Unassociated Document
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
DC 20549
FORM
10-Q
(Mark
One)
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF
1934
|
For the quarterly period ended:
JUNE 30,
2009
OR
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
|
For the
transition period from _________________ to _________________
Commission
File Number: 0-13646
DREW
INDUSTRIES INCORPORATED
(Exact
name of registrant as specified in its charter)
Delaware
|
13-3250533
|
(State
or other jurisdiction of
|
(I.R.S.
Employer
|
incorporation
or organization)
|
Identification
No.)
|
200
Mamaroneck Avenue, White Plains, NY 10601
(Address
of principal executive offices) (Zip Code)
(914)
428-9098
(Registrant’s
telephone number, including area code)
(Former
name, former address and former fiscal year, if changed since last
report) N/A
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No
¨
Indicate
by checkmark 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 (paragraph 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, or a smaller reporting company. See definitions of “large accelerated
filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. Large accelerated filer ¨ Accelerated filer x Non-accelerated filer
¨
(Do not
check if a smaller reporting company) Smaller reporting company ¨
Indicated
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes ¨
No x
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date. 21,583,533 shares of common stock as
of July 31, 2009.
DREW
INDUSTRIES INCORPORATED
INDEX
TO FINANCIAL STATEMENTS FILED WITH
QUARTERLY
REPORT OF REGISTRANT ON FORM 10-Q
FOR
THE QUARTER ENDED JUNE 30, 2009
(UNAUDITED)
|
|
Page
|
PART
I -
|
FINANCIAL
INFORMATION
|
|
|
|
|
|
Item
1 - FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
|
3
|
|
|
|
|
|
|
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
4
|
|
|
|
|
|
|
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
5
|
|
|
|
|
|
|
CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
|
6
|
|
|
|
|
|
|
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
7-18
|
|
|
|
|
Item
2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
|
19-35
|
|
|
|
|
Item
3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
36
|
|
|
|
|
Item
4 - CONTROLS AND PROCEDURES
|
37
|
|
|
|
PART
II -
|
OTHER
INFORMATION
|
|
|
|
|
|
Item
1 - LEGAL PROCEEDINGS
|
38-39
|
|
|
|
|
Item
1A - RISK FACTORS
|
40
|
|
|
|
|
Item
4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
40
|
|
|
|
|
Item
6 - EXHIBITS
|
40
|
|
|
|
SIGNATURES
|
41
|
|
|
EXHIBIT
31.1 - SECTION 302 CEO CERTIFICATION
|
|
|
|
EXHIBIT
31.2 - SECTION 302 CFO CERTIFICATION
|
|
|
|
EXHIBIT
32.1 - SECTION 906 CEO CERTIFICATION
|
|
|
|
EXHIBIT
32.2 - SECTION 906 CFO CERTIFICATION
|
|
DREW
INDUSTRIES INCORPORATED
PART
I - FINANCIAL INFORMATION
ITEM
1 – FINANCIAL STATEMENTS
DREW
INDUSTRIES INCORPORATED
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
|
Six
Months Ended
|
|
|
Three
Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
(In
thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
171,582 |
|
|
$ |
309,671 |
|
|
$ |
100,563 |
|
|
$ |
150,523 |
|
Cost
of sales
|
|
|
145,203 |
|
|
|
236,288 |
|
|
|
80,010 |
|
|
|
113,719 |
|
Gross
profit
|
|
|
26,379 |
|
|
|
73,383 |
|
|
|
20,553 |
|
|
|
36,804 |
|
Selling,
general and administrative expenses
|
|
|
33,610 |
|
|
|
43,545 |
|
|
|
16,360 |
|
|
|
21,297 |
|
Goodwill
impairment
|
|
|
45,040 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Other
(income)
|
|
|
(200 |
) |
|
|
(646 |
) |
|
|
- |
|
|
|
- |
|
Operating
(loss) profit
|
|
|
(52,071 |
) |
|
|
30,484 |
|
|
|
4,193 |
|
|
|
15,507 |
|
Interest
expense, net
|
|
|
435 |
|
|
|
279 |
|
|
|
235 |
|
|
|
197 |
|
(Loss) income before income
taxes
|
|
|
(52,506 |
) |
|
|
30,205 |
|
|
|
3,958 |
|
|
|
15,310 |
|
(Benefit)
provision for income taxes
|
|
|
(18,360 |
) |
|
|
11,910 |
|
|
|
1,402 |
|
|
|
6,120 |
|
Net
(loss) income
|
|
$ |
(34,146 |
) |
|
$ |
18,295 |
|
|
$ |
2,556 |
|
|
$ |
9,190 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
(1.58 |
) |
|
$ |
0.83 |
|
|
$ |
0.12 |
|
|
$ |
0.42 |
|
Diluted
|
|
$ |
(1.58 |
) |
|
$ |
0.83 |
|
|
$ |
0.12 |
|
|
$ |
0.42 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
21,662 |
|
|
|
21,967 |
|
|
|
21,682 |
|
|
|
21,920 |
|
Diluted
|
|
|
21,662 |
|
|
|
22,126 |
|
|
|
21,738 |
|
|
|
22,074 |
|
The
accompanying notes are an integral part of these financial
statements.
DREW
INDUSTRIES INCORPORATED
CONDENSED
CONSOLIDATED BALANCE SHEETS
(Unaudited)
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
(In
thousands, except shares and per share amount)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
24,919 |
|
|
$ |
43,397 |
|
|
$ |
8,692 |
|
Short-term
investments
|
|
|
1,997 |
|
|
|
- |
|
|
|
- |
|
Accounts
receivable, trade, less allowances
|
|
|
22,165 |
|
|
|
23,641 |
|
|
|
7,913 |
|
Inventories
|
|
|
58,833 |
|
|
|
99,836 |
|
|
|
93,934 |
|
Prepaid
expenses and other current assets
|
|
|
16,667 |
|
|
|
12,105 |
|
|
|
16,556 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
124,581 |
|
|
|
178,979 |
|
|
|
127,095 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
assets, net
|
|
|
86,087 |
|
|
|
94,603 |
|
|
|
88,731 |
|
Goodwill
|
|
|
- |
|
|
|
39,641 |
|
|
|
44,113 |
|
Other
intangible assets
|
|
|
41,417 |
|
|
|
30,584 |
|
|
|
42,787 |
|
Other
assets
|
|
|
18,443 |
|
|
|
7,710 |
|
|
|
8,632 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
270,528 |
|
|
$ |
351,517 |
|
|
$ |
311,358 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
payable, including current maturities of long-term
indebtedness
|
|
$ |
388 |
|
|
$ |
12,940 |
|
|
$ |
5,833 |
|
Accounts
payable, trade
|
|
|
8,047 |
|
|
|
18,143 |
|
|
|
4,660 |
|
Accrued
expenses and other current liabilities
|
|
|
25,064 |
|
|
|
40,389 |
|
|
|
32,224 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
33,499 |
|
|
|
71,472 |
|
|
|
42,717 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
indebtedness
|
|
|
800 |
|
|
|
6,918 |
|
|
|
2,850 |
|
Other
long-term liabilities
|
|
|
9,260 |
|
|
|
5,870 |
|
|
|
6,913 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
43,559 |
|
|
|
84,260 |
|
|
|
52,480 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock, par value $.01 per share: authorized 30,000,000 shares; issued
24,180,258 shares at June 2009, 24,088,454 shares at June 2008 and
24,122,054 at December 2008
|
|
|
242 |
|
|
|
241 |
|
|
|
241 |
|
Paid-in
capital
|
|
|
67,190 |
|
|
|
62,868 |
|
|
|
64,954 |
|
Retained
earnings
|
|
|
187,337 |
|
|
|
228,100 |
|
|
|
221,483 |
|
Accumulated
other comprehensive loss
|
|
|
- |
|
|
|
(11 |
) |
|
|
- |
|
|
|
|
254,769
|
|
|
|
291,198 |
|
|
|
286,678 |
|
Treasury
stock, at cost - 2,596,725 shares at June 2009and December 2008, 2,346,725
shares at June 2008
|
|
|
(27,800 |
) |
|
|
(23,941 |
) |
|
|
(27,800 |
) |
Total
stockholders’ equity
|
|
|
226,969 |
|
|
|
267,257 |
|
|
|
258,878 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’ equity
|
|
$ |
270,528 |
|
|
$ |
351,517 |
|
|
$ |
311,358 |
|
The
accompanying notes are an integral part of these financial
statements.
DREW
INDUSTRIES INCORPORATED
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
Six
Months Ended
|
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
(loss) income
|
|
$ |
(34,146 |
) |
|
$ |
18,295 |
|
Adjustments
to reconcile net (loss) income to cash flows provided by (used for)
operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
9,312 |
|
|
|
8,049 |
|
Deferred
taxes
|
|
|
(15,660 |
) |
|
|
- |
|
Loss
(gain) on disposal of fixed assets
|
|
|
1,420 |
|
|
|
(2,703 |
) |
Stock-based
compensation expense
|
|
|
2,143 |
|
|
|
1,875 |
|
Goodwill
impairment
|
|
|
45,040 |
|
|
|
- |
|
Changes
in assets and liabilities, net of business acquisitions:
|
|
|
|
|
|
|
|
|
Accounts
receivable, net
|
|
|
(14,252 |
) |
|
|
(7,901 |
) |
Inventories
|
|
|
35,290 |
|
|
|
(23,557 |
) |
Prepaid
expenses and other assets
|
|
|
672 |
|
|
|
(9 |
) |
Accounts
payable, accrued expenses and other liabilities
|
|
|
(3,481 |
) |
|
|
(669 |
) |
Net
cash flows provided by (used for) operating activities
|
|
|
26,338 |
|
|
|
(6,620 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(1,093 |
) |
|
|
(2,350 |
) |
Acquisitions
of businesses
|
|
|
(339 |
) |
|
|
(94 |
) |
Proceeds
from sales of fixed assets
|
|
|
751 |
|
|
|
8,091 |
|
Purchase
of short-term investments
|
|
|
(1,997 |
) |
|
|
- |
|
Other
investments
|
|
|
(15 |
) |
|
|
(39 |
) |
Net cash flows (used for)
provided by investing activities
|
|
|
(2,693 |
) |
|
|
5,608 |
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from line of credit and other borrowings
|
|
|
5,775 |
|
|
|
- |
|
Repayments
under line of credit and other borrowings
|
|
|
(13,270 |
) |
|
|
(7,404 |
) |
Purchase
of treasury stock
|
|
|
- |
|
|
|
(4,474 |
) |
Exercise
of stock options
|
|
|
94 |
|
|
|
74 |
|
Other
financing activities
|
|
|
(17 |
) |
|
|
- |
|
Net
cash flows used for financing activities
|
|
|
(7,418 |
) |
|
|
(11,804 |
) |
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash
|
|
|
16,227 |
|
|
|
(12,816 |
) |
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of period
|
|
|
8,692 |
|
|
|
56,213 |
|
Cash
and cash equivalents at end of period
|
|
$ |
24,919 |
|
|
$ |
43,397 |
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
on debt
|
|
$ |
403 |
|
|
$ |
668 |
|
Income
taxes, net of refunds
|
|
$ |
4,014 |
|
|
$ |
11,577 |
|
The
accompanying notes are an integral part of these financial
statements.
DREW
INDUSTRIES INCORPORATED
CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Common
|
|
|
Paid-in
|
|
|
Retained
|
|
|
Treasury
|
|
|
Stockholders’
|
|
|
|
Stock
|
|
|
Capital
|
|
|
Earnings
|
|
|
Stock
|
|
|
Equity
|
|
(In
thousands, except shares)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
- December 31, 2008
|
|
$ |
241 |
|
|
$ |
64,954 |
|
|
$ |
221,483 |
|
|
$ |
(27,800 |
) |
|
$ |
258,878 |
|
Net
loss for the six months ended June 30, 2009
|
|
|
- |
|
|
|
- |
|
|
|
(34,146 |
) |
|
|
- |
|
|
|
(34,146 |
) |
Issuance
of 58,204 shares of common stock pursuant to stock options
and deferred stock units
|
|
|
1 |
|
|
|
93 |
|
|
|
- |
|
|
|
- |
|
|
|
94 |
|
Stock-based
compensation expense
|
|
|
- |
|
|
|
2,143 |
|
|
|
- |
|
|
|
- |
|
|
|
2,143 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
- June 30, 2009
|
|
$ |
242 |
|
|
$ |
67,190 |
|
|
$ |
187,337 |
|
|
$ |
(27,800 |
) |
|
$ |
226,969 |
|
The
accompanying notes are an integral part of these financial
statements.
DREW
INDUSTRIES INCORPORATED
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Condensed Consolidated Financial
Statements include the accounts of Drew Industries Incorporated and its
wholly-owned subsidiaries (“Drew” or the “Company”). Drew has no unconsolidated
subsidiaries. Drew’s wholly-owned active subsidiaries are Kinro, Inc. and its
subsidiaries (collectively “Kinro”), and Lippert Components, Inc. and its
subsidiaries (collectively “Lippert”). Drew, through its wholly-owned
subsidiaries, manufactures a broad array of components for recreational vehicles
(“RVs”) and manufactured homes, and to a lesser extent manufactures specialty
trailers and related axles. All significant intercompany balances and
transactions have been eliminated. Certain prior year balances have been
reclassified to conform to current year presentation.
