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EX-31.1 - EXHIBIT 31.1 - PATRICK INDUSTRIES INCex31_1.htm
EX-21 - EXHIBIT 21 - PATRICK INDUSTRIES INCex21.htm
EX-31.2 - EXHIBIT 31.2 - PATRICK INDUSTRIES INCex31_2.htm
EX-12 - EXHIBIT 12 - PATRICK INDUSTRIES INCex12.htm
EX-23.1 - EXHIBIT 23.1 - PATRICK INDUSTRIES INCex23_1.htm
EX-32 - EXHIBIT 32 - PATRICK INDUSTRIES INCex32.htm
EX-23.2 - EXHIBIT 23.2 - PATRICK INDUSTRIES INCex23_2.htm


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, 2010
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ……………… to ………………
Commission file number 000-03922
 
PATRICK INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
 
INDIANA
 
35-1057796
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
(Identification No.)
     
107 W. FRANKLIN STREET, P.O. Box 638, ELKHART, IN   46515
(Address of principal executive offices)   (Zip Code)

(574) 294-7511
(Registrant’s telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act:
Common stock, without par value
(Title of each class)
 
Nasdaq Stock Market LLC
(Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act:  None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes  o No x
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.  
Yes o   No x
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x   No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes o  No o
 
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 registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.     Large accelerated filer o    Accelerated filer o  Non-accelerated filer o  Smaller reporting company x  (Do not check if a smaller reporting company
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).   Yes o   No x
 
The aggregate market value of the voting stock held by non-affiliates of the registrant on June 25, 2010 (based upon the closing price on the Nasdaq Stock Market LLC and an estimate that 36.6% of the shares are owned by non-affiliates) was $7,908,015.  The closing market price was $2.32 on that day and 9,313,189 shares of the Company’s common stock were outstanding.  As of March 11, 2011, there were 9,460,189 shares of the registrant’s common stock outstanding.
 
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Proxy Statement for its Annual Meeting of Shareholders scheduled to be held on May 26, 2011 are incorporated by reference into Part III of this Form 10-K.
 


 
 

 

PATRICK INDUSTRIES, INC.
 FORM 10-K
FISCAL YEAR ENDED DECEMBER 31, 2010
 
   
3
 
ITEM 1.
 
3
 
ITEM 1A.
 
14
 
ITEM 1B.
 
22
 
ITEM 2.
 
22
 
ITEM 3.
 
23
   
23
 
ITEM 5.
 
23
 
ITEM 6.
 
24
 
ITEM 7.
 
24
 
ITEM 7A.
 
46
 
ITEM 8.
 
46
 
ITEM 9.
 
46
 
ITEM 9A.
 
47
 
ITEM 9B.
 
47
   
47
 
ITEM 10.
 
47
 
ITEM 11.
 
48
 
ITEM 12.
 
48
 
ITEM 13.
 
48
 
ITEM 14.
 
48
   
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ITEM 15.
 
49
SIGNATURES    
52
 
FINANCIAL SECTION
 
 
INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS
 
This Form 10-K contains certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to financial condition, results of operations, business strategies, operating efficiencies or synergies, competitive position, growth opportunities for existing products, plans and objectives of management, markets for the common stock of Patrick Industries, Inc. and other matters.  Statements in this Form 10-K as well as other statements contained in the annual 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.   Patrick Industries, Inc. does not undertake to publicly update or revise any forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made, except as required by law.  You should consider forward-looking statements, therefore, in light of various important factors, including those set forth in the reports and documents that Patrick Industries, Inc. files with the Securities and Exchange Commission, including this Annual Report on Form 10-K for the year ended December 31, 2010.
 
There are a number of factors, many of which are beyond the control of Patrick Industries, Inc., which could cause actual results and events to differ materially from those described in the forward-looking statements.  These factors include the impact of any economic downturns especially  in the residential housing market, pricing pressures due to competition, costs and availability of raw materials, availability of commercial credit, availability of retail and wholesale financing for residential and manufactured homes, availability and costs of labor, inventory levels of retailers and manufacturers, levels of repossessed residential and manufactured homes, the financial condition of our customers, the ability to generate cash flow or obtain financing to fund growth, future growth rates in the Company’s core businesses, interest rates, oil and gasoline prices, the outcome of litigation, adverse weather conditions impacting retail sales, our ability to remain in compliance with our credit agreement covenants, and our ability to refinance or replace our existing credit facility.  In addition, national and regional economic conditions and consumer confidence may affect the retail sale of recreational vehicles and residential and manufactured homes.
 
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.  See Part I, Item 1A “Risk Factors” below for further discussion.
 
PART I
 
ITEM 1.                  BUSINESS
 
Company Overview
 
Patrick Industries, Inc. (collectively, the “Company,” “we,” “our” or “Patrick”), which was founded in 1959 and incorporated in Indiana in 1961, is a major manufacturer and distributor of building products and materials to the recreational vehicle (“RV”) and manufactured housing (“MH”) industries. In addition, we are a supplier to certain other industrial markets, such as kitchen cabinet, household furniture, fixtures and commercial furnishings, marine, and other industrial markets.  We manufacture a variety of products including decorative vinyl and paper panels, wrapped profile mouldings, interior passage doors, cabinet doors and components, slotwall and slotwall components, and countertops.
 
We are also an independent wholesale distributor of pre-finished wall and ceiling panels, drywall and drywall finishing products, electronics, adhesives, wiring, electrical and plumbing products, cement siding, interior passage doors, roofing products, laminate flooring, and other miscellaneous products.  We have a nationwide network of manufacturing and distribution centers for our products, thereby reducing in-transit delivery time and cost to the regional manufacturing plants of our customers.  We believe that we are one of the few suppliers to the RV and MH industries that has such a nationwide network.  We maintain three manufacturing plants and two distribution facilities
 
 
near our principal offices in Elkhart, Indiana, and operate nine other warehouse and distribution centers and six other manufacturing plants in eleven other states.
 
We have completed a number of cost reduction and efficiency improvements designed to address the downturn in general worldwide economic conditions (particularly in 2008 and 2009) that adversely affected demand for our products and services and to leverage our position to drive future growth.  These improvements included the restructuring and integration of operations, consolidation of facilities, disposition of non-core operations, streamlining of administrative and support activities, and the management of inventory levels to changes in sales levels.  In the Executive Summary section of Item 7.  “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” we provide an overview of the impact that macroeconomic conditions had on our operations and in the RV, MH, and residential housing industries in 2010.
 
We also continued to expand both the breadth and the depth of our products and services through the integration of new and expanded product lines designed to create additional scale advantages.  See “Strategic Acquisitions, Expansion and Restructuring” below and Note 3 to the Consolidated Financial Statements in Item 8 of this report for further details.
 
In accordance with changes made to our internal reporting structure, the Company changed its segment reporting from three reportable segments to two reportable segments effective January 1, 2010.  Operations previously included in the Other Component Manufactured Products segment were consolidated with the operations in the Primary Manufactured Products segment to form one new segment called Manufacturing.  The other reportable segment, Distribution, remained the same as reported in prior periods.  Prior year results were reclassified to reflect the new reporting structure.  Financial information about Patrick’s two segments is included in Note 20 to the Consolidated Financial Statements.

Competitive Position
 
The RV and MH industries are highly competitive with low barriers to entry.  This level of competition carries through to the suppliers to these industries.  Across the Company’s range of products and services, competition exists primarily on price, product features, quality, and service.  We believe that the quality, service, design and price of our products and the short order turnaround time that we provide allow us to compete favorably in the RV and MH markets.  We have several competitors that compete with us on a regional and local basis.  In order for a competitor to compete with us on a national basis, we believe that a substantial capital commitment and investment in personnel would be required.  The other industrial markets in which we continue to expand are also highly competitive. In 2010, sales to the RV industry continued to strengthen as evidenced by higher production levels and wholesale unit shipments versus the prior year period.  We believe that the restricted availability of capital, high unemployment, slow job growth, low consumer confidence levels, and continued depressed levels of discretionary spending will all continue to contribute to the further volatility in the markets we serve in 2011 before a sustained recovery takes hold.  Given this environment, the Company has identified several operating strategies to maintain or enhance earnings through productivity and fixed cost reduction initiatives, expansion into new product lines, and optimization of capacity utilization.
 
Strategy
 
Overview
 
We believe that we have developed quality-working relationships with our customers and suppliers, and have oriented our business to the needs of these customers.  These customers include all of the larger RV and MH manufacturers and a number of large to medium-sized industrial customers.  Our industrial customers generally are directly linked to the residential housing markets.  Our RV and MH customers generally demand the lowest competitive prices, high quality standards, short lead times, and a high degree of flexibility from their suppliers.  Our industrial customers generally are less price sensitive than our RV and MH customers, and more focused on quality customer service and quick response time.  Consequently, we have focused our efforts on driving our ‘Customer First’ performance-oriented culture by maintaining and improving the quality of our manufactured products, developing a nationwide manufacturing and distribution presence in response to our customers’ needs for flexibility and short lead times, and prioritizing the implementation of lean manufacturing principles and continuous improvement in all of our
 
 
facilities including our corporate office.   Additionally, because of the short lead times, which range from 48 hours to same day order receipt and delivery, we have intensified our focus on reducing our inventory levels with the help of some of our key suppliers with vendor managed inventory programs.  These initiatives have been instrumental in improving our operating cash flow and liquidity.  As we explore new markets and industries, we believe that these and other strategic initiatives provide us with a strong foundation for future growth.  In 2010, approximately 58% of our sales were to the RV industry, 28% to the MH industry, and 14% to the industrial and other markets.  In 2009, approximately 44% of our sales were to the RV industry, 37% to the MH industry, and 19% to the industrial and other markets.  In 2011, we expect an even higher percentage of our total sales to be concentrated in the RV industry than in 2010 primarily due to forecasted growth in the RV industry.
 
Operating Strategies
 
Key operating strategies identified by management, include the following:
 
Strategic Acquisitions, Expansion and Restructuring
 
We supply a broad variety of building material products and, with our nationwide manufacturing and distribution capabilities, we believe that we are well positioned for the introduction of new products.  We, from time to time, consider the acquisition of additional product lines, facilities, companies with a strategic fit, or other assets to complement or expand our existing businesses.
 
In May 2007, we purchased all of the outstanding stock of Adorn Holdings, Inc. (“Adorn”), an Elkhart, Indiana-based major manufacturer and supplier to the RV, MH and industrial markets, for $78.8 million.  This acquisition represented the largest acquisition in our history, virtually doubled our manufacturing revenues, and immediately strengthened our market position and presence in the major industries that we serve.  The consolidation of Adorn into Patrick afforded us many opportunities to realize synergies through facility rationalization, headcount reduction, vendor consolidation, and the implementation of best practices.
 
In the third quarter of 2008, we completed our restructuring plan (the “Restructuring Plan”) to integrate Adorn with our existing businesses which resulted in cumulative pretax charges totaling approximately $3.3 million.  Expenses associated with the Restructuring Plan included the closure of duplicate facilities, severance related to the elimination of redundant jobs, and various asset write-downs related to the consolidation of product lines.  We have realized, and expect to continue to realize, synergy savings from this acquisition on a go-forward basis.
 
While operating under depressed market and economic conditions throughout 2009 and into 2010, we focused our attention on fixed cost and debt reduction initiatives in order to reduce our leverage ratio, maintain operating cash flow, meet the covenants under our existing Credit Agreement (as defined herein) and maximize efficiencies from the consolidation of Adorn into Patrick.
 
In January 2010, we acquired the cabinet door business of Quality Hardwoods Sales (“Quality Hardwoods”).  In August 2010, we added new products and expanded our RV and MH distribution presence through the acquisition of the wiring, electrical and plumbing products distribution business of Blazon International Group (“Blazon”).
 
Strategic Divestitures
 
In an effort to strategically align our current operations with businesses within our core competencies, reduce overall fixed costs, and reduce our leverage position, we have explored and will continue to explore various alternatives for the divestiture of certain unprofitable, non-core operations.  In 2009, we sold certain assets of our American Hardwoods operation and the related operating facility for $4.5 million.  In addition, we sold certain assets of our aluminum extrusion operation in July 2009 for net cash proceeds of $7.4 million and the assumption by the buyer of approximately $2.2 million of certain accounts payable and accrued liabilities. The decision to divest these two operations was largely based on projected and potential operating losses under the current operating model and working capital requirements of these operations that led us to assess the overall fit of these operations within the parameters of our strategic plan.  The financial results of these operations for all prior periods presented were classified as discontinued operations in the consolidated financial statements.  See Note 4 to the Consolidated Financial Statements for further details.
 
 
Diversification into Other Markets
 
While we continually seek to improve our position as a leading supplier to the RV and MH industries, we are also seeking to expand our product lines into other industrial, commercial and institutional markets.  Many of our products, such as countertops, cabinet doors, laminated panels, slotwall, and shelving, have applications in the kitchen cabinet, household furniture, and architectural markets.  We have a dedicated sales force focused on increasing our industrial market penetration and on our diversification into additional commercial and institutional markets.
 
We believe that diversification into other industrial markets provides opportunities for improved operating margins with products that are complementary in nature to our current manufacturing processes.  In addition, we believe that our nationwide manufacturing and distribution capabilities enable us to position ourselves for new product expansion.
 
Utilization of Manufacturing Capacity
 
Efficiency Optimization
 
The acquisition and consolidation of Adorn into Patrick allowed us to increase capacity utilization at all of our consolidated manufacturing facilities.  While we increased capacity utilization as a result of our facility consolidations, the decline in volume levels due to soft industry conditions in all of the major end markets we serve resulted in unused capacity at almost all of our locations.  We have the ability to substantially increase volumes in almost all of our existing facilities without adding comparable incremental fixed costs.  With the expected continued weak economic conditions in certain parts of the country, we are continually exploring opportunities for further facility consolidation.  Additionally, we are focused on cross-training all of our manufacturing work force in our manufacturing cells within each facility to maximize our efficiencies and increase the flexibility of our labor force.
 
Plant Consolidations / Closures
 
Certain manufacturing and distribution operating facilities were either sold or consolidated during 2010 and 2009 in an effort to improve operating efficiencies in the plants through increased capacity utilization, keep the overhead structure at a level consistent with operating needs, and continue the Company’s efforts to reduce its leverage position.
 
During the fourth quarter of 2008, the Company entered into a listing agreement to sell its custom vinyls manufacturing facility in Ocala, Florida.  This facility was sold in late December 2009 for $1.6 million resulting in a pretax gain on sale of $1.2 million.  The Ocala operations were consolidated into the Company’s Alabama and Georgia facilities.
 
In the fourth quarter of 2009, the Company entered into a listing agreement to sell its manufacturing and distribution facility in Woodburn, Oregon.  The Oregon facility was sold in February 2010 for $4.2 million and the Company recorded a pretax gain on sale of approximately $0.8 million in its first quarter 2010 operating results.  The Company is currently operating in the same facility under a lease agreement with the purchaser for the use of a portion of the square footage previously occupied.
 
During the fourth quarter of 2008, the Company entered into a listing agreement to sell its remaining manufacturing and distribution facility in Fontana, California.  In March 2010, this facility was sold for $4.9 million and the Company recorded a pretax gain on sale of approximately $2.0 million in its first quarter 2010 operating results.  The Company is currently operating in the same facility under a lease agreement with the purchaser for the use of a portion of the square footage previously occupied.
 
In April 2010, we closed our manufacturing division in Madisonville, Tennessee and consolidated operations into the existing owned Mt. Joy, Pennsylvania manufacturing facility in order to offset a sizable reduction in sales volumes that stemmed from the adoption of a new vertical integration strategy by one of our key manufactured housing customers in Tennessee who began to produce and supply its own interior home components.   In October 2010, we sold the RV and MH business related to our Oregon manufacturing division to a third party in order to realign company assets.  We continue to manufacture and supply high-pressure laminate product lines to our industrial customers in this market and operate our existing Distribution branch in Oregon, which continues to service the RV and MH industries.
 
 
Product Development and New Product Introductions/Discontinuations
 
With our versatile manufacturing and distribution capabilities, we are continually striving to increase our market presence in all of the markets that we serve and gain entrance into other potential markets.  We remain committed to new product introduction and to new product development initiatives.  New product development is critical to growing our revenue base, keeping up with changing market conditions, and proactively addressing customer demand.  We plan to continue to devote our time and attention to manufacturing and distribution products that fit within the strategic parameters of our current business model including appropriate margin and inventory turn levels.
 
To further enhance our product offerings to our RV, MH and Industrial markets customers, we introduced several new products and expanded our existing product lines in 2010.  Our distribution line was expanded to include new wiring, electrical and plumbing products (via the acquisition of Blazon), adhesives, interior/exterior paints, a new laminate flooring product line, a new tile line, and house wrap.  On the manufacturing side, we expanded our existing pressed counter tops product line and began to manufacture a newly designed hardwood slide-out fascia.
 
In early 2009, we discontinued certain distribution product lines including our line of resilient flooring products, a ceramic tile line, and the hardwood products associated with the American Hardwoods operation.
 
Principal Products
 
Through our manufacturing divisions, we manufacture a variety of products including decorative vinyl and paper panels, wrapped profile mouldings, stiles and battens, hardwood, foil and membrane pressed cabinet doors, drawer sides and bottoms, interior passage doors, slotwall and slotwall components, and countertops.  In conjunction with our manufacturing capabilities, we also provide value added processes, including custom fabrication, edge-banding, drilling, boring, and cut-to-size capabilities.
 
We distribute pre-finished wall and ceiling panels, drywall and drywall finishing products, electronics, adhesives, wiring, electrical and plumbing products, cement siding, interior passage doors, roofing products, laminate flooring, and other miscellaneous products.
 
Manufactured laminated panels and hardwood doors contributed 56% and 18%, respectively, of total 2010 manufacturing segment sales.  The electronics division within our Distribution segment contributed 24% of total sales in this segment in 2010.
 
We have no material patents, licenses, franchises, or concessions and do not conduct significant research and development activities.  
 
Manufacturing Processes and Operations
 
Our primary manufacturing facilities utilize various materials including MDF, gypsum and particleboard, which are bonded by adhesives or a heating process to a number of products, including vinyl, paper, foil and high-pressure laminate.  Additionally, we offer high-pressure laminate laminated to substrates such as particleboard and lauan which has many uses, including counter tops and ambulance cabinetry.  We manufacture laminate countertops and solid surface countertops, as well as slotwall and slotwall components for the retail store fixture markets.  Laminated products are used in the production of wall, cabinet, shelving, counter and fixture products with a wide variety of finishes and textures.

We manufacture three distinct cabinet door product lines in both raised and flat panel designs, as well as square, shaker style, cathedral and arched panels.  One product line is manufactured from raw lumber using solid oak, maple, cherry and other hardwood materials.  Another line of doors is made of laminated fiberboard, and a third line uses membrane press technology to produce doors and components with vinyls ranging from 2 mil to 14 mil in thickness.  Several outside profiles are available on square, shaker style, cathedral, and arched raised panel doors and the components include rosettes, hardwood moulding, arched window trim, blocks and windowsills, among others.  Our doors are sold mainly to the RV and MH industries.  We also market to the cabinet manufacturers and “ready-to-assemble” furniture manufacturers.
 
 
Our vinyl printing facility produces a wide variety of decorative vinyls which are 4 mil in thickness and are shipped in rolls ranging from 300-750 yards in length.  This facility produces material for both internal use by Patrick and sale to external customers.
 
Markets
 
We are engaged in the manufacturing and distribution of building products and material for use primarily by the RV and MH industries, and in other industrial markets.
 
The recent economic recession and the continuing downturn in the residential housing market has had an adverse impact on our operations, particularly in the first half of 2010 and in most of 2009 in the three primary industries in which we operate.  Recreational vehicle purchases are generally consumer discretionary income purchases, and therefore, any situation which causes concerns related to discretionary income has a negative impact on these markets.  On the RV side, the economic downturn in the fourth quarter of 2008 and the first half of 2009 severely impacted shipment levels, however, production levels were stronger than expected based on a higher demand for RV’s by retail dealers in the latter half of 2009.  In 2010, the RV industry continued to strengthen as evidenced by higher production levels and wholesale unit shipments versus 2009.
 
The MH industry continues to be negatively impacted by financing concerns and a lack of available financing sources, and the current credit situation in the residential housing market puts additional pressure on consumers, who are generally using financial institutions and conventional financing as a source for these purchases.  We expect the overall declines experienced in the MH and industrial markets in 2010 and 2009 to continue into the first half of 2011.  Approximately 60% of our industrial revenue base in 2010 was associated with the U.S. residential housing market, and therefore, there is a direct correlation between the demand for our products in this market and new residential housing production.
 
