Patrick Industries, Inc.

1800 S. 14th Street
P.O. Box 638
Elkhart, Indiana 46515
U.S.A.
(219) 294-7511
Fax: (219) 522-5213
Web site: http://www.patrickind.com

Public Company
Incorporated: 1961 as Merv Lung Building Company
Employees: 1,722
Sales: $453.51 million (1998)
Stock Exchanges: NASDAQ
Ticker Symbol: PATK
NAIC: 42131 Lumber, Plywood, Millwork, and Wood Panel Wholesalers; 321918 Other Millwork; 321999 All Other Miscellaneous Wood Manufacturing; 44419 Other Building Material Dealers

Patrick Industries, Inc. is a manufacturer and supplier of building materials and equipment. Through its subsidiaries, the company manufactures a broad range of products, including decorative vinyl and paper panels often used as wallboard, cabinet doors, countertops, extruded aluminum products, drawer sides, pleated shades and mini-blinds, wood adhesives, and laminating machines. The company also operates a nationwide wholesale building materials distributorship, which supplies prefinished wall and ceiling panels, particleboard, hard-board siding, passage doors, roofing materials, hardware, insulation, and other building supplies. Patrick’s main markets are the manufactured housing industry and the recreational vehicle industry, which together account for approximately 80 percent of its total sales. The company also markets certain of its products to other markets, including the furniture manufacturing, automotive aftermarket, and marine industries.

Founding and Early Growth: 1959–69

Patrick Industries began its corporate life in 1959 as a small building supply distributorship in northern Indiana. The founder, Mervin Lung, was a hardworking entrepreneur who had already dabbled in several different jobs and industries. Lung had jumped into the world of work immediately after graduating from high school, first helping remodel homes, then later purchasing two small, local businesses. Eventually, he sold both of his businesses and took a job with an aircraft and auto parts manufacturer in South Bend, Indiana. He also continued to take on home remodeling projects on the side. This side business of remodeling led Lung to create the company that would become Patrick Industries. A shrewd and resourceful businessman, Lung realized that he could make money by wholesaling his excess building supplies to other remodelers. Working from a barn in which he stored his supplies, he began selling off his extra wood paneling, trim, and other building materials. He named his fledgling enterprise the Merv Lung Building Company.

The idea proved successful. Soon, Lung quit his job in South Bend and moved his wholesaling business into a larger facility in nearby Elkhart, Indiana. In 1961, he incorporated. Although Lung started out selling supplies to other home remodelers, his focus soon shifted to a different customer base. The north central region of Indiana, where Lung’s business was located, had become a major hub for the rapidly growing recreational vehicle and manufactured housing industries. Capitalizing on his proximity to the two thriving industries, Lung began catering to the production needs of area manufacturers. Targeting industrial scale customers allowed him to order supplies in bulk from building supply sources—then warehouse and resell the materials as required. Lung soon expanded his business to target makers of RVs and manufactured housing across the nation.

As Lung grew more familiar with his markets, he became keenly aware of the cyclical nature of the RV and manufactured housing industries. Sensitive to interest rates, availability of financing, and general economic conditions, both industries’ sales tended to fluctuate substantially and unpredictably. This made it virtually impossible for manufacturers to stock a consistent level of inventory. Consequently, they often found themselves without the materials necessary to complete new production orders, and had to rely on rush deliveries. Lung frequently had to scramble to meet very short delivery deadlines for customers who needed materials right away.

Lung began looking for ways to stabilize these irregular ordering methods and inventory levels. The solution he devised was to locate distribution centers near his customers’ manufacturing plants. This allowed him to fulfill orders immediately and consistently without incurring high shipping expenses. Lung’s first step toward implementing his plan came in 1963, when he built a new distribution and sales center near Valdosta, Georgia. Georgia’s manufactured housing industry was one of the largest in the nation; by 1968, 15 percent of Lung’s total sales were coming from his Valdosta facility. Encouraged by the initial success of his plan, Lung decided to open more strategically located distribution centers—in Kansas, Pennsylvania, Texas, Florida, and North Carolina. In another foresighted move, Lung linked his remote facilities together via a computer network. This allowed the corporate offices to monitor inventory levels and coordinate deliveries nationwide. Lung’s concept, the just-in-time (JIT) method, would eventually become common practice in many industries—but in the mid-1960s, it made the Merv Lung Building Company a standout among its competitors.

Other milestones arrived in 1968 as well. The first came when Lung took his building supply company public. Before making an initial public offering, he renamed the nine-year-old company Patrick Industries and adopted a Shamrock as the company logo. The Celtic-themed identity was an homage to the “Fightin’ Irish” of the University of Notre Dame, which was located in neighboring South Bend, Indiana, and which Lung faithfully supported. The second occurred with the company’s first two acquisitions. Using capital generated from the public offering, Lung led Patrick into new markets with the purchase of Mobilcraft Wood Products, Inc. and Midwest Laminated Plastic Products Inc. Mobilcraft was a maker of wood cabinet doors and drawer fronts. Midwest Laminated Plastic Products—subsequently renamed Midwest Laminating—manufactured furniture and cabinet components using laminated particleboard and plywood. Both companies already served Patrick’s two major markets.