The
Condensed Consolidated Financial Statements presented herein have been prepared
by the Company in accordance with the accounting policies described in its
December 31, 2008 Annual Report on Form 10-K and should be read in conjunction
with the Notes to Consolidated Financial Statements which appear in that
report.
In the
opinion of management, the information furnished in this Form 10-Q reflects all
adjustments necessary for a fair statement of the financial position and results
of operations as of and for the six and three month periods ended June 30, 2009
and 2008. All such adjustments are of a normal recurring nature. The Condensed
Consolidated Financial Statements have been prepared in accordance with the
instructions to Form 10-Q and therefore do not include some information and
notes necessary to conform with annual reporting requirements.
The
Company evaluated subsequent events through the date of filing this Quarterly
Report on Form 10-Q on August 7, 2009. We are not aware of any significant
events that occurred subsequent to the balance sheet date but prior to the
filing of this report that would have a material impact on our Condensed
Consolidated Financial Statements.
The Company has two reportable
segments, the recreational vehicle products segment (the "RV Segment") and the
manufactured housing products segment (the "MH Segment"). The RV Segment, which
accounted for 76 percent of consolidated net sales for the six-month periods
ended June 30, 2009 and 2008, manufactures a variety of products used primarily
in the production of RVs, including:
●Towable
RV steel chassis
|
●Aluminum
windows and screens
|
●Towable
RV axles and suspension solutions
|
●Chassis
components
|
●RV
slide-out mechanisms and solutions
|
●Furniture
and mattresses
|
●Thermoformed
products
|
|
|
●Entry
steps
|
●Manual,
electric and hydraulic stabilizer
|
●Other
towable accessories
|
and
lifting systems
|
●Specialty
trailers for hauling boats, personal
|
|
watercraft,
snowmobiles and equipment
|
More than 90 percent of the Company’s
RV Segment sales are of products used in travel trailers and fifth-wheel RVs.
The balance represents sales of components for motorhomes, as well as sales of
specialty trailers and axles for specialty trailers.
DREW
INDUSTRIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
(Unaudited)
The MH Segment, which accounted for 24
percent of consolidated net sales for the six-month periods ended June 30, 2009
and 2008, manufactures a variety of products used in the production of
manufactured homes, and to a lesser extent, modular housing and office units,
including:
●Vinyl
and aluminum windows and screens
|
●Steel
chassis
|
●Thermoformed
bath and kitchen products
|
●Steel
chassis parts
|
●Axles
|
|
Sales of products other than components
for RVs and manufactured homes are not considered significant. However, certain
of the Company’s MH Segment customers manufacture both manufactured homes and
modular homes, and certain of the products manufactured by the Company are
suitable for both manufactured homes and modular homes. As a result, the Company
is not always able to determine in which type of home its products are
installed. Intersegment sales are insignificant.
Decisions concerning the allocation of
the Company's resources are made by the Company's key executives. This group
evaluates the performance of each segment based upon segment operating profit or
loss, defined as income (loss) before interest, amortization of intangibles,
corporate expenses, goodwill impairment, other items and income taxes. Decisions
concerning the allocation of resources are also based on each segment’s
utilization of operating assets. Management of debt is a corporate function. The
accounting policies of the RV and MH Segments are the same as those described in
Note 1 of Notes to Consolidated Financial Statements of the Company’s December
31, 2008 Annual Report on Form 10-K.
Information relating to segments
follows (in
thousands):
|
|
Six
Months Ended
|
|
|
Three
Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Net
sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
RV
Segment
|
|
$ |
131,161 |
|
|
$ |
235,247 |
|
|
$ |
78,881 |
|
|
$ |
111,292 |
|
MH
Segment
|
|
|
40,421 |
|
|
|
74,424 |
|
|
|
21,682 |
|
|
|
39,231 |
|
Total
net sales
|
|
$ |
171,582 |
|
|
$ |
309,671 |
|
|
$ |
100,563 |
|
|
$ |
150,523 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
(loss) profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RV
Segment
|
|
$ |
1,684 |
|
|
$ |
27,250 |
|
|
$ |
6,346 |
|
|
$ |
12,996 |
|
MH
Segment
|
|
|
(272 |
) |
|
|
7,076 |
|
|
|
1,751 |
|
|
|
4,566 |
|
Total
segment operating profit
|
|
|
1,412 |
|
|
|
34,326 |
|
|
|
8,097 |
|
|
|
17,562 |
|
Amortization
of intangibles
|
|
|
(2,775 |
) |
|
|
(2,123 |
) |
|
|
(1,386 |
) |
|
|
(1,070 |
) |
Corporate
|
|
|
(3,118 |
) |
|
|
(3,967 |
) |
|
|
(1,588 |
) |
|
|
(2,017 |
) |
Goodwill
impairment
|
|
|
(45,040 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
Other
items
|
|
|
(2,550 |
) |
|
|
2,248 |
|
|
|
(930 |
) |
|
|
1,032 |
|
Total
operating (loss) profit
|
|
$ |
(52,071 |
) |
|
$ |
30,484 |
|
|
$ |
4,193 |
|
|
$ |
15,507 |
|
DREW
INDUSTRIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
(Unaudited)
3. Acquisitions,
Goodwill and Other Intangible Assets
Acquisition
of QuickBiteTM
On May
15, 2009, Lippert acquired the patents for the QuickBite CouplerTM, and
other intellectual properties and assets. The innovative design of the
QuickBiteTM
automatic dual jaw locking system eliminates several steps when coupling a
trailer to a tow vehicle, while at the same time making coupling simpler through
the use of an integrated alignment system. The minimum aggregate purchase price
was $0.5 million, of which $0.3 million was paid at closing and the balance will
be paid on May 15, 2010. The acquisition was financed with available cash. In
addition, Lippert will pay an earn-out of $2.50 per unit sold, up to a maximum
of $2.5 million, during the life of the patents. As such, the aggregate purchase
price could increase to a maximum of $3.0 million. The results of the acquired
QuickBiteTM
business have been included in the Company’s Condensed Consolidated Statement of
Operations beginning May 15, 2009.
Total
consideration was recorded as follows (in thousands):
Net
tangible assets acquired
|
|
$ |
239 |
|
Patents
|
|
|
1,130 |
|
Trademarks
|
|
|
200 |
|
Total
consideration
|
|
|
1,569 |
|
Less:
Future minimum payments
|
|
|
(150 |
) |
Less:
Present value of future estimated earn-out payments
|
|
|
(1,080 |
) |
Total
cash consideration
|
|
$ |
339 |
|
Goodwill
and Other Intangible Assets
Goodwill represents the excess of
purchase price and related costs over the fair value assigned to the net
tangible and identifiable intangible assets of businesses acquired. Goodwill and
other intangible assets with indefinite lives are not amortized, but instead are
tested at the reporting unit level for impairment annually, or more frequently
if certain circumstances indicate a possible impairment may exist. The
impairment tests are based on fair value, determined using discounted cash
flows, appraised values or management’s estimates, depending upon the nature of
the assets.
During the first quarter of 2009,
because the Company’s stock price on the New York Stock Exchange was below its
book value, and due to the continued declines in industry shipments of RVs and
manufactured homes, the Company conducted an impairment analysis of the goodwill
of each of its reporting units. The fair value of each reporting unit was
estimated with a discounted cash flow model utilizing internal forecasts and
observable market data to the extent available, to estimate future cash flows.
The forecast included an estimate of long-term future growth rates based on
management’s most recent views of the long-term outlook for each reporting
unit.
At March 31, 2009, the discount rate
used in the discounted cash flow model prepared for the goodwill impairment
analysis was approximately 16.5 percent, derived by applying the weighted
average cost of capital model which weights the cost of debt and equity
financing. The Company also considered the relationship of debt to equity of
other companies similar to the respective reporting units, the risks and
uncertainty inherent in the markets generally and in the Company’s internally
developed forecasts.
DREW
INDUSTRIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
(Unaudited)
Based on the analysis, the carrying
value of the RV and manufactured housing reporting units exceeded their fair
value. As a result, the Company performed the second step of the impairment
test, which required the Company to determine the fair value of each reporting
unit’s assets and liabilities, including all of the tangible and identifiable
intangible assets of each reporting unit, excluding goodwill. The results of the
second step implied that the fair value of goodwill was zero, therefore during
the first quarter the Company recorded a non-cash impairment charge to write-off
the entire $45.0 million of goodwill of these reporting units.
The non-cash goodwill impairment charge
was largely the result of uncertainties in the economy, and in the RV and
manufactured housing industries, as well as the 16.5 percent discount rate used
to determine the present value of projected cash flows.
Estimating
the fair value of reporting units, and the reporting unit’s asset and
liabilities, involves the use of estimates and significant judgments that are
based on a number of factors including actual operating results, future business
plans, economic projections and market data. Actual results may differ from
forecasted results.
Goodwill by reportable segment is as
follows (in
thousands):
|
|
MH Segment
|
|
|
RV Segment
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Balance
- December 31, 2008
|
|
$ |
9,251 |
|
|
$ |
34,862 |
|
|
$ |
44,113 |
|
Adjustments
related to Seating
|
|
|
|
|
|
|
|
|
|
|
|
|
Technologies,
acquired July 1, 2008
|
|
|
- |
|
|
|
927 |
|
|
|
927 |
|
Impairment
charge
|
|
|
(9,251 |
) |
|
|
(35,789 |
) |
|
|
(45,040 |
) |
Balance
- June 30, 2009
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
During the first quarter of 2009, the
Company reviewed the recoverability of the carrying value of other intangible
assets and other long-lived assets, and determined that there was no impairment.
The Company continues to monitor these assets for potential impairment, as a
downturn in the RV, manufactured housing, or marine and leisure industries, or
in the profitability of the Company’s operations, could result in a non-cash
impairment charge of these assets in the future.
4. Cash
and Investments
The Company considers all highly liquid
investments with a maturity of three months or less at the time of purchase to
be cash equivalents. At June 30, 2009, all but $0.1 million of the Company’s
cash balances were in fully FDIC insured accounts.
At June 30, 2009, the Company has $2.0
million invested in 6 month U.S. Treasury Bills that mature in December 2009.
This investment has been recorded at cost which approximates fair
value.
At June 30 and December 31, 2008, the
Company had $41.4 million and $3.8 million, respectively, invested in
high-quality, short-term money market instruments issued and payable in U.S
funds.
DREW
INDUSTRIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
(Unaudited)
5. Inventories
Inventories are stated at the lower of
cost (using the first-in, first-out method) or market. Cost includes material,
labor and overhead; market is replacement cost or realizable value after
allowance for costs of distribution.
Inventories consist of the
following (in
thousands):
|
|
June 30,
|
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
Finished
goods
|
|
$ |
7,718 |
|
|
$ |
12,348 |
|
|
$ |
10,801 |
|
Work
in process
|
|
|
2,287 |
|
|
|
3,811 |
|
|
|
2,946 |
|
Raw
material
|
|
|
48,828 |
|
|
|
83,677 |
|
|
|
80,187 |
|
Total
|
|
$ |
58,833 |
|
|
$ |
99,836 |
|
|
$ |
93,934 |
|
6. Long-Term
Indebtedness
On November 25, 2008, the Company
entered into an agreement (the “Credit Agreement”) for a $50.0 million line of
credit with JPMorgan Chase Bank, N.A., and Wells Fargo Bank N.A. (collectively,
the “Lenders”). The maximum borrowings under the Company’s line of credit can be
increased by $20.0 million upon approval of the Lenders. Interest on borrowings
under the line of credit is designated from time to time by the Company as
either the Prime Rate, but not less than 2.5 percent, plus additional interest
up to 0.8 percent (0 percent at June 30, 2009), or LIBOR plus additional
interest ranging from 2.0 percent to 2.8 percent (2.0 percent at June 30, 2009)
depending on the Company’s performance and financial condition. The Credit
Agreement expires December 1, 2011. At June 30, 2009, the Company had $7.6
million in outstanding letters of credit under the line of credit.
Simultaneously,
the Company entered into a $125.0 million “shelf-loan” facility with Prudential
Investment Management, Inc., and its affiliates (“Prudential”). The facility
provides for Prudential to consider purchasing, at the Company’s request, in one
or a series of transactions, Senior Promissory Notes of the Company in the
aggregate principal amount of up to $125.0 million, to mature no more than
twelve years after the date of original issue of each Senior Promissory Note.
Prudential has no obligation to purchase the Senior Promissory Notes. Interest
payable on the Senior Promissory Notes will be at rates determined by Prudential
within five business days after the Company issues a request to Prudential. The
shelf-loan facility expires November 25, 2011. In June 2009, the Company paid in
full the remaining $4.0 million of outstanding Senior Promissory Notes before
their scheduled maturity date.