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.  We believe that fluctuations in interest rates, consumer confidence, and concerns about the availability and price of gasoline have an impact on RV sales.
 
Demographic and ownership trends continue to point to favorable market growth in the long-term as the number of “baby-boomers” reaching retirement is steadily increasing, products such as sports-utility RV’s are becoming attractive to younger buyers, and RV manufacturers are also providing an array of product choices,  including producing lightweight towables and smaller, fuel efficient motorhomes.  Green technologies including lightweight composite materials, solar panels, and energy-efficient components are appearing on an increasing number of RVs.  In addition, federal economic credit and stimulus packages that contain provisions to stimulate RV lending and provide favorable tax treatment for new RV purchases may help promote sales and aid in the RV industry’s continued economic recovery.
 
Recreational vehicle classifications are based upon standards established by the Recreational Vehicle Industry Association (“RVIA”).  The principal types of recreational vehicles include conventional travel trailers, folding camping trailers, fifth wheel trailers, motor homes, and conversion vehicles.  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 RV 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 result in a decrease in the sale of leisure time products such as recreational vehicles.
 
Since 2000, industry-wide wholesale unit shipments of RV’s have declined 19%.  The period beginning in 2000 and continuing through 2007 resulted in seven out of the eight years with shipment levels over 300,000 units primarily due to the favorable demographic trend of the aging “baby-boomer” population, improved consumer confidence, depleted dealer inventories, lower interest rates, and a fear of flying after the September 11, 2001 terrorist attacks.  Shipment levels started to soften in the third and fourth quarters of 2006 and into 2007.  In 2008, shipment levels declined approximately 33% to 237,000 units reflecting the tightest credit conditions in several decades, declining consumer confidence, reduced disposable income levels, and the generally depressed economic environment.  In 2009, shipment levels declined approximately 30% versus 2008, reflecting low consumer confidence and the continuance of unfavorable market conditions experienced by the industry in 2008.  However, production levels in the RV industry were stronger than expected in the latter half of 2009 based on a higher demand for RV’s by retail dealers. In 2010, the RV industry continued to strengthen as shipment levels increased 46% from 2009 reaching 242,300 units, the highest annual total for RV shipments in the past three years.
 
In anticipation of continued strengthening short-term demand, the RVIA is currently forecasting a 9% increase in full year 2011 wholesale unit shipments compared to the full year 2010 level citing an improvement in dealer demand and retail sales.  According to the RVIA, the recovery is expected to strengthen as credit availability, job security and consumer confidence improve.
 
The Company estimates that approximately 85% of its revenues related to the RV industry are derived from the towables sector of the market.  In 2010, the towables sector of the RV market represented approximately 90% of total units shipped into the market as a whole.  The towable units are lighter and less expensive than standard gas or diesel powered units representing a more attractive solution for the cost-conscious buyer.  From 2009 to 2010, motorized unit shipments rose approximately 91% and towable unit shipments rose approximately 42%.  We believe that we are well positioned with respect to our product mix within the RV industry to take advantage of any improved market conditions.
 
 
The following chart reflects the historical wholesale unit shipment levels in the RV industry from 2000 through 2010 per RVIA statistics:
 
 
Manufactured Housing
 
Manufactured homes traditionally have been one of the principal means for first time homebuyers to overcome the obstacles of large down payments and higher monthly mortgage payments due to the relative lower cost of construction as compared to site-built homes.  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 and updated modern designs in manufactured homes created by multi-sectional models has made them more attractive to a larger segment of homebuyers.
 
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 terms and conditions.  In recent years, these units have been gaining in popularity due to their aesthetic similarity to site-built homes and their relatively less expensive cost.
 
The manufactured housing industry is cyclical and is affected by the availability of alternative housing, such as apartments, town houses, condominiums and site-built housing.  In addition, interest rates, availability of financing, regional population, employment trends, and general regional economic conditions affect the sale of manufactured homes.  Since 2000, industry-wide wholesale unit shipments of manufactured homes have declined 80%.  The 2009 level of 49,800 wholesale units was at the lowest level in the last 50 years.  MH unit shipments in 2010 rose a modest 0.4% when compared to 2009.  Factors that may favorably impact production levels in this industry include quality credit standards in the residential housing market, improved job growth, favorable changes in financing laws, new tax credits for new home buyers and other government incentives, and higher interest rates on traditional residential housing.  The Company currently estimates MH unit shipments for full year 2011 to increase in the range of approximately 0% to 10% compared to the full year 2010 level.       
 
We believe that the factors responsible for the past decade-plus decline include lack of available financing and access to the asset-backed securities markets, high vacancy rates in apartments, high levels of repossessed housing inventories, over-built housing markets in certain regions of the country that resulted in fewer sales of new manufactured homes, as well as the generally depressed economic environment.  Additionally, low conventional mortgage rates and less restrictive lending terms for residential site-built housing over much of this period contributed
 
 
to the decline as manufactured home loans generally carry a higher interest rate and less competitive terms.  Beginning in mid-1999 and continuing through 2010, the MH industry has also had to contend with credit requirements that became more stringent and a reduction in availability of lenders for manufactured homes for both retailers and dealers.  While there is demand for permanent rebuilding in areas damaged by major hurricanes in recent years, credit conditions remain adverse especially as a result of the recent credit crisis, and current overall economic conditions are not favorable in relation to the factors which will promote positive growth.  The availability of financing and access to the asset-backed securities market is still restricted, and we believe that employment growth and standard quality-oriented lending practices in the conventional site-built housing markets are needed to enable more balanced demand, thus resulting in the potential for increased production and shipment levels in the MH industry.
 
The following chart reflects the historical wholesale unit shipment levels in the MH industry from 2000 through 2010 per the Manufactured Housing Institute:
 
 
Other Markets
 
Many of our core manufacturing products, including paper/vinyl laminated panels, shelving, drawer-sides, and high-pressure laminated panels are utilized in the kitchen cabinet, store fixture and commercial furnishings, and residential furniture markets.  These markets are generally categorized by a more performance than price driven customer base, and provide an opportunity for us to diversify our clientele, while providing increased contribution to our core laminating and fabricating competencies.  While the residential furniture markets have been severely impacted by import pressures, other segments have been less vulnerable, and therefore provide opportunities for increased sales penetration and market share gains.  While demand for our products in the residential market has been adversely impacted by the severe housing downturn, long-term growth in the residential market will be based on improved job growth, low interest rates, and continuing government incentives to stimulate housing demand and reduce surplus inventory due to foreclosures, which we believe will ultimately increase the demand for our products.
 
Demand in the industrial markets in which the Company competes also fluctuates with economic cycles.  Industrial demand tends to lag the housing cycle by six to twelve months and will vary based on differences in regional economic prospects.  As a result, we believe continued focus on the industrial markets will help moderate the impact of the cyclical patterns in the RV/MH markets on our operating results.  We have the available capacity to increase industrial revenue and benefit from the diversity of multiple market segments, unique regional economies and varied customer strategies.
 
Marketing and Distribution
 
Our sales are to recreational vehicle and manufactured housing manufacturers and other industrial products manufacturers.  We have approximately 500 active customers.  We have five customers, who together accounted for approximately 59% and 53% of our consolidated net sales in 2010 and 2009, respectively.  We believe we have good relationships with our customers.
 
 
Sales to two different RV customers accounted for approximately 27% and 18%, respectively, of consolidated net sales of the Company for the year ended December 31, 2010.  For 2009, sales to two different customers in the RV market accounted for approximately 21% and 14%, respectively, and another customer in the MH market accounted for approximately 12% of consolidated net sales.  In 2008, sales to two different RV customers accounted for approximately 13% and 12%, respectively, of consolidated net sales.
 
Most products for distribution are generally purchased in carload or truckload quantities, warehoused, and then sold and delivered by us.  In addition, approximately 34% and 45% of our distribution segment’s products were shipped directly from the suppliers to our customers in 2010 and 2009, respectively.  We typically experience a one to two week delay between issuing our purchase orders and the delivery of products to our warehouses or customers.  As lead times have declined over the years, in some instances, certain customers have required same-day or next-day service.  We generally keep backup supplies of various commodity products in our warehouses to ensure that we have product on hand at all times for our distribution customers.  Our customers do not maintain long-term supply contracts, and therefore we must bear the risk of accurate advanced estimation of customer orders.  We have no significant backlog of orders.
 
We operate 11 warehouse and distribution centers and 9 manufacturing operations located in Alabama, Arizona, California, Georgia, Illinois, Indiana, Kansas, Minnesota, Oregon, Pennsylvania, Tennessee and Texas.  By using these facilities, we are able to minimize our in-transit delivery time and cost to the regional manufacturing plants of our customers.
 
Patrick does not engage in significant marketing efforts nor does it incur significant marketing or advertising expenditures other than attendance at certain trade shows and the activities of its sales personnel and the maintenance of customer relationships through price, quality of its products, service and customer satisfaction.  In our design showroom located in Elkhart, Indiana, many of our manufactured and distribution products are on display for current and potential customers.  We believe that the design showroom has provided Patrick with the opportunity to grow its market share by educating our customers regarding the style and content options that we have available and by offering custom design services to further differentiate our product lines.
 
Suppliers
 
During the year ended December 31, 2010, we purchased approximately 71% of our raw materials and distributed products from twenty different suppliers.  The five largest suppliers accounted for approximately 43% of our purchases.  Our current major material suppliers with contracts through December 31, 2011 include United States Gypsum, MJB Wood Group and Tumac Lumber Company.  We have terms and conditions with these and other suppliers that specify exclusivity in certain areas, pricing structures, rebate agreements and other parameters.
 
Materials are primarily commodity products, such as lauan, gypsum, particleboard, and other lumber products, which are available from many suppliers.  We maintain a long-term supply agreement with one of our major suppliers of materials to the MH industry.  Our sales in the short-term could be negatively impacted in the event any unforeseen negative circumstances were to affect our major supplier.  We believe that we have a good relationship with this supplier and all of our other suppliers.  Alternate sources of supply are available for all of our major material purchases.
 
Regulation and Environmental Quality
 
The Company’s operations are subject to certain Federal, state and local regulatory requirements relating to the use, storage, discharge and disposal of hazardous chemicals used during their manufacturing processes.  Over the past several years, Patrick has taken a proactive role in certifying that the composite wood substrate materials that it uses to produce products for its customers in the RV marketplace have complied with applicable emission standards developed by the California Air Resources Board (“CARB”).  All suppliers and manufacturers of composite wood materials are required to comply with the current CARB regulations.
 
We believe that we are currently operating in compliance with applicable laws and regulations and have made reports and submitted information as required.  The Company believes that the expense of compliance with these laws and
 
 
regulations with respect to environmental quality, as currently in effect, will not have a material adverse effect on its financial condition or competitive position, and will not require any material capital expenditures for plant or equipment modifications which would adversely affect earnings.
 
Seasonality
 
Manufacturing operations in the RV and MH 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.  However, seasonal industry trends have been different than in prior years primarily due to depressed economic conditions for both industries during most of 2009 and increased demand from RV dealers since the fourth quarter of 2009.
 
Employees
 
As of December 31, 2010, we had 668 employees, 565 of which were engaged directly in production, warehousing, and delivery operations; 38 in sales; and 65 in office and administrative activities.  There were no manufacturing plants or distribution centers covered by collective bargaining agreements.  Patrick continuously reviews benefits and other matters of interest to its employees and considers its relations with its employees to be good.
 
Executive Officers of the Company
 
The following table sets forth our executive officers as of December 31, 2010:
 
Name
Position
Todd M. Cleveland
President and Chief Executive Officer
Andy L. Nemeth
Executive Vice President of Finance, Chief Financial Officer, and Secretary-Treasurer
Jeffrey M. Rodino
Vice President of Sales – Midwest
James S. Ritchey
Vice President of Sales - South and West
Courtney A. Blosser
Vice President of Human Resources

Todd M. Cleveland (age 42) was appointed Chief Executive Officer as of February 1, 2009.  Mr. Cleveland assumed the position of President and Chief Operating Officer of the Company in May 2008.  Prior to that, Mr. Cleveland served as Executive Vice President of Operations and Sales and Chief Operating Officer from August 2007 to May 2008 following the acquisition of Adorn by Patrick in May 2007.  Mr. Cleveland spent 17 years with Adorn serving as President and Chief Executive Officer since 2004; President and Chief Operating Officer from 1998 to 2004; Vice President of Operations and Chief Operating Officer from 1994 to 1998; Sales Manager from 1992 to 1994; and Purchasing Manager from 1990 to 1992.  Mr. Cleveland has over 20 years of manufactured housing, recreational vehicle, and industrial experience in various operating capacities.
 
Andy L. Nemeth (age 41) 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 2003 to 2004, and Secretary-Treasurer from 2002 to 2003.  Mr. Nemeth was a Division Controller from 1996 to 2002 and prior to that, he spent five years in public accounting with Coopers & Lybrand (now PricewaterhouseCoopers).  Mr. Nemeth has over 19 years of manufactured housing, recreational vehicle, and industrial experience in various financial capacities.
 
Jeffrey M. Rodino (age 40) was appointed Vice President Sales for the Midwest as of August 2009 and elected an Officer in May 2010.  Prior to that, Mr. Rodino served in a variety of top level Sales and Marketing roles after joining Patrick and also held similar key sales positions during his tenure with Adorn from 2001 until May 2007, when Adorn was acquired by Patrick. Mr. Rodino has 17 years of experience in serving the recreational vehicle, manufacturing housing and industrial markets having held key sales management roles at ASA Electronics, Design Components (a former acquisition of Adorn), Odyssey Group/Blazon International Group, and at Adorn and Patrick.

James S. Ritchey (age 60) was appointed Vice President Sales for the South & West as of August 2009 and elected an Officer in May 2009.  Prior to that, Mr. Ritchey served in a variety of top level Sales and Marketing roles after
 
 
joining Patrick and also held similar key sales positions during his tenure with Adorn from 2001 until May 2007, when Adorn was acquired by Patrick.  Mr. Ritchey has a total of 13 years of experience in serving the manufactured housing, recreational vehicle and industrial markets having held key sales management roles at Décor Gravure, Design Components (both former acquisitions of Adorn), and at Adorn and Patrick.  Mr. Ritchey’s background and experience also includes several key management roles in the office furniture industry over a 22 year span starting in 1974.
 
Courtney A. Blosser (age 44) was appointed Vice President of Human Resources as of October 2009 and elected an Officer in May 2010.  Prior to that, Mr. Blosser served in executive level human resource leadership roles which included Corporate Director-Human Resources, Whirlpool Corporation from 2008 to 2009, and Vice President-Human Resources, Pfizer Inc. from 1999 to 2008.  Mr. Blosser held human resource leadership roles of increasing responsibility with JM Smucker Company from 1989 to 1999.  Mr. Blosser has over 22 years of operations and human resource experience in various industries.
 
Website Access to Company Reports
 
We make available free of charge through our website, www.patrickind.com, 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 or furnished to the Securities and Exchange Commission (“SEC).  The charters of our Audit, Compensation, and Corporate Governance/Nominations Committees, our Corporate Governance Guidelines, our Code of Ethics and Business Conduct, and our Code of Ethics Applicable to Senior Executives are also available on the “Corporate Governance” portion of our website.  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.

Additionally, the public may read or copy any materials we file with the SEC at the SEC's public reference room located at 100 F Street N.E., Washington D.C. 20549.  The public may obtain information on the operation of the public reference room by calling the SEC at 1-800-SEC-0330.  The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov.
 
ITEM 1A.                RISK FACTORS
 
The Company’s consolidated results of operations, financial position and cash flows can be adversely affected by various risks related to its business.  These risks include, but are not limited to, the principal factors listed below and the other matters set forth in this Annual Report on Form 10-K.  All of these risks should be carefully considered.
 
Our results of operations have been, and may continue to be, adversely impacted by the effects of the recent worldwide macroeconomic downturn.
 
In 2009 and part of 2010, general worldwide economic conditions continued to experience a downturn due to the effects of the deterioration in the residential housing market, subprime lending crisis, general credit market crisis, collateral effects on the finance and banking industries, increased commodity costs, volatile energy costs, concerns about inflation, slower economic activity, decreased consumer confidence, reduced corporate profits and capital spending, adverse business conditions and liquidity concerns  (the “economic crisis”).  These conditions adversely affected demand in the three major end-markets we serve (the recreational vehicle (“RV”), manufactured housing (“MH”) and industrial markets) in 2009 resulting in decreased sales of our component products into these markets.  Although economic conditions improved in 2010 and, as a result our sales, operating income, and cash flows improved when compared to 2009, a further deterioration in these conditions could negatively affect our operations and result in lower sales, income, and cash flows in the future.

In addition, it is still difficult at times for our customers and us to accurately forecast and plan future business activities.  If our business conditions warrant, we may be forced to close and/or consolidate certain of our operating facilities, sell assets, and/or reduce our workforce, which may result in our incurring restructuring charges.  We cannot predict the duration of the economic downturn, the timing or strength of a subsequent economic recovery or the
 
 
extent to which the economic downturn will continue to negatively impact our business, financial condition and results of operations.
 
The continuing downturn in the residential housing market has had an adverse impact on our operations, and is expected to continue into 2011.
 
The residential housing market has experienced overall declines and credit concerns that are expected to continue into 2011.  Approximately 60% of our industrial revenue in 2010 is directly or indirectly influenced by conditions in the residential housing market.  The decline in demand for residential housing and the tightening of consumer credit have lowered demand for our industrial products and have had an adverse impact on our operations as a whole.  In addition, the impact of the sub-prime mortgage crisis and housing downturn on consumer confidence, discretionary spending, and general economic conditions has decreased and may continue to decrease demand for our products sold to the MH and RV industries.

We may incur significant charges or be adversely impacted by the closure of all or part of a manufacturing or distribution facility.
 
We periodically assess the cost structure of our operating facilities to distribute and/or manufacture and sell our products in the most efficient manner.  Our manufacturing and distribution facilities in Woodburn, Oregon and Fontana, California were sold in February and March 2010, respectively, and we are currently operating in the same facilities under a lease agreement with the purchasers for the use of a portion of the square footage previously occupied.  We incurred charges in the first quarter of 2010 related to downsizing our operations in the California facility and to accommodate the use of this facility by two different parties.  In addition, in April 2010, we closed our manufacturing division in Madisonville, Tennessee and consolidated operations into the existing owned Mt. Joy, Pennsylvania manufacturing facility in order to offset a sizable reduction in sales volumes that stemmed from the adoption of a new vertical integration strategy by one of our key manufactured housing customers in Tennessee who began to produce and supply its own interior home components.   In October 2010, we sold the RV and MH business related to our Oregon manufacturing division to a third party in order to realign company assets.

Based on our assessments and if required by business conditions, we may make capital investments to move, discontinue manufacturing and/or distribution capabilities, sell or close all or part of additional manufacturing and/or distribution facilities in the future.  These changes could result in significant future charges or disruptions in our operations, and we may not achieve the expected benefits from these changes which could result in an adverse impact on our operating results, cash flows and financial condition.

The financial condition of our customers and suppliers may deteriorate as a result of the current economic environment and competitive conditions in their markets.
 
The lingering effects of the recent economic crisis may lead to increased levels of restructurings, bankruptcies, liquidations and other unfavorable events for our customers, suppliers and other service providers and financial institutions with whom we do business.  Such events could, in turn, negatively affect our business either through loss of sales or inability to meet our commitments (or inability to meet them without excess expense) because of loss of suppliers or other providers.  In addition, several of our major customers are undergoing unprecedented financial distress which may result in such customers undergoing major restructuring, reorganization or other significant changes.  The occurrence of any such event could have further adverse consequences to our business including a decrease in demand for our products.  If such customers become insolvent or file for bankruptcy, our ability to recover accounts receivables from those customers would be adversely affected and any payments we received in the preference period prior to a bankruptcy filing may be potentially recoverable by the bankruptcy trustee.

Many of our customers participate in highly competitive markets, and their financial condition may deteriorate as a result.  A decline in the financial condition of our customers could hinder our ability to collect amounts owed by customers.  In addition, such a decline could result in lower demand for our products and services.

 
Although we have a number of large customers, a limited number of customers account for a significant percentage of the Company’s sales and the loss of several significant customers could have a material adverse impact on our operating results.
 
We have a number of customers that account for a significant percentage of our net sales.  Specifically, two customers in the RV market accounted for a combined 45% of consolidated net sales in 2010.  The loss of any of our large customers could have a material adverse impact on our operating results.  We do not have long-term agreements with customers and cannot predict that we will maintain our current relationships with these customers or that we will continue to supply them at current levels.

The manufactured housing and recreational vehicle industries are highly competitive and some of our competitors may have greater resources than we do.
 
