PATRICK INDUSTRIES INC 10-Q

ITEM 1. FINANCIAL STATEMENTS PATRICK INDUSTRIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Second Quarter Ended Six Months Ended (In thousands, except per share data) July 2, 2023 June 26, 2022 July 2, 2023 June 26, 2022 NET SALES $ 920,685 $ 1,475,693 $ 1,820,785 $ 2,817,868 Cost of goods sold 710,717 1,148,589 1,416,573 2,195,419 GROSS PROFIT 209,968 327,104 404,212 622,449 Operating Expenses: Warehouse and delivery 36,031 44,047 71,876 85,216 Selling, general and administrative 78,540 90,485 160,941 166,045 Amortization of intangible assets 19,822 18,545 39,586 35,406 Total operating expenses 134,393 153,077 272,403 286,667 OPERATING INCOME 75,575 174,027 131,809 335,782 Interest expense, net 18,260 14,802 36,744 29,688 Income before income taxes 57,315 159,225 95,065 306,094 Income taxes 14,958 42,701 22,535 76,897 NET INCOME $ 42,357 $ 116,524 $ 72,530 $ 229,197 BASIC EARNINGS PER COMMON SHARE $ 1.97 $ 5.24 $ 3.36 $ 10.25 DILUTED EARNINGS PER COMMON SHARE $ 1.94 $ 4.79 $ 3.28 $ 9.33 Weighted average shares outstanding – Basic 21,521 22,230 21,556 22,369 Weighted average shares outstanding – Diluted 21,787 24,444 22,151 24,655 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 (In thousands) July 2, 2023 June 26, 2022 July 2, 2023 June 26, 2022 NET INCOME $ 42,357 $ 116,524 $ 72,530 $ 229,197 Other comprehensive income, net of tax: Unrealized gain of hedge derivatives — — — 757 Foreign currency translation loss ( 90 ) ( 75 ) ( 99 ) ( 46 ) Total other comprehensive income (loss) ( 90 ) ( 75 ) ( 99 ) 711 COMPREHENSIVE INCOME $ 42,267 $ 116,449 $ 72,431 $ 229,908 See accompanying Notes to Condensed Consolidated Financial Statements. 4 PATRICK INDUSTRIES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) As of (In thousands) July 2, 2023 December 31, 2022 ASSETS Current Assets Cash and cash equivalents $ 33,911 $ 22,847 Trade and other receivables, net 206,777 172,890 Inventories 554,851 667,841 Prepaid expenses and other 38,324 46,326 Total current assets 833,863 909,904 Property, plant and equipment, net 363,261 350,572 Operating lease right-of-use assets 170,575 163,674 Goodwill 633,183 629,263 Intangible assets, net 697,866 720,230 Other non-current assets 8,282 8,828 TOTAL ASSETS $ 2,707,030 $ 2,782,471 LIABILITIES AND SHAREHOLDERS’ EQUITY Current Liabilities Current maturities of long-term debt $ 7,500 $ 7,500 Current operating lease liabilities 46,224 44,235 Accounts payable 130,406 142,910 Accrued liabilities 123,000 172,595 Total current liabilities 307,130 367,240 Long-term debt, less current maturities, net 1,215,885 1,276,149 Long-term operating lease liabilities 127,612 122,471 Deferred tax liabilities, net 48,782 48,392 Other long-term liabilities 10,199 13,050 TOTAL LIABILITIES 1,709,608 1,827,302 SHAREHOLDERS’ EQUITY Common stock 196,912 197,003 Accumulated other comprehensive loss ( 794 ) ( 695 ) Retained earnings 801,304 758,861 TOTAL SHAREHOLDERS’ EQUITY 997,422 955,169 TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 2,707,030 $ 2,782,471 See accompanying Notes to Condensed Consolidated Financial Statements. 5 PATRICK INDUSTRIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Six Months Ended (In thousands) July 2, 2023 June 26, 2022 CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 72,530 $ 229,197 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 71,492 62,975 Stock-based compensation expense 7,946 10,244 Amortization of convertible notes debt discount 574 924 (Gain) loss on sale of property, plant and equipment 100 ( 5,548 ) Other non-cash items 2,304 4,193 Change in operating assets and liabilities, net of acquisitions of businesses: Trade and other receivables, net ( 33,057 ) ( 162,083 ) Inventories 117,440 ( 90,020 ) Prepaid expenses and other assets 7,112 13,463 Accounts payable, accrued liabilities and other ( 68,090 ) 10,951 Net cash provided by operating activities 178,351 74,296 CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property, plant and equipment ( 36,491 ) ( 44,467 ) Proceeds from sale of property and equipment and other investing activities 728 7,296 Business acquisitions, net of cash acquired ( 26,837 ) ( 150,389 ) Purchases of intangible assets and other investing activities ( 2,947 ) — Net cash used in investing activities ( 65,547 ) ( 