UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q ( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2003 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from..................to.................. Commission file number 0-3922 PATRICK INDUSTRIES, INC. (Exact name of registrant as specified in its charter) INDIANA 35-1057796 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1800 South 14th Street, Elkhart, IN 46516 (Address of principal executive offices) (ZIP Code) (574) 294-7511 (Registrant's telephone number, including area code) NONE (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark whether the registrant is an accelerated filer. Yes No X Shares of Common Stock Outstanding as of November 3, 2003: 4,616,886 PATRICK INDUSTRIES, INC. INDEX Page No. PART 1: Financial Information ITEM 1: Financial Statements Unaudited Condensed Balance Sheets September 30, 2003 & December 31, 2002 3 Unaudited Condensed Statements of Operations Three Months Ended September 30, 2003 & 2002, and Nine Months Ended September 30, 2003 & 2002 4 Unaudited Condensed Statements of Cash Flows Nine Months Ended September 30, 2003 & 2002 5 Notes to Unaudited Condensed Financial Statements 6 ITEM 2: Management's Discussion and Analysis of Financial Condition and Results of Operations 10 ITEM 3: Quantitative and Qualitative Disclosures About Market Risk 19 ITEM 4: Controls and Procedures 19 PART II: Other Information 20 Signatures 21 PART I: FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS PATRICK INDUSTRIES, INC. UNAUDITED CONDENSED BALANCE SHEETS
(Unaudited) SEPTEMBER 30 DECEMBER 31 2003 2002 ASSETS CURRENT ASSETS Cash and cash equivalents $ 5,396,358 $ 3,552,232 Trade receivables 18,585,667 11,544,753 Inventories 28,958,628 32,091,945 Income tax refund claims receivable 285,298 1,592,551 Prepaid expenses 1,137,482 849,344 Deferred tax assets 1,981,000 1,981,000 ----------- ----------- Total current assets 56,344,433 51,611,825 ----------- ----------- PROPERTY AND EQUIPMENT, at cost 91,402,945 91,499,922 Less accumulated depreciation 60,999,200 59,583,325 ----------- ----------- 30,403,745 31,916,597 ----------- ----------- INTANGIBLE AND OTHER ASSETS 2,618,682 2,937,438 ----------- ----------- Total assets $89,366,860 $86,465,860 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Current maturities of long-term debt $ 3,671,428 $ 3,671,428 Accounts payable 10,990,678 5,822,511 Accrued liabilities 5,127,238 3,552,574 ----------- ----------- Total current liabilities 19,789,344 13,046,513 ----------- ----------- LONG-TERM DEBT, less current maturities 8,471,431 11,442,860 ----------- ----------- DEFERRED COMPENSATION OBLIGATIONS 2,171,141 2,176,577 ----------- ----------- DEFERRED TAX LIABILITIES 279,200 521,000 ----------- ----------- Total liabilities $30,711,116 $27,186,950 ----------- ----------- SHAREHOLDERS' EQUITY Common stock 18,236,386 18,028,833 Retained earnings 40,419,358 41,250,077 ----------- ----------- Total shareholders' equity 58,655,744 59,278,910 ----------- ----------- Total liabilities and shareholders' equity $89,366,860 $86,465,860 =========== =========== See accompanying Notes to Unaudited Condensed Financial Statements.
PATRICK INDUSTRIES, INC. UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 2003 2002 2003 2002 NET SALES $ 70,267,568 $ 80,848,100 $ 208,502,593 $ 238,657,632 ------------- ------------- ------------- ------------- COST AND EXPENSES Cost of goods sold 61,358,268 70,498,170 183,960,275 207,717,224 Warehouse and delivery expenses 3,203,555 3,842,407 9,593,305 10,901,430 Selling, general, and administrative expenses 4,918,198 6,057,691 15,222,977 17,299,366 Restructuring charges 235,000 - - - 235,000 269,180 Interest expense, net 177,087 195,232 561,176 705,982 ------------- ------------- ------------- ------------- 69,892,108 80,593,500 209,572,733 236,893,182 ------------- ------------- ------------- ------------- INCOME (LOSS) BEFORE INCOME TAXES 375,460 254,600 (1,070,140) 1,764,450 INCOME TAXES (CREDIT) 148,300 101,600 (422,700) 705,600 ------------- ------------- ------------- ------------- NET INCOME (LOSS) $ 227,160 $ 153,000 $ (647,440) $ 1,058,850 ============= ============= ============= ============= BASIC AND DILUTED EARNINGS (LOSS) PER COMMON SHARE $ .05 $ .03 $ (.14) $ .23 ============= ============= ============= ============= DIVIDENDS PER SHARE $ .00 $ .04 $ .04 $ .12 ============= ============= ============= ============= WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 4,611,037 4,556,136 4,595,306 4,543,404 See accompanying Notes to Unaudited Condensed Financial Statements.
