in the fi rst nine months of 2022 .

Revenue attributable to acquisitions completed in the first nine months of 2021 was $84.0 million in the third quarter of 2021 and $146.1 million in the fi rst nine months of 2021 .

The Company’s RV content per wholesale unit (on a trailing twelve-month basis) for the third quarter of 2022 increased approximately 36% to $5,071 fr om $3,735 for the third quarter of 2021 .

Marine powerboat content per wholesale unit (on a trailing twelve-month basis) for the third quarter of 2022 increased approximately 60% to an estimated $5,109 from $3,196 for the third quarter of 2021.

MH content per wholesale unit (on a trailing twelve-month b asis) for the third quarter of 2022 increased approximately 21% to $6,023 from $4,960 for the third quarter of 2021 .

Net sales in the first quarter of 2023 decreased $442.1 million, or 33%, to $900.1 million from $1,342.2 million in the first quarter of 2022.

The net sales decrease in the first quarter of 2023 reflects growth in our marine end market, market share gains, and the contribution of acquisitions completed in 2022 that partially offset a $454 million decline in RV revenues in the quarter resulting from the continued reduction of production by our RV OEM customers and a $40 million decline in manufactured housing net sales due to industry headwinds from elevated financing rates and persistent inflation.

The Company's RV market sales decreased 55%, marine market sales increased 25%, MH market sales decreased 23% and industrial market sales decreased 3% when compared to the prior year quarter.

Revenue attributable to acquisitions completed in the first three months of 2022 was $8.4 million in the first quarter of 2022 .

There were no acquisitions completed in the first three months of 2023.

The Company’s RV content per wholesale unit (on a trailing twelve-month basis) for the first quarter of 2023 increased approximately 22% to $5,349 fr om $4,367 for the first quarter of 2022 .

Marine powerboat content per wholesale unit (on a trailing twelve-month basis) for the first quarter of 2023 increased approximately 27% to an estimated $5,266 from $4,144 for the first quarter of 2022.

MH content per wholesale unit (on a trailing twelve-month b asis) for the first quarter of 2023 increased approximately 16% to $6,366 from $5,487 for the first quarter of 2022 .

These increases in content per wholesale unit reflect market share gains, contributions from businesses acquired in 2022, and favorable pricing.

Cost of Goods Sold.

Cost of goods sold increased $23.6 million, or 3%, to $875.6 million in the third quarte r of 2022 from $852.0 million in 2021.

As a percentage of net sales, cost of goods sold decreased 170 basis points during the third quarter of 2022 to 78.7% from 80.4% in the prior year period.

Cost of goods sold increased $714.7 million, or 30%, to $3,071.1 million in the fi rst nine months of 2022 from $2,356.4 million in 2021.

As a percentage of net sales, cost of goods sold decreased 230 basis points during the fi rst nine months of 2022 to 78.1% from 80.4% in the prior year period.

Cost of goods sold as a percentage of net sales decreased in the third quarter and first nine months of 2022 primarily as a result of (i) continued cost reduction and automation initiatives we deployed throughout 2021 and into 2022 that have begun to have a positive impact on costs, (ii) improved labor efficiencies as a result of investment in human capital and improved retention rates, and (iii) synergies and different cost profiles from acquisitions completed in 2021 and 2022.

For the third quarter of 2022, these three factors contributed to a 110 basis point decrease in labor as a percentage of net sales and 130 basis point decrease in material costs as a percentage of net sales, partially offset by a 70 basis point increase in overhead as a percentage of net sales in part as a result of fixed cost absorption related to reduced RV market sales.

For the first nine months of 2022, these three factors contributed to a 220 basis point decrease in labor as a percentage of net sales and a 40 basis point decrease in overhead as a percentage of net sales, partially offset by a 40 basis point increase in material costs as a percentage of net sales as a result of supply-chain constraints, an increase in certain commodity cost inputs, and $6.8 million of inventory step-up adjustments from purchase accounting related to acquisitions.

Cost of goods sold decreased $340.9 million, or 33%, to $705.9 million in the first quarte r of 2023 from $1,046.8 million in 2022.

As a percentage of net sales, cost of goods sold increased 40 basis points during the first quarter of 2023 to 78.4% from 78.0% in the prior year period.

Cost of goods sold as a percentage of net sales increased in the first quarter of 2023 primarily as a result of reduced industry volume mentioned above that provided less favorable fixed cost absorption when compared to the prior period.

