ITEM 1B. | ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. | ITEM 2. PROPERTIES
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As of December 31, 2005,2006, the Company maintained the following warehouse, manufacturing and distribution facilities: | | | Ownership or Lease Arrangement | | | | | Elkhart, IN | Manufacturing(P) | 40,000 | Leased to 2007 | Elkhart, IN | Distribution(D) | 107,000 | Owned | Elkhart, IN | Manufacturing (P) | 182,000 | Owned | Elkhart, IN | Admin. Offices | 35,000 | Owned | Mishawaka, IN | Manufacturing(E) | 191,000 | Owned Subject to Mortgage | Decatur, AL | Distribution(D) | 30,000 | Leased to 20062008 | Decatur, AL | Manufacturing(P) | 35,000 | Owned | Decatur, AL | Manufacturing(P)(O) | 59,000 | Owned | Valdosta, GA | Distribution(D) | 31,000 | Owned | New London, NC | Mfg. & Dist.(P)(D) | 163,000 | Owned, Subject to Mortgage | Halstead, KS | Distribution(D) | 36,000 | Owned | Waco, TX | Mfg. & Dist.(P)(D) | 106,000 | Owned | Waco, TX | Manufacturing(P) | 21,000 | Leased to 20062008 | Mt. Joy, PA | Manufacturing(P) | 33,000 | Owned | Mt. Joy, PA | Mfg. & Dist. (P)(D) | 56,000 | Owned | Ocala, FL | Manufacturing(P) | 56,000 | Owned | Fontana, CA | Mfg. & Dist.(P)(D) | 110,000 | Owned | Fontana, CA | Manufacturing(P) | 72,000 | Owned | Fontana, CA | Mfg. & Dist.(P)(D) | 71,000 | Leased to 2009 | Woodland, CA | Distribution (D) | 17,000 | Leased to 20062009 | Phoenix, AZ | Manufacturing (P) | 45,000 | Leased to 2007 | Woodburn, OR | Mfg. & Dist.(P)(D)(O) | 153,000 | Owned, Subject to Mortgage | Boulder City, NV
| Manufacturing(O)
| 25,000
| Leased to 2006
| | | | |
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(P) Primary Manufactured Products (D) Distribution (O) Other Component Manufactured Products (E) Engineered Solutions Additionally, the Company owns a 30,900 square foot building in Elkhart, IN which is currently for sale andwe have approximately 20 acres of land in Elkhart, INIndiana, which is also for sale. As of December 31, 2005, the Company2006, we owned or leased 2826 trucks, 40 tractors, 7675 trailers, and 133123 forklifts. All owned and leased facilities and equipment are in good condition and well maintained.are well-maintained. ITEM 3. LEGAL PROCEEDINGS
The Company isWe are subject to claims and suits in the ordinary course of business. In management’s opinion, currently pending legal proceedings and claims against the Company will not, individually or in the aggregate, have a material adverse effect on the Company’sour financial condition, results of operations, or cash flows.
ITEM 4. | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report.
PART II ITEM 5.MARKET FOR THE COMPANY’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES The Company’sMarket Information
Our common stock is listed on The NASDAQ Stock MarketSM under the symbol PATK. The high and low trade prices of the Company’s common stock as reported on NASDAQ/NMSNASDAQ for each quarterly period during the last three years were as follows: | | | | | | | | | | 2006 | $12.380 - $10.220 | $13.400 - $10.910 | $13.000 - $9.250 | $13.480 - $11.530 | 2005 | $11.000 - $ 9.220 | $10.230 - $ 8.500 | $12.437 - $ 8.220 | $11.390 - $ 9.620 | 2004 | $10.000 - $ 8.130 | $12.700 - $ 9.500 | $12.200 - $ 9.550 | $11.720 - $ 8.590 | 2003
| $ 7.640 - $ 6.490
| $ 6.690 - $ 6.330
| $ 6.860 - $ 6.330
| $ 8.850 - $ 6.840
| | | | | |
The quotations represent prices between dealers, do not include retail mark-ups, mark-downs, or commissions, and may not necessarily represent actual transactions. Holders of Common Stock There were approximately 500 holders of the Company’sour common stock as of March 17, 200616, 2007 as taken from the transfer agent’s shareholder listing. It is estimated that there are approximately 1,200 holders of the Company’sour common stock held in street name. The CompanyDividends
We declared a first time quarterly dividend of $.04 per common share starting June 30, 1995 and continued it through the first quarter of 2003. The Board of Directors decided to suspendsuspended the quarterly dividend in the second quarter of 2003 due to industry conditions.conditions and has not paid a dividend since that time. Any future determination to pay cash 10
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. Purchases of Equity Securities by the Issuer or Affiliated Purchasers During the fourth quarter of 2005,2006, neither the Company, did not repurchasenor any affiliated purchaser, repurchased any of itsthe Company’s common stock.
ITEM 6. | ITEM 6. SELECTED FINANCIAL DATA
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The following selected financial data for each of the five years set forth below has been derived from financial statements audited by McGladrey & Pullen, LLP, independent certified public accountants, certain of which have been included elsewhere herein. The following data should be read in conjunction with the Financial Statements and related Notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere herein: | As of or for the Year Ended December 31, | As of or for the Year Ended December 31, | | | | | | | | | | | | | (dollars in thousands, except per share amounts) | (dollars in thousands, except per share amounts) | | | | Net sales | $323,400 | $301,555 | $274,682 | $308,755 | $293,070 | $347,629 | $323,400 | $301,555 | $274,682 | $308,755 | Gross profit | 38,140 | 35,880 | 32,183 | 39,193 | 34,012 | 42,063 | 38,140 | 35,880 | 32,183 | 39,193 | Warehouse and delivery expenses | 13,904 | 13,719 | 12,916 | 14,329 | 14,407 | 14,719 | 13,904 | 13,719 | 12,916 | 14,329 | Selling, general, and administrative expenses | 20,400 | 20,489 | 18,443 | 23,546 | 24,926 | 21,190 | 20,400 | 20,489 | 18,443 | 23,546 | Impairment charges | - - - | - - - | - - - | 2,834 | | Restructuring charges | - - - | 235 | 269 | 423 | - - - | 235 | 269 | Operating income | 3,836 | 1,672 | 589 | 1,049 | (8,578) | 6,154 | 3,836 | 1,672 | 589 | 1,049 | Interest expense, net | 1,396 | 671 | 679 | 891 | 962 | 1,631 | 1,396 | 671 | 679 | 891 | Income taxes (credits) | 1,016 | 400 | (35) | 63 | (3,769) | 1,894 | 1,016 | 400 | (35) | 63 | Net income (loss) | 1,424 | 601 | (55) | 95 | (5,771) | 2,629 | 1,424 | 601 | (55) | 95 | Basic earnings (loss) per common share | .30 | .13 | (.01) | .02 | (1.28) | .54 | .30 | .13 | (.01) | .02 | Diluted earnings (loss) per common share | .30 | .13 | (.01) | .02 | (1.28) | .53 | .30 | .13 | (.01) | .02 | Weighted average common shares outstanding | 4,774 | 4,704 | 4,601 | 4,547 | 4,524 | 4,870 | 4,774 | 4,704 | 4,601 | 4,547 | Cash dividends, per common share | - - - | .04 | .16 | - - - | .04 | .16 | Working capital | 39,447 | 28,770 | 35,635 | 38,566 | 39,082 | 37,105 | 39,447 | 28,770 | 35,635 | 38,566 | Total assets | 99,730 | 92,375 | 81,142 | 86,466 | 91,970 | 109,149 | 99,730 | 92,375 | 81,142 | 86,466 | Long-term debt | 16,472 | 4,100 | 7,771 | 11,443 | 15,114 | 14,006 | 16,472 | 4,100 | 7,771 | 11,443 | Shareholders’ equity | 62,680 | 60,740 | 59,248 | 59,279 | 59,504 | 66,076 | 62,680 | 60,740 | 59,248 | 59,279 | | | |
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ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL For the Company, fiscal 2006 represented our third year of consecutive growth and best operating results since 1999. This was the second year in our three-year strategic plan, and while 2005 could be characterized by opportunitywas dedicated to solidifying the organizational structure and execution. In 2004, through organizational and operational changes, the Company established its platformestablishing a foundation for future growth. Ingrowth, fiscal 2006 included execution of a number of initiatives including an aggressive acquisition platform, targeted sales focus, new product rollout and introductions, and concentrated efforts on operational improvement and lean manufacturing. Positive operating and sales trends from the fourth quarter of 2005 the Company set out on its strategic plancarried through to capitalize on that platform. While the first threeand second quarters of 2005 provided fairly stagnant market2006 with volume levels that were at contribution points well above break-even, and profitability which transferred to the bottom line. Industry conditions and Company earnings at approximately $0.2 million, or $.05 per share, the spike in demand for FEMA unitsbegan to soften in the fourthsecond quarter in the Manufactured Housing industry and in the third quarter in the Recreational Vehicle Industries, asindustry resulting in a result ofdecline in our trended sales from the need for temporary housing in hurricane damaged areas, produced market conditions not seen in many years, and an opportunity for the Companyfirst two quarters. The fourth quarter continued this trend, especially when compared to perform under almost optimal conditions. Consequently the Company posted operating results in the fourth quarter of 2005, which bettered any quarterincluded the FEMA shipments in the last four years. Further, the Company’s size, national presence, available capacity, and valued employee and supplier relationships proved to be invaluable in accommodating this need and we were able to continue to provide quality service to our customers in this timeboth of national crisis.
After several years of reporting relatively flat operating performance, the Company posted its strongest operating results since 1999. Revenues in the fourth quarter increased over 9% from the previous year and represented the highest quarter in the 2005 fiscal year. Annual revenues were $323.4 million, or 7% ahead of the $301.6 million reported in 2004, and the highest since fiscal 2000. Operating income for the quarter was $2.3 million compared to $9,000 in 2004, and net income was $1.2 million, or $.25 per share, compared to a loss of $0.1 million, or $.02 per share in 2004. Operating income for the year was $3.8 million, or more than doubled the $1.7 million reported in 2004, and the highest since 1999. Net income reported for the year was also the highest since 1999, at $1.4 million, or $.30 per share, compared to $0.6 million in 2004, or $.13 per share. Operating income in 2005 includes an additional $0.7 million, or $.08 per share, related to additional volume incentive rebates from certain vendors as a result of increased production and sales for the year. The 2004 results include a $0.5 million, or $.06 net of tax, charge to operations for bad debts related to one customer, and gains of approximately $0.5 million, or $.07 net of tax, related to life insurance proceeds and a sale of buildings. Interest expense increased approximately $0.7 million from the previous year due to the Company taking on $15 million of fixed term debt financing in March, 2005 to support its 2003-2005 capital expenditure plan. Capital expenditures were $8.5 million in 2005 and over the past three years were approximately $24.4 million. As the most recent capital initiative is complete, estimated capital expenditures for 2006 are $5 million.
Receivables increased from the prior year due to the increased sales in the fourth quarter and inventory levels decreased as a result of the Company’s strategic initiative to maintain certain turn levels. The Company expects inventory levels to rise in the first quarter, due to the expected increase in demand, however turn targets have been set for the year to maximize inventory utilization.
On a macroeconomic level, the year was characterized by economic uncertainty, a booming housing market, rising interest rates, unstable gasoline prices, and massive destructionthese industries as a result of the hurricanes in the southeast. Additionally, large lossesSoutheast in 2005. Sales for the fourth quarter were down approximately 13% from 2005.
