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 June 30, 2003
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 0-3922
PATRICK INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
INDIANA 35-1057796
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1800 South 14th Street, Elkhart, IN 46516
(Address of principal executive offices)
(ZIP Code)
(574) 294-7511
(Registrant's telephone number, including area code)
NONE
(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 is an accelerated filer.
Yes No X
Shares of Common Stock Outstanding as of July 31, 2003: 4,616,886
1
PATRICK INDUSTRIES, INC.
INDEX
Page No.
PART I: Financial Information
Unaudited Condensed Balance Sheets
June 30, 2003 & December 31, 2002 3
Unaudited Condensed Statements of Operations
Three Months Ended June 30, 2003 & 2002, and
Six Months Ended June 30, 2003 & 2002 4
Unaudited Condensed Statements of Cash Flows
Six Months Ended June 30, 2003 & 2002 5
Notes to Unaudited Condensed Financial Statements 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II: Other Information 20
Signatures 21
2
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PATRICK INDUSTRIES, INC.
UNAUDITED CONDENSED BALANCE SHEETS
(Unaudited)
JUNE 30 DECEMBER 31
2003 2002
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 4,657,525 $ 3,552,232
Trade receivables 19,176,205 11,544,753
Inventories 30,389,418 32,091,945
Income tax refund claims receivable 285,298 1,592,551
Prepaid expenses 763,352 849,344
Deferred tax assets 1,981,000 1,981,000
----------- -----------
Total current assets 57,252,798 51,611,825
----------- -----------
PROPERTY AND EQUIPMENT, at cost 92,010,981 91,499,922
Less accumulated depreciation 60,996,906 59,583,325
----------- -----------
31,014,075 31,916,597
----------- -----------
INTANGIBLE AND OTHER ASSETS 2,675,197 2,937,438
----------- -----------
Total assets $90,942,070 $86,465,860
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 3,671,428 $ 3,671,428
Accounts payable 10,988,342 5,822,511
Accrued liabilities 4,234,187 3,552,574
----------- -----------
Total current liabilities 18,893,957 13,046,513
----------- -----------
LONG-TERM DEBT, less current maturities 11,442,860 11,442,860
----------- -----------
DEFERRED COMPENSATION OBLIGATIONS 2,172,953 2,176,577
----------- -----------
DEFERRED TAX LIABILITIES 132,669 521,000
----------- -----------
Total liabilities $32,642,439 $27,186,950
----------- -----------
SHAREHOLDERS' EQUITY
Common stock 18,107,433 18,028,833
Retained earnings 40,192,198 41,250,077
----------- -----------
Total shareholders' equity 58,299,631 59,278,910
----------- -----------
Total liabilities and shareholders' equity $90,942,070 $86,465,860
=========== ===========
See accompanying Notes to Unaudited Condensed Financial Statements
3
PATRICK INDUSTRIES, INC.
UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
2003 2002 2003 2002
NET SALES $ 70,949,945 $ 82,566,743 $ 138,235,025 $157,809,532
------------- ------------- -------------- ------------
COST AND EXPENSES
Cost of goods sold 62,388,252 71,712,567 122,602,007 137,219,054
Warehouse and delivery expenses 3,195,977 3,634,000 6,389,750 7,059,023
Selling, general, and administrative expenses 5,133,407 5,611,363 10,304,779 11,241,675
Restructuring charges - - - 269,180 - - - 269,180
Interest expense, net 190,139 279,343 384,089 510,750
------------- ------------- -------------- ------------
70,907,775 81,506,453 139,680,625 156,299,682
------------- ------------- -------------- ------------
INCOME (LOSS) BEFORE INCOME TAXES 42,170 1,060,290 (1,445,600) 1,509,850
INCOME TAXES (CREDIT) 16,700 424,200 (571,000) 604,000
------------- ------------- -------------- ------------
NET INCOME (LOSS) $ 25,470 $ 636,090 $ (874,600) $ 905,850
============= ============= ============== ===========
BASIC AND DILUTED EARNINGS (LOSS)
PER COMMON SHARE $ .01 $ .14 $ (.19) $ .20
============= ============= ============== ============
DIVIDENDS PER SHARE $ .00 $ .04 $ .04 $ .08
============= ============= ============== ============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 4,590,327 4,544,015 4,587,311 4,536,932
See accompanying Notes to Unaudited Condensed Financial Statements.
4
PATRICK INDUSTRIES, INC.
UNAUDITED CONDENSED STATEMENTS OF
CASH FLOWS
SIX MONTHS ENDED
JUNE 30
2003 2002
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (874,600) $ 905,850
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,869,752 3,234,981
(Gain) on sale of fixed assets (90,695) (3,616)
Deferred income taxes (388,331) (548,839)
Other 141,000 384,770
Change in assets and liabilities:
Decrease (increase) in:
Trade receivables (7,631,452) (9,052,869)
Inventories 1,702,527 (2,974,815)
Income tax refund claims receivable 1,307,253 3,036,230
Prepaid expenses 85,992 385,600
Increase (decrease) in:
Accounts payable and accrued liabilities 6,087,444 6,843,205
Income taxes payable (240,000) 400,794
----------- -----------
Net cash provided by operating activities 2,968,890 2,611,291
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (1,775,107) (2,865,761)
Proceeds from sale of fixed assets 117,987 37,753
Other 124,742 66,301
----------- -----------
Net cash (used in) investing activities (1,532,378) (2,761,707)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on deferred compensation (144,624) (117,624)
Proceeds from sale of common stock - - - 15,128
Cash dividends paid (183,279) (363,163)
Other (3,316) (2,900)
----------- -----------
Net cash (used in) financing activities (331,219) (468,559)
----------- -----------
Increase (decrease) in cash and cash equivalents 1,105,293 (618,975)
Cash and cash equivalents, beginning 3,552,232 5,914,283
----------- -----------
Cash and cash equivalents, ending $ 4,657,525 $ 5,295,308
=========== ===========
Cash Payments for:
Interest $ 384,289 $ 507,600
Income taxes 57,168 24,107
See accompanying notes to Unaudited Condensed Financial Statements.