We operate in a highly competitive business environment and our sales could be negatively impacted by our inability to maintain or increase prices, changes in geographic or product mix, or the decision of our customers to purchase our competitors’ products instead of our products.  We compete not only with other suppliers to the RV and MH  producers but also with suppliers to traditional site-built homebuilders and suppliers of cabinetry and flooring.  Sales could also be affected by pricing, purchasing, financing, advertising, operational, promotional, or other decisions made by purchasers of our products.  Additionally, we cannot control the decisions made by suppliers of our distributed and manufactured products and therefore, our ability to maintain our exclusive and non-exclusive distributor contracts and agreements may be adversely impacted.
 
The greater financial resources or the lower amount of debt of certain of our competitors may enable them to commit larger amounts of capital in response to changing market conditions.  Certain competitors may also have the ability to develop innovative new products that could put the Company at a competitive disadvantage.  If we are unable to compete successfully against other manufacturers and suppliers to the RV and MH industries, we could lose customers and sales could decline, or we will not be able to improve or maintain profit margins on sales to customers or be able to continue to compete successfully in our core markets.
 
Seasonality and cyclical economic conditions affect the RV and MH markets the Company serves.
 
The RV and MH markets are cyclical and dependent upon various factors, including the general level of economic activity, consumer confidence, interest rates, access to financing, inventory and production levels, and the cost of fuel.  Economic and demographic factors can cause substantial fluctuations in production, which in turn impact sales and operating results.  Demand for recreational vehicles and manufactured housing generally declines during the winter season.  Our sales levels and operating results could be negatively impacted by changes in any of these items.  Consequently, the results for any prior period may not be indicative of results for any future period.
 
The cyclical nature of the domestic housing market has caused our sales and operating results to fluctuate.  These fluctuations may continue in the future, which could result in operating losses during downturns.
 
The U.S. housing industry is highly cyclical and is influenced by many national and regional economic and demographic factors, including:
 
 
·
terms and availability of financing for homebuyers and retailers;
 
·
consumer confidence;
 
·
interest rates;
 
·
population and employment trends;
 
·
income levels;
 
·
housing demand; and
 
·
general economic conditions, including inflation, deflation and recessions.
 
The RV and MH industries and the industrial markets are affected by the fluctuations in the residential housing market.  As a result of the foregoing factors, our sales and operating results fluctuate, and we expect that they will continue to fluctuate in the future.  Moreover, cyclical and seasonal downturns in the residential housing market may cause us to experience operating losses.
 
 
Fuel shortages or higher prices for fuel have had, and could continue to have, an adverse impact on our operations.
 
The products produced by the RV industry typically require gasoline or diesel fuel for their operation, or the use of a vehicle requiring gasoline or diesel fuel for their operation.  There can be no assurance that the supply of gasoline and diesel fuel will continue uninterrupted or that the price or tax on fuel will not significantly increase in the future.  Shortages of gasoline and diesel fuel have had a significant adverse effect on the demand for recreational vehicles in the past and would be expected to have a material adverse effect on demand in the future.  Rapid significant increases in fuel prices, as we experienced in recent years and are currently experiencing, appear to affect the demand for recreational vehicles when gasoline prices reach unusually high levels.  Such a reduction in overall demand for recreational vehicles could have a materially adverse impact on our revenues and profitability.  Approximately 58% and 44% of our sales were to the RV industry for 2010 and for 2009, respectively.  In 2011, we expect an even higher percentage of our total sales to be concentrated in the RV industry than in 2010 primarily due to forecasted growth in the RV industry.
 
We are dependent on third-party suppliers and manufacturers.
 
Generally, our raw materials, supplies and energy requirements are obtained from various sources and in the quantities desired.  While alternative sources are available, our business is subject to the risk of price increases and periodic delays in the delivery.  Fluctuations in the prices of these requirements may be driven by the supply/demand relationship for that commodity or governmental regulation.  In addition, if any of our suppliers seek bankruptcy relief or otherwise cannot continue their business as anticipated, the availability or price of these requirements could be adversely affected.
 
The increased cost and limited availability of raw materials may have a material adverse effect on our business and results of operations.
 
Prices of certain materials, including gypsum, lauan, particleboard, MDF, and other commodity products, can be volatile and change dramatically with changes in supply and demand.  Certain products are purchased from overseas and are dependent upon vessel shipping schedules and port availability.  Further, certain of our commodity product suppliers sometimes operate at or near capacity, resulting in some products having the potential of being put on allocation.  We generally have been able to maintain adequate supplies of materials and to pass higher material costs on to our customers in the form of surcharges and base price increases where needed.  However, it is not certain that future price increases can be passed on to our customers without affecting demand or that limited availability of materials will not impact our production capabilities.  The recent credit crisis and its continuing impact on the financial and housing markets may also impact our suppliers and affect the availability or pricing of materials.  Our sales levels and operating results could be negatively impacted by changes in any of these items.
 
We are subject to governmental and environmental regulations, and failure in our compliance efforts could result in damages, expenses or liabilities that individually or in the aggregate would have a material adverse affect on our financial condition and results of operations.
 
Our manufacturing businesses are subject to various governmental and environmental regulations.  Implementation of new regulations or amendments to existing regulations could significantly increase the cost of the Company’s products.  Certain components of manufactured and modular homes are subject to regulation by the U.S. Consumer Product Safety Commission.  We currently use materials that we believe comply with government regulations.  We cannot presently determine what, if any, legislation may be adopted by Congress or state or local governing bodies, or the effect any such legislation may have on us or the MH industry.  In addition, failure to comply with present or future regulations could result in fines or potential civil or criminal liability.  Both scenarios could negatively our results of operations or financial condition.
 
The inability to attract and retain qualified executive officers and key personnel may adversely affect our operations.
 
The loss of any of our executive officers or other key personnel could reduce our ability to manage our business and strategic plan in the short term and could cause our sales and operating results to decline.
 
 
Our ability to integrate acquired businesses may adversely affect operations.
 
As part of our business and strategic plan, we look for strategic acquisitions to provide shareholder value.  Any acquisition will require the effective integration of an existing business and its administrative, financial, sales and marketing, manufacturing and other functions to maximize synergies.  Acquired businesses involve a number of risks that may affect our financial performance, including increased leverage, diversion of management resources, assumption of liabilities of the acquired businesses, and possible corporate culture conflicts.  If we are unable to successfully integrate these acquisitions, we may not realize the benefits identified in our due diligence process, and our financial results may be negatively impacted.  Additionally, significant unexpected liabilities could arise from these acquisitions.
 
Increased levels of indebtedness may harm our financial condition and results of operations.
 
At December 31, 2010, we had approximately $36.2 million of total debt under our senior secured credit facility (the “Credit Facility”).  Our indebtedness, which was primarily the result of the Adorn acquisition in 2007, as well as a greater need for working capital, may harm our financial condition and negatively impact our results of operations.  The level of indebtedness could have consequences on our future operations, including (i) making it more difficult for us to meet our payments on outstanding debt; (ii) an event of default, if we fail to comply with the financial and other restrictive covenants contained in the Credit Agreement dated May 17, 2007 (the “Credit Agreement”) governing the Credit Facility, which could result in all of our debt becoming immediately due and payable; (iii) reducing the availability of our cash flow to fund working capital, capital expenditures, acquisitions and other general corporate purposes, and limiting our ability to obtain additional financing for these purposes; (iv) limiting our flexibility in planning for, or reacting to, and increasing our vulnerability to, changes in our business and the industry in which we operate; (v) placing us at a competitive disadvantage compared to our competitors that have less debt or are less leveraged; and (vi) creating concerns about our credit quality which could result in the loss of supplier contracts and/or customers.  Although the Company’s current lenders extended our existing Credit Facility to May 31, 2011 as modified by the Fifth Amendment to the Credit Agreement in December 2010 (the “Fifth Amendment”) in order to allow us to execute a new long-term credit facility, there can be no assurance that we will be able to refinance any or all of this indebtedness. We are currently negotiating a new long-term credit facility, as well as a subordinated debt financing required in connection with such facility.  The level of indebtedness under any new credit facility could have consequences to our future operations comparable to those described above.
 
Our current Credit Agreement contains various financial performance and other covenants with which we must remain in compliance.  If we do not remain in compliance with these covenants, our Credit Agreement could be terminated and the amounts outstanding thereunder could become immediately due and payable.  Any new credit facility will likewise contain various performance and other covenants and any breaches of those covenants could cause acceleration of debt beyond the Company’s ability to fund such debt.
 
We have a significant amount of debt outstanding that contains financial and non-financial covenants with which we must comply that place restrictions on us.  There can be no assurance that we will maintain compliance during 2011 with the financial covenants as modified by the Fifth Amendment. These covenants are measured on a quarterly basis and require that we attain minimum levels of Consolidated EBITDA as defined by our Credit Agreement.  In addition, there can be no assurance that we will maintain compliance during 2011 with the financial covenants contained in any new credit agreement that we may enter into to replace or refinance the existing Credit Facility.  If we fail to comply with our covenants under the Fifth Amendment and/or under any new credit agreement, the lenders could cause our debt to become due and payable prior to maturity or it could result in our having to refinance the related indebtedness under unfavorable terms.  If our debt were accelerated, our assets might not be sufficient to repay our debt in full.  If current unfavorable credit market conditions were to persist throughout 2011, there can be no assurance that we will be able to refinance any or all of this indebtedness.
 
For additional details and discussion concerning these financial covenants see “Liquidity and Capital Resources” in Item 7 of this Report and Note 12 to the Consolidated Financial Statements.
 

Industry conditions and our operating results have limited our sources of capital in the past.  If we are unable to locate suitable sources of capital when needed, we may be unable to maintain or expand our business.
 
We depend on our cash balances, our cash flows from operations, our existing Credit Facility, and any new credit facility going forward, and borrowing against our corporate-owned life insurance policies to finance our operating requirements, capital expenditures and other needs.  If the general economic conditions that prevailed during 2009 and 2010 continue or worsen, production of RVs and manufactured homes will likely decline, resulting in reduced demand for our products.  A further decline in our operating results could negatively impact our liquidity.  In addition, the downturn in the RV and MH industries, combined with our operating results and other changes, limited our sources of financing in the past.  If our cash balances, cash flows from operations, and availability under our Credit Agreement or any new credit agreement, are insufficient to finance our operations and alternative capital is not available, we may not be able to expand our business and make acquisitions, or we may need to curtail or limit our existing operations.
 
We have letters of credit representing collateral for our casualty insurance programs and for general operating purposes.  The letters of credit are issued under our Credit Agreement.  For additional detail and information concerning the amounts of our letters of credit, see Note 12 to the Consolidated Financial Statements.  The inability to retain our current letters of credit, to obtain alternative letter of credit sources, or to retain our current Credit Agreement to support these programs could require us to post cash collateral, reduce the amount of cash available for our operations or cause us to curtail or limit existing operations.
 
Increased levels of inventory may adversely affect our profitability.
 
Our customers generally do not maintain long-term supply contracts and, therefore, we must bear the risk of advanced estimation of customer orders.  We maintain an inventory to support these customers’ needs.  Changes in demand, market conditions and/or product specifications could result in material obsolescence and a lack of alternative markets for certain of our customer specific products and could negatively impact operating results.
 
We may be subject to additional charges for impairment of assets, including goodwill and other long-lived assets, due to potential declines in the fair value of those assets or a decline in expected profitability of the Company or individual reporting units of the Company.
 
A portion of our total assets as of December 31, 2010 was comprised of goodwill, amortizable intangible assets, and property, plant and equipment.  Under generally accepted accounting principles, each of these assets is subject to periodic review and testing to determine whether the asset is recoverable or realizable.  The events or changes that could require us to test our goodwill and intangible assets for impairment include a reduction in our stock price and market capitalization and changes in our estimated future cash flows, as well as changes in rates of growth in our industry or in any of our reporting units.

In the future, if actual sales demand or market conditions change from those projected by management, additional asset write-downs may be required.  Significant impairment charges, although not always affecting current cash flow, could have a material effect on our operating results and financial position.

A variety of factors could influence fluctuations in the market price for our common stock.
 
The market price of our common stock could fluctuate in the future in response to a number of factors, including those discussed below.  The market price of our common stock has in the past fluctuated and is likely to continue to fluctuate.  Some of the factors that may cause the price of our common stock to fluctuate include:
 
 
·
variations in our and our competitors’ operating results;
 
 
·
historically low trading volume;
 
 
·
high concentration of shares held by institutional investors and in particular our majority shareholder, Tontine Capital Partners, L.P. and affiliates (collectively, “Tontine Capital”);
 
 
 
·
announcements by us or our competitors of significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments;
 
 
·
the gain or loss of significant customers;
 
 
·
additions or departure of key personnel;
 
 
·
events affecting other companies that the market deems comparable to us;
 
 
·
general conditions in industries in which we operate;
 
 
·
general conditions in the United States and abroad;
 
 
·
the presence or absence of short selling of our common stock;
 
 
·
future sales of our common stock or debt securities;
 
 
·
announcements by us or our competitors of technological improvements or new products; and
 
 
·
the sale by Tontine Capital or its announcement of an intention to sell, all or a portion of its equity interests in the Company.
 
Fluctuations in the stock market may have an adverse effect upon the price of our common stock.
 
The stock markets in general have experienced substantial price and trading fluctuations.  These fluctuations have resulted in volatility in the market prices of securities that often has been unrelated or disproportionate to changes in operating performance.  These broad market fluctuations may adversely affect the trading price of our common stock.
 
Holders of our common stock are subject to the risk of dilution of their investment as the result of the issuance to our lenders of warrants to purchase common stock.
 
As part of the consideration for amending our Credit Agreement on December 11, 2008, we entered into a Warrant Agreement under which we issued to our lenders warrants to purchase an aggregate of 474,049 shares of common stock at an exercise price per share of $1 (the “Warrants”).  The Warrants are immediately exercisable, subject to anti-dilution provisions and expire on December 11, 2018.  Pursuant to the anti-dilution provisions, the number of shares of common stock issuable upon exercise of the Warrants was increased to an aggregate of 483,742 shares and the exercise price was adjusted to $0.98 per share during 2009.  The exercise of the Warrants would result in dilution to the holders of our common stock.  The renegotiation and extension of our current Credit Facility that expires on May 31, 2011, or any replacement credit facility, could involve the issuance of additional warrants or other equity-based arrangements, which would result in additional dilution to the holders of our common stock and could require a further adjustment to the Warrants pursuant to the anti-dilution provisions. The Company and an affiliate of Tontine Capital have executed a commitment letter whereby the Tontine Capital affiliate would provide all or a portion of the subordinated debt financing required in connection with any new credit facility.  It is expected that warrants to purchase 50,000 shares of common stock,  at an exercise price of $0.01 per share and with a term of five years, will be issued for each $1,000,000 of original principal amount of subordinated debt provided (currently expected to be approximately 250,000 shares in the aggregate).
 
A majority of our common stock is held by Tontine Capital, which has the ability to control all matters requiring shareholder approval and whose interests may not be aligned with the interests of our other shareholders.  In addition, the ownership of a significant portion of our common stock is concentrated in the hands of a few holders.
 
As of March 11, 2011, Tontine Capital owned 5,174,963 shares of our common stock or approximately 54.7% of our total common stock outstanding.  As a result of its majority interest, Tontine Capital has the ability to control all matters requiring shareholder approval, including the election of our directors, the adoption of amendments to our Articles of Incorporation, the approval of mergers and sales of all or substantially all of our assets, decisions affecting our capital structure and other significant corporate transactions.  In addition to its majority interest, pursuant to a Securities Purchase Agreement with Tontine Capital, dated April 10, 2007, if Tontine Capital (i) holds between 7.5% and 14.9% of our common stock then outstanding, Tontine Capital has the right to appoint one nominee to our board; or (ii) holds at least 15% of our common stock then outstanding, Tontine Capital has the right to appoint two
 
 
nominees to our board.  Tontine Capital’s rights related to the appointment of directors were affirmed in a subsequent Securities Purchase Agreement with Tontine Capital, dated March 10, 2008.  On July 21, 2008, a nominee of Tontine Capital was appointed to the board.  As of March 11, 2011, Tontine Capital has one director on the Company’s board of directors and has not exercised its right to nominate a second director to the board.
 
The Company and an affiliate of Tontine Capital have executed a commitment letter whereby the Tontine Capital affiliate would provide all or a portion of the subordinated debt financing required in connection with any new credit facility.  It is expected that a warrant to purchase common stock will be issued in connection with the subordinated debt, which could increase the ownership of our common stock by Tontine Capital.
 
The interests of Tontine Capital may not in all cases be aligned with the interests of our other shareholders.  The influence of Tontine Capital may also have the effect of deterring hostile takeovers, delaying or preventing changes in control or changes in management, or limiting the ability of our shareholders to approve transactions that they may deem to be in their best interests.  In addition, Tontine Capital and its affiliates are in the business of investing in companies and may, from time to time, invest in companies that compete directly or indirectly with us.  Tontine Capital and its affiliates may also pursue acquisition opportunities that may be complementary to our business and, as a result, those acquisition opportunities may not be available to us.
 
We are not able to predict whether or when Tontine Capital or the other institutions will sell or otherwise dispose of substantial amounts of our common stock.  Sales or other dispositions of our common stock by these institutions could adversely affect prevailing market prices for our common stock.
 
In addition, we are aware of one other institution that owned approximately 6% of our outstanding common stock as of December 31, 2010.
 
Tontine Capital indicated in a filing with the SEC in November 2008 that it would begin to explore alternatives for the disposition of its equity interests in the Company.  This filing, and any future dispositions of stock by Tontine Capital, could adversely affect the market price of our common stock.
 
On November 10, 2008, Tontine Capital filed with the SEC an amendment to its previously filed Schedule 13D with respect to its ownership of common stock of the Company.  Tontine Capital stated that it would begin to explore alternatives for the disposition of its equity interests in the Company, which alternatives may include: (a) dispositions of our common stock through open market sales, underwritten offerings and/or privately negotiated sales; (b) a sale of the Company; or (c) distributions by Tontine Capital of its shares to its investors.  The public disclosure of such possible disposition may adversely affect the market price for our common stock due to the large number of shares involved.  In addition, we are not able to predict whether or when Tontine Capital will dispose of its stock.  Any such future disposition of stock by Tontine Capital may also adversely affect the market price of our common stock.
 
In March 2010, Tontine Capital disclosed that it had reallocated the ownership of certain shares of common stock of the Company owned by it to a new investment fund, Tontine Capital Overseas Master Fund II, L.P. (“TCOMF2”).  The aggregate common stock ownership of Tontine Capital following the reallocation did not change.  In addition, Tontine Capital disclosed that TCOMF2 may hold and/or dispose of such securities or may purchase additional securities of the Company, at any time and from time to time in the open market or otherwise.
 
Certain provisions in our Articles of Incorporation and Amended and Restated By-laws may delay, defer or prevent a change in control that our shareholders each might consider to be in their best interest.
 
Our Articles of Incorporation and Amended and Restated By-laws contain provisions that are intended to deter coercive takeover practices and inadequate takeover bids by making them unacceptably expensive to the raider, and to encourage prospective acquirers to negotiate with our board of directors rather than to attempt a hostile takeover.
 
We have in place a Rights Agreement which permits under certain circumstances each holder of common stock, other than potential acquirers, to purchase one one-hundredth of a share of a newly created series of our preferred stock at a purchase price of $30 or to acquire additional shares of our common stock at 50% of the current market price.  The
 
 
rights are not exercisable or transferable until a person or group acquires 20% or more of our outstanding common stock, except with respect to Tontine Capital and its affiliates and associates, which are exempt from the provisions of the Rights Agreement pursuant to an amendment signed on March 12, 2008.  The effects of the Rights Agreement would be to discourage a stockholder from attempting to take over our company without negotiating with our Board of Directors.
 
Conditions within the insurance markets could impact our ability to negotiate favorable terms and conditions for various liability coverages and could potentially result in uninsured losses.
 
We negotiate our insurance contracts annually for property, casualty, workers compensation, general liability, health insurance, and directors’ and officers’ liability coverage.  Due to conditions within these insurance markets and other factors beyond our control, future coverage limits, terms and conditions and the amount of the related premiums could have a negative impact on our operating results.  While we continually measure the risk/reward of policy limits and coverage, the lack of coverage in certain circumstances could result in potential uninsured losses.
 
ITEM 1B.               UNRESOLVED STAFF COMMENTS
 
None.
 
ITEM 2.                  PROPERTIES 
 
As of December 31, 2010, the Company owned approximately 868,000 square feet of manufacturing and distribution facilities and leased an additional 667,800 square feet as listed below.

