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, 2004 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, 2004 (based upon the closing price on NASDAQ and an estimate
that 78.7% of the shares are owned by non-affiliates) was $36,326,238. The
closing market price was $9.80 on that day and 4,709,986 shares of the Company's
common stock were outstanding.
As of March 16, 2005 there were 4,748,198 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 12, 2005 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
kitchen cabinet, furniture manufacturing, marine, architectural, and the
automotive aftermarket. The Company manufactures decorative vinyl and paper
panels, wrapped mouldings, cabinet doors, electronic desks, 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 three
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
- --------
The Company has developed strong working relationships with its customers
and 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 future growth.
In both 2004 and 2003, approximately 41% of the Company's sales are to the
Manufactured Housing industry, 31% to the Recreational Vehicle industry, and 28%
to other industries. The Manufactured Housing and Recreational Vehicle
industries are characterized by price sensitivity, cyclical demand and
production, small order quantities, and short lead times. The Industrial and
other markets, while similar in some aspects, are characterized by longer
production runs and quality customer service.
Management has identified several operating strategies, including the
following:
Diversification into Other Industrial Markets
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 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.
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 other industrial markets
will reduce its vulnerability to the cyclical nature of the Manufactured Housing
and Recreational Vehicle industries. In addition, the Company believes that its
3
nationwide manufacturing and distribution capabilities enable it to position
itself for product expansion and effective customer service.
Utilization of Manufacturing Capacity
In the last 5 years, the Company has invested approximately $25.7 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 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 2003 and 2002 the Company incurred restructuring charges of $0.5
million related to the closing, consolidation, and relocation of two
manufacturing divisions in two 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 was realized in 2003 and 2004, and will continue to be realized
in future years.
Business Segments
- -----------------
The Company's operations through December 31, 2004 comprise three
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).
Principal Products
- ------------------
The Company distributes pre-finished wall and ceiling panels, drywall and
drywall finishing products, particleboard, vinyl and cement siding, vinyl and
hardwood flooring, interior passage doors, roofing products, high pressure
laminates, decorative mirrors and glass, insulation, and other related products.
Through its manufacturing divisions, the Company manufactures decorative vinyl
and paper panels, wrapped mouldings, cabinet doors, kitchen cabinets,
countertops, aluminum extrusions, drawer sides, adhesives, and laminating
machines. 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 36.0%, 39.6%, and 36.5% of total sales
for the years ended December 31, 2004, 2003, and 2002, respectively.
The Company has no material patents, licenses, franchises, or concessions
and does not conduct significant research and development activities.
4
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. Laminated products are used in the production of
furniture, shelving, wall, counter, and cabinet products with a wide variety of
finishes and textures.
The Company's Metals division produces aluminum extrusions for framing and
window applications. In addition, this division makes extrusions for stadium
seating, awnings, rapid rollup doors, framing for display cases, accessories and
parts for recreational vehicles, trucks, vans, and 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 using 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. 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. 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
5
population, employment trends, and general regional economic conditions affect
the sale of manufactured homes. From a trend perspective, the five year period
from 2000 through the end of 2004 has been very difficult for the industry with
shipment levels at more than forty year lows. The most recent cyclical downturn
began in 1999 and has continued through 2004 where the Industry has seen an
approximate 65% decline in unit shipments since 1998. The last industry downturn
was reported by the Manufactured Housing Institute during the four-year period
ended December 31, 1991 where shipments of manufactured homes declined 26.6% to
a total of approximately 171,000 units nationally.
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 2004, 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 five consecutive
years of decline in the number of industry shipments with 2003 and 2004
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 2004 levels which is
supported by the industry showing positive monthly increases in shipments
beginning in September, 2004 and continuing through January, 2005. Some of these
shipment increases can be attributed to the FEMA units that were shipped as a
result of the Hurricanes in the Southeast in the third and fourth quarters of
2004. 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 and an increase in
interest rates are needed to enable more balanced demand, thus resulting in the
potential for 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
2004 - 130,800
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 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.
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 period beginning in 1999 and continuing through 2004 resulted in five
out of the six years with shipment levels over 300,000 units. In 1999, the
Industry shipped 321,200 units. 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, and that rebound continued
through 2004, 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 levels are at near all time highs.
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
2004 - 370,100
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 and parts for recreational vehicles, 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 other industrial 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% of the Company's total sales in 2004 and 2003.
Ten other customers collectively accounted for approximately 21% of 2004 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 fifteen
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, 2004, the Company purchased
approximately 68% of its raw materials and distributed products from twenty
different suppliers. The five largest suppliers accounted for approximately 42%
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 other Industrial markets in which
the Company continues to expand are also highly competitive.
Employees
- ---------
As of December 31, 2004, the Company had 1,114 employees of which 914
employees were engaged directly in production, warehousing, and delivery
operations; 49 in sales; and 151 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, 2004:
Name Position
---- --------
Paul E. Hassler President and Chief Executive Officer
Andy L. Nemeth Executive Vice President of Finance,
Secretary-Treasurer and Chief Financial
Officer
Gregory J. Scharnott Executive Vice President of Operations
and Distribution
9
Paul E. Hassler (age 57) assumed the position of President and Chief Executive
Officer April 5, 2004. Prior to that, Mr. Hassler held the position of Vice
President Operations and Distribution - West from December, 2003 through the
first quarter of 2004, General Manager of California Operations from 1986 to
1994 and Executive Director of West Coast Operations from 1994 to 2003. Mr.
Hassler has over 33 years of Manufactured Housing, Recreational Vehicle, and
Industrial experience in various capacities.
Andy L. Nemeth (age 36) was elected Executive Vice President of Finance, Chief
Financial Officer, and Secretary-Treasurer as of May, 2004. Prior to that, Mr.
Nemeth was Vice President-Finance, Chief Financial Officer, and
Secretary-Treasurer from May, 2003 to April, 2004 and Secretary-Treasurer from
July, 2002 to May, 2003. Mr. Nemeth was a Division Controller from May, 1996 to
July, 2002 and prior to that, he spent five years in public accounting with
Coopers & Lybrand (now Pricewaterhouse Coopers).
Gregory J. Scharnott (age 55) was elected Executive Vice President of Operations
and Distribution as of May, 2004. Mr. Scharnott was Vice President Operations
and Distribution - East as of December, 2003, and 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 26 years of manufacturing management experience, including 20
years with the General Electric Company.
