PATRICK INDUSTRIES INC
10-Ks and 10-Qs
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UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
(Mark
One)
[
X
]
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the Fiscal Year Ended December 31, 2009
or
[ ]
TRANSITION REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the
transition period from ……………… to ………………
Commission
file number 000-03922
PATRICK INDUSTRIES,
INC.
(Exact
name of registrant as specified in its charter)
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INDIANA
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35-1057796
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(State
or other jurisdiction of
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(I.R.S.
Employer
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incorporation
or organization)
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(Identification
No.)
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107
W. FRANKLIN STREET, P.O. Box 638, ELKHART, IN
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46515
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(Address
of principal executive offices)
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(Zip
Code)
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(574) 294-7511
(Registrant’s
telephone number, including area code)
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Securities
registered pursuant to Section 12(b) of the Act:
Common
stock, without par
value Nasdaq
Stock Market LLC
(Title
of each
class) (Name
of each exchange on which registered)
Securities registered pursuant
to Section 12(g) of the Act:
None
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Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes
[ ] No [X]
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange Act. Yes
[ ] No [X]
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No
[ ]
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files). Yes [ ] No
[ ]
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. Large accelerated filer
[ ] Accelerated filer
[ ] Non-accelerated filer [ ] (Do
not check if a smaller reporting company) Smaller
reporting company [X]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes [ ] No
[X]
The
aggregate market value of the voting stock held by non-affiliates of the
registrant on June 26, 2009 (based upon the closing price on the Nasdaq Stock
Market LLC and an estimate that 37.7% of the shares are owned by non-affiliates)
was $5,348,424. The closing market price was $1.55 on that day and
9,146,939 shares of the Company’s common stock were outstanding. As
of March 12, 2010, there were 9,182,189 shares of the registrant’s common stock
outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the registrant’s Proxy Statement for its Annual Meeting of Shareholders
scheduled to be held on May 20, 2010 are incorporated by reference into Part III
of this Form 10-K.
PATRICK
INDUSTRIES, INC.
FORM
10-K
FISCAL
YEAR ENDED DECEMBER 31, 2009
TABLE
OF CONTENTS
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PART I
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3
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ITEM 1.
BUSINESS
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3
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ITEM 1A.
RISK
FACTORS
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14
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ITEM 1B.
UNRESOLVED STAFF
COMMENTS
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21
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ITEM 2.
PROPERTIES
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21
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ITEM 3.
LEGAL
PROCEEDINGS
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22
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PART II
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22
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ITEM 5.
MARKET FOR REGISTRANT’S COMMON
EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY
SECURITIES
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22
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ITEM 6.
SELECTED FINANCIAL
DATA
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23
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ITEM 7.
MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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23
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ITEM 7A.
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
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48
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ITEM 8.
FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA
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48
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ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
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48
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ITEM 9A.
CONTROLS AND
PROCEDURES
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49
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ITEM 9B.
OTHER
INFORMATION
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49
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PART III
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50
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ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND
CORPORATE GOVERNANCE
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50
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ITEM 11.
EXECUTIVE
COMPENSATION
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50
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ITEM 12.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
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50
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ITEM 13.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
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51
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ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND
SERVICES
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51
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PART IV
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51
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ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT
SCHEDULES
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51
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SIGNATURES
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54
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FINANCIAL
SECTION
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Index
to Financial Statements and Financial Statement Schedules
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F-1
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Report
of Independent Registered Public Accounting Firm, Crowe Horwath
LLP
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F-2
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Report
of Independent Registered Public Accounting Firm, Ernst & Young
LLP
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F-3
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Consolidated
Statements of Financial Position
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F-4
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Consolidated
Statements of Operations
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F-5
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Consolidated
Statements of Shareholders’ Equity
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F-6
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Consolidated
Statements of Cash Flows
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F-7
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Notes
to Consolidated Financial Statements
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F-8
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Exhibits
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2
INFORMATION CONCERNING
FORWARD-LOOKING STATEMENTS
This Form
10-K contains certain “forward-looking statements” within the meaning of the
Private Securities Litigation Reform Act of 1995 with respect to financial
condition, results of operations, business strategies, operating efficiencies or
synergies, competitive position, growth opportunities for existing products,
plans and objectives of management, markets for the common stock of
Patrick Industries, Inc. and other matters. Statements in this Form
10-K as well as other statements contained in the annual report and statements
contained in future filings with the Securities and Exchange Commission and
publicly disseminated press releases, and statements which may be made from time
to time in the future by management of the Company in presentations to
shareholders, prospective investors, and others interested in the business and
financial affairs of the Company, which are not historical facts, are
forward-looking statements that involve risks and uncertainties that could cause
actual results to differ materially from those set forth in the forward-looking
statements. Patrick Industries, Inc. does not undertake to
publicly update or revise any forward-looking statements to reflect
circumstances or events that occur after the date the forward-looking statements
are made, except as required by law. You should consider
forward-looking statements, therefore, in light of various important factors,
including those set forth in the reports and documents that Patrick Industries,
Inc. files with the Securities and Exchange Commission, including this Annual
Report on Form 10-K for the year ended December 31, 2009.
There are
a number of factors, many of which are beyond the control of Patrick Industries,
Inc., which could cause actual results and events to differ materially from
those described in the forward-looking statements. These factors
include pricing pressures due to competition, costs and availability of raw
materials, availability of commercial credit, availability of retail and
wholesale financing for residential and manufactured homes, availability and
costs of labor, inventory levels of retailers and manufacturers, levels of
repossessed residential and manufactured homes, the financial condition of our
customers, the ability to generate cash flow or obtain financing to fund growth,
future growth rates in the Company’s core businesses, interest rates, oil and
gasoline prices, the outcome of litigation, adverse weather conditions impacting
retail sales, and our ability to remain in compliance with our credit agreement
covenants. In addition, national and regional economic conditions and
consumer confidence may affect the retail sale of recreational vehicles and
residential and manufactured homes.
Any
projections of financial performance or statements concerning expectations as to
future developments should not be construed in any manner as a guarantee that
such results or developments will, in fact, occur. There can be no
assurance that any forward-looking statement will be realized or that actual
results will not be significantly different from that set forth in such
forward-looking statement. See Part I, Item 1A “Risk Factors” below
for further
discussion.
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Company
Overview
Patrick
Industries, Inc. (collectively, the “Company,” “we,” “our” or “Patrick”), which
was founded in 1959 and incorporated in Indiana in 1961, is a major manufacturer
and distributor of building products and materials to the recreational vehicle
(“RV”) and manufactured housing (“MH”) industries. In addition, we
are a supplier to certain other industrial markets, such as kitchen cabinet,
household furniture, fixtures and commercial furnishings, marine, and other
industrial markets. We manufacture a variety of products including
decorative vinyl and paper panels, wrapped moldings, interior passage doors,
cabinet doors and components, slotwall and slotwall components, and
countertops.
We are
also an independent wholesale distributor of pre-finished wall and ceiling
panels, drywall and drywall finishing products, electronics, adhesives, cement
siding, interior passage doors, roofing products, laminate flooring, and other
miscellaneous products. We have a nationwide network of manufacturing
and distribution centers for our products, thereby reducing in-transit delivery
time and cost to the regional manufacturing plants of our
customers. We believe that we are one of the few suppliers to the RV
and MH industries that has such a nationwide network. We maintain
three manufacturing plants and two distribution facilities near our principal
offices in Elkhart, Indiana, and operate nine other warehouse and distribution
centers and eight other manufacturing plants in eleven other
states.
3
Beginning
in 2007 in conjunction with the acquisition of Adorn Holdings, Inc. (“Adorn”)
and continuing throughout 2008 and 2009, we explored, initiated and completed a
number of cost reduction and efficiency improvements designed to address the
downturn in general worldwide economic conditions that adversely affected demand
for our products and services and to leverage our position to drive future
growth. These improvements included the restructuring and integration
of operations, consolidation of facilities, disposition of non-core operations,
streamlining of administrative and support activities
,
and the
reduction of inventory
levels. The Company also continued to enhance its products and
services through the integration of new and expanded product lines designed to
create additional scale advantages and offer both increased breadth and depth of
products and services. In the Executive Summary section of Item
7. “Management’s Discussion and Analysis of Financial Condition and
Results of Operations,” we provide an overview of the impact that the
deterioration in macroeconomic conditions had on our operations and in the RV,
MH, and residential housing industries in 2009.
We
completed the divestitures of certain non-core businesses in 2009, including
American Hardwoods, Inc. (“American Hardwoods”) and our aluminum extrusion
operation. See “Strategic Divestitures” below and Note 4 to the
Consolidated Financial Statements in Item 8 of this report for further
details.
Patrick
had three reportable business segments in 2009 (based on continuing operations):
Primary Manufactured Products, Distribution, and Other Component Manufactured
Products. Financial information about Patrick’s three segments is
included in Note 19 to the Consolidated Financial Statements.
Competition
The RV
and MH industries are highly competitive with low barriers to
entry. This level of competition carries through to the suppliers to
these industries. Across the Company’s range of products and
services, competition exists primarily on price, product features, quality, and
service. We have several competitors that compete with us on a
regional and local basis. In order for a competitor to compete with
us on a national basis, we believe that a substantial capital commitment and
investment in personnel would be required. The other industrial
markets in which we continue to expand are also highly
competitive. In 2009, declining sales volumes and the depressed
economic conditions in the MH and industrial markets we serve caused extreme
pricing pressure on certain products as supply outweighed demand. We
believe that there may be further volatility in the markets we serve in 2010
before a sustained recovery takes hold. Given this environment, the
Company has identified several operating strategies to maintain or enhance
earnings through productivity and fixed cost reduction initiatives, expansion
into new product lines, and optimization of capacity utilization.
Strategy
Overview
We
believe that we have developed quality-working relationships with our customers
and suppliers, and have oriented our business to the needs of these
customers. These customers include all of the larger RV and MH
manufacturers and a number of large to medium-sized industrial
customers. Our industrial customers generally are directly linked to
the residential housing markets. Our RV and MH customers generally
demand the lowest competitive prices, high quality standards, short lead times,
and a high degree of flexibility from their suppliers. Our industrial
customers generally are less price sensitive than our RV and MH customers, and
more focused on quality customer service and quick response
time. Consequently, we have focused our efforts on maintaining and
improving the quality of our manufactured products, developing a nationwide
manufacturing and distribution presence in response to our customers’ needs for
flexibility and short lead times, and prioritizing the implementation of lean
manufacturing principles and continuous improvement in all of our facilities
including our corporate office. Additionally, because of the short
lead times, which range from 24 hours to same day order receipt and delivery, we
have intensified our focus on reducing our inventory levels with the help of
some of our key suppliers with vendor managed inventory
programs. These initiatives have been instrumental in improving our
operating cash flow and liquidity. As we explore new markets and
industries, we believe that these and other strategic initiatives provide us
with a strong foundation for future growth. In 2009, approximately
44% of our sales were to the RV industry, 37% to the MH industry, and 19% to the
industrial and other markets. In 2008, approximately 37% of our sales
were to the RV industry, 45% to the MH industry, and 18% to the industrial and
other markets.
4
Operating
Strategies
Key
operating strategies identified by management, include the
following:
Strategic
Acquisitions, Expansion and Restructuring
We supply
a broad variety of building material products and, with our nationwide
manufacturing and distribution capabilities, we believe that we are well
positioned for the introduction of new products. We, from time to
time, consider the acquisition of additional product lines, facilities,
companies with a strategic fit, or other assets to complement or expand our
existing businesses.
In May
2007, we purchased all of the outstanding stock of Adorn, an Elkhart,
Indiana-based major manufacturer and supplier to the RV, MH and industrial
markets, for $78.8 million. This acquisition represented the largest
acquisition in our history, virtually doubled our manufacturing revenues, and
immediately strengthened our market position and presence in the major
industries that we serve. The consolidation of Adorn into Patrick
afforded us many opportunities to realize synergies through facility
rationalization, headcount reduction, vendor consolidation, and the
implementation
of best practices. In January 2010, we completed our first
acquisition since we acquired Adorn with the acquisition of a cabinet door
business.
In the
third quarter of 2008, the completion of our restructuring plan (the
“Restructuring Plan”) to integrate Adorn with our existing businesses, resulted
in cumulative pretax charges totaling approximately $3.3
million. Expenses associated with the Restructuring Plan included the
closure of duplicate facilities, severance related to the elimination of
redundant jobs, and various asset write-downs related to the consolidation of
product lines. We have realized, and expect to continue to realize,
synergy savings from this acquisition on a go-forward basis.
While
operating under depressed market and economic conditions throughout 2009, we
focused our attention on fixed cost and debt reduction initiatives in order to
reduce our leverage ratio, maintain operating cash flow, meet the covenants
under our credit agreement and maximize efficiencies from the consolidation of
Adorn into Patrick.
Strategic
Divestitures
In an
effort to strategically align our current operations with businesses within our
core competencies, reduce overall fixed costs, and reduce our leverage position,
we have explored and will continue to explore various alternatives for the
divestiture of certain unprofitable, non-core operations. In 2008, we
identified our American Hardwoods and aluminum extrusion operations as non-core
operations and reclassified the carrying values of the assets of American
Hardwoods and the aluminum extrusion operation to assets held for
sale. The decision to divest these two operations was largely based
on projected and potential operating losses under the current operating model
and working capital requirements of these operations that forced us to assess
the overall fit of these operations within the parameters of our strategic
plan. The financial results of these operations were classified as
discontinued operations in the consolidated financial statements and all prior
period operating results have been reclassified to conform to the current year
presentation. See Note 4 to the Consolidated Financial Statements for
further details.
Sale
of American Hardwoods, Inc. Operation/Building
In
January 2009, the Company sold certain assets and the business of the American
Hardwoods operation for cash consideration of $2 million and entered into a
separate real estate purchase agreement with the buyer to sell the building that
housed this operation for a purchase price of $2.5
million. Accordingly, the Company reclassified approximately $2.5
million of carrying value for this property to assets held for sale in the
Company’s consolidated financial statements at December 31, 2008. The building
and property were sold in June 2009 for a purchase price of $2.5
million. The pretax loss from operations was $19,000 and $0.5 million
in 2009 and 2008, respectively. The net pretax gain on the sale of
the American Hardwoods operation was $0.2 million in 2009. Estimated
pretax charges of approximately $1.0 million, which primarily reflected the
write down to fair market value of real estate and inventories, were included in
discontinued operations in 2008. Previously, the financial results of
American Hardwoods had been included in the Distribution segment.
5
Sale of Aluminum Extrusion
Operation
In July
2009, the Company sold certain assets of its aluminum extrusion
operation. The purchase price resulted in net cash proceeds of $7.4
million and the assumption by the buyer of approximately $2.2 million of certain
accounts payable and accrued liabilities. The net pretax gain on the
sale of the aluminum extrusion operation was $0.5 million in
2009. Estimated pretax charges of approximately $5.0 million
associated with the divesture were reflected in discontinued operations in 2008
and primarily reflected the write down to fair market value of inventories, real
estate and fixed assets. Pretax income from operations was $0.8
million in 2009 and the pretax loss from operations was $1.2 million in
2008. Previously, the financial results of this operation comprised
the entire Engineered Solutions business segment.
Diversification
into Other Markets
While we
continually seek to improve our position as a leading supplier to the RV and MH
industries and have substantially increased our presence in these markets
through the acquisition of Adorn in 2007, we are also seeking to expand our
product lines into other industrial, commercial and institutional
markets. Many of our products, such as countertops, cabinet doors,
laminated panels, slotwall, and shelving, have applications in the kitchen
cabinet, household furniture, and architectural markets. We have a
dedicated sales force focused on increasing our industrial market penetration
and on our diversification into additional commercial and institutional
markets.
We
believe that diversification into other industrial markets provides
opportunities for improved operating margins with products that are
complementary in nature to our current manufacturing processes. In
addition, we believe that our nationwide manufacturing and distribution
capabilities enable us to position ourselves for new product
expansion.
Utilization
of Manufacturing Capacity
Efficiency
Optimization
The
acquisition and consolidation of Adorn into Patrick allowed us to increase
capacity utilization at all of our consolidated manufacturing
facilities. While we increased capacity utilization as a result of
our facility consolidations, the decline in volume levels due to soft industry
conditions in all of the major end markets we serve has resulted in unused
capacity at almost all of our locations. We have the ability to
substantially increase volumes in almost all of our existing facilities without
adding comparable incremental fixed costs. With the expected
continued weak economic conditions in certain parts of the country, we are
continually exploring opportunities for further facility
consolidation. Additionally, we are focused on cross-training all of
our manufacturing work force in our manufacturing cells within each facility to
maximize our efficiencies and increase the flexibility of our labor
force.
Plant
Consolidations / Closures and Division Changes
In 2009,
we consolidated and closed certain manufacturing and distribution facilities in
an effort to align operating costs with our revenue base and keep our overhead
structure at a level consistent with operating needs, particularly given the
overall soft economic conditions experienced during the year.
In
December 2008, the Company decided to close its leased distribution facility in
Woodland, California and consolidate operations into the existing owned Fontana,
California manufacturing facility in order to offset a sizable reduction in
sales volumes that stemmed from the planned closure of one of our major
customers’ plants in the same area. The consolidation was completed
in January 2009.
During
the fourth quarter of 2008, the Company entered into a listing agreement to sell
its custom vinyls manufacturing facility in Ocala, Florida. We
originally anticipated that the sale of this facility would not be completed
until 2010 due to unfavorable real estate market conditions, and therefore the
property’s carrying value was not included in assets held for sale as of
December 31, 2008. However, this facility was sold in late December
2009 for $1.6 million resulting in a pretax gain on sale of $1.2
million. The Ocala operations were consolidated into the Company’s
Alabama and Georgia facilities.
6
In the
fourth quarter of 2009, the Company entered into a listing agreement to sell its
manufacturing and distribution facility in Woodburn,
Oregon. Approximately $3.2 million of carrying value for this
facility was reclassified to assets held for sale as of December 31,
2009. The Oregon facility was subsequently sold in February 2010 for
$4.2 million and the Company anticipates recording a pretax gain on sale of
approximately $0.8 million in its first quarter 2010 operating
results. The Company is currently operating in the same facility
under a license agreement with the purchaser while it explores options for a
more suitable long-term solution.
During
the fourth quarter of 2008, the Company entered into a listing agreement to sell
its remaining manufacturing and distribution facility in Fontana,
California. The Company reclassified approximately $1.6 million of
carrying value for this facility to assets held for sale in the consolidated
financial statements as of December 31, 2009 and 2008. In March 2010,
this facility was sold and the Company anticipates recording a pretax gain on
sale of approximately $2.0 million in its first quarter 2010 operating
results. The Company is currently operating in the same facility
under a lease agreement with the purchaser for the use of approximately one-half
of the square footage previously occupied.
Product Development and New Product
Introductions/Discontinuations
With our
versatile manufacturing and distribution capabilities, we are continually
striving to increase our market presence in all of the markets that we serve and
gain entrance into other potential markets. We remain committed to
new product development and introduction initiatives. New product
development is critical to growing our revenue base, keeping up with changing
market conditions, and proactively addressing customer demand. We
plan to continue to devote our time and attention to manufacturing and
distribution products that fit within the strategic parameters of our current
business model including appropriate margin and inventory turn
levels.
To
further enhance our product offerings to marine and RV customers, we established
new relationships with several vendors to distribute a complete line of
audio/video source units, televisions and microwaves to the marine, RV and
recreational product markets. This newly formed electronics division
within our Distribution segment was launched in the first quarter of
2009. In addition to line extensions of certain products in 2009, we
expanded our distribution line to include adhesives and a new laminate flooring
product line. We also began to manufacture interior passage doors to
complement our existing door product line.
In early
2009, we discontinued certain distribution product lines including our line of
resilient flooring products, a ceramic tile line, and the hardwood products
associated with the American Hardwoods operation.
Principal
Products
Through
our manufacturing divisions, we manufacture a variety of products including
decorative vinyl and paper panels, wrapped moldings, stiles and battens,
hardwood, foil and membrane pressed cabinet doors, drawer sides and bottoms,
interior passage doors, slotwall and slotwall components, components for
electronic desks, and countertops. In conjunction with our
manufacturing capabilities, we also provide value added processes, including
custom fabrication, edge-banding, drilling, boring, and cut-to-size
capabilities.
We
distribute pre-finished wall and ceiling panels, drywall and drywall finishing
products, electronics, adhesives, cement siding, interior passage doors, roofing
products, laminate flooring, and other miscellaneous products.
Manufactured
laminated panels contributed 49%, 45% and 39% of total sales for the years ended
December 31, 2009, 2008 and 2007, respectively. Pre-finished wall
panels and finishing products contributed 8%, 8%, and 10% of total sales for the
comparable periods in 2009, 2008 and 2007, respectively. The
electronics division within our Distribution segment (launched in the first
quarter of 2009), contributed 4% of total sales for the year ended December 31,
2009.
We have
no material patents, licenses, franchises, or concessions and do not conduct
significant research and development activities.
Manufacturing Processes and
Operations
Our
primary manufacturing facilities utilize various materials including gypsum,
particleboard, plywood and fiberboard, which are bonded by adhesives or a
heating process to a number of products, including vinyl, paper,
foil
7
and
high-pressure laminate. Additionally, we offer high-pressure laminate
laminated to substrates such as particleboard and lauan which has many uses,
including counter tops and ambulance cabinetry. We manufacture
laminate countertops and solid surface countertops, as well as slotwall and
slotwall components for the store and office fixture
markets. Laminated products are used in the production of wall,
cabinet, shelving, counter and fixture products with a wide variety of finishes
and textures.
We
manufacture three distinct cabinet door product lines in both raised and flat
panel designs, as well as square, shaker style, cathedral and arched
panels. One product line is manufactured from raw lumber using solid
oak, maple, cherry and other hardwood materials. Another line of
doors is made of laminated fiberboard, and a third line uses membrane press
technology to produce doors and components with vinyls ranging from 2 mil to 14
mil in thickness. Several outside profiles are available on square,
shaker style, cathedral, and arched raised panel doors and the components
include rosettes, hardwood moulding, arched window trim, blocks and windowsills,
among others. Our doors are sold mainly to the RV and MH
industries. We also market to the cabinet manufacturers and
“ready-to-assemble” furniture manufacturers.
Our vinyl
printing facility produces a wide variety of decorative vinyls which are 4 mil
in thickness and are shipped in rolls ranging from 300-750 yards in
length. This facility produces material for both internal and external
use.
Markets
We are
engaged in the manufacturing and distribution of building products and material
for use primarily by the RV and MH industries, and in other industrial
markets.
The
current downturn in the economy in general and the residential housing market
has had an adverse impact on our operations in 2009 in the three primary
industries in which we operate. On the RV side, the economic downturn
in the fourth quarter of 2008 and the first half of 2009 severely impacted
shipment levels, however, production levels were stronger than expected based on
a higher demand for RV’s by retail dealers in the latter half of
2009. The MH industry continues to be negatively impacted by
financing concerns and a lack of available financing sources, and the current
credit situation in the residential housing market puts additional pressure on
consumers, who are generally using financial institutions and conventional
financing as a source for these purchases. We expect the overall
declines experienced in the MH and industrial markets in 2009 to continue into
the first half of 2010. Recreational vehicle purchases are generally
consumer discretionary income purchases, and therefore any situation which
causes concerns related to discretionary income has a negative impact on these
markets. Approximately 70% of our industrial revenue base is
associated with the U.S. residential housing market, and therefore there is a
direct correlation between the demand for our products in this market and new
residential housing production.
Recreational
Vehicles
The
recreational vehicle industry has been characterized by cycles of growth and
contraction in consumer demand reflecting prevailing general economic conditions
which affect disposable income for leisure time activities. We
believe that fluctuations in interest rates, consumer confidence, and concerns
about the availability and price of gasoline have an impact on RV
sales.
Demographic
and ownership trends continue to point to favorable market growth in the
long-term as the number of “baby-boomers” reaching retirement is steadily
increasing, products such as sports-utility RV’s are becoming attractive to
younger buyers, and RV manufacturers are also providing an array of product
choices including producing lightweight towables and smaller, fuel
efficient motorhomes. Green technologies including lightweight
composite materials, solar panels, and energy-efficient components are appearing
on an increasing number of RVs. In addition, federal economic credit
and stimulus packages that contain provisions to stimulate RV lending and
provide favorable tax treatment for new RV purchases, may help promote sales and
aid in the RV industry’s economic recovery.
Recreational
vehicle classifications are based upon standards established by the
RVIA. The principal types of recreational vehicles include
conventional travel trailers, folding camping trailers, fifth wheel trailers,
motor homes, and conversion vehicles. These recreational vehicles are
distinct from mobile homes, which are manufactured houses designed for permanent
and semi-permanent residential dwelling.
8
Conventional
travel trailers and folding camping trailers are non-motorized vehicles designed
to be towed by passenger automobiles, pick-up trucks, or vans. They
provide comfortable, self-contained living facilities for short periods of
time. Conventional travel trailers and folding camping trailers are
towed by means of a frame hitch attached to the towing vehicle. Fifth
wheel trailers, designed to be towed by pick-up trucks, are constructed with a
raised forward section that is attached to the bed area of the pick-up
truck. This allows for a bi-level floor plan and more living space
than a conventional travel trailer.
A motor
home is a self-powered vehicle built on a motor vehicle chassis. The
interior typically includes a driver’s area, kitchen, bathroom, dining, and
sleeping areas. Motor homes are self-contained with their own
lighting, heating, cooking, refrigeration, sewage holding, and water storage
facilities. Although they are not designed for permanent or
semi-permanent living, motor homes do provide comfortable living facilities for
short periods of time.
Sales of
recreational vehicle products have been cyclical. Shortages of motor
vehicle fuels and significant increases in fuel prices have had a material
adverse effect on the market for recreational vehicles in the past, and could
adversely affect demand in the future. The RV industry is also
affected by the availability and terms of financing to dealers and retail
purchasers. Substantial increases in interest rates and decreases in
the general availability of credit have had a negative impact upon the industry
in the past and may do so in the future. Recession and lack of
consumer confidence generally result in a decrease in the sale of leisure time
products such as recreational vehicles.
Since
1998, industry-wide wholesale unit shipments of RV’s have declined
43%. The period beginning in 1999 and continuing through 2007
resulted in eight out of the nine years with shipment levels over 300,000 units
primarily due to the favorable demographic trend of the aging “baby-boomer”
population, improved consumer confidence, depleted dealer inventories, lower
interest rates, and a fear of flying after the September 11, 2001 terrorist
attacks. Shipment levels started to soften in the third and fourth
quarters of 2006 and into 2007. In 2008, shipment levels declined
approximately 33% to 237,000 units reflecting the tightest credit conditions in
several decades, declining consumer confidence, reduced disposable income
levels, and the generally depressed economic environment. In 2009,
shipment levels declined approximately 30% versus 2008, reflecting low consumer
confidence and the continuance of unfavorable market conditions experienced by
the industry in 2008. However, production levels in the RV industry
were stronger than expected in the latter half of 2009 based on a higher demand
for RV’s by retail dealers.
In
anticipation of continued strengthening short-term demand, the Recreational
Vehicle Industry Association (the “RVIA”) is currently forecasting a 30%
increase in full year 2010 wholesale unit shipments to 215,900 units compared to
the full year 2009 level citing an improvement in dealer demand (as evidenced in
the second half of 2009) and an increase in capacity by certain new and existing
manufacturers that have also added to their workforce. According to
the RVIA, the recovery is expected to strengthen as credit availability, job
security and consumer confidence improve.
The
Company estimates that approximately 85% of its revenues related to the RV
industry are derived from the towables sector of the market. In 2009,
the towables sector of the RV market represented approximately 92% of total
units shipped into the market as a whole. The towable units are
lighter and less expensive than standard gas or diesel powered units
representing a more attractive solution for the cost-conscious
buyer. From 2008 to 2009, motorized unit shipments declined
approximately 53% and towable unit shipments declined approximately
27%. We believe that we are well positioned with respect to our
product mix within the RV industry to take advantage of any improved market
conditions.
The
following chart reflects the historical wholesale unit shipment levels in the RV
industry from 1998 through 2009 per RVIA statistics:
9
Manufactured
Housing
Manufactured
homes traditionally have been one of the principal means for first time
homebuyers to overcome the obstacles of large down payments and higher monthly
mortgage payments due to the relative lower cost of construction as compared to
site built homes. Manufactured housing also presents an affordable
alternative to site built homes for retirees and others desiring a lifestyle in
which home ownership is less burdensome than in the case of site built
homes. The increase in square footage of living space and updated
modern designs in manufactured homes created by multi-sectional models has made
them more attractive to a larger segment of homebuyers.
Manufactured
homes are built in accordance with national, state and local building
codes. Manufactured homes are factory built and transported to a site
where they are installed, often permanently. Some manufactured homes
have design limitations imposed by the constraints of efficient production and
over-the-road transit. Delivery expense limits the effective
competitive shipping range of the manufactured homes to approximately 400 to 600
miles.
Modular
homes, which are a component of the manufactured housing industry, are factory
built homes that are built in sections and transported to the site for
installation. These homes are generally set on a foundation and are
subject to land/home-financing terms and conditions. In recent years,
these units have been gaining in popularity due to their aesthetic similarity to
site-built homes and their relatively less expensive cost.
The
manufactured housing industry is cyclical and is affected by the availability of
alternative housing, such as apartments, town houses, condominiums and
site-built housing. In addition, interest rates, availability of
financing, regional population, employment trends, and general regional economic
conditions affect the sale of manufactured homes. Since 1998,
industry-wide wholesale unit shipments of manufactured homes have declined 87%.
The 2009 level of
49,800 wholesale units was at the lowest level in the last 50
years. MH unit shipments declined approximately 39% when compared to
2008. Factors that may favorably impact production levels in this
industry include quality credit standards in the residential housing market, job
growth, favorable changes in financing laws, new tax credits for new home buyers
and other government incentives, a lack of residential housing inventory, and
rising interest rates that make traditional site built homes more expensive to
finance. The Company currently estimates MH unit shipments for full
year 2010 to decline approximately 2% compared to full year 2009
levels.
We
believe that the factors responsible for the past decade-plus decline include
lack of available financing and access to the asset-backed securities markets,
high vacancy rates in apartments, high levels of repossessed housing
inventories, over-built housing markets in certain regions of the country that
resulted in fewer sales of new manufactured homes, as well as the generally
depressed economic environment. Additionally, low conventional
mortgage rates and less restrictive lending terms for residential site built
housing over much of this period contributed to the decline as manufactured home
loans generally carry a higher interest rate and less competitive
terms. Beginning in mid-1999 and continuing through 2009, the MH
industry has also had to contend with credit requirements that became more
stringent and a reduction in availability of lenders for manufactured homes for
both retail and dealers. While there is demand for permanent
rebuilding in the hurricane damaged areas, credit conditions remain adverse
especially in conjunction with the current credit crisis, and current overall
economic conditions are not
10
favorable
in relation to the factors which will promote positive growth. The
availability of financing and access to the asset-backed securities market is
still restricted, and we believe that employment growth and standard
quality-oriented lending practices in the conventional site-built housing
markets are needed to enable more balanced demand, thus resulting in the
potential for increased production and shipment levels in the MH
industry.
The
following chart reflects the historical wholesale unit shipment levels in the MH
industry from 1998 through 2009 per the Manufactured Housing
Institute:
Other
Markets
Many of
our core manufacturing products, including paper/vinyl laminated panels,
shelving, drawer-sides, and high-pressure laminated panels are routinely
utilized in the kitchen cabinet, store fixture and commercial furnishings, and
residential furniture markets. These markets are generally categorized by
a more performance than price driven customer base, and provide an opportunity
for us to diversify our clientele while providing increased contribution to our
core laminating and fabricating competencies. While the residential
furniture markets have been severely impacted by import pressures, other
segments have been less vulnerable, and therefore provide opportunities for
increased sales penetration and market share gains. While demand for
our products in the residential market has been adversely impacted by the severe
housing downturn, long-term growth in the residential market will be based on
improved job growth, low interest rates, and continuing government incentives to
stimulate housing demand and reduce surplus inventory due to foreclosures, which
we believe will ultimately increase the demand for our products.
Demand in
the industrial markets in which the Company competes also fluctuates with
economic cycles. Industrial demand tends to lag the housing cycle by six
to twelve months, and will vary based on differences in regional economic
prospects. As a result, we believe continued focus on the industrial
markets will help moderate the impact of the cyclical patterns in the RV/MH
markets on our operating results. We have the available capacity to
increase industrial revenue and benefit from the diversity of multiple market
segments, unique regional economies and varied customer
strategies.
Marketing and
Distribution
Our sales
are to recreational vehicle and manufactured housing manufacturers and other
industrial products manufacturers. We have approximately 1,000
customers. We have five customers, who together accounted for
approximately 53% and 44% of our total sales in 2009 and 2008,
respectively. We believe we have good relationships with our
customers.
Sales to
three different customers accounted for approximately 21%, 14% and 12%,
respectively, of consolidated net sales of the Company for the year ended
December 31, 2009. Sales to two different customers accounted for
approximately 13.1% and 11.5%, respectively, of consolidated net sales for the
year ended December 31, 2008. No one customer accounted for 10% or
more of consolidated net sales for the year ended December 31,
2007.
11
Most
products for distribution are generally purchased in carload or truckload
quantities, warehoused, and then sold and delivered by us. In
addition, approximately 45% and 33% of our distribution segment’s products were
shipped directly from the suppliers to our customers in 2009 and 2008,
respectively. We typically experience a one to two week delay between
issuing our purchase orders and the delivery of products to our warehouses or
customers. As lead times have declined over the years, in some
instances, certain customers have required same-day or next-day
service. We generally keep backup supplies of various commodity
products in our warehouses to ensure that we have product on hand at all times
for our distribution customers. Our customers do not maintain
long-term supply contracts, and therefore we must bear the risk of accurate
advanced estimation of customer orders. We have no significant
backlog of orders.
We
operate 11 warehouse and distribution centers and 11 manufacturing operations
located in Alabama, Arizona, California, Georgia, Illinois, Indiana, Kansas,
Minnesota, Oregon, Pennsylvania, Tennessee and Texas. By using these
facilities, we are able to minimize our in-transit delivery time and cost to the
regional manufacturing plants of our customers.
Patrick
does not engage in significant marketing efforts nor does it incur significant
marketing or advertising expenditures other than attendance at certain trade
shows and the activities of its sales personnel and the maintenance of customer
relationships through price, quality of its products, service and customer
satisfaction. In our design showroom located in Elkhart, Indiana,
many of our manufactured and distribution products are on display for current
and potential customers. We believe that the design showroom has
provided Patrick with the opportunity to grow its market share by educating our
customers regarding the style and content options that we have available and by
offering custom design services to further differentiate our product
lines.
Suppliers
During
the year ended December 31, 2009, we purchased approximately 74% of our raw
materials and distributed products from twenty different
suppliers. The five largest suppliers accounted for approximately 48%
of our purchases. Our current major material suppliers with contracts
through December 31, 2010 include United States Gypsum, MJB Wood Group and Tumac
Lumber Company
.
We have terms and
conditions with these and other suppliers that specify exclusivity in certain
areas, pricing structures, rebate agreements and other parameters.
Materials
are primarily commodity products, such as lauan, gypsum
,
particleboard, and other
lumber products, which are available from many suppliers. We maintain
a long-term supply agreement with one
of our major suppliers
of materials to the MH industry. Our sales in the short-term could be
negatively impacted in the event any unforeseen negative circumstances were to
affect our major supplier. We believe that we have a good
relationship with this supplier and all of our other
suppliers. Alternate sources of supply are available for all of our
major material purchases.
Regulation and Environmental
Quality
The
Company’s operations are subject to certain Federal, state and local regulatory
requirements relating to the use, storage, discharge and disposal of hazardous
chemicals used during their manufacturing processes. Over the past
two and one-half years, Patrick has taken a proactive role in certifying that
the composite wood substrate materials that it uses to produce products for its
customers in the RV marketplace have complied with applicable emission standards
developed by the California Air Resources Board (“CARB”). All
suppliers and manufacturers of composite wood materials will be required to be
either CARB I or CARB II certified at some point in the near
future.
We
believe that we are currently operating in compliance with applicable laws and
regulations and have made reports and submitted information as
required. The Company believes that the expense of compliance with
these laws and regulations with respect to environmental quality, as currently
in effect, will not have a material adverse effect on its financial condition or
competitive position, and will not require any material capital expenditures for
plant or equipment modifications which would adversely affect
earnings.
12
Seasonality
Manufacturing
operations in the RV and MH industries historically have been seasonal and are
generally at the highest levels when the climate is
moderate. Accordingly, the Company’s sales and profits are generally
highest in the second and third quarters. However, depressed economic
conditions in both industries distorted the historical trends in
2009. RV unit shipments did not experience their normal seasonal
sales decline in the fourth quarter of 2009 as they generally have in prior
years.
