Company Quick10K Filing
Quick10K
Patrick Industries
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$47.05 24 $1,120
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-07-01 Quarter: 2018-07-01
10-Q 2018-04-01 Quarter: 2018-04-01
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-24 Quarter: 2017-09-24
10-Q 2017-06-25 Quarter: 2017-06-25
10-Q 2017-03-26 Quarter: 2017-03-26
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-25 Quarter: 2016-09-25
10-Q 2016-06-26 Quarter: 2016-06-26
10-Q 2016-03-27 Quarter: 2016-03-27
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-27 Quarter: 2015-09-27
10-Q 2015-06-28 Quarter: 2015-06-28
10-Q 2015-03-29 Quarter: 2015-03-29
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-28 Quarter: 2014-09-28
10-Q 2014-06-29 Quarter: 2014-06-29
10-Q 2014-03-30 Quarter: 2014-03-30
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-07-11 Regulation FD, Exhibits
8-K 2019-06-04 Regulation FD, Exhibits
8-K 2019-06-03 Accountant, Exhibits
8-K 2019-05-15 Amend Bylaw, Shareholder Vote, Exhibits
8-K 2019-04-25 Regulation FD, Exhibits
8-K 2019-04-25 Earnings, Exhibits
8-K 2019-04-11 Regulation FD, Exhibits
8-K 2019-04-09 Regulation FD, Exhibits
8-K 2019-03-21 Officers, Exhibits
8-K 2019-02-19 Regulation FD, Exhibits
8-K 2019-02-14 Earnings, Exhibits
8-K 2019-01-31 Regulation FD, Exhibits
8-K 2018-12-05 Regulation FD, Exhibits
8-K 2018-12-03 Regulation FD, Exhibits
8-K 2018-10-25 Earnings, Other Events, Exhibits
8-K 2018-10-25 Regulation FD, Exhibits
8-K 2018-10-11 Regulation FD, Exhibits
8-K 2018-10-01 Regulation FD, Exhibits
8-K 2018-09-13 Regulation FD, Exhibits
8-K 2018-08-27 Regulation FD, Exhibits
8-K 2018-07-30 Regulation FD, Exhibits
8-K 2018-07-26 Regulation FD, Exhibits
8-K 2018-07-26 Earnings, Exhibits
8-K 2018-07-12 Regulation FD, Exhibits
8-K 2018-06-05 Enter Agreement, Off-BS Arrangement, Regulation FD, Exhibits
8-K 2018-05-31 Regulation FD, Exhibits
8-K 2018-05-16 Officers, Shareholder Vote, Other Events, Exhibits
8-K 2018-04-30 Regulation FD, Exhibits
8-K 2018-04-26 Regulation FD, Exhibits
8-K 2018-04-12 Regulation FD, Exhibits
8-K 2018-03-19 Regulation FD, Exhibits
8-K 2018-03-12 Regulation FD, Exhibits
8-K 2018-03-05 Regulation FD, Exhibits
8-K 2018-02-26 Regulation FD, Exhibits
8-K 2018-02-20 Regulation FD, Exhibits
8-K 2018-02-15 Regulation FD, Exhibits
8-K 2018-02-01 Regulation FD, Exhibits
8-K 2018-01-29 Enter Agreement, Off-BS Arrangement, Other Events, Exhibits
8-K 2018-01-22 Enter Agreement, Off-BS Arrangement, Sale of Shares, Exhibits
8-K 2018-01-17 Enter Agreement, Off-BS Arrangement, Sale of Shares, Regulation FD, Exhibits
8-K 2018-01-16 Other Events, Exhibits
8-K 2018-01-10 Regulation FD, Exhibits
CAT Caterpillar 75,030
ALL Allstate Life Insurance 31,440
GOGL Golden Ocean Group 767
MSC Hexion 612
AMSWA American Software 413
ATNM Actinium Pharmaceuticals 34
IBIO Ibio 16
SOAG Sears Oil & Gas 0
FTLF Fitlife Brands 0
SUSG SusGlobal Energy 0
PATK 2019-03-31
Part 1: Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part Ii: Other Information
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits
EX-31.1 patk2019q1ex311transit.htm
EX-31.2 patk2019q1ex312transit.htm
EX-32 patk2019q1ex32transiti.htm

Patrick Industries Earnings 2019-03-31

PATK 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

Document
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
 
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2019
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ……………… to ………………
 
Commission file number 000-03922
 
PATRICK INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
INDIANA
35-1057796
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
                                                             
107 WEST FRANKLIN STREET, P.O. Box 638, ELKHART, IN 
46515
(Address of principal executive offices) 
(ZIP Code)
 (574) 294-7511
(Registrant’s telephone number, including area code)
         (Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.                             
Large accelerated filer [X]
Accelerated filer [ ] 
Non-accelerated filer [ ]
Smaller reporting company [ ] 
Emerging growth company [ ]
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).         Yes [ ] No [X]
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
 Common Stock, no par value
 PATK
 The NASDAQ Global Stock Market
As of April 26, 2019, there were 23,849,644 shares of the registrant’s common stock outstanding. 




PATRICK INDUSTRIES, INC.

 TABLE OF CONTENTS 

 
Page No.
PART I. FINANCIAL INFORMATION
 
 
 
ITEM 1. FINANCIAL STATEMENTS (Unaudited)
 
 
 
Condensed Consolidated Statements of Financial Position
    March 31, 2019 and December 31, 2018
 
 
Condensed Consolidated Statements of Income
    First Quarter Ended March 31, 2019 and April 1, 2018
 
 
Condensed Consolidated Statements of Comprehensive Income
    First Quarter Ended March 31, 2019 and April 1, 2018
 
 
Condensed Consolidated Statements of Shareholders' Equity
    First Quarter Ended March 31, 2019 and April 1, 2018
 
 
Condensed Consolidated Statements of Cash Flows
    First Quarter Ended March 31, 2019 and April 1, 2018
 
 
Notes to Condensed Consolidated Financial Statements
 
 
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
 
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
 
ITEM 4. CONTROLS AND PROCEDURES
 
 
PART II. OTHER INFORMATION
 
 
 
ITEM 1A. RISK FACTORS
 
 
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
 
ITEM 6. EXHIBITS
 
 
SIGNATURES

2



PART 1: FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS
PATRICK INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (Unaudited)
 

As of
(thousands)

March 31, 2019

December 31, 2018
ASSETS

 

 
Current Assets

 

 
    Cash and cash equivalents

$
8,454


$
6,895

    Trade receivables, net

137,318


82,499

    Inventories

264,994


272,898

    Prepaid expenses and other

17,757


22,875

        Total current assets

428,523


385,167

Property, plant and equipment, net

180,331


177,145

Operating lease right-of-use assets
 
79,868

 

Goodwill

292,113


281,734

Intangible assets, net

370,233


382,982

Deferred financing costs, net

3,617


3,688

Other non-current assets

499


515

        TOTAL ASSETS
 
$
1,355,184


$
1,231,231

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 
Current Liabilities

 

 
    Current maturities of long-term debt

$
10,000


$
8,750

    Current operating lease liabilities
 
25,874

 

    Accounts payable

124,640


89,803

    Accrued liabilities

57,292


59,202

        Total current liabilities

217,806


157,755

Long-term debt, less current maturities, net

613,599


621,751

Long-term operating lease liabilities
 
54,309

 

Deferred tax liabilities, net

23,624


22,699

Other long-term liabilities

16,757


20,272

        TOTAL LIABILITIES

926,095


822,477

SHAREHOLDERS’ EQUITY

 

 
Common stock

161,949


161,436

Additional paid-in-capital

25,124


25,124

Accumulated other comprehensive loss

(3,707
)

(2,680
)
Retained earnings

245,723


224,874

        TOTAL SHAREHOLDERS’ EQUITY

429,089


408,754

        TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

$
1,355,184


$
1,231,231


See accompanying Notes to Condensed Consolidated Financial Statements.


