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Item 2. Management’s Discussion and Analysis

2023-11-09 compared with 2023-08-10 · 136 added, 131 removed, 105 unchanged (72% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the Company’s Condensed Consolidated Financial Statements and Notes thereto included in Item 1 of this Report.

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand the results of operations, financial condition and cash flows of Patrick Industries, Inc.

This MD&A should be read in conjunction with the Company’s Condensed Consolidated Financial Statements and Notes thereto included in Item 1 of this Report.

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

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OVERVIEW OF MARKETS AND RELATED INDUSTRY PERFORMANCE

Second Quarter and Six Months 2023 Financial Overview

Third Quarter and Nine Months 2023 Financial Overview

Recreational Vehicle ("RV") Industry

The RV industry is our primary market and comprised 42% and 57% of the Company’s consolidated net sales in the second quarter ended July 2, 2023 and June 26, 2022, respectively, and 41% and 59% for the comparative six month periods, respectively.

Net sales to the RV industry decreased 54% and 55% in the second quarter and first six months of 2023, respectively, compared to the prior year periods.

According to the RV Industry Association ("RVIA"), RV wholesale shipments decreased 44% in the second quarter of 2023 to approximately 86,200 units from approximately 152,700 units in the second quarter of 2022.

While we estimate RV industry retail unit sales for second quarter of 2023 decreased approximately 16% compared to the second quarter of 2022, industry retail sales exceeded wholesale unit shipments in the second quarter of 2023 as RV OEMs maintained lower production volumes.

RV wholesale unit shipments for the first six months of 2023 totaled approximately 164,800 units, a decrease of 49% from approximately 324,600 units in the comparative prior year period.

We estimate that despite a 19% decrease in RV industry retail unit sales for the first six months of 2023 compared to the prior year period, industry retail sales exceeded wholesale unit shipments resulting in improved alignment of dealer inventory levels with retail demand.

The RV industry is our primary market and comprised 46% and 47% of the Company’s consolidated net sales in the third quarter ended October 1, 2023 and September 25, 2022, respectively, and 43% and 55% for the comparative nine months periods, respectively.

Net sales to the RV industry decreased 24% and 47% in the third quarter and first nine months of 2023, respectively, compared to the prior year periods.

According to the RV Industry Association ("RVIA"), RV wholesale shipments decreased 20% in the third quarter of 2023 to approximately 73,300 units from approximately 91,700 units in the third quarter of 2022.

While we estimate RV industry retail unit sales for third quarter of 2023 decreased approximately 38% compared to the third quarter of 2022, industry retail sales exceeded wholesale unit shipments in the third quarter of 2023 as RV OEMs maintained lower production volumes.

RV wholesale unit shipments for the first nine months of 2023 totaled approximately 238,100 units, a decrease of 43% from approximately 416,200 units in the comparative prior year period.

We estimate that despite a 24% decrease in RV industry retail unit sales for the first nine months of 2023 compared to the prior year period, industry retail sales exceeded wholesale unit shipments resulting in improved alignment of dealer inventory levels with retail demand.

Marine Industry

Net sales to the marine industry, which represented approximately 29% and 20% of the Company's consolidated net sales in the second quarter ended July 2, 2023 and June 26, 2022, respectively, decreased 8% in the second quarter of 2023 compared to the prior year period.

For the first six months of 2023 and 2022, net sales to the marine industry represented 30% and 18% of our consolidated net sales, respectively, increasing 6% in 2023 compared to the prior year period.

The increase in net sales beyond industry volumes is driven primarily by acquisitions completed in 2022 and 2023, 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"), decreased 19% for the second quarter of 2023 and were flat for the first six months of 2023 compared to the prior year periods.

We estimate that marine industry retail powerboat unit sales decreased 4% in the second quarter and first six months of 2023, compared to the prior year periods primarily due to the current macroeconomic environment faced by the end consumer,

such as rising interest rates and inflationary pressures.

Net sales to the marine industry, which represented approximately 24% and 24% of the Company's consolidated net sales in the third quarter ended October 1, 2023 and September 25, 2022, respectively, decreased 24% in the third quarter of 2023 compared to the prior year period.

For the first nine months of 2023 and 2022, net sales to the marine industry represented 28% and 20% of our consolidated net sales, respectively, decreasing 4% in the first nine months of 2023 compared to the prior year period.

The decrease in net sales was primarily due to a reduction in OEM production levels and inventory decreases at marine dealers, which were offset in part by the contribution from acquisitions completed in 2022 and 2023.

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"), decreased 23% for the third quarter of 2023 and decreased 4% for the first nine months of 2023 compared to the prior year periods.

We estimate that marine industry retail powerboat unit sales increased 1% in the third quarter and first nine months of 2023, compared to the prior year periods primarily due to the current macroeconomic environment faced by the end consumer, such as rising interest rates and inflationary pressures.

In both the third quarter and first nine months of 2023,

estimated retail shipments were higher than estimated wholesale unit sales and were in line with typical seasonal buying patterns of consumers for these products.