Sales for 2006 increased approximately $24.2 million, or 7.5% when compared to 2005. Our continued focus on keeping costs aligned with revenues resulted in a less than corresponding increase in operating expenses of approximately 4.7% thus reflecting improved operating income from year to year. Operating income increased $2.3 million, or 60%, and workforce reductionsnet income increased approximately 84% to $2.6 million, or $0.54 per share, compared to $1.4 million, or $0.30 per share in 2005. The operating income for the year includes approximately $0.5 million of incremental expenses for legal and professional fees related to our strategic acquisition efforts as the we are actively pursuing accretive acquisitions to help drive future growth. As industry conditions are expected to remain soft through the first quarter of 2007, we are maintaining our focus on cost control, maximization of operating margins, and increasing market penetration. Raw material product price increases, as a result of a fairly strong residential housing market through two quarters, and market penetration in all of the industries that we serve, helped to bolster overall sales levels and thus propel our sales beyond the industry trends in the US autoManufactured Housing sector. We estimate that raw material price increases account for approximately 81% of the year-to-date sales increase. Our strategic relationships with our suppliers also helped to secure product in areas where demand far exceeded supply, thus driving a premium, not only for the product availability and pricing, but further solidifying Patrick Industries, Inc. as a quality and valuable source of materials to our customer base. During the third and fourth quarters and carrying over into the first quarter of 2007, the residential housing market appears to be showing signs of decline and therefore may result in less demand on certain of our products. This could impact product pricing as supply catches up with the demand in the residual markets including Manufactured Housing. Inventory levels increased throughout the course of the year and finished the year approximately $9.4 million over the December 2005 levels due primarily to increased raw material prices from period to period, strategic purchasing initiatives implemented, uncertainty with regard to shipping schedules on product purchased from overseas, and a faster than expected market softening in all of the sectors we serve. The Manufactured Housing industry, which represents 44% of our sales for the year ending December 31, 2006, experienced shipment decreases of approximately 20% from 2005. Shipment levels in this industry, exclusive of FEMA units, have remained relatively flat for the past four years and intensified political pressureare operating at the lowest levels since 1961. While this industry is still plagued by financing concerns, including lack of funding sources, permanent rebuilding in the New Orleans area, rising interest rates, mild inflation and improved job growth may favorably impact this industry going forward. As certain housing manufacturers continue their penetration into the modular housing sector, the demand for our manufactured custom panels continues to shift to our distribution products which include, but are not limited to, the raw substrates and tape and texture products. The Recreational Vehicle industry, which represents approximately 28% of our sales for the year ended December 31, 2006, began to show signs of softening in the third quarter as shipment increases of 15%, and 14% in 12
the first and second quarters of 2006 were partially offset by declines in shipments of approximately 10% and 14% in the third and fourth quarters, respectively. Year to date, shipments in this industry are approximately 2% better than the 2005 year end figures. While rising gasoline prices have had an impact on motorized units, the towable unit shipments were fairly strong for the first six months of the year and began to show signs of decline in the third quarter. Towable unit shipments decreased approximately 22% from the fourth quarter of 2005, primarily as a result of the warincreased FEMA shipments in Iraq clouded2005, and were up approximately 4% year to date. Sales to the overall economic picture. Market conditions for mosttowable segment of the yearmarket approximate 75% of our total Recreational Vehicle industry market sales. We expect these soft industry conditions to continue at least through the first and second quarters of 2007. Additionally, market conditions could remain depressed in the Manufactured Housingshort term while FEMA attempts to sell off its excess yard inventories and Recreational Vehicle Industries, which represent 73% of the Company’s sales at December 31, 2005, included a Manufactured Housing Industry in its third consecutive year with shipments at their lowest levels in more than 40 years, and a Recreational Vehicle Industry that is performing at optimum levels not seen in less than 25 years. The market conditions in the Industrial market sector, which comprise 27% of the Company’s December 31, 2005 sales, were bolstered by strong residential housing starts and continued commercial building development. The Manufactured Housing Industry, which represents approximately 45% of the Company’s sales at December 31, 2005, continued to ship units at a stagnant pace for the first three quarters of 2005. While first quarter 2005 shipments improved more than 7% over the previous year and appeared to have some momentum aided by hurricanes in the fourth quarter of 2004, the second and third quarters quickly leveled off finishing a combined 0.5% down from the previous year’s comparable period. The FEMA demand in the fourth quarter boosted shipment levels by 42% from 2004 and 12% year to date, and provided a temporary fix to many of the economic difficulties affecting the Manufactured Housing Industry. Retail dealer lots were emptied and plants rushed to fill capacity levels. While the initial spike lasted for the fourth quarter, it remains unclear when and if there will be another round of FEMA orders released. Further, the economic uncertainty related to financing has not yet been solved and provides an unclear picture as to what the future holds for this market in the traditional sense.used units. Many of the manufacturersused units are continuingdamaged and will most likely have to shift towards modular units where land/home financing is more readily availablebe severely discounted to be sold.
Our diversification efforts into the Industrial and comparable with traditional residential housing terms. Overall, the Company’s sales to the Manufactured Housing Industry were up more than 15% from the previous year. The Recreational Vehicle Industry,other markets, which representsrepresent approximately 28% of our sales for the Company’syear ended December 31, 2005 sales,2006, resulted in additional market penetration of approximately $9.0 million for the year. Customer attrition continued on its torrid pace forfrom the first quarter of 2005 with shipments improving more than 6% over those2006 accounting for approximately $8.0 million of lost sales due to import pressures and financial and other circumstances at several of our larger customers. New sources of demand are developing in 2004. The second quarter gave indications that dealer lots were filling upthis market sector, however, not quickly enough to offset the losses of these large clients. Our efforts to penetrate and that demand was decreasing as shipments decreased almost 5% from 2004. Third quarter shipments improved more than 8% and fourth quarter shipments were up 7% as a result of the FEMA demand. Year to date shipments were up almost 4% from 2004 and have surpassed the 350,000 unit level for only the second timegain market share in twenty five years. The Company’s sales to the Recreational Vehicle Industry were comparable with those in 2004. Decreased sales and production levels atthese industries continues because we believe certain of our customers hadcore competencies including quality customer service, short order lead times, and high volume quality manufacturing are a direct impact onstrategic fit for the Company keeping up with overall industry increases on a percentage basis. While higher gasoline prices appear torequirements of this customer base.
We believe that we have affected the motorized units whichestablished our platform for future growth and are down more than 14% from 2004, towable units are still in demand and finished the year more than 8% ahead of 2004. This demand, exclusive of the FEMA situation, is expected to continue through the first quarter.
The Industrial market sector, which represents approximately 27% of the Company’s sales at December 31, 2005, also provided opportunitieswell positioned to increase market share with the products associated with residential housing, where sales of new family homes grew over 6% from 2004, and commercial and office furniture and fixture sales were up more than 10%. The products supplied to these markets are characterized by longer production runs resulting in increased operating efficiencies, and a less price-driven customer base. While overall market statistics are difficult to derive due to the vast nature of the products involved, complexity of the customer base, and lack of available industry trade information, the Company’s sales to these sectors increased more than 5% from 2004. The Industrial and other market sector is a key focus area to help diversify the Company’s customer base. In 2005, overall sales to this sector were negatively impacted by customer attrition primarily in the residential furniture markets which have been, and will continue to be, severely affected by imports. The furniture market represents approximately 4% of the Company’s total Industrial sales mix.
While market conditionsrevenues in all of the sectorsmarkets that the Company participateswe serve, without adding significant fixed overhead. While market conditions are expected to remain questionable and any downturns could have a material impact on operating performance, the Company continues to have adequate capacity to support future growth and the financial strength to drive its strategic plan. Keysoft at least partially into 2007, key focus areas for 20062007 include identifying and executing strategic accretive acquisitions, capturing market share, implementation of lean manufacturing in all of our manufacturing operations, maintaining a lean organizational structure, controlling costs, and growing all areas of the business. The Company is structuredmost recent capital plan ended in 2005 with three-year expenditures totaling approximately $24.0 million. The capital plan for 2007 includes expenditures up to take on significantly more revenue without adding significant incremental overhead$7.5 million including a $2.5 million in carryover related to the expansion to our engineered solutions segment. This particular expansion includes approximately $3.0 million for additional machinery and therefore improve contribution rates with increased volume,equipment and increase profitability and shareholder returns.
$1.5 million for a building addition, which was financed through a bond issuance that will close in the second quarter of 2007. The following table sets forth the percentage relationship to net sales of certain items in the Company’sour statements of operations: | | | | | | | | | | | | | Net sales | 100.0% | 100.0% | 100.0% | 100.0% | Cost of sales | 88.2 | 88.1 | 88.3 | 87.9 | 88.2 | 88.1 | Gross profit | 11.8 | 11.9 | 11.7 | 12.1 | 11.8 | 11.9 | Warehouse and delivery | 4.3 | 4.5 | 4.7 | 4.2 | 4.3 | 4.5 | Selling, general and administrative | 6.3 | 6.8 | 6.7 | 6.1 | 6.3 | 6.8 | Restructuring charges | - - | - - | 0.1 | - - | - - | Operating income | 1.2 | 0.6 | 0.2 | 1.8 | 1.2 | 0.6 | Net income | 0.4 | 0.2 | 0.0 | 0.8 | 0.4 | 0.2 |
RESULTS OF CONSOLIDATED OPERATIONS Year Ended December 31, 2006 Compared to Year Ended December 31, 2005 Net Sales. Net sales increased $24.2 million, or 7.5%, to $347.6 million in 2006 from $323.4 million in 2005. Excluding Fema unit sales in the fourth quarter of 2005, we estimate net sales increased approximately $30 million, or 9.5% over the 2005 revenues. The increased sales are attributable to increased raw material pricing in 2006 of an average of approximately 11% over the major commodities sold over 2005 and were evident in virtually all of the products we manufacture or distribute. The majority of these price increases were passed on to customers. 13
Additionally, increased production in the Manufactured Housing and Recreational Vehicle Industries, in the first six months of the year of approximately 2% and 14%, respectively helped to bolster sales. These two industries represent approximately 72% of our 2006 revenue base. We also experienced growth in our industrial segment of approximately $9 million over 2005. This growth, was however offset by customer attrition of approximately $8 million due to circumstances beyond our control, including foreign competition, customer financial insolvency, and customer vertical integration, among others. Gross Profit. Gross profit increased $3.9 million to $42.0 million in 2006 from $38.1 million in 2005. As a percentage of net sales, gross profit increased 0.3% to 12.1% in 2006 from 11.8% in 2005. The increase in dollars and the percentage of net sales are attributable to increased sales, comparable fixed costs, and improved overall labor efficiencies from the prior year. Gross profit in 2006 includes an additional $0.3 million, or 0.04% of net sales, of volume related rebates from various vendors. These rebates are contingent on a number of variables and could increase or decrease in the future based on market conditions, sales levels, and other factors. Warehouse and Delivery Expenses. Warehouse and delivery expenses increased $0.8 million to $14.7 million in 2006 from $13.9 million in 2005. As a percentage of net sales, warehouse and delivery expenses decreased 0.1% to 4.2% in 2006 from 4.3% in 2005. The increase in dollars is due to increased sales, fuel prices, and freight surcharges from freight carriers from year to year. The decrease in percentage of net sales is attributable to comparable fixed costs and fleet size from year to year. Continued high fuel prices and freight surcharges could have a negative impact on the future operating expense ratios. Selling, General, and Administrative Expenses. Selling, general, and administrative expenses increased approximately $0.8 million to $21.2 million in 2006 from $20.4 million in 2005. As a percentage of net sales, selling, general, and administrative expenses decreased 0.2% to 6.1% in 2006 from 6.3% in 2005. The slight increase in dollars is attributable to an increase in costs of $0.5 million for professional fees related to our strategic acquisition efforts. The decrease in the percentage of net sales is due to our efforts to keep costs aligned with revenues, resulting in comparable fixed costs from year to year. Operating Income. Operating income increased approximately $2.3 million to $6.1 million in 2006 from $3.8 million in 2005, due primarily to the factors described above. Interest Expense, Net. Interest expense, net increased $0.2 million to $1.6 million in 2006 from $1.4 million in 2005 due to increased borrowings on the line of credit offset somewhat by decreases in debt service requirements from year to year. Net Income. Net income increased $1.2 million to $2.6 million in 2006 from $1.4 million in 2005 primarily to the factors described above. Year Ended December 31, 2005 Compared to Year Ended December 31, 2004 Net Sales. Net sales increased $21.8 million, or 7.2%, to $323.4 million in 2005 from $301.6 million in 2004. The increased sales are attributable to increased production in the Manufactured Housing and Recreational Vehicle Industries in the first and fourth quarters of the year. The Company’sOur sales increased $14.0 million in the first quarter due to increased shipments in the Manufactured Housing and Recreational Vehicle Industries of approximately 7% and 6%, respectively. First quarter shipment increases were bolstered by FEMA demand as a result of fourth quarter 2004 hurricane damage. Fourth quarter 2005 sales increased $6.9 million, or 9.0%, due primarily to increased demand for units as a result of the hurricane damage in the third quarter of 2005. Shipments were up in the Manufactured Housing and Recreational Vehicle Industries in the fourth quarter by 42%, and 7%, respectively. The Manufactured Housing and Recreational Vehicle Industries represent approximately 73% of the Company’sour sales in 2005 compared to 72% in 2004. The Company’sOur sales to the Industrial and other markets were up approximately 5% from year to year. Gross Profit. Gross profit increased $2.2 million to $38.1 million in 2005 from $35.9 million in 2004. As a percentage of net sales, gross profit decreased 0.1% to 11.8% in 2005 from 11.9% in 2004. The increased dollars 14
are attributable to increased sales and the decrease in percentage of net sales is due to margin losses in the distribution segment as a result of the loss of certain products due to certain suppliers selling direct to customers and discontinuing product lines. Gross profit in 2005 includes an additional $0.7 million, or 0.2% of net sales, of volume related rebates from various vendors. These rebates are contingent on a number of variables and could increase or decrease based on market conditions, sales levels, and other factors.
