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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 September 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 November 5, 2004: 4,746,698
PATRICK INDUSTRIES, INC.
INDEX
Page No.
PART 1: Financial Information
ITEM 1: Financial Statements
Unaudited Condensed Balance Sheets
September 30, 2004 & December 31, 2003 3
Unaudited Condensed Statements of Operations
Three Months Ended September 30, 2004 & 2003, and
Nine Months Ended September 30, 2004 & 2003 4
Unaudited Condensed Statements of Cash Flows
Nine Months Ended September 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 10
ITEM 3: Quantitative and Qualitative Disclosures About Market Risk 16
ITEM 4: Controls and Procedures 16
PART II: Other Information 17
Signatures 18
2
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PATRICK INDUSTRIES, INC.
UNAUDITED CONDENSED BALANCE SHEETS
SEPTEMBER 30 DECEMBER 31
2004 2003
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 40,165 $ 7,077,390
Trade receivables 24,466,512 14,240,556
Inventories 37,535,270 23,042,444
Prepaid expenses 997,845 913,650
Deferred tax assets 1,954,000 1,954,000
-------------- --------------
Total current assets 64,993,792 47,228,040
-------------- --------------
PROPERTY AND EQUIPMENT, at cost 92,255,200 90,620,044
Less accumulated depreciation 59,074,060 59,927,134
-------------- --------------
33,181,140 30,692,910
-------------- --------------
INTANGIBLE AND OTHER ASSETS 2,954,503 3,221,010
-------------- --------------
Total assets $ 101,129,435 $ 81,141,960
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 3,671,429 $ 3,671,429
Short-term borrowings 5,900,000 - - -
Accounts payable 18,602,596 4,883,038
Accrued liabilities 4,830,768 3,038,926
-------------- --------------
Total current liabilities 33,004,793 11,593,393
-------------- --------------
LONG-TERM DEBT, less current maturities 4,800,000 7,771,430
-------------- --------------
DEFERRED LIABILITIES 2,519,247 2,529,403
-------------- --------------
Total liabilities $ 40,324,040 $ 21,894,226
-------------- --------------
SHAREHOLDERS' EQUITY
Common stock 19,094,397 18,236,386
Retained earnings 41,710,998 41,011,348
-------------- --------------
Total shareholders' equity 60,805,395 59,247,734
-------------- --------------
Total liabilities and shareholders' equity $ 101,129,435 $ 81,141,960
============== ==============
See accompanying Notes to Unaudited Condensed Financial Statements.
3
PATRICK INDUSTRIES, INC.
UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
2004 2003 2004 2003
Net Sales $ 80,260,900 $ 70,267,568 $224,593,455 $208,502,593
Cost of goods sold 69,848,245 61,358,268 197,049,715 183,960,275
-------------- ------------- ------------ ------------
Gross Profit 10,412,655 8,909,300 27,543,740 24,542,318
-------------- -------------- ------------ ------------
Operating expenses:
Warehouse and delivery expenses 3,543,915 3,203,555 10,217,890 9,593,305
Selling, general, and administrative expenses 5,536,910 4,918,198 15,663,010 15,222,977
Restructuring charges - - - 235,000 - - - 235,000
-------------- ------------- ------------ --===-------
Total operating expenses 9,080,825 8,356,753 25,880,900 25,051,282
-------------- ------------- ------------ ------------
Operating income (loss) 1,331,830 552,547 1,662,840 (508,964)
Interest expense, net 210,695 177,087 486,890 561,176
-------------- ------------- ------------ ------------
Income (loss) before income taxes (credits) 1,121,135 375,460 1,175,950 (1,070,140)
Federal and state income taxes (credits) 454,100 148,300 476,300 (422,700)
-------------- ------------- ------------ ------------
Net income (loss) $ 667,035 $ 227,160 $ 699,650 $ (647,440)
============== ============= ============ ============
Basic and diluted earnings (loss)
per common share $ .14 $ .05 $ .15 $ (.14)
============== ============= ============ ============
Dividends per share $ .00 $ .00 $ .00 $ .04
============== ============= ============ ============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 4,731,127 4,611,037 4,689,827 4,595,306
See accompanying Notes to Unaudited Condensed Financial Statements.
4
PATRICK INDUSTRIES, INC.