Location
Use
Area Sq. Ft.
Ownership or Lease Arrangement
Elkhart, IN
Distribution
107,000
Owned
Elkhart, IN
Manufacturing
182,000
Owned
Elkhart, IN
Administrative Offices
35,000
Owned
Elkhart, IN
Manufacturing
211,300
Leased to 2015
Elkhart, IN
Manufacturing & Distribution
198,000
Leased to 2018
Elkhart, IN
Design Center
4,000
Leased to 2013
Decatur, AL
Manufacturing & Distribution
94,000
Owned
Valdosta, GA
Distribution
31,000
Owned
Halstead, KS
Distribution
36,000
Owned
Waco, TX
Manufacturing & Distribution
131,000
Owned
Mt. Joy, PA
Manufacturing
33,000
Owned
Mt. Joy, PA
Distribution
56,000
Owned
Fontana, CA
Manufacturing & Distribution
72,500
Leased to 2012
Phoenix, AZ
Manufacturing
44,600
Leased to 2011
Bensenville, IL
Manufacturing
54,400
Leased to 2013
Madisonville, TN
Distribution
53,000
Leased (1)
Woodburn, OR
Distribution
30,000
Leased to 2011
New London, NC
 
163,000
Owned (2)

 
(1)
Leased on a month-to-month basis beginning in January 2011.
 
(2)
Represents an owned building, formerly used for manufacturing and distribution, that is currently leased to a third party through July 2012.
 
Pursuant to the terms of the Company’s Credit Agreement, all of its owned facilities are subject to a mortgage and security interest.

In addition, we utilize one contract warehouse located in Minnesota that houses certain of our distribution products inventory.  Remuneration to the third party owner of this facility consists of a percentage of sales to our customers from this facility in exchange for storage space and delivery services.

 
Lease Expirations
 
We believe that the facilities we occupy as of December 31, 2010 are adequate for the purposes for which they are currently being used and are well maintained.  We may, as part of our strategic operating plan, further consolidate and/or close certain owned facilities and, may not renew leases on property with near-term lease expirations.  Use of our manufacturing facilities may vary with seasonal, economic and other business conditions.
 
As of December 31, 2010, we owned or leased 15 trucks, 36 tractors, 44 trailers, 108 forklifts, and 3 automobiles.  All owned and leased facilities and equipment are in good condition and are well maintained.
 
ITEM 3.                  LEGAL PROCEEDINGS
 
We are 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 our financial condition, results of operations, or cash flows.
 
PART II
 
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
 
Market Information
 
Our common stock is listed on The NASDAQ Global Stock MarketSM under the symbol PATK.  The high and low trade prices per share of the Company’s common stock as reported on NASDAQ for each quarterly period during 2010 and 2009 were as follows:
 
   
1st Quarter
   
2nd Quarter
   
3rd Quarter
   
4th Quarter
 
2010
  $ 3.24 - $ 2.43     $ 3.69 - $ 2.20     $ 3.00 - $ 1.80     $ 2.32 - $ 1.67  
2009
  $ 0.80 - $ 0.01     $ 1.74 - $ 0.34     $ 5.00 - $ 1.05     $ 3.95 - $ 1.70  

The quotations represent prices between dealers, do not include retail mark-ups, mark-downs, or commissions, and may not necessarily represent actual transactions.

Holders of Common Stock
 
As of March 11, 2011, we had approximately 350 shareholders of record and approximately 1,400 beneficial holders of our common stock.
 
Dividends
 
The Board of Directors suspended the quarterly dividend in the second quarter of 2003 due to industry conditions and has not paid a dividend since that time.  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, restrictions under the Company’s Credit Agreement, and such other factors as the Board of Directors deems relevant.
 
Purchases of Equity Securities by the Issuer or Affiliated Purchasers
 
During the fourth quarter of 2010, neither the Company, nor any affiliated purchaser, repurchased any of the Company’s common stock.
 
 
ITEM 6.                  SELECTED FINANCIAL DATA
 
Not applicable.
 
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the Company’s Consolidated Financial Statements and Notes thereto included in Item 8 of this Report.  In addition, this MD&A contains certain statements relating to future results which are forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995.  See “Information Concerning Forward-Looking Statements” on page 3 of this Report.
 
This MD&A is divided into seven major sections.  The outline for our MD&A is as follows:
 
 
EXECUTIVE SUMMARY
 
Company Overview and Business Segments
 
Overview of Markets and Related Industry Performance
 
Acquisitions and Sales/Consolidations of Facilities
 
Summary of 2010 Financial Results
 
2010 Initiatives and Challenges
 
Fiscal Year 2011 Outlook
 
 
KEY RECENT EVENTS
 
Majority Shareholder Proposed Acquisition of Secured Senior Subordinated Notes of Company
 
Credit Agreement Amendment
 
Senior Secured Credit Facility Financing Proposal
 
 
CONSOLIDATED OPERATING RESULTS
 
General
 
Year Ended December 31, 2010 Compared to 2009
 
Year Ended December 31, 2009 Compared to 2008
 
 
BUSINESS SEGMENTS
 
General
 
Year Ended December 31, 2010 Compared to 2009
 
Year Ended December 31, 2009 Compared to 2008
 
 
LIQUIDITY AND CAPITAL RESOURCES
 
Cash Flows
 
Capital Resources
 
Summary of Liquidity and Capital Resources
 
Contractual Obligations
 
Off-Balance Sheet Arrangements
 
 
CRITICAL ACCOUNTING POLICIES
 
 
OTHER
 
Sale of Property
 
Purchase of Property
 
Inflation
 
 
EXECUTIVE SUMMARY
 
Company Overview and Business Segments
 
Patrick is a major manufacturer of component products and distributor of building products serving the recreational vehicle (“RV”), manufactured housing (“MH”), kitchen cabinet, household furniture, fixtures and commercial furnishings, marine, and other industrial markets and operates coast-to-coast through locations in 12 states.  Patrick's major manufactured products include decorative vinyl and paper panels, wrapped profile mouldings, interior passage doors, cabinet doors and components, slotwall and slotwall components, and countertops.  The Company also distributes drywall and drywall finishing products, electronics, adhesives, wiring, electrical and plumbing products, cement siding, interior passage doors, roofing products, laminate flooring, and other related products.  The Company has two reportable business segments:  Manufacturing and Distribution, which contributed approximately 80% and 20%, respectively, to 2010 net sales.

Overview of Markets and Related Industry Performance
 
While uncertainty surrounding the future course of the global economy helped fuel the decline in our sales to the RV, MH, and industrial markets in prior periods, we have seen improvement in two of the primary markets that we serve.  The RV industry, which represented 58% of the Company’s 2010 sales, continued to strengthen in 2010 as evidenced by higher production levels and wholesale unit shipments versus the prior year period.  According to the Recreational Vehicle Industry Association (“RVIA”), shipment levels of 242,300 units in 2010 represented an increase of 46% versus the comparable prior year period reflecting five consecutive quarter over quarter increases in shipments following declines in the previous 13 fiscal quarters.  Although the 2010 year marked the third year in the last nine years that shipment levels fell below the 300,000-unit level, it represented the first year in which shipment levels increased in the last four years.  While the full restoration of RV sales to prior levels is projected to be slow, many of our existing customers have increased production and capacity as well as added to their workforce during 2010 compared to 2009.  Based on current economic conditions, we anticipate that RV shipments on an annualized basis should continue to improve over at least the next 24 to 36 months.  In the MH sector, full year 2010 unit shipments rose 0.4% compared to 2009 with nominal seasonal improvement and continue to be well below historical levels, especially given the current unstable condition in the residential housing market.  The continuation of the unfavorable macroeconomic conditions in most sectors of the economy in 2010, including restricted availability of capital, high unemployment, slow job growth, low consumer confidence levels, and continued depressed levels of discretionary spending, all contributed to the negative impact on  the three major markets the Company serves.
 
Long-term demographic trends favor RV industry growth fueled by the anticipated positive impact that aging baby boomers are estimated to have on the industry as the industry continues its recovery from the recent economic recession. Although consumers still remain cautious when deciding whether or not to purchase discretionary items such as RVs, demographic trends point to positive conditions for this particular market sector in the long-term.  As a result of the recent short-term demand strength, the RVIA is predicting a 9% increase in full year 2011 unit shipments compared to the full year 2010 level as an improving economy should help keep retail sales of RVs on an upward trend in 2011.  Based on this estimated increase in unit shipments in the RV market compared to the softness in the other primary market sectors in which Patrick operates, and the impact of the acquisitions completed in 2010, the Company expects its RV market sales concentration to increase moderately in 2011.
 
The MH industry, which represented approximately 28% of the Company’s sales in 2010, continues to be negatively impacted by a lack of financing and the availability of credit, job losses, and excess residential housing foreclosure inventories even though the industry has begun to shows signs of improvement.  According to industry sources, wholesale unit shipments of 50,000 in 2010 were basically flat compared to the 2009 level of 49,800 units, levels not seen since 1961.  Growth in the MH industry continues to be negatively impacted by restricted credit conditions, large inventories of traditional site-built homes, and a significant number of foreclosed homes that are available.  Factors that may favorably impact production levels in this industry include quality credit standards in the residential housing market, improved job growth, favorable changes in financing laws, new tax credits for new home buyers and other government incentives, and higher interest rates on traditional residential housing.  The Company currently estimates MH unit shipments for full year 2011 to increase in the range of approximately 0% to 10% compared to the full year 2010 level.
 
 
The industrial market sector, which is tied to the residential housing market and accounted for approximately 14% of the Company’s 2010 sales, also showed signs of improvement in 2010.  New housing starts for full year 2010 increased approximately 6% from the comparable period in 2009 (as reported by the U.S. Department of Commerce).  We estimate that approximately 60% of our industrial revenue base is linked to the residential housing market, and we believe that there is a direct correlation between the demand for our products in this market and new residential housing construction.  Our sales to this market generally lag new residential housing starts by six to twelve months.  While the National Association of Homebuilders (“NAHB”) has forecasted (as of February 25, 2011) a 15% increase in new housing starts and a 6% increase in existing single-family home sales in 2011 compared to 2010, we remain cautious about further growth in the industrial sector due to restricted credit conditions and current uncertainty related to general economic conditions and the large numbers of repossessed homes in the marketplace.  In the long-term, residential expenditure growth will be based on job growth, the availability of credit, affordable interest rates, and continuing government incentives to stimulate housing demand and reduce surplus inventory due to foreclosures.
 
In addition, higher energy costs continue to affect the costs of raw materials.  The Company continues to explore alternative sources of raw materials and components, both domestically and from overseas.  In the last several years, there have been concerns about the allegedly defective drywall manufactured in China and sold in the U.S.  We do not believe that we have had any exposure to such products because we purchase our drywall materials from domestic suppliers that have certified to us that their products were not manufactured in China.
 
Acquisitions and Sales/Consolidations of Facilities
 
In January 2010, the Company acquired certain assets of the cabinet door business of Quality Hardwoods Sales (“Quality Hardwoods”) for $2.0 million.  Approximately $1.3 million of intangible assets were recorded in the Manufacturing segment as a result of the acquisition.
 
In August 2010, the Company acquired certain assets of Blazon International Group (“Blazon”), a Bristol, Indiana-based distributor of wiring, electrical, plumbing and other building products to the RV and MH industries.  The final purchase price was $3.8 million.  This acquisition added new products and expanded the Company’s existing RV and MH distribution presence.  Approximately $0.9 million of goodwill and intangible assets were recorded in the Distribution segment as a result of the acquisition.  See Notes 3 and 9 to the Consolidated Financial Statements for further details regarding these acquisitions.

Certain operating facilities were either sold or consolidated during 2010 to improve operating efficiencies in the plants through increased capacity utilization and to continue the Company’s efforts to reduce its leverage position.  In the first quarter of 2010, the Company’s owned facilities in Woodburn, Oregon and Fontana, California were sold with approximately $8.3 million of the net proceeds from the sales used to pay down principal on the Company’s term loan.  In addition, the Company recorded a pretax gain on the sales of approximately $2.8 million in its first quarter 2010 operating results.  See Notes 2 and 6 to the Consolidated Financial Statements for further details.

In addition, in April 2010, we closed our manufacturing division in Madisonville, Tennessee and consolidated operations into the existing owned Mt. Joy, Pennsylvania manufacturing facility in order to offset a sizable reduction in sales volumes that stemmed from the adoption of a new vertical integration strategy by one of our key manufactured housing customers in Tennessee who began to produce and supply its own interior home components.  In October 2010, we sold the RV and MH business related to our Oregon manufacturing division to a third party in order to realign company assets.  We continue to manufacture and supply high-pressure laminate product lines to our industrial customers in this market and operate our existing Distribution branch in Oregon, which continues to service the RV and MH industries.
 
Summary of 2010 Financial Results
 
Below is a summary of our 2010 financial results.  Additional detailed discussions are provided elsewhere in this MD&A and in the Notes to the Consolidated Financial Statements.
 
 
Continuing operations:
 
·   Net sales increased $65.7 million or 30.9% in 2010 to $278.2 million, compared to $212.5 million in 2009 primarily reflecting a 46% increase in wholesale unit shipments in the RV industry in 2010 and the impact of two acquisitions completed during the year which accounted for approximately $12 million of incremental 2010 revenues.
 
·   Gross profit increased $6.7 million to $29.6 million or 10.7% of net sales in 2010, compared with gross profit of $22.9 million or 10.8% of net sales in 2009.  While sales levels improved over the prior year, cost of goods sold was negatively impacted by production inefficiencies and labor variances at our cabinet door facility as a result of significant volatility in total volumes from month-to-month resulting in lower than expected gross margins for this facility than expected.  Beginning in the fourth quarter of 2010, we made organizational changes and process and pricing improvements to improve profitability at this facility in the future, barring any unforeseen circumstances.
 
·   Operating income increased $5.1 million to $6.4 million in 2010, compared to $1.3 million in 2009.  Operating income in 2010 was positively impacted by a $2.9 million gain on the sale of fixed assets and a non-cash credit of $0.3 million related to stock warrant accounting.  Operating income in 2009 included a $1.2 million gain on the sale of fixed assets which was partially offset by a non-cash charge of $0.8 million related to stock warrant accounting.
 
·   Income from continuing operations was approximately $1.2 million or $0.12 per diluted share in 2010, compared to a net loss of $5.4 million or $0.59 per diluted share for 2009.  The major factors that influenced the net income/loss for both periods are described above.

Discontinued Operations:
 
Discontinued operations includes the operating results, as well as the net gain or loss upon sale, of American Hardwoods (January 2009) and the aluminum extrusion operation (July 2009).  After-tax income from discontinued operations in 2009 was $0.9 million or $0.10 per diluted share which was comprised of $0.8 million of income from operations related to the aluminum extrusion operation, and a $0.7 million net gain related to the completion of the two divestitures, offset by income taxes of $0.6 million.  See Note 4 to the Consolidated Financial Statements for further details.
 
2010 Initiatives and Challenges
 
In fiscal year 2010, our primary focus was on maximizing efficiencies to support the Company’s long-term strategic growth goals, managing our talent pool, and cultivating a “Customer First” performance oriented culture, and included an emphasis on earnings before interest, taxes, depreciation, and amortization (“EBITDA”), cash management, liquidity maximization, debt reduction, improved net income, focused market share growth, and the refinancing of our existing senior secured credit facility (the “Credit Facility”).

During the year, we completed a number of cost reduction and efficiency improvement initiatives designed to reduce our leverage position, keep operating costs aligned with our revenue base, and keep our overhead structure at a level consistent with our operating needs given current economic conditions.  Some of these initiatives were as follows:
 
 
·
Completed the sale of the Oregon and California facilities;
 
·
Closed/consolidated facilities to improve operating efficiencies in our plants through increased capacity utilization;
 
·
Managed inventory costs by reducing supplier lead times and minimum order requirements, and by increasing inventory turns; and
 
·
Focused on talent management and performance-based culture; added key personnel in sales and administrative positions where needed.
 
In addition, we eliminated certain product lines not fitting within the parameters of our working capital targets and enhanced other product and service offerings to the RV and MH industries through:
 
 
·
new product development and expansion into new product lines;
 
·
the acquisition of the cabinet door business of Quality Hardwoods in January 2010; and
 
·
the acquisition of various wiring, electrical lighting, plumbing and electrical products of Blazon in August 2010.
 
 
Further, the Company’s capital utilization and preservation actions during 2010 were as follows:
 
 
·
Amended our senior secured credit agreement in December 2010 to extend our Credit Facility expiration to May 31, 2011 to allow sufficient time to put in place a new facility to meet both short-term and long-term operating needs.  The amendment to the Company’s Credit Agreement (as defined) amended and/or added certain definitions, terms and reporting requirements.  See Note 12 to the Consolidated Financial Statements for further details.
 
·
Paid down $12.5 million of principal on long-term debt, of which approximately $8.3 million was funded through the net  proceeds from the sales of the Oregon and California operating facilities.  From May 2007 through December 31, 2010, we paid down approximately $69.4 million in debt.  In addition, during 2010, we increased borrowings under our revolving line of credit by $5.8 million primarily due to increased working capital requirements.

Fiscal Year 2011 Outlook
 
Although RV market conditions improved in 2010, we anticipate that the market will continue to be impacted by the residual effects of the recession and low consumer confidence during 2011, as consumers remain cautious when deciding whether or not to purchase discretionary items such as RVs.  In addition, the recent sharp increase in gasoline prices, caused in part by the political uncertainty in the Middle East, may negatively affect RV demand.  While the full restoration of RV sales to prior levels is projected to be slow and uneven, we anticipate a modest increase in RV unit shipment levels in 2011 based upon increased production levels by many of our existing customers in 2010 and the current positive outlook for this industry as forecasted by the RVIA.  In addition, we anticipate an increase in production levels in the MH industry in 2011 that will continue to be well below historical pre-2008 sales levels.  New housing starts in 2011 are estimated to improve by approximately 15% year-over-year (as forecasted by the NAHB) consistent with slowly improving overall economic conditions.
 
We believe we are well positioned to increase revenues in all of the markets that we serve as the overall economic environment improves.  As we navigate through 2011 in anticipation of sustainable improvement in market conditions in the RV industry, we will continue to review our operations on a regular basis, balance appropriate risks and opportunities, and maximize efficiencies to support the Company’s long-term strategic growth goals.  The management team remains focused on keeping costs aligned with revenue, maximizing efficiencies, and the execution of our organizational strategic agenda, and will continue to size the operating platform according to the revenue base.  Key focus areas for 2011 include EBITDA, cash management, liquidity maximization, debt reduction, improved net income, and the refinancing of our Credit Facility.  Additional key focus areas include:
 
 
·
additional market share penetration;
 
·
sales into commercial/institutional markets to diversify revenue base;
 
·
further improvement of operating efficiencies in all manufacturing operations and corporate functions;
 
·
acquisition of businesses/product lines that meet established criteria;
 
·
aggressive management of inventory quantities and pricing, and the addition of select key commodity  suppliers; and
 
·
ongoing development of existing product lines and the addition of new product lines.

In conjunction with our organizational strategic agenda, we will continue to make targeted capital investments to support new business and leverage our operating platform, and we will work to more fully integrate sales efforts to broaden customer relationships and meet customer demands.  In 2010, capital expenditures were approximately $1.4 million versus $0.3 million in 2009.  Based on the full year 2011 plan, capital expenditures are estimated to be approximately $3.8 million, which includes projected costs related to the replacement of our current management information systems.
 
KEY RECENT EVENTS
 
Majority Shareholder Proposed Acquisition of Secured Senior Subordinated Notes of Company
 
On February 28, 2011, the Company and an affiliate of Tontine Capital Partners, L.P. (collectively with its affiliates, “Tontine Capital”) entered into a preliminary non-binding letter of intent (the “Letter of Intent”) concerning the
 
proposed acquisition by Tontine Capital of up to $8.0 million of secured senior subordinated notes of the Company (the “Notes”).  The Letter of Intent was disclosed in an amendment to Tontine Capital’s previously filed Schedule 13D, which amendment was filed with the SEC on March 4, 2011. The Notes, which would be issued in connection with the refinancing of the Company’s existing Credit Facility, would have a five-year maturity, with interest-only payments due over the term and the entire principal amount due at maturity.  In addition, for every $1 million of original principal amount of the Notes, the note holder would receive warrants to purchase 50,000 shares of common stock, with an exercise price of $0.01 per share and a five-year term. Tontine Capital, which owned approximately 54.7% of our common stock as of March 11, 2011, stated that the timing of the closing of the purchase of the Notes would be dependent upon many factors, including, without limitation, the successful refinancing of the Company’s existing Credit Facility, satisfactory legal documentation and other standard conditions.  On March 15, 2011, the  Company and Tontine Capital executed a commitment letter with respect to such financing, on terms and subject to conditions substantially identical to those contained in the Letter of Intent.
 