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, 2004, 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 Distribution(1) 133,600 Owned
Elkhart, IN Manufacturing (2) 181,700 Owned
Elkhart, IN Admin. Offices 10,000 Leased to 2006
Elkhart, IN Admin. Offices 35,000 Owned
Mishawaka, IN Manufacturing(4) 191,000 Owned, Subject to Mortgage
Decatur, AL Distribution(1) 30,000 Leased to 2005
Decatur, AL Distribution (1) 30,000 Leased to 2005
Decatur, AL Manufacturing(2) 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 2005
Waco, TX Manufacturing(2) 21,000 Leased to 2005
Mt. Joy, PA Distribution(1)(2) 32,800 Owned
Mt. Joy, PA Manufacturing(2) 55,700 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 2006
Fontana, CA Distribution(1) 11,300 Leased to 2005
Woodland, CA Distribution (1) 17,200 Leased to 2005
Phoenix, AZ Manufacturing (2) 44,545 Leased to 2007
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 30,900 square foot building in Elkhart, IN
which is currently for sale. During 2004, the Company sold its corporate office
complex which included approximately 15,000 square feet of office space and
approximately 109,000 square feet of manufacturing/distribution space. This
property was sold and leased back to the Company for a period that will end when
the Company moves its headquarters to the new office building in Elkhart,
Indiana. This move is expected to take place in the second quarter of 2005. In
March, 2004 the Company purchased a 155,000 square foot building complex in
Elkhart, Indiana for the consolidation of several of the above Elkhart
manufacturing operations. As of December 31, 2004, the Company owned or leased
31 trucks, 39 tractors, 75 trailers, 138 forklifts, and 1 automobile. 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 EQUITY, RELATED SHAREHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
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
2004 $ 10.000 - $ 8.130 $ 12.700 - $ 9.500 $ 12.200 - $ 9.550 $ 11.720 - $ 8.590
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
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, 2005 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.
During the fourth quarter of 2004, the Company did not repurchase any of
its common stock.
12
The following table presents the number of shares and weighted average
exercise price of equity compensation plans that have been approved by the
security holders.
EQUITY COMPENSATION PLAN INFORMATION
- ---------------------------- ------------------------------- ------------------------------ ----------------------------------------
Plan Category Number of securities to be Weighted-average exercise Number of securities remaining available
issued upon exercise of price of outstanding options, for future issuance under equity
outstanding options, warrants, warrants, and rights compensation plans (excluding securities
and rights reflected in column (a)
- ---------------------------- ------------------------------- ------------------------------ ----------------------------------------
Equity compensation plans 248,650 $8.12 325,968
approved by security
holders
- ---------------------------- ------------------------------- ------------------------------ ----------------------------------------
Equity compensation plans 0 N/A 0
not approved by security
holders
- ---------------------------- ------------------------------- ------------------------------ ----------------------------------------
Total 248,650 $8.12 325,968
- ---------------------------- ------------------------------- ------------------------------ ----------------------------------------
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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,
2004 2003 2002 2001 2000
(dollars in thousands, except per share amounts)
Net sales $ 301,555 $ 274,682 $ 308,755 $ 293,070 $ 361,620
Gross profit 35,880 32,183 39,193 34,012 41,905
Warehouse and delivery
expenses 13,719 12,916 14,329 14,407 15,140
Selling, general, and
administrative expenses 20,489 18,442 23,546 24,926 25,241
Impairment charges - - - - - - - - - 2,834 6,937
Restructuring charges - - - 235 269 423 718
Interest expense, net 671 680 891 962 1,224
Income taxes (credits) 400 (35) 63 (3,769) (2,821)
Net income (loss) 601 (55) 95 (5,771) (4,534)
Basic earnings (loss)
per common share .13 (.01) .02 (1.28) (0.89)
Diluted earnings (loss)
per common share .13 (.01) .02 (1.28) (0.89)
Weighted average common
shares outstanding 4,704 4,601 4,547 4,524 5,118
Cash dividends, per
common share - - - .04 .16 .16 .16
Working capital 28,770 35,635 38,566 39,082 41,416
Total assets 92,375 81,142 86,466 91,970 102,520
Long-term debt 4,100 7,771 11,443 15,114 18,786
Shareholders' equity 60,740 59,248 59,279 59,504 66,250
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
After coming off a close to "break-even" year in 2003, fiscal 2004 was a
year with many accomplishments, changes, and challenges at Patrick Industries.
Market conditions remained very competitive with a near record year in
Recreational Vehicle shipments and a Manufactured Housing industry that
continued to stagnate. Additionally, there continued to be an overall economic
uncertainty caused by the November, 2004 Presidential elections, the unstable
political situation in the Middle East, continued low interest rates, and record
high gas prices. Raw material price increases in the products that the Company
utilizes and supplies were prevalent in the marketplace and were caused by
significant economic production overseas and a strong residential housing market
in the United States. The Company elected a new President in April, 2004,
restructured the organization to provide increased focus and penetration into
its three key market sectors, and returned to profitability. Net sales declined
in the first quarter by approximately 2.3% and then showed growth in each of the
14
following three quarters with increases of 10.8%, 14.2% and 16.3% for the
second, third, and fourth quarters of 2004, respectively. Year over year sales
growth was approximately 9.8% and earnings per share increased $0.14 per share,
from a loss in 2003 of $0.01 per share to income of $0.13 per share in 2004. The
2004 operating results include offsetting adjustments related to the write-off
of receivables and the gain on life insurance compared to the 2003 operating
results which include positive adjustments of approximately $0.16 per share
related to gain on disposal of property and equipment and increases to cash
surrender value of life insurance policies.
The Manufactured Housing industry, which represents approximately 41% of
the Company's 2004 sales, continued to experience trials and tribulations with
shipments slightly less than in 2003, and at the lowest levels in forty-three
years. Shipment levels began to increase at the end of the third quarter and
have continued to show monthly increases through January, 2005. Some of these
increases were supported by the increased production of FEMA units related to
the Hurricanes which occurred in the Southeast in the 2004 third and fourth
quarters. Final 2004 shipments were approximately 130,800 compared to 130,900 in
2003. Shipment levels continued to be affected by slow jobs growth, lack of
significant dealer and retail financing, and restricted access to the Asset
Backed Securities Market. Repossessed inventories have declined from the
previous year, while Modular inventory per sales center has increased from the
previous year. Many of the manufacturers are concentrating their efforts on the
modular sector of the market where land/home financing is more readily available
and comparable with traditional residential housing terms. The Modular home
production, as a percentage of factory built homes, has increased over the past
two years up from approximately 17% in 2002 to approximately 22% in 2003 and 24%
in 2004. Year over year Modular shipments increased almost 13% from the 2003
levels. This shift towards Modular units has and will continue to result in less
demand as specified for the Company's laminated wallboard and an increase in
specified demand for the raw gypsum wallboard supplied by the Company's
distribution centers. Preliminary Manufactured Home shipment estimates for 2005
have been set at approximately 150,000 units, which represent an increase of
approximately 15% over the 2004 shipment levels.
The Recreational Vehicle industry, which represents approximately 31% of
the Company's 2004 sales, continued to improve and produced the second highest
shipment levels in over 25 years. 2004 shipments were 370,100 units, or 15.4%,
better than the 320,800 units shipped in 2003. The current 2005 shipment
forecast is expected to be approximately 353,000 units and would make 2004 and
2005 the two highest consecutive volume years ever. Recreational Vehicle unit
shipments have been over 300,000 in four out of the last five years. Growth in
disposable incomes, low inflation, historically low interest rates, increased
employment and consumer confidence, and shifting demographic trends are factors
that point towards a positive economic outlook for this industry as we head into
2005. The record high gasoline prices have not had a significant adverse impact
on this industry to date; however, future price increases and the availability
of supply could negatively impact this industry in the future.
The Industrial and Other markets, which represent 28% of the Company's 2004
sales, continue to be an area of strategic focus for the Company and an
opportunity for future growth. The Company's sales to these markets increased
more than 10% from 2003. These markets are characterized by longer production
runs and increased operating efficiencies which result in improved profit
margins. While the Industrial and Other markets are broad in scope, the products
that the Company manufactures and distributes to this particular market sector
complement the Company's core competencies and manufacturing capabilities.