PATRICK INDUSTRIES, INC. UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30 2003 2002 CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ (647,440) $ 1,058,850 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 4,309,083 4,802,106 (Gain) on sale of fixed assets (272,330) (9,111) Deferred income taxes (241,800) (467,839) Other 211,500 375,308 Change in assets and liabilities: Decrease (increase) in: Trade receivables (7,040,914) (9,103,928) Inventories 3,133,317 (7,568,577) Income tax refund claims receivable 1,307,253 3,046,799 Prepaid expenses (288,138) 174,721 Increase (decrease) in: Accounts payable and accrued liabilities 6,982,831 9,250,986 Income taxes payable (240,000) 289,264 ----------- ----------- Net cash provided by operating activities 7,213,362 1,848,579 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (3,490,903) (3,248,259) Proceeds from sale of fixed assets 1,271,767 47,218 Other 102,411 118,770 ----------- ----------- Net cash (used in) investing activities (2,116,725) (3,082,271) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Principal payments on long-term debt (2,971,429) (2,971,428) Payments of deferred compensation (216,936) (186,820) Proceeds from sale of common stock 128,953 15,128 Cash dividends paid (183,279) (545,298) Other (9,820) (9,901) ----------- ----------- Net cash (used in) financing activities (3,252,511) (3,698,319) ----------- ----------- Increase (decrease) in cash and cash equivalents 1,844,126 (4,932,011) Cash and cash equivalents, beginning 3,552,232 5,914,283 ----------- ----------- Cash and cash equivalents, ending $ 5,396,358 $ 982,272 =========== =========== Cash Payments for: Interest $ 694,926 $ 875,502 Income taxes 174,229 237,237 See accompanying notes to Unaudited Condensed Financial Statements
PATRICK INDUSTRIES, INC. NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS 1. In the opinion of the Company, the accompanying unaudited condensed financial statements contain all adjustments (consisting of only normal recurring accruals and the adjustments for restructuring charges as discussed in Note 5) necessary to present fairly the financial position as of September 30, 2003 and December 31, 2002, the results of operations for the three months and the nine months ended September 30, 2003 and 2002, and cash flows for the nine months ended September 30, 2003 and 2002. 2. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. It is suggested that these condensed financial statements be read in conjunction with the financial statements and notes thereto included in the Company's December 31, 2002 audited financial statements. The results of operations for the three month and nine month periods ended September 30, 2003 and 2002 are not necessarily indicative of the results to be expected for the full year. 3. The inventories on September 30, 2003 and December 31, 2002 consist of the following classes: September 30 December 31 2003 2002 ---- ---- Raw materials $16,737,662 $20,756,789 Work in process 1,537,353 1,625,099 Finished goods 4,455,816 4,190,366 ----------- ----------- Total manufactured goods 22,730,831 26,572,254 Distribution products 6,227,797 5,519,691 ----------- ----------- TOTAL INVENTORIES $28,958,628 $32,091,945 =========== =========== The inventories are stated at the lower of cost, First-In First-Out (FIFO) method, or market. 4. Dividends per common share for the quarters ending September 30, 2003 and 2002 were $.00 and $.04 per share, respectively. This resulted in total dividends for the nine month periods ending September 30, 2003 and 2002 of $.04 and $.12 per share, respectively. 5. In September, 2003, the Company recorded a restructuring charge related to the closing of one of its unprofitable cabinet door operating units. The Company recorded estimated and actual costs of $235,000, or $.03 per share, net of tax related to this restructuring. This operating unit was phased out in the third quarter of 2003 and the charges include, but are not limited to severance, retention, and accrued vacation for approximately 61 hourly and salaried employees, all of which will be terminated from this particular operation. Other charges include shut down expenses and the write-off of obsolete inventory. The operation was closed in September and the charges are expected to be paid in the fourth quarter of 2003. In June, 2002, the Company decided to close an unprofitable division in the Wood segment and consolidate it into another existing plant location. Accordingly, the Company recorded charges of approximately $269,000, or $.04 per share, net of tax which included plant shut-down expenses, the write-down of obsolete inventory, and severance payments of approximately $62,000 to approximately 51 employees, all of which were terminated from the operation. These restructuring charges were all paid in the third quarter of 2002. 6. New accounting standard: The FASB has issued Statement No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity". Statement No. 150 requires that certain freestanding financial instruments be reported as liabilities in the balance sheet. Depending on the type of financial instrument, it will be accounted for at either fair value or the present value of future cash flows determined at each balance sheet date with the change in that value reported as interest expense in the income statement. Prior to the application of Statement No. 150, either those financial instruments were not required to be recognized, or if recognized were reported in the balance sheet as equity and changes in the value of those instruments were normally not recognized in net income. The Company is required to apply Statement No. 150 in the current period. The Company presently does not have any freestanding financial instruments which are within the scope of Statement No. 150. 7. The Company accounts for grants of stock options under its stock option plan based on the recognition and measurement principles of APB Opinion No. 25 and related interpretations. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provision of FASB Statement No. 123 to stock based employee compensation: Nine Months Ended September 30 2003 2002 --------------------------------- Net income (loss): As reported $ (647,440) $1,058,850 Deduct total stock-based employee compensation expense determined under fair value based method for all rewards net of related tax effects (114,000) (114,117) --------------------------------- Pro forma $ (761,440) $ 944,733 ================================= Basic earnings (loss) per share: As reported $ (.14) $ .23 Pro forma (.17) .21 Diluted earnings (loss) per share: As reported $ (.14) $ .23 Pro forma (.17) .20
