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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2004
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from .................. to .................
Commission file number 0-3922
PATRICK INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
INDIANA 35-1057796
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1800 South 14th Street, Elkhart, IN 46516
(Address of principal executive offices)
(ZIP Code)
(574) 294-7511
(Registrant's telephone number, including area code)
NONE
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate by check mark whether the registrant is an accelerated filer.
Yes No X
Shares of Common Stock Outstanding as of July 30, 2004: 4,723,861
PATRICK INDUSTRIES, INC.
INDEX
Page No.
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Unaudited Condensed Balance Sheets
June 30, 2004 (unaudited) & December 31, 2003 3
Unaudited Condensed Statements of Operations
Three Months Ended June 30, 2004 & 2003, and
Six Months Ended June 30, 2004 & 2003 4
Unaudited Condensed Statements of Cash Flows
Six Months Ended June 30, 2004 & 2003 5
Notes to Unaudited Condensed Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 9
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 17
ITEM 4. CONTROLS AND PROCEDURES 17
PART II: OTHER INFORMATION 18
Signatures 19
2
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PATRICK INDUSTRIES, INC.
UNAUDITED CONDENSED BALANCE SHEETS
JUNE 30 DECEMBER 31
2004 2003
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 93,773 $ 7,077,390
Trade receivables 23,499,031 14,240,556
Inventories 34,305,298 23,042,444
Prepaid expenses 847,929 913,650
Deferred tax assets 1,954,000 1,954,000
----------- -----------
Total current assets 60,700,031 47,228,040
----------- -----------
PROPERTY AND EQUIPMENT, at cost 93,849,696 90,620,044
Less accumulated depreciation 60,139,391 59,927,134
----------- -----------
33,710,305 30,692,910
----------- -----------
INTANGIBLE AND OTHER ASSETS 3,000,719 3,221,010
----------- -----------
Total assets $97,411,055 $81,141,960
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 3,671,429 $ 3,671,429
Short-term borrowings 2,000,000 - - -
Accounts payable 17,220,737 4,883,038
Accrued liabilities 4,301,315 3,038,926
----------- -----------
Total current liabilities 27,193,481 11,593,393
----------- -----------
LONG-TERM DEBT, less current maturities 7,771,430 7,771,430
----------- -----------
DEFERRED LIABILITIES 2,503,084 2,529,403
----------- -----------
Total liabilities $37,467,995 $21,894,226
----------- -----------
SHAREHOLDERS' EQUITY
Common stock 18,899,097 18,236,386
Retained earnings 41,043,963 41,011,348
----------- -----------
Total shareholders' equity 59,943,060 59,247,734
----------- -----------
Total liabilities and shareholders' equity $97,411,055 $81,141,960
=========== ===========
See accompanying Notes to Unaudited Condensed Financial Statements
3
PATRICK INDUSTRIES, INC.
UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
2004 2003 2004 2003
Net Sales $ 78,620,200 $ 70,949,945 $ 144,332,555 $ 138,235,025
Cost of good sold 69,082,255 62,388,252 127,201,470 122,602,007
------------- ------------- ------------- -------------
Gross profit 9,537,945 8,561,693 17,131,085 15,633,018
------------- ------------- ------------- -------------
Operating expenses:
Warehouse and delivery expenses 3,513,120 3,195,977 6,673,975 6,389,750
Selling, general, and administrative expenses 4,969,555 5,133,407 10,126,100 10,304,779
------------- ------------- ------------- -------------
Total operating expenses 8,482,675 8,329,384 16,800,075 16,694,529
Operating income (loss) 1,055,270 232,309 331,010 (1,061,511)
Interest expense, net 138,365 190,139 276,195 384,089
------------- ------------- ------------- -------------
Income (loss) before income taxes (credits) 916,905 42,170 54,815 (1,445,600)
Federal and state income taxes (credits) 362,700 16,700 22,200 (571,000)
------------- ------------- ------------- -------------
Net income (loss) $ 554,205 $ 25,470 $ 32,615 $ (874,600)
Basic and diluted earnings (loss)
per common share $ .12 $ .01 $ .01 $ (.19)
============= ============= ============= ============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 4,697,159 4,590,327 4,668,950 4,587,311
See accompanying Notes to Unaudited Condensed Financial Statements.
4
PATRICK INDUSTRIES, INC.