This industry volume-driven impact was partially offset by (i) continued cost reduction and automation initiatives we deployed throughout 2022 and into 2023 that had a positive impact on material costs, (ii) improved labor efficiencies as a result of investment in human capital and improved retention rates, and (iii) synergies and different cost profiles from acquisitions completed in 2022.

For the first quarter of 2023, these factors contributed to a 320 basis point increase in overhead as a percentage of net sales, partially offset by a 20 basis point decrease in labor as a percentage of net sales and a 260 basis point decrease in material costs as a percentage of net sales.

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 production.

Gross Profit.

Gross profit increased $28.3 million, or 14%, to $236.5 million in the third quarter of 2022 from $208.2 million in the prior year period.

As a percentage of net sales, gross profit increased 170 basis points to 21.3% in the third quarter of 2022 from 19.6% in the same period in the prior year period.

Gross profit increased $284.7 million, or 50%, to $858.9 million in the fi rst nine months of 2022 from $574.2 million in 2021.

As a percentage of net sales, gross profit increased 230 basis points to 21.9% in the fi rst nine months of 2022 from 19.6% in the same period in 2021.

The increase in gross profit as a percentage of net sales in the third quarter and nine months ended September 25, 2022 compared to the same periods in 2021 reflects the impact of the factors discussed above under “Cost of Goods Sold”.

Gross profit decreased $101.1 million, or 34%, to $194.2 million in the first quarter of 2023 from $295.3 million in the prior year period.

As a percentage of net sales, gross profit decreased 40 basis points to 21.6% in the first quarter of 2023 from 22.0% in the same period in the prior year period.

The decrease in gross profit as a percentage of net sales in the first quarter of 2023 compared to the same period in 2022 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 11%, to $40.0 million in the third quarter of 2022 from $35.9 million in the third quarter of 2021.

As a percentage of net sales, warehouse and delivery expenses increased 20 basis points to 3.6% in the third quarter of 2022 compared to 3.4% in the third quarter of 2021.

Warehouse and delivery expenses increased $24.6 million, or 24%, to $125.2 million in the fi rst nine months of 2022 from $100.6 million in the fi rst nine months of 2021.

As a percentage of net sales, warehouse and delivery expenses decreased 20 basis points to 3.2% in the fi rst nine months of 2022 compared to 3.4% in the fi rst nine months of 2021.

The increase in warehouse and delivery expenses in the third quarter and first nine months ended September 25, 2022 compared to the same 2021 periods is attributable to the increase in sales.

The increase as a percentage of net sales in the third quarter of 2022 as compared to the same 2021 period is primarily attributable to the higher proportion of MH sales, which have higher warehouse and delivery costs as a percentage of sales, as well as elevated fuel prices and increased insurance rates.

The decrease as a percentage of net sales in the fi rst nine months of 2022 as compared to the same 2021 period is primarily attributable to leveraging certain fixed warehousing costs.

Warehouse and delivery expenses decreased $5.4 million, or 13%, to $35.8 million in the first quarter of 2023 from $41.2 million in the first quarter of 2022.

As a percentage of net sales, warehouse and delivery expenses increased 90 basis points to 4.0% in the first quarter of 2023 compared to 3.1% in the first quarter of 2022.

The decrease in warehouse and delivery expenses in the first quarter of 2023 compared to the same period in 2022 is attributable to the decrease in sales.

The increase as a percentage of net sales in the first quarter of 2023 as compared to the same 2022 period is primarily attributable to elevated fuel prices, increased insurance rates, and the fixed-cost nature of some warehouse and delivery expenses.

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

SG&A expenses increased $20.7 million, or 32%, to $84.9 million in the third quarter of 2022 from $64.2 million in the prior year quarter.

As a percentage of net sales, SG&A expenses were 7.6% in the third quarter of 2022 compared to 6.1% in the third quarter of 2021.

SG&A expenses increased $75.2 million, or 43%, to $251.0 million in the fi rst nine months of 2022 from $175.8 million in the comparative prior year period.

As a percentage of net sales, SG&A expenses were 6.4% in the fi rst nine months of 2022 compared to 6.0% in the fi rst nine months of 2021.

The increase in SG&A expenses in the third quarter and first nine months of 2022 compared to 2021 is primarily due to (i) the increase in net sales, and (ii) increases in the breadth and depth of corporate resources, specifically our investments in human capital, technology and other initiatives to support the size and growth of the Company.