Both the line of credit pursuant to the
Credit Agreement and the shelf-loan facility are subject to a maximum leverage
ratio covenant which limits the amount of consolidated outstanding indebtedness
to 2.5 times the trailing twelve-month EBITDA, as defined; provided however,
that if the Company’s trailing twelve-month EBITDA is less than $50 million, the
maximum leverage ratio covenant declines to 1.25 times the trailing twelve-month
EBITDA. Since the Company’s trailing twelve-month EBITDA declined to less than
$50 million at June 30, 2009, the maximum leverage ratio covenant limits the
remaining availability under these facilities collectively to $13.7 million. In
addition to the $27 million in cash and investments at June 30, 2009, the
borrowing availability under our credit and shelf-loan facilities is expected to
be adequate to finance the Company’s anticipated working capital and capital
expenditure requirements.
DREW
INDUSTRIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
(Unaudited)
Pursuant
to the Credit Agreement, Senior Promissory Notes, and certain other loan
agreements, the Company is required to maintain minimum net worth and interest
and fixed charge coverages and to meet certain other financial requirements. At
June 30, 2009, the Company was in compliance with all such requirements, and
expects to remain in compliance for the next twelve months. The Company’s loan
agreements contain prepayment penalties.
Borrowings under both the line of
credit and the shelf-loan facility are secured on a pari passu basis by first
priority liens on the capital stock or other equity interests of each of the
Company’s direct and indirect subsidiaries.
Long-term indebtedness consists of the
following (dollars in
thousands):
|
|
June 30,
|
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
Senior
Promissory Notes payable at the rate of $1,000 per quarter, with interest
payable quarterly at the rate of 5.01% per annum.
|
|
$ |
- |
|
|
$ |
8,000 |
|
|
$ |
6,000 |
|
Notes
payable pursuant to a Credit Agreement with interest at prime rate or
LIBOR plus a rate margin based upon the Company’s
performance
|
|
|
- |
|
|
|
6,000 |
|
|
|
- |
|
Industrial
Revenue Bonds, interest rates at June 30, 2009 of 2.73% to 4.68%, due 2009
through 2017; secured by certain real estate and equipment
|
|
|
1,188 |
|
|
|
3,131 |
|
|
|
1,662 |
|
Other
loans primarily secured by certain real estate and equipment, with fixed
interest rates
|
|
|
- |
|
|
|
2,727 |
|
|
|
1,021 |
|
|
|
|
1,188 |
|
|
|
19,858 |
|
|
|
8,683 |
|
Less
current portion
|
|
|
388 |
|
|
|
12,940 |
|
|
|
5,833 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
long-term indebtedness
|
|
$ |
800 |
|
|
$ |
6,918 |
|
|
$ |
2,850 |
|
The weighted average interest rate for
the Company’s indebtedness was 3.21 percent at June 30, 2009.
7. Stockholders’
Equity
At the Company’s Annual Meeting of
Stockholders held on May 20, 2009, stockholders ratified an amendment to the
Company’s Restated Certificate of Incorporation to decrease the authorized
number of shares of Common Stock from 50 million shares to 30 million shares.
Additionally, stockholders ratified an amendment to the 2002 Equity Award and
Incentive Plan to increase the number of shares of Common Stock available for
issuance pursuant to grants by 900,000 shares.
DREW
INDUSTRIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
(Unaudited)
On
November 29, 2007 the Board of Directors authorized the Company to repurchase up
to 1 million shares of the Company’s Common Stock, of which 447,400 shares were
repurchased in 2008. The Company is authorized to purchase shares from time to
time in the open market, or privately negotiated transactions, or block trades.
The number of shares ultimately repurchased, and the timing of the purchases,
will depend upon market conditions, share price, and other factors. At present,
due to current economic conditions, the Company believes it is prudent to
conserve cash, and does not intend to repurchase shares. However, changing
conditions may cause the Company to reconsider this position.
The following reconciliation details
the denominator used in the computation of basic and diluted earnings per, (in
thousands):
|
|
Six
Months Ended
|
|
|
Three
Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Weighted
average shares outstanding for basic earnings per share
|
|
|
21,662 |
|
|
|
21,967 |
|
|
|
21,682 |
|
|
|
21,920 |
|
Common
stock equivalents pertaining to stock options and contingently issuable
deferred stock units
|
|
|
- |
|
|
|
159 |
|
|
|
56 |
|
|
|
154 |
|
Total
for diluted shares
|
|
|
21,662 |
|
|
|
22,126 |
|
|
|
21,738 |
|
|
|
22,074 |
|
The
weighted average diluted shares outstanding for the six months ended June 30,
2009 and 2008, excludes the effect of 1,983,440 and 1,165,590 stock options,
respectively, and the three months ended June 30, 2009 and 2008, excludes the
effect of 1,582,840 and 1,162,240 stock options, respectively, because including
them in the calculation of total diluted shares would have been
anti-dilutive.
8. Commitments
and Contingencies
Litigation
On or
about January 3, 2007, an action was commenced in the United States District
Court, Central District of California, entitled Gonzalez vs. Drew Industries
Incorporated, Kinro, Inc., Kinro Texas Limited Partnership d/b/a Better Bath
Components; Skyline Corporation, and Skylines Homes, Inc. (Case No.
CV06-08233). The case purports to be a class action on behalf of the
named plaintiff and all others similarly situated in California. Plaintiff
initially alleged, but has not sought certification of, a national
class.
On April
1, 2008, the Court issued an order granting Drew’s motion to dismiss for lack of
personal jurisdiction, resulting in the dismissal of Drew Industries
Incorporated as one of the defendants in the case.
Plaintiff
alleges that certain bathtubs manufactured by Kinro Texas Limited Partnership, a
subsidiary of Kinro, Inc., and sold under the name “Better Bath” for use in
manufactured homes, fail to comply with certain safety standards relating to
flame spread established by the United States Department of Housing and Urban
Development (“HUD”). Plaintiff alleges, among other things, that sale of these
products is in violation of various provisions of the California Consumers Legal
Remedies Act (Cal. Civ. Code Sec. 1770 et seq.), the Magnuson-Moss Warranty Act
(15 U.S.C. Sec. 2301 et seq.), the California Song-Beverly Consumer Warranty Act
(Cal. Civ. Code Sec. 1790 et seq.), and the California Unfair Competition Law
(Cal. Bus. & Prof. Code Sec. 17200 et seq.).
DREW
INDUSTRIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
(Unaudited)
Plaintiff
seeks to require defendants to notify members of the class of the allegations in
the proceeding and the claims made, to repair or replace the allegedly defective
products, to reimburse members of the class for repair, replacement and
consequential costs, to cease the sale and distribution of the allegedly
defective products, and to pay actual and punitive damages and plaintiff’s
attorneys fees.
On
January 29, 2008, the Court issued an Order denying certification of a class
with plaintiff Gonzalez as the class representative. The Court ruled that
plaintiff may not be an appropriate class representative for injunctive relief
because her bathtub had been replaced. The Court granted plaintiff leave to
amend the complaint to add a different plaintiff.
On March
10, 2008, plaintiff amended her complaint to include an additional plaintiff,
Robert Royalty. Plaintiff Royalty states that his bathtub was not tested to
determine whether it complies with HUD standards. Rather, his allegations are
based on “information and belief”, including the testing of plaintiff Gonzalez’s
bathtub and other evidence. Kinro denies plaintiff Royalty’s allegations, and
intends to continue its vigorous defense against both plaintiffs’
claims.
On June
25, 2008, plaintiffs filed a renewed motion for class certification. On October
20, 2008, the Court again denied certification of a class, without prejudice,
which allowed plaintiffs to file a new motion for certification. Plaintiffs
filed a third motion for class certification on December 23, 2008. Defendants’
initial motion seeking summary judgment against plaintiffs’ case, which was
withdrawn pending further discovery, was supplemented and refiled on December
23, 2008.
On May
18, 2009, the Court issued an Order granting partial summary judgment in favor
of defendants, dismissing five of the six claims asserted by plaintiffs, except
for plaintiffs’ claim for violation of California’s Unfair Competition Law (the
“UCL”). The Court also granted plaintiffs’ motion for class certification as to
that one claim.
The Court
denied summary judgment on the UCL claim on the ground that there was a triable
issue of fact as to whether the alleged misrepresentation on defendants’ labels
regarding testing for flame spread rate caused plaintiffs to purchase the
manufactured homes containing bathtubs manufactured by Kinro.
Even
though the Court expressly found that plaintiffs did not actually rely on the
alleged misrepresentations on defendants’ labels, the Court concluded that
California law did not require plaintiffs to establish actual reliance in order
to assert a UCL claim. However, on the same day that the Court issued its Order,
the California Supreme Court issued a long-awaited ruling on the issue of
reliance under the UCL. In its opinion in In re Tobacco II Cases
(S147345, May 18, 2009), the California Supreme
Court held, contrary to the Court’s ruling on the summary judgment motion in
this case, that actual reliance is required to assert a UCL claim similar to the
claim made by plaintiffs. Defendants believe that the ruling of the California
Supreme Court compels the Court in this case to grant summary judgment to
defendants dismissing the final claim and denying class certification to
plaintiffs as to that claim.
As a
result of this development, on May 29, 2009, defendants made a motion for
reconsideration of the Court’s ruling on defendants’ motion for summary judgment
to dismiss the final claim, and on plaintiffs’ motion for class certification as
to that claim. Plaintiffs also filed a motion for reconsideration, arguing that
the California Supreme Court’s ruling required the Court to deny defendants’
motion for summary judgment as to plaintiffs’ claim for violation of the
Consumer Legal Remedies Act, as well as the UCL claim. A decision by the Court
on the motions for reconsideration has not yet been received.
DREW
INDUSTRIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
(Unaudited)
Defendant
Kinro has conducted a comprehensive investigation of the allegations made in
connection with the claims, including with respect to the HUD safety standards,
prior test results, testing procedures, and the use of labels. In addition, at
Kinro’s initiative, independent laboratories conducted multiple tests on
materials used by Kinro in the manufacture of bathtubs, the results of which
tests indicate that Kinro’s bathtubs are in compliance with HUD
regulations.
Based on
the foregoing investigation and testing, the Court’s ruling on the summary
judgment motion, and the ruling by the California Supreme Court, Kinro believes
that plaintiffs may not be able to prove the essential elements of their claims,
and defendants intend to vigorously defend against the claims. In addition,
Kinro believes that no remedial action is required or appropriate under HUD
safety standards.
In
October 2007, the parties participated in voluntary non-binding mediation in an
effort to reach a settlement. Kinro made an offer of settlement consistent with
its belief regarding the merits of plaintiffs’ allegations. Although no
settlement was reached, the parties have since had intermittent discussions. The
outcome of such settlement efforts cannot be predicted.
If
defendants’ motion for reconsideration is denied, so that the Court maintains
its rulings denying defendants’ motion for summary judgment as to the UCL claim
and granting plaintiffs’ motion for class certification with respect to that
claim or others, and if plaintiffs pursue their claims, protracted litigation
could result. Although the outcome of such litigation cannot be predicted, if
certain essential findings are ultimately unfavorable to Kinro, the Company
could sustain a material liability. The Company’s liability insurer denied
coverage on the ground that plaintiffs did not sustain any personal injury or
property damage.
In the
normal course of business, the Company is subject to proceedings, lawsuits and
other claims. All such matters are subject to uncertainties and outcomes that
are not predictable with assurance. While these matters could materially affect
operating results when resolved in future periods, it is management’s opinion
that after final disposition, including anticipated insurance recoveries, any
monetary liability or financial impact to the Company beyond that provided in
the Condensed Consolidated Balance Sheet as of June 30, 2009, would not be
material to the Company’s financial position or annual results of
operations.
Other
Income
In
February 2004, the Company sold certain intellectual property rights for $4.0
million, consisting of cash of $0.1 million at closing and a note of $3.9
million (the “Note”), payable over five years. The Note was initially recorded
net of a reserve of $3.4 million. In January 2008, the Company received a
scheduled payment of principal and interest of $0.8 million, which had been
previously fully reserved, and therefore recorded a pre-tax gain. The Company
did not receive the final scheduled payment of $1.0 million in January 2009;
however, in both February and March 2009 the Company received principal payments
of $0.1 million, which were previously fully reserved, and therefore recorded a
pre-tax gain of $0.2 million. The Company is currently attempting to collect the
balance due of $0.8 million.
DREW
INDUSTRIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
(Unaudited)
Facilities
Consolidation
In response to the slowdowns in both
the RV and manufactured housing industries, over the past few years the Company
has consolidated the operations previously conducted at 28 facilities and
reduced staff levels. The severance and operational relocation costs incurred by
the Company were not significant. The Company operated 27 facilities at June 30,
2009, and is continuing to explore additional facility consolidation
opportunities.
At June 30, 2009, the Company had seven
facilities and vacant land listed for sale, with an aggregate carrying value of
$9.8 million. In addition, the Company is attempting to sublease three vacant
leased facilities. In April 2009, the Company entered into a two year lease at
$25,000 per month for another vacant owned facility, which has a carrying value
of $3.0 million. This lease also contains an option for the lessee to purchase
the facility for $3.4 million.