UNAUDITED CONDENSED STATEMENTS OF
CASH FLOWS
SIX MONTHS ENDED
JUNE 30
2004 2003
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 32,615 $ (874,600)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,814,643 2,869,752
(Gain) on sale of fixed assets (25,375) (90,695)
Deferred income taxes (49,695) (388,331)
Other 141,000 141,000
Change in assets and liabilities:
Decrease (increase) in:
Trade receivables (9,258,475) (7,631,452)
Inventories (11,262,854) 1,702,527
Income tax refund claims receivable - - - 1,307,253
Prepaid expenses 65,721 85,992
Increase (decrease) in:
Accounts payable and accrued liabilities 13,573,366 6,087,444
Income taxes payable 26,722 (240,000)
------------ ------------
Net cash provided by (used in) operating activities (3,942,332) 2,968,890
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (5,652,674) (1,775,107)
Proceeds from sale of property and equipment 31,150 117,987
Other 275,596 124,742
------------ ------------
Net cash (used in) investing activities (5,345,928) (1,532,378)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Short-term borrowings 2,000,000 - - -
Payments on deferred compensation obligations (117,624) (144,624)
Proceeds from exercise of common stock options 452,480 - - -
Cash dividends paid - - - (183,279)
Other (30,213) (3,316)
------------ ------------
Net cash provided by (used in) financing activities 2,304,643 (331,219)
------------ ------------
Increase (decrease) in cash and cash equivalents (6,983,617) 1,105,293
Cash and cash equivalents, beginning 7,077,390 3,552,232
------------ ------------
Cash and cash equivalents, ending $ 93,773 $ 4,657,525
============ ============
Cash Payments for:
Interest $ 273,795 $ 384,289
Income taxes 45,173 57,168
See accompanying notes to Unaudited Condensed Financial Statements
5
PATRICK INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
1. In the opinion of the Company, the accompanying unaudited condensed
financial statements contain all adjustments (consisting of only normal
recurring accruals and the adjustments for restructuring charges as
discussed in Note 5) necessary to present fairly the financial position
as of June 30, 2004 and December 31, 2003, the results of operations for
the three months and the six months ended June 30, 2004 and 2003, and
cash flows for the six months ended June 30, 2004 and 2003.
2. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or
omitted. It is suggested that these condensed financial statements be
read in conjunction with the financial statements and notes thereto
included in the Company's December 31, 2003 audited financial statements.
The results of operations for the three month and six month periods ended
June 30, 2004 and 2003 are not necessarily indicative of the results to
be expected for the full year.
3. The inventories on June 30, 2004 and December 31, 2003 consist of the
following classes:
June 30 December 31
2004 2003
---- ----
Raw materials $20,960,904 $12,733,414
Work in process 1,942,753 1,630,052
Finished goods 4,797,811 3,501,779
----------- -----------
Total manufactured goods 27,701,468 17,865,245
Distribution products 6,603,830 5,177,199
----------- -----------
TOTAL INVENTORIES $34,305,298 $23,042,444
=========== ===========
Inventories are stated at the lower of cost, First-In First-Out (FIFO)
method, or market.
4. Dividends per common share for the six month period ending June 30, 2004
and 2003 were $.00 and $.04 per share, respectively.
5. The Company accounts for grants of stock options under its stock option
plan based on the recognition and measurement principles of APB Opinion
No. 25 and related interpretations. The following table illustrates the
effect on net income and earnings per share if the Company had applied
the fair value recognition provision of FASB No. 123 to stock based
employee compensation:
Three Months Six Months
Ended June 30 Ended June 30
2004 2003 2004 2003
---- ---- ---- ----
Net income (loss):
As reported $554,205 $ 25,470 $ 32,615 $(874,600)
Deduct total stock-based employee
compensation expense determined
under fair value based method for
all rewards net of related tax effects (19,202) (38,038) (38,403) (76,078)
-------- --------- --------- ---------
Pro forma $535,003 $ (12,568) $ (5,788) $(950,678)
-------- --------- --------- ---------
Basic and diluted earnings (loss) per share:
As reported $ .12 $ .01 $ .01 $ (.19)
Pro forma .11 - - - - - - (.21)
6
6. Effective January 1, 2004, the Company changed its segment reporting to no
longer allocate corporate expense to the individual business units.
Accordingly, the segment results have been restated to reflect this change.
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. Effective
January 1, 2004, in accordance with the Company's internal reporting, the
Company changed its segment reporting from four reportable segments to
three. As a result of this change, two of the operations in the wood
segment were combined into the Primary Manufactured Products segment and
two of the operations were combined into the Other Component Manufactured
Products segment. The Company's reportable segments are as follows:
Primary Manufactured Products - 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 products are utilized to
produce furniture, shelving, wall, counter, and cabinet products with a
wide variety of finishes and textures.
Distribution - Distributes primarily pre-finished wall and ceiling panels,
particleboard, hardboard and vinyl siding, roofing products, high pressure
laminates, passage doors, building hardware, insulation, and other
products.
Other Component Manufactured Products - Includes aluminum extrusion and
fabricating, an adhesive division, two cabinet door divisions, and a
machine manufacturing division.
