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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549 
FORM 10-K
(Mark One)                
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2019
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)
Indiana
35-1057796
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
 
 
 
107 W. FRANKLIN STREET, P.O. BOX 638
ELKHART,
Indiana
46515
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code: (574) 294-7511
Securities registered pursuant to Section 12(b) of the Act:
Common stock, without par value
PATK
Nasdaq Stock Market LLC
(Title of each class)
(Trading Symbol)
(Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No
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 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 (§ 232.405 of this chapter) 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer   Accelerated filer Non-accelerated filer Smaller reporting company Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No
As of June 28, 2019, the last business day of the registrant's most recently completed second fiscal quarter, the aggregate market value of the common stock of the registrant held by non-affiliates was $1.1 billion. As of February 14, 2020, there were 23,880,778 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 to be held on May 14, 2020 are incorporated by reference into Part III of this Form 10-K.



PATRICK INDUSTRIES, INC.
FORM 10-K
FISCAL YEAR ENDED DECEMBER 31, 2019
Table of Contents
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ITEM 16.
FORM 10-K SUMMARY


2



FINANCIAL SECTION
 
 
Report of Independent Registered Public Accounting Firm, Deloitte & Touche LLP
F-2
 
F-5
 
F-6
 
F-7
 
Consolidated Statements of Financial Position
F-8
 
Consolidated Statements of Cash Flows
F-9
 
F-10
 
 
Exhibits
 

3



INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS
This Annual Report on 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, industry growth and projections, growth opportunities for existing products, plans and objectives of management, markets for the common stock of Patrick Industries, Inc. (the “Company” or “Patrick”) 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 (“SEC”) 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.
There are a number of factors, many of which are beyond the control of the Company, which could cause actual results and events to differ materially from those described in the forward-looking statements. Many of these factors are identified in the “Risk Factors” section of this Form 10-K as set forth in Part I, Item 1A. These factors include, without limitation, the impact of any economic downturns especially in the residential housing market, a decline in discretionary consumer spending, pricing pressures due to competition, costs and availability of raw materials and commodities, the imposition of restrictions and taxes on imports of raw materials and components used in our products, information technology performance and security, the availability of commercial credit, the availability of retail and wholesale financing for recreational vehicles, watercraft, and residential and manufactured homes, the availability and costs of labor, inventory levels of retailers and manufacturers, the financial condition of our customers, retention and concentration of significant customers, the ability to generate cash flow or obtain financing to fund growth, future growth rates in the Company's core businesses, the seasonality and cyclicality in the industries to which our products are sold, realization and impact of efficiency improvements and cost reductions, the successful integration of acquisitions and other growth initiatives, increases in interest rates and oil and gasoline prices, the ability to retain key management personnel, adverse weather conditions impacting retail sales, our ability to remain in compliance with our credit agreement covenants, cyber-related risks and general economic, market and political conditions. In addition, national and regional economic conditions may affect the retail sale of recreational vehicles, watercraft, and residential and manufactured housing. You should consider forward-looking statements, therefore, in light of various important factors, including those set forth in the reports and documents that the Company files with the SEC, including this Annual Report on Form 10-K for the year ended December 31, 2019.
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. Patrick does not undertake to publicly update or revise any forward-looking statements, except as required by law. See Part I, Item 1A “Risk Factors” below for further discussion.

PART I
ITEM 1.
BUSINESS
Unless the context otherwise requires, the terms Company, Patrick, we, our, or us refer to Patrick Industries, Inc. and its subsidiaries.
Company Overview
Patrick Industries, Inc. was founded in 1959 and incorporated in the state of Indiana in 1961. Patrick is a major manufacturer and distributor of component and building products and materials serving original equipment manufacturers (“OEMs”) primarily in the recreational vehicle (“RV”), manufactured housing (“MH”) and marine

4



markets. The Company also supplies products to adjacent industrial markets, such as kitchen cabinet, high-rise, office and household furniture, fixtures and commercial furnishings, and other industrial markets.

The Company operates through a nationwide network that includes, as of December 31, 2019, 125 manufacturing plants and 48 warehouse and distribution facilities located in 23 states, China, Canada and the Netherlands. The Company operates within two reportable segments, Manufacturing and Distribution, through a nationwide network of manufacturing and distribution centers for its products, thereby reducing in-transit delivery time and cost to the regional manufacturing footprint of its customers. The Manufacturing and Distribution segments accounted for 70% and 30% of the Company’s consolidated net sales for 2019, respectively. Financial information about these operating segments is included in Note 19 of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K (the "Form 10-K") and incorporated herein by reference.

The Company’s strategic and capital allocation strategy is to optimally manage and utilize its resources and leverage its platform of operating brands to continue to grow and reinvest in its business. Through strategic acquisitions, geographic expansion, expansion into new product lines and investment in infrastructure and capital expenditures, Patrick seeks to ensure that its operating network contains capacity, technology and innovative thought processes to support anticipated growth needs, effectively respond to changes in market conditions, inventory and sales levels, and successfully integrate manufacturing, distribution and administrative functions.

Over the last three years, the Company has executed on a number of new product initiatives and invested approximately $651 million in acquisitions, which directly complement our core competencies and existing product lines as well as expand its presence in the marine industry. The combination of improved economic conditions and demographic trends benefiting the RV, MH and marine industries and the execution of the strategic initiatives identified above, among others, resulted in increases in sales, operating income, net income and cash flows over the last several years.

The Company’s principal executive and administrative offices are located at 107 West Franklin Street, Elkhart, Indiana 46515 and the telephone number is (574) 294-7511; Internet website address: www.patrickind.com. The information on Patrick's website is not incorporated by reference into this Form 10-K. The Company makes available free of charge through the website, its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports filed with the SEC as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC.























5



Major Product Lines

Patrick manufactures and distributes a variety of products within its reportable segments including:
Manufacturing
Distribution
Laminated products for furniture, shelving, walls and countertops
Pre-finished wall and ceiling panels
Decorative vinyl, wrapped vinyl, paper laminated panels and vinyl printing
Drywall and drywall finishing products
Solid surface, granite and quartz countertops
Interior and exterior lighting products
Fabricated aluminum products
Wiring, electrical and plumbing products
Wrapped vinyl, paper and hardwood profile mouldings
Transportation and logistics services
Custom cabinetry
Electronics and audio systems components
Electrical systems components including instrument and dash panels
Cement siding
Slide-out trim and fascia
Raw and processed lumber
Cabinet products, doors, components and custom cabinetry
Fiber reinforced polyester (“FRP”) products
Hardwood furniture
Interior passage doors
Fiberglass bath fixtures and tile systems
Roofing products
Specialty bath and closet building products
Laminate and ceramic flooring
Boat covers, towers, tops, and frames
Shower doors
Softwoods lumber
Furniture
Interior passage doors
Fireplaces and surrounds
Wiring and wire harnesses
Appliances
CNC molds and composite parts
Tile
Aluminum fuel tanks
Other miscellaneous products
Slotwall panels and components
 
RV painting
 
Thermoformed shower surrounds


Fiberglass and plastic components including front and rear caps and marine helms
 
Polymer-based flooring
 
Air handling products
 
Marine hardware
 

Primary Markets
Patrick manufactures and distributes its building products and interior decorative component products for use in the four primary markets it serves. Operating facilities that supply the Company’s products are strategically located in proximity to the customers they serve. The Company’s sales by market are as follows:

6



 
2019

2018

RV
55
%
63
%
Marine
14
%
12
%
MH
19
%
12
%
Industrial
12
%
13
%
     Total
100
%
100
%
Recreational Vehicles
The Company’s RV products are sold primarily to major manufacturers of RVs, smaller OEMs, and to a lesser extent, manufacturers in adjacent industries. The principal types of recreational vehicles include (1) towables: conventional travel trailers, fifth wheels, folding camping trailers, and truck campers; and (2) motorized: motor homes. The RV market is primarily dominated by Thor Industries, Inc. (“Thor”), Forest River, Inc. (“Forest River”) and Winnebago Industries, Inc. ("Winnebago") which combined held 91% of retail market share for towables and 74% for motorized units as reported per Statistical Surveys, Inc. ("SSI") for 2019.

The RV industry experienced a decline in wholesale unit shipments in 2019 and 2018 following eight straight years of growth as RV OEMs continued to adjust their production levels in tandem with the rebalancing of dealer inventories in the retail marketplace. According to the Recreation Vehicle Industry Association ("RVIA"), total RV industry wholesale shipments fell 16% in 2019 compared to 2018, with shipments reaching a total of approximately 406,000 units.

The Company estimates that its mix of RV revenues related to towable units and motorized units is consistent with the overall RV industry production mix. In 2019, towable and motorized unit shipments represented approximately 89% and 11%, respectively, of total RV industry wholesale shipments. The towable sector decreased 16% in 2019 compared to the prior year and the motorized sector decreased 19% per the RVIA.

With estimated retail unit shipments outpacing wholesale unit shipments in 2019, RV dealer inventories declined in 2019. On the retail side, estimated RV retail unit shipments declined 7% in 2019 compared to 2018. For the full year 2019, RV dealer inventories declined by more than 50,000 units, which we believe will position the industry to return to a more direct relationship between wholesale unit shipments and retail unit shipments for the upcoming 2020 selling season.

Recreational vehicle purchases are generally consumer discretionary income purchases, and therefore, any situation which causes concerns related to discretionary income can have a negative impact on this market. The Company believes that industry-wide retail sales and the related production levels of RVs will continue to be dependent on the overall strength of the economy, consumer confidence levels, equity securities market trends, fluctuations in dealer inventories, the level of disposable income, and other demographic trends.

Demographic and ownership trends continue to point to favorable market growth in the long term, as there is a shift toward outdoor, nature-based tourism activities, with a large segment of the population’s “millennials” and "Gen Xers" embracing this outdoor lifestyle and entering into the RV marketplace as well as a large percentage of new campers from increasingly more diverse groups. Per the 2019 KOA North American Camping Report, 41% of all campers and 56% of new campers are millennials, while 36% of all campers and 25% of new campers are Gen Xers.

Detailed narrative information about the Company’s sales to the RV industry is included in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (the "MD&A") of this Form 10-K.

Marine
The marine industry reflects the similar active, outdoor leisure-based, family-oriented lifestyle that characterizes the RV industry and the Company has increased its focus and expanded its presence in the adjacent marine market through recent acquisitions, particularly within the last three years. Consumer demand in the marine market is generally driven by the popularity of the recreational and leisure lifestyle and by economic conditions.

7




Based on current available data per SSI, within the powerboat sector, fiberglass units accounted for approximately 38% of retail unit sales, aluminum 29%, pontoon 28% and ski & wake 5% for 2019.

According to the National Marine Manufacturers Association ("NMMA"), per its latest available 2018 U.S. Recreational Boating Statistical Abstract, it is estimated that there were approximately 12 million registered boats in the U.S. in 2018. Total U.S. retail expenditures on boats, engines, accessories, and related costs totaled approximately $41.8 billion in 2018, up approximately 7% from 2017. The average age of boats currently in use is approximately 25 years compared to an average useful life of 30 years, and the expected number of boats to be retired over the next four years is approximately 1 million, according to NMMA.

The Company’s sales to the marine industry are primarily focused on the powerboat sector of the market which is comprised of four main categories: fiberglass, aluminum, pontoon and ski & wake. Based on current available data per SSI, marine powerboat retail unit shipments decreased 4% in 2019 compared to 2018, while marine wholesale unit shipments decreased approximately 13% in 2019 compared to 2018, marking the first year of declines in retail and wholesale unit shipments after eight consecutive years of growth in new boat shipments. Detailed narrative information about the Company’s sales to the marine industry is included in the MD&A of this Form 10-K.

Manufactured Housing
The Company’s manufactured housing products are sold primarily to major manufacturers of manufactured homes, other OEMs, and to a lesser extent, to manufacturers in adjacent industries. In the aggregate, the top three manufacturers produced approximately 78% of MH market retail unit shipments in 2019 per SSI.

Although wholesale unit shipments have increased in the MH industry from a low of approximately 49,800 units in 2009 to 94,633 units in 2019, they are still trending well below historical levels. The Company believes there is significant upside potential for this market in the long term driven by pent-up demand, multi-family housing capacity, improving consumer credit and financing conditions, residential housing market conditions, higher consumer confidence levels, increased affordability and quality, demographic trends such as first time home buyers and those looking to downsize, new home pricing, and improved consumer savings levels.

