PATRICK INDUSTRIES INC 10-Q

ITEM 1. FINANCIAL STATEMENTS PATRICK INDUSTRIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Third Quarter Ended Nine Months Ended ($ in thousands, except per share data) October 1, 2023 September 25, 2022 October 1, 2023 September 25, 2022 NET SALES $ 866,073 $ 1,112,089 $ 2,686,858 $ 3,929,957 Cost of goods sold 666,954 875,638 2,083,527 3,071,057 GROSS PROFIT 199,119 236,451 603,331 858,900 Operating expenses: Warehouse and delivery 37,664 39,997 109,540 125,213 Selling, general and administrative 70,873 84,924 231,814 250,969 Amortization of intangible assets 19,507 18,769 59,093 54,175 Total operating expenses 128,044 143,690 400,447 430,357 OPERATING INCOME 71,075 92,761 202,884 428,543 Interest expense, net 16,879 15,302 53,623 44,990 Income before income taxes 54,196 77,459 149,261 383,553 Income taxes 14,646 18,640 37,181 95,537 NET INCOME $ 39,550 $ 58,819 $ 112,080 $ 288,016 BASIC EARNINGS PER COMMON SHARE $ 1.84 $ 2.66 $ 5.20 $ 12.93 DILUTED EARNINGS PER COMMON SHARE $ 1.81 $ 2.43 $ 5.09 $ 11.78 Weighted average shares outstanding – Basic 21,511 22,087 21,541 22,274 Weighted average shares outstanding – Diluted 21,884 24,413 22,063 24,573 See accompanying Notes to Condensed Consolidated Financial Statements. 3 PATRICK INDUSTRIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) Third Quarter Ended Nine Months Ended ($ in thousands) October 1, 2023 September 25, 2022 October 1, 2023 September 25, 2022 NET INCOME $ 39,550 $ 58,819 $ 112,080 $ 288,016 Other comprehensive income, net of tax: Unrealized gain of hedge derivatives — — — 757 Foreign currency translation loss ( 10 ) ( 118 ) ( 109 ) ( 164 ) Total other comprehensive income (loss) ( 10 ) ( 118 ) ( 109 ) 593 COMPREHENSIVE INCOME $ 39,540 $ 58,701 $ 111,971 $ 288,609 See accompanying Notes to Condensed Consolidated Financial Statements. 4 PATRICK INDUSTRIES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) As of ($ in thousands) October 1, 2023 December 31, 2022 ASSETS Current Assets Cash and cash equivalents $ 16,450 $ 22,847 Trade and other receivables, net 240,850 172,890 Inventories 517,657 667,841 Prepaid expenses and other 36,296 46,326 Total current assets 811,253 909,904 Property, plant and equipment, net 358,266 350,572 Operating lease right-of-use assets 170,128 163,674 Goodwill 637,393 629,263 Intangible assets, net 670,763 720,230 Other non-current assets 8,140 8,828 TOTAL ASSETS $ 2,655,943 $ 2,782,471 LIABILITIES AND SHAREHOLDERS’ EQUITY Current Liabilities Current maturities of long-term debt $ 7,500 $ 7,500 Current operating lease liabilities 47,262 44,235 Accounts payable 148,239 142,910 Accrued liabilities 132,813 172,595 Total current liabilities 335,814 367,240 Long-term debt, less current maturities, net 1,104,618 1,276,149 Long-term operating lease liabilities 126,231 122,471 Deferred tax liabilities, net 47,390 48,392 Other long-term liabilities 10,587 13,050 TOTAL LIABILITIES 1,624,640 1,827,302 SHAREHOLDERS’ EQUITY Common stock 201,680 197,003 Accumulated other comprehensive loss ( 804 ) ( 695 ) Retained earnings 830,427 758,861 TOTAL SHAREHOLDERS’ EQUITY 1,031,303 955,169 TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 2,655,943 $ 2,782,471 See accompanying Notes to Condensed Consolidated Financial Statements. 5 PATRICK INDUSTRIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Nine Months Ended ($ in thousands) October 1, 2023 September 25, 2022 CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 112,080 $ 288,016 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 107,976 96,256 Stock-based compensation expense 13,675 15,596 Amortization of convertible notes debt discount 823 1,399 (Gain) loss on sale of property, plant and equipment 242 ( 5,713 ) Other non-cash items 2,959 5,049 Change in operating assets and liabilities, net of acquisitions of businesses: Trade and other receivables, net ( 68,114 ) ( 92,199 ) Inventories 154,634 ( 85,091 ) Prepaid expenses and other assets 9,098 31,058 Accounts payable, accrued liabilities and other ( 39,543 ) ( 24,563 ) Net cash provided by operating activities 293,830 229,808 CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property, plant and equipment ( 47,430 ) ( 63,437 ) Proceeds from sale of property, plant and equipment 946 7,441 Business acquisitions, net of cash acquired ( 26,009 ) ( 152,888 ) Purchases of intangible assets ( 2,970 ) — Net cash used in investing activities ( 75,463 ) ( 208,884 ) CASH FLOWS FROM FINANCING ACTIVITIES Term debt repayments ( 5,625 ) ( 3,750 ) Borrowings on revolver 482,194 703,402 Repayments on revolver ( 477,482 ) ( 703,402 ) Repayments of convertible notes ( 172,500 ) — Stock repurchases under buyback program ( 12,230 ) ( 46,984 ) Cash dividends paid to shareholders ( 30,260 ) ( 23,007 ) Taxes paid for share-based payment arrangements ( 8,762 ) ( 10,036 ) Payment of deferred financing costs and other — ( 2,142 ) Payment of contingent consideration from a business acquisition ( 1,430 ) ( 4,780 ) Proceeds from exercise of common stock options 1,413 195 Other financing activities ( 82 ) — Net cash used in financing activities ( 224,764 ) ( 90,504 ) Decrease in cash and cash equivalents ( 6,397 ) ( 69,580 ) Cash and cash equivalents at beginning of year 22,847 122,849 Cash and cash equivalents at end of period $ 16,450 $ 53,269 See accompanying Notes to Condensed Consolidated Financial Statements. 6 PATRICK INDUSTRIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited) Third Quarter Ended October 1, 2023 ($ in thousands) Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Loss Retained Earnings Total Balance July 2, 2023 $ 196,912 $ — $ ( 794 ) $ 801,304 $ 997,422 Net income — — — 39,550 39,550 Dividends declared — — — ( 10,021 ) ( 10,021 ) Other comprehensive loss, net of tax — — ( 10 ) — ( 10 ) Stock repurchases under buyback program ( 54 ) — — ( 406 ) ( 460 ) Repurchases of shares for tax payments related to the vesting and exercising of share-based grants ( 1,177 ) — — — ( 1,177 ) Issuance of shares upon exercise of common stock options 270 — — — 270 Stock-based compensation expense 5,729 — — — 5,729 Balance October 1, 2023 $ 201,680 $ — $ ( 804 ) $ 830,427 $ 1,031,303 Third Quarter Ended September 25, 2022 ($ in thousands) Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Loss Retained Earnings Total Balance June 26, 2022 $ 191,295 $ — $ ( 1,517 ) $ 707,812 $ 897,590 Net income — — — 58,819 58,819 Dividends declared — — — ( 7,540 ) ( 7,540 ) Other comprehensive loss, net of tax — — ( 118 ) — ( 118 ) Stock repurchases under buyback program ( 1,293 ) — — ( 6,147 ) ( 7,440 ) Repurchase of shares for tax payments related to the vesting and exercising of share-based grants ( 1 ) — — — ( 1 ) Issuance of shares upon exercise of common stock options 14 — — — 14 Stock-based compensation expense 5,352 — — — 5,352 Balance September 25, 2022 $ 195,367 $ — $ ( 1,635 ) $ 752,944 $ 946,676 7 Nine Months Ended October 1, 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 — — — 112,080 112,080 Dividends declared — — — ( 29,927 ) ( 29,927 ) Other comprehensive loss, net of tax — — ( 109 ) — ( 109 ) Share repurchases under buyback program ( 1,649 ) — — ( 10,587 ) ( 12,236 ) Repurchases of shares for tax payments related to the vesting and exercise of share-based grants ( 8,762 ) — — — ( 8,762 ) Issuance of shares upon exercise of common stock options 1,413 — — — 1,413 Stock-based compensation expense 13,675 — — — 13,675 Balance October 1, 2023 $ 201,680 $ — $ ( 804 ) $ 830,427 $ 1,031,303 Nine Months Ended September 25, 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 — — — 288,016 288,016 Dividends declared — — — ( 22,803 ) ( 22,803 ) Other comprehensive income, net of tax — — 593 — 593 Share repurchases under buyback program ( 6,771 ) — — ( 41,978 ) ( 48,749 ) Repurchases of shares for tax payments related to the vesting and exercise of share-based grants ( 10,036 ) — — — ( 10,036 ) Issuance of shares upon exercise of common stock options 195 — — — 195 Stock-based compensation expense 15,596 — — — 15,596 Balance September 25, 2022 $ 195,367 $ — $ ( 1,635 ) $ 752,944 $ 946,676 See accompanying Notes to Condensed Consolidated Financial Statements. 