3



PATRICK INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)



First Quarter Ended
(thousands except per share data)

March 31, 2019

April 1, 2018
NET SALES

$
608,218


$
551,832

Cost of goods sold

501,670


454,078

GROSS PROFIT

106,548


97,754

Operating Expenses:

 

 
  Warehouse and delivery

24,041


17,028

  Selling, general and administrative

37,692


31,841

  Amortization of intangible assets

8,989


7,127

    Total operating expenses

70,722


55,996

OPERATING INCOME

35,826


41,758

Interest expense, net

8,983


4,378

Income before income taxes

26,843


37,380

Income taxes

5,994


7,312

NET INCOME

$
20,849


$
30,068








BASIC NET INCOME PER COMMON SHARE

$
0.90


$
1.22

DILUTED NET INCOME PER COMMON SHARE

$
0.90


$
1.20








Weighted average shares outstanding - Basic

23,039


24,740

Weighted average shares outstanding - Diluted

23,248


25,110

 
 
 
 
 
See accompanying Notes to Condensed Consolidated Financial Statements.




4



PATRICK INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

 
 
First Quarter Ended
 
(thousands)
 
March 31, 2019
 
April 1, 2018
 
NET INCOME
 
$
20,849

 
$
30,068

 
Other comprehensive (loss) income, net of tax:
 
 
 
 
 
Change in unrealized loss of hedge derivatives
 
(1,054
)
 

 
Foreign currency translation gain
 
27

 
28

 
Total other comprehensive (loss) income
 
(1,027
)
 
28

 
COMPREHENSIVE INCOME
 
$
19,822

 
30,096

 

See accompanying Notes to Condensed Consolidated Financial Statements.


5



PATRICK INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited)
(thousands)
 
Common
Stock

 
Additional
Paid-in-
Capital

 
Accumulated
Other
Comprehensive
Income (Loss)

 
Retained
Earnings

 
Total

First Quarter Ended April 1, 2018
 
 
 
 
 
 
 
 
 
 
Balance December 31, 2017
 
$
163,196

 
$
8,243

 
$
66

 
$
199,180

 
$
370,685

Net income
 

 

 

 
30,068

 
30,068

Other comprehensive income, net of tax
 

 

 
28

 

 
28

Stock repurchases under buyback program
 
(1,424
)
 
(72
)
 

 
(11,974
)
 
(13,470
)
Shares used to pay taxes on stock grants
 
(2,843
)
 

 

 

 
(2,843
)
Stock-based compensation expense
 
3,696

 

 

 

 
3,696

Purchase of convertible notes hedges
 

 
(31,481
)
 

 

 
(31,481
)
Proceeds from sale of warrants
 

 
18,147

 

 

 
18,147

Equity component of convertible note issuance
 

 
30,948

 

 

 
30,948

Balance April 1, 2018
 
$
162,625

 
$
25,785

 
$
94

 
$
217,274

 
$
405,778

 
 
 
 
 
 
 
 
 
 
 
First Quarter Ended March 31, 2019
 
 
 
 
 
 
 
 
 
 
Balance December 31, 2018
 
$
161,436

 
$
25,124

 
$
(2,680
)
 
$
224,874

 
$
408,754

Net income
 

 

 

 
20,849

 
20,849

Other comprehensive loss, net of tax
 

 

 
(1,027
)
 

 
(1,027
)
Shares used to pay taxes on stock grants
 
(3,437
)
 

 

 

 
(3,437
)
Issuance of shares upon exercise of common stock options
 
3

 

 

 

 
3

Stock-based compensation expense
 
3,947

 

 

 

 
3,947

Balance March 31, 2019
 
$
161,949

 
$
25,124

 
$
(3,707
)
 
$
245,723

 
$
429,089


See accompanying Notes to Condensed Consolidated Financial Statements




6



PATRICK INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 

Three Months Ended
(thousands)

March 31, 2019

April 1, 2018
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
 
Net income

$
20,849


$
30,068

Adjustments to reconcile net income to net cash provided by operating activities:

 

 
Depreciation and amortization

15,543


11,325

Stock-based compensation expense

3,947


3,696

Amortization of convertible notes debt discount

1,671


1,246

Deferred income taxes

1,281


1,410

Other

(233
)

(1,304
)
Change in operating assets and liabilities, net of acquisitions of businesses:

 

 
Trade receivables

(54,188
)

(48,443
)
Inventories

1,224


(8,557
)
Prepaid expenses and other assets

5,216


2,136

Accounts payable, accrued liabilities and other

32,574


34,231

Net cash provided by operating activities

27,884


25,808

CASH FLOWS FROM INVESTING ACTIVITIES

 

 
Capital expenditures

(10,005
)

(7,641
)
Proceeds from sale of property, equipment and other investing activities

1,372


(6
)
Business acquisitions, net of cash acquired

(1,222
)

(95,861
)
Net cash used in investing activities

(9,855
)

(103,508
)
CASH FLOWS FROM FINANCING ACTIVITIES

 

 
Term debt repayments

(1,250
)

(3,941
)
Borrowings on revolver

213,523


331,058

Repayments on revolver

(220,855
)

(389,855
)
Stock repurchases under buyback program



(13,470
)
Proceeds from convertible notes offering



172,500

Purchase of convertible notes hedges



(31,481
)
Proceeds from sale of warrants



18,147

Payments related to vesting of stock-based awards, net of shares tendered for taxes

(3,222
)

(2,586
)
Payment of deferred financing costs

(253
)

(5,367
)
Payment of contingent consideration from a business acquisition
 
(4,416
)
 

Other financing activities

3


(1
)
Net cash (used in) provided by financing activities

(16,470
)

75,004

Increase (decrease) in cash and cash equivalents

1,559


(2,696
)
Cash and cash equivalents at beginning of year

6,895


2,767

Cash and cash equivalents at end of period

$
8,454


$
71


See accompanying Notes to Condensed Consolidated Financial Statements.

7




PATRICK INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
 
1.
BASIS OF PRESENTATION
 
In the opinion of Patrick Industries, Inc. (“Patrick”, the “Company”, "we", "our"), the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of normal recurring adjustments) necessary to present fairly the Company’s financial position as of March 31, 2019 and December 31, 2018, and its results of operations and cash flows for the three months ended March 31, 2019 and April 1, 2018.
 
Patrick’s unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission and in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The preparation of the condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to those rules or regulations. For a description of significant accounting policies used by the Company in the preparation of its consolidated financial statements, please refer to Note 2 of the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. The December 31, 2018 condensed consolidated statement of financial position data was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. Operating results for the first quarter ended March 31, 2019 are not necessarily indicative of the results to be expected for the year ending December 31, 2019.
 
In preparation of Patrick’s condensed consolidated financial statements as of and for the first quarter ended March 31, 2019, management evaluated all material subsequent events or transactions that occurred after the balance sheet date through the date of issuance of the Form 10-Q that required recognition or disclosure in the condensed consolidated financial statements.
 