Whereas Patrick’s initial business base had been distribution, the purchases of Mobilcraft and Midwest Laminating moved the company into manufacturing as well. Lung’s hope was for Patrick to achieve a higher profit margin on its newly acquired manufacturing operations than it traditionally had on its distribution business.

Rapid Diversification: 1970–95

The early 1970s were boom years for the manufactured housing industry. Interest rates started to fall in the spring of 1970 and continued to decrease steadily for two years. Wouldbe homeowners took advantage of the opportunity, and sales of manufactured homes—one of the most affordable options for first-time buyers—rose accordingly. Between 1970 and 1973, the number of shipments of manufactured homes rose from 401,190 to 579,960, an increase of almost 45 percent. As a primary supplier to the factory-built housing industry, Patrick was well-positioned to benefit from the surge in sales. The 1970s, however, were anything but good for Patrick’s other main market, the RV industry. The OPEC oil embargo of 1973 and the resulting hike in gas prices made the notion of “recreational” driving all but obsolete. As a result, sales of RVs plummeted, forcing several manufacturers out of business.

As Patrick entered the 1970s, Lung began looking for ways to further broaden the company’s product portfolio and command a greater presence in the manufactured housing supply chain. In 1972 the company formed a new division: Custom Vinyls. The division produced laminated panels by applying decorative vinyl or woodgrain paper to plywood or gypsum substrates. The finished panels were most commonly used as interior walls in manufactured housing and recreational vehicles. The following year, Patrick acquired Nickell Enterprises, a manufacturer of drawer sides, drawer bottoms, and shelving. In 1977 the company built a new cabinet and door manufacturing and distribution center in Woodburn, Oregon.

By 1980 the manufactured housing industry was suffering hard times. The falling interest rates of the early 1970s had reversed, climbing to alarming highs by the end of the decade. Consequently, shipments of manufactured homes fell to 221,091 in 1980—a decrease of 45 percent in ten years’ time. Patrick’s sales and income reflected the market slump, declining steadily as the 1970s wore on.

Despite the market downturn, Patrick Industries continued to expand and diversify. In 1980 the company entered a new field with the acquisition of the Elkhart, Indiana-based ILC Products, which it renamed Patrick Metals. The new subsidiary was a manufacturer of aluminum extrusion products—such as windows and doors—for the RV and manufactured housing industries. Also in 1980, Patrick purchased Conroth Distribution, a network of building supply distributorships that carried other manufacturers’ products. Like Patrick, Conroth served the manufactured housing, recreational vehicle, and marine industries.

In 1989 Mervin Lung’s son, David, became president of Patrick Industries. The 42-year-old David had grown up working in his father’s business. In 1970, after graduating from college, he joined the company full-time and in 1985, after having worked in various departments, became vice-president of administration. While David assumed the president’s position, Mervin Lung continued to be active in the company, serving as its chairman and CEO.

Company Perspectives:

Patrick’s astounding growth has been accomplished through strong customer affiliations, continued growth within existing divisions, enormous investment in new equipment and facilities, targeted acquisitions that complement the company’s original markets, and quality products and

The year 1991 brought the formation of a new Patrick division—Sun Adhesives. Sun was developed primarily to produce the wood glues and sealants Patrick used in its laminating and cabinetry operations. In addition, the company developed and marketed other adhesives products for use in a variety of industrial markets. Patrick’s decision to produce its own glues was significant in that it was the company’s first step toward vertical integration. A second such step came in 1994, with the acquisition of Harlan Machinery Co., of Boulder City, Nevada. Harlan, a producer of laminating presses and other woodworking machinery, had previously been one of Patrick’s major equipment suppliers. David Lung explained the rationale behind the acquisition in a 1997 interview with the Wall Street Corporate Reporter. “[The acquisition] allows us to develop equipment by experimenting without upsetting our current production,” he said. “In turn, we give our customers a better product for the money down the road, without disrupting our production and service to our customers.”

Patrick expanded again in 1995, with the purchase of U.S. Door. The Phoenix, Arizona-based company manufactured wooden cabinet doors for the manufactured housing and RV markets, as well as the furniture industry. The new subsidiary was renamed Patrick Door and began operating as a division of Patrick’s Mobilcraft division.

By the midpoint of the decade, Patrick was generating around $360 million in sales—almost double its sales just five years earlier. Almost half of the company’s total sales came from products manufactured by its laminating operations—specifically, the prefinished wall panels made by Custom Vinyls. Patrick’s distribution business accounted for another 35 to 37 percent, and the company’s wood and aluminum products made up the rest of the pie. Approximately 70 percent of Patrick’s total sales were made to customers in the manufactured housing industry.