Credit Agreement Amendment
 
On December 17, 2010, the Company entered into a Fifth Amendment to the Company’s Credit Agreement (the “Fifth Amendment”).  The Fifth Amendment included the modification of certain definitions, terms and reporting requirements and extended the revolving termination date and term maturity date of the Company’s existing Credit Facility to May 31, 2011 to allow a new facility to be put in place to meet both short-term and long-term operating needs.  In addition, financial covenants were modified to reflect the Company’s updated operating and cash flow projections for the fiscal quarters ending on or closest to December 31, 2010 and March 31, 2011.  Borrowings under the revolving line of credit, subject to a borrowing base up to a maximum borrowing limit of $28.0 million, and the interest rates for borrowings under the revolving line of credit and the term loan of the Credit Agreement, remained unchanged.  For additional details and discussion concerning these financial covenants see “Liquidity and Capital Resources” in Item 7 of this Report and Note 12 to the Consolidated Financial Statements.
 
Senior Secured Credit Facility Financing Proposal
 
On December 17, 2010, the Company received a proposal from Wells Fargo Capital Finance, LLC (“WFCF”) outlining the terms and conditions under which WFCF proposes to provide to the Company a four-year senior secured credit facility consisting of a $50.0 million revolving credit facility.   We are currently in negotiations with WFCF for a new long-term credit facility that we expect to have completed prior to the May 31, 2011 expiration date of our current Credit Facility.
 
CONSOLIDATED OPERATING RESULTS
 
General
 
The following consolidated and business segment discussions of operating results pertain to continuing operations.
 
Year Ended December 31, 2010 Compared to 2009
 
The following table sets forth the percentage relationship to net sales of certain items on the Company’s consolidated statements of operations for the years ended December 31, 2010, 2009 and 2008.
 
 
 
   
Year Ended December 31,
 
   
2010
   
2009
   
2008
 
Net sales
    100.0 %     100.0 %     100.0 %
Cost of goods sold
    89.3       89.2       91.4  
Restructuring charges
    -       -       0.2  
Gross profit
    10.7       10.8       8.4  
Warehouse and delivery expenses
    4.2       4.8       5.1  
Selling, general, and administrative expenses
    5.0       5.7       8.3  
Goodwill impairment
    -       -       8.4  
Intangible assets impairments
    -       -       9.0  
Restructuring charges
    -       -       0.1  
Amortization of intangible assets
    0.2       0.2       0.5  
Gain on sale of fixed assets
    (1.0 )     (0.5 )     (1.4 )
Operating income (loss)
    2.3       0.6       (21.6 )
Stock warrants revaluation
    (0.1 )     0.4       -  
Interest expense, net
    2.0       3.0       2.0  
Income tax benefit
    -       (0.2 )     (3.1 )
Income (loss) from continuing operations
    0.4       (2.6 )     (20.5 )

Net Sales.  Net sales increased $65.7 million or 30.9%, to $278.2 million in 2010 from $212.5 million in 2009. The increase in net sales primarily reflects improving conditions in the RV industry and the impact of the acquisitions of Quality Hardwoods and Blazon that were completed during the year.  From a market perspective, the RV industry, which represented approximately 58% of the Company’s sales in 2010, experienced an increase in wholesale unit shipments of approximately 46% versus 2009.
 
In the MH industry, which represented approximately 28% of the Company’s sales in 2010, unit shipments rose 0.4% compared to 2009.  This industry began to show signs of improvement in the second quarter of 2010 as unit shipments increased approximately 16% from the prior year period, marking the first quarter-over-quarter increase in unit shipments since 2006.
 
The industrial market sector accounted for approximately 14% of the Company’s 2010 sales.  We estimate that approximately 60% of our industrial revenue base in 2010 was linked to the residential housing market, which saw an increase in new housing starts of approximately 6% for 2010 compared to 2009 (as reported by the U.S. Department of Commerce).  The increase in new housing starts is not expected to impact the Company’s industrial revenue base until late in 2011 as our sales to this market generally lag new residential housing starts by six to twelve months.
 
Although improvements were seen in both the RV and MH industries during 2010, the Company anticipates that it will still face challenges in these industries due to the lingering impact of continuing tight credit markets, high unemployment and significant increases in raw materials costs.
 
Cost of Goods Sold.  Cost of goods sold increased $59.0 million or 31.1%, to $248.6 million in 2010 from $189.6 million in 2009. As a percentage of net sales, cost of goods sold increased during the year to 89.3% from 89.2%.  While sales levels improved in 2010 over the prior year, cost of goods sold was negatively impacted by increases in certain raw material prices and by some production inefficiencies and labor variances at our cabinet door facility as a result of significant volatility in total volumes from month-to-month at this facility.  As a result, gross margins on the cabinet door business were lower than expected during 2010.  Beginning in the fourth quarter of 2010, we made organizational changes and process and pricing improvements to improve profitability at this facility, barring any unforeseen circumstances.
 
Notwithstanding the issues related to this particular operation, we believe that the impact of the acquisition of several new product lines during 2010, including the cabinet door business acquired in the first quarter of 2010, and the wiring, electrical and plumbing products distribution business acquired in the third quarter of 2010, provided positive contribution to operating profitability and will continue to do so in upcoming quarters.  Cost of goods sold benefitted
 
 
in 2010 from the absorption of fixed manufacturing costs over a larger sales base and our ongoing efforts to keep operating costs aligned with our sales base and operating needs.
 
Gross Profit.  Gross profit increased $6.7 million or 29.5%, to $29.6 million in 2010 from $22.9 million in 2009.  As a percentage of net sales, gross profit decreased to 10.7% in 2010 from 10.8% in the same period in 2009.  The change in gross profit from period to period is primarily attributable to the factors described above.
 
Warehouse and Delivery Expenses.  Warehouse and delivery expenses increased $1.5 million or 14.2%, to $11.7 million in 2010 from $10.2 million in 2009.  As a percentage of net sales, warehouse and delivery expenses were 4.2% and 4.8% in 2010 and 2009, respectively.  The decrease as a percentage of net sales for 2010 reflected a decline in certain fixed costs such as building charges, fleet rental, and group insurance costs despite the increase in sales volumes.
 
Selling, General and Administrative (SG&A) Expenses.   SG&A expenses increased $1.7 million or 14.0%, to $13.8 million in 2010 from $12.1 million in 2009.  The increase in SG&A expenses for the current year periods included higher compensation levels for salaried and hourly employees, which reflected the partial reinstatement on January 1, 2010 of the base compensation reductions that were taken by all hourly and salaried employees in the first quarter of 2009, and to a lesser extent, increased headcount that was related to higher sales volumes.  The increase in SG&A expenses was partially offset by a reduction in bad debt expense of approximately $0.8 million in 2010 compared to the prior year reflecting the Company’s continued efforts to maintain appropriate credit policies with customers and suppliers especially given tight retail credit standards and the level of consolidations/closures of RV and MH customers.   As a percentage of net sales, SG&A expenses were 5.0% for 2010 and 5.7% for 2009, reflecting both an increased revenue base which was not offset by incremental increases in compensation related expenses despite the partial wage reinstatements, and certain non-compensation related fixed costs that remained relatively constant despite the increase in net sales in 2010.
 
Amortization of Intangible Assets.   In conjunction with the acquisition of the cabinet door business of Quality Hardwoods in January 2010, the Company recognized $0.6 million in certain finite-lived intangible assets which are being amortized over periods ranging from 3 to 5 years.  Amortization expense related to this acquisition was $150,000 in 2010.
 
In conjunction with the acquisition of the wiring, electrical and plumbing products distribution business of Blazon in late August 2010, the Company recognized $0.8 million in certain finite-lived intangible assets which are being amortized over periods ranging from 3 to 6 years beginning in the fourth quarter of 2010 as a result of the finalization of the fair value of the intangible assets in late October 2010.  As a result, amortization expense related to this acquisition was $61,000 in 2010.  Total amortization expense increased $0.2 million in 2010 as a result of these two acquisitions.
 
Gain on Sale of Fixed Assets.    During the first quarter of 2010, the Company sold the facilities housing its manufacturing and distribution operations in Oregon and California and recorded a pretax gain on sale of approximately $0.8 million and $2.0 million, respectively.  Because the Company is currently operating in the same facility in California under a lease agreement with the purchaser, an additional $0.7 million of a pretax gain on the sale was deferred during the first quarter of 2010 and is being offset against future lease payments that are included in cost of goods sold.  See Note 6 to the Consolidated Financial Statements for further details.
 
Operating Income.    Operating income increased $5.1 million to $6.4 million in 2010 compared to $1.3 million in 2009.  The change in operating income from period to period is primarily attributable to the items discussed above.
 
Stock Warrants Revaluation.   The stock warrants revaluation credit of $0.3 million in 2010 and expense of $0.8 million in 2009 represent non-cash charges/credits related to mark-to-market accounting for common stock warrants issued to certain of the Company’s senior lenders in conjunction with the December 2008 amendment to the Company’s Credit Agreement dated May 18, 2007 (the “Credit Agreement”).  See Note 10 to the Consolidated Financial Statements (“Warrants Subject to Revaluation”) for further details.
 
 
Interest Expense, Net.   Interest expense decreased $0.9 million in 2010 to $5.5 million from $6.4 million in 2009.  The decrease primarily reflects a net reduction in total debt outstanding due to scheduled principal payments on the Company’s senior notes and industrial and economic development revenue bonds, the application of the net proceeds from the sale of American Hardwoods and the aluminum extrusion operations in 2009, and the sales of certain manufacturing and distribution facilities in 2009 and in the first quarter of 2010.
 
Income Tax Benefit–Continuing Operations.  The Company had a tax valuation allowance for deferred tax assets net of deferred tax liabilities expected to reverse as of December 31, 2010 and December 31, 2009.  Deferred tax assets will continue to require a tax valuation allowance until the Company can demonstrate their realizability through sustained profitability and/or from other factors.   The tax valuation allowance does not impact the Company’s ability to utilize its net operating loss carryforwards to offset taxable earnings in the future.  The effective tax rate varies from the expected statutory rate primarily due to the recognition in 2010 of the deferred tax asset resulting from the utilization of federal and state net operating loss carryforwards, and in 2009, the tax valuation allowance that has been placed on the deferred tax assets that offset the tax benefit of the net loss for 2009.  A tax benefit from continuing operations of $81,000 was recognized in the fourth quarter and twelve months of 2010.  A tax benefit from continuing operations of $0.6 million related to the utilization of a net operating loss carryforward to offset the gain recognized from discontinued operations was recognized in 2009.  In addition, state tax expense of approximately $95,000 was recognized in the fourth quarter and twelve months of 2009.   As a result, the effective tax rate on continuing operations (exclusive of the valuation allowance and an intra-period tax adjustment in 2009) was 20.1% for 2010 and 31.6% for 2009.   At December 31, 2010, the Company’s federal and state net operating loss carryforwards exceeded taxable income for 2010.
 
Income From Discontinued Operations, Net of Tax.  Discontinued operations in 2009 included the operating results for American Hardwoods (through its sale in January 2009) and for the aluminum extrusion operation (through its sale in July 2009).  After-tax income from discontinued operations in 2009 was $0.9 million or $0.10 per diluted share which was comprised of $0.8 million of income from operations related to the aluminum extrusion operation and a $0.7 million net gain related to the completion of the two divestitures, offset by income taxes of $0.6 million.  See Note 4 to the Consolidated Financial Statements for further details.
 
Net Income (Loss).  Net income was $1.2 million or $0.12 per diluted share in 2010 compared to a net loss of $4.5 million or $0.49 per diluted share for 2009.  The changes in the net income (loss) reflect the impact of the items previously discussed. 

Average Diluted Shares Outstanding.  Average diluted shares outstanding increased 7.2% in 2010 compared to 2009   principally reflecting the impact of the addition of 512,000 shares of potentially dilutive securities in 2010 with no comparable amount in 2009.   See Note 16 to the Consolidated Financial Statements for additional details.
 
Year Ended December 31, 2009 Compared to 2008
 
Net Sales.  Net sales decreased $112.7 million or 34.6%, to $212.5 million in 2009 from $325.2 million in 2008.  The decline in net sales primarily reflected the continuation of overall lower end market demand due to the economic recession and its residual effects.  In addition, reduced RV and MH retail dealer inventory levels in response to restricted credit conditions and increasing credit costs, a decline in consumer discretionary spending, and economic trends that continued to weaken in all three of the primary markets the Company serves all had an impact on the Company’s revenues.  
 
From a market perspective, the RV industry, which represented 44% of our 2009 sales, experienced unit shipment declines of approximately 30% from year-to-year.  The MH industry, which represented approximately 37% of our 2009 sales, experienced unit shipment declines of approximately 39% from the prior year.  The industrial and other markets represented approximately 19% of our sales in 2009.  In 2009, approximately 70% of the Company’s industrial revenue base was linked to the residential housing market which continued to be impacted by depressed conditions as new housing starts for 2009 were down approximately 39% from 2008 (as reported by the U.S. Department of Commerce).
 
 
Cost of Goods Sold.  Cost of goods sold declined $107.5 million or 36.1% to $189.6 million in 2009 from $297.1 million in 2008. The decline was principally due to the impact of lower sales volumes as well as improved raw material pricing, improved production efficiencies, facility consolidations, certain direct labor efficiencies of approximately $0.6 million, and a reduction in total overhead expenses of approximately $10.1 million.  Labor inefficiencies as the Company adjusted to the rapidly declining market conditions and softening sales levels that began in the first quarter of 2008 were reflected in the 2008 results.
 
Cost of goods sold as a percentage of net sales decreased to 89.2% in 2009 from 91.4% in 2008 reflecting charges that impacted the 2008 results including a $3.5 million impairment to fixed assets related to machinery, furniture and equipment, and the write-down and disposal of $3.8 million of slow-moving inventory due to obsolescence and commodity market price declines.
 
Cost of goods sold in 2008 also included charges of approximately $0.7 million related to the misappropriation of Company assets and the underreporting of scrap at one of the Company’s manufacturing facilities.  As a result of the investigation of this matter and a second physical inventory, the Company recorded an adjustment to reduce inventory and increase cost of goods sold at this particular facility by approximately $0.7 million during the quarter ended March 30, 2008.  The impact of the $0.7 million inventory adjustment did not have a material impact on the Company’s liquidity or Credit Agreement at March 30, 2008 or in any other prior periods.  Exclusive of the charges that impacted 2008 results, cost of goods sold as a percentage of net sales increased slightly in 2009 compared to the prior year reflecting certain fixed overhead costs that remained relatively constant despite lower sales volumes.
 
Restructuring Charges.  In 2008, total restructuring charges were $1.0 million or 0.3% of net sales, of which $0.8 million was included as a separate line item under cost of goods sold.  The charges were recorded in conjunction with the final phase of the restructuring plan which related to the closing of a Patrick division in the Company’s Manufacturing Segment and the consolidation of two other divisions in the Company’s Manufacturing Segment, one from a leased facility into one of the Company’s owned manufacturing facilities, and the other into one of the leased manufacturing facilities.  The restructuring plan included Adorn and Patrick workforce reductions of approximately 240 employees, of which approximately 200 were completed in 2007 and remaining 40 in 2008, facility closures, and various asset write-downs.
 
Restructuring charges included as a separate line item under operating expenses of approximately $0.2 million were related to severance, benefits and other costs related to the consolidation activities.  There were no restructuring charges in 2009.
 
Gross Profit.  Gross profit decreased $4.3 million or 16.0%, to $22.9 million in 2009 from $27.2 million in 2008.  As a percentage of net sales, gross profit increased to 10.8% in 2009 from 8.4% in 2008.  The change in gross profit from period to period was attributable to the factors described above.
 
Warehouse and Delivery Expenses.  Warehouse and delivery expenses decreased $6.3 million or 38.0%, to $10.2 million in 2009 from $16.5 million in 2008.  As a percentage of net sales, warehouse and delivery expenses were 4.8% and 5.1% in 2009 and 2008, respectively.  Efficiency improvements realized from the consolidation of Adorn in 2008, and a $5.9 million decline in fixed and variable costs including delivery wages, fleet rental, fuel costs and freight charges, contributed to the decline in warehouse and delivery expenses in 2009.
 
Selling, General, and Administrative (SG&A) Expenses.  SG&A expenses decreased $14.7 million or 54.8%, to $12.1 million in 2009 from $26.8 million in 2008.  As a percentage of net sales, SG&A expenses were 5.7% in 2009 compared to 8.3% in 2008.  The decrease in SG&A expenses was primarily attributable to our ongoing efforts to align operating costs with revenue as a result of the soft market conditions.  Administrative, office, and sales wages declined $8.0 million during the year principally reflecting a reduction in headcount during 2009 and reductions in base compensation taken by all hourly and salaried employees in first quarter 2009.  In addition, bad debt expense decreased $1.0 million in 2009 reflecting the Company’s continued efforts to maintain appropriate credit policies with customers and suppliers especially given tight retail credit standards and the level of consolidations/closures of RV and MH customers.
 
 
SG&A expenses in 2008 included the impact of $0.3 million in costs associated with certain vesting of employee retirement obligations incurred as a result of the change of control provisions associated with the completion of a  rights offering of common stock to the Company’s shareholders, stock compensation of $0.5 million related to attaining certain milestone objectives in conjunction with the Adorn consolidation plan, and $0.2 million of restructuring charges.  In 2008, we eliminated certain administrative salaried positions in an effort to continue to align our operating costs with revenues as discussed above.  SG&A expenses also included a $1.9 million increase to the allowance for doubtful accounts in 2008 that was driven principally by certain customers of the Company that closed or filed bankruptcy.
 
Goodwill Impairment.  The acquisition of Adorn in May 2007 resulted in the recording of $29.5 million of goodwill within the Manufacturing segment on the date of the acquisition, and represented the excess of the purchase price over the fair value of the net assets acquired.  During our annual goodwill impairment analysis in the fourth quarter of 2008, we determined that the carrying value of goodwill exceeded its implied fair value, which resulted in a goodwill impairment charge of $27.4 million.  There was no impairment recognized for goodwill for the year ended December 31, 2009 based on the results of the annual impairment analyses.

Intangible Assets Impairments.  The acquisition of Adorn in May 2007 resulted in the recording of certain intangible assets including customer relationships, trademarks and non-compete agreements within the Manufacturing segment on the date of the acquisition.  During our impairment analysis in the fourth quarter of 2008, we determined that the carrying value of these intangible assets exceeded their implied fair value, which resulted in an impairment charge of $29.3 million.  There was no impairment recognized for intangible assets for the year ended December 31, 2009.

Amortization of Intangible Assets.  In conjunction with the Adorn acquisition in May 2007, the Company recognized $39.5 million in certain intangible assets which were being amortized over periods ranging from 5 to 19 years.  The Company recorded amortization expense on these intangibles of $0.4 million in 2009 and $1.7 million in 2008.  The impairment of $22.3 million of amortizable intangible assets in 2008 related to customer relationships and non-compete agreements reduced annual amortization expense by approximately $1.3 million beginning in 2009.
 
Gain on Sale of Fixed Assets.  In 2009, the Company sold its Ocala, Florida facility resulting in a pretax gain on sale of approximately $1.2 million.  A pretax gain of $4.2 million from the June 2008 sale of the Company’s idle California facility and approximately $0.4 million in gains on the sale of excess equipment acquired in the Adorn acquisition and in the normal course of business were included in the 2008 results.
 
Operating Income (Loss).  Operating income was $1.3 million in 2009 compared to a loss of $70.2 million in 2008.  The decrease in the operating loss from period to period was primarily attributable to the impairment charges related to goodwill and other intangible assets and fixed assets, the charges related to inventory write-downs and dispositions,  reductions in SG&A and warehouse and delivery expenses, restructuring charges, and the gain on the sale of fixed assets as discussed above.
 
Stock Warrants Revaluation.  The stock warrants revaluation expense of $0.8 million for 2009 represented non-cash charges related to mark-to-market accounting for common stock warrants issued to certain of the Company’s lenders in conjunction with the December 2008 amendment to the Credit Agreement.  See Note 10 to the Consolidated Financial Statements (“Warrants Subject to Revaluation”) for further details.
 
Income Tax Benefit–Continuing Operations.  The income tax benefit for twelve months 2008 reflected a non-cash charge of approximately $18.0 million related to the establishment of a deferred tax asset valuation allowance against all of the Company’s deferred tax assets and virtually all state deferred tax assets in accordance with accounting rules requiring it to record a valuation allowance when a threshold cumulative loss period has been reached.  An additional $1.4 million valuation allowance was provided in 2009 for deferred tax assets net of deferred tax liabilities.  The tax valuation allowance did not impact the Company’s ability to utilize its net operating loss carryforwards to offset taxable earnings in the future.
 