The table below presents unaudited information about the revenue and
operating income of those segments:
THREE MONTHS ENDED JUNE 30, 2004
--------------------------------
PRIMARY OTHER
MANUFACTURED COMPONENT
PRODUCTS DISTRIBUTION PRODUCTS SEGMENT TOTAL
-------- ------------ -------- -------------
Net outside sales $ 41,573,507 $ 25,864,573 $ 11,182,120 $ 78,620,200
Intersegment sales 1,851,502 328,073 2,204,291 4,383,866
------------ ------------ ------------ ------------
Total sales $ 43,425,009 $ 26,192,646 $ 13,386,411 $ 83,004,066 *
------------ ------------ ------------ ------------
Operating income $ 2,103,965 1,087,765 $ 171,544 $ 3,363,274
THREE MONTHS ENDED JUNE 30, 2003
--------------------------------
Net outside sales $ 37,883,684 $ 22,766,978 $ 10,299,283 $ 70,949,945
Intersegment sales 1,732,995 151,117 2,137,800 4,021,912
------------ ------------ ------------ ------------
Total sales $ 39,616,679 $ 22,918,095 $ 12,437,083 $ 74,971,857 *
------------ ------------ ------------ ------------
Operating income $ 1,663,316 $ 828,328 $ 23,308 $ 2,514,952
7
SIX MONTHS ENDED JUNE 30, 2004
------------------------------
PRIMARY OTHER
MANUFACTURED COMPONENT
PRODUCTS DISTRIBUTION PRODUCTS SEGMENT TOTAL
-------- ------------ -------- -------------
Net outside sales $ 77,007,811 $ 46,660,988 $ 20,663,756 $ 144,332,555
Intersegment sales 3,622,930 671,988 4,438,185 8,733,103
------------ ------------ ------------ --------------
Total sales $ 80,630,741 $ 47,332,976 $ 25,101,941 $ 153,065,658 *
------------ ------------ ------------ --------------
Operating income $ 2,832,637 $ 1,871,451 $ 325,119 $ 5,029,207
Total assets $ 41,736,241 $ 14,365,429 $ 8,665,509 $ 64,767,179
SIX MONTHS ENDED JUNE 30, 2003
------------------------------
Net outside sales $ 73,743,946 $ 42,928,757 $ 21,562,322 $ 138,235,025
Intersegment sales 3,563,245 357,507 4,030,075 7,950,827
------------ ------------ ------------ --------------
Total sales $ 77,307,191 $ 43,286,264 $ 25,592,397 $ 146,185,852 *
------------ ------------ ------------ --------------
Operating income (loss) $ 2,557,264 $ 1,375,133 $ (587,707) $ 3,344,690
Total assets $ 35,897,637 $ 12,073,063 $ 10,398,326 $ 58,369,026
Reconciliation of segment Operating income (loss) to consolidated Operating
income (loss):
Three Months Ended Six Months Ended
June 30, June 30,
2004 2003 2004 2003
---- ---- ---- ----
Operating income for segments $ 3,363,274 $ 2,514,952 $ 5,029,207 $ 3,344,690
Corporate incentive agreements 301,288 300,000 601,288 606,019
Consolidation reclassifications 1,119 146,433 9,768 200,469
Gain on sale of assets 14,000 77,319 25,375 90,695
Unallocated corporate expenses (2,387,711) (2,599,339) (5,135,934) (5,105,947)
Other (236,700) (207,056) (198,694) (197,437)
------------ ------------ ------------ ------------
Consolidated operating income (loss) $ 1,055,270 $ 232,309 $ 331,010 $ (1,061,511)
============= ============= ============ ============
*Does not agree to Financial Statements due to consolidation eliminations.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The second quarter and six month period ending June 30, 2004 showed
improvement as net sales increased 10.8% for the quarter and 4.4% year to date.
Raw material price increases and the continued strong shipment levels in the
Recreational Vehicle industry provided the support for the Company to show its
first quarter to quarter increase in sales in more than four consecutive
quarters. Operating expenses remained consistent with revenues on a percentage
basis; however, the Company's strategic focus on investment in key personnel
will show an increase on a dollar for dollar basis in selling, general, and
administrative expenses through the end of 2004, exclusive of the gain on life
insurance in the second quarter of 2004. Restructuring efforts in 2003 related
to the closing of one of the Company's unprofitable cabinet door divisions,
increased net sales, and a $0.4 million gain on life insurance proceeds in the
second quarter helped to improve overall profitability by more than $0.5 million
for the quarter and $0.9 million year to date thru June 2004. Earnings per share
improved by $.11 from $.01 per share in the second quarter of 2003 to $.12 per
share in the second quarter of 2004, and by $.20 for the six month period ending
June 30, 2004 from a loss of $.19 per share in 2003 to income of $.01 per share
in 2004.
The Manufactured Housing industry continued to struggle after showing its
first monthly shipment increase in twenty-four months in March 2004 of more than
8%. This industry, which represents approximately 39% and 40% of the Company's
sales at June 30, 2004, and 2003, respectively, showed a decline in shipments in
the second quarter of 2004 of approximately 2.3% and year to date of
approximately 3.8%. Repossessed inventory levels have decreased, but financing
and jobs growth remain in question and will have an impact on future shipment
levels. Analysts are estimating that final 2004 twelve month shipment levels
will show an increase in the 3% range.
The Recreational Vehicle industry, which represents approximately 32% of
the Company's sales at June 30, 2004 and 2003 continued on its strong pace with
second quarter and year to date shipments improving by more than 21% and 20%,
respectively. Shipments in this industry have been greater than 300,000 units in
four out of the last five years and 2004 is expected to be at or above the 2003
level, which was the second highest in the last twenty-five years. While
consistently high gasoline prices in 2004 have not had a major impact on
shipments in this industry to date, continued price increases, or decreases in
availability of gasoline could have a negative impact on future shipment levels.