Warehouse and Delivery Expenses. Warehouse and delivery expenses increased $0.2 million to $13.9 million in 2005 from $13.7 million in 2004. As percentage of net sales, warehouse and delivery expenses decreased 0.2% to 4.3% in 2005 from 4.5% in 2004. The increase in dollars is due to increased gasoline prices of approximately $0.2 million from year to year. The decrease in percentage of net sales is attributable to comparable fixed costs and fleet size from year to year. Selling, General, and Administrative Expenses. Selling, general, and administrative expenses decreased approximately $0.1 million to $20.4 million in 2005 from $20.5 million in 2004. As a percentage of net sales, selling, general, and administrative expenses decreased 0.5% to 6.3% in 2005 from 6.8% in 2004. The 2004 figures include a pre-tax charge of approximately $0.5 million related to a write-off of bad debts for a customer in the Southeast, and gains of approximately $0.5 million related to life insurance proceeds. The slight decrease in dollars and percentage of net sales is attributable to decreased fixed costs from year to year including depreciation expense, airplane expenses as a result of not renewing the lease on the Company airplane, and corporate salaries and wages. Operating Income. Operating income increased $2.1 million to $3.8 million in 2005 from $1.7 million in 2004 due primarily to the factors described above. Interest Expense, Net. Interest expense, net increased $0.7 million to $1.4 million in 2005 from $0.7 million in 2004 due to increased variable rates on the industrial revenue bonds, increased borrowings on the Company’sour line of credit in the first quarter of 2005, and the Companyus obtaining an additional $15.0 million in fixed term debt financing in March 2005. Net Income. Net income increased $0.8 million to $1.4 million in 2005 from $0.6 million in 2004 primarily to the factors described above. Year Ended December 31, 2004 Compared to Year Ended December 31, 2003
Net Sales. Net sales increased $26.9 million, or 9.8%, to $301.6 million in 2004 from $274.7 million in 2003. The increase is attributable to increased raw material prices which were passed on to customers, increased market share in the Manufactured Housing Industry in spite of its stagnant shipment levels, increased shipment levels in the Recreational Vehicle Industry of more than 15%, and increased penetration into the Industrial and other markets. The Company’s sales were 41% Manufactured Housing, 31% Recreational Vehicle, and 28% to the Industrial and other markets in both 2004 and 2003.
Gross Profit. Gross profit increased $3.7 million, or 11.5%, to $35.9 million in 2004 from $32.2 million in 2003. As a percentage of net sales, gross profit increased 0.2%, to 11.9% in 2004 from 11.7% in 2003. The increase in dollars is attributable to increased sales. The increase as a percentage of net sales is primarily attributable to improved labor efficiencies.
Warehouse and Delivery Expenses. Warehouse and delivery expenses increased $0.8 million, or 6.2%, to $13.7 million in 2004 from $12.9 million in 2003. As a percentage of net sales, warehouse and delivery expenses decreased 0.2%, to 4.5% in 2004 from 4.7% in 2003. The increase in dollars is attributable to increased sales and fuel prices, and the decrease in percentage of net sales is attributable to the Company maintaining a similar fleet size that it owns or leases from year to year, as well as its focused efforts to keep costs aligned with revenues.
Selling, General, and Administrative Expenses. Selling, general, and administrative expenses increased $2.1 million, or 11.1%, to $20.5 million in 2004 from $18.4 million in 2003. As a percentage of net sales, selling, general, and administrative expenses increased 0.1%, to 6.8% in 2004 from 6.7% in 2003. Approximately $0.8 million of the increase is attributable to increased sales, the addition of several key personnel, and increased group insurance costs. The 2004 figures include a pre-tax charge of $0.5 million related to a write-off of bad debts for a customer in the Southeast and gains of approximately $0.5 million related to life insurance proceeds. The 2003 figures include several positive adjustments including gains on the sale of two vacant buildings of approximately $0.3 million, a gain on sale of equipment held for sale as a result of closing of one of the operations in the wood segment of $0.4 million, and a gain on cash value of life insurance policies of $0.6 million. Exclusive of these items, selling, general, and administrative expenses were 6.8% of net sales in 2004 compared to 7.2% of net sales in 2003.
Restructuring Charges. As discussed in Note 10 of the financial statements, the Company recognized restructuring charges of approximately $0.2 million in 2003.
Operating Income. Operating income increased $1.1 million, to $1.7 million in 2004 from $0.6 million in 2003. The increase in operating income is attributable to the factors described above.
Interest Expense, Net. Interest expense, net remained fairly constant at $0.7 million for both 2004 and 2003. While normal debt service requirements continued to decline, the Company began borrowing on its line of credit in May 2004 to support its working capital needs.
Net Income. Net income increased $0.7 million, to income of $0.6 million in 2004 from a loss of $0.1 million in 2003 as a result of the factors described above.
BUSINESS SEGMENTS Effective October 1, 2005 and in accordance with the Company’s internal reporting, the Company changed its segment reporting from three reportable segments to four reportable segments. As a result of this change, one of the operations in the Other Component Manufactured Product Segment was broken out separately into a new segment called the Engineered Solutions Segment. Accordingly, the segment resultsWe have been restated to reflect these changes.
The Company has determined that itsour reportable segments are those that are based on the Company’sour method of internal reporting, which segregates its business by product category and production/distribution process. The Company’sOur reportable segments are as follows:
Primary Manufactured Products - Utilizes various materials including gypsum, particleboard, plywood, and fiberboard which are bonded by adhesives or a heating process to a number of products including vinyl, paper, foil, and high pressure laminate. These products are utilized to produce furniture, shelving, wall, counter, and cabinet products with a wide variety of finishes and textures. Distribution - Distributes primarily pre-finished wall and ceiling panels, particleboard, hardboard and vinyl siding, roofing products, high pressure laminates, passage doors, building hardware, insulation, and other products. Other Component Manufactured Products - Includes an adhesive division, a cabinet door division, (two in 2003), and a machine manufacturing division.division which was closed as of December 31, 2006. Engineered Solutions – Includes aluminum extrusion, distribution, and fabrication operations.
The table below presents information about the revenue and operating income of those segments. Reconciliation to consolidated totals is presented in footnoteFootnote 14 of the Company’s 2005our 2006 financial statements.statements, which are available as an Exhibit to this Annual Report at Item 15(a)(1). | | | | | | | (dollars in thousands) | Sales | | | | Primary Manufactured Products | $166,154 | $164,826 | $151,694 | Distribution | 112,519 | 103,519 | 90,631 | Other Component Manufactured Products | 16,415 | 19,792 | 22,235 | Engineered Solutions | 41,530 | 31,282 | 25,902 | | | | | Gross Profit | | | | Primary Manufactured Products | 15,913 | 15,063 | 14,087 | Distribution | 11,986 | 12,653 | 11,651 | Other Component Manufactured Products | 2,562 | 2,635 | 1,529 | Engineered Solutions | 3,269 | 2,446 | 2,239 | | | | | | | | | Operating income (loss) | | | | Primary Manufactured Products | 5,429 | 4,606 | 4,631 | Distribution | 3,295 | 4,135 | 3,148 | Other Component Manufactured Products | 432 | (66) | (1,083) | Engineered Solutions | 1,446 | 843 | 879 |
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| | | | | | | (dollars in thousands) | Sales | | | | Primary Manufactured Products | $176,562 | $166,154 | $164,826 | Distribution | 118,491 | 112,519 | 103,519 | Other Component Manufactured Products | 16,201 | 16,415 | 19,792 | Engineered Solutions | 48,141 | 41,530 | 31,282 | | | | | Gross Profit | | | | Primary Manufactured Products | 17,742 | 15,913 | 15,063 | Distribution | 14,677 | 11,986 | 12,653 | Other Component Manufactured Products | 1,453 | 2,562 | 2,635 | Engineered Solutions | 3,873 | 3,269 | 2,446 | | | | | | | | | Operating income (loss) | | | | Primary Manufactured Products | 6,977 | 5,429 | 4,606 | Distribution | 5,567 | 3,295 | 4,135 | Other Component Manufactured Products | 50 | 432 | (66) | Engineered Solutions | 1,655 | 1,446 | 843 |
Year Ended December 31, 2006 Compared to Year Ended December 31, 2005 |
Primary Manufactured Products Segment Discussion Net sales increased $10.4 million, or 6.3%, to $176.6 million in 2006 from $166.2 million in 2005. The increase is attributable to an approximate 5% increase in pricing in major raw material commodities which were passed on to customers and a slight increase in shipments in the Recreational Vehicle Industry of approximately 2% year over year. Industrial market penetration was offset by customer attrition and overall sales were further offset by declines in shipments in the Manufactured Housing industry of approximately 20% from 2005. The 2005 revenue base includes abnormal fourth quarter shipments in both the Manufactured Housing and Recreational Vehicle industries due to the hurricane relief efforts from FEMA. Gross profit increased $1.8 million, or 11.5%, to $17.7 million in 2006 from $15.9 million in 2005. As a percentage of net sales, gross profit increased 0.5% to 10.1% in 2006 from 9.6% in 2005. The increase in dollars and percent of net sales is attributable to increased sales, and improved operating efficiencies and contribution as a result of increased volume at several of the manufacturing facilities in this segment. We are focused on maintaining margins in conjunction with raw material price increases which are passed on to customers. Operating income increased $1.6 million, or 28.5%, to $7.0 million in 2006 from $5.4 million in 2005. The increase in operating income is attributable to the increased gross profits described above as well as a decrease of 0.2% in operating expenses as a percentage of net sales from year to year. Distribution Segment Discussion Net sales increased $6.0 million, or 5.3%, to $118.5 million in 2006 from $112.5 million in 2005. The increase is primarily attributable to product price increases averaging approximately 16% in the major commodities sold in this segment as increased sales of approximately $3.0 million related to our new product introductions in this segment. These increases were offset by shipment declines of approximately 20% year over year in the 16
Manufactured Housing industry which is the primary market sector this segment serves. We were able to pass on most of the product price increases to its customers with continued focus on maintaining margins. Gross profit increased $2.7 million, or 22.5%, to $14.7 million in 2006 from $12.0 million in 2005. As a percentage of net sales, gross profit increased 1.7% to 12.4% in 2006 from 10.7% in 2005. The increase in gross profit is attributable to overall increased sales dollars while maintaining margins and increased sales of our new product lines which carry higher margins. Operating income increased $2.3 million to $5.6 million in 2006 from $3.3 million in 2005 due primarily to the factors described above. Other Component Manufactured Products Segment Discussion Net sales decreased slightly by $0.2 million, or 1.3%, to $16.2 million in 2006 from $16.4 million in 2005. We closed our machine manufacturing division, which is included in this segment, in December 2006. Net sales for this division in 2006 and 2005 were $2.0 million, the majority being intercompany sales, which will result in lower net sales for this segment in 2007. Gross profit decreased $1.1 million, or 43.3%, to $1.4 million in 2006 from $2.5 million in 2005. As a percentage of net sales, gross profit decreased 6.6% to 9.0% in 2006 from 15.6% in 2005. The decrease in dollars and percentage of net sales is attributable to labor and operating inefficiencies at our cabinet door division. We are in the process of evaluating the overall value of this division in conjunction with our strategic plan and core competencies and may decide to close, restructure, or relocate some or all of the operations associated with it. The Company will accordingly record the future liability, if any, in our financial statements at the time such decision is made. Operating income decreased $0.3 million in 2006 to $0.1 million from $0.4 million in 2005 due primarily to the factors described above. Engineered Solutions Segment Discussion Net sales increased $6.6 million, or 15.9%, to $48.1 million in 2006 from $41.5 million in 2005. The increased sales are primarily attributable to increased raw aluminum market prices of approximately 33% from year to year. Gross profit increased $0.6 million, or 18.5%, to $3.9 million in 2006 from $3.3 million in 2005. As a percentage of net sales, gross profit increased 0.2% to 8.1% in 2006 from 7.9% in 2005. The increase in dollars is attributable to increased sales dollars and the slight increase in percentage of net sales is attributable to market conditions not allowing margin increases with price increases, and extreme fluctuations in aluminum market pricing throughout the year. Additionally, we have several customers who enter into forward contracts with us to minimize the risk of unstable aluminum market prices, thus resulting in more stable margins. Operating income increased $0.2 million to $1.6 million in 2006 from $1.4 million in 2005 due primarily to the factors described above. Year Ended December 31, 2005 Compared to Year Ended December 31, 2004 Primary Manufactured Products Segment Discussion Net sales increased $1.4 million, or 0.8%, to $166.2 million in 2005 from $164.8 million in 2004. The increase is attributable to an approximate 12% increase in shipments in the Manufactured Housing Industry, an approximate 4% increase in shipments in the Recreational Vehicle Industry, and increased penetration into the Industrial and other markets. Additionally, sales declines in certain operating units in this segment as a result of customer attrition due to financial issues and overseas competition were offset by increased business in other divisions in this segment in the kitchen cabinet and Fixturesfixtures and commercial furnishings markets. 17
Gross profit increased $0.8 million, or 5.7%, to $15.9 million in 2005 from $15.1 million in 2004. As a percentage of net sales, gross profit increased 0.5% to 9.6% in 2005 from 9.1% in 2004. The increase in dollars and percent of net sales is attributable to improved operating efficiencies and contribution as a result of increased volume at several of the manufacturing facilities in this segment. Operating income increased $0.8 million, or 17.9%, to $5.4 million in 2005 from $4.6 million in 2004. The increase in operating income is attributable to the increased gross profits described above as operating expenses remained consistent as a percentage of net sales from year to year. Distribution Segment Discussion Net sales increased $9.0 million, or 8.7%, to $112.5 million in 2005 from $103.5 million in 2004. The increase is primarily attributable to a 12% increase in shipments in the Manufactured Housing Industry, which is the principal market this segment serves. The increased FEMA demand in the fourth quarter and increased penetration into the Manufactured Housing Industry with certain commodity products helped to offset sales declines of certain products due to suppliers either shipping direct to customers or exiting the market. Gross profit decreased $0.7 million, or 5.3%, to $12.0 million in 2005 from $12.7 million in 2004. As a percentage of net sales, gross profit decreased 1.5% to 10.7% in 2005 from 12.2% in 2004. The decrease in gross profit is attributable to reduced margins as a result of one of the Company’sour major commodity suppliers deciding to
dramatically reduce its supply to the markets that the Company serveswe serve and to another Company making the strategic decision to ship direct to customers. Additionally, gross profit margin declines of approximately $1.0 million were attributable to increased direct shipments to customers which traditionally result in lower margins than warehouse sales. Operating income decreased $0.8 million to $3.3 million in 2005 from $4.1 million in 2004 due primarily to the factors described above. Other Component Manufactured Products Segment Discussion Net sales decreased $3.4 million, or 15.2%, to $16.4 million in 2005 from $19.8 million in 2004. The decrease is attributable to reduced sales of approximately $1.7 million in the Company’s machine manufacturing division as a result of the Companyus completing its itsour capital equipment initiative in 2005 and further reduction in sales of approximately $1.3 million in the Company’sour adhesive division as a result of the discontinuance of one of its unprofitable product lines. Gross profit decreased $0.1 million, or 2.7%, to $2.5 million in 2005 from $2.6 million in 2004. As a percentage of net sales, gross profit increased 2.3% to 15.6% in 2005 from 13.3% in 2004. The decrease in dollars is due to decreased sales and the increase in percentage of net sales is attributable to increased operating efficiencies at the Company’sour cabinet door division resulting in improvements of approximately $0.5 million. Operating income increased $0.5 million in 2005 to $0.4 million from a small loss in 2004 due primarily to the factors described above. Engineered Solutions Segment Discussion Net sales increased $10.2 million, or 32.8%, to $41.5 million in 2005 from $31.3 million in 2004. The increased sales are primarily attributable to increased aluminum pounds sold from year to year accounting for approximately $5.0 million, increased aluminum market prices accounting for approximately $1.0 million, and increased distribution sales. Gross profit increased $0.8 million, or 33.7%, to $3.3 million in 2005 from $2.5 million in 2004. As a percentage of net sales, gross profit increased 0.1% to 7.9% in 2005 from 7.8% in 2004. The increase in dollars is attributable to increased sales dollars and the slight increase in percentage of net sales is attributable to market conditions not allowing margin increases with price increases, and extreme fluctuations in aluminum market pricing throughout the year. 18
Operating income increased $0.6 million to $1.4 million in 2005 from $0.8 million in 2004 due primarily to the factors described above. OTHER ITEMS Year Ended December 31, 20042006 Compared to Year Ended December 31, 20032005 Primary Manufactured Products Segment Discussion
Net sales in the Primary Manufactured Products segmentInventory levels increased $13.1$9.4 million or 8.7%, to $164.8$43.3 million in 20042006 from $151.7$33.9 million in 2003. The increase is primarily attributable to a 15.4% increase in shipments in the Recreational Vehicle Industry, increased penetration into the Industrial and other markets, and overall raw product price increases which were passed on to customers. Together, the Recreational Vehicle and Industrial and other markets account for approximately 75% of the sales in this particular segment.