Factors that may favorably impact production levels further in this industry include improving quality credit standards in the residential housing market, new jobs growth, consumer confidence, favorable changes in financing regulations, a narrowing in the difference between interest rates on MH loans and mortgages on traditional residential "stick-built" housing, and any improvement in conditions in the asset-backed securities markets for manufactured housing loans.

In addition, there have been changes in financial regulations, including changes to the Dodd-Frank Wall Street Reform Act, in efforts to ease the regulatory burden on smaller financial institutions, as well as ongoing MH loan program initiatives by Fannie Mae, which in turn are expected to increase MH loan availability and reduce the total cost of MH borrowing, with a potential resulting increase in MH demand.

Detailed narrative information about the Company’s sales to the MH industry is included in the MD&A of this Form 10-K.

Industrial Markets
The Company estimates that approximately 60% of its industrial net sales in 2019 were associated with the U.S. residential housing market. The Company believes that there is a direct correlation between the demand for its products in this market and new residential housing construction and remodeling activities. Patrick's sales to the industrial market generally lag new housing starts by four to six months and will vary based on differences in regional economic prospects. 

Many of Patrick's core manufacturing products are also utilized in the kitchen cabinet, high-rise, office and household furniture, hospitality, and fixtures and commercial furnishings markets. These markets are generally

8



categorized by a more performance-than-price driven customer base, and provide an opportunity for the Company to diversify its customer base. Additionally, other residential and commercial segments have been less vulnerable to import competition, and therefore, provide opportunities for increased sales penetration and market share gains. Over the past three years, the residential housing market in particular has shown signs of improvement across the country and that trend is expected to continue in 2020.

Detailed narrative information about the Company’s sales to the industrial markets is included in the MD&A of this Form 10-K.

Strategic Acquisitions
The Company is focused on driving growth in each of its primary markets through the acquisition of companies with strong management teams having a strategic fit with Patrick’s core values, business model and customer presence, as well as additional product lines, facilities, or other assets to complement or expand its existing businesses. The Company may explore strategic acquisition opportunities that are not directly tied to the four primary markets it serves in order to further leverage its core competencies in manufacturing and distribution and to diversify its end market exposure and presence.

In 2019, the Company invested approximately $56 million in acquisitions and over the last three years has completed approximately $651 million of acquisitions. See Note 4 of the Notes to Consolidated Financial Statements for a description of acquisitions completed by the Company in 2019, 2018 and 2017.

Competition
The RV, MH, marine and industrial markets are highly competitive, both among manufacturers and the suppliers of various components. The barriers to entry for each industry are generally low and include compliance with industry standards, codes and safety requirements, and the initial capital investment required to establish manufacturing operations. In addition, the Company competes with manufacturers of manufactured homes with vertically integrated operations. Across the Company’s range of products and services, competition exists primarily on price, product features and innovation, timely and reliable delivery, quality and customer service. Several competitors compete with Patrick in each product line on a regional and local basis. However, in order for a competitor to compete with Patrick on a national basis, the Company believes that a substantial capital commitment and investment in personnel and facilities would be required.
Capacity and Plant Expansions
Patrick has the ability to fulfill demand for certain products in excess of capacity at certain facilities by shifting production to other facilities. Capital expenditures for 2019 consisted of $27.7 million of investments primarily to replace and upgrade production equipment, expand facilities outside of core Midwest markets to align with OEM expansions, increase capacity, and provide more advanced manufacturing automation. Management regularly monitors capacity at its facilities and reallocates existing resources where needed to maintain production efficiencies throughout all of its operations and capitalize on commercial and industrial synergies in key regions to support profitable growth, grow its customer base, and expand its geographical product reach outside its core Midwest market.

Branding
New product development is a key component of the Company’s efforts to grow its market share and revenue base, adapt to changing market conditions, and proactively address customer demand. The Company has expanded its product and service offerings with the integration of new and innovative product lines into its operations that bring additional value to customers and create additional scale advantages.


9



The Studio
The Company's Design/Innovation Center and Showroom, The Studio, is located in Elkhart, Indiana. The Studio presents the latest design trends and products in the markets served by Patrick, and provides a creative environment for customers to design products and enhance their brand. The 45,000 square foot facility includes a 25,000 square foot showroom devoted to the display of products, capabilities and services offered by each of Patrick’s business units, in addition to offices and conference rooms. The Company’s specialized team of designers, engineers and graphic artists works with RV, MH, marine and industrial customers to meet their creative design and product needs, including creating new styles and utilizing new colors, patterns, products, and wood types for panels and mouldings, cabinet doors, furniture, lighting and other products. Other services provided at The Studio include product development, 3D CAD illustration, 3D printing, photography and marketing.

Marine Studio

The Company's Marine Studio, which was opened in February 2020 and is located in Sarasota, Florida, is a comprehensive marine studio showroom, design and engineering center, which provides full engineering and integrated design solutions for our marine customers. The 14,000 square foot facility includes a showroom that displays the Company's marine products as well as the marine design and engineering capabilities and services offered by our marine businesses.

Operating Brands
Through its operating brands, the Company provides customers with specific product knowledge, expertise and support that are tailored to their needs. The Company strives to be the supplier of choice for its customers by elevating the customer purchasing experience with expert product line managers, and support staff and strategic partnerships for each operating brand, which help drive efficiency and maximize value for its customers.

Patrick has no material licenses, franchises, or concessions and does not conduct significant research and development activities.
Marketing and Distribution
As of December 31, 2019, the Company had over 3,100 active customers. Its revenues from the RV market include sales to two major manufacturers of RVs that each account for over 10% of the Company's net sales, Forest River and Thor. Both Forest River and Thor have multiple businesses and brands that operate independently under the parent company and these multiple businesses and brands generally purchase our products independently from one another. The Company’s sales to the various businesses of Forest River and Thor, on a combined basis, accounted for 40%, 49% and 57% of our consolidated net sales, for the years ended December 31, 2019, 2018 and 2017, respectively.

The Company generally maintains supplies of various commodity products in its warehouses to ensure that it has product on hand at all times for its distribution customers. The Company purchases a majority of its distribution segment products in railcar, container, or truckload quantities, which are warehoused prior to their sale to customers. Approximately 12%, 15% and 19% of the Company's distribution segment’s sales were from products shipped directly from the suppliers to Patrick customers in 2019, 2018 and 2017, respectively. Typically there is a one to two-week period between Patrick receiving a purchase order and the delivery of products to its warehouses or customers and, as a result, the Company has no significant backlog of orders. In periods of declining market conditions, customer order rates can decline, resulting in less efficient logistics planning and fulfillment and thus increasing delivery costs due to increased numbers of shipments with fewer products in each shipment.

Raw Materials
Patrick has arrangements with certain suppliers that specify exclusivity in certain geographic areas, pricing structures and rebate agreements among other terms.


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Raw materials are primarily commodity products, such as lauan, gypsum, particleboard and other lumber products, aluminum, resin, fiberglass and overlays, among others which are available from many suppliers. Our customers do not maintain long-term supply contracts, and therefore, the Company bears the risk of accurate forecasting of customer orders. Its sales in the short-term could be negatively impacted in the event any unforeseen negative circumstances were to affect its major suppliers. In addition, demand changes in certain market sectors can result in fluctuating costs of certain more commodity-oriented raw materials and other products that are utilized and distributed.

The Company continually explores alternative sources of raw materials and components, both domestically and from outside the U.S. Alternate sources of supply are available for all of its material purchases.

Regulation and Environmental Quality
The Company’s operations are subject to environmental laws and regulations administered by federal, state, and local regulatory authorities including requirements relating to air, water and noise pollution. Additionally, these requirements regulate the Company's use, storage, discharge and disposal of hazardous chemicals used or generated during specific manufacturing processes.

Select products are subject to various legally binding or voluntary standards. For example, the composite wood substrate materials that Patrick uses to produce products for its customers in the RV marketplace have been certified as to compliance with applicable emission standards developed by the California Air Resources Board (“CARB”). All suppliers and manufacturers of composite wood materials are required to comply with the current CARB regulations.

The Company is certified to sell Forestry Stewardship Council (“FSC”) materials to its customers at certain of its manufacturing branches. The FSC certification provides a link between responsible production and consumption of materials from the world’s forests and assists the Company’s customers in making socially and environmentally responsible buying decisions on the products they purchase. Upholstered products and mattresses provided by the Company for RVs must comply with Federal Motor Vehicle Safety Standards regulated by the National Highway Traffic Safety Administration regarding flammability.

The Company also produces and provides products for manufactured homes that must comply with performance and construction regulations promulgated by the U.S. Department of Housing and Urban Development (“HUD”).

Seasonality

Manufacturing operations in the RV, marine and MH industries historically have been seasonal and at their highest levels when the weather is moderate. Accordingly, the Company’s sales and profits had generally been the highest in the second quarter and lowest in the fourth quarter. Seasonal industry trends in the past several years have included the impact related to the addition of major RV manufacturer open houses for dealers in the August-September timeframe and marine open houses in the December-February timeframe, resulting in dealers delaying certain restocking purchases until new product lines are introduced at these shows. In addition, recent seasonal industry trends have been, and future trends may be, different than in prior years due to the impact of volatile economic conditions, interest rates, access to financing, cost of fuel, national and regional economic conditions and consumer confidence on retail sales of RVs and marine units and other products for which the Company sells its components, as well as fluctuations in RV and marine dealer inventories, increased volatility in demand from RV and marine dealers, the timing of dealer orders, and from time to time, the impact of severe weather conditions on the timing of industry-wide wholesale shipments.
 



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Employees
At December 31, 2019, we had approximately 7,500 employees. The Company believes its relations with its employees are good. The Company is not subject to any collective bargaining agreements with its employees.
Executive Officers of the Company
The following table sets forth our executive officers as of January 1, 2020:
Officer
 
Position
 
Age
Todd M. Cleveland
 
Executive Chairman of the Board
 
51
Andy L. Nemeth
 
President and Chief Executive Officer
 
50
Jeffrey M. Rodino
 
Executive Vice President-Sales and Chief Sales Officer
 
49
Kip B. Ellis
 
Executive Vice President-Operations and Chief Operating Officer
 
45
Joshua A. Boone
 
Vice President-Finance, Chief Financial Officer and Secretary-Treasurer
 
40
Courtney A. Blosser
 
Executive Vice President-Human Resources and Chief Human Resources Officer
 
53
Todd M. Cleveland was appointed Executive Chairman of the Board of the Company in January 2020. Prior to that, Mr. Cleveland was Chairman of the Board from May 2018 to December 2019 and Chief Executive Officer from February 2009 until December 2019. Mr. Cleveland was President of the Company from May 2008 to December 2015, and Chief Operating Officer from May 2008 to March 2013. 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 Holdings, Inc. by Patrick in May 2007. Mr. Cleveland has over 29 years of manufactured housing, recreational vehicle, and industrial experience in various leadership capacities.
Andy L. Nemeth was appointed Chief Executive Officer of the Company in January 2020. In addition to this role, Mr. Nemeth serves as President of the Company, a position he has held since January 2016. Mr. Nemeth was the Executive Vice President of Finance and Chief Financial Officer from May 2004 to December 2015, and Secretary-Treasurer from 2002 to 2015. Mr. Nemeth has over 28 years of manufactured housing, recreational vehicle, and industrial experience in various financial and managerial capacities.
Jeffrey M. Rodino was appointed Chief Sales Officer of the Company in September 2016. In addition to this role, Mr. Rodino serves as the Executive Vice President of Sales, a position he has held since December 2011. Prior to that, he was the Chief Operating Officer of the Company from March 2013 to September 2016, and Vice President of Sales for the Midwest from August 2009 to December 2011. Mr. Rodino has over 26 years of experience in serving the recreational vehicle, manufactured housing and industrial markets.
Kip B. Ellis was appointed Executive Vice President of Operations and Chief Operating Officer of the Company in September 2016.  He was elected an officer in September 2016. Mr. Ellis joined the Company as Vice President of Market Development in April 2016.  Prior to his role at Patrick, Mr. Ellis served as Vice President of Aftermarket Sales for the Dometic Group from 2015 to 2016.  Prior to his tenure at Dometic, Mr. Ellis served as Vice President of Global Sales and Marketing from 2007 to 2015 at Atwood Mobile Products.  Mr. Ellis has over 23 years of experience serving the recreational vehicle, manufactured housing, industrial and automotive markets.
Joshua A. Boone was appointed Vice President of Finance, Chief Financial Officer and Secretary-Treasurer of the Company in January 2016. He was elected an officer in May 2016. Mr. Boone joined the Company as its Director of Corporate Finance in July 2014. Prior to his role at Patrick, Mr. Boone served as Chief Financial Officer for Pretzels, Inc. from 2012 to 2014 and served in several leadership positions in finance and accounting at Brunswick Corporation from 2007 to 2012. Mr. Boone has over 15 years of experience serving the manufacturing, industrial and marine industries in various financial and managerial capacities.