Use
of Estimates
The preparation of these financial
statements in conformity with accounting principles generally accepted in the
United States of America requires the Company to make estimates and judgments
that affect the reported amounts of assets, liabilities, revenues and expenses,
and related disclosure of contingent assets and liabilities. On an ongoing
basis, the Company evaluates its estimates, including, but not limited to, those
related to product returns, accounts receivable, inventories, notes receivable,
goodwill and other intangible assets, income taxes, warranty obligations,
self-insurance obligations, lease terminations, asset retirement obligations,
long-lived assets, post-retirement benefits, stock-based compensation, segment
allocations, and contingencies and litigation. The Company bases its estimates
on historical experience, other available information and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other resources.
Actual results may differ from these estimates under different assumptions or
conditions.
9. Fair
Value Measurements
Effective January 1, 2008, the
Company adopted Statement of Financial Accounting Standards (“SFAS”) 157 for all
financial assets and liabilities and for non-financial assets and liabilities
that are recognized or disclosed in the financial statements at fair value on a
recurring basis. Additionally, effective January 1, 2009, the Company
adopted SFAS 157 for non-financial assets and liabilities that are recognized or
disclosed in the financial statements at fair value on a non-recurring basis.
Although such adoption did not have a material impact on the Company’s Condensed
Consolidated Financial Statements for the six months ended June 30, 2009, the
pronouncement may impact the Company’s accounting for future business
combinations, impairment charges and restructuring charges.
SFAS 157 establishes a new
framework for measuring fair value and expands related disclosures. The
SFAS 157 framework requires fair value to be determined based on the
exchange price that would be received for an asset, or paid to transfer a
liability (an exit price), in the principal or most advantageous market for the
asset or liability in an orderly transaction between market
participants.
DREW
INDUSTRIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
(Unaudited)
The valuation techniques required by
SFAS 157 are based upon observable and unobservable inputs. Observable inputs
reflect market data obtained from independent sources, while unobservable inputs
reflect the Company’s market assumptions. SFAS 157 requires the following fair
value hierarchy:
|
·
|
Level
1 - Quoted prices (unadjusted) for identical assets and liabilities in
active markets that the Company has the ability to access at the
measurement date.
|
|
·
|
Level
2 - Quoted prices for similar assets and liabilities in active markets;
quoted prices for identical or similar assets and liabilities in markets
that are not active; and inputs other than quoted prices that are
observable for the asset or liability, including interest rates, yield
curves and credit risks, or inputs that are derived principally from or
corroborated by observable market data through
correlation.
|
|
·
|
Level
3 - Values determined by models, significant inputs to which are
unobservable and are primarily based on internally derived assumptions
regarding the timing and amount of expected cash
flows.
|
Long-lived
assets, including goodwill and other intangible assets, may be measured at fair
value if such assets are held for sale or if there is a determination that the
asset is impaired. The determination of fair value is based on the best
information available, including internal cash flow estimates discounted at an
appropriate interest rate, quoted market prices when available, market prices
for similar assets, broker quotes and independent appraisals, as appropriate
under SFAS 157.
During the first quarter of 2009,
because the Company’s stock price on the New York Stock Exchange was below its
book value, and due to the continued declines in industry shipments of RVs and
manufactured homes, the Company conducted an impairment analysis of its
goodwill, and recorded a non-cash impairment charge of $45.0 million. This
evaluation was completed using Level 3 inputs. See Note 3 to Notes to
Condensed Consolidated Financial Statements.
During the second quarter of 2009, the
Company acquired the patents for the QuickBite CouplerTM, and
other intellectual properties and assets. The Company used Level 3 inputs to
value the assets acquired, as well as the liability for future earn-out
payments. See Note 3 to Notes to Condensed Consolidated Financial
Statements.
In addition, the Company reviewed the
recoverability of the carrying value of facilities and vacant land listed for
sale using broker quotes and management’s estimates, which are Level 3 inputs.
During the six months ended June 30, 2009, the Company recorded impairment
charges of $1.4 million, of which $0.9 million was recorded in the second
quarter of 2009, on facilities with an adjusted carrying value of $5.1 million
at June 30, 2009. These impairment charges are included in selling, general and
administrative expenses in the Condensed Consolidated Statements of
Operations.
10. New
Accounting Pronouncements
In
May 2009, the FASB issued SFAS No. 165, "Subsequent Events." SFAS
No. 165 establishes authoritative accounting and disclosure guidance for
recognized and non-recognized subsequent events that occur after the balance
sheet date but before financial statements are issued. SFAS No. 165 also
requires disclosure of the date through which an entity has evaluated subsequent
events and the basis for that date. The provisions of SFAS No. 165 are
effective for interim or annual periods ending after June 15, 2009. The adoption
of this standard for the quarterly period ended June 30, 2009 had no impact on
the Company.
DREW
INDUSTRIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
(Unaudited)
In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations.” SFAS
141(R) requires assets acquired and liabilities assumed in connection with a
business combination to be measured at fair value as of the acquisition date,
acquisition related costs incurred prior to the acquisition to be expensed, and
contractual contingencies to be recognized at fair value as of the acquisition
date. The provisions of SFAS No. 141(R) are effective for fiscal years
beginning after December 15, 2008. The adoption of this standard on January 1,
2009 did not have a material impact on the Company.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value
Measurements”, which establishes a framework for reporting fair value and
expands disclosures about fair value measurements. The provisions of SFAS
No. 157 are effective for fiscal years beginning after November 15, 2007.
However, the FASB deferred the effective date of SFAS 157, until fiscal years
beginning after November 15, 2008, as it relates to fair value measurement
requirements for nonfinancial assets and liabilities that are not remeasured at
fair value on a recurring basis. The Company adopted the applicable provisions
of this standard on January 1, 2009 and 2008, respectively. See Note
9 to Notes to Condensed Consolidated Financial Statements.
DREW
INDUSTRIES INCORPORATED
ITEM
2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Company has two reportable
segments, the recreational vehicle (“RV”) products segment (the “RV Segment”)
and the manufactured housing products segment (the “MH Segment”). The Company’s
operations are conducted through its wholly-owned operating subsidiaries, Kinro,
Inc. and its subsidiaries (collectively, “Kinro”) and Lippert Components, Inc.
and its subsidiaries (collectively, “Lippert”). Each has operations in both the
RV and MH Segments. At June 30, 2009, the Company operated 27 facilities in the
United States.
The RV Segment accounted for 76 percent
of consolidated net sales for the six months ended June 30, 2009 and 72 percent
of the annual consolidated net sales for 2008. The RV Segment manufactures a
variety of products used primarily in the production of RVs,
including:
●Towable
RV steel chassis
|
●Aluminum
windows and screens
|
●Towable
RV axles and suspension solutions
|
●Chassis
components
|
●RV
slide-out mechanisms and solutions
|
●Furniture
and mattresses
|
●Thermoformed
products
|
●Entry and baggage
doors
|
●Toy hauler ramp
doors
|
●Entry
steps
|
●Manual,
electric and hydraulic stabilizer
|
●Other
towable accessories
|
and
lifting systems
|
●Specialty
trailers for hauling boats, personal
|
|
watercraft,
snowmobiles and equipment
|
More than 90 percent of the Company’s
RV Segment sales are of products used in travel trailers and fifth-wheel RVs.
The balance represents sales of components for motorhomes, as well as sales of
specialty trailers and axles for specialty trailers. Travel trailers and
fifth-wheel RVs accounted for 78 percent and 74 percent of all RVs shipped by
the industry in 2008 and 2007, respectively, up from 61 percent in
2001.
The MH Segment, which accounted for 24
percent of consolidated net sales for the six months ended June 30, 2009 and 28
percent of the annual consolidated net sales for 2008, manufactures a variety of
products used in the production of manufactured homes and to a lesser extent,
modular housing and office units, including:
●Vinyl
and aluminum windows and screens
|
●Steel
chassis
|
●Thermoformed
bath and kitchen products
|
●Steel
chassis parts
|
●Axles
|
|
Sales of products other than components
for RVs and manufactured homes are not considered significant. However, certain
of the Company’s MH Segment customers manufacture both manufactured homes and
modular homes, and certain of the products manufactured by the Company are
suitable for both manufactured homes and modular homes. As a result, the Company
is not always able to determine in which type of home its products are
installed. Intersegment sales are insignificant.
DREW
INDUSTRIES INCORPORATED
ITEM
2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
BACKGROUND
Recreational
Vehicle Industry
An RV is a vehicle designed as
temporary living quarters for recreational, camping, travel or seasonal
use. RVs may be motorized (motorhomes) or towable (travel trailers,
fifth-wheel travel trailers, folding camping trailers and truck
campers). Towable RVs represented 88 percent of the 237,000 RVs produced in
2008, while motorhomes represented the remaining 12 percent of RVs produced.
Motorhomes have a significantly higher average retail selling price than towable
RVs. The Company sells minimal content for folding camping trailers or truck
campers.
During 2008, and continuing into the
first six months of 2009, retail sales of RVs declined because of severe
economic conditions, including low consumer confidence, limited credit
availability for both dealers and consumers, and continued weakness in the real
estate and mortgage markets. As a result, RV manufacturers significantly reduced
their output, which reduced sales by the Company of components for new RVs. As a
result of these conditions, according to the Recreation Vehicle Industry
Association (“RVIA”), industry-wide wholesale shipments of travel trailers and
fifth-wheel RVs, the Company’s primary RV markets, declined 61 percent to 24,800
units for the first quarter of 2009. However, trends improved during the second
quarter of 2009, with industry-wide wholesale shipments of travel trailers and
fifth-wheel RVs down 44 percent compared to the second quarter of 2008, to
34,600 units.
While the
Company measures its RV sales against industry-wide wholesale shipment
statistics, it believes the underlying health of the RV industry is determined
by retail demand. Throughout 2008 and the first six months of 2009, retail sales
remained below prior year levels. A comparison of the year over year percentage
change in industry-wide wholesale shipments and retail shipments, as reported by
Statistical Surveys, Inc., of travel trailers and fifth-wheel RVs is as
follows:
|
|
Wholesale
|
|
|
Retail
|
|
Quarter
ended March 31, 2008
|
|
|
(8)%
|
|
|
|
(16)%
|
|
Quarter
ended June 30, 2008
|
|
|
(18)%
|
|
|
|
(19)%
|
|
Quarter
ended September 30, 2008
|
|
|
(38)%
|
|
|
|
(27)%
|
|
Quarter
ended December 31, 2008
|
|
|
(63)%
|
|
|
|
(36)%
|
|
Quarter
ended March 31, 2009
|
|
|
(61)%
|
|
|
|
(38)%
|
|
Quarter
ended June 30, 2009
|
|
|
(44)%
|
|
|
|
(33)% (1) |
|
(1) Through
May 2009, the latest period for which retail information is
available.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31, 2008
|
|
|
(29)%
|
|
|
|
(23)%
|
|
Year
ended December 31, 2007
|
|
|
(10)%
|
|
|
|
4%
|
|
Retail
statistics, reported by Statistical Surveys, Inc., do not include sales of RVs
in Canada. The RVIA reported that over one in five towable RVs was shipped to
Canada in 2008.
Over the
past few quarters, retail sales of travel trailers and fifth-wheel RVs did not
decline as sharply as industry-wide wholesale shipments, indicating that dealer
inventories declined. A recent survey of RV dealers indicated that dealer
inventories declined to 87 days sales in the second quarter of 2009, from 123
days sales in the second quarter of 2008. In that survey, only 8 percent of
dealers said their inventories were too high.
DREW
INDUSTRIES INCORPORATED
ITEM
2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
Industry-wide
wholesale shipments of motorhomes, components for which represent about 3
percent of Drew’s RV Segment net sales, were down 72 percent during the first
six months of 2009. Retail sales of motorhomes were down 45 percent through May
2009, the latest period for which retail information is available.
For the balance of 2009, the Company
anticipates that continued weakness in the economy will cause consumers to be
cautious about purchasing discretionary big-ticket items, such as RVs. The RVIA
has projected a 39 percent decline in industry-wide wholesale shipments of
travel trailers and fifth-wheel RVs for 2009, to 112,100 units. This projection
by the RVIA, prepared in early June 2009, implies that the industry-wide
wholesale shipments of travel trailers and fifth-wheel RVs for the second half
of 2009 will be 52,700 units, a decline of 12 percent from the same period of
2008. In addition, the demand for larger travel trailer and fifth-wheel RVs,
which typically contain more of the Company’s product than smaller units, has
experienced a steeper decline.
The RVIA has projected a 25 percent
increase in industry-wide wholesale shipments of travel trailers and fifth-wheel
RVs for 2010, to 140,200 units. Following the last three recessions,
industry-wide shipments of RVs grew by more than 20 percent in the first year of
the recovery. Consumer confidence and the availability of financing have
historically been important factors in the overall growth in the RV
industry.
RV consumer and dealer floor-plan loans
are included in the Term Asset-Backed Securities Loan Facility (TALF) under the
Troubled Assets Relief Program (TARP). The Small Business Administration also
announced it would offer government guaranteed loans to finance inventory of
eligible RV dealers. The impact of these stimulus programs has been modest so
far, and any future impact cannot be determined at this point.
In the long-term, the Company expects
RV industry sales to be driven by positive demographics, as demand for RVs is
strongest from the over 50 age group, which is the fastest growing segment of
the U.S. population. U.S. Census Bureau projections released in March 2004
project that there will be in excess of 20 million more people over the age of
50 by 2014.