8 PATRICK INDUSTRIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 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 October 1, 2023 and December 31, 2022, its results of operations for the third quarter and nine months ended October 1, 2023 and September 25, 2022, and its cash flows for the nine months ended October 1, 2023 and September 25, 2022. Patrick's unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("U.S. GAAP"). The accompanying unaudited condensed consolidated financial statements for Patrick do not include all of the information and notes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) and disclosures considered necessary for a fair presentation have been included. For further information, refer to Patrick’s Audited Consolidated Financial Statements for the year ended December 31, 2022, and corresponding notes in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC on February 24, 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 third quarter of fiscal year 2023 ended on October 1, 2023 and the third quarter of fiscal year 2022 ended on September 25, 2022. NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A summary of significant accounting policies is included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC on February 24, 2023 New Accounting Standards Changes to U.S. GAAP are established by the Financial Accounting Standards Board (“FASB”) in the form of Accounting Standards Updates (“ASUs”) to the FASB’s Accounting Standards Codification. The Company considers the applicability and impact of all ASUs. ASUs not listed below were assessed and determined to be either not applicable or are expected to have an immaterial impact on the Company’s unaudited condensed consolidated financial statements. Accounting Pronouncements Not Yet Adopted In October 2023, the FASB issued ASU 2023-06, "Disclosure Improvements." The amendments in this update modify the disclosure or presentation requirements of a variety of topics in the codification. Certain of the amendments represent clarifications to or technical corrections of the current requirements. The amendments in this ASU are effective for public business entities for interim periods beginning after June 30, 2027. The Company is currently evaluating the impacts of the provisions of ASU 2023-06. 9 NOTE 3. REVENUE RECOGNITION In the following table, revenue from contracts with customers, net of intersegment sales, is disaggregated by market type and by reportable segment: Third Quarter Ended October 1, 2023 ($ in thousands) Manufacturing Distribution Total Market type: Recreational Vehicle $ 273,804 $ 126,300 $ 400,104 Marine 193,066 12,148 205,214 Manufactured Housing 66,671 79,030 145,701 Industrial 107,644 7,410 115,054 Total $ 641,185 $ 224,888 $ 866,073 Third Quarter Ended September 25, 2022 ($ in thousands) Manufacturing Distribution Total Market type: Recreational Vehicle $ 355,791 $ 167,784 $ 523,575 Marine 256,357 14,768 271,125 Manufactured Housing 85,767 89,676 175,443 Industrial 130,495 11,451 141,946 Total $ 828,410 $ 283,679 $ 1,112,089 Nine Months Ended October 1, 2023 ($ in thousands) Manufacturing Distribution Total Market type: Recreational Vehicle $ 780,993 $ 369,643 $ 1,150,636 Marine 705,399 44,160 749,559 Manufactured Housing 196,179 226,919 423,098 Industrial 339,108 24,457 363,565 Total $ 2,021,679 $ 665,179 $ 2,686,858 Nine Months Ended September 25, 2022 ($ in thousands) Manufacturing Distribution Total Market type: Recreational Vehicle $ 1,501,151 $ 680,463 $ 2,181,614 Marine 736,854 45,568 782,422 Manufactured Housing 269,773 279,625 549,398 Industrial 384,216 32,307 416,523 Total $ 2,891,994 $ 1,037,963 $ 3,929,957 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. 