Patrick’s string of acquisitions throughout the 1980s and early 1990s had been designed to build the manufacturing segment of the company’s business and to strengthen its position as a supplier to its two key markets. However, many of Patrick’s newly purchased manufacturing operations had “crossover” product lines—products that could readily be used in other industries. The countertops, shelving, and cabinet doors produced by Midwest Laminating, Mobilcraft, and Custom Vinyls, for example, had applications in the furniture and cabinetry industries. The manufacturing processes used by Patrick Metals could be used to produce running boards, ladders, and other accessories for the RV, automotive, and marine industries. Demand in these industries, while affected by general economic conditions, did not tend to fluctuate as dramatically as in the manufactured housing and RV markets. Therefore, by diversifying into these more consistent industries, Patrick could help reduce vulnerability to the cyclical nature of its two major markets.

Improvements and Expansions: 1996–99

Throughout the second half of the 1990s, Patrick invested heavily in improving its existing facilities and building new ones for various subsidiaries. In May 1996, the company opened a new $7 million manufacturing facility for its Woodburn, Oregon operation. The new plant contained a laminating and a cabinet door manufacturing division, as well as administrative offices and a distribution center. Also in 1996, the company opened a new 90,000-square-foot plant in Fontana, California. The facility, Patrick Moulding, manufactured mouldings and trim that were wrapped in vinyl or furniture-grade woodgrain papers.

The following year, Patrick started another major project to expand and consolidate the distribution and manufacturing operations of its Charlotte, North Carolina Custom Vinyls plant. In August 1997, Patrick added a new product line to its growing portfolio with the acquisition of United Shade, Inc. United Shade, based in Elkhart, manufactured window shades and blinds for vans, RVs, and manufactured housing.

That same year also saw the addition of a new Patrick division: Patrick Thermoforming Resources. The new plant, which was built in Goshen, Indiana, produced thermoformed plastic bath products, including tub surrounds, tubs, showers, and sinks. It served as a supplier to Patrick’s two core markets, as well as other industries. The following year, Patrick acquired Woodtek, L.L.C., a manufacturer of wood products, for $2.6 million.

At the end of 1998, Patrick had sales of $453.5 million and net profit of $9.3 million. Of total sales, approximately 35 percent derived from the company’s distribution business. Laminated products made up 40 percent of the total, with wood products, adhesives, shades, thermoformed products, and laminated equipment making up the remainder. The company operated 16 warehouse and distribution centers and 26 manufacturing plants located in 14 states. Manufactured housing and recreational vehicle producers remained Patrick’s two largest markets; in 1998, the two industries combined provided more than 80 percent of the company’s total sales.

Looking to the Future

With its upgraded and enlarged facilities, Patrick’s manufacturing capability was enhanced, allowing the company to handle larger industrial orders. This meant higher production at lower operating cost and a more consistent flow of inventory. It also paved the way for future growth in the company’s product lines and markets. Patrick expected to grow both through internal expansion and through acquisitions. Specifically, the company anticipated purchasing or opening subsidiaries that strengthened its presence in the RV and manufactured housing markets and offered the possibility of diversification into other industries as well. Another key point in Patrick’s strategy for the coming years was overseas opportunities. With an existing sales presence in Canada, Mexico, South America, and Asia, the company’s management was looking for ways to expand into other foreign markets.

As Patrick prepared to move into the 21st century, it remained heavily dependent upon market conditions in the manufactured housing and recreational vehicles industries. At the beginning of 1999, both industries were on an upturn. The quality of manufactured housing had improved steadily since the industry’s early days, making it an attractive option for a wider range of homeowners. As a result, the manufactured housing market had increased its share of the single-family housing market, claiming approximately 30 percent in 1998, according to the Manufactured Housing Institute. Demand in the RV market was also up, as favorable economic conditions and increased discretionary income allowed consumers to spend more for recreational products and activities. If the manufactured housing and RV markets remained strong, it was likely that Patrick would continue to see growth in its sales and profits.

Principal Subsidiaries

Harlan Machinery Company, Inc.; Patrick Door, Inc.; Patrick Mouldings, L.L.C.

Principal Divisions

Mobilcraft Wood Products; Midwest Laminating; Nickell Enterprises; Custom Vinyls; Sun Adhesive; Patrick Thermo-forming Resources; Patrick Metals; Conroth; Patrick Distribution.

Further Reading

Kurowski, Jeff, “Patrick Industries Establishes Impressive RV/MH Growth Curve,” RV Business, September 1, 1996, p. 13.

“Patrick Industries,” South Bend Tribune Business Biography, January 31, 1999.

“President and COO of Patrick Industries, Inc.,” Wall Street Corporate Reporter, October 23, 1997.

Smith, Bruce, “Wall Street Analysts Are Bullish on Patrick Industries,” Indianapolis Star/The Indianapolis News, May 15, 1995, p. 17.

—Shawna Brynildssen