Manufactured Housing ("MH") Industry

Net sales to the MH industry, which represented 16% and 13% of the Company’s consolidated net sales in the second quarter of 2023 and 2022, respectively, decreased 28% in the second quarter of 2023 compared to the prior year period.

MH net sales represented 15% and 13% of the Company's consolidated net sales for the first six months of 2023 and 2022, respectively, and decreased 26% in the first six months of 2023 compared to the first six months of 2022.

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

Net sales to the MH industry, which represented 17% and 16% of the Company’s consolidated net sales in the third quarter ended October 1, 2023 and September 25, 2022, respectively, decreased 17% in the third quarter of 2023 compared to the prior year period.

MH net sales represented 16% and 14% of the Company's consolidated net sales for the first nine months of 2023 and 2022, respectively, and decreased 23% in the first nine months of 2023 compared to the first nine months of 2022.

Based on industry data from the Manufactured Housing Institute, MH industry wholesale unit shipments decreased 19% in the third quarter of 2023 and decreased 26% in the first nine months of 2023 compared to the prior year periods 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 10% of our consolidated net sales in the second quarter of 2023 and 2022, respectively, and decreased 15% in the second quarter of 2023 compared to the prior year period.

Industrial net sales represented 14% and 10% of the Company's net sales in the first six months of 2023 and 2022, respectively, and decreased 9% in the first six months of 2023 compared to the first six months of 2022.

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

Net sales to this market represented 13% of our consolidated net sales in each of the third quarter ended October 1, 2023 and September 25, 2022, and decreased 19% in the third quarter ended October 1, 2023 compared to the prior year period.

Industrial net sales represented 13% and 11% of the Company's net sales in the first nine months of 2023 and 2022, respectively, and decreased 13% in the first nine months 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.

We estimate that, in general, approximately 70-80% of our industrial business is directly tied to the residential housing market, with the remaining 20-30% directly tied to the non-residential and commercial markets.

We estimate that, in general, approximately 70% to 80% of our industrial business is directly tied to the residential housing market, with the remaining 20% to 30% tied to the non-residential and commercial markets.

According to the U.S.

Census Bureau, combined new housing starts decreased 11% in the second quarter of 2023 compared to the prior year quarter, with single-family housing starts decreasing 14%, and multifamily housing starts decreasing 6% for the same period.

For the first six months of 2023, combined new housing starts decreased 15%, with single family housing starts decreasing 21% and multifamily housing starts decreasing 2% for the same period.

Census Bureau, combined new housing starts decreased 6% in the third quarter of 2023 compared to the prior year quarter, with single-family housing starts increasing 7%, and multifamily housing starts decreasing 28% for the same period.

For the first nine months of 2023, combined new housing starts decreased 12%, with single-family housing starts decreasing 13% and multifamily housing starts decreasing 11% 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

Second Quarter and Six Month Ended July 2, 2023 Compared to 2022

RESULTS OF OPERATIONS

Third Quarter and Nine Months Ended October 1, 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.

Second Quarter Ended

(In thousands) July 2, 2023 June 26, 2022 Amount Change % Change

Third Quarter Ended

($ in thousands) October 1, 2023 September 25, 2022 Amount Change % Change

Net sales $ 866,073 100.0 % $ 1,112,089 100.0 % $ (246,016) (22) %

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Net income $ 39,550 4.6 % $ 58,819 5.3 % $ (19,269) (33) %

Six Months Ended

(In thousands) July 2, 2023 June 26, 2022 Amount Change % Change

Nine Months Ended

($ in thousands) October 1, 2023 September 25, 2022 Amount Change % Change

Net sales $ 2,686,858 100.0 % $ 3,929,957 100.0 % $ (1,243,099) (32) %

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Net income $ 112,080 4.2 % $ 288,016 7.3 % $ (175,936) (61) %

Net sales in the second quarter of 2023 decreased $555.0 million, or 38%, to $920.7 million from $1,475.7 million in the second quarter of 2022.

The net sales decrease in the second quarter of 2023 reflects revenue decreases from each of our four end markets, partially offset by the contribution of acquisitions completed in 2022 and 2023.

Net sales in the third quarter of 2023 decreased $246.0 million, or 22%, to $866.1 million from $1,112.1 million in the third quarter of 2022.

Net sales in the third quarter of 2023 decreased as a result of lower wholesale unit shipments in our end markets and lower pricing passed on to our customers to reflect changes in certain commodity costs, partially offset by market share gains.

The Company's RV market sales decreased $123.5 million, or 24%, in the quarter resulting from the continued reduction of production by our RV OEM customers.

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MH market sales decreased $29.7 million, or 17%, due to industry headwinds from elevated financing rates and persistent inflation.

Industrial market sales decreased $22.8 million, or 15%, which is in line with new housing start trends when compared to the prior year quarter.