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Courtney A. Blosser was appointed Executive Vice President of Human Resources and Chief Human Resources Officer of the Company in May 2016. Prior to that, Mr. Blosser was the Vice President of Human Resources from October 2009 to May 2016. Prior to his role at Patrick, Mr. Blosser served as the Corporate Director-Human Resources of Whirlpool Corporation from 2008 to 2009. Mr. Blosser has over 31 years of operations and human resource experience in various industries.
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 SEC. The charters of our Audit, Compensation, and Corporate Governance and 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 “Corporate Governance” portion of our website. Our website and the information contained therein or incorporated therein are not intended to be incorporated into this Annual Report on Form 10-K.
ITEM 1A.
RISK FACTORS
In addition to the other information set forth in this report, you should carefully consider the following factors which could materially affect our business, financial condition or results of operations. The risks described below are not the only risks we face. Additional factors not presently known to us or that we currently deem to be immaterial also may materially adversely affect our business, cash flows, financial condition or results of operations in future periods.
Economic and business conditions beyond Patrick's control, including cyclicality and seasonality in the industries it sells products, could lead to fluctuations in and negatively impact operating results.
The RV, MH, marine and industrial markets in which we operate are subject to cycles of growth and contraction in consumer demand, and volatility in production levels, shipments, sales and operating results, due to external factors such as general economic conditions, consumer confidence, employment rates, financing availability, interest rates, inflation, fuel prices, and other economic conditions affecting consumer demand and discretionary spending. Periods of economic recession and downturns have adversely affected our business and operating results in the past, and have potential to adversely impact our future results. Consequently, the results for any prior period may not be indicative of results for any future period. In addition, fluctuation in demand could adversely affect our management of inventory, which could lead to an inability to meet customer needs or a charge for obsolete inventory.
Manufacturing operations in the RV, marine and MH industries historically have been seasonal and at their highest levels when the weather is moderate. Accordingly, the Company’s sales and profits had generally been the highest in the second quarter and lowest in the fourth quarter. Seasonal industry trends in the past several years have included the impact related to the addition of major RV manufacturer open houses for dealers in the August-September timeframe and marine open houses in the December-February timeframe, resulting in dealers delaying certain restocking purchases until new product lines are introduced at these shows. In addition, recent seasonal industry trends have been, and future trends may be, different than in prior years due to the impact of volatile economic conditions, interest rates, access to financing, cost of fuel, national and regional economic conditions and consumer confidence on retail sales of RVs and marine units and other products for which the Company sells its components, as well as fluctuations in RV and marine dealer inventories, increased volatility in demand from RV and marine dealers, the timing of dealer orders, and from time to time, the impact of severe weather conditions on the timing of industry-wide wholesale shipments.



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If the financial condition of our customers and suppliers deteriorate, our business and operating results could suffer.
The markets we serve have been highly sensitive to changes in the economic environment. Weakening conditions in the economy, or the lack of available financing in the credit market, could cause the financial condition of our customers and suppliers to deteriorate, which could negatively affect our business through the loss of sales or the inability to meet our commitments. Many of our customers participate in highly competitive markets and their financial condition may deteriorate as a result. In addition, a decline in the financial condition of our customers could hinder our ability to collect amounts owed by customers.
Although we have a large number of customers, our sales are significantly concentrated with two customers, the loss of either of which could have a material adverse impact on our operating results and financial condition.
Two customers in the RV market accounted for a combined 40% of our consolidated net sales in 2019. The loss of either of these customers could have a material adverse impact on our operating results and financial condition. We do not have long-term agreements with our 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.
Changes in consumer preferences relating to our products could adversely impact our sales levels and our operating results.
Changes in consumer preferences, or our inability to anticipate changes in consumer preferences for RVs, marine models or manufactured homes, or for the products we make could reduce demand for our products and adversely affect our operating results and financial condition.
A significant percentage of the Company’s sales are concentrated in the RV industry, and declines in the level of RV unit shipments or reductions in industry growth could reduce demand for our products and adversely impact our operating results and financial condition.
In 2019 and 2018, the Company's net sales to the RV industry were approximately 55% and 63%, respectively, of consolidated net sales. While the Company measures its RV segment sales against industry-wide wholesale shipment statistics, the underlying health of the RV industry is determined by retail demand. Retail sales of RVs historically have been closely tied to general economic conditions, and as well to consumer confidence, which has been on an upward trend since 2010. In addition, the recalibration of RV dealer inventory levels contributed to a decline in wholesale unit shipment levels in 2018 and 2019. Declines in RV unit shipment levels or reductions in industry growth could significantly reduce the Company’s revenue from the RV industry and have a material adverse impact on its operating results in 2020 and other future periods.
The RV, MH, marine and industrial 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 or to produce in-house products that we currently produce. We compete not only with other suppliers to the RV, MH, marine and industrial producers, but also with suppliers to traditional site-built homebuilders and suppliers of cabinetry and countertops. 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 distribution arrangements may be adversely impacted.
Although we are one of the largest competitors in our industry, the greater financial resources or the lower levels of debt or financial leverage of certain of our competitors may enable them to commit larger amounts of capital in response to changing market conditions. Competitors may develop innovative new products that could put the Company at a competitive disadvantage. If we are unable to compete successfully against other manufacturers and

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suppliers to the RV, MH and marine industries as well as to the industrial markets we serve, we could lose customers and sales could decline, or we may not be able to improve or maintain profit margins on sales to customers or be able to continue to compete successfully in our core markets.
Conditions in the credit market could limit the ability of consumers and wholesale customers to obtain retail and wholesale financing for RVs, manufactured homes, and marine products, resulting in reduced demand for our products.
Restrictions on the availability of consumer and wholesale financing for RVs, manufactured homes and marine products and increases in the costs of such financing have in the past limited, and could again limit, the ability of consumers and wholesale customers to purchase such products, which would result in reduced production by our customers, and therefore reduce demand for our products.
Loans used to finance the purchase of manufactured homes usually have shorter terms and higher interest rates, and are more difficult to obtain, than mortgages for site-built homes. Historically, lenders required a higher down payment, higher credit scores and other criteria for these loans. Current lending criteria are more stringent than historical criteria, and many potential buyers of manufactured homes may not qualify.
The availability, cost, and terms of these manufactured housing loans are also dependent on economic conditions, lending practices of financial institutions, government policies, and other factors, all of which are beyond our control. Reductions in the availability of financing for manufactured homes and increases in the costs of this financing have limited, and could continue to limit, the ability of consumers and wholesale customers to purchase manufactured homes, resulting in reduced production of manufactured homes by our customers, and therefore reduced demand for our products. In addition, certain provisions of the Dodd-Frank Act, which regulate financial transactions, could make certain types of loans more difficult to obtain, including those historically used to finance the purchase of manufactured homes.
The manufactured housing industry has experienced a significant long-term decline in shipments, which has led to reduced demand for our products.
The MH industry, which accounted for 19% of the Company's consolidated net sales for 2019, has experienced a significant decline in production of new homes compared to the last peak production level in 1998. The downturn was caused, in part, by limited availability and high cost of financing for manufactured homes and was exacerbated by economic and political conditions during the 2008 financial crisis. Although industry-wide wholesale production of manufactured homes has improved somewhat in recent years, annual production remains well below historical averages and a worsening of conditions in the MH market could have a material adverse impact on our operating results.
Fuel shortages or high prices for fuel could have an adverse impact on our operations.
The products produced by the RV and marine industries 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 or tax on fuel will not significantly increase in the future. Shortages of gasoline and diesel fuel, and substantial increases in the price of fuel, have had a material adverse effect on our business and the RV industry as a whole in the past and could have a material adverse effect on our business in the future.
If we cannot effectively manage the challenges and risks associated with doing business internationally, our revenues and profitability may suffer.
We purchase a significant portion of our raw materials and other supplies from suppliers located in Indonesia, China, Malaysia and Canada. As a result, our ability to obtain raw materials and supplies on favorable terms and in a timely fashion are subject to a variety of risks, including fluctuations in foreign currencies, changes in the economic strength of the foreign countries in which we do business, difficulties in enforcing contractual obligations and

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intellectual property rights, compliance burdens associated with a wide variety of international and U.S. import laws, and social, political, and economic instability. Our business with our international suppliers could be adversely affected by restrictions on travel to and from any of the countries in which we do business due to a health epidemic or outbreak or other event. Additional risks associated with our foreign business include restrictive trade policies, imposition of duties, taxes, or government royalties by foreign governments, and compliance with the Foreign Corrupt Practices Act and local anti-bribery laws. Any measures, or proposals to implement such measures, could negatively impact our relations with our international suppliers and the volume of shipments to the U.S. from these countries, which could have a materially adverse effect on our business and operating results. We maintain limited operations in Canada, the Netherlands and China but are nevertheless exposed to risks of operating in those countries associated with: (i) the difficulties and costs of complying with a wide variety of of complex laws, treaties and regulations; (ii) unexpected changes in political or regulatory environments; (iii) earnings and cash flows that may be subject to tax withholding requirements or the imposition of tariffs, exchange controls, or other restrictions; (iv) political, economic, and social instability; (v) import and export restrictions and other trade barriers; (vi) responding to disruptions in existing trade agreements or increased trade tensions between countries or political or economic unions; (vii) maintaining overseas subsidiaries and managing international operations; and (viii) fluctuations in foreign currency exchange rates.
We are dependent on third-party suppliers and manufacturers and any increased cost and limited availability of certain raw materials may have a material adverse effect on our business and results of operations.
Prices of certain materials, including gypsum, lauan, particleboard, MDF, aluminum and other commodity products, can be volatile and change dramatically with changes in supply and demand. Certain products are purchased from overseas and their availability is dependent upon weather conditions, seasonal and religious holidays, political unrest, economic conditions overseas, tariffs or other cross-border taxes, natural disasters, vessel shipping schedules and port availability. Further, our commodity product suppliers sometimes operate at or near capacity, resulting in some products having the potential of being put on 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 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. Our sales levels and operating results could be negatively impacted by changes in any of these items.
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 delivery. Fluctuations in prices may be driven by the supply/demand relationship for that commodity, governmental regulation, tariffs or other cross-border taxes, economic conditions in other countries, religious holidays, natural disasters, and other events. 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.
If we are unable to manage our inventory, our operating results could be materially and adversely affected.
Our customers generally do not maintain long-term supply contracts and, therefore, we must bear the risk of certain inventory commitments, based on our projections of future 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 could incur charges for impairment of assets, including goodwill and other long-lived 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.
Approximately 65% of our total assets as of December 31, 2019 were comprised of goodwill, intangible assets, operating lease right-of-use 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

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or realizable. The events or changes that could require us to test our goodwill and intangible assets for impairment include changes in our estimated future cash flows, changes in rates of growth in our industry or in any of our reporting units, and decreases in our stock price and market capitalization.
In the future, if sales demand or market conditions change from those projected by management, 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.
Increases in demand for our products could make it more difficult for us to obtain additional skilled labor, which may adversely impact our operating efficiencies.
In certain geographic regions in which we have manufacturing facilities, we have experienced shortages of qualified employees, which negatively impacted our cost of goods sold. Labor shortages and continued competition for qualified employees may increase, especially during improving economic times, the cost of our labor and create employee retention and recruitment challenges, as employees with knowledge and experience have the ability to change employers more easily.
If demand continues to increase, we may not be able to increase production to timely satisfy demand, and may initially incur higher labor and production costs, which could adversely impact our financial condition and operating results.
We may incur significant charges or be adversely impacted by the consolidation and/or 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 products in the most efficient manner. We may make capital investments to move, discontinue manufacturing and/or distribution capabilities, or products and product lines, sell or close all or part of additional manufacturing and/or distribution facilities in the future. 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.
We are subject to governmental and environmental regulations, and failure in our compliance efforts, changes to such laws and regulations or events beyond our control could result in damages, expenses or liabilities that individually, or in the aggregate, would have a material adverse effect on our financial condition and results of operations.
Some of our manufacturing processes involve the use, handling, storage and contracting for recycling or disposal of hazardous or toxic substances or wastes. Accordingly, we are subject to various governmental and environmental laws and regulations regarding these substances, as well as environmental requirements relating to air, water and noise pollution. The implementation of new laws and regulations or amendments to existing regulations could significantly increase the cost of the Company’s products. We cannot presently determine what, if any, legislation may be adopted by federal, state or local governing bodies, or the effect any such legislation may have on our customers or us. Failure to comply with present or future regulations could result in fines or potential civil or criminal liability. Both scenarios could negatively impact our results of operations or financial condition.
The inability to attract and retain qualified executive officers and key personnel may adversely affect our operations.
While we include succession planning as part of our ongoing talent development and management process to help ensure the continuity of our business model, 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. In addition, our future success will depend on, among other factors, our ability to attract and retain executive management, key employees, and other qualified personnel.