The Company's sales to the Industrial markets continued to show
improvement as net sales to these markets increased by approximately 11% for the
quarter and 6% year to date. These markets, which continue to be a focus to help
diversify the Company's customer base represent approximately 29% and 28% of the
company's consolidated sales at June 30, 2004 and 2003, respectively.
The Company remains focused on increasing penetration into all of the
markets that it serves and has the capacity to do so. Strategic investment in
property, plant, and equipment, key personnel, and potential future acquisitions
are all part of the overall growth plan to increase sales levels and maximize
shareholder value. Capital expenditures will increase for the remainder of 2004
and into 2005 as a part of this plan.
The following table sets forth the percentage relationship to net sales of
certain items in the Company's Statements of Operations:
Three Months Six Months
Ended June 30, Ended June 30,
2004 2003 2004 2003
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 87.9 87.9 88.1 88.7
Gross profit 12.1 12.1 11.9 11.3
Warehouse and delivery 4.5 4.5 4.6 4.6
Selling, general, & administrative 6.3 7.2 7.0 7.5
Operating income (loss) 1.3 0.3 0.2 (0.8)
Income (loss) before taxes 1.2 0.1 - - - (1.0)
Income taxes (credits) 0.5 (.01) - - - (0.4)
Net income (loss) 0.7 - - - - - - (0.6)
9
RESULTS OF OPERATIONS
Quarter Ended June 30, 2004 Compared to Quarter Ended June 30, 2003
Net Sales. Net sales increased approximately $7.7 million, or 10.8%
from $70.9 million in the second quarter of 2003 to $78.6 million in the second
quarter of 2004. The increase in net sales is primarily attributable to raw
material price increases and to the continued strong shipment levels in the
Recreational Vehicle Industry.
Gross Profit. Gross profit increased by approximately $0.9 million, or
11.4% from $8.6 million in the second quarter of 2003 to $9.5 million in the
same period of 2004. The increase in dollars is attributable to the increased
sales. As a percentage of net sales, gross profit remained constant at 12.1%.
Warehouse and Delivery Expenses. Warehouse and delivery expenses
increased by $0.3 million, or 9.9% from $3.2 million in the second quarter of
2003 to $3.5 million in the second quarter of 2004. As a percentage of net
sales, warehouse and delivery expenses remained constant at 4.5% in both 2003
and 2004. The increase in dollars is attributable to the increased net sales.
Selling, General, and Administrative Expenses. Selling, general, and
administrative expenses decreased by $0.2 million, or 3.2% from $5.1 million in
the second quarter of 2003 to $4.9 million in the second quarter of 2004. The
second quarter includes a gain on life insurance proceeds of approximately $0.4
million. Exclusive of this gain, selling, general, and administrative expenses
increased by $0.2 million, or 3.9% and as a percentage of net sales, selling,
general, and administrative expenses decreased by 0.4% from 7.2% in 2003 to 6.8%
in 2004. The increase in dollars is attributable to increased sales and the
decrease in percentage of net sales is attributable to similar fixed expenses
quarter to quarter.
Operating Income. Operating income increased by $0.8 million from $0.2
million in the second quarter of 2003 to $1.0 million in the second quarter of
2004. The increase in operating income is attributable to the factors described
above.
Interest Expense, Net. Interest expense, net decreased by $0.1 million
from $0.2 million in the second quarter of 2003 to $0.1 million in the second
quarter of 2004. The decrease in interest expense, net is attributable to lower
long term debt outstanding from quarter to quarter.
Net Income. Net income increased $0.5 million from $25,000 in the
second quarter of 2003 to $0.5 million in the second quarter of 2004 primarily
due to the factors described above.
Quarter Ended June 30, 2003 Compared to Quarter Ended June 30, 2002
Net Sales. Net sales decreased $11.7 million, or 14.1%, from $82.6
million in the quarter ending June 30, 2002 to $70.9 million in the same period
in 2003. This decrease is attributable to a 25% decrease in shipments in the
second quarter of 2003 in the Manufactured Housing Industry, which was partially
offset by flat shipments in the Recreational Vehicle Industry and increases in
sales to the Industrial and Other markets.
Gross Profit. Gross profit decreased by $2.3 million, or 21.1%, from
$10.9 million in the second quarter of 2002 to $8.6 million in the second
quarter of 2003. As a percentage of net sales, gross profit decreased 1.0%, from
13.1% in the June, 2002 quarter to 12.1% in the June, 2003 quarter. These
decreases in gross profits are due to significant competitive pricing situations
in both the Manufactured Housing and Recreational Vehicle markets.
Warehouse and Delivery Expenses. Warehouse and delivery expenses
decreased $0.4 million, or 12.1%, from $3.6 million in the quarter ended June
30, 2002 to $3.2 million in the same period in 2003. As a percentage of net
sales, warehouse and delivery expenses increased slightly from 4.4% in 2002 to
4.5% in 2003. The decline in dollars and minimal increase in percentage of net
sales is consistent with the Company's efforts to control costs in this area and
keep costs aligned with revenues.