As a percentage of sales, SG&A expenses increased 150 basis points for the third quarter of 2022 compared to the third quarter of 2021 and 40 basis points for the first nine months of 2022 compared to the first nine months of 2021.

These increases are primarily a result of increased expenses related to the enhancement of the Company's healthcare and employee benefit plans and the investments in information technology initiatives.

SG&A expenses increased $6.8 million, or 9%, to $82.4 million in the first quarter of 2023 from $75.6 million in the prior year quarter.

As a percentage of net sales, SG&A expenses were 9.2% in the first quarter of 2023 compared to 5.6% in the first quarter of 2022.

The increase in SG&A expenses in the first quarter of 2023 compared to 2022 is primarily due to continued investments to increase the breadth and depth of corporate resources, specifically human capital, technology and other initiatives to support the size and growth of the Company.

As a percentage of sales, SG&A expenses increased 360 basis points for the first quarter of 2023 compared to the first quarter of 2022.

This increase primarily reflects these continued investments, the decrease in net sales and the fixed-cost nature of certain SG&A expenses.

In addition, certain acquisitions completed in 2022 have higher sales and marketing expenses as a percentage of sales than our other businesses.

Additionally, SG&A in the first quarter of 2022 includes a $5.5 million pre-tax gain on sale of property.

Amortization of Intangible Assets.

Amortization of intangible assets increased $4.0 million, or 27%, to $18.8 million in the third quarter of 2022 from $14.8 million in the prior year quarter.

Amortization of intangible assets increased $13.5 million, or 33%, to $54.2 million in the fi rst nine months of 2022 from $40.7 million in the prior year period.

The increase in the third quarter and fi rst nine months of 2022 compared to the prior year period primarily reflects the impact of businesses acquired in 2021 and 2022.

Amortization of intangible assets increased $2.9 million, or 17%, to $19.8 million in the first quarter of 2023 from $16.9 million in the prior year quarter.

The increase in the first quarter of 2023 compared to the prior year period primarily reflects the impact of businesses acquired in 2022.

Operating Income.

Operating income decreased $0.5 million, or 1%, to $92.8 million in the third quarter of 2022 from $93.3 million in 2021.

As a percentage of net sales, operating income decreased 50 basis points to 8.3% in the third quarter of 2022 versus 8.8% in the same period in 2021.

For the fi rst nine months of 2022, operating income increased $171.5 million, or 67%, to $428.5 million in the first nine months of 2022 from $257.0 million in the same 2021 period.

As a percentage of net sales, operating income increased 210 basis points to 10.9% in the fi rst nine months of 2022 versus 8.8% in the same period in 2021.

Operating income decreased $105.6 million, or 65%, to $56.2 million in the first quarter of 2023 from $161.8 million in 2022.

As a percentage of net sales, operating income decreased 590 basis points to 6.2% in the first quarter of 2023 versus 12.1% in the same period in 2022.

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

Interest Expense, Net.

Interest expense decreased $0.1 million, or 1%, to $15.3 million in the third quarter of 2022 from $15.4 million in the prior year period.

Interest expense increased $3.8 million, or 9%, to $45.0 million in the fi rst nine months of 2022 from $41.2 million in the prior year period.

The increase in interest expense for the first nine months of 2022 reflects (i) increased borrowings related to 2021 and 2022 acquisitions and (ii) the Company's issuance of its 1.75% Convertible Notes due 2028 in December 2021.

These increases were partially offset by (i) a reduction in non-cash interest expense related to our 1.00% Convertible Notes due 2023 as a result of the adoption of ASU 2020-06 in the first quarter of 2022 and (ii) a reduction in interest expense on our credit facility due to the maturity of our interest rate swaps.

Interest expense increased $3.6 million, or 24%, to $18.5 million in the first quarter of 2023 from $14.9 million in the prior year period.

This increase primarily reflects the increase in interest rates on our variable rate debt, as well as repayment of our 1.00% Convertible Senior Notes due 2023 at maturity through borrowings under our revolving credit facility, which has a comparatively higher interest rate.

Income Taxes.

Income tax expense decreased $1.8 million in the third quarter of 2022 to $18.6 million from $20.4 million in the prior year period.

Income tax expense increased $43.6 million in the f i rst nine months of 2022 to $95.5 million from $51.9 million in the prior year period.