187,560 ) CASH FLOWS FROM FINANCING ACTIVITIES Term debt repayments ( 3,750 ) ( 1,875 ) Borrowings on revolver 364,814 595,882 Repayments on revolver ( 250,104 ) ( 455,882 ) Repayments of convertible notes ( 172,500 ) — Stock repurchases under buyback program ( 11,776 ) ( 40,385 ) Cash dividends paid to shareholders ( 20,507 ) ( 15,666 ) Taxes paid for share-based payment arrangements ( 7,585 ) ( 10,035 ) Payment of contingent consideration from a business acquisition ( 1,400 ) ( 4,780 ) Proceeds from exercise of common stock options 1,143 181 Other financing activities ( 75 ) — Net cash (used in) provided by financing activities ( 101,740 ) 67,440 Increase (decrease) in cash and cash equivalents 11,064 ( 45,824 ) Cash and cash equivalents at beginning of year 22,847 122,849 Cash and cash equivalents at end of period $ 33,911 $ 77,025 See accompanying Notes to Condensed Consolidated Financial Statements. 6 PATRICK INDUSTRIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited) Second Quarter Ended July 2, 2023 (In thousands) Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Loss Retained Earnings Total Balance April 2, 2023 $ 194,753 $ — $ ( 704 ) $ 775,773 $ 969,822 Net income — — — 42,357 42,357 Dividends declared — — — ( 9,820 ) ( 9,820 ) Other comprehensive loss, net of tax — — ( 90 ) — ( 90 ) Stock repurchases under buyback program ( 1,110 ) — — ( 7,006 ) ( 8,116 ) Repurchases of shares for tax payments related to the vesting and exercising of share-based grants ( 86 ) — — — ( 86 ) Issuance of shares upon exercise of common stock options 651 — — — 651 Stock-based compensation expense 2,704 — — — 2,704 Balance July 2, 2023 $ 196,912 $ — $ ( 794 ) $ 801,304 $ 997,422 Second Quarter Ended June 26, 2022 (In thousands) Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Loss 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 7 PATRICK INDUSTRIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited) Six Months Ended July 2, 2023 (In thousands) Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Loss Retained Earnings Total Balance December 31, 2022 $ 197,003 $ — $ ( 695 ) $ 758,861 $ 955,169 Net income — — — 72,530 72,530 Dividends declared — — — ( 19,906 ) ( 19,906 ) Other comprehensive income, net of tax — — ( 99 ) — ( 99 ) Share repurchases under buyback program ( 1,595 ) — — ( 10,181 ) ( 11,776 ) Repurchases of shares for tax payments related to the vesting and exercise of share-based grants ( 7,585 ) — — — ( 7,585 ) Issuance of shares upon exercise of common stock options 1,143 — — — 1,143 Stock-based compensation expense 7,946 — — — 7,946 Balance July 2, 2023 $ 196,912 $ — $ ( 794 ) $ 801,304 $ 997,422 Six Months Ended June 26, 2022 (In thousands) Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Loss 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 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 July 2, 2023 and December 31, 2022, its results of operations for the second quarter and six months ended July 2, 2023 and June 26, 2022, and its cash flows for the six months ended July 2, 2023 and June 26, 2022. 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. Intercompany balances and transactions have been eliminated in consolidation. 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, 2022. The December 31, 2022 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 July 2, 2023 are not necessarily indicative of the results that we will realize or expect for the full year ending December 31, 2023. 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 2023 ended on July 2, 2023 and the second quarter of fiscal year 2022 ended on June 26, 2022. In preparation of Patrick’s condensed consolidated financial statements as of and for the second quarter and six months ended July 2, 2023, 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. REVENUE RECOGNITION In the following table, revenue from contracts with customers, net of intersegment sales, is disaggregated by market type and by reportable segment: Second Quarter Ended July 2, 2023 (In thousands) Manufacturing Distribution Total Market type: Recreational Vehicle $ 254,745 $ 128,827 $ 383,572 Marine 251,313 17,128 268,441 Manufactured Housing 65,319 78,654 143,973 Industrial 116,721 7,978 124,699 Total $ 688,098 $ 232,587 $ 920,685 9 Second Quarter Ended June 26, 2022 (In 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 Six Months Ended July 2, 2023 (In thousands) Manufacturing Distribution Total Market type: Recreational Vehicle $ 507,189 $ 243,343 $ 750,532 Marine 512,333 32,012 544,345 Manufactured Housing 129,508 147,889 277,397 Industrial 231,464 17,047 248,511 Total $ 1,380,494 $ 440,291 $ 1,820,785 Six Months Ended June 26, 2022 (In 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 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. 