FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended June 30, 1998 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 incorporated or organization) Identification No.) 1800 South 14th Street, Elkhart, IN 46516 (Address of principal executive offices) (ZIP Code) Registrant's telephone number, including area code (219) 294-7511 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 Shares of Common Stock Outstanding as of July 31, 1998: 5,933,266 PATRICK INDUSTRIES, INC. INDEX Page No. PART I: Financial Information Unaudited Condensed Balance Sheets June 30, 1998 & December 31, 1997 3 Unaudited Condensed Statements of Income Three Months Ended June 30, 1998 & 1997, and Six Months Ended June 30, 1998 & 1997 4 Unaudited Condensed Statements of Cash Flows Six Months Ended June 30, 1998 & 1997 5 Notes to Unaudited Condensed Financial Statements 6 Management's Discussion and Analysis of Financial Condition and Results of Operations 7 PART II: Other Information 10 Signatures 11 PART I: FINANCIAL INFORMATION PATRICK INDUSTRIES, INC. UNAUDITED CONDENSED BALANCE SHEETS
(Unaudited) (Note) JUNE 30 DECEMBER 31 1998 1997 ASSETS CURRENT ASSETS Cash and cash equivalents $ 526,488 $ 3,765,171 Trade receivables 31,868,681 17,127,797 Inventories 38,933,334 34,602,154 Prepaid expenses 359,579 608,611 Total current assets $ 71,688,082 $ 56,103,733 PROPERTY AND EQUIPMENT, at cost $ 81,071,409 $ 78,052,343 Less accumulated depreciation 31,094,303 29,830,987 $ 49,977,106 $ 48,221,356 INTANGIBLE AND OTHER ASSETS $ 8,653,748 $ 7,862,419 Total assets $ 130,318,936 $ 112,187,508 LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Current maturities of long-term debt $ 1,138,517 $ 1,138,517 Accounts payable, trade 23,257,374 10,329,507 Accrued liabilities 5,325,129 4,455,005 Total current liabilities $ 29,721,020 $ 15,923,029 LONG-TERM DEBT, less current maturities $ 24,785,067 $ 25,015,218 DEFERRED COMPENSATION OBLIGATIONS $ 1,602,002 $ 1,416,002 DEFERRED TAX LIABILITIES $ 1,107,000 $ 1,107,000 SHAREHOLDERS' EQUITY Common stock $ 22,439,197 $ 21,896,822 Retained earnings 50,664,650 46,829,437 $ 73,103,847 $ 68,726,259 Total liabilities and shareholders' equity $ 130,318,936 $ 112,187,508 NOTE: The balance sheet at December 31, 1997 has been taken from the audited financial statements at that date and condensed. See accompanying notes to Unaudited Condensed Financial Statements.
PATRICK INDUSTRIES, INC. UNAUDITED CONDENSED STATEMENTS OF INCOME
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 1998 1997 1998 1997 NET SALES $117,731,176 $106,599,506 $222,718,348 $203,535,216 COST AND EXPENSES Cost of goods sold $102,268,713 $ 93,271,870 $194,002,496 $178,251,038 Warehouse and delivery expenses 4,059,689 3,913,889 7,776,937 7,309,451 Selling, general, and administrative expenses 6,976,003 5,415,413 13,239,516 10,268,640 Interest expense, net 264,905 307,901 518,875 595,810 $113,569,310 $102,909,073 $215,537,824 $196,424,939 INCOME BEFORE INCOME TAXES $ 4,161,866 $ 3,690,433 $ 7,180,524 $ 7,110,277 INCOME TAXES 1,664,700 1,448,500 2,872,200 2,782,200 NET INCOME $ 2,497,166 $ 2,241,933 $ 4,308,324 $ 4,328,077 EARNINGS PER COMMON SHARE $ .42 $ .38 $ .73 $ .73 WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 5,915,206 5,929,140 5,905,890 5,946,769 See accompanying notes to Unaudited Condensed Financial Statements.
PATRICK INDUSTRIES, INC. UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30 1998 1997 CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 4,308,324 $ 4,328,077 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 3,524,364 2,725,881 Other 204,183 53,403 Change in assets and liabilities: Decrease (Increase) in: Trade receivables (13,978,204) (12,228,928) Inventories (3,712,782) 1,407,842 Prepaid expenses 271,408 (38,620) Increase in: Accounts payable and accrued liabilities 12,979,587 9,321,841 Income taxes payable 494,919 496,829 Net cash provided by operating activities 4,091,799 6,066,325 CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (4,174,394) (5,750,567) Investment in marketable securities - - - (500,000) Acquisition of business (2,581,490) (286,840) Other 3,238,683) (1,783,501) Cash and cash equivalents, beginning 3,765,171 2,041,482 Cash and cash equivalents, ending $ 526,488 $ 257,981 See accompanying notes to Unaudited Condensed Financial Statements.