Employees
As of
December 31, 2009, we had 580 employees, 486 of which were engaged directly in
production, warehousing, and delivery operations; 36 in sales; and 58 in office
and administrative activities. There were no manufacturing plants or
distribution centers covered by collective bargaining
agreements. Patrick continuously reviews benefits and other matters
of interest to its employees and considers its relations with its employees to
be good.
Executive Officers of the
Company
The
following table sets forth our executive officers as of February 1,
2010:
|
Name
|
Position
|
|
Todd
M. Cleveland
|
President
and Chief Executive Officer
|
|
Andy
L. Nemeth
|
Executive
Vice President of Finance, Chief Financial Officer, and
Secretary-Treasurer
|
|
Darin
R. Schaeffer
|
Vice
President, Corporate Controller, and Principal Accounting
Officer
|
Todd M. Cleveland
(age 41) was appointed Chief Executive Officer as of February 1,
2009. Mr. Cleveland assumed the position of President and Chief
Operating Officer of the Company in May 2008. Prior to that, Mr.
Cleveland served as Executive Vice President of Operations and Sales and Chief
Operating Officer from August 2007 to May 2008 following the acquisition of
Adorn by Patrick in May 2007. Mr. Cleveland spent 17 years with Adorn
serving as President and Chief Executive Officer since 2004; President and Chief
Operating Officer from 1998 to 2004; Vice President of Operations and Chief
Operating Officer from 1994 to 1998; Sales Manager from 1992 to 1994; and
Purchasing Manager from 1990 to 1992. Mr. Cleveland has over 19 years
of manufactured housing, recreational vehicle, and industrial experience in
various operating capacities.
Andy L. Nemeth
(age
40) was elected Executive Vice President of Finance, Chief Financial Officer,
and Secretary-Treasurer as of May 2004. Prior to that,
Mr. Nemeth was Vice President-Finance, Chief Financial Officer, and
Secretary-Treasurer from 2003 to 2004, and Secretary-Treasurer from 2002 to
2003. Mr. Nemeth was a Division Controller from 1996 to 2002 and
prior to that, he spent five years in public accounting with Coopers &
Lybrand (now PricewaterhouseCoopers). Mr. Nemeth has over 17 years of
manufactured housing, recreational vehicle, and industrial experience in various
financial capacities.
Darin R. Schaeffer
(age 42) was elected Vice President, Corporate Controller, and Principal
Accounting Officer as of March 26, 2008. From September 2007 to March
26, 2008, Mr. Schaeffer served as the Company’s Corporate
Controller. From 2005 to 2007, Mr. Schaeffer was a Corporate
Controller for Utilimaster Corporation. Mr. Schaeffer also served in
a variety of roles, including plant controller, for Robert Bosch Corporation
from 1996 to 2005. Prior to that, Mr. Schaeffer spent seven
years in public accounting, including three years with Coopers & Lybrand
(now PricewaterhouseCoopers).
Website Access to Company
Reports
We make
available free of charge through our website, www.patrickind.com, our Annual
Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K, and all amendments to those reports as soon as reasonably practicable after
such material is electronically filed with or furnished to the Securities and
Exchange Commission (“SEC
”
). The charters of
our Audit, Compensation, and Corporate Governance/Nominations Committees, our
Corporate Governance Guidelines, our Code of Ethics and Business Conduct, and
our Code of Ethics Applicable to Senior Executives are also available on the
“About Us –Corporate Governance” portion of our website. Our
internet
13
website
and the information contained therein or incorporated therein are not intended
to be incorporated into this Annual Report on Form 10-K.
Additionally,
the public may read or copy any materials we file with the SEC at the SEC's
public reference room located at 100 F Street N.E., Washington D.C.
20549. The public may obtain information on the operation of the
public reference room by calling the SEC at 1-800-SEC-0330. The SEC
maintains an Internet site that contains reports, proxy and information
statements, and other information regarding issuers that file electronically
with the SEC at www.sec.gov.
The
Company’s consolidated results of operations, financial position and cash flows
can be adversely affected by various risks related to its
business. These risks include, but are not limited to, the principal
factors listed below and the other matters set forth in this Annual Report on
Form 10-K. All of these risks should be carefully
considered.
Our
results of operations have been, and may continue to be, adversely impacted by a
worldwide macroeconomic downturn.
In 2009,
general worldwide economic conditions continued to experience a downturn due to
the effects of the deterioration in the residential housing market, subprime
lending crisis, general credit market crisis, collateral effects on the finance
and banking industries, increased commodity costs, volatile energy costs,
concerns about inflation, slower economic activity, decreased consumer
confidence, reduced corporate profits and capital spending, adverse business
conditions and liquidity concerns (the “economic
crisis”). These conditions have adversely affected demand in the
three major end-markets we serve (the recreational vehicle, manufactured housing
and industrial markets), resulting in decreased sales of our component products
into these markets and could negatively affect our operations and result in
lower sales, income, and cash flows.
In
addition, it has become more difficult for our customers and us to accurately
forecast and plan future business activities, and ultimately our profitability
has been adversely affected. If our business conditions continue to
deteriorate, we may be forced to close and/or consolidate certain of our
operating facilities, sell assets, and/or reduce our workforce, which may result
in our incurring restructuring charges. We cannot predict the
duration of the economic downturn, the timing or strength of a subsequent
economic recovery or the extent to which the economic downturn will continue to
negatively impact our business, financial condition and results of
operations.
The
current economic downturn in the residential housing market has had an adverse
impact on our operations, and is expected to continue into 2010.
The
residential housing market has experienced overall declines and credit concerns
that are expected to continue into 2010. Approximately 70% of our
industrial revenue is directly or indirectly influenced by conditions in the
residential housing market. The decline in demand for residential
housing and the tightening of consumer credit have lowered demand for our
industrial products and have had an adverse impact on our operations as a
whole. In addition, the impact of the sub-prime mortgage crisis and
housing downturn on consumer confidence, discretionary spending, and general
economic conditions has decreased and may continue to decrease demand for our
products sold to the manufactured housing and recreational vehicle
industries.
We
may incur significant charges or be adversely impacted by the closure of all or
part of a manufacturing or distribution facility.
We
periodically assess the cost structure of our operating facilities to distribute
and/or manufacture and sell our products in the most efficient
manner. Based on our assessments, we may make capital investments to
move, discontinue manufacturing and/or distribution capabilities, sell or close
all or part of a manufacturing and/or distribution facility. In
January 2009, we closed our leased distribution facility in Woodland, California
and consolidated operations into the existing owned Fontana, California
manufacturing facility in order to offset a sizable reduction in sales volumes
that stemmed from the planned closure of one of our major customer’s plants in
the same area. The Fontana facility was subsequently sold in March
2010 and we are currently operating in the same facility
14
under a
lease agreement with the purchaser for the use of approximately one-half of the
square footage previously occupied. We have incurred charges in the
first quarter of 2010 related to downsizing our operations in this facility and
to accommodate the use of this facility by two different parties. In
addition, we closed and sold our manufacturing facility in Ocala, Florida in
late 2009 and consolidated its operations into our Alabama and Georgia
facilities. Our manufacturing and distribution facility in Oregon was
sold in February 2010 and we are currently operating in the same facility under
a license agreement with the purchaser while we explore options for a more
suitable long-term solution. These changes could result in
significant future charges or disruptions in our operations, and we may not
achieve the expected benefits from these changes which could result in an
adverse impact on our operating results, cash flows and financial
condition.
The
financial condition of our customers and suppliers may deteriorate as a result
of the current economic environment and competitive conditions in their
markets.
The
economic crisis may lead to increased levels of restructurings, bankruptcies,
liquidations and other unfavorable events for our customers, suppliers and other
service providers and financial institutions with whom we do
business. Such events could, in turn, negatively affect our business
either through loss of sales or inability to meet our commitments (or inability
to meet them without excess expense) because of loss of suppliers or other
providers. In addition, several of our major customers are undergoing
unprecedented financial distress which may result in such customers undergoing
major restructuring, reorganization or other significant changes. The
occurrence of any such event could have further adverse consequences to our
business including a decrease in demand for our products. If such
customers become insolvent or file for bankruptcy, our ability to recover
accounts receivables from those customers would be adversely affected and any
payments we received in the preference period prior to a bankruptcy filing may
be potentially recoverable by the bankruptcy trustee.
Many of
our customers participate in highly competitive markets, and their financial
condition may deteriorate as a result. A decline in the financial
condition of our customers could hinder our ability to collect amounts owed by
customers. In addition, such a decline could result in lower demand
for our products and services.
We
have a number of large customers, the loss of any of which could have a material
adverse impact on our operating results.
We have a
number of customers which account for a significant percentage of our net
sales. Specifically, two customers in the RV market accounted for a
combined 35%, and another customer in the MH market accounted for 12% of
consolidated net sales in 2009. The loss of any of these large
customers could have a material adverse impact on our operating
results. We do not have long-term agreements with customers and
cannot predict that we will maintain our current relationships with these
customers or that we will continue to supply them at current
levels.
The
manufactured housing and recreational vehicle industries are highly competitive,
and some of our competitors may have greater resources than we do.
We
operate in a highly competitive business environment and our sales could be
negatively impacted by our inability to maintain or increase prices, changes in
geographic or product mix, or the decision of our customers to purchase our
competitors’ products instead of our products. We compete not only
with other suppliers to the manufactured housing and recreational vehicle
producers, but also with suppliers to traditional site-built homebuilders and
suppliers of cabinetry and flooring. Sales could also be affected by
pricing, purchasing, financing, advertising, operational, promotional, or other
decisions made by purchasers of our products. Additionally, we cannot
control the decisions made by suppliers of our distributed and manufactured
products and therefore our ability to maintain our exclusive and non-exclusive
distributor contracts and agreements may be adversely impacted.
As a
result of highly competitive market conditions in the industries in which we
participate, some of our competitors have been forced to seek bankruptcy
protection. These competitors may emerge from bankruptcy protection
with stronger balance sheets and a desire to gain market share by offering below
market pricing, which would have an adverse impact on our financial condition
and results of operations and cash flows.
15
Seasonality
and cyclical economic conditions affect the RV and MH markets the Company
serves.
The RV
and MH markets are cyclical and dependent upon various factors, including the
general level of economic activity, consumer confidence, interest rates, access
to financing, inventory and production levels, and the cost of
fuel. Economic and demographic factors can cause substantial
fluctuations in production, which in turn impact sales and operating
results. Demand for recreational vehicles and manufactured housing
generally declines during the winter season. Our sales levels and
operating results could be negatively impacted by changes in any of these
items.
The
cyclical nature of the domestic housing market has caused our sales and
operating results to fluctuate. These fluctuations may continue in
the future, which could result in operating losses during
downturns.
The
U.S. housing industry is highly cyclical and is influenced by many national
and regional economic and demographic factors, including:
|
·
|
terms
and availability of financing for homebuyers and
retailers;
|
|
·
|
consumer
confidence;
|
|
·
|
interest
rates;
|
|
·
|
population
and employment trends;
|
|
·
|
income
levels;
|
|
·
|
housing
demand; and
|
|
·
|
general
economic conditions, including inflation, deflation and
recessions.
|
The
manufactured housing and recreational vehicle industries and the industrial
markets are affected by the fluctuations in the residential housing
market. As a result of the foregoing factors, our sales and operating
results fluctuate, and we expect that they will continue to fluctuate in the
future. Moreover, cyclical and seasonal downturns in the residential
housing market may cause us to experience operating losses.
Fuel
shortages, or higher prices for fuel, have had, and could continue to have, an
adverse impact on our operations.
The
products produced by the RV industry typically require gasoline or diesel fuel
for their operation, or the use of a vehicle requiring gasoline or diesel fuel
for their operation. There can be no assurance that the supply of
gasoline and diesel fuel will continue uninterrupted or that the price of or tax
on fuel will not significantly increase in the future. Shortages of
gasoline and diesel fuel have had a significant adverse effect on the demand for
recreational vehicles in the past and would be expected to have a material
adverse effect on demand in the future. Rapid significant increases
in fuel prices, as we experienced in recent years, appear to affect the demand
for recreational vehicles when gasoline prices reach unusually high
levels. Such a reduction in overall demand for recreational vehicles
could have a materially adverse impact on our revenues and
profitability. Approximately 44% and 37% of our sales were to the RV
industry for 2009 and for 2008, respectively. In 2010, we expect an
even higher percentage of our total sales to be concentrated in the RV industry
than in 2009 due to forecasted growth in the RV industry and continued softness
in the MH and industrial markets.
Dependence
on Third-Party Suppliers and Manufacturers.
Generally,
our raw materials, supplies and energy requirements are obtained from various
sources and in the quantities desired. While alternative sources are
available, our business is subject to the risk of price increases and periodic
delays in the delivery. Fluctuations in the prices of these
requirements may be driven by the supply/demand relationship for that commodity
or governmental regulation. In addition, if any of our suppliers seek
bankruptcy relief or otherwise cannot continue their business as anticipated,
the availability or price of these requirements could be adversely
affected.
Increased
cost and limited availability of raw materials may have a material adverse
effect on our business and results of operations.
Prices of
certain materials, including gypsum, lauan, particleboard, MDF, and other
commodity products, can be volatile and change dramatically with changes in
supply and demand. Certain products are purchased from overseas and
are dependent upon vessel shipping schedules and port
availability. Further, certain of our commodity product suppliers
sometimes operate at or near capacity, resulting in some products having the
potential of being put on
16
allocation. We
generally have been able to maintain adequate supplies of materials and to pass
higher material costs on to our customers in the form of surcharges and base
price increases where needed. However, it is not certain that future
price increases can be passed on to our customers without affecting demand or
that limited availability of materials will not impact our production
capabilities. The current credit crisis and its impact on the
financial and housing markets may also impact our suppliers and affect the
availability or pricing of materials. Our sales levels and operating
results could be negatively impacted by changes in any of these
items.
We
are subject to governmental and environmental regulations, and failure in our
compliance efforts could result in damages, expenses or liabilities that
individually or in the aggregate would have a material adverse affect on our
financial condition and results of operations.
Our
manufacturing businesses are subject to various governmental and environmental
regulations. Implementation of new regulations or amendments to
existing regulations could significantly increase the cost of the Company’s
products. Certain components of manufactured and modular homes are
subject to regulation by the U.S. Consumer Product Safety
Commission. We currently use materials that we believe comply with
government regulations. We cannot presently determine what, if any,
legislation may be adopted by Congress or state or local governing bodies, or
the effect any such legislation may have on us or the manufactured housing
industry. In addition, failure to comply with present or future
regulations could result in fines or potential civil or criminal
liability. Both scenarios could negatively our results of operations
or financial condition.
The
inability to attract and retain qualified executive officers and key personnel
may adversely affect our operations.
The loss
of any of our executive officers or other key personnel could reduce our ability
to manage our business and strategic plan in the short term and could cause our
sales and operating results to decline.
Our
ability to integrate acquired businesses may adversely affect
operations.
As part
of our business and strategic plan, we look for strategic acquisitions to
provide shareholder value. Any acquisition will require the effective
integration of an existing business and its administrative, financial, sales and
marketing, manufacturing and other functions to maximize
synergies. Acquired businesses involve a number of risks that may
affect our financial performance, including increased leverage, diversion of
management resources, assumption of liabilities of the acquired businesses, and
possible corporate culture conflicts. If we are unable to
successfully integrate these acquisitions, we may not realize the benefits
identified in our due diligence process, and our financial results may be
negatively impacted. Additionally, significant unexpected liabilities
could arise from these acquisitions.
Increased
levels of indebtedness may harm our financial condition and results of
operations.
As of
December 31, 2009, we had approximately $42.3 million of total debt of which
$41.8 million was under our senior secured credit facility (the “Credit
Facility”) and $0.5 million was related to our economic development revenue
bonds. Our indebtedness, which was primarily the result of the Adorn
acquisition in 2007, as well as a greater need for working capital, may harm our
financial condition and negatively impact our results of
operations. The level of indebtedness could have consequences on our
future operations, including (i) making it more difficult for us to meet our
payments on outstanding debt; (ii) an event of default, if we fail to comply
with the financial and other restrictive covenants contained in the credit
agreement governing the Credit Facility (the “Credit Agreement”), which could
result in all of our debt becoming immediately due and payable; (iii) reducing
the availability of our cash flow to fund working capital, capital expenditures,
acquisitions and other general corporate purposes, and limiting our ability to
obtain additional financing for these purposes; (iv) limiting our flexibility in
planning for, or reacting to, and increasing our vulnerability to, changes in
our business and the industry in which we operate; (v) placing us at a
competitive disadvantage compared to our competitors that have less debt or are
less leveraged; and (vi) creating concerns about our credit quality which could
result in the loss of supplier contracts and/or customers. While we
will be working with our current lenders or otherwise during 2010 to execute a
new long-term Credit Facility prior to its scheduled expiration on January 3,
2011, there can be no assurance that we will be able to refinance any or all of
this indebtedness.
17
Our
Credit Facility contains various financial performance and other covenants with
which we must remain in compliance. If we do not remain in compliance
with these covenants, our senior secured credit facility could be terminated and
the amounts outstanding thereunder could become immediately due and
payable.
We have a
significant amount of debt outstanding that contains financial and non-financial
covenants with which we must comply that place restrictions on our subsidiaries
and us. Without improvements from the conditions in the current
economic downturn in 2010, there can be no assurance that we will maintain
compliance during 2010 with the financial covenants as modified by the fourth
amendment to the Credit Agreement in December 2009 (the “Fourth
Amendment”). These covenants are measured on a quarterly basis and
require that we attain minimum levels of Consolidated EBITDA as defined by our
Credit Agreement. If we fail to comply with our covenants under the
Fourth Amendment, the lenders could cause our debt to become due and payable
prior to maturity or it could result in our
having to
refinance the related indebtedness under unfavorable terms. If our
debt were accelerated, our assets might not be sufficient to repay our debt in
full. If current unfavorable credit market conditions were to persist
throughout 2010, there can be no assurance that we will be able to refinance any
or all of this indebtedness.
For
additional details and discussion concerning these financial covenants see
“Liquidity and Capital Resources” in Item 7 of this Report and Note 12 to
the Consolidated Financial Statements.
Industry
conditions and our operating results have limited our sources of capital in the
past. If we are unable to locate suitable sources of capital when
needed, we may be unable to maintain or expand our business.
We depend
on our cash balances, our cash flows from operations, our Credit Agreement, and
potentially borrowing against our corporate-owned life insurance policies to
finance our operating requirements, capital expenditures and other
needs. If the general economic conditions that prevailed during 2009
and the first quarter of 2010 continue or worsen, production of RVs and
manufactured homes will likely decline, resulting in reduced demand for our
products. A further decline in our operating results could negatively
impact our liquidity. In addition, the downturn in the MH and RV
industries, combined with our operating results and other changes, has limited
our sources of financing in the past. If our cash balances, cash
flows from operations, and availability under our Credit Agreement are
insufficient to finance our operations and alternative capital is not available,
we may not be able to expand our business and make acquisitions, or we may need
to curtail or limit our existing operations.
We have
letters of credit representing collateral for our casualty insurance programs
and for general operating purposes. The letters of credit are issued
under our Credit Agreement. For additional detail and information
concerning the amounts of our letters of credit, see Note 12 to the
Consolidated Financial Statements. The inability to retain our
current letters of credit, to obtain alternative letter of credit sources, or to
retain our current Credit Agreement to support these programs could require us
to post cash collateral, reduce the amount of cash available for our operations
or cause us to curtail or limit existing operations.
Increased
levels of inventory may adversely affect our profitability.
Our
customers generally do not maintain long-term supply contracts and, therefore,
we must bear the risk of advanced estimation of customer orders. We
maintain an inventory to support these customers’ needs. Changes in
demand, market conditions and/or product specifications could result in material
obsolescence and a lack of alternative markets for certain of our customer
specific products and could negatively impact operating results.
We
may be subject to additional charges for impairment of assets, including
goodwill, other long-lived assets and deferred tax assets, due to potential
declines in the fair value of those assets or a decline in expected
profitability of the Company or individual reporting units of the
Company.
A portion
of our total assets as of December 31, 2009 was comprised of goodwill,
amortizable intangible assets, and property, plant and
equipment. Under generally accepted accounting principles, each of
these assets is subject to periodic review and testing to determine whether the
asset is recoverable or realizable. The events or changes that could
require us to test our goodwill and intangible assets for impairment include a
reduction in our stock price and market capitalization and changes in our
estimated future cash flows, as well as changes in rates of growth in our
industry or in any of our reporting units.
18
In the
future, if actual sales demand or market conditions change from those projected
by management, additional asset write-downs may be
required. Significant impairment charges, although not always
affecting current cash flow, could have a material effect on our operating
results and financial position.
A
variety of factors could influence fluctuations in the market price for our
common stock.
The
market price of our common stock could fluctuate in the future in response to a
number of factors, including those discussed below. The market price
of our common stock has in the past fluctuated and is likely to continue to
fluctuate. Some of the factors that may cause the price of our common
stock to fluctuate include:
|
·
|
variations
in our and our competitors’ operating
results;
|
|
·
|
historically
low trading volume;
|
|
·
|
high
concentration of shares held by institutional investors and in particular
our majority shareholder, Tontine Capital Partners, L.P. and affiliates
(collectively, “Tontine Capital”);
|
|
·
|
announcements
by us or our competitors of significant contracts, acquisitions, strategic
partnerships, joint ventures or capital
commitments;
|
|
·
|
the
gain or loss of significant
customers;
|
|
·
|
additions
or departure of key personnel;
|
|
·
|
events
affecting other companies that the market deems comparable to
us;
|
|
·
|
general
conditions in industries in which we
operate;
|
|
·
|
general
conditions in the United States and
abroad;
|
|
·
|
the
presence or absence of short selling of our common
stock;
|
|
·
|
future
sales of our common stock or debt
securities;
|
|
·
|
announcements
by us or our competitors of technological improvements or new products;
and
|
|
·
|
the
disclosure by Tontine Capital in November 2008 that it will begin to
explore alternatives for the disposition of its equity interests in the
Company.
|
Fluctuations
in the stock market may have an adverse effect upon the price of our common
stock.
The stock
markets in general have experienced substantial price and trading
fluctuations. These fluctuations have resulted in volatility in the
market prices of securities that often has been unrelated or disproportionate to
changes in operating performance. These broad market fluctuations may
adversely affect the trading price of our common stock.
Holders of our
common stock are subject to the risk of dilution of their investment as the
result of the issuance to our lenders of warrants to purchase common
stock.
As part
of the consideration for amending our Credit Agreement on December 11, 2008, we
entered into a Warrant Agreement under which we issued to our lenders warrants
to purchase an aggregate of 474,049 shares of common stock at an exercise price
per share of $1 (the “Warrants”). The Warrants are immediately
exercisable, subject to anti-dilution provisions and expire on December 11,
2018. Pursuant to the anti-dilution provisions, the number of shares
of common stock issuable upon exercise of the Warrants was increased to an
aggregate of 483,742 shares and the exercise price was adjusted to $0.98 per
share during 2009. The exercise of the Warrants would result in
dilution to the holders of our common stock. The renegotiation and
extension of our current Credit Facility that expires on January 3, 2011, or any
replacement credit facility, could involve the issuance of additional warrants
or other equity-based arrangements.
A
majority of our common stock is held by Tontine Capital, which has the ability
to control all matters requiring shareholder approval and whose interests may
not be aligned with the interests of our other shareholders. In
addition, the ownership of a significant portion of our common stock is
concentrated in the hands of a few holders.
19
As of
March 1, 2010, Tontine Capital owned 5,174,963 shares of our common stock or
approximately 56.4% of our total common stock outstanding. As a
result of its majority interest, Tontine Capital has the ability to control all
matters requiring shareholder approval, including the election of our directors,
the adoption of amendments to our Articles of Incorporation, the approval of
mergers and sales of all or substantially all of our assets, decisions affecting
our capital structure and other significant corporate
transactions. In addition to its majority interest, pursuant to a
Securities Purchase Agreement with Tontine Capital, dated April 10, 2007, if
Tontine Capital (i) holds between 7.5% and 14.9% of our common stock then
outstanding, Tontine Capital has the right to appoint one nominee to our board;
or (ii) holds at least 15% of our common stock then outstanding, Tontine Capital
has the right to appoint two nominees to our board. Tontine Capital’s
rights related to the appointment of directors were affirmed in a subsequent
Securities Purchase Agreement with Tontine Capital, dated March 10,
2008. On July 21, 2008, a nominee
of
Tontine Capital was appointed to the board. As of March 1, 2010,
Tontine Capital has one director on the Company’s board of directors and has not
exercised its right to nominate a second director to the board.
The
interests of Tontine Capital may not in all cases be aligned with the interests
of our other shareholders. The influence of Tontine Capital may also
have the effect of deterring hostile takeovers, delaying or preventing changes
in control or changes in management, or limiting the ability of our shareholders
to approve transactions that they may deem to be in their best
interests. In addition, Tontine Capital and its affiliates are in the
business of investing in companies and may, from time to time, invest in
companies that compete directly or indirectly with us. Tontine
Capital and its affiliates may also pursue acquisition opportunities that may be
complementary to our business and, as a result, those acquisition opportunities
may not be available to us.
We are
not able to predict whether or when Tontine Capital or the other institutions
will sell or otherwise dispose of substantial amounts of our common
stock. Sales or other dispositions of our common stock by these
institutions could adversely affect prevailing market prices for our common
stock.
In
addition, we were aware of four other institutions that collectively own
approximately 18.3% of our outstanding common stock as of December 31,
2009.
Tontine
Capital indicated in a filing with the SEC that it would begin to explore
alternatives for the disposition of its equity interests in the
Company. This filing, and any future dispositions of stock by Tontine
Capital, could adversely affect the market price of our common
stock.
On
November 10, 2008, Tontine Capital filed with the SEC an amendment to its
previously filed Schedule 13D with respect to its ownership of common stock of
the Company. Tontine Capital stated that it would begin to explore
alternatives for the disposition of its equity interests in the Company, which
alternatives may include: (a) dispositions of our common stock through open
market sales, underwritten offerings and/or privately negotiated sales; (b) a
sale of the Company; or (c) distributions by Tontine Capital of its shares to
its investors. The public disclosure of such possible disposition may
adversely affect the market price for our common stock due to the large number
of shares involved. In addition, we are not able to predict whether
or when Tontine Capital will dispose of its stock. Any such future
disposition of stock by Tontine Capital may also adversely affect the market
price of our common stock.
In March 2010, Tontine Capital disclosed that it had reallocated the ownership of certain shares of common stock of the Company owned by it to a new investment fund, Tontine Capital Overseas Master Fund II, L.P. (“TCOMF2”). The aggregate common stock ownership of Tontine Capital following the reallocation did not change. In addition, Tontine Capital disclosed that TCOMF2 may hold and/or dispose of such securities or may purchase additional securities of the Company, at any time and from time to time in the open market or otherwise.
Certain
provisions in our Articles of Incorporation and Amended and Restated By-laws may
delay, defer or prevent a change in control that our shareholders each might
consider to be in their best interest.
Our
Articles of Incorporation and Amended and Restated By-laws contain provisions
that are intended to deter coercive takeover practices and inadequate takeover
bids by making them unacceptably expensive to the raider, and to encourage
prospective acquirers to negotiate with our board of directors rather than to
attempt a hostile takeover.
20
We have
in place a Rights Agreement which permits under certain circumstances each
holder of common stock, other than potential acquirers, to purchase one
one-hundredth of a share of a newly created series of our preferred stock at a
purchase price of $30 or to acquire additional shares of our common stock at 50%
of the current market price. The rights are not exercisable or
transferable until a person or group acquires 20% or more of our outstanding
common stock, except with respect to Tontine Capital and its affiliates and
associates, which are exempt from the provisions of the Rights Agreement
pursuant to an amendment signed on March 12, 2008. The effects of the
Rights Agreement would be to discourage a stockholder from attempting to take
over our company without negotiating with our Board of Directors.
Insurance
Coverages and Terms and Conditions.
We
negotiate our insurance contracts annually for property, casualty, workers
compensation, general liability, health insurance, and directors’ and officers’
liability coverage. Due to conditions within these insurance markets
and other factors beyond our control, future coverage limits, terms and
conditions and the amount of the related premiums could have a negative impact
on our operating results. While we continually measure the
risk/reward of policy limits and coverage, the lack of coverage in certain
circumstances could
result in
potential uninsured losses.
None.
As of
December 31, 2009, the Company owned approximately 1.1 million square feet of
manufacturing and distribution facilities and leased an additional 565,200
square feet as listed below.
|
Location
|
Use
|
Area
Sq. Ft.
|
Ownership
or Lease Arrangement
|
|
Elkhart,
IN
|
Distribution
(D)
|
107,400
|
Owned
|
|
Elkhart,
IN
|
Manufacturing
(P)
|
181,800
|
Owned
|
|
Elkhart,
IN
|
Administrative
Offices
|
35,000
|
Owned
|
|
Elkhart,
IN
|
Manufacturing
(O)
|
211,300
|
Leased
to 2015
|
|
Elkhart,
IN
|
Manufacturing
(P)
|
198,000
|
Leased
to 2018
|
|
Elkhart,
IN
|
Design
Center
|
4,000
|
Leased
to 2010
|
|
Decatur,
AL
|
Mfg.
& Dist. (P) (D)
|
94,000
|
Owned
|
|
Valdosta,
GA
|
Distribution
(D)
|
30,900
|
Owned
|
|
New
London, NC
|
Mfg.
& Dist. (P) (D) (1)
|
163,000
|
Owned
|
|
Halstead,
KS
|
Distribution
(D)
|
36,000
|
Owned
|
|
Waco,
TX
|
Mfg.
& Dist. (P) (D)
|
105,600
|
Owned
|
|
Mt.
Joy, PA
|
Mfg.
& Dist. (P) (D)
|
86,500
|
Owned
|
|
Fontana,
CA
|
Mfg.
& Dist. (P) (D) (1)
|
110,000
|
Owned
|
|
Phoenix,
AZ
|
Manufacturing
(P)
|
44,500
|
Leased
to 2010
|
|
Bensenville,
IL
|
Manufacturing
(O)
|
54,400
|
Leased
to 2013
|
|
Madisonville,
TN
|
Mfg.
& Dist. (P)
|
53,000
|
Leased
to 2011
|
|
Woodburn,
OR
|
Mfg.
& Dist. (P) (D) (1)
|
153,000
|
Owned
|
(P) Primary
Manufactured Products
(D) Distribution
(O) Other
Component Manufactured Products
(1) Represents
owned buildings that were for sale by the Company as of December 31,
2009.
Pursuant
to the terms of the Company’s credit agreement, all of its owned facilities are
subject to a mortgage and security interest.
21
Buildings
for Sale
In the
fourth quarter of 2008, the Company reclassified approximately $1.6 million of
carrying value for the Fontana, California property to assets held for
sale. In the fourth quarter of 2009, the Company reclassified
approximately $3.2 million of carrying value for the Woodburn, Oregon property
to assets held for sale. Both of these properties were included in
assets held for sale as of December 31, 2009. The Oregon and
California properties were sold in February 2010 and March 2010,
respectively. The Company is currently operating in the same facility
in Oregon under a license agreement with the purchaser while it explores options
for a more suitable long-term solution, and it is operating in the same facility
in California under a lease agreement with the purchaser for the use of
approximately one-half of the square footage previously occupied.
In
addition, the Company entered into a listing agreement in March 2009 to sell its
manufacturing and distribution facility in New London, North
Carolina. Since it is anticipated that the sale of this facility will
not be completed within the next twelve months due to unfavorable real estate
market conditions in this region, the property’s carrying value was not included
in assets held for sale.
Lease
Expirations
We
believe that the facilities we occupy as of December 31, 2009, excluding those
designated for sale, are adequate for the purposes for which they are currently
being used and are well maintained. We may, as part of our strategic
operating plan, further consolidate and/or close certain owned facilities and,
may not renew leases on property with near-term lease
expirations. Use of our manufacturing facilities may vary with
seasonal, economic and other business conditions.
As of
December 31, 2009, we owned or leased 25 trucks, 31 tractors, 49 trailers, 106
forklifts, and 3 automobiles. All owned and leased facilities and
equipment are in good condition and are well maintained.
We are
subject to claims and suits in the ordinary course of business. In
management’s opinion, currently pending legal proceedings and claims against the
Company will not, individually or in the aggregate, have a material adverse
effect on our financial condition, results of operations, or cash
flows.
|
|
|
|
ITEM
5.
|
MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER
PURCHASES OF EQUITY SECURITIES
|
Market
Information
Our
common stock is listed on The NASDAQ Global Stock Market
SM
under the symbol PATK. The high and low trade prices per share of the
Company’s common stock as reported on NASDAQ for each quarterly period during
2009 and 2008 were as follows:
|
1st Quarter
|
2nd Quarter
|
3rd Quarter
|
4th Quarter
|
|
|
2009
|
$ 0.80
- $ 0.01
|
$ 1.74
- $ 0.34
|
$ 5.00
- $ 1.05
|
$ 3.95
- $ 1.70
|
|
2008
|
$ 9.87
- $ 6.77
|
$ 8.17
- $ 6.25
|
$ 9.03
- $ 6.05
|
$ 5.99
- $ 0.25
|
The
quotations represent prices between dealers, do not include retail mark-ups,
mark-downs, or commissions, and may not necessarily represent actual
transactions.
Holders
of Common Stock
As of
March 12, 2010, we had approximately 400 shareholders of record and
approximately 1,400 beneficial holders of our common stock.
22
Dividends
The Board
of Directors suspended the quarterly dividend in the second quarter of 2003 due
to industry conditions and has not paid a dividend since that
time. Any future determination to pay cash dividends will be made by
the Board of Directors in light of the Company’s earnings, financial position,
capital requirements, restrictions under the Company’s credit agreement, and
such other factors as the Board of Directors deems relevant.
Purchases
of Equity Securities by the Issuer or Affiliated Purchasers
During
the fourth quarter of 2009, neither the Company, nor any affiliated purchaser,
repurchased any of the Company’s common stock.
Not applicable
.
|
ITEM
7.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
This
Management’s Discussion and Analysis of Financial Condition and Results of
Operations (“MD&A”) should be read in conjunction with the Company’s
Consolidated Financial Statements and Notes thereto included in Item 8 of this
Report. In addition, this MD&A contains certain statements
relating to future results which are forward-looking statements as that term is
defined in the Private Securities Litigation Reform Act of 1995. See
“Information Concerning Forward-Looking Statements” on page 3 of this
Report.
This
MD&A is divided into seven major sections. The outline for our
MD&A is as follows:
|
|
EXECUTIVE
SUMMARY
|
|
|
Company
Overview and Business Segments
|
|
|
Overview
of Markets and Related Industry
Performance
|
|
|
Consolidations,
Sales and Divestitures
|
|
|
Summary
of 2009 Financial Results
|
|
|
2009
Challenges and Initiatives
|
|
|
Fiscal
Year 2010 Outlook
|
|
|
KEY
RECENT EVENTS
|
|
Credit Agreement Amendments
|
|
|
|
Shareholder
Approval of 2009 Omnibus Incentive
Plan
|
|
|
Acquisition
|
|
Sales of Operating Facilities
|
|
|
|
CONSOLIDATED
OPERATING RESULTS
|
|
|
General
|
|
|
Year
Ended December 31, 2009 Compared to
2008
|
|
|
Year
Ended December 31, 2008 Compared to
2007
|
|
|
BUSINESS
SEGMENTS
|
|
|
General
|
|
|
Year
Ended December 31, 2009 Compared to
2008
|
|
|
Year
Ended December 31, 2008 Compared to
2007
|
|
|
LIQUIDITY
AND CAPITAL RESOURCES
|
|
|
Cash
Flows
|
|
|
Capital
Resources
|
|
|
Summary
of Liquidity and Capital Resources
|
23
|
|
Contractual
Obligations
|
|
|
Off-Balance
Sheet Arrangements
|
|
|
CRITICAL
ACCOUNTING POLICIES
|
|
|
OTHER
|
|
|
Sale
of Property
|
|
|
Purchase
of Property
|
|
|
Inflation
|
EXECUTIVE
SUMMARY
Company
Overview and Business Segments
Patrick
Industries is a major manufacturer of component products and distributor of
building products serving the recreational vehicle (“RV”), manufactured housing
(“MH”), kitchen cabinet, household furniture, fixtures and commercial
furnishings, marine, and other industrial markets and operates coast-to-coast
through locations in 12 states. Patrick's major manufactured products
include decorative vinyl and paper panels, wrapped moldings, interior passage
doors, cabinet doors and components, slotwall and slotwall components, and
countertops. The Company also distributes drywall and drywall
finishing products, electronics, adhesives, cement siding, interior passage
doors, roofing products, laminate flooring, and other related
products. The Company has three reportable business
segments: Primary Manufactured Products, Distribution and Other
Component Manufactured Products, which contributed approximately 69%, 21% and
10%, respectively, to 2009 net sales.