8. The Company's reportable segments are as follows: Laminating - Utilizes various materials including gypsum, particleboard, plywood, and fiberboard which are bonded by adhesives or a heating process to a number of products including vinyl, paper, foil, and high pressure laminate. These laminated products are utilized to produce furniture, shelving, wall, counter, and cabinet products with a wide variety of finishes and textures. Distribution - Distributes primarily pre-finished wall and ceiling panels, particleboard, hardboard and vinyl siding, roofing products, high pressure laminates, passage doors, building hardware, insulation, and other products. Wood - Uses raw lumber including solid oak, other hardwood materials, and laminated particleboard or plywood to produce cabinet door product lines. Other - Includes aluminum extrusion and fabricating, an adhesive division, a pleated shade division, and a machine manufacturing division. The table below presents unaudited information about the revenue and operating income of those segments: THREE MONTHS ENDED SEPTEMBER 30, 2003 ------------------------------------- Segment Laminating Distribution Wood Other Total ---------- ------------ ---- ----- ----- Net outside sales $ 33,527,467 $ 23,896,457 $ 6,317,863 $ 5,327,527 $ 69,069,314 Intersegment sales 1,714,860 147,692 175,193 3,404,165 5,441,910 ------------------------------------------------------------------------------------------------ Total sales $ 35,242,327 $ 24,044,149 $ 6,493,056 $ 8,731,692 $ 74,511,224* ------------------------------------------------------------------------------------------------ Operating income (loss) $ 499,631 $ 579,144 $ (222,808) $ 250,556 $ 1,106,523 THREE MONTHS ENDED SEPTEMBER 30, 2002 ------------------------------------- Net outside sales $ 37,391,514 $ 28,097,187 $ 7,803,389 $ 7,556,010 $ 80,848,100 Intersegment sales 1,731,595 200,547 169,691 2,421,992 4,523,825 ------------------------------------------------------------------------------------------------ Total sales $ 39,123,109 $ 28,297,734 $ 7,973,080 $ 9,978,002 $ 85,371,925* ------------------------------------------------------------------------------------------------ Operating income (loss) $ 722,886 $ 464,132 $ (285,905) $ 213,148 $ 1,114,261 NINE MONTHS ENDED SEPTEMBER 30, 2003 ------------------------------------ Segment Laminating Distribution Wood Other Total ---------- ------------ ---- ----- ----- Net outside sales $101,943,562 $ 66,825,213 $ 19,571,062 $ 18,964,502 $ 207,304,339 Intersegment sales 5,008,402 505,200 445,326 7,433,809 13,392,737 ------------------------------------------------------------------------------------------------ Total sales $106,951,964 $ 67,330,413 $ 20,016,388 $ 26,398,311 $ 220,697,076* ------------------------------------------------------------------------------------------------ Operating income (loss) $ 1,003,062 $ 914,666 $ (1,360,767) $ 410,273 $ 967,234 Total assets $ 33,347,723 $ 12,715,050 $ 4,947,955 $ 6,801,082 $ 57,811,810 NINE MONTHS ENDED SEPTEMBER 30, 2002 ------------------------------------ Net outside sales $108,866,154 $ 83,131,792 $ 24,515,552 $ 22,144,134 $ 238,657,632 Intersegment sales 4,986,862 582,648 582,881 7,862,590 14,014,981 ------------------------------------------------------------------------------------------------ Total sales $113,853,016 $ 83,714,440 $ 25,098,433 $ 30,006,724 $ 252,672,613* ------------------------------------------------------------------------------------------------ Operating income (loss) $ 3,089,192 $ 1,237,260 $ (420,074) $ 528,482 $ 4,434,860 Total assets $ 37,445,686 $ 15,405,792 $ 6,346,333 $ 7,976,585 $ 67,174,396
Reconciliation of segment operating income to consolidated operating income (loss): 3 Months Ended 9 Months Ended September 30, September 30, 2003 2002 2003 2002 ---- ---- ---- ---- Operating income for segments $ 1,106,523 $ 1,114,261 $ 967,234 $ 4,434,860 Corporate incentive agreements 300,000 337,426 906,019 1,073,827 Consolidation reclassifications 196,359 18,306 396,828 95,910 Gain on sale of assets 181,635 5,494 272,330 9,111 Unallocated corporate expenses (765,075) (981,612) (2,387,043) (2,359,862) Other (231,895) (44,043) (429,332) (514,234) Restructuring charges (235,000) - - - (235,000) (269,180) ----------- ----------- ----------- ----------- Consolidated operating income (loss) $ 552,547 $ 449,832 $ (508,964) $ 2,470,432 =========== =========== =========== =========== *Does not agree to Financial Statements due to consolidation eliminations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. GENERAL The first nine months of 2003 have been a challenge for the Company. After coming off of a fairly positive 2002 year, with the exception of a few items including the Oakwood Homes Corporation bankruptcy filing, 2003 has been a year faced with much uncertainty. The end of the first quarter and the beginning of the second quarter were impacted by the unstable situation in the Middle East and the War in Iraq. The third quarter continued with stagnant economic conditions and ended with the lowest consumer confidence levels since March. Net sales for the three and nine month periods ending September 30, 2003 were approximately 13% less than the comparative 2002 periods. The third quarter trended sales levels showed slight improvement as first quarter sales were down a little more than 10% and second quarter sales were down more than 14%. The Manufactured Housing Industry, which represents approximately 41% of the Company's sales at September 30, 2003, is entering its fifth year of this negative cycle. Shipment levels began their fall in the middle of 1999 and have continued that decline through the third quarter of 2003. Year to date shipments through September 2003 were down approximately 24% from the 2002 levels and down almost 64% from the 1998 year to date numbers. The significant declines in shipment levels and plant closings and consolidations have caused extremely competitive market pricing conditions. While this industry appears to have corrected its problems related to dealer and retail inventory levels, repossessed inventory levels, while declining, still remain high and the lack of available financing alternatives lingers on. Current twelve month shipment estimates for calendar 2003 are now projected to be between 130,000 and 135,000 units, which would indicate a range of continued decline between 20% and 23% from the 2002 levels. There have been indications of new entrants into the Manufactured Housing financing arena, but little, if any, impact has been felt yet. Analysts are predicting that shipment improvements in this industry will begin in 2004. The climate in the Recreational Vehicle Industry, which represents approximately 32% of the Company's sales at September 30, 2003, remains relatively strong. Year to date shipments through September 2003 are currently running approximately 2% ahead of the 2002 levels which represents the second highest number of units shipped in the last ten years. While 2003 cumulative monthly shipment numbers have been trending downwards, this industry appears to be on track for a strong year in 2003 and is projected to continue through 2004, barring any unforeseen circumstances. Diversification into the industrial and other markets has been a priority for the Company and