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EX-21 - LCI INDUSTRIES | v177000_ex21.htm |
EX-23 - LCI INDUSTRIES | v177000_ex23.htm |
EX-31.1 - LCI INDUSTRIES | v177000_ex31-1.htm |
EX-32.1 - LCI INDUSTRIES | v177000_ex32-1.htm |
EX-32.2 - LCI INDUSTRIES | v177000_ex32-2.htm |
EX-31.2 - LCI INDUSTRIES | v177000_ex31-2.htm |
EX-14.2 - LCI INDUSTRIES | v177000_ex14-2.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM 10-K
x ANNUAL
REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended
December 31,
2009
or
o TRANSITION REPORT PURSUANT TO SECTION
13 or 15(d) OF THE SECUTITIES EXCHANGE ACT OF 1934 For the transition
period from to
___________________
Commission file number:
|
001-13646
|
Drew Industries Incorporated
(Exact
name of registrant as specified in its charter)
Delaware
|
13-3250533
|
|
State
or other jurisdiction of incorporation or organization
|
(I.R.S.
Employer Identification
No.)
|
200 Mamaroneck Avenue, White
Plains, NY
|
10601
|
(Address of principal executive offices)
|
(Zip
Code)
|
Registrant’s
telephone number, including area code: (914)
428-9098
Securities
registered pursuant to Section 12(b) of the Act:
Title
of each class
|
Name
of each exchange on which registered
|
|
Common Stock, par value
$0.01
|
New York Stock
Exchange
|
Securities
registered pursuant to section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the securities Act.
¨ Yes x No
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
£
Yes x
No
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. x Yes £
No
Indicate
by check mark whether the registrant submitted electronically and posted on its
corporate Website, if any, every Interactive Data File required to be submitted
and posted pursuant to the Rule 405 of Regulations S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). £
Yes £
No
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment of this Form 10-K. x
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
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12(b)-2 of the Exchange Act. Accelerated
filer x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). £
Yes x
No
The
aggregate market value of the voting common equity held by non-affiliates
computed by reference to the price at which the common equity was last sold, or
the average bid and asked price of such common equity, as of the last business
day of the registrant’s most recently completed second fiscal quarter was
$225,918,593. Registrant has no non-voting common stock.
The
number of shares outstanding of the registrant’s common stock, as of the latest
practicable date (February 26, 2010) was 21,973,608 shares of common
stock.
DOCUMENTS
INCORPORATED BY REFERENCE
Proxy Statement with respect to the
2010 Annual Meeting of Stockholders to be held on May 19, 2010 is incorporated
by reference into Items 10, 11, 12 and 14 of Part III.
SPECIAL NOTE REGARDING FORWARD-LOOKING
STATEMENTS
This Form
10-K contains certain “forward-looking statements” within the meaning of the
Private Securities Litigation Reform Act of 1995 with respect to financial
condition, results of operations, business strategies, operating efficiencies or
synergies, competitive position, 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-K 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, income (loss), cash flow, and financial condition, whenever they occur
in this Form 10-K 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-K, 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-K, 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
(“RVs”), inventory levels of dealers 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 either 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 affect the retail sale of RVs and manufactured homes.
PART
I
Item
1. BUSINESS.
Summary
Drew
Industries Incorporated (“Drew” or the “Company” or the “Registrant”) has two
reportable operating segments: the recreational vehicle (“RV”) products segment
(the “RV Segment”), and the manufactured housing products segment (the “MH
Segment”). The RV Segment accounted for 79 percent of consolidated net sales for
2009, and the MH Segment accounted for 21 percent of consolidated net sales for
2009. Nearly 93 percent of the Company’s RV Segment sales were of products for
travel trailers and fifth-wheel RVs. The balance represents sales of components
for motorhomes and mid-size buses, and sales of specialty trailers for hauling
boats, personal watercraft, snowmobiles and equipment, as well as axles for
specialty trailers. Drew’s operations are conducted through its wholly-owned
subsidiaries, Kinro, Inc. and its subsidiaries (collectively, “Kinro”), and
Lippert Components, Inc. and its subsidiaries (collectively, “Lippert”), each of
which has operations in both the RV Segment and the MH Segment.