Net sales in the first six months of 2023 decreased $997.1 million, or 35%, to $1,820.8 million from $2,817.9 million in the first six months of 2022.

The net sales decrease in the first six months of 2023 reflects a $907.5 million decline in RV revenues in the quarter resulting from the continued reduction of production by our RV OEM customers and a $96.6 million decline in MH net sales due to industry headwinds from elevated financing rates and persistent inflation, partially offset by growth in our marine end market, market share gains, and the contribution of acquisitions completed in 2022 and 2023.

The Company's RV market sales decreased 55%, marine market sales increased 6%, MH market sales decreased 26% and industrial market sales decreased 9% in the first six months of 2023 when compared to the prior year period.

Revenue attributable to acquisitions completed in the first six months of 2023 was $2.3 million in both the second quarter and first six months of 2023.

Revenue attributable to acquisitions completed in the first six months of 2022 was $40.8 million in the second quarter of 2022 and $49.2 million in the first six months of 2022 .

The Company’s RV content per wholesale unit (on a trailing twelve-month basis) for the second quarter of 2023 increased approximately 6% to $5,054 fr om $4,749 for the second quarter of 2022 .

Marine powerboat content per wholesale unit (on a trailing twelve-month basis) for the second quarter of 2023 increased approximately 15% to an estimated $5,330 from $4,648 for the second quarter of 2022.

MH content per wholesale unit (on a trailing twelve-month b asis) for the second quarter of 2023 increased approximately 10% to $6,393 from $5,800 for the second quarter of 2022 .

These increases in content per wholesale unit reflect market share gains, contributions from businesses acquired in 2022 and 2023, and favorable pricing impacts.

Industrial market sales decreased $26.9 million, or 19% when compared to the prior year quarter, which is in line with housing start trends in the prior two quarters.

Net sales in the first nine months of 2023 decreased $1,243.1 million, or 32%, to $2,686.9 million from $3,930.0 million in the first nine months of 2022.

The net sales decrease in the first nine months of 2023 reflects a $1,031.0 million decline in RV revenues resulting from the continued reduction of production by our RV OEM customers, a $126.3 million decline in MH revenues due to industry headwinds from elevated financing rates and persistent inflation and a $32.9 million decline in marine revenues due to a reduction in OEM production levels and inventory decreases at the marine dealers, which were partially offset by the contribution from acquisitions completed in 2022 and 2023.

The Company's RV market sales decreased 47%, marine market sales decreased 4%, MH market sales decreased 23% and industrial market sales decreased 13% in the first nine months of 2023 when compared to the prior year period.

Revenue attributable to acquisitions completed in the first nine months of 2023 was $7.3 million and $9.8 million in the third quarter and first nine months of 2023, respectively.

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

The Company’s RV content per wholesale unit (on a trailing twelve-month basis) for the third quarter of 2023 decreased approximately 2% to $4,957 fr om $5,065 for the third quarter of 2022 .

Marine powerboat content per wholesale unit (on a trailing twelve-month basis) for the third quarter of 2023 increased approximately 3% to an estimated $5,009 from $4,860 for the third quarter of 2022.

MH content per wholesale unit (on a trailing twelve-month b asis) for the third quarter of 2023 increased approximately 7% to $6,444 from $6,029 for the third quarter of 2022 .

The decrease in content per wholesale unit in the RV market reflects pricing impacts.

The increases in content per wholesale unit in the marine powerboat and MH markets primarily reflect product mix shifts by certain OEM customers, market share gains, and contributions from businesses acquired in 2022 and 2023.

Cost of Goods Sold.

Cost of goods sold decreased $437.9 million, or 38%, to $710.7 million in the second quarte r of 2023 from $1,148.6 million in the comparative 2022 period.

As a percentage of net sales, cost of goods sold decreased 60 basis points during the second quarter of 2023 to 77.2% from 77.8% in the prior year period.

Cost of goods sold decreased $778.8 million, or 35%, to $1,416.6 million in the first six months of 2023 from $2,195.4 million in the first six months of 2022.

As a percentage of net sales, cost of goods sold decreased 10 basis points during the first six months of 2023 to 77.8% from 77.9% in the prior year period.

Cost of goods sold as a percentage of net sales decreased in the second quarter and first six months of 2023 primarily as a result of (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 and 2023, partially offset by reduced industry volumes resulting in less favorable fixed cost absorption when compared to the prior year periods.

For the second quarter of 2023, these factors contributed to a 340 basis point decrease in material costs as a percentage of net sales and a 50 basis point decrease in labor as a percentage of net sales, partially offset by a 330 basis point increase in overhead as a percentage of net sales.

For the first six months of 2023, these factors contributed to a 300 basis point decrease in material costs as a percentage of net sales and a 40 basis point decrease in labor as a percentage of net sales, partially offset by a 330 basis point increase in overhead as a percentage of net sales.

Cost of goods sold decreased $208.6 million, or 24%, to $667.0 million in the third quarte r of 2023 from $875.6 million in the comparative 2022 period.

