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:
SEPTEMBER 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. 21,910,233 shares of common stock as
of October 30, 2009.
DREW
INDUSTRIES INCORPORATED
INDEX
TO FINANCIAL STATEMENTS FILED WITH
QUARTERLY
REPORT OF REGISTRANT ON FORM 10-Q
FOR
THE QUARTER ENDED SEPTEMBER 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
|
7-19
|
|
|
|
|
Item
2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
|
20-37
|
|
|
|
|
Item
3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
38
|
|
|
|
|
Item
4 - CONTROLS AND PROCEDURES
|
39
|
|
|
|
PART
II -
|
OTHER
INFORMATION
|
|
|
|
|
|
Item
1 - LEGAL PROCEEDINGS
|
40-42
|
|
|
|
|
Item
1A - RISK FACTORS
|
42
|
|
|
|
|
Item
6 - EXHIBITS
|
42
|
|
|
|
SIGNATURES
|
43
|
|
|
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)
|
|
Nine Months Ended
|
|
|
Three Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
(In
thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
293,248 |
|
|
$ |
433,945 |
|
|
$ |
121,666 |
|
|
$ |
124,274 |
|
Cost
of sales
|
|
|
238,895 |
|
|
|
335,580 |
|
|
|
93,692 |
|
|
|
99,292 |
|
Gross
profit
|
|
|
54,353 |
|
|
|
98,365 |
|
|
|
27,974 |
|
|
|
24,982 |
|
Selling,
general and administrative expenses
|
|
|
50,331 |
|
|
|
64,026 |
|
|
|
16,721 |
|
|
|
20,481 |
|
Goodwill
impairment
|
|
|
45,040 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Other
(income)
|
|
|
(260 |
) |
|
|
(675 |
) |
|
|
(60 |
) |
|
|
(29 |
) |
Operating
(loss) profit
|
|
|
(40,758 |
) |
|
|
35,014 |
|
|
|
11,313 |
|
|
|
4,530 |
|
Interest
expense, net
|
|
|
614 |
|
|
|
602 |
|
|
|
179 |
|
|
|
323 |
|
(Loss) income before income
taxes
|
|
|
(41,372 |
) |
|
|
34,412 |
|
|
|
11,134 |
|
|
|
4,207 |
|
(Benefit)
provision for income taxes
|
|
|
(14,415 |
) |
|
|
13,524 |
|
|
|
3,945 |
|
|
|
1,614 |
|
Net
(loss) income
|
|
$ |
(26,957 |
) |
|
$ |
20,888 |
|
|
$ |
7,189 |
|
|
$ |
2,593 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
(1.24 |
) |
|
$ |
0.95 |
|
|
$ |
0.33 |
|
|
$ |
0.12 |
|
Diluted
|
|
$ |
(1.24 |
) |
|
$ |
0.95 |
|
|
$ |
0.33 |
|
|
$ |
0.12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
21,724 |
|
|
|
21,879 |
|
|
|
21,847 |
|
|
|
21,702 |
|
Diluted
|
|
|
21,724 |
|
|
|
22,023 |
|
|
|
21,994 |
|
|
|
21,815 |
|
The
accompanying notes are an integral part of these financial
statements.
DREW
INDUSTRIES INCORPORATED
CONDENSED
CONSOLIDATED BALANCE SHEETS
(Unaudited)
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
(In
thousands, except shares and per share amount)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
44,932 |
|
|
$ |
9,185 |
|
|
$ |
8,692 |
|
Short-term
investments
|
|
|
1,999 |
|
|
|
- |
|
|
|
- |
|
Accounts
receivable, trade, less allowances
|
|
|
27,728 |
|
|
|
23,874 |
|
|
|
7,913 |
|
Inventories
|
|
|
57,184 |
|
|
|
107,272 |
|
|
|
93,934 |
|
Prepaid
expenses and other current assets
|
|
|
15,647 |
|
|
|
11,924 |
|
|
|
16,556 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
147,490 |
|
|
|
152,255 |
|
|
|
127,095 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
assets, net
|
|
|
83,263 |
|
|
|
93,957 |
|
|
|
88,731 |
|
Goodwill
|
|
|
- |
|
|
|
49,864 |
|
|
|
44,113 |
|
Other
intangible assets
|
|
|
40,518 |
|
|
|
43,099 |
|
|
|
42,787 |
|
Other
assets
|
|
|
17,994 |
|
|
|
6,386 |
|
|
|
8,632 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
289,265 |
|
|
$ |
345,561 |
|
|
$ |
311,358 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
payable, including current maturities of long-term
indebtedness
|
|
$ |
- |
|
|
$ |
11,797 |
|
|
$ |
5,833 |
|
Accounts
payable, trade
|
|
|
11,761 |
|
|
|
14,273 |
|
|
|
4,660 |
|
Accrued
expenses and other current liabilities
|
|
|
29,327 |
|
|
|
41,585 |
|
|
|
32,224 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
41,088 |
|
|
|
67,655 |
|
|
|
42,717 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
indebtedness
|
|
|
- |
|
|
|
5,315 |
|
|
|
2,850 |
|
Other
long-term liabilities
|
|
|
8,659 |
|
|
|
5,660 |
|
|
|
6,913 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
49,747 |
|
|
|
78,630 |
|
|
|
52,480 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock, par value $.01 per share: authorized 30,000,000 shares; issued
24,497,558 shares at September 2009, 24,088,454 shares at September 2008
and 24,122,054 at December 2008
|
|
|
245 |
|
|
|
241 |
|
|
|
241 |
|
Paid-in
capital
|
|
|
72,547 |
|
|
|
63,802 |
|
|
|
64,954 |
|
Retained
earnings
|
|
|
194,526 |
|
|
|
230,693 |
|
|
|
221,483 |
|
Accumulated
other comprehensive loss
|
|
|
- |
|
|
|
(5 |
) |
|
|
- |
|
|
|
|
267,318 |
|
|
|
294,731 |
|
|
|
286,678 |
|
Treasury
stock, at cost - 2,596,725 shares
|
|
|
(27,800 |
) |
|
|
(27,800 |
) |
|
|
(27,800 |
) |
Total
stockholders’ equity
|
|
|
239,518 |
|
|
|
266,931 |
|
|
|
258,878 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’ equity
|
|
$ |
289,265 |
|
|
$ |
345,561 |
|
|
$ |
311,358 |
|
The
accompanying notes are an integral part of these financial
statements.