Over the
last ten years, the Company acquired a number of manufacturers of products for
RVs, manufactured homes, and specialty trailers, expanded its geographic market
and product lines, consolidated manufacturing
facilities, and integrated manufacturing, distribution and administrative
functions. At December 31, 2009, the Company operated 24 manufacturing
facilities in 12 states, and achieved consolidated net sales of $398 million for
the year.
2
The
Company was incorporated under the laws of Delaware on March 20, 1984, and is
the successor to Drew National Corporation, which was incorporated under the
laws of Delaware in 1962. The Company's principal executive and administrative
offices are located at 200 Mamaroneck Avenue, White Plains, New York 10601;
telephone number (914) 428-9098; website www.drewindustries.com;
e-mail drew@drewindustries.com.
The Company makes available free of charge on its website its Annual Report on
Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K (and
amendments to those reports) filed with the Securities and Exchange Commission
as soon as reasonably practicable after such materials are electronically
filed.
Recent
Developments
Sales
and Profits During the Recession
In Item
7. “Management’s Discussion and Analysis of Financial Condition and Results of
Operations,” we describe in detail the effect on our operations of the
substantial decline in sales in both the RV Segment and the MH Segment during
2009 and 2008.
Briefly,
during 2008, as a result of the severe economic downturn and the resulting
decline in shipments by the RV and manufactured housing industries, the two
industries to which we sell our products, we suffered a 24 percent decline in
our sales from $669 million in 2007 to $511 million in 2008. Our net income
declined 71 percent from $39.8 million in 2007 to $11.7 million in 2008, after
giving effect to $4.9 million of after-tax charges related to goodwill
impairment and executive retirement.
During
the first six months of 2009, the economy and the industries we serve remained
weak. As a result, we experienced a 45 percent decline in our sales from $310
million in the first six months of 2008 to $172 million in the first six months
of 2009. In the first six months of 2009, we reported a net loss of $34.1
million, including a non-cash after-tax charge of $29.4 million related to a
goodwill impairment, as compared to net income of $18.3 million in the first six
months of 2008.
The
decline in our results for 2008 and the first six months of 2009 would have been
substantially greater had it not been for an aggressive program of cost-cutting
measures and efficiency improvements implemented beginning in the latter part of
2006, as well as the introduction of a variety of new products. The benefits of
these cost-cutting measures will be realized for years to come. Collectively,
the fixed cost reductions since 2006 have improved our annual operating profit
by nearly $25 million as compared to what our results would have been if these
steps had not been taken.
During
the second half of 2009, industry-wide wholesale shipments of travel trailer and
fifth-wheel RVs, the Company’s primary RV market, increased 32 percent compared
to the second half of 2008, while manufactured housing industry-wide production
declined by 33 percent. As a result, our sales increased to $226 million in the
second half of 2009, or 13 percent over the same period in 2008, and we reported
net income of $10.1 million in the second half of 2009 as compared to a net loss
of $6.6 million in the comparable period of 2008.
Our sales
for the first two months of 2010 more than doubled to over $90 million, compared
to less than $44 million in the same period of 2009, when most RV producers were
shut down for extended periods of time. Nearly all of this increase was in sales
of the Company’s RV products. Sales of manufactured housing products increased
approximately 3 percent as compared to the first two months of
2009.
On
February 19, 2010, the Recreational Vehicle Industry Association (“RVIA”)
published its latest forecast of industry-wide wholesale shipments for 2010,
which projects a 31 percent increase in the shipments of travel trailers and
fifth-wheel RVs as compared to 2009. There is no assurance that this RV
industry-wide wholesale shipments level will be achieved. There are no industry
forecasts for the manufactured housing industry.
Liquidity
During
2009, in large part because of inventory reduction, as well as cost-cutting and
efficiency improvements, the Company generated significant cash flow. As a
result, at December 31, 2009, the Company had no debt and $65 million in cash and
short-term investments.
3
The
Company and its subsidiaries have a $50 million revolving line of credit
facility with JPMorgan Chase Bank, N.A. and Wells Fargo Bank, N.A., which
expires in December 2011, and a $125 million “shelf-loan” facility with
Prudential Investment Management, Inc. and its affiliates, which expires in
November 2011. Aggregate borrowing availability under these facilities at
December 31, 2009 was $37.8 million.