As a percentage of net sales, cost of goods sold decreased 170 basis points during the third quarter of 2023 to 77.0% from 78.7% in the prior year period.

Cost of goods sold decreased $987.6 million, or 32%, to $2,083.5 million in the first nine months of 2023 from $3,071.1 million in the first nine months of 2022.

As a percentage of net sales, cost of goods sold decreased 60 basis points during the first nine months of 2023 to 77.5% from 78.1% 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 2023 primarily as a result of (i) continued cost reduction and automation initiatives we deployed throughout 2022 and into 2023 that had a positive impact on material and labor 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 and 2023, partially offset by reduced industry volumes resulting in less favorable fixed cost absorption when compared to the prior year periods.

For the third quarter of 2023, these factors contributed to a 290 basis point decrease in material costs as a percentage of net sales and a 120 basis point decrease in labor as a percentage of net sales, partially offset by a 240 basis point increase in overhead as a percentage of net sales.

For the first nine months of 2023, these factors contributed to a 300 basis point decrease in material costs as a percentage of net sales and a 60 basis point decrease in labor as a percentage of net sales, partially offset by a 300 basis point increase in overhead 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 decreased $117.1 million, or 36%, to $210.0 million in the second quarter of 2023 from $327.1 million in the prior year period.

As a percentage of net sales, gross profit increased 60 basis points to 22.8% in the second quarter of 2023 from 22.2% in the same period in the prior year period.

Gross profit decreased $218.2 million, or 35%, to $404.2 million in the first six months of 2023 from $622.4 million in the prior year period.

As a percentage of net sales, gross profit increased 10 basis points to 22.2% in the first six months of 2023 from 22.1% in the same period in the prior year period.

The increase in gross profit as a percentage of net sales in the second quarter and first six months of 2023 compared to the same periods in 2022 reflects the impact of the factors discussed above under “Cost of Goods Sold”.

Gross profit decreased $37.4 million, or 16%, to $199.1 million in the third quarter of 2023 from $236.5 million in the prior year period.

As a percentage of net sales, gross profit increased 170 basis points to 23.0% in the third quarter of 2023 from 21.3% in the same period in the prior year period.

Gross profit decreased $255.6 million, or 30%, to $603.3 million in the first nine months of 2023 from $858.9 million in the prior year period.

As a percentage of net sales, gross profit increased 60 basis points to 22.5% in the first nine months of 2023 from 21.9% in the same period in the prior year period.

The increase in gross profit as a percentage of net sales in the third quarter and first nine months of 2023 compared to the same periods in 2022 reflects the impact of the factors discussed above under “Cost of Goods Sold”.

Warehouse and Delivery Expenses .

Warehouse and delivery expenses decreased $8.0 million, or 18%, to $36.0 million in the second quarter of 2023 from $44.0 million in the second quarter of 2022.

As a percentage of net sales, warehouse and delivery expenses increased 90 basis points to 3.9% in the second quarter of 2023 compared to 3.0% in the second quarter of 2022.

Warehouse and delivery expenses decreased $13.3 million, or 16%, to $71.9 million in the first six months of 2023 from $85.2 million in the first six months of 2022.

As a percentage of net sales, warehouse and delivery expenses increased 90 basis points to 3.9% in the first six months of 2023 compared to 3.0% in the first six months of 2022.

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

The increase as a percentage of net sales in the second quarter and first six months of 2023 as compared to the same 2022 periods is primarily attributable to increased property and casualty insurance rates and the fixed-cost nature of certain warehouse and delivery expenses.

Warehouse and delivery expenses decreased $2.3 million, or 6%, to $37.7 million in the third quarter of 2023 from $40.0 million in the third quarter of 2022.

As a percentage of net sales, warehouse and delivery expenses increased 70 basis points to 4.3% in the third quarter of 2023 compared to 3.6% in the third quarter of 2022.

Warehouse and delivery expenses decreased $15.7 million, or 13%, to $109.5 million in the first nine months of 2023 from $125.2 million in the first nine months of 2022.

As a percentage of net sales, warehouse and delivery expenses increased 90 basis points to 4.1% in the first nine months of 2023 compared to 3.2% in the first nine months of 2022.

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

The increase as a percentage of net sales in the third quarter and first nine months of 2023 as compared to the same 2022 periods is primarily attributable to increased property and casualty insurance rates, the fixed-cost nature of certain warehouse and delivery expenses, and the impact from acquisitions.

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

SG&A expenses decreased $12.0 million, or 13%, to $78.5 million in the second quarter of 2023 from $90.5 million in the prior year quarter.

As a percentage of net sales, SG&A expenses were 8.5% in the second quarter of 2023 compared to 6.1% in the second quarter of 2022.

SG&A expenses decreased $5.1 million, or 3%, to $160.9 million in the first six months of 2023 from $166.0 million in the prior year quarter.

As a percentage of net sales, SG&A expenses were 8.8% in the first six months of 2023 compared to 5.9% in the first six months of 2022.