Gross profit increased $1.0 million, or 6.9%, to $15.1 million in 2004 from $14.1 million in 2003. As a percentage of net sales, gross profit decreased 0.2% to 9.1% in 2004 from 9.3% in 2003.2005. The increase in dollarsinventories is duethe result our strategic purchasing efforts with regards to the 8.7% increaseoverseas commodity products, unreliable vendor freight shipping schedules, and shorter customer lead times requiring us to maintain higher levels of certain items. Additionally, we have introduced several new products out of our distribution segment thus resulting in net salesincremental supply needs to support its initial product offering and the decrease in percentage of net sales is attributable to competitive pricing pressures keeping margins down and to a change in product mix sold by two operating units in this segment which shifted to lower margin finished product.
Operating income remained fairly consistent at $4.6marketing efforts. Accounts receivable decreased $2.4 million for both 2004 and 2003. This consistency, in light of the increased sales, is attributable to increased group insurance costs from year to year and extremely competitive market conditions which negatively impacted margins.
Distribution Segment Discussion
Netas a result of the decreased sales in the fourth quarter of 2006 compared to the previous year primarily as a result of increased $12.9 million, or 14.2%, to $103.5 millionFEMA shipments in 2004 from $90.6 million in 2003. The increased net sales are attributable to increased penetration intoboth the Manufactured Housing Industry, which isand Recreational Vehicle industries in the primary market this segment serves,fourth quarter of 2005. Corporate incentive agreements increased $0.4 million as well as product price increases which were passed on to customers.
Gross profit increased $1.0 million, or 8.6%, to $12.7 million in 2004 from $11.7 million in 2003. As a percentageresult of net sales, gross profit decreased 0.6% to 12.2% in 2004 from 12.8% in 2003. The increase in dollars is due to increased sales of certain products which are included in the corporate rebate agreements. Unallocated corporate expenses increased $0.8 million primarily as a result of incremental general and administrative costs of approximately $0.5 million related to our strategic acquisition efforts and the decrease in percentageinvestigation of net sales is due to competitive pricing pressures forcing lower margins.
Operating income increased $1.0 million, to $4.1 million in 2004 from $3.1 million in 2003 primarily due to increased sales.
Other Component Manufactured Products Segment Discussion
Net sales decreased by $2.4 million, or 11.0%, to $19.8 million in 2004 from $22.2 million in 2003. The decreased sales are attributable to the Company closing one of its unprofitable cabinet door lines in 2003 which accounted for $4.8 million of the decrease. The lost sales due to this closing were partially offset by increased sales in one of the Company’s other cabinet door division in this segment of approximately $2.0 million from year to year.
Gross profit increased by $1.1 million, or 72.3%, to $2.6 million in 2004 from $1.5 million in 2003. As a percentage of net sales, gross profit increased 6.5% to 13.4% in 2004 from 6.9% in 2003. The increased gross profits are due to the closing of one of the Company’s unprofitable cabinet door divisions in 2003.
Operating losses decreased $1.0 million to a loss of $0.1 million in 2004 from a loss of $1.1 million in 2003. The decrease in operating losses is primarily attributable to the closing of one of the Company’s unprofitable cabinet door divisions in 2003 which accounted for approximately $1.3 million of the losses in 2003.
Engineered Solutions Segment Discussion
Net sales increased $5.4 million, or 20.8%, to $31.3 million in 2004 from $25.9 million in 2003. The increased sales are attributable to an increase in pounds of aluminum sold being up approximately 10% and aluminum prices up on average $.19 per pound from year to year.
Gross profit increased $0.3 million, or 9.2%, to $2.5 million in 2004 from $2.2 million in 2003. As a percentage of net sales, gross profit decreased 0.8% to 7.8% in 2004 from 8.6% in 2003. The increase in dollars is attributable to increased sales dollars and the decrease in percentage of net sales is attributable to industry conditions permitting only cost increases to be passed on to customers resulting in decreased margin as a percentage of sales as sales increase.
Operating income was comparable from 2004 to 2003 at $0.8 million for both periods due primarily to the factors described above.
OTHER ITEMScertain strategic businesses.
Year Ended December 31, 2005 Compared to Year Ended December 31, 2004 Inventory levels remained consistent from year to year in light of increased sales in the fourth quarter. The Company wasWe were able to supply the increased demand for FEMA units and maintain its inventory turn goals. Accounts receivable increased $3.6 million from year to year as a result of the increased sales in the fourth quarter of 2005
compared to the previous year. Deferred tax assets declined $0.5 million primarily as a result of the Company using upus utilizing some of itsour net operating loss carryforwards due to the increase in profitability and taxable income from year to year. Corporate incentive agreements increased $0.7 million as a result of increased sales of various products which are considered in the corporate rebate agreements. Unallocated corporate expenses decreased $0.6 million as a result of the Company’sour continued lean cost emphasis, decreased depreciation, wages, building rent, and airplane expenses from year to year. Corporate property and equipment increased approximately $4.0 million primarily due to the Companyus purchasing one of it’sour manufacturing facilities from itsour former major shareholder in 2005 and the purchase of the new corporate office in 2005. Year Ended December 31, 2004 Compared to Year Ended December 31, 2003
Corporate incentives increased from year to year primarily as a result of increased purchases related to increased sales of qualifying products from year to year. Unallocated corporate expenses increased slightly to $10.7 million in 2004 from $10.3 million in 2003 due to increased sales and the Company filling several key management positions in 2004. Current assets not allocated to segments decreased approximately $7.0 million, to $3.5 million in 2004 from $10.5 million in 2003 due to the decrease in cash and cash equivalents from year to year.
LIQUIDITY AND CAPITAL RESOURCES The Company’sOur primary capital requirements are to meet working capital needs, support itsour capital expenditure plans, and meet debt service requirements.
The Company,In January 2007, we secured a term note for $7.5 million in September, 1995, issued to an insurance companyconjunction with the American Hardwoods, Inc. acquisition. Interest on this note is at prime or the Eurodollar rate plus a percentage based on our cash flow. This note provides for a five year maturity in January 2011 and a private placement $18,000,000 of senior unsecured notes. The ten year notes included interest at 6.82%,amortization schedule with semi-annualmonthly principal and interest payments that begandue at the end of each month beginning in 1996 and seven annual principal repayments of $2,571,429 that began in September, 1999. The final payment was made in September, 2005.February 2007.
The Company has aIn April 2006, we renewed our secured bank revolving credit agreement thatwhich provides loan availability of $10,000,000 with$15.0 million and maturity in May 2006.the year 2009. Interest on this note is at prime or the Eurodollar rate plus a percentage based on our cash flow. We pay a commitment fee of between 0.25% and 0.375% of the unused portion of the revolving line, based on our cash flow. The Company has agreed in principal on terms and conditions with its lenders and expects to renew this facility for another three year period. agreement is secured by all of the Company’s assets.
In March 2005, the Companywe secured a term debt financing package for $15,000,000.$15.0 million. This package provides for a five-year maturity in January 2010 and a ten yearten-year amortization schedule with interest only payments due in 2005 and principal payments that beginbegan in the first quarter ofFebruary 2006. In order to reduce itsthe vulnerability to variable interest rates, this financing package includedincludes an interest rate swap agreement with interest fixed at 4.78% plus a percentage based on the Company’s cash flow. In conjunction with this agreement and the Company’s projected cash flow needs, the Company reduced its available line of credit from $15,000,000 to $10,000,000 on February 1, 2006 through maturity in May 2006. . Pursuant to the private placement and the Credit Agreement, the Company iswe are required to maintain certain financial ratios including a debt service coverage ratio and other 19
cash flow ratios, all of which are currently complied with. In addition, the term debt which was obtained in March 2005 includes certain financial covenants which are incorporated into the overall credit facility. In conjunction with itsour strategic and capital plan, the Company increased itsour capital expenditures for property and equipment in 2004 to2005 were approximately $10.6$8.5 million and in 2005 to2006 were approximately $8.5$7.5 million. Capital expenditures over the three previous years were approximately $10.6 million, $5.3 million, and $4.2 million for 2004, 2003, and $1.8 million for 2003, 2002, and 2001, respectively. The Company expectsWe expect to spend approximately $5.0$7.5 million in 20062007 on capital expenditures, including buildings and equipment. The Company believesApproximately $2.5 million of this will be the result of carryover of a major capital project related to our installation of a new vertical powder coat paint system in our Metals division. We believe that cash generated from operations and borrowings under itsour credit agreements will be sufficient to fund itsour working capital requirements, remaining capital expenditures, and common stock purchase program as currently contemplated. The changes in inventory and accounts receivable balances, which affect the Company’sour cash flows, are part of normal business cycles that cause them to change periodically.
cycles. A summary of our contractual cash obligations at December 31, 20052006 is as follows:follows (dollars in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Long-term debt, including interest at Variable rates** | $ 4,579,750 | $1,282,875 | $ 933,000 | $ 895,000 | $ 955,021 | $ 513,854 | $4,117 | $1,139 | $1,105 | $1,166 | $707 | $0 | Long-term debt, including interest at Fixed rates** | $18,315,084 | $ 2,514,881 | $2,540,011 | $2,427,639 | $2,310,872 | $8,521,681 | $15,913 | $2,599 | $2,484 | $2,358 | $8,472 | $0 | Operating Leases | $4,987,968 | $1,854,885 | $1,501,717 | $1,003,690 | $ 499,783 | $ 127,893 | $4,093 | $1,729 | $1,157 | $666 | $374 | $167 | Total contractual cash obligations | $27,882,802 | $5,652,641 | $4,974,728 | $4,326,329 | $3,765,676 | $9,163,428 | $24,123 | $5,467 | $4,746 | $4,190 | $9,553 | $167 |
**Interest payments have been calculated using the fixed rate of 4.78% plus the estimated credit spread for the Senior notesNotes and the projected 20062007 annual interest rate of 4.75%3.79% for the Industrial Revenue Bonds. We also have commercial commitments as described below:below (dollars in thousands): Other Commercial Commitment | | | | | | | | | | | | | | Revolving Credit Agreement | $10,000,000 | $0 | May 31, 2006 | $15,000 | $10,000 | May 31, 2009 | Letters of Credit | $5,581,000 | $5,581,000 | various through 2009 | $5,931 | $5,931 | various through 2009 |
We believe that our cash balance, availability under our line of credit as amended, and anticipated cash flows from operations will be adequate to fund our cash requirements for fiscal 2006.2007. OFF-BALANCE SHEET ARRANGEMENTS | Other than the commercial commitments set forth above, we have no off-balance sheet arrangements. |
CRITICAL ACCOUNTING POLICIES Our significant accounting policies are summarized in the footnotes to our financial statements. Some of the most critical policies are also discussed below. 20
We ship product based on specific orders from customers and revenue is recognized at the time of passage of title and risk of loss to the customer, which is generally upon delivery. The Company’sOur selling price is fixed and determined at the time of shipment, and collectibilitycollectability is reasonably assured and not contingent upon the customers’ use or resale of the product. Our major operating assets are accounts receivable, inventory, and property and equipment. Exclusive of the write-off of certain assets related to the Oakwood Homes Corporation bankruptcy filing in November 2002, and the write-off of certain receivables in the fourth quarter of 2004 related to one customer, we have not experienced significant bad debts losses and our reserve for doubtful accounts of $150,000 should be adequate for any exposure to loss in our December 31, 20052006 accounts receivable. We have also established reserves for slow moving and obsolete inventories and believe them to be adequate. We depreciate our property and equipment over their estimated useful lives, and we have not identified any items that are impaired for the twelve months ended December 31, 2005.2006. 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’sour sales and profits are generally highest in the second and third quarters.