2.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

Leases
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, "Leases (Topic 842)", which requires that an entity recognize lease assets and lease liabilities on its statement of financial position for leases that were previously classified as operating leases under U.S. GAAP. The standard also requires companies to disclose in the footnotes to the financial statements information about the amount and timing of lease payments. The standard is effective for financial statements issued for annual and interim periods beginning after December 15, 2018 on a modified retrospective basis and early adoption was permitted.

In July 2018, the FASB issued ASU 2018-11, "Leases (Topic 842): Targeted Improvements", which offered practical expedient alternatives to the modified retrospective adoption of Accounting Standards Codification (“ASC”) 842. Specifically, the practical expedients allow companies to recognize right of use lease assets and lease liabilities at the date of adoption only, rather than retrospectively for all periods presented, as well as practical expedients related to the presentation of lease components.

The Company adopted ASC 842 effective January 1, 2019, and recorded approximately $80 million in lease right-of-use assets and corresponding lease liabilities, with no material impact on the condensed consolidated statement of shareholders' equity, results of operations or cash flows. See Note 12 for further information.

Goodwill Impairment
In January 2017, the FASB issued ASU 2017-04, "Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment". This ASU simplifies the accounting for goodwill impairments by eliminating step two from the

8



goodwill impairment test. The standard requires that the impairment loss be measured as the excess of the reporting unit's carrying amount over its fair value. It eliminates the second step that requires the impairment to be measured between the implied value of a reporting unit's goodwill and its carrying value. The standard is effective for annual and any interim impairment tests for periods beginning after December 15, 2019 and early adoption is permitted. The Company is currently evaluating the effect of adopting this new accounting standard and has not yet determined the impact that its implementation will have on its condensed consolidated financial statements.

Credit Losses
In June 2016, the FASB issued ASU 2016-13 “Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments”, which amends certain provisions of ASC 326, “Financial Instruments-Credit Loss”. The ASU changes the impairment model for most financial assets and certain other instruments. For trade and other receivables, held to maturity debt securities, loans and other instruments, entities will be required to use a new forward-looking “expected loss” model that generally will result in the earlier recognition of allowances for losses. Additionally, entities will have to disclose more information with respect to credit quality indicators, including information used to track credit quality by year of origination for most financing receivables. The ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years and will be applied as a cumulative effect adjustment to retained earnings as of the beginning of the first reporting period for which the guidance is effective. The Company does not expect that the adoption of the ASU will have a material effect on its condensed consolidated financial statements.
3.
REVENUE RECOGNITION
Effective January 1, 2018, the Company adopted FASB ASU 2014-09, "Revenue from Contracts with Customers" (commonly referred to as “Topic 606”), which requires a company to recognize revenue when it transfers goods or services to customers in an amount that reflects the consideration that the company expects to receive. The Company adopted Topic 606 using the modified retrospective method and applied it to those contracts which were not completed as of the adoption date. The adoption of the new revenue standard did not have a material impact on the Company’s condensed consolidated financial position, results of operations, or revenues as of the adoption date.
Revenue Recognition
Revenues are recognized when or as control of the promised goods or services transfers to the Company's customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services.

The transaction price for contracts may include forms of variable consideration, including reductions to the transaction price for volume discounts and rebates. To the extent a contract is deemed to have multiple performance obligations, the Company allocates the transaction price of the contract to each performance obligation using the standalone selling price of each distinct good or service in the contract.
Disaggregation of Revenue
In the following table, revenue from contracts with customers, net of intersegment sales, is disaggregated by market type and by reportable operating segments:
 
 
First Quarter Ended March 31, 2019
(thousands)
 
Manufacturing
 
Distribution
 
Total Reportable Operating Segments
Market type:
 
 
 
 
 
 
Recreational Vehicle
 
$
234,878

 
$
107,558

 
$
342,436

Manufactured Housing
 
42,203

 
63,816

 
106,019

Industrial
 
60,928

 
8,049

 
68,977

Marine
 
87,675

 
3,111

 
90,786

Total
 
$
425,684

 
$
182,534

 
$
608,218



9



 
 
First Quarter Ended April 1, 2018
(thousands)
 
Manufacturing
 
Distribution
 
Total Reportable Operating Segments
Market type:
 
 
 
 
 
 
Recreational Vehicle
 
$
293,225

 
$
85,066

 
$
378,291

Manufactured Housing
 
39,315

 
22,941

 
62,256

Industrial
 
58,677

 
7,018

 
65,695

Marine
 
44,696

 
894

 
45,590

Total
 
$
435,913

 
$
115,919

 
$
551,832

`
Description of Products and Services
The Company is a major manufacturer of component products and a distributor of building products and materials serving original equipment manufacturers (“OEMs”). The following is a description of the principal activities, by reportable segments, from which the Company generates its revenue. See Note 15 for more detailed information about the Company's reportable operating segments.
Manufacturing
The Company’s Manufacturing segment revenue is primarily derived from the sale of laminated products that are utilized to produce furniture, shelving, walls, countertops, and cabinet products, cabinet doors, fiberglass bath fixtures and tile systems, hardwood furniture, vinyl printing, decorative vinyl and paper laminated panels, solid surface, granite, and quartz countertop fabrication, RV painting, fabricated aluminum products, fiberglass and plastic components, softwoods lumber, custom cabinetry, polymer-based flooring, electrical systems components (including instrument and dash panels), wrapped vinyl, paper and hardwood profile mouldings, interior passage doors, air handling products, slide-out trim and fascia, thermoformed shower surrounds, specialty bath and closet building products, fiberglass and plastic helm systems and components products, wiring and wire harnesses, boat covers, towers, tops and frames, aluminum fuel tanks, CNC molds and composite parts, slotwall panels and components and other products.
Manufacturing segment revenue is recognized when control of the product transfers to the customer which is the point when the customer gains the ability to direct the use of and obtain substantially all of the remaining benefits from the asset, which is generally upon delivery of goods. In limited circumstances, where the products are customer specific with no alternative use to the Company and the Company has a legally enforceable right to payment for performance to date with a reasonable margin, revenue is recognized over the contract term based on the cost-to-cost method. The Company uses this measure of progress because it best depicts the transfer of value to the customer and correlates with the amount of consideration to which the entity expects to be entitled in exchange for transferring the promised goods to the customer. However, revenue recognized based on the cost-to-cost method does not constitute a material amount of total Manufacturing segment revenue and consolidated net sales.
Distribution
The Company’s Distribution segment revenue is primarily derived from the resale of pre-finished wall and ceiling panels, drywall and drywall finishing products, electronics and audio systems components, appliances, wiring, electrical and plumbing products, fiber reinforced polyester products, cement siding, raw and processed lumber, interior passage doors, roofing products, laminate and ceramic flooring, tile, shower doors, furniture, fireplaces and surrounds, interior and exterior lighting products, and other miscellaneous products, in addition to providing transportation and logistics services.

The Company acts as a principal in such arrangements because it controls the promised goods before delivery to the customer. Distribution segment revenue from product sales is recognized on a gross basis upon delivery of goods at which point control transfers to the customer. The Distribution segment also generates revenue by providing marketing services for other manufacturers in exchange for agreed upon commissions. The commission revenue is recognized in the amount of expected commissions to be collected from the manufacturer upon delivery of goods to the customer. The overall commission business is not material to the Company’s consolidated net sales.