3. INVENTORIES Inventories consist of the following: (In thousands) July 2, 2023 December 31, 2022 Raw materials $ 282,532 $ 348,670 Work in process 21,022 22,630 Finished goods 120,733 141,516 Less: reserve for inventory obsolescence ( 18,906 ) ( 14,059 ) Total manufactured goods, net 405,381 498,757 Materials purchased for resale (distribution products) 157,264 175,061 Less: reserve for inventory obsolescence ( 7,794 ) ( 5,977 ) Total materials purchased for resale (distribution products), net 149,470 169,084 Total inventories $ 554,851 $ 667,841 10 4. GOODWILL AND INTANGIBLE ASSETS Changes in the carrying amount of goodwill for the six months ended July 2, 2023 by segment are as follows: (In thousands) Manufacturing Distribution Total Balance - December 31, 2022 $ 558,362 $ 70,901 $ 629,263 Acquisitions — 5,905 5,905 Adjustments to preliminary purchase price allocations ( 2,160 ) 175 ( 1,985 ) Balance - July 2, 2023 $ 556,202 $ 76,981 $ 633,183 Intangible assets, net consist of the following as of July 2, 2023 and December 31, 2022: (In thousands) July 2, 2023 December 31, 2022 Customer relationships $ 737,424 $ 722,503 Non-compete agreements 21,791 20,412 Patents 69,186 69,164 Trademarks 196,857 195,957 1,025,258 1,008,036 Less: accumulated amortization ( 327,392 ) ( 287,806 ) Intangible assets, net $ 697,866 $ 720,230 Changes in the carrying value of intangible assets for the six months ended July 2, 2023 by segment are as follows: (In thousands) Manufacturing Distribution Total Balance - December 31, 2022 $ 622,647 $ 97,583 $ 720,230 Additions 2,947 11,100 14,047 Amortization ( 34,258 ) ( 5,328 ) ( 39,586 ) Adjustments to preliminary purchase price allocations 3,260 ( 85 ) 3,175 Balance - July 2, 2023 $ 594,596 $ 103,270 $ 697,866 5. ACQUISITIONS General The Company completed three acquisitions in the second quarter and first six months of 2023 (the "2023 Acquisitions"). For the second quarter and six months ended July 2, 2023, net sales included in the Company's condensed consolidated statements of income related to the 2023 Acquisitions were $ 2.3 million, and operating income was $ 0.2 million. Acquisition-related costs associated with the 2023 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 two acquisitions in the second quarter of 2022 and completed three acquisitions in the six months ended June 26, 2022. 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 acquisition completed in the second quarter and first six months of 2022 were $ 40.8 million and $ 49.2 million, respectively, and operating income was $ 7.6 million and $ 9.0 million, respectively. Business combinations generally take place to gain key technology, expand into additional markets, or strengthen Patrick's positions in existing markets. Acquisitions are accounted for under the acquisition method of accounting. For 11 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. Contingent Consideration 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. Changes in the fair value of contingent consideration for the six months ended July 2, 2023 are as follows: (In thousands) Balance - December 31, 2022 $ 9,213 Additions 3,590 Fair value adjustments (1) 1,000 Settlements ( 5,150 ) Balance - July 2, 2023 $ 8,653 (1) The Company records non-cash fair value adjustments to contingent consideration based on expected results, which are included in Selling, general and administrative expenses in the Company's condensed consolidated statements of income for the first six months of 2023. The following table shows the balance sheet location of the fair value of contingent consideration and the maximum amount of contingent consideration payments the Company may be subject to at July 2, 2023 and December 31, 2022: (In thousands) July 2, 2023 December 31, 2022 Accrued liabilities $ 