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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the fiscal year ended December 31, 2003 or [ ] TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE Act OF 1934
Commission file Number 0-3922
PATRICK INDUSTRIES, INC.
(Exact name of Company as specified in its charter)
Indiana 35-1057796
(State or other jurisdiction of (IRS Employer
incorporation or organization) identification No.)
1800 South 14th Street, P.O. Box 638, Elkhart, Indiana 46515
(Address of principal executive offices) (ZIP code)
Company's telephone number, including area code: (574) 294-7511
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, WITHOUT PAR VALUE
PREFERRED SHARE PURCHASE RIGHTS
(Title of each class)
Indicate by check mark whether the Company (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 Company 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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Company's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K [ ]
Indicate by check mark whether the registrant is an accelerated filer.
YES NO X
----- ------
1
The aggregate market value of the voting stock held by non-affiliates of the
Company on June 30, 2003 (based upon the closing price on NASDAQ and an estimate
that 76.3% of the shares are owned by non-affiliates) was $22,374,322. The
closing market price was $6.38 on that day and 4,596,261 shares of the Company's
common stock were outstanding.
As of March 16, 2004 there were 4,676,549 shares of the Company's common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE.
Portions of the Company's Proxy Statement for its Annual
Meeting of Shareholders to be held on May 14, 2004 are
incorporated by reference into Parts III of this Form
10-K.
2
PART I
ITEM 1. BUSINESS
The Company is a leading manufacturer and supplier of building
products and materials to the Manufactured Housing and Recreational Vehicle
industries. In addition, the Company is a supplier to certain other industrial
markets, such as furniture manufacturing, marine, architectural, and the
automotive aftermarket. The Company manufactures decorative vinyl and paper
panels, wrapped mouldings, cabinet doors, electronic desks, kitchen cabinets,
countertops, aluminum extrusions, drawer sides, adhesives, and laminating
machines. The Company is also an independent wholesale distributor of
pre-finished wall and ceiling panels, drywall and drywall finishing products,
particleboard, vinyl and cement siding, interior passage doors, roofing
products, high pressure laminates, decorative mirrors and glass, insulation, and
other related products.
The Company has a nationwide network of distribution centers for
its products, thereby reducing intransit delivery time and cost to the regional
manufacturing plants of its customers. The Company believes that it is one of
the few suppliers to the Manufactured Housing and Recreational Vehicle
industries that have such a nationwide network. The Company maintains five
manufacturing plants and a distribution facility near its principal offices in
Elkhart, Indiana, and operates eleven other warehouse and distribution centers
and twelve other manufacturing plants in twelve other states.
Strategy
- --------
Over time, the Company has developed very strong working
relationships with its customers. In so doing, the Company has oriented its
business and expansion to the needs of these customers. These customers include
all of the larger Manufactured Housing and Recreational Vehicle manufacturers.
The Company's customers generally demand high quality standards and a high
degree of flexibility from their suppliers. The result has been that the Company
focuses on maintaining and improving the quality of its manufactured products,
and has developed a nationwide manufacturing and distribution presence in
response to its customers' need for flexibility. As the Company explores new
markets and industries, it believes that this nationwide network provides it
with a strong foundation for expansion.
The Company continually seeks to improve its position as a leading
supplier to the Manufactured Housing and Recreational Vehicle industries and
other industries to which its products, manufacturing processes, or sales and
distribution system are applicable. Currently, approximately 41% of the
Company's sales are to the Manufactured Housing industry, 31% to the
Recreational Vehicle industry, and 28% to other industries compared to 2002
where sales were 47%, 30% and 23%, respectively. These industries, and the
impact that they have on their suppliers, are characterized by cyclical demand
and production, small order quantities, and short lead times. These
characteristics have an impact on the suppliers, many of whom tend to be small,
regional, and specific product line companies.
Management has identified several tools which it expects to
utilize to accomplish its operating strategies, including the following:
Diversification into Additional Industries
While the Company continually seeks to improve its position as a
leading supplier to the Manufactured Housing and Recreational Vehicle
industries, it is also seeking to expand its product lines into other industrial
markets. Many of the Company's products, such as its countertops, cabinet doors,
laminated panels, and shelving, have applications in the furniture and cabinetry
markets. In addition, the manufacturing processes for the Company's aluminum
extrusions are easily applied to the production of products for the marine,
automotive and truck accessories markets and aftermarkets, and many other
markets. The Company's adhesives are produced for almost all industrial
applications.
3
Because order size from these additional industries tends to be for
larger numbers of units, the Company enjoys better production efficiencies for
these orders. The Company believes that diversification into additional
industries will reduce its vulnerability to the cyclical nature of the
Manufactured Housing and Recreational Vehicle industries. In addition, the
Company believes that its nationwide manufacturing and distribution capabilities
enable it to serve its customers more effectively and position itself for
product expansion.
Expansion of Manufacturing Capacity
In the last 5 years, the Company has invested approximately $22.6
million to upgrade existing facilities and equipment and to purchase
manufacturing and distribution facilities for its laminated paneling products,
industrial adhesives, cabinet doors, and furniture components. The capacity
created by these investments has enabled the Company to accommodate future
growth in the Company's product lines and markets.
Strategic Acquisitions and Expansion
The Company supplies a broad variety of building material products
and, with its nationwide manufacturing and distribution capabilities, is
well-positioned for the introduction of new products. The Company, from time to
time, considers the acquisition of additional product lines, facilities or other
assets to complement or expand its existing business. In 1999, the Company
expanded the Sun Adhesive facility in Decatur, Alabama to increase capacity and
in March, 2004, the Company purchased a new building complex in Elkhart, Indiana
for the consolidation of its manufacturing operations in that area. This
acquisition should provide opportunities for improved efficiencies and capacity
for future growth both in manufacturing and distribution operations.
Restructuring and Impairment
- ----------------------------
In the last three years the Company has incurred restructuring
charges of $0.9 million related to the closing, consolidation, and relocation of
five manufacturing divisions in various states. The charges included severance
payments, write-down of obsolete inventories, equipment relocation, and future
rental commitments related to closed facilities. These strategic initiatives
were done to eliminate duplication of efforts, close negative performing
operations, and increase volume levels at other locations. The majority of cost
savings related to these plans will be realized in future years.
Additionally, in the last three years the Company has incurred
impairment charges of $2.8 million related to the write-down of the net book
value of long-lived assets primarily in the Company's Wood and Other segments.
The impairment costs were calculated by estimating discounted future cash flow
and comparing it to the carrying value of these assets. These write-downs were
non-cash charges and effectively eliminated all of the goodwill on the Company's
books as well as reducing future yearly depreciation expense.
Business Segments
- -----------------
The Company's operations through December 31, 2003 comprise four
reportable segments. Information related to those segments is contained in "Note
14-Segment Information" appearing in the financial statements included herein as
noted in the index appearing under Item 15(a)(1) and (2). Beginning in 2004, the
Company's operations will be presented in three reportable segments.
4
7
Principal Products
- ------------------
The Company distributes pre-finished wall and ceiling panels,
vinyl and cement siding, roofing products, high pressure laminates, passage
doors, building hardware, insulation, decorative mirrors and glass, and other
products. Through its manufacturing divisions, the Company manufactures
decorative vinyl and paper panels, cabinet doors, shelving, countertops, wrapped
wood mouldings, aluminum extrusions, drawer sides, furniture components, wood
adhesives, and laminating presses. In conjunction with its manufacturing
capabilities, the Company also provides value added processes including custom
fabrication, edge-banding, drilling, and cut to size capabilities.
Pre-finished wall panels contributed more than 10% to total sales.
The percentage contributions of this class of product to total sales was 39.6%,
36.5%, and 36.0% for the years ended December 31, 2003, 2002, and 2001,
respectively.
The Company has no material patents, licenses, franchises, or
concessions and does not conduct significant research and development
activities.
Manufacturing Processes and Operations
- --------------------------------------
The Company's laminating facilities utilize 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.
The Company's Metals division utilizes technology to produce
aluminum extrusions for framing and window applications. In addition, this
division makes extrusions for running boards, accessories and parts for trucks,
vans, automobiles, marine industry products, and other construction-related
materials.
The Company manufactures two distinct cabinet door product lines.
One product line is manufactured from raw lumber utilizing solid oak and other
hardwood materials. The Company's other line of doors is made of laminated
fiberboard. The Company's doors are sold mainly to the Manufactured Housing and
Recreational Vehicle industries, and the Company also markets to the cabinet
manufacturers and "ready-to-assemble" furniture manufacturers.
The Company's adhesive division, which supplies adhesives used in
most of the Company's manufacturing processes and to outside industrial
customers, uses a process of mixing non-toxic non-hazardous chemicals with water
to produce adhesives sold in tubes, pails, barrels, totes, and rail tank cars.
Markets
- -------
The Company is engaged in the manufacturing and distribution of
building products and material for use primarily by the Manufactured Housing and
Recreational Vehicle industries and other Industrial markets.
Manufactured Housing
The Manufactured Housing industry has historically served as a
more affordable alternative to the home buyer. Because of the relatively lower
cost of construction as compared to site-built homes, manufactured homes
traditionally have been one of the principal means for first-time home buyers to
overcome the obstacles of large down payments and higher monthly mortgage
payments. Manufactured housing also presents an affordable alternative to
site-built homes for retirees and others desiring a lifestyle in which home
ownership is less burdensome than in the case of site-built homes. The increase
in square footage of living space in manufactured homes created by
multi-sectional models has made them more attractive to a larger segment of home
buyers.
Manufactured homes are built in accordance with national, state,
and local building codes. Manufactured homes are factory-built and transported
to a site where they are installed, often permanently.
5
Some manufactured homes have design limitations imposed by the constraints of
efficient production and over-the-road transit. Delivery expense limits the
effective competitive shipping range of the manufactured homes to approximately
400 to 600 miles.
Modular homes, which are a component of the manufactured housing
industry, are factory built homes that are built in sections and transported to
the site for installation. These homes are generally set on a foundation and are
subject to land/home financing conditions. These units in recent years have been
gaining in popularity due to their aesthetic similarity to site-built homes and
their relatively less expensive cost as well as their less restrictive access to
financing when compared to the chattel lending market.
The Manufactured Housing industry is cyclical and is affected by
the availability of alternative housing such as apartments, town houses, and
condominiums. In addition, interest rates, availability of financing, regional
population, employment trends, and general regional economic conditions affect
the sale of manufactured homes. The Manufactured Housing Institute reported that
during the four-year period ended December 31, 1991, shipments of manufactured
homes declined 26.6% to a total of approximately 171,000 units nationally in
1991. The reported number of units increased sharply in the five years following
1991, with increases in each of those years. Manufactured home unit shipments
reached a peak for the latest cycle in 1998 at 372,800, which represents 118%
more units than in 1991. The industry has seen an approximate 65% decline in
unit shipments since 1998, with 2003 shipments finishing at 130,900.
These cycles have a historic precedent. The Company believes that
the factors responsible for the national decline prior to 1992 included weakness
in the manufacturing, agricultural, and, in particular, oil industry sectors.
These industry sectors have historically provided a significant portion of the
Manufactured Housing industry's customer base. Additionally, high vacancy rates
in apartments, high levels of repossession inventories, and over-built housing
markets in certain regions of the country resulted in fewer sales of new
manufactured homes in the past. Changes in these market characteristics had
caused the manufactured housing cycle to change positively until 1999. Beginning
in mid-1999 and continuing through 2003, the Manufactured Housing industry has
had to contend with increased repossessed inventory levels, credit requirements
that became more stringent, and a reduction in availability of lenders for both
retail and dealers. As a result, the industry has experienced four consecutive
years of significant declines in the number of industry shipments with 2003
finishing at levels which were almost 62% lower than those experienced in 1999.
There is speculation that the coming year will provide an increase of
approximately 5% to 10% in unit shipments from the 2003 levels, however nothing
tangible has been seen yet. Repossessed inventory levels have been reduced to a
manageable level, however the availability of financing and access to the
Asset-Backed securities market is still restricted. Additionally, employment
growth is needed to provide more significant increased demand, thus resulting in
increased production and shipment levels.
Manufactured Housing Shipments:
-------------------------------
1990 - 188,200
1991 - 170,700
1992 - 210,800
1993 - 254,300
1994 - 303,900
1995 - 339,600
1996 - 363,400
1997 - 353,400
1998 - 372,800
1999 - 348,700
2000 - 250,600
2001 - 193,200
2002 - 168,500
2003 - 130,900
6
Recreational Vehicles
The Recreational Vehicle industry has been characterized by cycles
of growth and contraction in consumer demand reflecting prevailing general
economic conditions which affect disposable income for leisure time activities.
Fluctuations in interest rates, consumer confidence, and concerns about the
availability and price of gasoline, in the past, have had an adverse impact on
recreational vehicle sales. Recently the industry has been characterized by
increased demand as a result of continued growth in disposable incomes, low
inflation, low interest rates and renewed growth in employment. Long term trends
point to market growth because of favorable demographics.
Recreational vehicle classifications are based upon standards
established by the Recreational Vehicle Industry Association. The principal
types of recreational vehicles include conventional travel trailers, folding
camping trailers, fifth wheel trailers, motor homes, and van conversions. These
recreational vehicles are distinct from mobile homes, which are manufactured
houses designed for permanent and semi-permanent residential dwelling.