continues to be a strategic focus. These industries generally provide for longer production runs and improved operating efficiencies resulting in improved gross margins. Additionally, the Company wants to reduce its reliance on the Manufactured Housing and Recreational Vehicle industries through market diversification, while still maintaining and increasing market share with them. The Company is continually evaluating its overhead structure and making cost cutting adjustments where necessary in order to keep costs aligned with revenues and operate more efficiently at reduced volumes. These efforts are ongoing as are initiatives related to strategic sales growth, new product introductions, potential acquisitions, and investment in property and equipment. Current capacity levels are running at around 40%, and management feels that the Company is well positioned both financially and strategically to take advantage of improvements in the industries which it serves. The following table sets forth the percentage relationship to net sales of certain items in the Company's Statements of Operations: Three Months Nine Months Ended September 30, Ended September 30, 2003 2002 2003 2002 Net sales 100.0% 100.0% 100.0% 100.0% Cost of sales 87.3 87.2 88.2 87.0 Gross profit 12.7 12.8 11.8 13.0 Warehouse and delivery 4.6 4.8 4.6 4.6 Selling, general, & administrative 7.0 7.5 7.3 7.3 Restructuring charges 0.3 - - - 0.1 0.1 Operating income (loss) 0.8 0.5 (0.2) 1.0 Income (loss) before taxes 0.5 0.3 (0.5) 0.7 Income taxes (credits) 0.2 0.1 (0.2) 0.3 Net income (loss) 0.3 0.2 (0.3) 0.4
RESULTS OF OPERATIONS Quarter Ended September 30, 2003 Compared to Quarter Ended September 30, 2002 Net Sales. Net sales decreased approximately $10.6 million, or 13.1%, from $80.8 million in the quarter ended September 30, 2002 to $70.2 million in the quarter ended September 30, 2003. The decrease is attributable to a 20% quarterly decrease in shipments in the Manufactured Housing Industry which was partially offset by strong shipment levels in the Recreational Vehicle Industry. Gross Profit. Gross profit decreased $1.4 million, or 13.9%, from $10.3 million in the quarter ended September 30, 2002 to $8.9 million in the same period in 2003. As a percentage of net sales, gross profit remained relatively consistent decreasing only 0.1%, from 12.8% in 2002 to 12.7% in 2003. Significant competitive pricing situations continue to apply downward pressures on profit margins; however, margins have improved from their levels in the first and second quarters of 2003. This is due to the Company choosing to eliminate certain low margin business as well as better pricing on some of the commodity inventory items that the Company uses. Warehouse and Delivery Expenses. Warehouse and delivery expenses decreased $0.6 million, or 16.6%, from $3.8 million in the third quarter of 2002 to $3.2 million in the third quarter of 2003. As a percentage of net sales, these expenses decreased 0.2%, from 4.8% in 2002 to 4.6% in 2003. These decreases are attributable to decreased sales volume, increased efficiencies related to shipping more full truckloads, and a reduction in the fleet size that the Company owns or leases. Selling, General, and Administrative Expenses. Exclusive of the restructuring charges of $0.2 million in the third quarter of 2003, selling, general, and administrative expenses decreased $1.2 million, or 18.8%, from $6.1 million in the third quarter of 2002 to $4.9 million in the third quarter of 2003. This decrease is due to the elimination of certain fixed expenses as the Company has concentrated on keeping costs aligned with revenues. Additionally, the third quarter of 2003 includes a gain of approximately $0.2 million related to the disposition of a building and real estate which was being held for sale. Restructuring Charges. As discussed in Note 5 to the financial statements, the Company recorded restructuring charges of $235,000 in the third quarter of 2003. Operating Income. Operating income for the third quarter of 2003 and 2002 was $0.5 million. Interest expense, net. Interest expense, net decreased by $18,000, or 9.3%, due to a decline in rates on the variable tax exempt bonds as well as the normal debt service requirements resulting in less long-term debt outstanding. Net Income. The Company had net income of $0.2 million for the third quarter of 2003, or $.05 per share, compared to income of $0.1 million in the third quarter of 2002, or $.03 per share. Quarter Ended September 30, 2002 Compared to Quarter Ended September 30, 2001 Net Sales. Net sales increased $3.3 million, or 4.3%, from $77.5 million for the quarter ended September 30, 2001 to $80.8 million for the quarter ended September 30, 2002. This increase is attributable to an approximate 27% quarterly increase in units shipped and produced in the Recreational Vehicle Industry coupled with a change in the sales mix to core industries which the Company serves. The Company's sales to the Manufactured Housing, Recreational Vehicle, and other industries was 48%, 29%, and 23%, respectively. In the quarter ended September 30, 2001 the Company's sales to these industries was 49%, 27%, and 24%, respectively. Gross Profit. Gross profit increased by 12.8%, or $1.1 million, from $9.2 million for the quarter ended September 30, 2001 to $10.3 million for the quarter ended September 30, 2002. As a percentage of net sales, gross profit increased 1.0%, from 11.8% in the third quarter of 2001 to 12.8% for the same three month period in 2002. These increases are due to increased sales as well as increased operating efficiencies. The elimination of certain low margin business, strategic cost cutting measures taken in the past two years, and the restructuring activities related to significantly underperforming operating units have all contributed to the positive increases in margin. The ongoing developments in the Manufactured Housing Industry related to the lack of dealer and retail financing and the more than 8% drop in unit shipments from the previous year have caused competitive pricing situations and may have future impacts on gross profit margins. Warehouse and Delivery Expenses. Warehouse and delivery expenses remained fairly constant at $3.8 million for each of the three month periods ending September, 2002 and 2001. As a percentage of net sales, warehouse and delivery expenses decreased approximately 0.1%, from 4.9% in the quarter ended September 30, 2001 to 4.8% in the quarter ended September 30, 2002. The Company continues to gain efficiencies in this area by shipping more full truckloads compared to the previous year, as well as a reduction in the size of the fleet that the Company owns or leases. Selling, General and Administrative Expenses. Selling, general, and administrative expenses decreased by $0.2 million, or 4.1%, from $6.3 million in the quarter ended September 30, 2001 to $6.1 million in the quarter ended September 30, 2002. As a percentage of net sales, selling, general, and administrative