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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 certain of its administrative, financial, sales and marketing, manufacturing, distribution 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.
Our level of indebtedness could limit our operational flexibility and harm our financial condition and results of operations.
As of December 31, 2019, we had $705.0 million of total long-term debt, including current maturities and exclusive of deferred financing costs and debt discount, outstanding under our $650.0 million 2019 Credit Facility, Senior Notes and Convertible Senior Notes (all as defined herein).
Our level of indebtedness could have adverse consequences on our future operations, including making it more difficult for us to meet our payments on outstanding debt, and we may not be able to find alternative financing sources to replace our indebtedness in such an event. Our level of indebtedness could: (i) reduce the availability of our cash flow to fund working capital, capital expenditures, acquisitions and other general corporate purposes, and limit our ability to obtain additional financing for these purposes; (ii) limit our flexibility in planning for, or reacting to, and increase our vulnerability to, changes in our business and the industry in which we operate; (iii) place us at a competitive disadvantage compared to our competitors that have less debt or are less leveraged; and (iv) create concerns about our credit quality which could result in the loss of supplier contracts and/or customers. Our ability to satisfy our debt obligations will depend on our future operating performance which may be affected by factors beyond our control.
Our 2019 Credit Agreement contains various financial performance and other covenants. If we do not remain in compliance with these covenants, our 2019 Credit Agreement could be terminated and the amounts outstanding thereunder could become immediately due and payable.
We have debt outstanding that contains financial and non-financial covenants with which we must comply that place restrictions on us. There can be no assurance that we will maintain compliance with the financial covenants under our 2019 Credit Agreement (as defined herein). These covenants require that we comply with a maximum level of a consolidated total leverage ratio and a minimum level of a consolidated fixed charge coverage ratio. If we fail to comply with the covenants contained in our 2019 Credit Agreement, the lenders could cause our debt to become due and payable prior to maturity or it could result in our having to refinance the indebtedness under unfavorable terms. If our debt were accelerated, our assets might not be sufficient to repay our debt in full and there can be no assurance that we would be able to refinance any or all of this indebtedness.
Due to industry conditions and our operating results, there have been times in the past when we have had limited access to sources of capital. 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, and our 2019 Credit Facility to finance our operating requirements, capital expenditures and other needs. If a significant economic recession occurred, such as the recession that impacted the economy in 2007-2010, production of RVs, marine units and manufactured homes could decline, resulting in reduced demand for our products. A decline in our operating results could negatively impact our liquidity. If our cash balances, cash flows from operations, and availability under our 2019 Credit Facility 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.

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We have letters of credit representing collateral for our casualty insurance programs and for general operating purposes that have been issued under our 2019 Credit Agreement. The inability to retain our current letters of credit, to obtain alternative letter of credit sources, or to retain our 2019 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.
The conditional conversion feature of the Convertible Notes that we issued in January 2018, if triggered, may adversely affect our financial condition and operating results.
In the event the conditional conversion feature of the Convertible Senior Notes due 2023 (the "Convertible Notes") is triggered, holders of Convertible Notes will be entitled to convert the Convertible Notes at any time during specified periods at their option. If one or more holders elect to convert their Convertible Notes, unless we elect to satisfy our conversion obligation by delivering solely shares of our common stock (other than paying cash in lieu of delivering any fractional share), we would be required to settle a portion or all of our conversion obligation through the payment of cash, which could adversely affect our liquidity. In addition, even if holders do not elect to convert their Convertible Notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the Convertible Notes as a current rather than long-term liability. See Notes 8 and 9 of the Notes to Consolidated Financial Statements for additional details.
The convertible note hedge and warrant transactions may affect the value of the Convertible Notes and our common stock.
In connection with the pricing of the Convertible Notes, we entered into convertible note hedge transactions with certain of the initial purchasers and/or their respective affiliates (the “option counterparties”). At the same time, we entered into warrant transactions with the option counterparties. The convertible note hedge transactions are expected generally to reduce the potential dilution upon conversion of the Convertible Notes and/or offset any cash payments we are required to make in excess of the principal amount of converted notes, as the case may be. However, the warrant transactions could separately have a dilutive effect on our common stock to the extent that the market price per share of our common stock exceeds the strike price of the warrants.
In addition, the option counterparties or their respective affiliates may modify their hedge positions by entering into or unwinding various derivatives with respect to our common stock and/or purchasing or selling our common stock or other securities of ours in secondary market transactions following the pricing of the Convertible Notes and prior to the maturity of the Convertible Notes (and are likely to do so during any observation period related to a conversion of Convertible Notes). This activity could cause or avoid an increase or a decrease in the market price of our common stock or the Convertible Notes, which could affect a holder's ability to convert the Convertible Notes and, to the extent the activity occurs during any observation period related to a conversion of Convertible Notes, it could affect the number of shares and value of the consideration that a holder will receive upon conversion of the Convertible Notes.
A variety of factors, many of which are beyond our control, could influence fluctuations in the market price for our common stock.
The stock market, in general, experiences volatility that has often been unrelated to the underlying operating performance of companies. If this volatility continues, the trading price of our common stock could decline significantly, independent of our actual operating performance. The market price of our common stock could fluctuate significantly in response to a number of factors, many of which are beyond our control, including the following:
variations in our, our customers' and our competitors’ operating results;
high concentration of shares held by institutional investors;
announcements by us or our competitors of significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments;
announcements by us or our competitors of technological improvements or new products;

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the gain or loss of significant customers;
additions or departures of key personnel;
events affecting other companies that the market deems comparable to us;
changes in investor perception of our business and/or management;
changes in global economic conditions or general market conditions in the industries in which we operate;
sales of our common stock held by certain equity investors or members of management;
issuance of our common stock or debt securities by the Company; and
the occurrence of other events that are described in these risk factors.

If our information technology systems fail to perform adequately, our operations could be disrupted and could adversely affect our business, reputation and results of operations.
We are increasingly dependent on digital technology, including information systems and related infrastructure, to process and record financial and operating data, manage inventory and communicate with our employees and business partners. We rely on our information technology systems to effectively manage our business data, inventory, supply chain, order entry and fulfillment, manufacturing, distribution, warranty administration, invoicing, collection of payments, and other business processes. Our systems are subject to damage or interruption from power outages, telecommunications or internet failures, computer viruses and malicious attacks, security breaches and catastrophic events. If our systems are damaged or fail to function properly or reliably, we may incur substantial repair or replacement costs, experience data loss or theft and impediments to our ability to manage our business, which could adversely affect our results of operations. At the end of the third quarter of 2019, the Company experienced a highly-sophisticated third-party malware cyberattack that impacted certain of the Company's administrative and production servers and resulted in a disruption of administrative and network operations for approximately two business days. Any such events could result in legal claims or proceedings, liability or penalties under privacy laws, disruption in operations, and damage to our reputation, which could adversely affect our business.
In addition, we may be required to make significant technology investments to maintain and update our existing computer systems. Implementing significant system changes increases the risk of computer system disruption. The potential problems and interruptions associated with implementing technology initiatives could disrupt or reduce our operational efficiency.
A cyber incident or data breach could result in information theft, data corruption, operational disruption, and/or financial loss.
Our technologies, systems, networks, and those of our business partners have in the past and may in the future become the target of cyber-attacks or information security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss, or destruction of proprietary and other information, or other disruption of our business operations. A cyber-attack could include gaining unauthorized access to digital systems for purposes of misappropriating assets or sensitive information, corrupting data, or causing operational disruption or destruction due to ransom attacks or malware or result in denial of service on websites. We have programs in place to detect, contain and respond to data security incidents. However, because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and may be difficult to detect for long periods of time, we may be unable to anticipate these techniques or implement adequate preventive measures. Unauthorized parties may also attempt to gain access to our systems or facilities, or those of third parties with whom we do business, through fraud, trickery, or other forms of deceiving our team members, contractors, vendors, and temporary staff. In addition, hardware, software, or applications we develop or procure from third parties may contain defects in design or manufacture or other problems that could unexpectedly compromise information security. Any cyber-attack on our business could materially harm our business and operating results. The Company currently carries insurance to cover exposure to this type of incident, but this coverage may not be sufficient to cover all potential losses. As cyber threats continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance our protective measures or to investigate and remediate any information security vulnerabilities. At the end of the third quarter of 2019, the Company experienced a highly-sophisticated third-party malware cyberattack that impacted certain of the Company's administrative and production servers and

20



resulted in a disruption of administrative and network operations for approximately two business days. If we or our suppliers experience additional significant data security breaches or fail to detect and appropriately respond to significant data security breaches, we could be exposed to costly government enforcement actions and private litigation and our business and operating results could suffer.
We are required to evaluate our internal controls over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002 and any adverse results from such evaluation could result in a loss of investor confidence in our financial reports and could have an adverse effect on our stock price.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we are required to furnish a report by our management on our internal control over financial reporting. Such report contains, among other matters, an assessment of the effectiveness of our internal control over financial reporting as of the end of our fiscal year, including a statement as to whether or not our internal control over financial reporting is effective. This assessment must include disclosure of any material weaknesses in our internal control over financial reporting identified by management. Each year we must prepare or update the process documentation and perform the evaluation needed to comply with Section 404. During this process, if our management identifies one or more material weaknesses in our internal control over financial reporting, we will be unable to assert that such internal control is effective. Ensuring that we have adequate internal financial and accounting controls and procedures in place is a costly and time-consuming effort that needs to be re-evaluated frequently. We and our independent auditors may in the future discover areas of our internal controls that need further attention and improvement, particularly with respect to any businesses that we decide to acquire in the future. Any failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our operating results or cause us to fail to meet our reporting obligations. Investor perception that our internal controls are inadequate or that we are unable to produce accurate financial statements on a timely, consistent basis may adversely affect our stock price. Failure to comply with Section 404 could also potentially subject us to sanctions or investigations by the SEC, NASDAQ, or other regulatory authorities.
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. These provisions may delay, defer or prevent a change in control that our shareholders might consider to be in their best interest.
Conditions within the insurance markets could impact our ability to negotiate favorable terms and conditions for various liability coverage and could potentially result in uninsured losses.
We generally 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.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.

21



ITEM 2.
PROPERTIES
At December 31, 2019, the Company leased approximately 6.9 million square feet of manufacturing, distribution and corporate facilities and owned approximately 2.7 million square feet, as listed below.
 