10 NOTE 4. INVENTORY Inventories consist of the following: ($ in thousands) October 1, 2023 December 31, 2022 Raw materials $ 276,681 $ 348,670 Work in process 19,635 22,630 Finished goods 107,840 141,516 Less: reserve for inventory obsolescence ( 20,297 ) ( 14,059 ) Total manufactured goods, net 383,859 498,757 Materials purchased for resale (distribution products) 142,394 175,061 Less: reserve for inventory obsolescence ( 8,596 ) ( 5,977 ) Total materials purchased for resale (distribution products), net 133,798 169,084 Total inventories $ 517,657 $ 667,841 NOTE 5. GOODWILL AND INTANGIBLE ASSETS Changes in the carrying amount of goodwill for the nine months ended October 1, 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 2,008 217 2,225 Balance - October 1, 2023 $ 560,370 $ 77,023 $ 637,393 Intangible assets, net consist of the following as of October 1, 2023 and December 31, 2022: ($ in thousands) October 1, 2023 December 31, 2022 Customer relationships $ 729,764 $ 722,503 Non-compete agreements 21,561 20,412 Patents 69,310 69,164 Trademarks 197,027 195,957 Intangible assets, gross 1,017,662 1,008,036 Less: accumulated amortization ( 346,899 ) ( 287,806 ) Intangible assets, net $ 670,763 $ 720,230 Changes in the carrying value of intangible assets for the nine months ended October 1, 2023 by segment are as follows: ($ in thousands) Manufacturing Distribution Total Balance - December 31, 2022 $ 622,647 $ 97,583 $ 720,230 Additions 2,970 11,100 14,070 Amortization ( 50,905 ) ( 8,188 ) ( 59,093 ) Adjustments to preliminary purchase price allocations ( 4,359 ) ( 85 ) ( 4,444 ) Balance - October 1, 2023 $ 570,353 $ 100,410 $ 670,763 11 NOTE 6. ACQUISITIONS General 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 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. The Company completed three acquisitions in the first nine months of 2023 (the "2023 Acquisitions"). For the third quarter and nine months ended October 1, 2023, net sales included in the Company's condensed consolidated statements of income related to the 2023 Acquisitions were $ 7.3 million and $ 9.8 million, respectively, and operating income was $( 0.1 ) million and $ 0.1 million, respectively. 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 three acquisitions in the first nine months of 2022. For the third quarter and nine months ended September 25, 2022, net sales included in the Company's condensed consolidated statements of income related to the acquisitions completed in the first nine months 2022 were $ 38.0 million and $ 87.3 million, respectively, and operating income was $ 6.9 million and $ 15.9 million, respectively. Contingent Consideration In connection with certain acquisitions, the Company is required to pay additional cash consideration if certain financial results of the acquired businesses are achieved. 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 nine months ended October 1, 2023 are as follows: ($ in thousands) Balance - December 31, 2022 $ 9,213 Additions 3,590 Fair value adjustments (1) 1,000 Settlements ( 5,180 ) Balance - October 1, 2023 $ 8,623 (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 nine months of 2023. 12 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 October 1, 2023 and December 31, 2022: ($ in thousands) October 1, 2023 December 31, 2022 Accrued liabilities $ 7,583 $ 5,250 Other long-term liabilities 1,040 3,963 Total fair value of contingent consideration $ 8,623 $ 9,213 Maximum amount of contingent consideration $ 10,167 $ 10,747 2023 Acquisitions The Company completed three acquisitions in the first nine months ended October 1, 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 operates 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 third quarter and nine months ended October 1, 2023 related to the 2023 Acquisitions were immaterial. 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 $ 248.1 million, plus contingent consideration over a one to two-year period based on future performance in connection with certain acquisitions. Purchase price allocations and all valuation activities in connection with the 2022 Acquisitions have been finalized, and adjustments made during the year related to changes in the preliminary purchase price allocation recorded in all periods related to the 2022 Acquisitions were immaterial and relate primarily to the valuation of intangible and fixed assets. 