expenses decreased by 0.7%, from 8.2% for the quarter ended September 30, 2001 to 7.5% for the quarter ended September 30, 2002. The decrease in dollars and percentage of net sales is due to the Company continuing to make variable cost reductions as well as reduced depreciation expense from quarter to quarter. Operating Income. Operating income increased by $1.4 million, from a loss of $0.9 million in the third quarter of 2001 to income of $0.5 million in the third quarter of 2002. The increase in operating income is due to the factors described above. Interest Expense, Net. Interest expense, net, decreased by $82,000 due to a decline in rates on the variable tax exempt bonds as well as the normal debt service requirements resulting in less long term debt outstanding. Net Income. The Company had net income of $0.1 million for the third quarter ended September 30, 2002 compared to a net loss of $0.7 million for the same period in 2001. The increase in net income is attributable to the factors described above. Nine Months Ended September 30, 2003 Compared to Nine Months Ended September 30, 2002 Net Sales. Net sales decreased $30.2 million, or 12.6%, from $238.7 million in the nine month period ended September 30, 2002 to $208.5 million in the same period in 2003. This decrease is attributable to an approximate 24% decrease in shipments in the Manufactured Housing Industry and an offsetting increase of approximately 2% in shipments in the Recreational Vehicle Industry, which are the two primary industries that the Company serves. The Company's sales for the first nine months of 2003 were 41% to Manufactured Housing, 32% to Recreational Vehicle, and 27% to the Industrial and other markets. For the same period in 2002, the Company's sales were 48%, 29%, and 23%, respectively. Gross Profit. Gross profit for the nine month period decreased $6.4 million, or 20.7%, from $30.9 million in 2002 to $24.5 million in 2003. As a percentage of net sales, gross profit decreased 1.2%, from 13.0% in 2002 to 11.8% in 2003. Significant competitive pricing pressures in both the Manufactured Housing and Recreational Vehicle markets have had an impact on the decline in gross profits and gross profit as a percentage of net sales. Warehouse and Delivery Expenses. Warehouse and delivery expenses decreased $1.3 million, or 12.0%, from $10.9 million in 2002 to $9.6 million in 2003. As a percentage of net sales, warehouse and delivery expenses have remained fairly constant at approximately 4.6% of net sales for both 2002 and 2003. The decline in dollars and comparable percentages of net sales is the result of reduced sales volume as well as a reduction in the fleet size that the Company owns or leases. Additionally, the Company has been able to take advantage of improved efficiencies at its various locations by shipping more full truckloads. Selling, General, and Administrative Expenses. Selling, general, and administrative expenses decreased by $2.1 million, or 12.0%, from $17.3 million in 2002 to $15.2 million in 2003. As a percentage of net sales, selling, general, and administrative expenses remained constant from 2002 to 2003. The 2003 figures include a gain on sale of one of the Company's idle manufacturing facilities of approximately $0.2 million. The decrease in dollars is attributable to the Company's ongoing efforts to reduce fixed costs and keep costs aligned with revenues. Operation Loss. Operating losses increased from income of $2.5 million in 2002 to a loss of $0.5 million in 2003 due to the factors described above. Restructuring Charges. As discussed in Note 5 of the financial statements, the Company recorded restructuring charges of approximately $235,000 for the nine months ended September 30, 2003. Interest Expense, net. Interest expense, net decreased $144,000, or 20.5%, due to reduced debt service levels and a decline in rates on the variable tax exempt bonds. Net Loss. The Company reported a net loss of $0.6 million for the first nine months of 2003 compared to net income of $1.1 million for the same period in 2002. The decrease in income is attributable to the factors described above. Nine Months Ended September 30, 2002 Compared to Nine Months Ended September 30, 2001 Net Sales. Net sales increased $14.0 million, or 6.2%, from $224.7 million for the nine months ended September 30, 2001 to $238.7 million for the nine months ended September 30, 2002. This increase is attributable to an approximate 18% increase in units shipped in the Recreational Vehicle Industry coupled with an approximate 8% decrease in units shipped in the Manufactured Housing Industry. The Company's sales for the first nine months of 2002 were 48% to Manufactured Housing, 29% to Recreational Vehicle , and 23% to other industries. Gross Profit. Gross profit increased 17.4%, or $4.6 million, from $26.3 million for the nine months ended September 30, 2001 to $30.9 million for the same period in 2002. As a percentage of net sales, gross profit increased approximately 1.3%, from 11.7% for the nine months ended September 30, 2001 to 13.0% for the nine months ended September 30, 2002. The increase in dollars and percentage of net sales was due to the Company making significant strategic cost cutting measures in 2000 and 2001 including plant closings, eliminating low margin business, and reducing certain fixed overhead expenses. Warehouse and Delivery Expenses. Warehouse and delivery expenses increased approximately $0.1 million, or 1.3%, from $10.8 million for the nine month period ended September 30, 2001 to $10.9 million for the same period in 2002. As a percentage of net sales, warehouse and delivery expenses decreased approximately 0.2%, from 4.8% in 2001 to 4.6% in 2002. The small increase in costs and the decrease in costs as a percentage of net sales was due to increased sales levels allowing the Company to ship more full truckloads than in the previous year and a reduction in the size of the fleet that the Company owns or leases. Selling, General, and Administrative Expenses. Selling, general, and administrative expenses decreased $1.3 million, or 7.0%, from $18.6 million for the nine months ended September 30, 2001 to $17.3 million for the same period in 2002. As a percentage of net sales, selling, general, and administrative expenses decreased 1.0%, from 8.3% in 2001 to 7.3% in 2002. This decrease in dollars and percentage of net sales is due to the Company's continued cost cutting efforts to reduce both fixed and variable expenses. Restructuring Charges. As discussed in Note 5 of the financial statements, the Company recorded restructuring charges of $269,000 for the nine months ended September 30, 2002. Operating Income. Operating income increased $5.5 million, from a loss of $3.0 million for the nine months ended September 30, 2001 to income of $2.5 million for the same period in 2002. The increase in operating income is due to the factors described above. Interest Expense, Net. Interest expense, net, decreased $55,000 due to a decrease