5
PATRICK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
1. In the opinion of the Company, the accompanying unaudited condensed
financial statements contain all adjustments (consisting of only normal
recurring accruals and the adjustments for restructuring charges as
discussed in Note 5) necessary to present fairly financial position as of
June 30, 2003 and December 31, 2002, the results of operations for the
three months and the six months ended June 30, 2003 and 2002, and cash
flows for the six months ended June 30, 2003 and 2002.
2. Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. It is suggested that these
condensed financial statements be read in conjunction with the financial
statements and notes thereto included in the Company's December 31, 2002
audited financial statements. The results of operations for the three month
and six month periods ended June 30, 2003 and 2002 are not necessarily
indicative of the results to be expected for the full year.
3. The inventories on June 30, 2003 and December 31, 2002 consist of the
following classes:
June 30 December 31
2003 2002
---- ----
Raw materials $18,875,364 $20,756,789
Work in process 1,899,683 1,625,099
Finished goods 4,054,449 4,190,366
----------- -----------
Total manufactured goods 24,829,496 26,572,254
Distribution products 5,559,922 5,519,691
----------- -----------
TOTAL INVENTORIES $30,389,418 $32,091,945
=========== ===========
The inventories are stated at the lower of cost, First-In First-Out (FIFO)
method, or market.
4. Income (loss) per common share for the six months ended June 30, 2003 and
2002 has been computed based on the weighted average common shares
outstanding of 4,587,311 and 4,536,932, respectively. Stock options
outstanding are immaterial and had no effect on earnings per share.
Dividends per common share for the quarter ending June 30, 2003 and 2002
were $.00 and $.04 per share respectively. This resulted in total dividends
for the six month period ending June 30, 2003 and 2002 of $.04 and $.08 per
share, respectively.
5. In June, 2002, the Company recorded a restructuring charge based on the
decision to close one of its cabinet door manufacturing facilities and
consolidate its operation into another facility. The Company recorded
estimated and actual costs related to this restructuring of $269,180, or
$.04 per share.
6. Delayed adoption of accounting standard:
The FASB has issued Statement No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity. Statement
No. 150 requires that certain freestanding financial instruments be
reported as liabilities in the balance sheet. Depending on the type of
financial instrument, it will be accounted for at either fair value or the
present value of future cash flows determined at each balance sheet date
with the change in that value reported as interest expense in the income
statement. Prior to the application of Statement No. 150, either those
financial instruments were not required to be recognized, or if recognized
were reported in the balance sheet as equity and changes in the value of
those instruments were normally not recognized in net income. The Company
is required to apply Statement No. 150 for the period beginning on July 1,
2003. The Company presently does not have any freestanding financial
instruments which will be affected by the application of Statement No. 150.
6
7. The Company accounts for grants of stock options under its stock option
plan based on the recognition and measurement principles of APB Opinion No.
25 and related interpretations. The following table illustrates the effect
on net income and earnings per share if the Company had applied the fair
value recognition provision of FASB Statement No. 123 to stock based
employee compensation:
Six Months Ended June 30
2003 2002
------------------------------------
Net income (loss):
As reported $ (874,600) $ 905,850
Deduct total stock-based employee
compensation expense determined
under fair value based method for
all rewards net of related tax effects (76,000) (76,078)
------------------------------------
Pro forma $ (950,600) $ 829,772
==================================
Basic earnings (loss) per share:
As reported $ (0.19) $ 0.20
Pro forma (0.21) 0.18
Diluted earnings (loss) per share:
As reported $ (0.19) $ 0.20
Pro forma (0.21) 0.18
8. The Company's reportable segments are as follows:
Laminating - Utilizes various materials including gypsum, particleboard,
plywood, and fiberboard which are bonded by adhesives or a heating process
to a number of products including vinyl, paper, foil, and high pressure
laminate. These laminated products are utilized to produce furniture,
shelving, wall, counter, and cabinet products with a wide variety of
finishes and textures.
Distribution - Distributes primarily pre-finished wall and ceiling panels,
particleboard, hardboard and vinyl siding, roofing products, high pressure
laminates, passage doors, building hardware, insulation, and other
products.
Wood - Uses raw lumber including solid oak, other hardwood materials, and
laminated particleboard or plywood to produce cabinet door product lines.
Other - Includes aluminum extrusion and fabricating, an adhesive division,
a pleated shade division, and a machine manufacturing division.