10
Selling, General, and Administrative Expenses. Selling, general, and
administrative expenses decreased $0.5 million, or 8.5%, from $5.6 million in
the 2002 second quarter to $5.1 million in the 2003 second quarter. As a
percentage of net sales, selling, general, and administrative expenses increased
0.4%, from 6.8% in 2002 to 7.2% in 2003. The decrease in dollars is due to the
Company continuing its efforts to control fixed costs in this area and keep
costs aligned with revenues. The slight increase in percentage of net sales is
due to the 14% decline in sales in the second quarter of 2003.
Restructuring Charges. The Company recognized restructuring charges of
$269,000 in the second quarter of 2002.
Operating Income. Operating income decreased by $1.1 million, or 82.7%,
from $1.3 million in the quarter ended June 30, 2002 to $0.2 million in the
quarter ended June 30, 2003. The decrease in operating income is due primarily
to the decrease in sales in the second quarter of 2003 coupled with significant
competitive pricing conditions causing reduced prices and gross profits.
Interest Expense, Net. Interest expense, net decreased by $89,000 as a
result of a decrease in interest rates on the variable tax exempt bonds as well
as reduced debt service requirements.
Net Income. The Company recorded net income of $25,000 in the second
quarter of 2003 compared to income of $636,000 in the second quarter of 2002.
The decrease in net income is attributable to the factors described above.
Six Months Ended June 30, 2004 Compared to Six Months Ended June 30, 2003
Net Sales. Net sales increased $6.1 million, or 4.4% from $138.2 million
in the six months ended June 30, 2003 to $144.3 million in the same period in
2004. The increase in net sales is attributable to increased raw material prices
and the continued growth in shipments in the Recreational Vehicle Industry.
While Manufactured Housing shipments decreased approximately 3.8% for the six
month period, Recreational Vehicle shipments increased by approximately 20.1%
from the previous year. Additionally, the Company increased its sales to the
Industrial and Other markets during the period.
Gross Profit. Gross profit increased by $1.5 million, or 9.6% from $15.6
million in the six months ended June 30, 2003 to $17.1 million in the same
period in 2004. As a percentage of net sales, gross profit increased 0.6% from
11.3% in 2003 to 11.9% in 2004. The increase in dollars and percentage of net
sales is attributable to the increased sales levels and improvements as a result
of the restructuring related to the closing of one of the Company's unprofitable
cabinet door operations in the third quarter of 2003.
Warehouse and Delivery Expenses. Warehouse and delivery expenses
increased by $0.3 million from $6.4 million in the six months ending June 30,
2003 to $6.7 million in the six months ending June 30, 2004. As a percentage of
net sales warehouse and delivery remained constant at 4.6% of net sales. The
increase in dollars is attributable to the increased sales.
Selling, General and Administrative expenses. Selling, general and
administrative expenses decreased approximately $0.2 million from $10.3 million
in the six month period ending June 30, 2003 to $10.1 million in the same period
in 2004. Exclusive of a $0.4 million gain on life insurance proceeds in 2004,
selling, general and administrative expenses increased $0.2 million, or 1.7% and
as a percentage of net sales, selling, general and administrative expenses
decreased 0.2% from 7.5% in 2003 to 7.3% in 2004.
Operating Income. Operating income increased $1.4 million from a loss of
$1.1 million in 2003 to income of $0.3 million in 2004. The increase in
operating income is attributable to the factors described above.
Interest Expense, Net. Interest expense, net decreased $0.1 million from
$0.4 million in the six months ending June 30, 2003 to $0.3 million in the six
months ending June 30, 2004. The decrease is attributable to lower long term
debt outstanding from year to year.
Net income. Net income increased $0.9 million from a loss of $0.9 million
in the six month period ending June 30, 2003 to income of $33,000 in the same
period in 2004.
11
Six Months Ended June 30, 2003 Compared to Six Months Ended June 30, 2002
Net Sales. Net sales decreased $19.6 million, or 12.4%, from $157.8
million in the six months ended June 30, 2002 to $138.2 million in the same
period in 2003. The decrease is attributable to an approximate 26% decrease in
units shipped in the Manufactured Housing Industry which was offset by a 3%
increase in shipments in the Recreational Vehicle Industry. The Company's sales
for the first six months of 2003 are 40% to Manufactured Housing, 32% to
Recreational Vehicle, and 28% to Other industries.
Gross Profit. Gross Profit decreased $5.0 million, or 24.1%, from $20.6
million in 2002 to $15.6 million in 2003. As a percentage of net sales, gross
profit decreased 1.7%, from 13.0% in 2002 to 11.3% in 2003. The decrease in
gross profits both in dollars and as a percentage of net sales, is due to the
decrease in sales as well as significant competitive market pricing conditions
affecting both the Manufactured Housing and Recreational Vehicle industries.
Warehouse and Delivery Expenses. Warehouse and delivery expenses
decreased $0.7 million, or 9.5%, from $7.1 million in 2002 to $6.4 million in
2003. As a percentage of net sales, warehouse and delivery expenses increased
0.1%, from 4.5% in 2002 to 4.6% in 2003. The Company has continued to reduce its
fleet size from the previous year as well as gaining operating efficiencies by
consolidating shipments and attempting to ship more full truckloads. These
efforts have been offset by increased gasoline prices and delivery surcharges
from the trucking companies.