Conventional travel trailers and folding camping trailers are
non-motorized vehicles which are designed to be towed by passenger automobiles,
pick-up trucks, or vans. They provide comfortable, self-contained living
facilities for short periods of time. Conventional travel trailers and folding
camping trailers are towed by means of a frame hitch attached to the towing
vehicle. Fifth wheel trailers, designed to be towed by pick-up trucks, are
constructed with a raised forward section that is attached to the bed area of
the pick-up truck. This allows for a bi-level floor plan and more living space
than a conventional travel trailer.
A motor home is a self-powered vehicle built on a motor vehicle
chassis. The interior typically includes a driver's area, kitchen, bathroom,
dining, and sleeping areas. Motor homes are self-contained with their own
lighting, heating, cooking, refrigeration, sewage holding, and water storage
facilities. Although they are not designed for permanent or semi-permanent
living, motor homes do provide comfortable living facilities for short periods
of time.
Van conversions are conventional vans modified for recreational or
other use.
Sales of recreational vehicle products have been cyclical.
Shortages of motor vehicle fuels and significant increases in fuel prices have
had a material adverse effect on the market for recreational vehicles in the
past, and could adversely affect demand in the future. The Recreational Vehicle
industry is also affected by the availability and terms of financing to dealers
and retail purchasers. Substantial increases in interest rates and decreases in
the general availability of credit have had a negative impact upon the industry
in the past and may do so in the future. Recession and lack of consumer
confidence generally results in a decrease in the sale of leisure time products
such as recreational vehicles.
The industry shipped 321,200 units in 1999. Increased gasoline
prices and uncertainty with regards to the economy resulted in shipment declines
over the next two years of more than 20%. The industry rebounded in 2002 due to
improved consumer confidence, depleted dealer inventories, lower interest rates,
and a fear of flying after the September 11, 2001 terrorist attacks. Shipment
levels in 2003 improved yet again almost to the 1999 levels and 2004 shipments
are expected to be better than those attained in 2003.
7
Recreational Vehicle Shipments:
-------------------------------
1990 - 173,100
1991 - 163,300
1992 - 203,400
1993 - 227,800
1994 - 259,200
1995 - 247,000
1996 - 247,500
1997 - 254,500
1998 - 292,700
1999 - 321,200
2000 - 300,100
2001 - 256,800
2002 - 311,000
2003 - 320,800
Other Markets
Many of the Company's products, such as its countertops, laminated
panels, cabinet doors, and shelving may be utilized in the furniture and
cabinetry markets. The Company's aluminum extrusion process is easily applied to
the production of accessories for trucks, vans, and automobiles, as well as
architectural and certain other building products. The Company's adhesives are
marketed in many industrial adhesive markets.
While demand in these industries also fluctuates with general
economic cycles, the Company believes that these cycles are less severe than
those in the Manufactured Housing and Recreational Vehicle industries. As a
result, the Company believes that diversification into these new markets will
reduce its reliance on the markets it has traditionally served and will mitigate
the impact of their historical cyclical patterns on its operating results.
Marketing and Distribution
- --------------------------
The Company's sales are to Manufactured Housing and Recreational
Vehicle manufacturers and other building products manufacturers. The Company has
approximately 2,000 customers. The Company has three customers, who together
accounted for approximately 26% and 27% of the Company's total sales in 2003 and
2002, respectively. Ten other customers collectively accounted for approximately
19% of 2003 sales. The Company believes it has good relationships with its
customers.
Products for distribution are purchased in carload or truckload
quantities, warehoused, and then sold and delivered by the Company.
Approximately 43% of the Company's distribution segment products are shipped
directly from the suppliers to the customers. The Company typically experiences
a two to four week delay between issuing its purchase orders and delivering of
products to the Company's warehouses or customers. The Company's customers do
not maintain long-term supply contracts, and therefore the Company must bear the
risk of accurate advance estimation of customer orders. The Company maintains a
substantial inventory to satisfy these orders. The Company has no significant
backlog of orders.
The Company operates twelve warehouse and distribution centers and
seventeen manufacturing plants located in Alabama, Arizona, California, Florida,
Georgia, Indiana, Kansas, Minnesota, Nevada, North Carolina, Oregon,
Pennsylvania, and Texas. Through the use of these facilities, the Company is
able to minimize its in-transit delivery time and cost to the regional
manufacturing plants of its customers.
8
Suppliers
- ---------
During the year ended December 31, 2003, the Company purchased
approximately 67% of its raw materials and distributed products from twenty
different suppliers. The five largest suppliers accounted for approximately 40%
of the Company's purchases. Materials are primarily commodity products, such as
lauan, gypsum, aluminum, particleboard, and other lumber products which are
available from many suppliers. Alternate sources of supply are available for all
of the Company's major materials.
Competition
- -----------
The Manufactured Housing and Recreational Vehicle industries are
highly competitive with low barriers to entry. This level of competition carries
through to the suppliers to these industries. Competition is based primarily on
price, product features, quality, and service. The Company has several
competitors in each of its classes of products. Some manufacturers and suppliers
of materials purchased by the Company also compete with it and sell directly to
the same industries. Most of the Company's competitors compete with the Company
on a regional basis. In order for a competitor to compete with the Company on a
national basis, the Company believes that a substantial capital commitment and
experienced personnel would be required. The industrial markets in which the
Company continues to expand are also highly competitive.
Employees
- ---------
As of December 31, 2003, the Company had 1,065 employees of which
952 employees were engaged directly in production, warehousing, and delivery
operations, 54 in sales, and 59 in office and administrative activities. There
are three manufacturing plants and one distribution center covered by collective
bargaining agreements. The Company considers its relationships with its
employees to be good.
The Company provides retirement, group life, hospitalization, and
major medical plans under which the employee pays a portion of the cost.
Executive Officers of the Company
- ---------------------------------
The following table sets forth the executive officers of the Company, as
of December 31, 2003:
Name Position
---- --------
Keith V. Kankel Interim President and Chief Executive Officer
Andy L. Nemeth Vice President Finance, Secretary-Treasurer
and Chief Financial Officer
Gregory J. Scharnott Vice President Operations and Distribution -
East
Paul E. Hassler Vice President Operations and Distribution -
West (President and Chief Executive Officer
effective April 5, 2004)
Alan M. Rzepka Vice President Sales & Marketing
Keith V. Kankel (age 61) assumed the position of Interim President and Chief
Executive Officer of the Company in October, 2003 following the resignation of
David D. Lung. Mr. Kankel previously held the position of Secretary-Treasurer
from 1974 through 2002 and Vice President of Finance from 1987 through July,
2002, when he retired. He will continue as Interim President and Chief Executive
Officer until April 5, 2004, after which he will remain with the Company for the
remainder of the year on a part time basis as Senior Vice President of Special
Projects. Mr. Kankel has been a member of the Board of Directors of the Company
since 1977.
Andy L. Nemeth (age 35) assumed the position of Secretary-Treasurer in July,
2002, and in May, 2003, Mr. Nemeth was elected Vice President Finance. Mr.
Nemeth was a Division Controller from May, 1996 to July,
9
2002 and prior to that he spent five years in public accounting with Coopers &
Lybrand (now Pricewaterhouse Coopers).
Gregory J. Scharnott (age 54) was elected Vice President Operations and
Distribution - East in December, 2003. Prior to that, Mr. Scharnott was
Executive Director of Midwest Operations from February, 2001 to June, 2002, and
Vice President of Operations from June, 2002 to December, 2003. Mr. Scharnott
has over 25 years of manufacturing management experience, including 20 years
with the General Electric Company.
Paul E. Hassler (age 56) assumed the position of Vice President Operations and
Distribution - West in December, 2003. Prior to that, Mr. Hassler served as
General Manager of California Operations from 1986 to 1994 and Executive
Director of West Coast Operations from 1994 to 2003. Mr. Hassler has over 32
years of Manufactured Housing and Recreational Vehicle experience in various
capacities. In February, 2004, Mr. Hassler was elected President and Chief
Executive Officer of the Company effective April 5, 2004.
Alan M. Rzepka (age 47) assumed the position of Vice President of Sales &
Marketing in May, 2000.
Mr. Rzepka was National Sales Manager from January, 1997 to May, 2000 and prior
to that was Director of Manufacturing Purchasing since 1994.
Website Access to Company Reports
- ---------------------------------
We make available free of charge through our website,
www.patrickind.com, (1) our annual report on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K, and all amendments to those reports as
soon as reasonably practicable after such material is electronically filed with
the Securities and Exchange Commission and (2) the Audit Committee, Compensation
Committee and Nominating and Corporate Governance Committee charters, our
Corporate Governance Guidelines and our Corporate Compliance and Code of Ethics
Policy. Our internet website and the information contained therein or
incorporated therein are not intended to be incorporated into this Annual Report
on Form 10-K.
10
ITEM 2. PROPERTIES AND EQUIPMENT
As of December 31, 2003, the Company maintained the following
warehouse, manufacturing and distribution facilities:
Ownership or
Location Use Area Sq. Ft. Lease Arrangement
- -------- --- ------------ -----------------
Elkhart, IN Manufacturing(3) 40,400 Leased to 2005
Elkhart, IN Mfg. & Dist.(1)(3) 173,400 Owned
Elkhart, IN Manufacturing (2) 42,000 Leased to 2004
Elkhart, IN Manufacturing(2) 30,000 Leased to 2004
Elkhart, IN Manufacturing(2) 31,000 Leased to 2004
Elkhart, IN Admin. Offices 10,000 Owned
Mishawaka, IN Manufacturing(4) 191,000 Owned, Subject to Mortgage
Decatur, AL Distribution(1) 30,000 Leased to 2004
Decatur, AL Manufacturing(2)(4) 35,000 Owned
Decatur, AL Manufacturing(2)(4) 59,000 Owned
Valdosta, GA Distribution(1) 30,800 Owned
New London, NC Mfg. & Dist.(1)(2) 163,200 Owned, Subject to Mortgage
Halstead, KS Distribution(1) 36,000 Owned
Waco, TX Mfg. & Dist.(1)(2) 105,600 Leased to 2004
Waco, TX Manufacturing(2) 21,000 Leased to 2004
Mt. Joy, PA Distribution(1)(2) 58,500 Owned
Mt. Joy, PA Manufacturing(2) 30,000 Owned
Ocala, FL Manufacturing(2) 55,500 Owned
Fontana, CA Mfg. & Dist.(1)(2) 110,000 Owned
Fontana, CA Manufacturing(2) 71,800 Owned
Fontana, CA Manufacturing(2) 32,000 Leased to 2004
Fontana, CA Distribution(1) 22,400 Leased to 2004
Woodland, CA Distribution (1) 17,200 Leased to 2005
Phoenix, AZ Manufacturing (2) 36,000 Leased to 2004
Phoenix, AZ Manufacturing (2) 7,500 Leased to 2004
Woodburn, OR Mfg. & Dist.(1,2,3) 153,000 Owned, Subject to Mortgage
Boulder City, NV Manufacturing(4) 24,700 Leased to 2006
(1) Distribution center
(2) Vinyl/paper/foil laminating
(3) Cabinet doors and other wood related
(4) Aluminum, adhesives, and other
Additionally, the Company owns a 109,000 square foot building in
Elkhart, IN which is being used for administrative offices and materials
storage. The Company also owns a 30,900 square foot building with administrative
offices in Elkhart, IN which is currently for sale. During 2003, the Company
sold its vacant 50,900 square foot manufacturing building in Goshen, IN and its
62,000 square foot vacant building in Bristol, IN. In March, 2004 the Company
purchased a 155,000 square foot building complex in Elkhart, IN for the
consolidation of several of the above Elkhart manufacturing operations during
2004. As of December 31, 2003, the Company owned or leased 30 trucks, 38
tractors, 83 trailers, 137 forklifts, 1 automobile and a corporate aircraft. All
owned and leased facilities and equipment are in good condition and well
maintained.
11
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to claims and suits in the ordinary course of
business. In management's opinion, currently pending legal proceedings and
claims against the Company will not, individually or in the aggregate, have a
material adverse effect on the Company's financial condition, results of
operations, or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SECURITY
HOLDER MATTERS
The Company's common stock is listed on The NASDAQ Stock MarketSM
under the symbol PATK. The high and low trade prices of the Company's common
stock as reported on NASDAQ/NMS for each quarterly period during the last three
years were as follows:
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
2003 7.640 - 6.490 6.690 - 6.330 6.860 - 6.330 8.850 - 6.840
2002 9.944 - 7.059 10.000 - 8.050 9.000 - 6.760 7.999 - 5.440
2001 7.563 - 5.625 9.180 - 6.250 8.550 - 6.000 7.280 - 5.450
The quotations represent prices between dealers, do not include
retail mark-ups, mark-downs or commissions, and may not necessarily represent
actual transactions.
There were approximately 500 holders of the Company's common stock as
of March 16, 2004 as taken from the transfer agent's shareholder listing. It is
estimated that there are approximately 2,000 holders of the Company's common
stock held in street name.