DREW
INDUSTRIES INCORPORATED
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
(loss) income
|
|
$ |
(26,957 |
) |
|
$ |
20,888 |
|
Adjustments
to reconcile net (loss) income to cash flows provided by (used for)
operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
14,337 |
|
|
|
12,534 |
|
Deferred
taxes
|
|
|
(15,660 |
) |
|
|
- |
|
Loss
(gain) on disposal of fixed assets and other non-cash
items
|
|
|
1,549 |
|
|
|
(2,410 |
) |
Stock-based
compensation expense
|
|
|
3,043 |
|
|
|
2,809 |
|
Goodwill
impairment
|
|
|
45,040 |
|
|
|
- |
|
Changes
in assets and liabilities, net of business acquisitions:
|
|
|
|
|
|
|
|
|
Accounts
receivable, net
|
|
|
(19,815 |
) |
|
|
(6,384 |
) |
Inventories
|
|
|
38,108 |
|
|
|
(26,357 |
) |
Prepaid
expenses and other assets
|
|
|
1,830 |
|
|
|
115 |
|
Accounts
payable, accrued expenses and other liabilities
|
|
|
3,600 |
|
|
|
(4,703 |
) |
Net
cash flows provided by (used for) operating activities
|
|
|
45,075 |
|
|
|
(3,508 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(1,915 |
) |
|
|
(3,274 |
) |
Acquisitions
of businesses
|
|
|
(1,709 |
) |
|
|
(28,442 |
) |
Proceeds
from sales of fixed assets
|
|
|
959 |
|
|
|
9,800 |
|
Purchase
of short-term investments
|
|
|
(1,999 |
) |
|
|
- |
|
Other
investments
|
|
|
(25 |
) |
|
|
(3,195 |
) |
Net
cash flows used for investing activities
|
|
|
(4,689 |
) |
|
|
(25,111 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from line of credit and other borrowings
|
|
|
5,775 |
|
|
|
14,600 |
|
Repayments
under line of credit and other borrowings
|
|
|
(14,458 |
) |
|
|
(24,750 |
) |
Purchase
of treasury stock
|
|
|
- |
|
|
|
(8,333 |
) |
Exercise
of stock options
|
|
|
4,554 |
|
|
|
74 |
|
Other
financing activities
|
|
|
(17 |
) |
|
|
- |
|
Net
cash flows used for financing activities
|
|
|
(4,146 |
) |
|
|
(18,409 |
) |
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash
|
|
|
36,240 |
|
|
|
(47,028 |
) |
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of period
|
|
|
8,692 |
|
|
|
56,213 |
|
Cash
and cash equivalents at end of period
|
|
$ |
44,932 |
|
|
$ |
9,185 |
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
on debt
|
|
$ |
412 |
|
|
$ |
1,021 |
|
Income
taxes, net of refunds
|
|
$ |
3,729 |
|
|
$ |
13,577 |
|
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 nine months ended September 30, 2009
|
|
|
- |
|
|
|
- |
|
|
|
(26,957 |
) |
|
|
- |
|
|
|
(26,957 |
) |
Issuance
of 375,504 shares of common stock pursuant to stock options and deferred
stock units
|
|
|
4 |
|
|
|
4,165 |
|
|
|
- |
|
|
|
- |
|
|
|
4,169 |
|
Income
tax benefit relating to issuance of common stock pursuant to stock options
exercised
|
|
|
- |
|
|
|
385 |
|
|
|
- |
|
|
|
- |
|
|
|
385 |
|
Stock-based
compensation expense
|
|
|
- |
|
|
|
3,043 |
|
|
|
- |
|
|
|
- |
|
|
|
3,043 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
- September 30, 2009
|
|
$ |
245 |
|
|
$ |
72,547 |
|
|
$ |
194,526 |
|
|
$ |
(27,800 |
) |
|
$ |
239,518 |
|
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 nine and three month periods ended September 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 November 9, 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 77 percent and 74 percent of consolidated net sales for the
nine-month periods ended September 30, 2009 and 2008, respectively, 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 primarily consists of 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 23
percent and 26 percent of consolidated net sales for the nine-month periods
ended September 30, 2009 and 2008, respectively, manufactures a variety of
products used in the production of manufactured homes, and to a lesser extent,
modular housing and office units, as well as replacement parts for manufactured
homes, including:
●Vinyl
and aluminum windows and screens
|
|
●Steel
chassis
|
●Thermoformed
bath and kitchen products
|
|
●Steel
chassis parts
|
●Axles
|
|
|
In addition, in the fourth quarter of
2009, the Company began production of entry doors for manufactured
homes.
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):
|
|
Nine Months Ended
September 30,
|
|
|
Three Months Ended
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Net
sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
RV
Segment
|
|
$ |
225,621 |
|
|
$ |
320,941 |
|
|
$ |
94,460 |
|
|
$ |
85,694 |
|
MH
Segment
|
|
|
67,627 |
|
|
|
113,004 |
|
|
|
27,206 |
|
|
|
38,580 |
|
Total
net sales
|
|
$ |
293,248 |
|
|
$ |
433,945 |
|
|
$ |
121,666 |
|
|
$ |
124,274 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RV
Segment
|
|
$ |
12,814 |
|
|
$ |
31,848 |
|
|
$ |
11,130 |
|
|
$ |
4,598 |
|
MH
Segment
|
|
|
2,559 |
|
|
|
10,989 |
|
|
|
2,831 |
|
|
|
3,913 |
|
Total
segment operating profit
|
|
|
15,373 |
|
|
|
42,837 |
|
|
|
13,961 |
|
|
|
8,511 |
|
Amortization
of intangibles
|
|
|
(4,185 |
) |
|
|
(3,670 |
) |
|
|
(1,410 |
) |
|
|
(1,547 |
) |
Corporate
|
|
|
(4,819 |
) |
|
|
(5,714 |
) |
|
|
(1,701 |
) |
|
|
(1,747 |
) |
Goodwill
impairment
|
|
|
(45,040 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
Other
items
|
|
|
(2,087 |
) |
|
|
1,561 |
|
|
|
463 |
|
|
|
(687 |
) |
Total
operating (loss) profit
|
|
$ |
(40,758 |
) |
|
$ |
35,014 |
|
|
$ |
11,313 |
|
|
$ |
4,530 |
|
DREW
INDUSTRIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
(Unaudited)
3.
|
Acquisitions,
Goodwill and Other Intangible
Assets
|
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. Therefore, 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.
Slide-out
storage box for pick-up trucks
On
September 11, 2009, Lippert acquired the patent-pending design for a tool box
containing a slide-out storage tray. This newly-designed product,
used in pick-up trucks, tow trucks and other mobile service vehicles, will be
produced at the Company’s existing manufacturing plants, with existing
management, utilizing production techniques with which the Company has extensive
experience. The purchase price was $0.4 million, which was paid at
closing. The acquisition was financed with available
cash. The results of the acquired business have been included in the
Company’s Condensed Consolidated Statement of Operations beginning September 11,
2009.
Front
entry doors for manufactured homes
On
September 29, 2009, Kinro purchased certain inventory and equipment used for the
production of front entry doors for manufactured homes. This
acquisition will increase Kinro’s content per manufactured home and also add a
new product category. The Company estimates that the current annual market for
front entry doors for manufactured homes is about $25 million to $30 million,
and that half of this new potential is in aftermarket replacement doors for the
millions of existing manufactured homes. Kinro will begin to
manufacture entry doors at plants in Indiana and South Carolina in the 2009
fourth quarter. The purchase price was $1.0 million, which was paid
at closing. The acquisition was financed with available
cash. The results of the acquired business have been included in the
Company’s Condensed Consolidated Statement of Operations beginning September 29,
2009.
