UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(MarkOne)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended December 31, 1998 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file Number 0-3922
PATRICK INDUSTRIES, INC.
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(Exact name of Company as specified in its charter)
Indiana 35-1057796
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(State or other jurisdiction of (IRS Employer
incorporation or organization) identification No.)
1800 South 14th Street, P.O. Box 638, Elkhart, Indiana 46515
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(Address of principal executive offices) (ZIP code)
Company's telephone number, including area code: (219) 294-7511
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, WITHOUT PAR VALUE
PREFERRED SHARE PURCHASE RIGHTS
(Title of each class)
Indicate by check mark whether the Company (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Company was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ________
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Company's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K [X]
The aggregate market value of the voting stock held by non-affiliates of the
Company on March 22, 1999 (based upon the closing price on NASDAQ and an
estimate that 77.57% of the shares are owned by non-affiliates) was $65,572,813.
The closing market price was $14.688 on that day.
As of March 22, 1999, 5,705,266 shares of the Company's common stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE.
Portions of the Company's Proxy Statement for its Annual
Meeting of Shareholders to be held on May 13, 1999 are
incorporated by reference into Parts III of this Form
10-K.
<PAGE>
PART I
ITEM 1. BUSINESS
The Company is a leading manufacturer and supplier of building products
and materials to the Manufactured Housing and Recreational Vehicle Industries.
In addition, the Company is a supplier to certain other industrial markets, such
as furniture manufacturing, marine, and the automotive aftermarket. The Company
manufactures decorative vinyl and paper panels, cabinet doors, countertops,
aluminum extrusions, drawer sides, pleated shades, wood adhesives, and
laminating machines. The Company is also an independent wholesale distributor of
pre-finished wall and ceiling panels, particleboard, hardboard siding, passage
doors, roofing products, building hardware, insulation, and other related
products.
The Company has a nationwide network of distribution centers for its
products, thereby reducing intransit delivery time and cost to the regional
manufacturing plants of its customers. The Company believes that it is one of
the few suppliers to the Manufactured Housing and Recreational Vehicle
Industries that has such a nationwide network. The Company maintains ten
manufacturing plants and two distribution facilities near its principal offices
in Elkhart, Indiana, and operates fourteen other warehouse and distribution
centers and sixteen other manufacturing plants in fourteen states.
Strategy
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Over time, the Company has developed very strong working relationships
with its customers. In so doing, the Company has oriented its business and
expansion to the needs of these customers. These customers include all of the
larger Manufactured Housing and Recreational Vehicle manufacturers. The
Company's customers generally demand high quality standards and a high degree of
flexibility from their suppliers. The result has been that the Company focuses
on maintaining and improving the quality of its manufactured products, and has
developed a nationwide manufacturing and distribution presence in response to
its customers' need for flexibility. As the Company explores new markets and
industries, it believes that this nationwide network provides it with a strong
foundation for expansion.
The Company continually seeks to improve its position as a leading
supplier to the Manufactured Housing and Recreational Vehicle Industries and
other industries to which its products, manufacturing processes, or sales and
distribution system are applicable. Currently, approximately 62% of the
Company's sales are to the Manufactured Housing Industry and the remaining 38%
is almost evenly divided between the Recreational Vehicle and other industries.
These industries, and the impact that they have on their suppliers, are
characterized by cyclical demand and production, small order quantities, and
short lead times. These characteristics have an impact on the suppliers, many of
whom tend to be small, regional, and specific product line companies.
Management has identified several tools which it expects to utilize to
accomplish its operating strategies, including the following:
Diversification into Additional Industries
While the Company continually seeks to improve its position as a
leading supplier to the Manufactured Housing and Recreational Vehicle
Industries, it is also seeking to expand its product lines into other industrial
markets. Many of the Company's products, such as its countertops, cabinet doors,
laminated panels, and shelving, have applications in the furniture and cabinetry
markets. In addition, the manufacturing processes for the Company's aluminum
extrusions are easily applied to the production of products for the marine,
automotive and truck accessories markets and aftermarkets, and many other
markets, and the Company's adhesives are produced for almost all industrial
applications.
<PAGE>
Because industrial order size tends to be for larger numbers of units,
the Company enjoys better production efficiencies for these orders. The Company
believes that diversification into additional industries will reduce its
vulnerability to the cyclical nature of the Manufactured Housing and
Recreational Vehicle Industries. In addition, the Company believes that it's
nationwide manufacturing and distribution capabilities enable it to more
effectively serve it's customers and position it for product expansion.
Expansion of Manufacturing Capacity
In the last 3 years, the Company has invested approximately $30.2
million to upgrade existing facilities and equipment and to build new
manufacturing facilities for its laminated paneling products, industrial
adhesives, cabinet doors, and furniture components. In addition, the Company has
invested $9.4 million to purchase existing businesses. The new capacity created
by these investments has enabled the Company to obtain more efficiencies in its
operations and will accommodate future growth in the Company's product lines and
markets.
Strategic Acquisitions and Expansion
The Company supplies a broad variety of building material products and,
with its nationwide manufacturing and distribution capabilities, is
well-positioned for the introduction of new products. The Company, from time to
time, considers the acquisition of additional product lines, facilities or other
assets to complement or expand its existing business. In 1997 the Company
purchased the assets of two pleated shade manufacturers, and in 1998 acquired
the assets of a wood component manufacturer who was a competitor. In 1996 the
Company expanded existing product lines and capacity with the opening of a new
manufacturing and distribution complex in Woodburn, Oregon, and in 1998 did the
same in New London, North Carolina. In 1998 the Company also started a new
plastic thermoforming operation in Indiana.
Business Segments
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The Company's operations comprise four reportable segments. Information
related to those setments is contained in "Note 13-Segment Information"
appearing herein the financial statements as noted in the index appearing under
Item 14(a)(1) and (2).
Principal Products
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The Company distributes primarily prefinished wall and ceiling panels,
particleboard, hardboard siding, roofing products, passage doors, building
hardware, insulation, and other products. Through its manufacturing divisions,
the Company fabricates decorative vinyl and paper panels, cabinet doors,
shelving, countertops, wood mouldings, aluminum extrusions, drawer sides,
furniture components, wood adhesives, and laminating presses.
Pre-finished wall panels contributed more than 10% to total sales. The
percentage contributions of this class of product to total sales was 42.4%,
40.9%, and 42.0% for the years ended December 31, 1998, 1997, and 1996
respectively.
The Company has no material patents, licenses, franchises, or
concessions and does not conduct significant research and development
activities.
Manufacturing Processes and Operations
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The Company's laminating facilities utilize various materials including
gypsum, particleboard, plywood, and fiberboard which are bonded by adhesives or
a heating process to a number of products including vinyl, paper, foil, and high
pressure laminate. These laminated products are utilized to produce furniture,
shelving, wall, counter, and cabinet products with a wide variety of finishes
and textures.
<PAGE>
The Company's metals division utilizes sophisticated technology to
produce aluminum extrusions for framing and window applications. In addition,
the Company's metals division extrudes running boards, accessories for pick-up
trucks, marine industry products, and construction-related materials.
The Company manufactures two distinct cabinet door product lines. One
product line is manufactured from raw lumber utilizing solid oak and other
hardwood materials. The Company's other line of doors is made of laminated
fiberboard. The Company's doors are sold mainly to the Manufactured Housing and
Recreational Vehicle Industries, and continue to gain acceptance with cabinet
manufacturers and "ready-to-assemble" furniture manufacturers.
The Company's wood adhesive division, which supplies adhesives used in
most of the Company's manufacturing processes and to outside industrial
customers, uses a process of mixing non-toxic non-hazardous chemicals with water
to produce adhesives sold in tubes, pails, barrels, totes, and rail tank cars.
Markets
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The Company is engaged in the manufacturing and distribution of
building products and material for use primarily by the Manufactured Housing and
Recreational Vehicle Industries and other industrial markets.
Manufactured Housing
The Manufactured Housing Industry has historically served as a more
affordable alternative to the home buyer. Because of the relatively lower cost
of construction as compared to site-built homes, manufactured homes
traditionally have been one of the principal means for first-time home buyers to
overcome the obstacles of large down payments and higher monthly mortgage
payments. Manufactured Housing also presents an affordable alternative to
site-built homes for retirees and others desiring a lifestyle in which home
ownership is less burdensome than in the case with site-built homes. The
increase in square footage of living space in manufactured homes created by
multi-sectional models has made them more attractive to a larger segment of home
buyers.
Manufactured homes are built in accordance with national and state
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.
The Manufactured Housing Industry is cyclical, and is affected by the
availability of alternative housing such as apartments, town houses, and
condominiums. In addition, interest rates, availability of financing, regional
population, employment trends, and general regional economic conditions affect
the sale of manufactured homes. The Manufactured Housing Institute reported that
during the four-year period ended December 31, 1991, shipments of manufactured
homes declined 26.6% to a total of approximately 171,000 units nationally in
1991. The reported number of units increased sharply in the five years following
1991, with increases in each of those years. Manufactured home unit shipments in
1997 were 353,000, which is 2.8% lower than 1996, but still 106% more units than
shipped in 1991. The shipments in 1998 were 373,000 homes, an increase of 5.5%,
which was the most units shipped since the early 1970's.
These cycles have a historic precedent. The Company believes that the
factors responsible for the national decline prior to 1992 included weakness in
the manufacturing, the agricultural, and, in particular, the oil industry
sectors. These industry sectors have historically provided a significant portion
of the Manufactured Housing Industry's customer base. Additionally, high vacancy
rates in apartments, high levels of repossession inventories, and over-built
housing markets in certain regions of the country resulted in fewer sales of new
manufactured homes in the past. Changes in these market characteristics have
caused the Manufactured Housing cycle to change positively. Manufactured Housing
now accounts for 33% of all homes built, which is up from 25% in 1989.
<PAGE>
Recreational Vehicles
The Recreational Vehicle Industry has been characterized by cycles of
growth and contraction in consumer demand, reflecting prevailing general
economic conditions which affect disposable income for leisure time activities.