10



Significant Judgments and Practical Expedients Applied
Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods. Sales and other taxes collected concurrent with revenue-producing activities are excluded from revenue. Incidental items that are immaterial in the context of the contract are not recognized as separate performance obligations to which a portion of revenue would otherwise be allocated.
The Company records freight billed to customers in net sales. The corresponding costs incurred for shipping and handling related to these customer billed freight costs are recorded as costs to fulfill the contract and are included in warehouse and delivery expenses.
The Company’s contracts across each of its businesses typically do not result in situations where there is a time period greater than one year between performance under the contract and collection of the related consideration. The Company elected the practical expedient under Topic 606 related to significant financing components, where the Company expects, at contract inception, that the period between the entity’s transfer of a promised good or service to a customer and the customer’s payment for that good or service will be one year or less.
The Company also applies the practical expedient in Topic 606 related to costs to obtain a contract and recognizes the incremental costs of obtaining contracts as an expense when incurred if the amortization period of the incurred costs that the Company otherwise would have capitalized is one year or less. These costs are included in selling, general and administrative expenses.
Contract Balances
The Company typically invoices the customer after shipment of the promised goods, at which time it has an unconditional right to payment. In limited circumstances, the Company may receive upfront payments from customers prior to satisfaction of a performance obligation in both the manufacturing and distribution businesses, in which case a contract liability is recorded. The following table provides information about contract balances:
(thousands)
March 31, 2019
 
December 31, 2018
Receivables, which are included in trade receivables, net
$
135,202

 
$
74,196

Contract liabilities
$
2,847

 
$
2,642


Significant changes in the contract liabilities balance during the three months ended March 31, 2019 are as follows:
(thousands)
 
Contract Liabilities
Revenue recognized that was included in the contract liability balance at the beginning of the period
 
$
(910
)
Increases due to cash received, excluding amounts recognized as revenue during the period
 
$
1,115


Transaction Price Allocated to the Remaining Performance Obligation
The Company applies the practical expedient in paragraph 606-10-50-14 and does not disclose information about remaining performance obligations that have original expected durations of one year or less. The Company does not have material contracts that have original expected durations of more than one year.







11



4.
INVENTORIES
Inventories are stated at the lower of cost (First-In, First-Out (FIFO) Method) and net realizable value and consist of the following classes:
(thousands)
 
March 31, 2019
 
December 31, 2018
Raw materials
 
$
166,369

 
$
164,408

Work in process
 
13,882

 
12,829

Finished goods
 
25,003

 
28,341

Less: reserve for inventory obsolescence
 
(7,341
)
 
(5,354
)
  Total manufactured goods, net
 
197,913

 
200,224

Materials purchased for resale (distribution products)
 
68,876

 
74,914

Less: reserve for inventory obsolescence
 
(1,795
)
 
(2,240
)
  Total materials purchased for resale (distribution products), net
 
67,081

 
72,674

Total inventories
 
$
264,994

 
$
272,898



5.
GOODWILL AND INTANGIBLE ASSETS
The Company acquired goodwill and intangible assets in various acquisitions in 2018 that were determined to be business combinations. No new intangible assets were acquired through business combination in the first quarter of 2019, but purchase accounting adjustments to previously reported estimated amounts were made in such quarter. See Note 6 for further details. Goodwill and intangible assets are allocated to the Company’s reporting units on the date they are initially recorded. Goodwill and indefinite-lived intangible assets are not amortized but are subject to an impairment test based on their estimated fair value performed annually (or under certain circumstances more frequently as warranted). Goodwill impairment testing is performed at the reporting unit level, one level below the business segment.
 
Finite-lived intangible assets that meet certain criteria continue to be amortized over their useful lives and are also subject to an impairment test based on estimated undiscounted cash flows when impairment indicators exist. The Company assesses finite-lived intangible assets for impairment if events or changes in circumstances indicate that the carrying value may exceed the fair value.
 
No impairment was recognized during the three months ended March 31, 2019 and April 1, 2018, related to goodwill, indefinite-lived intangible assets or finite-lived intangible assets.
Goodwill
Changes in the carrying amount of goodwill for the three months ended March 31, 2019 by segment are as follows:
(thousands)
 
Manufacturing
 
Distribution
 
Total
Balance - December 31, 2018
 
$
235,345

 
$
46,389

 
$
281,734

Adjustments to prior year preliminary purchase price allocations
 
339

 
10,040

 
10,379

Balance - March 31, 2019
 
$
235,684

 
$
56,429

 
$
292,113


Intangible Assets
Intangible assets are comprised of customer relationships, non-compete agreements, trademarks and patents. Customer relationships and non-compete agreements represent finite-lived intangible assets that have been recorded in the Manufacturing and Distribution segments along with related amortization expense. As of March 31, 2019, the remaining intangible assets balance of $370.2 million is comprised of $85.2 million of trademarks which have an indefinite life, and therefore, no amortization expense has been recorded for trademarks, and $285.0 million pertaining to customer relationships, non-compete agreements and patents which are being amortized over periods ranging from three to 19 years.    

Amortization expense for the Company’s intangible assets in the aggregate was $9.0 million and $7.1 million for the three months ended March 31, 2019 and April 1, 2018, respectively.

12






Intangible assets, net consist of the following as of March 31, 2019 and December 31, 2018:
(thousands)

March 31,
2019

Weighted Average Useful Life
(in years)

December 31,
2018

Weighted Average Useful Life
(in years)
Customer relationships

$
361,308


10.1

$
366,228


10.1
Non-compete agreements

17,499


5.0

19,159


4.9
Patents

1,048


9.0

1,048


8.9
Trademarks
 
85,178

 
Indefinite
 
82,358

 
Indefinite
 

465,033


 

468,793


 
Less: accumulated amortization

(94,800
)



(85,811
)

 
Intangible assets, net

$
370,233


 

$
382,982


 

Changes in the carrying value of intangible assets for the three months ended March 31, 2019 by segment are as follows:
(thousands)

Manufacturing

Distribution

Total
Balance - December 31, 2018

$
304,485


$
78,497


$
382,982

Amortization

(7,715
)

(1,274
)

(8,989
)
Adjustments to prior year preliminary purchase price allocations

(3,451
)

(309
)

(3,760
)
Balance - March 31, 2019

$
293,319


$
76,914


$
370,233



6.
ACQUISITIONS
 
General 
The Company did not complete any acquisitions the first quarter of 2019 and completed nine acquisitions in 2018, including four acquisitions in the first quarter of 2018. Each of the 2018 acquisitions was funded through borrowings under the Company’s credit facility in effect at the time of acquisition. Assets acquired and liabilities assumed in the individual acquisitions were recorded on the Company’s condensed consolidated statements of financial position 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 the one year measurement period.  For those acquisitions where the purchase price allocation has been noted as being provisional, the Company generally is still in the process of finalizing the fair values of acquired goodwill, intangible assets, fixed assets, and, if applicable, related deferred tax assets and liabilities. Historically, the impact of finalizing provisional purchase price allocations has not been significant.  In general, the acquisitions described below provided the opportunity for the Company to either establish a new presence in a particular market and/or expand its product offerings in an existing market and increase its market share and per unit content.

For each acquisition, the excess of the purchase consideration over the fair value of the net assets acquired was recorded as goodwill, which 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, revenue impact, market share growth and net income. The goodwill recognized is expected to be deductible for income tax purposes for each of the 2018 acquisitions with the exception of the acquisition of Marine Accessories Corporation which is expected to be partially deductible for income tax purposes, and the acquisition of LaSalle Bristol which is not deductible for income tax purposes. Intangible asset values were estimated using income based valuation methodologies. See Note 5 for information regarding the amortization periods assigned to finite-lived intangible assets.