Total
consideration for these acquisitions was recorded as follows (in thousands):
Net
tangible assets acquired
|
|
$ |
1,400 |
|
Intangible
assets
|
|
|
1,780 |
|
|
|
|
3,180 |
|
Less:
Present value of future estimated earn-out payments
|
|
|
(1,205 |
) |
Less:
Other
|
|
|
(266 |
) |
Total
cash consideration
|
|
$ |
1,709 |
|
DREW
INDUSTRIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
(Unaudited)
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 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.
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
- September 30, 2009
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
DREW
INDUSTRIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
(Unaudited)
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.
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 September 30, 2009, all but $0.1 million of the
Company’s cash balances were in fully FDIC insured accounts.
At September 30, 2009, the Company had
$2.0 million invested in 6 month U.S. Treasury Bills that mature in December
2009. This investment was recorded at cost which approximates fair
value.
At September 30 and December 31, 2008,
the Company had $7.5 million and $3.8 million, respectively, invested in
high-quality, short-term money market instruments issued and payable in U.S
funds.
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):
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
Finished
goods
|
|
$ |
7,261 |
|
|
$ |
12,276 |
|
|
$ |
10,801 |
|
Work
in process
|
|
|
2,016 |
|
|
|
3,376 |
|
|
|
2,946 |
|
Raw
material
|
|
|
47,907 |
|
|
|
91,620 |
|
|
|
80,187 |
|
Total
|
|
$ |
57,184 |
|
|
$ |
107,272 |
|
|
$ |
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 September 30, 2009), or LIBOR plus additional
interest ranging from 2.0 percent to 2.8 percent (2.0 percent at September 30,
2009) depending on the Company’s performance and financial condition. The Credit
Agreement expires December 1, 2011. At September 30, 2009, the Company had $8.4
million in outstanding letters of credit under the line of
credit.
DREW
INDUSTRIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
(Unaudited)
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 September 30, 2009, the maximum leverage ratio covenant limits the
remaining availability under these facilities collectively to $24.5 million. The
$47 million in cash and investments at September 30, 2009, together with the
borrowing availability under our credit and shelf-loan facilities, are more than
adequate to finance the Company’s anticipated working capital and capital
expenditure requirements.
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
September 30, 2009, the Company was in compliance with all such requirements,
and expects to remain in compliance for the next twelve months.
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.
In September 2009, the Company paid in
full its remaining debt obligations of approximately $1 million.
DREW
INDUSTRIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
(Unaudited)
Long-term indebtedness consists of the
following (dollars in
thousands):
|
|
September 30,
|
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
Senior
Promissory Notes
|
|
$ |
- |
|
|
$ |
7,000 |
|
|
$ |
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
|
|
|
- |
|
|
|
5,000 |
|
|
|
- |
|
Industrial
Revenue Bonds, secured by certain
|
|
|
|
|
|
|
|
|
|
|
|
|
real
estate and equipment
|
|
|
- |
|
|
|
2,895 |
|
|
|
1,662 |
|
Other
loans primarily secured by certain real estate and
|
|
|
|
|
|
|
|
|
|
|
|
|
equipment,
with fixed interest rates
|
|
|
- |
|
|
|
2,217 |
|
|
|
1,021 |
|
|
|
|
- |
|
|
|
17,112 |
|
|
|
8,683 |
|
Less
current portion
|
|
|
- |
|
|
|
11,797 |
|
|
|
5,833 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
long-term indebtedness
|
|
$ |
- |
|
|
$ |
5,315 |
|
|
$ |
2,850 |
|
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.
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):
|
|
Nine Months Ended
|
|
|
Three Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Weighted
average shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
for
basic earnings per share
|
|
|
21,724 |
|
|
|
21,879 |
|
|
|
21,847 |
|
|
|
21,702 |
|
Common
stock equivalents pertaining
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to
stock options and contingently
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
issuable
deferred stock units
|
|
|
- |
|
|
|
144 |
|
|
|
147 |
|
|
|
113 |
|
Total
for diluted shares
|
|
|
21,724 |
|
|
|
22,023 |
|
|
|
21,994 |
|
|
|
21,815 |
|
DREW
INDUSTRIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
(Unaudited)
The
weighted average diluted shares outstanding for the nine months ended September
30, 2009 and 2008, excludes the effect of 1,861,873 and 1,164,473 stock options,
respectively, and the three months ended September 30, 2009 and 2008, excludes
the effect of 964,490 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.).
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 she no longer owned the bathtub. 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.
DREW
INDUSTRIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
(Unaudited)
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.
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.
On August
26, 2009, the Court issued an Order granting in part defendants’ motion for
reconsideration. The Court concluded that the May 18, 2009 decision of the
California Supreme Court does bar plaintiffs’ fraud-based UCL claim because
plaintiffs did not actually rely on defendants’ labels when they bought the
homes containing the bathtubs. Therefore, the Court dismissed that claim.
However, the Court concluded that simply selling bathtubs which may fail to
satisfy Federal standards may violate the “unfair prong” of the UCL, even if
plaintiffs did not actually rely on defendant’s labels.
On
September 11, 2009, defendants filed with the Ninth Circuit Court of Appeals a
Petition for Permission to Appeal, on an interlocutory basis, that part of the
District Court’s ruling on the motion for reconsideration that certified a class
to pursue a claim under the “unfair prong” of the UCL. Defendants contend in
this petition that the District Court erred because (1) plaintiffs neither
alleged nor sought to certify such a claim, and (2) such a claim does not exist
under California law based on the facts in this case. Plaintiffs filed an
opposition to defendants’ petition, and the Ninth Circuit has not yet
ruled.
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.
DREW
INDUSTRIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
(Unaudited)
Based on
the foregoing investigation and testing, the Court’s ruling dismissing five of
plaintiffs’ six claims, 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.
If
defendants’ motion for appeal is denied, and 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, 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 September 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 the first nine months of 2009 the Company received principal
payments of $0.3 million, which were previously fully reserved, and therefore
recorded a pre-tax gain of $0.3 million. The Company is currently attempting to
collect the balance due of $0.7 million plus interest.
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 more than 30 facilities
and reduced staff levels. The severance and operational relocation costs
incurred by the Company in the first nine months of 2009 and 2008 were not
significant. The Company operated 27 facilities at September 30, 2009, and is
continuing to explore additional facility consolidation
opportunities.
At September 30, 2009, the Company had
eight facilities and land with an aggregate carrying value of $12.4 million
which are not currently being used in production, including six facilities and
vacant land with an aggregate carrying value of $6.9 million which are listed
for sale. In 2009, the remaining two facilities were leased for two and three
year terms, for a combined $50,000 per month. Each lease also contains an option
for the lessee to purchase the facility at an amount in excess of carrying
value. In addition to the owned facilities, the Company is attempting to
sublease three vacant leased facilities.