 
Area Sq. Ft.
Location
Use
Leased
Owned
Alabama
Manufacturing
10,000
 
Alabama
Distribution
103,000
 
Alabama
Manufacturing & Distribution
 
94,000
Arizona
Manufacturing
22,550
 
Arizona
Distribution
10,600
 
California
Manufacturing
332,404
 
California
Manufacturing & Distribution
193,297
 
Canada
Distribution
9,752
 
China
Manufacturing
6,876
 
Colorado
Distribution
9,918
 
Florida
Manufacturing
316,661
 
Florida
Distribution
60,977
 
Georgia
Manufacturing
150,800
50,440
Georgia
Distribution
75,000
31,000
Idaho
Manufacturing
117,510
 
Idaho
Distribution
16,000
 
Illinois
Manufacturing
54,400
 
Indiana
Manufacturing
2,283,171
1,271,761
Indiana
Distribution
669,653
593,733
Indiana
Manufacturing & Distribution
373,400
 
Michigan
Manufacturing
363,552
 
Michigan
Distribution
22,525
 
Minnesota
Distribution
 
58,000
Minnesota
Manufacturing
19,088
 
Mississippi
Manufacturing
267,250
 
Missouri
Manufacturing
223,000
31,250
North Carolina
Manufacturing
 
81,950
North Carolina
Distribution
104,160
 
The Netherlands
Distribution
1,300
 
Nevada
Manufacturing
8,295
 
Nevada
Distribution
6,720
 
Oregon
Manufacturing
54,600
 
Oregon
Distribution
86,000
48,565
Pennsylvania
Manufacturing
 
89,000
Pennsylvania
Distribution
79,000
 
South Carolina
Manufacturing
57,650
 
Tennessee
Manufacturing
371,837
 
Tennessee
Distribution
67,500
 
Texas
Manufacturing
105,162
132,600
Texas
Distribution
99,510
 
Utah
Distribution
6,000
 
Washington
Manufacturing
64,000
 
Wisconsin
Manufacturing
 
85,055
Corporate/Other:
 
 
 
Indiana
Corporate/Administrative Offices
 
35,000
Indiana
Design Center & Showrooms
56,200
 
Various
Other
52,137
50,925
Total square footage
 
6,931,455
2,653,279

22



Pursuant to the terms of the Company’s 2019 Credit Agreement, all owned real property subject to the existing security documents is subject to a security interest.
The Company's leased properties have lease expiration dates ranging from 2020 to 2030. Patrick believes the facilities occupied as of December 31, 2019 are adequate for the purposes for which they are currently being used and are well-maintained. The Company may, as part of its 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 its manufacturing and distribution facilities may vary with seasonal, economic, and other business conditions.

ITEM 3.
LEGAL PROCEEDINGS
Patrick is subject to claims and lawsuits 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 its financial condition, results of operations, or cash flows.
In August 2019, a group of companies calling itself the Lusher Site Remediation Group (the “Group”) commenced litigation against the Company in Lusher Site Remediation Group v. Sturgis Iron & Metal Co., Inc., et al., Case Number 3:18-cv-00506, pending in the U.S. District Court for the Northern District of Indiana. The Group’s Second Amended Complaint, which is the first to assert claims against Patrick, asserts claims under the federal Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”), 42 U.S.C. § 7601 et seq., an Indiana state environmental statute and Indiana common law. One of the other defendants in the case, Sturgis Iron & Metal Co., Inc. (“Sturgis”) subsequently filed two cross claims against Patrick, one for contribution under CERCLA and one for contractual indemnity. The Company has moved to dismiss the Second Amended Complaint and the Sturgis cross claims, and those motions remain pending. The Company does not currently believe that this matter is likely to have a material adverse impact on its financial condition, results of operations, or cash flows. However, any litigation is inherently uncertain, and any judgment or injunctive relief entered against us or any adverse settlement could materially and adversely impact our business, results of operations, financial condition, and prospects.
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
The Company's common stock is listed on The NASDAQ Global Stock MarketSM under the symbol PATK.
Holders of Common Stock
As of February 14, 2020, there were 266 shareholders of record. A number of shares are held in broker and nominee names on behalf of beneficial owners.
Dividends
In December 2019, the Company's Board of Directors (the "Board") adopted a dividend policy under which it plans to declare regular quarterly cash dividends. The Company paid cash dividends of $0.25 per share, or $5.8 million in the aggregate, in 2019. Any future determination to pay cash dividends will be made by the Board in light of the Company’s earnings, financial position, capital requirements, and restrictions under the Company’s 2019 Credit Agreement, and such other factors as the Board deems relevant.

23



Purchases of Equity Securities by the Issuer
(c)
Issuer Purchases of Equity Securities
Period
Total
Number of
Shares
Purchased (1)


Average Price
Paid Per
Share (1)


Total Number of Shares
Purchased as
Part of Publicly
Announced Plans
or Programs (2)


Maximum Dollar Value
of Shares that May Yet
Be Purchased Under
the Plans or Programs
(2)

Sep. 30 - Oct. 27, 2019

 
$

 

 
$
26,722,195

Oct. 28 - Dec. 1, 2019
3,582

 
48.96

 
3,166

 
26,567,451

Dec. 2 - Dec. 31, 2019
1,565

 
48.68

 
1,565

 
26,491,262

Total
5,147

 
 
 
4,731

 
 
(1)
Amount includes 416 shares common stock purchased by the Company in November 2019 for the sole purpose of satisfying the minimum tax withholding obligations of employees upon the vesting of stock awards held by the employees.
(2)
See Note 14 of the Notes to Consolidated Financial Statements for additional information about the Company's stock repurchase program.
Stock Performance Graph
The following graph compares the cumulative 5-year total return to shareholders of the Company’s common stock relative to the cumulative total returns of the Russell 2000 index and a customized peer group of companies, which includes Brunswick Corporation, Cavco Industries, Inc., LCI Industries, Spartan Motors, Inc., Thor Industries, Inc., Winnebago Industries, Inc., and Wabash National Corporation. This graph assumes an initial investment of $100 (with reinvestment of all dividends) was made in our common stock, in the index and in the peer group on December 31, 2014 and its relative performance is tracked through December 31, 2019.
chart-21ff2491ffac5a19b6e.jpg

24



($)
12/31/2014
12/31/2015
12/31/2016
12/31/2017
12/31/2018
12/31/2019
Patrick Industries, Inc.
100.00

148.36

260.23

355.30

151.48

268.23

Peer Group
100.00

97.15

157.74

231.50

125.10

212.63

Russell 2000
100.00

94.29

112.65

127.46

111.94

138.50

*The stock price performance included in this graph is not necessarily indicative of future stock price performance.
ITEM 6.
SELECTED FINANCIAL DATA

As of or for the Year Ended December 31

2019
2018
2017
2016
2015

(thousands except per share amounts)
Operating Data:
 
 
 
 
 
Net sales (1)
$
2,337,082

$
2,263,061

$
1,635,653

$
1,221,887

$
920,333

Gross profit
422,871

415,866

278,915

202,469

152,279

Operating income (1)
154,442

178,415

121,900

90,837

69,918

Net income
89,566

119,832

85,718

55,577

42,219

Basic net income per common share
$
3.88

$
4.99

$
3.54

$
2.47

$
1.84

Diluted net income per common share
$
3.85

$
4.93

$
3.48

$
2.43

$
1.81

Cash dividends paid per common share
$
0.25

$

$

$

$


 
 
 
 
 
Financial Data:
 
 
 
 
 
Total assets (1) (2)
$
1,470,993

$
1,231,231

$
866,644

$
534,950

$
381,584

Cash and cash equivalents
139,390

6,895

2,767

6,449

87

Total short-term and long-term debt (3)
705,000

661,082

354,357

273,153

204,484

Shareholders' equity
497,481

408,754

370,685

185,448

128,597

Cash flows from operating activities
192,410

200,013

99,901

97,147

66,856

(1) See Note 4 to Consolidated Financial Statements for information regarding revenues, operating income and net assets of businesses acquired in fiscal years 2019, 2018 and 2017.
(2) See Note 16 to the Consolidated Financial Statements for information regarding operating lease right-of-use assets reflected on the Company's balance sheet with the adoption of a new lease accounting standard in 2019.
(3) Total short-term and long-term debt for each of the periods presented in the table above is not presented net of deferred financing costs or debt discount.

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 that 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 4 of this Report.


25



EXECUTIVE SUMMARY
Overview of Markets and Related Industry Performance
Recreational Vehicle ("RV") Industry 
The RV industry is our primary market and comprised 55% of the Company’s sales in 2019. Sales from the RV industry decreased 10% in 2019 compared to 2018.

According to the Recreation Vehicle Industry Association (“RVIA”), wholesale industry shipments totaled 406,000 units in 2019, a decline of 16% compared to 484,000 units in 2018. On the retail side, RV industry retail unit shipments declined 7% in 2019. With retail industry unit shipments outpacing wholesale industry unit shipments in 2019, RV industry dealer inventories declined in 2019. For the full year 2019, RV industry dealer inventories declined by more than 50,000 units, which we believe will position the industry to return to a more direct relationship between wholesale unit shipments and retail unit shipments for the upcoming 2020 selling season.

Marine Industry
Sales to the marine industry, which represented approximately 14% of the Company's consolidated net sales in 2019, increased 20% in 2019 compared to 2018. For 2019, overall marine retail industry unit shipments in the powerboat sector, which is the Company's primary marine market, decreased an estimated 4%, with aluminum fishing industry shipments decreasing an estimated 10%; pontoon industry shipments decreasing an estimated 2%; fiberglass industry shipments decreasing an estimated 3%; and ski and wake industry shipments increasing an estimated 4%.

Adverse weather and flooding in certain regions of the country impacted marine retail unit shipments in the first half of 2019, particularly in the pontoon and aluminum fishing categories. Reflecting this retail softness in the first half of 2019, we saw inventory recalibration by marine dealers in the second half of 2019, which we believe contributed to a decline in wholesale unit shipments in the second half of 2019 despite the slight increase in overall retail unit shipments in the second half of 2019. Due to the impact of weather in the first half of 2019 and the related dealer inventory re-calibration, the powerboat sector of this market experienced an estimated wholesale unit percentage decline of 13%.

Manufactured Housing ("MH") Industry
Sales to the MH industry, which represented 19% of the Company’s sales in 2019, increased 59% in 2019 compared to 2018. Based on industry data from the Manufactured Housing Institute, MH wholesale industry unit shipments decreased by 2% in 2019. Manufactured housing was negatively impacted in the first half of 2019 by wet weather conditions in certain regions of the country where moving inventory and setting foundations and houses were difficult.
Industrial Market
The industrial market is comprised primarily of the kitchen cabinet industry, high-rise, hospitality market, retail and commercial fixtures market, office and household furniture market and regional distributors. Sales to this market represented 12% of our consolidated sales in 2019, increasing 2% in 2019 compared to 2018. Overall, our revenues in these markets are focused on the residential housing, hospitality, high-rise housing and office, commercial construction and institutional furniture markets. We estimate that approximately 60% of our industrial business is directly tied to the residential housing market, with the remaining 40% directly tied to the non-residential and commercial markets.
Combined new housing starts increased 3% in 2019 compared to 2018, with single family housing starts increasing 1% and multifamily residential starts increasing 8% for the same period. Our industrial products are generally among the last components installed in new unit construction and as such our related sales typically trail new housing starts by four to six months. Because of this lag in the relationship between new housing starts and our sales of related industrial products, we expect our industrial sales to benefit in 2020 from recent growth in residential housing starts.

26




CONSOLIDATED OPERATING RESULTS
The following table sets forth the percentage relationship to net sales of certain items on the Company’s consolidated statements of income for the years ended December 31, 2019, 2018 and 2017.