The effective tax rate varies from the expected statutory rate primarily due to the tax valuation allowance that has been placed on the deferred tax assets that offset the tax benefit of the net loss for the current period.  A tax benefit
 
 
from continuing operations of approximately $0.6 million related to the utilization of a net operating loss carryforward to offset the gain recognized from discontinued operations was recognized in 2009.  In addition, state tax expense of approximately $95,000 was recognized in the fourth quarter and twelve months of 2009.  The effective tax rate on continuing operations (exclusive of the valuation allowance and an intra-period tax adjustment in 2009) was 31.6% and 36.4% for 2009 and 2008, respectively.
 
Income (Loss) From Discontinued Operations, Net of Tax.  Discontinued operations included the operating results, as well as the net gain or loss upon sale, of American Hardwoods (through its sale in January 2009) and the aluminum extrusion operation (through its sale in July 2009).  After-tax income from discontinued operations in 2009 was $0.9 million or $0.10 per diluted share which was comprised of $0.5 million of income from operations related to the aluminum extrusion operation, and a $0.4 million net gain related to the completion of the two divestitures.  For 2008, the after-tax loss was $4.9 million or $0.61 diluted per diluted share which was comprised of a $1.0 million loss on operations and $3.9 million of estimated costs related to the write-down to fair value of certain assets pertaining to the two operations.  See Note 4 to the Consolidated Financial Statements for further details.
 
Net Loss.  The net loss was $4.5 million or $0.49 per diluted share for 2009 compared to $71.5 million or $8.93 per diluted share for 2008.  The changes in the net loss reflected the impact of the items previously discussed. 
 
Average Diluted Shares Outstanding.  Average diluted shares outstanding increased 14.8% in 2009 compared to 2008.  The increase principally reflected the completion in March 2008 of the private placement of 1,125,000 shares of common stock and the sale in June 2008 of 1,850,000 shares in connection with the rights offering.  Based on the timing of these two transactions, the shares were outstanding for the full year of 2009 and for a portion of the year in 2008.
 
BUSINESS SEGMENTS
 
General
 
In accordance with changes made to the Company’s internal reporting structure, which segregates businesses by product category and production/distribution process, the Company changed its segment reporting from three reportable segments to two reportable segments effective January 1, 2010.  Operations previously included in the Other Component Manufactured Products segment were consolidated with the operations in the Primary Manufactured Products segment to form one new segment called Manufacturing.  The other reportable segment, Distribution, remained the same as reported in prior periods.  Prior year results were reclassified to reflect the current year presentation.  The Company regularly evaluates the performance of each segment and allocates resources to them based on a variety of indicators including sales, cost of goods sold, and operating income.
 
The Company’s reportable business segments based on continuing operations are as follows:
 
 
·
Manufacturing - 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.  This segment also includes a cabinet door division and a vinyl printing division.
 
 
·
Distribution - Distributes pre-finished wall and ceiling panels, drywall and drywall finishing products, electronics, adhesives, wiring, electrical and plumbing products, cement siding, interior passage doors, roofing products, laminate flooring, and other miscellaneous products.   Previously, this segment included the American Hardwoods operation that was sold in January 2009 and was classified as a discontinued operation for all periods presented.

Results relating to the aluminum extrusion operation that was sold in July 2009 and which comprised the entire Engineered Solutions segment, were reclassified to discontinued operations for all periods presented.
 
 
Year Ended December 31, 2010 Compared to 2009
 
General
 
Sales pertaining to the manufacturing and distribution segments as stated in the table below and in the following discussions include intersegment sales.  In addition, gross profit includes the impact of intersegment operating activity.
 
The table below presents information about the sales, gross profit and operating income (loss) from continuing operations of the Company’s operating segments.  A reconciliation to consolidated totals is presented in Note 20 to the Consolidated Financial Statements.

   
Years Ended December 31
 
(thousands)
 
2010
   
2009
   
2008
 
Sales
                 
Manufacturing
  $ 234,541     $ 177,436     $ 266,830  
Distribution
    55,557       43,821       71,416  
                         
Gross Profit
                       
Manufacturing
    20,863       15,655       15,973  
Distribution
    7,745       5,548       9,390  
                         
Operating Income (Loss)
                       
Manufacturing
    8,586       5,412       (57,707 )
Distribution
    1,186       76       1,527  
 
Manufacturing
 
Sales.  Sales increased $57.1 million or 32.2%, to $234.5 million in 2010 from $177.4 million in 2009.  This segment accounted for approximately 80% of the Company’s consolidated net sales in 2010.  A 46% increase in wholesale unit shipments in the RV industry in 2010 positively impacted sales.  The sales increase in 2010 included approximately $7.4 million from the acquisition of the cabinet door business of Quality Hardwoods in January 2010.   In addition, the Company continues to gain product content per unit in the RV industry. The Company anticipates that the lingering impact of continuing tight credit markets, high unemployment and significant increases in raw materials costs will continue to impact sales to the RV and MH markets in 2011.
 
Gross Profit.  Gross profit increased $5.2 million to $20.9 million in 2010 from $15.7 million in 2009.   As a percentage of sales, gross profit increased to 8.9% in 2010 from 8.8% in 2009.   The increase in gross profit in 2010 primarily reflects the impact of higher sales volumes and manufacturing overhead costs remaining near prior year levels.  Increases in wages, payroll taxes, operating supplies and repairs and maintenance were offset by reductions in depreciation, rent and insurance costs.
 
Gross profit was negatively influenced during 2010 by increases in certain raw materials prices and by the impact of RV production levels that were higher than anticipated resulting in production inefficiencies and labor variances at our cabinet door facility as a result of significant volatility in total volumes from month to month at this facility.  As a result, gross margins on the cabinet door business were lower than expected during the year.  Beginning in the fourth quarter of 2010, we made organizational changes and process and pricing improvements to improve profitability at this facility in the future, barring any unforeseen circumstances.
 
Operating Income.  Operating income increased $3.2 million to $8.6 million in 2010 compared to $5.4 million in 2009.  Higher sales volumes and improved fixed cost absorption positively impacted operating income in 2010.
 
Distribution
 
Sales.  Sales increased $11.7 million or 26.8%, to $55.5 million in 2010 from $43.8 million in 2009, primarily reflecting increased sales in a majority of the Company’s distribution facilities.  This segment accounted for approximately 20%
 
 
of the Company’s consolidated net sales for 2010.  The wiring, electrical and plumbing products division, which was acquired in the third quarter of 2010, accounted for approximately $4.9 million or 41% of the 2010 sales increase.  The electronics division, which was launched in the first quarter of 2009, accounted for approximately $4.4 million of the sales increase during 2010 compared to 2009.  The strength of the RV industry in 2010 (which the electronics division principally distributes to) and improvements in the MH industry (which the other distribution divisions supply) contributed to the sales volume increase in the current year.
 
Gross Profit.  Gross profit increased $2.2 million or 39.6%, to $7.7 million in 2010 from $5.5 million in 2009.  As a percentage of sales, gross profit was 13.9% in 2010 compared to 12.7% in 2009.  The increase in gross profit as a percentage of sales for 2010 is primarily attributable to a mix shift to less direct shipment sales from the Company’s vendors to its customers.
 
Operating Income.  Operating income increased $1.1 million to $1.2 million in 2010 from $0.1 million in 2009.  Higher sales volumes primarily contributed to the operating income improvement in 2010.   The electronics division, which accounted for approximately 37% of the distribution sales increase in 2010, incurred lower warehouse and delivery charges than our other distribution divisions.  In addition, the newly acquired wiring, electrical and plumbing products division made a positive contribution to operating income in 2010.

Unallocated Corporate Expenses
 
Unallocated corporate expenses increased $0.5 million to $7.2 million in 2010 from $6.7 million in 2009.  As discussed above, the increase primarily reflected the partial reinstatement on January 1, 2010 of the base compensation reductions taken by salaried and hourly employees in the first quarter of 2009 as a result of extremely soft market conditions.
 
Year Ended December 31, 2009 Compared to 2008
 
Manufacturing
 
Sales.  Total sales decreased $89.4 million or 33.5%, to $177.4 million in 2009 from $266.8 million in 2008.  This segment accounted for approximately 79% of the Company’s consolidated net sales in 2009.  As discussed earlier, decreased unit shipment levels in the MH and RV industries and declines in the industrial market which were exacerbated by the credit crisis in both 2009 and 2008, largely impacted the year’s results.  From a pricing perspective, overall price increases in certain commodity products were offset by pricing declines in certain other major commodity products from period to period. Additionally, pricing on gypsum related commodity products that the Company sells into the MH industry rose approximately 10% year-over-year on manufactured products.
 
Gross profit.  Gross profit decreased $0.3 million or 2.0%, to $15.7 million in 2009 from $16.0 million in 2008.  As a percentage of sales, gross profit increased to 8.8% in 2009 compared to 6.0% in the prior year.  The increase in gross profit as a percentage of sales in 2009 was primarily driven by charges that impacted the 2008 results, which included $3.8 million for the write down and disposal of inventory due to obsolescence and commodity market price declines,  $3.5 million related to fixed asset impairments, a $0.7 million adjustment to inventory and cost of goods sold related to the misappropriation of Company assets and underreporting of scrap at one of the Company’s manufacturing facilities, and restructuring charges of $0.8 million.
 
Operating income (loss).  Operating income was $5.4 million compared to an operating loss of $57.7 million in 2008.  Operating results improved in 2009 largely due to the 2008 charges discussed above and reduced administrative costs, primarily resulting from staff and wage reductions and lower warehouse and delivery expenses.   The operating loss in 2008 reflected the fixed asset impairment and inventory adjustments discussed above as well as a goodwill impairment charge of $27.4 million and an impairment charge for other intangible assets of $29.3 million.  
 
 
Distribution  
 
Sales.  Sales decreased $27.6 million or 38.6%, to $43.8 million in 2009 from $71.4 million in 2008.  This segment accounted for approximately 21% of the Company’s consolidated net sales in 2009.  The decline in sales is attributable to the approximate 39% decline in unit shipments in the MH industry, which is the primary market sector this segment serves.  The decline in sales was partially offset by pricing increases on gypsum related products of approximately 6%.   Additionally, pricing on gypsum related commodity products that the Company sells into the MH industry rose approximately 6% year-over-year on distribution products.
 
Gross profit.  Gross profit decreased $3.8 million or 40.9%, to $5.6 million in 2009 from $9.4 million in 2008.  As a percentage of sales, gross profit decreased to 12.7% in 2009 from 13.2% in 2008.  The decrease in gross profit dollars for 2009 was due to the decline in sales primarily resulting from decreased shipment levels in the MH industry.  The decrease in gross profit as a percentage of sales was attributable to certain fixed overhead costs decreasing but not in proportion to the lower sales volumes.
 
Operating income.  Operating income decreased $1.4 million or 95.0%, to $0.1 million in 2009 from $1.5 million in 2008 due primarily to the decrease in gross profit dollars described above.
 
Unallocated Corporate Expenses
 
Unallocated corporate expenses decreased $12.9 million to $6.7 million in 2009 from $19.6 million in 2008 primarily reflecting salaried and hourly headcount and wage reductions.  See Note 20 to the Consolidated Financial Statements.
 
LIQUIDITY AND CAPITAL RESOURCES
 
Cash Flows
 
Operating Activities
 
Cash flows from operations represent the net income we earned or the net loss sustained in the reported periods adjusted for non-cash charges and changes in operating assets and liabilities.  Our primary sources of liquidity have been cash flows from operating activities and borrowings under our Credit Agreement.  Our principal uses of cash have been to support seasonal working capital demands, meet debt service requirements and support our capital expenditure plans.
 
Net cash provided by operating activities was $7.8 million in 2010 compared to $3.7 million in 2009.  Trade receivables decreased $3.5 million in 2010 from year-end 2009 reflecting plant shutdowns by many of our larger customers in mid-to-late December 2010 for the holiday season.  A stronger demand cycle due to an increase in wholesale unit shipments of approximately 46% in the RV industry in 2010 compared to the prior year partially offset the impact of the plant shutdowns.  Additionally, inventories increased approximately $2.0 million in 2010 from December 2009, compared to a decrease of $4.7 million in the 2009 period, primarily resulting from the increase in sales to the RV industry.   The Company continues to focus on aggressively managing inventory turns by closely following customer sales levels and increasing or reducing purchases correspondingly, while working together with key suppliers to reduce lead-time and minimum quantity requirements.  Cash provided by operating activities also included a $0.3 million non-cash credit related to mark-to-market accounting for common stock warrants issued to certain of the Company’s lenders in December 2008 versus a non-cash charge of $0.8 million in 2009.  The $1.3 million net increase in accounts payable and accrued liabilities in both 2010 and 2009 reflected seasonal demand cycles and ongoing operating cash management.
 
Net cash provided by operating activities was $3.7 million in 2009 compared to $2.0 million in 2008.  Certain factors that contributed to the increase in operating cash flows in 2009, with no comparable amount in the prior year, included: (1) $0.8 million related to stock warrant accounting and (2) interest paid-in-kind (“PIK interest”) on the Company’s term loan of $1.0 million (see “Capital Resources” for further details) which were offset in part by a $0.7 million change in the fair value of two interest rate swaps entered into in connection with the Credit Facility.  In addition, the year-over-year change in operating cash flows reflected a lower net loss in 2009 that was impacted by a reduction in warehouse and delivery and SG&A expenses, all of which were in line with the Company’s operating plan
 
 
to keep operating costs aligned with the revenue base given current economic conditions.  Operating cash flows in 2008 included the impact of non-cash impairment charges and inventory write-downs of approximately $64.7 million.
 
Trade receivables increased $5.4 million in 2009 from December 2008 reflecting a stronger seasonal demand cycle due to improved shipment levels in the RV industry in the fourth quarter of 2009 of approximately 76% compared to the fourth quarter of 2008.  Additionally, in 2008, many of our larger customers began their normal holiday season shutdowns in early December compared to a later shutdown in December 2009.
 
Cash provided by operating activities included a decrease in inventory levels of $4.7 million in 2009 primarily resulting from a shift in demand concentration to operations with historically better inventory turns and the Company’s continued focus on improving inventory turns and reducing inventory to levels more consistent with demand in order to maximize liquidity.  Inventory cash flows in 2008 included an adjustment of $3.8 million for the write-down and disposal of slow moving inventories due to obsolescence and commodity market price declines and a $0.7 million physical inventory adjustment at one of the Company’s manufacturing facilities.  In both 2009 and 2008, the Company focused on reducing inventory levels and managing inventory costs by closely following customer sales levels and reducing purchases correspondingly, while working together with key suppliers to reduce lead-time and minimum quantity requirements.
 
The $1.4 million net decrease to accounts payable and accrued liabilities in 2009 was due to a reduction in employee headcount, which drove lower payroll and benefit related accruals, and the discontinued operations being sold, which reduced accounts payable and accrued liabilities.
 
Investing Activities
 
Investing activities provided cash of $1.2 million in 2010 compared to $13.2 million in 2009.  Net proceeds from the sale of property, equipment and facilities included $4.0 million and $4.3 million from the sale of the Oregon and California facilities in February 2010 and March 2010, respectively.  Cash outflows in 2010 included the acquisition of the cabinet door business of Quality Hardwoods for $2.0 million and the acquisition of the wiring, electrical and plumbing products distribution business of Blazon for $3.8 million.  In 2009, proceeds from the sale of businesses and related facilities included approximately $2.0 million from the sale of the American Hardwoods operation in January 2009 and an additional $2.5 million from the June 2009 sale of the building that housed this operation. In addition, $7.4 million was received from the sale of the aluminum extrusion operation in July 2009 and $1.5 million from the sale of the Ocala, Florida facility in December 2009.  Capital expenditures in 2010 of $1.4 million included targeted capital investments to support new business and upgrade our existing management information systems.  The capital plan for full year 2011 includes expenditures of up to $3.8 million, which includes costs related to the replacement of our current management information systems.
 
Investing activities provided cash of $13.2 million in 2009 compared to $1.9 million in 2008.  As described above, 2009 included proceeds from the sale of the Ocala, Florida facility, the American Hardwoods operation and related operating facility, and the aluminum extrusion operation.  Approximately $6.6 million was received from the sale of the California facility in June 2008.
 
Capital expenditures in 2009 were $0.3 million versus $4.2 million in the prior year.  Capital expenditures in 2008 were primarily related to certain building expansion initiatives to accommodate the consolidation of certain Patrick and Adorn business units.  Additionally, in conjunction with the acquisition of Adorn in May 2007, the Company was able to take advantage of excess redundant equipment as a result of the consolidation plan and therefore minimize capital expenditures in 2009 while still performing regularly scheduled preventative maintenance on all of its equipment.
 
Financing Activities
 
Net cash flows used in financing activities were approximately $7.0 million in 2010 compared to $19.6 million in 2009.   In accordance with its scheduled debt service requirements, the Company paid down $3.5 million in principal on its term loan in 2010.  The Company also utilized the proceeds received from the sale of its Oregon and California facilities in February/March 2010 and from other asset sales to pay down approximately $8.5 million in principal on long-term debt.   In August 2010, the remaining principal of $0.5 million was paid on the State of North Carolina

 
 
Economic Development Revenue bonds as planned.   In 2010, the Company increased borrowings on its revolving line of credit by $5.8 million to finance its operations and meet working capital needs.
 
Our net financing cash outflows were approximately $19.6 million in 2009 compared to $1.3 million in 2008.  In 2009, the Company paid down approximately $14.5 million in principal on its long-term debt.  The additional repayments on long-term debt, including the payoff of the remaining $3.3 million of principal on industrial revenue bonds associated with the aluminum extrusion operation, were funded by the $2.5 million of net proceeds from the sale of the American Hardwoods building, the $4.4 million of net proceeds from the aluminum extrusion building and equipment sale, and the $1.5 million of net proceeds from the sale of the Ocala, Florida facility.  In addition, the remaining net proceeds of $3.0 million from the aluminum extrusion operation sale were used to reduce borrowings under the Company’s revolving line of credit.

Capital Resources
 
In May 2007, the Company entered into an eight-bank syndication agreement led by JPMorgan Securities Inc. and JPMorgan Chase Bank, N.A. for a $110 million senior secured credit facility comprised of revolving credit availability of $35 million (“revolver”) and a term loan of $75 million.  The Credit Agreement provided for a five-year maturity and replaced the Company’s previous credit agreement and related term loans.  The Credit Facility’s interest was at Prime or the Eurodollar rate plus the Company’s credit spread which was based on cash flow leverage.  Subsequently, the Company entered into five amendments to this Credit Agreement (which are discussed below), the latest of which occurred on December 17, 2010.  Obligations under the Credit Facility are secured by essentially all of the tangible and intangible assets of the Company.  In order to reduce its vulnerability to variable interest rates, the package included an interest rate swap agreement with interest fixed at a rate of 4.78% for approximately $12.9 million of term-debt at May 18, 2007.  In July 2007, the Company entered into a second interest rate swap agreement for approximately $10.0 million of term-debt with interest fixed at a rate of 5.60%.
 
Concurrently with the closing of the Adorn acquisition, Tontine Capital Partners, L.P. and Tontine Capital Overseas Master Fund, L.P. (collectively, “Tontine Capital”), significant shareholders of Patrick, purchased 980,000 shares of Patrick common stock in a private placement for total proceeds of approximately $11.0 million.  Tontine Capital also provided additional interim debt financing of approximately $14.0 million in the form of senior subordinated promissory notes.  On March 10, 2008, the Company issued an additional 1,125,000 shares of its common stock to Tontine Capital for an aggregate purchase price of $7.9 million.  Proceeds from the sale of common stock were used to prepay approximately $7.7 million of the approximate $14.8 million in principal then outstanding under the senior subordinated promissory notes and to pay related accrued interest.
 
In June 2008, the Company conducted a rights offering of 1,850,000 shares of common stock to its shareholders and raised a total of approximately $13.0 million of additional equity capital.  The Company used the proceeds from the rights offering to prepay approximately $7.1 million of remaining principal under the senior subordinated promissory notes and to pay approximately $0.3 million of related accrued interest, and used the remaining proceeds to reduce borrowings under its Credit Facility.
 
The Company entered into a First Amendment and Waiver to its Credit Agreement in March 2008 and modified certain financial covenants, terms and reporting requirements.  In December 2008, the Company entered into a Second Amendment and Waiver (the “Second Amendment”) to its Credit Agreement.  The Second Amendment included both the addition and modification of certain definitions, terms and reporting requirements and amended the termination date of the Credit Agreement to expire on January 3, 2011.  The financial covenants were amended to eliminate the Consolidated Net Worth, Minimum Fixed Charge Coverage Ratio and Maximum Leverage Ratio covenants, in lieu of new one-month and two-month minimum consolidated earnings before interest, taxes, depreciation and amortization (“EBITDA”) requirements and a $2.25 million capital expenditures limitation for any fiscal year.
 