DREW
INDUSTRIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
(Unaudited)
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 new accounting guidance 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 new accounting guidance 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 nine months ended September 30, 2009, the
pronouncement may impact the Company’s accounting for future business
combinations, impairment charges and restructuring charges.
This new accounting guidance
establishes a new framework for measuring fair value and expands related
disclosures. The 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.
The valuation techniques required by
the accounting guidance 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. The accounting
guidance 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.
|
DREW
INDUSTRIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
(Unaudited)
|
·
|
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.
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 2009, the Company acquired
patents, other intellectual properties and assets in business combinations. The
Company used Level 3 inputs to value the assets acquired, as well as the
liabilities 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 nine months ended September 30, 2009, the Company recorded impairment
charges of $1.6 million, of which $0.2 million was recorded in the third quarter
of 2009, on facilities with an adjusted carrying value of $4.8 million at
September 30, 2009. These impairment charges are included in selling, general
and administrative expenses in the Condensed Consolidated Statements of
Operations. Additionally, the Company reviewed the recoverability of vacant
facilities with a net carrying value of $2.1 million, using Level 3 inputs, and
determined no impairment was required.
10.
|
New
Accounting Pronouncements
|
In May
2009, the Financial Accounting Standards Board (“FASB”) issued new accounting
and disclosure guidance for recognized and non-recognized subsequent events that
occur after the balance sheet date but before financial statements are issued.
The new guidance also requires disclosure of the date through which an entity
has evaluated subsequent events and the basis for that date. The provisions of
the new accounting guidance were effective for interim or annual periods ending
after June 15, 2009. The adoption of this new accounting guidance had no impact
on the Company.
In
December 2007, the FASB amended its guidance on accounting for business
combinations. The new accounting guidance 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 the new accounting guidance were 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.
DREW
INDUSTRIES INCORPORATED
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
(Unaudited)
In
September 2006, the FASB issued new accounting guidance which establishes a
framework for reporting fair value and expands disclosures about fair value
measurements. The provisions of the new accounting guidance were effective for
fiscal years beginning after November 15, 2007. However, in February
2008, the FASB delayed the effective date of the new accounting guidance 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 the new accounting guidance 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 September
30, 2009, the Company operated 27 facilities in the United
States.
The RV Segment accounted for 77 percent
of consolidated net sales for the nine months ended September 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 primarily consists of 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 23
percent of consolidated net sales for the nine months ended September 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, as well as replacement parts for
manufactured homes, including:
●Vinyl
and aluminum windows and screens
|
|
●Steel
chassis
|
●Thermoformed
bath and kitchen products
|
|
●Steel
chassis parts
|
●Axles
|
|
|
In addition, in the fourth quarter of
2009, the Company began production of entry doors for manufactured
homes.
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 93 percent of the 121,400 RVs produced in
the first nine months of 2009, while motorhomes represented the remaining 7
percent of RVs produced. Motorhomes have a significantly higher average retail
selling price than towable RVs.
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, and, 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 53 percent to 59,400 units for
the first six months of 2009, which reduced sales by the Company of components
for new RVs. However, trends improved during the third quarter of 2009, with
industry-wide wholesale shipments of travel trailers and fifth-wheel RVs
increasing 5 percent compared to the third quarter of 2008, to 41,500
units. This was the first year over year increase in quarterly
shipments since the fourth quarter of 2007, and is reportedly due to both a
restocking of inventory by dealers, and an improvement in retail
demand.
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 eight months of 2009, retail
sales remained below prior year levels. September 2009 retail sales information
is not yet available.
A
comparison of the year over year percentage change in industry-wide wholesale
shipments and retail shipments of travel trailers and fifth-wheel RVs, as
reported by Statistical Surveys, Inc., 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 |
)% |
|
|
(30 |
)% |
Quarter
ended September 30, 2009
|
|
|
5 |
% |
|
|
(21 |
)%
(1) |
(1)
Through August 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. Towable RV shipments to Canada for 2009 are not yet
available.
DREW
INDUSTRIES INCORPORATED
ITEM
2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
For the
four quarters ended June 30, 2009, retail sales of travel trailers and
fifth-wheel RVs did not decline as sharply as industry-wide wholesale shipments,
indicating that dealers were selling, but not replacing inventories, and
therefore dealer inventories declined. However, in the quarter ended September
30, industry-wide wholesale shipments of travel trailers and fifth-wheel RVs
increased 5 percent, while retail sales for July and August 2009, the last
months for which retail data is available, declined, indicating that dealers may
have restocked inventory. A survey of RV dealers indicated that dealer
inventories of towable RVs in the third quarter of 2009 were 90 days, consistent
with the 87 days sales in the second quarter of 2009, but a significant decline
from the 154 days sales reported for the third quarter of 2008. In that 2009
survey, only 16 percent of dealers said their inventories were too
high.
The RVIA has projected a 35 percent
decline in industry-wide wholesale shipments of travel trailers and fifth-wheel
RVs for 2009, to 120,700 units. However, based upon the increase in
industry-wide wholesale shipments of travel trailers and fifth wheel RVs
subsequent to the September 2009 RVIA forecast, the actual industry-wide
wholesale shipments in 2009 are likely to be greater than the RVIA
projection.
The RVIA has projected an increase in
industry-wide wholesale shipments of travel trailers and fifth-wheel RVs for
2010, to 155,700 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.
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.
The Institute for Building Technology
and Safety (“IBTS”) reported that for the first nine months of 2009,
industry-wide wholesale production of manufactured homes decreased 42 percent
over the first nine months of 2008, including a 37 percent decline during the
third quarter of 2009. Manufactured homes contain one or more “floors” or
sections which can be joined to make larger homes. For the first nine months of
2009, larger multi-section manufactured homes represented 63 percent of the
total manufactured homes produced, down from 68 percent for all of 2007, and 80
percent in all of 2003. Multi-section manufactured homes contain more of the
Company’s products than single-section manufactured homes.
DREW
INDUSTRIES INCORPORATED
ITEM
2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
The decline in multi-section homes over
the past few years is 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 had
done historically.
For the full year 2009, industry-wide
wholesale production of manufactured homes is estimated to be approximately
45,000 to 50,000, a decline of over 85 percent since 1998. This 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).
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, subject to future adjustments based on inflation. The final regulations
for the insured lending limits were put into place in March 2009. The American
Recovery and Reinvestment Act of 2009 also authorized 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. The Worker, Homeownership, and Business Assistance Act of
2009 extended the tax credit until April 30, 2010, and also authorized a tax
credit of up to $6,500 for qualified repeat home buyers. 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 time.
The Company believes the manufactured
housing industry may begin to experience a modest recovery once the recession
ends and home buyers begin to look for affordable housing. However, 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 and the
first half of 2010.