In 1997, the RVIA began a generic
advertising campaign promoting the RV lifestyle. The current phase is targeted
at both parents aged 30-49 with children at home, as well as couples aged 50-64
with no children at home. The popularity of traveling in RVs to NASCAR and other
sporting events, and using RVs as second homes, also appears to motivate
consumer demand for RVs.
Manufactured
Housing Industry
Manufactured homes are built entirely
in a factory on permanent steel undercarriages or chassis, transported to a home
site, and installed pursuant to a federal building code administered by the U.S.
Department of Housing and Urban Development (“HUD”). The federal standards
regulate manufactured housing design and construction, strength and durability,
transportability, fire resistance, energy efficiency and quality. The HUD Code
also sets performance standards for the heating, plumbing, air conditioning,
thermal and electrical systems. It is the only federally regulated national
building code. On-site additions, such as garages, decks and porches, often add
to the attractiveness of manufactured homes and must be built to local, state or
regional building codes. A manufactured home may be sited on owned or leased
land.
DREW
INDUSTRIES INCORPORATED
ITEM
2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
Industry-wide wholesale production of
manufactured homes has declined approximately 78 percent since 1998, including a
14 percent decline in 2008, to 81,900 homes. This decade-long decline was
primarily the result of limited credit availability because of high credit
standards applied to purchases of manufactured homes, high down payment
requirements, and high interest rate spreads between conventional mortgages for
site-built homes and chattel loans for manufactured homes (chattel loans are
loans secured only by the home which is sited on leased land). In addition, in
the several years leading up to 2008, many traditional buyers of manufactured
homes were able to purchase site-built homes instead of manufactured homes, as
subprime mortgages were readily available at unrealistic terms for site-built
homes.
The Institute for Building Technology
and Safety (“IBTS”) reported that for the first six months of 2009,
industry-wide wholesale production of manufactured homes decreased 45 percent
over the first six months of 2008, including a 44 percent decline during the
second quarter of 2009. In the first six months of 2009, the size of the average
manufactured home also declined. Manufactured homes contain one or more “floors”
or sections which can be joined to make larger homes. For the first six months
of 2009, larger multi-section manufactured homes represented 62 percent of the
total manufactured homes produced, down from 63 percent and 68 percent for all
of 2008 and 2007, respectively, and 80 percent in all of 2003. Multi-section
manufactured homes contain more of the Company’s products than single-section
manufactured homes.
The decline in multi-section homes over
the past few years was apparently partly due to the weak site-built housing
market, as a result of which many retirees have not been able to sell their
primary residence, or may have been unwilling to sell at currently depressed
prices, and purchase a more affordable manufactured home as many retirees have
done historically.
Legislation enacted in July 2008
increased Federal Housing Administration (“FHA”) insured lending limits for
chattel mortgages for manufactured homes from less than $49,000 to nearly
$70,000. This new legislation also provides for future adjustments based on
inflation. The final regulations for the insured lending limits were put into
place in March 2009. The Small Business Administration also announced it would
offer government guaranteed loans to finance inventory of eligible manufactured
housing dealers. Further, the American Recovery and Reinvestment Act of 2009
authorizes a tax credit of the lesser of 10 percent of the purchase price, or
$8,000, for qualified first-time home buyers purchasing a principal residence
during 2009, which applies to manufactured housing. This credit is currently
scheduled to expire on November 30, 2009. The impact of these programs has been
modest so far, and any future impact on demand for new manufactured homes cannot
be determined at this point.
The Company believes the manufactured
housing industry will begin to experience a modest recovery once the recession
ends and Americans begin to look for affordable housing alternatives. While
these factors point to the potential for future growth, because of the current
real estate and economic environment, low consumer confidence, and tight credit
markets, the Company currently expects industry-wide wholesale production of
manufactured homes to remain low for the balance of 2009.
The Company also believes that
long-term growth prospects for manufactured housing may be positive because of
(i) the quality and affordability of the home, (ii) the favorable demographic
trends, including the increasing number of retirees who, in the past, had
represented a significant market for manufactured homes, (iii) pent-up demand by
retirees who have been unable or unwilling to sell their primary residence and
purchase a manufactured home, and (iv) the unavailability of subprime mortgages
for site-built homes.
DREW
INDUSTRIES INCORPORATED
ITEM
2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
RESULTS
OF OPERATIONS
Net sales
and operating (loss) profit are as follows (in thousands):
|
|
Six
Months Ended
|
|
|
Three
Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Net
sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
RV
Segment
|
|
$ |
131,161 |
|
|
$ |
235,247 |
|
|
$ |
78,881 |
|
|
$ |
111,292 |
|
MH
Segment
|
|
|
40,421 |
|
|
|
74,424 |
|
|
|
21,682 |
|
|
|
39,231 |
|
Total
net sales
|
|
$ |
171,582 |
|
|
$ |
309,671 |
|
|
$ |
100,563 |
|
|
$ |
150,523 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
(loss) profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RV
Segment
|
|
$ |
1,684 |
|
|
$ |
27,250 |
|
|
$ |
6,346 |
|
|
$ |
12,996 |
|
MH
Segment
|
|
|
(272 |
) |
|
|
7,076 |
|
|
|
1,751 |
|
|
|
4,566 |
|
Total
segment operating profit
|
|
|
1,412 |
|
|
|
34,326 |
|
|
|
8,097 |
|
|
|
17,562 |
|
Amortization
of intangibles
|
|
|
(2,775 |
) |
|
|
(2,123 |
) |
|
|
(1,386 |
) |
|
|
(1,070 |
) |
Corporate
|
|
|
(3,118 |
) |
|
|
(3,967 |
) |
|
|
(1,588 |
) |
|
|
(2,017 |
) |
Goodwill
impairment
|
|
|
(45,040 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
Other
items
|
|
|
(2,550 |
) |
|
|
2,248 |
|
|
|
(930 |
) |
|
|
1,032 |
|
Total
operating (loss) profit
|
|
$ |
(52,071 |
) |
|
$ |
30,484 |
|
|
$ |
4,193 |
|
|
$ |
15,507 |
|
Consolidated
Highlights
|
§
|
Excluding
the impact of sales price increases and acquisitions, there was a $62
million (41 percent) “organic” decline in net sales in the second quarter
of 2009, as compared to the second quarter of 2008, primarily as a result
of the 44 percent decline in industry-wide wholesale shipments of travel
trailers and fifth-wheel RVs in the second quarter of 2009, as well as a
44 percent decline in industry-wide wholesale production of manufactured
homes.
|
Partially
offsetting the industry declines during the second quarter of 2009, the Company
continued to achieve market share gains, led by recently-introduced products, in
particular, suspension and hydraulic products, jack stabilizers and RV entry
doors. Additional market share gains came from the Company’s Seating Technology
furniture products. The Company’s average furniture content per travel trailer
and fifth wheel produced by the RV industry for the twelve months ended June
2009 was approximately $200 per unit, an increase of $35 per unit, or 20
percent, from the average content of approximately $165 per unit when Seating
Technology was acquired in July 2008.
|
§
|
Net
income for the second quarter of 2009 declined $6.6 million, or 72
percent, from the second quarter of 2008, primarily due to the decrease in
net sales, partially offset by fixed cost reductions. In addition, the
Company recorded facility write-downs of $0.9 million, or $0.5 million
after taxes, during the 2009 second quarter, as compared to a net gain on
facility disposals of $1.4 million, or $0.8 million after taxes, in the
2008 second quarter.
|
DREW
INDUSTRIES INCORPORATED
ITEM
2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
|
§
|
During
the second quarter of 2009, the Company increased cash and investments by
$13 million, to nearly $27 million, and reduced total debt by more than $5
million, to $1 million. This was accomplished by reducing inventory by
over $16 million during the second quarter of 2009, which more than offset
the seasonal increase in accounts receivable. The Company expects strong
cash flow to continue over the next several quarters, as the Company
anticipates it will further reduce inventory levels by $8 million to $10
million in addition to the $35 million reduction in the first six months
of 2009.
|
|
§
|
For
the balance of 2009, the Company anticipates that continued weakness in
the economy, a tight credit market, low consumer confidence, and weakness
in the real estate and mortgage markets, would cause consumers to remain
cautious, which would likely continue to impact purchases of manufactured
homes and discretionary big-ticket items, such as
RVs.
|
However,
while there are uncertainties, it appears that many of the RV producers will
continue to produce five days a week for the balance of the third quarter of
2009, as opposed to the lighter production schedules earlier in the year. It is
difficult to anticipate production levels beyond September, particularly during
the traditionally slower winter months. The RV and manufactured housing
industries are likely to face additional challenges in the latter part of 2009
and the beginning of 2010. If retail sales slow further, RV manufacturers and
manufactured home producers could reduce their output, which would negatively
affect the Company.
|
§
|
In
response to the current economic environment, the Company has taken the
following steps:
|
|
·
|
Increased
market share on existing products.
|
|
·
|
Introduced
new products.
|
|
·
|
Reduced
its workforce and production capacity to be more in line with anticipated
demand.
|
|
·
|
Reduced
fixed overhead costs.
|
|
·
|
Reduced
costs by combining certain administrative functions and sales efforts of
its subsidiaries.
|
Cost
reduction measures benefitted the Company’s operating results in the second
quarter of 2009 by more than $2 million, compared to the second quarter of 2008,
and will benefit the full year 2009 operating results by nearly $10 million as
compared to the full year 2008. Additional cost reduction measures are expected
to be implemented during the second half of 2009.
Further,
if exceptional opportunities for market share and product line expansion arise
due to current economic conditions, the Company’s experienced operating
management team, strong balance sheet and solid cash flow should allow it to
respond quickly to such opportunities.
|
§
|
Steel
and aluminum are among the Company’s principal raw materials. Since late
2007, the costs of steel and aluminum have been volatile. During the
second quarter of 2009, raw material costs temporarily declined, but have
recently risen 5 percent to 15 percent, depending upon the type of raw
material.
|
DREW
INDUSTRIES INCORPORATED
ITEM
2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
While the
Company has historically been able to obtain sales price increases to offset the
majority of raw material cost increases, there can be no assurance that future
cost increases, if any, can be partially or fully passed on to customers. The
Company also continues to explore improved product design, efficiency
improvements, and alternative sources of raw materials and components, both
domestic and imported.
|
§
|
A
competitor of the Company recently announced it was ceasing production of
windows and most doors for manufactured homes. As a result, the Company
has received requests for quotes from many of the competitor’s former
manufactured housing window and door customers. This presents the
potential for the Company to add $10 million or more in annual sales, even
in the current environment.
|
|
§
|
Net
sales in July 2009 are expected to be down approximately 11 percent
year-over-year, an improvement over the 33 percent net sales decline in
the 2009 second quarter. July 2009 had one more shipping day than July
2008. In 2009, the annual July 4th holiday shut-downs by RV and
manufactured home producers generally lasted 1 week, compared to the 2
week furloughs taken in 2008 at that
time.
|
RV
Segment – Second Quarter
Net sales
of the RV Segment in the second quarter of 2009 decreased 29 percent, or $32
million, as compared to the second quarter of 2008 due to:
|
·
|
An
‘organic’ sales decline of approximately $41 million, or 39 percent, of
RV-related products. This decline was due largely to the 44 percent
decrease in industry-wide wholesale shipments of travel trailers and
fifth-wheel RVs, the Company’s primary RV
market.
|
|
·
|
An
‘organic’ sales decline of approximately 45 percent or $2 million in
specialty trailers due primarily to a severe industry-wide decline in
sales of small and medium size boats, particularly on the West Coast, the
Company’s primary specialty trailer
market.
|
Partially offset by:
|
·
|
Sales
generated from acquisitions, aggregating approximately $8
million.
|
|
·
|
Sales
price increases of approximately $3 million, primarily due to raw material
cost increases in 2008.
|
DREW
INDUSTRIES INCORPORATED
ITEM
2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
The trend in the Company’s average
product content per RV is an indicator of the Company’s overall market share.
Content per RV is also impacted by changes in selling prices for the Company’s
products. The Company’s average product content per type of RV, calculated based
upon the Company’s net sales of components for the different types of RVs, for
the twelve months ended June 30, divided by the industry-wide wholesale
shipments of the different types of RVs for the twelve months ended June 30, was
as follows:
|
|
2009
|
|
|
2008
|
|
|
Percent Change
|
|
Content
per Travel Trailer and Fifth-Wheel RV
|
|
$ |
2,071 |
|
|
$ |
1,725 |
|
|
|
20 |
% |
Content
per Motorhome
|
|
$ |
471 |
|
|
$ |
505 |
|
|
|
(7 |
)% |
Content
per all RVs
|
|
$ |
1,718 |
|
|
$ |
1,381 |
|
|
|
24 |
% |
Sales of certain RV components have
been reclassified between travel trailer and fifth-wheel RVs, and motorhomes in
prior periods.