in the tax exempt variable interest rate as well as a decrease in the total debt outstanding due to normal debt service requirements. Net Income. The Company had net income of $1.1 million for the nine months ended September 30, 2002 compared to a net loss of $2.3 million for the same period in 2001. This increase in net income is due to the factors described above. BUSINESS SEGMENTS Quarter ended September 30, 2003 Compared to Quarter Ended September 30, 2002 Laminating Segment Discussion Net sales decreased $3.9 million, or 9.9%, from $39.1 million in the quarter ended September 30, 2002 to $35.2 million in the same period in 2003. The decrease is attributable to a 20% quarterly decline in shipments in the Manufactured Housing Industry which was offset by comparable shipments in the Recreational Vehicle Industry. Operating income decreased $0.2 million, or 30.9%, from $0.7 million in the quarter ended September 30, 2002 to $0.5 million in the same period in 2003. As a percentage of laminating segment sales, operating income decreased approximately 0.4%. The decrease in dollars is due to the decline in sales volume. The relatively small decrease in operating income as a percentage of net sales is attributable to the Company's constant focus on keeping operating costs aligned with revenues. Distribution Segment Discussion Net sales decreased $4.3 million, or 15.0%, from $28.3 million in the third quarter of 2002 to $24.0 million in the third quarter of 2003. The decrease in net sales is attributable to the approximate 20% decrease in quarterly shipments in the Manufactured Housing Industry, which is the primary industry this segment serves. Operating income increased $0.1 million, or 25.0%, from $0.5 million in the third quarter of 2002 to $0.6 million in the third quarter of 2003. The increase in operating income despite decreased sales is attributable to this segment improving profit margins in this extremely competitive business environment. Wood Segment Discussion Net sales decreased $1.5 million, or 18.6%, from $8.0 million in the third quarter of 2002 to $6.5 million in the third quarter of 2003. This decrease is due to the closing of one of the unprofitable divisions in this segment and its related phase out during the third quarter, as discussed in Note 5 to the financial statements. The operating loss decreased approximately $0.1 million, or 22%, from a loss of $0.3 million in the third quarter of 2002 to a loss of $0.2 million in the third quarter of 2003. This decrease is attributable to operating improvements as a result of increased sales volume in one of the divisions in this segment in 2003, some of which were offset by the shut down expenses related to the closing of another division in this segment in the third quarter of 2003, which is discussed in Note 5 to the financial statements. Other Segment Discussion Net sales decreased $1.3 million, or 12.5%, from $10.0 million in the third quarter of 2002 to $8.7 million in the third quarter of 2003. This decrease is attributable to the sale of one of the operating units in this segment in the fourth quarter of 2002. Operating income remained relatively constant at $0.2 million for both 2002 and 2003. Quarter ended September 30, 2002 Compared to Quarter Ended September 30, 2001 Laminating Segment Discussion Net sales in the laminating segment increased $4.8 million, or 14.1%, from $34.3 million for the quarter ended September 30, 2001 to $39.1 million for the quarter ended September 30, 2002. This increase in net sales is due to an approximate 27% increase in shipments in the Recreational Vehicle Industry in the third quarter of 2002 compared to the same period in 2001. Shipments in the Manufactured Housing Industry were down approximately 15% for the same quarterly period. Operating income increased $0.7 million, from a small loss of $4,200 for the quarter ended September 30, 2001 to income of $0.7 million for the quarter ended September 30, 2002. This increase was due to the increased sales volume as well as the cost cutting measures that the Company has undertaken over the past two years to reduce fixed and variable costs. Distribution Segment Discussion Net sales increased $0.5 million, or 1.7%, from $27.8 million to $28.3 million for the quarters ended September 30, 2001 and 2002, respectively. This increase was due to this segment gaining market share despite the downturn in the Manufactured Housing Industry, which is the major industry this segment serves. Operating income increased $0.3 million, from $0.2 million in the quarter ended September 30, 2001 to $0.5 million in the same period in 2002. This increase was due to the increased sales volume. Wood Segment Discussion Net sales decreased $0.1 million, or 1.5%, from $8.1 million in the quarter ended September 30, 2001 to $8.0 million in the same period in 2002. This decrease was due to the closing and consolidation of one of the business units in this segment in August, 2002. Operating losses remained fairly constant at an operating loss of approximately $0.3 million. Other Segment Discussion Net sales in this segment decreased $2.5 million, or 20.0%, from $12.5 million in the quarter ended September 30, 2001 to $10.0 million for the same period in 2002. This decrease was attributable to the closing and consolidation of two operations in this segment in 2001, as well as the approximate 15% decrease in shipments in the Manufactured Housing Industry for the three month period ended September 30, 2002. Operating income increased $0.3 million, from a loss of $0.1 in the quarter ended September 30, 2001 to income of $0.2 in the quarter ended September 30, 2002. This increase was attributable to the closing and consolidation of two of the significantly underperforming operating units in this segment in 2001. Nine Months Ended September 30, 2003 Compared to Nine Months Ended September 30, 2002 Laminating Segment Discussion Net sales decreased approximately $6.9 million, or 6.1% from $113.9 million in 2002 to $107.0 million in 2003. This decrease is attributable to the 24% decrease in shipments in the Manufactured Housing Industry, which was offset by the 2% increase in shipments in the Recreational Vehicle Industry. Operating income decreased $2.1 million, or 67.5% from $3.1 million in 2002 to $1.0 million in 2003. The decrease is due to significant competitive pricing pressures in the Manufactured Housing and Recreational Vehicle Industries Distribution Segment Discussion Net sales decreased $16.4 million, or 19.6% from $83.7 million in 2002 to $67.3 million in 2003. The decrease is attributable to the 24% decrease in shipments in the Manufactured Housing Industry, which is the primary industry this segment serves. Operating income decreased $0.3 million, or 26.1% from $1.2 million in 2002 to $0.9 million in 2003. This decrease is attributable to lower sales volume. Wood Segment Discussion Net sales decreased $5.1 million, or 20.2% from $25.1 million in 2002 to $20.0 million in 2003. This