Acquisitions
On May 15, 2009, Lippert acquired the
patents for the QuickBiteTM
coupler, 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 from available cash,
with the balance to be paid on May 15, 2010. 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.
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, is being 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 from available cash.
On September 29, 2009, Kinro acquired
certain inventory and equipment used for the production of front entry doors for
manufactured homes, which will increase Kinro’s content per manufactured home
and add a new product category. Kinro began to manufacture entry doors at plants
in Indiana and South Carolina in the 2009 fourth quarter. The purchase price was
$0.9 million, which was paid at closing from available cash.
On February 18, 2010, Lippert acquired
the patent-pending design for a six-point leveling system for fifth-wheel RVs.
The purchase price was $1.4 million paid at closing with available cash, plus an
earn-out depending on future unit sales of the system in excess of certain sales
hurdles.
On
February 18, 2010, the Company reported that Lippert agreed in principle to
acquire certain intellectual property and other assets from Michigan-based
Schwintek, Inc. The purchase would include several products for which patents
are pending, including innovative RV wall slides that are considerably lighter,
more space efficient, and more reliable than previous slide-out designs. The
purchase price, undisclosed at the time of the announcement, is expected to
include cash payable at closing, plus an earn-out depending on future unit
sales. It is expected that the cash portion of the purchase price payable at
closing will be funded from available cash. Closing of the transaction is
subject to completion of due diligence, agreement on final terms and conditions,
the execution of definitive transaction documents, and satisfaction of customary
closing conditions.
RV
Segment
Through
its wholly-owned subsidiaries, the Company manufactures and markets a number of
components used in the production of RVs, primarily travel trailers and
fifth-wheel 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
bath, kitchen and other 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
|
In 2009,
the RV Segment represented 79 percent of the Company's consolidated net sales,
and 84 percent of consolidated segment operating profit. Nearly 93 percent of
the Company’s RV Segment sales are of products used in travel trailers and
fifth-wheel RVs. The balance represents sales of components for motorhomes and
mid-size buses, and sales of specialty trailers, as well as axles for specialty
trailers.
4
Raw
materials used by the Company's RV Segment, consisting primarily of fabricated
steel (coil, sheet, tube and I-beam), extruded aluminum, glass, fabric and
polyfoam are available from a number of sources, both domestic and
foreign.
Operations
of the Company's RV Segment consist primarily of fabricating, welding, painting
and assembling components into finished products, and tempering glass. The
Company's RV Segment operations are conducted at 15 manufacturing and warehouse
facilities throughout the United States, strategically located in proximity to
the customers they serve. Of these facilities, 6 also conduct operations in the
Company's MH Segment. See Item 2. “Properties.”
The
Company's RV Segment products are sold primarily to major manufacturers of RVs
such as Thor Industries (symbol: THO), Forest River (a subsidiary of Berkshire
Hathaway, symbol: BRKA), and Heartland Recreational Vehicles.
The
Company's RV Segment operations compete on the basis of price, customer service,
product quality, and reliability. Although definitive information is not readily
available, the Company believes that (i) its market share for most of its
towable RV window and door products exceeds 75 percent; (ii) the two
leading suppliers of RV chassis and chassis parts are the Company and
Dexter, a division
of Tomkins plc, and the Company's market share for RV chassis, chassis parts and
slide-out mechanisms for travel trailers and fifth-wheel RVs is approximately 70
percent; (iii) the leading suppliers of axles for towable RVs are the Company,
Al-Ko Kober and Dexter, and the Company’s market share for axles for towable RVs
is approximately 50 percent; and (iv) its
market share for upholstered furniture for RVs is approximately 30 percent, and
the Company competes with several other manufacturers. See Item 1. “Business –
Intellectual Property” for a description of the patent license agreement
applicable to certain of the Company’s slide-out mechanisms.
Detailed
narrative information about the results of operations of the RV Segment is
included in Item 7. “Management’s Discussion and Analysis of
Financial Condition and Results of Operations.”