Fluctuations in interest rates, consumer confidence, and concerns about the
availability and price of gasoline, in the past, have had an adverse impact on
recreational vehicle sales. Recently the industry has been characterized by
shifting demand towards lower-priced, higher-value products which appeal to
economy-minded, value-conscious buyers.
Recreational Vehicle classifications are based upon standards
established by the Recreational Vehicle Industry Association. The principal
types of recreational vehicles include conventional travel trailers, folding
camping trailers, fifth wheels, motor homes, and van conversions. These
Recreational Vehicles are distinct from mobile homes, which are manufactured
houses designed for permanent and semi-permanent residential dwelling.
Conventional travel trailers and folding camping trailers are
non-motorized vehicles which are 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.
Van conversions are conventional vans modified for recreational or
other use.
Sales of Recreational Vehicle products have been cyclical. Shortages of
motor vehicle fuels and significant increases in fuel prices have had a material
adverse effect on the market for Recreational Vehicles in the past, and could
adversely affect demand in the future. The Recreational Vehicle Industry is also
affected by the availability and terms of financing to dealers and retail
purchasers. Substantial increases in interest rates and decreases in the general
availability of credit have had a negative impact upon the industry in the past
and may do so in the future. Recession and lack of consumer confidence generally
results in a decrease in the sale of leisure time products such as Recreational
Vehicles. The industry shipped 292,700 units in 1998, which was 15% more than in
1997 and more than any other year in the 1990's.
Other Markets
Many of the Company's products, such as its countertops, laminated
panels, cabinet doors, and shelving may be utilized in the furniture and
cabinetry markets. The Company's aluminum extrusion process is easily applied to
the production of running boards and other accessories for pick-up trucks and
vans, and also certain building products. The Company's adhesives are marketed
in many industrial adhesive markets.
<PAGE>
While demand in these industries also fluctuates with general economic
cycles, the Company believes that these cycles are less severe than those in the
Manufactured Housing and Recreational Vehicle Industries. As a result, the
Company believes that diversification into these new markets will reduce its
reliance on the markets it has traditionally served and will mitigate the impact
of their historical cyclical patterns on its operating results.
Marketing and Distribution
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The Company's sales are to Manufactured Housing and Recreational
Vehicle manufacturers and other building products manufacturers. The Company has
approximately 4,000 customers. The Company has three customers, who together
accounted for 35% of the Company's total sales in 1998 and 34.2% of 1997 sales.
Ten other customers collectively accounted for approximately 28.1% of 1998
sales. The Company believes it has good relationships with its customers.
Products for distribution are purchased in carload or truckload
quantities, warehoused, and then sold and delivered by the Company. Some of the
Company's products are shipped directly from the suppliers to the customers. The
Company typically experiences a two to four week delay between issuing its
purchase orders and delivering of products to the Company's warehouses or
customers. The Company's customers do not maintain long-term supply contracts,
and therefore the Company must bear the risk of accurate advance estimation of
customer orders. The Company maintains a substantial inventory to satisfy these
orders. The Company has no significant backlog of orders.
The Company operates sixteen warehouse and distribution centers and
twenty-six manufacturing plants located in Alabama, Arizona, California,
Florida, Georgia, Idaho, Indiana, Kansas, New Mexico, Nevada, North Carolina,
Oregon, Pennsylvania, and Texas. Through the use of these facilities, the
Company is able to minimize its in-transit delivery time and cost to the
regional manufacturing plants of its customers.
Suppliers
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During the year ended December 31, 1998, the Company purchased
approximately 67% of its raw materials and distributed products from twenty
different suppliers. The five largest suppliers accounted for approximately 42%
of the Company's purchases. Materials are primarily commodity products, such as
lauan, gypsum, aluminum, particleboard, and other lumber products which are
available from many suppliers. Alternate sources of supply are available for all
of the Company's important materials.
Competition
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The Manufactured Housing and Recreational Vehicle Industries are highly
competitive with low barriers to entry. This level of competition carries
through to the suppliers to these industries. Competition is based primarily on
price, product features, quality, and service. The Company has several
competitors in each of its classes of products. Some manufacturers and suppliers
of materials purchased by the Company also compete with it and sell directly to
the same industries. Most of the Company's competitors compete with the Company
on a regional basis. In order for a competitor to compete with the Company on a
national basis, the Company believes that a substantial capital commitment and
experienced personnel would be required. The industrial markets in which the
Company continues to expand are also highly competitive.
<PAGE>
Employees
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As of December 31, 1998, the Company had 1,722 employees of which 1,477
employees are engaged directly in production, warehousing, and delivery
operations, 58 in sales, and 187 in office and administrative activities. There
are five manufacturing plants and one distribution center covered by collective
bargaining agreements. The Company considers its relationships with its
employees to be good.
The Company provides retirement, group life, hospitalization, and major
medical plans under which the employee pays a portion of the cost.
<PAGE>
ITEM 2. PROPERTIES AND EQUIPMENT
As of December 31, 1998, the Company maintained the following
warehouse, manufacturing and distribution facilities:
<TABLE>
<CAPTION>
Ownership or
Location Use Area Sq. Ft. Lease Arrangement
<S> <C> <C> <C>
Argos, IN Manufacturing(3) 44,000 Leased to 2001
Elkhart, IN Manufacturing(3) 40,400 Leased to 2000
Elkhart, IN Mfg. & Dist.(1)(3) 133,600 Leased to 2005
Elkhart, IN Manufacturing(3) 32,900 Owned
Elkhart, IN Manufacturing (2) 42,000 Leased to 2001
Elkhart, IN Manufacturing(2) 31,000 Leased to 1999
Elkhart, IN Manufacturing(2) 30,000 Leased to 2000
Elkhart, IN Manufacturing(4) 36,000 Owned
Goshen, IN Manufacturing(5) 50,870 Owned
Bristol, IN Mfg. & Dist.(1)(4) 62,000 Owned
Decatur, AL Distribution(1) 30,000 Leased to 2000
Decatur, AL Manufacturing(2) 35,000 Owned
Decatur, AL Manufacturing(2) 35,000 Leased to 1999
Decatur, AL Manufacturing(4) 41,000 Owned
Valdosta, GA Distribution (1) 20,000 Leased to 1999
Valdosta, GA Manufacturing(2) 30,800 Owned
New London, NC Mfg. & Dist.(1)(2) 160,000 Owned, Subject to Mortgage
Halstead, KS Distribution(1) 36,000 Owned
Waco, TX Distribution(1) 57,000 Leased to 1999
Waco, TX Manufacturing(2) 57,000 Leased to 1999
Waco, TX Manufacturing(2) 21,000 Leased to 1999
Mt. Joy, PA Distribution(1) 58,500 Owned
Mt. Joy, PA Manufacturing(2) 30,000 Owned
Ocala, FL Manufacturing(3) 20,600 Leased to 1999
Ocala, FL Manufacturing(2) 15,000 Leased to 1999
Ocala, FL Mfg. & Dist.(1)(2) 55,500 Owned
Fontana, CA Mfg. & Dist.(1)(2) 110,000 Owned
Fontana, CA Manufacturing(2) 71,755 Owned
Phoenix, AZ Manufacturing (3) 43,600 Leased to 2000
Phoenix, AZ Manufacturing (2) 36,000 Leased to 1999
Phoenix, AZ Manufacturing (2) 15,700 Leased to 1999
Woodburn, OR Manufacturing(3) 21,500 Owned
Woodburn, OR Mfg. & Dist.(1,2,3) 153,000 Owned, Subject to Mortgage
Mishawaka, IN Manufacturing(4) 191,000 Owned, Subject to Mortgage
Elkhart, IN Manufacturing(4) 90,700 Owned
Boulder City, NV Manufacturing(5) 24,700 Leased to 1999
Elkhart, IN Admin. Offices 10,000 Owned
(1) Distribution center
(2) Vinyl/paper/foil laminating
(3) Cabinet doors and other wood related
(4) Aluminum, adhesives, and other
</TABLE>
<PAGE>
Additionally, the Company operates distribution centers out of public
warehouses in Phoenix, Arizona, Woodland, California, Nampa, Idaho, and Belen,
New Mexico. As of December 31, 1998, the Company owned or leased 39 trucks, 66
tractors, 97 trailers, 130 forklifts, 13 automobiles and a corporate aircraft.
All owned and leased facilities and equipment are in good condition and well
maintained.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to claims and suits in the ordinary course of
business. In management's opinion, currently pending legal proceedings and
claims against the Company will not, individually or in the aggregate, have a
material adverse effect on the Company's financial condition or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this report.
<PAGE>
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SECURITY
HOLDER MATTERS
The Company's common stock is listed on The NASDAQ Stock Market(R)
under the symbol PATK. The high and low trade prices of the Company's common
stock as reported on NASDAQ/NMS for each quarterly period during the last two
years were as follows:
<TABLE>
<CAPTION>
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
<S> <C> <C> <C> <C>
1998 17.000 - 14.000 16.750 - 15.000 16.125 - 13.250 15.750 - 14.250
1997 17.250 - 14.000 18.250 - 13.125 20.125 - 13.750 16.625 - 13.500
</TABLE>
The quotations represent prices between dealers, do not include
retail mark-ups, mark-downs or commissions and may not necessarily represent
actual transactions.
There were approximately 652 holders of the Company's common stock as
of March 19, 1999 as taken from the transfer agent's shareholder listing. It is
estimated that there are approximately 2,150 holders of the Company's common
stock held in street name.
