OVERVIEW
This Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") should be read in conjunction with the Company's Condensed Consolidated Financial Statements and Notes thereto included in Item 1 of this Report. In addition, this MD&A contains certain statements relating to future results which are forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. See "Information Concerning Forward-Looking Statements" on page 25 of this Report. The Company undertakes no obligation to update these forward-looking statements.
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OVERVIEW OF MARKETS AND RELATED INDUSTRY PERFORMANCE
The global spread of the novel coronavirus (COVID-19) in recent months has
negatively impacted the global economy, disrupted global supply chains and
created significant volatility and disruption in financial markets. The impact
of this pandemic has created significant uncertainty in the global economy and
has had, and is expected to continue to have, a material adverse effect on our
business, employees, suppliers, and customers. Despite a strong start to the
year, there was an abrupt decline in OEM production in the recreational vehicle
and marine markets as well as a decrease in
Sustained adverse impacts to the Company, certain suppliers, and customers may also affect the Company's future valuation of certain assets and therefore may increase the likelihood of an impairment charge, write-off, or reserve associated with such assets, including goodwill, indefinite and finite-lived intangible assets, property and equipment, inventories, accounts receivable, tax assets, and other assets.
We believe that the combination of our financial position, our available liquidity, the flexibility of our highly variable cost operating model and the diversification of our end markets and the geographic regions in which we operate will help to lessen the impacts of COVID-19 on the Company's operations and financial results. If the situation evolves into a more prolonged pandemic, we plan to continue to adjust mitigation measures as needed related to the health and safety of our employees as well as to operating efficiencies. Those measures have included, and could continue to include in the future, temporarily suspending select plant operations, modifying workspaces, continuing social distancing policies, implementing new personal protective equipment or health screening policies at our facilities, or such other industry best practices needed to continue to maintain a healthy and safe environment for our employees during the pandemic. While we have enhanced, and will continue to enhance, functionality and security of technology for off-site functions, we are planning for the eventual reintroduction of our on-site workforce to our facilities.
We have taken steps to reduce the impact of the COVID-19 pandemic on our operating results, including reducing working capital, postponing non-essential capital expenditures, reducing operating costs, aligning production with demand, initiating workforce reductions and furloughs, reducing salaries, and substantially reducing discretionary spending. These countermeasures are expected to lessen the impacts of COVID-19 on our full year 2020 financial results. As the impact of the COVID-19 pandemic on the economy and our markets evolves, we will continue to assess the impact on the Company and plan to continue to take actions to reduce such impact on our business and operating results.
First Quarter 2020 Financial Overview
Recreational Vehicle ("RV") Industry
The RV industry is our primary market and comprised 55% and 56% of the Company's
sales in the first quarter ended
According to theRecreation Vehicle Industry Association , wholesale shipments totaled 100,404 units in the first quarter of 2020, and were virtually flat compared to 99,976 units in the first quarter of 2019. Retail unit sales in the first quarter of 2020 are estimated to have increased slightly despite the disruption to consumers related to COVID-19. Additionally, based on our estimates, RV dealer inventories at the end of the first quarter of 2020 were at their lowest level since 2014. Marine Industry Sales to the marine industry, which represented approximately 13% and 15% of the Company's consolidated net sales in the first quarter of 2020 and 2019, respectively, decreased 14% compared to the prior year quarter.
For the first quarter of 2020, overall marine retail unit shipments in the powerboat sector, which is the Company's primary marine market, decreased an estimated 5%, with aluminum fishing sales decreasing an estimated 5%; pontoon sales
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decreasing an estimated 2%; fiberglass sales decreasing an estimated 7%; and ski and wake sales decreasing an estimated 6%. Inventory re-calibration continued in the first quarter of 2020, with wholesale unit shipments declining at an estimated mid-to-high teens percentage rate as OEMs continued to decrease production in alignment with lower dealer inventories.
Industrial Market The industrial market is comprised primarily of the kitchen cabinet industry, hospitality market, retail and commercial fixtures market, office and household furniture market and regional distributors. Sales to this market represented 13% and 12% of our sales in the first quarter of 2020 and 2019, respectively, and increased 14% in the first quarter of 2020 compared to the prior year quarter. Overall, our revenues in these markets are focused on the residential housing, hospitality, high-rise housing and office, commercial construction and institutional furniture markets. We estimate that approximately 60% of our industrial business is directly tied to the residential housing market, with the remaining 40% directly tied to the non-residential and commercial markets. Combined new housing starts increased 22% in the first quarter of 2020 compared to the prior year quarter, with single family housing starts increasing 12% and multifamily residential starts increasing 47% for the same period. Our industrial products are generally among the last components installed in new unit construction and as such our related sales typically trail new housing starts by four to six months. REVIEW OF CONSOLIDATED OPERATING RESULTS First Quarter EndedMarch 29, 2020 Compared to 2019 The following table sets forth the percentage relationship to net sales of certain items on the Company's Condensed Consolidated Statements of Income. First Quarter Ended March 29, 2020 March 31, 2019 Net sales 100.0 % 100.0 % Cost of goods sold 81.4 82.5 Gross profit 18.6 17.5 Warehouse and delivery expenses 4.2 4.0 Selling, general and administrative expenses 6.1 6.2 Amortization of intangible assets 1.6 1.5 Operating income 6.7 5.9 Interest expense, net 1.8 1.5 Income taxes 1.3 1.0 Net income 3.6 3.4
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14% and MH market sales increased 6% when compared to the prior year quarter. All four of our end markets were impacted by business disruptions and associated lost shipping days due to the COVID-19 pandemic.