UNAUDITED CONDENSED STATEMENTS OF
CASH FLOWS
NINE MONTHS ENDED
SEPTEMBER 30
2004 2003
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 699,650 $ (647,440)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 4,071,975 4,309,083
(Gain) on sale of fixed assets (246,075) (272,330)
Deferred income taxes (45,220) (241,800)
Other 211,500 211,500
Change in assets and liabilities:
Decrease (increase) in:
Trade receivables (10,225,956) (7,040,914)
Inventories (14,492,826) 3,133,317
Income tax refund claims receivable - - - 1,307,253
Prepaid expenses (84,195) (288,138)
Increase (decrease) in:
Accounts payable and accrued liabilities 15,035,918 6,982,831
Income taxes payable 475,482 (240,000)
------------ ------------
Net cash provided by (used in) operating activities (4,599,747) 7,213,362
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (7,133,651) (3,490,903)
Proceeds from sale of property and equipment 1,101,167 1,271,767
Other 256,490 102,411
------------ ------------
Net cash (used in) investing activities (5,775,994) (2,116,725)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Short-term borrowings 5,900,000 - - -
Payments on long-term debt (2,971,429) (2,971,429)
Payments on deferred compensation obligations (176,436) (216,936)
Proceeds from exercise of common stock options 647,780 128,953
Cash dividends paid - - - (183,279)
Other (61,399) (9,820)
------------ ------------
Net cash provided by (used in) financing activities 3,338,516 (3,252,511)
------------ ------------
Increase (decrease) in cash and cash equivalents (7,037,225) 1,844,126
Cash and cash equivalents, beginning 7,077,390 3,552,232
------------ ------------
Cash and cash equivalents, ending $ 40,165 $ 5,396,358
============ ============
Cash Payments for:
Interest $ 611,643 $ 694,926
Income taxes 55,818 174,229
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 4) necessary to present fairly the financial position as
of September 30, 2004 and December 31, 2003, the results of operations for
the three months and the nine months ended September 30, 2004 and 2003, and
cash flows for the nine months ended September 30, 2004 and 2003.
2. Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. It is suggested that these
condensed financial statements be read in conjunction with the financial
statements and notes thereto included in the Company's December 31, 2003
audited financial statements. The results of operations for the three month
and nine month periods ended September 30, 2004 and 2003 are not
necessarily indicative of the results to be expected for the full year.
3. The inventories on September 30, 2004 and December 31, 2003 consist of the
following classes:
September 30 December 31
2004 2003
---- ----
Raw materials $23,098,737 $12,733,414
Work in process 2,301,468 1,630,052
Finished goods 4,649,013 3,501,779
----------- -----------
Total manufactured goods 30,049,218 17,865,245
Distribution products 7,486,052 5,177,199
----------- -----------
TOTAL INVENTORIES $37,535,270 $23,042,444
=========== ===========
The inventories are stated at the lower of cost, First-In First-Out
(FIFO) method, or market.
4. In September, 2003, the Company recorded a restructuring charge related to
the closing of one of its unprofitable cabinet door operating units. The
Company recorded estimated and actual costs of $235,000, or $.03 per share,
net of tax, related to this restructuring. This operating unit was phased
out in the third quarter of 2003 and the charges included, but were not
limited 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 and
the charges were paid in the fourth quarter of 2003.
6
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 Statement No. 123 to stock based
employee compensation:
Three Months Nine Months
Ended September 30 Ended September 30
2004 2003 2004 2003
-------------------------- --------------------------
Net income (loss):
As reported $667,035 $227,160 $699,650 $(647,440)
Deduct total stock-based
employee compensation
expense determined under
fair value based method for
all rewards net of related
tax effects (19,202) (38,000) (57,604) (114,000)
-------- -------- --------- ---------
Pro forma 647,833 $189,160 $642,046 $(761,440)
======== ======== ======== =========
Basic earnings (loss) per share:
As reported $ .14 $ .05 $ .15 $ (.14)
Pro forma .14 .04 .14 (.17)
Diluted earnings (loss) per share:
As reported $ .14 $ .05 $ .15 $ (.14)
Pro forma .14 .04 .14 (.17)
7. Effective January 1, 2004, the Company changed its segment reporting to
discontinue allocating 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 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.