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):
|
|
Nine Months Ended
|
|
|
Three Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Net
sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
RV
Segment
|
|
$ |
225,621 |
|
|
$ |
320,941 |
|
|
$ |
94,460 |
|
|
$ |
85,694 |
|
MH
Segment
|
|
|
67,627 |
|
|
|
113,004 |
|
|
|
27,206 |
|
|
|
38,580 |
|
Total
net sales
|
|
$ |
293,248 |
|
|
$ |
433,945 |
|
|
$ |
121,666 |
|
|
$ |
124,274 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RV
Segment
|
|
$ |
12,814 |
|
|
$ |
31,848 |
|
|
$ |
11,130 |
|
|
$ |
4,598 |
|
MH
Segment
|
|
|
2,559 |
|
|
|
10,989 |
|
|
|
2,831 |
|
|
|
3,913 |
|
Total
segment operating profit
|
|
|
15,373 |
|
|
|
42,837 |
|
|
|
13,961 |
|
|
|
8,511 |
|
Amortization
of intangibles
|
|
|
(4,185 |
) |
|
|
(3,670 |
) |
|
|
(1,410 |
) |
|
|
(1,547 |
) |
Corporate
|
|
|
(4,819 |
) |
|
|
(5,714 |
) |
|
|
(1,701 |
) |
|
|
(1,747 |
) |
Goodwill
impairment
|
|
|
(45,040 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
Other
items
|
|
|
(2,087 |
) |
|
|
1,561 |
|
|
|
463 |
|
|
|
(687 |
) |
Total
operating (loss) profit
|
|
$ |
(40,758 |
) |
|
$ |
35,014 |
|
|
$ |
11,313 |
|
|
$ |
4,530 |
|
Consolidated
Highlights
|
§
|
Net
sales in the third quarter of 2009 decreased 2 percent, or $3 million,
compared to the third quarter of 2008 due
to:
|
|
·
|
A
29 percent decline in net sales of the MH Segment due to the 37 percent
decline in industry-wide wholesale production of manufactured homes,
partially offset by market share
gains.
|
Partially
offset by:
|
·
|
A
10 percent increase in net sales of the RV Segment due to the 5 percent
increase in industry-wide wholesale shipments of travel trailers and
fifth-wheel RVs, as well as market share
gains.
|
The
Company’s RV Segment continued to achieve market share gains, led by
recently-introduced products, in particular, RV entry doors and the Company’s
Seating Technology furniture products.
In July
2009, a supplier of manufactured housing windows and doors exited the
market. Since then, the Company has gained new window business of $2
million in the third quarter of 2009, and more than $7 million
annually.
DREW
INDUSTRIES INCORPORATED
ITEM
2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
In
addition, with the purchase of entry door production equipment and inventory on
September 29, 2009, the Company is entering the $25 million to $30 million
market for manufactured housing entry doors. The Company will begin production
of manufactured housing entry doors in the fourth quarter of 2009. Approximately
half of this new potential is in aftermarket replacement entry doors for
manufactured homes. The Company’s aftermarket sales, primarily comprised of
windows and thermoformed bath products, were approximately $10 million to $12
million for the twelve months ended September 2009, and could increase if the
Company gains market share in aftermarket manufactured housing entry
doors.
|
§
|
Net
income for the third quarter of 2009 increased $4.6 million, or 177
percent, from the third quarter of 2008, primarily due to lower raw
material and health insurance costs, and fixed cost
reductions. In addition, incentive compensation was lower in
the third quarter of 2009 because year-to-date operating profit for
certain operations were below the pro-rata portion of previously
established annual incentive compensation
hurdles.
|
|
§
|
During
the third quarter of 2009, the Company continued to generate significant
cash flow, increasing cash and investments by over $20 million, to nearly
$47 million, and paying off the $1 million of remaining debt. This was
largely accomplished by cash flows provided by operating activities of $19
million.
|
|
§
|
Net
sales in October 2009 are expected to be up approximately 8 percent
compared to October 2008, an improvement over the 2 percent net sales
decline in the 2009 third quarter. October 2009 had one less shipping day
than October 2008.
|
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 fourth quarter of 2009, as
opposed to the reduced production schedules during the fourth quarter of 2008
and first few months of 2009. However, it is difficult to anticipate production
levels beyond November 2009, particularly during the traditionally slower winter
months. In addition, if retail sales slow further, RV manufacturers and
manufactured home producers could reduce their output, which would negatively
affect the Company.
|
§
|
For
the balance of 2009 and the first half of 2010, the Company does not
expect significant changes in the economy, the credit market, consumer
confidence, or the real estate and mortgage markets. In response to the
current economic environment, the Company has taken the following
steps:
|
|
·
|
Increased
market share for 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.
|
|
·
|
Strengthened
its balance sheet by reducing inventory and conserving
cash.
|
DREW
INDUSTRIES INCORPORATED
ITEM
2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
Cost
reduction measures benefitted the Company’s operating results in the third
quarter of 2009 by more than $2 million, compared to the third quarter of 2008,
and will benefit the full year 2009 operating results by more than $9 million as
compared to the full year 2008. The cost reduction measures taken in 2009 will
benefit 2010 by an additional $2.5 million. In addition, management has improved
production efficiencies. The Company anticipates that a significant
portion of the fixed cost reductions and production efficiencies implemented
will be retained even as sales increase.
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. Last years’
third quarter net income was reduced by $0.06 to $0.08 per diluted share
due to high material costs which impacts the comparison to the 2009 third
quarter. Then, earlier this year, raw material costs temporarily declined,
but have risen 10 percent to 30 percent in the last few months, depending
upon the type of raw material. The Company anticipates that these recent
cost increases will likely reduce operating profit in the fourth quarter
of 2009 by $1 million to $1.5
million.
|
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.
RV
Segment – Third Quarter
Net sales
of the RV Segment in the third quarter of 2009 increased 10 percent, or $9
million, compared to the third quarter of 2008 due to:
|
·
|
An
‘organic’ sales increase of approximately $10 million, or 12 percent, of
RV-related products. This increase was greater than the 5 percent increase
in industry-wide wholesale shipments of travel trailers and fifth-wheel
RVs, the Company’s primary RV market, primarily due to market share
gains.
|
Partially
offset by:
|
·
|
An
‘organic’ sales decline of approximately 39 percent or $1 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.
|
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 September 30, divided by the industry-wide wholesale
shipments of the different types of RVs for the twelve months ended September
30, was as follows:
DREW
INDUSTRIES INCORPORATED
ITEM
2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
|
|
2009
|
|
|
2008
|
|
|
Percent Change
|
|
Content
per Travel Trailer and
|
|
|
|
|
|
|
|
|
|
Fifth-Wheel
RV
|
|
$ |
2,088 |
|
|
$ |
1,870 |
|
|
|
12 |
% |
Content
per Motorhome
|
|
$ |
493 |
|
|
$ |
554 |
|
|
|
-11 |
% |
Content
per all RVs
|
|
$ |
1,762 |
|
|
$ |
1,513 |
|
|
|
16 |
% |
Sales of certain RV components have
been reclassified between travel trailer and fifth-wheel RVs, and motorhomes in
prior periods. The Company’s average product content per type of RV
does not include sales of replacement parts to aftermarket
customers. Prior periods have been adjusted to conform to this
presentation.