The Company's RV content per wholesale unit (on a trailing twelve-month basis)
for the first quarter of 2020 decreased approximately 1% to
Cost of Goods Sold. Cost of goods sold decreased
Cost of goods sold as a percentage of net sales decreased primarily as a result
of (i) cost reductions we initiated in the third quarter of 2019 which benefited
our gross margins in the first quarter of 2020, (ii) synergies achieved and
realized in the first quarter of 2020 from our 2018 and 2019 acquisitions and
(iii) decreases in commodity cost inputs. In general, the Company's cost of
goods sold percentage can be impacted from quarter-to-quarter by demand changes
in certain market sectors that can result in fluctuating costs of certain raw
materials and commodity-based components that are utilized in the production of
our products.
Gross Profit. Gross profit increased
Warehouse and Delivery Expenses. Warehouse and delivery expenses increased
Selling, General and Administrative ("SG&A") Expenses. SG&A expenses decreased
The decrease in SG&A expenses in the first quarter of 2020 compared to 2019 is primarily due to the realization of cost reduction measures implemented in the third quarter of 2019 as well as reductions in certain SG&A spending associated with the decrease in net sales in the first quarter of 2020.
Amortization of Intangible Assets. Amortization of intangible assets increased
Operating Income. Operating income increased
Interest Expense, Net. Interest expense increased
Income Taxes. Income tax expense increased
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The increase in income tax expense is due primarily to an increase in pretax
income as well as an increase in the effective tax rate in the first quarter of
2020 compared to the prior year quarter. The effective tax rate in the first
quarter of 2020 and 2019 was 26.4% and 22.3%, respectively. The effective tax
rate for the first quarter of 2019 includes the impact of the recognition of
excess tax benefits on share-based compensation that was recorded as a reduction
to income tax expense upon realization in the amount of
Use of Financial Metrics
Our MD&A includes financial metrics, such as RV, marine and MH content per unit,
which we believe are important measures of the Company's business performance.
Content per unit metrics are generally calculated using our market sales divided
by third-party measures of industry volume. These metrics should not be
considered alternatives to
REVIEW BY BUSINESS SEGMENT
First Quarter Ended
In the discussion that follows, sales attributable to the Company's reportable segments include intersegment sales and gross profit includes the impact of intersegment operating activity.
The table below presents information about the sales, gross profit and operating income of the Company's reportable segments. A reconciliation of consolidated operating income is presented in Note 15 to the Notes to Condensed Consolidated Financial Statements. First Quarter Ended (thousands) March 29, 2020 March 31, 2019 Sales Manufacturing $ 426,839$ 433,404 Distribution 171,266 183,699 Gross Profit Manufacturing 78,947 76,827 Distribution 29,196 28,973 Operating Income Manufacturing 45,704 44,437 Distribution 9,968 8,291 Manufacturing
Sales. Sales decreased
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Gross Profit. Gross profit increased
Gross profit increased during the first quarter of 2020 compared to the prior year quarter primarily due to cost reduction initiatives implemented in the third quarter of 2019 as well as synergies we achieved from our 2018 and 2019 acquisitions.
Operating Income. Operating income increased
Distribution
Sales. Sales decreased
Gross Profit. Gross profit increased
Operating Income. Operating income increased
LIQUIDITY AND CAPITAL RESOURCES
As the impact of the COVID-19 pandemic on the economy, our markets and our operations evolves, we will continue to assess our liquidity needs. The COVID-19 pandemic has materially adversely impacted the global economy, disrupted global supply chains and created significant volatility and disruption in financial markets. An extended period of global supply chain and economic disruption could materially affect our business, results of operations, ability to meet debt covenants, access to sources of liquidity and financial condition. Given the economic uncertainty as a result of the pandemic, we have taken actions to improve our current liquidity position, including reducing working capital, pausing our share repurchase program, postponing non-essential capital expenditures, reducing executive salaries, reducing operating costs by initiating workforce reductions and furloughs, and reducing discretionary spending.