The decrease in income tax expense for the third quarter is due primarily to a decrease in pretax income as well as a decreased effective tax rate for the third quarter of 2022 primarily related to adjustments recorded with the completion of our prior period returns and realizing greater research and development credits than originally anticipated.

The increase in income tax expense for the first nine months of 2022 is due primarily to an increase in pretax income.

The effective tax rate in the third quarter of 2022 and 2021 was 24.1% and 26.3%, respectively.

The effective tax rate in the f i rst nine months of 2022 and 2021 was 24.9% and 24.1%, respectively.

The first nine 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.

Income tax expense decreased $26.6 million in the first quarter of 2023 to $7.6 million from $34.2 million in the prior year period.

The decrease in income tax expense is driven primarily by the decrease in income before income taxes.

Additionally, the first quarter of 2023 and 2022 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 $2.3 million and $4.0 million, respectively.

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 Company estimates based on third-party measures of industry volume.

Content per unit metrics are generally calculated using our market sales divided by Company estimates of industry unit volume, which are derived from third-party industry data.

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

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

Third Quarter and Nine Months Ended September 25, 2022 Compared to 2021

First Quarter Ended April 2, 2023 Compared to 2022

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.

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A reconciliation of consolidated operating income is presented in Note 12 of the Notes to Condensed Consolidated Financial Statements.

Third Quarter Ended

(thousands) September 25, 2022 September 26, 2021 Amount Change % Change

Manufacturing $ 846,891 $ 792,299 $ 54,592 7%

Distribution 286,538 289,822 (3,284) (1)%

Manufacturing 182,362 149,139 33,223 22%

Distribution 56,150 57,349 (1,199) (2)%

Operating Income

Manufacturing 109,462 91,370 18,092 20%

Distribution 27,228 31,187 (3,959) (13)%

Nine Months Ended

(thousands) September 25, 2022 September 26, 2021 Amount Change % Change

First Quarter Ended

(thousands) April 2, 2023 March 27, 2022 Amount Change % Change

Manufacturing $ 708,815 $ 998,585 $ (289,770) (29)%

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Manufacturing

Sales increased $54.6 million, or 7%, to $846.9 million in the third quarter of 2022 from $792.3 million in the prior year quarter.

For the f i rst nine months of 2022, sales increased $802.5 million, or 37%, to $2,954.4 million in the f i rst nine months of 2022 from $2,151.9 million in the prior year period.

This segment accounted for approximately 75% and 73% of the Company’s sales for the third quarter of 2022 and 2021, respectively, and 74% and 72% of the Company’s sales for the f i rst nine months of 2022 and 2021, respectively.

The sales increase in the third quarter of 2022 compared to 2021 was attributed to sales increases in the Company's marine, MH and industrial markets partially offset by a decline in RV market sales resulting from a reduction in RV OEM production.

The Company's RV end market sales decreased 18%, the marine end market sales increased 56% , the MH end market sales increased 30% and industrial end market sales increased 21%.

The sales increase in the f i rst nine months of 2022 compared to the same 2021 period was attributed to sales increases in all four of the Company's end markets, where sales to the RV end market increased 29%, marine increased 63% , MH increased 41% and industrial increased 29%.

Net sales in the third quarter and f i rst nine months of 2022 attributable to acquisitions completed in the first nine months of 2022 was approximately $38.0 million and $87.3 million, respectively.

Net sales in the third quarter and f i rst nine months of 2021 attributable to acquisitions completed in the first nine months of 2021 was approximately $63.4 million and $110.1 million, respectively.

Sales decreased $289.8 million, or 29%, to $708.8 million in the first quarter of 2023 from $998.6 million in the prior year quarter.

This segment accounted for approximately 77% and 73% of the Company’s sales for the first quarter of 2023 and 2022, respectively.

The sales decrease in the first quarter of 2023 compared to 2022 was attributed to sales decreases in the Company's RV, MH and industrial markets due to reduced industry wholesale unit shipments in the RV and MH industries and previous slowing of housing starts, partially offset by growth in our marine market sales resulting from market share gains and acquisitions completed in 2022.

The Company's RV end-market sales decreased 56%, the marine end-market sales increased 26% , the MH end-market sales decreased 24% and industrial end-market sales decreased 2%.

Net sales in the first quarter of 2022 attributable to acquisitions completed in the first three months of 2022 was approximately $8.4 million.