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 $ 94,705 $ 20,832 $ 248,094 Working capital holdback and other, net ( 10 ) — — ( 20 ) ( 20 ) Contingent consideration (1) 3,500 — — 1,840 1,840 Total consideration $ 29,849 $ 132,557 $ 94,705 $ 22,652 $ 249,914 Assets Acquired Trade receivables $ 570 $ 20,640 $ 4,880 $ 904 $ 26,424 Inventories 4,407 32,744 8,732 2,352 43,828 Prepaid expenses & other 190 1,325 164 128 1,617 Property, plant & equipment 10,149 4,681 8,086 1,464 14,231 Operating lease right-of-use assets 1,044 2,917 1,435 599 4,951 Identifiable intangible assets Customer relationships 10,370 58,000 30,970 7,055 96,025 Non-compete agreements 430 500 — 310 810 Patents — 7,500 9,500 — 17,000 Trademarks — 17,000 8,080 1,310 26,390 Liabilities Assumed Current portion of operating lease obligations ( 262 ) ( 512 ) ( 289 ) ( 273 ) ( 1,074 ) Accounts payable & accrued liabilities ( 472 ) ( 24,521 ) ( 3,336 ) ( 1,291 ) ( 29,148 ) Operating lease obligations ( 782 ) ( 2,405 ) ( 1,146 ) ( 326 ) ( 3,877 ) Deferred tax liabilities — ( 19,930 ) ( 12,684 ) — ( 32,614 ) Total fair value of net assets acquired 25,644 97,939 54,392 12,232 164,563 Goodwill (2) 5,905 34,618 40,313 10,420 85,351 Bargain purchase gain (3) ( 1,700 ) — — — — $ 29,849 $ 132,557 $ 94,705 $ 22,652 $ 249,914 (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 $ 74.9 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 third quarter and nine months ended October 1, 2023 and September 25, 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 $ 0.0 million and $ 0.4 million, respectively, for the third quarter and nine months ended October 1, 2023, and $ 1.0 million and $ 5.1 million, respectively, for the third quarter and nine months ended September 25, 2022. Third Quarter Ended Nine Months Ended ($ in thousands, except per share data) October 1, 2023 September 25, 2022 October 1, 2023 September 25, 2022 Revenue $ 866,073 $ 1,124,619 $ 2,702,753 $ 4,029,451 Net income $ 39,550 $ 59,023 $ 112,876 $ 292,824 Basic earnings per common share $ 1.84 $ 2.67 $ 5.24 $ 13.15 Diluted earnings per common share $ 1.81 $ 2.44 $ 5.12 $ 11.97 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. NOTE 7. STOCK-BASED COMPENSATION The Company's Board of Directors (the "Board") approved various stock-based grants under the Company’s 2009 Omnibus Incentive Plan in the nine months ended October 1, 2023 totaling 330,359 shares in the aggregate at an average fair value of $ 56.28 at grant date for a total fair value at grant date of $ 18.6 million. The Company recorded expense, net of forfeitures, of approximately $ 5.8 million and $ 13.7 million in the third quarter and nine months ended October 1, 2023, respectively, for its stock-based compensation plans in the condensed consolidated statements of income. Stock-based compensation expense of $ 5.4 million and $ 15.6 million was recorded in the third quarter and nine months ended September 25, 2022, respectively. As of October 1, 2023, there was approximately $ 24.1 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 12.4 months. 15 NOTE 8. EARNINGS PER COMMON SHARE Earnings per common share calculated for the third quarter and first nine months of 2023 and 2022 is as follows: Third Quarter Ended Nine Months Ended ($ in thousands, except per share data) October 1, 2023 September 25, 2022 October 1, 2023 September 25, 2022 Numerator: Earnings for basic earnings per common share calculation $ 39,550 $ 58,819 $ 112,080 $ 288,016 Effect of interest on potentially dilutive convertible notes, net of tax — 478 162 1,417 Earnings for diluted earnings per common share calculation $ 39,550 $ 59,297 $ 112,242 $ 289,433 Denominator: Weighted average common shares outstanding - basic 21,511 22,087 21,541 22,274 Weighted average impact of potentially dilutive convertible notes — 2,064 221 2,053 Weighted average impact of potentially dilutive securities 373 262 301 246 Weighted average common shares outstanding - diluted 21,884 24,413 22,063 24,573 Earnings per common share: Basic earnings per common share $ 1.84 $ 2.66 $ 5.20 $ 12.93 Diluted earnings per common share $ 1.81 $ 2.43 $ 5.09 $ 11.78 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 the periods presented. NOTE 9. DEBT A summary of total debt outstanding at October 1, 2023 and December 31, 2022 is as follows: ($ in