7
The table below presents unaudited information about the revenue and
operating income of those segments:
THREE MONTHS ENDED JUNE 30, 2003
--------------------------------
SEGMENT
LAMINATING DISTRIBUTION WOOD OTHER TOTAL
---------- ------------ ---- ----- -----
Net outside sales $ 35,188,555 $ 22,766,977 $ 6,529,057 $ 6,465,356 $ 70,949,945
Intersegment sales 1,571,960 151,118 161,325 2,137,509 4,021,912
-----------------------------------------------------------------------------------------------
Total sales $ 36,760,515 $ 22,918,095 $ 6,690,382 $ 8,602,865 $ 74,971,857*
-----------------------------------------------------------------------------------------------
Operating
income (loss) $ 602,354 $ 278,661 $ (335,332) $ 179,763 $ 725,446
THREE MONTHS ENDED JUNE 30, 2002
--------------------------------
Net outside sales $ 37,109,896 $ 29,389,085 $ 8,469,644 $ 7,598,118 $ 82,566,743
Intersegment sales 1,670,621 183,681 218,512 2,907,764 4,980,578
-----------------------------------------------------------------------------------------------
Total sales $ 38,780,517 $ 29,572,766 $ 8,688,156 $ 10,505,882 $ 87,547,321*
-----------------------------------------------------------------------------------------------
Operating
income (loss) $ 1,243,116 $ 665,428 $ (118,754) $ 227,541 $ 2,017,331
SIX MONTHS ENDED JUNE 30, 2003
------------------------------
SEGMENT
LAMINATING DISTRIBUTION WOOD OTHER TOTAL
---------- ------------ ---- ----- -----
Net outside sales $ 68,416,095 $ 42,928,756 $ 13,253,199 $ 13,636,975 $138,235,025
Intersegment sales 3,293,542 357,508 270,133 4,029,644 7,950,827
-----------------------------------------------------------------------------------------------
Total sales $ 71,709,637 $ 43,286,264 $ 13,523,332 $ 17,666,619 $146,185,852*
-----------------------------------------------------------------------------------------------
Operating
income (loss) $ 503,431 $ 336,016 $ (1,138,453) $ 159,717 $ (139,289)
Total assets $ 33,999,331 $ 11,427,991 $ 3,794,614 $ 6,262,237 $ 55,484,173
SIX MONTHS ENDED JUNE 30, 2002
------------------------------
Net outside sales $ 71,474,640 $ 55,034,605 $ 16,712,163 $ 14,588,124 $157,809,532
Intersegment sales 3,255,267 382,101 413,190 5,440,598 9,491,156
-----------------------------------------------------------------------------------------------
Total sales $ 74,729,907 $ 55,416,706 $ 17,125,353 $ 20,028,722 $167,300,688*
-----------------------------------------------------------------------------------------------
8
Operating
income (loss) $ 2,366,306 $ 773,128 $ (134,169) $ 315,334 $ 3,320,599
Total assets $ 33,880,287 $ 15,647,131 $ 6,273,744 $ 7,947,914 $ 63,749,076
9
Reconciliation of segment Operating income (loss) to consolidated Operating
income (loss):
3 Months Ended 6 Months Ended
June 30, June 30,
2003 2002 2003 2002
---- ---- ---- ----
Operating income (loss) for segments $ 725,446 $ 2,017,331 $ (139,289) $ 3,320,599
Corporate incentive agreements 300,000 322,500 606,019 736,401
Consolidation reclassifications 146,433 36,089 200,469 77,604
Gain (loss) on sale of assets 77,319 (49) 90,695 3,617
Restructuring charges - - - (269,180) - - - (269,180)
Unallocated corporate expenses (809,833) (547,736) (1,621,968) (1,378,250)
Other (207,056) (219,322) (197,437) (470,191)
----------- ----------- ----------- -----------
Consolidated operating income (loss) $ 232,309 $ 1,339,633 $(1,061,511) $ 2,020,600
=========== =========== =========== ===========
*Does not agree to Financial Statements due to consolidation eliminations.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
After coming off of a fairly positive 2002 year, with the exception of a
few items including the Oakwood Homes Corporation bankruptcy filing, 2003 thus
far has been a fairly difficult year for the Company. Conditions in the
Manufactured Housing and Recreational Vehicles industries', which represent
approximately 72% of the Company's sales at June 30, 2003 and are the primary
industries the Company serves, continue to be affected by a stagnant economy.
The end of the first quarter and the beginning of the second quarter of 2003
were impacted by the unstable situation in the Middle East and the War in Iraq.
The Company's sales for the first quarter of 2003 were off more than 10% from
the 2002 levels and second quarter sales were off more than 14%. Year to date
through June 30, 2003, the Company's sales decreased more than 12% from the
previous year.
The Manufactured Housing Industry is entering its fifth year of this
negative cycle as shipment levels began their fall in the middle of 1999.
Shipments through June, 2003 were down approximately 26% from the same period in
2002 and down almost 65% from the 1998 year to date numbers. The significant
declines in shipment levels and plant closings and consolidations have caused
extremely competitive market pricing conditions resulting in reduced prices and
gross profits. While this industry appears to have corrected its problems
related to dealer and retail inventory levels, repossessed inventory levels,
while declining, still remain high and the lack of available financing
alternatives lingers on. Current twelve month shipment estimates for calendar
2003 are now projected at between 135,000 and 140,000 units, which indicates a
range of continued decline of between 17% and 20% from the 2002 levels. There
have been indications of new entrants into the Manufactured Housing financing
arena, but little, if any, impact has been felt as of yet. Analysts are
predicting that shipment improvements in this industry will begin in 2004.
The Recreational Vehicle Industry saw January shipments come in at levels
more than 18% ahead of those achieved in 2002. As conflict in the Middle East
became more evident, consumer confidence declined and shipment levels began to
trend downward. Overall consumer confidence rebounded in the second quarter
providing certain Recreational Vehicle manufacturers with optimism that the year
may still reach shipment levels between 10% and 15% ahead of 2002.
The Company has continued its focus on diversifying into the Industrial
and Other markets where longer production runs contribute to improved operating
efficiencies and increased gross margins. Additionally, the Company wants to
reduce its reliance on the Manufactured Housing and Recreational Vehicle
industries. The Company's sales to these markets through June, 2003 were up more
than 5% from the previous year.
While conditions in the Manufactured Housing and Recreational Vehicle
Industries remain uncertain at this time, the Company has continued to evaluate
its overhead structure and make cost cutting adjustments where necessary in
order to keep costs aligned with revenues and operate more efficiently at these
reduced volumes. In conjunction with its strategic plan, however, the Company is
continuing to invest in equipment improvements in other areas to enhance its
market position and penetration. These efforts are ongoing as are efforts
related to strategic sales growth, new product introductions, and potential
acquisitions in order to grow the business and further allow the Company to
position itself to take advantage of a rebound in the industries which it serves
and has the potential to serve.