MH
Segment
Through
its wholly-owned subsidiaries, the Company manufactures and markets a number of
components for new and aftermarket manufactured homes and, to a lesser extent,
modular housing and office units, including:
●Vinyl
and aluminum windows and screens
|
●Steel
chassis
|
|
●Thermoformed
bath and kitchen products
|
●Steel
chassis parts
|
|
●Axles
|
●Entry
doors
|
In 2009,
the MH Segment represented 21 percent of the Company's
consolidated net sales, and 16 percent of consolidated
segment operating profit. 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. The MH Segment also supplies
related products to other industries, representing less than 5 percent of sales
of this segment.
Raw
materials used by the Company's MH Segment, consisting of fabricated steel
(coil, sheet, and I-beam), extruded aluminum and vinyl, glass, and ABS resin,
are available from a number of sources, both domestic and foreign.
Operations
of the Company's MH Segment consist primarily of fabricating, welding,
thermoforming, painting and assembling components into finished products. The
Company's MH Segment operations are conducted at 15 manufacturing and
warehouse facilities throughout the United States, strategically located in
proximity to the customers they serve. Of these facilities, 6 also conduct operations
in the Company's RV Segment. See Item 2. “Properties.”
5
The
Company's manufactured housing products are sold primarily to major builders of
manufactured homes such as Clayton Homes (a subsidiary of Berkshire Hathaway,
symbol: BRKA) and Skyline Corporation (symbol: SKY) and, to a lesser extent, to
distributors of aftermarket products.
The
Company's MH Segment competes on the basis of price, customer service, product
quality, and reliability. Although definitive information is not readily
available, the Company believes that (i) it is the leading supplier of windows
for manufactured homes, and the Company's market
share for windows and screens exceeds 75 percent; (ii) the
Company's manufactured housing chassis and chassis parts operations compete with
several other manufacturers of chassis and chassis parts, as well as with
builders of manufactured homes, most of which produce their own chassis and
chassis parts, and the Company’s market share for chassis and chassis parts for
manufactured homes is approximately 25 percent; (iii) the Company’s thermoformed
bath and kitchen unit operation competes with three other manufacturers of bath
and kitchen units and the Company’s market share for bath and kitchen products
in the product lines the Company supplies exceeds 50 percent.
Detailed
narrative information about the results of operations of the MH Segment is
included in Item 7. “Management’s Discussion and Analysis of
Financial Condition and Results of Operations.”
Sales
and Marketing
Other
than the activities of its sales personnel and maintenance of customer
relationships through price, quality of its products, service, and customer
satisfaction, the Company does not engage in significant marketing efforts, and
does not incur significant marketing or advertising expenditures.
The
Company has several
supply agreements or other arrangements with certain of its customers that
provide for prices of various products to be fixed for periods generally not in
excess of eighteen months; however, in certain cases the Company has the right
to renegotiate the prices on sixty-days’ notice. Both the RV Segment and the MH
Segment typically ship products on average within one to two weeks of receipt of
orders from their customers and, as a result, neither segment has any
significant backlog.
The
Company’s operations are somewhat seasonal, as sales are typically slower in the
first and fourth quarters, consistent with the industries which the Company
supplies.
Capacity
In 2009,
the Company’s facilities operated at an average of approximately 45 percent of their
practical capacity, and typically ran one shift of production per day.
Therefore, when demand increased in the RV industry in the latter part of 2009,
the Company had the ability to increase production, and could substantially
increase production should demand increase further in the RV or manufactured
housing industries. Due to seasonal demand, capacity utilization varies during
the year. Capacity utilization also varies significantly by product line and
geographic region. At December 31, 2009, the Company operated 24 facilities, and for most
products has the ability to fill demand in excess of capacity at individual
facilities by shifting production to other facilities, but the Company would
incur additional freight costs. Capital expenditures for 2009 were $3.1 million.
The ability to expand capacity in certain product areas, if necessary, as well
as the potential to reallocate existing resources, is monitored regularly by
management.
Intellectual
Property
The
Company manufactures and sells certain of its slide-out mechanisms pursuant to a
non-exclusive license granted by the exclusive licensee and owner of three
patents until October 24, 2017, the date of the last to expire of the patents.