Effective with the Second Amendment, the interest rates for borrowings under the revolving line of credit were the Alternate Base Rate (the”ABR”) plus 3.50%, or the London InterBank Offer Rate (“LIBOR”) plus 4.50%.  For term loans, interest is at the ABR plus 6.50%, or LIBOR plus 7.50%.  The fee payable by the Company on unused but committed

 
 
portions of the revolving loan facility was amended to 0.50%.  The Company has the option to defer payment of any interest on the term loan in excess of 4.5% (“PIK interest”) until the maturity date.  Since January 2009, the Company has elected the PIK interest option.  As a result, the principal amount outstanding under the term loan was increased by $1.7 million from January 1, 2009 through December 31, 2010.  Approximately, $0.7 million and $1.0 million of the term loan increase related to PIK interest is reflected in interest expense on the consolidated statements of operations for the years ended December 31, 2010 and 2009, respectively.  PIK interest is reflected as a non-cash charge adjustment in operating cash flows under the caption “Interest paid-in-kind”.
 
In connection with the Second Amendment to the Credit Agreement, the Company issued warrants to the lenders to purchase an aggregate of 474,049 shares of common stock, subject to adjustment related to anti-dilution provisions, at an exercise price per share of $1.00 (the “Warrants”).  The Warrants are immediately exercisable, subject to anti-dilution provisions, and expire on December 11, 2018.  The debt discount of $214,000, which was equal to the fair market value of the warrants as of December 11, 2008, was amortized to interest expense over the life of the term loan.  As of December 31, 2010 and 2009, the unamortized portion of the debt discount was $0 and $98,000, respectively.
 
Pursuant to the anti-dilution provisions, the number of shares of common stock issuable upon exercise of the Warrants was increased to an aggregate of 483,742 shares and the exercise price was adjusted to $0.98 per share as a result of the issuance on May 21, 2009 and on June 22, 2009, pursuant to the Company’s 1987 Stock Option Program, as amended, of restricted stock at a price less than, and options to purchase common stock with an exercise price less than, the warrant exercise price then in effect.  See Note 10 for further details.
 
In April 2009, the Company entered into a Third Amendment and Waiver to the Credit Agreement (the “Third Amendment”).  The Third Amendment amended and/or added certain definitions, terms and reporting requirements.  In particular, the revolving commitments were reduced by $5.0 million to a maximum of $30.0 million, the maximum borrowing limit amount was reduced from $33.0 million to $29.0 million, and the receipt of net cash proceeds related to any asset disposition, other than proceeds attributable to inventory and receivables, was to be used to pay down principal on the term loan.
 
Consolidated EBITDA is calculated pursuant to the Credit Agreement, whereby adjustments to reported EBITDA include items such as (i) removing the effects of non-cash gains and losses, non-cash impairment charges, and certain non-recurring items; (ii) adding back non-cash stock compensation expenses; (iii) excluding the impact of certain closed operations; and (iv) excluding the effects of losses and gains due to discontinued operations and restructuring charges, subject to approval of the administrative agent.
 
In December 2009, the Company entered into a Fourth Amendment to the Credit Agreement (the “Fourth Amendment”).  The Fourth Amendment amended certain definitions, terms and reporting requirements to better align with the Company’s updated operating and cash flow projections for fiscal year 2010.  Pursuant to the Fourth Amendment, the financial covenants were modified to establish new quarterly minimum EBITDA requirements beginning with the fiscal quarter ended March 28, 2010.  
 
The minimum Consolidated EBITDA versus the actual Consolidated EBITDA by quarter in 2010 is as follows:

   
Minimum EBITDA
   
Actual EBITDA
 
First Quarter 2010
  $ (584,000 )   $ 1,489,000  
Second Quarter 2010
    2,204,300       4,273,000  
Third Quarter 2010
    1,973,200       2,247,000  
Fourth Quarter 2010 (1)
    1,200,000       1,447,000  
(1) Minimum EBITDA requirement as modified in the Fifth Amendment to the Credit Agreement.
 
 
In addition, effective with the Fourth Amendment, the monthly borrowing limits under the revolving commitments were subject to a borrowing base, up to a maximum borrowing limit of $28.0 million for fiscal year 2010.  The current Credit Facility allows the Company to borrow funds based on certain percentages of accounts receivable (80% of eligible accounts) and inventories (50% of eligible inventory), less outstanding letters of credit.
 
 
On December 17, 2010, the Company entered into a Fifth Amendment to the Credit Agreement (the “Fifth Amendment”).  The Fifth Amendment included the modification of certain definitions, terms and reporting requirements and extended the revolving termination date and term maturity date of the Company’s existing Credit Facility to May 31, 2011 to allow a new facility to be put in place to meet both short-term and long-term operating needs.  In addition, financial covenants were modified to reflect the Company’s updated operating and cash flow projections for the fiscal quarters ending on or closest to December 31, 2010 and March 31, 2011.  Borrowings under the revolving line of credit, subject to a borrowing base up to a maximum borrowing limit of $28.0 million, and the interest rates for borrowings under the revolving line of credit and the term loan, remained unchanged.    The Company’s ability to access these borrowings is subject to compliance with the terms and conditions of the Credit Agreement including the financial covenants.
 
During 2010, the Company paid down $12.0 million in principal on its term loan, and paid $0.5 million in principal on outstanding bonds.  Borrowings under the Company’s revolving line of credit were increased by $5.8 million in 2010.
 
In anticipation of entering into a new credit facility, the interest rate swap agreements were terminated on March 25, 2011 resulting in a $1.1 million cash settlement to JPMorgan Chase Bank, N.A.   See Note 21 to the Consolidated Financial Statements.
 
Summary of Liquidity and Capital Resources
 
Our primary capital requirements are to meet seasonal working capital demands, meet debt service requirements, and support our capital expenditure plans.  We also have a substantial asset collateral base, which we believe if sold in the normal course, is more than sufficient to cover our outstanding senior debt.  We obtain additional liquidity through selling our products and collecting receivables.  We use the funds collected to pay creditors and employees and to fund working capital needs.  The Company has another source of cash through the cash surrender value of life insurance policies.  We believe that cash generated from operations, borrowings under our current Credit Facility or any replacement credit facility, and additional liquidity from life insurance policies, will be sufficient to fund our working capital requirements and capital expenditure programs as currently contemplated.

We are subject to market risk primarily in relation to our cash and short-term investments.  The interest rate we may earn on the cash we invest in short-term investments is subject to market fluctuations.  While we attempt to minimize market risk and maximize return, changes in market conditions may significantly affect the income we earn on our cash and cash equivalents and short-term investments.  In addition, a portion of our debt obligations under our Credit Facility are currently subject to variable rates of interest based on LIBOR.
 
Cash, cash equivalents, and borrowings available under our existing Credit Facility and the proposed replacement credit facility are expected to be sufficient to finance the known and/or foreseeable liquidity and capital needs of the Company for at least the next 12 months.  Our working capital requirements vary from period to period depending on manufacturing volumes related to the RV and MH industries, the timing of deliveries and the payment cycles of our customers.  In the event that our operating cash flow is inadequate and one or more of our capital resources were to become unavailable, we would seek to revise our operating strategies accordingly.
 
We expect to maintain compliance with the revised minimum quarterly Consolidated EBITDA covenant, as modified in the Fifth Amendment, based on the Company’s 2011 operating plan, notwithstanding continued uncertain and volatile market conditions.  Management has also identified other actions within its control that could be implemented, if necessary, to help the Company reduce its leverage position.  These actions include the exploration of asset sales, divestitures and other types of capital raising alternatives.  However, there can be no assurance that these actions will be successful or generate cash resources adequate to retire or sufficiently reduce the Company’s indebtedness under the Credit Agreement prior to its expiration.
 
We currently have the intent and we believe we have the ability to refinance or replace our Credit Facility, which is scheduled to expire on May 31, 2011.   Beginning in the second quarter of 2010, we commenced discussions with existing and other lenders regarding the refinancing of our Credit Facility. See Note 21 to the Consolidated Financial Statements.  In order to classify our outstanding indebtedness as a long-term liability as of December 31, 2010, the
 
 
following two criteria were required: (1) the Company must have the intent to refinance, and (2) the Company must have the ability to consummate the refinancing.  The ability to consummate the refinancing can be satisfied by either: (a) the issuance of a long-term obligation after the date of the Company‘s statement of financial position but before that statement is issued; or (b) entrance into a financing agreement before the statement of financial position is issued that clearly permits it to refinance the short-term obligation on a long-term basis on terms that are readily determinable, and certain conditions are being satisfied.  The refinancing was not completed by the time we issued our statement of financial position for the year ended December 31, 2010, nor was a financing agreement relating to the refinancing entered into before such time.  Based on the above criteria, our outstanding long-term indebtedness as of December 31, 2010 was classified as a current liability until such time as the refinancing or replacement of our Credit Facility is completed.  The Company’s financial statements at December 31, 2010 reflect a deficit in working capital (total current assets less total current liabilities) of approximately $12.9 million primarily as a result of the classification of its Credit Facility as short-term.
 
On February 28, 2011, Tontine Capital and the Company entered into the Letter of Intent concerning the proposed acquisition by Tontine Capital of up to $8.0 million of secured senior subordinated notes of the Company.  The Notes, which would be issued in connection with the refinancing of the Company’s Credit Facility, would have a five-year maturity, with interest-only payments due over the term and the entire principal amount due at maturity.  In addition, for every $1 million of original principal amount of the Notes, the note holder would receive warrants to purchase 50,000 shares of common stock, with an exercise price of $0.01 per share and a five-year term.  The timing of the closing of the purchase of the Notes would be dependent upon many factors, including, without limitation, the successful refinancing of the Company’s Credit Facility, satisfactory legal documentation and other standard conditions.  On March 15, 2011, the Company and Tontine Capital executed a commitment letter with respect to such financing, on terms and subject to conditions substantially identical to those contained in the Letter of Intent.

If we fail to comply with the covenants under our amended Credit Agreement, there can be no assurance that a majority of the lenders that are party to our Credit Agreement will consent to a further amendment of the Credit Agreement.  In this event, the lenders could cause the related indebtedness to become due and payable prior to maturity or it could result in the Company having to refinance this indebtedness under unfavorable terms.  If our debt were accelerated, our assets might not be sufficient to repay our debt in full should they be required to be sold outside of the normal course of business, such as through forced liquidation or bankruptcy proceedings.  Further, while conditions in the credit markets have improved in recent months and we are currently in negotiations with respect to a new long-term credit facility to refinance the Credit Facility, if unfavorable conditions were to return before the Credit Facility expires, there can be no assurance that we will be able to refinance any or all of this indebtedness.
 
Contractual Obligations
 
The following table summarizes our contractual cash obligations at December 31, 2010, and the future periods during which we expect to settle these obligations.  We have provided additional details about some of these obligations in our Notes to the Consolidated Financial Statements.
 
(thousands)
 
Payments due by period
Contractual Obligations
 
2011
      2012-2013       2014-2015    
Thereafter
   
Total
Revolving line of credit
  $ 19,250     $ -     $ -     $ -     $ 19,250  
Long-term debt (1)
    16,983       -       -       -       16,983  
Interest payments on debt (2)
    966       -       -       -       966  
Deferred compensation payments
    465       777       685       3,342       5,269  
Facility leases
    2,184       3,179       2,232       1,681       9,276  
Equipment leases
    809       818       268       112       2,007  
Total contractual cash obligations
  $ 40,657     $ 4,774     $ 3,185     $ 5,135     $ 53,751  
 
(1)
The estimated long-term debt payment of $17.0 million in 2011 is based on scheduled debt service requirements per the terms of the existing Credit Facility scheduled to expire on May 31, 2011.
 
(2)
Scheduled interest payments on debt are calculated based on interest rates in effect at December 31, 2010 as follows: (a) revolving line of credit - 6.75%; (b) revolver with LIBOR option – 4.76%; and (c) term loan (including PIK interest of 3%) –7.76%
 
 
We also have commercial commitments as described below (in thousands):

Other Commercial Commitments
 
Total Amount Committed
   
Outstanding at 12/31/10
 
Date of Expiration
Revolving Credit Agreement
  $ 30,000     $ 19,250  
May 31, 2011
Letters of Credit
  $ 15,000     $ 1,520  
May 31, 2011
            $ 200  
April 23, 2012
 
Off-Balance Sheet Arrangements
 
Other than the commercial commitments set forth above, we have no off-balance sheet arrangements.
 
CRITICAL ACCOUNTING POLICIES
 
The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  The SEC has defined a company’s most critical accounting policies as those that are most important to the portrayal of its financial condition and results of operations, and which require the company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain.  Although management believes that its estimates and assumptions are reasonable, they are based upon information available when they are made.  Actual results may differ significantly from these estimates under different assumptions or conditions.  Other significant accounting policies are described in Note 2 to the Consolidated Financial Statements.  The Company has identified the following critical accounting policies and judgments:
 
Trade Receivables.  We are 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.  Trade receivables consist primarily of amounts due to us from our normal business activities.  We control credit risk related to our trade receivables through credit approvals, credit limits and monitoring procedures, and perform ongoing credit evaluations of our customers.  In assessing the carrying value of its trade receivables, the Company estimates the recoverability by making assumptions based on its historical write-off and collection experience and specific risks identified in the accounts receivable portfolio.  A change in the Company’s assumptions would result in the Company recovering an amount of its accounts receivable that differs from the carrying value.  Additional changes to the allowance could be necessary in the future if a customer’s creditworthiness deteriorates, or if actual defaults are higher than the Company’s historical experience.  Any difference could result in an increase or decrease in the allowance for doubtful accounts.  The Company does not accrue interest on any of its trade receivables.  Based on the Company’s estimates and assumptions, the allowance for doubtful accounts was decreased by $0.3 million to $0.4 million at December 31, 2010 compared to $0.7 million for 2009.  In 2009, the allowance for doubtful accounts was decreased by $1.3 million to $0.7 million compared to $2.0 million for 2008.  In 2008, the allowance for doubtful accounts was increased by $1.9 million to $2.0 million compared to $153,000 in the prior year to reflect certain customers of the Company that had closed or filed bankruptcy.

Inventories.  Estimated inventory allowances for slow-moving and obsolete inventories are based on current assessments of future demands, market conditions and related management initiatives.  Based on the Company’s estimates and assumptions, an allowance for inventory obsolescence of $0.9 million and $1.3 million was established at December 31, 2010 and 2009, respectively.  If market conditions or customer requirements change and are less favorable than those projected by management, inventory allowances are adjusted accordingly.  The Company decreased its reserve for obsolescence by $0.4 million at December 31, 2010 to $0.9 million from $1.3 million at December 31, 2009 and decreased the reserve by $0.7 million at December 31, 2009 from $2.0 million at December 31, 2008 reflecting a continued focus on managing inventory to levels more consistent with demand in order to maximize liquidity. During 2008, depressed market conditions and commodity market price declines contributed to a significant decrease in product demand.  As a result, the Company increased its reserve for obsolescence by $0.9
 
 
million to $2.0 million at December 31, 2008 from $1.1 million at December 31, 2007 to reflect inventory dedicated to certain customers who had filed bankruptcy.
 
Impairment of Long-Lived Assets. The Company records impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted future cash flows estimated to be generated by those assets are less than the carrying amount of those items.  Events that may indicate that certain long-lived assets might be impaired might include a significant downturn in the economy or the RV or MH industries, and/or a loss of a major customer or several customers.  Our cash flow estimates are based on historical results adjusted to reflect our best estimate of future market and operating conditions and forecasts.  The net carrying value of assets not recoverable is reduced to fair value.  Our estimates of fair value represent our best estimate based on industry trends and reference to market rates and transactions.  A change in the Company’s business climate in 2008, including a significant downturn in the Company’s operations, led to a required assessment of the recoverability of the Company’s long-lived assets, which subsequently resulted in an impairment charge of $3.5 million related to machinery and equipment which is included in cost of goods sold on the consolidated statements of operations.  No events or changes in circumstances occurred that required the Company to assess the recoverability of its property and equipment for the years ended December 31, 2010 and 2009, and therefore the Company has not recognized any impairment charges for those years.

All of the Company’s goodwill and long-lived asset impairment assessments are based on established fair value techniques, including discounted cash flow analysis.  These analyses require management to estimate both future cash flows and an appropriate discount rate to reflect the risk inherent in the current business model.  The assumptions supporting valuation models, including discount rates, are determined using the best estimates as of the date of the impairment review.  These estimates are subject to significant uncertainty, and differences in actual future results may require further impairment charges, which may be significant.

Impairment of Goodwill and Other Acquired Intangible Assets.  The Company has made acquisitions in the past that included goodwill and other intangible assets.  Although goodwill and indefinite-lived intangible assets are not amortized, we perform the required impairment test of goodwill and indefinite-lived intangible assets annually (or more frequently if conditions warrant) based on estimates of the fair value of the Company’s reporting units.  The fair value is calculated using a discounted cash flow analysis.  A change in the Company’s business climate in future periods, including a significant downturn in the Company’s operations, and/or a significant decrease in the market value of the Company’s discounted cash flows could result in an impairment charge.  In addition, the assumptions, inputs and judgments used in performing the valuation analysis are inherently subjective and reflect estimates based on known facts and circumstances at the time the Company performs the valuation.  These estimates and assumptions primarily include, but are not limited to, the discount rate, terminal growth rate, five-year compound average growth rate, and the weighted average cost of capital.   Another estimate using different, but still reasonable, assumptions could produce a significantly different result.  Therefore, impairment losses could be recorded in the future.

The impairment calculation compares the implied fair value of reporting unit goodwill and intangible assets with the carrying amount.  If the carrying amount of goodwill exceeds its implied fair value, an impairment loss is recognized in an amount equal to that excess.  Finite-lived intangible assets that meet certain criteria continue to be amortized over their useful lives and are also subject to an impairment test based on estimated undiscounted cash flows when impairment indicators exist, similar to other long-lived assets.

A change in the Company’s business climate in 2008, including a significant downturn in the Company’s operations, led to a required assessment of the Company’s goodwill and other acquired intangible assets.  Based on the results of a third party appraisal and the Company’s impairment analyses in 2008, the Company recorded a $27.4 million goodwill impairment charge and a $29.3 million impairment charge to write-down its other intangible assets to fair value.  Based on the results of the annual impairment analyses, no events or changes in circumstances occurred that required the Company to re-evaluate its goodwill or other intangible assets for the years ended December 31, 2010 and 2009, and therefore the Company has not recognized any impairment charges for those years.
 
 
Deferred Income Taxes.  The carrying value of the Company’s deferred tax assets assumes that the Company will be able to generate sufficient taxable income in future years to utilize these deferred tax assets.  If these assumptions change, the Company may be required to record valuation allowances against its gross deferred tax assets, which would cause the Company to record additional income tax expense in the Company’s consolidated statements of operations.  Management evaluates the potential the Company will be able to realize its gross deferred tax assets and assesses the need for valuation allowances on a quarterly basis.  The Company recorded an $18.0 million valuation allowance in 2008 and increased the valuation allowance by $1.4 million in 2009.  The valuation allowance was reduced by $0.3 million in 2010.   See Note 14 to the Consolidated Financial Statements for further details.
 
OTHER
 
Sale of Property
 
In the first quarter of 2010, the Company sold its manufacturing and distribution facilities in Woodburn, Oregon and Fontana, California.  The Company is currently operating in the same facilities in Oregon and California under lease agreements with the respective purchasers for the use of a portion of the square footage previously occupied. The Company recorded a pretax gain on the sales of approximately $2.8 million in its first quarter 2010 operating results.
 
In 2009, the Company sold its manufacturing facility in Ocala, Florida, resulting in a pretax gain on sale of approximately $1.2 million.  In addition, the Company sold the building which housed its American Hardwoods operation in 2009 with no gain or loss recognized on the sale.  The sale of the Company’s aluminum extrusion operation in 2009 included the sale of the building which housed this operation.
 
In 2008, the Company sold an idle manufacturing facility in Fontana, California, which was exited in 2007, resulting in a pretax gain on sale of approximately $4.2 million.
 
Purchase of Property
 
Not Applicable.
 
Inflation
 
The prices of key raw materials, consisting primarily of lauan, gypsum, and particleboard are influenced by demand and other factors specific to these commodities, such as the price of oil, rather than being directly affected by inflationary pressures.  Prices of certain commodities have historically been volatile.  During periods of rising commodity prices, we have generally been able to pass the increased costs to our customers in the form of surcharges and price increases. We do not believe that inflation had a material effect on results of operations for the periods presented.
 