7,583 $ 5,250 Other long-term liabilities 1,070 3,963 Total fair value of contingent consideration $ 8,653 $ 9,213 Maximum amount of contingent consideration $ 10,215 $ 10,747 2023 Acquisitions The Company completed three acquisitions in the six months ended July 2, 2023, including the following previously announced acquisition: Company Segment Description BTI Transport Distribution Provider of transportation and logistics services to marine original equipment manufacturers ("OEMs") and dealers, based in Elkhart, Indiana, acquired in April 2023. The acquired business will now operate under the Patrick Marine Transport brand. Inclusive of two acquisitions not discussed above, total cash consideration for the 2023 Acquisitions was approximately $ 26.4 million, plus contingent consideration over a two-year period based on future performance in connection with certain acquisitions. The preliminary purchase price allocations are subject to valuation activities being finalized, and thus certain purchase accounting adjustments are subject to change within the measurement period as the Company finalizes its estimates. Changes to preliminary purchase accounting estimates recorded in the second quarter and six months ended July 2, 2023 related to the 2023 Acquisitions were immaterial. 12 2022 Acquisitions The Company completed five acquisitions in the year ended December 31, 2022, including the following three previously announced acquisitions (collectively, the "2022 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 OEMs, based in Cocoa, Florida, acquired in May 2022. Transhield Manufacturing Designer and manufacturer of customized and proprietary protection solutions for the marine, military and industrial markets, including covers and shrinkable packaging, to protect equipment during transport and storage, based in Elkhart, Indiana, acquired in November 2022. Inclusive of two acquisitions not discussed above, total cash consideration for the 2022 Acquisitions was approximately $ 249.0 million, plus contingent consideration over a one to two-year period based on future performance in connection with certain acquisitions. The preliminary purchase price allocations are subject to valuation activities being finalized, and thus certain purchase accounting adjustments are subject to change within the measurement period as the Company finalizes its estimates. Purchase price allocations and all valuation activities in connection with the acquisition completed in the first six months of 2022 have been finalized. Changes to preliminary purchase accounting estimates recorded in the second quarter and six months ended July 2, 2023 related to the 2022 Acquisitions were immaterial. 13 The following table summarizes the fair values of the assets acquired and the liabilities assumed as of the date of acquisition for the 2023 Acquisitions and 2022 Acquisitions: 2023 Acquisitions 2022 Acquisitions (In thousands) Acquisition A Acquisition B All Others Total Consideration Cash, net of cash acquired $ 26,359 $ 132,557 $ 95,571 $ 20,833 $ 248,961 Working capital holdback and other, net ( 121 ) — ( 907 ) 7 ( 900 ) Contingent consideration (1) 3,500 — — 1,840 1,840 Total consideration $ 29,738 $ 132,557 $ 94,664 $ 22,680 $ 249,901 Assets Acquired Trade receivables $ 570 $ 20,640 $ 4,911 $ 904 $ 26,455 Inventories 4,407 32,744 8,732 2,352 43,828 Prepaid expenses & other 190 1,325 164 116 1,605 Property, plant & equipment 10,149 4,681 6,026 1,506 12,213 Operating lease right-of-use assets 1,044 2,917 1,435 599 4,951 Identifiable intangible assets Customer relationships 10,370 58,000 38,630 7,055 103,685 Non-compete agreements 430 500 230 310 1,040 Patents — 7,500 9,400 — 16,900 Trademarks — 17,000 7,910 1,310 26,220 Liabilities Assumed Current portion of operating lease obligations ( 262 ) ( 512 ) ( 289 ) ( 273 ) ( 1,074 ) Accounts payable & accrued liabilities ( 583 ) ( 24,521 ) ( 3,408 ) ( 1,251 ) ( 29,180 ) Operating lease obligations ( 782 ) ( 2,405 ) ( 1,146 ) ( 326 ) ( 3,877 ) Deferred tax liabilities — ( 19,930 ) ( 14,076 ) — ( 34,006 ) Total fair value of net assets acquired 25,533 97,939 58,519 12,302 168,760 Goodwill (2) 5,905 34,618 36,145 10,378 81,141 Bargain purchase gain (3) ( 1,700 ) — — — — $ 29,738 $ 132,557 $ 94,664 $ 22,680 $ 249,901 (1) These amounts