The decrease in SG&A expenses in the second quarter and first six months of 2023 compared to 2022 is primarily attributed to decreases in incentive compensation, professional fees, and prior period adjustments to the fair value of contingent consideration, partially offset by increases in software and insurance expenditures.

As a percentage of sales, SG&A expenses increased 240 and 290 basis points for the second quarter and first six months of 2023, respectively, compared to the same periods in 2022.

SG&A expenses decreased $14.0 million, or 17%, to $70.9 million in the third quarter of 2023 from $84.9 million in the prior year quarter.

As a percentage of net sales, SG&A expenses were 8.2% in the third quarter of 2023 compared to 7.6% in the third quarter of 2022.

SG&A expenses decreased $19.2 million, or 8%, to $231.8 million in the first nine months of 2023 from $251.0 million in the prior year quarter.

As a percentage of net sales, SG&A expenses were 8.6% in the first nine months of 2023 compared to 6.4% in the first nine months of 2022.

The decrease in SG&A expenses in the third quarter and first nine months of 2023 compared to 2022 is primarily attributed to decreases in incentive compensation, professional fees, and adjustments to the fair value of contingent consideration, partially offset by increases in software and insurance expenditures.

As a percentage of sales, SG&A

expenses increased 60 basis points and 220 basis points for the third quarter and first nine months of 2023, respectively, compared to the same periods in 2022.

This increase primarily reflects 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 six months of 2022 includes a $5.5 million pre-tax gain on sale of property.

Additionally, SG&A expenses in the first nine months of 2022 include a $5.5 million pre-tax gain on sale of property, as noted above.

Amortization of Intangible Assets.

Amortization of intangible assets increased $1.3 million, or 7%, to $19.8 million in the second quarter of 2023 from $18.5 million in the prior year quarter.

Amortization of intangible assets increased $4.2 million, or 12%, to $39.6 million in the first six months of 2023 from $35.4 million in the prior year period.

The increase in the second quarter and first six months of 2023 compared to the prior year periods primarily reflects the impact of businesses acquired in 2022 and 2023.

Amortization of intangible assets increased $0.7 million, or 4%, to $19.5 million in the third quarter of 2023 from $18.8 million in the prior year quarter.

Amortization of intangible assets increased $4.9 million, or 9%, to $59.1 million in the first nine months of 2023 from $54.2 million in the prior year period.

The increase in the third quarter and first nine months of 2023 compared to the prior year periods primarily reflects the impact of businesses acquired in 2022 and 2023.

Operating Income.

Operating income decreased $98.4 million, or 57%, to $75.6 million in the second quarter of 2023 from $174.0 million in 2022.

As a percentage of net sales, operating income decreased 360 basis points to 8.2% in the second quarter of 2023 versus 11.8% in the same period in 2022.

For the first six months of 2023, operating income decreased $204.0 million, or 61%, to $131.8 million from $335.8 million in the same period in 2022.

As a percentage of net sales, operating income decreased 470 basis points to 7.2% in the first six months of 2023 versus 11.9% in the same period in 2022.

Operating income decreased $21.7 million, or 23%, to $71.1 million in the third quarter of 2023 from $92.8 million in 2022.

As a percentage of net sales, operating income decreased 10 basis points to 8.2% in the third quarter of 2023 versus 8.3% in the same period in 2022.

For the first nine months of 2023, operating income decreased $225.6 million, or 53%, to $202.9 million from $428.5 million in the same period in 2022.

As a percentage of net sales, operating income decreased 330 basis points to 7.6% in the first nine months of 2023 versus 10.9% in the same period in 2022.

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

Interest Expense, Net.

Interest expense increased $3.5 million, or 23%, to $18.3 million in the second quarter of 2023 from $14.8 million in the prior year period.

Interest expense increased $7.0 million, or 24%, to $36.7 million in the first six months of 2023 from $29.7 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, partially offset by decreases in average borrowings compared to the prior year periods.

Interest expense increased $1.6 million, or 10%, to $16.9 million in the third quarter of 2023 from $15.3 million in the prior year period.

Interest expense increased $8.6 million, or 19%, to $53.6 million in the first nine months of 2023 from $45.0 million in the prior year period.

These increases primarily reflect 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, partially offset by decreases in average borrowings compared to the prior year periods.

Income Taxes.

Income tax expense decreased $27.7 million in the second quarter of 2023 to $15.0 million from $42.7 million in the prior year period.

Income tax expense decreased $54.4 million in the first six months of 2023 to $22.5 million from $76.9 million in the prior year period.

Income tax expense decreased $4.0 million in the third quarter of 2023 to $14.6 million from $18.6 million in the prior year period.

Income tax expense decreased $58.3 million in the first nine months of 2023 to $37.2 million from $95.5 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 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.

Additionally, the first nine 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 $2.3 million and $4.0 million, respectively.