thousands) October 1, 2023 December 31, 2022 Long-term debt: 1.00 % convertible notes due 2023 $ — $ 172,500 Term loan due 2027 131,250 136,875 Revolver due 2027 85,000 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 1,125,000 1,298,414 Less: convertible notes debt discount, net ( 5,166 ) ( 5,989 ) Less: term loan deferred financing costs, net ( 587 ) ( 701 ) Less: senior notes deferred financing costs, net ( 7,129 ) ( 8,075 ) Less: current maturities of long-term debt ( 7,500 ) ( 7,500 ) Total long-term debt, less current maturities, net $ 1,104,618 $ 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 October 1, 2023 was the Secured Overnight Financing Rate (“SOFR”) plus 1.75 % (or 7.17 %) for the SOFR-based option. The fee payable on committed but unused portions of the Revolver due 2027 was 0.23 % at October 1, 2023. Total cash interest paid for the third quarter of 2023 and 2022 was $ 8.1 million and $ 3.8 million, respectively, and $ 40.8 million and $ 30.9 million for the comparative nine months periods, respectively. NOTE 10. LEASES Lease expense, supplemental cash flow information, and other information related to leases were as follows: Third Quarter Ended Nine Months Ended ($ in thousands) October 1, 2023 September 25, 2022 October 1, 2023 September 25, 2022 Operating lease cost $ 14,350 $ 12,801 $ 41,602 $ 37,528 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows for operating leases $ 14,253 $ 12,673 $ 41,286 $ 36,909 Right-of-use assets obtained in exchange for lease obligations: Operating leases $ 14,078 $ 10,297 $ 45,420 $ 40,029 Balance sheet information related to leases was as follows: ($ in thousands, except lease term and discount rate) October 1, 2023 December 31, 2022 Assets Operating lease right-of-use assets $ 170,128 $ 163,674 Liabilities Operating lease liabilities, current portion $ 47,262 $ 44,235 Long-term operating lease liabilities 126,231 122,471 Total lease liabilities $ 173,493 $ 166,706 Weighted average remaining lease term, operating leases (in years) 4.8 5.1 Weighted average discount rate, operating leases 5.1 % 4.4 % 17 Maturities of lease liabilities were as follows at October 1, 2023: ($ in thousands) 2023 (excluding the nine months ended October 1, 2023) $ 14,289 2024 52,997 2025 43,322 2026 32,346 2027 19,684 Thereafter 35,136 Total lease payments 197,774 Less imputed interest ( 24,281 ) Total $ 173,493 As of October 1, 2023, outstanding leases have remaining lease terms ranging from one year to 16 years. The Company has additional operating leases that have not yet commenced as of October 1, 2023 and, therefore, were not included as operating right-of-use assets and corresponding operating lease liabilities on our condensed consolidated balance sheet at October 1, 2023. These operating leases are anticipated to commence in the first quarter of fiscal 2024 with lease terms of five 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 $ 2.8 million. NOTE 11. FAIR VALUE MEASUREMENTS The following table presents fair values of certain assets and liabilities at October 1, 2023 and December 31, 2022: October 1, 2023 December 31, 2022 ($ in millions) Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 Cash equivalents (1) $ 7.1 $ — $ — $ 15.2 $ — $ — 7.50 % senior notes due 2027 (2) $ — $ 288.1 $ — $ — $ 293.9 $ — 4.75 % senior notes due 2029 (2) $ — $ 292.6 $ — $ — $ 293.8 $ — 1.00 % convertible notes due 2023 (2) $ — $ — $ — $ — $ 172.0 $ — 1.75 % convertible notes due 2028 (2) $ — $ 247.2 $ — $ — $ 219.9 $ — Term loan due 2027 (3) $ — $ 131.3 $ — $ — $ 136.9 $ — Revolver due 2027 (3) $ — $ 85.0 $ — $ — $ 80.3 $ — Contingent consideration (4) $ — $ — $ 8.6 $ — $ — $ 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 October 1, 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 October 1, 2023 and December 31, 2022 using the interest rate method. Repayment of the 1.00 % Convertible Notes at maturity is discussed further in Note 9 "Debt". (3) The carrying amounts of our Term loan due 2027 and Revolver due 2027 approximate fair value as of October 1, 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 6 "Acquisitions". NOTE 