Over the past two years, and continuing on and through 2005, the Company
has focused its investment in personnel, machinery and equipment, and facilities
to achieve and support future growth. The Company's operations have available
capacity to take on additional business and increase market share in all of the
regions which they serve, as well as to expand into other geographic areas. The
Company has continued its focus to keep operating costs aligned with revenues
and maintain the strength of its balance sheet. In March, 2005, the Company
added an additional $15.0 million in term debt to its credit facility to support
these strategic initiatives and free up working capital in anticipation of
future growth. Going forward, the Company looks to capitalize on its resources
15
as well as explore and execute future acquisition opportunities in order to
drive future growth and improve profitability.
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,
2004 2003 2002
Net sales 100.0% 100.0% 100.0%
Cost of sales 88.1 88.3 87.3
Gross profit 11.9 11.7 12.7
Warehouse and delivery 4.5 4.7 4.7
Selling, general and administrative 6.8 6.7 7.6
Impairment charges -- -- --
Restructuring charges -- 0.1 0.1
Operating income 0.6 0.2 0.3
Net income 0.2 0.0 0.0
16
RESULTS OF CONSOLIDATED OPERATIONS
Year Ended December 31, 2004 Compared to Year Ended December 31, 2003
Net Sales. Net sales increased $26.9 million, or 9.8%, from $274.7 million
in 2003 to $301.6 million in 2004. The increase is attributable to increased raw
material prices which were passed on to customers, increased market share in the
Manufactured Housing industry in spite of its stagnant shipment levels,
increased shipment levels in the Recreational Vehicle industry of more than 15%,
and increased penetration into the Industrial and Other markets. The Company's
sales were 41% Manufactured Housing, 31% Recreational Vehicle, and 28% to the
Industrial and Other markets in both 2004 and 2003.
Gross Profit. Gross profit increased $3.7 million, or 11.5%, from $32.2
million in 2003 to $35.9 million in 2004. As a percentage of net sales, gross
profit increased 0.2%, from 11.7% in 2003 to 11.9% in 2004. The increase in
dollars is attributable to increased sales. The increase as a percentage of net
sales is primarily attributable to improved labor efficiencies.
Warehouse and Delivery Expenses. Warehouse and delivery expenses increased
$0.8 million, or 6.2%, from $12.9 million in 2003 to $13.7 million in 2004. As a
percentage of net sales, warehouse and delivery expenses decreased 0.2%, from
4.7% in 2003 to 4.5% in 2004. The increase in dollars is attributable to
increased sales and fuel prices, and the decrease in percentage of net sales is
attributable to the Company maintaining a similar fleet size that it owns or
leases from year to year, as well as its focused efforts to keep costs aligned
with revenues.
Selling, General, and Administrative Expenses. Selling, general, and
administrative expenses increased $2.1 million, or 11.1%, from $18.4 million in
2003 to $20.5 million in 2004. As a percentage of net sales, selling, general,
and administrative expenses increased 0.1%, from 6.7% in 2003 to 6.8% in 2004.
Approximately $0.8 million of the increase is attributable to increased sales,
the addition of several key personnel, and increased group insurance costs. The
2004 figures include a pre-tax charge of $0.5 million related to a write-off of
bad debts for a customer in the Southeast and gains of approximately $0.5
million related to life insurance proceeds. The 2003 figures include several
positive adjustments including gains on the 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. Exclusive
of these items, selling, general, and administrative expenses were 6.8% of net
sales in 2004 compared to 7.2% of net sales in 2003.
Restructuring Charges. As discussed in Note 10 of the financial statements,
the Company recognized restructuring charges of approximately $235,000 in 2003.
Operating Income. Operating income increased $1.1 million, from $0.6
million in 2003 to $1.7 million in 2004. The increase in operating income is
attributable to the factors described above.
Interest Expense, net. Interest expense, net remained fairly constant at
$0.7 million for both 2003 and 2004. While normal debt service requirements
continued to decline, the Company began borrowing on its line of credit in May,
2004 to support its working capital needs.
Net Income (Loss). Net income increased $0.7 million, from a loss of $0.1
million in 2003 to income of $0.6 million in 2004 due the factors described
above.
17
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 4.0% increase in sales to the
Industrial market segment helped to partially offset the Manufactured Housing
shipment decline.
Gross Profit. Gross profit 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 the sale of two vacant buildings of approximately
$0.3 million, a gain on the 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.
18
BUSINESS SEGMENTS
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 information about the revenue and operating income
of those segments. Reconciliation to consolidated totals is presented in
footnote 14 of the Company's 2004 financial statements.
Year Ended
December 31
2004 2003 2002
(dollars in thousands)
Sales
Primary Manufactured Products $ 164,826 $ 151,694 $ 160,472
Distribution 103,519 90,631 108,134
Other Component Manufactured Products 51,074 48,137 57,979
Operating income (loss)
Primary Manufactured Products $ 4,606 $ 4,631 $ 7,046
Distribution 4,135 3,148 4,442
Other Component Manufactured Products 777 (204) (650)
Year Ended December 31, 2004 Compared to Year Ended December 31, 2003
Primary Manufactured Products Segment Discussion
Net sales in the Primary Manufactured Products segment increased $13.1
million, or 8.7%, from $151.7 million in 2003 to $164.8 million in 2004. The
increase is primarily attributable to a 15.4% increase in shipments in the
19
Recreational Vehicle industry, product price increases which were passed on to
customers, and increased penetration into the Industrial and Other markets.
Operating income remained fairly consistent at $4.6 million for both 2003
and 2004. This consistency, in light of the increased sales, is attributable to
increased group insurance costs from year to year and extremely competitive
market conditions which negatively impacted margins.
Distribution Segment Discussion
Net sales increased $12.9 million, or 14.2%, from $90.6 million in 2003 to
$103.5 million in 2004. The increase is attributable to increased penetration
into the Manufactured Housing industry, which is the primary market this segment
serves, as well as product price increases which were passed on to customers.
Operating income increased $1.0 million, from $3.1 million in 2003 to $4.1
million in 2004 primarily due to increased sales.
Other Component Manufactured Products Discussion
Net sales increased $3.0 million, or 6.2%, from $48.1 million in 2003 to
$51.1 million in 2004. The increased sales are attributable to increased sales
in the Company's aluminum extrusion division and cabinet door division, which
were offset by the closing of one of the Company's cabinet door divisions in
2003.
Operating income increased $1.0 million, from a loss of $0.2 million in
2003 to income of $0.8 million in 2004 primarily due to the closing of one of
the Company's unprofitable cabinet door divisions in 2003.
Year Ended December 31, 2003 Compared to Year Ended December 31, 2002
Primary Manufactured Products Segment Discussion
Net sales in the Primary Manufactured Products segment decreased by $8.8
million, or 5.5%, from $160.5 million in 2002 to $151.7 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.
Operating income decreased by $2.4 million, or 34.3%, from $7.0 million in
2002 to $4.6 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 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 $1.3 million, from $4.4 million in 2002 to
$3.1 million in 2003. The decrease in operating income is due to decreased sales
volume.