11
The following table sets forth the percentage relationship to net sales
of certain items in the Company's Statements of Operations:
Three Months Six Months
Ended June 30, Ended June 30,
2003 2002 2003 2002
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 87.9 86.9 88.7 86.9
Gross profit 12.1 13.1 11.3 13.1
Warehouse and delivery 4.5 4.4 4.6 4.5
Selling, general, & administrative 7.2 6.8 7.5 7.1
Restructuring charges - - - 0.3 - - - 0.2
Operating income (loss) 0.3 1.6 (0.8) 1.3
Income (loss) before taxes 0.1 1.3 (1.0) 1.0
Income taxes (credits) (0.1) 0.5 (0.4) 0.4
Net income (loss) - - - 0.8 (0.6) 0.6
RESULTS OF OPERATIONS
Quarter Ended June 30, 2003 Compared to Quarter Ended June 30, 2002
Net Sales. Net sales decreased $11.7 million, or 14.1%, from $82.6
million in the quarter ending June 30, 2002 to $70.9 million in the same period
in 2003. This decrease is attributable to a 25% decrease in shipments in the
second quarter of 2003 in the Manufactured Housing Industry, which was partially
offset by flat shipments in the Recreational Vehicle Industry and increases in
sales to the Industrial and Other markets.
Gross Profit. Gross profit decreased by $2.3 million, or 21.1%, from
$10.9 million in the second quarter of 2002 to $8.6 million in the second
quarter of 2003. As a percentage of net sales, gross profit decreased 1.0%, from
13.1% in the June, 2002 quarter to 12.1% in the June, 2003 quarter. These
decreases in gross profits are due to significant competitive pricing situations
in both the Manufactured Housing and Recreational Vehicle markets.
Warehouse and Delivery Expenses. Warehouse and delivery expenses
decreased $0.4 million, or 12.1%, from $3.6 million in the quarter ended June
30, 2002 to $3.2 million in the same period in 2003. As a percentage of net
sales, warehouse and delivery expenses increased slightly from 4.4% in 2002 to
4.5% in 2003. The decline in dollars and minimal increase in percentage of net
sales is consistent with the Company's efforts to control costs in this area and
keep costs aligned with revenues.
Selling, General, and Administrative Expenses. Selling, general, and
administrative expenses decreased $0.5 million, or 8.5%, from $5.6 million in
the 2002 second quarter to $5.1 million in the 2003 second quarter. As a
percentage of net sales, selling, general, and administrative expenses increased
0.4%, from 6.8% in 2002 to 7.2% in 2003. The decrease in dollars is due to the
Company continuing its efforts to control fixed costs in this area and keep
costs aligned with revenues. The slight increase in percentage of net sales is
due to the 14% decline in sales in the second quarter of 2003.
Restructuring Charges. As discussed in Note 5, the Company recognized
restructuring charges of $269,000 in the second quarter of 2002.
Operating Income. Operating income decreased by $1.1 million, or 82.7%,
from $1.3 million in the quarter ended June 30, 2002 to $0.2 million in the
quarter ended June 30, 2003. The decrease in operating income is due primarily
to the decrease in sales in the second quarter of 2003 coupled with significant
competitive pricing conditions causing reduced prices and gross profits.
12
Interest Expense, Net. Interest expense, net decreased by $89,000 as a
result of a decrease in interest rates on the variable tax exempt bonds as well
as reduced debt service requirements.
Net Income. The Company recorded net income of $25,000 in the second
quarter of 2003 compared to income of $636,000 in the second quarter of 2002.
The decrease in net income is attributable to the factors described above.
Quarter Ended June 30, 2002 Compared to Quarter Ended June 30, 2001
Net Sales. Net sales increased $3.7 million, or 4.6%, from $78.9 million
for the quarter ended June 30, 2001 to $82.6 million for the quarter ended June
30, 2002. This increase is attributable to an approximate 19% quarterly increase
in units shipped in the Recreational Vehicle industry coupled by a change in the
sales mix of core industries to which the Company serves. The Company's sales to
the Manufactured Housing, Recreational Vehicle, and other industries was 47%,
30%, and 23%, respectively. At June 30, 2001 the Company's sales to these
industries was 48%, 26%, and 26%, respectively.
Gross Profit. Gross profit increased by 7.6%, or $0.8 million, from $10.1
million for the quarter ended June 30, 2001 to $10.9 million for the quarter
ended June 30, 2002. As a percentage of net sales, gross profit increased 0.3%
for the same three month period. These increases are due to increased sales as
well as increased operating efficiencies resulting from the elimination of
certain low margin business and strategic cost cutting measures taken in the
past two years.
Warehouse and Delivery Expenses. Warehouse and delivery expenses
increased by $76,000, or 2.1%, from the three month period ended June 30, 2001
to the same period in 2002. As a percentage of net sales, warehouse and delivery
expenses decreased 0.1%, from 4.5% in the quarter ended June 30, 2001 to 4.4% in
the quarter ended June 30, 2002. The increase in dollars is due to the increased
sales levels while the decrease in percentage of net sales is due to the Company
shipping more full truckloads compared to the previous year as well as a
reduction in fleet size that the Company owns or leases.
Selling, General and Administrative Expenses. Selling, general, and
administrative expenses decreased by $318,000, or 5.4%, from $5.9 million in the
three month period ended June 30, 2001 to $5.6 million in the same period ended
June 30, 2002. As a percentage of net sales, selling, general, and
administrative expenses decreased by 0.7%, from 7.5% for the quarter ended June
30, 2001 to 6.8% for the quarter ended June 30, 2002. The decreases in dollars
and percentage of net sales is due to the Company making cost and staffing
reductions which has reduced the fixed portion of these expenses.
Restructuring Charges. As discussed in Note 5 of the financial
statements, the Company recognized restructuring charges of $269,000 in the
second quarter of 2002.
Operating Income. Operating income increased by $0.7 million, or 124%,
from approximately $0.6 million in the quarter ended June 30, 2001 to $1.3
million in the quarter ended June 30, 2002. The increase in operating income is
due to the factors described above.