decrease is due to the closing of two operating units in this segment, one in June 2002 and the other in September 2003. These closings are discussed in Note 5 to the financial statements. The operating loss increased $1.0 million from a loss of $0.4 million in 2002 to a loss of $1.4 million in 2003. The increase in the operating loss is due to one of the operating units in this segment experiencing operating inefficiencies and material problems in 2003. As discussed in Note 5 to the financial statements, this operating unit was closed in September 2003. Other Segment Discussion Net sales decreased $3.6 million, or 12.0% from $30.0 million in 2002 to $26.4 million in 2003. This decrease is attributable to the sale of one of the operating units in this segment in the fourth quarter of 2002. Operating income decreased $0.1 million, or 22.4% from $0.5 million in 2002 to $0.4 million in 2003. Nine Months Ended September 30, 2002 Compared to Nine Months Ended September 30, 2001 Laminating Segment Discussion Net sales in this segment increased $12.2 million, or 12.0%, from $101.7 million in the nine months ended September 30, 2001 to $113.9 million in the same period in 2002. This increase was mostly due to the approximate 18% increase in shipments in the Recreational Vehicle Industry. Additionally, the Company closed three divisions in the other segment in 2001 which had sales of approximately $4.7 million for the nine months ended September 30, 2001 and certain of these operations were merged into a facility in the laminating segment which was operating at less than capacity and subsequently in 2002 has seen significantly increased volume resulting in higher efficiencies and increased profitability. Operating income increased $3.3 million, from a loss of $0.2 million in the nine months ended September 30, 2001 to income of $3.1 million in the same period in 2002. This increase was due to increased sales volume coupled with increased operating efficiencies from the reduction of fixed and variable costs related to the strategic cost cutting measures that were taken in 2000 and 2001. Distribution Segment Discussion Net sales in this segment increased $6.4 million, or 8.3%, from $77.3 million in the nine months ended September 30, 2001 to $83.7 million in the nine months ended September 30, 2002. This increase was due to increased sales in certain of the Company's operating units in the southeast region of the Manufactured Housing Industry. Operating income increased $563,000, or 84%, from $674,000 in the nine months ended September 30, 2001 to $1.2 million for the same period in 2002 due to increased sales volume. Wood Segment Discussion Net Sales increased $1.3 million, or 5.3%, from $23.8 million in the nine months ended September 30, 2001 to $25.1 million in the nine months ended September 30, 2002. This increase was attributable to the approximate 18% increase in shipments in the Recreational Vehicle Industry for the first nine months of 2002. Operating losses increased $0.1 million, from a loss of $0.3 million for the nine months ended September 30, 2001 to a loss of $0.4 million for the same period in 2002. This decrease is attributable to two operating units in this segment experiencing operating inefficiencies, one of which was consolidated into another division in this segment. The operating results of these two divisions have offset the positive results of the three other divisions within this segment. Other Segment Discussion Net sales in this segment decreased $7.0 million, or 19.0%, from $37.0 million in the first nine months of 2001 compared to $30.0 million in the same period in 2002. This decline was due to the closing and consolidation of one division in the first quarter of 2001 and two divisions in the fourth quarter of 2001, as well as the more than 8% decline in shipments in the Manufactured Housing Industry compared to the previous year. Operating income increased $1.1 million, from a loss of $0.6 million in the nine month period ended September 30, 2001 to income of $0.5 million in the nine month period ended September 30, 2002. This increase is due to the closing and consolidation of three unprofitable divisions in this segment in 2001. LIQUIDITY AND CAPITAL RESOURCES The Company's primary capital requirements are to meet working capital needs, support its capital expenditure plans, and meet debt service requirements. The Company, in September, 1995, issued to an insurance company in a private placement $18,000,000 of senior unsecured notes. The ten year notes bear interest at 6.82%, with semi-annual interest payments that began in 1996 and seven annual principal repayments of $2,571,428 which began in September, 1999. These funds were used to reduce existing bank debt and for working capital needs. The Company has a secured bank Revolving Credit Agreement that provides loan availability of $10,000,000 with maturity in the year 2006. Pursuant to the private placement and the Credit Agreement, the Company is required to maintain certain financial ratios, all of which are currently complied with. The Company believes that cash generated from operations and borrowings under its credit agreements will be sufficient to fund its working capital requirements and normal recurring capital expenditures as currently contemplated. The changes in inventory and accounts receivable balances, which affect the Company's cash flows, are part of normal business cycles that cause them to change periodically. A summary of our contractual cash obligations remaining at September 30, 2003 and for the twelve month periods ending 2004 through 2007 is as follows: --------------------------------------------------------------------------------------------- PAYMENTS DUE BY PERIOD --------------------------------------------------------------------------------------------- - -------------------------------------- CONTRACTUAL OBLIGATIONS TOTAL 2003 2004 2005 2006 2007 - -------------------------------------- -------------- --------------- --------------- --------------- --------------- -------------- Long-term debt, including interest at variable rates** $5,167,017 $731,667 $1,214,950 $1,194,050 $1,173,150 $853,200 -------------- --------------- --------------- --------------- --------------- -------------- Long-term debt, including interest at fixed rates** $5,654,360 $87,685 $2,871,021 $2,695,654 $0 $0 -------------- --------------- --------------- --------------- --------------- -------------- Operating Leases $2,430,124 $489,212 $1,290,873 $338,629 $198,736 $112,674 -------------- --------------- --------------- --------------- --------------- -------------- Total contractual cash obligations $13,251,501 $1,308,564 $5,376,844 $4,228,333 $1,371,886 $965,874 -------------- --------------- --------------- --------------- --------------- -------------- **Interest payments have been calculated using the fixed rate of 6.82% for the Senior notes and the average 2002 annual interest rate of 1.90% for the Industrial Revenue Bonds.