The Company declared a first time regular quarterly dividend of $.04
per common share starting June 30, 1995 and has continued it through December
31, 1998. Although this is a regular quarterly dividend, any future
determination to pay cash dividends will be made by the Board of Directors in
light of the Company's earnings, financial position, capital requirements, and
such other factors as the Board of Directors deems relevant.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data for each of the five years set
forth below has been derived from financial statements examined by McGladrey &
Pullen, LLP, independent certified public accountants, certain of which have
been included elsewhere herein. The following data should be read in conjunction
with the Financial Statements and related Notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere herein:
As of or for the Year Ended December 31,
1998 1997 1996 1995 1994
(dollars in thousands, except per share amounts)
Net sales $453,518 $410,567 $403,511 $362,519 $330,981
Gross profit 59,556 52,142 53,362 49,690 42,328
Warehouse and delivery
expenses 16,076 15,158 14,645 13,244 12,070
Selling, general, and
administrative expenses 26,796 22,145 19,909 18,809 14,792
Interest expense, net 1,172 1,149 1,078 1,200 940
Income taxes 6,205 5,396 6,929 6,344 5,642
Net income 9,307 8,294 10,800 10,093 8,884
Basic earnings
per common share (1) 1.58 1.40 1.81 1.70 1.46
Dilutive earnings
per common share (1) 1.57 1.39 1.80 1.69 1.45
Weighted average common
shares outstanding(1) 5,903 5,921 5,967 5,947 6,094
Cash dividends, per
common share .16 .16 .16 .12 --
Working capital 46,698 40,181 45,646 43,280 35,011
Total assets 127,755 112,187 106,606 95,916 87,269
Long-term debt 26,129 25,015 26,152 26,200 21,150
Shareholders' equity 76,307 68,726 62,296 52,989 43,439
(1) Adjusted to reflect the and the two-for-one stock split effective March 8,
1994.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Company's business has shown significant revenue growth since 1991,
as net sales increased annually from $143 million to over $453 million in seven
years. Although the rate of growth in 1997 slowed to 1.8%, the sales in 1998
were 10.5% ahead of the 1997 record year. 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 Company's statements of operations:
Year Ended
December 31,
1998 1997 1996
Net sales 100.0% 100.0% 100.0%
Cost of sales 86.9 87.3 86.8
Gross profit 13.1 12.7 13.2
Warehouse and delivery 3.5 3.7 3.6
Selling, general and administrative 5.9 5.4 4.9
Operating income 3.7 3.6 4.7
Net income 2.1 2.0 2.7
RESULTS OF CONSOLIDATED OPERATIONS
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Net Sales. Net sales increased by $42.9 million, or 10.5%, from $410.6
million for the year ended December 31, 1997, to $453.5 million in the year
ended December 31, 1998. This sales increase was attributable to increases in
the number of units produced in both the Manufactured Housing and Recreational
Vehicle Industries, to whom the Company is a major supplier. The Company's sales
in the year were 62% to Manufactured Housing, 19% to Recreational Vehicle, and
19% to other industries. The Manufactured Housing units shipped were up 5.5% and
Recreational Vehicle shipments were up 15.0% in 1998.
Gross Profit. Gross Profit increased by approximately $7.5 million, or
14.2%, from $52.1 million in the year 1997, to $59.6 million in the same 1998
period. As a percentage of net sales, gross profit increased from 12.7% in 1997
to 13.1% 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 continued to have a
negative impact on normal gross profits making several of the Company's
manufacturing operations unprofitable in 1998.
Warehouse and Delivery Expenses. Warehouse and delivery expenses
increased approximately $0.9 million, or 6.1%, from $15.2 million in 1997, to
$16.1 million in 1998. As a percentage of net sales, warehouse and delivery
expenses decreased from 3.7% in 1997 to 3.5% in 1998.
<PAGE>
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $4.7 million, or 21.0%, from $22.1 million
in 1997, to $26.8 million in 1998. As a percentage of net sales, selling,
general and administrative expenses increased from 5.4% in 1997 to 5.9% in 1998.
Expense increases were partially attributable to new management information
systems, additional personnel required due to the growth the Company has
experienced over the last several years, and for management transition plans.
Operating Income. Operating income increased by approximately $1.8
million because of the increased sales and the increased gross profits. As a
percentage of sales, operating income increased from 3.6% in 1997 to 3.7% in the
same 1998 period.
Interest Expense, Net. Interest expense, net increased by approximately
$23,000 in 1998. The Company's borrowing levels during the 1998 period were
approximately the same while invested cash was lower.
Net Income. Net income increased by approximately $1.0 million from
$8.3 million in 1997 to $9.3 million in 1998. This increase is attributable to
the factors described above.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Net Sales. Net sales increased by 7.1 million, or 1.7%, from $403.5
million for the year ended December 31, 1996, to $410.6 million in the year
ended December 31, 1997. This small sales increase was attributable to a 2.8%
decrease in the year in units shipped by the Manufactured Housing Industry,
which represents approximately 67% of the Company's sales. The Company's sales
to the Recreational Vehicle Industry were higher in the year 1997 because the
Industry, which represents approximately 16% of Company's sales, was
experiencing an increase in units shipped of the units that utilize the
Company's products.
Gross Profit. Gross profit decreased by approximately $1.2 million, or
2.3%, from $53.3 million in the 1996 year to $52.1 million in the same period of
1997. As a percentage of sales, gross profit decreased from 13.2% in the year
1996 to 12.7% in 1997. This decrease was attributable to reduced volumes in
certain operations and competitive market pressure on product pricing. In
certain markets highly competitive pricing continues to have a negative impact
on normal gross profits making several of the Company's manufacturing operations
unprofitable for the year.
Warehouse and Delivery Expenses. Warehouse and delivery expenses
increased by approximately $0.6 million, or 3.5%, from $14.6 million in 1996, to
$15.2 million in the year 1997. As a percentage of sales, warehouse and delivery
expenses increased from 3.6% in 1996 to 3.7% in 1997.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by approximately $2.2 million, or 11.2% in the
1997 year, from $19.9 million to $22.1 million. As a percentage of net sales,
these expenses increased from 4.9% to 5.4% in 1997 compared to 1996. These
expense increases were partially attributable to new Management Information
System expenses and additional personnel required due to the growth the Company
has experienced over the last several years, and for management transition
plans. The Company believes that the new Management Information System currently
<PAGE>
being implemented will improve it's information system and will be operational
so that the Year 2000 will not pose significant operational problems for the
Company's software systems.
Operating Income. Operating income decreased by approximately $4.0
million, or 21.1% from $18.8 million in 1996 to $14.8 million in 1997, because
of the higher operating expenses at certain manufacturing operations. As a
percentage of sales, operating income decreased from 4.7 % to 3.6% in 1997.
Interest Expense. Interest expense increased by approximately $71,000.
The Company's borrowing levels were about the same during 1997 compared to 1996,
but invested funds were lower.
Net Income. Net income decreased by approximately $2.5 million from
$10.8 million in 1996 to $8.3 million in 1997. This decrease is attributable to
the factors described above.
BUSINESS SEGMENTS
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, 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, painting and distribution,
manufacture of adhesive products, pleated shades, plastic thermoforming, and
manufacturer of laminating equipment.
The table below presents information about the revenue and operating
income of those segments. A reconciliation to consolidated totals is presented
in footnote 13 of the Company's 1998 financial statements.
Year Ended
December 31
1998 1997 1996
(dollars in thousands)
Sales
Laminating $ 198,448 $ 201,203 $ 184,863
Distribution 171,700 144,881 157,531
Wood 50,853 36,566 39,442
Other 68,641 54,860 49,376
Operating Income
Laminating $ 8,289 $ 7,582 $ 6,226
Distribution 3,480 3,700 5,842
Wood (3,019) (2,250) 1,609
Other 4,590 2,299 2,722
<PAGE>
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Laminating Segment Discussion
Net sales for both years were comparable, with the 1998 total
laminating segment sales lower than 1997 by 1.4%. In 1998, one operation in this
segment was closed resulting in approximately $9.0 million less sales and a new
operation was added resulting in $4.7 million of new sales. In 1998, the Company
also moved one operation into a larger facility so that additional products can
be offered in that market area.
Operating income in the laminating segment increased 9.3% in 1998 and
as a percentage of sales the increase was 0.4%. The segment was able to reduce
material costs in most of the larger operations and direct labor and
manufacturing expenses would have been less than 1997 except for the costs
associated with plant closings and new start-ups. Selling and administrative
expenses were higher in 1998 in this segment because of additional personnel and
the costs associated with the implementation of information systems.
Distribution Segment Discussion
Net sales in 1998 increased by 18.5% in the distribution segment
primarily because of the growth in both the Manufactured Housing and
Recreational Vehicle markets. In addition, the Company introduced some new
products for the distribution operations in 1998.
The operating income generated by the distribution operations in 1998
did not reach the levels of 1997, primarily because of increased allocated
corporate expenses to this segment in 1998, resulting in a reduction of
approximately $1.6 million to operating income.
Wood Segment Discussion
Net sales in the wood segment were higher in 1998 by more than $14.2
million, or 39.1%. In 1998 the Company consolidated the assets and sales of a
company acquired during the year into its operation and this increased this
segment's sales approximately $8.0 million. The balance of the increased sales
was the result of new or expanded business.
Certain operations in this segment have gone from profitable results
two years ago to losses in both 1998 and 1997. In 1998, the consolidation of the
newly purchased business contributed to the losses because of moving expenses,
product design changes required, and overtime to meet customer demand. In
addition, new competitors have entered this segment causing significant pricing
pressures. The operating losses for the wood segment did show improvement in
1998 as percentages of sales, and management has made changes in production
methods, pricing, and personnel to return these operations to profitability.
Other Segment Discussion
Sales increased over $13.7 million, or 25.1%, in this segment in 1998.
A business acquired in the third quarter of 1997 had a full year of sales in
1998 which resulted in $5.1 million more revenue than in 1997. The other
operations in this segment also experienced sales increases over 1997. This
segment operates in several markets and continued economic growth has benefited
the operations of this segment.
The operating income in this business segment for 1998 increased almost
100% over 1997. The addition of the acquired business in late 1997 and the
increased sales in certain other operations, while maintaining operating costs,
has provided the additional operating income. A new start-up operation in this
segment had operating losses for 1998 due to sales below anticipated levels,
<PAGE>
however, new personnel and equipment have been added to this operation to
increase product capabilities to increase sales.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Laminating Segment Discussion
Net sales increased 8.8% for the laminating segment in 1997. This
increase over 1996 was experienced at most of the Company's laminating
operations because of increased business from the Recreational Vehicle
manufacturers and other building products customers.
The operating income in the laminating segment was higher by 21.8% in
1997 due to the increase in sales, and slightly lower labor, material, and
manufacturing costs. Selling and administrative expenses attributable to this
segment increased only 0.16% as a percentage of sales.