There were no acquisitions completed in the first three months of 2023.

Gross Profit .

Gross profit increased $33.3 million, or 22%, to $182.4 million in the third quarter of 2022 from $149.1 million in the third quarter of 2021.

For the f i rst nine months of 2022, gross profit increased $257.3 million, or 61%, to $677.9 million from $420.6 million in the f i rst nine months of 2021.

As a percentage of sales, gross profit increased to 21.5% in the third quarter of 2022 from 18.8% in the third quarter of 2021, and increased to 22.9% in the f i rst nine months of 2022 from 19.5% in the f i rst nine months of 2021.

Gross profit margin increased during the third quarter of 2022 compared to third quarter of 2021 primarily due to a 260 basis point decrease in manufacturing material expense as a percentage of sales and an 80 basis point decrease in manufacturing labor as a percentage of sales, partially offset by a 60 basis point increase in manufacturing overhead as a percentage of sales.

These margin improvements were in part a result of previous and ongoing automation and production efficiency initiatives, as well as the margin profiles of certain acquisitions.

Gross profit margin increased during the first nine months of 2022 compared to the first nine months of 2021 primarily due to a 160 basis point decrease in manufacturing labor as a percentage of sales, a 100 basis point decrease in manufacturing overhead as a percentage of sales, and a 70 basis point decrease in manufacturing material expense as a percentage of sales.

These margin improvements were in part a result of previous and ongoing automation and production efficiency initiatives, as well as the margin profiles of certain acquisitions and leveraging certain fixed costs.

Gross profit decreased $81.2 million, or 34%, to $155.1 million in the first quarter of 2023 from $236.3 million in the first quarter of 2022.

As a percentage of sales, gross profit decreased to 21.9% in the first quarter of 2023 from 23.7% in the first quarter of 2022.

Gross profit as a percentage of sales decreased during the first quarter of 2023 compared to first quarter of 2022 due to a 420 basis point increase in manufacturing overhead as a percentage of sales and a 100 basis point increase in manufacturing labor as a percentage of sales, partially offset by a 340 basis point decrease in manufacturing material expense as a percentage of sales.

Operating Income.

Operating income increased $18.1 million, or 20%, to $109.5 million in the third quarter of 2022 from $91.4 million in the prior year quarter.

For the f i rst nine months of 2022, operating income increased $191.5 million, or 71%, to $460.7 million from $269.2 million in the prior year period.

The overall increase in operating income in the third quarter and f i rst nine months of 2022 primarily reflects the items discussed above.

Sales decreased $3.3 million, or 1%, to $286.5 million in the third quarter of 2022 from $289.8 million in the prior year quarter.

For the f i rst nine months of 2022, sales increased $212.5 million, or 26%, to $1,045.9 million in the f i rst nine months of 2022 from $833.4 million in the prior year period.

This segment accounted for approximately 25% and 27% of the Company’s sales for the third quarter of 2022 and 2021, respectively, and approximately 26% and 28% of the Company’s sales for the f i rst nine months of 2022 and 2021, respectively.

The sales decrease in the third quarter of 2022 compared to the third quarter of 2021 was attributed to a 16% decrease in our RV market sales as a result of reduced wholesale shipments, partially offset by a 74% increase in marine market sales and a 30% increase in MH market sales.

The sales increase in the f i rst nine months of 2022 compared to the f i rst nine months of 2021 was attributed to a 20% increase in our RV market sales, a 97% increase in marine market sales, and a 37% increase in MH market sales, partially offset by a 2% decrease in industrial market sales.

None of the net sales in the third quarter and first nine months of 2022 were attributable to acquisitions completed in the first nine months of 2022.

Net sales in the third quarter and f i rst nine months of 2021 attributable to acquisitions completed in the first nine months of 2021 were approximately $20.6 million and $36.0 million, respectively.

Operating income decreased $83.3 million, or 49%, to $87.2 million in the first quarter of 2023 from $170.5 million in the prior year quarter.

The overall decrease in operating income in the first quarter of 2023 primarily reflects the items discussed above.

Sales decreased $155.5 million, or 43%, to $210.2 million in the first quarter of 2023 from $365.7 million in the prior year quarter.

This segment accounted for approximately 23% and 27% of the Company’s sales for the first quarter of 2023 and 2022, respectively.

