PATK

Business Context and Reporting Period

Company: Patrick Industries, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2002
Industry: Manufacturer and supplier of building products and materials, primarily for the Manufactured Housing and Recreational Vehicle (RV) industries.

The Company operates four reportable segments: Laminating, Distribution, Wood, and Other. In 2002, sales were distributed as follows: 47% to Manufactured Housing, 30% to Recreational Vehicles, and 23% to other industrial markets. The Company returned to profitability in 2002, its first year of increased sales and income since 1999, driven by a rebound in the RV industry and cost-control measures.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 5.4% ($15.7 million) compared to 2001. This was driven by a 21% increase in RV industry shipments and expanded penetration into industrial markets, offsetting a 13% decline in Manufactured Housing shipments.
• Profitability Turnaround: The Company moved from a net loss of $5.8 million in 2001 to a net income of $95,000 in 2002. Operating income improved by $9.6 million.
• Margin Expansion: Gross profit margin improved to 12.7% from 11.6% in 2001 due to increased operating efficiencies and reduced fixed overhead.
• Expense Reduction: Selling, general, and administrative (SG&A) expenses decreased 5.5% to $23.5 million. This included a $1.6 million write-off of receivables and inventory related to the bankruptcy of major customer Oakwood Homes Corporation.
• Debt Reduction: Long-term debt decreased by approximately $3.7 million due to scheduled principal repayments.

Outlook, Risks, and Management Commentary

Management Commentary & Guidance

• Manufactured Housing: The industry remains in a severe downturn, with 2002 shipments at 40-year lows. Management expects 2003 shipments to decline at least 5% further due to high repossessed inventory and tight financing.
• Recreational Vehicles: The RV industry rebounded in 2002 with shipments up 21%. Management expects 2003 shipments to remain consistent with 2002 levels, though risks include high gasoline prices and geopolitical instability.
• Strategy: Continued focus on cost cutting, plant consolidations, and diversification into non-cyclical industrial markets to reduce reliance on housing and RV sectors.

Risks and Contingencies

• Customer Concentration: Three customers accounted for 27% of 2002 sales. The bankruptcy of Oakwood Homes Corporation (a major customer) resulted in a $1.6 million charge in Q4 2002.
• Cyclicality: The Company is highly exposed to the cyclical nature of the Manufactured Housing and RV industries.
• Supplier Concentration: The five largest suppliers accounted for 40% of purchases in 2002.
• Legal: No material legal proceedings are currently pending that would have a material adverse effect.

Investor Verification Checklist

• Oakwood Homes Exposure: Verify the extent of remaining exposure to Oakwood Homes Corporation and the adequacy of reserves for receivables.
• Manufactured Housing Trends: Monitor industry shipment data for 2003 to validate management's forecast of a further 5% decline.
• Segment Performance: Review the "Wood" segment, which reported an increased operating loss of $1.6 million in 2002 due to production inefficiencies and material scrap issues.
• Liquidity Position: Confirm the renewal status of the $10 million revolving credit facility, which matures in April 2003.
• Restructuring Savings: Track the realization of cost savings from the $0.7 million in restructuring charges incurred over the last two years.