The Company declared a first time regular quarterly dividend of $.04
per common share starting June 30, 1995 and continued it through the first
quarter of 2003. The Board of Directors decided to suspend the quarterly
dividend in the second quarter of 2003 due to industry conditions. Any future
determination to pay cash dividends will be made by the Board of Directors in
light of the Company's earnings, financial position, capital requirements, and
such other factors as the Board of Directors deems relevant.
12
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data for each of the five years
set forth below has been derived from financial statements audited by McGladrey
& Pullen, LLP, independent certified public accountants, certain of which have
been included elsewhere herein. The following data should be read in conjunction
with the Financial Statements and related Notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere herein:
As of or for the Year Ended December 31,
2003 2002 2001 2000 1999
(dollars in thousands, except per share amounts)
Net sales $ 274,682 $ 308,755 $ 293,070 $ 361,620 $ 457,356
Gross profit 32,183 39,193 34,012 41,905 57,339
Warehouse and delivery
expenses 12,916 14,329 14,407 15,140 16,715
Selling, general, and
administrative expenses 18,442 23,546 24,926 25,241 27,058
Impairment charges - - - - - - 2,834 6,937 - - -
Restructuring charges 235 269 423 718 - - -
Interest expense, net 680 891 962 1,224 1,393
Income taxes (credits) (35) 63 (3,769) (2,821) 4,769
Net income (loss) (55) 95 (5,771) (4,534) 7,404
Basic earnings (loss)
per common share (.01) .02 (1.28) (0.89) 1.30
Diluted earnings (loss)
per common share (.01) .02 (1.28) (0.89) 1.29
Weighted average common
shares outstanding 4,601 4,547 4,524 5,118 5,714
Cash dividends, per
common share .04 .16 .16 .16 .16
Working capital 35,635 38,566 39,082 41,416 47,553
Total assets 81,142 86,466 91,970 102,520 126,203
Long-term debt 7,771 11,443 15,114 18,786 22,457
Shareholders' equity 59,248 59,279 59,504 66,250 79,567
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
After coming off of a fairly positive 2002 year, the twelve months
ending December 31, 2003 proved to be a challenge for the Company as well as a
year faced with much economic uncertainty. Market conditions were adversely
affected early in the year by the unstable situation in the Middle East, the War
in Iraq, and a relatively stagnant economy. Consumer confidence levels in 2003
fluctuated up and down on a monthly and quarterly basis with December finishing
the second highest month and quarter of the year. The Company's sales were
approximately 11.0% less than the previous year and declined each quarter from
2002 as sales decreased by 10.5%, 14.1%, 13.1%, and 5.5% for the first, second,
third, and fourth quarters of 2003, respectively. The fourth quarter 2003
included $1.2 million in positive adjustments compared to the fourth quarter of
2002, which included a $1.6 million write-off of receivables and inventory
related to the Oakwood Homes Corporation Bankruptcy filing. The Company reported
a slight loss year to date for 2003 of $55,000 compared to income in 2002 of
$95,000.
13
The Manufactured Housing Industry, which represents approximately 41%
of the Company's 2003 sales, continued to struggle as total shipments were in
their fifth year of decline and the lowest in over forty years. Unit shipments
in 2003 were approximately 130,900, or 22.3%, less than the 168,500 in 2002.
Further, the 2003 shipment levels were 62% less or approximately 218,000 units
less, than they were in 1999, the year that the downturn began. These low
shipment levels have caused significant closings and consolidations in the
industry and have promoted an environment of extremely competitive pricing which
has negatively impacted the Company's margins. While repossessed inventory
levels declined to more manageable levels in 2003, slow jobs growth, the lack of
significant dealer and retail financing, and restricted access to the Asset
Backed Securities market continues to deter significant growth in this industry.
Current estimates for 2004 shipment levels are approximately 145,000 units, or a
projected 10% increase over 2003. There are indications that the market is
improving and prospective new lenders are considering entering the financing
arena, however preliminary signs indicate that tangible evidence of this, if
any, won't be seen until at least the second quarter.
As trends are changing and modular housing units have become more
popular with the consumers, the manufacturers have shifted some of the product
mix that goes into these units. They have specified increased amounts of
distribution type wallboard versus the laminated substrates that have
traditionally been used in the past. This shift has negatively impacted the
demand for the Company's laminated wallboard that used to be dominant in these
units. This trend is expected to continue not only in the modular units, but
also in the conventional HUD code manufactured housing units.
The Recreational Vehicle Industry, which makes up approximately 31% of
the Company's 2003 sales, on the other hand experienced a near record year and
the second highest shipment levels in the last 25 years to finish at 320,800
units, or 3.2% better than 2002. Low interest rates, an improving economy,
shifting demographic trends, and changing attitudes towards RV's have stimulated
growth and preliminary signs indicate that 2004 shipment levels will be
consistent, if not better, than those achieved in 2003.
The Industrial market segment, which continues to be an area of focus
for the Company, provides opportunities for future growth. Sales to this
particular market comprise the remaining 28% of consolidated sales and the
longer production runs contribute to increased efficiencies and improved profit
margins. The Company has been proactive in its investment in equipment to help
diversify its manufacturing and fabricating capabilities to penetrate the
industrial and other markets and help offset the demand decreases from modular
housing market. Additionally, the Company continues to look for new products to
increase its market share in the industries that it serves.
The following table sets forth the percentage relationship to net
sales of certain items in the Company's statements of operations:
Year Ended
December 31,
2003 2002 2001
Net sales 100.0% 100.0% 100.0%
Cost of sales 88.3 87.3 88.4
Gross profit 11.7 12.7 11.6
Warehouse and delivery 4.7 4.7 4.9
Selling, general and administrative 6.7 7.6 8.5
Impairment charges - - - - 1.0
Restructuring charges 0.1 0.1 0.1
Operating income (loss) 0.2 0.3 (2.9)
Net income (loss) 0.0 0.0 (2.0)
14
RESULTS OF CONSOLIDATED OPERATIONS
Year Ended December 31, 2003 Compared to Year Ended December 31, 2002
Net Sales. Net sales decreased by $34.1 million, or 11.0%, from $308.8
million in 2002 to $274.7 million in 2003. The decrease is primarily
attributable to the 22.3% decrease in shipments in the Manufactured Housing
industry which was partially offset by the strong market conditions in the
Recreational Vehicle industry and the 3.2% increase in shipments compared to
2002. Additionally, the Company's approximate 4% increase in sales to the
Industrial market segment helped to partially offset the Manufactured Housing
shipment decline.
Gross Profit. Gross profits decreased by $7.0 million, or 17.9%, from
$39.2 million in 2002 to $32.2 million in 2003. As a percentage of net sales,
gross profit decreased approximately 1.0%, from 12.7% in 2002 to 11.7% in 2003.
The decrease in dollars and percentage of net sales is attributable to the 11.0%
decrease in consolidated net sales and competitive pricing situations in both
the Manufactured Housing and Recreational Vehicle markets as the Company and its
major competitors generally supply both of these industries with products. The
Company has continued its focus on increasing operating efficiencies and
reducing fixed costs where possible while operating at current sales levels
which are close to break-even.
Warehouse and Delivery Expenses. Warehouse and delivery expenses
decreased by $1.4 million, or 9.9%, from $14.3 million in 2002 to $12.9 million
in 2003. As a percentage of net sales, warehouse and delivery expenses remained
fairly constant at 4.7% of net sales for 2002 and 2003. The decrease in dollars
is due to reduced sales levels and the Company reducing the size of the fleet
that it rents or owns. The efforts to keep costs aligned with revenues are
ongoing and contributed to the warehouse and delivery expenses as a percentage
of net sales remaining fairly constant.
Selling, General, and Administrative Expenses. Selling, general, and
administrative expenses decreased by $5.1 million, or 21.7%, from $23.5 million
for the twelve months ending December 31, 2002 to $18.4 million in the same
period in 2003. As a percentage of net sales, selling, general and
administrative expenses decreased by 0.9%, from 7.6% in 2002 to 6.7% in 2003.
Approximately $2.0 million of the decrease is attributable to the Company making
significant fixed cost cutting efforts in 2003 in order to keep costs aligned
with revenues. Additionally, the 2003 figures include several positive
adjustments including gains on sale of two vacant buildings of approximately
$0.3 million, a gain on sale of equipment held for sale as a result of closing
of one of the operations in the wood segment of $0.4 million, and a gain on cash
value of life insurance policies of $0.6 million. Comparatively, the 2002
figures include a negative adjustment of $1.6 million related to the Oakwood
Homes bankruptcy filing. Exclusive of the adjustments mentioned above, selling,
general and administrative expenses were 7.2% of net sales for 2003 and 7.1% of
net sales for 2002.
Restructuring Charges. As discussed in Note 10 of the financial
statements, the Company recognized restructuring charges of approximately
$235,000 in 2003 and $269,000 in 2002.
Operating Income. Operating income decreased by $0.4 million, from $1.0
million in 2002 to $0.6 million in 2003. The decrease in operating income is due
to the factors described above.
Interest Expense, net. Interest expense, net decreased by $0.2 million,
or 23.7%, from $0.9 million in 2002 to $0.7 million in 2003. The decrease is due
to a decline in interest rates on the variable rate bonds and normal debt
service requirements resulting in reduced long term debt outstanding.
Net Income (Loss). Net income decreased by $150,000, from income of
$95,000 in 2002 to a loss of $55,000 in 2003. The decrease in net income is due
to the factors described above.
15
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
Net Sales. Net sales increased $15.7 million, or 5.4%, from $293.1
million for the year ended December 31, 2001 to $308.8 million for the year
ended December 31, 2002. This increase is attributable to a 21% increase in
units shipped and produced in the Recreational Vehicle industry as well as an
increase in penetration into the industrial and other markets.
Gross Profit. Gross profit increased by 15.2%, or $5.2 million, from
$34.0 million for the year ended December 31, 2001 to $39.2 million for the year
ended December 31, 2002. As a percentage of net sales, gross profit increased
1.1%, from 11.6% in 2001 to 12.7% for the same period in 2002. These
improvements are primarily due to increased sales, increased operating
efficiencies specifically in the laminating and other segments, and the
reduction of certain fixed overhead expenses. The Company has focused on
strategic cost cutting measures over the past two years as well as certain
restructuring activities related to significantly underperforming operating
units. These initiatives will continue as the Manufactured Housing industry
continues to show uncertainty specifically related to dealer and retail
financing.
Warehouse and Delivery Expenses. Warehouse and delivery expenses have
remained fairly constant at $14.3 million in 2002 compared to $14.4 million in
2001. As a percentage of net sales, however, warehouse and delivery expenses
decreased approximately 0.2%, from 4.9% in 2001 to 4.7% in 2002. The decrease in
percentage of net sales is a result of efficiencies gained from the increased
sales volume by the Company continuing to ship more full truckloads compared to
the previous year, as well as a reduction in the size of the fleet that the
Company owns or leases.
Selling, General, and Administrative Expenses. Selling, general, and
administrative expenses decreased by $1.4 million, or 5.5%, from $24.9 million
in 2001 to $23.5 million in 2002. As a percentage of net sales, selling,
general, and administrative expenses decreased by 0.9%, from 8.5% in 2001 to
7.6% in 2002. The 2002 totals include the write-off of receivables and inventory
of approximately $1.6 million related to Oakwood Homes Corporation filing for
bankruptcy protection in the fourth quarter. Exclusive of this charge, selling,
general, and administrative expenses decreased by approximately $3.0 million
from 2001. The decrease in both dollars and percentage of net sales is due to
the Company continuing to concentrate on fixed and variable cost reductions as
well as the benefit of reduced depreciation from year to year.
Impairment Charges. As discussed in Note 10 of the financial
statements, the Company recognized impairment charges of approximately $2.8
million in the fourth quarter of 2001 related to two underperforming operations
in the Company's Other segment. Impaired assets included Goodwill and certain
fixed assets.
Restructuring Charges. As discussed in Note 10 of the financial
statements, the Company recognized restructuring charges of approximately
$269,000 in 2002 and $423,000 in 2001.
Operating Income. Operating income increased by $9.6 million, from a
loss of $8.6 million in 2001 to income of $1.0 million in 2002. The increase in
operating income is due to the factors described above.
Interest Expense, Net. Interest expense, net decreased by $71,000 due
to a decline in rates on the variable tax exempt bonds as well as the normal
debt service requirements resulting in reduced long term debt outstanding.
Net Income. Net income increased by $5.9 million, from a loss of $5.8
million in 2001 to income of $95,000 in 2002. The increase in net income is
attributable to the factors described above.
16
BUSINESS SEGMENTS
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 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, hardwood, particleboard,
medium density fiberboard, and laminated particleboard or plywood to produce
cabinet doors, drawer sides, laminated table tops, and various cut to size parts
used in the furniture, desk, hotel, restaurant and cabinet industries. Effective
for 2004, the wood segment will be eliminated and the operations will be
combined into the remaining segments.
Other - Includes aluminum extrusion and fabricating, manufacture of
adhesive products, pleated shades, and laminating equipment.
The table below presents information about the revenue and earnings
before interest and taxes of those segments. A reconciliation to consolidated
totals is presented in footnote 14 of the Company's 2003 financial statements.