Distribution Segment Discussion
This segment experienced a reduction of 8.0% in sales in 1997 compared
to 1996. The distribution segment's market is primarily manufacturers of
manufactured housing and recreational vehicles. Manufactured Housing shipments
were only 1.8% higher in 1997 and sales of certain products supplied to this
industry lost market share due to style changes. In the Recreational Vehicle
industry, products which include a higher percentage of materials supplied by
our Company were less in demand than in 1996.
The operating income in the distribution segment decreased 36.7% in
1997 because of the lower sales and slight increases in warehouse, selling, and
administrative expenses. This was caused by certain unusual competitive pricing
situations reducing margins and necessary increases in wages.
Wood Segment Discussion
Net sales for the total segment decreased 7.3% in 1997 from 1996 even
though certain operations experienced increased sales in the furniture and other
building materials markets. . The cabinet door operations producing for the
Manufactured Housing and Recreational Vehicle Industries, had lower sales
because of level demand and due to highly competitive pricing, quality, and
delivery problems.
In 1997, the wood segment had operating losses and in 1996 this segment
had operating income of 4.1% of sales. This change in operating income was due
to several factors. In 1997, a large operation of the segment moved into new
facilities with much more capacity at the same time their primary customer base
decreased. This resulted in new and existing competition pursuing a smaller
market for cabinet doors, resulting in pricing situations unprofitable for our
operations. The lower sales and operating margins in 1997 were insufficient for
this segment to be profitable.
Other Segment Discussion
Net sales in 1997 in this segment increased 11.1% over 1996. A business
acquired in August of 1997 provided 5% of the increase and sales increases in
the other operations in this business segment accounted for the balance.
<PAGE>
Operating income in this segment was lower $420,000, or 1.4%, as a
percentage of sales. Start-up expenses of a new operation and competitive
pricing situations lowered margins at another operation, accounting for the
decline.
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 beginning September 15, 1999. These funds were
used to reduce existing bank debt and for working capital needs.
The Company 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 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.
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.
<PAGE>
NEW ACCOUNTING STANDARDS
In 1998, the Company adopted Statement of Financial Accounting
Standards (FASB) Statement No. 131, "Disclosures about Segments of an Enterprise
and Related Information." FASB No. 131 supersedes FASB No. 14, "Financial
Reporting for Segments of Business Enterprise," replacing the "industry segment"
approach with the "management" approach. The management approach designates the
internal organization that is used by management for making operating decisions
and assessing performance as the source of the Company's reportable segments.
FASB No. 131 also requires disclosures about products and services, geographic
areas, and major customers. The adoption of FASB No. 131 had no effect on the
results of operations or financial position of the Company.
YEAR 2000 ISSUE
The Company began a new management information system implementation
project in the first quarter of 1996, which when fully implemented, will result
in the Company's information systems being Year 2000 compliant. The project was
started because of the need to upgrade all hardware and software to meet
capacity and information needs at present and for the future. The Year 2000
issue for internal information systems would be resolved since the new hardware
and software is compliant when implemented.
The Company at present has successfully implemented this Year 2000
compliant system in accounting, finance, general ledger, and distribution
operations. Implementation has also been completed at two of six wood product
operations, eight of ten laminating operations, and the shade and thermoforming
operations. The remaining laminating operations are scheduled to be completed in
the second quarter of 1999. The remaining cabinet door and two other operations
are scheduled to be implemented in 1999 with anticipated completion in November.
In the event that the scheduled implementations get delayed,
contingency plans allow basic conversion of existing software to the new system
so it would be Year 2000 compliant prior to the year 2000 in all remaining
areas.
The Company has developed a Year 2000 plan to address risk assessment
in areas other than information technology. The Plan Committee is examining all
automated plant systems and external parties with whom the Company interacts.
This assessment is scheduled to be completed by mid-year in 1999. The Company's
contingency plans for external party compliance are to replace any
telecommunications and other equipment that cannot be made compliant. A risk
assessment of customers, vendors, and service providers is underway and will be
on-going. At present the assessment shows that the ones responding are either
compliant or would be compliant in a timely manner.
The total cost of Year 2000 activities cannot be specifically
determined because the internal information system project was planned for
management and operation purposes and Year 2000 compliance was a benefit of that
system. The expenditures of implementing the new information hardware and
software systems has been $2.87 million in 1996, $1.93 million in 1997, and
$1.42 million in 1998. Approximately $0.9 million will be expended during 1999
to complete the project by December, 1999. The costs of assessment of external
party compliance is minimal and costs of replacement of telecommunications and
other equipment would be part of normal scheduled upgrades.
<PAGE>
SALE OF PROPERTY
The Company sold a vacant facility in the first quarter of 1999. This
sale resulted in a one-time gain that will add $.06 per share to the earnings in
the first quarter of 1999.
INFLATION
The Company does not believe that inflation had a material effect on
results of operations for the periods presented.
SAFE HARBOR STATEMENT
Statements that do not address historical performance are
"forward-looking statements" within the meaning of the Private Securities
Litigation reform Act of 1995 and are based on a number of assumptions,
including but not limited to: (1) continued domestic economic growth and demand
for the Company's products; (2) the Company's belief with respect to its capital
expenditures, seasonality and inflation; and (3) satisfactory identification and
completion of Year 2000 software and hardware revisions by the Company and
entities with which it does business. Any developments significantly deviating
from these assumptions could cause actual results to differ materially from
those forecast or implied in the aforementioned forward-looking statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is set forth in Item 14 (a) 1. on
page 22 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
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 13,
1999, under the caption "Election of Directors," which information is hereby
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is set forth in Company's Proxy
Statement for the Annual Meeting of Shareholders to be held on May 13, 1999,
under the caption "Compensation of Executive Officers and Directors," which
information is hereby incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is set forth in Company's Proxy
Statement for the Annual Meeting of Shareholders to be held on May 13, 1999,
under the caption "Election of Directors," which information is hereby
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is set forth in Company's Proxy
Statement for the Annual Meeting of Shareholders to be held on May 13, 1999,
under the caption "Certain Transactions," which information is hereby
incorporated herein by reference.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Page
(a) 1. FINANCIAL STATEMENTS
Independent auditor's report F-1
Balance sheets -
December 31, 1998 and 1997 F-2
Statements of income-years ended
December 31, 1998, 1997, and 1996 F-3
Statements of shareholders' equity-
years ended December 31,
1998, 1997, 1996 F-4
Statements of cash flow-
years ended December 31,
1998, 1997, and 1996 F-5
Notes to the financial statements F-6-19
(a) 2. FINANCIAL STATEMENT SCHEDULES
Independent auditor's report
on supplemental schedule & consent F-20
Schedule II - Valuation and qualifying
accounts and reserves F-21
All other schedules have been omitted as not required, not applicable,
not deemed material or because the information is included in the Notes to
Financial Statements.
(a) 3. EXHIBITS
The exhibits listed in the accompanying Exhibit Index on pages 45 and
46 are filed or incorporated by reference as part of this report.
(b) REPORTS ON FORM 8-K
There were no reports on Form 8-K filed for the three months ended
December 31, 1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on the date indicated.
PATRICK INDUSTRIES, INC
By /s/ Mervin D. Lung
----------------------
Mervin D. Lung, Chairman of the Board
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
Company and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
Mervin D. Lung Chairman of the Board, Chief March 25, 1999
Mervin D. Lung Executive Officer and Director
David D. Lung President, Chief Operating Officer March 25, 1999
David D. Lung and Director
Keith V. Kankel Vice President-Finance, March 25, 1999
Keith V. Kankel Principal Accounting Officer and Director
Thomas G. Baer Vice President-Operations and Director March 25, 1999
Thomas G. Baer
Harold E. Wyland Vice President-Sales and Director March 25, 1999
Harold E. Wyland
Clyde H. Keith Director March 25, 1999
Clyde H. Keith
Merlin D. Knispel Director March 25, 1999
Merlin D. Knispel
Dorothy M. Lung Director March 25, 1999
Dorothy M. Lung
John H. McDermott Director March 25, 1999
John H. McDermott
Robert C. Timmins Director March 25, 1999
Robert C. Timmins
</TABLE>
<PAGE>
PATRICK INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL REPORT
DECEMBER 31, 1998
CONTENTS
- ------------------------------------------------------------------------------
INDEPENDENT AUDITOR'S REPORT 1
- ------------------------------------------------------------------------------
FINANCIAL STATEMENTS
Consolidated balance sheets 2
Consolidated statements of income 3
Consolidated statements of shareholders' equity 4
Consolidated statements of cash flows 5
Notes to financial statements 6-19
- ------------------------------------------------------------------------------
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
PATRICK INDUSTRIES, INC.
Elkhart, Indiana
We have audited the accompanying consolidated balance sheets of PATRICK
INDUSTRIES, INC. AND SUBSIDIARIES as of December 31, 1998 and 1997, and the
related consolidated statements of income, shareholders' equity, and cash flows
for each of the years in the three-year period ended December 31, 1998. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence sup-
porting the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of PATRICK INDUSTRIES,
INC. AND SUBSIDIARIES as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
McGLADREY & PULLEN, LLP
Elkhart, Indiana
January 29, 1999
<PAGE>
PATRICK INDUSTRIES, INC.
AND SUBSIDIARIES
<TABLE>
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<CAPTION>
- -------------------------------------------------------------------------------------------
1998 1997
- -------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 3,704,693 $ 3,765,171
Trade receivables 20,767,406 17,127,797
Inventories 43,498,632 34,602,154
Prepaid expenses 591,470 608,611
---------------------------------------
TOTAL CURRENT ASSETS 68,562,201 56,103,733
PROPERTY and EQUIPMENT, net 50,472,703 48,221,356
Intangible and OTHER ASSETS 8,719,759 7,862,419
---------------------------------------
$ 127,754,663 $ 112,187,508
=======================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 3,985,963 $ 1,138,517
Accounts payable, trade 13,184,295 10,329,507
Accrued liabilities 4,693,559 4,455,005
---------------------------------------
TOTAL CURRENT LIABILITIES 21,863,817 15,923,029
---------------------------------------
LONG-TERM DEBT, less current maturities 26,128,572 25,015,218
---------------------------------------
DEFERRED COMPENSATION obligations 1,781,491 1,416,002
---------------------------------------
DEFERRED TAX LIABILITIES 1,674,000 1,107,000
---------------------------------------
COMMITMENTS and Contingencies
Shareholders' EQUITY
Preferred stock, no par value; authorized
1,000,000 shares
Common stock, no par value; authorized
12,000,000 shares; issued 1998 5,843,966
shares; 1997 5,895,766 shares 22,117,481 21,896,822
Retained earnings 54,189,302 46,829,437
---------------------------------------
76,306,783 68,726,259
---------------------------------------
$ 127,754,663 $ 112,187,508
=======================================
See Notes to Financial Statements.