We also have a commercial commitment as described below: - -------------------------------------- --------------------------------- ------------------------------- --------------------------- OTHER COMMERCIAL TOTAL AMOUNT OUTSTANDING DATE OF COMMITMENT COMMITTED AT 09/30/03 EXPIRATION - -------------------------------------- --------------------------------- ------------------------------- --------------------------- Line of Credit $10,000,000 $0 August 15, 2006 - -------------------------------------- --------------------------------- ------------------------------- ---------------------------
We believe that our cash balance, availability under our line of credit, if needed, and anticipated cash flows from operations will be adequate to fund our cash requirements for 2003. CIRITICAL ACCOUNTING POLICIES Our significant accounting policies are summarized in the footnotes to our financial statements. Some of the most critical policies are also discussed below. Our major operating assets are accounts receivable, inventory, and property and equipment. Exclusive of the write-off of certain assets related to the Oakwood Homes Corporation bankruptcy filing in November, 2002, we have not experienced significant bad debt losses and our reserve for doubtful accounts of $350,000 should be adequate for any exposure to loss in our September 30, 2003 accounts receivable. We have also established reserves for slow moving and obsolete inventories and believe them to be adequate. We depreciate our property and equipment over their estimated useful lives and we have not identified any items that are impaired at September 30, 2003. SEASONALITY Manufacturing operations in the manufactured housing and recreational vehicle industries historically have been seasonal and are generally at the highest levels when the climate is moderate. Accordingly, the Company's sales and profits are generally highest in the second and third quarters. INFLATION The Company does not believe that inflation had a material effect on results of operations for the periods presented. SAFE HARBOR STATEMENT The Company makes forward-looking statements from time to time and desires to take advantage of the "safe harbor" which is afforded such statements under the Private Securities Litigation Reform Act of 1995 when they are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the forward-looking statements. The statements contained in the foregoing "Management's Discussion and Analysis of Financial Condition and Results of Operations," as well as other statements contained in this Quarterly Report and statements contained in future filings with the Securities and Exchange Commission and publicly disseminated press releases, and statements which may be made from time to time in the future by management of the Company in presentations to shareholders, prospective investors, and others interested in the business and financial affairs of the Company, which are not historical facts, are forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those set forth in the forward-looking statements. Any projections of financial performance or statements concerning expectations as to future developments should not be construed in any manner as a guarantee that such results or developments will, in fact, occur. There can be no assurance that any forward-looking statement will be realized or that actual results will not be significantly different from that set forth in such forward-looking statement. In addition to the risks and uncertainties of ordinary business operations, the forward-looking statements of the Company referred to above are also subject to the following risks and uncertainties: o The Company operates in highly competitive business environment, and its sales could be negatively affected by its inability to maintain or increase prices, changes in geographic or product mix, or the decision of its customers to purchase competitive products instead of the Company's products. Sales could also be affected by pricing, purchasing, financing, operational, advertising, or promotional decisions made by purchasers of the Company products. o On an annual basis, the Company negotiates renewals for property, casualty, workers compensation, general liability, product liability, and health insurance coverages. Due to conditions within these insurance markets and other factors beyond the Company's control, future coverages and the amount of the related premiums could have a negative affect on the Company's results. o The primary markets to which the Company sells include the Manufactured Housing and Recreational Vehicle Industries, which are cyclical and dependent on various factors including interest rates, access to financing, inventory and production levels and other economic and demographic factors. The Company's sales levels could be negatively impacted by changes in any one of the above items. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risk related to interest rate changes on its debt. Long term debt includes $5,142,859 of indebtedness bearing interest at a fixed rate of 6.82%. The related maturities and interest are reported in the contractual obligations table in the Liquidity and Capital Resources section of this report. ITEM 4. CONTROLS AND PROCEDURES The Company's Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation as of the end of the period covered by this report, that the Company's "disclosure controls and procedures" (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e) are effective to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. There were no changes in the Company's internal control over financial reporting during the quarter ended September 30, 2003 that have materially affected, or are reasonable likely to materially affect, the Company's internal controls over financial reporting. PART II. OTHER INFORMATION Item 1. Legal Proceedings None Item 2. Changes in Securities None Item 3. Defaults upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: 31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(b) and Section 302 of the Sarbanes-Oxley Act of 2002, 31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(b) and Section 302 of the Sarbanes-Oxley Act of 2002, 32.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith (b) A Form 8-K was filed on October 16, 2003, announcing the resignation of David D. Lung as President and Chief Executive Officer and the appointment of Keith V. Kankel as successor. (c) A Form 8-K was filed on October 21, 2003, announcing the third quarter financial results. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PATRICK INDUSTRIES, INC. (Company) Date November 13, 2003 /S/Keith V. Kankel --------------------- --------------------------- Keith V. Kankel (President) (Chief Executive Officer) Date November 13, 2003 /S/Andy L. Nemeth ----------------------- --------------------------- Andy L. Nemeth (Vice President, Finance) (Chief Financial Officer)