SALE OF PROPERTY Not ApplicableApplicable. PURCHASE OF PROPERTY In February 2005, the Company purchased a 35,000 square foot corporate office building in Elkhart, Indiana and spent approximately $1.6 million, including renovations, which were completed in the third quarter of 2005. The Company moved its corporate personnel to this new facility in the third quarter of 2005.
In July 2005, the Company purchased a 106,000 square foot manufacturing facility in Waco, Texas which it had been previously leasing from the former chairman emeritus for approximately $2.5 million.Not Applicable.
INFLATION The Company doesWe do not believe that inflation had a material effect on results of operations for the periods presented.
SAFE HARBOR STATEMENT
The Company makes forward-looking statements from time to time and desires to take advantage of the “safe harbor” which is afforded such statements under the Private Securities Litigation Reform Act of 1995 when they are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the forward-looking statements.
The statements contained in the foregoing “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, as well as other statements contained in the annual report and statements contained in future filings with the Securities and Exchange Commission and publicly disseminated press releases, and statements which may be made from time to time in the future by management of the Company in presentations to shareholders, prospective investors, and others interested in the business and financial affairs of the Company, which are not historical facts, are forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those set forth in the forward-looking statements. Any projections of financial performance or statements concerning expectations as to future developments should not be construed in any manner as a guarantee that such results or developments will, in fact, occur. There can be no assurance that any forward-looking statement will be realized or that actual results will not be significantly different from that set forth in such forward-looking statement. See Item 1A for further discussion on Risk Factors.
ITEM 7A. | ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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In March 2005, the Companywe entered into an interest rate swap agreement. This swap agreement effectively converts a portion of the Company’sour variable-rate borrowings to a fixed-rate basis, thus reducing the impact of changes in interest rates on future interest expense. We are subject to market risk primarily in relation to our cash and short-term investments. The interest rate we may earn on the cash we invest in short-term investments is subject to market fluctuations. We utilize a mix of investment maturities based on our anticipated cash needs and evaluation of existing interest rates and market conditions. While we attempt to minimize market risk and maximize return, changes in market conditions may significantly affect the income we earn on our cash and cash equivalents and short-term investments. ITEM 8. | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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The information required by this item is set forth in Item 15 (a) 1.15(a)(1) on page 2724 of this report.Annual Report. ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None
There were no changes in and disagreements with accountants during the fiscal years 2005 and 2006.
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ITEM 9A.CONTROLS AND PROCEDURES Disclosure Controls And Procedures Under the supervision and with the participation of our senior management, including our Chief Executive Officer and Chief Financial Officer, the Company conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15(d)-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this annual report (the “Evaluation Date”). Based on this evaluation, our chiefChief Executive Officer and Chief Financial Officer concluded as of the Evaluation Date that our disclosure controls and procedures were effective such that the information relating to the Company, including consolidated subsidiaries, required to be disclosed in our Securities and Exchange Commission (“SEC”) reports (i) is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to the Company’s management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. See CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTINGChanges in Internal Controls
There have been no changes in our internal control over financial reporting that occurred during the period ended December 31, 20052006 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. ITEM 9B. OTHER INFORMATION
None
ITEM 9B. | OTHER INFORMATION |
None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY | DIRECTORS AND EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
Directors of the Company The information required by this item with respect to directors is set forth in the Company’sour Proxy Statement for the Annual Meeting of Shareholders to be held on May 11, 2006,10, 2007, under the captions “Election of Directors”, and “Section 16(a) Beneficial Ownership Reporting Compliance”,Compliance,” which information is hereby incorporated herein by reference. The information with respect to executive officers is set forth at the end of Part I of this Form 10-K. Executive Officers of the Company ReferenceThe information required by this item is made toset forth under the caption “Executive Officers of the Company” in Part I of this annual report.Annual Report.
On March 12, 2007, Gregory J. Scharnott, Executive Vice President of Operations, resigned to pursue other options. Audit Committee Financial Expert Information on our Audit Committee is contained under the caption “Audit Committee” in our Proxy Statement for the Annual Meeting of Shareholders to be held on May 10, 2007 and is incorporated herein by reference. 22
The Company has determined that Robert C. Timmins, Larry D. Renbarger, Terrence D. Brennan, and Walter E. Wells all qualify as “audit committee financial experts” as defined in Item 401(h)407(d)(5)(ii) of Regulation S-K, and that these directors are “independent” as the term is used in Item 7(d)(3)(iv)407(a)(1) of Schedule 14A under the Securities Exchange Act.Regulation S-K. Code of Business Conduct The Company hasWe have adopted a Code of Ethics Policy applicable to all employees. Additionally, the Company haswe have adopted a Code of Business Conduct Applicable to Senior Executives including, but not limited to, the Chief Executive Officer and Chief Financial Officer of the Company. The Company’sOur Code of Ethics and Code of Business Conduct Applicable to Senior Executives is available on the Company’s web site at www.patrickind.com under “Corporate Governance”. The Company intendsWe intend to post on itsour web site any amendments to, or waivers from, itsour Corporate Governance Guidelines and itsour Code of Ethics and Business Conduct Policy Applicable to Senior Executives. The CompanyWe will provide shareholders with a copy of these policies without charge upon written request directed to the Company’s Secretary at the Company’s address.
Corporate Governance Information on our corporate governance practice is contained under the caption “Corporate Governance” in our Proxy Statement for the Annual Meeting of Shareholders to be held on May 10, 2007 and incorporated herein by reference. ITEM 11. | ITEM 11. EXECUTIVE COMPENSATION
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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 11, 2006,10, 2007, under the caption “Compensation of Executive Officers and Directors”, which information and is hereby incorporated herein by reference. ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS The information required by this item is set forth in the Company’sour Proxy Statement for the Annual Meeting of Shareholders to be held on May 11, 2006,10, 2007, under the captions “Election of Directors”, and “Equity Compensation Plan Information”, which information and “Security Ownership of Certain Beneficial Owners and Management,” and is hereby incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE The information required by this item is set forth in the Company’sour Proxy Statement for the Annual Meeting of Shareholders to be held on May 11, 2006,10, 2007, under the captioncaptions “Certain Transactions”, which information and “Director Independence,” and is hereby incorporated herein by reference. ITEM 14. | ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
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The information required by this item is set forth in the Company’sour Proxy Statement for the Annual Meeting of Shareholders to be held on May 11, 2006,10, 2007, under the heading “Accounting Information”, which informationInformation,” and is hereby incorporated herein by reference. 23
PART IV | ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES | | | | | Page |
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The exhibits listed in the accompanying Exhibit Index on pages 53, 54,26 and 5527 are filed orand incorporated by reference as part of this report. Annual Report.
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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. By /S//s/ Paul E. Hassler Paul E. Hassler, President and Chief Executive Officer Pursuant to the Requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated. | | | | | | | | | | President, Chief Executive Officer and Director | March 16, 200630, 2007 | Paul E. Hassler | | | | | | | Executive Vice President Finance, Secretary-Treasurer | March 16, 200630, 2007 | Andy L. Nemeth | Chief Financial Officer, and Director | | | | | | Lead Director | March 16, 200630, 2007 | Robert C. Timmins | | | | | | | Director | March 16, 200630, 2007 | Keith V. Kankel | | | | | | | Director | March 16, 200630, 2007 | Harold E. Wyland | | | | | | | Director | March 16, 200630, 2007 | John H. McDermott | | | | | | /S/s/ Terrence D. Brennan | Director | March 16, 200630, 2007 | Terrence D. Brennan | | | | | | | Director | March 16, 200630, 2007 | Walter E. Wells | | | | | | | Director | March 16, 200630, 2007 | Larry D. Renbarger | | |
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Patrick Industries, Inc. And Subsidiaries Consolidated Financial Report 12.31.2006 McGladrey & Pullen, LLP is a member firm of RSM International -- an affiliation of separate and independent legal entities.
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Report of Independent Registered Public Accounting Firm To the Board of Directors Patrick Industries, Inc. Elkhart, Indiana We have audited the accompanying consolidated balance sheets of Patrick Industries, Inc. and Subsidiaries as of December 31, 20052006 and 2004,2005, and the related consolidated statements of operations,income, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2005.2006. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Patrick Industries, Inc. and Subsidiaries as of December 31, 20052006 and 2004,2005, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2005,2006, in conformity with U.S. generally accepted accounting principles. As discussed in Note 1, effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123(R) “Share Based Payment”. As also discussed in Note 1, the Company adopted the provisions of Statement of Financial Accounting Standards No. 158 “ Employers’ Accounting for Defined Benefit Pension and Other Post Retirement Plans” as of December 31, 2006.
Elkhart, Indiana February 20, 2006April 2, 2007
McGladrey & Pullen, LLP is a member firm of RSM International – an affiliation of separate and independent legal entities.
F-3
F-4
Patrick Industries, Inc. And Subsidiaries Notes To Financial Statements (in thousands, except per share amounts) Note 1. | Nature of Business, Use of Estimates, Risks and Uncertainties, and Significant Accounting Policies |
Nature of business: The Company's operations consist of the manufacture and distribution of building products and materials for use primarily by the Manufactured Housing, Recreational Vehicle, and Industrial markets for customers throughout the United States. Use of estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Risks and uncertainties: The Company purchases significant amounts of materials, which are commodities, from a limited number of suppliers. The purchase price of such items can be volatile as it is subject to prevailing market conditions, both domestically and internationally. The Company's purchases of these items can be based on supplier allocations. Significant accounting policies: Principles of consolidation: The consolidated financial statements include the accounts of Patrick Industries, Inc., and its wholly-owned subsidiary,subsidiaries, Harlan Machinery Company, Inc. and Machinery Repair Company, Inc. ("the Company"). All significant intercompany accounts and transactions have been eliminated in consolidation. Cash and cash equivalents: The Company has cash on deposit in financial institutions in amounts which, at times, may be in excess of insurance coverage provided by the Federal Deposit Insurance Corporation. For purposes of the statement of cash flows, the Company considers all overnight repurchase agreements and commercial paper with a maturity of 30 days or less acquired in connection with its sweep account arrangements with its bank to be cash equivalents. Reclassifications: Certain items in the prior years’ financial statements have been reclassified to conform to the current year classification.
Patrick Industries, Inc. And Subsidiaries Notes To Financial Statements (in thousands, except per share amounts) Trade receivables: Trade receivables are carried at original invoice amount less an estimate made for doubtful receivables based on a review of all outstanding amounts on a monthly basis. Trade receivables in the accompanying balance sheets at December 31, 20052006 and 20042005 are stated net of an allowance for doubtful accounts of $150,000 and $250,000 respectively.$150. Management determines the allowance for doubtful accounts by evaluating individual customer receivables and considering a customer's financial condition, credit history, and current economic conditions. In conjunction with the Company's credit terms, trade receivables are considered to be past due if any portion of the receivable balance is outstanding for more than 30 days. Trade receivables are written off when deemed uncollectible. Recoveries of trade receivables previously written off are recorded when received. Customer terms are generally on an unsecured basis for terms of 30 days. The following table summarizes the changes in the Company's allowance for doubtful accounts for 20052006 and 2004:2005:
Inventories: Inventories are stated at the lower of cost (first-in, first-out (FIFO) method) or market. Inventories are also written-down for management's estimates of product which will not sell at historical cost. Write-downs of inventories establish a new cost basis which is not adjusted for future increases in the market value of inventories or changes in estimated obsolescence. The following table summarizes the reserve for inventory obsolescence:
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, and transportation equipment. Leasehold improvements are amortized over the lesser of their useful lives or the related lease term.