13




For the first quarter ended April 1, 2018, revenue and operating income of approximately $12.6 million and $1.3 million, respectively, was included in the Company’s condensed consolidated statements of income relating to the four businesses acquired in the first three months of 2018. Acquisition-related costs in the aggregate associated with the businesses acquired in the first three months of 2018 were immaterial.

Contingent Consideration

In connection with certain 2018 and 2017 acquisitions, if certain financial targets for the acquired businesses are achieved, the Company will be required to pay additional cash consideration. The Company has recorded a liability for the 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. As required, the liabilities for the contingent consideration associated with each of these acquisitions will be measured quarterly at fair value and the Company could record adjustments in future periods.

The aggregate fair value of the estimated contingent consideration payments was $9.4 million, $4.9 million of which is included in the line item "Accrued liabilities" and $4.5 million is included in “Other long-term liabilities” on the condensed consolidated statement of financial position as of March 31, 2019. The liabilities for contingent consideration expire at various dates through December 2023. The contingent consideration arrangements are subject to a maximum payment amount of up to $13.7 million in the aggregate. In the first quarter of 2019, the Company made cash payments of approximately $4.4 million related to contingent consideration liabilities, recording a corresponding reduction to accrued liabilities.

2018 Acquisitions

Metal Moulding Corporation (MMC”)
In February 2018, the Company completed the acquisition of the business and certain assets of Madison, Tennessee-based MMC, a manufacturer of custom metal fabricated products, primarily for the marine market, including hinges, arm rests, brackets, panels and trim, as well as plastic products including boxes, inlay tables, steps, and related components, for a net initial purchase price of $19.9 million, plus subsequent contingent consideration over a one-year period based on future performance.
The results of operations for MMC are included in the Company’s condensed consolidated financial statements and the Manufacturing operating segment from the date of acquisition.
Aluminum Metals Company, LLC (“AMC”)
In February 2018, the Company completed the acquisition of the business and certain assets of Elkhart, Indiana-based AMC, a manufacturer of aluminum products including coil, fabricated sheets and extrusions, in addition to roofing products, primarily for the recreational vehicle (“RV”), industrial, and marine markets, for a net purchase price of $17.8 million.
The results of operations for AMC are included in the Company’s condensed consolidated financial statements and the Manufacturing operating segment from the date of acquisition.
IMP Holdings, LLC d/b/a Indiana Marine Products (“IMP”)
In March 2018, the Company completed the acquisition of the business and certain assets of Angola, Indiana-based IMP, a manufacturer of fully-assembled helm assemblies, including electrical wiring harnesses, dash panels, instrumentation and gauges, and other products primarily for the marine market, for a net initial purchase price of $18.6 million, plus subsequent contingent consideration payments over a three-year period based on future performance. The Company recorded a fair value estimate of the contingent consideration of $7.9 million at the time of acquisition.
The results of operations for IMP are included in the Company’s condensed consolidated financial statements and the Manufacturing operating segment from the date of acquisition. The purchase price allocation and all required purchase accounting adjustments were finalized in the first quarter of 2019. Net changes from previously reported estimated amounts as of December 31, 2018 were immaterial.

14



Collins & Company, Inc. (“Collins”)
In March 2018, the Company completed the acquisition of the business and certain assets of Bristol, Indiana-based Collins, a distributor of appliances, trim products, fuel systems, flooring, tile, and other related building materials primarily to the RV market as well as the housing and industrial markets, for a net purchase price of $40.0 million.
The results of operations for Collins are included in the Company’s condensed consolidated financial statements and the Distribution operating segment from the date of acquisition. The purchase price allocation and all required purchase accounting adjustments were finalized in the first quarter of 2019. Changes from previously reported estimated amounts as of December 31, 2018 include a decrease to intangible assets of $3.6 million and a $3.6 million offsetting increase to goodwill. There was no material impact to the condensed consolidated statement of income related to these changes in the first quarter of 2019.
Dehco, Inc. (“Dehco”)
In April 2018, the Company completed the acquisition of Dehco, a distributor and manufacturer of flooring, kitchen and bath products, adhesives and sealants, electronics, appliances and accessories, LP tanks, and other related building materials, primarily for the RV market as well as the manufactured housing (“MH”), marine and other industrial markets, for a net purchase price of $52.8 million. Dehco has operating facilities in Indiana, Oregon, Pennsylvania and Alabama.
The results of operations for Dehco are included in the Company’s condensed consolidated financial statements and the Manufacturing and Distribution operating segments from the date of acquisition. The purchase price allocation and all required purchase accounting adjustments were finalized in the first quarter of 2019. Changes from previously reported estimated amounts as of December 31, 2018 include a decrease to intangible assets of $0.3 million and a $0.3 million offsetting increase to goodwill. There was no material impact to the condensed consolidated statement of income related to these changes in the first quarter of 2019.
Dowco, Inc. (“Dowco”)
In May 2018, the Company completed the acquisition of Dowco, a designer and manufacturer of custom designed boat covers and bimini tops, full boat enclosures, mounting hardware, and other accessories and components for the marine market, for a net purchase price of $56.3 million, net of cash acquired. Dowco has operating facilities in Wisconsin, Missouri, Indiana, and Minnesota.
The results of operations for Dowco are included in the Company’s condensed consolidated financial statements and the Manufacturing operating segment from the date of acquisition. The preliminary purchase price allocation is subject to final review and approval, and thus all required purchase accounting adjustments are subject to change within the measurement period as the Company finalizes its fair value estimates. Changes from previously reported estimated amounts as of December 31, 2018 were immaterial.
Marine Accessories Corporation (“MAC”)
In June 2018, the Company acquired 100% of the membership interests of Maryville, Tennessee-based MAC, a manufacturer, distributor and aftermarket supplier of custom tower and canvas products and other related accessories to OEMs, dealers, retailers and distributors within the marine market, as well as direct to consumers, for a net purchase price of $57.0 million, net of cash acquired.
The results of operations for MAC are included in the Company’s condensed consolidated financial statements and the Manufacturing and Distribution operating segments from the date of acquisition. The preliminary purchase price allocation is subject to final review and approval, and thus all required purchase accounting adjustments are subject to change within the measurement period as the Company finalizes its fair value estimates. Changes from previously reported estimated amounts as of December 31, 2018 were immaterial.
Engineered Metals and Composites, Inc. (“EMC”)
In September 2018, the Company completed the acquisition of West Columbia, South Carolina-based EMC, a designer and manufacturer of custom marine towers, frames, and other fabricated component products for OEMs in the marine industry, for a net initial purchase price of $24.9 million, plus subsequent contingent consideration over a three-month period based on future performance. The Company recorded a preliminary fair value estimate of the contingent consideration of $2.5 million.