Year Ended
December 31
2003 2002 2001
(dollars in thousands)
Sales
Laminating $140,118 $148,863 $131,144
Distribution 90,631 108,134 104,337
Wood 25,266 31,998 30,182
Other 34,447 37,590 46,397
Earnings (Loss) Before Interest and Taxes (EBIT)
Laminating $ 461 $ 2,530 $ (1,120)
Distribution 974 1,847 619
Wood (1,379) (1,648) (1,027)
Other 622 240 (1,730)
Year Ended December 31, 2003 Compared to Year Ended December 31, 2002
Laminating Segment Discussion
Net sales in the laminating segment decreased by $8.7 million, or 5.9%,
from $148.8 million in 2002 to $140.1 million in 2003. The decrease is primarily
attributable to a 22.3% decrease in shipments in the Manufactured Housing
Industry. This decrease was partially offset by a 3.2% increase in shipments in
the Recreational Vehicle Industry as well as increased sales into the Industrial
market.
17
Operating income decreased by $2.0 million, or 81.8%, from $2.5 million
in 2002 to $0.5 million in 2003. This decrease is primarily attributable to
reduced gross margins as a result of significant competitive pricing pressures
in both the Manufactured Housing and Recreational Vehicle markets, which
comprise 60% of the sales in this segment. Additionally, while the Company has
focused on fixed cost reduction in its manufacturing operations, workers
compensation and utility costs have continued to increase which have contributed
to the negatively impacted margins.
Distribution Segment Discussion
Net sales in the distribution segment decreased by $17.5 million, or
16.2%, from $108.1 million in 2002 to $90.6 million in 2003. This decrease is
attributable to the 22.3% decrease in shipments in the Manufactured Housing
industry, which is the primary market that this segment serves.
Operating income decreased by $0.8, million from $1.8 million in 2002
to $1.0 million in 2003. The decrease in operating income is due to decreased
sales volume.
Wood Segment Discussion
Net sales decreased by $6.7 million, or 21.0%, from $32.0 million in
2002 to $25.3 million in 2003. The decrease is attributable to the closing of
two of the unprofitable divisions in this segment, one in mid 2002 and the other
in 2003. Together, these two divisions accounted for approximately $13.8 million
of the sales volume in this segment in 2002 compared to $4.8 million in 2003.
The decreased sales from these two divisions were partially offset by increased
sales of approximately $2.3 million in another division in this segment in 2003.
Operating losses in the wood segment decreased by $0.3, million from a
loss of $1.6 million in 2002 to a loss of $1.3 million in 2003. Savings of $0.5
million from the closing of one of the unprofitable divisions in this segment in
2002 and decreased losses from another division in this segment of $0.7 million
were partially offset by losses in another division in this segment of
approximately $0.9 million, which was closed during 2003.
Other Segment Discussion
Net sales decreased by $3.1 million, or 8.4%, from $37.6 million in
2002 to $34.5 million in 2003. The decline in sales is attributable to the
Company selling one of the divisions in this segment in 2002.
Operating income increased by $0.4, million from $0.2 million in 2002
to $0.6 million in 2003. The increase is due to operating efficiencies gained as
a result of increased sales volume of one of the divisions in this segment.
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
Laminating Segment Discussion
Net sales in the laminating segment increased $17.7 million, or
13.5%, from $131.1 million in 2001 to $148.8 million in 2002. This increase is
primarily attributable to an approximate 21% increase in shipments in the
Recreational Vehicle industry as well as increased penetration into the
industrial and other markets by certain operating units in this segment.
Additionally, the Company closed three divisions in the other segment in 2001
which had sales of approximately $5.9 million for the twelve months ended
December 31, 2001. Certain of these operations were merged into a facility in
the laminating segment which was operating at less than capacity and contributed
to increased volume in 2002 resulting in improved efficiencies and
profitability.
18
Operating income increased $3.6 million, from a loss of $1.1 million
in 2001 to income of $2.5 million in 2002. This increase is due to the increased
sales volume, the elimination of certain low margin business in exchange for
business that resulted in higher production runs and increased operating
efficiencies, and the cost cutting measures that the Company has undertaken over
the past two years to reduce fixed and variable costs.
Distribution Segment Discussion
Net sales increased by $3.8 million, or 3.6%, from $104.3 million in
2001 to $108.1 million in 2002. This increase is due to certain operating units
in this segment gaining market share despite the downturn in the Manufactured
Housing industry which is the major industry this segment serves. Oakwood Homes
Corporation, which filed for bankruptcy protection in the fourth quarter,
accounted for a significant portion of this increase and future periods may
reflect decreases as the Company has limited its exposure by reducing
receivables and inventory specifically related to this particular customer,
which is operating as a "Debtor in Possession".
Operating income increased $1.2 million, from $0.6 million in 2001
to $1.8 million in 2002. This increase is due to the increased sales volume, the
elimination of certain low margin business, and the elimination of certain
unprofitable product lines.
Wood Segment Discussion
Net sales increased $1.8 million, or 6.0%, from $30.2 million in
2001 to $32.0 million in 2002. The increase in shipments in the Recreational
Vehicle industry, which is the primary industry this segment serves, was the
major contributor to the increase in sales in this segment. However, as
discussed in Note 10 to the financial statements, the Company closed one of the
operating units in this segment in June, 2002, which partially offset the impact
that the increase in industry shipments had on this segment.
Operating losses in this segment increased $0.6 million, from a loss
of $1.0 million in 2001 to a loss of $1.6 million in 2002. The increased losses
are the result of production inefficiencies and labor problems in two of the
operating units in this segment. Additionally, one of these operating units
encountered significant material problems and scrap related to a change in raw
material required by a customer as a result of the annual model change. The new
material is very susceptible to damage and consequently has required the Company
to incur additional costs related to increased handling, production rework, and
customer returns. The Company is taking steps to reduce these increased costs;
however, losses are expected to continue through at least the first quarter of
2003.
Other Segment Discussion
Net sales in this segment decreased $8.8 million, or 19.0%, from
$46.4 million in 2001 to $37.6 million in 2002. This decline is attributable to
the closing and consolidation of three operations in this segment in 2001 as
well as the 12.8% decrease in units shipped in the Manufacturing Housing
industry in 2002.
Operating income increased $1.9 million, from a loss of $1.7 million
in 2001 to income of $0.2 million in 2002. This increase is the result of the
closing and consolidation of three unprofitable operating units in 2001 as well
as a return to profitability of one of the operating units which experienced
losses in 2001.
19
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 that 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's Board of Directors from time to time has authorized the
repurchase of shares of the Company's common stock, in the open market or
through negotiated transactions, at such times and at such prices as management
may decide.
In conjunction with its strategic and capital plan, the Company
intends to increase its capital expenditures for property and equipment in 2004
to approximately $11 million. Capital expenditures over the past three years
have been approximately $5.3 million, $4.2 million, and $1.8 million for 2003,
2002, and 2001, respectively. The Company expects to enter into borrowing
arrangements with its financial institutions to fund the expenditures for two
new buildings included in this plan, and believes that cash generated from
operations and borrowings under its credit agreements will be sufficient to fund
its working capital requirements, remaining capital expenditures, and common
stock purchase program 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.
A summary of our contractual cash obligations at December 31, 2003 is
as follows:
--------------------------------------------------------------------------------------------
PAYMENTS DUE BY PERIOD
--------------------------------------------------------------------------------------------
- --------------------------------------
CONTRACTUAL OBLIGATIONS TOTAL 2004 2005 2006 2007 2008
- -------------------------------------- -------------- --------------- --------------- --------------- --------------- -------------
-------------- --------------- --------------- --------------- --------------- -------------
Long-term debt, including interest $5,243,875 $1,205,875 $1,186,625 $1,167,375 $849,000 $835,000
at Variable rates**
-------------- --------------- --------------- --------------- --------------- -------------
Long-term debt, including interest $5,566,675 $2,871,021 $2,695,654 $0 $0 $0
at Fixed rates**
-------------- --------------- --------------- --------------- --------------- -------------
Operating Leases $3,727,584 $1,923,548 $886,965 $502,892 $279,623 $134,556
-------------- --------------- --------------- --------------- --------------- -------------
Total contractual cash obligations $14,538,134 $6,000,444 $4,769,244 $1,670,267 $1,128,623 $969,556
-------------- --------------- --------------- --------------- --------------- -------------
**Interest payments have been calculated using the fixed rate of 6.82% for the
Senior notes and the average 2003 annual interest rate of 1.75% for the
Industrial Revenue Bonds.
We also have a commercial commitment as described below:
- -------------------------------------- -------------------------------- ------------------------------- ---------------------------
OTHER COMMERCIAL TOTAL AMOUNT OUTSTANDING DATE OF
COMMITMENT COMMITTED AT 12/31/03 EXPIRATION
- -------------------------------------- -------------------------------- ------------------------------- ---------------------------
Revolving Credit Agreement $10,000,000 $0 May 31, 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 fiscal 2004.
20
Critical 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. Excluding the write-off of certain assets related to the
Oakwood Homes Corporation bankruptcy filing in 2002, we have not experienced
significant bad debts expense and our reserve for doubtful accounts of $250,000
should be adequate for any exposure to loss in our December 31, 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 year ended December 31, 2003. The Company ships
product based on specific orders from customers and revenue is recognized upon
delivery.
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.
SALE OF PROPERTY
During 2003, the Company sold its 50,900 square foot manufacturing
facility in Goshen, Indiana. This building had previously been leased to a third
party and the transaction resulted in a gain on sale of approximately $158,000.
Also during 2003, the Company sold its vacant 62,000 square foot building
located in Bristol, Indiana in a transaction that resulted in a gain on sale of
approximately $178,000.
PURCHASE OF PROPERTY
In March, 2004, the Company purchased a 155,000 square foot building
complex in Elkhart, Indiana for approximately $1,800,000. The Company intends to
consolidate certain manufacturing operations in Elkhart, Indiana into this
location and plans on spending an additional $1.0 million in improvements to
this facility.
The Company intends to build a new distribution facility on its
Fontana, California property for an approximate cost of between $1.5 and $2.0
million. This building is currently in the planning stage and is anticipated to
be completed in the fourth quarter of 2004.
The Company purchased in 2002 a previously leased building complex
near its principal offices in Elkhart, Indiana for an appraised value of $2
million from a major shareholder and Chairman Emeritus of the Company.
INFLATION
The Company does not believe that inflation had a material effect on
results of operations for the periods presented.
21
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 the 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 a 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's products.
o On an annual basis, the Company negotiates renewals for property,
casualty, workers compensation, general 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 effect 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 7A. 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 $5,142,859 of indebtedness bearing
interest at a fixed rate of 6.82%. The related maturities and interest are
reported in the contractual obligations table in Item 7.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is set forth in Item 15 (a) 1.
on page 25 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
22
ITEM 9A. CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and 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 are effective
in all material respects in ensuring that information required to be disclosed
in the reports that we file or submit 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. There
have been no significant changes in our internal controls over financial
reporting or in other factors that could significantly affect these controls
subsequent to the date of the previous mentioned evaluation.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Directors of the Company
The information required by this item with respect to directors is
set forth in the Company's Proxy Statement for the Annual Meeting of
Shareholders to be held on May 14, 2004, under the captions "Election of
Directors", and "Section 16(a) Beneficial Ownership Reporting Compliance", which
information is hereby incorporated herein by reference. The information with
respect to executive officers is set forth at the end of Part I of this Form
10-K.
Executive Officers of the Company
Reference is made to "Executive Officers of the Company" in Part I of
this annual report.
Audit Committee Financial Expert
The Company has determined that Robert C. Timmins, Larry D.
Renbarger, Terrence D. Brennan, and Walter E. Wells all qualify as "audit
committee financial experts" as defined in Item 401(h) of Regulation S-K, and
that these directors are "independent" as the term is used in Item 7(d)(3)(iv)
of Schedule 14A under the Securities Exchange Act.
Code of Business Conduct
The Company has adopted a Code of Ethics Policy applicable to all
employees. Additionally, the Company has adopted a Code of Business Conduct
applicable to Senior Executives including, but not limited to the Chief
Executive Officer and Chief Financial Officer of the Company. The Company's Code
of Ethics and Code of Business Conduct Applicable to Senior Executives is
available on the Company's web site at www.patrickind.com under "Corporate
Governance". The Company intends to post on its web site any amendments to, or
waivers from its Corporate Governance Guidelines and its Code of Ethics and
Business Conduct Policy applicable to Senior Executives. The Company will
provide shareholders with a copy of these policies upon written request directed
to the Company's Secretary at the Company's address.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is set forth in Company's Proxy
Statement for the Annual Meeting of Shareholders to be held on May 14, 2004,
under the caption "Compensation of Executive Officers and Directors," which
information is hereby incorporated herein by reference.
23
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCK MATTERS
The information required by this item is set forth in Company's Proxy
Statement for the Annual Meeting of Shareholders to be held on May 14, 2004,
under the captions "Election of Directors", and "Equity Compensation Plan
Information", which information is hereby incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is set forth in Company's Proxy
Statement for the Annual Meeting of Shareholders to be held on May 14, 2004,
under the caption "Certain Transactions," which information is hereby
incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is set forth in the Company's Proxy
Statement for the Annual Meeting of Shareholders to be held on May 14,
2004, under the heading "Accounting Information", which information is
hereby incorporated herein by reference.