Year Ended December 31,

2019

 
2018

 
2017

Net sales
100.0
%
 
100.0
%
 
100.0
%
Cost of goods sold
81.9

 
81.6

 
82.9

Gross profit
18.1

 
18.4

 
17.1

Warehouse and delivery expenses
4.2

 
3.3

 
2.9

Selling, general and administrative expenses
5.8

 
5.7

 
5.6

Amortization of intangible assets
1.5

 
1.5

 
1.2

Operating income
6.6

 
7.9

 
7.4

Interest expense, net
1.6

 
1.2

 
0.5

Income taxes
1.2

 
1.4

 
1.7

Net income
3.8

 
5.3

 
5.2

Year Ended December 31, 2019 Compared to 2018
Net Sales. Net sales in 2019 increased approximately $74.0 million or 3%, to $2.34 billion from $2.26 billion in 2018. The increase was attributable to a 59% increase in the Company’s sales from the MH industry, a 20% increase in revenues from the marine industry and a 2% increase in sales from the industrial markets, partly offset by a 10% decrease in sales from the RV industry. The sales increase largely reflected the revenue contribution from the acquisition of LaSalle Bristol ("LaSalle"), completed in the fourth quarter of 2018. The consolidated net sales decrease from the RV industry in 2019 primarily reflected decreases in RV OEM wholesale unit shipments.
In 2019 and 2018, revenue attributable to acquisitions completed in each of those periods was $8.3 million and $249.3 million, respectively.
The Company’s RV content per wholesale unit for 2019 increased 7% to $3,170 from $2,965 in 2018. Marine powerboat content per retail unit for 2019 increased 26% to an estimated $1,581 from $1,256 in 2018. The MH content per wholesale unit for 2019 increased 62% to $4,616 from $2,849 in 2018.
Cost of Goods Sold. Cost of goods sold increased $67.0 million, or 4%, to $1.9 billion in 2019 from $1.8 billion in 2018. As a percentage of net sales, cost of goods sold increased during 2019 to 81.9% from 81.6% in 2018.    
Cost of goods sold as a percentage of net sales was impacted during 2019 by: (i) higher overall fixed overhead costs relative to RV and marine revenue and (ii) the lower margin profile of LaSalle, which was acquired in the fourth quarter of 2018. In general, the Company's cost of goods sold percentage can be impacted by demand changes in certain market sectors that can result in fluctuating costs of certain raw materials and commodity-based components that are utilized in the production of our products.
Gross Profit. Gross profit increased $7.0 million or 2%, to $422.9 million in 2019 from $415.9 million in 2018. As a percentage of net sales, gross profit decreased to 18.1% in 2019 from 18.4% in 2018. The decrease in gross profit as a percentage of net sales in 2019 compared to 2018 reflects the impact of the factors discussed above under “Cost of Goods Sold”.

27



Economic or industry-wide factors affecting the profitability of our RV, MH, marine and industrial businesses include the costs of commodities and the labor used to manufacture our products as well as the competitive environment that can cause gross margins to fluctuate from quarter-to-quarter and year-to-year.
Warehouse and Delivery Expenses. Warehouse and delivery expenses increased $23.1 million, or 31%, to $98.1 million in 2019 from $75.0 million in 2018. As a percentage of net sales, warehouse and delivery expenses were 4.2% in 2019 and 3.3% in 2018. The increase in expense 2019 compared to 2018 was primarily attributable to the impact of the LaSalle acquisition that had higher warehouse and delivery expenses as a percentage of net sales when compared to the consolidated percentage. Increased sales volumes in 2019 compared to 2018 also contributed to the increase in warehouse and delivery expense. In addition, the Company's shipments to OEMs in 2019 compared to 2018 were generally lower volume and higher frequency, and as a result transportation costs relative to sales levels of products delivered increased as a percentage of net sales.
Selling, General and Administrative ("SG&A") Expenses. SG&A expenses increased $6.3 million, or 5%, to $134.5 million in 2019 from $128.2 million in 2018. As a percentage of net sales, SG&A expenses were 5.8% in 2019 and 5.7% in 2018. The increase in SG&A expenses in 2019 compared to 2018 is primarily due to: (i) a loss on extinguishment of debt associated with the amendment of the Company's credit facility in 2019 and (ii) the impact of certain acquisitions completed in 2018 that had higher SG&A expenses as a percentage of net sales when compared to the consolidated percentage. Partially offsetting these factors was a decrease in incentive compensation and sales commissions in 2019 compared to 2018.
Amortization of Intangible Assets. Amortization of intangible assets increased $1.7 million, or 5%, in 2019 compared to 2018. The increase in 2019 compared to 2018 primarily reflects the impact of businesses acquired in 2018, partly offset by purchase accounting adjustments to intangible assets and the associated impact to amortization expense.
Operating Income. Operating income decreased $24.0 million, or 13%, to $154.4 million in 2019 from $178.4 million in 2018. Operating income in 2019 and 2018 included $0.9 million and $23.2 million, respectively, from the businesses acquired in each such year. Operating income as a percentage of net sales was 6.6% in 2019 and 7.9% in 2018. The decrease in operating income is primarily attributable to the items discussed above.
Interest Expense, Net. Interest expense, net, increased $10.2 million, or 39%, to $36.6 million in 2019 from $26.4 million in 2018. The increase in net interest expense reflects: (i) increased borrowings related to 2018 acquisitions, (ii) increases in the average interest rate on the variable rate portion of the Company's debt, which reflects a higher weighted average LIBOR in 2019 compared to 2018 and (iii) an increase in the Company's overall average interest rate resulting from the issuance of the Company's 7.5% Senior Notes due 2027 (the "Senior Notes") in the third quarter of 2019.
Income Taxes. Income tax expense decreased $3.8 million, or 12%, to $28.3 million in 2019 from $32.1 million in 2018. For 2019, the effective tax rate was 24.0% compared to 21.2% in 2018. The increase in the effective tax rate in 2019 was mostly attributable to a decrease in excess tax benefits on share-based compensation. For the full year 2020, the Company estimates its effective tax rate to be between 25% and 26%.

See our Form 10-K for the year ended December 31, 2018 for a discussion of our consolidated operating results for the year ended December 31, 2018 compared to 2017.
Use of Financial Metrics
Our MD&A includes financial metrics, such as RV, marine and MH content per unit, which we believe are important measures of the Company's business performance. Content per unit metrics are generally calculated using our market sales divided by third-party industry volume metrics. These metrics should not be considered alternatives to U.S. GAAP. Our computations of content per unit may differ from similarly titled measures used by others. These metrics should not be considered in isolation or as substitutes for an analysis of our results as reported under U.S. GAAP.

28



BUSINESS SEGMENTS
The Company's reportable segments, manufacturing and distribution, are based on its method of internal reporting. The Company regularly evaluates the performance of the manufacturing and distribution segments and allocates resources to them based on a variety of indicators including sales and operating income. The Company does not measure profitability at the customer market (RV, marine, MH and industrial) level.
Manufacturing – This segment includes the following products: laminated products that are utilized to produce furniture, shelving, walls, countertops and cabinet products; cabinet doors; fiberglass bath fixtures and tile systems; hardwood furniture; vinyl printing; decorative vinyl and paper laminated panels; solid surface, granite, and quartz countertop fabrication; RV painting; fabricated aluminum products; fiberglass and plastic components; fiberglass bath fixtures and tile systems; softwoods lumber; custom cabinetry; polymer-based flooring; electrical systems components including instrument and dash panels; wrapped vinyl, paper and hardwood profile mouldings; interior passage doors; air handling products; slide-out trim and fascia; thermoformed shower surrounds; specialty bath and closet building products; fiberglass and plastic helm systems and components products; wiring and wire harnesses; boat covers, towers, tops and frames; marine hardware; aluminum fuel tanks; CNC molds and composite parts; slotwall panels and components; and other products.
Distribution – The Company distributes pre-finished wall and ceiling panels; drywall and drywall finishing products; electronics and audio systems components; appliances; wiring, electrical and plumbing products; fiber reinforced polyester products; cement siding; raw and processed lumber; interior passage doors; roofing products; laminate and ceramic flooring; tile; shower doors; furniture; fireplaces and surrounds; interior and exterior lighting products; and other miscellaneous products in addition to providing transportation and logistics services.
Sales pertaining to the manufacturing and distribution segments as stated in the table below and in the following discussions include intersegment sales. Gross profit includes the impact of intersegment operating activity.
The table below presents information about the sales, gross profit, and operating income of the Company’s segments. Reconciliations of the amounts below to consolidated totals are presented in Note 19 to Consolidated Financial Statements.  
 
Year Ended December 31,
(thousands)
2019
 
2018
 
2017
Sales
 
 
 
 
 
Manufacturing
$
1,673,486

 
$
1,779,048

 
$
1,368,454

Distribution
699,159

 
521,235

 
300,447

Gross Profit
 
 
 
 
 
Manufacturing
307,362

 
337,451

 
232,671

Distribution
110,957

 
81,016

 
48,136

Operating Income
 
 
 
 
 
Manufacturing
174,913

 
215,246

 
151,635

Distribution
38,953

 
31,491

 
18,858





29



Year Ended December 31, 2019 Compared to 2018
Manufacturing 
Sales. Sales decreased $105.6 million, or 6%, to $1.67 billion from $1.78 billion in 2018. This segment accounted for approximately 70% and 77% of the Company’s consolidated net sales in 2019 and 2018, respectively. The sales decrease primarily reflected a decrease in revenue from of the Company's RV market.
In 2019 and 2018, revenue attributable to acquisitions completed in each of those periods was $8.3 million and $150.9 million, respectively.
Gross Profit. Gross profit decreased $30.1 million, or 9%, to $307.4 million in 2019 from $337.5 million in 2018. As a percentage of sales, gross profit decreased to 18.4% in 2019 from 19.0% in 2018. The overall decrease in gross profit dollars and as a percentage of sales reflected higher overall fixed overhead costs relative to RV and marine revenue in 2019.
Operating Income. Operating income decreased $40.3 million, or 19%, to $174.9 million in 2019 from $215.2 million in 2018. Operating income attributable to acquisitions completed in 2019 and 2018 was $0.9 million and $18.5 million, respectively. The decrease in operating income primarily reflects the decrease in gross profit mentioned above.
Distribution
Sales. Sales increased $178.0 million, or 34%, to $699.2 million in 2019 from $521.2 million in 2018. This segment accounted for approximately 30% and 23% of the Company’s consolidated net sales for 2019 and 2018, respectively. The sales increase largely reflected the revenue contribution from the acquisition of LaSalle. The businesses acquired in 2018 contributed $98.4 million to total sales in the Distribution segment in 2018. There were no Distribution segment acquisitions in 2019.
Gross Profit. Gross profit increased $30.0 million, or 37%, to $111.0 million in 2019 from $81.0 million in 2018. As a percentage of sales, gross profit was 15.9% in 2019 compared to 15.5% in 2018. The increase in gross profit as a percentage of sales for 2019 reflected the contribution of increased sales in our higher margin transportation business and the positive impact of leveraging fixed costs on higher sales volumes in our other distribution businesses, partially offset by the lower gross margin profile of LaSalle, which was acquired in the fourth quarter of 2018, compared to our other distribution businesses.
Operating Income. Operating income in 2019 increased $7.5 million, or 24%, to $39.0 million from $31.5 million in 2018. The businesses acquired in 2018 contributed approximately $4.7 million to operating income in the Distribution segment in 2018. The overall net improvement in operating income in 2019 primarily reflects the items discussed above.
Unallocated Corporate Expenses
As presented in Note 19 to the Consolidated Financial Statements, unallocated corporate expenses in 2019 decreased $10.6 million, or 31%, to $23.5 million from $34.1 million in 2018. The decrease in 2019 was mostly attributed to a decrease in professional fees, administrative wages and incentive compensation.
LIQUIDITY AND CAPITAL RESOURCES 
The Company's primary sources of liquidity are cash flow from operations, which includes selling its products and collecting receivables, available cash reserves and borrowing capacity available under its credit facility. Principal uses of cash are to support working capital demands, meet debt service requirements and support the Company's capital allocation strategy, which includes acquisitions, capital expenditures, dividends and repurchases of the Company’s common stock, among others.