</TABLE>
<PAGE>
PATRICK INDUSTRIES, INC.
AND SUBSIDIARIES
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 453,518,573 $ 410,566,851 $ 403,510,956
Cost of goods sold 393,962,419 358,425,516 350,149,363
-----------------------------------------------------------
GROSS PROFIT 59,556,154 52,141,335 53,361,593
-----------------------------------------------------------
Operating expenses:
Warehouse and delivery 16,076,212 15,158,001 14,644,949
Selling, general, and administrative 26,796,204 22,144,623 19,909,274
-----------------------------------------------------------
42,872,416 37,302,624 34,554,223
-----------------------------------------------------------
OPERATING INCOME 16,683,738 14,838,711 18,807,370
Interest expense, net 1,171,967 1,148,955 1,078,206
-----------------------------------------------------------
INCOME BEFORE INCOME TAXES (CREDITS) 15,511,771 13,689,756 17,729,164
Federal and state income taxes 6,204,700 5,395,800 6,929,000
-----------------------------------------------------------
NET INCOME $ 9,307,071 $ 8,293,956 $ 10,800,164
===========================================================
Basic earnings per common share $ 1.58 1.40 $ 1.81
===========================================================
Dilutive earnings per common share $ 1.57 $ 1.39 $ 1.80
===========================================================
See Notes to Financial Statements.
</TABLE>
<PAGE>
PATRICK INDUSTRIES, INC.
AND SUBSIDIARIES
<TABLE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Preferred Common Retained
Stock Stock Earnings Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, December 31, 1995 $ $ 21,626,489 $ 31,362,063 $ 52,988,552
Net income 10,800,164 10,800,164
Proceeds from the exercise of 84,800 stock options 545,474 545,474
Issuance of 30,000 shares of common stock for stock award plan 393,750 393,750
Repurchase and retirement of 117,900 shares of common stock (427,219) (1,052,257) (1,479,476)
Dividends on common stock ($.16 per share) (952,805) (952,805)
--------------------------------------------------------------
Balance, December 31, 1996 22,138,494 40,157,165 62,295,659
Net income 8,293,956 8,293,956
Proceeds from the exercise of 1,500 stock options 16,125 16,125
Repurchase and retirement of 69,500 shares of common stock (257,797) (678,203) (936,000)
Dividends on common stock ($.16 per share) (943,481) (943,481)
--------------------------------------------------------------
Balance, December 31, 1997 21,896,822 46,829,437 68,726,259
Net income 9,307,071 9,307,071
Proceeds from the exercise of 7,500 stock options 80,625 80,625
Issuance of 30,000 shares of common stock for stock award plan 472,500 472,500
Repurchase and retirement of 89,300 shares of common stock (332,466) (1,003,262) (1,335,728)
Dividends on common stock ($.16 per share) (943,944) (943,944)
--------------------------------------------------------------
Balance, December 31, 1998 $ $ 22,117,481 $ 54,189,302 $ 76,306,783
==============================================================
See Notes to Financial Statements.
</TABLE>
<PAGE>
PATRICK INDUSTRIES, INC.
AND SUBSIDIARIES
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING Activities
Net income $ 9,307,071 $ 8,293,956 $ 10,800,164
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 7,580,928 5,780,713 4,506,768
Deferred income taxes 567,000 (243,000) (111,000)
Other 397,673 (254,927) 488,557
Change in assets and liabilities:
Decrease (increase) in:
Trade receivables (2,876,930) (1,024,045) 5,218,684
Inventories (8,278,080) 6,279,132 (3,880,354)
Prepaid expenses 39,523 (204,174) (5,738)
Increase (decrease) in:
Accounts payable and accrued liabilities 3,144,893 (49,892) 954,657
Income taxes payable (397,579) 577,920
------------------------------------------------------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 9,484,499 19,155,683 17,971,738
------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (8,242,644) (12,095,357) (9,811,116)
Investment in marketable securities 4,400,000 (4,400,000)
Acquisition of businesses, net of cash (2,581,490) (6,797,316)
Other (295,880) 60,344 (264,539)
------------------------------------------------------
NET CASH (USED IN) INVESTING
ACTIVITIES (11,120,014) (14,432,329) (14,475,655)
------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under long-term debt agreements 5,214,483
Principal payments on long-term debt (1,253,683) (1,136,309) (917,503)
Proceeds from exercise of common stock options 80,625 16,125 545,474
Repurchase of common stock (1,335,728) (936,000) (1,479,476)
Cash dividends paid (943,944) (943,481) (952,805)
Other (186,716)
------------------------------------------------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 1,575,037 (2,999,665) (2,804,310)
------------------------------------------------------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (60,478) 1,723,689 691,773
Cash and cash equivalents, beginning 3,765,171 2,041,482 1,349,709
------------------------------------------------------
Cash and cash equivalents, ending $ 3,704,693 $ 3,765,171 $ 2,041,482
======================================================
See Notes to Financial Statements.
</TABLE>
<PAGE>
NOTE 1. NATURE OF BUSINESS, USE OF ESTIMATES, RISKS AND UNCERTAINTIES, AND
SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS:
The Company's operations consist primarily of the manufacture and distribution
of building products and materials for use primarily by the manufactured housing
and recreational vehicle industries for customers throughout the United States.
Credit is generally granted on an unsecured basis for terms of 30 days.
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities as of the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
RISKS AND UNCERTAINTIES:
The Company purchases significant amounts of inventory which are commodities
from a limited number of suppliers. The purchase price of such items can be
volatile as it is subject to prevailing market con- ditions, both domestically
and internationally. The Company's purchases of these items are based on
supplier allocations.
SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of Patrick
Industries, Inc. and its wholly- owned subsidiaries, Harlan Machinery Company,
Inc., Patrick Door, Inc., and its majority-owned sub- sidiary, Patrick
Mouldings, L.L.C. ("the Company"). All significant intercompany accounts and
transac- tions have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS:
The Company has cash on deposit in financial institutions in amounts which, at
times, may be in excess of insurance coverage provided by the Federal Deposit
Insurance Corporation.
For purposes of the statement of cash flows, the Company considers all overnight
repurchase agreements in connection with its sweep account arrangements with its
bank to be cash equivalents.
<PAGE>
INVENTORIES:
Inventories are stated at the lower of cost (first-in, first-out (FIFO) method)
or market.
PROPERTY AND EQUIPMENT:
Property and equipment is recorded at cost. Depreciation has been computed
primarily by the straight- line method applied to individual items based on
estimated useful lives which generally range from 10 to 40 years for buildings
and improvements and from 3 to 15 years for machinery and equipment,
transportation equipment, and leasehold improvements.
GOODWILL:
Goodwill, the excess of cost over the fair value of net assets acquired, is
amortized by the straight-line method over 15-year periods. At each balance
sheet date, management assesses whether there has been a permanent impairment in
the value of goodwill. In the event that an impairment is evident, the Company
would record an expense for that impairment. Factors considered by management
include current oper- ating results, anticipated future cash flows, trends, and
prospects, as well as the effects of obsolescence, demand, competition, and
other economic factors.
REVENUE RECOGNITION:
The Company ships product based on specific orders from customers. Shipments are
made by the Com- pany only after receiving authorization from the customer, and
revenue is recognized upon delivery.
EARNINGS PER COMMON SHARE:
Following is information about the computation of the earnings per share data
for the years ended Decem- ber 31, 1998, 1997, and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------------------------------------
<S> <C> <C> <C>
Numerator for basic and diluted
earnings per share, net income $ 9,307,071 $ 8,293,956 $ 10,800,164
========================================================
Denominator:
Weighted average shares, denominator
for basic earnings per share 5,902,615 5,921,058 5,967,489
Effect of dilutive potential common
shares, employee stock options 24,395 29,120 20,023
--------------------------------------------------------
Denominator for diluted
earnings per share 5,927,010 5,950,178 5,987,512
========================================================
Basic earnings per share $ 1.58 $ 1.40 $ 1.81
========================================================
Diluted earnings per share $ 1.57 $ 1.39 $ 1.80
========================================================
</TABLE>
SEGMENT INFORMATION:
In 1998, the Company adopted Statement of Financial Accounting Standards (FASB)
Statement No. 131, "Disclosures about Segments of an Enterprise and Related
Information." FASB No. 131 supersedes FASB No. 14, "Financial Reporting for
Segments of a Business Enterprise," replacing the "industry segment" approach
with the "management" approach. The management approach designates the internal
organization that is used by management for making operating decisions and
assessing performance as the source of the Company's reportable segments. FASB
No. 131 also requires disclosures about products and services, geographic areas,
and major customers. The adoption of FASB No. 131 had no effect on the results
of operations or financial position of the Company.
NOTE 2. BALANCE SHEET DATA
TRADE RECEIVABLES:
Trade receivables in the accompanying balance sheets at December 31, 1998 and
1997 are stated net of an allowance for doubtful accounts of $125,000 in each
year.