12. INCOME TAXES The effective tax rate in the third quarter of 2023 and 2022 was 27.0 % and 24.1 %, respectively, and the effective tax rate for the comparable nine months periods was 24.9 % and 24.9 %, respectively. The first nine months of 2023 and 2022 18 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. Cash paid for income taxes, net of refunds, was $ 16.9 million and $ 65.9 million, respectively, in the third quarter and first nine months of 2023 and $ 38.4 million and $ 114.9 million, respectively, in the third quarter and first nine months of 2022. NOTE 13. SEGMENT INFORMATION Financial results for the Company's reportable segments have been prepared using a management approach, which is consistent with the basis and manner in which financial information is evaluated by the Company's Chief Operating Decision Maker (CODM) in allocating resources and in assessing performance. The Company has two reportable segments, Manufacturing and Distribution. The operating results of the operating segments are regularly reviewed by the Company’s CODM, the Chief Executive Officer, to assess the performance of the individual operating segments and to make decisions about resources to be allocated to the operating segments. The tables below present information about the sales and operating income of those segments. Third Quarter Ended October 1, 2023 ($ in thousands) Manufacturing Distribution Total Net outside sales $ 641,185 $ 224,888 $ 866,073 Intersegment sales 18,308 1,971 20,279 Total sales $ 659,493 $ 226,859 $ 886,352 Operating income $ 80,777 $ 24,026 $ 104,803 Third Quarter Ended September 25, 2022 ($ in thousands) Manufacturing Distribution Total Net outside sales $ 828,410 $ 283,679 $ 1,112,089 Intersegment sales 18,481 2,859 21,340 Total sales $ 846,891 $ 286,538 $ 1,133,429 Operating income $ 109,462 $ 27,228 $ 136,690 Nine Months Ended October 1, 2023 ($ in thousands) Manufacturing Distribution Total Net outside sales $ 2,021,679 $ 665,179 $ 2,686,858 Intersegment sales 50,920 6,585 57,505 Total sales $ 2,072,599 $ 671,764 $ 2,744,363 Operating income $ 263,146 $ 68,172 $ 331,318 Nine Months Ended September 25, 2022 ($ in thousands) Manufacturing Distribution Total Net outside sales $ 2,891,994 $ 1,037,963 $ 3,929,957 Intersegment sales 62,426 7,943 70,369 Total sales $ 2,954,420 $ 1,045,906 $ 4,000,326 Operating income $ 460,691 $ 116,835 $ 577,526 19 The following table presents a reconciliation of segment operating income to consolidated operating income: Third Quarter Ended Nine Months Ended ($ in thousands) October 1, 2023 September 25, 2022 October 1, 2023 September 25, 2022 Operating income for reportable segments $ 104,803 $ 136,690 $ 331,318 $ 577,526 Unallocated corporate expenses ( 14,221 ) ( 25,160 ) ( 69,341 ) ( 94,808 ) Amortization ( 19,507 ) ( 18,769 ) ( 59,093 ) ( 54,175 ) Consolidated operating income $ 71,075 $ 92,761 $ 202,884 $ 428,543 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. NOTE 14. 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 $ 84.1 million remains in the amount of the Company's common stock that may be acquired under the current stock repurchase program as of October 1, 2023. Under the stock repurchase plan, the Company made repurchases of common stock as follows for the respective periods: Third Quarter Ended Nine Months Ended October 1, 2023 September 25, 2022 October 1, 2023 September 25, 2022 Shares repurchased 6,184 154,388 185,993 808,642 Average price $ 74.43 $ 48.18 $ 65.79 $ 60.28 Aggregate cost (in millions) $ 0.5 $ 7.4 $ 12.2 $ 48.7 NOTE 15. 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 only remaining 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 Company sold certain parcels of real property that the EPA contends are connected to the Superfund Site (the "Divested Properties") in January 2022 for a pretax gain on disposal of $ 5.5 million that is included in selling, general and administrative expenses in the Company's condensed consolidated statements of income for the first nine 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 20 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.