reflect the acquisition date fair value of contingent consideration based on expected future results relating to certain acquisitions. (2) Goodwill is not tax-deductible for Acquisition A and Acquisition B (totaling approximately $ 70.8 million) but is tax-deductible for the remaining 2022 Acquisitions and the 2023 Acquisitions. (3) In connection with one of the 2023 Acquisitions, the Company anticipates it will recognize a bargain purchase gain. A bargain purchase gain is recognized when the net assets acquired in a business combination have a higher fair value than the consideration paid. This gain is primarily attributable to the fair value assigned to customer relationships, has been deferred for recognition until the Company finalizes all purchase accounting adjustments, and is included in "Accrued liabilities" on the condensed consolidated balance sheet. 14 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 of 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 the 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. The estimated useful life for customer relationships is 10 years. The estimated useful life for non-compete agreements is 5 years. The weighted average estimated useful life for patents is 13 years, ranging from 10 to 18 years. Trademarks have an indefinite useful life. Pro Forma Information The following pro forma information for the second quarter and six months ended July 2, 2023 and June 26, 2022 assumes the 2023 Acquisitions and 2022 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 2023 Acquisitions and 2022 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 $ 0.4 million, respectively, for the second quarter and six months ended July 2, 2023, and $ 1.1 million and $ 3.8 million, respectively, for the second quarter and six months ended June 26, 2022. Second Quarter Ended Six Months Ended (In thousands, except per share data) July 2, 2023 June 26, 2022 July 2, 2023 June 26, 2022 Revenue $ 927,443 $ 1,490,922 $ 1,836,680 $ 2,895,696 Net income 42,733 117,049 73,326 233,178 Basic earnings per common share 1.99 5.27 3.40 10.42 Diluted earnings per common share 1.96 4.81 3.32 9.50 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. 6. STOCK-BASED COMPENSATION The Company recorded expense, net of forfeitures, of approximately $ 2.7 million and $ 7.9 million in the second quarter and six months ended July 2, 2023, respectively, for its stock-based compensation plans in the condensed consolidated statements of income. Stock-based compensation expense of $ 5.1 million and $ 10.2 million was recorded in the second quarter and six months ended June 26, 2022, respectively. The Company's Board of Directors (the "Board") approved various stock-based grants under the Company’s 2009 Omnibus Incentive Plan in the six months ended July 2, 2023 totaling 328,059 shares in the aggregate at an average fair value of $ 56.20 at grant date for a total fair value at grant date of $ 18.4 million. As of July 2, 2023, there was approximately $ 27.1 million of total unrecognized compensation cost related to stock-based compensation arrangements granted under incentive plans. That cost is expected to be recognized over a weighted-average period of 19.6 months. 15 7. EARNINGS PER COMMON SHARE Earnings per common share calculated for the second quarter and first six months of 2023 and 2022 is as follows: Second Quarter Ended Six Months Ended (thousands except per share data) July 2, 2023 June 26, 2022 July 2, 2023 June 26, 2022 Numerator: Earnings for basic earnings per common share calculation $ 42,357 $ 116,524 $ 72,530 $ 229,197 Effect of interest on potentially dilutive convertible notes, net of tax — 481 162 939 Earnings for diluted earnings per common share calculation $ 42,357 $ 117,005 $ 72,692 $ 230,136 Denominator: Weighted average common shares outstanding - basic 21,521 22,230 21,556 22,369 Weighted average impact of potentially dilutive convertible notes — 2,052 331 2,047 Weighted average impact of potentially dilutive securities 266 162 264 239 Weighted average common shares outstanding - diluted 21,787 24,444 22,151 24,655 Earnings per common share: Basic earnings per common share $ 1.97 $ 5.24 $ 3.36 $ 10.25 Diluted earnings per common share $ 1.94 $ 4.79 $ 3.28 $ 9.33 An immaterial amount of securities was not included in the computation of diluted earnings per common share as they are considered anti-dilutive under the treasury stock method for all periods presented. 