7
The table below presents unaudited information about the revenue and
operating income of those segments:
THREE MONTHS ENDED SEPTEMBER 30, 2004
-------------------------------------
PRIMARY OTHER
MANUFACTURED COMPONENT
PRODUCTS DISTRIBUTION PRODUCTS SEGMENT TOTAL
-------- ------------ -------- -------------
Net outside sales $ 40,918,755 $ 27,943,789 $ 11,398,356 $ 80,260,900
Intersegment sales 1,827,117 318,107 1,770,279 3,915,503
------------ ------------ ------------ ------------
Total sales $ 42,745,872 $ 28,261,896 $ 13,168,635 $ 84,176,403 *
------------ ------------ ------------ ------------
Operating income $ 1,736,140 $ 1,202,133 $ 339,795 $ 3,278,068
THREE MONTHS ENDED SEPTEMBER 30, 2003
-------------------------------------
Net outside sales $ 36,450,970 $ 23,896,457 $ 9,920,141 $ 70,267,568
Intersegment sales 1,887,200 147,692 2,208,764 4,243,656
------------ ------------ ------------ ------------
Total sales $ 38,338,170 $ 24,044,149 $ 12,128,905 $ 74,511,224 *
------------ ------------ ------------ ------------
Operating income $ 1,638,082 $ 1,156,216 $ 77,985 $ 2,872,283
NINE MONTHS ENDED SEPTEMBER 30, 2004
------------------------------------
PRIMARY OTHER
MANUFACTURED COMPONENT
PRODUCTS DISTRIBUTION PRODUCTS SEGMENT TOTAL
-------- ------------ -------- -------------
Net outside sales $117,926,566 $ 74,604,777 $ 32,062,112 $224,593,455
Intersegment sales 5,450,047 990,095 6,208,464 12,648,606
------------ ------------ ------------ ------------
Total sales $123,376,613 $ 75,594,872 $ 38,270,576 $237,242,061 *
------------ ------------ ------------ ------------
Operating income $ 4,568,777 $ 3,073,584 $ 664,914 $ 8,307,275
Total assets $ 45,169,127 $ 15,663,623 $ 11,367,027 $ 72,199,777
NINE MONTHS ENDED SEPTEMBER 30, 2003
------------------------------------
Net outside sales $110,194,916 $ 66,825,214 $ 31,482,463 $208,502,593
Intersegment sales 5,450,445 505,199 6,238,839 12,194,483
------------ ------------ ------------ ------------
Total sales $115,645,361 $ 67,330,413 $ 37,721,302 $220,697,076 *
------------ ------------ ------------ ------------
Operating income (loss) $ 4,195,346 $ 2,531,349 $ (509,722) $ 6,216,973
Total assets $ 35,295,087 $ 12,715,050 $ 9,783,673 $ 57,793,810
8
Reconciliation of segment operating income to consolidated operating income
(loss):
3 Months Ended 9 Months Ended
September 30, September 30,
2004 2003 2004 2003
---- ---- ---- ----
Operating income for segments $ 3,278,068 $ 2,872,283 $ 8,307,275 $ 6,216,973
Corporate incentive agreements 804,570 300,000 1,405,858 906,019
Consolidation reclassifications 251,130 196,359 260,898 396,828
Gain on sale of assets 220,700 181,635 246,075 272,330
Unallocated corporate expenses (3,161,839) (2,765,835) (8,297,773) (7,871,782)
Other (60,799) 3,105 (259,493) (194,332)
Restructuring charges - - - (235,000) - - - (235,000)
------------- ------------ ------------ ------------
Consolidated operating income (loss) $ 1,331,830 $ 552,547 $ 1,662,840 $ (508,964)
============= ============ ============ ============
*Does not agree to Financial Statements due to consolidation eliminations.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The third quarter and nine month period ending September 30, 2004
continued to show improvement, in light of difficult circumstances in the
Manufactured Housing Industry, as net sales increased 14.2% for the quarter and
7.7% year to date. Raw material price increases and the continued strong
shipment levels in the Recreational Vehicle Industry have provided the support
for the Company to show its second quarter to quarter increase in sales in more
than four consecutive quarterly reporting periods. Operating expenses remained
consistent with revenues on a percentage basis, however, the Company's strategic
focus on investment in key personnel has and is expected to continue to show an
increase on a dollar for dollar basis in selling, general, and administrative
expenses through the end of 2004. Additionally, the Company recorded a $0.5
million charge to the allowance for doubtful accounts in the third quarter of
2004 related to one customer. Restructuring efforts in 2003 related to the
closing of one of the Company's unprofitable cabinet door divisions, increased
net sales, a $0.4 million gain on life insurance proceeds in the second quarter,
and a $0.2 million gain on the sale of a building helped to improve overall
profitability by $0.5 million for the quarter and $1.3 million year to date
through September, 2004. Earnings per share improved by $.09, from $.05 per
share in the third quarter of 2003 to $.14 per share in the third quarter of
2004, and by $.29 for the nine month period ending September 30, 2004 from a
loss of $.14 per share in 2003 to income of $.15 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%. Sales to this Industry, which represents approximately 40% of the Company's
sales at September 30, 2004, and 2003, reflected a decline in shipments in the
third quarter of 2004 of approximately 1% and year to date of approximately 3%
compared to comparable periods in 2003. Repossessed inventory levels have
decreased, but financing and job growth remain in question and will have an
impact on future shipment levels.