15



The results of operations for EMC are included in the Company’s condensed consolidated financial statements and the Manufacturing operating segment from the date of acquisition. The preliminary purchase price allocation is subject to final review and approval, and thus all required purchase accounting adjustments are subject to change within the measurement period as the Company finalizes its fair value estimates. Changes from previously reported estimated amounts as of December 31, 2018 include a decrease to the estimated purchase price of $0.3 million based on a final working capital adjustment resulting from an increase to accounts payable in the same amount. There was no material impact to the condensed consolidated statement of income related to these changes in the first quarter of 2019.
LaSalle Bristol (“LaSalle”)
In November, 2018, the Company completed the acquisition of LaSalle, a distributor and manufacturer of plumbing, flooring, tile, lighting, air handling and building products for the MH, RV, and industrial markets, for a net purchase price of $51.5 million, net of cash acquired. LaSalle is headquartered in Elkhart, Indiana and operates a total of 15 manufacturing and distribution centers located in North America.
The results of operations for LaSalle are included in the Company’s condensed consolidated financial statements and the Manufacturing and Distribution operating segments from the date of acquisition. The preliminary purchase price allocation is subject to final review and approval, and thus all required purchase accounting adjustments are subject to change within the measurement period as the Company finalizes its fair value estimates.
After adjusting for a $1.5 million increase in the estimated purchase price reported at December 31, 2018 due to a final working capital adjustment of $1.4 million and other adjustments of $0.1 million, changes from previously reported estimated amounts as of December 31, 2018 include a $6.7 million decrease to inventory and a $6.8 million increase to goodwill. There was no material impact to the condensed consolidated statement of income related to these changes in the first quarter of 2019.
The following table summarizes the fair values of the assets acquired and the liabilities assumed as of the date of the acquisition for the 2018 acquisitions. The purchase price allocation in each acquisition is final except as noted in the discussions above:
(thousands)
Trade receivables
Inventories
Property, plant and equipment
Prepaid expenses & other
Intangible assets
Goodwill
Less: Total liabilities
Less: Deferred tax liability, net
Total net assets acquired
2018









MMC (1)
$
1,463

$
2,324

$
2,085

$

$
8,540

$
7,668

$
827

$

$
21,253

AMC
3,942

5,623

2,321

39

6,550

1,755

2,463


17,767

IMP (2)
1,943

4,286

1,463

13

12,920

8,803

2,930


26,498

Collins
2,830

9,903

1,188

5

18,430

10,237

2,586


40,007

Dehco
4,771

16,923

13,755

208

13,950

6,580

3,392


52,795

Dowco
4,053

4,498

5,910

1,240

34,379

10,444

4,178


56,346

MAC
3,054

6,815

8,000

284

32,733

19,264

4,290

8,839

57,021

EMC (3)
634

1,576

2,500


15,750

8,074

1,115


27,419

LaSalle
8,888

39,318

8,500

6,548

5,885

10,497

28,128

41

51,467

Other
473
329

300

13

1,667

899

184

 
3,497

2018 Totals
$
32,051

$
91,595

$
46,022

$
8,350

$
150,804

$
84,221

$
50,093

$
8,880

$
354,070


(1) Total net assets acquired for MMC reflect the preliminary estimated liability of $1.4 million pertaining to the fair value of the contingent consideration based on future performance. The actual net cash paid for the MMC acquisition of $19.9 million is included in Cash Flows from Investing Activities - Business Acquisitions on the consolidated statement of cash flows for the year ended December 31, 2018.
(2) Total net assets acquired for IMP reflect the preliminary estimated liability of $7.9 million pertaining to the fair value of the contingent consideration based on future performance. The actual net cash paid for the IMP acquisition of $18.6 million is included in Cash Flows from Investing Activities - Business Acquisitions on the consolidated statement of cash flows for the year ended December 31, 2018.

16



(3) Total net assets acquired for EMC reflect the preliminary estimated liability of $2.5 million pertaining to the fair value of the contingent consideration based on future performance. The actual net cash paid for the EMC acquisition of $24.9 million included $25.2 million in Cash Flows from Investing Activities - Business Acquisitions on the consolidated statement of cash flows for the year ended December 31, 2018 as well as a decrease of $0.3 million in Cash Flows from Investing Activities - Business Acquisitions on the condensed consolidated statement of cash flows for the first quarter ended March 31, 2019.
Pro Forma Information 
The following pro forma information for the first quarter ended April 1, 2018 assumes the MMC, AMC, IMP, Collins, Dehco, Dowco, MAC, EMC and LaSalle acquisitions (which were completed in 2018) occurred as of the beginning of the year immediately preceding each such acquisition. The pro forma information contains the actual operating results of the 2018 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 the actual incremental borrowings incurred in connection with each transaction as if it occurred as of the beginning of the year immediately preceding each such acquisition. In addition, the pro forma information includes amortization expense, in the aggregate, related to intangible assets acquired in connection with the transactions of $2.9 million for the first quarter ended April 1, 2018.
 

First Quarter Ended
(thousands except per share data)

April 1, 2018
Revenue

$
690,482

Net income

34,375

Basic net income per common share

1.39

Diluted net income per common share

1.37


 
The pro forma information is presented for informational purposes only and is not necessarily indicative of the results of operations that actually would have been achieved had the acquisitions been consummated as of that time, nor is it intended to be a projection of future results.
  
7.
STOCK-BASED COMPENSATION
 
The Company accounts for stock-based compensation in accordance with fair value recognition provisions. The Company recorded compensation expense of $3.9 million and $3.7 million for the first quarter ended March 31, 2019 and April 1, 2018, respectively, for its stock-based compensation plans on the condensed consolidated statements of income.
 
The Company estimates the fair value of (i) all stock grants as of the grant date using the closing price per share of the Company’s common stock on such date, and (ii) all stock option and stock appreciation rights awards as of the grant date by applying the Black-Scholes option pricing model.
 
For full year 2018, the Board of Directors (the “Board”) approved various share grants under the Company’s 2009 Omnibus Incentive Plan (the “Plan”) totaling 181,808 shares in the aggregate, of which grants of 164,988 shares were approved in the first quarter of 2018.

The Board approved various share grants under the Plan in the first quarter of 2019 totaling 356,017 shares in the aggregate.
 
As of March 31, 2019, there was approximately $31.3 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 23.5 months.
 



17



8.
NET INCOME PER COMMON SHARE
 
Basic net income per common share is computed by dividing net income by the weighted-average number of common shares outstanding. Diluted net income per common share is computed by dividing net income by the weighted-average number of common shares outstanding, plus the dilutive effect of stock options, stock appreciation rights, and restricted stock units (collectively “Common Stock Equivalents”). The dilutive effect of Common Stock Equivalents is calculated under the treasury stock method using the average market price for the period. Certain Common Stock Equivalents were not included in the computation of diluted net income per common share because the exercise prices of those Common Stock Equivalents were greater than the average market price of the common shares.
 
Income per common share is calculated for the first quarter of 2019 and 2018 is as follows:
 
 
First Quarter Ended
 
(thousands except per share data)
 
March 31, 2019
 
April 1, 2018
 
Net income for basic and diluted per share calculation
 
$
20,849

 
$
30,068

 
Weighted average common shares outstanding - basic
 
23,039

 
24,740

 
Effect of potentially dilutive securities
 
209

 
370

 
Weighted average common shares outstanding - diluted
 
23,248

 
25,110

 
Basic net income per common share
 
$
0.90

 
$
1.22

 
Diluted net income per common share
 
$
0.90

 
$
1.20

 


9.
DEBT
 
A summary of total debt outstanding at March 31, 2019 and December 31, 2018 is as follows:
(thousands)

March 31, 2019

December 31, 2018
Long-term debt:

 

 
Revolver

$
385,000


$
392,332

Term Loan

95,000


96,250

Convertible Notes

172,500


172,500

Total long-term debt

652,500


661,082

Less: Convertible Notes debt discount

(28,454
)

(30,125
)
Less: current maturities of long-term debt

(10,000
)

(8,750
)
Less: net deferred financing costs related to Term Loan

(447
)

(456
)
Total long-term debt, less current maturities, net

$
613,599


$
621,751



2018 Credit Facility
The Company entered into a Second Amended and Restated Credit Agreement, dated as of June 5, 2018, (the “2018 Credit Agreement”) by and among the Company, the Lenders party thereto, and Wells Fargo, as Administrative Agent. The 2018 Credit Agreement amended and restated the Company’s 2015 Credit Agreement.