Selling, General, and Administrative Expenses. Selling, general, and
administrative expenses decreased by $0.9 million, or 8.3%, from $11.2 million
in 2002 to $10.3 million in 2003. As a percentage of net sales, selling,
general, and administrative expenses increased 0.3% from 2002 to 2003. The
decrease in dollars is due to the Company's cost reduction efforts and continued
emphasis on reducing fixed costs and keeping costs aligned with revenues.
Restructuring Charges. The Company recorded restructuring charges of
$269,000 in the six months ended June 30, 2002.
Operating Income (Loss). Operating income decreased by $3.1 million, from
operating income of $2.0 million in 2002 to an operating loss of $1.1 million in
2003. The decrease in operating income is due to the factors described above.
Interest Expense, Net. Interest expense, net decreased by $127,000 due to
decreased debt service levels and a corresponding decrease in interest rates on
the variable rate debt from the previous year.
Net Income (Loss). The Company reported a net loss of $0.9 million in the
first six months of 2003 compared to net income of $0.9 million in the same
period in 2002. The decrease is due to the factors described above.
BUSINESS SEGMENTS
Quarter Ended June 30, 2004 Compared to Quarter Ended June 30, 2003
PRIMARY MANUFACTURED PRODUCTS SEGMENT DISCUSSION
Net sales increased $3.8 million, or 9.6% from $39.6 million in the
quarter ended June 30, 2003 to $43.4 million in the same period in 2004. The
increased sales levels are attributable to raw material price increases and an
approximate 21% increase in quarterly shipments in the Recreational Vehicle
industry. The Manufactured Housing industry experienced an approximate 2%
decline in shipments from the 2003 second quarter to the 2004 second quarter.
Operating income increased $0.4 million, or 26.5% from $1.7 million in
the second quarter of 2003 to $2.1 million in the second quarter of 2004. The
increase in operating income is attributable to the increased sales.
12
DISTRIBUTION SEGMENT DISCUSSION
Net sales increased $3.3 million, or 14.3% from $22.9 million in the
second quarter of 2003 to $26.2 million in the second quarter of 2004. The
increased sales levels are attributable to increased raw material prices.
Operating income increased $0.3 million, or 31.3% from $0.8 million in
the three month period ending June 30, 2003 to $1.1 million in the same period
in 2004. The increase in operating income is due to increased sales.
OTHER COMPONENT MANUFACTURED PRODUCTS DISCUSSION
Net sales increased $1.0 million, or 7.6% from $12.4 million in the
second quarter of 2003 to $13.4 million in the second quarter of 2004. The
increased sales are attributable to increased raw material prices.
Operating income increased approximately $148,000 from $24,000 in the
second quarter of 2003 to $172,000 in the second quarter of 2004. The increase
is attributable to decreased losses from one of the Company's unprofitable
cabinet door divisions which was closed in the third quarter of 2003.
Quarter Ended June 30, 2003 Compared to Quarter Ended June 30, 2002
PRIMARY MANUFACTURED PRODUCTS DISCUSSION
Net sales decreased $2.3 million, or 5.5%, from $41.9 million in the 2002
second quarter to $39.6 million in the 2003 second quarter. The decrease in net
sales is due to a 25% decrease in shipments in the Manufactured Housing Industry
in the second quarter which was offset by increased sales to the Industrial and
Other markets which account for approximately one third of the sales in this
segment.
Operating income decreased by $0.8 million, or 33%, from $2.5 million in
the quarter ended June 30, 2002 to $1.7 million in the quarter ended June 30,
2003. The decrease is due to significant competitive pricing conditions
affecting gross profits on sales to the Manufactured Housing and Recreational
Vehicle industries.
DISTRIBUTION SEGMENT DISCUSSION
Net sales decreased by $6.6 million, or 23%, from $29.5 million in the
2002 second quarter to $22.9 million in the same period in 2003. This decrease
is consistent with the 25% quarterly decrease in shipments in the Manufactured
Housing Industry, which is the primary market that this segment serves.
Operating income decreased $0.5 million, or 40%, as a result of the
decreased sales volume for the quarter.
OTHER COMPONENT MANUFACTURED PRODUCTS DISCUSSION
Net sales decreased $3.6 million, or 22%, from $16.0 million for the
quarter ended June 30, 2002 to $12.4 million for the quarter ended June 30,
2003. Approximately $1.0 million of this decrease is due to the Company closing
one of its cabinet door facilities in the second quarter of 2002. The remaining
decrease is due to the Company choosing to discontinue the production and sale
to a particular customer of a specific raw material which caused production
inefficiencies and labor problems throughout the fourth quarter of 2002 and the
first quarter of 2003 as well as the fact that the Company sold one of its
business units in this segment in late 2002.
Operating losses in this segment increased approximately $0.2 million
from the 2002 second quarter as the phase-out of the inefficient product
concluded in the second quarter of 2003 and competitive market pricing
conditions in the Manufactured Housing and Recreational Vehicle industries
forced margins down.
13
Six Months Ended June 30, 2004 Compared to Six Months Ended June 30, 2003
PRIMARY MANUFACTURED PRODUCTS SEGMENT DISCUSSION
Net sales increased $3.3 million, or 4.3% from $77.3 million in 2003 to
$80.6 million in 2004. The increase is attributable to increased raw material
prices and increases in shipments in the Recreational Vehicle industry of more
than 20% for the six months ending June 30, 2004.