The Recreational Vehicle Industry, which represents approximately 31% and
32% of the Company's sales at September 30, 2004 and 2003, respectively,
continued on its strong pace with third quarter and year to date shipments
improving by more than 11% and 17%, respectively, compared to comparable periods
in 2003. 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 above the 2003 level,
which was the second highest in the last twenty-five years. While the Company
believes that 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 23% for the
quarter and 12% 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 September 30, 2004 and 2003,
respectively.
The Company remains focused on increasing penetration into all
of the markets that it serves. 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. The
Company expects that capital expenditures will increase for the remainder of
2004 and into 2005 as a part of this plan.
10
The following table sets forth the percentage relationship to net sales
of certain items in the Company's Statements of Operations:
Three Months Nine Months
Ended September 30, Ended September 30,
2004 2003 2004 2003
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 87.0 87.3 87.7 88.2
Gross profit 13.0 12.7 12.3 11.8
Warehouse and delivery 4.4 4.6 4.6 4.6
Selling, general, & administrative 6.9 7.0 7.0 7.3
Restructuring charges - - - 0.3 - - - 0.1
Operating income (loss) 1.7 0.8 0.7 (0.2)
Income (loss) before taxes 1.4 0.5 0.5 (0.5)
Income taxes (credits) 0.6 0.2 0.2 (0.2)
Net income (loss) 0.8 0.3 0.3 (0.3)
RESULTS OF OPERATIONS
Quarter Ended September 30, 2004 Compared to Quarter Ended September 30, 2003
Net Sales. Net sales increased $10.0 million, or 14.2%, from $70.2
million in the quarter ended September 30, 2003 to $80.2 million in the same
period in 2004. The increase is attributable to raw material price increases,
which were passed on to the Company's customers, increased shipments of
approximately 11% in the Recreational Vehicle Industry in the third quarter of
2004, and the Company gaining market share in the Manufactured Housing and
Industrial markets.
Gross Profit. Gross profit increased approximately $1.5 million, or
16.9%, from $8.9 million in the third quarter of 2003 to $10.4 million in the
third quarter of 2004. As a percentage of net sales, gross profit increased
0.3%, from 12.7% in the third quarter of 2003 to 13.0% in the third quarter of
2004. The increase in gross profit is attributable to increased net sales and an
increase in corporate incentive agreements for the quarter.
Warehouse and Delivery Expenses. Warehouse and delivery expenses
increased approximately $0.3 million, or 10.6%, from $3.2 million in the third
quarter of 2003 to $3.5 million in the third quarter of 2004. As a percentage of
net sales, warehouse and delivery expenses decreased approximately 0.2%, from
4.6% in 2003 to 4.4% in 2004. The increase in dollars is attributable to
increased sales and the decrease in percentage of net sales is attributable to
fixed costs remaining constant.
Selling, General, and Administrative Expenses. Selling, general, and
administrative expenses increased approximately $0.6 million, or 12.5%, from
$4.9 million in the third quarter of 2003 to $5.5 million in the third quarter
of 2004. As a percentage of net sales, selling, general, and administrative
expenses decreased 0.1%, from 7.0% in 2003 to 6.9% in 2004. The third quarter
2004 expenses include a charge of approximately $0.5 million related to an
increase in the allowance for doubtful accounts related to one customer and a
credit of approximately $0.2 million related to a gain on the sale of a
building. The third quarter of 2003 includes a gain on the sale of a building of
approximately $0.2 million.
Restructuring Charges. As discussed in Note 4 to the financial
statements, the Company recorded restructuring charges of $235,000 in the third
quarter of 2003.
Operating Income. Operating income increased $0.8 million, from $0.5
million in the third quarter of 2003 to $1.3 million in the third quarter of
2004. The increase in operating income is attributable to the factors described
above.