Other Component Manufactured Products Segment Discussion
Net sales decreased by $9.9 million, or 17.0%, from $58.0 million in 2002
to $48.1 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, and the sale of one of the divisions in this segment in December, 2002.
Together, two of these divisions accounted for approximately $13.8 million of
the sales volume in this segment in 2002 compared to $4.8 million in 2003. The
20
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 this segment decreased by $0.5, million from a loss of
$0.7 million in 2002 to a loss of $0.2 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 $0.8 million were
partially offset by losses in another division in this segment of approximately
$0.9 million, which was closed during 2003.
21
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 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 $15,000,000 with maturity in the year 2006. In March, 2005,
the Company secured fixed term debt financing for $15,000,000 with interest at
4.78%. This term debt was hedged through a cash flow interest rate swap
transaction with a five year maturity in January, 2010, and a ten year
amortization schedule with interest only payments due in 2005 and principal
payments to begin in the first quarter of 2006. In conjunction with this
agreement, the Company reduced its available line of credit from $15,000,000 to
$10,000,000.
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. In addition, the term debt which was obtained in March, 2005
includes certain financial covenants which are incorporated into the overall
credit facility.
In conjunction with its strategic and capital plan, the Company increased
its capital expenditures for property and equipment in 2004 to approximately
$10.6 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 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, 2004 is as
follows:
----------------------------------------------------------------------------------------------
PAYMENTS DUE BY PERIOD
----------------------------------------------------------------------------------------------
- -------------------------------------
CONTRACTUAL OBLIGATIONS TOTAL 2005 2006 2007 2008 2009
- --------------------------------------------------- --------------- --------------- --------------- --------------- ---------------
-------------- --------------- --------------- --------------- --------------- ---------------
Long-term debt, including interest $5,068,958 $1,223,750 $1,196,250 $870,000 $850,000 $928,958
at Variable rates**
-------------- --------------- --------------- --------------- --------------- ---------------
Long-term debt, including interest $2,695,651 $2,695,651 $0 $0 $0 $0
at Fixed rates**
-------------- --------------- --------------- --------------- --------------- ---------------
Operating Leases $3,620,012 $1,550,837 $1,093,239 $635,314 $267,291 $73,331
-------------- --------------- --------------- --------------- --------------- ---------------
Total contractual cash obligations $11,384,621 $5,470,238 $2,289,489 $1,505,314 $1,117,291 $1,002,289
-------------- --------------- --------------- --------------- --------------- ---------------
**Interest payments have been calculated using the fixed rate of 6.82% for the Senior notes and the projected 2005 annual
interest rate of 2.50% for the Industrial Revenue Bonds.
22
We also have a commercial commitment as described below:
- -------------------------------------- -------------------------------- ------------------------------- ----------------------------
OTHER COMMERCIAL TOTAL AMOUNT OUTSTANDING DATE OF
COMMITMENT COMMITTED AT 12/31/04 EXPIRATION
- -------------------------------------- -------------------------------- ------------------------------- ----------------------------
Revolving Credit Agreement $15,000,000 $7,300,000 May 31, 2006
- -------------------------------------- -------------------------------- ------------------------------- ----------------------------
We believe that our cash balance, availability under our line of credit as
amended, and anticipated cash flows from operations will be adequate to fund our
cash requirements for fiscal 2005.
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. Exclusive of the write-off of certain assets related to the
Oakwood Homes Corporation bankruptcy filing in November, 2002, and the write-off
of certain receivables in the fourth quarter of 2004 related to one customer, we
have not experienced significant bad debts losses and our reserve for doubtful
accounts of $250,000 should be adequate for any exposure to loss in our December
31, 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 twelve months ended December 31,
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.
SALE OF PROPERTY
During 2004, the Company sold its corporate office complex, which includes
two office buildings and a 109,000 square foot facility, which was used for
warehousing, and recorded a gain of $0.2 million.
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 $0.2 million.
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 $0.2 million.
PURCHASE OF PROPERTY
In February, 2005, the Company purchased a 35,000 square foot corporate
office building in Elkhart, Indiana and expects to spend approximately $1.6
million, including renovations, which will be complete in the second quarter of
2005.
In March, 2004, the Company purchased a 155,000 square foot building
complex in Elkhart, Indiana and consolidated all of its manufacturing operations
into this facility.
23
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 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 coverage. 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 $2,571,430 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.
24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is set forth in Item 15 (a) 1. on
page 27 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None
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.
ITEM 9B. OTHER INFORMATION
None
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 12, 2005, 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.
25
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 the Company's Proxy
Statement for the Annual Meeting of Shareholders to be held on May 12, 2005,
under the caption "Compensation of Executive Officers and Directors," which
information is hereby incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCK MATTERS
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 12, 2005,
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 the Company's Proxy
Statement for the Annual Meeting of Shareholders to be held on May 12, 2005,
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 12, 2005,
under the heading "Accounting Information", which information is hereby
incorporated herein by reference.
26
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
Page
(a) 1. FINANCIAL STATEMENTS
Report of Independent Registered
Public Accounting Firm F-1
Consolidated balance sheets -
December 31, 2004 and 2003 F-2
Consolidated statements of operations-years
ended December 31, 2004, 2003, and 2002 F-3
Consolidated statements of shareholders'
equity years ended December 31,
2004, 2003, 2002 F-4
Consolidated statements of cash flows-
years ended December 31,
2004, 2003, and 2002 F-5
Notes to the financial statements F-6-22
(a) 2. 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 53, 54, 55,
and 56 are filed or incorporated by reference as part of this report.
27
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 18, 2005
- ----------------------------- --------------
Robert C. Timmins
/S/Paul E. Hassler President and Chief Executive Officer March 18, 2005
- ----------------------------- --------------
Paul E. Hassler
/S/Andy L. Nemeth Executive Vice President Finance, March 18, 2005
- ----------------------------- --------------
Andy L. Nemeth Secretary-Treasurer and Chief Financial Officer
/S/Mervin D. Lung Chairman Emeritus and Director March 18, 2005
- ----------------------------- --------------
Mervin D. Lung
/S/Keith V. Kankel Director March 18, 2005
- ----------------------------- --------------
Keith V. Kankel
/S/David D. Lung Director March 18, 2005
- ----------------------------- --------------
David D. Lung
/S/Harold E. Wyland Director March 18, 2005
- ----------------------------- --------------
Harold E. Wyland
/S/John H. McDermott Director March 18, 2005
- ----------------------------- --------------
John H. McDermott
/S/Terrence D. Brennan Director March 18, 2005
- ----------------------------- --------------
Terrence D. Brennan
/S/Walter E. Wells Director March 18, 2005
- ----------------------------- --------------
Walter E. Wells
/S/Larry D. Renbarger Director March 18, 2005
- ----------------------------- --------------
Larry D. Renbarger
28
CONTENTS
- --------------------------------------------------------------------------------
Report of Independent Registered Public Accounting Firm 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-22
Supplementary Information
Schedule II - Valuation and qualifying
accounts and reserves F-23
- --------------------------------------------------------------------------------
29
McGladrey & Pullen
Certified Public Accountants
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2004 and 2003, 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, 2004.
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 the standards of the Public Company
Accounting Oversight Board (United States). 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, 2004 and 2003, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2004, in conformity with U.S. generally accepted accounting
principles.