According
to the RVIA, industry production for the twelve months ended September 30, was
as follows:
|
|
2009
|
|
|
2008
|
|
|
Percent Change
|
|
Travel
Trailer and Fifth-
|
|
|
|
|
|
|
|
|
|
Wheel
RVs
|
|
|
120,800 |
|
|
|
218,900 |
|
|
|
-45 |
% |
Motorhomes
|
|
|
11,900 |
|
|
|
37,300 |
|
|
|
-68 |
% |
All
RVs
|
|
|
146,500 |
|
|
|
284,200 |
|
|
|
-48 |
% |
Operating
profit of the RV Segment in the third quarter of 2009 increased $6.5 million, or
142 percent, to $11.1 million, compared to the third quarter of 2008. The
increase in RV Segment operating profit was more than the Company would
typically expect based on the increase in net sales of $9 million.
The
operating margin of the RV Segment in the third quarter of 2009 was positively
impacted by:
|
·
|
Lower
raw material costs than in the third quarter of 2008 when raw material
costs were high. However, depending upon the type of raw material, costs
have recently risen 10 percent to 30
percent.
|
|
·
|
Implementation
of cost-cutting measures which reduced cost of
sales.
|
|
·
|
Labor
efficiencies due to operational improvements and the increase in
sales.
|
|
·
|
Lower
warranty and health insurance
costs.
|
|
·
|
A
decrease in selling, general and administrative expenses to 10.8 percent
of net sales in the third quarter of 2009 from 12.5 percent of net sales
in the third quarter of 2008, largely due to the implementation of fixed
cost reductions, lower fuel costs, and the spreading of fixed
administrative costs over a larger sales base. In addition, incentive
compensation was lower as a percent of sales in the third quarter of 2009
because year-to-date operating profit for certain operations were below
the pro-rata portion of previously established annual incentive
compensation hurdles.
|
|
·
|
The
spreading of fixed manufacturing costs over a larger sales
base.
|
Partially offset by:
DREW
INDUSTRIES INCORPORATED
ITEM
2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
RV
Segment – Year to Date
Net sales
of the RV Segment in the first nine months of 2009 decreased 30 percent, or $95
million, compared to the same period of 2008 due to:
|
·
|
An
‘organic’ sales decline of approximately $118 million, or 52 percent, of
RV-related products during the first six months of 2009, partially offset
by an ‘organic’ sales increase of approximately $10 million, or 12
percent, of RV-related products in the third quarter of 2009. The 35
percent ‘organic’ sales decline during the first nine months of 2009 was
due to the 39 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 52 percent or $6 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 nine months of 2009 decreased $19.0
million, or 60 percent, to $12.8 million, compared to the first nine 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 $15.7
million in the first nine months of 2009, a decrease of $16.1 million, or 51
percent, from the segment operating profit of $31.8 million in the same period
last year. This adjusted decline in RV Segment operating profit was 16 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 first nine months of 2009 was
positively impacted by:
|
·
|
Implementation
of cost-cutting measures which reduced cost of
sales.
|
|
·
|
Lower
warranty, health insurance, supplies and repair
costs.
|
Partially offset by:
|
·
|
Higher
raw material costs during the first six months of 2009, partially offset
by lower raw material costs in the third quarter of 2009 compared to the
third quarter of 2008 when raw material costs were high. However,
depending upon the type of raw material, costs have recently risen 10
percent to 30 percent.
|
|
·
|
Labor
inefficiencies due to the sharp drop in sales during the first six months
of 2009, partially offset by labor efficiencies during the third quarter
of 2009 due to operational improvements and the increase in
sales.
|
|
·
|
The
spreading of fixed manufacturing costs over a smaller sales
base.
|
DREW
INDUSTRIES INCORPORATED
ITEM
2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
|
·
|
An
increase in selling, general and administrative expenses to 12.3 percent
of net sales in the first nine months of 2009 from 12.1 percent of net
sales in the first nine 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 nine months of 2009 because year-to-date operating profit for
certain operations were below the pro-rata portion of previously
established annual incentive compensation
hurdles.
|
|
MH
Segment – Third Quarter
|
Net sales of the MH Segment in the
third quarter of 2009 decreased 29 percent, or $11 million, from the third
quarter of 2008, less than the 37 percent decrease in industry-wide production
of manufactured homes due primarily to market share gains. In July 2009, a
supplier of manufactured housing windows and doors exited the
market. Since then, the Company has gained new window business of $2
million in the third quarter of 2009, and more than $7 million
annually.
In addition, with the recent purchase
of entry door production equipment and inventory, the Company is entering the
$25 million to $30 million market for manufactured housing entry
doors. Approximately half of this new potential is in aftermarket
replacement entry doors for manufactured homes. The Company’s aftermarket sales,
primarily comprised of windows and thermoformed bath products, were
approximately $10 million to $12 million for the twelve months ended September
2009, and could increase if the Company gains market share in aftermarket
manufactured housing entry doors.
The trend in the Company’s average
product content per manufactured home produced 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 produced for the twelve months ended September 30, divided by
the number of manufactured homes and manufactured home floors produced by the
industry, respectively, for the twelve months ended September 30, was as
follows:
|
|
2009
|
|
|
2008
|
|
|
Percent Change
|
|
Content
per Home Produced
|
|
$ |
1,477 |
|
|
$ |
1,448 |
|
|
|
2 |
% |
Content
per Floor Produced
|
|
$ |
903 |
|
|
$ |
868 |
|
|
|
4 |
% |
The
Company’s average product content per manufactured home does not include sales
of replacement parts to aftermarket customers. Prior periods have
been adjusted to conform to this presentation.