24
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Page
(a) 1. FINANCIAL STATEMENTS
Independent auditor's report F-1
Consolidated Balance sheets -
December 31, 2003 and 2002 F-2
Consolidated Statements of operations-years
ended December 31, 2003, 2002, and 2001 F-3
Consolidated Statements of shareholders'
equity years ended December 31,
2003, 2002, 2001 F-4
Consolidated Statements of cash flows-
years ended December 31,
2003, 2002, and 2001 F-5
Notes to the financial statements F-6-21
(a) 2. FINANCIAL STATEMENT SCHEDULES
Independent auditor's report
on supplemental schedule & consent F-22
Schedule II - Valuation and qualifying
accounts and reserves F-23
All other schedules have been omitted as not required, not applicable,
not deemed material or because the information is included in the Notes to
Financial Statements.
(a) 3. EXHIBITS
The exhibits listed in the accompanying Exhibit Index on pages 51, 52,
and 53 are filed or incorporated by reference as part of this report.
(b) REPORTS ON FORM 8-K
October 16, 2003
Item 5. Other Events and Regulation FD Disclosure
Exhibit 99.1 - Press Release Announcing the Resignation of
David D. Lung as President and Chief Executive Officer
October 21, 2003
Item 7. Financial Statements and Exhibits
Exhibit 99.1 - Press Release Announcing Third Quarter 2003
Earnings
25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on the date indicated.
PATRICK INDUSTRIES, INC
By /s/ Robert C. Timmins
--------------------------------
Robert C. Timmins, Lead Director
Pursuant to the Requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Company and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Robert C. Timmins Lead Director March 19, 2004
- ------------------------------ --------------
Robert C. Timmins
/s/ Keith V. Kankel President, Chief Executive Officer, March 19, 2004
- ------------------------------ and Director --------------
Keith V. Kankel
/s/ Andy L. Nemeth Vice President Finance, Secretary-Treasurer, March 19, 2004
- ------------------------------ Chief Financial Officer --------------
Andy L. Nemeth
/s/ Mervin D. Lung Chairman Emeritus and Director March 19, 2004
- ------------------------------ --------------
Mervin D. Lung
/s/ David D. Lung Director March 19, 2004
- ------------------------------ --------------
David D. Lung
/s/ Harold E. Wyland Director March 19, 2004
- ------------------------------ --------------
Harold E. Wyland
/s/ John H. McDermott Director March 19, 2004
- ------------------------------ --------------
John H. McDermott
/s/ Terrence D. Brennan Director March 19, 2004
- ------------------------------ --------------
Terrence D. Brennan
/s/ Walter E. Wells Director March 19, 2004
- ------------------------------ --------------
Walter E. Wells
/s/ Larry D. Renbarger Director March 19, 2004
- ------------------------------ --------------
Larry D. Renbarger
26
Patrick Industries, Inc.
And Subsidiaries
Consolidated Financial Report
12.31.2003
CONTENTS
- --------------------------------------------------------------------------------
Independent Auditor's Report F-1
- --------------------------------------------------------------------------------
Financial Statements
Consolidated balance sheets F-2
Consolidated statements of operations F-3
Consolidated statements of shareholders' equity F-4
Consolidated statements of cash flows F-5
Notes to financial statements F-6-F-21
Independent Auditor's Report
On the Supplementary Information F-22
Supplementary Information
Schedule II - Valuation and qualifying
accounts and reserves F-23
- --------------------------------------------------------------------------------
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
PATRICK INDUSTRIES, INC.
Elkhart, Indiana
We have audited the accompanying consolidated balance sheets of PATRICK
INDUSTRIES, INC. AND SUBSIDIARIES as of December 31, 2003 and 2002, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 2003.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of PATRICK INDUSTRIES,
INC. AND SUBSIDIARIES as of December 31, 2003 and 2002, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2003, in conformity with accounting principles generally
accepted in the United States of America.
Elkhart, Indiana
January 23, 2004
F-1
PATRICK INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2003 AND 2002
2003 2002
- --------------------------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents $ 7,077,390 $ 3,552,232
Trade receivables 14,240,556 11,544,753
Inventories 23,042,444 32,091,945
Income tax refund claims receivable -- 1,592,551
Prepaid expenses 913,650 849,344
Deferred tax assets 1,954,000 1,981,000
---------------------------
TOTAL CURRENT ASSETS 47,228,040 51,611,825
Property and Equipment, net 30,692,910 31,916,597
Other Assets 3,221,010 2,937,438
---------------------------
TOTAL ASSETS $81,141,960 $86,465,860
===========================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt $ 3,671,429 $ 3,671,428
Accounts payable 4,883,038 5,822,511
Accrued liabilities 3,038,926 3,552,574
---------------------------
TOTAL CURRENT LIABILITIES 11,593,393 13,046,513
Long-Term Debt, less current maturities 7,771,430 11,442,860
Deferred Compensation Obligations 2,103,403 2,176,577
Deferred Tax Liabilities 426,000 521,000
---------------------------
TOTAL LIABILITIES 21,894,226 27,186,950
---------------------------
Commitments and Contingencies
Shareholders' Equity
Preferred stock, no par value; authorized
1,000,000 shares -- --
Common stock, no par value; authorized
12,000,000 shares; issued 2003 4,616,886
shares; 2002 4,584,261 18,236,386 18,028,833
Retained earnings 41,011,348 41,250,077
---------------------------
TOTAL SHAREHOLDERS' EQUITY 59,247,734 59,278,910
---------------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $81,141,960 $86,465,860
===========================
See Notes to Financial Statements.
F-2
PATRICK INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001
2003 2002 2001
- ------------------------------------------------------------------------------------------------------------------
Net sales $ 274,681,995 $ 308,754,982 $ 293,070,216
Cost of goods sold 242,498,880 269,561,768 259,057,716
-----------------------------------------------------------
GROSS PROFIT 32,183,115 39,193,214 34,012,500
-----------------------------------------------------------
Operating expenses:
Warehouse and delivery 12,916,460 14,329,135 14,406,931
Selling, general, and administrative 18,442,660 23,546,020 24,926,575
Impairment charges - - 2,833,987
Restructuring charges 235,000 269,180 423,617
-----------------------------------------------------------
TOTAL OPERATING EXPENSES 31,594,120 38,144,335 42,591,110
-----------------------------------------------------------
OPERATING INCOME (LOSS) 588,995 1,048,879 (8,578,610)
Interest expense, net 679,645 891,259 961,800
-----------------------------------------------------------
INCOME (LOSS) BEFORE INCOME
TAXES (CREDITS) (90,650) 157,620 (9,540,410)
Federal and state income taxes (credits) (35,200) 63,100 (3,769,000)
-----------------------------------------------------------
NET INCOME (LOSS) $ (55,450) $ 94,520 $ (5,771,410)
===========================================================
Basic earnings (loss) per common share $ (0.01) $ 0.02 $ (1.28)
===========================================================
Diluted earnings (loss) per common share $ (0.01) $ 0.02 $ (1.28)
===========================================================
See Notes to Financial Statements.
F-3
PATRICK INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001
Preferred Common Retained
Stock Stock Earnings Total
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 $ - $ 17,689,417 $ 48,560,118 $ 66,249,535
Net loss - - (5,771,410) (5,771,410)
Issuance of 24,000 shares of common stock for stock award plan - 170,640 - 170,640
Repurchase and retirement of 63,000 shares of common stock - (239,540) (182,417) (421,957)
Dividends on common stock ($.16 per share) - - (723,287) (723,287)
----------------------------------------------------------------
Balance, December 31, 2001 - 17,620,517 41,883,004 59,503,521
Net income - - 94,520 94,520
Issuance of 24,000 shares of common stock for stock award plan - 216,000 - 216,000
Issuance of 30,595 shares of common stock
upon exercise of common stock options - 192,316 - 192,316
Dividends on common stock ($.16 per share) - - (727,447) (727,447)
----------------------------------------------------------------
Balance, December 31, 2002 - 18,028,833 41,250,077 59,278,910
Net (loss) - - (55,450) (55,450)
Issuance of 12,000 shares of common stock for stock award plan - 78,600 - 78,600
Issuance of 20,625 shares of common stock
upon exercise of common stock options - 128,953 - 128,953
Dividends on common stock ($.04 per share) - - (183,279) (183,279)
----------------------------------------------------------------
Balance, December 31, 2003 $ - $ 18,236,386 $ 41,011,348 $ 59,247,734
================================================================
See Notes to Financial Statements.
F-4
PATRICK INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001
2003 2002 2001
- ------------------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities
Net income (loss) $ (55,450) $ 94,520 $ (5,771,410)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 5,897,051 6,295,388 7,512,286
Impairment charges - - 2,833,987
Deferred income taxes (68,000) 473,000 (1,163,000)
(Gain) loss on sale of property and equipment (840,121) 11,775 (66,581)
Other 205,689 371,051 632,275
Change in assets and liabilities:
Decrease (increase) in:
Trade receivables (2,695,803) 2,177,463 559,458
Inventories 9,049,501 (3,466,198) 2,312,207
Income tax refund claims receivable 1,592,551 1,454,248 (2,015,713)
Prepaid expenses (64,306) (44,946) (34,381)
Increase (decrease) in:
Accounts payable and accrued liabilities (1,453,121) (1,998,108) 785,601
-------------------------------------------------------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 11,567,991 5,368,193 5,584,729
-------------------------------------------------------
Cash Flows From Investing Activities
Capital expenditures (5,293,264) (4,186,726) (1,817,120)
Proceeds from sale of property and equipment 1,862,952 904,599 540,193
Other (546,950) 116,929 (23,270)
-------------------------------------------------------
NET CASH (USED IN) INVESTING
ACTIVITIES (3,977,262) (3,165,198) (1,300,197)
-------------------------------------------------------
Cash Flows From Financing Activities
Principal payments on long-term debt (3,671,429) (3,671,428) (3,671,428)
Payments on deferred compensation obligations (278,863) (258,094) (135,186)
Proceeds from exercise of common stock options 128,953 192,316 -
Repurchase of common stock - - (421,957)
Cash dividends paid (183,279) (727,447) (730,988)
Other (60,953) (100,393) (126,818)
-------------------------------------------------------
NET CASH (USED IN) FINANCING
ACTIVITIES (4,065,571) (4,565,046) (5,086,377)
-------------------------------------------------------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 3,525,158 (2,362,051) (801,845)
Cash and cash equivalents, beginning 3,552,232 5,914,283 6,716,128
-------------------------------------------------------
Cash and cash equivalents, ending $ 7,077,390 $ 3,552,232 $ 5,914,283
=======================================================
See Notes to Financial Statements.
F-5
PATRICK INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS, USE OF ESTIMATES, RISKS AND UNCERTAINTIES, AND
SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS:
The Company's operations consist primarily of the manufacture and distribution
of building products and materials for use primarily by the Manufactured Housing
and Recreational Vehicle industries for customers throughout the United States.
Credit is generally granted on an unsecured basis for terms of 30 days.
USE OF ESTIMATES:
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
RISKS AND UNCERTAINTIES:
The Company purchases significant amounts of materials, which are commodities,
from a limited number of suppliers. The purchase price of such items can be
volatile as it is subject to prevailing market conditions, both domestically and
internationally. The Company's purchases of these items can be based on supplier
allocations.
SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of Patrick
Industries, Inc., its wholly-owned subsidiary, Harlan Machinery Company, Inc.,
and its majority-owned subsidiary, Patrick Mouldings, L.L.C. ("the Company").
During the year ended December 31, 2002, Patrick Mouldings, L.L.C. ceased
operations, and is not a consolidated subsidiary at December 31, 2003. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
CASH AND CASH EQUIVALENTS:
The Company has cash on deposit in financial institutions in amounts which, at
times, may be in excess of insurance coverage provided by the Federal Deposit
Insurance Corporation.
For purposes of the statement of cash flows, the Company considers all overnight
repurchase agreements and commercial paper with a maturity of 30 days or less
acquired in connection with its sweep account arrangements with its bank to be
cash equivalents.
F-6
PATRICK INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
TRADE RECEIVABLES:
Trade receivables are carried at original invoice amount less an estimate made
for doubtful receivables based on a review of all outstanding amounts on a
monthly basis. Trade receivables in the accompanying balance sheets at December
31, 2003 and 2002 are stated net of an allowance for doubtful accounts of
$250,000 and $300,000 respectively. Management determines the allowance for
doubtful accounts by evaluating individual customer receivables and considering
a customer's financial condition, credit history, and current economic
conditions. In conjunction with the Company's credit terms, trade receivables
are considered to be past due if any portion of the receivable balance is
outstanding for more than 30 days. Trade receivables are written off when deemed
uncollectible. Recoveries of trade receivables previously written off are
recorded when received.
INVENTORIES:
Inventories are stated at the lower of cost (first-in, first-out (FIFO) method)
or market. Inventories are also written-down for management's estimates of
product which will not sell at historical cost. Write-downs of inventories
establish a new cost basis which is not increased for future increases in the
market value of inventories or changes in estimated obsolescence.