Operating income increased $0.3 million, or 10.8% from $2.5 million in
2003 to $2.8 million in 2004. The increase is attributable to increased sales
levels.
DISTRIBUTION SEGMENT DISCUSSION
Net sales increased $4.0 million or 9.4% from $43.3 million in 2003 to
$47.3 million in 2004. The increase is attributable to increased raw material
prices.
Operating income increased $0.5 million from $1.4 million in 2003 to $1.9
million in 2004. The increase is attributable to increased sales.
OTHER COMPONENT MANUFACTURED PRODUCTS DISCUSSION
Net sales decreased $0.5 million, or 1.9% from $25.6 million in 2003 to
$25.1 million in 2004. The decrease is attributable to the closing of one of the
business units in this segment in the third quarter of 2003.
Operating income increased $0.9 million from a loss of $0.6 million in
2003 to income of $0.3 million in 2004 primarily due to the closing of one of
the unprofitable cabinet door divisions in the third quarter of 2003.
Six Months Ended June 30, 2003 Compared to Six Months Ended June 30, 2002
PRIMARY MANUFACTURED PRODUCTS DISCUSSION
Net sales decreased $3.6 million, or 4.5%, from $80.9 million in 2002 to
$77.3 million in 2003. This decrease is due primarily to the 26% decrease in
units shipped in the Manufactured Housing Industry in the first six months of
2003. These sales decreases were offset by the 3% increase in units shipped in
the Recreational Vehicle Industry and increases in sales to the Industrial and
Other markets by the operations in this segment.
Operating income decreased $2.2 million, or almost 47%, due primarily to
significant competitive pricing situations in the Manufactured Housing and
Recreational Vehicle industries.
DISTRIBUTION SEGMENT DISCUSSION
Net sales decreased $12.1 million, or 21.9%, from $55.4 million in 2002
to $43.3 million in 2003. This decrease is due primarily to the decrease in
units shipped in the Manufactured Housing Industry, which is the primary
industry this segment serves.
Operating income decreased $0.7 million, from $2.1 million in 2002 to
$1.4 million in 2003 due to decreased sales volume.
OTHER COMPONENT MANUFACTURED PRODUCTS DISCUSSION
Net sales decreased $5.4 million, or 17.4%, from $31.0 million in 2002 to
$25.6 million in 2003. This decrease is due primarily to the closing of one of
the unprofitable business units in this segment in 2002 as well as the sale of
one of the business units in this segment late in 2002.
Operating losses in this segment increased approximately $1.0 million due
primarily to one of the business units in this segment continuing to experience
problems related to production inefficiencies and increased labor as a result of
the change in raw material required by a particular customer. This change
occurred in the fourth quarter of 2002 and continued through the first six
months of 2003 as the Company phased out its business related to this particular
product.
The Company decided, subsequent to June 30, 2003, to close this operating
unit as a result of historical losses, unfavorable projected operating results,
and general business conditions. The Company incurred restructuring charges in
14
the third quarter of approximately 269,000. The closing of this business unit
was completed during the third quarter of 2003.
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 $2,571,429 which began in September, 1999.
These funds were used to reduce existing bank debt and for working capital
needs.
The Company has a secured bank Revolving Credit Agreement that provides
loan availability of $15,000,000 with maturity in the year 2006.
Pursuant to the private placement and the Credit Agreement, the Company
is required to maintain certain financial ratios, all of which are currently
complied with.
The Company believes that cash generated from operations and borrowings
under its credit agreements will be sufficient to fund its working capital
requirements and planned capital expenditures. 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 the Company's contractual cash obligations remaining at June
30, 2004 and for the twelve month periods ending 2005 through 2008 is as
follows:
----------------------------------------------------------------------------------------------
PAYMENTS DUE BY PERIOD
----------------------------------------------------------------------------------------------
- -------------------------------------
CONTRACTUAL OBLIGATIONS TOTAL 2004 2005 2006 2007 2008
- ------------------------------------- --------------- --------------- --------------- --------------- --------------- --------------
--------------- --------------- --------------- --------------- --------------- --------------
Long-term debt, including interest
at variable rates** $5,188,750 $1,150,750 $1,186,625 $1,167,375 $849,000 $835,000
--------------- --------------- --------------- --------------- --------------- --------------
Long-term debt, including interest
at fixed rates** $5,391,304 $2,695,650 $2,695,654 $0 $0 $0
--------------- --------------- --------------- --------------- --------------- --------------
Operating Leases $2,687,777 $930,669 $840,037 $502,892 $279,623 $134,556
--------------- --------------- --------------- --------------- --------------- --------------
Total contractual cash obligations $13,267,831 $4,777,069 $4,722,316 $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.
The Company also has a commercial commitment as described below:
- -------------------------------------- --------------------------------- ------------------------------- ---------------------------
OTHER COMMERCIAL TOTAL AMOUNT OUTSTANDING DATE OF
COMMITMENT COMMITTED AT 06/30/04 EXPIRATION
- -------------------------------------- --------------------------------- ------------------------------- ---------------------------
Line of Credit $15,000,000 $2,000,000 August 15, 2006
- -------------------------------------- --------------------------------- ------------------------------- ---------------------------
Borrowings outstanding on the line of credit at July 31, 2004 were $5.2
million.