Overview
of Markets and Related Industry Performance
Throughout
the majority of 2009, recreational vehicle (“RV”) and manufactured housing
(“MH”) retailers and manufacturers continued to aggressively manage their
inventory levels in response to restricted credit conditions and weakening
economic trends, which in turn reduced demand and negatively impacted the sales
of the Company’s products. While uncertainty surrounding the future
course of the global economy has helped fuel the decline in RV and MH sales
compared to prior periods, production levels in the RV industry were stronger
than expected based on a higher demand for RV’s by retail dealers in the latter
half of 2009. In the MH sector, monthly shipments have been flat with
nominal seasonal improvement and continue to be well below historical levels,
especially given the current unstable condition in the residential housing
market. The continuation of the deterioration in macroeconomic
conditions in all sectors of the economy in 2009, including restricted
availability of capital, high unemployment, negative job growth, low consumer
confidence levels, and a decline in discretionary spending all contributed to
the negative impact on all three of the major markets the Company
serves.
According
to industry sources, the RV industry, which represents approximately 44% of the
Company’s 2009 sales, experienced unit shipment declines in the first three
quarters of 2009 compared to the prior year. The RV industry began to
show signs of recovery in the fourth quarter of 2009 as unit shipments increased
approximately 76% over the fourth quarter of 2008. This quarter over
quarter increase in unit shipment levels represented the first quarter over
quarter increase since 2006. For full year 2009, RV unit shipment
levels experienced unit shipment declines of approximately 30% to finish at
165,700 units. The 2009 year marked only the second year in the last
eight years that shipment levels fell below the 300,000-unit level and
represented the third decline in the last four years. While the full
restoration of RV sales to prior levels is projected to be slow, many of our
existing customers have indicated that they envision increased production in
2010 compared to 2009.
Long-term
demographic trends favor RV industry growth fueled by the anticipated positive
impact that aging baby boomers are estimated to have on the industry once the
industry recovers from the current economic crisis. In addition,
federal economic credit and stimulus packages, which include provisions to
stimulate RV purchases and provide favorable tax treatment for new RV purchases,
may help promote sales and aid in the RV industry’s economic
recovery. Demographic trends point to positive conditions for this
particular market sector in the long-term. Dealer demand improved in
the second, third and fourth quarters of 2009 and certain new and existing
manufacturers have increased capacity and added to their
workforce. In anticipation of continued strengthening short-term
demand, the Recreational Vehicle Industry Association (“RVIA”) is predicting a
30% increase in full year 2010 unit shipments
24
compared
to the full year 2009 level. Based on this estimated increase in unit
shipments in the RV market compared to the softness in the other primary market
sectors in which Patrick operates, the Company expects its RV market sales
concentration to increase in 2010.
MH
wholesale unit shipments continued to show weakness and reflected 15 consecutive
quarters of declining shipments compared to prior periods. According
to industry sources, the MH industry, which represents approximately 37% of the
Company’s revenue base for 2009, continued to experience shipment declines of
approximately 39% versus the prior year and finished the year with shipments at
approximately 49,800 units, levels not seen since 1961. Growth in the
MH industry continues to be negatively impacted by restricted credit conditions,
large inventories of traditional site built homes, and a significant number of
foreclosed homes that are available. Factors that may favorably
impact production levels in this industry include credit quality standards in
the residential housing market, improved job growth, favorable changes in
financing laws, new tax credits for new home buyers and other government
incentives, and rising interest rates that make traditional site built homes
relatively more expensive to finance. The Company currently estimates
MH unit shipments for full year 2010 to decline approximately 2% compared to
full year 2009 levels.
The weak
conditions in the MH industry dramatically impacted the Company’s Distribution
Segment, which saw sales decline from the prior year by approximately 39% as
approximately 72% of the Company’s sales in this segment are associated with the
MH Industry. Additionally, pricing on gypsum related commodity
products that the Company sells into the MH industry rose approximately 10%
year- over-year on manufactured products and approximately 6% on distribution
products.
The
industrial and other markets represent approximately 19% of the Company’s
revenue base for 2009. The Company estimates that approximately 70%
of our revenue base in these industries is linked to the residential housing
market which continued to be impacted by depressed conditions as new housing
starts for 2009 were down approximately 39% from the comparable period in 2008
(as reported by the U.S. Department of Commerce). There is a
direct correlation between the demand for our products in this market and new
residential housing construction. In addition, the renewal of the
first-time homebuyer’s credit and reductions in unemployment could build
additional momentum in this market. The National Association of
Homebuilders (as of February 26, 2010) forecasted a 16% increase in total
housing starts and a 17% increase in existing single-family home sales in 2010
compared to 2009. The Company expects the predicted growth in new
construction and existing home sales to positively influence its presence in
these markets during the second half of 2010. In the long-term,
residential expenditure growth will be based on job growth, affordable interest
rates, and lingering government incentives to stimulate housing demand and
reduce surplus inventory due to foreclosures.
In
addition, higher energy costs continue to affect the costs of raw
materials. The Company continues to explore alternative sources of
raw materials and components, both domestically and from
overseas. Recently there have been concerns about the allegedly
defective drywall manufactured in China and sold in the U.S. We do
not believe that we have had any exposure to such products because we purchase
our drywall materials from domestic suppliers that have certified to us that
their products were not manufactured in China.
Consolidations,
Sales and Divestitures
We
completed the divestitures of certain non-core businesses in 2009, including
American Hardwoods, Inc. (“American Hardwoods”) and our aluminum extrusion
operation. Results relating to these operations were reclassified to
discontinued operations in the consolidated financial statements for all periods
presented. The total pretax gain recognized on the sales of these
operations was approximately $0.7 million in 2009. See Note 4 to the
Consolidated Financial Statements for further details.
Certain
assets and the business of American Hardwoods were sold in January 2009 for cash
consideration of $2.0 million. Results relating to this operation
were previously reported in the Distribution segment. The building
that housed the operation was subsequently sold in June 2009 for $2.5
million. Proceeds from the sale of the building were used to pay down
approximately $2.5 million in long-term debt.
25
In July
2009, the Company completed the sale of certain assets of its aluminum extrusion
operation. Previously, the financial results of this operation had
comprised the entire Engineered Solutions segment. Net cash proceeds
of approximately $7.4 million were used to pay down $4.4 million of long-term
debt and reduce borrowings under the Company’s revolving line of credit by $3.0
million.
Certain
operating facilities were closed or consolidated during 2009 to improve
operating efficiencies in the plants through increased capacity utilization and
to continue the Company’s efforts to reduce its leverage position.
In
December 2009, the Company sold its operating facility located in Ocala,
Florida. Approximately $1.5 million of the net proceeds from the sale
were used to pay down principal on the Company’s term loan. In
addition, a pretax gain on the sale of approximately $1.2 million was recognized
in the fourth quarter of 2009.
Through
March 29, 2010, the Company’s owned facilities in Woodburn, Oregon and
Fontana, California were sold with approximately $8.3 million of the net
proceeds from the sales used to pay down principal on the Company’s term
loan. In addition, the Company anticipates recording a pretax gain on
the sales of approximately $2.8 million in its first quarter 2010 operating
results. See Note 20 to the Consolidated Financial Statements for
further details.
Summary
of 2009 Financial Results
Below is
a summary of our 2009 financial results. Additional detailed
discussions are provided elsewhere in this MD&A and in the Notes to the
Consolidated Financial Statements.
Continuing
operations:
·
Net
sales declined $112.7 million or 34.6% in 2009 to $212.5 million, compared to
$325.2 million in 2008. Net sales were negatively impacted by the
credit crisis and overall economic uncertainty, extremely restricted credit
conditions, and low consumer confidence resulting in reductions in end market
demand, particularly during the first three quarters of the year in the RV
industry and the full year in the MH industry and residential housing market,
and reductions in RV and MH retailer and manufacturer inventory
levels.
·
Gross
profit was $22.9 million or 10.8% of net sales in 2009, compared with gross
profit of $27.2 million or 8.4% of net sales in 2008. The increase in
gross profit as a percentage of net sales in 2009 is primarily driven by several
charges that impacted 2008 results including $4.5 million for the write-down and
disposal of slow moving inventory, $3.5 million related to fixed asset
impairments, and $0.8 million of restructuring charges related to the Adorn
Holdings, Inc. (“Adorn”) acquisition.
·
Operating
income was $1.3 million in 2009, compared to an operating loss of $70.2 million
in 2008. Operating income in 2009 was positively impacted by a $21.0
million reduction in warehouse and delivery and SG&A expenses compared to
the prior year and a $1.2 million gain on the sale of fixed
assets. The operating loss in 2008 included non-cash impairment
charges and inventory write-downs of approximately $64.7 million, a $1.9 million
charge to increase the allowance for doubtful accounts, restructuring and other
acquisition and financing related costs of approximately $1.7 million,
acquisition-related amortization of $1.7 million, and partially offset by a $4.6
million gain on the sale of fixed assets.
·
The
loss from continuing operations was approximately
$5.4 million or $0.59
per diluted share in 2009, compared to a net loss of $66.7 million or $8.32 per
diluted share for 2008. The major factors that influenced the net
loss for
both
periods
are
described above.
Discontinued
Operations:
Discontinued
operations includes the operating results, as well as the net gain or loss upon
sale, of American Hardwoods (January 2009) and the aluminum extrusion operation
(July 2009). After-tax income from discontinued operations in 2009
was $0.9 million or $0.10 per diluted share which was comprised of $0.8 million
of income from operations related to the aluminum extrusion operation, and a
$0.7 million net gain related to the completion of the two divestitures, offset
by income taxes of $0.6 million. For 2008, the after-tax loss from
discontinued operations was $4.9 million or $0.61 diluted per diluted share
which was comprised of a $1.0 million loss on operations and $3.9
26
million
of estimated losses on the sale of the operations including the
write-down to fair value of certain assets pertaining to the two
operations. See Note 4 to the Consolidated Financial Statements for
further details.
2009
Challenges and Initiatives
In 2009,
our overarching goal was to keep the Company intensely focused on its strategic
operating plan, which included an emphasis on earnings before interest, taxes,
depreciation, and amortization (“EBITDA”), cash flow, debt reduction, improved
inventory turns, and focused market share growth despite declining
revenue.
In fiscal
year 2009, we proactively explored, initiated and completed a number of
necessary cost reduction and efficiency improvement initiatives designed to
reduce our leverage position, keep operating costs aligned with our revenue
base, and keep our overhead structure at a level consistent with our operating
needs given current economic conditions. Some of these initiatives
are as follows:
|
·
|
Completed
the sale of American Hardwoods and the aluminum extrusion
operation
|
|
·
|
Closed/consolidated
facilities to improve operating efficiencies in our plants through
increased capacity utilization;
|
|
·
|
Managed
inventory costs by reducing supplier lead times and minimum order
requirements, and by increasing inventory
turns;
|
|
·
|
Further
reduced workforce and production capacities to accommodate anticipated
customer demand and maintain efficiencies;
and
|
|
·
|
Managing
our delivery costs through the reduction in our fleet size and
consolidating our delivery loads.
|
Further,
the Company’s capital utilization and preservation actions during 2009
included:
|
·
|
Amended
our senior secured credit agreement in April 2009 and in December 2009 to
better match our operating, financing and working capital needs for 2009
and through the end of 2010. The amendments to the Company’s
Credit Agreement (as defined) amended and/or added certain definitions,
terms and reporting requirements. See Note 12 to the
Consolidated Financial Statements for further
details.
|
|
·
|
Paid
down approximately $14.5 million of principal on long-term debt, of which
approximately $8.4 million was funded through a portion of the proceeds
from the sale of the aluminum extrusion operation and from the sales of
the American Hardwoods and Florida operating facilities. From
May 2007 through December 31, 2009, we paid down approximately $60.6
million in debt. In addition, during 2009, we reduced
borrowings under our revolving line of credit by $4.7
million.
|
In
addition, we eliminated certain product lines not fitting within the parameters
of our working capital targets and enhanced other product and service offerings
through:
|
●
|
new
product development and expansion into new product lines including the
establishment of a new electronics distribution
division; and
|
|
●
|
the
acquisition of a cabinet door business in January
2010.
|
Fiscal
Year 2010 Outlook
Although
RV market conditions have improved in the first quarter of 2010, we anticipate
that the residual effects of the recession and low consumer confidence will
potentially continue into 2010 as consumers remain cautious when deciding
whether or not to purchase discretionary items such as RVs. While the
full restoration of RV sales to prior levels is projected to be slow and uneven,
we anticipate an increase in RV unit shipment levels in 2010 based upon
increased production levels by many of our existing customers in the latter half
of 2009 and the current positive outlook for this industry as forecasted by
the RVIA. In addition, we anticipate a decline in production
levels in the MH industry for at least the first half of 2010 that will continue
to be well below historical sales levels. New housing starts are
estimated to improve slightly year-over-year consistent with slowly improving
overall economic conditions.
Based
upon the wage and salary reductions taken by our team members, reductions in
fixed and variable overhead expense levels, available capacity, and production
and cost efficiencies that we have gained since our acquisition of Adorn in May
2007, we believe we are well positioned to increase revenues in all of the
markets that we serve upon
27
improvement
in the overall economic environment. As we navigate through 2010 in
anticipation of improving market conditions in the RV industry, we will continue
to review our operations on a regular basis, balance appropriate risks and
opportunities, and maximize efficiencies to support the Company’s long-term
strategic growth goals. The management team remains focused on
keeping costs aligned with revenues and will continue to size the operating
platform according to the revenue base. Key focus areas for 2010
include EBITDA, cash flow, liquidity maximization, and debt
reduction. Additional key focus areas include:
|
·
|
additional
market share penetration;
|
|
·
|
sales
into commercial/institutional markets to diversify revenue
base;
|
|
·
|
further
improvement of operating efficiencies in all manufacturing operations and
corporate functions;
|
|
·
|
acquisition
of businesses/product lines that meet established
criteria;
|
|
·
|
aggressive
management of inventory quantities and pricing, and the addition of select
key commodity suppliers; and
|
|
·
|
ongoing
development of existing product lines and the addition of new product
lines.
|
In
conjunction with our strategic plan, we will continue to make targeted capital
investments to support new business and leverage our operating platform, and
work to more fully integrate sales efforts to broaden customer relationships and
meet customer demands. In 2009, capital expenditures were
approximately $0.3 million based on our capital needs and cash management
priorities. The acquisition of Adorn and the related consolidation
plan allowed us to take advantage of excess, redundant equipment, and therefore,
reduced our need for significant capital expenditures in the
short-term. Additionally, we have continued to perform necessary and
regular preventative maintenance on our equipment in order to ensure that it is
working at an optimal efficiency level. The capital plan for full
year 2010 includes estimated expenditures of up to $1.0 million, and such
expenditures are limited to $2.25 million for any fiscal year per our amended
Credit Agreement.
KEY RECENT
EVENTS
Credit
Agreement Amendments
At March
1, 2009 (the Company’s February fiscal month end), we were in violation of the
Consolidated EBITDA financial covenant under the terms of the Credit
Agreement. On April 14, 2009, the Company entered into a Third
Amendment to the Company’s Credit Agreement, (the “Third Amendment”) pursuant to
which, among other things, the lenders waived any actual or potential Event of
Default (as defined in the Credit Agreement) resulting from our failure to
comply with the Consolidated EBITDA covenants for the fiscal months ended March
1, 2009 and March 29, 2009. In addition, the Third Amendment amended
and/or added certain definitions, terms and reporting requirements including a
modification of the one-month and two-month Consolidated EBITDA covenants to be
more reflective of current economic conditions. Borrowings under the
revolving line of credit are subject to a borrowing base, up to a borrowing
limit. The maximum borrowing limit amount was reduced from $33.0
million to $29.0 million in accordance with the Company’s cash flow
forecast. The principal amount outstanding under the term loan, the
interest rates for borrowings under the revolving line of credit and the term
loan, and the expiration date of the Credit Agreement remained unchanged under
the amended terms.
On
December 11, 2009, the Company entered into a Fourth Amendment to the Company’s
Credit Agreement (the “Fourth Amendment”). The Fourth Amendment
amended certain definitions, terms and reporting requirements to better align
with the Company’s updated operating and cash flow projections for fiscal year
2010. In addition, the financial covenants were modified to establish
new quarterly minimum EBITDA requirements that will replace the existing minimum
one-month and two-month requirements beginning with the fiscal quarter ended
March 28, 2010
.
The monthly
borrowing limits under the revolving commitments were also reset in conjunction
with updated projected monthly cash flows for 2010. The maximum
borrowing limit amount was further reduced from $29.0 million to $28.0 million
for fiscal year 2010 in accordance with the Company’s updated cash flow
forecast. The interest rates for borrowings under the revolving line
of credit and the term loan, and the expiration date of the Credit Agreement
remained unchanged. For additional details and discussion concerning
these financial covenants see “Liquidity and Capital Resources” in Item 7
of this Report and Note 12 to the Consolidated Financial
Statements.
28
Shareholder
Approval of 2009 Omnibus Incentive Plan
In
November 2009, Patrick’s shareholders approved the Patrick Industries, Inc. 2009
Omnibus Incentive Plan (the “2009 Plan”) which included incentive stock options,
non-qualified stock options, related stock appreciation rights, performance and
restricted stock awards, and other awards. Prior to November 2009,
Patrick granted equity awards under the terms of the Patrick Industries, Inc.
1987 Stock Option Program, as amended and restated (the “1987
Plan”). Stock options and awards previously granted under the 1987
Plan will not be affected by the 2009 Plan and will remain outstanding until
they are exercised, expire or otherwise terminate. The shares that
were available for future awards under the 1987 Plan are included in the total
shares available under the 2009 Plan.
The Company’s 2009 Plan
permits the future granting of share options and share awards to its employees,
Directors and other service providers for up to 759,502 shares of stock as of
December 31, 2009.
Acquisition
In
January 2010, the Company acquired certain assets of the cabinet door business
of Quality Hardwoods Sales, a limited liability company. The purchase
was determined to be a business combination and the assets acquired will be
recorded at fair value during the first quarter of 2010. The purchase
price was not significant.
Sales
of Operating Facilities
Certain
operating facilities were closed or consolidated during 2009 to improve
operating efficiencies in the plants through increased capacity utilization and
to continue the Company’s effort to reduce its leverage position. In
December 2009, the Company sold its operating facility located in Ocala, Florida
and used the net proceeds from the sale to pay down approximately $1.5 million
in principal on the Company’s term loan. In addition, a pretax gain
on the sale of approximately $1.2 million was recognized in the fourth quarter
of 2009.
Through
March 29, 2010, the Company’s owned facilities in Woodburn, Oregon and Fontana,
California were sold with approximately $8.3 million of the net proceeds from
the sales used to pay down principal on the Company’s term loan. The
Company is currently operating in the same facility in Oregon under a license
agreement with the purchaser while it explores options for a more suitable
long–term solution, and is operating in the same facility in California under a
lease agreement with the purchaser for the use of approximately one-half of the
square footage previously occupied. In addition, the Company
anticipates recording a pretax gain on the sales of approximately $2.8 million
in its first quarter 2010 operating results. See Note 20 to the
Consolidated Financial Statements for further details.
CONSOLIDATED OPERATING
RESULTS
General
The
following consolidated and business segment discussions of operating results
pertain to continuing operations. The results of operations related
to the acquisition of Adorn (acquired on May 18, 2007) are included since its
acquisition date.
29
Year
Ended December 31, 2009 Compared to 2008
The
following table sets forth the percentage relationship to net sales of certain
items on the Company’s consolidated statements of operations for the years ended
December 31, 2009, 2008 and 2007.
|
Year
Ended December 31,
|
|||
|
2009
|
2008
|
2007
|
|
|
Net
sales
|
100.0%
|
100.0%
|
100.0%
|
|
Cost
of goods sold
|
89.2
|
91.4
|
87.5
|
|
Restructuring
charges
|
-
|
0.2
|
0.6
|
|
Gross
profit
|
10.8
|
8.4
|
11.9
|
|
Warehouse
and delivery expenses
|
4.8
|
5.1
|
5.1
|
|
Selling,
general, and administrative expenses
|
5.7
|
8.3
|
7.2
|
|
Goodwill
impairment
|
-
|
8.4
|
-
|
|
Intangible
assets impairments
|
-
|
9.0
|
-
|
|
Restructuring
charges
|
-
|
0.1
|
0.1
|
|
Amortization
of intangible assets
|
0.2
|
0.5
|
0.3
|
|
Gain
on sale of fixed assets
|
(0.5)
|
(1.4)
|
(0.1)
|
|
Operating income
(loss)
|
0.6
|
(21.6)
|
(0.7)
|
|
Stock
warrants revaluation
|
0.4
|
-
|
-
|
|
Interest
expense, net
|
3.0
|
2.0
|
1.8
|
|
Income
tax benefit
|
(0.2)
|
(3.1)
|
(0.9)
|
|
Loss
from continuing operations
|
(2.6)
|
(20.5)
|
(1.6)
|
Net Sales
. Net
sales decreased $112.7 million or 34.6%, to $212.5 million in 2009 from $325.2
million in 2008. The decline in net sales primarily reflects the
continuation of overall lower end market demand due to the economic recession
and its residual effects. In addition, reduced RV and MH retail
dealer inventory levels in response to restricted credit conditions and
increasing credit costs, a decline in consumer discretionary spending, and
economic trends that continued to weaken in all three of the primary markets the
Company serves all had an impact on the Company’s revenues (as discussed
above).
From a
market perspective, the RV industry, which represents 44% of our 2009 sales,
experienced unit shipment declines of approximately 30% from
year-to-year. The MH industry, which represents approximately 37% of
our 2009 sales, experienced unit shipment declines of approximately 39% from the
prior year. The industrial and other markets represent approximately
19% of our sales in 2009. Approximately 70% of the Company’s
industrial revenue base is linked to the residential housing market which
continued to be impacted by depressed conditions as new housing starts for 2009
were down approximately 39% from 2008 (as reported by the U.S. Department of
Commerce). While the RV market appears to be stabilizing with
projected improvement into 2010, the Company expects continued weakness in all
three major markets it serves when compared to prior periods.
Cost of Goods
Sold.
Cost of goods sold declined $107.5 million or 36.1% to
$189.6 million in 2009 from $297.1 million in 2008.
The decline was
principally due to the impact of lower sales volumes as well as improved raw
material pricing, improved production efficiencies, facility consolidations,
certain direct labor efficiencies of approximately $0.6 million, and a reduction
in total overhead expenses of approximately $10.1 million. Labor
inefficiencies as the Company adjusted to the rapidly declining market
conditions and softening sales levels that began in the first quarter of 2008
were reflected in the 2008 results.
Cost of
goods sold as a percentage of net sales decreased to 89.2% in 2009 from 91.4% in
2008 reflecting charges that impacted the 2008 results including a $3.5 million
impairment to fixed assets related to machinery, furniture and equipment, and
the write-down and disposal of $3.8 million of slow-moving inventory due to
obsolescence and commodity market price declines.
30
Cost of
goods sold in 2008 also included charges of approximately $0.7 million related
to the misappropriation of Company assets and the underreporting of scrap at one
of the Company’s manufacturing facilities. As a result of the
investigation of this matter and a second physical inventory, the Company
recorded an adjustment to reduce inventory and increase cost of goods sold at
this particular facility by approximately $0.7 million during the quarter ended
March 30, 2008.
The impact of the $0.7
million inventory adjustment did not have a material impact on the Company’s
liquidity or Credit Facility (as defined) at March 30, 2008 or in any other
prior periods. Exclusive of the charges that impacted 2008 results,
cost of goods sold as a percentage of net sales increased slightly in 2009
compared to the prior year reflecting certain fixed overhead costs that remained
relatively constant despite lower sales volumes.
Restructuring
Charges
. In 2008, total restructuring charges were $1.0
million or 0.3% of net sales, of which $0.8 million was included as a separate
line item under cost of goods sold. The charges were recorded in
conjunction with the final phase of the restructuring plan which related to the
closing of a Patrick division in the Company’s Other Component Manufactured
Products Segment and the consolidation of two divisions in the Company’s Primary
Manufactured Products Segment, one from a leased facility into one of the
Company’s owned manufacturing facilities, and the other into one of the leased
manufacturing facilities. The restructuring plan included Adorn and
Patrick workforce reductions of approximately 240 employees, of which
approximately 200 were completed in 2007 and remaining 40 in 2008, facility
closures, and various asset write-downs.
Restructuring
charges included as a separate line item under operating expenses of
approximately $0.2 million were related to severance, benefits and other costs
related to the consolidation activities. There were no restructuring
charges in 2009. In 2010, the Company may identify further cost
reduction opportunities which may result in additional restructuring
charges.
Gross Profit
. Gross
profit decreased $4.3 million or 16.0%, to $22.9 million in 2009 from $27.2
million in 2008. As a percentage of net sales, gross profit increased
to 10.8% in 2009 from 8.4% in 2008. The change in gross profit from
period to period is attributable to the factors described above.
Warehouse and Delivery
Expenses
. Warehouse and delivery expenses decreased $6.3
million or 38.0%, to $10.2 million in 2009 from $16.5 million in
2008. As a percentage of net sales, warehouse and delivery expenses
were 4.8% and 5.1% in 2009 and 2008, respectively. Efficiency
improvements realized from the consolidation of Adorn in 2008, and a $5.9
million decline in fixed and variable costs including delivery wages, fleet
rental, fuel costs and freight charges contributed to the decline in warehouse
and deliver expenses in 2009.
Selling, General, and Administrative
(SG&A) Expenses
. SG&A expenses decreased $14.7 million
or 54.8%, to $12.1 million in 2009 from $26.8 million in 2008. As a
percentage of net sales, SG&A expenses were 5.7% in 2009 compared to 8.3% in
2008. The decrease in SG&A expenses is primarily attributable to
our ongoing efforts to align operating costs with revenue as a result of the
soft market conditions. Administrative, office, and sales wages
declined $8.0 million during the year principally reflecting a reduction in
headcount over the past twelve months and reductions in base compensation taken
by all hourly and salaried employees in first quarter 2009. In
addition, bad debt expense decreased $1.0 million in 2009 reflecting the
Company’s continued efforts to maintain appropriate credit policies with
customers and suppliers especially given tight retail credit standards and the
level of consolidations/closures of RV and MH customers.
SG&A
expenses in 2008 included the impact of $0.3 million in costs associated with
certain vesting of employee retirement obligations incurred as a result of the
change of control provisions associated with the completion of the previously
announced rights offering, stock compensation of $0.5 million related to
attaining certain milestone objectives in conjunction with the Adorn
consolidation plan, and $0.2 million of restructuring charges. In
2008, we eliminated certain administrative salaried positions in an effort to
continue to align our operating costs with revenues as discussed
above. SG&A expenses also included a $1.9 million increase to the
allowance for doubtful accounts in 2008 that was driven principally by certain
customers of the Company that have closed or filed bankruptcy.
Goodwill
Impairment.
The acquisition of Adorn in May 2007 resulted in
the recording of $29.5 million of goodwill within the Primary Manufactured
Products segment and in the Other Component Manufactured Products
segments
31
on the
date of the acquisition, and represented the excess between the purchase price
and the net assets acquired. During our annual goodwill impairment
analysis in the fourth quarter of 2008, we determined that the carrying value of
goodwill exceeded its implied fair value, which resulted in a goodwill
impairment charge of $27.4 million. There was no impairment
recognized for goodwill for the year ended December 31, 2009 based on the
results of the annual impairment analyses.
Intangible Assets
Impairments.
The acquisition of Adorn in May 2007 resulted in
the recording of certain intangible assets includes customer relationships,
trademarks and non-compete agreements within the Primary Manufactured Products
segment and in the Other Component Manufactured Products segments on the date of
the acquisition. During our impairment analysis in the fourth quarter
of 2008, we determined that the carrying value of these intangible assets
exceeded their implied fair value, which resulted in an impairment charge of
$29.3 million. There was no impairment recognized for intangible
assets for the year ended December 31, 2009.
Amortization of Intangible
Assets
. In conjunction with the Adorn acquisition in May 2007,
the Company recognized $39.5 million in certain intangible assets which were
being amortized over periods ranging from 5 to 19 years. The Company
recorded amortization expense on these intangibles of $0.4 million in 2009 and
$1.7 million in 2008. The impairment of $22.3 million of amortizable
intangible assets in 2008 related to customer relationships and non-compete
agreements reduced annual amortization expense by approximately $1.3 million
beginning in 2009.
Gain on Sale of Fixed
Assets
. In 2009, the Company sold its Ocala, Florida facility
resulting in a pretax gain on sale of approximately $1.2 million. A
pretax gain of $4.2 million from the June 2008 sale of the Company’s idle
California facility and approximately $0.4 million in gains on the sale of
excess equipment acquired in the Adorn acquisition and in the normal course of
business are included in the 2008 results.
Operating Income
(Loss).
Operating income was $1.3 million in 2009 compared to
a loss of $70.2 million in 2008. The decrease in the operating loss
from period to period is primarily attributable to the impairment charges
related to goodwill and other intangible assets and fixed assets, the charges
related to inventory write-downs and dispositions, reductions in
SG&A and warehouse and delivery expenses, restructuring charges, and the
gain on the sale of fixed assets as discussed above.
Stock Warrants
Revaluation.
The stock warrants revaluation expense of
$0.8 million for 2009
represents non-cash charges related to mark-to-market accounting for common
stock warrants issued to certain of the Company’s lenders in conjunction with
the December 2008 amendment to the Credit Agreement. See Note 10 to
the Consolidated Financial Statements (“Warrants Subject to Revaluation”) for
further details.
Income Tax Benefit–Continuing
Operations.
The income tax benefit for twelve months 2008
reflected a non-cash charge of approximately $18.0 million related to the
establishment of a deferred tax asset valuation allowance against all of the
Company’s deferred tax assets and virtually all state deferred tax assets in
accordance with accounting rules requiring it to record a valuation allowance
when a threshold cumulative loss period has been reached. An
additional $1.1 million valuation allowance was provided in 2009 for deferred
tax assets net of deferred tax liabilities. The tax valuation
allowance does not impact the Company’s ability to utilize its net operating
loss carryforwards to offset taxable earnings in the future.
The
effective tax rate varies from the expected statutory rate primarily due to the
tax valuation allowance that has been placed on the deferred tax assets that
offset the tax benefit of the net loss for the current period. A tax
benefit from continuing operations of approximately $0.6 million related to the
utilization of a net operating loss carryforward to offset the gain recognized
from discontinued operations was recognized in 2009. In addition,
state tax expense of approximately $95,000 was recognized in the fourth quarter
and twelve months of 2009. The effective tax rate on continuing
operations (exclusive of the valuation allowance) was 26.9% and 36.4% for 2009
and 2008, respectively.
Income (Loss) From Discontinued
Operations, Net of Tax.
Discontinued operations include
the operating results,
as well as the net gain or loss upon sale, of American Hardwoods (through its
sale in January 2009) and the aluminum extrusion operation (through its sale in
July 2009). After-tax income from discontinued operations in 2009 was
$0.9 million or $0.10 per diluted share which was comprised of $0.5 million of
income from operations related to the
32
aluminum
extrusion operation, and a $0.4 million net gain related to the completion of
the two divestitures. For 2008, the after-tax loss was $4.9 million
or $0.61 diluted per diluted share which was comprised of a $1.0 million loss on
operations and $3.9 million of estimated costs related to the write-down to fair
value of certain assets pertaining to the two operations. See Note 4
to the Consolidated Financial Statements for further details.
Net Loss.
The net
loss was $4.5 million or $0.49 per diluted share for 2009 compared to $71.5
million or $8.93 per diluted share for 2008. The changes in the net
loss reflect the impact of the items previously discussed.
Average Diluted Shares
Outstanding.
Average diluted shares outstanding increased
14.8% in 2009 compared to 2008. The increase principally reflects the
completion in March 2008 of the private placement of 1,125,000 shares of common
stock and the sale in June 2008 of 1,850,000 shares in connection with the
rights offering. Based on the timing of these two transactions, the
shares were outstanding for the full year of 2009 and for a portion of the year
in 2008.
Year
Ended December 31, 2008 Compared to 2007
Net Sales
. Net
sales decreased $45.0 million or 12.2%, to $325.2 million in 2008 from $370.2
million in 2007. Net sales were negatively impacted as RV and MH
retailers and manufacturers reduced inventory levels in response to restricted
credit conditions and increasing credit costs, a decline in consumer
discretionary spending, and economic trends that continued to weaken in all
three of the primary markets the Company serves. Gypsum products,
which are sold out of both manufacturing and distribution divisions, experienced
pricing erosion during the year and resulted in overall manufacturing and
distribution revenue declines. From a market perspective, the MH
industry, which represents approximately 45% of our 2008 sales, experienced unit
shipment declines of approximately 14% from the prior year. The RV
industry, which represents 37% of our 2008 sales, experienced unit shipment
declines of approximately 33% from year-to-year. The industrial and
other markets represent approximately 18% of our sales in 2008. The
residential housing market, which represents approximately 70% of the Company’s
industrial revenue base, continued to be impacted by depressed conditions as new
housing starts for 2008 were down 33% from 2007 (as reported by the U.S.
Department of Commerce).
Cost of Goods
Sold.
Cost of goods sold declined $26.9 million or 8.3% to
$297.1 million in 2008 from $324.0 million in 2007.
The decline was
principally due to the impact of lower sales volumes. Improved
production efficiencies, facility consolidations, and lower workers compensation
costs also contributed to the decline in cost of goods sold. A $3.5
million impairment to fixed assets related to machinery, furniture and equipment
and the write-down and disposal of $3.8 million of slow-moving inventory due to
obsolescence and commodity market price declines in the fourth quarter of 2008
partially offset the decline. As a percentage of net sales, cost of
goods sold increased to 91.4% from 87.5% as a result of certain manufacturing
overhead costs such as depreciation, building charges, and property taxes
remaining relatively constant despite lower sales, as well as the charges
mentioned above. Higher steel and other raw materials costs declined
from peak levels due to the global economic downturn.
In
addition, on March 30, 2008, in conjunction with the performance of its physical
inventory at a Patrick manufacturing facility, the Company discovered that
certain procedures were not being followed in accordance with the Company’s
established policies. The Company conducted an internal investigation
and discovered that certain members of the management team at that particular
facility had engaged in collusive acts to circumvent various controls in order
to misappropriate Company assets and concealed the misappropriation by
underreporting scrap at the facility. As a result of the
investigation and a second physical inventory, the Company recorded an
adjustment to reduce inventory and increase cost of goods sold at this
particular facility by approximately $0.7 million during the quarter ended March
30, 2008. The Company further performed a detailed analysis of its
internal controls associated with the inventory and control thereof, and
determined that appropriate controls were in place and working effectively, and
that the level of collusion was significant enough to be able to circumvent the
controls. The impact of the $0.7 million inventory adjustment did not
have a material impact on the Company’s liquidity or Credit Facility at March
30, 2008, or in any other prior periods.
Restructuring
Charges
. In 2008, total restructuring charges were $1.0
million or 0.3% of net sales, of which $0.8 million was included as a separate
line item under cost of goods sold. The charges were recorded in
conjunction with
33
the final
phase of the restructuring plan. Comparatively, total restructuring
charges in 2007 were approximately $2.4 million or 0.7% of net sales, of which
$2.2 million was included as a separate line item under costs of goods
sold. These activities were related to the first phase of the
restructuring plan. The restructuring plan included total estimated
workforce reductions of approximately 240 employees, facility closures, and
various asset write-downs.
Restructuring
charges included as a separate line item under operating expenses were $0.2
million in 2008 for severance costs related to consolidation activities and for
severance and benefits for a former officer who notified the Company of his
intention to resign from the Company as of June 27, 2008. The Company
entered into a separation agreement which included severance
payments. In 2007, restructuring charges included as a separate line
item under operating expenses were $0.2 million for severance packages and other
contractual closing costs to be incurred in conjunction with various
consolidation activities related to the acquisition integration
plans.