During the year ended December 31, 2003, the Company entered into an agreement
whereby certain materials, which were previously acquired as inventory, are held
on consignment and entered into inventory when the material is introduced into
the manufacturing process.
PROPERTY AND EQUIPMENT:
Property and equipment is recorded at cost. Depreciation has been computed
primarily by the straight-line method applied to individual items based on
estimated useful lives which generally range from 10 to 40 years for buildings
and improvements and from 3 to 15 years for machinery and equipment,
transportation equipment, and leasehold improvements.
LONG-LIVED ASSETS:
The Company reviews its long-lived assets periodically to determine potential
impairment by comparing the carrying value of the long-lived assets with the
estimated future net undiscounted cash flows expected to result from the use of
the assets, including cash flows from disposition. Should the sum of the
expected future net cash flows be less than the carrying value, the Company
would recognize an impairment loss at that date. An impairment loss would be
measured by comparing the amount by which the carrying value exceeds the fair
value of the long-lived assets.
During the year ended December 31, 2001, recorded goodwill was considered to be
impaired and was written off (see Note 10).
REVENUE RECOGNITION:
The Company ships product based on specific orders from customers and revenue is
recognized upon delivery.
F-7
PATRICK INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STOCK OPTION PLAN:
At December 31, 2003, the Company has a stock option plan with shares of common
stock reserved for options to key employees. The Company accounts for those
plans under the recognition and measurement principles of APB Opinion # 25,
Accounting for Stock Issued to Employees, and related interpretations.
Accordingly, no stock-based employee compensation cost has been recognized, as
all options granted under those plans had an exercise price equal to the market
value of the underlying common stock on the date of grant. The following table
illustrates the effect on net income and earnings per share had compensation
cost for the stock-based compensation plan been determined based on the grant
date fair value of awards (the method described in FASB Statement No. 123,
Accounting for Stock-Based Compensation):
2003 2002 2001
------------------------------------------------------------
Net income (loss):
As reported $ (55,450) $ 94,520 $ (5,771,410)
Deduct total stock-based employee
compensation expense determined under
fair value based method for all rewards
net of related tax effects (152,155) (152,155) (150,699)
------------------------------------------------------------
Pro forma $ (207,605) $ (57,635) $ (5,922,109)
============================================================
Basic earnings (loss) per share:
As reported $ (0.01) $ 0.02 $ (1.28)
Pro forma (0.04) (0.01) (1.31)
Diluted earnings (loss) per share:
As reported $ (0.01) $ 0.02 $ (1.28)
Pro forma (0.04) (0.01) (1.31)
FAIR VALUE OF FINANCIAL INSTRUMENTS:
The Company's financial instruments consist principally of cash and cash
equivalents, receivables, long-term debt and accounts payable. The Company
believes cash and cash equivalents, receivables, and accounts payable are
recorded at amounts that approximate their current market values. Based on the
borrowing rates currently available to the Company for long-term debt with
similar terms and average maturities, the fair value of the long-term debt
instruments approximates their carrying value.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:
In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46 (FIN 46), Consolidation Of Variable Interest Entities. FIN
46 requires that if an entity has a controlling financial interest in a variable
interest entity, the assets, liabilities and results of activities of the
variable interest entity should be included in the consolidated financial
statements of the entity. FIN 46 as amended must be applied at the end of
periods ending after March 15, 2004. The Company does not believe that the
adoption of FIN 46 will have a material impact on the financial statements, as
at this time the Company does not have a variable interest in any variable
interest entities.
F-8
PATRICK INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
In May 2003, the FASB issued SFAS No. 150, Accounting For Certain Financial
Instruments With Characteristics Of Both Liabilities And Equity. SFAS 150
establishes standards on the classification and measurement of certain financial
instruments with characteristics of both liabilities and equity. The provisions
of SFAS 150 are effective for financial instruments entered into or modified
after May 31, 2003 and to all other instruments that exist as of the beginning
of the first interim financial reporting period beginning after June 15, 2003.
SFAS 150 did not have a material impact on the Company's financial statements as
the Company did not have any financial instruments within the scope of this
pronouncement.
In December 2003, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 104 (SAB No. 104), Revenue Recognition, which codifies, revises and
rescinds certain sections of SAB No. 101, Revenue Recognition, in order to make
this interpretive guidance consistent with current authoritative accounting and
auditing guidance and SEC rules and regulations. The changes noted in SAB No.
104 did not have a material effect on the Company's financial statements.
EARNINGS PER COMMON SHARE:
Following is information about the computation of the earnings per share data
for the years ended December 31, 2003, 2002, and 2001:
2003 2002 2001
------------------------------------------------------
Numerator for basic and diluted
earnings per share, net income (loss) $ (55,450) $ 94,520 $ (5,771,410)
======================================================
Denominator:
Weighted average shares, denominator
for basic earnings per share 4,600,746 4,547,075 4,523,891
Effect of dilutive potential common
shares, employee stock options (a) - 66,821 -
------------------------------------------------------
Denominator for diluted
earnings per share 4,600,746 4,613,896 4,523,891
======================================================
Basic earnings (loss) per share $ (0.01) $ 0.02 $ (1.28)
======================================================
Diluted earnings (loss) per share $ (0.01) $ 0.02 $ (1.28)
======================================================
(a) Due to the loss incurred during the years ended December 31, 2003
and 2001, 29,139 and 40,942 dilutive potential common shares,
respectively, are not included because the effect would be
antidilutive.
F-9
PATRICK INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2. BALANCE SHEET DATA
INVENTORIES: 2003 2002
-------------------------------------
Raw materials $ 12,733,414 $ 20,756,789
Work in process 1,630,052 1,625,099
Finished goods 3,501,779 4,190,366
Materials purchased for resale 5,177,199 5,519,691
-------------------------------------
$ 23,042,444 $ 32,091,945
=====================================
PROPERTY AND EQUIPMENT:
Land and improvements $ 3,783,829 $ 3,858,329
Buildings and improvements 24,656,022 26,188,501
Machinery and equipment 57,116,232 56,263,774
Transportation equipment 1,754,781 1,772,221
Leasehold improvements 3,309,180 3,417,097
-------------------------------------
90,620,044 91,499,922
Less accumulated depreciation 59,927,134 59,583,325
-------------------------------------
$ 30,692,910 $ 31,916,597
=====================================
OTHER ASSETS:
Cash value of life insurance $ 2,979,950 $ 2,433,000
Other 241,060 504,438
-------------------------------------
$ 3,221,010 $ 2,937,438
=====================================
ACCRUED LIABILITIES:
Payroll and related expenses $ 1,018,117 $ 951,320
Property taxes 561,390 841,236
Group insurance 700,000 805,000
Other 759,419 955,018
-------------------------------------
$ 3,038,926 $ 3,552,574
=====================================
F-10
PATRICK INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 3. PLEDGED ASSETS AND LONG-TERM DEBT
Long-term debt at December 31, 2003 and 2002 is as follows:
2003 2002
--------------------------
Senior Notes, insurance company $ 5,142,859 $ 7,714,288
Indiana Development Finance Authority Bonds 900,000 1,200,000
State of Oregon Economic Development Revenue Bonds 2,400,000 2,800,000
State of North Carolina Economic Development
Revenue Bonds 3,000,000 3,400,000
--------------------------
11,442,859 15,114,288
Less current maturities 3,671,429 3,671,428
--------------------------
$ 7,771,430 $ 11,442,860
==========================
The senior notes bear interest at a fixed rate of 6.82% and are unsecured. The
notes are due in annual principal installments of $2,571,429 and the final
installment is due September 15, 2005. This agreement requires that the Company
maintain a minimum level of tangible net worth.
The Indiana Development Finance Authority Bonds are payable in annual
installments of $300,000 plus interest at a variable tax exempt bond rate, set
periodically to enable the bonds to be sold at par (1.4% at December 31, 2003).
The final installment is due November 1, 2006. The bonds are collateralized by
real estate and equipment purchased with the bond funds and are backed by a bank
standby letter of credit totaling approximately $954,000.
The State of Oregon Economic Development Revenue Bonds are payable in annual
installments of $400,000 plus interest at a variable tax exempt bond rate (1.4%
at December 31, 2003). The final installment is due December 1, 2009. The bonds
are collateralized by real estate and equipment purchased with the bond funds
and are backed by a bank standby letter of credit totaling approximately
$2,508,000.
The State of North Carolina Economic Development Revenue Bonds are payable in
annual installments of $400,000 plus quarterly interest payments at a variable
tax exempt bond rate (1.4% at December 31, 2003). Annual payments of $500,000
are due in each of the last two years with a final payment due August 1, 2010.
The bonds are collateralized by real estate and equipment purchased with the
bond funds and are backed by a bank standby letter of credit totaling
approximately $3,108,000.
The Company has an unsecured revolving credit agreement which allows borrowings
up to $10,000,000 or a borrowing base defined in the agreement and expires on
May 31, 2006. Interest on this note is at prime or the Eurodollar rate plus a
percentage based on the Company's cash flow. The Company pays a commitment fee
of between .25% and .375% of the unused portion of the revolving line, based on
the Company's cash flow. In addition, this agreement requires the Company to,
among other things, maintain minimum levels of debt service coverage, tangible
net worth, working capital, and debt to net worth.
Aggregate maturities of long-term debt for the next five years ending December
31, are 2004 $3,671,429; 2005 $3,671,430; 2006 $1,100,000; 2007 $800,000; 2008
$800,000; and thereafter $1,400,000.
F-11
PATRICK INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
In addition, the Company is contingently liable for standby letters of credit of
approximately $2,700,000 to meet credit requirements for one of the Company's
insurance providers.
Interest expense for the years ended December 31, 2003, 2002, and 2001 was
approximately $755,000, $1,035,000, and $1,280,000 respectively.
NOTE 4. EQUITY TRANSACTIONS
SHAREHOLDER RIGHTS PLAN:
On February 29, 1996, the Company's Board of Directors adopted a
shareholder rights agreement, granting certain new rights to holders of
the Company's common stock. Under the agreement, one right was granted
for each share of common stock held as of March 20, 1996, and one right
will be granted for each share subsequently issued. Each right entitles
the holder to 1/100th of a preferred share after paying the exercise
price (currently $30), and in an unfriendly takeover situation, to
purchase Patrick common stock having a market value equal to two times
the exercise price. Also, if the Company is merged into another
corporation, or if 50 percent or more of the Company's assets are sold,
then rightholders are entitled, upon payment of the exercise price, to
buy common shares of the acquiring corporation's common stock having a
then current market value equal to two times the exercise price. In
either situation, these rights are not available to the acquiring
party. However, these exercise features will not be activated if the
acquiring party makes an offer to acquire the Company's outstanding
shares at a price which is judged by the Board of Directors to be fair
to all Patrick shareholders. The rights may be redeemed by the Company
under certain circumstances at the rate of $.01 per right. The rights
will expire on March 20, 2006. The Company has authorized 100,000
shares of preferred stock, Series A, no par value, in connection with
this plan, none of which have been issued.
REPURCHASE OF COMMON STOCK:
The Company's Board of Directors from time to time has authorized the repurchase
of shares of the Company's common stock, in the open market or through
negotiated transactions, at such times and at such prices as management may
decide.
NOTE 5. COMMITMENTS AND RELATED PARTY TRANSACTIONS
The Company leases office, manufacturing, and warehouse facilities and certain
equipment under various noncancelable agreements, which expire at various dates
through 2008. These agreements contain various renewal options and provide for
minimum annual rentals plus the payment of real estate taxes, insurance, and
normal maintenance on the properties. Certain of the leases are with the
chairman emeritus/major shareholder and expire at various dates through August
31, 2005.
The total minimum rental commitment at December 31, 2003 under the leases
mentioned above is approximately $3,728,000 which is due approximately
$1,924,000 in 2004, $887,000 in 2005, $502,000 in 2006, $280,000 in 2007 and
$135,000 in 2008.
F-12
PATRICK INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The total rent expense included in the statements of operations for the years
ended December 31, 2003, 2002, and 2001 is approximately $3,800,000, $3,900,000,
and $4,300,000 respectively, of which approximately $828,000 was paid in 2003,
$1,100,000 was paid in 2002, and $1,300,000 was paid in 2001, to the chairman
emeritus/major shareholder.
In June 2002, the Company purchased a previously leased building complex near
its principal offices in Elkhart, Indiana for its appraised value of $2,000,000
from the chairman emeritus/major shareholder.
NOTE 6. MAJOR CUSTOMER
Net sales for the years ended December 31, 2003, 2002, and 2001
included sales to one customer accounting for 14.7%, 12.7%, and 11.9%,
respectively of total net sales of the Company.
The balances due from this customer at December 31, 2003 and 2002 were
approximately $2,031,000 and $2,119,000 respectively.