8. DEBT A summary of total debt outstanding at July 2, 2023 and December 31, 2022 is as follows: (In thousands) July 2, 2023 December 31, 2022 Long-term debt: 1.00 % convertible notes due 2023 $ — $ 172,500 Term loan due 2027 133,125 136,875 Revolver due 2027 195,000 80,289 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 1,236,875 1,298,414 Less: convertible notes debt discount, net ( 5,415 ) ( 5,989 ) Less: term loan deferred financing costs, net ( 625 ) ( 701 ) Less: senior notes deferred financing costs, net ( 7,450 ) ( 8,075 ) Less: current maturities of long-term debt ( 7,500 ) ( 7,500 ) Total long-term debt, less current maturities, net $ 1,215,885 $ 1,276,149 16 The Company maintains a senior secured credit facility comprised of a $ 775 million revolving credit facility (the "Revolver due 2027") and the remaining balance of a $ 150 million term loan. On February 1, 2023, the Company utilized borrowing capacity under the Revolver due 2027 to satisfy its repayment obligation at maturity of the 1.00 % Convertible Senior Notes due 2023 (the " 1.00 % Convertible Notes"). All noteholders elected to receive cash in repayment of the 1.00 % Convertible Notes. The interest rate for incremental borrowings under the Revolver due 2027 at July 2, 2023 was SOFR plus 1.50 % (or 6.70 %) for the SOFR-based option. The fee payable on committed but unused portions of the Revolver due 2027 was 0.20 % at July 2, 2023. Total cash interest paid for the second quarter of 2023 and 2022 was $ 26.9 million and $ 23.9 million, respectively, and $ 32.7 million and $ 27.1 million for the comparative six month periods, respectively. 9. LEASES Lease expense, supplemental cash flow information, and other information related to leases were as follows: Second Quarter Ended Six Months Ended (In thousands) July 2, 2023 June 26, 2022 July 2, 2023 June 26, 2022 Operating lease cost $ 13,788 $ 12,563 $ 27,252 $ 24,727 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows for operating leases $ 13,656 $ 12,308 $ 27,034 $ 24,235 Right-of-use assets obtained in exchange for lease obligations: Operating leases $ 16,308 $ 6,007 $ 31,342 $ 29,732 Balance sheet information related to leases was as follows: (In thousands, except lease term and discount rate) July 2, 2023 December 31, 2022 Assets Operating lease right-of-use assets $ 170,575 $ 163,674 Liabilities Operating lease liabilities, current portion $ 46,224 $ 44,235 Long-term operating lease liabilities 127,612 122,471 Total lease liabilities $ 173,836 $ 166,706 Weighted average remaining lease term, operating leases (in years) 5.0 5.1 Weighted average discount rate, operating leases 5.0 % 4.4 % 17 Maturities of lease liabilities were as follows at July 2, 2023: (In thousands) 2023 (excluding the six months ended July 2, 2023) $ 27,622 2024 49,935 2025 40,153 2026 29,252 2027 17,609 Thereafter 34,064 Total lease payments 198,635 Less imputed interest ( 24,799 ) Total $ 173,836 As of July 2, 2023, outstanding leases have remaining lease terms ranging from 1 year to 16 years. The Company has additional operating leases that have not yet commenced as of July 2, 2023 and, therefore, were not included as operating right-of-use assets and corresponding operating lease liabilities on our condensed consolidated balance sheet at July 2, 2023. These operating leases are anticipated to commence in the third and fourth quarters of fiscal 2023 with lease terms of 5 years to 7 years. The estimated fair value of these operating lease right-of-use assets and corresponding operating lease liabilities to be recorded on our balance sheet upon lease commencement is approximately $ 8.5 million. 