The Company believes 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 2004.
Subsequent to June 30, 2004, one of our major customers in the Southeast
began to experience cash flow difficulties and have extended their receivable
balance out beyond our normal terms. While we cannot predict the outcome of this
situation at this time, if this balance is deemed to be uncollectible, it could
have a material impact on third or fourth quarter operating results.
15
CRITICAL ACCOUNTING POLICIES
The Company's significant accounting policies are summarized in the
footnotes to our financial statements. Some of the most critical policies are
also discussed below.
The Company's major operating assets are accounts receivable, inventory,
and property and equipment. Exclusive of the write-off of certain assets related
to the Oakwood Homes Corporation bankruptcy filing in November, 2002, we have
not experienced significant bad debts losses. 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
assess impairment when indicators are present and have had no impairment charges
during the six months ended June 30, 2004.
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.
INFLATION
The Company does not believe that inflation had a material effect on
results of operations for the periods presented.
SAFE HARBOR STATEMENT
The Company makes forward-looking statements from time to time and
desires to take advantage of the "safe harbor" which is afforded such statements
under the Private Securities Litigation Reform Act of 1995 when they are
accompanied by meaningful cautionary statements identifying important factors
that could cause actual results to differ materially from those in the
forward-looking statements.
The statements contained in the foregoing "Management's Discussion and
Analysis of Financial Condition and Results of Operations," as well as other
statements contained in this Quarterly Report and statements contained in future
filings with the Securities and Exchange Commission and publicly disseminated
press releases, and statements which may be made from time to time in the future
by management of the Company in presentations to shareholders, prospective
investors, and others interested in the business and financial affairs of the
Company, which are not historical facts, are forward-looking statements that
involve risks and uncertainties that could cause actual results to differ
materially from those set forth in the forward-looking statements. Any
projections of financial performance or statements concerning expectations as to
future developments should not be construed in any manner as a guarantee that
such results or developments will, in fact, occur. There can be no assurance
that any forward-looking statement will be realized or that actual results will
not be significantly different from that set forth in such forward-looking
statement. In addition to the risks and uncertainties of ordinary business
operations, the forward-looking statements of the Company referred to above are
also subject to the following risks and uncertainties:
o The Company operates in 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 products.
o On an annual basis, the Company negotiates renewals for property,
casualty, workers compensation, general liability, product liability,
and health insurance coverages. Due to conditions within these
insurance markets and other factors beyond the Company's control,
future coverages and the amount of the related premiums could have a
negative affect on the Company's results.
o The primary markets to which the Company sells include the
Manufactured Housing and Recreational Vehicle Industries, which are
cyclical and dependent on various factors including interest rates,
access to financing, inventory and production levels and other
economic and demographic factors. The Company's sales levels could be
negatively impacted by changes in any one of the above items.
16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk related to interest rate changes on
its debt. Long term debt includes $5,142,868 of indebtedness bearing interest at
a fixed rate of 6.82%. The related maturities and interest are reported in the
contractual obligations table in the Liquidity and Capital Resources section of
this report.
ITEM 4. CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and our Chief Financial Officer
have concluded, based on their evaluation as of the end of the period covered by
this report that the Company's "disclosure controls and procedures" (as defined
in the Securities Exchange Act of 1934 rules 13a-15(e) and 15d-15(e) are
effective to ensure that information required to be disclosed in the reports
that the Company files or submits under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported, within the time periods specified
in the Securities and Exchange Commission's rules and forms. There have been no
significant changes in our internal controls over financial reporting or in
other factors that could significantly affect these controls, during the period
covered by this report.
17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Shareholders of the Company was held on
May 14, 2004.
(b) Not applicable.
(c) 1. Set forth below is the tabulation of the votes on each nominee
for election as a director:
WITHHOLD
NAME FOR AUTHORITY
Keith V. Kankel 3,360,509 664,416
Mervin D. Lung 3,297,163 727,762
Harold E. Wyland 2,949,388 1,075,537
2. Set forth below is the tabulation of the votes related to the
amendments of the 1987 stock option plan
FOR AGAINST WITHHOLD
AUTHORITY
2,395,935 559,313 568,646
(d) Not applicable.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
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
32.1 Certification pursuant to 18 U.S.C. Section 350
(b) Reports on Form 8-K
Item 9. Regulation FD Disclosure
Press Release dated July 18, 2004 announcing second
quarter 2004 earnings
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PATRICK INDUSTRIES, INC.
(Company)
Date August 13, 2004 /S/Robert C. Timmins
--------------------------------------
Robert C. Timmins
(Lead Director)
Date August 13, 2004 /S/Paul E. Hassler
--------------------------------------
Paul E. Hassler
(President)
(Chief Executive Officer)
Date August 13, 2004 /S/Andy L. Nemeth
--------------------------------------
Andy L. Nemeth
(Executive Vice President, Finance)
(Chief Financial Officer)
19