We have also audited Schedule II of PATRICK INDUSTRIES, INC. AND SUBSIDIARIES
for each of the years in the three-year period ended December 31, 2004. In our
opinion, this schedule presents fairly, in all material respects, the
information required to be set forth therein.
/s/ McGladrey & Pullen, LLP]
Elkhart, Indiana
January 28, 2005
McGladrey & Pullen, LLP is a member firm of RSM International -
an affiliation of separate and independent legal entities.
F-1
Patrick Industries, Inc.
And Subsidiaries
Consolidated Balance Sheets
December 31, 2004 and 2003
2004 2003
- -----------------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents $ 82,787 $ 7,077,390
Trade receivables 16,720,245 14,240,556
Inventories 34,343,558 23,042,444
Prepaid expenses 951,192 913,650
Deferred tax assets 1,658,000 1,954,000
--------------------------
TOTAL CURRENT ASSETS 53,755,782 47,228,040
Property and Equipment, net 35,642,867 30,692,910
Other Assets 2,976,026 3,221,010
--------------------------
TOTAL ASSETS $92,374,675 $81,141,960
==========================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt $ 3,671,430 $ 3,671,429
Short-term borrowings 7,300,000 --
Accounts payable 11,389,966 4,883,038
Accrued liabilities 2,624,489 3,038,926
--------------------------
TOTAL CURRENT LIABILITIES 24,985,885 11,593,393
Long-Term Debt, less current maturities 4,100,000 7,771,430
Deferred Compensation Obligations 2,169,606 2,103,403
Deferred Tax Liabilities 379,000 426,000
--------------------------
TOTAL LIABILITIES 31,634,491 21,894,226
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 2004 4,746,698
shares; 2003 4,616,886 19,128,021 18,236,386
Retained earnings 41,612,163 41,011,348
--------------------------
TOTAL SHAREHOLDERS' EQUITY 60,740,184 59,247,734
--------------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $92,374,675 $81,141,960
==========================
See Notes to Financial Statements.
F-2
PATRICK INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
2004 2003 2002
- -----------------------------------------------------------------------------------------
Net sales $ 301,554,460 $ 274,681,995 $ 308,754,982
Cost of goods sold 265,674,780 242,498,880 269,561,768
----------------------------------------------
GROSS PROFIT 35,879,680 32,183,115 39,193,214
----------------------------------------------
Operating expenses:
Warehouse and delivery 13,718,515 12,916,460 14,329,135
Selling, general, and administrative 20,489,105 18,442,660 23,546,020
Restructuring charges -- 235,000 269,180
----------------------------------------------
TOTAL OPERATING EXPENSES 34,207,620 31,594,120 38,144,335
----------------------------------------------
OPERATING INCOME 1,672,060 588,995 1,048,879
Interest expense, net 671,245 679,645 891,259
----------------------------------------------
INCOME (LOSS) BEFORE INCOME
TAXES (CREDITS) 1,000,815 (90,650) 157,620
Federal and state income taxes (credits) 400,000 (35,200) 63,100
NET INCOME (LOSS) $ 600,815 $ (55,450) $ 94,520
==============================================
Basic earnings (loss) per common share $ 0.13 $ (0.01) $ 0.02
==============================================
Diluted earnings (loss) per common share $ 0.13 $ (0.01) $ 0.02
==============================================
See Notes to Financial Statements.
F-3
PATRICK INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
Preferred Common Retained
Stock Stock Earnings Total
- ---------------------------------------------------------------------------------------------------------------------
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
Net income -- -- 600,815 600,815
Issuance of 21,000 shares of common stock for stock award plan -- 210,231 -- 210,231
Issuance of 108,812 shares of common stock
upon exercise of common stock options -- 681,404 -- 681,404
-----------------------------------------------------
Balance, December 31, 2004 $ -- 19,128,021 41,612,163 60,740,184
=====================================================
See Notes to Financial Statements.
F-4
PATRICK INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
2004 2003 2002
- --------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities
Net income (loss) $ 600,815 $ (55,450) $ 94,520
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 4,941,831 5,708,211 6,118,568
Deferred income taxes 249,000 (68,000) 473,000
Stock based compensation expense 202,354 188,840 176,820
(Gain) loss on sale of property and equipment (321,625) (840,121) 11,775
Other 305,975 205,689 371,051
Change in assets and liabilities:
Decrease (increase) in:
Trade receivables (2,479,689) (2,695,803) 2,177,463
Inventories (11,301,114) 9,049,501 (3,466,198)
Income tax refund claims receivable -- 1,592,551 1,454,248
Prepaid expenses (37,542) (64,306) (44,946)
Increase (decrease) in:
Accounts payable and accrued liabilities 6,092,491 (1,453,121) (1,998,108)
-----------------------------------------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES (1,747,504) 11,567,991 5,368,193
-----------------------------------------------
Cash Flows From Investing Activities
Capital expenditures (10,605,333) (5,293,264) (4,186,726)
Proceeds from sale of property and equipment 1,183,524 1,862,952 904,599
Other 214,010 (546,950) 116,929
-----------------------------------------------
NET CASH (USED IN) INVESTING
ACTIVITIES (9,207,799) (3,977,262) (3,165,198)
-----------------------------------------------
Cash Flows From Financing Activities
Short term borrowings 7,300,000 -- --
Principal payments on long-term debt (3,671,429) (3,671,429) (3,671,428)
Payments on deferred compensation obligations (239,772) (278,863) (258,094)
Proceeds from exercise of common stock options 681,404 128,953 192,316
Cash dividends paid -- (183,279) (727,447)
Other (109,503) (60,953) (100,393)
-----------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES 3,960,700 (4,065,571) (4,565,046)
-----------------------------------------------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (6,994,603) 3,525,158 (2,362,051)
Cash and cash equivalents, beginning 7,077,390 3,552,232 5,914,283
-----------------------------------------------
Cash and cash equivalents, ending $ 82,787 $ 7,077,390 $ 3,552,232
-----------------------------------------------
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, Recreational Vehicle, and Industrial markets for customers throughout
the United States.
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, 2004 and 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, 2004 and 2003 are stated net of an allowance for doubtful accounts of
$250,000. 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. Customer terms are generally on an unsecured basis for terms of 30
days.
The following table provides the changes in the Company's allowance for doubtful
accounts for 2004 and 2003:
2004 2003
-----------------------
Balance, beginning $ 250,000 $ 300,000
Provisions made during the year 440,000 (155,000)
Write-offs (526,000) (115,000)
Recoveries during the year 86,000 220,000
-----------------------
Balance, ending $ 250,000 $ 250,000
=======================
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, were
held on consignment and entered into inventory when the material is introduced
into the manufacturing process. This agreement was terminated in 2004.
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.
F-7
PATRICK INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
REVENUE RECOGNITION:
The Company ships product based on specific orders from customers and revenue is
recognized at the time of passage of title and risk of loss to the customer,
which is generally upon delivery.
Shipping and handling charges billed to the customers are included in net sales.
Shipping and handling costs incurred by the Company are included in warehouse
and delivery expenses.