The sales decrease in the first quarter of 2023 compared to the first quarter of 2022 was attributed to a 54% decrease in our RV market sales and a 22% decrease in MH market sales as a result of reduced industry wholesale unit shipments in the respective industries, as well as a 9% decrease in industrial sales, partially offset by a 10% increase in marine market sales.

None of the net sales in the first quarter of 2023 or 2022 were attributable to acquisitions completed in the first three months of 2023 or 2022.

Gross Profit.

Gross profit decreased $1.1 million, or 2%, to $56.2 million in the third quarter of 2022 from $57.3 million in the third quarter of 2021.

For the f i rst nine months of 2022, gross profit increased $49.5 million, or 31%, to $207.5 million from $158.0 million in the f i rst nine months of 2021.

As a percentage of sales, gross profit decreased slightly to 19.6% in the third quarter of 2022 from 19.8% in the third quarter of 2021, and increased to 19.8% in the f i rst nine months of 2022 from 19.0% in the f i rst nine months of 2021.

Gross profit margin decreased during the third quarter of 2022 compared to third quarter of 2021 primarily due to an 80 basis point increase in distribution material expense as a percentage of sales as a result of supply-chain constraints and increased material costs, partially offset by a 70 basis point decrease in distribution labor as a percentage of sales primarily attributable to a decrease in utilization of outsourced labor.

Gross profit margin increased during the first nine months of 2022 compared to first nine months of 2021 primarily due to a 290 basis point decrease in distribution labor as a percentage of sales attributable to reduced utilization of outsourced labor, partially offset by a 200 basis point increase in distribution material expense as a percentage of sales as a result of supply-chain constraints and increased material costs.

Gross profit decreased $31.7 million, or 42%, to $44.1 million in the first quarter of 2023 from $75.8 million in the first quarter of 2022.

As a percentage of sales, gross profit increased to 21.0% in the first quarter of 2023 from 20.7% in the first quarter of 2022.

Gross profit as a percentage of sales increased during the first quarter of 2023 compared to first quarter of 2022 primarily due to a 260 basis point decrease in distribution labor as a percentage of sales primarily attributable to a decrease in utilization of outsourced labor, partially offset by a 230 basis point increase in distribution material expense as a percentage of sales as a result of increased material costs.

Operating Income.

Operating income decreased $4.0 million, or 13%, to $27.2 million in the third quarter of 2022 from $31.2 million in the prior year quarter.

For the f i rst nine months of 2022, operating income increased $33.2 million, or 40%, to $116.8 million from $83.6 million in the prior year period.

The changes in operating income in the third quarter and f i rst nine months of 2022 primarily reflects the items discussed above.

Operating income decreased $27.7 million, or 60%, to $18.3 million in the first quarter of 2023 from $46.0 million in the prior year quarter.

The decrease in operating income in the first quarter of 2023 primarily reflects the items discussed above.

LIQUIDITY AND CAPITAL RESOURCES

Our liquidity at September 25, 2022 consisted of cash and cash equivalents of $53.3 million and $432.1 million of availability under our credit facility.

This unused capacity on our revolving credit facility is net of a $202.5 million temporary reserve until the settlement of our 1.00% Convertible Notes due 2023.

Our liquidity at April 2, 2023 consisted of cash and cash equivalents of $30.8 million and $457.9 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 was $229.8 million in the f i rst nine months of 2022 compared to $147.4 million in the f i rst nine months of 2021.

The increase is primarily attributable to an increased source of cash from (i) a $124.1 million increase in net income and (ii) a $20.0 million increase in depreciation and amortization, partially offset by an increase in use of cash for net working capital of $47.0 million, associated primarily with a reduction in current liabilities, as compared to the prior period.

In addition, there was a decrease in a source of cash for deferred income taxes of $6.5 million and an increase in a use of cash for gain on sale of property, plant and equipment of $5.7 million.

Net cash used in operating activities was $1.0 million in the f i rst quarter of 2023 compared to net cash used in operating activities of $23.0 million in the f i rst quarter of 2022.

The change in operating cash flows is primarily attributable to a $93.7 million reduction in cash used for working capital, substantially offset by an $82.5 million reduction in net income.

Investing Activities

Net cash used in investing activities decreased $134.8 million to $208.9 million in the f i rst nine months of 2022 from $343.7 million in the f i rst nine months of 2021 primarily due to a decrease in cash used in business acquisitions of $144.8 million, partially offset by an increase in capital expenditures of $19.2 million.