The 2018 Credit Agreement established a credit facility comprised of an $800 million revolving credit loan (the “2018 Revolver”) and a $100 million term loan (the “2018 Term Loan” and, together with the 2018 Revolver, the “2018 Credit Facility”). Borrowings under the 2018 Credit Agreement mature on March 17, 2022.

The 2018 Credit Agreement is secured by substantially all personal property assets of the Company and any domestic subsidiary guarantors. The 2018 Credit Agreement includes certain definitions, terms and reporting requirements and includes the following additional provisions:

18




The 2018 Term Loan will be repaid in consecutive quarterly installments on the last business day of each of March, June, September and December in the following amounts: (i) beginning June 30, 2018, through and including March 31, 2019, $1,250,000, (ii) beginning June 30, 2019, through and including March 31, 2021, $2,500,000, and (iii) beginning June 30, 2021, and each quarter thereafter, $3,750,000, with the remaining balance due at maturity;
The interest rates for borrowings under the 2018 Revolver and the 2018 Term Loan are the Base Rate plus the Applicable Margin or LIBOR plus the Applicable Margin, with a fee payable by the Company on unused but committed portions of the Revolver;
The 2018 Revolver includes a $10.0 million limit for same day advances (“Swing Line”) which shall bear interest based upon the Base Rate plus the Applicable Margin;
Up to $10.0 million of the 2018 Revolver is available as a sub facility for the issuance of standby letters of credit, which are subject to certain expiration dates;
The financial covenants include requirements as to a consolidated total leverage ratio and a consolidated fixed charge coverage ratio, and other covenants include limitations and restrictions concerning permitted acquisitions, investments, sales of assets, liens on assets, dividends and other payments; and
Customary prepayment provisions, representations, warranties and covenants, and events of default.

At March 31, 2019, the Company had $95.0 million outstanding under the 2018 Term Loan under the LIBOR-based option, and borrowings outstanding under the 2018 Revolver of $385.0 million under the LIBOR-based option. The interest rate for incremental borrowings at March 31, 2019 was the Prime Rate plus 1.00% (or 6.50%) for the Base Rate-based option, or LIBOR plus 2.00% (or 4.50%) for the LIBOR-based option. At December 31, 2018, the Company had $96.3 million outstanding under the 2018 Term Loan under the LIBOR-based option, and borrowings outstanding under the 2018 Revolver of: (i) $388.0 million under the LIBOR-based option and (ii) $4.3 million under the Base Rate-based option. The interest rate for incremental borrowings at December 31, 2018 was the Prime Rate plus 1.00% (or 6.50%) for the Base Rate-based option, or LIBOR plus 2.00% (or 4.56%) for the LIBOR-based option. The fee payable on committed but unused portions of the 2018 Revolver was 0.25% at March 31, 2019 and December 31, 2018.
 
Pursuant to the 2018 Credit Agreement, the financial covenants include: (a) a required maximum consolidated total leverage ratio, measured on a quarter-end basis, not to exceed 3.00:1.00 for the 12-month period ending on such quarter-end; and (b) a required minimum consolidated fixed charge coverage ratio, measured on a quarter-end basis, of at least 1.50:1.00 for the 12-month period ending on such quarter-end.

The consolidated total leverage ratio is the ratio for any period of consolidated total indebtedness (as measured as of the second day following the end of the immediately preceding fiscal quarter) to consolidated adjusted earnings before interest, taxes, depreciation and amortization (“EBITDA”). Consolidated total indebtedness for any period is the sum of: (i) total debt outstanding under the 2018 Revolver, the 2018 Term Loan and the Convertible Notes (as defined herein); (ii) capital leases and letters of credit outstanding; and (iii) deferred payment obligations. The consolidated fixed charge coverage ratio for any period is the ratio of consolidated EBITDA less restricted payments, taxes paid and capital expenditures as defined under the 2018 Credit Agreement to consolidated fixed charges. Consolidated fixed charges for any period is the sum of cash interest expense related to the 2018 Term Loan, 2018 Revolver and the Convertibles Notes, and scheduled principal payments on outstanding indebtedness under the 2018 Term Loan.

As of and for the March 31, 2019 reporting date, the Company was in compliance with both of these financial debt covenants as required under the terms of the 2018 Credit Agreement. The required maximum consolidated total leverage ratio and the required minimum consolidated fixed charge coverage ratio compared to the actual amounts as of March 31, 2019 and for the fiscal period then ended are as follows:  
 

Required


Actual

Consolidated total leverage ratio (12-month period)

3.00


2.46

Consolidated fixed charge coverage ratio (12-month period)

1.50


2.87



Total cash interest paid for the first quarter of 2019 and 2018 was $6.5 million and $2.9 million, respectively.


19



Interest Rate Swaps

In the third quarter of 2018, the Company entered into $200.0 million notional amount of variable to fixed interest rate swaps to partially hedge risks associated with the variable LIBOR component of the 2018 Credit Facility. These interest rate swaps fix the LIBOR component of interest expense on $200.0 million of the debt outstanding under the 2018 Credit Facility at an average interest rate of 2.91%, with an all-in average rate of 4.91% with the current applicable margin, discussed above. See Note 10 for further details.
Convertible Senior Notes
In January 2018, the Company issued $172.5 million aggregate principal amount of 1.00% Convertible Senior Notes due 2023 (the “Convertible Notes”). The total debt discount of $36.0 million at issuance consisted of two components: (i) the conversion option component, recorded to shareholders' equity, in the amount of $31.9 million, representing the difference between the principal amount of the Convertible Notes upon issuance less the present value of the future cash flows of the Convertible Notes and (ii) debt issuance costs of $4.1 million. The unamortized portion of the total debt discount is being amortized to interest expense over the life of the Convertible Notes beginning in the first quarter of 2018. The effective interest rate on the Convertible Notes, which includes the non-cash interest expense of debt discount amortization and debt issuance costs, was 5.25% as of March 31, 2019 and December 31, 2018. The unamortized portion of the debt discount and debt issuance costs as of March 31, 2019 was $28.5 million.
The net proceeds from the issuance of the Convertible Notes were approximately $167.5 million, after deducting the initial purchasers’ discounts and commissions and offering expenses payable by the Company, but before deducting the net cost of the Convertible Note Hedge Transactions and the Warrant Transactions (each as defined herein) described in Note 10. The Convertible Notes are senior unsecured obligations of the Company and pay interest semi-annually in arrears on February 1 and August 1 of each year at an annual rate of 1.00% beginning August 1, 2018. The Convertible Notes will mature on February 1, 2023 unless earlier repurchased or converted in accordance with their terms. The Convertible Notes are convertible by the noteholders, in certain circumstances and subject to certain conditions, into cash, shares of common stock of the Company, or a combination thereof, at the Company’s election. The initial conversion rate for the Convertible Notes is 11.3785 shares of the Company's common stock per $1,000 principal amount of the Convertible Notes (or 1,962,790 shares in the aggregate) and is equal to an initial conversion price of approximately $87.89 per share. If an event of default on the Convertible Notes occurs, the principal amount of the Convertible Notes, plus accrued and unpaid interest (including additional interest, if any) may be declared immediately due and payable, subject to certain conditions.
Convertible Notes holders can convert their Convertibles Notes on or after August 1, 2022 at any time at their option. Holders may convert Convertible Notes prior to August 1, 2022, only under the following circumstances: (i) during any calendar quarter commencing after the calendar quarter ending on June 30, 2018, if the last reported sale price of the Company's common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day, (ii) during the five business day period after any five consecutive trading day period in which the trading price per $1,000 principal amount of notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate on each such trading day and (iii) upon the occurrence of certain specified distributions or corporate events.
10.
DERIVATIVE FINANCIAL INSTRUMENTS
Convertible Note Hedge Transactions and Warrant Transactions
In January 2018, in connection with the Convertible Notes offering, the Company entered into privately negotiated convertible note hedge transactions (together, the “Convertible Note Hedge Transactions”) with each of Bank of America, N.A. and Wells Fargo Bank, National Association (together, the “Hedge Counterparties”). Pursuant to the Convertible Note Hedge Transactions, the Company acquired options to purchase the same number of shares of the Company's common stock (or 1,962,790 shares) initially underlying the Convertibles Notes at an initial strike price equal to the initial strike price of the Convertible Notes of approximately $87.89 per share, subject to customary anti-dilution adjustments. The options expire on February 1, 2023, subject to earlier exercise.