STOCK OPTION PLAN:
At December 31, 2004, the Company has a stock option plan with shares of common
stock reserved for options to key employees. The Company accounts for
stock-based compensation under the provisions of APB No. 25. The Company has
adopted the disclosure-only provisions of FASB No. 123, Accounting for
Stock-Based Compensation. Accordingly, no compensation expense has been
recognized as the exercise price of all options equals the fair market value of
the underlying stock at the date of grant. The table below illustrates the
effect on net income (loss) and earnings (loss) per share had compensation
expense for the stock option plan been determined based on the fair value at the
grant date for awards consistent with the provision of FASB No. 123. The fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model using the following assumptions.
2004 2001
--------------------------
Dividend rate 0.00% 2.25%
Risk-free interest rate 3.50% 5.25%
Expected option life 4 YEARS 4 years
Price volatility 31.00% 43.00%
2004 2003 2002
------------------------------------------
Net income (loss):
As reported $ 600,815 $ (55,450) $ 94,520
Deduct total stock-based employee
compensation expense determined under
fair value based method for all awards
net of related tax effects (166,668) (152,155) (152,155)
------------------------------------------
Pro forma $ 434,147 $ (207,605) $ (57,635)
===========================================
Basic earnings (loss) per share:
As reported $ 0.13 $ (0.01)$ 0.02
Pro forma 0.09 (0.04) (0.01)
Diluted earnings (loss) per share:
As reported $ 0.13 $ (0.01) $ 0.02
Pro forma 0.09 (0.04) (0.01)
F-8
PATRICK INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 December 2004, the Financial Accounting Standards Board ("FASB") published
FASB Statement No. 123 (revised 2004), "Share-Based Payment" ("FAS 123(R)" or
the "Statement"). FAS 123(R) requires that the compensation cost relating to
share-based payment transactions, including grants of employee stock options, be
recognized in financial statements. That cost will be measured based on the fair
value of the equity or liability instruments issued. FAS 123(R) covers a wide
range of share-based compensation arrangements including stock options,
restricted share plans, performance-based awards, share appreciation rights, and
employee share purchase plans. FAS 123(R) is a replacement of FASB Statement No.
123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees, and its related interpretive guidance
(APB 25).
The effect of the Statement will be to require entities to measure the cost of
employee services received in exchange for stock options based on the grant-date
fair value of the award, and to recognize the cost over the period the employee
is required to provide services for the award. FAS 123(R) permits entities to
use any option-pricing model that meets the fair value objective in the
Statement.
The Company will be required to apply FAS 123(R) as of the beginning of its
interim period that begins January 1, 2006.
FAS 123(R) allows two methods for determining the effects of the transition: the
modified prospective transition method and the modified retrospective method of
transition. Under the modified prospective transition method, an entity would
use the fair value based accounting method for all employee awards granted,
modified, or settled after the effective date. As of the effective date,
compensation cost related to the nonvested portion of awards outstanding as of
that date would be based on the grant-date fair value of those awards as
calculated under the original provisions of Statement No. 123; that is, an
entity would not remeasure the grant-date fair value estimate of the unvested
portion of awards granted prior to the effective date. An entity will have the
further option to either apply the Statement to only the quarters in the period
of adoption and subsequent periods, or apply the Statement to all quarters in
the fiscal year of adoption. Under the modified retrospective method of
transition, an entity would revise its previously issued financial statements to
recognize employee compensation cost for prior periods presented in accordance
with the original provisions of Statement No. 123.
The Company has not yet completed its study of the transition methods or made
any decisions about how it will adopt FAS 123(R). The impact of this Statement
on the Company in 2006 and beyond will depend upon various factors, among them
being the Company's future compensation strategy. The pro forma compensation
costs presented in the stock option table above and in prior filings for the
Company have been calculated using a Black-Scholes option pricing model and may
not be indicative of amounts which should be expected in future years. No
decisions have been made as to which option-pricing model is most appropriate
for the Company for future awards.
F-9
PATRICK INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
EARNINGS PER COMMON SHARE:
Following is information about the computation of the earnings per share data
for the years ended December 31, 2004, 2003, and 2002:
2004 2003 2002
----------------------------------------
Numerator for basic and diluted
earnings per share, net income (loss) $ 600,815 $ (55,450) $ 94,520
========================================
Denominator:
Weighted average shares, denominator
for basic earnings per share 4,703,671 4,600,746 4,547,075
Effect of dilutive potential common
shares, employee stock options (a) 51,086 -- 66,821
----------------------------------------
Denominator for diluted
earnings per share 4,754,757 4,600,746 4,613,896
========================================
Basic earnings (loss) per share $ 0.13 $ (0.01) $ 0.02
========================================
Diluted earnings (loss) per share $ 0.13 $ (0.01) $ 0.02
========================================
(a) Due to the loss incurred during the year ended December 31, 2003, the
dilutive potential of 29,139 common shares were not included because the
effect would be antidilutive.
F-10
PATRICK INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2. BALANCE SHEET DATA
INVENTORIES: 2004 2003
-------------------------
Raw materials $20,466,965 $12,733,414
Work in process 1,955,284 1,630,052
Finished goods 5,336,306 3,501,779
Materials purchased for resale 6,585,003 5,177,199
-------------------------
$34,343,558 $23,042,444
=========================
PROPERTY AND EQUIPMENT:
Land and improvements $ 3,748,124 $ 3,783,829
Buildings and improvements 26,376,504 24,656,022
Machinery and equipment 59,133,177 57,116,232
Transportation equipment 1,619,259 1,754,781
Leasehold improvements 3,284,469 3,309,180
-------------------------
94,161,533 90,620,044
Less accumulated depreciation 58,518,666 59,927,134
-------------------------
$35,642,867 $30,692,910
=========================
OTHER ASSETS:
Cash value of life insurance $ 2,765,940 $ 2,979,950
Other 210,086 241,060
-------------------------
$ 2,976,026 $ 3,221,010
=========================
ACCRUED LIABILITIES:
Payroll and related expenses $ 810,152 $ 1,018,117
Property taxes 476,397 561,390
Group insurance 600,000 700,000
Other 737,940 759,419
-------------------------
$ 2,624,489 $ 3,038,926
=========================
F-11
PATRICK INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 3. NOTE PAYABLE, PLEDGED ASSETS AND LONG-TERM DEBT
The Company has an unsecured revolving credit agreement which allows borrowings
up to $15,000,000 of which $7,300,000 was outstanding at December 31, 2004. This
agreement 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. The borrowings bear interest
at an effective rate of 4.38% at December 31, 2004. 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.
Long-term debt at December 31, 2004 and 2003 is as follows:
2004 2003
-------------------------
Senior Notes, insurance company $ 2,571,430 $ 5,142,859
Indiana Development Finance Authority Bonds 600,000 900,000
State of Oregon Economic Development Revenue Bonds 2,000,000 2,400,000
State of North Carolina Economic Development Revenue
Bonds 2,600,000 3,000,000
-------------------------
7,771,430 11,442,859
Less current maturities 3,671,430 3,671,429
-------------------------
$ 4,100,000 $ 7,771,430
=========================
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 (2.15% at December 31, 2004).
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 $636,000.
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 (2.15%
at December 31, 2004). 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
$2,090,000.
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 (2.15% at December 31, 2004). 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 $2,694,000.