Interest Expense, Net. Interest expense, net increased by $33,000 due to
the decline in interest rates on funds invested over the past year.
Net Income. The Company had net income of $636,000 for the quarter ended
June 30, 2002 compared to net income of $212,000 for the same period in 2001.
The increase in net income is attributable to the factors described above.
Six Months Ended June 30, 2003 Compared to Six Months Ended June 30, 2002
Net Sales. Net sales decreased $19.6 million, or 12.4%, from $157.8
million in the six months ended June 30, 2002 to $138.2 million in the same
period in 2003. The decrease is attributable to an approximate 26% decrease in
units shipped in the Manufactured Housing Industry which was offset by a 3%
increase in shipments in the Recreational Vehicle Industry. The Company's sales
for the first six months of 2003 are 40% to Manufactured Housing, 32% to
Recreational Vehicle, and 28% to Other industries.
13
Gross Profit. Gross Profit decreased $5.0 million, or 24.1%, from $20.6
million in 2002 to $15.6 million in 2003. As a percentage of net sales, gross
profit decreased 1.7%, from 13.0% in 2002 to 11.3% in 2003. The decrease in
gross profits both in dollars and as a percentage of net sales, is due to the
decrease in sales as well as significant competitive market pricing conditions
affecting both the Manufactured Housing and Recreational Vehicle industries.
Warehouse and Delivery Expenses. Warehouse and delivery expenses
decreased $0.7 million, or 9.5%, from $7.1 million in 2002 to $6.4 million in
2003. As a percentage of net sales, warehouse and delivery expenses increased
0.1%, from 4.5% in 2002 to 4.6% in 2003. The Company has continued to reduce its
fleet size from the previous year as well as gaining operating efficiencies by
consolidating shipments and attempting to ship more full truckloads. These
efforts have been offset by increased gasoline prices and delivery surcharges
from the trucking companies.
Selling, General, and Administrative Expenses. Selling, general, and
administrative expenses decreased by $0.9 million, or 8.3%, from $11.2 million
in 2002 to $10.3 million in 2003. As a percentage of net sales, selling,
general, and administrative expenses increased 0.3% from 2002 to 2003. The
decrease in dollars is due to the Company's cost reduction efforts and continued
emphasis on reducing fixed costs and keeping costs aligned with revenues.
Restructuring Charges. As discussed in Note 5, the Company recorded
restructuring charges of $269,000 in the six months ended June 30, 2002.
Operating Income (Loss). Operating income decreased by $3.1 million, from
operating income of $2.0 million in 2002 to an operating loss of $1.1 million in
2003. The decrease in operating income is due to the factors described above.
Interest Expense, Net. Interest expense, net decreased by $127,000 due to
decreased debt service levels and a corresponding decrease in interest rates on
the variable rate debt from the previous year.
Net Income (Loss). The Company reported a net loss of $0.9 million in the
first six months of 2003 compared to net income of $0.9 million in the same
period in 2002. The decrease is due to the factors described above.
Six Months Ended June 30, 2002 Compared to Six Months Ended June 30, 2001
Net Sales. Net sales increased $10.6 million, or 7.2%, from $147.2
million for the six months ended June 30, 2001 to $157.8 million for the six
months ended June 30, 2002. This increase is attributable to an approximate 14%
increase in units shipped in the Recreational Vehicle industry which was offset
by an approximate 5% decrease in units shipped in the Manufactured Housing
industry. The Company's sales for the first six months of 2002 are 47% to
Manufactured Housing, 30% to Recreational Vehicle, and 23% to other industries.
Gross Profit. Gross Profit increased 19.9%, or $3.4 million, from $17.2
million for the six months ended June 30, 2001 to $20.6 million for the same
period in 2002. As a percentage of net sales, gross profit increased
approximately 1.4%, from 11.7% for the six months ended June 30, 2001 to 13.1%
for the six months ended June 30, 2002. The increase in dollars and percentage
of net sales is due to the Company making significant strategic cost cutting
measures in 2000 and 2001, including plant closings and consolidations,
eliminating low margin business, and certain fixed overhead expenses.
Warehouse and Delivery Expenses. Warehouse and delivery expenses
increased approximately $92,000, or 1.3%, from $7.0 million for the six month
period ended June 30, 2001 to $7.1 million for the same period in 2002. As a
percentage of net sales, warehouse and delivery expenses decreased approximately
0.2%, from 4.7% in 2001 to 4.5% in 2002. The small increase in costs and the
decrease as a percentage of net sales is due to increased sales levels allowing
the Company to ship more full truckloads than in the previous year and a
reduction in fleet size that the Company owns or leases.
Selling, General, and Administrative Expenses. Selling, general, and
administrative expenses decreased $1.1 million, or 8.5%, from $12.3 million for
the six months ended June 30, 2001 to $11.2 million for the same period in 2002.
14
As a percentage of net sales, selling, general, and administrative expenses
decreased 1.2%. This decrease in dollars and percentage of net sales is due to
the Company making significant cost cutting measures in 2000 and 2001 which has
reduced the fixed portion of these expenses.
Restructuring Charges. As discussed in Note 5 of the financial
statements, the Company recorded restructuring charges of $269,000 for the six
months ended June 30, 2002.
Operating Income (Loss). Operating income increased $4.1 million, from a
loss of $2.1 million for the six months ended June 30, 2001 to income of $2.0
million for the six months ended June 30, 2002. The increase in operating income
is due to the factors described above.
Interest Expense, Net. Interest expense, net increased $27,000 due to the
Company earning less interest on funds invested due to the decline in interest
rates over the past year.
Net Income (Loss). The Company had net income of $0.9 million for the six
months ended June 30, 2002 compared to a net loss of $1.5 million for the same
period in 2001. This increase in net income is due to the factors described
above.