Interest Expense, net. Interest expense, net increased approximately
$34,000 due to additional borrowings on the Company's line of credit from the
third quarter of 2003 to the same period in 2004.
11
Net Income. Net income increased $0.5, million from $0.2 million in the
third quarter of 2003 to $0.7 million in the third quarter of 2004 due primarily
to the factors described above.
Nine Months Ended September 30, 2004 Compared to Nine Months Ended September 30,
2003
Net Sales. Net sales increased $16.1 million, or 7.7%, from $208.5
million in the nine month period ending September 30, 2003 to $224.6 million in
the same period in 2004. The increase in net sales is primarily attributable to
a 17% increase in shipments in the Recreational Vehicle Industry, increased raw
material prices, which were passed on to the Company's customers, and the
Company gaining market share in the Manufactured Housing and Industrial markets.
Gross Profit. Gross profit increased $3.0 million, or 12.2%, from $24.5
million in 2003 to $27.5 million in 2004. As a percentage of net sales, gross
profit increased 0.5%, from 11.8% in 2003 to 12.3% in 2004. The increase in
dollars is attributable to increased net sales and the increase in percentage of
net sales is attributable to an increase in Corporate incentive agreements from
period to period.
Warehouse and Delivery Expenses. Warehouse and delivery expenses
increased $0.6 million, or 6.5%, from $9.6 million in 2003 to $10.2 million in
2004. As a percentage of net sales, warehouse and delivery expenses remained
constant at 4.6% of net sales in both 2003 and 2004. The increase in dollars is
attributable to increased sales.
Selling, General, and Administrative Expenses. Selling, general, and
administrative expenses increased $0.5 million, or 2.9%, from $15.2 million in
2003 to $15.7 million in 2004. As a percentage of net sales, selling, general,
and administrative expenses decreased 0.3%, from 7.3% in 2003 to 7.0% in 2004.
Included in 2004 are charges of approximately $0.5 million related to an
increase in the allowance for doubtful accounts due to one customer and credits
of $0.2 million and $0.4 million related to a gain on sale of a building and a
gain on life insurance proceeds, respectively. The 2003 expenses include a gain
on the sale of a building of approximately $0.2 million.
Operating Income. Operating income increased $2.2 million, from a loss of
$0.5 million in 2003 to income of $1.7 million in 2004. The increase in
operating income is attributable to the factors described above and the closing
of one of the Company's unprofitable cabinet door operations in the third
quarter of 2003.
Interest Expense, net. Interest expense, net decreased approximately $0.1
million from $0.6 million in 2003 to $0.5 million in 2004. The decrease is
attributable to less long term debt outstanding from period to period. The
Company has, however, increased its borrowings on its line of credit which may
result in increased interest expense in future periods.
Net Income. Net income increased from a loss of $0.6 million in the nine
month period ending September 30, 2003 to income of $0.7 million in the same
period in 2004. The increase is attributable to the factors described above.
12
BUSINESS SEGMENTS
Quarter Ended September 30, 2004 Compared to Quarter Ended September 30, 2003
PRIMARY MANUFACTURED PRODUCTS SEGMENT DISCUSSION
Net sales increased $4.4 million, or 11.5%, from $38.3 million in the
third quarter of 2003 to $42.7 million in the third quarter of 2004. The
increase is attributable to an 11% increase in shipments in the Recreational
Vehicle Industry, increased raw material prices, and the Company gaining market
share in the Manufactured Housing and Industrial markets.
Operating income increased $0.1 million, or 6.0%, from $1.6 million in
the third quarter of 2003 to $1.7 million in the third quarter of 2004.
DISTRIBUTION SEGMENT DISCUSSION
Net sales increased $4.2 million, or 17.5%, from $24.0 million in the
third quarter of 2003 to $28.2 million in the third quarter of 2004 due
primarily to increased raw material prices to the Manufactured Housing Industry
which were passed on to the Company's customers. This industry is the primary
market that this segment serves.
Operating income remained fairly constant at $1.2 million for both the
third quarter of 2003 and 2004.
OTHER COMPONENT MANUFACTURED PRODUCTS DISCUSSION
Net sales increased approximately $1.1 million, or 8.6%, from $12.1
million in the third quarter of 2003 to $13.2 million in the third quarter of
2004. The increase in net sales is attributable to increased sales in the
Company's aluminum extrusion division, which were partially offset by decreases
in sales related to the closing of one of the Company's unprofitable cabinet
door division in the third quarter of 2003.