Aggregate maturities of long-term debt for the next five years ending December
31, are; 2005 $3,671,430; 2006 $1,100,000; 2007 $800,000; 2008 $800,000; 2009
$900,000; and thereafter $500,000.
F-12
In addition, the Company is contingently liable for standby letters of credit of
approximately $3,675,000 to meet credit requirements for one of the Company's
insurance providers.
Interest expense for the years ended December 31, 2004, 2003, and 2002 was
approximately $711,000, $755,000, and $1,035,000 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.
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 2009. 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, 2004 under the leases
mentioned above is approximately $3,620,000 which is due approximately
$1,551,000 in 2005, $1,093,000 in 2006, $635,000 in 2007, and $267,000 in 2008,
and $74,000 in 2009.
The total rent expense included in the statements of operations for the years
ended December 31, 2004, 2003, and 2002 is approximately $2,600,000, $3,800,000,
and $3,900,000 respectively, of which approximately $744,000 was paid in 2004,
$828,000 was paid in 2003, $1,100,000 was paid in 2002, to the chairman
emeritus/major shareholder.
F-13
PATRICK INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 6. MAJOR CUSTOMER
Net sales for the years ended December 31, 2004, 2003, and 2002 included sales
to one customer accounting for 13.4%, 14.7%, and 12.7%, respectively of total
net sales of the Company.
The balances due from this customer at December 31, 2004 and 2003 were
approximately $2,200,000 and $2,031,000 respectively.
NOTE 7. INCOME TAX MATTERS
Federal and state income taxes (credits) for the years ended December 31, 2004,
2003, and 2002, all of which are domestic, consist of the following:
2004 2003 2002
-------------------------------------
Current:
Federal $ 111,000 $ 32,800 $(233,900)
State 40,000 -- (176,000)
Deferred 249,000 (68,000) 473,000
-------------------------------------
$ 400,000 $ (35,200) $ 63,100
=====================================
The provisions for income taxes (credits) for the years ended December 31, 2004,
2003, and 2002 are different from the amounts that would otherwise be computed
by applying a graduated federal statutory rate to income before income taxes. A
reconciliation of the differences is as follows:
2004 2003 2002
-------------------------------------
Rate applied to pretax income $ 340,300 $ (31,700) $ 55,100
State taxes, net of federal
tax effect 26,000 (4,000) 9,000
Other 33,700 500 (1,000)
-------------------------------------
$ 400,000 $ (35,200) $ 63,100
=====================================
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-14
PATRICK INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The composition of the deferred tax assets and liabilities at December 31, 2004
and 2003 is as follows:
2004 2003
---------------------------
Gross deferred tax liabilities:
Accelerated depreciation $(2,372,000) $(1,920,000)
Prepaid expenses (135,000) (273,000)
---------------------------
(2,507,000) (2,193,000)
---------------------------
Gross deferred tax assets:
Trade receivables allowance 99,000 99,000
Inventory capitalization 426,000 335,000
Accrued expenses 523,000 876,000
Deferred compensation 857,000 861,000
Unvested stock awards 47,000 201,000
Noncompete agreement 154,000 173,000
Inventory reserves 123,000 144,000
AMT and other tax credit carryforwards 311,000 311,000
Federal and State NOL carryforwards 1,038,000 488,000
Other 208,000 233,000
---------------------------
3,786,000 3,721,000
---------------------------
Net deferred tax assets $ 1,279,000 $ 1,528,000
===========================
The deferred tax amounts above have been reflected on the accompanying
consolidated balance sheets as of December 31, 2004 and 2003 as follows:
2004 2003
---------------------------
Current deferred tax assets $ 1,658,000 $ 1,954,000
Long-term deferred tax liabilities (379,000) (426,000)
---------------------------
$ 1,279,000 $ 1,528,000
===========================
At December 31, 2004, the Company has net operating loss carryforwards of
approximately $1,975,000 available under provisions of the Internal Revenue Code
and approximately $4,575,000 of net operating loss carryforwards available under
various state revenue codes to be applied against future taxable income. These
carryforwards expire in varying amounts between 2010 and 2024.
At December 31, 2004, the Company has federal AMT credit and state manufacturing
credit carryforwards which are available to be directly offset against future
federal and state income tax liabilities. These carryfowards expire in varying
amounts between 2008 and 2020.
F-15
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 $4,433,000 in the aggregate at December 31, 2004. 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,
general liability and automobile insurance. The Company is responsible for a per
occurrence limit, with an aggregate amount not to exceed approximately
$7,500,000 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.
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 $720,000, $632,000,
and $790,000, for the years ended December 31, 2004, 2003, and 2002
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, 2004, 2003, and 2002
were immaterial.
F-16
PATRICK INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STOCK OPTION PLAN:
A summary of transactions of granted shares under option for the years ended
December 31, 2004, 2003 and 2002 is as follows:
2004 2003 2002
---------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------------------------------------------------------------------
Outstanding, beginning
of year 244,462 $ 6.24 274,775 $ 6.24 349,800 $ 6.25
Issued during the year 125,000 10.01 -- -- -- --
Canceled during the year (12,000) 6.18 (9,688) 6.24 (44,430) 6.24
Exercised during the year (108,812) 6.26 (20,625) 6.25 (30,595) 6.29
---------------------------------------------------------------------
Outstanding, end of year 248,650 $ 8.12 244,462 $ 6.24 274,775 $ 6.24
=====================================================================
Eligible, end of year for
exercise 123,650 $ 6.26 223,425 $ 6.25 182,856 $ 6.27
=====================================================================
Weighted average fair value
of options granted during
the year $ 3.01 N/A $ 1.86
A further summary about fixed options outstanding at December 31, 2004 is as
follows:
Options Outstanding Options Exercisable
---------------------------------------------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Number Contractual Exercise Number Exercise
Outstanding Life Price Exercisable Price
---------------------------------------------------------------
2000 Grants:
Exercise price of $6.13 52,400 1.5 $ 6.13 52,400 $ 6.13
===============================================================
2001 Grants:
Exercise price of $6.30 71,250 2.5 $ 6.30 71,250 $ 6.30
===============================================================
2004 Grants:
Exercise price of $10.01 125,000 5.5 $ 10.01 -- $ --
===============================================================
F-17
PATRICK INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
STOCK AWARD PLAN:
The Company has adopted a stock award plan for the non-employee directors.
Grants awarded during May 2004 and 2003 of 21,000 shares and 12,000 shares,
respectively are subject to forfeiture in the event the recipient terminates
within one year from the date of grant as a director. The related compensation
expense is being recognized over the one-year vesting period. Total compensation
expense for the years ended December 31, 2004, 2003, and 2002 were $202,354,
$188,840, and $176,820, 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.
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.