BUSINESS SEGMENTS
Quarter Ended June 30, 2003 Compared to Quarter Ended June 30, 2002
Laminating Segment Discussion
Net sales decreased $2.0 million, or 5.2%, from $38.8 million in the 2002
second quarter to $36.8 million in the 2003 second quarter. The decrease in net
sales is due to a 25% decrease in shipments in the Manufactured Housing Industry
in the second quarter which was offset by increased sales to the Industrial and
Other markets which account for approximately one third of the sales in this
segment.
Operating income decreased by $0.6 million, or 52%, from $1.2 million in
the quarter ended June 30, 2002 to $0.6 million in the quarter ended June 30,
2003. The decrease is due to significant competitive pricing conditions
affecting gross profits on sales to the Manufactured Housing and Recreational
Vehicle industries.
Distribution Segment Discussion
Net sales decreased by $6.6 million, or 23%, from $29.5 million in the
2002 second quarter to $22.9 million in the same period in 2003. This decrease
is consistent with the 25% quarterly decrease in shipments in the Manufactured
Housing Industry, which is the primary market that this segment serves.
Operating income decreased $0.4 million, or 58%, as a result of the
decreased sales volume for the quarter.
Wood Segment Discussion
Net sales decreased $2.0 million, or 23%, from $8.7 million for the
quarter ended June 30, 2002 to $6.7 million for the quarter ended June 30, 2003.
Approximately $1.0 million of this decrease is due to the Company closing one of
its cabinet door facilities in the second quarter of 2002. The remaining
decrease is due primarily to the Company choosing to discontinue the production
and sale to a particular customer of a specific raw material which caused
production inefficiencies and labor problems throughout the fourth quarter of
2002 and the first quarter of 2003.
Operating losses in this segment increased approximately $0.2 million
from the 2002 second quarter as the phase-out of the inefficient product
concluded in the second quarter of 2003.
15
Other Segment Discussion
Net sales in this segment decreased approximately $1.9 million, or 18%,
from $10.5 million in the second quarter of 2002 to $8.6 million in the second
quarter of 2003. This decrease is due primarily to the Company selling one of
its business units in this segment in late 2002.
Operating income decreased 21%, from $228,000 in the second quarter of
2002 to $180,000 in the second quarter of 2003. This is due primarily to
competitive market pricing conditions in the Manufactured Housing and
Recreational Vehicle industries.
Quarter Ended June 30, 2002 Compared to Quarter Ended June 30, 2001
Laminating Segment Discussion
Net sales in the laminating segment increased $3.5 million, or 10.0%,
from $35.3 million for the quarter ended June 30, 2001 to $38.8 million for the
quarter ended June 30, 2002. This increase in net sales is due to an approximate
19% increase in shipments in the Recreational Vehicle industry in the second
quarter of 2002 compared to the same period in 2001. Shipments in the
Manufactured Housing industry were down almost 10% for the same period.
Operating income increased $1.0 million, from $0.2 million for the
quarter ended June 30, 2001 to $1.2 million for the quarter ended June 30, 2002.
This increase is due to the increased sales volume and the cost cutting measures
that the Company has undertaken over the past two years to reduce fixed costs.
Distribution Segment Discussion
Net sales increased $2.2 million, or 8.2%, from $27.3 million to $29.5
million for the quarters ended June 30, 2001 and 2002, respectively. This
increase is due to market share gains in this segment.
Operating income increased 22.2%, or $121,000, from $545,000 in the
quarter ended June 30, 2001 to $666,000 in the same period in 2002. This
increase is due to the increased sales volume.
Wood Segment Discussion
Net sales increased $0.7 million, or 8.2%, from $8.0 million in the three
month period ended June 30, 2001 to $8.7 million in the same period in 2002.
This increase is consistent with the increase in units shipped in the
Recreational Vehicle industry which is the major industry that this segment
serves.
Operating income decreased $232,000, from income of $113,000 for the
quarter ended June 30, 2001 to a loss of $119,000 for the quarter ended June 30,
2002. This decrease is due to operating inefficiencies at one facility due to
equipment problems and inefficiencies at another facility which is being
consolidated into another operation.
Other Segment Discussion
Net sales in this segment decreased $3.4 million, or 24.7%, from $13.9
million in the quarter ended June 30, 2001 to $10.5 million for the same period
in 2002. This decrease is attributable to the closing and consolidation of two
operations in this segment in 2001 as well as the almost 10% decrease in sales
in the Manufactured Housing industry for the three month period ended June 30,
2002.
Operating income decreased $116,000, or 33.9%, from $344,000 in the
quarter ended June 30, 2001 to $228,000 in the quarter ended June 30, 2002. This
decrease is attributable to an approximate 83% decline in sales in one of the
operating units in this segment.
Six Months Ended June 30, 2003 Compared to Six Months Ended June 30, 2002
16
Laminating Segment Discussion
Net sales decreased $3.0 million, or 4.0%, from $74.7 million in 2002 to
$71.7 million in 2003. This decrease is due primarily to the 26% decrease in
units shipped in the Manufactured Housing Industry in the first six months of
2003. These sales decreases were offset by the 3% increase in units shipped in
the Recreational Vehicle Industry and increases in sales to the Industrial and
Other markets by the operations in this segment.
Operating income decreased $1.9 million, or almost 79%, due primarily to
significant competitive pricing situations in the Manufactured Housing and
Recreational Vehicle industries.
Distribution Segment Discussion
Net sales decreased $12.1 million, or 21.9%, from $55.4 million in 2002
to $43.3 million in 2003. This decrease is due primarily to the decrease in
units shipped in the Manufactured Housing Industry, which is the primary
industry this segment serves.
Operating income decreased $0.4 million, from $0.7 million in 2002 to
$0.3 million in 2003 due to decreased sales volume.