Gross Profit
. Gross
profit decreased $16.9 million or 38.2%, to $27.2 million in 2008 from $44.1
million in 2007. As a percent of net sales, gross profit decreased to
8.4% in 2008 from 11.9% in 2007. The decrease in the percentage of
net sales is attributable to certain fixed overhead costs remaining relatively
constant despite lower sales volumes, and a shift to lower margin products that
was partially offset by direct labor efficiencies of approximately 0.4% of net
sales. As discussed above, restructuring charges decreased $1.4
million to $0.8 million from $2.2 million in 2007. Additionally,
estimated purchasing synergies resulting from the Adorn acquisition were offset
by an adjustment in the first quarter of 2008 to increase cost of goods sold and
reduce inventory by approximately $0.7 million related to the misappropriation
of Company assets and the underreporting of scrap at one of the Company’s
manufacturing facilities (as discussed above), and by the $3.5 million
impairment to fixed assets and the $3.8 million write-down and
disposal of slow-moving inventory adjustments made in the fourth quarter of
2008. Throughout 2008, the Company proactively adjusted its strategic
operating plan based on rapidly declining market conditions and softening sales
levels that began in the first quarter of 2008. Increases in fixed
overhead costs including depreciation expense, rent and utilities of
approximately $1.0 million or 0.3% of net sales, were largely offset by
improvements in other overhead costs including workers compensation and group
and liability insurance of approximately $0.9 million.
Warehouse and Delivery
Expenses
. Warehouse and delivery expenses decreased $2.4
million or 12.4%, to $16.5 million in 2008 from $18.9 million in
2007. As a percentage of net sales, warehouse and delivery expenses
were 5.1% for both 2008 and 2007. Efficiency improvements realized
from the consolidation of Adorn related to delivery costs were partially offset
by increased fuel costs, including surcharges, and common carrier charges, as
customers are requiring similar numbers of deliveries but of smaller quantities,
thus resulting in higher delivery cost per unit.
SG&A
Expenses
. SG&A expenses in 2008 were basically flat with
2007, with an increase of $147,000 or 0.6%. As a percentage of net
sales, SG&A expenses increased to 8.3% in 2008 from 7.2% in
2007. A full year of depreciation expense related to the Adorn
acquisition compared to 7½ months of depreciation expense in 2007 and an
increase in capital expenditures primarily contributed to a $1.0 million
increase in depreciation expense in 2008 compared to the prior
year. SG&A expenses were partially offset by a reduction in
expenses related to our ongoing efforts to align operating costs with revenue
and maximize efficiencies gained through headcount reduction synergies achieved
from the Adorn acquisition.
SG&A
expenses in 2008 included the impact of $0.3 million in costs associated with
certain vesting of employee retirement obligations incurred as a result of the
change of control provisions associated with the completion of the previously
announced rights offering, $0.5 million related to attaining certain milestone
objectives in conjunction with the Adorn consolidation plan, and $0.2 million of
restructuring charges. In 2008, we eliminated certain administrative
salaried positions in an effort to continue to align our operating costs with
revenues as discussed above. SG&A expenses also included a $1.9
million increase to the allowance for doubtful accounts in 2008 that was driven
principally by certain customers of the Company that have closed or filed
bankruptcy.
In 2007,
SG&A included $0.9 million in stock compensation, and $1.0 million in
deferred compensation vesting and severance expenses, all directly related to
the Adorn acquisition and the consolidation of Adorn into
Patrick. Additionally, the Company recognized approximately $1.1
million in incentive compensation expense related to the achievement of certain
debt reduction targets established during 2007 as a result of the Company
entering into a new credit facility upon consummation of the Adorn acquisition,
and approximately $1.2 million of expenses related to
34
certain
severance and litigation settlement costs, and the write-off of costs related to
an overseas expansion initiative, and $0.2 million of restructuring
charges.
Goodwill
Impairment.
The acquisition of Adorn in May 2007 resulted in
the recording of $29.5 million of goodwill within the Primary Manufactured
Products segment and in the Other Component Manufactured Products segments on
the date of the acquisition, and represented the excess between the purchase
price and the net assets acquired. During our annual goodwill
impairment analysis in the fourth quarter of 2008, we determined that the
carrying value of goodwill exceeded its implied fair value, which resulted in a
goodwill impairment charge of $27.4 million. No goodwill impairment
charges were recorded in 2007.
Intangible Assets
Impairments.
The acquisition of Adorn in May 2007 resulted in
the recording of certain intangible assets including customer relationships,
trademarks and non-compete agreements within the Primary Manufactured Products
segment and in the Other Component Manufactured Products segments on the date of
the acquisition. During our impairment analysis in the fourth quarter
of 2008, we determined that the carrying value of these intangible assets
exceeded their implied fair value, which resulted in an impairment charge of
$29.3 million. No impairment charges were recorded in
2007.
Amortization of Intangible
Assets
. In conjunction with the Adorn acquisition in May 2007,
the Company recognized $39.5 million in certain intangible assets which were
being amortized over periods ranging from 5 to 19 years. The Company
recorded amortization expense on these intangibles of $1.7 million in 2008
compared to $1.0 million in 2007. The impairment of $22.3 million of
amortizable intangible assets will reduce annual amortization expense by
approximately $1.3 million in 2009 and beyond.
Gain on Sale of Fixed
Assets
. A pretax gain of $4.2 million from the June 2008 sale
of our idle Fontana, California facility was included in 2008
results. The building that was sold formerly housed the Company's
west coast molding division. In 2007, the Company consolidated this
molding division into its Fontana Custom Vinyls facility. The
consolidation was part of the Company's multiphase integration effort following
the acquisition of Adorn. In addition, 2008 results include $0.4
million in gains on the sale of excess equipment acquired in the Adorn
acquisition and in the normal course of business.
Operating Loss.
The
operating loss was $70.2 million in 2008 compared to a loss of $2.5 million in
2007. The increase in the operating loss from period to period is
primarily attributable to the impairment charges related to goodwill and other
intangible assets and fixed assets, the charges related to inventory write-downs
or dispositions, the increase in the allowance for doubtful accounts,
restructuring charges and the decline in net sales as discussed
above. The year-end 2007 operating loss included approximately $2.4
million in restructuring charges related to the Adorn acquisition as well as
approximately $4.2 million of other acquisition-related or integration related
expenses and certain settlement and litigation costs as discussed
above.
Income Tax Benefit–Continuing
Operations.
As of December 31, 2008, we provided a valuation
allowance against our deferred tax assets net of deferred tax liabilities
expected to reverse, resulting in a non-cash charge of approximately $18.0
million in the fourth quarter of 2008. The effective tax rate on
continuing operations was 36.4% (exclusive of the valuation allowance) for
2008. In 2007, the effective tax rate was 32.5%.
Income (Loss) From Discontinued
Operations, Net of Tax.
These results include the operations
for American Hardwoods since its acquisition on January 29, 2007 and for the
aluminum extrusion operation for full years in 2007 and 2008. The after-tax loss
from discontinued operations in 2008 was $4.9 million or $0.61 per diluted share
which was comprised of a $0.7 million loss on operations and $3.2 million
related to estimated planned divestiture costs related to the aluminum extrusion
operation, and a $0.3 million loss on operations and a $0.7 million loss on sale
related to American Hardwoods. For 2007, after-tax income from
discontinued operations was $0.2 million or $0.04 per diluted
share. See Note 4 to the Consolidated Financial Statements for
further details.
Net Loss.
The
Company reported a net loss of approximately $71.5 million or $8.93 per diluted
share for 2008 compared to a net loss of approximately $5.8 million or $1.03 per
diluted share for 2007. The incremental decline in net income
reflects the impact of the items previously discussed.
35
Average Diluted Shares
Outstanding.
Average diluted shares outstanding increased
41.7% in 2008 compared to 2007. The increase principally reflects the
completion on March 12, 2008 of the private placement of 1,125,000 shares of
common stock, and the sale of 1,850,000 shares in connection with the June 26,
2008 rights offering.
BUSINESS
SEGMENTS
General
We
classify our businesses into three reportable business segments based on the
Company’s method of internal reporting, which segregates its business by product
category and production/distribution process. The Company regularly
evaluates the performance of each segment and allocates resources to them based
on a variety of indicators including sales, cost of goods sold, operating income
and EBITDA.
The
Company’s reportable business segments based on continuing operations 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
pre-finished wall and ceiling panels, drywall and drywall
finishing products, electronics, adhesives, cement siding, interior
passage doors, roofing products, laminate flooring, and other
miscellaneous products. Previously, this segment included the
American Hardwoods operation that was sold in January 2009 and was
reclassified to discontinued operations for all periods
presented.
|
|
●
|
Other Component Manufactured
Products
includes an adhesive division (closed in first quarter
2008), a cabinet door division, and a vinyl printing
division.
|
Results
relating to the planned divestiture of the aluminum extrusion operation, which
comprised the entire Engineered
Solutions segment, have
been reclassified to discontinued operations for all periods
presented.
In
accordance with changes made to the Company’s internal reporting structure, the
Company changed its segment reporting from three reportable segments to two
reportable segments effective January 1, 2010. Operations previously
included in the Other Component Manufactured Products segment will be
consolidated with the operations in the Primary Manufactured Products segment to
form one new segment called Manufacturing. The other reportable
segment, Distribution, will remain the same as reported in prior
periods. Prior year results will be reclassified to reflect the
current year presentation beginning with the first quarter of 2010.
The table
below presents information about the sales, gross profit and operating income
(loss) from continuing operations of those segments. A reconciliation to
consolidated totals is presented in Note 19 to the Consolidated Financial
Statements.
36
|
Years
Ended December 31
|
|||
|
(thousands)
|
2009
|
2008
|
2007
(1)
|
|
Sales
|
|||
|
Primary
Manufactured Products
|
$ 150,151
|
$ 223,875
|
$ 247,889
|
|
Distribution
|
43,821
|
71,416
|
92,947
|
|
Other
Component Manufactured Products
|
27,285
|
42,955
|
42,323
|
|
Gross
Profit
|
|||
|
Primary
Manufactured Products
|
12,399
|
13,111
|
22,887
|
|
Distribution
|
5,548
|
9,390
|
11,762
|
|
Other
Component Manufactured Products
|
3,256
|
2,862
|
3,522
|
|
Operating
Income (Loss)
|
|||
|
Primary
Manufactured Products
|
3,663
|
(10,706)
|
6,965
|
|
Distribution
|
76
|
1,527
|
3,606
|
|
Other
Component Manufactured Products
|
1,749
|
(47,001)
|
135
|
|
(1)
|
Includes
7½ months activity pertaining to the Adorn
acquisition.
|
Year
Ended December 31, 2009 Compared to 2008
Primary
Manufactured Products
Sales.
Total sales
decreased $73.7 million or 32.9%, to $150.2 million in 2009 from $223.9 million
in 2008. This segment accounted for approximately 69% of the
Company’s consolidated net sales in 2009. As discussed earlier,
decreased unit shipment levels in the MH and RV industries and declines in the
industrial market which were exacerbated by the current credit crisis in both
2009 and 2008, largely impacted the year’s results. From a pricing
perspective, overall price increases in certain commodity products were offset
by pricing declines in certain other major commodity products from period to
period.
Gross profit.
Gross
profit decreased $0.7 million or 5.4%, to $12.4 million in 2009 from $13.1
million in 2008. As a percentage of sales, gross profit increased to
8.3% in 2009 compared to 5.9% in the prior year. The increase in
gross profit as a percentage of sales in 2009 is primarily driven by charges
that impacted the 2008 results, which included $3.8 million for the write down
and disposal of inventory due to obsolescence and commodity market price
declines, $3.5 million related to fixed asset impairments, a
$0.7 million adjustment to inventory and cost of goods sold related to the
misappropriation of Company assets and underreporting of scrap at one of the
Company’s manufacturing facilities, and restructuring charges of $0.5
million.
Operating income
(loss).
Operating income was $3.7 million compared to an
operating loss of $10.7 million in 2008. Operating results improved
in 2009 largely due to the 2008 charges discussed above and reduced
administrative costs, primarily resulting from staff and wage reductions and
lower warehouse and delivery expenses. The operating loss in
2008 reflected the fixed asset impairment and inventory adjustments discussed
above as well as a goodwill impairment charge of $9.2 million and an impairment
charge for other intangible assets of $0.5 million.
Distribution
Sales.
Sales
decreased $27.6 million or 38.6%, to $43.8 million in 2009 from $71.4 million in
2008. This segment accounted for approximately 21% of the Company’s
consolidated net sales in 2009. The decline in sales is attributable
to the approximate 39% decline in unit shipments in the MH industry, which is
the primary market sector this segment serves
.
The decline in
sales was partially offset by pricing increases on gypsum related products of
approximately 6%.
Gross profit.
Gross
profit decreased $3.8 million or 40.9%, to $5.6 million in 2009 from $9.4
million in 2008. As a percentage of sales, gross profit decreased to
12.7% in 2009 from 13.2% in 2008. The decrease in gross profit
dollars for 2009 is due to the decline in sales primarily resulting from
decreased shipment levels in the MH industry. The decrease in gross
profit as a percentage of sales is attributable to certain fixed overhead costs
decreasing but not in proportion to the lower sales volumes.
37
Operating
income.
Operating income decreased $1.4 million or 95.0%, to
$0.1 million in 2009 from $1.5 million in 2008 due primarily to the decrease in
gross profit dollars described above.
Other
Component Manufactured Products
Sales.
Sales
decreased $15.7 million or 36.5%, to $27.3 million in 2009 from $43.0 million in
2008. This segment accounted for approximately 10% of the Company’s
consolidated net sales in 2009. The decline in sales primarily
reflects overall unit shipment declines in the RV and MH
industries.
Gross profit.
Gross
profit increased $0.4 million or 13.8%, to $3.3 million in 2009 from $2.9
million in 2008. As a percentage of sales, gross profit increased to
11.9% in 2009 from 6.7% in 2008. The increase in gross profit dollars
primarily reflects a shift in product mix and margin
improvement. Gross profit for 2008 includes the impact of
approximately $0.2 million in restructuring charges related to the closing and
consolidation of two Patrick divisions.
Operating income
(loss).
Operating income in 2009 was $1.7 million compared to
an operating loss of $47.0 million in 2008. The operating loss in
2008 included $47.0 million of charges related to the impairment of intangible
assets. A decline in cost of goods sold more than offset lower sales
volumes in 2009 as discussed above. In addition, reduced
administrative costs, primarily resulting from wage and staff reductions,
positively contributed to the operating income improvement.
Unallocated Corporate
Expenses
Unallocated
corporate expenses decreased $12.9 million to $6.7 million in 2009 from $19.6
million in 2008 primarily reflecting salaried and hourly headcount and wage
reductions. See Note 19 to the Consolidated Financial
Statements.
Year
Ended December 31, 2008 Compared to 2007
Primary
Manufactured Products
Sales.
Total sales
decreased $24.0 million or 9.7%, to $223.9 million in 2008 from $247.9 million
in 2007. This segment accounted for approximately 67% of the
Company’s consolidated net sales in 2008. As discussed earlier,
decreased unit shipment levels in the MH and RV industries and declines in the
industrial market which were exacerbated by the current credit crisis in 2008,
largely impacted the year’s results on a year-over-year basis. From a
pricing perspective, overall price increases in certain commodity products were
offset by pricing declines in certain other major commodity products from period
to period.
Gross profit.
Gross
profit decreased $9.8 million or 42.7%, to $13.1 million in 2008 from $22.9
million in 2007. As a percentage of sales, gross profit decreased to
5.9% in 2008 compared to 9.2% in the prior year. The decrease in the
percentage of sales is attributable to certain fixed overhead costs remaining
relatively constant despite lower sales volumes, and a shift in product mix to
lower margin products. Gross profit for 2008 and 2007 includes the
impact of restructuring charges of $0.5 million and $1.2 million,
respectively. In addition, gross profit in 2008 includes a $3.5
million fixed asset impairment charge, a $3.8 million charge to reflect the
write down and disposal of inventory due to obsolescence and commodity
market price declines, and a $0.7 million adjustment to inventory and cost of
goods sold related to the misappropriation of Company assets and underreporting
of scrap at one of the Company’s manufacturing facilities.
Operating income
(loss).
For 2008, the operating loss was $10.7 million
compared to operating income of $7.0 million in 2007. The decline in
operating income in 2008 reflected the decline in gross profit (which included
the fixed asset impairment and inventory adjustments discussed above) as well as
charges reflecting the impairment of intangible assets. Based on the
results of the Company’s annual impairment analysis in the fourth quarter of
2008, it was determined that the entire carrying value of the goodwill and other
intangible assets attributable to this segment was impaired. As a
result, a goodwill impairment charge of $9.2 million and an impairment charge
for other intangible assets of $0.5 million were recorded in the fourth quarter
of 2008. No impairment charges were recorded in
2007. These impairment charges and the decline in gross profit were
partially offset by lower restructuring charges and
38
lower
SG&A expenses (including a reduction in administrative costs resulting from
staffing reductions and reduced charges for vesting of retirement
obligations).
Distribution
Sales.
Sales
decreased $21.5 million or 23.2%, to $71.4 million in 2008 from $92.9 million in
2007. This segment accounted for approximately 22% of the Company’s
consolidated net sales in 2008. The decline in sales is attributable
to the approximate 14% decline in unit shipments in the MH industry, which is
the primary market sector this segment serves. Additionally, pricing
declines on prices charged to customers on certain major commodity products
negatively impacted revenues in this segment by an estimated $3.0
million. The decrease in sales is attributable to pricing declines on
gypsum related products of approximately 15%. These declines were
partially offset by increased new product sales of approximately $3.0
million.
Gross profit.
Gross
profit decreased $2.4 million or 20.2%, to $9.4 million in 2008 from $11.8
million in 2007. As a percentage of sales, gross profit increased to
13.2% in 2008 from 12.7% in 2007. The decrease in gross profit
dollars for 2008 is due to the decline in sales primarily resulting from
decreased shipment levels in the MH industry. The increase in percent
of sales is attributable to the Company being able to maintain margins in light
of pricing declines and due to increased sales of the Company’s flooring product
line, which carries higher gross margins.
Operating
income.
Operating income decreased $2.1 million or 57.7%, to
$1.5 million in 2008 from $3.6 million in 2007 due primarily to the decrease in
gross profit dollars described above.
Other
Component Manufactured Products
Sales.
Sales
increased $0.7 million or 1.5%, to $43.0 million in 2008 from $42.3 million in
2007. This segment accounted for approximately 11% of the Company’s
consolidated net sales in 2008. The increase in sales reflects the
full year impact of the addition of a cabinet door facility and vinyl printing
facility as the result of the May 2007 Adorn acquisition. The
acquisition of Adorn contributed sales of $42.2 million and $32.9 million for
2008 and 2007, respectively. These increased sales were primary
offset by the closing and consolidation of one of the Company’s hardwood cabinet
door operations in late 2007.
Gross profit.
Gross
profit decreased $0.6 million or 18.8%, to $2.9 million in 2008 from $3.5
million in 2007. As a percentage of sales, gross profit decreased to
6.7% in 2008 from 8.3% in 2007. Gross profit includes the impact of
approximately $0.2 million in restructuring charges in 2008 related to the
closing and consolidation of two Patrick divisions. Restructuring
charges of $1.0 million in 2007 related to the closing and consolidation of the
Company’s cabinet door division as a result of the Adorn acquisition.
The decrease in gross
profit dollars is due to the decline in
net
sales
as discussed
above. The decrease in the percentage of sales is attributable to
certain fixed overhead costs remaining relatively constant despite lower sales
volumes, and a shift in product mix to lower margin products in the cabinet door
division.
Operating income
(loss).
The operating loss in 2008 was $47.0 million compared
to a profit of $135,000 in 2007. This operating loss was primarily
due to charges reflecting the impairment of intangible assets. Based
on the results of the Company’s impairment analysis in the fourth quarter of
2008, it was determined that approximately $18.2 million of the carrying value
of goodwill and $28.8 million of the carrying value of other intangible assets
attributable to this segment was impaired. As a result, total
impairment charges of $47.0 million were recorded in the fourth quarter of
2008. No impairment charges were recorded in 2007.
Unallocated Corporate
Expenses
Unallocated
corporate expenses increased $3.1 million to $19.6 million from $16.5 million in
2007 primarily reflecting twelve months of Adorn related activity in 2008
compared to 7½ months in 2007. Wage reductions partially offset the
increase in unallocated corporate expenses in 2008
.
See Note 19 to
the Consolidated Financial Statements.
39
LIQUIDITY AND CAPITAL
RESOURCES
Cash
Flows
Operating
Activities
Cash
flows from operations represent the net income or the net loss sustained in the
reported periods adjusted for non-cash charges and changes in operating assets
and liabilities. Our primary sources of liquidity have been cash
flows from operating activities and borrowings under our Credit
Facility. Our principal uses of cash have been to support seasonal
working capital demands, meet debt service requirements and support our capital
expenditure plans.
Net cash
provided by operating activities was $3.7 million in 2009 compared to $2.0
million in 2008. Certain factors that contributed to the increase in
operating cash flows in 2009, with no comparable amount in the prior year,
include: (1) $0.8 million related to mark-to-market accounting for common stock
warrants issued to certain of the Company’s lenders in December 2008 and (2)
interest paid-in-kind (“PIK interest”) on the Company’s term loan of $1.0
million (see “Capital Resources” for further details) which were
offset in part by a $0.7 million change in the fair value of the interest rate
swaps. In addition, the year-over-year change in operating cash flows
reflects a lower net loss in 2009 that was impacted by a reduction in warehouse
and delivery and SG&A expenses, all of which were in line with the
Company’s operating plan to keep operating costs aligned with the
revenue base given current economic conditions. Operating cash flows
in 2008 included the impact of non-cash impairment charges and inventory
write-downs of approximately $64.7 million.
Trade
receivables increased $5.4 million in 2009 from December 2008 reflecting a
stronger seasonal demand cycle due to improved shipment levels in the RV
industry in the fourth quarter of 2009 of approximately 76% compared to the
fourth quarter of 2008. Additionally, in 2008, many of our larger
customers began their normal holiday season shutdowns in early December compared
to a later shutdown in December 2009.
Cash
provided by operating activities included a decrease in inventory levels of $4.7
million primarily resulting from a shift in demand concentration to operations
with historically better inventory turns and the Company’s continued focus on
improving inventory turns and reducing inventory to levels more consistent with
demand in order to maximize liquidity. Inventory cash flows in 2008
included an adjustment of $3.8 million for the write-down and disposal of slow
moving inventories due to obsolescence and commodity market price declines and a
$0.7 million physical inventory adjustment at one of the Company’s manufacturing
facilities. In both 2009 and 2008, the Company focused on reducing
inventory levels and managing inventory costs by closely following customer
sales levels and reducing purchases correspondingly, while working together with
key suppliers to reduce lead-time and minimum quantity
requirements.
The $1.4
million net decrease to accounts payable and accrued liabilities in 2009 was due
to a reduction in employee headcount, which drove lower payroll and benefit
related accruals, and the discontinued operations being sold, which reduced
accounts payable and accrued liabilities.
Net cash
provided by operating activities decreased $20.5 million to $2.0 million in 2008
compared to $22.5 million in 2007. The year-over-year change in
operating cash flow is primarily the result of lower net income in 2008 that was
largely impacted by the deterioration of macroeconomic conditions that
negatively impacted sales volumes in the RV, MH and residential housing markets
and industries. The 2008 net loss also included non-cash impairment
charges and inventory write-downs of approximately $64.7
million. Inventory decreased $16.5 million reflecting a decline in
customer inventory levels and an increased focus on managing working capital
needs.
In 2007,
trade receivables decreased $16.1 million primarily reflecting plant shutdowns
at the end of 2007. Inventory decreased $17.3 million and accounts
payable and accrued expenses decreased $11.7 million in 2007 primarily
reflecting normal seasonal declines in inventory levels which comprise a
significant portion of the accounts payable balance at any given
time. In addition, the Company improved its inventory turns and
entered into a vendor managed inventory program in June 2007.
40
Investing
Activities
Investing
activities provided cash of $13.2 million in 2009 compared to $1.9 million in
2008. Proceeds from the sale of property and equipment and facilities
included $1.5 million from the sale of the Ocala, Florida facility in December
2009, $4.4 million from the sale of American Hardwoods equipment in January 2009
and the building in June 2009, and $7.4 million from the July 2009 sale of the
aluminum extrusion operation. Approximately $6.6 million was received
from the sale of the California facility in June 2008.
Capital
expenditures in 2009 were $0.3 million versus $4.2 million in the prior
year. The capital plan for full year 2010 includes expenditures of up
to $1.0 million, and such expenditures are limited to $2.25 million for any
fiscal year per our amended Credit Agreement. Capital expenditures in
2008 were primarily related to certain building expansion initiatives to
accommodate the consolidation of certain Patrick and Adorn business
units. Additionally, in conjunction with the acquisition of Adorn in
May 2007, the Company was able to take advantage of excess redundant
equipment as a result of the consolidation plan and therefore minimize capital
expenditures in 2009 while still performing regularly scheduled preventative
maintenance on all of its equipment.
Cash
outflows for investing activities were $86.8 million in 2007 and included $2.4
million for capital expenditures that were in conjunction with our strategic and
capital plans, the acquisitions of American Hardwoods and Adorn for $7.1 million
and $78.7 million, respectively.
Financing
Activities
Our net
financing cash outflows were approximately $19.6 million in 2009 compared to
$1.3 million in 2008. In 2009, the Company paid down approximately
$14.5 million in principal on its long-term debt. The additional
repayments on long-term debt, including the payoff of the remaining $3.3 million
of principal on the industrial revenue bonds, were funded by the $2.5 million of
net proceeds from the sale of the American Hardwoods building, the $4.4 million
of net proceeds from the aluminum extrusion building and equipment sale, and the
$1.5 million of net proceeds from the sale of the Ocala, Florida
facility. In addition, the remaining net proceeds of $3.0 million
from the aluminum extrusion operation sale were used to reduce borrowings under
the Company’s revolving line of credit.
In
addition, net proceeds of approximately $8.3 million from the sales of the
Woodburn, Oregon and Fontana, California facilities were used to pay down
principal on the Company’s term loan through March 29, 2010.
Our net
financing needs were $1.3 million in 2008 compared to a net inflow of $64.1
million in 2007. In 2008, net borrowings under our revolver of $16.7
million, proceeds of $7.9 million from the private placement of common stock and
$13.0 million from our rights offering, substantially offset principal
repayments on long-term debt of $38.3 million.
In 2007,
net cash provided by financing activities included borrowings under debt
agreements of $101.8 million (principally to fund the Adorn and American
Hardwoods acquisitions), and $10.9 million of proceeds from the private
placement of common stock. Net short-term borrowing payments of $8.5
million and principal payments on long-term debt of $38.1 million partially
reduced the cash inflows.
Capital
Resources
In April
2007, in conjunction with the addition of a new paint line facility and
equipment, the Company issued $4.5 million in industrial revenue
bonds. These bonds were purchased by JPMorgan Chase and were subject
to the terms of a loan agreement with JPMorgan Chase. The bonds bore
interest at a variable tax-exempt bond rate with principal and interest payments
due monthly over five years and covenants consistent with the Company’s
revolving credit agreement. The final installment was originally due
in April 2012. Approximately $3.3 million of the net proceeds from
the sale of the aluminum extrusion operation were used to pay off the remaining
principal on the bonds in July 2009.
In May
2007, the Company completed the acquisition of Adorn. The acquisition
was funded through both debt and equity financing, which was structured to
provide additional liquidity to facilitate the combined companies’ future growth
plans and working capital needs. In connection with the Adorn
acquisition, the Company entered into an eight-bank syndication agreement led by
JPMorgan Securities Inc. and JPMorgan Chase Bank, N.A. for a $110 million senior
secured credit facility (the “Credit Facility”) comprised of revolving credit
availability of $35 million and a term
41
loan of
$75 million. The Credit Facility provided for a five-year maturity
and replaced the Company’s previous credit agreement and related term
loans. The Credit Facility’s interest was at Prime or the Eurodollar
rate plus the Company’s credit spread which was based on cash flow
leverage. The term-debt and revolving credit loans may be prepaid at
any time without penalty. Interest payments are due monthly with
quarterly principal payments that began in September 2007. The
Company incurred approximately $2.2 million in financing costs as part of this
transaction. Obligations under the Credit Facility are secured by
essentially all of the tangible and intangible assets of the
Company. In order to reduce its vulnerability to variable interest
rates, the package included an interest rate swap agreement with interest fixed
at a rate of 4.78% for approximately $12.9 million of term-debt at May 18,
2007. In July 2007, the Company entered into a second interest rate
swap agreement on approximately $10.0 million of term-debt to fix interest at a
rate of 5.60%.
Concurrently
with the closing of the Adorn acquisition, Tontine Capital Partners, L.P. and
Tontine Capital Overseas Master Fund, L.P. (collectively, “Tontine Capital”),
significant shareholders of Patrick, purchased 980,000 shares of Patrick common
stock in a private placement for total proceeds of approximately $11.0
million. Tontine Capital also provided additional interim debt
financing of approximately $14.0 million in the form of senior subordinated
promissory notes. On March 10, 2008, the Company issued an
additional 1,125,000 shares of its common stock to Tontine Capital for an
aggregate purchase price of $7.9 million. Proceeds from the sale of
common stock were used to prepay approximately $7.7 million of the approximate
$14.8 million in principal then outstanding under the senior subordinated
promissory notes and to pay related accrued interest.
In June
2008, the Company conducted a rights offering of 1,850,000 shares of common
stock to its shareholders and raised a total of approximately $13.0 million of
additional equity capital. The Company used the proceeds from the
rights offering to prepay approximately $7.1 million of remaining principal
under the senior subordinated promissory notes and to pay approximately $0.3
million of related accrued interest, and used the remaining proceeds to reduce
borrowings under its Credit Facility.
The
Company amended its Credit Agreement in March 2008 and modified certain
financial covenants, terms and reporting requirements. In December
2008, the Company entered into a Second Amendment and Waiver (the “Second
Amendment”) to its Credit Agreement. The Second Amendment included
both the addition and modification of certain definitions, terms and reporting
requirements and amended the termination date of the Credit Agreement to expire
on January 3, 2011. Under the terms of the Second Amendment, the
lenders waived any event of default (as defined in the Credit Agreement) that
resulted from the Company’s failure to comply with the Maximum Leverage Ratio
and Minimum Fixed Charge Coverage Ratio covenants for the Computation Period
ended September 28, 2008. The financial covenants were amended to
eliminate the Consolidated Net Worth, Minimum Fixed Charge Coverage
Ratio and
Maximum Leverage Ratio covenants, in lieu of new one-month and two-month minimum
Consolidated EBITDA requirements and a $2.25 million capital expenditures
limitation for any fiscal year.
Effective
with the Second Amendment, the interest rates for borrowings under the revolving
line of credit are the Alternate Base Rate (the”ABR”) plus 3.50%, or the London
Interbank Offer Rate (“LIBOR”) plus 4.50%. For term loans, interest
rates are the ABR plus 6.50%, or LIBOR plus 7.50%. The fee payable by
the Company on unused but committed portions of the revolving loan facility was
amended to 0.50%. The Company has the option to defer payment of any
interest on term loans in excess of 4.5% (“PIK Interest”) until the term
maturity date. Since January 2009, the Company has elected the PIK
interest option. As a result, the principal amount outstanding under
the term loan for the year ended December 31, 2009 was increased by
approximately $1.0 million to reflect PIK interest. For 2009, PIK
interest is reflected as a non-cash charge adjustment in operating cash flows
under the caption “Interest paid-in-kind”.
In
addition, effective with the Second Amendment, the interest rates on the
obligation were adjusted and the Company determined that its two swap agreements
were ineffective as hedges against changes in interest rates and, as a result,
the swaps were de-designated. Losses on the swaps included in other
comprehensive income as of the de-designation date are being amortized into net
income (loss) over the life of the swaps utilizing the straight-line method
which approximates the effective interest method. All future changes
in the fair value of the de-designated swaps will be recorded within earnings on
the statements of operations. For the years ended December 31, 2009
and 2008, amortized losses of $0.3 million and $46,000, respectively, were
recognized in interest expense on the
42
consolidated
statements of operations. The de-designation losses to be amortized
to interest expense is expected to approximate $0.3 million in
2010. In addition, the change in the fair value of the de-designated
swaps for the year ended December 31, 2009 resulted in a $0.7 million reduction
to interest expense and the corresponding liability.
As part
of the lenders’ consideration for the Second Amendment, on December 11, 2008,
the Company issued warrants to the lenders to purchase an aggregate of 474,049
shares of common stock, subject to adjustment related to anti-dilution
provisions, at an exercise price per share of $1 (the
“Warrants”). The Warrants are immediately exercisable, subject to
anti-dilution provisions and expire on December 11, 2018. Pursuant to
the anti-dilution provisions, the number of shares of common stock issuable upon
exercise of the Warrants was increased to an aggregate of 483,742 shares and the
exercise price was adjusted to $0.98 per share as a result of the issuance on
May 21, 2009 and on June 22, 2009, pursuant to the Company’s 1987 Stock Option
Program, as amended, of restricted shares at a price less than, and options to
purchase common stock with an exercise price less than, the warrant exercise
price then in effect. See Note 10 to the Consolidated Financial
Statements for further details.
At March
1, 2009 (February fiscal month end), the Company was in violation of its
Consolidated EBITDA financial covenant under the terms of the Credit
Agreement. On April 14, 2009, the Company entered into a Third
Amendment to the Company’s Credit Agreement (the “Third
Amendment”). The Third
Amendment
amended and/or added certain definitions, terms and reporting requirements and
included the following provisions:
|
(a)
|
The
lenders waived any actual or potential Event of Default (as defined in the
Credit Agreement) resulting from the Company’s failure to comply with the
one-month and two-month Consolidated EBITDA covenants for the fiscal
months ended March 1, 2009 and March 29,
2009.
|
|
(b)
|
The
financial covenants were modified to establish new one-month and two-month
minimum Consolidated EBITDA requirements that became effective beginning
with the fiscal months ended June 28, 2009 and July 26, 2009,
respectively. Until such dates, there was no applicable minimum
Consolidated EBITDA requirement.
|
|
(c)
|
The
definition of Consolidated EBITDA was amended to exclude the effects of
losses and gains due to discontinued operations and restructuring charges,
subject to approval of the administrative
agent.
|
|
(d)
|
The
revolving commitments were reduced by $5.0 million to a maximum of $30.0
million.
|
|
(e)
|
The
monthly borrowing limits under the revolving commitments were reset in
conjunction with projected monthly cash
flows.
|
|
(f)
|
The
Company agreed to provide an appraisal by a lender approved firm of each
parcel of real estate owned by the Company and its subsidiaries within 60
days of the effectiveness of the Third Amendment. Based on the
results of the appraisals, there was no indication of impairment for any
of the real estate parcels.
|
|
(g)
|
The
receipt of net cash proceeds related to any asset disposition, other than
proceeds attributable to inventory and receivables, will be used to pay
down principal on the term loan.
|
Effective
with the Third Amendment, the minimum one and two-month Consolidated EBITDA
requirement is measured at the end of each month beginning with the fiscal
months ended June 28, 2009 and July 26, 2009, respectively. The
maximum borrowing limit amount (as defined in the Second Amendment) was reduced
from $33.0 million to $29.0 million. The principal amount outstanding
under the term loan at March 29, 2009 remained unchanged under the amended
terms. The interest rates for borrowings under the revolving line of
credit and the term loan, and the expiration date of the Credit Agreement also
remained unchanged.
Consolidated
EBITDA is calculated pursuant to the Credit Agreement, whereby adjustments to
reported EBITDA include items such as (i) removing the effects of non-cash gains
and losses, non-cash impairment charges, and certain non-recurring items; (ii)
adding back non-cash stock compensation expenses; (iii) excluding the impact of
certain closed operations; and (iv) excluding the effects of losses and gains
due to discontinued operations and restructuring charges, subject to approval of
the administrative agent.
The
Company has maintained compliance with the revised minimum one and two-month
Consolidated EBITDA requirements as modified in the Third
Amendment. There was no applicable minimum Consolidated EBITDA
requirement for the fiscal month ended March 29, 2009. For the fiscal
month ended June 28, 2009, the one-month minimum Consolidated EBITDA was
$279,300 versus actual Consolidated EBITDA of $761,000. For the
fiscal month ended September 27, 2009, the one and two-month minimum
Consolidated EBITDA was $648,800 and $2,437,600,
43
respectively,
versus actual Consolidated EBITDA for the same periods of $892,000 and
$2,604,000, respectively. For the fiscal month ended December 31,
2009, the one and two-month minimum Consolidated EBITDA was ($206,200) and
$570,400, respectively, versus actual Consolidated EBITDA for the same periods
of $180,000 and $982,000, respectively.
On
December 11, 2009, the Company entered into a Fourth Amendment to the Company’
Credit Agreement (the “Fourth Amendment”). The Fourth Amendment
amended certain definitions, terms and reporting requirements to better align
with the Company’s updated operating and cash flow projections for fiscal year
2010. Pursuant to the Fourth Amendment, the financial covenants were
modified to establish new quarterly minimum EBITDA requirements that will
replace the existing minimum one-month and two-month requirements beginning with
the fiscal quarter ended March 28, 2010
.