Patrick Industries, Inc. And Subsidiaries Notes To Financial Statements (in thousands, except per share amounts) Shareholder’s Equity: SFAS No. 130, “Reporting Comprehensive Income”, defines comprehensive income as non-shareholder changes in equity. Accumulated other comprehensive loss at the end of each year, in thousands, included the following components:
Long-lived assets: In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS No. 144”), when current events or circumstances indicate that the carrying value of an asset may not be recoverable, the Company tests the carrying value of the asset. If the tests indicate that the carrying value of the asset is greater than the expected undiscounted cash flows to be generated by such asset, then an impairment adjustment needs to be recognized. Such adjustment consists of the amount by which the carrying value of such asset exceeds its fair value. The Company generally measures fair value by considering sale prices for similar assets or by discounting estimated future cash flows from such asset using an appropriate discount rate. Considerable management judgment is necessary to estimate the fair value of assets, and accordingly, actual results could vary significantly from such estimates. Assets to be disposed of are carried at the lower of their carrying value or fair value less costs to sell. Revenue recognition: The Company ships product based on specific orders from customers and revenue is recognized at the time of passage of title and risk of loss to the customer, which is generally upon delivery. The Company’s selling price is fixed and determined at the time of shipment and collectibility is reasonably assured and not contingent upon the customer’s use or resale of the product. Costs and expenses: Cost of goods sold includes material costs, direct and indirect labor, overhead expenses, inbound freight charges, inspection costs, internal transfer costs, receiving costs, and other costs. Warehouse and delivery costs include salaries and wages, building rent and insurance, and other overhead costs related to distribution operations and delivery costs related to the shipment of finished and distributed products to customers. Purchasing costs are included in selling, general, and administrative expenses. F-8
Patrick Industries, Inc. And Subsidiaries Notes To Financial Statements (in thousands, except per share amounts) Derivative financial instruments: All derivatives are recognized on the balance sheet at their fair value. On the date the derivative contract is entered into, the Company designates the derivative as a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability "cash flow" hedge. Changes in the fair value of a derivative that is highly effective as - and that is designated and qualifies as - a cash-flow hedge are recorded in other comprehensive income, until earnings are affected by the variability of cash flows (e.g., when periodic settlements on a variable-rate asset or liability are recorded in earnings). The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedged transactions. This process includes linking all derivatives that are designated as cash-flow hedges to specific assets and liabilities on the balance sheet or forecasted transactions. The Company also formally assesses, both at the hedge's inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows of hedged items. When it is determined that a derivative is not highly effective as a hedge or that it has ceased to be a highly effective hedge, the Company discontinues hedge accounting prospectively, as discussed below.
Patrick Industries, Inc.
And Subsidiaries
Notes To Financial Statements
(in thousands, except per share amounts)
The Company discontinues hedge accounting prospectively when (1) it is determined that the derivative is no longer effective in offsetting changes in the cash flows of a hedged item (including forecasted transactions); (2) the derivative expires or is sold, terminated, or exercised; (3) the derivative is designated as a hedge instrument, because it is unlikely that a forecasted transaction will occur; or (4) management determines that designation of the derivative as a hedge instrument is no longer appropriate. When hedge accounting is discontinued because it is probable that a forecasted transaction will not occur, the derivative will continue to be carried on the balance sheet at its fair value, and gains and losses that were accumulated in other comprehensive income will be recognized immediately in earnings. In all other situations in which hedge accounting is discontinued, the derivative will be carried at its fair value on the balance sheet, with subsequent changes in its fair value recognized in current-period earnings. Stock optionoptions plan: AtEffective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123R, “Share Based Payment” (“SFAS 123R”), and began recognizing compensation expense in its consolidated statements of operations as a selling, general, and administrative expense for its stock option grants based on the fair value of the awards. Prior to January 1, 2006, the Company accounted for stock option grants under the recognition and measurement provisions of APB Opinion 25, “Accounting for Stock Issued to Employees”, and related interpretations, as permitted by Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”). The Company elected to use the modified prospective method in applying this standard in which, as of January 1, 2006, compensation cost related to the non-vested portion of the awards outstanding was based on the grant-date fair value of those awards as calculated under the original provisions of Statement No. 123. Therefore, the Company was not required to, and did not re-measure, the grant-date fair value estimate of the unvested portion of awards prior to January 1, 2006. Further, the Company did not restate prior period financial statements. As a result of adopting SFAS 123R, the Company’s pretax income and net income for the year to date period ending December 31, 2005, the Company has a stock option plan with shares of common stock reserved for options2006 is $148 and $89 ($.02 per share basic and diluted) lower respectively, than if it had continued to key employees. The Company accountsaccount for stock-based compensation under the provisions of APB No. 25. The Company has adopted the disclosure-only provisionseffect of FASB No. 123, Accounting for Stock-Based Compensation. Accordingly, no compensation expense has been recognized as the exercise price of all options equals the fair market value of the underlying stock at the date of grant. The fair value of each option grant is estimatedadoption on the date of grant using the Black-Scholes option-pricing model using the following assumptions:
cash flows from operating activities and cash flows from financing activities was not material.
Patrick Industries, Inc. And Subsidiaries Notes To Financial Statements (in thousands, except per share amounts) The table below illustrates the effect on net income (loss) and earnings (loss) per share had compensation expense for the stock option plan been determined based on the fair value at the grant date for awards consistent with the provision of FASB No. 123:
Fair value of financial instruments: The Company’s financial instruments consist principally of cash and cash equivalents, receivables, long-term debt and accounts payable. The Company believes cash and cash equivalents, receivables, and accounts payable are recorded at amounts that approximate their current market values. Based on the borrowing rates currently available to the Company for long-term debt with similar terms and average maturities, theThe fair value of the long-term debt instruments approximates their carrying value.value based on the instrument’s variable rates. Recently issued accounting pronouncements: In December 2004,September 2006, the SEC staff issued Staff Accounting Bulletin (“SAB”) 108 “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Accounting Standards Board (“FASB”) published FASB Statement No. 123 (revised 2004), “Share-Based Payment” (“FAS 123(R)” or the “Statement”)Statements” (SAB 108). FAS 123(R) establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services andSAB 108 requires that public companies utilize a “dual-approach” to assessing the compensation cost relatingquantitative effects of financial misstatements. This dual approach includes both an income statement focused assessment and a balance sheet focused assessment. The guidance in SAB 108 must be applied to share-based payment transactions, including grantsannual financial statements for fiscal years ending after November 15, 2006. The adoption of employee stock options, be recognized inSAB 108 did not have a material effect on our consolidated financial statements. That cost will be measured based on the fair valueposition or results of the equity or liability instruments issued. FAS 123(R) covers a wide range of share-based compensation arrangements including stock options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. FAS 123(R) is a replacement of FASB Statement No. 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related interpretive guidance (APB 25). The effect of the Statement will be to require entities to measure the cost of employee services received in exchange for stock options based on the grant-date fair value of the award, and to recognize the cost over the period the employee is required to provide services for the award. FAS 123(R) permits entities to use any option-pricing model that meets the fair value objective in the Statement.operations.
Patrick Industries, Inc. And Subsidiaries Notes To Financial Statements (in thousands, except per share amounts) In September 2006, the FASB issued Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106 and 132(R)” (SFAS 158). This statement requires balance sheet recognition of the overfunded or underfunded status of pension and postretirement benefit plans. Under SFAS 123(R)158, actuarial gains and losses, prior service costs or credits, and any remaining transition assets or obligations that have not been recognized under previous accounting standards must be recognized in Accumulated Other Comprehensive Income, net of tax effects, until they are amortized as a component of net periodic benefit cost. In addition, the measurement date (the date at which plan assets and the benefit obligation are measured) is required to be the company’s fiscal year end. Presently, we use a September 30 measurement date for our pension and postretirement benefit plan. SFAS 158 is effective for publicly-held companies for fiscal years ending after December 15, 2006, except for the measurement date provisions, which are effective for fiscal years ending after December 15, 2008. Based on the funded status of our plans as of December 31, 2006, the annual reporting period that begins after June 15, 2005adoption of SFAS 158 decreased total assets by approximately $108, increased total liabilities by approximately $270 and therefore the Company will be required to apply FAS 123(R) asreduced total shareowners’ equity by approximately $108, net of the beginningtaxes. The adoption of its interim period that begins January 1, 2006. SFAS 123(R) applies to all awards granted after the required effective date and to awards modified, repurchased, or cancelled after that date and as a consequence future employee stock option grants and other stock based compensation plans will be recorded as expense over the vesting period158 did not affect our results of the award based on their fair values at the date the stock based compensation expense is granted.operations. FAS 123(R) allows two methodsIn June 2006, the Financial Accounting Standards Accounting Board (FASB) issued FASB Interpretation No. 48 Accounting for determining the effectsUncertainty in Income Taxes (“FIN 48”) an interpretation of the transition: the modified prospective transition method and the modified retrospective method of transition. Under the modified prospective transition method, an entity would use the fair value based accounting method for all employee awards granted, modified, or settled after the effective date. As of the effective date, compensation cost related to the nonvested portion of awards outstanding as of that date would be based on the grant-date fair value of those awards as calculated under the original provisions ofFASB Statement No. 123; that is, an entity would not remeasure109 (“SFAS 109”). This interpretation clarifies the grant-date fair value estimate of the unvested portion of awards granted prior to the effective date. Further, an entity will have the option to either apply the Statement to only the quartersaccounting for uncertainty in the period of adoption and subsequent periods, or apply the Statement to all quartersincome taxes recognized in the fiscal year of adoption. Under the modified retrospective method of transition, an entity would revise its previously issueda company’s financial statements to recognize employee compensation cost for prior periods presented in accordance with SFAS 109, Accounting for Income Taxes. FIN 48 details how companies should recognize, measure, present and disclose uncertain tax positions that have been or expect to be taken. As such, financial statements will reflect expected future tax consequences of uncertain tax positions presuming the original provisionstaxing authorities’ full knowledge of Statement No. 123.the position and all relevant facts FIN 48 is effective for public companies for annual periods that begin after December 15, 2006. The Company intends to useis currently evaluating the modified prospective transition method.
The impact of this Statement on the Company in 2006 and beyond will depend upon various factors, among them being the Company’s future compensation strategy. The Company estimates the additional compensation expense associated with its current outstanding awards should approximate $100 after tax for the fiscal year ended December 31, 2006. The pro forma compensation costs presented above and in prior filings for the Company have been calculated using a Black-Scholes option pricing model and may not be indicative of amounts which should be expected in future years.FIN 48.
In November 2004,September 2006, the Financial Accounting Standards Board (“FASB”)(FASB) issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS No. 151, “Inventory Costs” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material.157”). This standard requiresclarifies the principle that such itemsfair value should be recognized as current-period charges. This standard also establishes the concept of “normal capacity” and requires the allocation of fixed production overhead to inventory based on the normal capacityassumptions that market participants would use when pricing an asset or liability. Additionally, it establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. We have not yet determined the impact that the implementation of the production facilities. Any unallocated overhead must be recognized as an expense in the period incurred. This standardSFAS No. 157 will have on our results of operations or financial condition. SFAS No. 157 is effective for inventory costs incurred startingfinancial statements issued for fiscal years beginning after November 1, 2005. Management does not believe this Standard will have a material impact on the Company’s financial statements.15, 2007.
Patrick Industries, Inc. And Subsidiaries Notes To Financial Statements (in thousands, except per share amounts) Earnings per common share: Following is information about the computation of the earnings per share data for the years ended December 31, 2006, 2005 2004 and 2003:2004:
F-12 (a)
| Due to the loss incurred during the year ended December 31, 2003, the dilutive potential of 29,139 common shares were not included because the effect would be antidilutive.
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Note 2. | Balance Sheet Data |
Patrick Industries, Inc. And Subsidiaries Notes To Financial Statements (in thousands, except per share amounts)
Note 3. | Note Payable, Pledged Assets and Long-Term Debt |
The Company has a secured revolving credit agreement which allows borrowings up to $15,000, through January 31, 2006 and $10,000 until maturity at May 31, 2006 of which no$10,000 of borrowings were was outstanding at December 31, 2005.2006. Interest on this note is at prime or the Eurodollar rate plus a percentage based on the Company's cash flow. The Company pays a commitment fee of between .375% and .25% of the unused portion of the revolving line, based on the Company’s cash flow. The agreement is secured by all of the Company’s assets. In addition, this agreement requires the Company to, among other things,things; maintain minimum levels of debt service coverage, tangible net worth, working capital, and debt to net worth.
Patrick Industries, Inc. And Subsidiaries Notes To Financial Statements (in thousands, except per share amounts) Long-term debt at December 31, 20052006 and 20042005 is as follows:
On March 3, 2005, the Company entered into a $15,000 variable interest rate term note with JP Morgan Chase, N.A. with a maturity on January 31, 2010. Interest on the note is variable at the 30 day Eurodollar rate plus a percentage based on the Company’s cash flow. The effective rate at December 31, 20052006 was 7.25%6.78%. The note is payable in monthly installments beginning February 2006 of $139 and is secured by all of the Company’s assets and is subject to certain financial covenants, primarily minimum tangible net worth and debt service coverage as defined in the agreement. The notes are being amortized over a 10 year payment schedule with a balloon payment due in March 2010. On March 8, 2005, in connection with the term note, the Company entered into an interest rate swap agreement with JP Morgan Chase, N.A. with a notional amount of $15,000 and a maturity date of January 31, 2015 to hedge against increases in variable interest rates associated with the term note and the revolving credit agreement. The terms of the agreement effectively fix the interest rate at 4.78% plus a percentage based on the Company’s cash flow. Based on its terms and conditions, under SFAS No. 133, and SFAS No. 138, “Accounting for Derivative Financial Instruments and Hedging Activities”, the Company records the hedge at fair value as of the end of each fiscal quarter with the effective offsetting portion of the hedge being recorded as a component of accumulated other comprehensive income and the ineffective portion, if any, of the hedge being recorded in the Company’s statement of operations. The final installment on the senior notes-insurance company was paid in September 2005. The Indiana Development Finance Authority Bonds are payable in annual installments of $300 plus interest at a variable tax exempt bond rate, set periodically to enable the bonds to be sold at par (3.68% at December 31, 2005). The final installment is due November 1, 2006. The bonds are collateralized by real estate and equipment purchased with the bond funds, are backed by a bank standby letter of credit totaling approximately $318 and are subject to certain financial covenants as defined in the agreement.