30



Cash Flows 
Year Ended December 31, 2019 Compared to 2018
Operating Activities
Cash flows from operating activities are one of the Company's primary sources of liquidity, representing the net income the Company earned in the reported periods, adjusted for non-cash items and changes in operating assets and liabilities.
Net cash provided by operating activities decreased $7.6 million to $192.4 million 2019 from $200.0 million in 2018 primarily due to: a decrease in net income of $30.2 million, partly offset by (i) an increase of depreciation and amortization of $7.7 million, (ii) an increase in stock based compensation expense, amortization of debt discount and other operating items of $3.8 million, (iii) an increase in deferred income taxes of $4.8 million and (iv) a net source of cash from changes in operating assets and liabilities of $6.3 million. Changes in operating assets and liabilities were mostly attributable to a decrease in inventories due to improved working capital management and a decrease in accounts receivable, net of acquisitions, due to timing of collections, offset partly by an increase in prepaid expenses, mostly attributable to an increase in prepaid income taxes.
Investing Activities  
Net cash used in investing activities decreased $292.2 million to $79.2 million in 2019 from $371.4 million in 2018 primarily due to a decrease in cash used in business acquisitions of $287.4 million and a decrease in capital expenditures of $6.8 million, offset slightly by a decrease in proceeds from sale of property, plant, equipment and other investing activities of $2.0 million.
The Company's current operating model forecasts capital expenditures, primarily to enhance and expand our capabilities in our manufacturing facilities, for fiscal 2020 of approximately $30 million.
Financing Activities 
Net cash flows provided by financing activities decreased $156.2 million to $19.3 million in 2019 from $175.5 million in 2018 primarily due to: (i) cash used for net repayments on the Company's credit facility of $256.1 million in 2019 compared to a source of cash from net borrowings on the Company's credit facility of $134.2 million in 2018; (ii) gross proceeds of $172.5 million from the third quarter 2018 issuance of 1% Convertible Senior Notes due 2023 (the "Convertible Notes") with no comparable amount in 2019; (iii) a source of cash in 2018 of $18.1 million from the related sale of warrants with no comparable amount in 2019 (iv) a use of cash of $4.4 million in 2019 from payment of contingent consideration resulting from a business acquisition with no comparable amount in 2018 and (v) payment of dividends of $5.8 million in 2019 with no comparable amount in 2018. Partially offsetting these items were: (i) the issuance of $300.0 million of Senior Notes in 2019 with no comparable amount in 2018; (ii) a use of cash in 2018 of $31.5 million from the purchase of Convertible Notes hedges with no comparable amount in 2019 and (iii) a decrease in the use of cash for stock repurchases of $103.8 million in 2019 compared to 2018.
See our Form 10-K for the year ended December 31, 2018 for a discussion of cash flows for the year ended December 31, 2018 compared to 2017.
Summary of Liquidity and Capital Resources 
The Company believes that existing cash and cash equivalents, cash generated from operations, and available borrowings under its 2019 Credit Facility (as defined herein) will be sufficient to meet anticipated cash needs for working capital and capital expenditures for at least the next 12 months, exclusive of any acquisitions, based on its current cash flow budgets and forecast of short-term and long-term liquidity needs.
The ability to access unused borrowing capacity under the 2019 Credit Facility as a source of liquidity is dependent on maintaining compliance with the financial covenants as specified under the terms of the credit agreement that

31



established the 2019 Credit Facility (the "2019 Credit Agreement"). In 2019, the Company was in compliance with its financial debt covenants as required under the terms of the 2019 Credit Agreement. The required maximum consolidated total leverage ratio and the required minimum consolidated fixed charge coverage ratio compared to the actual amounts as of December 31, 2019 and for the fiscal period then ended are as follows:  
 
 
Required

 
Actual

Consolidated total leverage ratio (12-month period)
 
4.00

 
2.27

Consolidated fixed charge coverage ratio (12-month period)
 
1.50

 
5.28


Working capital requirements vary from period to period depending on manufacturing volumes primarily related to the RV, MH and marine industries as well as the industrial markets we serve, the timing of deliveries, and the payment cycles of customers. In the event that operating cash flow is inadequate and one or more of the Company's capital resources were to become unavailable, the Company would seek to revise its operating strategies accordingly. The Company will continue to assess its liquidity position and potential sources of supplemental liquidity in view of operating performance, current economic and capital market conditions, and other relevant circumstances.

Borrowings under the revolving credit loan (the "2019 Revolver") and the term loan (the "2019 Term Loan" and, together with the 2019 Revolver, the "2019 Credit Facility") established under the 2019 Credit Agreement, which are subject to variable rates of interest, are subject to a maximum total borrowing limit of $650.0 million (effective September 17, 2019). See Note 8 of the Notes to the Consolidated Financial Statements for further information. See Note 9 of the Notes to Consolidated Financial Statements for information on interest rate swaps used to partially hedge variable interest rates under the 2019 Revolver and 2019 Term Loan. The unused availability under the 2019 Credit Facility as of December 31, 2019 was $411.1 million.


Contractual Obligations
The following table summarizes the Company's contractual cash obligations at December 31, 2019, and the future periods during which the Company expects to settle these obligations.
 
Payments due by period
(thousands)
2020
2021-2022
2023-2024
Thereafter
Total
Long-term debt
$
5,000

$
17,500

$
382,500

$
300,000

$
705,000

Interest payments on debt (1)
34,838

68,884

61,213

62,812

227,747

Deferred compensation payments
216

309

260

1,831

2,616

Minimum pension contributions
610

1,810

1,500

1,800

5,720

Purchase obligations (2)
210,609




210,609

Contingent consideration (3)
2,000

8,000

1,000


11,000

Leases payments
30,443

42,765

22,553

5,867

101,628

Total contractual cash obligations
$
283,716

$
139,268

$
469,026

$
372,310

$
1,264,320

(1)
Scheduled interest payments on debt obligations are calculated based on interest rates in effect at December 31, 2019 as follows: (a) 2019 Revolver - 4.59%, (b) 2019 Term Loan - 4.53%, (c) Convertible Notes - 1.00% and (d) Senior Notes - 7.50%. The projected interest payments exclude non-cash interest that would normally be included in interest expense on the Company’s Consolidated Statements of Income.

32



(2)
The purchase obligations are primarily comprised of purchase orders issued in the normal course of business.
(3)
Amount for 2020 represents actual contractual payment in 2020 achieved based on 2019 performance. 2021-2023 amounts represent undiscounted estimated contingent payments.
We also have commercial commitments as described below (in thousands):
Other Commercial
Commitments
Total Amount Committed
Outstanding
at 12/31/19
Date of
Expiration
Letters of Credit
$
25,000

(1)
$
3,863

 
September 17, 2024
(1)
The $25.0 million commitment for the Letters of Credit is a sub-limit contained within the 2019 Revolver as of December 31, 2019.
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 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 Notes 1, 3 and 16 of the Notes to Consolidated Financial Statements. The Company has identified the following critical accounting policies and estimates:
Goodwill and Other Intangible Assets. The Company’s acquisitions include purchased goodwill and other intangible assets. Goodwill represents the excess of cost over the fair value of the net assets acquired. Other intangible assets acquired are classified as customer relationships, non-compete agreements, patents and trademarks.
Goodwill and indefinite-lived intangible assets, representing acquired trademarks, are not amortized but are subject to an annual (or under certain circumstances more frequent) impairment test in the fourth quarter based on their estimated fair value. We test more frequently, if there are indicators of impairment, or whenever such circumstances suggest that the carrying value of goodwill or trademarks may not be recoverable. These indicators include a sustained significant decline in our share price and market capitalization, a decline in expected future cash flows, or a significant adverse change in the business climate. A significant adverse change in the business climate could result in a significant loss of market share or the inability to achieve previously projected revenue growth.
Impairment reviews of goodwill are performed at the reporting unit level. The Company’s reporting units are defined as one level below our operating segments, Manufacturing and Distribution, which are the same as our reportable segments. In evaluating goodwill for impairment, either a qualitative or quantitative assessment is performed. If the qualitative assessment indicates it is more likely than not that the fair value of the reporting unit is less than its carrying value, the Company performs a quantitative assessment. When estimating reporting unit fair value with the quantitative assessment, the Company uses a combination of market and income-based methodologies. The market approach includes a comparison of multiples of earnings before interest, taxes, depreciation and amortization for the reporting units to similar businesses or guideline companies whose securities are actively traded in public markets. When calculating the present value of future cash flows under the income

33



approach, the Company takes into consideration multiple variables, including forecasted sales volumes and operating income, current industry and economic conditions, and historical results. The income approach fair value estimate also includes estimates of long-term growth rates and discount rates that are commensurate with the risks and uncertainty inherent in the respective reporting units and the internally-developed forecasts.
Impairment reviews of indefinite-lived intangible assets (trademarks) consist of a comparison of the fair value of the trademark to its carrying value. Fair value is measured using a relief-from-royalty approach, a form of discounted cash flow method. Estimated royalty rates applied to projected revenues are based on comparable industry studies and consideration of operating margins. Discount rates are derived in a manner similar to what is done in testing goodwill for impairment.

Based on the results of the Company's analyses, the estimated fair value of each of the Company's reporting units and trademarks was determined to exceed the carrying value for each of the years ended December 31, 2019, 2018 and 2017, and so no impairments were recognized. Further, based on the results of the impairment analyses, none of the Company’s reporting units or trademarks were at risk of failing the impairment assessments discussed above that would have a material effect on the Company’s consolidated financial statements for any period presented.

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.

Business Combinations. From time to time, we may enter into business combinations. We recognize the identifiable assets acquired and the liabilities assumed at their fair values as of the date of acquisition. We measure goodwill as the excess of consideration transferred, which we also measure at fair value, over the net of the acquisition date fair values of the identifiable assets acquired and liabilities assumed. The acquisition method of accounting requires us to make significant estimates and assumptions regarding the fair values of the elements of a business combination as of the date of acquisition, including the fair values of identifiable intangible assets and contingent consideration. Significant estimates and assumptions include subjective and/or complex judgments regarding items such as discount rates, customer attrition rates, royalty rates, economic lives and other factors, including estimated future cash flows that we expect to generate from the acquired assets.
The acquisition method of accounting also requires us to refine these estimates over a measurement period not to exceed one year to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date. If we are required to adjust provisional amounts that we have recorded for the fair values of assets and liabilities in connection with acquisitions, these adjustments could have a material impact on our financial condition and results of operations. No changes in fiscal 2019 to our fiscal 2018 provisional fair value estimates of assets and liabilities assumed in acquisitions were material. If the subsequent actual results and updated projections of the underlying business activity change compared with the assumptions and projections used to develop the acquisition date fair value estimates, we could record future impairment charges. In addition, we estimate the economic lives of certain acquired assets and these lives are used to calculate depreciation and amortization expense. If our estimates of the economic lives change, depreciation or amortization expenses could be increased or decreased, or the acquired assets could be impaired.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Debt Obligations
At December 31, 2019, our total debt obligations under our 2019 Credit Agreement were under LIBOR-based interest rates. A 100 basis point increase in the underlying LIBOR rates would result in additional annual interest cost of approximately $0.3 million, assuming average borrowings, including the Term Loan, subject to variable rates of $33.0 million, which was the amount of such borrowings outstanding at December 31, 2019 subject to variable rates after taking into consideration interest rate swaps with a combined notional principal amount of $200 million.

34



Inflation
The prices of key raw materials, consisting primarily of lauan, gypsum, particleboard, fiberglass and aluminum, and petroleum-based products 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 and continued to fluctuate in 2019. 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. However, there can be no assurance future cost increases, if any, can be partially or fully passed on to customers, or that the timing of such sales price increases will match raw material cost increases. We do not believe that inflation had a material effect on results of operations for the periods presented.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is set forth in Item 15(a)(1) of Part IV of this Annual Report on Form 10-K.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
The information required by this Item 9 was previously reported in the Company’s Current Report on Form 8-K that was filed with the SEC on June 7, 2019.
ITEM 9A.
CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Company maintains “disclosure controls and procedures”, as such term is defined under Securities Exchange Act Rule 13a-15(e), that are designed to ensure that information required to be disclosed in our Securities Exchange Act of 1934, as amended (the “Exchange Act”) reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow for timely decisions regarding required disclosures. In designing and evaluating the disclosure controls and procedures, the Company’s management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and the Company’s management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible 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 of the end of the period covered by this 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 reports filed under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and is accumulated and communicated to Company’s management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Management’s Annual Report on Internal Control Over Financial Reporting
We are responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control system was designed to provide reasonable assurance regarding the fair and reliable preparation and presentation of our published financial statements. We continually evaluate our system of internal control over financial reporting to determine if changes are appropriate based upon changes in our operations or the business environment in which we operate.