In addition, the
monthly borrowing limits under the revolving commitments were reset in
conjunction with updated projected monthly cash flows for 2010.
Effective
with the Fourth Amendment, borrowings under the revolving line of credit are
subject to a borrowing base, up to a maximum borrowing limit of $28.0 million
for fiscal year 2010. The interest rates for borrowings under the
revolving line of credit and the term loan, and the expiration date of the
Credit Agreement remained unchanged. The Company’s ability to access
these borrowings is subject to compliance with the terms and conditions of the
credit facility including the financial covenants.
During
2009, the Company paid down $9.8 million in principal on its senior notes, and
paid $4.7 million in principal on outstanding bonds. See discussion
below. In addition, borrowings under the Company’s revolving line of
credit were reduced by $4.7 million in 2009.
Summary
of Liquidity and Capital Resources
Our
primary capital requirements are to meet seasonal working capital demands, meet
debt service requirements, and support our capital expenditure
plans. We also have a substantial asset collateral base, which we
believe if sold in the normal course, is more than sufficient to cover our
outstanding senior debt. We obtain additional liquidity through
selling our products and collecting receivables. We use the funds
collected to pay creditors and employees and to fund working capital
needs. The Company has another source of cash through the cash
surrender value of life insurance policies. We believe that cash
generated from operations and borrowings under our current Credit Facility and
life insurance policies will be sufficient to fund our working capital
requirements and capital expenditure programs as currently contemplated.
Our current Credit Facility allows us to borrow funds based on certain
percentages
of accounts receivable (80% of eligible accounts) and inventories (50% of
eligible inventory), less outstanding letters of credit.
We are
subject to market risk primarily in relation to our cash and short-term
investments. The interest rate we may earn on the cash we invest in
short-term investments is subject to market fluctuations. While we
attempt to minimize market risk and maximize return, changes in market
conditions may significantly affect the income we earn on our cash and cash
equivalents and short-term investments. In addition, a portion of our
debt obligations under our Credit Facility are currently subject to variable
rates of interest based on LIBOR.
Cash,
cash equivalents, and borrowings available under our Credit Facility are
expected to be sufficient to finance the known and/or foreseeable liquidity and
capital needs of the Company for at least the next 12 months. Our
working capital requirements vary from period to period depending on
manufacturing volumes related to the RV and MH industries, the timing of
deliveries and the payment cycles of our customers. In the event that
our operating cash flow is inadequate and one or more of our capital resources
were to become unavailable, we would seek to revise our operating strategies
accordingly.
We expect
to maintain compliance with the revised minimum quarterly Consolidated EBITDA
covenant, as modified in the Fourth Amendment, based on the Company’s 2010
operating plan, notwithstanding continued uncertain and volatile market
conditions. Management has also identified other actions within its
control that could be implemented, if necessary, to help the Company reduce its
leverage position. These actions include the exploration of asset
sales, divestitures and other types of capital raising
alternatives. However, there can be no assurance that these
44
actions
will be successful or generate cash resources adequate to retire or sufficiently
reduce the Company’s indebtedness under the Credit Agreement prior to its
expiration.
Our
Credit Facility is scheduled to expire on January 3, 2011. We
currently have the intent and we believe we have the ability to refinance during
2010. However, we do not believe we will be able to consummate this
refinancing by the time we issue our balance sheet for the first quarter of
2010. In order to classify our outstanding indebtedness as a
long-term liability beginning with the first quarter of 2010, the following two
criteria are required: (1) the Company must have the intent to refinance, and
(2) the Company must have the ability to consummate the
refinancing. The ability to consummate the refinancing can be
satisfied by either: (a) the issuance of a long-term obligation after the date
of the Company‘s balance sheet but before that balance sheet is issued; or (b)
entrance into a financing agreement before the balance sheet is issued that
clearly permits it to refinance the short-term obligation on a long-term basis
on terms that are readily determinable, and certain conditions are being
satisfied. Based on the above criteria, our outstanding long-term
indebtedness as of March 28, 2010 (first fiscal quarter end) is expected to be
reclassified as a short-term liability until such time as the refinancing of our
Credit Facility is completed.
If we
fail to comply with the covenants under our amended Credit Agreement, there can
be no assurance that a majority of the lenders that are party to our Credit
Agreement will consent to a further amendment of the Credit
Agreement. In this event, the lenders could cause the related
indebtedness to become due and payable prior to maturity or it could result in
the Company having to refinance this indebtedness under unfavorable
terms. If our debt were accelerated, our assets might not be
sufficient to repay our debt in full should they be required to be sold outside
of the normal course of business, such as through forced liquidation or
bankruptcy proceedings. Further, if current unfavorable credit market
conditions were to persist throughout the remainder of 2010, there can be no
assurance that we will be able to refinance any or all of this
indebtedness.
Contractual
Obligations
The
following table summarizes our contractual cash obligations at December 31,
2009, and the future periods during which we expect to settle these
obligations. We have provided additional details about some of these
obligations in our Notes to the Consolidated Financial Statements.
|
(thousands)
|
Payments
due by period
|
|||||||||||||||||||
|
Contractual
Obligations
|
2010
|
2011-2012 | 2013-2014 |
Thereafter
|
Total
|
|||||||||||||||
|
Revolving
line of credit
|
$ | 13,500 | $ | - | $ | - | $ | - | $ | 13,500 | ||||||||||
|
Long-term
debt
(1)
|
10,359 | 18,408 | - | - | 28,767 | |||||||||||||||
|
Interest
payments on debt
(2)
|
2,495 | 20 | - | - | 2,515 | |||||||||||||||
|
Deferred
compensation payments
|
419 | 857 | 721 | 3,691 | 5,688 | |||||||||||||||
|
Facility
leases
|
1,951 | 3,134 | 2,807 | 2,555 | 10,447 | |||||||||||||||
|
Equipment leases
|
1,075 | 1,026 | 210 | 179 | 2,490 | |||||||||||||||
|
Total
contractual cash obligations
|
$ | 29,799 | $ | 23,445 | $ | 3,738 | $ | 6,425 | $ | 63,407 |
|
(1)
|
The
estimated long-term debt payment of $10.3 million in 2010 includes $5.5
million of payments based on scheduled debt service
requirements. In addition, the Company used the net proceeds
from the sales of two buildings classified as available for sale at
December 31, 2009 to prepay approximately $8.3 million in principal on the
Company’s term loan through March 29,
2010.
|
|
(2)
|
Scheduled
interest payments on debt are calculated based on interest rates in effect
at December 31, 2009 as follows: (a) revolving line of credit – 4.73%; (b)
term loan (including PIK interest of 3%) –7.75%; and (c) North Carolina
revenue bonds – 1.5%.
|
We also
have commercial commitments as described below (in thousands):
|
Other
Commercial Commitments
|
Total
Amount Committed
|
Outstanding
at
12/31/09
|
Date
of
Expiration
|
|
Revolving Credit
Agreement
|
$
30,000
|
$
13,500
|
January
3, 2011
|
|
Letters
of Credit
|
$
15,000
|
$ 2,499
|
January
3, 2011
|
45
Off-Balance
Sheet Arrangements
Other
than the commercial commitments set forth above, we have no off-balance sheet
arrangements.
CRITICAL ACCOUNTING
POLICIES
The
preparation of financial statements in conformity with accounting principles
generally accepted in the U.S requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. The SEC has defined a company’s most critical
accounting policies as those that are most important to the portrayal of its
financial condition and results of operations, and which require the company to
make its most difficult and subjective judgments, often as a result of the need
to make estimates of matters that are inherently uncertain. Although
management believes that its estimates and assumptions are reasonable, they are
based upon information available when they are made. Actual results
may differ significantly from these estimates under different assumptions or
conditions. Other significant accounting policies are described in
Note 1 to the Consolidated Financial Statements. The Company has
identified the following critical accounting policies and
judgments:
Trade Receivables
.
We are engaged
in the manufacturing and distribution of building products and material for use
primarily by the manufactured housing and recreational vehicle industries and
other industrial markets. Trade receivables consist primarily of
amounts due to us from our normal business activities. We control
credit risk related to our trade receivables through credit approvals, credit
limits and monitoring procedures, and perform ongoing credit evaluations of our
customers. In assessing the carrying value of its trade receivables,
the Company estimates the recoverability by making assumptions based on our
historical write-off and collection experience and specific risks identified in
the accounts receivable portfolio. A change in the Company’s
assumptions would result in the Company recovering an amount of its accounts
receivable that differs from the carrying value. Additional changes
to the allowance could be necessary in the future if a customer’s
creditworthiness deteriorates, or if actual defaults are higher than the
Company’s historical experience. Any difference could result in an
increase or decrease in the allowance for doubtful accounts. The
Company does not accrue interest on any of its trade
receivables. Based on the Company’s estimates and assumptions, the
allowance for doubtful accounts was decreased by $1.3 million to $0.7 million at
December 31, 2009 compared to $2.0 million for 2008. In 2008, the
allowance for doubtful accounts was increased by $1.9 million to $2.0 million
compared to $153,000 for 2007 to reflect certain customers of the Company that
had closed or filed bankruptcy. There were no material changes made
to the allowance in 2007.
Inventories.
Estimated
inventory allowances for slow-moving and obsolete inventories are based on
current assessments of future demands, market conditions and related management
initiatives. Based on the Company’s estimates and assumptions, an
allowance for inventory obsolescence of $1.3 million and $2.0 million was
established at December 31, 2009 and 2008, respectively. If market
conditions or customer requirements change and are less favorable than those
projected by management, inventory allowances are adjusted
accordingly. The Company decreased its reserve for obsolescence by
$0.7 million at December 31, 2009 from $2.0 million at December 31, 2008
reflecting a continued focus on managing inventory to levels more consistent
with demand in order to maximize liquidity.
During 2008, depressed
market conditions and commodity market price declines contributed to a
significant decrease in product demand. As a result, the Company
increased its reserve for obsolescence by $0.9 million to $2.0 million at
December 31, 2008 from $1.1 million at December 31, 2007 to reflect inventory
dedicated to certain customers who had filed bankruptcy. In 2007, the
reserve was increased to $1.1 million from $139,000 in the prior year primarily
to reflect changes in customer demand.
Impairment of Long-Lived
Assets
.
The
Company records impairment losses on long-lived assets used in operations when
events and circumstances indicate that the assets might be impaired and the
undiscounted future cash flows estimated to be generated by those assets are
less than the carrying amount of those items. Events that may
indicate that certain long-lived assets might be impaired might include a
significant downturn in the economy or the RV or MH industries, and/or a loss of
a major customer or several customers. Our cash flow estimates are
based on historical results adjusted to reflect our best estimate of future
market and operating conditions and forecasts. The net carrying value
of assets not recoverable is reduced to fair value. Our estimates of
fair value represent our best estimate based
46
on
industry trends and reference to market rates and transactions. A
change in the Company’s business climate in 2008, including a significant
downturn in the Company’s operations, led to a required assessment of the
recoverability of the Company’s long-lived assets, which subsequently resulted
in an impairment charge of $3.5 million related to machinery and equipment which
is included in cost of goods sold on the consolidated statements of
operations. No events or changes in circumstances occurred that
required the Company to assess the recoverability of its property and equipment
for the years ended December 31, 2009 and 2007, and therefore the Company has
not recognized any impairment charges for those years. See Note 8 to
the Consolidated Financial Statements for further details regarding the
impairment charge in 2008.
All of
the Company’s goodwill and long-lived asset impairment assessments are based on
established fair value techniques, including discounted cash flow
analysis. These analyses require management to estimate both future
cash flows and an appropriate discount rate to reflect the risk inherent in the
current business model. The assumptions supporting valuation models,
including discount rates, are determined using the best estimates as of the date
of the impairment review. These estimates are subject to significant
uncertainty, and differences in actual future results may require further
impairment charges, which may be significant.
Impairment of Goodwill and Other
Acquired Intangible Assets
.
The Company has
made acquisitions in the past that included goodwill and other intangible assets
and has made a purchase subsequent to the balance sheet date which included
goodwill and other intangible assets. Goodwill and indefinite-lived
intangible assets are not amortized but are subject to an annual (or under
certain circumstances more frequent) impairment test based on its estimated fair
value. There are many assumptions and estimates underlying the
determination of an impairment loss. Another estimate using
different, but still reasonable, assumptions could produce a significantly
different result. Therefore, impairment losses could be recorded in
the future. We perform the required impairment test of goodwill and
indefinite-lived intangible assets annually, or more frequently if conditions
warrant. For purposes of the goodwill impairment test, the reporting
units of the Company are utilized. The impairment tests performed by
the Company are based on estimates of the fair value of the Company’s reporting
units. The fair value is calculated using a discounted cash flow
analysis. A change in the Company’s business climate in future
periods, including a significant downturn in the Company’s operations, and/or a
significant decrease in the market value of the Company’s discounted cash flows
could result in an impairment charge.
The
impairment calculation compares the implied fair value of reporting unit
goodwill and intangible assets with the carrying amount. If the
carrying amount of goodwill exceeds its implied fair value, an impairment loss
is recognized in an amount equal to that excess. Finite-lived
intangible assets that meet certain criteria continue to be amortized over
their
useful lives and are also subject to an impairment test based on estimated
undiscounted cash flows when impairment indicators exist, similar to other
long-lived assets.
Note 9 to
the Consolidated Financial Statements sets out the impact of $56.7 million of
charges taken in 2008 to recognize the impairment of goodwill and other
intangible assets and the factors which led to changes in estimates and
assumptions. Significant assumptions used in our step one discounted
cash flow analysis for the reporting units included a five-year compound average
growth rate (CAGR) of 0.7%, weighted average cost of capital of 14.5%, and a
terminal value growth rate of 2.5%.
Deferred Income
Taxes
. The carrying value of the Company’s deferred tax assets
assumes that the Company will be able to generate sufficient taxable income in
future years to utilize these deferred tax assets. If these assumptions
change, the Company may be required to record valuation allowances against its
gross deferred tax assets, which would cause the Company to record additional
income tax expense in the Company’s consolidated statements of operations.
Management evaluates the potential the Company will be able to realize its
gross deferred tax assets and assesses the need for valuation allowances on a
quarterly basis. The Company recorded an $18.0 million valuation allowance
in 2008 and increased the allowance by $1.1 million in 2009. See Note
14 to the Consolidated Financial Statements for further details.
47
OTHER
Sale
of Property
In 2009,
the Company sold its manufacturing facility in Ocala, Florida, resulting in a
pretax gain on sale of approximately $1.2 million. The building sale
was part of the Company’s continuing effort to reduce its leverage position. In
2008, the Company sold an idle manufacturing facility in Fontana, California,
which was exited in 2007, resulting in a pretax gain on sale of approximately
$4.2 million. The Fontana building formerly housed the Company’s west
coast molding division. In 2007, the Company consolidated this
molding division into its Fontana custom vinyls facility. The
consolidation was part of a multiphase integration effort following the
acquisition of Adorn.
In the
first quarter of 2010, the Company sold its owned manufacturing and distribution
facilities in Woodburn, Oregon and Fontana, California. The Company
is currently operating in the same facility in Oregon under a license agreement
with the purchaser while it explores options for a more suitable long-term
solution. In addition, the Company is operating in the same facility
in Fontana, California under a lease agreement with the purchaser for the use of
approximately one-half of the square footage previously occupied. The
Company anticipates recording a pretax gain on the sales of approximately $2.8
million in its first quarter 2010 operating results.
Purchase
of Property
Not
Applicable.
Inflation
The
prices of key raw materials, consisting primarily of lauan, gypsum, and
particleboard are influenced by demand and other factors specific to these
commodities, such as the price of oil, rather than being directly affected by
inflationary pressures. Prices of certain commodities have
historically been volatile. During periods of rising commodity
prices, we have generally been able to pass the increased costs to our customers
in the form of surcharges and price increases
.
We do not believe that
inflation had a material effect on results of operations for the periods
presented.
Not
applicable.
The
information required by this item is set forth in Item 15(a)(1) of Part IV on
page 51 of this Annual Report.
|
ITEM
9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
|
On June
22, 2009, the Audit Committee (the “Audit Committee”) of the Company’s Board of
Directors, selected Crowe Horwath LLP (“Crowe Horwath”) as its independent
registered public accounting firm for the fiscal year ending December 31,
2009. Also on June 22, 2009, the Audit Committee informed Ernst &
Young LLP (“E&Y”) that it will be dismissed as the Company’s independent
registered public accounting firm.
The
decision to change independent registered accounting firms was made by the
Company’s Audit Committee following the solicitation of proposals from three
other registered public accounting firms. The decision of the Audit
Committee was ratified by the Board of Directors. The decision was
made following a review of the proposals submitted, including the price and
services to be provided. The Audit Committee also gave significant
consideration to changes in the condition of the overall economic environment,
the industries in which the Company operates, and in the markets it
serves.
During
the fiscal years ended December 31, 2008 and 2007 and the subsequent interim
period through June 22, 2009, the Company had (i) no disagreements with E&Y
on any matter of accounting principles or practices, financial
48
statement
disclosure, or auditing scope or procedure, any of which that, if not resolved
to E&Y’s satisfaction, would have caused it to make reference to the subject
matter of any such disagreement in connection with its reports for such years
and interim period and (ii) no reportable events within the meaning of Item
304(a)(1)(v) of Regulation S-K during the two most recent fiscal years or the
subsequent interim period.
E&Y’s
reports on the Company’s consolidated financial statements for the fiscal years
ended December 31, 2008 and 2007 do not contain an adverse opinion or disclaimer
of opinion, nor are they qualified or modified as to uncertainty, audit scope,
or accounting principles.
During
the Company’s two most recent fiscal years ended December 31, 2008 and 2007, and
the subsequent interim period through the date of the Company’s appointment of
Crowe Horwath on June 22, 2009, neither the Company nor anyone on its behalf
consulted with Crowe Horwath regarding any of the matters or events set forth in
Item 304(a)(2)(i) or (ii) of Regulation S-K.
There
were no disagreements with accountants during the fiscal years 2008 and
2007.
Disclosure
Controls and Procedures
Under the
supervision and with the participation of our senior management, including our
Chief Executive Officer and Chief Financial Officer, the Company conducted an
evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures, as defined in Rules 13a-15(e) and 15(d)-15(e) under the
Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end
of the period covered by this annual report (the “Evaluation
Date”). Based on this evaluation, our Chief Executive Officer and
Chief Financial Officer concluded as of the Evaluation Date that our disclosure
controls and procedures were effective such that the information relating to the
Company, including consolidated subsidiaries, required to be disclosed in our
Securities and Exchange Commission (“SEC”) reports (i) is recorded, processed,
summarized, and reported within the time periods specified in SEC rules and
forms,
and (ii)
is accumulated and communicated to the Company’s management, including our Chief
Executive Officer and Chief Financial Officer, as appropriate to allow timely
decisions regarding required disclosure.
Changes in internal control over
financial reporting.
There have been no changes in our internal control
over financial reporting that occurred during the fourth quarter ended December
31, 2009 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
Management’s
Annual Report on Internal Control Over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act Rules
13a-15(f) and 15d-15(f). Under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief
Financial Officer, we conducted an evaluation of the effectiveness of our
internal control over financial reporting based on the framework in Internal
Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on our evaluation, we
concluded that our internal controls over financial reporting were effective as
of December 31, 2009. This annual report does not include an
attestation report of the Company's registered public accounting firm regarding
internal control over financial reporting. Management's report was
not subject to attestation by the Company's registered public accounting firm
pursuant to temporary rules of the Securities and Exchange Commission that
permit the Company to provide only management's report in this annual
report
.
A
proposal to approve the Patrick Industries, Inc. 2009 Omnibus Incentive Plan was
submitted to and approved at a Special Meeting of Shareholders held on November
19, 2009. Of the total votes cast, 6,849,505 votes were cast for the
proposal, 349,789 votes were cast against the proposal, and there were 5,431
abstentions.
49
|
|
|
Directors of the
Company
The
information required by this item with respect to directors is set forth in our
Proxy Statement for the Annual Meeting of Shareholders to be held on
May 20, 2010, under the captions “Election of Directors” and “Section
16(a) Beneficial Ownership Reporting Compliance,” which information is hereby
incorporated herein by reference.
Executive Officers of the
Registrant
The
information required by this item is set forth under the caption “Executive
Officers of the Company” in Part I of this Annual Report.
Audit
Committee
Information
on our Audit Committee is contained under the caption “Audit Committee” in our
Proxy Statement for the Annual Meeting of Shareholders to be held on May 20,
2010 and is incorporated herein by reference.
The
Company has determined that Terrence D. Brennan,
Keith V.
Kankel, Larry D. Renbarger and Walter E. Wells all qualify as “audit
committee financial experts” as defined in Item 407(d)(5)(ii) of Regulation S-K,
and that these directors are “independent” as the term is used in 407(a)(1) of
Regulation S-K.
Code of Ethics and Business
Conduct
We have
adopted a Code of Ethics and Business Conduct Policy applicable to all
employees. Additionally, we have adopted a Code of Ethics Applicable
to Senior Executives including, but not limited to, the Chief Executive Officer
and Chief Financial Officer of the Company. Our Code of Ethics and
Business Conduct, and our Code of Ethics Applicable to Senior Executives are
available on the Company’s web site at
www.patrickind.com
under “Corporate Governance”. We intend to post on our web site any
amendments to, or waivers from, our Corporate Governance Guidelines and
our Code
of Ethics Policy Applicable to Senior Executives. We will provide
shareholders with a copy of these policies without charge upon written request
directed to the Company’s Corporate Secretary at the Company’s
address.
Corporate
Governance
Information
on our corporate governance practices is contained under the caption “Corporate
Governance” in our Proxy Statement for the Annual Meeting of Shareholders to be
held on May 20, 2010 and incorporated herein by reference.
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 20, 2010, under
the captions “Compensation of Executive Officers and Directors,” “Compensation
Committee Interlocks and Director Participation,” and “Compensation Committee
Report,” and is incorporated herein by reference.
|
|
ITEM
12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
|
The
information required by this item is set forth in our Proxy Statement for the
Annual Meeting of Shareholders to be held on May 20, 2010, under the
captions “Equity Compensation Plan Information” and “Security Ownership of
Certain Beneficial Owners and Management,” and is incorporated herein by
reference.
50
|
ITEM
13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
The
information required by this item is set forth in our Proxy Statement for the
Annual Meeting of Shareholders to be held on May 20, 2010, under the
captions “Related Party Transactions” and “Independent Directors,” and is
incorporated herein by reference.
The
information required by this item is set forth in our Proxy Statement for the
Annual Meeting of Shareholders to be held on May 20, 2010, under the heading
“Independent Public Accountants,” and is incorporated herein by
reference.
|
|
|
|
(a)
|
(1)
The financial statements listed in the accompanying Index to the Financial
Statements on page F-1 of the separate financial section of this Report
are incorporated herein by
reference.
|
|
|
(3) The
exhibits required to be filed as part of this Annual Report on Form 10-K
are listed under (c) below.
|
|
|
(c)
|
Exhibits
|
|
Exhibit
Number
|
Exhibits
|
|
3.1**
|
Articles
of Incorporation of Patrick Industries, Inc.
|
|
3.2
|
Amended
and Restated By-laws (filed as Exhibit 3.1 to the Company’s Form 8-K on
January 21, 2009 and incorporated herein by
reference).
|
|
4.1
|
Rights
Agreement, dated March 21, 2006, between Patrick Industries, Inc. and
National City Bank, as Rights Agent (filed as Exhibit 10.1 to the
Company’s Form 8-K filed on March 23, 2006 and incorporated herein by
reference).
|
|
4.2
|
Amendment
No. 1 to Rights Agreement, dated May 18, 2007, between Patrick Industries,
Inc. and National City Bank, as Rights Agent (filed as Exhibit 10.5 to the
Company’s Form 8-K filed on May 24, 2007 and incorporated herein by
reference).
|
|
4.3
|
Amendment
No. 2 to Rights Agreement, dated March 12, 2008, between Patrick
Industries, Inc. and National City Bank, as Rights Agent (filed as Exhibit
10.3 to the Company’s Form 8-K filed on March 13, 2008 and incorporated
herein by reference).
|
|
4.4
|
Second
Amended and Restated Registration Rights Agreement, dated as of December
11, 2008, by and among Patrick Industries, Inc., Tontine Capital Partners,
L.P., Tontine Capital Overseas Master Fund, L.P. and the lenders party
thereto (filed as Exhibit 10.3 to the Company’s Form 8-K filed on December
15, 2008 and incorporated by reference).
|
|
10.1*
|
Patrick
Industries, Inc. 2009 Omnibus Incentive Plan, (filed as Appendix A to the
Company’s revised Definitive Proxy Statement on Schedule 14A filed on
October 20, 2009 and incorporated herein by reference).
|
|
10.2*,
**
|
Form
of Employment Agreements with Executive Officers.
|
|
10.3*,
**
|
Form
of Officers Retirement Agreement.
|
51
| Exhibit Number | Exhibits |
|
10.4**
|
Form
of Non-Qualified Stock Option.
|
|
10.5**
|
Form
of Directors’ Annual Restricted Stock Grant.
|
|
10.6**
10.7
|
Form
of Officer and Employee Restricted Stock Award.
Credit
Agreement, dated May 18, 2007, among Patrick Industries, Inc., JPMorgan
Chase Bank, N.A.; Fifth Third Bank; Bank of America, N.A./LaSalle Bank
National Association; Key Bank, National Association; RBS Citizens,
National Association/Charter One Bank; Associated Bank; National City
Bank; and 1st Source Bank (collectively, the “Lenders” and JPMorgan Chase
Bank, N.A., as administrative agent) (filed as Exhibit 10.1 to the
Company’s Form 8-K filed on May 24, 2007 and incorporated herein by
reference).
|
|
10.8
|
First
Amendment and Waiver, dated March 19, 2008, among Patrick Industries,
Inc., the Lenders and JPMorgan Chase Bank, N.A. (filed as Exhibit 10.1 to
the Company’s Form 8-K filed on March 26, 2008 and incorporated herein by
reference).
|
|
10.9
|
Second
Amendment and Waiver, dated December 11, 2008, among Patrick Industries,
Inc., the Lenders and JPMorgan Chase Bank, N.A. (filed as Exhibit 10.1 to
the Company’s Form 8-K filed on December 15, 2008 and incorporated herein
by reference).
|
|
10.10
|
Warrant
Agreement, dated December 11, 2008, among Patrick Industries, Inc., and
the holders of the Warrants (filed as Exhibit 10.2 to the Company’s Form
8-K filed on December 15, 2008 and incorporated herein by
reference).
|
|
10.11
|
Third
Amendment and Waiver, dated April 14, 2009, among Patrick Industries,
Inc., the Lenders and JPMorgan Chase Bank, N.A. (filed as Exhibit 10.1 to
the Company’s Form 8-K filed on April 15, 2009 and incorporated herein by
reference).
|
|
10.12
|
Fourth
Amendment and Waiver, dated December 11, 2009, among Patrick Industries,
Inc., the Lenders and JPMorgan Chase Bank, N.A. (filed as Exhibit 10.1 to
the Company’s Form 8-K filed on December 16, 2009 and incorporated herein
by reference).
|
|
10.13
|
Securities
Purchase Agreement, dated March 10, 2008, by and among Tontine Capital
Partners, L.P., Tontine Capital Overseas Master Fund L.P., and Patrick
Industries, Inc. (filed as Exhibit 10.1 to Form 8-K filed on December 15,
2008 and incorporated herein by reference).
|
|
12**
|
Statement
of Computation of Operating Ratios.
|
|
16.1
|
Letter
from Ernst & Young LLP to the SEC dated June 26, 2009 (filed as
Exhibit 16.1 to Form 8-K filed on June 26, 2009 and incorporated herein by
reference).
|
|
21**
|
Subsidiaries
of the Registrant.
|
|
23.1**
23.2**
|
Consent
of Crowe Horwath LLP.
Consent
of Ernst & Young LLP.
|
|
31.1**
|
Certification
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Chief
Executive Officer.
|
52
| Exhibit Number | Exhibits |
|
31.2**
|
Certification
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Chief
Financial Officer.
|
|
32**
|
Certification
pursuant to 18 U.S.C. Section 1350.
|
*Management
contract or compensatory plan or arrangement.
**Filed
herewith.
|
|
53
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
PATRICK INDUSTRIES, INC.
Date: March
30,
2010
By:
/s/ Todd M.
Cleveland
Todd M. Cleveland
President and Chief Executive
Officer
Pursuant
to the Requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
|
Signature
|
Title
|
Date
|
||
|
/s/
Paul E. Hassler
|
Chairman
of the Board
|
March 30, 2010
|
||
|
Paul
E. Hassler
|
||||
|
/s/
Todd M. Cleveland
|
President
and Chief Executive Officer
|
March 30, 2010
|
||
|
Todd M.
Cleveland
|
(Principal
Executive Officer)
|
|||
|
/s/
Andy L. Nemeth
|
Executive
Vice President-Finance, Secretary-
|
March 30, 2010
|
||
|
Andy
L. Nemeth
|
Treasurer,
Chief Financial Officer and Director
|
|||
|
(Principal
Financial Officer)
|
||||
|
/s/
Darin R. Schaeffer
|
Vice
President and Corporate Controller
|
March 30, 2010
|
||
|
Darin
R. Schaeffer
|
(Principal
Accounting Officer)
|
|||
|
/s/
Terrence D. Brennan
|
Director
|
March 30, 2010
|
||
|
Terrence
D. Brennan
|
||||
|
/s/
Joseph M. Cerulli
|
Director
|
March 30, 2010
|
||
|
Joseph
M. Cerulli
|
||||
|
/s/
Keith V. Kankel
|
Director
|
March 30, 2010
|
||
|
Keith
V. Kankel
|
||||
|
/s/
Larry D. Renbarger
|
Director
|
March 30, 2010
|
||
|
Larry
D. Renbarger
|
||||
|
/s/
Walter E. Wells
|
Director
|
March 30, 2010
|
||
| Walter E. Wells | ||||
54
PATRICK
INDUSTRIES, INC.
Index
to the Financial Statements
|
Report
of Independent Registered Public Accounting Firm, Crowe Horwath
LLP
|
F-2
|
|
Report
of Independent Registered Public Accounting Firm, Ernst & Young
LLP
|
F-3
|
|
Financial Statements
:
|
|
|
Consolidated
Statements of Financial Position
|
F-4
|
|
Consolidated
Statements of Operations
|
F-5
|
|
Consolidated
Statements of Shareholders' Equity
|
F-6
|
|
Consolidated
Statements of Cash Flows
|
F-7
|
|
Notes
to Consolidated Financial Statements
|
F-8
|
F-1
Report
of Independent Registered Public Accounting Firm
To the
Shareholders and Board of Directors of Patrick Industries, Inc.:
We have
audited the accompanying consolidated statement of financial position of Patrick
Industries, Inc. and subsidiary companies as of December 31, 2009, and the
related consolidated statements of operations, shareholders’ equity, and cash
flows for the year ended December 31, 2009. These financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no
such opinion. An audit 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 audit provides a reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of the Company as of December 31,
2009, and the results of its operations and its cash flows for the year ended
December 31, 2009, in conformity with U.S. generally accepted accounting
principles.
/s/ Crowe
Horwath LLP
Elkhart,
Indiana
March 30,
2010
F-2
Report
of Independent Registered Public Accounting Firm
To the
Board of Directors and Shareholders of Patrick Industries, Inc. and
Subsidiaries:
We have
audited the accompanying consolidated statements of financial position of
Patrick Industries, Inc. and subsidiaries as of December 31, 2008 and 2007, and
the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the two years in the period ended December 31,
2008. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these financial statements based on our 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. We were
not engaged to perform an audit of the Company’s internal control over financial
reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Patrick Industries,
Inc. and subsidiaries at December 31, 2008 and 2007, and the consolidated
results of their operations and their cash flows for each of the two years in
the period ended December 31, 2008, in conformity with U.S. generally accepted
accounting principles.
/s/ Ernst
& Young LLP
Grand
Rapids, Michigan
April 14,
2009
F-3
|
PATRICK
INDUSTRIES, INC.
|
|||||||
|
CONSOLIDATED
STATEMENTS OF FINANCIAL POSITION
|
|||||||
|
As
of December 31,
|
|||||||
|
(thousands
except share data)
|
2009
|
2008
|
|||||
|
ASSETS
|
|||||||
|
Current
assets
|
|||||||
|
Cash
and cash equivalents
|
$ | 60 | $ | 2,672 | |||
|
Trade
receivables, net of allowance for doubtful
accounts
(2009: $700; 2008: $2,031)
|
12,507 | 8,290 | |||||
|
Inventories
|
17,485 | 21,471 | |||||
|
Prepaid
expenses and other
|
1,981 | 2,803 | |||||
|
Assets
held for sale
|
4,825 | 15,816 | |||||
|
Total current
assets
|
36,858 | 51,052 | |||||
|
Property,
plant and equipment, net
|
26,433 | 34,621 | |||||
|
Goodwill
|
2,140 | 2,140 | |||||
|
Intangible
assets, net
|
7,047 | 7,400 | |||||
|
Deferred
tax assets, net of valuation allowance (2009: $19,087;
2008:
$17,967)
|
- | - | |||||
|
Deferred
financing costs, net of accumulated amortization
(2009:
$2,185; 2008: $891)
|
1,463 | 2,270 | |||||
|
Other
non-current assets
|
3,096 | 3,010 | |||||
|
TOTAL
ASSETS
|
$ | 77,037 | $ | 100,493 | |||
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|||||||
|
Current
liabilities
|
|||||||
|
Current
maturities of long-term debt
|
$ | 10,359 | $ | 14,741 | |||
|
Short-term
borrowings
|
13,500 | 18,200 | |||||
|
Accounts
payable
|
5,874 | 5,156 | |||||
|
Accrued
liabilities
|
5,275 | 7,252 | |||||
|
Total current
liabilities
|
35,008 | 45,349 | |||||
|
Long-term
debt, less current maturities and discount
|
18,408 | 27,367 | |||||
|
Deferred
compensation and other
|
5,963 | 5,708 | |||||
|
Deferred
tax liabilities
|
1,309 | 1,309 | |||||
|
TOTAL
LIABILITIES
|
60,688 | 79,733 | |||||
|
COMMITMENTS
AND CONTINGENCIES
|
|||||||
|
SHAREHOLDERS’
EQUITY
|
|||||||
|
Preferred
stock, no par value; authorized
1,000,000
shares
|
- | - | |||||
|
Common
stock, no par value; authorized
20,000,000
shares; issued 2009 - 9,182,189
shares; issued
2008 – 9,025,939 shares
|
53,588 | 53,522 | |||||
|
Accumulated
other comprehensive loss
|
(1,181 | ) | (1,439 | ) | |||
|
Additional
paid-in-capital
|
148 | 362 | |||||
|
Accumulated
deficit
|
(36,206 | ) | (31,685 | ) | |||
|
TOTAL SHAREHOLDERS’
EQUITY
|
16,349 | 20,760 | |||||
|
TOTAL
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
$ | 77,037 | $ | 100,493 | |||
|
See
accompanying Notes to Consolidated Financial Statements.
|
|||||||
F-4
|
PATRICK
INDUSTRIES, INC.
|
||||||||||||
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
||||||||||||
|
(thousands
except per share data)
|
For
the years ended December 31,
|
|||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
NET
SALES
|
$ | 212,522 | $ | 325,151 | $ | 370,210 | ||||||
|
Cost
of goods sold
|
189,643 | 297,133 | 323,964 | |||||||||
|
Restructuring
charges
|
- | 779 | 2,181 | |||||||||
|
GROSS
PROFIT
|
22,879 | 27,239 | 44,065 | |||||||||
|
Operating
expenses:
|
||||||||||||
|
Warehouse
and delivery
|
10,248 | 16,533 | 18,879 | |||||||||
|
Selling,
general and administrative
|
12,132 | 26,859 | 26,712 | |||||||||
|
Goodwill
impairment
|
- | 27,374 | - | |||||||||
|
Intangible
assets impairments
|
- | 29,353 | - | |||||||||
|
Restructuring
charges
|
- | 202 | 183 | |||||||||
|
Amortization
of intangible assets
|
353 | 1,716 | 1,001 | |||||||||
|
Gain
on sale of fixed assets
|
(1,201 | ) | (4,566 | ) | (231 | ) | ||||||
|
Total
operating expenses
|
21,532 | 97,471 | 46,544 | |||||||||
|
OPERATING INCOME
(LOSS)
|
1,347 | (70,232 | ) | (2,479 | ) | |||||||
|
Stock
warrants revaluation
|
817 | - | - | |||||||||
|
Interest
expense, net
|
6,442 | 6,377 | 6,529 | |||||||||
|
Loss
from continuing operations before income tax benefit
|
(5,912 | ) | (76,609 | ) | (9,008 | ) | ||||||
|
Income
tax benefit
|
(469 | ) | (9,952 | ) | (2,928 | ) | ||||||
|
Loss
from continuing operations
|
(5,443 | ) | (66,657 | ) | (6,080 | ) | ||||||
|
Income
(loss) from discontinued operations
|
1,486 | (7,699 | ) | 351 | ||||||||
|
Income
taxes (benefit)
|
564 | (2,849 | ) | 114 | ||||||||
|
I
ncome (loss) from discontinued
operations, net of tax
|
922 | (4,850 | ) | 237 | ||||||||
|
NET
LOSS
|
$ | (4,521 | ) | $ | (71,507 | ) | $ | (5,843 | ) | |||
|
Basic
and diluted net income (loss) per common share:
|
||||||||||||
|
Continuing
operations
|
$ | (0.59 | ) | $ | (8.32 | ) | $ | (1.07 | ) | |||
|
Discontinued
operations
|
0.10 | (0.61 | ) | 0.04 | ||||||||
|
Net
loss
|
$ | (0.49 | ) | $ | (8.93 | ) | $ | (1.03 | ) | |||
|
Weighted
average shares outstanding – basic and diluted
|
9,198 | 8,009 | 5,653 | |||||||||
See
accompanying Notes to Consolidated Financial Statements.