INVENTORIES:
1998 1997
----------------------------------
Raw materials $ 26,676,674 $ 19,710,068
Work in process 1,278,367 1,170,054
Finished goods 3,103,860 5,089,861
Materials purchased for resale 12,439,731 8,632,171
----------------------------------
$ 43,498,632 $ 34,602,154
==================================
PROPERTY AND EQUIPMENT:
Land and improvements $ 3,645,568 $ 3,352,851
Buildings and improvements 24,711,921 23,083,890
Machinery and equipment 49,911,446 45,857,694
Transportation equipment 2,780,895 2,883,395
Leasehold improvements 3,478,016 2,874,513
----------------------------------
84,527,846 78,052,343
Less accumulated depreciation 34,055,143 29,830,987
----------------------------------
$ 50,472,703 $ 48,221,356
==================================
INTANGIBLE AND OTHER ASSETS:
Goodwill, at amortized cost $ 5,152,022 $ 5,597,062
Cash value of life insurance 2,231,879 1,867,880
Other 1,335,858 397,477
----------------------------------
$ 8,719,759 $ 7,862,419
==================================
<PAGE>
ACCRUED LIABILITIES:
1998 1997
---------------------------------
Payroll and related expenses $ 2,127,462 $ 1,937,149
Property taxes 919,908 907,678
Other 1,646,189 1,610,178
---------------------------------
$ 4,693,559 $ 4,455,005
=================================
NOTE 3. PLEDGED ASSETS AND LONG-TERM DEBT
Long-term debt at December 31, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1998 1997
-------------------------------------
<S> <C> <C>
Senior Notes, insurance company $ 18,000,000 $ 18,000,000
Indiana Development Finance Authority Bonds 2,400,000 2,700,000
State of Oregon Economic Development Revenue Bonds 4,400,000 4,800,000
State of North Carolina Economic Development Revenue Bonds
Bonds 5,000,000
Other 314,535 653,735
-------------------------------------
30,114,535 26,153,735
Less current maturities 3,985,963 1,138,517
-------------------------------------
$ 26,128,572 $ 25,015,218
=====================================
</TABLE>
The senior notes bear interest at a fixed rate of 6.82% and are unsecured. The
annual principal install- ments of $2,571,428 commence on September 15, 1999 and
the final installment is due September 15, 2005. This agreement requires that
the Company maintain a minimum level of tangible net worth.
The Indiana Development Finance Authority Bonds are payable in annual
installments of $300,000 plus interest at a variable tax exempt bond rate, set
periodically to enable the bonds to be sold at par (4% at December 31, 1998).
The final installment is due November 1, 2006. The bonds are collateralized by
real estate and equipment purchased with the bond funds and are backed by a bank
standby letter of credit.
The State of Oregon Economic Development Revenue Bonds are payable in annual
installments of $400,000 plus interest at a variable tax exempt bond rate (4.2%
at December 31, 1998). The final install- ment is due December 1, 2009. The
bonds are collateralized by real estate and equipment purchased with the bond
funds and are backed by a bank standby letter of credit.
The State of North Carolina Economic Development Revenue Bonds are payable in
annual installments of $400,000 plus quarterly interest payments at a variable
tax exempt bond rate (3.2% at December 31, 1998) with the first principal
payment due August 1, 1999. Annual payments of $500,000 are due in each of the
last two years with a final payment due August 1, 2010. The bonds are
collateralized by real estate and equipment purchased with the bond funds and
are backed by a bank standby letter of credit.
<PAGE>
The Company has an unsecured revolving credit agreement which allows borrowings
up to $10,000,000 or a borrowing base defined in the agreement and which expires
on February 2, 2000. Interest on this note is at either prime or the Eurodollar
rate plus 1% to 1.25%. The Company pays .25% of the unused portion of the
revolving line. In addition, this agreement requires the Company to, among other
things, maintain minimum levels of tangible net worth, working capital, and debt
to net worth.
Aggregate maturities of long-term debt for the years ending December 31, 2000
through 2003 and there- after are as follows: 2000 $3,671,428; 2001 $3,671,428;
2002 $3,671,428; 2003 $3,671,428; and there- after $11,442,860.
In addition, the Company is contingently liable for standby letters of credit of
$9,375,000 to meet credit policies of certain suppliers.
Based on the borrowing rates currently available to the Company for loans with
similar terms and average maturities, the fair value of the long-term debt
instruments approximates their carrying value.
Interest expense for the years ended December 31, 1998, 1997, and 1996 was
approximately $1,640,000, $1,720,000, and $1,670,000 respectively.
NOTE 4. EQUITY TRANSACTIONS
STOCK OPTIONS EXERCISED:
Common stock sold to key employees through the exercise of stock options
resulted in a tax deduction for the Company equivalent to the taxable income
recognized by the employee. For financial reporting purposes, the tax benefit
resulting from this deduction, along with the proceeds from the exercise of the
options, is accounted for as an increase to common stock.
SHAREHOLDER RIGHTS PLAN:
On February 29, 1996, the Company's Board of Directors adopted a shareholder
rights agreement, granting certain new rights to holders of the Company's common
stock. Under the agreement, one right was granted for each share of common stock
held as of March 20, 1996, and one right will be granted for each share
subsequently issued. Each right entitles the holder, in an unfriendly takeover
situation, and after paying the exercise price (currently $30), to purchase
Patrick common stock having a market value equal to two times the exercise
price. Also, if the Company is merged into another corporation, or if 50 percent
or more of the Company's assets are sold, then rightholders are entitled, upon
payment of the exercise price, to buy common shares of the acquiring
corporation's common stock having a then current market value equal to two times
the exercise price. In either situation, these rights are not available to the
acquiring party. However, these exercise features will not be activated if the
acquiring party makes an offer to acquire the Company's outstanding shares at a
price which is judged by the Board of Directors to be fair to all Patrick
shareholders. The rights may be redeemed by the Company under certain circum-
stances at the rate of $.01 per right. The rights will expire on March 20, 2006.
The Company has author- ized 100,000 shares of preferred stock, Series A, no par
value, in connection with this plan, none of which have been issued.
REPURCHASE OF COMMON STOCK:
The Company's Board of Directors from time to time has authorized the repurchase
of shares of the Company's common stock, in the open market or through
negotiated transactions, at such times and at such prices as management may
decide.
NOTE 5. COMMITMENTS AND RELATED PARTY LEASES
The Company leases office, manufacturing, and warehouse facilities and certain
equipment under various noncancelable agreements which expire at various dates
through 2005. These agreements contain various renewal options and provide for
minimum annual rentals plus the payment of real estate taxes, insurance, and
normal maintenance on the properties. Certain of the leases are with the
chairman/major shareholder and expire at various dates through September 30,
2005.
The total minimum rental commitment at December 31, 1998 under the leases
mentioned above is ap- proximately $8,319,000, which is due approximately
$2,877,000 in 1999, $2,063,000 in 2000, $1,415,000 in 2001, $905,000 in 2002,
$475,000 in 2003, and $584,000 thereafter.
The total rent expense included in the statements of income for the years ended
December 31, 1998, 1997, and 1996 is approximately $3,900,000, $3,400,000, and
$3,400,000 respectively, of which approximately $1,300,000 each year was paid to
the chairman/major shareholder.
NOTE 6. MAJOR CUSTOMERS
Net sales for the year ended December 31, 1998 included sales to two customers,
each of which accounted for 10% or more of the total net sales of the Company
for the year. The percentage of sales for these customers was 12.1% and 11.3%.
Net sales for the year ended December 31, 1997 included sales to three
customers, each of which accounted for 10% or more of the total net sales of the
Company for the year. The percentage of sales for these customers was 13.3%,
10.9%, and 10.0%.
Net sales for the year ended December 31, 1996 included sales to two customers,
each of which accounted for 10% or more of the total net sales of the Company
for the year. The percentage of sales for these customers was 11.2% and 10.6%.
The balances due from these customers at December 31, 1998 and 1997 were not
significant to the total trade receivables balance.
<PAGE>
NOTE 7. INCOME TAX MATTERS
Federal and state income taxes for the years ended December 31, 1998, 1997, and
1996, all of which are domestic, consist of the following:
1998 1997 1996
---------------------------------------------------
Current:
Federal $ 4,704,700 $ 4,987,400 $ 6,016,000
State 933,000 651,400 1,024,000
Deferred 567,000 (243,000) (111,000)
---------------------------------------------------
$ 6,204,700 $ 5,395,800 $ 6,929,000
===================================================
The provisions for income taxes for the years ended December 31, 1998, 1997, and
1996 are different from the amounts that would otherwise be computed by applying
a graduated federal statutory rate of 35% to income before income taxes. A
reconciliation of the differences is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------------------------------------
<S> <C> <C> <C>
Rate applied to pretax income $ 5,430,000 $ 4,791,400 $ 6,197,000
State taxes, net of federal
tax benefit 706,000 558,400 701,000
Other 68,700 46,000 31,000
--------------------------------------------------------
$ 6,204,700 $ 5,395,800 $ 6,929,000
========================================================
</TABLE>
Deferred income tax assets and liabilities are computed annually for differences
between the financial statement and tax bases of assets and liabilities that
will result in taxable or deductible amounts in the future based on enacted tax
laws and rates applicable to the periods in which the differences are expected
to affect taxable income. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be realized. Income tax
expense is the tax payable or refundable for the current period plus or minus
the change during the period in deferred tax assets and liabilities.
The composition of the deferred tax assets and liabilities at December 31, 1998
and 1997 is as follows:
<TABLE>
<CAPTION>
1998 1997
-------------------------------------
<S> <C> <C>
Gross deferred tax liability,
accelerated depreciation $ (3,482,000) $ (2,762,000)
-------------------------------------
Gross deferred tax assets:
Trade receivables allowance 48,000 48,000
Inventory capitalization 323,000 285,000
Accrued expenses 662,000 619,000
Deferred compensation 686,000 545,000
Unvested stock awards 54,000 120,000
Other 35,000 38,000
-------------------------------------
1,808,000 1,655,000
-------------------------------------
Net deferred tax liabilities $ (1,674,000) $ (1,107,000)
=====================================
</TABLE>
<PAGE>
NOTE 8. SELF-INSURED PLANS
The Company has a self-insured health plan for its employees under which there
is both a participant stop loss and an aggregate stop loss based on total
participants. The total annual aggregate liability was approximately $2,700,000
at December 31, 1998. The excess loss portion of the employees' coverage has
been insured with a commercial carrier.
The Company is partially self insured for its workers' compensation liability.