According
to the RVIA, industry production for the twelve months ended June 30, was as
follows:
|
|
2009
|
|
|
2008
|
|
|
Percent Change
|
|
Travel
Trailer and Fifth- Wheel RVs
|
|
|
119,000 |
|
|
|
242,900 |
|
|
|
(51 |
)% |
Motorhomes
|
|
|
13,600 |
|
|
|
45,300 |
|
|
|
(70 |
)% |
All
RVs
|
|
|
147,200 |
|
|
|
319,900 |
|
|
|
(54 |
)% |
Operating
profit of the RV Segment in the second quarter of 2009 decreased 51 percent to
$6.3 million, compared to the second quarter of 2008, largely due to the decline
in sales. The decline in RV Segment operating profit was 15 percent of the
‘organic’ decline in net sales, a smaller percentage decline than the Company
would typically expect.
The
operating margin of the RV Segment in the second quarter of 2009 was positively
impacted by:
|
·
|
Implementation
of cost-cutting measures which reduced cost of
sales.
|
|
·
|
Lower
warranty, health insurance, supplies and repair
costs.
|
|
·
|
A
decrease in selling, general and administrative expenses to 11.6 percent
of net sales in the second quarter of 2009 from 12.1 percent of net sales
in the second quarter of 2008, largely due to the implementation of fixed
cost reductions, partially offset by the spreading of fixed administrative
costs over a smaller sales base. Also, incentive compensation was lower as
a percent of sales in the second quarter of 2009 because year-to-date
operating profit was below the previously established incentive
compensation hurdles.
|
Partially offset by:
|
·
|
Higher
raw material costs.
|
|
·
|
Labor
inefficiencies due to the drop in
sales.
|
|
·
|
The
spreading of fixed manufacturing costs over a smaller sales
base.
|
RV
Segment – Year to Date
Net sales
of the RV Segment in the first six months of 2009 decreased 44 percent, or $104
million, as compared to the same period of 2008 due to:
|
·
|
An
‘organic’ sales decline of approximately $118 million, or 52 percent, of
RV-related products. This decline was due largely to the 53 percent
decrease in industry-wide wholesale shipments of travel trailers and
fifth-wheel RVs, the Company’s primary RV market. Also, many of the
towable RVs produced by the industry over the last year have included
fewer of the features and options ordinarily provided by the
Company.
|
DREW
INDUSTRIES INCORPORATED
ITEM
2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
|
·
|
An
‘organic’ sales decline of approximately 58 percent or $5 million in
specialty trailers due primarily to a severe industry-wide decline in
sales of small and medium size boats, particularly on the West Coast, the
Company’s primary specialty trailer
market.
|
Partially offset by:
|
·
|
Sales
generated from acquisitions, aggregating approximately $13
million.
|
|
·
|
Sales
price increases of approximately $6 million, primarily due to raw material
cost increases in 2008.
|
Operating
profit of the RV Segment in the first six months of 2009 decreased 94 percent to
$1.7 million, compared to the first six months of 2008, largely due to the
decline in sales and $2.9 million of extra expenses, recorded in the first
quarter of 2009, related to plant consolidations, staff reductions, increased
bad debts, and obsolete inventory and tooling. Excluding these extra expenses,
the Company’s RV Segment had an operating profit of $4.6 million in the first
six months of 2009, a decrease of $22.7 million from the segment operating
profit of $27.3 million in the same period last year. This adjusted decline in
RV Segment operating profit was 18 percent of the ‘organic’ decline in net
sales, a slightly smaller percentage decline than the Company would typically
expect.
The
operating margin of the RV Segment in the first six months of 2009 was
positively impacted by:
|
·
|
Implementation
of cost-cutting measures which reduced cost of
sales.
|
|
·
|
Lower
supplies and repair costs.
|
Partially offset by:
|
·
|
Higher
raw material costs.
|
|
·
|
Labor
inefficiencies due to the sharp drop in
sales.
|
|
·
|
The
spreading of fixed manufacturing costs over a smaller sales
base.
|
|
·
|
An
increase in selling, general and administrative expenses to 13.6 percent
of net sales in the first six months of 2009 from 12.0 percent of net
sales in the first six months of 2008, largely due to an increase in bad
debt expense, as well as the spreading of fixed administrative costs over
a smaller sales base, partially offset by the implementation of fixed cost
reductions. Also, incentive compensation was lower as a percent of sales
in the first six months of 2009 because year-to-date operating profit was
below the previously established incentive compensation
hurdles.
|
|
MH
Segment – Second Quarter
|
Net sales of the MH Segment in the
second quarter of 2009 decreased 45 percent, or $18 million, from the second
quarter of 2008. Excluding $1 million in sales price increases, net sales of the
MH Segment declined 47 percent, compared to a 44 percent decrease in
industry-wide production of manufactured homes. The 47 percent ‘organic’
decrease in sales of the Company’s MH Segment was greater than the manufactured
housing industry decline due partly to a reduction in the average size of the
homes produced by the manufactured housing industry, which require less of the
Company’s products, a decline in modular and office units, and customer
mix.
DREW
INDUSTRIES INCORPORATED
ITEM
2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
MH Segment sales in the 2009 second
quarter included $1 million of components for homes purchased by the Federal
Emergency Management Agency (“FEMA”). The Company expects approximately $1
million of additional FEMA-related sales in the third quarter of
2009.
The trend in the Company’s average
product content per manufactured home is an indicator of the Company’s overall
market share. Manufactured homes contain one or more “floors” or sections which
can be joined to make larger homes. Content per manufactured home and content
per floor is also impacted by changes in selling prices for the Company’s
products. The Company’s average product content per manufactured home produced
by the industry and total manufactured home floors produced by the industry,
calculated based upon the Company’s net sales of components for manufactured
homes for the twelve months ended June 30, divided by the number of manufactured
homes and manufactured home floors produced by the industry, respectively, for
the twelve months ended June 30, was as follows:
|
|
2009
|
|
|
2008
|
|
|
Percent Change
|
|
Content
per Home Produced
|
|
$ |
1,657 |
|
|
$ |
1,615 |
|
|
|
3 |
% |
Content
per Floor Produced
|
|
$ |
1,010 |
|
|
$ |
962 |
|
|
|
5 |
% |
According
to the IBTS, industry production for the twelve months ended June 30, was as
follows:
|
|
2009
|
|
|
2008
|
|
|
Percent Change
|
|
Total
Homes Produced
|
|
|
62,100 |
|
|
|
92,300 |
|
|
|
(33 |
)% |
Total
Floors Produced
|
|
|
102,000 |
|
|
|
154,900 |
|
|
|
(34 |
)% |
Operating
profit of the MH Segment in the second quarter of 2009 decreased 62 percent to
$1.8 million, compared to the second quarter of 2008, primarily due to the
decrease in net sales. The decline in MH Segment operating profit was
15 percent of the ‘organic’ decline in net sales, a smaller percentage decline
than the Company would typically expect.
The
operating margin of the MH Segment in the second quarter of 2009 was positively
impacted by:
|
·
|
A
temporary decline in raw material costs. However, depending upon the type
of raw material, costs have recently risen 5 percent to 15
percent.
|
|
·
|
Implementation
of cost-cutting measures which reduced cost of
sales.
|
Partially offset by:
|
·
|
The
spreading of fixed manufacturing costs over a smaller sales
base.
|
|
·
|
Labor
inefficiencies due to the drop in
sales.
|
|
·
|
An
increase in selling, general and administrative expenses to 17.3 percent
of net sales in the second quarter of 2009 from 15.7 percent of net sales
in the second quarter of 2008 due largely to the spreading of fixed
administrative costs over a smaller sales base, partially offset by fixed
cost reductions. Also, incentive compensation was lower as a percent of
sales in the second quarter of 2009 because year-to-date operating profit
was below the previously established incentive compensation
hurdles.
|
DREW
INDUSTRIES INCORPORATED
ITEM
2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
MH
Segment – Year to Date
Net sales of the MH Segment in the
first six months of 2009 decreased 46 percent, or $34 million, from the same
period of 2008. Excluding $3 million in sales price increases, net sales of the
MH Segment declined 49 percent, compared to a 45 percent decrease in
industry-wide production of manufactured homes. The 49 percent ‘organic’
decrease in sales of the Company’s MH Segment was greater than the manufactured
housing industry decline due partly to a reduction in the average size of the
homes produced by the manufactured housing industry, which require less of the
Company’s products, a decline in modular and office units, and partly due to
customer mix.
MH Segment sales in the first six
months 2009 included $2 million of components for homes purchased by the Federal
Emergency Management Agency (“FEMA”). The Company expects approximately $1
million of additional FEMA-related sales in the third quarter of
2009.
The MH
Segment reported an operating loss of $0.3 million in the first six months of
2009, compared to an operating profit of $7.1 million in the first six months of
2008, largely due to the decline in sales and $0.6 million of extra expenses,
recorded in the first quarter of 2009, related to plant consolidations, staff
reductions, and obsolete inventory. Excluding these extra expenses, the
Company’s MH Segment had an operating profit of $0.3 million in the first six
months of 2009, a decrease of $6.7 million from the segment operating profit of
$7.1 million in the same period last year. The adjusted decline in MH Segment
operating results was 18 percent of the ‘organic’ decline in net sales, a
slightly smaller percentage decline than the Company would typically
expect.
The
operating margin of the MH Segment in the first six months of 2009 was
positively impacted by:
|
·
|
Implementation
of cost-cutting measures which reduced cost of
sales.
|
Partially offset by:
|
·
|
The
spreading of fixed manufacturing costs over a smaller sales
base.
|
|
·
|
Labor
inefficiencies due to the sharp drop in
sales.
|
|
·
|
An
increase in selling, general and administrative expenses to 19.8 percent
of net sales in the first six months of 2009 from 15.6 percent of net
sales in the first six months of 2008 due largely to an increase in bad
debt expense, as well as the spreading of fixed administrative costs over
a smaller sales base, partially offset by fixed cost reductions. Also,
incentive compensation was lower as a percent of sales in the first six
months of 2009 because year-to-date operating profit was below the
previously established incentive compensation
hurdles.
|
Corporate
Corporate
expenses for the first six months of 2009 and the second quarter of 2009
decreased $0.8 million and $0.4 million as compared to the comparable periods in
2008, respectively, due primarily to a decrease in incentive-based compensation
as a result of lower profits, as well as other cost reductions.
DREW
INDUSTRIES INCORPORATED
ITEM
2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
Other
non-segment items
Because the Company’s stock price on
the New York Stock Exchange was below its book value, and due to the continued
declines in industry shipments of RVs and manufactured homes, the Company
conducted an impairment analysis of its goodwill in the first quarter of 2009.
The fair value of each reporting unit was determined using a discounted cash
flow model utilizing observable market data to the extent available, and the
Company’s weighted average cost of capital of approximately 16.5 percent. Based
on the analysis, the carrying value of the RV and manufactured housing reporting
units exceeded their fair value and, as a result, the Company recorded a
non-cash impairment charge to write-off the entire $45.0 million of goodwill of
these reporting units during the first quarter of 2009.
During the first quarter of 2009, the
Company reviewed the recoverability of the carrying value of other intangible
assets and other long-lived assets, and determined that there was no impairment.
The Company continues to monitor these assets for potential impairment, as a
downturn in the RV, manufactured housing, or marine and leisure industries, or
in the profitability of the Company’s operations, could result in a non-cash
impairment charge of these assets in the future.
Other non-segment items include the
following (in
thousands):
|
|
Six
Months Ended
|
|
|
Three
Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Legal
proceedings
|
|
$ |
345 |
|
|
$ |
853 |
|
|
$ |
52 |
|
|
$ |
498 |
|
Gain
on sold facilities
|
|
|
(22 |
) |
|
|
(3,275 |
) |
|
|
(22 |
) |
|
|
(2,081 |
) |
Loss
on sold facilities and write- downs to estimated current fair value of
facilities to be sold
|
|
|
2,150 |
|
|
|
447 |
|
|
|
900 |
|
|
|
302 |
|
Other
|
|
|
277 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Incentive
compensation impact of other non-segment items
|
|
|
- |
|
|
|
487 |
|
|
|
- |
|
|
|
249 |
|
Other
(income) from the collection of the previously reserved
Note
|
|
|
(200 |
) |
|
|
(760 |
) |
|
|
- |
|
|
|
- |
|
|
|
$ |
2,550 |
|
|
$ |
(2,248 |
) |
|
$ |
930 |
|
|
$ |
(1,032 |
) |
Effective in the third quarter of 2008,
gains or losses on sold manufacturing facilities and charges for write-downs to
estimated current fair value of manufacturing facilities to be sold have been
reclassified from cost of goods sold to selling, general, and administrative
expenses in the Condensed Consolidated Statements of Operations. Prior periods
have been reclassified to conform to this presentation.
Taxes
Our tax rate in the second quarter of
2009 was 35.4 percent, lower than the 38.6 percent rate for all of 2008, due to
tax reserve adjustments.
DREW
INDUSTRIES INCORPORATED
ITEM
2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
The tax rate in the first six months of
2009 was 35.0 percent, which is a combination of a 34.8 percent rate on the
goodwill impairment charge, and a 36.2 percent rate for the remaining operating
results. A portion of the goodwill impairment charge is not deductible for tax
purposes, thus lowering the tax benefit recorded. The 36.2 percent rate on the
remaining operations was lower than the 38.6 percent rate for all of 2008, as
the tax benefit on the losses incurred in the first six months of 2009 was
partially offset by the effect of permanent tax differences and tax reserve
adjustments.