The State of Oregon Economic Development Revenue Bonds are payable in annual installments of $400 plus interest at a variable tax exempt bond rate (3.68%(4.2% at December 31, 2005)2006). The final installment is due December 1, 2009. The bonds are collateralized by real estate and equipment purchased with the bond funds, are backed by a bank standby letter of credit totaling approximately $1,672$1,254 and are subject to certain financial covenants as defined in the agreement.
The State of North Carolina Economic Development Revenue Bonds are payable in annual installments of $400 plus quarterly interest payments at a variable tax exempt bond rate (3.68%(4.2% at December 31, 2005)2006). Annual payments of $500 are due in each of the last two years with a final payment due August 1, 2010. The bonds are collateralized by real estate and equipment purchased with the bond funds and are backed by a bank standby letter of credit totaling approximately $2,280.$1,865. Aggregate maturities of long-term debt for the next five years ending December 31, are; 2007 $2,467; 2008 $2,467; 2009 $2,567 and 2010 $8,972. In addition, the Company is contingently liable for standby letters of credit of approximately $2,812 to meet credit requirements for the Company's insurance providers. Interest expense for the years ended December 31, 2006, 2005, and 2004 was approximately $1,648, $1,395, and $711 respectively.
Patrick Industries, Inc. And Subsidiaries Notes To Financial Statements (in thousands, except per share amounts) Aggregate maturities of long-term debt for the next five years ending December 31, are; 2006 $2,628; 2007 $2,467; 2008 $2,467; 2009 $2,567; and 2010 $8,971.
In addition, the Company is contingently liable for standby letters of credit of approximately $3,842 to meet credit requirements for the Company's insurance providers.
Interest expense for the years ended December 31, 2005, 2004, and 2003 was approximately $1,395, $711, and $755 respectively.
Note 4. | Equity Transactions |
Shareholder Rights Plan: On February 29,March 21, 2006, in conjunction with the expiration of the Rights Agreement dated March 20, 1996, the Company'sCompany’s Board of Directors adopted a shareholder rights agreement,Shareholder Rights Agreement granting certain new rights to holders of the Company's common stock.Company’s Common Stock. Under the agreement, the Company authorized and declared a dividend distribution of one right was grantedpayable on March 31, 2006 for each share of common stock held asCommon Stock of the Company outstanding on March 20, 1996,31, 2006, and the issuance of one right will be granted for each share of Common Stock subsequently issued.issued prior to the separation date as defined in the Rights Agreement. Each right entitles the holder to purchase 1/100th of a preferred share after payingPreferred Share at the exercise price (currently $30), and in an unfriendly takeover situation, to purchase Patrick common stockCompany 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'sCompany’s assets are sold, then rightholdersright-holders are entitled, upon payment of the exercise price, to buy common shares of the acquiring corporation'scorporation’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 all of the Company'sCompany’s outstanding shares at a price which is judged by the Board of Directors to be fair to Patrick shareholders. The rights may be redeemed by the Company under certain circumstances at the rate of $.01 per right. The rights will expire on March 20, 2006.21, 2016. The Company has authorized 100,000 shares of preferred stock,Preferred Stock Series A, no par value, in connection with this plan, none of which have been issued. Note 5. | Commitments and Related Party Transactions |
The Company leases office, manufacturing, and warehouse facilities and certain equipment under various noncancelable agreements, which expire at various dates through 2009. These agreements contain various renewal options and provide for minimum annual rentals plus the payment of real estate taxes, insurance, and normal maintenance on the properties. Certain of the leases are with the former chairman emeritus/major shareholder and expire at various dates through 2011. The total minimum rental commitment at December 31, 20052006 under the facility leases mentioned above is approximately $2,212$1,474 which is due approximately $935 in 2006, $718$846 in 2007, $397$457 in 2008, and $162$171 in 2009. The total minimum rental commitment at December 31, 20052006 under the equipment leases mentioned above is approximately $2,776$2,618 which is due approximately $920 in 2006, $784$883 in 2007, $607$700 in 2008, $338$494 in 2009, and $127$541 thereafter. The total rent expense included in the statements of operations for the years ended December 31, 2006, 2005, 2004, and 20032004 is approximately $2,253, $2,300, $2,600, and $3,800$2,600 respectively, of which approximately $110 was paid in 2006, $240 was paid in 2005, and $744 was paid in 2004, and $828 was paid in 2003, to the former chairman emeritus/major shareholder.emeritus. The Company is committed to equipment purchases in the amount of $800 at December 31, 2006. Net sales for the years ended December 31, 2005, and 2004 included sales to one customer in the Primary Manufactured Products and Distribution segments accounting for 10.6%, and 13.4% respectively of total net sales of the Company. The balance due from this customer at December 31, 2005 was approximately $2,900.
Patrick Industries, Inc. And Subsidiaries Notes To Financial Statements (in thousands, except per share amounts) Net sales for the years ended December 31, 2005, 2004, and 2003 included sales to one customer accounting for 10.6%, 13.4%, and 14.7% respectively of total net sales of the Company.
The balances due from this customer at December 31, 2005 and 2004 were approximately $2,900 and $2,200 respectively.
Note 7. | Income Tax Matters |
Federal and state income taxes (credits) for the years ended December 31, 2006, 2005, 2004, and 2003,2004, all of which are domestic, consist of the following:
The provisions for income taxes (credits) for the years ended December 31, 2006, 2005, 2004, and 20032004 are different from the amounts that would otherwise be computed by applying a graduated federal statutory rate to income before income taxes. A reconciliation of the differences is as follows:
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.
Patrick Industries, Inc. And Subsidiaries Notes To Financial Statements (in thousands, except per share amounts) The composition of the deferred tax assets and liabilities at December 31, 20052006 and 20042005 is as follows:
The deferred tax amounts above have been reflected on the accompanying consolidated balance sheets as of December 31, 20052006 and 20042005 as follows:
At December 31, 2005,2006, the Company has state net operating loss carryforwards of approximately $2,300$412 available under various state revenue codes to be applied against future taxable income. These carryforwards expire in varying amounts between 2010 and 2024. At December 31, 2005,2006, the Company has federal AMT credit and state manufacturing credit carryforwards which are available to be directly offset against future federal and state income tax liabilities. These carryfowards expire in varying amounts between 2008 and 2020.
Patrick Industries, Inc. And Subsidiaries Notes To Financial Statements (in thousands, except per share amounts) Note 8. | Self-Insured Plans |
The Company has a self-insured health plan for its employees under which there is both a participant stop loss and an aggregate stop loss based on total participants. The Company is potentially responsible for annual claims not to individually exceed approximately $5,981 in the aggregate$225 at December 31, 2005.2006. The excess loss portion of the employees' coverage has been insured with a commercial carrier. The Company is partially self-insured for its workers' compensation liability, general liability and automobile insurance. The Company is responsible for a per occurrence limit, with an aggregate amount not to exceed approximately $7,500$7,000 on an annual basis. The excess loss portion of the employees' coverage has been insured with a commercial carrier. The Company has accrued an estimated liability for these benefits based upon claims incurred. Note 9. | Compensation Plans |
Deferred compensation obligations: The Company has deferred compensation agreements with certain key employees. The agreements provide for monthly benefits for ten years subsequent to retirement, disability, or death. The Company has accrued an estimated liability based upon the present value of an annuity needed to provide the future benefit payments. Life insurance contracts have been purchased which may be used to fund these agreements. TheseThe contracts are recorded at their cash surrender value in the accompanying balance sheet. Any differences between actual proceeds and cash surrender value are recorded as gains in the periods presented. Additionally, the Company records gains or losses in the cash surrender value in the period incurred. For the years ended December 31, 2006, 2005, 2004, and 2003,2004, the Company recognized gains (losses) of ($25), ($8), $425, and $344$2, respectively. 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 $847, $770, $720, and $632$720, for the years ended December 31, 2006, 2005, 2004, and 20032004 respectively. Profit-sharing plan: The Company has a qualified profit-sharing plan, more commonly known as a 401(k) plan, for substantially all of its employees with over one year of service and who are at least 21 years of age. The plan provides for a matching contribution by the Company as defined in the agreement and, in addition, provides for a discretionary contribution annually as determined by the Board of Directors. The contributions for the years ended December 31, 2006, 2005, 2004, and 20032004 were immaterial.
Patrick Industries, Inc. And Subsidiaries Notes To Financial Statements (in thousands, except per share amounts) Stock option plan: A summaryThe Company’s 1987 Stock Option Plan, which is shareholder approved, permits the grant of transactionsshare options and shares to its employees and Directors for up to 728 shares of stock at December 31, 2006. The Company believes that such awards better align the interests of its employees and Directors with those of its shareholders. Option awards are generally granted with an exercise price equal to the market price of the Company’s stock at the date of grant; those option awards generally vest over 4 years of continuous service and have 6 year contractual terms. Share awards generally vest over one year. Certain option and share awards provide for accelerated vesting if there is a change in control (as defined in the Plan).
For purposes of this pro-forma disclosure, the value to the options is estimated using the Black-Scholes option pricing model and amortized to expense over the options’ vesting periods using the following assumptions:
The Company estimates the fair value of all stock option awards as of the grant date by applying the Black-Scholes option pricing model. The use of this valuation model involves assumptions that are judgmental and highly sensitive in the determination of compensation expense and include the dividend yield, exercise price, and forfeiture rate. Expected volatilities are based on historical volatility of the Company stock. The expected term of options represents the period of time that options granted are expected to be outstanding based on historical company trends. The risk free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for instruments of a similar term. In accordance with SFAS 123R, the fair value of stock and options granted prior to adoption and determined for purposes of disclosure under SFAS 123 have not been changed. As of December 31, 2006, there was approximately $208 of total unrecognized compensation cost related to share-based compensation arrangements granted under incentive plans. That cost is expected to be recognized over a weighted-average period of two years. The total fair value of shares under option forvested during the yearsyear ended December 31, 2005, 2004 and 2003 is as follows:
A further summary about fixed options outstanding at December 31, 2005 is as follows:
2006 was approximately $158.
Patrick Industries, Inc. And Subsidiaries Notes To Financial Statements (in thousands, except per share amounts) Stock options issued prior to 2006 expire six years from the date of grant and are generally exercisable ratably over five years. The following table summarizes the Company’s option activity for employees during the year ended December 31, 2006:
The aggregate intrinsic value in the table above is before income taxes, based on the Company’s closing stock price of $12.50 as of the last business day of the year ended December 31, 2006. The aggregate intrinsic value of options exercised for the year ended December 31, 2006 is $244. F-20
Patrick Industries, Inc. And Subsidiaries Notes To Financial Statements (in thousands, except per share amounts) A further summary about fixed options outstanding at December 31, 2006 is as follows:
Cash received from option exercises under the stock option plan for the year ended December 31, 2006 was $303. The actual tax benefit realized from the tax deductions from option exercise of the share based payment arrangements totaled $83 for the year ended December 31, 2006. The total income tax benefit recognized in the income statement for share based compensation arrangements, including the stock award plans, was approximately $190. Stock award plan:plans: The Company has adopted a stock award plan for the non-employee directors. Grants awarded during May 2005 and 20042006 of 24,000 shares and 21,000 shares respectively are subject to forfeiture in the event the recipient terminates within one year from the date of grant as a director. The total fair value of unvested shares at December 31, 2006 is $262,500. These shares will vest in May 2007. The related compensation expense is being recognized over the one-year vesting period. Total compensation expense for the years ended December 31, 2006, 2005, and 2004 were $249, $211, and 2003 were $211, $202, respectively. The Company has adopted a stock award plan for its officers. Grants awarded in January 2006 of 7,560 shares vest quarterly over a one year period and $189 respectively.are subject to forfeiture in the event the officer terminates employment during the course of the year. The related compensation expense is recognized over a one year period. The total compensation expense for the year ended December 31, 2006 is $80. Note 10. | Restructurings and Asset Impairments
|
In July 2003, the Company decided to close an unprofitable cabinet door division. Accordingly, the Company recorded restructuring charges of approximately $235, or $.03 per share, net of tax, related to severance, retention, and accrued vacation for approximately 61 hourly and salaried employees, all of which were terminated from this particular operation. Other charges included shut down expenses and the write-off of obsolete inventory. The operation was closed in September 2003 and all of the restructuring reserve was utilized in the fourth quarter.
The Company is subject to claims and suits in the ordinary course of business. In management's opinion, current pending legal proceedings and claims against the Company will not, individually or in the aggregate, have a material adverse effect on the Company's financial condition, results of operations, or cash flows. F-21
Patrick Industries, Inc. And Subsidiaries Notes To Financial Statements (in thousands, except per share amounts) Note 12.11. | Cash Flows Information |
Supplemental information relative to the statements of cash flows for the years ended December 31, 2006, 2005, 2004, and 20032004 is as follows:
Patrick Industries, Inc.