The Company is respon- sible for a per occurrence limit amount not to exceed
approximately $1,400,000 in aggregate annually. The excess loss portion of the
employees' coverage has been insured with a commercial carrier.
The Company has accrued an estimated liability for these benefits based upon
claims incurred.
NOTE 9. COMPENSATION PLANS
DEFERRED COMPENSATION OBLIGATIONS:
The Company has deferred compensation agreements with certain key employees. The
agreements pro- vide for monthly benefits for ten years subsequent to
retirement, disability, or death. The Company has accrued an estimated liability
based upon the present value of an annuity needed to provide the future benefit
payments.
BONUS PLAN:
The Company pays bonuses to certain management personnel. Historically, bonuses
are determined annually and are based upon corporate and divisional income
levels. The charge to operations amounted to approximately $2,200,000,
$1,980,000, and $2,196,000 for the years ended December 31, 1998, 1997, and 1996
respectively.
PROFIT-SHARING PLAN:
The Company has a qualified profit-sharing plan, more commonly known as a 401(k)
plan, for substan- tially all of its employees with over one year of service and
who are at least 21 years of age. The plan provides for a matching contribution
by the Company as defined in the agreement and, in addition, pro- vides for a
discretionary contribution annually as determined by the Board of Directors. The
amounts of contributions for the years ended December 31, 1998, 1997, and 1996
were immaterial.
STOCK OPTION PLAN:
The Company has adopted a stock option plan with shares of common stock reserved
for options to key employees. These options were included in computing diluted
earnings per common share as shown on the consolidated statements of income.
<PAGE>
Following is a summary of transactions of granted shares under option for the
years ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
-------------------------------------------------------------
WEIGHTED Weighted
AVERAGE Average
EXERCISE Exercise
SHARES PRICE Shares Price
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding, beginning of year 96,000 $10.75 98,000 $10.75
Canceled during the year - 10.75 (500) 10.75
Exercised during the year (7,500) 10.75 (1,500) 10.75
-------------------------------------------------------------
Outstanding, end of year 88,500 $10.75 96,000 $10.75
=============================================================
Eligible, end of year for exercise 88,500 $10.75 68,750 $10.75
=============================================================
</TABLE>
A further summary about fixed options outstanding at December 31, 1998 is as
follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------------------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Number Contractual Exercise Number Exercise
Outstanding Life Price Exercisable Price
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Exercise price of $10.75 88,500 1.25 $10.75 88,500 $10.75
===============================================================================
</TABLE>
As permitted under generally accepted accounting principles, the Company's
present accounting with respect to the recognition and measurement of
stock-based employee compensation costs, primarily related to the Company's
stock option plan, is in accordance with APB Opinion No. 25, which generally
requires that compensation costs be recognized for the difference, if any,
between the quoted market price of the stock and the amount an employee must pay
to acquire the stock at the date of grant. FASB Statement No. 123 prescribes a
fair-value based method of measurement that results in the disclosure of
computed compensation costs for essentially all awards of stock-based
compensation to employees. This requirement is to be applied prospectively to
any options granted after the effective date of the standard. No options were
granted after that date and, therefore, there are no pro forma net income
effects reported.
STOCK AWARD PLAN:
The Company has adopted a stock award plan for the five existing non-employee
directors. Grants awarded during May 1998 of 30,000 shares are subject to
forfeiture in the event the recipient terminates as a director within two years
from the date of grant. The related compensation expense is being recognized
over the two-year vesting period.
<PAGE>
NOTE 10. BUSINESS COMBINATION
In August 1997, the Company purchased substantially all of the assets of United
Shade, Inc., a manufac- turer of window shades and blinds. The total acquisition
cost was $5,810,400. The excess of the total acquisition cost over the fair
value of the net assets acquired of $2,760,000 is being amortized over fifteen
years by the straight-line method. The acquisition has been accounted for as a
purchase and results of operations of United Shade, Inc. since the date of
acquisition are included in the consolidated financial statements.
In April 1998, the Company acquired for cash all of the assets and liabilities
of Woodtek, L.L.C., a manufacturer of wood products. The total acquisition cost
was $2,581,490. The acquisition has been accounted for as a purchase and the
results of operations of Woodtek, L.L.C. since the date of acquisition are
included in the consolidated financial statements.
Summarized pro forma financial information for the years ended December 31, 1998
and 1997 as though the two acquisitions had occurred as of January 1, 1997 is as
follows:
1998 1997
-------------------------------------
Net sales $ 456,281,052 $ 423,513,123
Net income 9,340,957 8,461,784
Earnings per share 1.58 1.43
NOTE 11. CASH FLOWS INFORMATION
Supplemental information relative to the statements of cash flows for the years
ended December 31, 1998, 1997, and 1996 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------------------------------------
<S> <C> <C> <C>
Supplemental disclosures of cash flows information:
Cash payments for:
Interest $ 1,621,879 $ 1,720,934 $ 1,583,112
========================================================
Income taxes $ 6,359,279 $ 5,360,319 $ 7,379,844
========================================================
Supplemental schedule of noncash
investing and financing activities:
Equipment contracts incurred
for use of equipment $ $ $ 1,307,547
========================================================
Business acquisitions:
Cash purchase price $ 2,581,490 $ 6,797,316 $
========================================================
Working capital acquired $ 1,081,490 $ 2,455,644 $
Fair value of long-lived assets acquired 1,500,000 4,341,672
--------------------------------------------------------
$ 2,581,490 $ 6,797,316 $
========================================================
</TABLE>
The changes in assets and liabilities in arriving at net cash provided by
operating activities are net of amounts related to acquisitions.
NOTE 12. UNAUDITED INTERIM FINANCIAL INFORMATION
Presented below is certain selected unaudited quarterly financial information
for the years ended Decem- ber 31, 1998 and 1997 (dollars in thousands, except
per share data):
<TABLE>
<CAPTION>
Quarter Ended
--------------------------------------------------------------------
March 31, June 30, September 30, December 31,
1998
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 104,987 $ 117,731 $ 119,070 $ 111,730
Gross profit 13,253 15,463 15,894 14,946
Net income 1,811 2,497 2,724 2,275
Earnings per common share 0.31 0.42 0.46 0.39
Weighted average common
shares outstanding 5,896,472 5,915,206 5,925,865 5,872,923
1997
--------------------------------------------------------------------
Net sales $ 96,936 $ 106,600 $ 105,126 $ 101,905
Gross profit 11,957 13,328 13,379 13,477
Net income 2,086 2,242 2,074 1,892
Earnings per common share 0.35 0.38 0.35 0.32
Weighted average common
shares outstanding 5,964,594 5,929,140 5,895,766 5,895,766
</TABLE>
NOTE 13. SEGMENT INFORMATION
The Company has determined that its reportable segments are those that are based
on the Company's method of internal reporting, which segregates its business by
product category and production/ distribution process. 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.
<PAGE>
Distribution -- Distributes primarily pre-finished wall and ceiling panels,
particleboard, hardboard, and vinyl siding, roofing products, passage doors,
building hardware, insulation, and other products.
Wood -- Uses raw lumber including solid oak as well as other hardwood
materials or laminated particleboard or plywood to produce cabinet door
product lines.
Other -- Includes aluminum extruding, painting and distributing divisions, an
adhesive division, a pleated shade division, a plastic thermoforming
division, and a machine manufacturing division.
The accounting policies of the segments are the same as those described in
"Significant Accounting Poli- cies," except as described below. Segment data
includes intersegment revenues, as well as a charge allo- cating a majority of
the corporate costs to each of its operating segments. Assets are identified
with the segments with the exception of cash, trade receivables, and land and
buildings, which are identified with the corporate division. The corporate
division charges rents to the segment for use of the land and buildings based
upon market rates. The Company accounts for intersegment sales as if the sales
were to third parties, that is, at current market prices. The Company also
records income from purchase incentive agreements as corporate division revenue.
The Company evaluates the performance of its segments and allocates resources to
them based on a variety of indicators including revenues, cost of goods sold,
earnings before interest and taxes (EBIT), and total identifiable assets.
The table below presents information about the net income (loss) and segment
assets used by the chief operating decision makers of the Company as of and for
the years ended December 31, 1998, 1997, and 1996. Segment information for
earlier years has been presented to conform with the requirements of FASB No.
131 (dollars in thousands).