F-18
PATRICK INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 12. CASH FLOWS INFORMATION
Supplemental information relative to the statements of cash flows for the years
ended December 31, 2004, 2003, and 2002 is as follows:
2004 2003 2002
--------------------------------
Supplemental disclosures of cash
flows information:
Cash payments for:
Interest $747,718 $727,295 $875,059
================================
Income taxes $ 88,765 $ 81,285 $717,232
================================
Supplemental schedule of noncash
financing activities:
Issuance of common stock
for stock award plan $210,231 $ 78,600 $216,000
================================
NOTE 13. UNAUDITED INTERIM FINANCIAL INFORMATION
Presented below is certain selected unaudited quarterly financial information
for the years ended December 31, 2004 and 2003 (dollars in thousands, except per
share data):
Quarter Ended
-------------------------------------------------------
March 31, June 30, September 30, December 31,
-------------------------------------------------------
2004
-------------------------------------------------------
Net sales $ 65,712 $ 78,621 $ 80,261 $ 76,961
Gross profit 7,593 9,538 10,413 8,336
Net income (loss) (522) 555 667 (99)
Earnings (loss) per common
share (0.11) 0.12 0.14 (0.02)
Weighted average common
shares outstanding 4,640,741 4,697,159 4,731,127 4,744,900
2004
-------------------------------------------------------
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.
F-19
PATRICK INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 14. SEGMENT INFORMATION
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 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, operating income, and total identifiable assets.
F-20
PATRICK INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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, 2004, 2003, and 2002.
Other
Primary Component
Manufactured Manufactured
Products Distribution Products Total
---------------------------------------------------
2004
---------------------------------------------------
Sales $157,642 $102,369 $ 41,544 $301,555
Sales, intersegment 7,184 1,150 9,530 17,864
---------------------------------------------------
Total sales 164,826 103,519 51,074 319,419
Cost of goods sold 149,763 90,866 45,993 286,622
Operating income 4,606 4,135 777 9,518
Identifiable assets 40,972 12,657 10,529 64,158
Depreciation 2,328 148 626 3,102
2003
---------------------------------------------------
Sales $144,561 $ 89,992 $ 40,129 $274,682
Sales, intersegment 7,133 639 8,008 15,780
---------------------------------------------------
Total sales 151,694 90,631 48,137 290,462
Cost of goods sold 137,607 78,980 44,369 260,956
Operating income 4,631 3,148 (204) 7,575
Identifiable assets 30,510 9,779 7,802 48,091
Depreciation
2,455 172 856 3,483
2002
---------------------------------------------------
Sales $153,062 $107,376 $ 48,317 $308,755
Sales, intersegment 7,410 758 9,662 17,830
---------------------------------------------------
Total sales 160,472 108,134 57,979 326,585
Cost of goods sold 142,946 94,839 53,180 290,965
Operating income 7,046 4,442 (650) 10,838
Identifiable assets 35,289 10,357 9,141 54,787
Depreciation 2,756 250 958 3,964
F-21
PATRICK INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
A reconciliation of total segment sales, cost of goods sold, and operating
income to consolidated sales, cost of goods sold, and segment information to the
consolidated financial statements as of and for the years ended December 31,
2004, 2003, and 2002 is as follows (dollars in thousands):
2004 2003 2002
------------------------------------
Sales:
Total sales for reportable segments $ 319,419 $ 290,462 $ 326,585
Elimination of intersegment revenue (17,864) (15,780) (17,830)
------------------------------------
Consolidated sales $ 301,555 $ 274,682 $ 308,755
====================================
Cost of goods sold:
Total cost of goods sold for reportable
segments $ 286,622 $ 260,956 $ 290,965
Elimination of intersegment cost of goods
sold (17,864) (15,780) (17,830)
Consolidation reclassifications (842) (1,197) (1,397)
Corporate incentive agreements (2,047) (1,815) (2,427)
Other (194) 335 251
------------------------------------
Consolidated cost of goods sold $ 265,675 $ 242,499 $ 269,562
====================================
Operating income:
Operating income for reportable segments 9,518 7,575 10,838
Corporate incentive agreements 2,047 1,815 2,427
Consolidation reclassifications 435 852 131
Gain (loss) on sale of property
and equipment 322 840 (12)
Restructuring charge -- (235) (269)
Unallocated corporate expenses (10,650) (10,258) (12,066)
------------------------------------
Consolidated operating income $ 1,672 $ 589 $ 1,049
====================================
Consolidated assets:
Identifiable assets for reportable segments $ 64,158 $ 48,091 $ 54,787
Corporate property and equipment 22,055 19,632 22,235
Current assets not allocated to segments 3,533 10,511 6,703
Intangible and other assets not allocated
to segments 2,976 3,221 2,937
Consolidation eliminations (347) (313) (196)
------------------------------------
Consolidated assets $ 92,375 $ 81,142 $ 86,466
====================================
Depreciation and amortization:
Depreciation for reportable segments $ 3,102 $ 3,483 $ 3,964
Corporate depreciation and amortization 1,840 2,225 2,155
------------------------------------
Consolidated depreciation and
amortization $ 4,942 $ 5,708 $ 6,119
====================================
F-22
Patrick Industries, Inc.
And Subsidiaries
Schedule II
Valuation And Qualifying Accounts And Reserves
December 31, 2004, 2003, and 2002
- -------------------------------------------------------------------------------------------------------------------
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:
2002 $ 175,000 $ 1,762,297 $ 1,637,297 $ 300,000
====================================================================
2003 $ 300,000 $ (155,149) $ (105,149) $ 250,000
====================================================================
2004 $ 250,000 $ 439,880 $ 439,880 $ 250,000 *
====================================================================
* Negative balances due to recovery of previously written off balances.
Allowance for restructuring
charges - in accrued
liabilities in the balance
sheets:
2002 $ 126,000 $ 269,180 $ 395,180 $ -
====================================================================
2003 $ - $ 235,000 $ 235,000 $ -
====================================================================
2004 $ - $ - $ - $ -
====================================================================
Allowance for inventory write-
downs - in accrued
liabilities in the balance
sheets:
2002 $ - $ 2,569,662 $ 2,484,505 $ 85,157
====================================================================
2003 $ 85,157 $ 1,674,989 $ 1,518,716 $ 241,430
====================================================================
2004 $ 241,430 $ 1,571,724 $ 1,534,528 $ 278,626
====================================================================
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) ...........
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(h)(1)**-Amendment to extend Patrick Industries, Inc. 1987 Stock Option
Program to May 2014.
*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) ..........
Exhibit Number Exhibits
- -------------- --------
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)
..........
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 and Real Estate Purchase Agreement dated October
1, 2004 between Mervin D. Lung, 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, 2004 and incorporated herein by
reference) .........
10(v)** -Commercial Lease dated December 1, 2004 between Teachers Insurance
and Annuity Association of America (TIAA) as lessor, and the
company, as lessee (filed as Exhibit 10(v) to the company's Form
10-K for the fiscal year ended December 31, 2004 and incorporated
herein by reference) .........
10(w)** -Amendment to Credit Facility and Loan Participation Agreement,
dated March 3, 2004 among the Company, JPMorgan Chase Bank, N.A.
formerly known as Bank One, N.A. and National City Bank of Indiana,
and new Term Note Agreement dated March 3, 2004 among the Company,
JPMorgan Chase Bank, N.A. (filed as Exhibit 10(w) to the company's
Form 10-K for the fiscal year ended December 31, 2004 and
incorporated herein by reference) .........
10(x)** -Patrick Industries, Inc. Form of Stock Option .........
10(y)** -Patrick Industries, Inc. Form of Directors Annual Restricted Stock
Grant .........
Exhibit Number Exhibits
- -------------- --------
12** -Computation of Operating Ratios .........
23** -Consent of accountants .........
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 1350 .........
*Management contract or compensatory plan or arrangement
**Filed herewith