Use of Financial Metrics

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

REVIEW BY BUSINESS SEGMENT

SEGMENT REPORTING

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

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

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

Second Quarter and Six Month Ended July 2, 2023 Compared to 2022

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

Third Quarter and Nine Months Ended October 1, 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.

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

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

Second Quarter Ended

(In thousands) July 2, 2023 June 26, 2022 Amount Change % Change

A reconciliation of consolidated operating income is presented in Note 13 "Segment Information" of the Notes to Condensed Consolidated Financial Statements.

Third Quarter Ended

($ in thousands) October 1, 2023 September 25, 2022 Amount Change % Change

Manufacturing $ 659,493 $ 846,891 $ (187,398) (22)%

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Distribution $ 24,026 $ 27,228 $ (3,202) (12)%

Six Months Ended

(In thousands) July 2, 2023 June 26, 2022 Amount Change % Change

Nine Months Ended

($ in thousands) October 1, 2023 September 25, 2022 Amount Change % Change

Manufacturing $ 2,072,599 $ 2,954,420 $ (881,821) (30)%

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Manufacturing

Sales decreased $404.6 million, or 36%, to $704.3 million in the second quarter of 2023 from $1,108.9 million in the prior year quarter.

For the first six months of 2023, sales decreased $694.4 million, or 33%, to $1,413.1 million from $2,107.5 million in the prior year period.

This segment accounted for approximately 75% and 74% of the Company’s sales for the second quarter of 2023 and 2022, respectively, and 76% and 74% of the Company's sales for the first six months of 2023 and 2022, respectively.

The sales decrease in the second quarter of 2023 compared to 2022 was attributed to sales decreases in each of the Company's four end-markets due to reduced industry wholesale unit shipments in the RV, marine and MH industries and previous slowing of housing starts, partially offset by acquisitions completed in 2022 and 2023.

For the second quarter of 2023 compared to the same prior year period, the Company's RV end-market sales decreased 56%, the marine end-market sales decreased 8% , the MH end-market sales decreased 34% and industrial end-market sales decreased 15%.

For the first six months of 2023 compared to the same prior year period, the Company's RV end-market sales decreased 56%, the marine end-market sales increased 7%, the MH end-market sales decreased 30% and industrial end-market sales decreased 9%.

Net sales in the second quarter and first six months of 2022 attributable to acquisitions completed in the first six months of 2022 were approximately $40.8 million and $49.2 million, respectively.

Sales decreased $187.4 million, or 22%, to $659.5 million in the third quarter of 2023 from $846.9 million in the prior year quarter.

For the first nine months of 2023, sales decreased $881.8 million, or 30%, to $2,072.6 million from $2,954.4 million in the prior year period.

The manufacturing segment accounted for approximately 74% and 75% of the Company’s sales for the third quarter of 2023 and 2022, respectively, and 76% and 74% of the Company's sales for the first nine months of 2023 and 2022, respectively.

The sales decrease in the third quarter of 2023 compared to 2022 was attributed to sales decreases in each of the Company's four end markets due to reduced industry wholesale unit shipments in the RV, marine and MH industries and slowing of housing starts, partially offset by acquisitions completed in 2022 and 2023.

For the third quarter of 2023 compared to the same prior year period, the Company's RV end market sales decreased 23%, the marine end market sales decreased 25% , the MH end market sales decreased 22% and industrial end market sales decreased 18%.

For the first nine months of 2023 compared to the same prior year period, the Company's RV end market sales decreased 48%, the marine end market sales decreased 4%, the MH end market sales decreased

27% and industrial end market sales decreased 12%.

Net sales attributable to acquisitions completed in the first nine months of 2023 were approximately $1.6 million for both the third quarter and the first nine months of 2023.

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

Gross Profit .

Gross profit decreased $97.6 million, or 38%, to $161.6 million in the second quarter of 2023 from $259.2 million in the second quarter of 2022.

For the first six months of 2023, gross profit decreased $178.8 million, or 36%, to $316.7 million from $495.5 million in the first six months of 2022.

As a percentage of sales, gross profit decreased to 22.9% in the second quarter of 2023 from 23.4% in the second quarter of 2022, and decreased to 22.4% in the first six months of 2023 from 23.5% in the first six months of 2022.

Gross profit as a percentage of sales decreased during the second quarter of 2023 compared to second quarter of 2022 due to a 430 basis point increase in manufacturing overhead as a percentage of sales and a 130 basis point increase in manufacturing labor as a percentage of sales, partially offset by a 510 basis point decrease in manufacturing material expense as a percentage of sales.

Gross profit as a percentage of sales decreased during the first six months of 2023 compared to first six months of 2022 due to a 420 basis point increase in manufacturing overhead as a percentage of sales and a 120 basis point increase in manufacturing labor as a percentage of sales, partially offset by a 430 basis point decrease in manufacturing material expense as a percentage of sales.

Gross profit decreased $38.2 million, or 21%, to $144.2 million in the third quarter of 2023 from $182.4 million in the third quarter of 2022.