ITEM 7A. 
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Not applicable.
 
ITEM 8. 
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
The information required by this item is set forth in Item 15(a)(1) of Part IV on page 49 of this Annual Report.
 
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
 
Not applicable.
 
 
ITEM 9A. 
CONTROLS AND PROCEDURES
 
Disclosure Controls and Procedures
 
Under the supervision and with the participation of our senior management, including our Chief Executive Officer and Chief Financial Officer, the Company conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15(d)-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this annual report (the “Evaluation Date”).  Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded as of the Evaluation Date that our disclosure controls and procedures were effective such that the information relating to the Company, including consolidated subsidiaries, required to be disclosed in our Securities and Exchange Commission (“SEC”) reports (i) is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to the Company’s management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
 
Changes in internal control over financial reporting. There have been no changes in our internal control over financial reporting that occurred during the fourth quarter ended December 31, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
Management’s Annual Report on Internal Control Over Financial Reporting
 
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f).  Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.  Based on our evaluation, we concluded that our internal controls over financial reporting were effective as of December 31, 2010.  This annual report does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting.  Management's report is not subject to attestation by the Company's registered public accounting firm pursuant to rules of the SEC that permit the Company to provide only management's report in this annual report.

ITEM 9B. 
OTHER INFORMATION
 
None.
 
PART III
 
ITEM 10. 
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
 
Directors of the Company
 
The information required by this item with respect to directors is set forth in our Proxy Statement for the Annual Meeting of Shareholders to be held on May 26, 2011, under the captions “Election of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance,” which information is hereby incorporated herein by reference.
 
Executive Officers of the Registrant
 
The information required by this item is set forth under the caption “Executive Officers of the Company” in Part I of this Annual Report.
 
Audit Committee
 
Information on our Audit Committee is contained under the caption “Audit Committee” in our Proxy Statement for the Annual Meeting of Shareholders to be held on May 26, 2011 and is incorporated herein by reference.
 
 
47

 
The Company has determined that Terrence D. Brennan,  Keith V. Kankel,  Larry D. Renbarger and Walter E. Wells all qualify as “audit committee financial experts” as defined in Item 407(d)(5)(ii) of Regulation S-K, and that these directors are “independent” as the term is used in 407(a)(1) of Regulation S-K.
 
Code of Ethics and Business Conduct
 
We have adopted a Code of Ethics and Business Conduct Policy applicable to all employees.  Additionally, we have adopted a Code of Ethics Applicable to Senior Executives including, but not limited to, the Chief Executive Officer and Chief Financial Officer of the Company.  Our Code of Ethics and Business Conduct, and our Code of Ethics Applicable to Senior Executives are available on the Company’s web site at www.patrickind.com under “Corporate Governance”.   We intend to post on our web site any amendments to, or waivers from, our Corporate Governance Guidelines and our Code of Ethics Policy Applicable to Senior Executives.  We will provide shareholders with a copy of these policies without charge upon written request directed to the Company’s Corporate Secretary at the Company’s address.
 
Corporate Governance
 
Information on our corporate governance practices is contained under the caption “Corporate Governance” in our Proxy Statement for the Annual Meeting of Shareholders to be held on May 26, 2011 and incorporated herein by reference.
 
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 26, 2011, under the captions “Executive Compensation – Compensation of Executive Officers and Directors,” “Compensation Committee Interlocks and Director Participation,” and “Compensation Committee Report,”  and is incorporated herein by reference.
 
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
 
The information required by this item is set forth in our Proxy Statement for the Annual Meeting of Shareholders to be held on May 26, 2011, under the captions “Equity Compensation Plan Information” and “Security Ownership of Certain Beneficial Owners and Management,” and is incorporated herein by reference.
 
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
 
The information required by this item is set forth in our Proxy Statement for the Annual Meeting of Shareholders to be held on May 26, 2011, under the captions “Related Party Transactions” and “Independent Directors,” and is incorporated herein by reference.
 
ITEM 14. 
PRINCIPAL ACCOUNTANT FEES AND SERVICES
 
The information required by this item is set forth in our Proxy Statement for the Annual Meeting of Shareholders to be held on May 26, 2011, under the heading “Independent Public Accountants,” and is incorporated herein by reference.
 
 
PART IV
 
ITEM 15. 
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 
 
(a)
(1) The financial statements listed in the accompanying Index to the Financial Statements on page F-1 of the separate financial section of this Report are incorporated herein by reference.
 
(3)  The exhibits required to be filed as part of this Annual Report on Form 10-K are listed under (c) below.
 
 
(c)
Exhibits
 
Exhibit Number
 
Exhibits
3.1
 
Articles of Incorporation of Patrick Industries, Inc. (filed as Exhibit 3.1 to the Company’s Form 10-K filed on March 30, 2010 and incorporated herein by reference).
     
3.2
 
Amended and Restated By-laws (filed as Exhibit 3.1 to the Company’s Form 8-K on January 21, 2009 and incorporated herein by reference).
     
4.1
 
Rights Agreement, dated March 21, 2006, between Patrick Industries, Inc. and National City Bank, as Rights Agent (filed as Exhibit 10.1 to the Company’s Form 8-K filed on March 23, 2006 and incorporated herein by reference).
     
4.2
 
Amendment No. 1 to Rights Agreement, dated May 18, 2007, between Patrick Industries, Inc. and National City Bank, as Rights Agent (filed as Exhibit 10.5 to the Company’s Form 8-K filed on May 24, 2007 and incorporated herein by reference).
     
4.3
 
Amendment No. 2 to Rights Agreement, dated March 12, 2008, between Patrick Industries, Inc. and National City Bank, as Rights Agent (filed as Exhibit 10.3 to the Company’s Form 8-K filed on March 13, 2008 and incorporated herein by reference).
     
4.4
 
Second Amended and Restated Registration Rights Agreement, dated as of December 11, 2008, by and among Patrick Industries, Inc., Tontine Capital Partners, L.P., Tontine Capital Overseas Master Fund, L.P. and the lenders party thereto (filed as Exhibit 10.3 to the Company’s Form 8-K filed on December 15, 2008 and incorporated by reference).
     
10.1*
 
Patrick Industries, Inc. 2009 Omnibus Incentive Plan, (filed as Appendix A to the Company’s revised Definitive Proxy Statement on Schedule 14A filed on October 20, 2009 and incorporated herein by reference).
     
10.2*
 
Form of Employment Agreements with Executive Officers (filed as Exhibit 10.2 to the Company’s Form 10-K filed on March 30, 2010 and incorporated herein by reference).
     
10.3*
 
Form of Officers Retirement Agreement (filed as Exhibit 10.3 to the Company’s Form 10-K filed on March 30, 2010 and incorporated herein by reference).
     
10.4
 
Form of Non-Qualified Stock Option (filed as Exhibit 10.4 to the Company’s Form 10-K filed on March 30, 2010 and incorporated herein by reference).
     
10.5
 
Form of Directors’ Annual Restricted Stock Grant (filed as Exhibit 10.5 to the Company’s Form 10-K filed on March 30, 2010 and incorporated herein by reference).
 
 
 10.6   Form of Officer and Employee Restricted Stock Award (filed as Exhibit 10.5 to the Company’s Form 10-K filed on March 30, 2010 and incorporated herein by reference).
     
 10.7   Credit Agreement, dated May 18, 2007, among Patrick Industries, Inc., JPMorgan Chase Bank, N.A.; Fifth Third Bank; Bank of America, N.A./LaSalle Bank National Association; Key Bank, National Association; RBS Citizens, National Association/Charter One Bank; Associated Bank; National City Bank; and 1st Source Bank (collectively, the “Lenders” and JPMorgan Chase Bank, N.A., as administrative agent) (filed as Exhibit 10.1 to the Company’s Form 8-K filed on May 24, 2007 and incorporated herein by reference).
     
10.8
 
First Amendment and Waiver, dated March 19, 2008, among Patrick Industries, Inc., the Lenders and JPMorgan Chase Bank, N.A. (filed as Exhibit 10.1 to the Company’s Form 8-K filed on March 26, 2008 and incorporated herein by reference).
     
10.9
 
Second Amendment and Waiver, dated December 11, 2008, among Patrick Industries, Inc., the Lenders and JPMorgan Chase Bank, N.A. (filed as Exhibit 10.1 to the Company’s Form 8-K filed on December 15, 2008 and incorporated herein by reference).
 
   
 10.10   Warrant Agreement, dated December 11, 2008, among Patrick Industries, Inc., and the holders of the Warrants (filed as Exhibit 10.2 to the Company’s Form 8-K filed on December 15, 2008 and incorporated herein by reference).
     
10.11   Third Amendment and Waiver, dated April 14, 2009, among Patrick Industries, Inc., the Lenders and JPMorgan Chase Bank, N.A. (filed as Exhibit 10.1 to the Company’s Form 8-K filed on April 15, 2009 and incorporated herein by reference).
     
10.12   Fourth Amendment, dated December 11, 2009, among Patrick Industries, Inc., the Lenders and JPMorgan Chase Bank, N.A. (filed as Exhibit 10.1 to the Company’s Form 8-K filed on December 16, 2009 and incorporated herein by reference).
     
10.13   Fifth Amendment, dated December 17, 2010, among Patrick Industries, Inc., the Lenders and JPMorgan Chase Bank, N.A. (filed as Exhibit 10.1 to the Company’s Form 8-K filed on December 20, 2010 and incorporated herein by reference).
     
10.14   Securities Purchase Agreement, dated March 10, 2008, by and among Tontine Capital Partners, L.P., Tontine Capital Overseas Master Fund L.P., and Patrick Industries, Inc. (filed as Exhibit 10.1 to Form 8-K filed on December 15, 2008 and incorporated herein by reference).
     
12**  
Statement of Computation of Operating Ratios.
 
 
 
16.1
 
Letter from Ernst & Young LLP to the SEC dated June 26, 2009 (filed as Exhibit 16.1 to Form 8-K filed on June 26, 2009 and incorporated herein by reference).
     
 
Subsidiaries of the Registrant.
     
23.1**   Consent of Crowe Horwath LLP.
     
 
Consent of Ernst & Young LLP.
     
 
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Chief Executive Officer.
     
 
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Chief Financial Officer.
 
 
50

 
 
Exhibit Number
 
Exhibits
     
 
Certification pursuant to 18 U.S.C. Section 1350.

*Management contract or compensatory plan or arrangement.
**Filed herewith.
 
 All other financial statement schedules are omitted because they are not applicable or the required information is immaterial or is shown in the Notes to the Consolidated Financial Statements.


SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
  PATRICK INDUSTRIES, INC.
     
Date: March 30, 2011     
By: /s/ Todd M. Cleveland
    Todd M. Cleveland
    President and Chief Executive Officer
 
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 registrant and in the capacities and on the dates indicated.
 
Signature
 
Title
 
Date
         
/s/ Paul E. Hassler
 
Chairman of the Board
 
March 30, 2011
Paul E. Hassler
       
         
/s/ Todd M. Cleveland
 
President and Chief Executive Officer and Director
 
March 30, 2011
Todd  M. Cleveland
 
(Principal Executive Officer)
   
         
/s/ Andy L. Nemeth
 
Executive Vice President-Finance, Secretary-
 
March 30, 2011
Andy L. Nemeth
 
Treasurer, Chief Financial Officer and Director (Principal Financial Officer)
   
         
/s/ Terrence D. Brennan
 
Director
 
March 30, 2011
Terrence D. Brennan
       
         
/s/ Joseph M. Cerulli
 
Director
 
March 30, 2011
Joseph M. Cerulli
       
         
/s/ Keith V. Kankel
 
Director
 
March 30, 2011
Keith V. Kankel
       
         
/s/ Larry D. Renbarger
 
Director
 
March 30, 2011
Larry D. Renbarger
       
         
/s/ Walter E. Wells
 
Director
 
March 30, 2011
Walter E. Wells
       

 
PATRICK INDUSTRIES, INC.
Index to the Financial Statements
 
Report of Independent Registered Public Accounting Firm, Crowe Horwath LLP
F-2
Report of Independent Registered Public Accounting Firm, Ernst & Young LLP
F-3
Financial Statements:
 
Consolidated Statements of Financial Position
F-4
Consolidated Statements of Operations
F-5
Consolidated Statements of Shareholders' Equity
F-6
Consolidated Statements of Cash Flows
F-7
Notes to Consolidated Financial Statements
F-8
 
 
F-1

 
Report of Independent Registered Public Accounting Firm

To the Shareholders and Board of Directors of Patrick Industries, Inc.:

We have audited the accompanying consolidated statements of financial position of Patrick Industries, Inc. and subsidiary companies as of December 31, 2010 and 2009, and the related consolidated statements of operations, shareholders’ equity, and cash flows for the years then ended.  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.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion.  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 financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2010 and 2009, and the results of its operations and its cash flows for the years ended December 31, 2010 and 2009, in conformity with U.S. generally accepted accounting principles.
 
 
/s/ Crowe Horwath LLP
 
Elkhart, Indiana
March 30, 2011
 
 
Report of Independent Registered Public Accounting Firm

To The Board of Directors and Shareholders of Patrick Industries, Inc.:
 
We have audited the accompanying consolidated statements of operations, shareholders' equity, and cash flows of Patrick Industries, Inc. for the year ended December 31, 2008.  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 audit.
 
We conducted our audit 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. We were not engaged to perform an audit of the Company’s internal control over financial reporting.  Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation.  We believe that our audit provides a reasonable basis for our opinion.
 
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated results of operations and cash flows of Patrick Industries, Inc. for the year ended December 31, 2008, in conformity with U.S. generally accepted accounting principles.
 
/s/ Ernst & Young LLP
 
Grand Rapids, Michigan
April 14, 2009,
except for Note 20, as to which the date is March 30, 2011
 
 
PATRICK INDUSTRIES, INC.
           
             
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
           
             
   
As of December 31,
 
(thousands except share data)
 
2010
   
2009
 
ASSETS
           
Current assets
           
Cash and cash equivalents
  $ 1,957     $ 60  
Trade receivables, net of allowance for doubtful accounts (2010: $397; 2009: $700)
    10,190       12,507  
Inventories
    22,723       17,485  
Prepaid expenses and other
    2,258       1,981  
Assets held for sale
    -       4,825  
Total current assets
    37,128       36,858  
Property, plant and equipment, net
    23,172       26,433  
Goodwill
    2,966       2,140  
Intangible assets, net
    7,901       7,047  
Deferred tax assets
    -       -  
Deferred financing costs, net of accumulated amortization (2010: $3,720; 2009: $2,185)
    325       1,463  
Other non-current assets
    3,325       3,096  
TOTAL ASSETS
  $ 74,817     $ 77,037  
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
Current liabilities
               
Current maturities of long-term debt
  $ 16,983     $ 10,359  
Short-term borrowings
    19,250       13,500  
Accounts payable
    8,204       5,874  
Accrued liabilities
    5,628       5,275  
Total current liabilities
    50,065       35,008  
Long-term debt, less current maturities and discount
    -       18,408  
Deferred compensation and other
    5,290       5,963  
Deferred tax liabilities
    1,326       1,309  
TOTAL LIABILITIES
    56,681       60,688  
                 
COMMITMENTS AND CONTINGENCIES
               
                 
SHAREHOLDERS’ EQUITY
               
Preferred stock, no par value; authorized 1,000,000 shares
     -        -  
Common stock, no par value; authorized 20,000,000 shares; issued 2010 - 9,313,189 shares;  issued 2009 – 9,182,189 shares
      53,798         53,588  
Accumulated other comprehensive loss
    (830 )     (1,181 )
Additional paid-in-capital
    148       148  
Accumulated deficit
    (34,980 )     (36,206 )
TOTAL SHAREHOLDERS’ EQUITY
    18,136       16,349  
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
  $ 74,817     $ 77,037  
 
See accompanying Notes to Consolidated Financial Statements.

 
PATRICK INDUSTRIES, INC.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CONSOLIDATED STATEMENTS OF OPERATIONS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(thousands except per share data)
 
For the years ended December 31,
 
 
2010
   
2009
   
2008
 
NET SALES
 
$
278,232
 
 
$
212,522
 
 
$
325,151
 
Cost of goods sold
 
 
248,594
 
 
 
189,643
 
 
 
297,133
 
Restructuring charges
 
 
-
 
 
 
-
 
 
 
779
 
GROSS PROFIT
 
 
29,638
 
 
 
22,879
 
 
 
27,239
 
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
Warehouse and delivery
 
 
11,699
 
 
 
10,248
 
 
 
16,533
 
Selling, general and administrative
 
 
13,835
 
 
 
12,132
 
 
 
26,859
 
Goodwill impairment
 
 
-
 
 
 
-
 
 
 
27,374
 
Intangible assets impairments
 
 
-
 
 
 
-
 
 
 
29,353
 
Restructuring charges
 
 
-
 
 
 
-
 
 
 
202
 
Amortization of intangible assets
 
 
564
 
 
 
353
 
 
 
1,716
 
Gain on sale of fixed assets
 
 
(2,866
)
 
 
(1,201
)
 
 
(4,566
Total operating expenses
 
 
23,232
 
 
 
21,532
 
 
 
97,471
 
OPERATING INCOME (LOSS)
 
 
6,406
 
 
 
1,347
 
 
 
(70,232
Stock warrants revaluation
 
 
(261
)
 
 
817
 
 
 
-
 
Interest expense, net
 
 
5,522
 
 
 
6,442
 
 
 
6,377
 
Income (loss) from continuing operations before income tax benefit
 
 
1,145
 
 
 
(5,912
)
 
 
(76,609
Income tax benefit
 
 
(81
)
 
 
(469
)
 
 
(9,952
Income (loss) from continuing operations
 
 
1,226
 
 
 
(5,443
)
 
 
(66,657
                         
Income (loss) from discontinued operations
 
 
-
 
 
 
1,486
 
 
 
(7,699
Income taxes (benefit)
 
 
-
 
 
 
564
 
 
 
(2,849
Income (loss) from discontinued operations, net of tax
 
 
-
 
 
 
922
 
 
 
(4,850
NET  INCOME (LOSS)
 
$
1,226
 
 
$
(4,521
)
 
$
(71,507
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic net income (loss) per common share:
 
 
 
 
 
 
 
 
 
 
 
 
Continuing operations
 
$
0.13
 
 
$
(0.59
)
 
$
(8.32
Discontinued operations
 
 
-
 
 
 
0.10
 
 
 
(0.61
Net income (loss)
 
$
0.13
 
 
$
(0.49
)
 
$
(8.93
 
 
 
 
 
 
 
 
 
 
 
 
 
Diluted net income (loss) per common share:
 
 
 
 
 
 
 
 
 
 
 
 
Continuing operations
 
$
0.12
 
 
$
(0.59
)
 
$
(8.32
Discontinued operations
 
 
-
 
 
 
0.10
 
 
 
(0.61
Net income (loss)
 
$
0.12
 
 
$
(0.49
)
 
$
(8.93
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average shares outstanding – basic
 
 
9,351
 
 
 
9,198
 
 
 
8,009
 
Weighted average shares outstanding – diluted
 
 
9,863
 
 
 
9,198
 
 
 
8,009
 
 
See accompanying Notes to Consolidated Financial Statements.
 

PATRICK INDUSTRIES, INC.
 
   
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
           
                       
Years Ended December 31, 2010, 2009 and 2008
                     
(thousands except share data)
 
Comprehensive
Income (Loss)
   
Preferred
Stock
   
Common
Stock
   
Accumulated
Other
Comprehensive
Loss
   
Additional Paid-in-
Capital
   
Retained
Earnings
(Accumulated
(Deficit)
   
Total
 
Balance,  January 1, 2008
        $ -     $ 32,635     $ (672 )   $ 148     $ 39,822     $ 71,933  
Net loss
  $ (71,507 )     -       -       -       -       (71,507 )     (71,507 )
Change in accumulated pension obligation, net of tax
    (17 )     -       -       (17 )     -       -       (17 )
Change in fair value of interest rate swaps, net of tax
    (750 )     -       -       (750 )     -       -       (750 )
Issuance of warrants to purchase 474,049 shares
    -       -       -       -       214       -       214  
Issuance of common stock for stock award plan
    -       -       228       -       -       -       228  
Issuance of 1,125,000 shares in private placement
    -       -       7,875       -       -       -       7,875  
Issuance of 1,850,000 shares in rights offering
    -       -       12,950       -       -       -       12,950  
Shares used to pay taxes on stock grants
    -       -       (75 )     -       -       -       (75 )
Stock option and compensation expense
    -       -       497       -       -       -       497  
Rights offering and private placement expenses
    -       -       (588 )     -       -       -       (588 )
Balance, December 31, 2008