Operating income increased $0.2 million, from $0.1 million in the third
quarter of 2003 to $0.3 million in the third quarter of 2004.
Nine Months Ended September 30, 2004 Compared to Nine Months Ended September 30,
2003
PRIMARY MANUFACTURED PRODUCTS SEGMENT DISCUSSION
Net sales increased $7.7 million, or 6.7%, from $115.6 million in the
nine month period ending September 30, 2003 to $123.4 million in the same period
in 2004. The increased sales are attributable to a 17% increase in sales to the
Recreational Vehicle Industry, increased raw material prices, which were passed
on to the Company's customers, and increased penetration to the Manufactured
Housing and Industrial Markets from period to period.
Operating income increased approximately $0.4 million, from $4.2 million
in 2003 to $4.6 million in 2004. The increase in operating income is
attributable to increased efficiencies in several of the Company's manufacturing
divisions in this segment from period to period.
DISTRIBUTION SEGMENT DISCUSSION
Net sales increased $8.3 million, or 12.3%, from $67.3 million in 2003 to
$75.6 million 2004. The increased sales are attributable to increased material
pricing and market penetration to the Manufactured Housing Industry, which is
the primary industry that this segment serves.
Operating income increased $0.6 million, from $2.5 million in 2003 to
$3.1 million in 2004. The increase in operating income is attributable to
increased sales.
OTHER COMPONENT MANUFACTURED PRODUCTS DISCUSSION
Net sales increased $0.6 million, or 1.5%, from $37.7 million in 2003 to
$38.3 million in 2004. The increase in sales in this segment is attributable to
increased sales in two of the operations in this segment which were offset by
the decrease in sales related to the closing of the one of the Company's cabinet
door divisions which is discussed in Note 4 to the financial statements.
Operating income increased $1.2 million, from a loss of $0.5 million in
2003 to income of $0.7 million in 2004. The increase in operating income is
attributable to the closing of one of the Company's unprofitable cabinet door
divisions in the third quarter of 2003.
13
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. At September 30, 2004, there is one payment remaining of approximately
$2,571,429 on these senior notes.
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, planned capital expenditures, and common stock repurchase 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 remaining at September
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** $4,762,354 $724,354 $1,186,625 $1,167,375 $849,000 $835,000
-------------- ------------- ------------- ------------- ------------- -------------
Long-term debt, including interest
at fixed rates** $2,739,497 $43,843 $2,695,654 $0 $0 $0
-------------- ------------- ------------- ------------- ------------- -------------
Operating Leases $2,947,076 $849,178 $1,153,327 $530,392 $279,623 $134,556
-------------- ------------- ------------- ------------- ------------- -------------
Total contractual cash obligations $10,448,927 $1,617,375 $5,035,606 $1,697,767 $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 09/30/04 EXPIRATION
- ----------------------- ------------------ ------------------ ------------------
Line of Credit $15,000,000 $5,900,000 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 2004.
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.
14
Our major operating assets are accounts receivable, inventory, and
property and equipment. Exclusive of the write-off of certain assets related to
the Oakwood Homes Corporation bankruptcy filing in November, 2002, and the
increase in the allowance for doubtful accounts in the third quarter of 2004
related to one customer, we have not experienced significant bad debt losses
and believe that our reserve for doubtful accounts of $700,000 should be
adequate for any exposure to loss in our September 30, 2004 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 nine months ended September 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 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 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.
o The Company does not undertake any obligation to update these
forward-looking statements.
15
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 $2,571,429 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 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 were no changes in
the Company's internal control over financial reporting during the quarter ended
September 30, 2004 that have materially affected, or are reasonably likely to
materially affect, the Company's internal controls over financial reporting.
16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
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) A Form 8-K was furnished but not filed on October 26, 2004,
announcing the third quarter financial results.
17
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 November 12, 2004 /S/Robert C. Timmins
--------------------- -----------------------------------
Robert C. Timmins
(Lead Director)
Date November 12, 2004 /S/Paul E. Hassler
--------------------- -----------------------------------
Paul E. Hassler
(President)
(Chief Executive Officer)
Date November 12, 2004 /S/Andy L. Nemeth
----------------------- -----------------------------------
Andy L. Nemeth
(Executive Vice President, Finance)
(Chief Financial Officer)