<TABLE>
<CAPTION>
Laminating Distribution Wood Other Total
--------------------------------------------------------------------------------------
1998
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales $ 190,204 $ 171,700 $ 45,019 $ 45,717 $ 452,640
Sales, intersegment 8,244 5,834 22,924 37,002
--------------------------------------------------------------------------------------
Total sales 198,448 171,700 50,853 68,641 489,642
Cost of goods sold 174,673 156,303 49,061 57,020 437,057
EBIT 8,289 3,480 (3,019) 4,590 13,340
Identifiable assets 32,181 14,480 10,965 11,960 69,586
Depreciation 1,982 367 1,349 1,254 4,952
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Laminating Distribution Wood Other Total
--------------------------------------------------------------------------------------
1997
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales $ 193,399 $ 144,870 $ 34,936 $ 36,512 $ 409,717
Sales, intersegment 7,804 11 1,630 18,348 27,793
--------------------------------------------------------------------------------------
Total sales 201,203 144,881 36,566 54,860 437,510
Cost of goods sold 179,297 131,185 34,831 47,125 392,438
EBIT 7,582 3,700 (2,250) 2,299 11,331
Identifiable assets 28,044 10,390 9,774 12,408 60,616
Depreciation 1,560 272 1,071 917 3,820
1996
--------------------------------------------------------------------------------------
Sales $ 176,655 $ 157,528 $ 37,914 $ 30,411 $ 402,508
Sales, intersegment 8,208 3 1,528 18,965 28,704
--------------------------------------------------------------------------------------
Total sales 184,863 157,531 39,442 49,376 431,212
Cost of goods sold 165,728 142,401 33,853 41,626 383,608
EBIT 6,226 5,842 1,609 2,722 16,399
Identifiable assets 29,703 11,637 9,430 8,977 59,747
Depreciation 1,240 257 918 932 3,347
</TABLE>
A reconciliation of total segment sales, cost of goods sold, and EBIT to
consolidated sales, cost of goods sold, and segment information to the
consolidated financial statements as of and for the years ended December 31,
1998, 1997, and 1996 is as follows (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------------------------------------
<S> <C> <C> <C>
Sales:
Total sales for reportable segments $ 489,642 $ 437,510 $ 431,212
Elimination of intersegment revenue (36,123) (26,943) (27,701)
--------------------------------------------------------
Consolidated sales $ 453,519 $ 410,567 $ 403,511
========================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------------------------------------
<S> <C> <C> <C>
Cost of goods sold:
Total cost of goods sold for reportable
segments $ 437,057 $ 392,438 $ 383,608
Elimination of intersegment cost of goods
sold (36,123) (26,943) (27,701)
Consolidation reclassifications (2,858) (2,795) (2,937)
Corporate incentive agreements (3,740) (3,484) (2,246)
Other (373) (790) (575)
--------------------------------------------------------
Consolidated cost of goods sold $ 393,963 $ 358,426 $ 350,149
========================================================
Earnings before interest and taxes (EBIT):
EBIT for reportable segments $ 13,340 $ 11,331 $ 16,399
Corporate incentive agreements 3,740 3,484 2,246
Consolidation reclassifications (173) (142) 145
Other (223) 166 17
--------------------------------------------------------
Consolidated EBIT $ 16,684 $ 14,839 $ 18,807
========================================================
Consolidated assets:
Identifiable assets for reportable segments $R 69,586 $% 60,616 $ 59,747
Corporate property and equipment 24,541 22,268 19,355
Current assets not allocated to segments 25,063 21,502 22,044
Intangible and other assets not allocated
to segments 8,720 7,862 5,460
Consolidation eliminations (155) (60)
--------------------------------------------------------
Consolidated assets $ 127,755 $ 112,188 $ 106,606
========================================================
Depreciation and amortization:
Depreciation for reportable segments $ 4,952 $ 3,820 $ 3,347
Corporate depreciation and amortization 2,629 1,961 1,160
--------------------------------------------------------
Consolidated depreciation $ 7,581 $ 5,781 $ 4,507
========================================================
</TABLE>
<PAGE>
INDEPENDENT AUDITOR'S REPORT ON THE
SUPPLEMENTAL SCHEDULE AND CONSENT
To the Board of Directors
Patrick Industries, Inc.
Elkhart, Indiana
Our audits of the consolidated financial statements of Patrick Industries, Inc.
and Subsidiaries included Schedule II, contained herein, for each of the years
in the three-year period ended December 31, 1998. Such schedule is presented for
purposes of complying with the Securities and Exchange Commission's rule and is
not a required part of the basic consolidated financial statements. In our
opinion, such schedule presents fairly the information set forth therein, in
conformity with generally accepted accounting principles.
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (File No. 333-04187) and in the related Prospectus of our
report, dated January 29, 1999, with respect to the consolidated financial
statements and schedule of Patrick Industries, Inc. and Subsidiaires included in
this Annual Report on Form 10-K for the year ended December 31, 1998.
McGLADREY & PULLEN, LLP
Elkhart, Indiana
March 30, 1999
<PAGE>
Patrick Industries, Inc.
And Subsidiaries
<TABLE>
Schedule II
<CAPTION>
Valuation And Qualifying Accounts And Reserves
December 31, 1996, 1997, and 1998
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Balance At Deductions Balance At
Beginning Charged To From Close
Of Period Operations Reserves Of Period
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Allowance for doubtful accounts - deducted from trade receivables, in the
balance sheets:
<S> <C> <C> <C> <C>
1996 $ 100,000 $ 42,307 $ 62,307 $ 80,000
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1997 $ 80,000 $ 168,514 $ 123,515 $ 125,000
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1998 $ 125,000 $ 235,000 $ 235,000 $ 125,000
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</TABLE>
<PAGE>
INDEX TO EXHIBITS
Exhibit Number Exhibits
3(a) -Amended Articles of Incorporation of the Registrant as
further amended (filed as Exhibit 3(a) to the Registrant's
Form 10-K/A-1 amending its report on Form 10-K for the fiscal
year ended December 31, 1992 and incorporated herein by
reference) ...........
3(b) -By-Laws of the Registrant (filed as Exhibit 3(b) to the
Registrant's Form 10-K/A-1 amending its report on Form 10-K
for the fiscal year ended December 31, 1992 and incorporated
herein by reference) ...........
3(c) - Preferred Share Purchase Rights Agreement (filed April 3,
1996 on Form 8-A and incorporated herein by reference)
.........
10(a) -Second Amendment to February 2, 1994 Credit Agreement, dated
as of June 26, 1995 among the Registrant, NBD Bank, as agent,
and NBD Bank, N.A. (filed as Exhibit 10(a) to the Registrant's
Form 10-K for the fiscal year ended December 31, 1995 and
incorporated herein by reference) ...........
10(b) -Note Agreement, dated September 1, 1995, between the
Registrant and Nationwide Life Insurance Company (filed as
Exhibit 10(b) to the Registrant's Form 10-K for the fiscal
year ended December 31, 1995 and incorporated herein by
reference) ...........
10(c) -Commercial Lease and Option to Purchase dated as of October
1, 1995 between Mervin Lung Building Company, Inc., as lessor,
and the Registrant, as lessee (filed as Exhibit 10(c) to the
Registrant's Form 10-K for the fiscal year ended December 31,
1995 and incorporated herein by reference) ...........
10(d) -First Amendment to Credit Agreement, dated as of October 27,
1994 among the Registrant, NBD Bank, as agent, and NBD Bank,
N.A. (filed as Exhibit 10(a) to the Registrant=s Form 10-K for
the fiscal year ended December 31, 1994 and incorporated
herein by reference) ...........
10(e) -Loan Agreement dated as of December 1, 1994 between the State
of Oregon Economic Development Commission, along with the
Pledge and Security Agreement relating thereto (filed as
Exhibit 10(b) to the Registrant=s Form 10-K for the fiscal
year ended December 31, 1994 and incorporated herein by
reference) ...........
10(f) -Credit Agreement dated as of February 2, 1994 among the
Registrant, NBD Bank, as agent, and NBD Bank, N.A. (filed as
Exhibit 10(a) to the Registrant's Form 10-K for the fiscal
year ended December 31, 1993 and incorporated herein by
reference) ...........
<PAGE>
Exhibit Number Exhibits
10(g) -Loan Agreement dated as of November 1, 1991 between the
Registrant and the Indiana Development Finance Authority,
along with the Pledge and Security Agreement relating thereto
(filed as Exhibit 10(c) to the Registrant's Form 10-K/A-1
amending its report on Form 10-K for the fiscal year ended
December 31, 1992 and incorporated herein by reference) .....
*10(h) -Patrick Industries, Inc. 1987 Stock Option Program, as
amended (filed as Exhibit 10(e) to the Registrant=s Form 10-K
for the fiscal year ended December 31, 1994 and incorporated
herein by reference) ...........
*10(i) -Patrick Industries, Inc. 401(k) Employee Savings Plan (filed
as Exhibit 10(a) to the Registrant's Form 10-K for the fiscal
year ended December 31, 1993 and incorporated herein by
reference) ...........
*10(j) -Form of Employment Agreements with Executive Officers (filed
as Exhibit 10(e) to the Registrant's Form 10-K/A-1 amending
its report on Form 10-K for the fiscal year ended December 31,
1992 and incorporated herein by reference) .....
*10(k) -Form of Deferred Compensation Agreements with Executive
Officers (filed as Exhibit 10(f) to the Registrant's Form
10-K/A-1 amending its report on Form 10-K for the fiscal year
ended December 31, 1992 and incorporated herein by reference)
...........
10(l) -Commercial Lease and dated as of October 1, 1994 between
Mervin D. Lung, as lessor, and the Registrant, as lessee
(filed as Exhibit 10(k) to the Registrant=s Form 10-K for the
fiscal year ended December 31, 1994 and incorporated herein by
reference) ...........
10(m) -Commercial Lease dated September 1, 1994 between Mervin D.
Lung Building Company, Inc., as lessor, and the Registrant, as
lessee (filed as Exhibit 10(l) to the Registrant=s Form 10-K
for the fiscal year ended December 31, 1994 and incorporated
herein by reference) ...........
10(n) -Commercial Lease dated November 1, 1994 between Mervin D.
Lung Building Company, Inc., as lessor, and the Registrant, as
lessee (filed as Exhibit 10(m) to the Registrant=s Form 10-K
for the fiscal year ended December 31, 1994 and incorporated
herein by reference) ...........
12** -Computation of Operating Ratios ...........
23 -Consent of accountants (included in Independent auditor's
report on supplemental schedule & consent on page F-15) .....
27** -Financial Data Schedule ...........
*Management contract or compensatory plan or arrangement
**Filed herewith
Exhibit 12
PATRICK INDUSTRIES, INC.
STATEMENT OF COMPUTATION OF OPERATING RATIOS
Operating ratios which appear in this Form 10-K, including gross profit,
warehouse and dellivery expenses, selling, general, and administrative expenses,
operating income, and net income were computed dividing the respective amounts
by net sales for the period indicated.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 3,704,693
<SECURITIES> 0
<RECEIVABLES> 20,892,406
<ALLOWANCES> (125,000)
<INVENTORY> 43,498,632
<CURRENT-ASSETS> 68,562,201
<PP&E> 84,527,846
<DEPRECIATION> 34,055,143
<TOTAL-ASSETS> 127,754,663
<CURRENT-LIABILITIES> 21,863,817
<BONDS> 0
0
0
<COMMON> 22,117,481
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 127,754,663
<SALES> 453,518,573
<TOTAL-REVENUES> 453,518,573
<CGS> 393,962,419
<TOTAL-COSTS> 436,834,835
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,171,967
<INCOME-PRETAX> 15,511,771
<INCOME-TAX> 6,204,700
<INCOME-CONTINUING> 9,307,071
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,307,071
<EPS-PRIMARY> 1.58
<EPS-DILUTED> 1.57
</TABLE>