NOTE 7. INCOME TAX MATTERS
Federal and state income taxes (credits) for the years ended December 31, 2003,
2002, and 2001, all of which are domestic, consist of the following:
2003 2002 2001
---------------------------------------------------------
Current:
Federal $ 32,800 $ (233,900) $ (2,133,000)
State - (176,000) (473,000)
Deferred (68,000) 473,000 (1,163,000)
---------------------------------------------------------
$ (35,200) $ 63,100 $ (3,769,000)
=========================================================
The provisions for income taxes (credits) for the years ended December 31, 2003,
2002, and 2001 are different from the amounts that would otherwise be computed
by applying a graduated federal statutory rate of 35% to income before income
taxes. A reconciliation of the differences is as follows:
2003 2002 2001
--------------------------------------------
Rate applied to pretax income $ (31,700) $ 55,100 $ (3,339,000)
State taxes, net of federal
tax effect (4,000) 9,000 (572,000)
Other 500 (1,000) 142,000
--------------------------------------------
$ (35,200) $ 63,100 $ (3,769,000)
============================================
Deferred income tax assets and liabilities are computed annually for differences
between the financial statement and tax bases of assets and liabilities that
will result in taxable or deductible amounts in the future based on enacted tax
laws and rates applicable to the periods in which the differences are expected
to affect taxable income. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be realized. Income tax
expense is the tax payable or refundable for the current period plus or minus
the change during the period in deferred tax assets and liabilities.
F-13
PATRICK INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The composition of the deferred tax assets and liabilities at December 31, 2003
and 2002 is as follows:
2003 2002
--------------------------------------
Gross deferred tax liability,
accelerated depreciation $ (2,040,000) $ (2,057,000)
--------------------------------------
Gross deferred tax assets:
Trade receivables allowance 99,000 119,000
Inventory capitalization 335,000 336,000
Accrued expenses 738,000 767,000
Deferred compensation 861,000 860,000
Unvested stock awards 248,000 197,000
Inventory reserves 144,000 18,000
AMT credit carryforward 63,000 115,000
State NOL carryforwards 301,000 600,000
Goodwill 452,000 276,000
Other 327,000 229,000
--------------------------------------
3,568,000 3,517,000
--------------------------------------
Net deferred tax assets $ 1,528,000 $ 1,460,000
======================================
The deferred tax amounts above have been reflected on the accompanying
consolidated balance sheets as of December 31, 2003 and 2002 as follows:
2003 2002
--------------------------------------
Current deferred tax assets $ 1,954,000 $ 1,981,000
Long-term deferred tax liabilities (426,000) (521,000)
--------------------------------------
$ 1,528,000 $ 1,460,000
======================================
NOTE 8. SELF-INSURED PLANS
The Company has a self-insured health plan for its employees under which there
is both a participant stop loss and an aggregate stop loss based on total
participants. The Company is potentially responsible for annual claims not to
exceed approximately $4,619,000 in the aggregate at December 31, 2003. The
excess loss portion of the employees' coverage has been insured with a
commercial carrier.
The Company is partially self-insured for its workers' compensation liability.
The Company is responsible for a per occurrence limit, with an aggregate amount
not to exceed approximately $2,750,000 on an annual basis. The excess loss
portion of the employees' coverage has been insured with a commercial carrier.
The Company has accrued an estimated liability for these benefits based upon
claims incurred.
F-14
PATRICK INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 9. COMPENSATION PLANS
DEFERRED COMPENSATION OBLIGATIONS:
The Company has deferred compensation agreements with certain key employees. The
agreements provide for monthly benefits for ten years subsequent to retirement,
disability, or death. The Company has accrued an estimated liability based upon
the present value of an annuity needed to provide the future benefit payments.
BONUS PLAN:
The Company pays bonuses to certain management personnel. Historically, bonuses
are determined annually and are based upon corporate and divisional income
levels. The charge to operations amounted to approximately $632,000, $790,000,
and $540,000, for the years ended December 31, 2003, 2002, and 2001
respectively.
PROFIT-SHARING PLAN:
The Company has a qualified profit-sharing plan, more commonly known as a 401(k)
plan, for substantially all of its employees with over one year of service and
who are at least 21 years of age. The plan provides for a matching contribution
by the Company as defined in the agreement and, in addition, provides for a
discretionary contribution annually as determined by the Board of Directors. The
amounts of contributions for the years ended December 31, 2003, 2002, and 2001
were immaterial.
STOCK OPTION PLAN:
A summary of transactions of granted shares under option for the years ended
December 31, 2003, 2002 and 2001 is as follows:
2003 2002 2001
--------------------------------------------------------------------------
WEIGHTED Weighted Weighted
AVERAGE Average Average
EXERCISE Exercise Exercise
SHARES PRICE Shares Price Shares Price
--------------------------------------------------------------------------
Outstanding, beginning
of year 274,775 $ 6.24 349,800 $ 6.25 452,500 $ 12.55
Issued during the year - - - - 240,000 6.30
Canceled during the year (9,688) 6.24 (44,430) 6.24 (342,700) 14.62
Exercised during the year (20,625) 6.25 (30,595) 6.29 - -
--------------------------------------------------------------------------
Outstanding, end of year 244,462 $ 6.24 274,775 $ 6.24 349,800 $ 6.24
==========================================================================
Eligible, end of year for
exercise 223,425 $ 6.25 182,856 $ 6.27 147,450 $ 6.27
==========================================================================
Weighted average fair value
of options granted during
the year N/A N/A $ 1.86
============ ============= =============
F-15
PATRICK INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
A further summary about fixed options outstanding at December 31, 2003 is as
follows:
Options Outstanding Options Exercisable
---------------------------------------------------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Number Contractual Exercise Number Exercise
Outstanding Life Price Exercisable Price
---------------------------------------------------------------------
Exercise price of $6.13 84,150 6.5 $ 6.13 63,113 $ 6.13
=====================================================================
Exercise price of $6.30 160,312 5.5 $ 6.30 160,312 $ 6.30
=====================================================================
The fair value of each grant is estimated at the grant date using the
Black-Scholes option-pricing model with the following assumptions for 2001:
dividend rate of 2.25% for all years; risk-free interest rate of 5.25%; expected
lives of 5 years; and price volatility of 43%.
STOCK AWARD PLAN:
The Company has adopted a stock award plan for the non-employee directors.
Grants awarded during May 2003 of 12,000 shares are subject to forfeiture in the
event the recipient terminates within one year from the date of grant as a
director. Of the 24,000 shares granted during May 2002, 12,000 shares vested in
May 2003, and 12,000 shares are set to vest in May 2004. The related
compensation expense is being recognized over the one-year vesting period. Total
compensation expense for the years ended December 31, 2003 and 2002 was $241,260
and $188,840 respectively.
NOTE 10. RESTRUCTURINGS AND ASSET IMPAIRMENTS
In July 2003, the Company decided to close an unprofitable cabinet door division
in the Wood Segment. Accordingly, the Company recorded restructuring charges of
approximately $235,000, or $.03 per share, net of tax, related to severance,
retention, and accrued vacation for approximately 61 hourly and salaried
employees, all of which were terminated from this particular operation. Other
charges included shut down expenses and the write-off of obsolete inventory. The
operation was closed in September 2003 and all of the restructuring reserve was
utilized in the fourth quarter.
In June 2002, the Company decided to close an unprofitable division in the Wood
segment and consolidate it into another existing plant location. Accordingly,
the Company recorded charges of approximately $269,000 which included plant shut
down expenses, the write-down of obsolete inventory, and severance payments of
approximately $62,000 to 51 employees. These restructuring charges approximated
$162,000 after tax, or $.04 per share and were all utilized in the third quarter
of 2002.
F-16
PATRICK INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
In 2001, restructuring charges were incurred from the decision to relocate two
manufacturing plants in the Other segment and consolidate them into existing
plant locations. The Company recorded charges of approximately $424,000 which
included the write-down of obsolete inventory, plant shut down expenses, and
severance payments of approximately $61,000 to 25 employees. These restructuring
charges approximated $254,000 after tax, or $.06 per share. The restructuring
reserve at December 31, 2001 was approximately $408,000, all of which was
utilized in the first quarter of 2002.
During 2001 the Company determined that asset impairment existed by comparing
the estimated future undiscounted cash flows of certain long lived-assets with
their respective carrying values. Impairment charges were the result of two of
the Company's divisions in the Other segment, which were non-core business
units, experiencing negative operating results as well as lower projected sales
volume levels due to the overall downturn in the Manufactured Housing and
Recreational Vehicle Industries. Accordingly, the Company recorded a pre-tax
charge to operations of approximately $2,834,000, of which, approximately
$186,000 related to the write-down of certain fixed assets and $2,648,000
related to the write-down of goodwill. This charge approximated $1,700,000 after
tax or $.38 per share in 2001.
NOTE 11. CONTINGENCIES
The Company is subject to claims and suits in the ordinary course of
business. In management's opinion, current pending legal proceedings and claims
against the Company will not, individually or in the aggregate, have a material
adverse effect on the Company's financial condition, results of operations, or
cash flows.
NOTE 12. CASH FLOWS INFORMATION
Supplemental information relative to the statements of cash flows for the years
ended December 31, 2003, 2002, and 2001 is as follows:
2003 2002 2001
-------------------------------------------
Supplemental disclosures of cash
flows information:
Cash payments for:
Interest $ 727,295 $ 875,059 $ 1,062,450
===========================================
Income taxes $ 81,285 $ 717,232 $ 125,234
===========================================
Supplemental schedule of noncash
financing activities:
Issuance of common stock
for stock award plan $ 78,600 $ 216,000 $ 170,640
===========================================
F-17
PATRICK INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 13. UNAUDITED INTERIM FINANCIAL INFORMATION
Presented below is certain selected unaudited quarterly financial information
for the years ended December 31, 2003 and 2002 (dollars in thousands, except per
share data):
Quarter Ended
--------------------------------------------------------------
March 31, June 30, September 30, December 31,
--------------------------------------------------------------
2003
--------------------------------------------------------------
Net sales $ 67,285 $ 70,950 $ 70,267 $ 66,180
Gross profit 7,071 8,562 8,909 7,641
Net income (loss) (900) 25 228 592 *
Earnings (loss) per common
share (0.20) 0.01 0.05 0.13
Weighted average common
shares outstanding 4,584,261 4,590,327 4,611,037 4,616,886
* During the 4th quarter ended December 31, 2003, the Company recorded
pre-tax positive adjustments of $1.2 million, or .16 cents per share net
of tax related to gains on disposal of a building, sale of equipment as
a result of a plant closing, and increases in cash surrender value of
life insurance policies.
2002
--------------------------------------------------------------
Net sales $ 75,243 $ 82,567 $ 80,848 $ 70,097
Gross profit 9,736 10,855 10,350 8,252
Net income (loss) 270 636 153 (964)*
Earnings (loss) per common
share 0.06 0.14 0.03 (0.21)
Weighted average common
shares outstanding 4,529,770 4,544,015 4,556,136 4,557,970
* During the 4th quarter ended December 31, 2002, the Company wrote-off
receivables of approximately $1,600,000 which had an impact of $.21 per
share, net of taxes.
NOTE 14. SEGMENT INFORMATION
The Company has determined that its reportable segments are those that are based
on the Company's method of internal reporting, which segregates its business by
product category and production/ distribution process. 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.
F-18
PATRICK INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Distribution -- Distributes primarily pre-finished wall and ceiling panels,
drywall and drywall finishing products, particleboard, hardboard, vinyl
siding, roofing products, passage doors, building hardware, insulation, and
other products.
Wood -- Uses raw lumber including solid oak as well as other hardwood
materials or laminated particleboard or plywood to produce cabinet door
product lines.
Other -- Includes aluminum extrusion and fabricating, an adhesive division,
a pleated shade division, a plastic thermoforming division, and a machine
manufacturing division.
The accounting policies of the segments are the same as those described in
"Significant Accounting Policies," except that segment data includes
intersegment revenues, as well as a charge allocating a majority of the
corporate costs to each of its operating segments based on a percentage of
sales. Assets are identified with the segments with the exception of cash, land
and buildings, and intangibles which are identified with the corporate division.
The corporate division charges rents to the segment for use of the land and
buildings based upon market rates. The Company accounts for intersegment sales
as if the sales were to third parties, that is, at current market prices. The
Company also records income from purchase incentive agreements as corporate
division revenue. The Company evaluates the performance of its segments and
allocates resources to them based on a variety of indicators including revenues,
cost of goods sold, earnings before interest and taxes (EBIT), and total
identifiable assets.
The table below presents information about the net income (loss) and
segment assets used by the chief operating decision makers of the Company as of
and for the years ended December 31, 2003, 2002, and 2001.