And Subsidiaries
Notes To Financial Statements
(in thousands, except per share amounts)
Note 13.12. | Unaudited Interim Financial Information |
Presented below is certain selected unaudited quarterly financial information for the years ended December 31, 20052006 and 2004:2005:
F-22
Patrick Industries, Inc. And Subsidiaries Notes To Financial Statements (in thousands, except per share amounts) Note 14.13. | 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. Effective October 1, 2005, in accordance with the Company’s internal reporting, the Company changed its segment reporting from three reportable segments to four. As a result of this change, one of the operations in the Other Component Manufactured Products segment was broken out separately into a new segment called the Engineered Solutions segment. Accordingly, the segment results have been restated to reflect this change. The Company’s reportable segments are as follows: Primary Manufactured Products - Utilizes various materials including gypsum, particleboard, plywood, and fiberboard which are bonded by adhesives or a heating process to a number of products including vinyl, paper, foil, and high pressure laminate. These products are utilized to produce furniture, shelving, wall, counter, and cabinet products with a wide variety of finishes and textures. Distribution - Distributes primarily pre-finished wall and ceiling panels, particleboard, hardboard and vinyl siding, roofing products, high pressure laminates, passage doors, building hardware, insulation, and other products. Other Component Manufactured Products - Includes an adhesive division, a cabinet door division, (two in 2003), and a machine manufacturing division. The Company closed its machine manufacturing division in the fourth quarter of 2006. Engineered Solutions – Includes aluminum extrusion, distribution, and fabrication.
Patrick Industries, Inc.
And Subsidiaries
Notes To Financial Statements
(in thousands, except per share amounts)
The accounting policies of the segments are the same as those described in "Significant Accounting Policies," except that segment data includes intersegment revenues. Assets are identified with the segments with the exception of cash, prepaid expenses, land and buildings, and intangibles which are identified with the corporate division. The corporate division charges rents to the segment for use of the land and buildings based upon market rates. The Company accounts for intersegment sales as if the sales were to third parties, that is, at current market prices. The Company also records income from purchase incentive agreements as corporate division revenue. The Company evaluates the performance of its segments and allocates resources to them based on a variety of indicators including revenues, cost of goods sold, operating income, and total identifiable assets. F-23
Patrick Industries, Inc. And Subsidiaries Notes To Financial Statements (in thousands, except per share amounts) 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, 2006, 2005, 2004, and 2003:2004:
Patrick Industries, Inc. And Subsidiaries Notes To Financial Statements (in thousands, except per share amounts) A reconciliation of total segment sales, cost of goods sold, and operating income to consolidated sales, cost of goods sold, and segment information to the consolidated financial statements as of and for the years ended December 31, 2006, 2005, 2004, and 20032004 is as follows:
Corporate incentive agreements include vendor rebate agreements and are included as a reduction of cost of goods sold. Unallocated corporate expenses include corporate general and administrative expenses including wages, insurance, taxes, supplies, travel and entertainment, professional fees, and others.
Patrick Industries, Inc. And Subsidiaries Notes To Financial Statements (in thousands, except per share amounts) On January 29, 2007, the Company purchased all of the assets of American Hardwoods, Inc. in Phoenix, AZ for approximately $7,500 financed with long-term debt. The debt consists of a $7,500 term note with annual principal payments of $750 with a ten year amortization and a balloon payment in 2012. F-26
INDEX TO EXHIBITS | | | | 3(a)3.1
| -Amended Articles of Incorporation of the Company as further amended (filed as Exhibit 3(a) to the Company’s Form 10-K/A-1 amending its report on Form 10-K for the fiscal year ended December 31, 1992 and incorporated herein by reference) ........... | | | 3(b)3.2
| -By-Laws of the Company (filed as Exhibit 3(b) to the Company’s Form 10-K/A-1 amending its report on Form 10-K for the fiscal year ended December 31, 1992 and incorporated herein by reference) ........... | | | 3(c)3.3
| -Preferred Share Purchase Rights-Rights Agreement, dated March 21, 2006, between Patrick Industries, Inc. and American Stock Transfer and Trust Company, as successor to National City Bank, as rights agent (filed
| | April 3, 1996 on as Exhibit 10.1 to the Company’s Form 8-A8-K dated March 21, 2006 and incorporated herein by reference) ...............
| | | 10(a)10.1
| -Second Amendment to February 2, 1994 Credit Agreement, dated as of June 26, 1995 among the Company, NBD Bank, as agent, and NBD Bank, N.A. (filed as Exhibit 10(a) to the Company’s Form 10-K for the fiscal year ended December 31, 1995 and incorporated herein by reference) ........... | | | 10(b)
| -Note Agreement, dated September 1, 1995, between the Company and Nationwide Life Insurance Company (filed as Exhibit 10(b) to the Company’s Form 10-K for the fiscal year ended December 31, 1995 and incorporated herein by reference) ...........
| | | 10(c)
| -Commercial Lease and Option to Purchase dated as of October 1, 1995 between Mervin Lung Building Company, Inc., as lessor, and the Company, as lessee (filed as Exhibit 10(c) to the Company’s Form 10-K for the fiscal year ended December 31, 1995 and incorporated herein by reference) ...........
| | | 10(d)10.2
| -First Amendment to Credit Agreement, dated as of October 27, 1994 among the Company, NBD Bank, as agent, and NBD Bank, N.A. (filed as Exhibit 10(a) to the Company’s Form 10-K for the fiscal year ended December 31, 1994 and incorporated herein by reference) ........... | | | 10(e)10.3
| -Loan Agreement dated as of December 1, 1994 between the State of Oregon Economic Development Commission, along with the Pledge and Security Agreement relating thereto (filed as Exhibit 10(b) to the Company’s Form 10-K for the fiscal year ended December 31, 1994 and incorporated herein by reference) ........... | | | 10(f)10.4
| -Credit Agreement dated as of February 2, 1994 among the Company, NBD Bank, as agent, and NBD Bank, N.A. (filed as Exhibit 10(a) to the Company’s Form 10-K for the fiscal year ended December 31, 1993 and incorporated herein by reference) ........... | | | 10(g)
| -Loan Agreement dated as of November 1, 1991 between the Company and the Indiana Development Finance Authority, along with the Pledge and Security Agreement relating thereto (filed as Exhibit 10(c) to the Company’s Form 10-K/A-1 amending its report on Form 10-K for the fiscal year ended December 31, 1992 and incorporated herein by reference) .....
| | | *10(h)10.5*
| -Patrick Industries, Inc. 1987 Stock Option Program, as amended (filed as Exhibit 10(e) to the Company’s Form 10-K for the fiscal year ended December 31, 1994 and incorporated herein by reference) ........... | | | 10(h)(1)10.6
| -Amendment to extend Patrick Industries, Inc. 1987 Stock Option Program to May 14, 2014 (filed as Exhibit 10(h)(1) to the Company’s Form 10-K for the fiscal year ended December 31, 2004 and incorporated herein by reference) ......... |
| |
*10(i)10.7*
| -Patrick Industries, Inc. 401(k) Employee Savings Plan (filed as Exhibit 10(a) to the Company’s Form 10-K for the fiscal year ended December 31, 1993 and incorporated herein by reference) ........... | | | *10(j)10.8*
| -Form of Employment Agreements with Executive Officers (filed as Exhibit 10(e) to the Company’s Form 10-K/A-1 amending its report on Form 10-K for the fiscal year ended December 31, 1992 and incorporated herein by reference) ..... | | | *10(k)10.9*
| -Form of Deferred Compensation Agreements with Executive Officers (filed as Exhibit 10(f) to the Company’s Form 10-K/A-1 amending its report on Form 10-K for the fiscal year ended December 31, 1992 and incorporated herein by reference) ........... |
26
| | 10(l)
| -Commercial Lease and dated as of October 1, 1994 between Mervin D. Lung, as lessor, and the Company, as lessee (filed as Exhibit 10(k) to the Company’s Form 10-K for the fiscal year ended December 31, 1994 and incorporated herein by reference) ...........
| | | 10(m)
| -Commercial Lease dated September 1, 1994 between Mervin D. Lung Building Company, Inc., as lessor, and the Company, as lessee (filed as Exhibit 10(l) to the Company’s Form 10-K for the fiscal year ended December 31, 1994 and incorporated herein by reference) ...........
| | | 10(n)
| -Commercial Lease dated November 1, 1994 between Mervin D. Lung Building Company, Inc., as lessor, and the Company, as lessee (filed as Exhibit 10(m) to the Company’s Form 10-K for the fiscal year ended December 31, 1994 and incorporated herein by reference) ...........
| | | 10(o)
| -Commercial Lease dated October 1, 1999 between Mervin D. Lung, as lessor, and the Company, as lessee (filed as Exhibit 10(o) to the Company’s Form 10-K for the fiscal year ended December 31, 1999 and incorporated herein by reference) ..........
| | | 10(p)
| -Commercial Lease dated September 1, 2000 between Mervin D. Lung Building Company, Inc., as lessor, and the Company, as lessee (filed as Exhibit 10(p) to the Company’s Form 10-K for the fiscal year ended December 31, 2000 and incorporated herein by reference) ..........
| | | 10(q)
| -Commercial Lease dated November 1, 2000 between Mervin D. Lung Building Company, Inc., as lessor, and the Company, as lessee (filed as Exhibit 10(q) to the Company’s Form 10-K for the fiscal year ended December 31, 2000 and incorporated herein by reference) ..........
| | | 10(r)10.10
| -Credit Agreement dated as of January 28, 2000 among the Company, Bank One, Indiana, N.A. (filed as Exhibit 10(r) to the Company’s Form 10-K for the fiscal year ended December 31, 2000 and incorporated herein by reference) .......... | | | 10(s)
| -Commercial Lease dated August 1, 2001 between Mervin D. Lung Building Company, Inc., as lessor, and the Company, as lessee (filed as Exhibit 10(s) to the Company’s Form 10-K for the fiscal year ended December 31, 2001 and incorporated herein by reference) ..........
| | | 10(t)
| -Commercial Lease dated October 1, 2002 between M. D. Lung, Inc., as lessor, and the Company, as lessee (filed as Exhibit 10(t) to the Company’s Form 10-K for the fiscal year ended December 31, 2002 and incorporated herein by reference) ..........
| | | 10(u)10.11
| -Commercial Lease and Real Estate Purchase Agreement dated October 1, 2004 between Mervin D. Lung, as lessor, and the Company, as lessee (filed as Exhibit 10(u) to the Company’s Form 10-K for the fiscal year ended December 31, 2004 and incorporated herein by reference) ......... | | |
10(v)10.12
| -Commercial Lease dated December 1, 2004 between Teachers Insurance and Annuity Association of America (TIAA) as lessor, and the Company, as lessee (filed as Exhibit 10(v) to the Company’s Form 10-K for the fiscal year ended December 31, 2004 and incorporated herein by reference) ......... | | | 10(w)10.13
| -Amendment to Credit Facility and Loan Participation Agreement, dated March 3, 2004 among the Company, JPMorgan Chase Bank, N.A. formerly known as Bank One, N.A. and National City Bank of Indiana, and new Term Note Agreement dated March 3, 2004 among the Company, JPMorgan Chase Bank, N.A. (filed as Exhibit 10(w) to the Company’s Form 10-K for the fiscal year ended December 31, 2004 and incorporated herein by reference) ......... | | | 10(x)10.14
| -Patrick Industries, Inc. form of Stock Option (filed as Exhibit 10(x) to the Company’s Form 10-K for the fiscal year ended December 31, 2004 and incorporated herein by reference) ...... | | | 10(y)10.15
| -Patrick Industries, Inc. form of Directors’ Annual Restricted Stock Grant (filed as Exhibit 10(y) to the Company’s Form 10-K for the fiscal year ended December 31, 2004 and incorporated herein by reference) ......... | | | 10(z)
| -Amendment, dated September 13, 2005, to the Shareholder Rights Agreement between the Company and Harris Bank, N.A., as rights agent (filed as Exhibit 10.1 to the Company’s Form 8-K dated September 13, 2005 and incorporated herein by reference)............
| | | 10(aa)10.16
| -Registration Rights Agreement dated September 13, 2005, between the Company and Tontine Capital Partners, L.P. (filed as Exhibit 10.2 to the Company’s Form 8-K dated September 13, 2005 and incorporated herein by reference)...... | | | 10.17** | -Amendment to Credit Facility and Loan Participation Agreement, dated January 29, 2007, among the Company, JPMorgan Chase Bank, N.A. and National City Bank of Indiana, and new Term Note, dated January 29, 2007, between the Company and JPMorgan Chase Bank, N.A...... | | | 12.1** | -Computation of Operating Ratios...... | | | 21.1** | -Subsidiaries of the Registrant ......... | | | 12**
| -Computation of Operating Ratios .........
| | | 23*23.1**
| -Consent of McGladrey & Pullen, LLP ......... | | | 31.1** | -Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Chief Executive Officer ......... | | | 31.2** | -Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Chief Financial Officer ......... | | | 32.1** | -Certification pursuant to 18 U.S.C. Section 1350 ......... | | |
*Management contract or compensatory plan or arrangementarrangement. **Filed herewithherewith. 5527
|