PATRICK INDUSTRIES, INC. NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS 1. In the opinion of the Registrant, the accompanying unaudited condensed financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly financial position as of June 30, 1998, and December 31, 1997, and the results of operations and cash flows for the three months and the six months ended June 30, 1998 and 1997. 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 Registrant's December 31, 1997 audited financial statements. The results of operations for the three months and six months periods ended June 30, 1998 and 1997 are not necessarily indicative of the results to be expected for the full year. 3. The inventories on June 30, 1998 and December 31, 1997 consist of the following classes:
June 30 December 31 1998 1997 Raw materials $23,207,598 $19,710,068 Work in process 835,425 1,170,054 Finished 4,121,492 5,089,861 Total manufactured goods $28,164,515 $25,969,983 Distribution products 10,768,819 8,632,171 TOTAL INVENTORIES $38,933,334 $34,602,154
The inventories are stated at the lower of cost, First-In First-Out (FIFO) method, or market. 4. Stock options outstanding are immaterial and had no effect on earnings per share. Application of Financial Standards Accounting Board Statement No. 128 had no effect on previously reported earnings per share. Earnings per common share for the six months ended June 30, 1998 and 1997 have been computed based on the weighted average common shares outstanding of 5,905,890 and 5,946,769 respectively. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. GENERAL The Registrant's business has shown significant revenue growth since 1991, as net sales increased annually from $143 million to over $410 million in six years. Although the rate of growth in the year 1997 was 1.75%, the first six months of 1998 showed an increase of 9.4% when compared to the previous years' first half. The increase in sales resulted from the continued strength of both the economy and the Manufactured Housing and Recreational Vehicle industries. The following table sets forth the percentage relationship to net sales of certain items in the Registrant's Statements of Operations:
Three Months Six Months Ended June 30 Ended June 30 1998 1997 1998 1997 Net Sales 100.0% 100.0% 100.0% 100.0% Cost of Sales 86.9 87.5 87.1 87.6 Gross Profit 13.1 12.5 12.9 12.4 Warehouse and Delivery 3.4 3.7 3.5 3.6 Selling, General & Administrative 5.9 5.1 5.9 5.0 Operating Income 3.8 3.7 3.5 3.8 Net Income 2.1 2.1 1.9 2.1
RESULTS OF OPERATIONS Quarter Ended June 30, 1998 Compared to Quarter Ended June 30, 1997 Net Sales. Net sales increased by $11.1 million, or 10.4%, from $106.6 million for the quarter ended June 30, 1997, to $117.7 million in the quarter ended June 30, 1998. This sales increase was attributable to increases in the number of units produced in both the Manufactured Housing and Recreational Vehicle industries, and to the acquisition of two companies whose sales were not in the 1997 sales. The sales of the acquired companies represented 3.7% of the sales increase. The Registrant's sales in the quarter were 62% to Manufactured Housing, 20% to Recreational Vehicle, and 18% to other industries. Gross Profit. Gross profit increased by approximately $2.1 million, or 16.0%, from $13.3 million in the second quarter of 1997, to $15.4 million in the same 1998 quarter. As a percentage of net sales, gross profit increased from 12.5% in 1997 to 13.1% in the second quarter of 1998. The increase in gross profit was due to certain manufacturing operations showing improvement in volume and efficiencies over the same 1997 period. In certain markets highly competitive pricing continues to have a negative impact on normal gross profits. Warehouse and Delivery Expenses. Warehouse and delivery expenses increased approximately $146,000, or 3.7%, from $3.9 million in 1997, to $4.1 million in the second quarter of 1998. As a percentage of net sales, warehouse and delivery expenses decreased from 3.7% in 1997 to 3.4% in the 1998 second quarter. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased by $1.6 million, or 28.8%, from $5.4 million in 1997, to $7.0 million in 1998. As a percentage of net sales, selling, general and administrative expenses increased from 5.1% in 1997 to 5.9% in the second quarter of 1998. Expense increases were partially attributable to new management information system expenses, additional personnel required due to the growth the Registrant has experienced over the last several years, and for management transition plans. Operating Income. Operating income increased by approximately $428,000 because of the increased sales and the increased gross profits. As a percentage of sales, operating income remained the same at 3.8% for both second quarters. Interest Expense, Net. Interest expense, net decreased by approximately $43,000 from $308,000 in 1997 to $265,000 in the second quarter of 1998. The Registrant's borrowing levels during the 1998 period were lower than those in 1997. Net Income. Net income increased by approximately $255,000 from $2.2 million in 1997 to $2.5 million in 1998 for the second quarter ended June 30. This increase is attributable to the factors described above. Net income also remained the same as a percentage of net sales. Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997 Net Sales. Net sales increased by $19.2 million, or 9.4%, from $203.5 million for the six months ended June 30, 1997, to $222.7 million in the six months ended June 30, 1998. This sales increase was attributable to increases in the number of units produced in both the Manufactured Housing and Recreational Vehicle industries, and to the acquisition of two companies whose sales were not in the 1997 sales. The sales of the acquired companies represented 2.9% of the sales increase. The Registrant's sales in the first six months were 61% to Manufactured Housing, 20% to Recreational Vehicle, and 19% to other industries. Gross Profit. Gross profit increased by $3.4 million, or 13.6%, from $25.3 million in the first six months of 1997, to $28.7 million in the same period in 1998. As a percentage of net sales, gross profit increased from 12.4% in the first six months of 1997 to 12.9% in 1998. The increase in gross profit was due to certain manufacturing operations showing improvement in volume and efficiencies over the same 1997 period. In certain markets highly competitive pricing continues to have a negative impact on normal gross profits. Warehouse and Delivery Expenses. Warehouse and delivery expenses increased approximately $467,000, or 6.4%, from $7.3 million in 1997, to $7.8 million in the first six months of 1998. As a percentage of net sales, warehouse and delivery expenses decreased from 3.6% for 1997 to 3.5% in 1998. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased by $2.9 million, or 28.9%, from $10.3 million in 1997, to $13.2 million in 1998. As a percentage of net sales, selling, general and administrative expenses increased from 5.0% for 1997 to 5.9% in 1998. Expense increases were partially attributable to new management information system expenses, additional personnel required due to the growth the Registrant has experienced over the last several years, and for management transition plans. Operating Income. Operating income remained the same in dollars in the 1998 second quarter as compared to 1997, but as a percentage of sales, operating income decreased from 3.8% in 1997 to 3.5% in 1998. Interest Expense, Net. Interest expense, net decreased by $77,000 from $596,000 in 1997, to $519,000 in 1998. This decrease was due to lower borrowings during the first six months of 1998. Net Income. Net income remained the same in 1998 as it was in the 1997 period. As a percentage of net sales, net income decreased from 2.1% in 1997 to 1.9% in 1998. This is primarily attributable to the factors described above. YEAR 2000 ISSUE The Registrant began a new management information system implementation project in the first quarter of 1996, which when fully implemented, will result in the Registrant's information systems being Year 2000 compliant. The Registrant has committed approximately $5,500,000 for the purchase of new hardware and software systems, hiring of additional personnel, and training. As of June 30, 1998, a majority of the Registrant's information systems were compliant with the Year 2000 and the remaining information systems are expected to be compliant by the fourth quarter of 1999. As of June 30, 1998, the Registrant has incurred approximately $5,000,000 of the $5,500,000 committed to the project. LIQUIDITY AND CAPITAL RESOURCES The Registrant's primary capital requirements are to meet working capital needs, support its capital expenditure plans, and meet debt service requirements. The Registrant, 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 beginning September 15, 1999. These funds were used to reduce existing bank debt and for working capital needs. The Registrant has an unsecured bank Revolving Credit Agreement that provides loan availability of $10,000,000 with maturity in the year 2000. Pursuant to the private placement and the Credit Agreement, the Registrant is required to maintain certain financial ratios, all of which are currently complied with. The Registrant 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 Registrant initiated an expansion project of approximately $6,000,000 in North Carolina in 1997. The project was completed in July, 1998, and in August the Registrant anticipates obtaining a municipal industrial revenue bond in the amount of $5,000,000 to restore working capital used to finance the project. 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 Registrant's sales and profits are generally highest in the second and third quarters. NEW ACCOUNTING STANDARDS In June, 1997, the FASB issued Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information" (FAS 131), which requires that a public business enterprise report financial and descriptive information about its reportable operating segments. This Statement is effective for fiscal years beginning after December 15, 1997. In the initial year of application, comparative information for earlier years is to be restated. This Statement need not be applied to interim financial statements in the initial year of its application, but comparative information for interim periods in the initial year of application is to be reported in financial statements for interim periods in the second year of application. INFLATION The Registrant does not believe that inflation had a material effect on results of operations for the periods presented. PART II. OTHER INFORMATION Item 1. Legal Proceedings None Item 2. Changes in Securities None Item 3. Defaults upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders (a) The Annual Meeting of Shareholders of the Registrant was held on May 15, 1998. (b) Not applicable. (c) 1. Set forth below is the tabulation of the votes on each nominee for election as a director:
WITHHOLD NAME FOR AUTHORITY Mervin D. Lung 4,992,683 13,184 Keith V. Kankel 4,986,701 19,166 John H. McDermott 4,994,566 11,301 Harold E. Wyland 4,990,866 15,001 2. Not applicable. (d) Not applicable. Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 27 Financial Data Schedule (b) There were no reports filed on Form 8-K 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. (Registrant) Date August 6, 1998 /S/Mervin D. Lung Mervin D. Lung (Chairman of the Board) Date August 7, 1998 /SDavid D. Lung David D. Lung (President) Date August 6, 1998 /S/Keith V. Kankel Keith V. Kankel (Vice President Finance) (Principal Accounting Officer)