For the first nine months of 2023, gross profit decreased $217.1 million, or 32%, to $460.8 million from $677.9 million in the first nine months of 2022.

As a percentage of sales, gross profit increased to 21.9% in the third quarter of 2023 from 21.5% in the third quarter of 2022, and decreased to 22.2% in the first nine months of 2023 from 22.9% in the first nine months of 2022.

Gross profit as a percentage of sales increased during the third quarter compared to the same period in 2022 due to decrease in manufacturing material cost as a percentage of sales, partially offset by increases in manufacturing overhead and labor costs as a percentage of sales.

Gross profit as a percentage of sales decreased during the first nine months of 2023 compared to the same period in 2022 due to an increase in manufacturing overhead and labor costs as a percentage of sales, partially offset by a decrease in manufacturing material costs as a percentage of sales.

These fluctuations are a result of changes in certain commodity input costs, reduced sales volumes, and differing cost and margin profiles of acquisitions completed in 2022 and 2023.

Operating Income.

Operating income decreased $85.5 million, or 47%, to $95.2 million in the second quarter of 2023 from $180.7 million in the prior year quarter.

For the first six months of 2023, operating income decreased $168.8 million, or 48%, to $182.4 million from $351.2 million in the first six months of 2022.

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

Sales decreased $158.9 million, or 40%, to $234.7 million in the second quarter of 2023 from $393.6 million in the prior year quarter.

For the first six months of 2023, sales decreased $314.5 million, or 41%, to $444.9 million from $759.4 million in the prior year period.

This segment accounted for approximately 25% and 26% of the Company’s sales for the second quarter of 2023 and 2022, respectively, and 24% and 26% of the Company's sales for the first six months of 2023 and 2022, respectively.

The sales decrease in the second quarter of 2023 compared to the second quarter of 2022 was attributed to a 51% 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 27% decrease in industrial sales, and a 1% decrease in marine market sales.

The sales decrease in the first six months of 2023 compared to the first six months of 2022 was attributed to a 53% 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 18% decrease in industrial sales, partially offset by a 4% increase in marine market sales.

Net sales in the second quarter and first six months of 2023 attributable to acquisitions completed in the first six months of 2023 was approximately $2.3 million.

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

Operating income decreased $28.7 million, or 26%, to $80.8 million in the third quarter of 2023 from $109.5 million in the prior year quarter.

For the first nine months of 2023, operating income decreased $197.6 million, or 43%, to $263.1 million from $460.7 million in the first nine months of 2022.

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

Sales decreased $59.6 million, or 21%, to $226.9 million in the third quarter of 2023 from $286.5 million in the prior year quarter.

For the first nine months of 2023, sales decreased $374.1 million, or 36%, to $671.8 million from $1,045.9 million in the prior year period.

This segment accounted for approximately 26% and 25% of the Company’s sales for the third quarter of 2023 and 2022, respectively, and 24% and 26% of the Company's sales for the first nine months of 2023 and 2022, respectively.

The sales decrease in the third quarter of 2023 compared to the third quarter of 2022 was attributed to a 25% decrease in our RV end-market sales and a 12% decrease in MH end-market sales as a result of reduced industry wholesale unit shipments in the respective industries, as well as a 35% decrease in industrial end-market sales, and a 18% decrease in marine end-market sales.

The sales decrease in the first nine months of 2023 compared to the first nine months of 2022 was attributed to a 46% decrease in our RV end-market sales and a 19% decrease in MH end-market sales as a result of reduced industry wholesale unit shipments in the respective industries, as well as a 24% decrease in industrial end-market sales, partially offset by a 3% increase in marine end-market sales.

Net sales in the third quarter and first nine months of 2023 attributable to acquisitions completed in the first nine months of 2023 was approximately $5.7 million and $8.2 million, respectively.

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.

Gross Profit.

Gross profit decreased $23.1 million, or 30%, to $52.5 million in the second quarter of 2023 from $75.6 million in the second quarter of 2022.

For the first six months of 2023, gross profit decreased $54.7 million, or 36%, to $96.6 million from $151.3 million in the first six months of 2022.

As a percentage of sales, gross profit increased to 22.4% in the second quarter of 2023 from 19.2% in the second quarter of 2022, and increased to 21.7% in the first six months of 2023 from 19.9% in the first six months of 2022.

Gross profit as a percentage of sales increased during the second quarter of 2023 compared to second quarter of 2022 primarily due to a 500 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 180 basis point increase in distribution material expense as a percentage of sales as a result of increased material costs.

Gross profit as a percentage of sales increased during the first six months of 2023 compared to the first six months of 2022 primarily due to a 390 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 210 basis point increase in distribution material expense as a percentage of sales as a result of increased material costs.

Gross profit decreased $6.0 million, or 11%, to $50.2 million in the third quarter of 2023 from $56.2 million in the third quarter of 2022.