Pursuant to the license, remaining royalties are payable by the Company on an
annual basis until expiration of the patents at the rate of one percent of sales
of certain slide-out mechanisms produced by the Company. For 2009, the Company
paid royalties of $0.2 million on sales of applicable slide-out systems.
Pursuant to the license, aggregate royalty payments subsequent to December 31,
2009 through the expiration of the patents cannot exceed $4.3
million.
6
The
Company holds several United States patents and patent applications that relate
to various products sold by the Company, and has granted certain licenses that
permit third parties to manufacture and sell products in consideration for
royalty payments. While the Company believes that its patents are valuable, and
vigorously protects its patents when appropriate, none of the individual patent
rights is essential to the Company or its business segments.
From time
to time, the Company has received notices that it may be infringing certain
patent rights of others, and the Company has given notices to others that they
may be infringing certain patent rights of the Company. Although the Company has
asserted patent infringement claims against others, no material litigation is
currently pending as a result of these claims.
Regulatory
Matters
Windows
and entry doors produced by the Company for manufactured homes must comply with
performance and construction regulations promulgated by the U.S. Department of
Housing and Urban Development (“HUD”) and by the American Architectural
Manufacturers Association relating to air and water infiltration, structural
integrity, thermal performance, emergency exit conformance, and hurricane
resistance. Certain of the Company’s products must also comply with the
International Code Council standards, such as the IRC (International Residential
Code), the IBC (International Building Code), and the IECC (International Energy
Conservation Code) as well as state and local building codes. Thermoformed bath
products manufactured by the Company for manufactured homes must comply with
performance and construction regulations promulgated by HUD.
Windows
and doors produced by the Company for the RV industry are regulated by The U.S.
Department of Transportation Federal Highway Administration (“DOT”) and National
Highway Traffic Safety Administration (“NHTSA”) division of the DOT governing
safety glass performance, egressability, door hinge and lock systems, egress
window retention hardware, and baggage door ventilation.
New tires
distributed by the Company are subject to regulations promulgated by DOT and by
HUD relating to weight tolerance, maximum speed, size and
components.
Trailers
produced by the Company for hauling boats, personal watercraft, snowmobiles and
equipment must comply with regulations promulgated by the NHTSA and Federal
Motor Vehicle Safety Standards relating to lighting, breaking, wheels, tires and
other vehicle systems.
Rules
promulgated under the Transportation Recall Enhancement, Accountability and
Documentation Act (the “Tread Act”) require manufacturers of motor vehicles and
certain motor vehicle related equipment to regularly make reports and submit
documents and certain historical data to NHTSA to enhance motor vehicle safety,
and to respond to requests for information relating to specific complaints or
incidents.
Upholstered
products and mattresses produced by the Company for motorized RVs must comply
with Federal Motor Vehicle Safety Standards promulgated by NHTSA and regulations
promulgated by the Consumer Products Safety Commission regarding flammability.
Plywood, particleboard and fiberboard used in these products are required to
comply with standards for formaldehyde emission levels promulgated by the
California Air Resources Board and adopted by the RVIA.
The
Company's operations are also subject to certain Federal, state and local
regulatory requirements relating to the use, storage, discharge and disposal of
hazardous chemicals used during their manufacturing processes.
The
Company believes that it is currently operating in compliance with applicable
laws and regulations and has made reports and submitted information as required.
The Company does not believe that the expense of compliance with these laws and
regulations, as currently in effect, will have a material effect on the
Company's capital expenditures, earnings or competitive
position.
7
Employees
The number of persons employed
full-time by the Company and its subsidiaries at December 31, 2009 was 3,054,
compared to 2,223 at December 31, 2008 and
3,499 at December 31, 2007. Of the total at December 31, 2009, 2,675 were in manufacturing
and product research and development, 102 in transportation,
23 in sales, 61 in
customer support and servicing, and 193 in administration. None of the employees
of the Company and its subsidiaries are subject to collective bargaining
agreements. The Company and its subsidiaries believe that relations with its
employees are good.
Item
1A. RISK FACTORS.
Industry
Risk Factors
Economic and business
conditions beyond our control have had a significant adverse impact on our
earnings, and these conditions may continue.