Interest
Expense, Net
The $0.2
million increase in interest expense, net, for the first six months of 2009, was
primarily due to lower interest income. Interest expense in the second quarter
of 2009 was consistent with the second quarter of 2008.
LIQUIDITY
AND CAPITAL RESOURCES
The
Statements of Cash Flows reflect the following for the six months ended June 30,
(in
thousands):
|
|
2009
|
|
|
2008
|
|
Net
cash flows provided by (used for) operating activities
|
|
$ |
26,338 |
|
|
$ |
(6,620 |
) |
Net
cash flows (used for) provided by investment activities
|
|
$ |
(2,693 |
) |
|
$ |
5,608 |
|
Net
cash flows used for financing activities
|
|
$ |
(7,418 |
) |
|
$ |
(11,804 |
) |
Cash
Flows from Operations
Net cash
flows from operating activities in the first six months of 2009 were $33.0
million better than in the first six months of 2008, primarily as a result of a
$35 million reduction in inventories in the first six months of 2009, as
compared to an increase in the comparable period in 2008, partially offset by
(i) a larger seasonal increase in accounts receivable of $6 million, and (ii)
lower after-tax operating results in the first six months of 2009. Inventories
increased in 2008 due to the Company’s strategic purchase of raw materials in
advance of price increases, as well as higher priced raw materials in inventory.
The Company expects to lower inventory over the balance of 2009 by an additional
$8 million to $10 million through consumption of higher priced inventory on
hand, and reduced inventory purchases. However, raw material costs have recently
risen by 5 percent to 15 percent, depending upon the type of raw material, which
may impact the Company’s ability to reduce inventory in the future.
Depreciation
and amortization was $9.3 million in the first six months of 2009, and are
expected to aggregate $17 million to $18 million in 2009. In addition, non-cash
stock-based compensation was $2.1 million in the first six months of 2009, and
is expected to be nearly $4 million for the full year.
Cash
Flows from Investing Activities
Cash
flows used for investing activities of $2.7 million in the first six months of
2009 included capital expenditures of $1.1 million. Capital expenditures for
2009 are expected to be less than $3 million, and are expected to be funded by
cash flows from operations.
DREW
INDUSTRIES INCORPORATED
ITEM
2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
In June
2009, the Company purchased $2.0 million of 6 month U.S. Treasury Bills that
mature in December 2009.
On May
15, 2009, Lippert acquired the patents for the QuickBite CouplerTM, and
other intellectual properties and assets. The innovative design of the
QuickBiteTM
automatic dual jaw locking system eliminates several steps when coupling a
trailer to a tow vehicle, while at the same time making coupling simpler through
the use of an integrated alignment system. The minimum aggregate purchase price
was $0.5 million, of which $0.3 million was paid at closing and the balance will
be paid on May 15, 2010. The acquisition was financed with available cash. In
addition, Lippert will pay an earn-out of $2.50 per unit sold, up to a maximum
of $2.5 million, during the life of the patents. As such, the aggregate purchase
price could increase to a maximum of $3.0 million.
At June 30, 2009, the Company had seven
facilities and vacant land listed for sale, with an aggregate carrying value of
$9.8 million. In addition, the Company is attempting to sublease three vacant
leased facilities. In April 2009, the Company entered into a two year lease at
$25,000 per month for another vacant owned facility, which has a carrying value
of $3.0 million. This lease also contains an option for the lessee to purchase
the facility for $3.4 million.
Cash
flows provided by investing activities of $5.6 million in the first six months
of 2008 included proceeds of $8.1 million received from the sale of fixed assets
in connection with the Company’s consolidation of production operations,
partially offset by $2.4 million for capital expenditures.
Cash
Flows from Financing Activities
Cash
flows used for financing activities for the first six months of 2009 and 2008 of
$7.4 million and $11.8 million, respectively, were primarily due to net debt
payments of $7.5 million and $7.4 million, respectively. Cash flows used for
financing activities for the first six months of 2008 also included the purchase
of treasury stock of $4.5 million.
The
Company’s priorities for cash are liquidity and security. At June 30, 2009, all
but $0.1 million of the Company’s cash balances were in fully FDIC insured
accounts.
On November 25, 2008, the Company
entered into an agreement (the “Credit Agreement”) for a $50.0 million line of
credit with JPMorgan Chase Bank, N.A., and Wells Fargo Bank N.A. (collectively,
the “Lenders”). The maximum borrowings under the Company’s line of credit can be
increased by $20.0 million upon approval of the Lenders. Interest on borrowings
under the line of credit is designated from time to time by the Company as
either the Prime Rate, but not less than 2.5 percent, plus additional interest
up to 0.8 percent (0 percent at June 30, 2009), or LIBOR plus additional
interest ranging from 2.0 percent to 2.8 percent (2.0 percent at June 30, 2009)
depending on the Company’s performance and financial condition. The Credit
Agreement expires December 1, 2011. At June 30, 2009, the Company had $7.6
million in outstanding letters of credit under the line of credit.
DREW
INDUSTRIES INCORPORATED
ITEM
2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
Simultaneously,
the Company entered into a $125.0 million “shelf-loan” facility with Prudential
Investment Management, Inc., and its affiliates (“Prudential”). The facility
provides for Prudential to consider purchasing, at the Company’s request, in one
or a series of transactions, Senior Promissory Notes of the Company in the
aggregate principal amount of up to $125.0 million, to mature no more than
twelve years after the date of original issue of each Senior Promissory Note.
Prudential has no obligation to purchase the Senior Promissory Notes. Interest
payable on the Senior Promissory Notes will be at rates determined by Prudential
within five business days after the Company issues a request to Prudential. The
shelf-loan facility expires November 25, 2011. In June 2009, the Company paid in
full the remaining $4.0 million of outstanding Senior Promissory Notes before
their scheduled maturity date.
Both the line of credit pursuant to the
Credit Agreement and the shelf-loan facility are subject to a maximum leverage
ratio covenant which limits the amount of consolidated outstanding indebtedness
to 2.5 times the trailing twelve-month EBITDA, as defined; provided however,
that if the Company’s trailing twelve-month EBITDA is less than $50 million, the
maximum leverage ratio covenant declines to 1.25 times the trailing twelve-month
EBITDA. Since the Company’s trailing twelve-month EBITDA was less than $50
million at June 30, 2009, the maximum leverage ratio covenant limits the
remaining availability under these facilities collectively to $13.7 million. In
addition to the $27 million in cash and investments at June 30, 2009, the
borrowing availability under our credit and shelf-loan facilities is expected to
be adequate to finance the Company’s anticipated working capital and capital
expenditure requirements.
At June
30, 2009, the Company was in compliance with all of its debt covenants and
expects to remain in compliance for the next twelve months. The Company’s loan
agreements contain prepayment penalties.
On
November 29, 2007 the Board of Directors authorized the Company to repurchase up
to 1 million shares of the Company’s Common Stock, of which 447,400 shares were
repurchased in 2008. The Company is authorized to purchase shares from time to
time in the open market, or privately negotiated transactions, or block trades.
The number of shares ultimately repurchased, and the timing of the purchases,
will depend upon market conditions, share price, and other factors. At present,
due to current economic conditions, the Company believes it is prudent to
conserve cash, and does not intend to repurchase shares. However, changing
conditions may cause the Company to reconsider this position.
CORPORATE
GOVERNANCE
The Company is in compliance with the
corporate governance requirements of the Securities and Exchange Commission
(“SEC”) and the New York Stock Exchange. The Company’s governance documents and
committee charters and key practices have been posted to the Company’s website
(www.drewindustries.com)
and are updated periodically. The website also contains, or provides direct
links to, all SEC filings, press releases and investor presentations. The
Company has also established a toll-free hotline (877-373-9123) to report
complaints about the Company’s accounting, internal controls, auditing matters
or other concerns.
CONTINGENCIES
Additional
information required by this item is included under Item 1 of Part II of this
Quarterly Report on Form 10-Q.
INFLATION
The prices of key raw materials,
consisting primarily of steel, vinyl, aluminum, glass and ABS resin, 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. The Company did
not experience any significant increase in its labor costs in the second quarter
of 2009 related to inflation.
DREW
INDUSTRIES INCORPORATED
ITEM
2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
NEW ACCOUNTING
PRONOUNCEMENTS
In
May 2009, the FASB issued Statement of Financial Accounting Standards (“SFAS”)
No. 165, "Subsequent Events." SFAS No. 165 establishes authoritative
accounting and disclosure guidance for recognized and non-recognized subsequent
events that occur after the balance sheet date but before financial statements
are issued. SFAS No. 165 also requires disclosure of the date through which
an entity has evaluated subsequent events and the basis for that date. The
provisions of SFAS No. 165 are effective for interim or annual periods
ending after June 15, 2009. The adoption of this standard for the quarterly
period ended June 30, 2009 had no impact on the Company.
In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations.” SFAS
141(R) requires assets acquired and liabilities assumed in connection with a
business combination to be measured at fair value as of the acquisition date,
acquisition related costs incurred prior to the acquisition to be expensed, and
contractual contingencies to be recognized at fair value as of the acquisition
date. The provisions of SFAS No. 141(R) are effective for fiscal years
beginning after December 15, 2008. The adoption of this standard on January 1,
2009 did not have a material impact on the Company.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value
Measurements”, which establishes a framework for reporting fair value and
expands disclosures about fair value measurements. The provisions of SFAS
No. 157 are effective for fiscal years beginning after November 15, 2007.
However, the FASB deferred the effective date of SFAS 157, until fiscal years
beginning after November 15, 2008, as it relates to fair value measurement
requirements for nonfinancial assets and liabilities that are not remeasured at
fair value on a recurring basis. The Company adopted the applicable provisions
of this standard on January 1, 2009 and 2008, respectively. See Note 9 to Notes
to Condensed Consolidated Financial Statements.
USE
OF ESTIMATES
The preparation of these financial
statements in conformity with accounting principles generally accepted in the
United States of America requires the Company to make estimates and judgments
that affect the reported amounts of assets, liabilities, revenues and expenses,
and related disclosure of contingent assets and liabilities. On an ongoing
basis, the Company evaluates its estimates, including, but not limited to, those
related to product returns, accounts receivable, inventories, notes receivable,
goodwill and other intangible assets, income taxes, warranty obligations,
self-insurance obligations, lease terminations, asset retirement obligations,
long-lived assets, post-retirement benefits, stock-based compensation, segment
allocations, and contingencies and litigation. The Company bases its estimates
on historical experience, other available information and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other resources.
Actual results may differ from these estimates under different assumptions or
conditions.
FORWARD-LOOKING
STATEMENTS AND RISK FACTORS
This Form
10-Q contains certain “forward-looking statements” within the meaning of the
Private Securities Litigation Reform Act of 1995 with respect to financial
condition, results of operations, business strategies, operating efficiencies or
synergies, competitive position, growth opportunities for existing products,
plans and objectives of management, markets for the Company’s Common Stock and
other matters. Statements in this Form 10-Q that are not historical facts are
“forward-looking statements” for the purpose of the safe harbor provided by
Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”) and
Section 27A of the Securities Act of 1933 (the “Securities Act”).
DREW
INDUSTRIES INCORPORATED
ITEM
2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
Forward-looking statements, including,
without limitation, those relating to our future business prospects, revenues,
expenses and income (loss), whenever they occur in this Form 10-Q are
necessarily estimates reflecting the best judgment of our senior management at
the time such statements were made, and involve a number of risks and
uncertainties that could cause actual results to differ materially from those
suggested by forward-looking statements. The Company does not undertake to
update forward-looking statements to reflect circumstances or events that occur
after the date the forward-looking statements are made. You should consider
forward-looking statements, therefore, in light of various important factors,
including those set forth in this Form 10-Q, and in our subsequent filings with
the Securities and Exchange Commission (“SEC”).
There are
a number of factors, many of which are beyond the Company’s control, which could
cause actual results and events to differ materially from those described in the
forward-looking statements. These factors include, in addition to other matters
described in this Form 10-Q, pricing pressures due to domestic and foreign
competition, costs and availability of raw materials (particularly steel and
related components, vinyl, aluminum, glass and ABS resin), availability of
credit for financing the retail and wholesale purchase of manufactured homes and
recreational vehicles, availability and costs of labor, inventory levels of
retailers and manufacturers, levels of repossessed manufactured homes and RVs,
the disposition into the market by the Federal Emergency Management Agency
(“FEMA”), by sale or otherwise, of RVs or manufactured homes purchased by FEMA,
changes in zoning regulations for manufactured homes, continuing sales declines
in the RV or manufactured housing industries, the financial condition of our
customers, the financial condition of retail dealers of RVs and manufactured
homes, retention of significant customers, interest rates, oil and gasoline
prices, and the outcome of litigation. In addition, national and regional
economic conditions and consumer confidence may affect the retail sale of RVs
and manufactured homes.
DREW
INDUSTRIES INCORPORATED
Item
3. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The
Company is exposed to changes in interest rates primarily as a result of its
financing activities.