20



At the same time, the Company also entered into separate, privately negotiated warrant transactions (the “Warrant Transactions”) with each of the Hedge Counterparties, pursuant to which the Company sold warrants to purchase the same number of shares of the Company’s common stock (or 1,962,790 shares) underlying the Convertible Notes, at an initial strike price of approximately $113.93 per share, subject to customary anti-dilution adjustments. The warrants have a final expiration date of September 20, 2023.
The Company paid $31.5 million associated with the cost of the Convertible Note Hedge Transactions and received proceeds of $18.1 million related to the Warrant Transactions. The Convertible Note Hedge Transactions are expected generally to reduce potential dilution to the Company’s common stock upon any conversion of the Convertible Notes and/or offset any cash payments the Company is required to make in excess of the principal amount of converted Convertible Notes. However, the Warrant Transactions, could separately have a dilutive effect on the Company's common stock to the extent that the market price per share of the common stock exceeds the strike price of the warrants.
As these transactions meet certain accounting criteria, the Convertible Note Hedges Transactions and Warrant Transactions are recorded in stockholders’ equity and are not accounted for as derivatives.
Interest Rate Swaps
The 2018 Credit Facility exposes the Company to risk associated with the variability in interest expense associated with fluctuations in LIBOR. To partially mitigate this risk, the Company entered into interest rate swaps on a portion of its 2018 Credit Facility. As of March 31, 2019, the Company had a combined notional principal amount of $200.0 million of variable to fixed interest rate swap agreements, all of which were designated as cash flow hedges. These swap agreements effectively convert the interest expense associated with a portion of the 2018 Term Loan and a portion of the 2018 Revolver from variable interest rates to fixed interest rates and have maturities ranging from February 2022 to March 2022.
Fair Value of Derivative Contracts

The following table summarizes the fair value of derivative contracts included in the accompanying condensed consolidated balance sheet (in thousands):
 
 
Fair value of derivative liabilities
Derivatives accounted for as cash flow hedges
 
Balance sheet location
March 31, 2019
 
December 31, 2018
Interest rate swap agreements
 
Other long-term liabilities
$
4,062

 
$
2,652



The interest rate swaps are comprised of over-the-counter derivatives, which are valued using models that primarily rely on observable inputs such as yield curves, and are classified as Level 2 in the fair value hierarchy.

AOCI Recognition

The following table presents the amount of gains and losses that have been recognized in accumulated other comprehensive ("AOCI") from changes in the unrealized gain on the interest rate swaps, net of tax (in thousands):
Unrealized Loss Recognized in AOCI
First Quarter Ended
 
March 31, 2019
 
April 1, 2018
 
$
3,027

 
$

 







21



11.
ACCUMULATED OTHER COMPREHENSIVE LOSS

The Company incurs activity in AOCI for unrealized gains and losses on derivatives that qualify as hedges of cash flows, unrecognized pension costs and cumulative foreign currency translation adjustments. The activity in AOCI is as follows:
(thousands)
Cash Flow Hedges
 
Defined Benefit Pension
 
Foreign Currency Items
 
Total
Balance at December 31, 2018
$
(1,973
)
 
$
(675
)
 
$
(32
)
 
$
(2,680
)
Other comprehensive income (loss) (net of tax of $356, $0 and $0)
(1,054
)
 

 
27

 
(1,027
)
Balance at March 31, 2019
$
(3,027
)
 
$
(675
)
 
$
(5
)
 
$
(3,707
)

(thousands)
Defined Benefit Pension
 
Foreign Currency Items
 
Total
Balance at December 31, 2017
$
66

 
$

 
$
66

Other comprehensive income (net of tax of $0 and $0)

 
28

 
28

Balance at April 1, 2018
$
66

 
$
28

 
$
94




12.
LEASES

The Company adopted the provisions of ASC 842 in January of 2019 using the modified retrospective approach as of the effective date of ASC 842 (the effective date method). Under the effective date method, financial results in periods reported prior to 2019 are unchanged.

As a result of the adoption of ASC 842, operating leases for certain warehouses, buildings, forklifts, trucks, trailers and other equipment are now recognized as right-of-use assets and corresponding short-term and long-term lease liabilities. The Company utilized a package of available practical expedients in the adoption of ASC 842, which, among them, does not require the reassessment of operating versus capital lease classification.

Leases with an initial term of 12 months or less are not recorded on the balance sheet and expense related to these short term leases is included in total operating lease cost and not separately disclosed due to immateriality. Lease and non-lease components in the fixed base rent of facility and equipment leases are included as a single component and accounted for as a lease. Pursuant to ASC 842, the Company elected to use the remaining non-cancellable lease term as of January 1, 2019 in determining the lease term at the date of adoption and the corresponding incremental borrowing rate for such leases. Variable lease expense, principally related to trucks, forklifts, and index-related facility rent escalators, was immaterial for the quarter ended March 31, 2019 and is expected to be immaterial for 2019. Leases have remaining lease terms of one year to ten years. Certain leases include options to renew for an additional term. Where there is reasonable certainty to utilize a renewal option, we would include the renewal option in the lease term used to calculate operating lease right-of-use assets and liabilities.












22



Lease expense, supplemental cash flow information, and other information related to leases were as follows:
(thousands)
First Quarter Ended
 
March 31, 2019
Operating lease cost
$
7,787

 
 
Cash paid for amounts included in the measurement of lease liabilities:
 
Operating cash flows for operating leases
$
6,724

 
 
Right-of-use assets obtained in exchange for lease obligations:
 
Operating leases
$
577



Balance sheet information related to leases was as follows:
(thousands, except lease term and discount rate)
March 31, 2019
Assets
 
Operating lease right-of-use assets
$
79,868

Liabilities
 
Operating lease liabilities, current portion
$
25,874

Long-term operating lease liabilities
54,309

Total lease liabilities
$
80,183

Weighted average remaining lease term, operating leases (in years)
3.86

Weighted average discount rate, operating leases
4.01
%


Maturities of lease liabilities were as follows at March 31, 2019:
(thousands)
 
2019 (excluding the three months ended March 31, 2019)
$
21,884

2020