10. FAIR VALUE MEASUREMENTS The following table presents fair values of certain assets and liabilities at July 2, 2023 and December 31, 2022: July 2, 2023 December 31, 2022 (In millions) Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 Cash equivalents (1) $ 22.1 $ — $ — $ 15.2 $ — $ — 7.50 % senior notes due 2027 (2) — 290.9 — — 293.9 — 4.75 % senior notes due 2029 (2) — 300.8 — — 293.8 — 1.00 % convertible notes due 2023 (2) — — — — 172.0 — 1.75 % convertible notes due 2028 (2) — 250.5 — — 219.9 — Term loan due 2027 (3) — 133.1 — — 136.9 — Revolver due 2027 (3) — 195.0 — — 80.3 — Contingent consideration (4) — — 8.7 — — 9.2 (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 July 2, 2023 and December 31, 2022 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 July 2, 2023 and December 31, 2022 using the interest rate method. Repayment of the 1.00 % Convertible Notes at maturity is discussed further in Note 8. (3) The carrying amounts of our Term loan due 2027 and Revolver due 2027 approximate fair value as of July 2, 2023 and December 31, 2022 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 estimated fair value of the Company's contingent consideration is discussed further in Note 5. 18 11. INCOME TAXES The effective tax rate in the second quarter of 2023 and 2022 was 26.1 % and 26.8 %, respectively, and the effective tax rate for the comparable six month periods was 23.7 % and 25.1 %, respectively. The first six months 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 $ 1.8 million and $ 4.0 million, respectively. Cash paid for income taxes, net of refunds, was $ 31.9 million and $ 49.0 million, respectively, in the second quarter and first six months of 2023 and $ 58.1 million and $ 76.5 million, respectively, in the second quarter and first six months of 2022. 12. 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 July 2, 2023 (In thousands) Manufacturing Distribution Total Net outside sales $ 688,098 $ 232,587 $ 920,685 Intersegment sales 16,193 2,159 18,352 Total sales $ 704,291 $ 234,746 $ 939,037 Operating income $ 95,204 $ 25,839 $ 121,043 Second Quarter Ended June 26, 2022 (In 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 Six Months Ended July 2, 2023 (In thousands) Manufacturing Distribution Total Net outside sales $ 1,380,494 $ 440,291 $ 1,820,785 Intersegment sales 32,612 4,614 37,226 Total sales $ 1,413,106 $ 444,905 $ 1,858,011 Operating income $ 182,369 $ 44,146 $ 226,515 Six Months Ended June 26, 2022 (In 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 19 The following table presents a reconciliation of segment operating income to consolidated operating income: Second Quarter Ended Six Months Ended (In thousands) July 2, 2023 June 26, 2022 July 2, 2023 June 26, 2022 Operating income for reportable segments $ 121,043 $ 224,326 $ 226,515 $ 440,836 Unallocated corporate expenses ( 25,646 ) ( 31,754 ) ( 55,120 ) ( 69,648 ) Amortization ( 19,822 ) ( 18,545 ) ( 39,586 ) ( 35,406 ) Consolidated operating income $ 75,575 $ 174,027 $ 131,809 $ 335,782 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. 13. STOCK REPURCHASE PROGRAMS In December 2022, the 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 $ 38.2 million remaining under the previous authorization. Approximately $ 84.6 million remains in the amount of the Company's common stock that may be acquired under the current stock repurchase program as of July 2, 2023. Under the stock repurchase plan, the Company made repurchases of common stock as follows for the respective periods: Second Quarter Ended Six Months Ended July 2, 2023 June 26, 2022 July 2, 2023 June 26, 2022 Shares repurchased 125,189 288,627 179,809 654,254 Average price $ 64.83 $ 57.28 $ 65.49 $ 63.14 Aggregate cost (in millions) $ 8.1 $ 16.5 $ 11.8 $ 41.3 14. 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. In the Company's Form 10-K for the year ended December 31, 2022, the Company described the current status of litigation concerning the Lusher Site Remediation Group. In early July 2023, the court granted the Company’s Rule 54(b) Motion for Final Judgment on previously dismissed claims and granted the Company’s Motion to Dismiss the plaintiff’s remaining claims against the defendants, without prejudice (the Company’s Motion to Dismiss having been joined by the remaining defendants in the litigation.) The sole issue pending in the litigation for the Court’s determination is the plaintiff’s motion to bar contribution claims. 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 proceedings remain subject to a court-approved stay, granted in September 2021, pending negotiations with the EPA. The 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 20 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. 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.