At June
30, 2009, the Company had $0.3 million of fixed rate debt outstanding. Assuming
there is a decrease of 100 basis points in the interest rate for borrowings of a
similar nature subsequent to June 30, 2009, which the Company becomes unable to
capitalize on in the short-term as a result of the structure of its fixed rate
financing, future cash flows would be less than $0.1 million lower per annum
than if the fixed rate financing could be obtained at current market
rates.
At June
30, 2009, the Company had $0.9 million of variable rate debt outstanding.
Assuming there is an increase of 100 basis points in the interest rate for
borrowings under these variable rate loans subsequent to June 30, 2009, and
outstanding borrowings of $0.9 million, future cash flows would be reduced by
less than $0.1 million per annum.
At June
30, 2009, the Company had $2.0 million of short-term investments in U.S.
Treasuries with a current yield of approximately 0.3 percent. Assuming there is
an increase of 100 basis points in the interest rate for these fixed rate
investments subsequent to June 30, 2009, and total investments of $2.0 million,
future cash flows would be less than $0.1 million lower per annum than if the
fixed rate investment could be obtained at current market rates.
If the
actual change in interest rates is substantially different than 100 basis
points, or the outstanding borrowings change significantly, the net impact of
interest rate risk on the Company’s cash flow may be materially different than
that disclosed above.
Additional
information required by this item is included under the caption “Inflation” in
the Management’s Discussion and Analysis of Financial Condition and Results of
Operations section of this Report.
DREW
INDUSTRIES INCORPORATED
Item
4. CONTROLS AND PROCEDURES
|
a)
|
Evaluation
of Disclosure Controls and
Procedures
|
The Company maintains disclosure
controls and procedures that are designed to ensure that information required to
be disclosed in the Company’s 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 the
Company’s management, including its Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosure, in accordance with the definition of “disclosure controls and
procedures” in Rule 13a-15 under the Exchange Act. In designing and evaluating
the disclosure controls and procedures, management recognized that any controls
and procedures, no matter how well designed and operated, cannot provide
absolute assurance of achieving the desired control objectives. Management
included in its evaluation the cost-benefit relationship of possible controls
and procedures. The Company continually evaluates its disclosure controls and
procedures to determine if changes are appropriate based upon changes in the
Company’s operations or the business environment in which it
operates.
As of the end of the period covered by
this Form 10-Q, the Company performed an evaluation, under the supervision and
with the participation of the Company’s management, including the Company’s
Chief Executive Officer and the Company’s Chief Financial Officer, of the
effectiveness of the design and operation of the Company’s disclosure controls
and procedures. Based on the foregoing, the Company’s Chief Executive Officer
and Chief Financial Officer concluded that the Company’s disclosure controls and
procedures were effective.
|
b)
|
Changes
in Internal Controls
|
There
were no changes in the Company’s internal controls over financial reporting
during the quarter ended June 30, 2009 or subsequent to the date the Company
completed its evaluation, that have materially affected, or are reasonably
likely to materially affect, the Company’s internal control over financial
reporting.
During
2005, Lippert installed enterprise resource planning (“ERP”) software and
subsequently implemented certain functions of the ERP software. Over the last
few years, the internal controls of Lippert have incrementally been strengthened
due both to the ERP software and business process changes. In the third quarter
of 2009, the Company has begun to implement certain functions of the ERP
software and business process changes for Kinro. Implementation of additional
functions of the ERP software and business process changes are planned for the
upcoming quarters for Kinro. The Company also anticipates that it will continue
to implement other additional functionalities of the ERP software at both
Lippert and Kinro to further strengthen the Company’s internal
control.
DREW
INDUSTRIES INCORPORATED
PART
II – OTHER INFORMATION
Item 1 – LEGAL PROCEEDINGS
On or
about January 3, 2007, an action was commenced in the United States District
Court, Central District of California, entitled Gonzalez vs. Drew Industries
Incorporated, Kinro, Inc., Kinro Texas Limited Partnership d/b/a Better Bath
Components; Skyline Corporation, and Skylines Homes, Inc. (Case No.
CV06-08233). The case purports to be a class action on behalf of the
named plaintiff and all others similarly situated in California. Plaintiff
initially alleged, but has not sought certification of, a national
class.
On April
1, 2008, the Court issued an order granting Drew’s motion to dismiss for lack of
personal jurisdiction, resulting in the dismissal of Drew Industries
Incorporated as one of the defendants in the case.
Plaintiff
alleges that certain bathtubs manufactured by Kinro Texas Limited Partnership, a
subsidiary of Kinro, Inc., and sold under the name “Better Bath” for use in
manufactured homes, fail to comply with certain safety standards relating to
flame spread established by the United States Department of Housing and Urban
Development (“HUD”). Plaintiff alleges, among other things, that sale of these
products is in violation of various provisions of the California Consumers Legal
Remedies Act (Cal. Civ. Code Sec. 1770 et seq.), the Magnuson-Moss Warranty Act
(15 U.S.C. Sec. 2301 et seq.), the California Song-Beverly Consumer Warranty Act
(Cal. Civ. Code Sec. 1790 et seq.), and the California Unfair Competition Law
(Cal. Bus. & Prof. Code Sec. 17200 et seq.).
Plaintiff
seeks to require defendants to notify members of the class of the allegations in
the proceeding and the claims made, to repair or replace the allegedly defective
products, to reimburse members of the class for repair, replacement and
consequential costs, to cease the sale and distribution of the allegedly
defective products, and to pay actual and punitive damages and plaintiff’s
attorneys fees.
On
January 29, 2008, the Court issued an Order denying certification of a class
with plaintiff Gonzalez as the class representative. The Court ruled that
plaintiff may not be an appropriate class representative for injunctive relief
because her bathtub had been replaced. The Court granted plaintiff leave to
amend the complaint to add a different plaintiff.
On March
10, 2008, plaintiff amended her complaint to include an additional plaintiff,
Robert Royalty. Plaintiff Royalty states that his bathtub was not tested to
determine whether it complies with HUD standards. Rather, his
allegations are based on “information and belief”, including the testing of
plaintiff Gonzalez’s bathtub and other evidence. Kinro denies plaintiff
Royalty’s allegations, and intends to continue its vigorous defense against both
plaintiffs’ claims.
On June
25, 2008, plaintiffs filed a renewed motion for class certification. On October
20, 2008, the Court again denied certification of a class, without prejudice,
which allowed plaintiffs to file a new motion for certification. Plaintiffs
filed a third motion for class certification on December 23, 2008. Defendants’
initial motion seeking summary judgment against plaintiffs’ case, which was
withdrawn pending further discovery, was supplemented and refiled on December
23, 2008.
On May
18, 2009, the Court issued an Order granting partial summary judgment in favor
of defendants, dismissing five of the six claims asserted by plaintiffs, except
for plaintiffs’ claim for violation of California’s Unfair Competition Law (the
“UCL”). The Court also granted plaintiffs’ motion for class certification as to
that one claim.
The Court
denied summary judgment on the UCL claim on the ground that there was a triable
issue of fact as to whether the alleged misrepresentation on defendants’ labels
regarding testing for flame spread rate caused plaintiffs to purchase the
manufactured homes containing bathtubs manufactured by Kinro.
Even
though the Court expressly found that plaintiffs did not actually rely on the
alleged misrepresentations on defendants’ labels, the Court concluded that
California law did not require plaintiffs to establish actual reliance in order
to assert a UCL claim. However, on the same day that the Court issued its Order,
the California Supreme Court issued a long-awaited ruling on the issue of
reliance under the UCL. In its opinion in In re Tobacco II Cases
(S147345, May 18, 2009), the California Supreme
Court held, contrary to the Court’s ruling on the summary judgment motion in
this case, that actual reliance is required to assert a UCL claim similar to the
claim made by plaintiffs. Defendants believe that the ruling of the California
Supreme Court compels the Court in this case to grant summary judgment to
defendants dismissing the final claim and denying class certification to
plaintiffs as to that claim.
As a
result of this development, on May 29, 2009, defendants made a motion for
reconsideration of the Court’s ruling on defendants’ motion for summary judgment
to dismiss the final claim, and on plaintiffs’ motion for class certification as
to that claim. Plaintiffs also filed a motion for reconsideration, arguing that
the California Supreme Court’s ruling required the Court to deny defendants’
motion for summary judgment as to plaintiffs’ claim for violation of the
Consumer Legal Remedies Act, as well as the UCL claim. A decision by the Court
on the motions for reconsideration has not yet been received.
Defendant
Kinro has conducted a comprehensive investigation of the allegations made in
connection with the claims, including with respect to the HUD safety standards,
prior test results, testing procedures, and the use of labels. In addition, at
Kinro’s initiative, independent laboratories conducted multiple tests on
materials used by Kinro in the manufacture of bathtubs, the results of which
tests indicate that Kinro’s bathtubs are in compliance with HUD
regulations.
Based on
the foregoing investigation and testing, the Court’s ruling on the summary
judgment motion, and the ruling by the California Supreme Court, Kinro believes
that plaintiffs may not be able to prove the essential elements of their claims,
and defendants intend to vigorously defend against the claims. In addition,
Kinro believes that no remedial action is required or appropriate under HUD
safety standards.
In
October 2007, the parties participated in voluntary non-binding mediation in an
effort to reach a settlement. Kinro made an offer of settlement consistent with
its belief regarding the merits of plaintiffs’ allegations. Although no
settlement was reached, the parties have since had intermittent discussions. The
outcome of such settlement efforts cannot be predicted.
If
defendants’ motion for reconsideration is denied, so that the Court maintains
its rulings denying defendants’ motion for summary judgment as to the UCL claim
and granting plaintiffs’ motion for class certification with respect to that
claim or others, and if plaintiffs pursue their claims, protracted litigation
could result. Although the outcome of such litigation cannot be predicted, if
certain essential findings are ultimately unfavorable to Kinro, the Company
could sustain a material liability. The Company’s liability insurer denied
coverage on the ground that plaintiffs did not sustain any personal injury or
property damage.
In the
normal course of business, the Company is subject to proceedings, lawsuits and
other claims. All such matters are subject to uncertainties and outcomes that
are not predictable with assurance. While these matters could materially affect
operating results when resolved in future periods, it is management’s opinion
that after final disposition, including anticipated insurance recoveries, any
monetary liability or financial impact to the Company beyond that provided in
the Condensed Consolidated Balance Sheet as of June 30, 2009, would not be
material to the Company’s financial position or annual results of
operations.
Item 1A – RISK FACTORS
There have been no material changes to
the matters discussed in Part I, Item 1A – Risk Factors in our Annual Report on
Form 10-K as filed with the Securities and Exchange Commission on March 12,
2009.
Item 4 – SUBMISSION OF MATTERS TO A
VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of
Stockholders on May 20, 2009. Of the 21,575,533 shares of common stock entitled
to vote at such meeting, holders of at least 19,536,850 shares were present in
person or by proxy. At the meeting, stockholders elected to the Board of
Directors Leigh J. Abrams, Edward W. Rose, III, Fredric M. Zinn, Jason D.
Lippert, James F. Gero, Frederick B. Hegi, Jr., David A. Reed and John B. Lowe,
Jr., each with a term expiring in 2010. There was no solicitation in opposition
to management’s nominees, all of whom were elected, and each nominee received 75
percent or more, of the votes cast, in favor of his election. There were no
abstentions or broker non-votes.
The stockholders also ratified an
amendment to the Company’s Restated Certificate of Incorporation to decrease the
authorized number of shares of Common Stock from 50,000,000 shares to
30,000,000. Voting for the resolution ratifying the amendment were 19,461,769
shares. Voting against were 65,303 shares. Abstaining were 9,778 shares. There
were no broker non-votes.
The stockholders also ratified an
amendment to the 2002 Equity Award and Incentive Plan to increase the number of
shares of Common Stock available for issuance pursuant to grants by 900,000
shares. Voting for the resolution ratifying the amendment were 16,707,006
shares. Voting against were 1,418,938 shares. Abstaining were 2,187 shares.
There were 1,408,719 broker non-votes.
The stockholders also ratified the
appointment of KPMG LLP as independent auditors for stockholders of the Company
for 2009. Voting for the resolution ratifying the appointment were 19,402,459
shares. Voting against were 131,002 shares. Abstaining were 3,389 shares. There
were no broker non-votes.
Item 6 – EXHIBITS
|
a)
|
Exhibits
as required by item 601 of Regulation
8-K:
|
|
1)
|
31.1
Certification of Chief Executive Officer pursuant to 13a-14(a) under the
Securities Exchange Act of 1934. Exhibit 31.1 is filed
herewith.
|
|
2)
|
31.2
Certification of Chief Financial Officer pursuant to 13a-14(a) under the
Securities Exchange Act of 1934. Exhibit 31.2 is filed
herewith.
|
|
3)
|
32.1
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section
1350. Exhibit 32.1 is filed
herewith.
|
|
4)
|
32.2
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section
1350. Exhibit 32.2 is filed
herewith.
|
DREW
INDUSTRIES INCORPORATED
SIGNATURES
Pursuant
to the requirements 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.
|
DREW
INDUSTRIES INCORPORATED
|
|
|
Registrant
|
|
|
|
|
|
|
By
|
/s/ Joseph S. Giordano
III
|
|
|
Joseph
S. Giordano III
|
|
|
Chief
Financial Officer and Treasurer
|
|
August 7,
2009