According
to the IBTS, industry production for the twelve months ended September 30, was
as follows:
|
|
2009
|
|
|
2008
|
|
|
Percent Change
|
|
Total
Homes Produced
|
|
|
54,200 |
|
|
|
88,400 |
|
|
|
-39 |
% |
Total
Floors Produced
|
|
|
88,600 |
|
|
|
147,400 |
|
|
|
-40 |
% |
DREW
INDUSTRIES INCORPORATED
ITEM
2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
Operating
profit of the MH Segment in the third quarter of 2009 decreased 28 percent to
$2.8 million, compared to the third quarter of 2008, primarily due to the
decrease in net sales. The decline in MH Segment operating profit was
10 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 third 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 10 percent to 30
percent.
|
|
·
|
Lower
health insurance costs.
|
|
·
|
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.
|
|
·
|
Start
up costs incurred in connection with the new window business gained in the
third quarter of 2009
|
|
·
|
An
increase in selling, general and administrative expenses to 16.5 percent
of net sales in the third quarter of 2009 from 15.9 percent of net sales
in the third 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 third quarter of 2009 because year-to-date operating profit
for certain operations were below the pro-rata portion of previously
established annual incentive compensation
hurdles.
|
MH
Segment – Year to Date
Net sales of the MH Segment in the
first nine months of 2009 decreased 40 percent, or $45 million, from the same
period of 2008. Excluding $2 million in sales price increases, net sales of the
MH Segment declined 42 percent, consistent with the 42 percent decrease in
industry-wide production of manufactured homes. During the first six months of
2009, the Company’s sales decline 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. However, the Company’s third quarter 2009 sales decline was less
than the manufactured housing industry decline due primarily to market share
gains. In July 2009, a supplier of manufactured housing windows and
doors exited the market. Since then the Company has gained new window
business of $2 million in the third quarter of 2009, and more than $7 million
annually.
In addition, with the recent purchase
of entry door production equipment and inventory, the Company is entering the
$25 million to $30 million market for manufactured housing entry
doors. Approximately half of this new potential is in aftermarket
replacement entry doors for manufactured homes. The Company’s aftermarket sales,
primarily comprised of windows and thermoformed bath products, were
approximately $10 million to $12 million for the twelve months ended September
2009, and could increase if the Company gains market share in aftermarket
manufactured housing entry doors.
DREW
INDUSTRIES INCORPORATED
ITEM
2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
Operating
profit of the MH Segment in the first nine months of 2009 decreased 77 percent
to $2.6 million, compared to the first nine months of 2008, largely due to the
decline in sales. In addition, the Company had $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 $3.2 million in the first nine
months of 2009, a decrease of $7.8 million from the segment operating profit of
$11.0 million in the same period last year. The adjusted decline in MH Segment
operating profit was 16 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 first nine months of 2009 was
positively impacted by:
|
·
|
Implementation
of cost-cutting measures which reduced cost of
sales.
|
|
·
|
Lower
raw material costs. However, depending upon the type of raw
material, costs have recently risen 10 percent to 30
percent.
|
|
·
|
Lower
health insurance costs.
|
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 18.3 percent
of net sales in the first nine months of 2009 from 15.7 percent of net
sales in the first nine 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 nine
months of 2009 because year-to-date operating profit for certain
operations were below the pro-rata portion of previously established
annual incentive compensation
hurdles.
|
Corporate
Corporate
expenses for the first nine months of 2009 decreased $0.9 million compared to
the comparable period in 2008, due primarily to a decrease in incentive-based
compensation as a result of lower profits, as well as other cost
reductions. Corporate expenses for the third quarter of 2009 were
consistent with the 2008 third quarter as cost reductions were offset by higher
professional fees.
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.
DREW
INDUSTRIES INCORPORATED
ITEM
2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
Other non-segment items include the
following (in
thousands):
|
|
Nine Months Ended
|
|
|
Three Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Legal
proceedings
|
|
$ |
376 |
|
|
$ |
1,382 |
|
|
$ |
31 |
|
|
$ |
529 |
|
Gain
on sold facilities
|
|
|
(89 |
) |
|
|
(3,523 |
) |
|
|
(67 |
) |
|
|
(248 |
) |
Loss
on sold facilities and write-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
downs
to estimated current fair
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
value
of facilities to be sold
|
|
|
2,330 |
|
|
|
1,005 |
|
|
|
181 |
|
|
|
558 |
|
Other
|
|
|
(157 |
) |
|
|
- |
|
|
|
(435 |
) |
|
|
- |
|
Incentive
compensation impact of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
other
non-segment items
|
|
|
(113 |
) |
|
|
369 |
|
|
|
(113 |
) |
|
|
(118 |
) |
Other
(income) from the collection of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
a
previously reserved note
|
|
|
(260 |
) |
|
|
(794 |
) |
|
|
(60 |
) |
|
|
(34 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,087 |
|
|
$ |
(1,561 |
) |
|
$ |
(463 |
) |
|
$ |
687 |
|
Taxes
Our tax rate in the third quarter of
2009 was 35.4 percent, lower than the 38.6 percent rate for all of 2008, due to
the benefit of federal tax credits and tax reserve adjustments.
The tax rate in the first nine months
of 2009 was 34.8 percent, which is a combination of a 34.8 percent rate on the
goodwill impairment charge, and a 33.9 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 33.9 percent rate on the
remaining operations was lower than the 38.6 percent rate for all of 2008, as
the tax rate benefited from federal tax credits and tax reserve
adjustments.
The tax rate for the fourth quarter of
2009 is expected to be approximately 38 percent to 42 percent, depending upon
pre-tax results.
Interest
Expense, Net
The $0.1
million decrease in interest expense, net, in the third quarter of 2009, was
primarily due to lower debt levels. Interest expense for the first nine months
of 2009 was consistent with the same period of 2008.
DREW
INDUSTRIES INCORPORATED
ITEM
2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
LIQUIDITY
AND CAPITAL RESOURCES
The
Statements of Cash Flows reflect the following for the nine months ended
September 30, (in
thousands):
|
|
2009
|
|
|
2008
|
|
Net
cash flows provided by (used for) operating activities
|
|
$ |
45,075 |
|
|
$ |
(3,508 |
) |
Net
cash flows used for investment activities
|
|
$ |
(4,689 |
) |
|
$ |
(25,111 |
) |
Net
cash flows used for financing activities
|
|
$ |
(4,146 |
) |
|
$ |
(18,490 |
) |
Cash
Flows from Operations
Net cash
flows from operating activities in the first nine months of 2009 were $48.6
million better than in the first nine months of 2008, primarily as a result of a
$38.1 million reduction in inventories in the first nine months of 2009,
compared to a $26.4 million increase in the comparable period in 2008, partially
offset by (i) a larger seasonal increase in accounts receivable of $13.4
million, and (ii) lower after-tax operating results in the first nine 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 $5 million, depending upon the level of sales. However,
raw material costs have recently risen by 10 percent to 30 percent, depending
upon the type of raw material, which may impact the Company’s ability to reduce
inventory.
Depreciation
and amortization was $14.3 million in the first nine months of 2009, and are
expected to aggregate $18 million in 2009. The Company estimates that
depreciation and amortization will be approximately $16 million in 2010.
Non-cash stock-based compensation was $3.0 million in the first nine months of
2009, and is expected to be nearly $4 million for the full year. The Company
estimates that non-cash stock-based compensation will be approximately $4
million in 2010.
Cash
Flows from Investing Activities
Cash
flows used for investing activities of $4.7 million in the first nine months of
2009 included capital expenditures of $1.9 million. Capital expenditures for
2009 are expected to be less than $3 million, and are expected to be funded by
cash flows from operations. The Company estimates that capital expenditures will
be $5 million to $7 million in 2010.