35



All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an assessment of the effectiveness of our internal control over financial reporting based on the framework in the 2013 Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). This assessment included a review of the documentation of controls, an assessment of the design effectiveness of controls, testing of the operating effectiveness of controls, and a conclusion on this evaluation. As permitted under SEC guidance, management’s assessment of and conclusion regarding the design and effectiveness of internal control over financial reporting excluded the internal control over financial reporting of the operations of businesses acquired in 2019, which are described in Note 4 of the Notes to Consolidated Financial Statements. Businesses acquired in 2019 represented less than 1% of consolidated net sales for the year ended December 31, 2019 and approximately 5% of consolidated total assets as of December 31, 2019. Based on our assessment, we have concluded that our internal control over financial reporting was effective as of December 31, 2019.
The Company’s independent registered public accounting firm, Deloitte & Touche LLP, audited our internal control over financial reporting as of December 31, 2019, as stated in their report in the section entitled “Report of Independent Registered Public Accounting Firm” included elsewhere in this Form 10-K, which expresses an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2019.
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, 2019 or subsequent to the date the Company completed its evaluation, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B.
OTHER INFORMATION
None.
PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
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 14, 2020, 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 on Form 10-K.
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 14, 2020 and is incorporated herein by reference.

36



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 “Investor Relations”. We intend to post on our web site any substantive amendments to, or waivers from, our Code of Ethics and Business Conduct Policy and our Code of Ethics Applicable to Senior Executives as well as our Corporate Governance Guidelines. 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 14, 2020 and incorporated herein by reference.
ITEM 11.
EXECUTIVE COMPENSATION
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 14, 2020, under the captions “Executive Compensation – 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 14, 2020, under the captions “Equity Compensation Plan Information” and “Security Ownership of Certain Beneficial Owners and Management,” and is incorporated herein by reference.
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 14, 2020, under the captions “Related Party Transactions” and “Independent Directors,” and is incorporated herein by reference.
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this item is set forth in our Proxy Statement for the Annual Meeting of Shareholders to be held on May 14, 2020, under the heading “Independent Public Accountants,” and is incorporated herein by reference.

37



PART IV
ITEM 15.    EXHIBITS AND FINANCIAL STATEMENT SCHEDULES 
 
(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
 
 
 
 
3.2
 
 
 
 
3.3
 
 
 
 
4.1
 
 
 
 
4.2
 
 
 
 
4.3**
 
10.1
 
 
 
 
10.2*
 
 
 
 
10.3*
 
 
 
 
10.4*
 
 
 
 
10.5*
 
 
 
 
10.6*
 
 
 
 
10.7*
 
 
 
 
10.8*
 
 
 
 

38



10.9
 

 
 
 
10.10
 
 
 
 
10.11
 

 
 
 
10.12
 

 
 
 
10.13
 
 
 
 
10.14
 
 
 
 
10.15
 
 
 
 
10.16
 
 
 
 
10.17
 
 
 
 
12**
 
 
 
 
21**
 
 
 
 
16.1
 
 
 
 
23.1**
 
 
 
 
23.2**
 
 
 
 
31.1**
 
 
 
 
31.2**
 
 
 
 
32**
 

39



XBRL Exhibits.
Interactive Data Files. The following materials are filed electronically with this Annual Report on Form 10-K:
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Schema Document
101.CAL
XBRL Taxonomy Calculation Linkbase Document
101.DEF
XBRL Taxonomy Definition Linkbase Document
101.LAB
XBRL Taxonomy Label Linkbase Document
101.PRE
XBRL Taxonomy Presentation Linkbase Document
Attached as Exhibits 101 to this report are the following financial statements from the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 formatted in XBRL (“eXtensible Business Reporting Language”): (i) the Consolidated Statements of Financial Position; (ii) the Consolidated Statements of Income; (iii) the Consolidated Statements of Comprehensive Income; (iv) the Consolidated Statements of Shareholders’ Equity; and (v) the Consolidated Statements of Cash Flows, and the related Notes to these financial statements in detail tagging format.
*Management contract or compensatory plan or arrangement.
**Filed herewith.
All other financial statement schedules are omitted because they are not applicable or the required information is immaterial or is shown in the Notes to Consolidated Financial Statements.

ITEM 16.    FORM 10-K SUMMARY
None.


40



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: February 27, 2020
By:
/s/ Andy L. Nemeth
 
 
Andy L. Nemeth
 
 
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/ Andy L. Nemeth
 
President and Chief Executive Officer
 
February 27, 2020
Andy L. Nemeth
 
(Principal Executive Officer)
 
 
 
 
Director
 
 
 
 
 
 
 
/s/ Joshua A. Boone
 
Vice President Finance, Chief Financial Officer and
 
February 27, 2020
Joshua A. Boone
 
Secretary-Treasurer
 
 
 
 
(Principal Financial and Accounting Officer)
 
 
 
 
 
 
 
/s/ Joseph M. Cerulli
 
Director
 
February 27, 2020
Joseph M. Cerulli
 
 
 
 
 
 
 
 
 
/s/ Todd M. Cleveland
 
Executive Chairman of the Board
 
February 27, 2020
Todd M. Cleveland
 
 
 
 
 
 
 
 
 
/s/ John A. Forbes
 
Director
 
February 27, 2020
John A. Forbes
 
 
 
 
 
 
 
 
 
/s/ Michael A. Kitson
 
Director
 
February 27, 2020
Michael A. Kitson
 
 
 
 
 
 
 
 
 
/s/ Pamela R. Klyn
 
Director
 
February 27, 2020
Pamela R. Klyn

 
 
 
 
 
 
 
 
 
/s/ Derrick B. Mayes
 
Director
 
February 27, 2020
Derrick B. Mayes
 
 
 
 
 
 
 
 
 
/s/ Denis G. Suggs
 
Director
 
February 27, 2020
Denis G. Suggs

 
 
 
 
 
 
 
 
 
/s/ M. Scott Welch
 
Lead Director
 
February 27, 2020
M. Scott Welch
 
 
 
 

41



PATRICK INDUSTRIES, INC.
Index to the Financial Statements
Report of Independent Registered Public Accounting Firm, Deloitte & Touche LLP
F-2
F-5
Financial Statements:
 
F-6
F-7
F-8
F-9
F-10
F-11

F-1


Report of Independent Registered Public Accounting Firm
To the shareholders and the Board of Directors of Patrick Industries, Inc.

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated statement of financial position of Patrick Industries, Inc. and subsidiaries (the "Company") as of December 31, 2019, the related consolidated statements of income, comprehensive income, shareholders' equity, and cash flows, for the year ended December 31, 2019, and the related notes (collectively referred to as the "financial statements"). We also have audited the Company’s internal control over financial reporting as of December 31, 2019 based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). 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, 2019, and the results of its operations and its cash flows for the year ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.

Basis for Opinions

The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on these financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. As described in Management’s Annual Report on Internal Control Over Financial Reporting, management excluded from its assessment the internal control over financial reporting at the operations of businesses acquired in 2019, which are described in Note 4, whose financial statements constitute less than 1% of consolidated net sales for the year ended December 31, 2019 and approximately 5% of consolidated total assets as of December 31, 2019. Accordingly, our audit did not include the internal control over financial reporting at these businesses.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audit of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in

F-2


accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.    
Goodwill-Refer to Notes 1 and 7 to the financial statements
Critical Audit Matter Description

The Company’s evaluation of goodwill for impairment involves the comparison of the fair value of each reporting unit to its carrying value. The Company uses a combination of market and income-based methodologies. The market approach includes a comparison of multiples of earnings before interest, taxes, depreciation and amortization (EBITDA) for the reporting units to similar businesses or guideline companies whose securities are actively traded in public markets. When calculating the present value of future cash flows under the income approach, the Company takes into consideration multiple variables, including forecasted sales volumes and operating income, current industry and economic conditions, and historical results. The income approach fair value estimate also includes estimates of long-term growth rates and discount rates that are commensurate with the risks and uncertainty inherent in the respective reporting units and the internally-developed forecasts. The goodwill balance was $319 million as of December 31, 2019. The estimated fair value of each of the Company's reporting units was determined to exceed the carrying value for the year ended December 31, 2019, and so no impairment was recognized.
Given the significant judgments made by management to estimate the fair value of certain of the Company’s reporting units, performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions related to selection of the discount rates and forecasts of sales and operating income, specifically due to the sensitivity of the Company’s operations to periods of volatility in the Company’s end customer markets, required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the discount rate and forecasts of sales and operating income used by management to estimate the fair value of certain reporting units included the following, among others:
We tested the effectiveness of controls over management’s goodwill impairment evaluation, including those over the determination of the fair value of the Company’s reporting units, such as controls related to management’s selection of the discount rates and forecasts of sales and operating income.

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We evaluated management’s ability to accurately forecast sales and operating income by comparing actual results to management’s historical forecasts.
We evaluated the reasonableness of management’s sales and operating income assumptions included in the income approach model, and extent to which forecast projection risk had been contemplated in the selection of the discount rates, by comparing the forecasts to historical sales and operating income, the strategic plans communicated to the Board of Directors, and forecasted information included in analyst and industry reports.
With the assistance of our fair value specialists, we evaluated the reasonableness of the valuation methodology and discount rates by testing the source information underlying the determination of the discount rates and the mathematical accuracy of the calculations and developing a range of independent estimates and comparing those to the discount rates selected by management.

/s/ Deloitte & Touche LLP

Chicago, Illinois
February 27, 2020

We have served as the Company's auditor since 2019.

















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Report of Independent Registered Public Accounting Firm
Shareholders and the Board of Directors of Patrick Industries, Inc.
Elkhart, Indiana

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated statements of financial position of Patrick Industries, Inc. (the "Company") as of December 31, 2018, the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2018, and the related notes (collectively referred to as the "financial statements"). 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, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2018 in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.



/s/ Crowe LLP

We served as the Company's auditor from 2009 to 2018.

Oak Brook, Illinois
February 28, 2019




F-5


PATRICK INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(thousands except per share data)
Year Ended December 31,
 
2019
 
2018
 
2017
NET SALES
$
2,337,082

 
$
2,263,061

 
$
1,635,653

Cost of goods sold
1,914,211

 
1,847,195

 
1,356,738

GROSS PROFIT
422,871

 
415,866

 
278,915

 
 
 
 
 
 
Operating Expenses:
 
 
 
 
 
Warehouse and delivery
98,055

 
74,996

 
46,905

Selling, general and administrative
134,466

 
128,242

 
90,736

Amortization of intangible assets
35,908

 
34,213

 
19,374

Total operating expenses
268,429

 
237,451

 
157,015

OPERATING INCOME
154,442

 
178,415

 
121,900

Interest expense, net
36,616

 
26,436

 
8,790

Income before income taxes
117,826

 
151,979

 
113,110

Income taxes
28,260

 
32,147

 
27,392

NET INCOME
$
89,566

 
$
119,832

 
$
85,718

 
 
 
 
 
 
BASIC NET INCOME PER COMMON SHARE
$
3.88

 
$
4.99

 
$
3.54

DILUTED NET INCOME PER COMMON SHARE
$
3.85

 
$
4.93

 
$
3.48

 
 
 
 
 
 
Weighted average shares outstanding - Basic
23,058

 
23,995

 
24,230

Weighted average shares outstanding - Diluted
23,280

 
24,317

 
24,643


See accompanying Notes to Consolidated Financial Statements.

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PATRICK INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(thousands)
Year Ended December 31,
 
2019
 
2018
 
2017
NET INCOME
$
89,566

 
$
119,832

 
$
85,718

Other comprehensive (loss) income, net of tax:
 
 
 
 
 
Change in unrealized loss of hedge derivatives
(2,401
)
 
(1,973
)
 

Foreign currency translation loss
(22
)
 
(32
)
 

Other
(595
)
 
(741
)
 
39

Total other comprehensive (loss) income
(3,018
)
 
(2,746
)
 
39

COMPREHENSIVE INCOME
$
86,548

 
$
117,086

 
$
85,757

See accompanying Notes to Consolidated Financial Statements.

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PATRICK INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
 
December 31,
(thousands except share data)
2019
 
2018
ASSETS
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
139,390

 
$
6,895

Trade receivables, net
87,536

 
82,499

Inventories
253,870

 
272,898

Prepaid expenses and other
36,038

 
22,875

Total current assets
516,834

 
385,167

Property, plant and equipment, net
180,849

 
177,145

Operating lease right-of-use-assets
93,546

 

Goodwill
319,349