Laminating Distribution Wood Other Total
-------------------------------------------------------------------------------
2003
-------------------------------------------------------------------------------
Sales $ 133,569 $ 89,992 $ 24,679 $ 26,442 $ 274,682
Sales, intersegment 6,549 639 587 8,005 15,780
-------------------------------------------------------------------------------
Total sales 140,118 90,631 25,266 34,447 290,462
Cost of goods sold 127,593 78,980 23,962 30,421 260,956
EBIT 461 974 (1,379) 622 678
Identifiable assets 28,549 9,779 4,483 5,280 48,091
Depreciation 2,279 172 506 526 3,483
F-19
PATRICK INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Laminating Distribution Wood Other Total
-------------------------------------------------------------------------------
2002
-------------------------------------------------------------------------------
Sales $ 142,156 $ 107,376 $ 31,266 $ 27,957 $ 308,755
Sales, intersegment 6,707 758 732 9,633 17,830
-------------------------------------------------------------------------------
Total sales 148,863 108,134 31,998 37,590 326,585
Cost of goods sold 132,969 94,839 30,061 33,096 290,965
EBIT 2,530 1,847 (1,648) 240 2,969
Identifiable assets 33,609 10,357 5,207 5,614 54,787
Depreciation 2,461 250 626 627 3,964
2001
-------------------------------------------------------------------------------
Sales $ 127,092 $ 103,298 $ 29,256 $ 33,424 $ 293,070
Sales, intersegment 4,052 1,039 926 12,973 18,990
-------------------------------------------------------------------------------
Total sales 131,144 104,337 30,182 46,397 312,060
Cost of goods sold 119,702 92,500 27,657 42,181 282,040
EBIT (1,120) 619 (1,027) (1,730) (3,258)
Identifiable assets 30,324 12,561 5,323 8,318 56,526
Depreciation 2,644 343 647 1,201 4,835
A reconciliation of total segment sales, cost of goods sold, and EBIT to
consolidated sales, cost of goods sold, and segment information to the
consolidated financial statements as of and for the years ended December 31,
2003, 2002, and 2001 is as follows (dollars in thousands):
2003 2002 2001
-----------------------------------------
Sales:
Total sales for reportable segments $ 290,462 $ 326,585 $ 312,060
Elimination of intersegment revenue (15,780) (17,830) (18,990)
-----------------------------------------
Consolidated sales $ 274,682 $ 308,755 $ 293,070
=========================================
F-20
PATRICK INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
2003 2002 2001
----------------------------------------------------------
Cost of goods sold:
Total cost of goods sold for reportable
segments $ 260,956 $ 290,965 $ 282,040
Elimination of intersegment cost of goods
sold (15,780) (17,830) (18,990)
Consolidation reclassifications (1,197) (1,397) (1,535)
Corporate incentive agreements (1,815) (2,427) (2,286)
Other 335 251 (171)
----------------------------------------------------------
Consolidated cost of goods sold $ 242,499 $ 269,562 $ 259,058
==========================================================
Earnings before interest and taxes (EBIT):
EBIT for reportable segments $ 678 $ 2,969 $ (3,258)
Corporate incentive agreements 1,815 2,427 2,286
Consolidation reclassifications 852 131 21
Gain (loss) on sale of property
and equipment 840 (12) 67
Impairment charge - - (2,834)
Restructuring charge (235) (269) (424)
(Underallocated) corporate expenses (3,361) (4,197) (4,437)
----------------------------------------------------------
Consolidated EBIT $ 589 $ 1,049 $ (8,579)
==========================================================
Consolidated assets:
Identifiable assets for reportable segments $ 48,091 $ 54,787 $ 56,526
Corporate property and equipment 19,632 22,235 22,586
Current assets not allocated to segments 10,511 6,703 9,917
Intangible and other assets not allocated
to segments 3,221 2,937 3,209
Consolidation eliminations (313) (196) (268)
----------------------------------------------------------
Consolidated assets $ 81,142 $ 86,466 $ 91,970
==========================================================
Depreciation and amortization:
Depreciation for reportable segments $ 3,483 $ 3,964 $ 4,835
Corporate depreciation and amortization 2,414 2,331 2,677
----------------------------------------------------------
Consolidated depreciation and
amortization $ 5,897 $ 6,295 $ 7,512
==========================================================
F-21
INDEPENDENT AUDITOR'S REPORT
ON THE SUPPLEMENTAL SCHEDULE AND CONSENT
To the Board of Directors
PATRICK INDUSTRIES, INC.
Elkhart, Indiana
Our audits of the consolidated financial statements of PATRICK INDUSTRIES, INC.
AND SUBSIDIARIES included Schedule II, contained herein, for each of the years
in the three-year period ended December 31, 2003. Such schedule is presented for
purposes of complying with the Securities and Exchange Commission's rule and is
not a required part of the basic consolidated financial statements. In our
opinion, such schedule presents fairly the information set forth therein, in
conformity with generally accepted accounting principles.
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (File No. 333-04187) and in the related Prospectus of our
report, dated January 23, 2004, with respect to the consolidated financial
statements and schedule of PATRICK INDUSTRIES, INC. AND SUBSIDIARIES included in
this Annual Report on Form 10-K for the year ended December 31, 2003.
Elkhart, Indiana
(Date of filing)
F-22
PATRICK INDUSTRIES, INC.
AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
DECEMBER 31, 2003, 2002, AND 2001
- ----------------------------------------------------------------------------------------------------------------------
Balance At Deductions Balance At
Beginning Charged To From Close
Of Period Operations Reserves Of Period
- ----------------------------------------------------------------------------------------------------------------------
Allowance for doubtful accounts
deducted from trade receiv-
ables in the balance sheets:
2001 $ 750,000 $ 196,195 $ 771,195 $ 175,000
===========================================================================
2002 $ 175,000 $1,762,297 $1,637,297 $ 300,000
===========================================================================
2003 $ 300,000 $ (155,149) $ (105,149) $ 250,000
===========================================================================
* Negative balances due to recovery of previously written off balances.
Allowance for restructuring
charges - in accrued
liabilities in the balance
sheets:
2001 $ 126,000 $ 423,617 $ 141,617 $ 408,000
===========================================================================
2002 $ 126,000 $ 269,180 $ 395,180 $ -
===========================================================================
2003 $ - $ 235,000 $ 235,000 $ -
===========================================================================
Allowance for inventory write-
downs - in accrued
liabilities in the balance
sheets:
2001 $ 11,123 $3,510,816 $3,521,939 $ -
===========================================================================
2002 $ - $2,569,662 $2,484,505 $ 85,157
===========================================================================
2003 $ 85,157 $1,674,989 $1,518,716 $ 241,430
===========================================================================
F-23
INDEX TO EXHIBITS
Exhibit Number Exhibits
- -------------- --------
3(a) -Amended Articles of Incorporation of the Company as
further amended (filed as Exhibit 3(a) to the Company's
Form 10-K/A-1 amending its report on Form 10-K for the
fiscal year ended December 31, 1992 and incorporated
herein by reference) ...........
3(b) -By-Laws of the Company (filed as Exhibit 3(b) to the
Company's Form 10-K/A-1 amending its report on Form
10-K for the fiscal year ended December 31, 1992 and
incorporated herein by reference) ...........
3(c) - Preferred Share Purchase Rights Agreement (filed
April 3, 1996 on Form 8-A and incorporated herein by
reference) .........
10(a) -Second Amendment to February 2, 1994 Credit Agreement,
dated as of June 26, 1995 among the Company, NBD Bank,
as agent, and NBD Bank, N.A. (filed as Exhibit 10(a) to
the Company's Form 10-K for the fiscal year ended
December 31, 1995 and incorporated herein by reference)
...........
10(b) -Note Agreement, dated September 1, 1995, between the
Company and Nationwide Life Insurance Company (filed as
Exhibit 10(b) to the Company's Form 10-K for the fiscal
year ended December 31, 1995 and incorporated herein by
reference) ...........
10(c) -Commercial Lease and Option to Purchase dated as of
October 1, 1995 between Mervin Lung Building Company,
Inc., as lessor, and the Company, as lessee (filed as
Exhibit 10(c) to the Company's Form 10-K for the fiscal
year ended December 31, 1995 and incorporated herein by
reference) ...........
10(d) -First Amendment to Credit Agreement, dated as of
October 27, 1994 among the Company, NBD Bank, as agent,
and NBD Bank, N.A. (filed as Exhibit 10(a) to the
Company's Form 10-K for the fiscal year ended December
31, 1994 and incorporated herein by reference)
...........
10(e) -Loan Agreement dated as of December 1, 1994 between
the State of Oregon Economic Development Commission,
along with the Pledge and Security Agreement relating
thereto (filed as Exhibit 10(b) to the Company's Form
10-K for the fiscal year ended December 31, 1994 and
incorporated herein by reference) ...........
10(f) -Credit Agreement dated as of February 2, 1994 among
the Company, NBD Bank, as agent, and NBD Bank, N.A.
(filed as Exhibit 10(a) to the Company's Form 10-K for
the fiscal year ended December 31, 1993 and
incorporated herein by reference) ...........
49
Exhibit Number Exhibits
- -------------- --------
10(g) -Loan Agreement dated as of November 1, 1991 between
the Company and the Indiana Development Finance
Authority, along with the Pledge and Security Agreement
relating thereto (filed as Exhibit 10(c) to the
Company's Form 10-K/A-1 amending its report on Form
10-K for the fiscal year ended December 31, 1992 and
incorporated herein by reference) .....
*10(h) -Patrick Industries, Inc. 1987 Stock Option Program, as
amended (filed as Exhibit 10(e) to the Company's Form
10-K for the fiscal year ended December 31, 1994 and
incorporated herein by reference) ...........
*10(i) -Patrick Industries, Inc. 401(k) Employee Savings Plan
(filed as Exhibit 10(a) to the Company's Form 10-K for
the fiscal year ended December 31, 1993 and
incorporated herein by reference) ...........
*10(j) -Form of Employment Agreements with Executive Officers
(filed as Exhibit 10(e) to the Company's Form 10-K/A-1
amending its report on Form 10-K for the fiscal year
ended December 31, 1992 and incorporated herein by
reference) .....
*10(k) -Form of Deferred Compensation Agreements with
Executive Officers (filed as Exhibit 10(f) to the
Company's Form 10-K/A-1 amending its report on Form
10-K for the fiscal year ended December 31, 1992 and
incorporated herein by reference) ...........
10(l) -Commercial Lease and dated as of October 1, 1994
between Mervin D. Lung, as lessor, and the Company, as
lessee (filed as Exhibit 10(k) to the Company's Form
10-K for the fiscal year ended December 31, 1994 and
incorporated herein by reference) ...........
10(m) -Commercial Lease dated September 1, 1994 between
Mervin D. Lung Building Company, Inc., as lessor, and
the Company, as lessee (filed as Exhibit 10(l) to the
Company's Form 10-K for the fiscal year ended December
31, 1994 and incorporated herein by reference)
...........
10(n) -Commercial Lease dated November 1, 1994 between Mervin
D. Lung Building Company, Inc., as lessor, and the
Company, as lessee (filed as Exhibit 10(m) to the
Company's Form 10-K for the fiscal year ended December
31, 1994 and incorporated herein by reference)
...........
10(o) -Commercial Lease dated October 1, 1999 between Mervin
D. Lung, as lessor, and the Company, as lessee (filed
as Exhibit 10(o) to the Company's Form 10-K for the
fiscal year ended December 31, 1999 and incorporated
herein by reference) ..........
10(p) -Commercial Lease dated September 1, 2000 between
Mervin D. Lung Building Company, Inc., as lessor, and
the Company, as lessee (filed as Exhibit 10(p) to the
Company's Form 10-K for the fiscal year ended December
31, 2000 and incorporated herein by reference)
..........
50
Exhibit Number Exhibits
- -------------- --------
10(q) -Commercial Lease dated November 1, 2000 between Mervin
D. Lung Building Company, Inc., as lessor, and the
Company, as lessee (filed as Exhibit 10(q) to the
Company's Form 10-K for the fiscal year ended December
31, 2000 and incorporated herein by reference)
..........
10(r) -Credit Agreement dated as of January 28, 2000 among
the Company, Bank One, Indiana, N.A. (filed as Exhibit
10(r) to the Company's Form 10-K for the fiscal year
ended December 31, 2000 and incorporated herein by
reference)..........
10(s) -Commercial Lease dated August 1, 2001 between Mervin
D. Lung Building Company, Inc., as lessor, and the
company, as lessee (filed as Exhibit 10(s) to the
Company's Form 10-K for the fiscal year ended December
31, 2001 and incorporated herein by reference)
..........
10(t) -Commercial Lease dated October 1, 2002 between M. D.
Lung, Inc., as lessor, and the company, as lessee
(filed as Exhibit 10(t) to the Company's Form 10-K for
the fiscal year ended December 31, 2002 and
incorporated herein by reference) ..........
10(u)** -Commercial Lease dated September 1, 2003 between
Mervin D. Lung Building Company, Inc., as lessor, and
the Company, as lessee (filed as Exhibit 10(u) to the
Company's Form 10-K for the fiscal year ended December
31, 2003 and incorporated herein by
reference)..........
10(v)** -Credit Agreement dated April 11, 2003 among the
Company, Bank One, N.A. (filed as Exhibit 10(v) to the
Company's Form 10-K for the fiscal year ended December
31, 2003 and incorporated herein by
reference)............
12** -Computation of Operating Ratios...........
23 -Consent of accountants (included in Independent
auditor's report on supplemental schedule & consent on
page F-21) .....
31.1** -Certification Pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002 by Chief Executive Officer.....
31.2** -Certification Pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002 by Chief Financial Officer.....
32** -Certification pursuant to 18 U.S.C. Section 1350......
*Management contract or compensatory plan or arrangement
**Filed herewith
51