Wood Segment Discussion
Net sales decreased $3.6 million, or 21.0%, from $17.1 million in 2002 to
$13.5 million in 2003. This decrease is due primarily to the closing of one of
the unprofitable business units in this segment in 2002.
Operating losses in this segment increased approximately $1.0 million due
primarily to one of the business units in this segment continuing to experience
problems related to production inefficiencies and increased labor as a result of
the change in raw material required by a particular customer. This change
occurred in the fourth quarter of 2002 and continued through the first six
months of 2003 as the Company phased out its business related to this particular
product.
The Company has decided, subsequent to June 30, 2003, to close this
operating unit as a result of historical losses, unfavorable projected operating
results, and general business conditions. The Company expects to incur
restructuring charges in the third quarter of approximately 250,000. The closing
of this business unit will be completed by September 30, 2003.
Other Segment Discussion
Net sales decreased $2.3 million, or 11.8%, from $20.0 million in 2002 to
$17.7 million in 2003. This decrease is due primarily to the Company selling one
of the business units in this segment late in 2002.
Operating income decreased approximately $155,000 due primarily to the
decline in shipments in the Manufactured Housing Industry.
Six Months Ended June 30, 2002 Compared to Six Months Ended June 30, 2001
Laminating Segment Discussion
Net Sales in this segment increased $7.3 million, or 10.9%, from $67.4
million in the six months ended June 30, 2001 to $74.7 million in the same
period in 2002. This increase is due to the approximate 14% increase in
shipments in the Recreational Vehicle industry. Additionally, the Company closed
two divisions in the other segment in 2001 which had sales of approximately $3.0
million for the six months ended June 30, 2001. Certain of these operations were
merged into a facility in the laminating segment which was operating at less
than capacity and subsequently in 2002 has seen significantly increased volume
resulting in higher efficiencies and increased profitability.
17
Operating income increased $2.6 million, from a loss of $0.2 million in
the six months ended June 30, 2001 to income of $2.4 million in the same period
in 2002. This increase is attributable to increased sales volume coupled with
increased operating efficiencies from the reduction of fixed costs related to
the strategic cost cutting measures that were taken in 2000 and 2001.
Distribution Segment Discussion
Net sales in this segment increased $5.9 million, or 12.0%, from $49.5
million in the six months ended June 30, 2001 to $55.4 million in the six months
ended June 30, 2002. This increase is due to market share gains.
Operating income increased $261,000, or 51%, due to increased sales
volume.
Wood Segment Discussion
Net sales increased $1.4 million, or 8.8%, from $15.7 million in the six
months ended June 30, 2001 to $17.1 million in the six months ended June 30,
2002. This increase is attributable to the approximate 14% increase in shipments
in the Recreational Vehicle industry for the first six months of 2002.
Operating losses increased $122,000, from a loss of $12,000 for the six
months ended June 30, 2001 to a loss of $134,000 for the six months ended June
30, 2002. This decrease is attributable to two operating units in this segment
experiencing operating inefficiencies, one of which is being consolidated into
another division in this segment. The operating results of these two divisions
have offset the positive results of the three other divisions within this
segment.
Other Segment Discussion
Net sales in this segment decreased $4.5 million, or 18.5%, from $24.6
million in the first six months of 2001 compared to $20.0 million in the same
period in 2002. This decline is due to the closing and consolidation of one
division in the first quarter of 2001 and two divisions in the fourth quarter of
2001.
Operating income increased $822,000, or 162.1%, from a loss of $507,000
in the six month period ended June 30, 2001 compared to income of $315,000 in
the six month period ended June 30, 2002. This increase is due to the closing
and consolidation of three unprofitable divisions in this segment in 2001.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary capital requirements are to meet working capital
needs, support its capital expenditure plans, and meet debt service
requirements.
The Company, in September, 1995, issued to an insurance company in a
private placement $18,000,000 of senior unsecured notes. The ten year notes bear
interest at 6.82%, with semi-annual interest payments that began in 1996 and
seven annual principal repayments of $2,571,428 which began in September, 1999.
These funds were used to reduce existing bank debt and for working capital
needs.
The Company has a secured bank Revolving Credit Agreement that provides
loan availability of $10,000,000 with maturity in the year 2006.
Pursuant to the private placement and the Credit Agreement, the Company
is required to maintain certain financial ratios, all of which are currently
complied with.
The Company believes that cash generated from operations and borrowings
under its credit agreements will be sufficient to fund its working capital
requirements and normal recurring capital expenditures as currently
contemplated. The changes in inventory and accounts receivable balances, which
affect the Company's cash flows, are part of normal business cycles that cause
them to change periodically.
18
A summary of our contractual cash obligations remaining at June 30,
2003 and for the twelve month periods ending 2003 through 2007 is as follows:
----------------------------------------------------------------------------------------------
PAYMENTS DUE BY PERIOD
----------------------------------------------------------------------------------------------
- --------------------------------------
CONTRACTUAL OBLIGATIONS TOTAL 2003 2004 2005 2006 2007
- ----------------------------------------------------- --------------- --------------- --------------- -------------- ---------------
--------------- --------------- --------------- --------------- -------------- ---------------
Long-term debt, including interest
at variable rates** $5,600,900 $1,165,550 $1,214,950 $1,194,050 $1,173,150 $853,200
--------------- --------------- --------------- --------------- -------------- ---------------
Long-term debt, including interest
at fixed rates** $8,350,010 $2,783,335 $2,871,021 $2,695,654 $0 $0
--------------- --------------- --------------- --------------- -------------- ---------------
Operating Leases $2,610,315 $943,715 $1,089,729 $265,461 $198,736 $112,674
--------------- --------------- --------------- --------------- -------------- ---------------
Total contractual cash obligations $16,561,225 $4,892,600 $5,175,700 $4,155,165 $1,371,886 $965,874
--------------- --------------- --------------- --------------- -------------- ---------------
**Interest payments have been calculated using the fixed rate of 6.82% for the
Senior notes and the average 2002 annual interest rate of 1.90% for the
Industrial Revenue Bonds.