Our liquidity at
Cash Flows
Operating Activities Cash flows from operating activities are one of the Company's primary sources of liquidity, representing the net income the Company earned in the reported periods, adjusted for non-cash items and changes in operating assets and liabilities. Net cash provided by operating activities decreased$14.7 million to$13.2 million in the first quarter of 2020 from$27.9 million in the first quarter of 2019 primarily as a result of an increase in the use of cash from trade receivables of$12.3 million , primarily reflecting the timing of cash receipts from one large customer, and an increase in the use of cash from inventories of$19.4 million , due mostly to purchases of raw materials in anticipation of potential supply chain disruptions related to COVID-19. These decreases in operating cash flows were partially offset by an increase of cash flows from prepaid expenses and other assets of$4.4 million , accounts payable of$10.5 million , and other items of$2.1 million , mostly due to the timing of prepaid expenditures and accounts payable disbursements. 23
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Investing Activities Net cash used in investing activities increased$21.9 million to$31.8 million in the first quarter 2020 from$9.9 million in the first quarter of 2019 primarily due to an increase in cash used in business acquisitions of$23.1 million , partially offset by a decrease in capital expenditures and other investing activities of$1.2 million . Financing Activities Net cash flows used by financing activities increased$9.7 million to$26.2 million in the first quarter of 2020 from$16.5 million in the first quarter of 2019 primarily due to stock repurchases under our buyback program of$15.6 million with no corresponding amount in the prior year quarter and cash dividends paid to shareholders of$5.8 million with no corresponding amount in the prior year quarter. These increases in use of cash from financing activities were partially offset by a decrease in the payment of contingent consideration from a business acquisition of$2.4 million and a decrease in net repayments on our credit facility of$8.6 million and other financing activities of$0.7 million . Summary of Liquidity and Capital ResourcesThe Company's existing cash and cash equivalents, cash generated from operations, and available borrowings under its credit facility are expected to be sufficient to meet anticipated cash needs for working capital and capital expenditures for at least the next 12 months, exclusive of any acquisitions, based on its current cash flow budgets and forecast of short-term and long-term liquidity needs. The Company's credit facility consists of a$550 million senior secured revolver and a$100 million senior secured term loan. The maturity date for borrowings under the credit agreement that established the credit facility isSeptember 17, 2024 . Upon the satisfaction of certain conditions, and obtaining incremental commitments from its lenders, the Company may be able to increase the borrowing capacity of the credit facility by up to$250 million . Borrowings under the credit facility are secured by substantially all personal property assets of the Company and any domestic subsidiary guarantors. Pursuant to the credit agreement:
• The term loan is due in consecutive quarterly installments in the
following amounts: (i) through and includingJune 30, 2021 ,$1,250,000 and (ii) beginningSeptember 30, 2021 , and each quarter thereafter,$2,500,000 , with the remaining balance due at maturity;
• The interest rates for borrowings under the revolver and the term loan are
the Prime Rate or LIBOR
plus a margin, which ranges from 0.00% to 0.75% for Prime Rate loans and from 1.00% to 1.75% for LIBOR loans depending on the Company's consolidated total leverage ratio. The Company is required to pay fees on unused but committed portions of the revolver, which range from 0.15% to 0.225%.
At
As of and for the
Required Actual Consolidated total leverage ratio (12-month period) 4.00 2.32
Consolidated fixed charge coverage ratio (12-month period) 1.50 6.53
Working capital requirements vary from period to period depending on manufacturing volumes primarily related to the RV, MH and marine industries as well as the industrial markets we serve, the timing of deliveries, and the payment cycles of customers. In the event that operating cash flow is inadequate and one or more of the Company's capital resources were to become unavailable, the Company would seek to revise its operating strategies accordingly. The Company will continue to
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assess its liquidity position and potential sources of supplemental liquidity in view of operating performance, current economic and capital market conditions, and other relevant circumstances.
CRITICAL ACCOUNTING POLICIES
There have been no material changes to our critical accounting policies which
are summarized in the MD&A in our Annual Report on Form 10-K for the year ended
OTHER
Seasonality
Manufacturing operations in the RV, marine and MH industries historically have been seasonal and at their highest levels when the weather is moderate. Accordingly, the Company's sales and profits had generally been the highest in the second quarter and lowest in the fourth quarter. Seasonal industry trends in the past several years have included the impact related to the addition of major RV manufacturer open houses for dealers in the August/September timeframe as well as marine open houses in the January/February timeframe, resulting in dealers delaying certain restocking purchases until new product lines are introduced at these shows. In addition, current and future seasonal industry trends may be different than in prior years due to the impact of national and regional economic conditions and consumer confidence on retail sales of RVs and other products for which the Company sells its components, timing of dealer orders, fluctuations in dealer inventories, and from time to time, the impact of severe weather conditions on the timing of industry-wide wholesale shipments. INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS
The Company makes forward-looking statements with respect to financial
condition, results of operations, business strategies, operating efficiencies or
synergies, competitive position, growth opportunities for existing products,
plans and objectives of management, markets for the common stock of
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