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. Therefore, the aggregate
purchase price could increase to a maximum of $3.0 million.
DREW
INDUSTRIES INCORPORATED
ITEM
2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
On
September 11, 2009, Lippert acquired the patent-pending design for a tool box
containing a slide-out storage tray. This newly-designed product,
used in pick-up trucks, tow trucks and other mobile service vehicles, will be
produced at the Company’s existing manufacturing plants, with existing
management, utilizing production techniques with which the Company has extensive
experience. The purchase price was $0.4 million, which was paid at
closing. The acquisition was financed with available
cash.
On
September 29, 2009, Kinro purchased certain inventory and equipment used for the
production of front entry doors for manufactured homes. This
acquisition will increase Kinro’s content per manufactured home and also add a
new product category. The Company estimates that the current annual market for
front entry doors for manufactured homes is about $25 million to $30 million,
and that half of this new potential is in aftermarket replacement doors for the
millions of existing manufactured homes. Kinro will begin to
manufacture entry doors at plants in Indiana and South Carolina in the 2009
fourth quarter. The purchase price was $1.0 million, which was paid
at closing. The acquisition was financed with available
cash.
At September 30, 2009, the Company had
eight facilities and vacant land with an aggregate carrying value of $12.4
million which are not currently being used in production, including six
facilities and vacant land with an aggregate carrying value of $6.9 million
which are listed for sale. In 2009, the remaining two facilities were leased for
two and three year terms, for a combined $50,000 per month. Each lease also
contains an option for the lessee to purchase the facility at an amount in
excess of carrying value. In addition to the owned facilities, the Company is
attempting to sublease three vacant leased facilities.
Cash
flows used for investing activities of $25.1 million in the first nine months of
2008 included $31.6 million for an acquisition of a business and other
investments, which were financed from available cash. In addition, cash flows
from investing activities included proceeds of $9.8 million received from the
sale of fixed assets in connection with the Company’s consolidation of
production operations, partially offset by $3.3 million for capital
expenditures.
Cash
Flows from Financing Activities
Cash
flows used for financing activities for the first nine months of 2009 of $4.1
million were primarily due to net debt payments of $8.7 million, partially
offset by $4.6 million in cash and the related tax benefits from the exercise of
stock options. At September 30, 2009, the Company had no debt.
Cash
flows used for financing activities for the first nine months of 2008 of $18.4
million were primarily due to $10.2 million of net debt payments and $8.3
million for the purchase of treasury stock.
The
Company’s priorities for its cash are liquidity and security. At September 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 September 30, 2009), or LIBOR plus additional
interest ranging from 2.0 percent to 2.8 percent (2.0 percent at September 30,
2009) depending on the Company’s performance and financial condition. The Credit
Agreement expires December 1, 2011. At September 30, 2009, the Company had $8.4
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 September 30, 2009, the maximum leverage ratio covenant limits the
remaining availability under these facilities collectively to $24.5 million. The
$47 million in cash and investments at September 30, 2009, together with the
borrowing availability under our credit and shelf-loan facilities, are more than
adequate to finance the Company’s anticipated working capital and capital
expenditure requirements.
At
September 30, 2009, the Company was in compliance with all of its debt covenants
and expects to remain in compliance for the next twelve months.
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.
DREW
INDUSTRIES INCORPORATED
ITEM
2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
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 third quarter
of 2009 related to inflation.
NEW
ACCOUNTING PRONOUNCEMENTS
In May
2009, the Financial Accounting Standards Board (“FASB”) issued new accounting
and disclosure guidance for recognized and non-recognized subsequent events that
occur after the balance sheet date but before financial statements are issued.
The new guidance also requires disclosure of the date through which an entity
has evaluated subsequent events and the basis for that date. The provisions of
the new accounting guidance were effective for interim or annual periods ending
after June 15, 2009. The adoption of this new accounting guidance had no impact
on the Company.
In
December 2007, the FASB amended its guidance on accounting for business
combinations. The new accounting guidance 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 the new accounting guidance were 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 new accounting guidance which establishes a
framework for reporting fair value and expands disclosures about fair value
measurements. The provisions of the new accounting guidance were effective for
fiscal years beginning after November 15, 2007. However, in February
2008, the FASB delayed the effective date of the new accounting guidance 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 the new accounting guidance 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.
DREW
INDUSTRIES INCORPORATED
ITEM
2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
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”).
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, 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 has historically been exposed to changes in interest rates primarily as
a result of its financing activities. At September 30, 2009, the
Company had no outstanding borrowings.
At
September 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 September 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 September 30, 2009 or subsequent to the date the
Company completed its evaluation, which have materially affected, or are
reasonably likely to materially affect, the Company’s internal control over
financial reporting.
Over the
last few years, the internal controls of Lippert have incrementally been
strengthened due both to the installation of enterprise resource planning
(“ERP”) software and business process changes. In the third quarter of 2009, the
Company implemented certain significant functions of the ERP software and
business process changes at Kinro. Implementation of additional functions of the
ERP software and business process changes are planned during the upcoming
quarters at 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 she no longer owned the bathtub. 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.
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.
On August
26, 2009, the Court issued an Order granting in part defendants’ motion for
reconsideration. The Court concluded that the May 18, 2009 decision of the
California Supreme Court does bar plaintiffs’ fraud-based UCL claim because
plaintiffs did not actually rely on defendants’ labels when they bought the
homes containing the bathtubs. Therefore, the Court dismissed that claim.
However, the Court concluded that simply selling bathtubs which may fail to
satisfy Federal standards may violate the “unfair prong” of the UCL, even if
plaintiffs did not actually rely on defendant’s labels.
On
September 11, 2009, defendants filed with the Ninth Circuit Court of Appeals a
Petition for Permission to Appeal, on an interlocutory basis, that part of the
District Court’s ruling on the motion for reconsideration that certified a class
to pursue a claim under the “unfair prong” of the UCL. Defendants contend in
this petition that the District Court erred because (1) plaintiffs neither
alleged nor sought to certify such a claim, and (2) such a claim does not exist
under California law based on the facts in this case. Plaintiffs filed an
opposition to defendants’ petition, and the Ninth Circuit has not yet
ruled.
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 dismissing five of
plaintiffs’ six claims, 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.
If
defendants’ motion for appeal is denied, and 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, 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 September 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, except as noted below.
No additional charges for
impairment to goodwill will be recorded.
In our 2008 Annual Report on Form 10-K,
we indicated that the severe decline during 2008 in the industries to which we
sell our products, and the resulting decline in demand for our products, could
result in non-cash impairment charges for goodwill and other intangible
assets.
After
conducting an impairment analysis during the first quarter of 2009, we recorded
a non-cash charge to write-off the entire $45 million of goodwill of our
reporting units. We will not have any additional impairment charges for
goodwill.
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
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/s/ Joseph S. Giordano
III
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|
Joseph
S. Giordano III
|
|
Chief
Financial Officer and
Treasurer
|
November
9, 2009