F-5
|
PATRICK
INDUSTRIES, INC.
|
|||||||||||||||||||||||||||
|
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY
|
|||||||||||||||||||||||||||
|
Years
Ended December 31, 2009, 2008 and 2007
(thousands
except share data)
|
Comprehensive
Income
(Loss)
|
Preferred
Stock
|
Common
Stock
|
Accumulated
Other
Comprehensive
Loss
|
Additional
Paid-in-Capital
|
Retained
Earnings
(Accumulated
(Deficit)
|
Total
|
||||||||||||||||||||
|
Balance, January
1, 2007
|
$ -
|
$
20,360
|
$ (97)
|
$ 148
|
$ 45,665
|
$ 66,076
|
|||||||||||||||||||||
|
Net
loss
|
$ (5,843)
|
-
|
-
|
-
|
-
|
(5,843)
|
(5,843)
|
||||||||||||||||||||
|
Change
in accumulated pension obligation, net of tax
|
53
|
-
|
-
|
53
|
-
|
-
|
53
|
||||||||||||||||||||
|
Change
in fair value of interest rate swaps, net of
tax
|
(628)
|
-
|
-
|
(628)
|
-
|
-
|
(628)
|
||||||||||||||||||||
|
Issuance
of common stock for stock award plan
|
-
|
-
|
286
|
-
|
-
|
-
|
286
|
||||||||||||||||||||
|
Issuance
of 980,000 shares in private placement, net of expenses
|
-
|
-
|
10,851
|
-
|
-
|
-
|
10,851
|
||||||||||||||||||||
|
Net
Issuance of 128,553 shares under stock based plans including tax
benefit
|
-
|
-
|
82
|
-
|
-
|
-
|
82
|
||||||||||||||||||||
|
Issuance
of 37,125 shares upon exercise of common stock options including tax
benefit
|
-
|
-
|
359
|
-
|
-
|
-
|
359
|
||||||||||||||||||||
|
Stock
option and compensation expense
|
-
|
-
|
874
|
-
|
-
|
-
|
874
|
||||||||||||||||||||
|
Rights
offering expenses
|
-
|
-
|
(177)
|
-
|
-
|
-
|
(177)
|
||||||||||||||||||||
|
Balance,
December 31, 2007
|
$ (6,418)
|
$ -
|
$
32,635
|
$ (672)
|
$ 148
|
$ 39,822
|
$ 71,933
|
||||||||||||||||||||
|
Net
loss
|
$ (71,507)
|
-
|
-
|
-
|
-
|
(71,507)
|
(71,507)
|
||||||||||||||||||||
|
Change
in accumulated pension obligation, net of tax
|
(17)
|
-
|
-
|
(17)
|
-
|
-
|
(17)
|
||||||||||||||||||||
|
Change
in fair value of interest rate swaps, net of tax
|
(750)
|
-
|
-
|
(750)
|
-
|
-
|
(750)
|
||||||||||||||||||||
|
Issuance
of warrants to purchase 474,049 shares
|
-
|
-
|
-
|
-
|
214
|
-
|
214
|
||||||||||||||||||||
|
Issuance
of common stock for stock award plan
|
-
|
-
|
228
|
-
|
-
|
-
|
228
|
||||||||||||||||||||
|
Issuance
of 1,125,000 shares in private placement
|
-
|
-
|
7,875
|
-
|
-
|
-
|
7,875
|
||||||||||||||||||||
|
Issuance
of 1,850,000 shares in rights offering
|
-
|
-
|
12,950
|
-
|
-
|
-
|
12,950
|
||||||||||||||||||||
|
Shares
used to pay taxes on stock grants
|
-
|
-
|
(75)
|
-
|
-
|
-
|
(75)
|
||||||||||||||||||||
|
Stock
option and compensation expense
|
-
|
-
|
497
|
-
|
-
|
-
|
497
|
||||||||||||||||||||
|
Rights
offering and private placement expenses
|
-
|
-
|
(588)
|
-
|
-
|
-
|
(588)
|
||||||||||||||||||||
|
Balance,
December 31, 2008
|
$ (72,274)
|
$ -
|
$
53,522
|
$ (1,439)
|
$ 362
|
$ (31,685)
|
$ 20,760
|
||||||||||||||||||||
|
Net
loss
|
$ (4,521)
|
-
|
-
|
-
|
-
|
(4,521)
|
(4,521)
|
||||||||||||||||||||
|
Change
in accumulated pension obligation, net of tax
|
(60)
|
-
|
-
|
(60)
|
-
|
-
|
(60)
|
||||||||||||||||||||
|
Amortization
of loss on interest rate swap agreements, net of tax
|
318
|
-
|
-
|
318
|
-
|
-
|
318
|
||||||||||||||||||||
|
Reclass
of warrants to long-term liabilities
|
-
|
-
|
-
|
-
|
(214)
|
-
|
(214)
|
||||||||||||||||||||
|
Issuance
of 5,250 shares upon exercise of common stock
options
|
-
|
-
|
7
|
-
|
-
|
-
|
7
|
||||||||||||||||||||
|
Stock
option and compensation expense
|
-
|
-
|
98
|
-
|
-
|
-
|
98
|
||||||||||||||||||||
|
Equity
issuance expenses
|
-
|
-
|
(39)
|
-
|
-
|
-
|
(39)
|
||||||||||||||||||||
|
Balance,
December 31, 2009
|
$ (4,263)
|
$ -
|
$
53,588
|
$ (1,181)
|
$ 148
|
$ (36,206)
|
$
16,349
|
||||||||||||||||||||
|
See
accompanying Notes to Consolidated Financial Statements.
|
|||||||||||||||||||||||||||
F-6
|
PATRICK
INDUSTRIES, INC.
|
|||||||||
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|||||||||
|
For the
years ended December 31,
|
|||||||||
|
(thousands)
|
2009
|
2008
|
2007
|
||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|||||||||
|
Net
loss
|
$ (4,521)
|
$ (71,507)
|
$ (5,843)
|
||||||
|
Adjustments
to reconcile net loss to net cash provided by operating
activities:
|
|||||||||
|
Depreciation
|
4,918
|
6,357
|
5,367
|
||||||
|
Amortization
of intangible assets
|
353
|
1,716
|
1,001
|
||||||
|
Stock-based
compensation expense
|
98
|
726
|
1,519
|
||||||
|
Deferred
compensation expense
|
250
|
615
|
1,303
|
||||||
|
Provision
for bad debts
|
950
|
1,998
|
4
|
||||||
|
Deferred
income taxes
|
-
|
(13,690)
|
(144)
|
||||||
|
Gain
on sale of fixed assets
|
(1,201)
|
(4,566)
|
(231)
|
||||||
|
Restructuring
charges
|
-
|
221
|
1,297
|
||||||
|
Goodwill
impairment
|
-
|
27,374
|
-
|
||||||
|
Intangible
assets impairments
|
-
|
29,353
|
-
|
||||||
|
Fixed
asset impairments
|
-
|
3,505
|
-
|
||||||
|
Stock
warrants revaluation
|
817
|
-
|
-
|
||||||
| (Increase) decrease in cash surrender value of life insurance | (109) | 87 | 87 | ||||||
|
Deferred
financing amortization
|
1,294
|
626
|
265
|
||||||
|
Gain
from divestitures
|
(683)
|
-
|
-
|
||||||
|
Adjustment
to carrying value of assets held for sale
|
-
|
6,070
|
-
|
||||||
|
Interest
paid-in-kind
|
1,035
|
-
|
-
|
||||||
|
Amortization
of loss on interest rate swap agreements
|
318
|
46
|
- | ||||||
|
Change
in fair value of derivative financial instruments
|
(697)
|
-
|
-
|
||||||
|
Other
|
(159)
|
-
|
-
|
||||||
|
Change
in operating assets and liabilities:
|
|||||||||
|
Trade
receivables
|
(5,414)
|
1,806
|
16,069
|
||||||
|
Inventories
|
4,703
|
16,523
|
17,252
|
||||||
|
Prepaid
expenses and other
|
822
|
1,681
|
50
|
||||||
|
Income
taxes receivable
|
-
|
3,691
|
(3,404)
|
||||||
|
Accounts
payable and accrued liabilities
|
1,363
|
(10,251)
|
(11,735)
|
||||||
|
Payments
on deferred compensation obligations
|
(428)
|
(395)
|
(349)
|
||||||
|
Net
cash provided by operating activities
|
3,709
|
1,986
|
22,508
|
||||||
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|||||||||
|
Capital
expenditures
|
(309)
|
(4,218)
|
(2,453)
|
||||||
|
Proceeds
from sale of property, equipment and facility
|
1,697
|
6,594
|
1,269
|
||||||
|
Proceeds
from sale of American Hardwoods operation and facility
|
4,450
|
-
|
-
|
||||||
|
Proceeds
from sale of aluminum extrusion operation
|
7,374
|
-
|
-
|
||||||
|
Proceeds
from life insurance
|
67
|
101
|
516
|
||||||
|
Insurance
premiums paid
|
(54)
|
(615)
|
(252)
|
||||||
|
Acquisition
of American Hardwoods
|
-
|
-
|
(7,136)
|
||||||
|
Acquisition
of Adorn, LLC, net of cash acquired
|
-
|
-
|
(78,737)
|
||||||
|
Net
cash provided by (used in) investing activities
|
13,225
|
1,862
|
(86,793)
|
||||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|||||||||
|
Borrowings
under long-term debt agreements
|
-
|
501
|
101,801
|
||||||
|
Short-term
borrowings (payments), net
|
(4,700)
|
16,721
|
(8,521)
|
||||||
|
Principal
payments on long-term debt
|
(14,483)
|
(38,317)
|
(38,144)
|
||||||
|
Proceeds
from private placement of common stock, net of expenses
|
-
|
7,875
|
10,851
|
||||||
|
Proceeds
from rights offering, net of expenses
|
-
|
12,950
|
-
|
||||||
|
Payment
of deferred financing/debt issuance costs
|
(487)
|
(1,035)
|
(2,126)
|
||||||
|
Proceeds
from exercise of stock options, including tax benefit
|
7
|
-
|
359
|
||||||
|
Other
|
117
|
(22)
|
(141)
|
||||||
|
Net
cash provided by (used in) financing activities
|
(19,546)
|
(1,327)
|
64,079
|
||||||
|
Increase (decrease) in cash and
cash equivalents
|
(2,612)
|
2,521
|
(206)
|
||||||
|
Cash
and cash equivalents at beginning of year
|
2,672
|
151
|
357
|
||||||
|
Cash
and cash equivalents at end of year
|
$ 60
|
$ 2,672
|
$ 151
|
||||||
|
See
accompanying Notes to Consolidated Financial Statements.
|
|||||||||
F-7
PATRICK
INDUSTRIES, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1.
ORGANIZATION AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
Principles
of Consolidation and Basis of Presentation
The
accompanying consolidated financial statements have been prepared pursuant to
the rules and regulations of the Securities and Exchange Commission (“SEC”) and
in accordance with U.S. generally accepted accounting principles (“U.S.
GAAP”). The consolidated financial statements include the accounts of
Patrick Industries, Inc., and its wholly owned subsidiaries, Adorn Holdings,
Inc. (“Adorn”), Adorn, LLC, Harlan Machinery, Inc., and Machinery, Inc.
(“Patrick” or the “Company"). All significant intercompany accounts
and transactions have been eliminated in consolidation.
Certain
amounts in prior years’ consolidated financial statements and footnotes have
been reclassified to conform to the current year presentation.
In
preparation of Patrick’s consolidated financial statements as of December 31,
2009, management evaluated all material subsequent events or transactions that
occurred after the balance sheet date through the date of issuance of our Form
10-K for potential recognition or disclosure in the consolidated financial
statements.
Use
of Estimates
The
preparation of the consolidated financial statements in conformity with U.S.
GAAP requires management to
make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Our significant estimates include
the valuation of goodwill, the valuation of long-lived assets, the allowance for
doubtful accounts, excess and obsolete inventories, and deferred tax asset
valuation allowances. Actual results could differ from the amounts
reported.
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 and Canada. As of December 31, 2009, the Company maintained 11
manufacturing plants and 11 distribution facilities located in 12
states. Patrick operates in three business
segments: Primary Manufactured Products, Distribution, and Other
Component Manufactured Products. Unallocated expenses, when combined
with the operating segments and after the elimination of intersegment revenues,
totals to the amounts included in the consolidated financial
statements.
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 they are subject to prevailing market conditions, both
domestically and internationally. The Company's purchases of these
items can be based on supplier allocations.
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 collectability is reasonably
assured and not contingent upon the customer’s use or resale of the
product.
Shipping
and Handling - The Company records freight billed to customers in net sales and
the corresponding costs incurred for shipping and handling are recorded in
warehouse and delivery expenses. The amounts recorded in warehouse
and delivery expenses were $0.4 million, $1.0 million and $0.8 million for 2009,
2008, and 2007, respectively.
F-8
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 expenses 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 (“SG&A”) expenses.
Restructuring
Charges
Restructuring
charges for the years ended December 31, 2008 and 2007 are comprised of expenses
associated with the restructuring plan announced in conjunction with the
Company’s May 2007 acquisition of Adorn and included the closure of duplicate
facilities, severance related to the elimination of redundant jobs, and various
asset write-downs related to the consolidation of product
lines. Losses on property lease obligations are recorded when the
lease is abandoned. Termination benefits are recorded at the time
they are communicated to the affected employees. Asset write-downs
are recorded consistent with our accounting policy related to long-lived
assets. See Note 5 for further information.
Income
Per Common Share
Basic net
income per common share is computed by dividing net income by the
weighted-average number of common shares outstanding. Diluted net
income per common share is computed by dividing net income by the
weighted-average number of common shares outstanding, plus the dilutive effect
of stock options, stock awards, and warrants. The dilutive effect of
stock options, stock awards, and warrants is calculated under the treasury stock
method using the average market price for the period. Certain common
stock equivalents related to options and warrants were not included in the
computation of diluted net income per share because those options’ and warrants’
exercise prices were greater than the average market price of the common
shares. See Note 16 for the calculation of both basic and diluted net
income per common share.
For the
years ended December 31, 2009, 2008 and 2007, there is no difference in basic or
diluted earnings per share since a net loss was recorded in each of these
periods, resulting in all common stock equivalents having no dilutive
effect.
Cash
and Cash Equivalents
Cash and
cash equivalents include all overnight sweep investments with an initial
maturity of up to 90 days.
Trade
Receivables
Trade
receivables, including those designated as held for sale, consist primarily of
amounts due to the Company from its normal business activities. In
assessing the carrying value of its trade receivables, the Company estimates the
recoverability by making assumptions based on factors such as current overall
and industry-specific economic conditions, historical and anticipated customer
performance, historical write-off experience, the level of past-due
amounts, and specific risks identified in the trade receivables
portfolio. A change in the Company’s assumptions would result in the
Company recovering an amount of its trade receivables that differs from the
carrying value. The Company does not accrue interest on any of its
trade receivables.
The
following table summarizes the changes in the allowance for doubtful
accounts:
|
(thousands)
|
2009
|
2008
|
||||||
|
Balance
at January 1
|
$ | 2,031 | $ | 153 | ||||
|
Provisions
made during the year
|
950 | 1,998 | ||||||
|
Write-offs
|
(2,364 | ) | (208 | ) | ||||
|
Recoveries
during the year
|
83 | 88 | ||||||
|
Balance
at December 31
|
$ | 700 | $ | 2,031 | ||||
F-9
Inventories
Inventories
are stated at the lower of cost (First-In, First-Out (FIFO) Method) or
market. Based on the inventory aging and other considerations for
realizable value, the Company writes down the carrying value to market value
where appropriate. The Company reviews inventory on-hand and records
provisions for obsolete inventory. A significant increase in the
demand for the Company’s raw materials could result in a short-term increase in
the cost of inventory purchases, while a significant decrease in demand could
result in an increase in the amount of excess inventory quantities on
hand. Any significant unanticipated changes in demand could have a
significant impact on the value of the Company’s inventory and operating
results. The cost of manufactured inventories includes raw materials,
labor and overhead. The Company’s distribution inventories include
the cost of raw materials and inbound freight. The Company estimates
inventory allowances for slow-moving and obsolete inventories based on current
assessments of future demands, market conditions and related management
initiatives.
Assets
Held for Sale
The
components of assets held for sale as of December 31 are as
follows:
| (thousands) | 2009 | 2008 | ||||||
|
American
Hardwoods
|
$ | - | $ | 4,340 | ||||
|
Aluminum
extrusion operation
|
- | 9,894 | ||||||
|
Owned
real estate
|
4,825 | 1,582 | ||||||
|
Total
|
$ | 4,825 | $ | 15,816 |
The
assets reclassified to held for sale as of December 31 by class are as
follows:
| (thousands) | 2009 | 2008 | ||||||
|
Trade
receivables , net
|
$ | - | $ | 2,606 | ||||
|
Inventories
|
- | 3,755 | ||||||
|
Property,
plant and equipment, net
|
4,825 | 9,455 | ||||||
|
Total
assets
|
$ | 4,825 | $ | 15,816 |
Assets
held for sale pertaining to discontinued operations include American Hardwoods,
Inc. (“American Hardwoods”) and the aluminum extrusion
operation. Approximately $4.3 million of carrying value pertaining to
the American Hardwoods operation was reclassified to assets held for sale as of
December 31, 2008, of which $2.5 million was related to the building that housed
the operation. Certain assets and the business of American Hardwoods
were sold in January 2009, and the building was subsequently sold in June
2009. Approximately $9.9 million of carrying value pertaining to the
aluminum extrusion operation was reclassified to assets held for sale as of
December 31, 2008. This operation was sold in July
2009. See Note 4 for further details.
Approximately
$1.6 million of carrying value pertaining to the Company’s owned facility
located in Fontana, California was classified as held for sale as of December
31, 2009 and 2008. The Company’s owned facility in Woodburn, Oregon
was classified as held for sale as of December 31, 2009 at an approximate
carrying value of $3.2 million.
The
Oregon facility was subsequently sold in February 2010 for $4.2
million. In March 2010, the California facility was sold for $4.9
million. Approximately $8.3 million of the net proceeds from the
sales were used to pay down principal on the Company’s term loan through March
29, 2010. See Note 20 for further details.
These
assets are included on a separate line in the consolidated statements of
financial position at the lower of their carrying value or their estimated fair
value.
Property,
Plant and Equipment
Property,
plant and equipment (“PP&E”) is recorded at cost. Depreciation is
computed primarily by the straight-line method applied to individual items based
on estimated useful lives which generally range from 10 to 30 years
F-10
for
buildings and improvements, and from 3 to 5 years for machinery, equipment and
transportation equipment. Leasehold improvements are amortized over
the lesser of their useful lives or the related lease term. When
properties are retired or disposed, the costs and accumulated depreciation are
eliminated and the resulting profit or loss is recognized in the results of
operations. Long-lived assets other than goodwill and intangible
assets that are held for sale are recorded at the lower of the carrying value or
the fair market value less the estimated cost to sell. The
recoverability of PP&E is evaluated whenever events or changes in
circumstances indicate that the carrying amount of the assets may not be
recoverable, primarily based on estimated selling price, appraised value or
projected future cash flows.
Goodwill
and Intangible Assets
Assets
and liabilities acquired in business combinations are accounted for using the
purchase method and are recorded at their respective fair
values. Goodwill and other intangible assets are related to the Other
Component Manufactured Products segment. Goodwill and
indefinite-lived intangible assets are not amortized but are subject to annual
(or under certain circumstances more frequent) impairment tests based on their
estimated fair value. Finite-lived intangible assets relate to
customer relationships. Finite-lived intangible assets that meet
certain criteria continue to be amortized over their useful lives and are also
subject to an impairment test based on estimated undiscounted cash flows when
impairment indicators exist. The Company performs the required test
for goodwill impairment in the fourth quarter,
or
more frequently,
if events or changes in circumstances indicate that the carrying value may
exceed the fair value.
The
goodwill impairment test is a two-step process which requires the Company to
make assumptions regarding fair value
.
First,
the fair value of the reporting unit is compared to its carrying
value. When estimating fair value, the Company calculates the present
value of future cash flows based on projected future operating results and
business plans, forecasted sales volumes, discount
rates, comparable marketplace fair value data from within a
comparable industry grouping, current industry and economic conditions, and
historical results. If the fair value exceeds the carrying value,
goodwill and other intangible assets are not impaired and no further steps are
required.
If the
estimated fair value is less than the carrying value, the second step is
completed to compute the impairment amount by determining the “implied fair
value” of goodwill. This determination requires the allocation of the
estimated fair value of the reporting unit to the assets and liabilities of the
reporting unit. Any remaining unallocated fair value represents the
“implied fair value” of goodwill, which is compared to the corresponding
carrying value to compute the goodwill impairment amount that is recorded and
charged to operations. See Note 9 for further information
regarding goodwill and other intangible assets impairments.
Impairment of Long-Lived
Assets
When
events or conditions warrant, the Company evaluates the recoverability of
long-lived assets and considers whether these assets are impaired. The
Company assesses the recoverability of these assets based upon several factors,
including management's intention with respect to the assets and their projected
future undiscounted cash flows. If projected undiscounted cash flows are
less than the carrying amount of the assets, the Company adjusts the carrying
amounts of such assets to their estimated fair value. A change in the
Company’s business climate in future periods, including a significant downturn
in the Company’s operations, could lead to a required assessment of the
recoverability of the Company’s long-lived assets, which may subsequently result
in an impairment charge. See Note 8 for further information regarding
fixed asset impairments.
Deferred
Financing Costs
Debt
issuance costs and deferred financing costs are classified as non-current assets
on the statement of financial position and are amortized over the life of the
related debt or credit facility using the straight-line method which
approximates the effective interest method.
Accrued
Self-Insurance
The
Company is self-insured for a significant portion of its workers’ compensation
and health insurance coverage, subject to certain stop loss
deductibles. The Company accrues for claims as they are incurred as
well as an estimate of claims incurred but not reported as
required.
F-11
Derivative
Financial Instruments
All derivatives are recorded on the statement of financial position 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 an 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 designated as cash-flow hedges to specific assets and
liabilities on the statement of financial position or forecasted
transactions. The Company also formally assesses, both at the hedge's
inception and on an ongoing basis, whether the derivatives used in hedging
transactions are highly effective in offsetting changes in cash flows of hedged
items. When it is determined a derivative is not highly effective as
a hedge or it has ceased to be a highly effective hedge, the Company
discontinues hedge accounting prospectively, as discussed below.
The
Company discontinues hedge accounting prospectively when (1) it is determined
the derivative is no longer highly 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 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 a forecasted transaction
will not occur, the derivative will continue to be carried on the statement of
financial position 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 statement
of financial position, with subsequent changes in its fair value recognized in
current-period earnings.
Disclosures
relative to derivative instruments can also be found in Notes 10 and
12.
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. The fair value of the long-term debt instruments approximates
their carrying value based on the instrument’s variable rates.
Income Taxes
Deferred
taxes are provided on an asset and liability method whereby deferred tax assets
are recognized for deductible temporary differences and operating loss
carry-forwards and deferred tax liabilities are recognized for taxable temporary
differences. Temporary differences are the differences between the
reported amounts of assets and liabilities and their tax
basis. Deferred tax assets are recognized in the current year to the
extent future deferred tax liability timing differences are expected to
reverse. Deferred tax assets and liabilities are adjusted for the
effects of changes in tax laws and rates on the date of
enactment. Deferred tax assets are reduced by a valuation allowance
when, in the opinion of management, it is more likely than not that some portion
or all of the deferred tax assets will not be realized.
The Company reports a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits in income tax expense.
F-12
Accumulated
Other Comprehensive Income (Loss)
U.S. GAAP
defines comprehensive income as non-shareholder changes in
equity. The components of and changes in accumulated other
comprehensive loss as of December 31, 2009, 2008, and 2007 are as
follows:
| (thousands) | Interest Rate Swap Adjustment | Pension Liability Adjustment | Accumulated Other Comprehensive Loss | |||||||||
|
Balance,
January 1, 2007
|
$ | 65 | $ | (162 | ) | $ | (97 | ) | ||||
|
Current
period change, net of tax
|
(628 | ) | 53 | (575 | ) | |||||||
|
Balance,
December 31, 2007
|
(563 | ) | (109 | ) | ( 672 | ) | ||||||
|
Current
period change, net of tax
|
(750 | ) | (17 | ) | (767 | ) | ||||||
|
Balance,
December 31, 2008
|
(1,313 | ) | (126 | ) | (1,439 | ) | ||||||
|
Current
period change, net of tax
|
318 | (60 | ) | 258 | ||||||||
|
Balance,
December 31, 2009
|
$ | (995 | ) | $ | (186 | ) | $ | (1,181 | ) |
2.
RECENTLY ISSUED ACCOUNTING
PRONOUNCEMENTS
FASB
Codification.
In June 2009, the Financial Accounting
Standards Board (“FASB”) issued guidance that establishes the FASB Accounting
Standards Codification TM (the “Codification”) as the single source of
authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental
entities. Rules and interpretive releases of the SEC under authority
of federal securities laws are also sources of authoritative U.S. GAAP for SEC
registrants. The guidance and the Codification are effective for
financial statements issued for interim and annual periods ending after
September 15, 2009. The Codification became effective for the Company
during its interim period ended September 27, 2009 and its adoption did not
have an impact on its consolidated financial statements.
Business
Combinations.
In April 2009, the FASB issued revised guidance
which amends the guidance previously issued in December 2007 to require
contingent assets acquired and liabilities assumed in a business combination to
be recognized at fair value on the acquisition date if fair value can be
reasonably estimated during the measurement period. If fair value
cannot be reasonably estimated during the measurement period, the contingent
asset or liability would be recognized in accordance with U.S. GAAP.
However, contingent consideration arrangements of an acquiree assumed by
the acquirer in a business combination would still be initially and subsequently
measured at fair value. This guidance is effective for all business
acquisitions occurring on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008. The Company
prospectively adopted the provisions of this guidance for business combinations
with an acquisition date on or after January 1, 2009.
Fair Value Measurements.
In February 2008, the FASB issued revised guidance related to fair value
measurements that delays the effective date for all nonfinancial assets and
nonfinancial liabilities, except those that are recognized or disclosed at fair
value in the financial statements on a recurring basis (at least annually), to
fiscal years beginning after November 15, 2008 (fiscal year 2009 for the
Company). The fair value measurements discussion in Note 11 omits
disclosures pertaining to long-lived assets and trade receivables due to this
revised guidance. The adoption of the provisions of this new guidance
on January 1, 2009 did not have a material impact on the consolidated financial
statements.
In April
2009, the FASB issued additional guidance for estimating fair value when the
volume and level of activity for the asset or liability has significantly
decreased and for identifying circumstances that indicate a transaction is not
orderly. The adoption of this guidance during the second quarter of
2009 did not have a material impact on the Company’s consolidated financial
statements. See Note 11 for additional required
disclosures.
Derivative Instruments and Hedging
Activities.
On January 1, 2009, the Company adopted guidance
issued by the FASB which required additional financial statement disclosures
related to derivative instruments and hedging activities. Entities
are required to provide enhanced disclosures about how and why an entity uses
derivative instruments, how the instruments are accounted for in the financial
statements, and how the instruments and
F-13
related
hedged items affect an entity's financial position, financial performance, and
cash flows. The guidance is effective for financial statements issued
for fiscal years and interim periods beginning on January 1,
2009. The Company applied the requirements of this guidance on a
prospective basis. Accordingly, disclosures related to interim
periods prior to the date of adoption have not been
presented. Because only additional disclosures concerning derivatives
and hedging activities are required, the adoption did not affect the Company’s
financial condition, results of operations, or cash flows. See Note
10 for related disclosures.
Instrument Indexed to Entity’s Own
Stock.
In June 2008,
the FASB ratified the consensus reached in guidance that clarifies the
determination of whether an instrument (or an embedded feature) is indexed to an
entity’s own stock. The guidance is effective for financial
statements issued for fiscal years beginning after December 15, 2008. As
part of the lenders’ consideration for the Amendment of the Company’s Credit
Agreement (as defined) in December 2008, the Company issued warrants to the
lenders to purchase shares of the Company’s common stock. The warrant
series was determined to be a derivative financial instrument. As of
January 1, 2009, the fair value of these warrants was reclassified from
shareholders’ equity to a long-term liability included in the deferred
compensation and other line on the consolidated statements of financial
position. The fair value of the warrants will be periodically remeasured
with any changes in value recognized in the stock warrants revaluation line on
the consolidated statements of operations. See Note 10 for the
required disclosures related to derivative financial instruments.
3.
ACQUISITIONS
American
Hardwoods, Inc.
On
January 29, 2007, the Company acquired certain assets of American Hardwoods for
$7.1 million. The purchase represented an acquisition of a
business. The cash consideration exchanged for the assets of American
Hardwoods was funded with new debt totaling $7.5 million. Assets
acquired and liabilities assumed in the acquisition were recorded on the
Company’s consolidated statements of financial position at their estimated fair
values as of the date of the acquisition. The excess of the estimated
fair values of the underlying assets acquired and liabilities assumed over the
purchase price was allocated pro-rata to the long-lived assets of American
Hardwoods.
The
Company sold certain assets and the business of its American Hardwoods operation
in January 2009 and sold the building that housed this operation in June
2009. Results relating to this operation, which were previously
reported in the Distribution segment, have been reclassified to discontinued
operations for all periods presented.
Adorn Holdings,
Inc
.
On May
18, 2007, the Company completed the acquisition of all of the outstanding
capital stock of Adorn, an Elkhart, Indiana based manufacturer and supplier of
interior components to the recreational vehicle and manufactured housing
industries, for $78.8 million in cash. The acquisition was financed
through both debt and equity financing. The results of operations for
Adorn are included in the Company’s consolidated financial statements and
respective operating segments for the full years ended December 31, 2009, and
2008, and in 2007, from the date of acquisition through December 31,
2007.
The
consideration paid for the acquisition consisted of cash consideration of $77.7
million for the repayment of all outstanding Adorn indebtedness and the purchase
of all outstanding Adorn common stock, and transaction costs of $1.1
million. The cash consideration exchanged for the capital stock of
Adorn was funded through the issuance of Patrick Industries, Inc. common stock
in a private placement to Tontine Capital Partners, L.P. and Tontine Capital
Overseas Master Fund, L.P., (collectively with their affiliates
,“Tontine Capital”) of approximately $11.0 million, the issuance of senior
subordinated notes to Tontine Capital of approximately $14.0 million, term
debt of $50.0 million under the Company’s $110 million senior secured credit
facility (the “Credit Facility”), and borrowings under the Company’s revolving
line of credit of approximately $3.8 million.
Assets
acquired and liabilities assumed in the acquisition were recorded on the
Company’s consolidated statements of financial position at their estimated fair
values as of the date of the acquisition. The purchase price
allocation and all required purchase accounting adjustments were finalized
during the third quarter of 2008.
F-14
The
following unaudited pro forma information assumes the Adorn acquisition occurred
as of January 1 of the period presented. The pro forma information
contains the actual combined operating results of Adorn with the results prior
to the acquisition date, adjusted to reflect the pro forma impact of the
acquisition occurring at the beginning of the period. Pro forma
adjustments include the amortization of acquired intangible assets and the
interest expense on debt incurred to finance the transactions. The
pro forma results are not necessarily indicative of what actually would have
occurred had the acquisition been in effect for the period
presented.
|
(thousands
except per share data)
|
Year
ended December 31, 2007
|
|||
|
Revenue
|
$ | 529,395 | ||
|
Net
loss
|
$ | (5,786 | ) | |
|
Loss
per share – basic and diluted
|
$ | (1.02 | ) | |
4.
DISCONTINUED
OPERATIONS
During
the fourth quarter of 2008, the Company reclassified the assets of both American
Hardwoods and the aluminum extrusion operation to assets held for sale, which is
included in current assets, on the consolidated statements of financial
position.
American
Hardwoods
In
January 2009, the Company completed the sale of certain assets and the business
of American Hardwoods for cash consideration of $2.0 million. In
conjunction with the sale, the Company entered into a separate real estate
purchase agreement with the buyer to sell the building that housed this
operation for a purchase price of $2.5 million. Approximately $2.5
million of the total carrying value of $4.3 million that was reclassified to
assets held for sale as of December 31, 2008 pertained to the
building. The building and property were sold in June 2009 for $2.5
million, net of selling expenses, and proceeds from the sale were used to pay
down approximately $2.5 million in long-term debt. Financial results
for American Hardwoods were previously included in the Distribution
segment.
The
Company recorded a net pretax gain on the sale of certain assets and the
business of American Hardwoods of approximately $0.2 million for the year ended
December 31, 2009. There was no gain or loss recognized on the sale
of the building in 2009. The $1.0 million pretax loss on the
divestiture in 2008 reflected the write-down to fair value of real estate and
inventories classified as held for sale. The pretax loss from
operations was $19,000 and $0.5 million in 2009 and 2008,
respectively. Pretax income from operations was $0.3 million in
2007.
Aluminum
Extrusion Operation
In July
2009, the Company completed the sale of certain assets of its aluminum extrusion
operation. Previously, the financial results of this operation had
comprised the entire Engineered Solutions segment. The purchase price
resulted in (i) net cash proceeds of $7.4 million and (ii) the assumption by the
buyer of approximately $2.2 million of certain accounts payable and accrued
liabilities pursuant to the definitive purchase agreement, of which $4.2 million
of the purchase price pertained to the sale of equipment and the facility and
$5.4 million pertained to the sale of trade receivables and
inventory. The assumed liabilities were included in accounts payable
and accrued liabilities on the consolidated statements of financial position as
of December 31, 2008.
Approximately
$4.4 million of the net cash proceeds were used to pay down an additional $1.1
million in principal on the Company’s term loan and pay off the remaining $3.3
million of principal on the industrial revenue bonds related to this
facility. The remaining $3.0 million of proceeds were used to reduce
borrowings under the Company’s revolving line of credit
.
The
Company recorded a pretax gain on the sale of approximately $0.5 million for the
year ended December 31, 2009. The $5.0 million loss on the aluminum
extrusion divestiture for 2008 reflected the write-down to fair value of
inventories, real estate and fixed assets classified as held for
sale. Pretax income from operations was $0.8 million in 2009 and
$26,000 in 2007. The pretax loss from operations was $1.2 million in
2008.