Net cash used in investing activities decreased $119.5 million to $23.6 million in the f i rst quarter of 2023 from $143.1 million in the f i rst quarter of 2022 primarily due to a decrease in cash used in business acquisitions of $131.1 million.

Financing Activities

Net cash used in financing activities was $90.5 million in the f i rst nine months of 2022 compared to net cash provided by financing activities of $196.4 million in the f i rst nine months of 2021.

This change is primarily due to proceeds of $350.0 million from the Company's issuance of its 4.75% Senior Notes due 2029 in the first nine months of 2021 and an additional $58.8 million in term loan borrowings in the first nine months of 2021.

These changes were partially offset by a decrease in net revolver repayments of $139.5 million compared to the prior year period and an $18.6 million increase in stock repurchases and dividends to shareholders.

Net cash provided by financing activities was $32.5 million in the f i rst quarter of 2023 compared to $107.2 million in the f i rst quarter of 2022.

In the first quarter of 2023, borrowings under our revolving credit facility, net of revolver and term loan repayments and the repayment of our 1.00% Convertible Senior Notes due 2023 at maturity, were $55.3 million, compared to borrowings under our revolving credit facility, net of revolver repayments, of $154.0 million in the first quarter of 2022.

In addition, there was a $21.1 million decrease in stock repurchases in the first quarter of 2023 compared to the prior year quarter.

Summary of Liquidity and Capital Resources

At September 25, 2022, the Company's existing cash and cash equivalents, cash generated from operations, and available borrowings under its current 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, including satisfying its obligations related to the 1.00% Convertible Notes due 2023.

The ability to access unused borrowing capacity under the Company's current credit facility as a source of liquidity is dependent on maintaining compliance with the financial covenants as specified under the terms of the Company's current credit agreement (as amended, the "2021 Credit Agreement").

As of and for the reporting period ended September 25, 2022, the Company was in compliance with its financial covenants as required under the terms of its 2021 Credit Agreement.

The required maximum consolidated secured net leverage ratio and the required minimum consolidated fixed charge coverage ratio, as such ratios are defined in the 2021 Credit Agreement, compared to the actual amounts as of September 25, 2022 and for the fiscal period then ended are as follows:

At April 2, 2023, the Company's existing cash and cash equivalents, cash generated from operations, and available borrowings under its current 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 Company's senior 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 governing the credit facility (the "2021 Credit Agreement").

As of and for the reporting period ended April 2, 2023, the Company was in compliance with its financial covenants as required under the terms of its 2021 Credit Agreement.

The required maximum consolidated secured net leverage ratio and the required minimum consolidated fixed charge coverage ratio, as such ratios are defined in the 2021 Credit Agreement, compared to the actual amounts as of April 2, 2023 and for the fiscal period then ended are as follows:

Required Actual

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Consolidated fixed charge coverage ratio (12-month period) 1.50 3.86

In addition, as of September 25, 2022, the Company's consolidated total net leverage ratio (12-month period) was 1.81.

While this ratio was a covenant under the Company’s credit agreement in existence prior to the 2021 Credit Agreement, it is not a covenant under the 2021 Credit Agreement.

However, it is used in the determination of the applicable borrowing margin under the 2021 Credit Agreement.

In addition, as of April 2, 2023, the Company's consolidated total net leverage ratio (12-month period) was 2.34, which is used to determine the applicable borrowing margin under the 2021 Credit Agreement.

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

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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, the impact of the COVID-19 pandemic on consumer buying patterns, and from time to time, the impact of severe weather conditions on the timing of industry-wide wholesale shipments.

Russia-Ukraine War

In February 2022, Russia invaded Ukraine.

As military activity proceeds and sanctions, export controls and other measures are imposed against Russia, Belarus and specific areas of Ukraine, the war is increasingly affecting the global economy and financial markets, as well as exacerbating ongoing economic challenges, including rising inflation and global supply-chain disruption.

We will continue to monitor the impacts of the Russia-Ukraine war on macroeconomic conditions and continually assess the effect these matters may have on consumer demand, our suppliers’ ability to deliver products, cybersecurity risks and our liquidity and access to capital.

Subsequent Events

We 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 15 of the Notes to Condensed Consolidated Financial Statements for further discussion of events occurring after April 2, 2023 until the filing date of this Form 10-Q.

INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS

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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