We also have a commercial commitment as described below:
- --------------------- -------------------- ----------------- -------------------
OTHER COMMERCIAL TOTAL AMOUNT OUTSTANDING DATE OF
COMMITMENT COMMITTED AT 06/30/03 EXPIRATION
- --------------------- -------------------- ----------------- -------------------
Line of Credit $10,000,000 $0 August 15, 2006
- --------------------- -------------------- ----------------- -------------------
We believe that our cash balance, availability under our line of credit,
if needed, and anticipated cash flows from operations will be adequate to fund
our cash requirements for 2003.
CIRITICAL ACCOUNTING POLICIES
Our significant accounting policies are summarized in the footnotes to
our financial statements. Some of the most critical policies are also discussed
below.
Our major operating assets are accounts receivable, inventory, and
property and equipment. Exclusive of the write-off of certain assets related to
the Oakwood Homes Corporation bankruptcy filing in November, 2002, we have not
experienced significant bad debts losses and our reserve for doubtful accounts
of $350,000 should be adequate for any exposure to loss in our June 30, 2003
accounts receivable. We have also established reserves for slow moving and
obsolete inventories and believe them to be adequate. We depreciate our property
and equipment over their estimated useful lives and we have not identified any
items that are impaired for the six months ended June 30, 2003.
SEASONALITY
Manufacturing operations in the manufactured housing and recreational
vehicle industries historically have been seasonal and are generally at the
highest levels when the climate is moderate. Accordingly, the Company's sales
and profits are generally highest in the second and third quarters.
19
INFLATION
The Company does not believe that inflation had a material effect on
results of operations for the periods presented.
SAFE HARBOR STATEMENT
The Company makes forward-looking statements from time to time and
desires to take advantage of the "safe harbor" which is afforded such statements
under the Private Securities Litigation Reform Act of 1995 when they are
accompanied by meaningful cautionary statements identifying important factors
that could cause actual results to differ materially from those in the
forward-looking statements.
The statements contained in the foregoing "Management's Discussion and
Analysis of Financial Condition and Results of Operations," as well as other
statements contained in this Quarterly Report and statements contained in future
filings with the Securities and Exchange Commission and publicly disseminated
press releases, and statements which may be made from time to time in the future
by management of the Company in presentations to shareholders, prospective
investors, and others interested in the business and financial affairs of the
Company, which are not historical facts, are forward-looking statements that
involve risks and uncertainties that could cause actual results to differ
materially from those set forth in the forward-looking statements. Any
projections of financial performance or statements concerning expectations as to
future developments should not be construed in any manner as a guarantee that
such results or developments will, in fact, occur. There can be no assurance
that any forward-looking statement will be realized or that actual results will
not be significantly different from that set forth in such forward-looking
statement. In addition to the risks and uncertainties of ordinary business
operations, the forward-looking statements of the Company referred to above are
also subject to the following risks and uncertainties:
o The Company operates in highly competitive business environment, and
its sales could be negatively affected by its inability to maintain or
increase prices, changes in geographic or product mix, or the decision
of its customers to purchase competitive products instead of the
Company's products. Sales could also be affected by pricing,
purchasing, financing, operational, advertising, or promotional
decisions made by purchasers of the Company products.
o On an annual basis, the Company negotiates renewals for property,
casualty, workers compensation, general liability, product liability,
and health insurance coverages. Due to conditions within these
insurance markets and other factors beyond the Company's control,
future coverages and the amount of the related premiums could have a
negative affect on the Company's results.
o The primary markets to which the Company sells include the
Manufactured Housing and Recreational Vehicle Industries, which are
cyclical and dependent on various factors including interest rates,
access to financing, inventory and production levels and other
economic and demographic factors. The Company's sales levels could be
negatively impacted by changes in any one of the above items.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk related to interest rate changes on
its debt. Long term debt includes $7,714,288 of indebtedness bearing interest at
a fixed rate of 6.82%. The related maturities and interest are reported in the
contractual obligations table in the Liquidity and Capital Resources section of
this report.
ITEM 4. CONTROLS AND PROCEDURES
Our Chief Executive Officer and our Chief Financial Officer have
concluded, based on their evaluation as of the end of the period covered by this
report that the Company's "disclosure controls and procedures" (as defined in
the Securities Exchange Act of 1934 rules 13a-15(e) and 15d-15(e) are effective
to ensure that information required to be disclosed in the reports that the
Company files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported, within the time periods specified in the
Securities and Exchange Commission's rules and forms.
20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Shareholders of the Company was held on May
15, 2003.
(b) Not applicable.
(c) 1. Set forth below is the tabulation of the votes on each nominee
for election as a director:
WITHHOLD
NAME FOR AUTHORITY
Walter E. Wells 3,121,395 1,037,415
David D. Lung 2,830,266 1,328,544
John H. McDermott 3,121,395 1,037,415
(d) Not applicable.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
31.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(b) and Section 302 of the Sarbanes-Oxley Act of 2002,
31.2 Certification of Chief Financial Officer pursuant to Rule
13a-14(b) and Section 302 of the Sarbanes-Oxley Act of 2002,
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant Section 906 of the Sarbanes-Oxley Act of 2002,
filed herewith.
(b) A Form 8-K was filed on May 19, 2003, announcing the
suspension of the quarterly dividend.
(c) A Form 8-K was filed on July 17, 2003, announcing the second
quarter financial results.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PATRICK INDUSTRIES, INC.
(Company)
Date August 13, 2003 /S/David D. Lung
------------------- ---------------------------------
David D. Lung
(President)
Date August 13, 2003 /S/Andy L. Nemeth
--------------------- ---------------------------------
Andy L. Nemeth
(Vice President, Finance)
(Chief Financial Officer)