F-15
The
operating results for American Hardwoods (since its January 29, 2007 acquisition
date) and for the aluminum extrusion operation are classified as discontinued
operations, and prior years’ operating results have been reclassified to
discontinued operations as follows:
| (thousands) Years Ended December 31 | 2009 | 2008 | 2007 | |||||||||||
| Net sales: | ||||||||||||||
|
American
Hardwoods
|
$ | 449 | $ | 11,727 | $ | 13,784 | ||||||||
|
Aluminum
extrusion operation
|
13,282 | 38,612 | 51,209 | |||||||||||
|
Total
net sales
|
$ | 13,731 | $ | 50,339 | $ | 64,993 | ||||||||
|
Pretax
income (loss):
|
||||||||||||||
|
Operations:
|
||||||||||||||
|
American
Hardwoods
|
$ | (19 | ) | $ | (461 | ) | $ | 325 | ||||||
|
Aluminum
extrusion operation
|
822 | (1,168 | ) | 26 | ||||||||||
|
Total
pretax income (loss) from operations
|
803 | (1,629 | ) | 351 | ||||||||||
|
Gain
(loss) from divestitures:
|
||||||||||||||
|
American
Hardwoods
|
229 | (1,034 | ) | - | ||||||||||
|
Aluminum
extrusion operation
|
454 | (5,036 | ) | - | ||||||||||
|
Total
gain (loss) from divestitures
|
683 | (6,070 | ) | - | ||||||||||
|
Total
pretax income (loss)
|
$ | 1,486 | $ | (7,699 | ) | $ | 351 | |||||||
|
After-tax
income (loss):
|
||||||||||||||
|
Operations
|
$ | 498 | $ | (1,026 | ) | $ | 237 | |||||||
|
Divestitures
|
424 | (3,824 | ) | - | ||||||||||
|
Total
after-tax income (loss)
|
$ | 922 | $ | (4,850 | ) | $ | 237 | |||||||
Operating
Facilities
Approximately
$1.6 million of carrying value pertaining to the Company’s owned facility
located in Fontana, California was classified as held for sale as of December
31, 2009 and 2008. The Company’s owned facility in Woodburn, Oregon
was classified as held for sale as of December 31, 2009 at an approximate
carrying value of $3.2 million. The Oregon and California facilities
were sold in the first quarter of 2010. The Company anticipates
recording a pretax gain on the sales of approximately $2.8 million in its first
quarter 2010 operating results.
5.
RESTRUCTURING
CHARGES
In second
quarter 2007, the Company announced a restructuring plan (the “Restructuring
Plan”) in an effort to integrate the acquisition of Adorn with its existing
businesses. The completion of the final phase of the Restructuring
Plan in the third quarter of 2008 resulted in cumulative pretax charges in 2007
and 2008 totaling approximately $3.3 million. Expenses associated
with the Restructuring Plan included the closure of duplicate facilities,
severance related to the elimination of redundant jobs, and various asset
write-downs related to the consolidation of product lines. The
Restructuring Plan included Adorn and Patrick workforce reductions of
approximately 240 employees, of which approximately 200 were completed as of
December 31, 2007 and the remaining 40 in 2008.
Approximately
$2.96 million of restructuring and related expenses were recorded in cost of
goods sold on the consolidated statements of operations from the plan inception
in second quarter 2007 through 2008.
In
addition, approximately $385,000 of restructuring charges were included in
selling, general and administrative expenses (“SG&A”) on the consolidated
statements of operations through 2008, related to severance costs as a result of
the elimination of certain administrative positions.
F-16
Below is
a summary of restructuring and related expenses for the Restructuring Plan
incurred by type:
|
(thousands)
|
2007
|
2008
|
Total
Incurred
|
||||
|
Severance
|
$ 884
|
$ 403
|
$ 1,287
|
||||
|
Asset
write-downs
|
1,297
|
221
|
1,518
|
||||
|
Facility
exit costs
|
183
|
357
|
540
|
||||
|
Total
restructuring and related expenses
|
$ 2,364
|
$ 981
|
$ 3,345
|
||||
The
following is a summary of restructuring and related expenses recorded in cost of
goods sold and in SG&A on the consolidated statements of
operations:
|
(thousands)
|
2007
|
2008
|
Total
Incurred
|
|
Restructuring
charges - cost of goods sold
|
$ 2,181
|
$ 779
|
$ 2,960
|
|
Restructuring
charges - SG&A
|
183
|
202
|
385
|
|
Total
restructuring and related expenses
|
$ 2,364
|
$ 981
|
$ 3,345
|
The
following table summarizes the expected, incurred and remaining costs for the
Restructuring Plan at December 31, 2008:
|
Asset
|
Facility
Exit
|
||||||||
|
(thousands)
|
Severance
|
Write-Downs
|
Costs
|
Total
|
|||||
|
Restructuring
liability balance at January 1, 2008
|
$ 206
|
$ -
|
$ -
|
$ 206
|
|||||
|
Restructuring
charges
|
403
|
221
|
357
|
981
|
|||||
|
Cash
payments/write-offs
|
(609)
|
(221)
|
(357)
|
(1,187)
|
|||||
|
Restructuring
liability balance at December 31, 2008
|
$ -
|
$ -
|
$ -
|
$ -
|
|||||
Severance
costs
reflect a
cash expense although the expense may be recognized prior to paying for the
expenditure. Asset write-downs are non-cash
expenses. Facility exit costs reflect a cash expense.
6.
GAIN ON SALE OF FIXED
ASSETS
In third
quarter 2009, the Company entered into a listing agreement to sell its Ocala,
Florida facility and accordingly, reclassified the $0.3 million carrying value
of this facility to assets held for sale. In fourth quarter 2009,
this facility was sold, resulting in a pretax gain on sale of $1.2
million.
During
first quarter 2008, the Company entered into a listing agreement to sell one of
its California facilities. During the first quarter ended March 30,
2008, the Company reclassified the $1.7 million carrying value of this facility
to assets held for sale. In the second quarter of 2008, this facility
was sold resulting in a pretax gain on sale of $4.2 million.
7.
INVENTORIES
In the
fourth quarter of 2008, the Company recorded an adjustment to reduce inventories
by $3.8 million reflecting the write-down and disposal of slow moving
inventories due to obsolescence and commodity market price
declines. In addition, in the first quarter of 2008, inventories were
reduced by $0.7 million as a result of the misappropriation of Company assets
and the underreporting of scrap at one of the Company’s manufacturing
facilities.
F-17
Inventories
as of December 31 consist of the following classes:
|
(thousands)
|
2009
|
2008
|
||||||||
|
Raw
materials
|
$ | 11,152 | $ | 13,719 | ||||||
|
Work
in process
|
954 | 929 | ||||||||
|
Finished
goods
|
1,575 | 1,601 | ||||||||
|
Total
manufactured goods
|
13,681 | 16,249 | ||||||||
|
Materials
purchased for resale (distribution products)
|
3,804 | 5,222 | ||||||||
|
Balance
at December 31
|
$ | 17,485 | $ | 21,471 | ||||||
The
following table summarizes the reserve for inventory obsolescence:
|
(thousands)
|
2009
|
2008
|
||||||
|
Balance
at January 1
|
$ | 2,003 | $ | 1,057 | ||||
|
Charged
to operations
|
1,746 | 2,736 | ||||||
|
Deductions
from reserves
|
(2,449 | ) | (1,790 | ) | ||||
|
Balance
at December 31
|
$ | 1,300 | $ | 2,003 | ||||
8.
PROPERTY, PLANT AND
EQUIPMENT
Property,
plant and equipment, net, consists of the following classes at December
31:
|
(thousands)
|
2009
|
2008
|
||||||||
|
Land
and improvements
|
$ | 1,268 | $ | 2,041 | ||||||
|
Buildings
and improvements
|
19,434 | 24,286 | ||||||||
|
Machinery
and equipment
|
51,874 | 53,863 | ||||||||
|
Transportation
equipment
|
907 | 1,138 | ||||||||
|
Leasehold
improvements
|
2,470 | 2,428 | ||||||||
|
Property,
plant & equipment, at cost
|
75,953 | 83,756 | ||||||||
|
Less:
accumulated depreciation and amortization
|
(49,520 | ) | (49,135 | ) | ||||||
|
Property,
plant & equipment, net
|
$ | 26,433 | $ | 34,621 | ||||||
For the
year ended December 31, 2009, no events or changes in circumstances occurred
that required the Company to assess the recoverability of its property and
equipment, and therefore the Company did not recognize any impairment
charges.
In 2008,
the Company recorded a non-cash pretax charge to continuing operations to
reflect impairment of certain long-lived assets. The impairment
charge, classified in cost of goods sold on the consolidated statements of
operations, represents management’s best estimate of the fair value of the
long-lived assets based on current market trends. The total non-cash
pretax impairment charge related to the fourth quarter analysis was $3.5 million
and was all related to machinery and equipment. This impairment
charge was reported in the Primary Manufactured Products segment.
F-18
9.
GOODWILL AND OTHER
INTANGIBLE ASSETS
Goodwill
Changes
in the carrying amount of goodwill for the years ended December 31, 2009 and
2008 by segment are as follows:
|
Other
|
||||||||||||
|
Primary
|
Component
|
|||||||||||
|
Manufactured
|
Manufactured
|
|||||||||||
|
(thousands)
|
Products
|
Products
|
Total
|
|||||||||
|
Balance
– January 1, 2008
|
$ | 9,170 | $ | 20,344 | $ | 29,514 | ||||||
|
Impairments
|
(9,170 | ) | (18,204 | ) | (27,374 | ) | ||||||
|
Balance
– December 31, 2008
|
- | 2,140 | 2,140 | |||||||||
|
2009
activity
|
- | - | - | |||||||||
|
Balance
– December 31, 2009
|
$ | - | $ | 2,140 | $ | 2,140 | ||||||
The
Company performed its annual impairment test for goodwill and other
indefinite-lived intangible assets in the fourth quarter of 2009 and affirmed
that there were no events or circumstances that required a re-evaluation of
goodwill as of December 31, 2009.
During
the fourth quarter of 2008, as part of the Company’s annual impairment analysis
for both goodwill and other intangible indefinite-lived assets, a third-party
appraisal firm was engaged to assist the Company in its determination of the
fair value of its reporting units, in part based on estimates of future net
sales, operating margin and cash flows developed by management. Due
to current market conditions and the difference between the Company’s market
value and book value, the Company concluded that the carrying amounts of
goodwill for certain reporting units exceeded their respective fair
values. Based upon the results of the third-party appraisal and
internal estimates of discounted cash flows, management compared the implied
fair value of the goodwill in each reporting unit with the carrying value and
concluded that a $27.4 million goodwill impairment charge was
required. After the recognition of the impairment losses, the
remaining goodwill is $2.1 million. See “Other Intangible Assets”
section below for impairments related to indefinite-lived other intangible
assets including trademarks.
Other Intangible Assets
Intangible
assets are comprised of customer relationships, non-compete agreements and
trademarks. Customer relationships represent finite-lived intangible
assets that have been recorded in the Primary Manufactured Products and Other
Component Manufactured Products segments along with related amortization
expense. As of December 31, 2009, the remaining intangible assets
balance of $7.0 million is comprised of $1.4 million of trademarks which have an
indefinite life, and therefore, no amortization expense has been recorded, and
$5.6 million pertaining to customer relationships which are being amortized over
19 years. Amortization expense for intangible assets was $0.4 million
and $1.7 million for 2009 and 2008, respectively.
During
2008, the Company performed its impairment analyses on certain other
finite-lived intangible assets that had indications that the carrying amount may
not be recoverable. Based on the Company’s impairment analyses, the
Company determined that certain trademarks, customer relationships, and
non-compete agreements were impaired. Accordingly, the Company
recorded $29.3 million of impairment charges to write-down these other
intangible assets to fair value of which $0.5 million of the impairment charges
were included in the Primary Manufactured Products segment and $28.8 million in
the Other Component Manufactured Products segment. No impairment
charges were considered necessary for the remaining intangible
assets. The impairment loss for the year ended December 31, 2008 is
included in intangible assets impairments on the consolidated statements of
operations. There was no impairment recognized for indefinite-lived
intangible assets for the year ended December 31, 2009 based on the results of
the annual impairment analyses.
F-19
Other
intangible assets, net consist of the following as of December 31, 2009 and
2008
:
|
(thousands)
|
2009
|
2008
|
||||||||
|
Trademarks
|
$ | 1,400 | $ | 8,400 | ||||||
|
Customer
relationships
|
6,000 | 30,760 | ||||||||
|
Non-compete
agreements
|
- | 310 | ||||||||
| 7,400 | 39,470 | |||||||||
|
Less:
accumulated amortization
|
(353 | ) | (2,717 | ) | ||||||
|
Impairments
|
- | (29,353 | ) | |||||||
|
Other
intangible assets, net
|
$ | 7,047 | $ | 7,400 | ||||||
Changes
in the carrying value of other intangible assets for the years ended December
31, 2009 and 2008 by segment are as follows:
|
|
Other
|
|||||||||||
|
Primary
|
Component
|
|||||||||||
|
Manufactured
|
Manufactured
|
|||||||||||
|
(thousands)
|
Products
|
Products
|
Total
|
|||||||||
|
Balance
– January 1, 2008
|
$ | 577 | $ | 37,892 | $ | 38,469 | ||||||
|
Amortization
|
(69 | ) | (1,647 | ) | (1,716 | ) | ||||||
|
Impairments
(1)
|
(508 | ) | (28,845 | ) | (29,353 | ) | ||||||
|
Balance
– December 31, 2008
|
- | 7,400 | 7,400 | |||||||||
|
Amortization
|
- | (353 | ) | (353 | ) | |||||||
|
Balance
– December 31, 2009
|
$ | - | $ | 7,047 | $ | 7,047 | ||||||
(1)
The
Primary Manufactured Products segment impairment loss is comprised of $330,000
for customer relationships and $178,000 for non-compete
agreements. The Other Component Manufactured Products segment
impairment loss is comprised of $7.0 million for trademarks, $21.809 million for
customer relationships, and $36,000 for non-compete agreements.
Amortization
expense on finite-lived intangible assets is estimated to be $0.4 million for
each of the next five years.
|
10
.
DERIVATIVE FINANCIAL
INSTRUMENTS
|
The
Company enters into certain derivative financial instruments, on a
cost-effective basis, to mitigate its risk associated with changes in interest
rates. All derivatives are recognized on the consolidated statements
of financial position at their fair value. Changes in fair value are
recognized periodically in earnings or accumulated other comprehensive income
within shareholders' equity, depending on the intended use of the derivative and
whether the derivative has been designated by management as an ineffective
hedging instrument. Changes in fair value of derivative instruments
not designated as effective hedging instruments are recognized in earnings in
the current period. Additional derivative disclosures can be found in
Notes 1 and 12.
Interest
Rate Swap Agreements
Effective
with the Second Amendment on December 11, 2008 to the Credit Agreement dated May
18, 2007 (the “Credit Agreement”), the interest rates on the obligation were
adjusted and the Company determined that its two swap agreements were
ineffective as hedges against changes in interest rates and, as a result, the
swaps were de-designated. Losses on the swaps included in other
comprehensive income as of the de-designation date are being amortized into net
income (loss) over the life of the swaps utilizing the straight-line method
which approximates the effective interest method. For the years ended
December 31, 2009 and 2008, amortized losses of $0.3 million and $46,000,
respectively, were recognized in interest expense on the consolidated statements
of operations. The loss to be amortized to interest expense is
expected to approximate $0.3 million in 2010. In addition, the change
in the fair value of the de-designated swaps for the year ended December 31,
2009 resulted in a $0.7 million reduction to interest expense and the
corresponding liability.
F-20
The
absolute value of the notional amounts of derivative contracts for the Company
approximates $18.5 million at December 31, 2009. Gains and losses
related to the derivative instruments are expected to be largely offset by gains
and losses on the original underlying asset or liability. The Company
does not use derivative financial instruments for speculative purposes
.
See Note 11 for
further details.
Warrants
Subject to Revaluation
In
conjunction with the December 2008 Amendment to its Credit Agreement, the
Company issued a series of warrants to its lenders to purchase 474,049 shares of
the Company’s common stock. The calculated fair value of the warrants
is classified as a liability and is periodically remeasured with any changes in
value recognized in the stock warrants revaluation line on the consolidated
statements of operations. Guidance related to the accounting of the
warrants became effective for the Company as of January 1,
2009. Accordingly, the fair value of the warrants as of that date was
reclassified from shareholders’ equity to long-term liabilities.
Pursuant
to the anti-dilution provisions of the stock warrant agreement, the number of
shares of common stock issuable upon exercise of the warrants was increased to
an aggregate of 483,742 shares and the exercise price was adjusted to $0.98 per
share as a result of the issuance on May 21, 2009 and on June 22, 2009, pursuant
to the Company’s 1987 Stock Option Program, as amended, of restricted shares at
a price less than, and options to purchase common stock with an exercise price
less than, the warrant exercise price then in effect.
The fair
value of the warrants at December 31, 2009 is as follows:
|
(thousands)
|
|
||||
|
Balance
at January 1, 2009
|
$ | 214 | |||
|
Change
in fair value, included in earnings
|
817 | ||||
|
Balance
at December 31, 2009
|
$ | 1,031 | |||
The
Company’s warrants were measured at fair value on a recurring basis as of
December 31, 2009 and were valued using Level 2 valuation
methodologies. The Company utilizes inputs such as its stock trading
value, price volatility, risk-free interest rate and the warrants expected life
for valuation purposes.
|
11.
FAIR VALUE
MEASUREMENTS
|
As of
December 31, 2009 and December 31, 2008, liabilities of $1.5 million and $2.2
million, respectively, have been recognized in deferred compensation and other
on the consolidated statements of financial position for the fair value of the
interest rate swap agreements. These liabilities fall within Level 2 of
the fair value hierarchy. Level 2 represents financial instruments
lacking quoted prices (unadjusted) from active market exchanges, including
over-the-counter exchange-traded financial instruments. The prices for the
financial instruments are determined using prices for recently traded financial
instruments with similar underlying terms as well as directly or indirectly
observable inputs. Financial instruments included in Level 2 of the
fair value hierarchy include the Company’s interest rate swap agreements and
warrants. The interest rate swaps are valued based on the LIBOR yield
curve and the fair market values are provided by the Company’s lending
institution.
Effective
with the Second Amendment to the Credit Agreement, the interest rates on the
obligation were adjusted and the Company determined that its two swap agreements
were ineffective as hedges against changes in interest rates and, as a result,
the swaps were de-designated. The Company is amortizing losses on the
swaps included in other comprehensive income as of the de-designation date into
net income (loss) over the life of the swaps utilizing the straight-line method
which approximates the effective interest method. All future changes
in the fair value of the de-designated swaps will be recorded within earnings on
the consolidated statements of operations.
F-21
|
12.
DEBT AND INTEREST RATE
SWAP AGREEMENTS
|
Debt
A summary
of total debt outstanding at December 31, 2009 and 2008 is as
follows:
|
(thousands)
|
2009
|
2008
|
||||||
|
Short-term
borrowings (revolver)
|
$ | 13,500 | $ | 18,200 | ||||
|
Long-term
debt:
|
||||||||
|
Senior
Notes (term loan):
|
||||||||
|
Term
loan
|
$ | 27,330 | $ | 37,163 | ||||
|
Interest
paid-in-kind
|
1,035 | - | ||||||
|
Debt
discount
|
(98 | ) | (205 | ) | ||||
|
Total
senior notes (term loan)
|
28,267 | 36,958 | ||||||
|
City
of Mishawaka, Indiana Industrial Revenue Bonds
|
- | 3,750 | ||||||
|
State
of Oregon Economic Development Revenue Bonds
|
- | 400 | ||||||
|
State
of North Carolina Economic Development Revenue Bonds
|
500 | 1,000 | ||||||
|
Total
long-term debt
|
28,767 | 42,108 | ||||||
|
Less:
current maturities of long-term debt
|
10,359 | 14,741 | ||||||
|
Total
long-term debt, less current maturities and discount
|
$ | 18,408 | $ | 27,367 | ||||
|
Total
short-term borrowings and long-term debt
|
$ | 42,267 | $ | 60,308 | ||||
In May
2007, the Company completed the acquisition of Adorn. In connection
with the Adorn acquisition, the Company entered into an eight-bank syndication
agreement led by JPMorgan Securities Inc. and JPMorgan Chase Bank, N.A. for a
$110 million senior secured credit facility (the “Credit Agreement”) comprised
of revolving credit availability of $35 million (“revolver”) and a term loan of
$75 million. Obligations under the 2007 Credit Facility are secured
by essentially all of the tangible and intangible assets of the
Company.
The
Company entered into a First Amendment and Waiver to its Credit Agreement in
March 2008 and modified certain financial covenants, terms and reporting
requirements. On December 11, 2008, the Company entered into a Second
Amendment and Waiver (the “Second Amendment”) to its Credit
Agreement. The Second Amendment included both the addition and
modification of certain definitions, terms and reporting requirements and
amended the termination date of the Credit Agreement to expire on January 3,
2011. Under the terms of the Second Amendment, the lenders waived any
Event of Default (as defined in the Credit Agreement) that resulted from the
Company’s failure to comply with the Maximum Leverage Ratio and Minimum Fixed
Charge Coverage Ratio covenants for the Computation Period ended September 28,
2008. The financial covenants were amended to eliminate the
Consolidated Net Worth, Minimum Fixed Charge Coverage Ratio and Maximum Leverage
Ratio covenants, in lieu of new one-month and two-month minimum consolidated
earnings before interest, taxes, depreciation and amortization (“EBITDA”)
requirements
and a $2.25 million capital expenditures limitation for any fiscal
year. The Company incurred approximately $0.7 million in financing
costs as part of this transaction.
Effective
with the Second Amendment, the interest rates for borrowings under the revolving
line of credit were the Alternate Base Rate (the”ABR”) plus 3.50%, or the London
Interbank Offer Rate (“LIBOR”) plus 4.50%. For term loans, interest
rates were the ABR plus 6.50%, or LIBOR plus 7.50%. The Company has
the option to pay any interest in excess of 4.5% as paid-in-kind or “PIK”
interest. Since January 2009, the Company has elected the PIK
interest option. As a result, the principal amount outstanding under
the term loan for the year ended December 31, 2009 was increased by $1.0 million
to reflect PIK interest. For 2009, PIK interest is reflected as a
non-cash charge adjustment in operating cash flows under the caption “Interest
paid-in-kind”. The fee payable by the Company on unused but committed
portions of the revolving loan facility was amended to 0.50%.
As part
of the lenders’ consideration for the Second Amendment, on December 11, 2008,
the Company issued warrants to the lenders to purchase an aggregate of 474,049
shares of common stock, subject to adjustment, at an exercise price per share of
$1 (the “Warrants”). The Warrants are immediately exercisable,
subject to anti-dilution provisions and expire on December 11,
2018. The debt discount of $214,000, which is equal to the fair
market
value of
the warrants as of December 11, 2008, is being amortized to interest expense
over the life of the term loan. As of December 31, 2009, the remaining
unamortized portion of the debt discount was $98,000.
F-22
Pursuant
to the anti-dilution provisions, the number of shares of common stock issuable
upon exercise of the Warrants was increased to an aggregate of 483,742 shares
and the exercise price was adjusted to $0.98 per share as a result of the
issuance on May 21, 2009 and on June 22, 2009, pursuant to the Company’s 1987
Stock Option Program, as amended, of restricted stock at a price less than, and
options to purchase common stock with an exercise price less than, the warrant
exercise price then in effect. See Note 10 for further
details.
At March
1, 2009 (February month end), the Company was in violation of its Consolidated
EBITDA financial covenant under the terms of the Credit Agreement. On
April 14, 2009, the Company entered into a Third Amendment to the Company’s
Credit Agreement (the “Third Amendment”). The Third
Amendment
amended and/or added certain definitions, terms and reporting requirements and
included the following provisions:
|
(a)
|
The
lenders waived any actual or potential Event of Default (as defined in the
Credit Agreement) resulting from the Company’s failure to comply with the
one-month and two-month Consolidated EBITDA covenants for the fiscal
months ended March 1, 2009 and March 29,
2009.
|
|
(b)
|
The
financial covenants were modified to establish new one-month and two-month
minimum Consolidated EBITDA requirements that became effective beginning
with the fiscal months ended June 28, 2009 and July 26, 2009,
respectively. Until such dates, there was no applicable minimum
Consolidated EBITDA requirement.
|
|
(c)
|
The
definition of Consolidated EBITDA was amended to exclude the effects of
losses and gains due to discontinued operations and restructuring charges,
subject to approval of the administrative
agent.
|
|
(d)
|
The
revolving commitments were reduced by $5.0 million to a maximum of $30.0
million.
|
|
(e)
|
The
monthly borrowing limits under the revolving commitments were reset in
conjunction with projected monthly cash
flows.
|
|
(f)
|
The
Company agreed to provide an appraisal by a lender approved firm of each
parcel of real estate owned by the Company and its subsidiaries within 60
days of the effectiveness of the Third Amendment. Based on the
results of the appraisals, there was no indication of impairment for any
of the real estate parcels.
|
|
(g)
|
The
receipt of net cash proceeds related to any asset disposition, other than
proceeds attributable to inventory and receivables, will be used to pay
down principal on the term loan.
|
The
maximum borrowing limit amount was reduced from $33.0 million to $29.0
million. The principal amount outstanding under the term loan at
March 29, 2009 remained unchanged under the amended terms. The
interest rates for borrowings under the revolving line of credit and the term
loan, and the expiration date of the Credit Agreement also remained
unchanged.
Consolidated
EBITDA is calculated pursuant to the Credit Agreement, whereby adjustments to
reported EBITDA include items such as (i) removing the effects of non-cash gains
and losses, non-cash impairment charges, and certain non-recurring items; (ii)
adding back non-cash stock compensation expenses; (iii) excluding the impact of
certain closed operations; and (iv) excluding the effects of losses and gains
due to discontinued operations and restructuring charges, subject to approval of
the administrative agent.
The
Company has maintained compliance with the revised minimum one and two-month
Consolidated EBITDA requirements as modified in the Third
Amendment. There was no applicable minimum Consolidated EBITDA
requirement for the fiscal month ended March 29, 2009. For the fiscal
month ended June 28, 2009, the one-month minimum Consolidated EBITDA was
$279,300 versus actual Consolidated EBITDA of $761,000. For the
fiscal month ended September 27, 2009, the one and two-month minimum
Consolidated EBITDA was $648,800 and $2,437,600, respectively, versus actual
Consolidated EBITDA for the same periods of $892,000 and $2,604,000,
respectively. For the fiscal month ended December 31, 2009, the one
and two-month minimum Consolidated EBITDA was ($206,200) and $570,400,
respectively, versus actual Consolidated EBITDA for the same periods of $180,000
and $982,000, respectively.
On
December 11, 2009, the Company entered into a Fourth Amendment to the Company’
Credit Agreement (the “Fourth Amendment”). The Fourth Amendment
amended certain definitions, terms and reporting requirements to better align
with the Company’s updated operating and cash flow projections for fiscal year
2010. Pursuant to the
Fourth
Amendment, the financial covenants were modified to establish new quarterly
minimum EBITDA requirements that will replace the existing minimum one-month and
two-month requirements beginning with the
F-23
fiscal
quarter ended March 28, 2010
.
In addition, the
monthly borrowing limits under the revolving commitments were reset in
conjunction with updated projected monthly cash flows for 2010.
Effective
with the Fourth Amendment, borrowings under the revolving line of credit are
subject to a borrowing base, up to a maximum borrowing limit of $28.0 million
for fiscal year 2010. The interest rates for borrowings under the
revolving line of credit and the term loan, and the expiration date of the
Credit Agreement remained unchanged. The Company’s ability to access
these borrowings is subject to compliance with the terms and conditions of the
Credit Facility including the financial covenants.
During
2009, the Company paid down $9.8 million in principal on its senior notes, and
paid $4.7 million in principal on outstanding bonds. In addition,
borrowings under the Company’s revolving line of credit were reduced by $4.7
million in 2009.
Management
expects to maintain compliance with the revised minimum quarterly Consolidated
EBITDA covenant, as modified in the Fourth Amendment, based on the Company’s
2010 operating plan, notwithstanding continued uncertain and volatile market
conditions. Management has also identified other actions within its
control that could be implemented, if necessary, to help the Company reduce its
leverage position. These actions include the exploration of asset
sales, divestitures and other types of capital raising
alternatives. However, there can be no assurance that these actions
will be successful or generate cash resources adequate to retire or sufficiently
reduce the Company’s indebtedness under the Credit Agreement prior to its
expiration on January 3, 2011.
If the
Company fails to comply with the covenants under its amended Credit Agreement,
there can be no assurance that a majority of the lenders that are party to the
Credit Agreement will consent to a further amendment of the Credit
Agreement. In this event, the lenders could cause the related
indebtedness to become due and payable prior to maturity or it could result in
the Company having to refinance this indebtedness under unfavorable
terms. If its debt were accelerated, the Company’s assets might not
be sufficient to repay its debt in full should the assets be required to be sold
outside of the normal course of business, such as through forced liquidation or
bankruptcy proceedings. Further, if current unfavorable credit market
conditions were to persist throughout 2010, there can be no assurance that the
Company will be able to refinance any or all of this indebtedness.
On May
18, 2007, in conjunction with the acquisition of Adorn, the Company issued
senior subordinated notes to Tontine Capital for $13.975 million. The
senior subordinated notes bore interest at 9.50% through May 18, 2008, at which
time the interest rate increased to 13.50%. Interest on the notes was
due semi-annually on June 30 and December 31. Interest payable on the
notes was payable on each interest payment date, at the election of the Company,
(i) in cash or (ii) in kind, in which event the amount of the principal
outstanding under the notes increased by the amount of such interest payment
(“PIK Interest”) on such interest payment date and interest then accrued on the
increased principal amount.
At December
31, 2007, the Company elected the PIK Interest option and increased the
principal amount of the notes by approximately $826,000. In two
separate transactions on March 12, 2008 and June 30, 2008, the Company paid down
the total principal balance of $14.8 million on the senior subordinated
notes.
On April
12, 2007, in conjunction with the addition of a new paint line facility and
equipment, the Company issued $4.5 million in industrial revenue
bonds. These bonds were purchased by JPMorgan Chase and were subject
to the terms of a loan agreement with JPMorgan Chase. The City of
Mishawaka, Indiana Industrial Revenue Bonds were payable in monthly installments
of $37,500 plus interest at a variable tax-exempt bond rate (3.83
%
at July 26,
2009). The final installment was originally due on April 12,
2012. Approximately $3.3 million of the net proceeds from the sale of
the aluminum extrusion operation were used to pay off the remaining principal on
the bonds in July 2009.
The State
of Oregon Economic Development Revenue Bonds were payable in annual installments
of $400,000 plus interest at a variable tax-exempt bond rate (2.31% at November
30, 2009). The final installment was paid on December 1,
2009.
The State
of North Carolina Economic Development Revenue Bonds are payable in annual
installments of $500,000 plus quarterly interest payments at a variable
tax-exempt bond rate (1.50% at December 31, 2009). A final
F-24
payment
of $500,000 is due on 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 $0.5 million.
Aggregate
maturities of long-term debt, including the debt discount of $98,000 which is
being amortized over the life of the Credit Facility, for the next five years
ending December 31 are (in thousands): 2010 - $10,359; 2011 - $18,408; 2012 -
$0; 2013 - $0; and 2014 - $0. The estimated long-term debt payment of
$10.3 million in 2010 includes $5.5 million of payments based on debt service
requirements. In addition, the net proceeds from the sales of two
buildings subsequent to December 31, 2009 were used to prepay approximately $8.3
million in principal on the Company’s term loan through March
29, 2010. See Note 20 for further details.
The
Company is contingently liable for standby letters of credit of approximately
$2.0 million at December 31, 2009 to meet credit requirements for the Company's
insurance providers. The letters of credit expire on various dates
through 2011.
Interest
expense for the years ended December 31, 2009, 2008, and 2007 (in thousands) was
approximately $6,453, $6,388, and $6,590, respectively.
Interest
paid for the years ended December 31, 2009, 2008, and 2007 (in thousands) was
approximately $6,767, $6,070, and $6,232, respectively.
Interest
Rate Swap Agreements
In March
2005, the Company entered into an interest rate swap agreement with JP Morgan
Chase, N.A. with a notional amount of $15.0 million 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. From its inception through the end of the third quarter of
2008, this swap agreement was designated as a cash flow hedge and is used to
manage the economic risks associated with fluctuations in interest rates by
converting a portion of the Company's variable-rate debt to a fixed-rate basis
through January of 2015, thus reducing the impact of changes in interest rates
on future interest expense. In July 2007, the Company entered into a
second interest rate swap agreement with JP Morgan Chase, N.A. with a notional
amount of $10.0 million and a maturity date of May 17, 2012, to hedge against
changes in cash flows attributable to changes in LIBOR.
At
December 31, 2009, these agreements had notional amounts of $8.5 million and
$10.0 million, respectively. In accordance with the terms of the swap
agreements, the Company pays a fixed interest rate of 4.78% and 5.60%,
respectively. The Company receives variable rates, based on LIBOR,
calculated on the notional amount, with net receipts or payments being
recognized as adjustments to interest expense. The Company recorded a
liability for the fair value of these swap agreements in the amount of $1.5
million at December 31, 2009 and $2.2 million at December 31,
2008. This represents the fair value of the swap instruments and has
been recorded in the statements of financial position as a noncurrent
liability. The effective portion of the cash flow hedge has been
recorded, net of taxes, as a reduction of shareholders' equity as a component of
accumulated other comprehensive loss.
Effective
with the Second Amendment, the interest rates on the obligation were adjusted
and the Company determined that its two swap agreements were ineffective as
hedges against changes in interest rates and, as a result, the swaps were
de-designated. Losses on the swaps included in other comprehensive
income as of the de-designation date are being amortized into net income (loss)
over the life of the swaps utilizing the straight-line method which approximates
the effective interest method. All future changes in the fair value
of the de-designated swaps will be recorded within earnings on the consolidated
statements of operations. For the years ended December 31, 2009
and 2008, amortized losses of $0.3 million and $46,000, respectively, were
recognized in interest expense on the consolidated statements of
operations. In addition, the change in the fair value of the
de-designated swaps for the year ended December 31, 2009 resulted in a $0.7
million reduction to interest expense and the corresponding
liability.
Since the
derivatives no longer qualified as cash flow hedges as of December 31, 2008,
hedge accounting was discontinued and the derivatives are carried in the
consolidated statements of financial position at their fair value,
F-25
subsequent
changes in the fair value of the derivatives are recognized in current-period
earnings, and the derivative gain or loss is deferred to accumulated other
comprehensive income until the hedged forecasted transactions affect
earnings. If the hedged forecasted transaction is probable of not
occurring in the time period described in the hedge documentation or within a
two-month period of time thereafter, the deferred derivative gain or loss would
be reclassified immediately to earnings. Hedge ineffectiveness was
not material in 2007. Additional derivative disclosures can be found
in Notes 1 and 10.
|
13.
ACCRUED
LIABILITIES
|
In the
consolidated statements of financial position are the following accrued
liabilities:
|
(thousands)
|
2009
|
2008
|
||||||
|
Accrued
liabilities:
|
||||||||
|
Payroll
and related expenses
|
$ | 1,889 | $ | 2,581 | ||||
|
Property
taxes
|
946 | 1,879 | ||||||
|
Self
insurance
|
643 | 924 | ||||||
|
Professional
fees
|
172 | 430 | ||||||
|
Customer
incentives
|
666 | 934 | ||||||
|
Other
|
959 | 504 | ||||||
|
Total
|
$ | 5,275 | $ | 7,252 | ||||
|
14.
|
INCOME
TAXES
|
The
provision for income taxes (benefit) from continuing operations for the years
ended December 31, 2009, 2008 and 2007 consists of the following:
|
(thousands)
|
2009
|
2008
|
2007
|
|||||||||
|
Income
taxes (benefit):
|
||||||||||||
|
Current:
|
||||||||||||
|
Federal
|
$ | (564 | ) | $ | - | $ | (2,782 | ) | ||||
|
State
|
95 | - | 4 | |||||||||
|
Total
current
|
(469 | ) | - | (2,778 | ) | |||||||
|
Deferred:
|
||||||||||||
|
Federal
|
- | (9,016 | ) | 187 | ||||||||
|
State
|
- | (936 | ) | (337 | ) | |||||||
|
Total
deferred
|
- | (9,952 | ) | (150 | ) | |||||||
|
Income
tax benefit
|
$ | (469 | ) | $ | (9,952 | ) | $ | (2,928 | ) | |||
The
provisions for income taxes (benefit) for the years ended December 31, 2009,
2008 and 2007 are different from the amounts that would otherwise be computed by
applying a graduated federal statutory rate (34% in each of the years presented)
to income before income taxes.
A
reconciliation of the differences related to continuing operations is as
follows:
|
(thousands)
|
2009
|
2008
|
2007
|
|||||||||
|
Rate
applied to pretax loss
|
$ | (2,010 | ) | $ | (26,047 | ) | $ | (3,049 | ) | |||
|
State
taxes, net of federal tax effect
|
(83 | ) | (2,269 | ) | (216 | ) | ||||||
|
Deferred
tax valuation allowance
|
1,120 | 17,967 | - | |||||||||
|
Other
|
504 | 397 | 337 | |||||||||
|
Income
tax benefit- continuing operations
|
$ | (469 | ) | $ | (9,952 | ) | $ | (2,928 | ) | |||
Deferred
income tax assets and liabilities are computed annually for differences between
the financial statement and tax basis of assets and liabilities that will result
in deductible or taxable 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.
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.
F-26
Current
conditions in the residential and manufactured housing and credit markets and
the general economy in the U.S. continue to present challenges to returning
the Company’s operations to profitability. In the absence of specific
favorable factors, the Company records a valuation allowance for deferred tax
assets in a tax jurisdiction when a company has cumulative financial accounting
losses over several years.