For the first nine months of 2023, gross profit decreased $60.7 million, or 29%, to $146.8 million from $207.5 million in the first nine months of 2022.

As a percentage of sales, gross profit increased to 22.1% in the third quarter of 2023 from 19.6% in the third quarter of 2022, and increased to 21.9% in the first nine months of 2023 from 19.8% in the first nine months of 2022.

Gross profit as a percentage of sales increased during the third quarter and first nine months of 2023 compared to the same periods in 2022 primarily due to a decrease in distribution labor as a percentage of sales, attributable to a decrease in utilization of outsourced labor, partially offset by increased material costs.

Operating Income.

Operating income decreased $17.8 million, or 41%, to $25.8 million in the second quarter of 2023 from $43.6 million in the prior year quarter.

For the first six months of 2023, operating income decreased $45.5 million, or 51%, to $44.1 million from $89.6 million in the first six months of 2022.

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

Operating income decreased $3.2 million, or 12%, to $24.0 million in the third quarter of 2023 from $27.2 million in the prior year quarter.

For the first nine months of 2023, operating income decreased $48.6 million, or 42%, to $68.2 million from $116.8 million in the first nine months of 2022.

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

LIQUIDITY AND CAPITAL RESOURCES

Our liquidity at July 2, 2023 consisted of cash and cash equivalents of $33.9 million and $573.0 million of availability under our credit facility.

Our liquidity at October 1, 2023 consisted of cash and cash equivalents of $16.5 million and $683.1 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 $178.4 million in the first six months of 2023 compared to $74.3 million in the first six months of 2022.

The change in operating cash flows is primarily attributable to a $23.4 million source of cash from working capital working compared to a $227.7 million use of cash in the prior year period, partially offset by a $156.7 million reduction in net income.

Net cash provided by operating activities was $293.8 million in the first nine months of 2023 compared to $229.8 million in the first nine months of 2022.

The change in operating cash flows is primarily attributable to a $56.1 million source of cash from working capital compared to a $170.8 million use of cash in the prior year period, partially offset by a $175.9 million reduction in net income.

Investing Activities

Net cash used in investing activities decreased $122.1 million to $65.5 million in the first six months of 2023 from $187.6 million in the first six months of 2022 primarily due to a decrease in cash used in business acquisitions of $123.6 million.

Net cash used in investing activities decreased $133.4 million to $75.5 million in the first nine months of 2023 from $208.9 million in the first nine months of 2022 primarily due to a decrease in cash used in business acquisitions of $126.9 million.

Financing Activities

Net cash used in financing activities was $101.7 million in the first six months of 2023 compared to net cash provided by financing activities of $67.4 million in the first six months of 2022.

In the first six months of 2023, revolver and term loan repayments and the repayment of our 1.00% Convertible Senior Notes due 2023 at maturity, net of borrowings under our revolving credit facility, were $61.5 million, compared to borrowings under our revolving credit facility, net of revolver and term loan repayments, of $138.1 million in the first six months of 2022.

In addition, there was a $28.6 million decrease in stock repurchases in the first six months of 2023 compared to the prior year period.

Net cash used in financing activities was $224.8 million in the first nine months of 2023 compared to $90.5 million used in the first nine months of 2022.

In the first nine months of 2023, revolver and term loan repayments and the repayment of our 1.00% Convertible Senior Notes due 2023 at maturity, net of borrowings under our revolving credit facility, were $173.4 million, compared to net repayments on our revolver and term loan of $3.8 million in the first nine months of 2022.

This increase in outflows was partially offset by a $34.8 million decrease in stock repurchases in the first nine months of 2023 compared to the prior year period.

Summary of Liquidity and Capital Resources

At July 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.

At October 1, 2023, the Company's existing cash and cash equivalents, cash generated from operations, and available borrowing capacity 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 July 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 July 2, 2023 and for the fiscal period then ended are as follows:

As of and for the reporting period ended October 1, 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 October 1, 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 2.88

In addition, as of July 2, 2023, the Company's consolidated total net leverage ratio (12-month period) was 2.60, which is used to determine the applicable borrowing margin under the 2021 Credit Agreement.

In addition, as of October 1, 2023, the Company's consolidated total net leverage ratio (12-month period) was 2.50, 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, marine, MH, and industrial markets we serve, the timing of deliveries, and the payment cycles of customers.

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RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

There have been no new accounting pronouncements issued but not yet adopted or effective that we believe will have a significant impact on our consolidated financial statements.

See Note 2, “Summary of Significant Accounting Policies” to the accompanying condensed consolidated financial statements in Item 1.

CRITICAL ACCOUNTING POLICIES

There have been no material changes to our critical accounting policies which are summarized in the MD&A in our Annual Report on Form 10-K for the year ended December 31, 2022.

There have been no material changes to our critical accounting policies which are summarized in the MD&A in our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC on February 24, 2023.

Manufacturing operations in the RV, marine and MH industries historically have been seasonal and at their highest levels when the weather is moderate.

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

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

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

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

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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