Given the
accumulated net operating loss after carry-backs in the prior three years, the
net loss reported for the years ended December 31, 2009, 2008 and 2007, and
current economic conditions, it is more likely than not that the deferred tax
assets will not be realized. Accordingly, after consideration of
these factors, effective December 31, 2008, the Company provided a valuation
allowance for deferred tax assets net of deferred tax liabilities expected to
reverse resulting in a non-cash tax charge of approximately $18.0 million
in the fourth quarter of 2008.
An additional $1.1
million valuation allowance was provided in 2009 for deferred tax assets net of
deferred tax liabilities incurred in the current period.
Deferred tax
assets will continue to require a tax valuation allowance until the Company can
demonstrate their realizability through sustained profitability and/or from
other tax planning strategies.
For the
year ended December 31, 2009, the Company incurred a net loss of approximately
$4.5 million. The valuation allowance offset the benefits of the net
loss for the current period, except for certain intra-period tax adjustments
related to taxable income from discontinued operations, and recognized in the
year ended December 31, 2009. As a result, the effective tax rate on
continuing operations (exclusive of the valuation allowance) was 26.9% in 2009
compared to 36.4% for 2008 and 32.5% for 2007. The effective tax rate
varies from the expected statutory rate primarily due to the tax valuation
allowance that has been placed on the deferred tax assets that offset the tax
benefit of the net loss from continuing and discontinued operations for the
current period.
The
composition of the deferred tax assets and liabilities is as
follows:
|
(thousands) As
of December 31
|
2009
|
2008
|
||||||
|
Gross
deferred tax assets:
|
||||||||
|
Trade
receivables allowance
|
$ | 259 | $ | 751 | ||||
|
Inventory
capitalization
|
90 | 271 | ||||||
|
Accrued
expenses
|
634 | 692 | ||||||
|
Reserve
for discontinued operations
|
- | 2,246 | ||||||
|
Deferred
compensation
|
1,155 | 1,221 | ||||||
|
Non-compete
agreement
|
58 | 75 | ||||||
|
Inventory
reserves
|
481 | 741 | ||||||
|
AMT
and other tax credit carry-forwards
|
529 | 527 | ||||||
|
Federal
and State NOL carry-forwards
|
11,853 | 6,975 | ||||||
|
Share-based
compensation
|
132 | 113 | ||||||
|
Pension
liability
|
93 | 79 | ||||||
|
Interest
rate swap
|
569 | 810 | ||||||
|
Intangibles
|
3,489 | 4,615 | ||||||
|
Valuation
allowance
|
(19,087 | ) | (17,967 | ) | ||||
|
Gross
deferred tax assets
|
255 | 1,149 | ||||||
|
Gross
deferred tax liabilities:
|
||||||||
|
Accelerated
depreciation
|
(1,458 | ) | (2,273 | ) | ||||
|
Prepaid
expenses
|
(106 | ) | (182 | ) | ||||
|
Share-based
compensation
|
- | ( 3 | ) | |||||
|
Gross
deferred tax liabilities
|
(1,564 | ) | (2,458 | ) | ||||
|
Net
deferred tax liabilities
|
$ | (1,309 | ) | $ | (1,309 | ) | ||
F-27
The
deferred tax amounts above have been reflected on the accompanying consolidated
statements of financial position as of December 31, 2009 and 2008 as
follows:
|
(thousands)
|
2009
|
2008
|
||||||
|
Current
deferred tax assets
|
$ | - | $ | - | ||||
|
Long-term
deferred tax liabilities
|
(1,309 | ) | (1,309 | ) | ||||
|
Deferred
tax liabilities, net
|
$ | (1,309 | ) | $ | (1,309 | ) | ||
The tax
valuation allowance does not impact the Company’s ability to utilize its net
operating loss carryforwards to offset taxable earnings in the
future. At December 31, 2009, the Company had a federal net operating
loss carryforward of approximately $31.8 million that will not begin to expire
before 2027 and state net operating loss carryforwards of approximately $34.7
million that will expire in varying amounts between 2012 and 2029.
At
December 31, 2009, the Company has federal AMT credit carry-forwards of $0.2
million and state manufacturing credit carry-forwards of $0.1 million which are
available to be directly offset against future federal and state income tax
liabilities. The state manufacturing carry-forwards expire in varying
amounts between 2010 and 2021. The AMT credits do not
expire.
The
amount of income taxes paid in 2009, 2008 and 2007, was $0 million, $0.3 million
and $0.7 million, respectively. Taxes paid in 2007 were subsequently
refunded due to loss carry-backs.
The
Company is subject to periodic audits by domestic tax authorities.
Currently, the Company is not undergoing any routine periodic audits in
domestic tax jurisdictions.
For the
majority of tax jurisdictions, the Company is no longer subject to U.S. federal,
state and local income tax examinations by tax authorities for years before
2005.
|
15.
SHAREHOLDERS’
EQUITY
|
Preferred
Stock
The
Company has 1,000,000 shares of preferred stock authorized, without par value,
the issuance of which is subject to approval by the Board of
Directors. The Board has the authority to fix the number, rights,
preferences and limitations of the shares, subject to applicable laws and the
provisions of the Articles of Incorporation.
Common
Stock
Concurrent
with the closing of the Adorn acquisition in May 2007, Tontine Capital purchased
980,000 shares of Patrick common stock in a private placement at a purchase
price of $11.25 per share for total proceeds of approximately $11.0 million less
related costs.
On
March 10, 2008, the Company entered into a Securities Purchase Agreement
providing for the sale in a private placement of 1,125,000 shares of its common
stock to Tontine Capital at $7.00 per share, for an aggregate purchase price of
approximately $7.9 million. The sale was completed on March 12,
2008.
On May
22, 2008, the Company's shareholders approved the issuance of 1,850,000 shares
of common stock in a rights offering to its shareholders. In total,
of the 1,850,000 shares approved by shareholders for issuance, Tontine Capital
purchased 1,706,874 shares (including 895,005 shares representing its ratable
portion of shares offered in the rights offering and 811,869 shares not
purchased by shareholders in the rights offering) for a total purchase price of
approximately $11.9 million, and 143,126 shares were purchased by other
shareholders for a total purchase price of approximately $1.0
million.
During
2009, 2008 and 2007, the Company issued approximately 156,250, 24,500 and
128,600 shares, respectively, related to stock option and stock-based
compensation plans. See Note 18 for further details.
F-28
Warrants
As part
of the lenders’ consideration for the Amendment of the Credit Agreement on
December 11, 2008, the Company entered into a Warrant Agreement under which the
Company issued warrants to the lenders to purchase an aggregate of 474,049
shares of common stock at an exercise price per share of $1.00. The
warrants are immediately exercisable, subject to anti-dilution provisions, and
expire on December 11, 2018. The fair value of the warrants was
recorded in additional paid-in-capital for approximately $214,000 as of December
11, 2008. As of January 1, 2009, the fair value of these warrants was
reclassified from shareholders’ equity to a long-term liability included in
deferred compensation and other in the consolidated statements of financial
position. The fair value of the warrants will be periodically
remeasured with any changes in value recognized in the stock warrants
revaluation line on the consolidated statements of operations
Pursuant
to the anti-dilution provisions of the stock warrant agreement, the number of
shares of common stock issuable upon exercise of the warrants was increased to
an aggregate of 483,742 shares and the exercise price was adjusted to $0.98 per
share as a result of the issuance on May 21, 2009 and on June 22, 2009, pursuant
to the Company’s 1987 Stock Option Program, as amended, of restricted stock at a
price less than, and options to purchase common stock with an exercise price
less than, the warrant exercise price then in effect. See Notes
10 and 12 for further details.
Shareholder
Rights Plan
On March
21, 2006, in conjunction with the expiration of the Rights Agreement dated March
20, 1996, the Company’s Board of Directors adopted a Shareholder Rights
Agreement granting new rights to holders of the Company’s Common
Stock. Under the agreement, the Company authorized and declared a
dividend distribution of one right payable on March 31, 2006 for each share of
Common Stock of the Company outstanding on March 31, 2006, and the issuance of
one right for each share of Common Stock subsequently issued prior to the
separation date as defined in the Rights Agreement. Each right
entitles the holder to purchase 1/100
th
of a
Preferred Share at the exercise price (currently $30), and in an unfriendly
takeover situation, to purchase Company 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% or more of the Company’s assets are sold, then
rights-holders are entitled, upon payment of the exercise price, to buy common
shares of the acquiring corporation’s common stock having a then current market
value equal to two times the exercise price. In either situation,
these rights are not available to the acquiring party. However, these
exercise features will not be activated if the acquiring party makes an offer to
acquire all of the Company’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 $0.01
per right. The rights will expire on March 21, 2016. The
Company has authorized 1,000,000 shares of Preferred Stock Series A, no par
value, in connection with this plan, none of which have been
issued.
On March
12, 2008, in connection with a private placement of common stock with Tontine
Capital, the Company amended the provisions of the Rights Agreement to exempt
all Tontine Capital entities or any of their affiliates or
associates.
|
16.
INCOME PER COMMON
SHARE
|
Income
per common share is calculated for the years ended December 31, 2009, 2008 and
2007 as follows:
|
(thousands
except per share data)
|
2009
|
2008
|
2007
|
|||||||||
|
Loss
from continuing operations
|
$ | (5,443 | ) | $ | (66,657 | ) | $ | (6,080 | ) | |||
|
Income
(loss) from discontinued operations
|
922 | (4,850 | ) | 237 | ||||||||
|
Net loss
for basic and diluted per share calculation
|
$ | (4,521 | ) | $ | (71,507 | ) | $ | (5,843 | ) | |||
|
Weighted
average common shares outstanding – basic
|
9,198 | 8,009 | 5,653 | |||||||||
|
Effect
of potentially dilutive securities
|
- | - | - | |||||||||
|
Weighted
average common shares outstanding – diluted
|
9,198 | 8,009 | 5,653 | |||||||||
F-29
|
Basic
net income (loss) per share:
|
|
|
|
|||||||||
|
Continuing
operations
|
$ | (0.59 | ) | $ | (8.32 | ) | $ | (1.07 | ) | |||
|
Discontinued
operations
|
0.10 | (0.61 | ) | 0.04 | ||||||||
|
Net
loss
|
$ | (0.49 | ) | $ | (8.93 | ) | $ | (1.03 | ) | |||
|
Diluted
net income (loss) per share:
|
||||||||||||
|
Continuing
operations
|
$ | (0.59 | ) | $ | (8.32 | ) | $ | (1.07 | ) | |||
|
Discontinued
operations
|
0.10 | (0.61 | ) | 0.04 | ||||||||
|
Net
loss
|
$ | (0.49 | ) | $ | (8.93 | ) | $ | (1.03 | ) | |||
For the
years ended December 31, 2009, 2008 and 2007, there is no difference in basic
and diluted earnings per share since a net loss was recorded in each of these
periods, resulting in all common stock equivalents having no dilutive
effect. The following shares were excluded from diluted earnings per
share because of their anti-dilutive effect: 2009 -
approximately 132,200 shares related to stock options and 192,900 shares
related to stock warrants; 2008 - 35,700 shares related to stock options and
86,600 shares related to warrants; and approximately 147,000 shares
related to stock options in 2007.
On May
22, 2008, the Company's shareholders approved the issuance of 1,850,000 shares
of common stock in a rights offering to its shareholders. Pursuant to
a Standby Purchase Agreement, dated March 10, 2008 (the “2008 Standby Purchase
Agreement”), Tontine Capital agreed to acquire 895,005 shares (its ratable
portion of the 1,850,000 shares approved by shareholders), and also had the
obligation to purchase those shares that were unsubscribed for by other
shareholders at the close of the rights offering on June 20, 2008 and, pursuant
to this obligation, purchased an additional 811,869 shares. In total,
of the 1,850,000 shares approved by shareholders for issuance, Tontine Capital
purchased 1,706,874 shares and 143,126 shares were purchased by other
shareholders.
Under the
terms of the rights offering, shareholders received one right to purchase
0.2580693 of a share of common stock for each share of common stock held as of
the May 27, 2008 record date at a purchase price of $7.00 per
share. Under the terms of the 2008 Standby Purchase Agreement,
Tontine Capital purchased the 1,706,874 shares at the same $7.00 per share
subscription price offered in the rights offering. As the $7.00 per
share subscription price used in the rights offering and pursuant to the 2008
Standby Purchase Agreement was less than the Company’s stock price of $7.44 per
share on May 27, 2008, the rights offering contained a bonus element.
As a result, earnings
per share was adjusted retroactively for the bonus element for all periods
presented. This bonus element is reflected in earnings per share as
presented herein and reduced both the basic and diluted net loss per common
share by $0.02 for the year ended December 31, 2007. For 2009 and
2008, there was no impact to the basic and diluted net earnings per common
share.
|
17.
|
LEASE COMMITMENTS AND
CONTINGENCIES
|
Leases
The
Company leases office, manufacturing, and warehouse facilities and certain
equipment under various non-cancelable agreements, which expire at various dates
through 2018. 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 were with the former chairman emeritus/major shareholder and expired
during 2008.
F-30
At
December 31, 2009, future minimum lease payments for continuing operations
required under facility and equipment operating leases that have initial or
remaining noncancelable lease terms in excess of one year, are as
follows:
|
(thousands)
|
Facility Leases
|
Equipment Leases
|
||||||
|
2010
|
$ | 1,951 | $ | 1,075 | ||||
|
2011
|
1,527 | 629 | ||||||
|
2012
|
1,607 | 397 | ||||||
|
2013
|
1,448 | 128 | ||||||
|
2014
|
1,359 | 82 | ||||||
|
Thereafter
|
2,555 | 179 | ||||||
|
Total
minimum lease payments
|
$ | 10,447 | $ | 2,490 | ||||
The total
rent expense (in thousands) included in the consolidated statements of
operations for the years ended December 31, 2009, 2008, and 2007 is
approximately $3,841, $5,257, and $4,145, respectively, of which approximately
$49 was paid in 2008 and $113 was paid in 2007, to the former chairman
emeritus. There was no rent paid to the former chairman emeritus in
2009.
Contingencies
The
Company is subject to proceedings, lawsuits and audits and other claims arising
in the normal course of business. All such matters are subject to
uncertainties and outcomes that are not predictable with
assurance. Accruals for these items, when applicable, have been
provided to the extent that losses are deemed probable and are reasonably
estimable. These accruals are adjusted from time to time as
developments warrant.
Although
the ultimate outcome of these matters cannot be ascertained, on the basis of
present information, amounts already provided, availability of insurance
coverages and legal advice received, it is the opinion of management that the
ultimate resolution of these proceedings, lawsuits and other claims will not
have a material adverse effect on our consolidated financial position, results
of operations, or cash flows.
Self-Insurance
The
Company has a self-insured health plan for its Patrick 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 $225,000 at December 31,
2009.
The
Company is partially self-insured for its workers' compensation liability,
general liability and automobile insurance. The Company is
responsible for a limit of $500,000 per workers’ compensation
injury.
The Company has accrued an estimated
liability for these benefits based upon claims incurred and for estimated claims
incurred but not reported.
|
18.
|
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. The assumed discount rate to
measure the liability was 7% at both December 31, 2009 and 2008,
respectively. The Company recognized expense of $0.2 million, $0.6
million, and $1.3 million for the years ended December 31, 2009, 2008, and 2007,
respectively, in conjunction with this plan. Life insurance contracts
have been purchased which may be used to fund these agreements. The
contracts are recorded at their cash surrender value in the statements of
financial position. Any differences between actual proceeds and cash
surrender value are recorded as gains in the periods
presented. Additionally, the Company records gains or losses on the
cash surrender value in
F-31
the
period incurred. For the year ended December 31, 2009, the Company
recognized a gain of $109,000 and recognized losses for 2008 and 2007 of $87,000
and $87,000, respectively.
Bonus
Plan
The
Company pays bonuses to certain management and sales
personnel. Historically, bonuses are determined annually and are
based upon corporate and divisional income levels. The charge to
operations amounted to approximately $89,000, $1.1 million and $2.0 million for
the years ended December 31, 2009, 2008 and 2007, 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. Through December 31, 2007, Adorn, LLC contributed to a
defined contribution plan for all of its employees who met the general
eligibility requirements of the plan. Effective January 1, 2008, this
plan was merged into the Company’s qualified profit sharing plan. The
contributions and related expense for the years ended December 31, 2009, 2008,
and 2007 were immaterial.
Stock
Option and Stock-Based Incentive Plans
The
Company has various stock option and stock-based incentive plans and various
agreements whereby stock options, performance share awards, restricted stock
awards, and other stock-based incentives were made available to certain key
employees, directors and others based upon meeting various individual,
divisional or company-wide performance criteria and time-based
criteria. Non-equity incentive plan awards are intended to reward
outstanding performance and efforts as they relate to the Company’s short-term
and long-term objectives and its strategic plan and are tied to items including
EBITDA and debt reduction
.
The
Company recorded compensation expense of $98,000 and $0.7 million for the years
ended December 31, 2009 and 2008, and $1.5 million (net of related income tax
benefit of $0.6 million) for 2007 on the consolidated statements of operations
for its stock-based compensation plans.
In
November 2009, Patrick’s shareholders approved the Patrick Industries, Inc. 2009
Omnibus Incentive Plan (the “2009 Plan”) which included incentive stock options,
non-qualified stock options, related stock appreciation rights, performance and
restricted stock awards, and other awards. Prior to November 2009,
Patrick granted equity awards under the terms of the Patrick Industries, Inc.
1987 Stock Option Program, as amended and restated (the “1987
Plan”). Stock options and awards previously granted under the 1987
Plan will not be affected by the 2009 Plan and will remain outstanding until
they are exercised, expire or otherwise terminate. The shares that
were available for future awards under the 1987 Plan are included in the total
shares available under the 2009 Plan.
The
Company’s 2009 Plan permits the future granting of share options and share
awards to its employees, Directors and other service providers for up to 759,502
shares of stock as of December 31, 2009. Option awards are generally
granted with an exercise price equal to the market price of the Company’s stock
at the date of grant. Option awards granted under the 1987 Plan
generally vest over four years of continuous service and have six-year
contractual terms. Ten percent of the option awards granted on May
21, 2009 under the 1987 Plan were immediately vested on the grant
date. The remaining options will vest in increments until the
completion of a three-year period of continuous employment and have 10-year
contractual terms.
F-32
The
following table summarizes the Company’s option activity during the years ended
December 31, 2009, 2008, and 2007:
| Years ended December 31 | 2009 | 2008 | 2007 | |||||||||||||||||||
| (shares in thousands) | Shares | Weighted Average Exercise Price | Shares | Weighted Average Exercise Price | Shares | Weighted Average Exercise Price | ||||||||||||||||
|
Total
Options:
|
|
|||||||||||||||||||||
|
Outstanding,
beginning of year
|
126 | $ | 9.99 | 143 | $ | 9.99 | 199 | $ | 9.54 | |||||||||||||
|
Granted
during the year
|
495 | 1.25 | - | - | - | - | ||||||||||||||||
|
Forfeited
during the year
|
(31 | ) | 9.99 | (17 | ) | 9.98 | (19 | ) | 9.98 | |||||||||||||
|
Exercised
during the year
|
(5 | ) | 1.25 | - | - | (37 | ) | 7.57 | ||||||||||||||
|
Outstanding,
end of year
|
585 | $ | 2.67 | 126 | $ | 9.99 | 143 | $ | 9.99 | |||||||||||||
|
Aggregate
intrinsic value of total options
outstanding ($ thousands)
|
$ | 578 | $ | 0 | $ | 0 | ||||||||||||||||
|
Vested
Options:
|
||||||||||||||||||||||
|
Vested
during the year
|
67 | $ | 3.49 | 47 | $ | 9.99 | 47 | $ | 9.99 | |||||||||||||
|
Eligible,
end of year for exercise
|
143 | $ | 7.02 | 114 | $ | 9.99 | 80 | $ | 10.00 | |||||||||||||
|
Aggregate
intrinsic value of options
Exercisable
($ thousands)
|
$ | 58 | $ | 0 | $ | 0 | ||||||||||||||||
|
Weighted
average fair value of
Options
granted during the year
|
$ | 1.25 | N/A | N/A | ||||||||||||||||||
The
aggregate intrinsic value (excess of market value over the option exercise
price) in the table above is before income taxes, based on the Company’s closing
stock price of $2.43 per share as of December 31, 2009, which would have been
received by the option holders had those option holders exercised their options
as of that date.
The aggregate intrinsic
value of options exercised for the years ended December 31, 2009 and 2007 was
$16,000 and $217,000, respectively. The cash received, and the tax
benefit realized from, the exercise of stock options was approximately $7,000 in
2009 and $0.3 million (net of related income tax benefit of $0.1 million) in
2007. No options were exercised for the year ended December 31,
2008. There are 123,750 stock options that are expected to vest in
2010.
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.
The
following table presents assumptions used in the Black-Scholes model for the
stock options granted in 2009. There were no stock options granted in
2008 and 2007.
|
2009
|
|||||
|
Dividend
rate
|
- | % | |||
|
Risk-free
interest rate
|
3.37 | % | |||
|
Expected
option life
|
4 years
|
||||
|
Price
volatility
|
71.42 | % | |||
F-33
A summary
of options outstanding and exercisable at December 31, 2009 is as
follows:
|
Options
Outstanding
|
Options
Exercisable
|
||||||
|
Weighted
|
|||||||
|
Average
|
Weighted
|
Weighted
|
|||||
|
Remaining
|
Average
|
Average
|
|||||
|
Shares
|
Contractual
|
Exercise
|
Shares
|
Exercise
|
|||
|
(shares
in thousands)
|
Outstanding
|
Life
(years)
|
Price
|
Exercisable
|
Price
|
||
|
2004
Grants:
|
|||||||
|
Exercise
price - $10.01
|
56
|
0.5
|
$
10.01
|
56
|
$
10.01
|
||
|
2005
Grants:
|
|||||||
|
Exercise
price - $9.95
|
39
|
2.0
|
9.95
|
39
|
9.95
|
||
|
2009
Grants:
|
|||||||
|
Exercise
price - $0.75
|
245
|
9.4
|
0.75
|
24
|
0.75
|
||
|
Exercise
price - $1.75
|
245
|
9.4
|
1.75
|
24
|
1.75
|
||
In
conjunction with the Company’s restricted stock awards, the Board of Directors
approved the following share grants in 2008 and 2009: 8,000 shares on January 5,
2008; 16,000 shares on March 26, 2008; 24,500 shares on April 25, 2008; 10,000
shares on August 14, 2008; 117,500 shares on May 21, 2009; 3,500 shares on June
22, 2009; 10,000 shares on September 21, 2009; and 20,000 shares on October 1,
2009. In addition, the Board of Directors approved the grant of
495,000 shares related to stock options on May 21, 2009.
As of
December 31, 2009, there was approximately $0.3 million 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 approximately 27 months. The total fair
value of stock options vested during the years ended December 31, 2009, 2008 and
2007 was approximately $0.2 million, $0.5 million and $0.5 million,
respectively.
Restricted
Stock
The
following table summarizes the activity for unvested restricted stock for the
year ended December 31, 2009:
|
(shares
in thousands)
|
Shares
|
Weighted-
Average
Grant
Date
Fair
Value
|
|
|
Unvested,
January 1, 2009
|
8
|
$ 6.50
|
|
|
Granted
during the year
|
151
|
1.23
|
|
|
Vested
during the year
|
(47)
|
1.86
|
|
|
Unvested,
December 31, 2009
|
112
|
1.35
|
|
The total fair value of shares vested during the year ended December 31, 2009 was approximately $87,000.
|
19.
|
SEGMENT
INFORMATION
|
The
Company has determined that its reportable segments are those based on the
Company’s method of internal reporting, which segregates its businesses by
product category and production/distribution process. Certain segment
information in prior periods' consolidated financial statements has been
reclassified to reflect sold business reported as discontinued
operations.
A
description of the Company’s reportable segments is 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.
F-34
Distribution
- Distributes
pre-finished wall and ceiling panels, drywall and drywall finishing products,
vinyl and cement siding, roofing products, interior passage doors, insulation
and other miscellaneous products. In January 2009, the Company
established an electronics distribution division that includes an expansion of
its products offering to marine and RV customers
.
Other Component Manufactured
Products
- Includes a cabinet door division and a vinyl printing
division. The Company closed its adhesive division in the first
quarter of 2008.
The
Company sold certain assets and the business of its American Hardwoods operation
in January 2009 and sold the building that housed this operation in June
2009. Results relating to this operation, which were previously
reported in the Distribution segment, have been reclassified to discontinued
operations for all periods presented.
The
Company sold certain assets and the business of its aluminum extrusion operation
in July 2009. Results relating to this operation, which comprised the
entire Engineered
Solutions segment, have
been reclassified to discontinued operations for all periods
presented.
In
accordance with changes made to the Company’s internal reporting structure, the
Company changed its segment reporting from three reportable segments to two
reportable segments effective January 1, 2010. Operations previously
included in the Other Component Manufactured Products segment will be
consolidated with the operations in the Primary Manufactured Products segment to
form one new segment called Manufacturing. The Distribution segment
will remain the same as reported in prior periods. See Note 20 for
further details.
The
accounting policies of the segments are the same as those described in Note 1,
except that segment data includes intersegment sales. Assets are
identified to 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 segments for
use of the land and buildings based upon estimated market rates. The
Company accounts for intersegment sales similar to third party transactions,
which reflect 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 sales, cost of goods sold,
operating income and total identifiable assets. In addition, certain
significant items, including impairments and restructuring charges (the majority
of which are non-cash in nature), are presented in the table below.
The table
below presents information about the net income, segment assets, and certain
other items that are either used by or provided to the chief operating decision
makers of the Company as of and for the years ended December 31, 2009, 2008 and
2007 (in thousands):
|
2009
|
||||||||
|
Other
|
||||||||
|
Primary
|
Component
|
|||||||
|
Manufactured
|
Manufactured
|
|||||||
|
Products
|
Distribution
|
Products
|
Total
|
|||||
|
Net
outside sales
|
$ 147,109
|
$ 43,812
|
$ 21,601
|
$ 212,522
|
||||
|
Intersegment
sales
|
3,042
|
9
|
5,684
|
8,735
|
||||
|
Total
sales
|
150,151
|
43,821
|
27,285
|
221,257
|
||||
|
Cost
of goods sold
|
137,752
|
38,273
|
24,029
|
200,054
|
||||
|
Operating
income
|
3,663
|
76
|
1,749
|
5,488
|
||||
|
Identifiable
assets
|
26,948
|
8,262
|
17,180
|
52,390
|
||||
|
Depreciation
and amortization
|
2,082
|
126
|
1,863
|
4,071
|
||||
F-35
|
2008
|
||||||||
|
Other
|
||||||||
|
Primary
|
Component
|
|||||||
|
Manufactured
|
Manufactured
|
|||||||
|
Products
|
Distribution
|
Products
|
Total
|
|||||
|
Net
outside sales
|
$ 219,100
|
$ 71,369
|
$ 34,682
|
$ 325,151
|
||||
|
Intersegment
sales
|
4,775
|
47
|
8,273
|
13,095
|
||||
|
Total
sales
|
223,875
|
71,416
|
42,955
|
338,246
|
||||
|
Cost
of goods sold
|
210,764
|
62,026
|
40,093
|
312,883
|
||||
|
Operating
income (loss)
|
(10,706)
|
1,527
|
(47,001)
|
(56,180)
|
||||
|
Identifiable
assets
|
29,630
|
9,857
|
18,830
|
58,317
|
||||
|
Depreciation
and amortization
|
2,626
|
112
|
3,085
|
5,823
|
||||
|
Intangible
asset impairments
(1)
|
9,678
|
-
|
47,049
|
56,727
|
||||
|
Restructuring
charges
(2)
|
536
|
-
|
243
|
779
|
||||
|
(1)
|
Intangible
asset impairments are reflected in the operating
loss.
|
|
(2)
|
Restructuring
charges are reflected in cost of goods sold and the operating
loss.
|
|
2007
|
|||||||
|
Other
|
|||||||
|
Primary
|
Component
|
||||||
|
Manufactured
|
Manufactured
|
||||||
|
Products
|
Distribution
|
Products
|
Total
|
||||
|
Net
outside sales
|
$ 243,732
|
$ 92,682
|
$ 33,796
|
$ 370,210
|
|||
|
Intersegment
sales
|
4,157
|
265
|
8,527
|
12,949
|
|||
|
Total
sales
|
247,889
|
92,947
|
42,323
|
383,159
|
|||
|
Cost
of goods sold
|
225,001
|
81,185
|
38,801
|
344,987
|
|||
|
Operating
income
|
6,965
|
3,606
|
135
|
10,706
|
|||
|
Identifiable
assets
|
52,484
|
11,504
|
70,220
|
134,208
|
|||
|
Depreciation
and amortization
|
2,535
|
120
|
2,370
|
5,025
|
|||
|
Restructuring
charges
(1)
|
1,368
|
-
|
996
|
2,364
|
|||
(1)
Restructuring
charges are reflected in cost of goods sold and operating income. In
the Primary Manufactured Products segment, $1.222 million and $146,000 of
restructuring charges were recorded in cost of goods sold and SG&A expenses,
respectively. In the Other Component Manufactured Products segment,
$959,000 and $37,000 of restructuring charges were recorded in cost of goods
sold and SG&A expenses, respectively.
A
reconciliation of certain line items pertaining to the total reportable segments
to the consolidated financial statements as of and for the years ended December
31, 2009, 2008 and 2007 is as follows (in thousands):
|
2009
|
2008
|
2007
|
||||||||||
|
Net sales:
|
||||||||||||
|
Total
sales for reportable segments
|
$ | 221,257 | $ | 338,246 | $ | 383,159 | ||||||
|
Elimination
of intersegment sales
|
(8,735 | ) | (13,095 | ) | (12,949 | ) | ||||||
|
Consolidated
net sales
|
$ | 212,522 | $ | 325,151 | $ | 370,210 | ||||||
|
Cost of goods sold:
|
||||||||||||
|
Total
cost of goods sold for reportable segments
|
$ | 200,054 | $ | 312,883 | $ | 344,987 | ||||||
|
Elimination
of intersegment cost of goods sold
|
(8,735 | ) | (13,095 | ) | (12,949 | ) | ||||||
|
Consolidation
reclassifications
|
(99 | ) | (199 | ) | (160 | ) | ||||||
|
Corporate
incentive agreements
|
(1,708 | ) | (2,945 | ) | (3,582 | ) | ||||||
|
Other
|
131 | 1,268 | (2,151 | ) | ||||||||
|
Consolidated
cost of goods sold
|
$ | 189,643 | $ | 297,912 | $ | 326,145 | ||||||
F-36
|
Operating income (loss):
|
||||||||||||||||||||||
|
Operating
income (loss) for reportable segments
|
$ | 5,488 | $ | (56,180 | ) | $ | 10,706 | |||||||||||||||
|
Corporate
incentive agreements
|
1,708 | 2,945 | 3,582 | |||||||||||||||||||
|
Consolidation
reclassifications
|
- | - | 646 | |||||||||||||||||||
|
Gain
on sale of fixed assets
|
1,201 | 4,566 | 231 | |||||||||||||||||||
|
Unallocated
corporate expenses
|
(6,697 | ) | (19,645 | ) | (16,460 | ) | ||||||||||||||||
|
Amortization
|
(353 | ) | (1,716 | ) | (1,001 | ) | ||||||||||||||||
|
Restructuring
charges
|
- | (202 | ) | (183 | ) | |||||||||||||||||
|
Consolidated
operating income (loss)
|
$ | 1,347 | $ | (70,232 | ) | $ | (2,479 | ) | ||||||||||||||
|
Consolidated total assets:
|
||||||||||||||||||||||
|
Identifiable
assets for reportable segments
|
$ | 52,390 | $ | 58,317 | $ | 134,208 | ||||||||||||||||
|
Corporate
property and equipment
|
15,030 | 19,295 | 25,900 | |||||||||||||||||||
|
Current
assets not allocated to segments
|
508 | 2,060 | 7,597 | |||||||||||||||||||
|
Intangibles
and other assets not allocated to segments
|
4,558 | 5,279 | 4,583 | |||||||||||||||||||
|
Consolidation
eliminations
|
(274 | ) | (274 | ) | (297 | ) | ||||||||||||||||
|
Assets
held for sale
|
4,825 | 15,816 | 24,251 | |||||||||||||||||||
|
Consolidated
total assets
|
$ | 77,037 | $ | 100,493 | $ | 196,242 | ||||||||||||||||
|
Depreciation and
amortization:
|
||||||||||||||||||||||
| Depreciation and amortization for reportable segments | $ | 4,071 | $ | 5,823 | $ | 5,025 | ||||||||||||||||
|
Corporate
depreciation and amortization
|
1,200 | 1,499 | 945 | |||||||||||||||||||
|
Depreciation
for discontinued operations
|
- | 751 | 398 | |||||||||||||||||||
|
Consolidated
depreciation and amortization
|
$ | 5,271 | $ | 8,073 | $ | 6,368 | ||||||||||||||||
|
Restructuring Charges:
|
||||||||||||||||||||||
|
Restructuring
charges – cost of goods sold
|
$ | - | $ | 779 | $ | 2,181 | ||||||||||||||||
|
Restructuring
charges – SG&A
|
- | 202 | 183 | |||||||||||||||||||
|
Consolidated
restructuring charges
|
$ | - | $ | 981 | $ | 2,364 | ||||||||||||||||
|
Intangible Assets
Impairments:
|
||||||||||||||||||||||
|
Impairments
for reportable segments:
|
||||||||||||||||||||||
|
Goodwill
|
$ | - | $ | 27,374 | $ | - | ||||||||||||||||
|
Other
intangible assets
|
- | 29,353 | - | |||||||||||||||||||
|
Consolidated
intangible assets impairments
|
$ | - | $ | 56,727 | $ | - | ||||||||||||||||
Amortization
expense related to intangible assets in the Primary Manufactured Products
segment for the years ended December 31, 2009, 2008 and 2007 was $0, $69,000 and
$40,000, respectively. Intangible assets amortization expense in the
Other Component Manufactured Products segment was $353,000, $1,647,000 and
$961,000 for the same periods.
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 comprised of wages,
insurance, taxes, supplies, travel and entertainment, professional fees and
other.
Major
Customers
Sales to
three different customers accounted for approximately 21%, 14% and 12%,
respectively, of consolidated net sales of the Company for the year ended
December 31, 2009. In 2008, sales to two different customers
accounted for approximately 13.1% and 11.5%, respectively, of consolidated net
sales of the Company. No one customer accounted for 10% or more of
consolidated net sales for the year ended December 31, 2007.
F-37
|
20.
|
SUBSEQUENT
EVENTS
|
Segment
Reporting
In
accordance with changes made to the Company’s internal reporting structure, the
Company changed its segment reporting from three reportable segments to two
reportable segments effective January 1, 2010. Operations previously
included in the Other Component Manufactured Products segment will be
consolidated with the operations in the Primary Manufactured Products segment to
form one new segment called Manufacturing. The other reportable
segment, Distribution, will remain the same as reported in prior
periods. Prior year results will be reclassified to reflect the
current year presentation beginning with the first quarter of 2010.
Acquisition
In
January 2010, the Company acquired certain assets of the cabinet door business
of Quality Hardwoods Sales, a limited liability company. The purchase
was determined to be a business combination and the assets acquired will be
recorded at fair value during the first quarter of 2010. The purchase
price was not signifant.
Sales
of Operating Facilities
In
February 2010, the Company completed the sale of its operating facility in
Woodburn, Oregon for $4.2 million and is currently operating in the same
facility under a license agreement with the purchaser while it explores options
for a more suitable long-term solution. In March 2010, the Fontana,
California facility was sold for $4.9 million and the Company is operating in
the same facility under a lease agreement with the purchaser for the use of
approximately one-half of the square footage previously occupied. The
carrying value of these two facilities was classified as assets held for sale as
of December 31, 2009. Approximately $8.3 million of the net proceeds
from the sales of these two facilities were used to pay down principal on the
Company’s term loan through March 29, 2010. The Company
anticipates recording a pretax gain on the sales of approximately $2.8 million
in its first quarter 2010 operating results.
F-38
TABLE OF CONTENTS
Part IItem 1. BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsPart IIItem 5. Market For Registrant S Common Equity, Related Stockholder Matters, and Issuer Purchases Of Equity SecuritiesItem 6. Selected Financial DataItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationPart IIIItem 10. Directors, Executive Officers and Corporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related Transactions, and Director IndependenceItem 14. Principal Accounting Fees and ServicesPart IVItem 15. Exhibits, Financial Statement Schedules