Our net
sales in 2009 fell 22 percent compared to
2008, which adversely impacted our operating results. We attribute this decline
to a combination of factors, including the weak economy and resulting recession,
tight credit, low consumer confidence, and the deterioration in the real estate
and mortgage markets. As a result of these conditions, which may continue,
dealers reduced inventories and consumers have been cautious about making
purchases of discretionary “big-ticket” items such as RVs and manufactured
homes. See Item 7. “Management’s Discussion and Analysis of Financial Condition
and Results of Operations”.
The
severe decline in the retail demand and wholesale production of RVs and
manufactured homes has reduced the demand for our products. Our annual results
of operations could decline if industry conditions worsen.
Reductions in the
availability of wholesale financing limits the inventories carried by retail
dealers of RVs and manufactured homes, which causes reduced production of RVs
and manufactured homes and reduced demand for our products.
Retail
dealers of RVs and manufactured homes generally finance their purchases of
inventory with financing known as floor-plan financing provided by lending
institutions. Reduction in the availability of floor-plan financing would cause
many dealers to reduce inventories of RVs and manufactured homes, which would
result in reduced production of RVs and manufactured homes, resulting in reduced
demand for our products.
Moreover,
dealers which are unable to obtain adequate financing could cease operations.
Their remaining inventories would likely be sold at deep discounts. Such sales
would cause a decline in orders for new inventory, which would reduce demand for
our products.
The recession and conditions
in the credit market have limited, and could continue to limit, the ability of
consumers to obtain financing for RVs and manufactured homes, resulting in
reduced demand for our products.
As a
result of the recession and the factors leading to it, there have been
significant changes in the lending practices of financial institutions, and many
lenders have severely restricted loan availability. Limitations on the
availability of financing for RVs and manufactured homes limit the ability of
consumers to purchase RVs and manufactured homes, resulting in reduced
production, and reduced demand for our products.
Limited availability of
financing for manufactured homes and higher costs of this financing limits the
ability of consumers to purchase manufactured homes, which would result in
reduced demand for our products.
Loans
used to finance the purchase of manufactured homes usually have shorter terms
and higher interest rates, and are more difficult to obtain than mortgages for
site-built homes. Historically, lenders required higher down payment, higher
credit scores and other criteria for these loans. Current lending criteria are
even higher, and many potential buyers of manufactured homes may not
qualify.
8
The
availability, cost, and terms of these loans are also dependent on economic
conditions, lending practices of financial institutions, governmental policies,
and other factors, all of which are beyond our control. Reductions in the
availability of financing for manufactured homes and increases in the costs of
this financing have limited, and could continue to limit, the ability of
consumers to purchase manufactured homes, resulting in reduced production of
manufactured homes and reduced demand for our products.
Excess inventories at
dealers and manufacturers can cause a decline in the demand for our
products.
As a
result of the severe decline in sales of RVs and manufactured homes, dealers and
manufacturers of RVs and manufactured homes carried excess unsold inventory.
Existence of excess inventory can cause a reduction in orders for new RVs and
manufactured homes, which would cause a decline in demand for our
products.
High levels of repossessions
of manufactured homes and RVs could cause manufacturers to reduce production of
new manufactured homes and RVs, resulting in reduced demand for our
products.
Repossessed
manufactured homes and RVs are resold by lenders, often at substantially reduced
prices, which reduces the demand for new manufactured homes and RVs. Economic
conditions could result in loan defaults and cause high levels of repossessions,
which would cause manufacturers to reduce production of new manufactured homes
and RVs, resulting in reduced demand for our products.
Gasoline shortages, or high
prices for gasoline, could lead to reduced demand for our
products.
Travel
trailer and fifth-wheel RVs, components for which represent nearly 93 percent of
our RV Segment sales, are usually towed by light trucks or SUVs. Generally,
these vehicles use more fuel than automobiles, particularly while towing RVs.
High prices for gasoline, or anticipation of potential fuel shortages, can
affect consumer use and purchase of light trucks and SUVs, which would result in
reduced demand for fifth-wheel RVs and travel trailers, and therefore reduced
demand for our products.
Disposition into the market
by FEMA of RVs or manufactured homes could result in reduced demand for our
products.
From time
to time, FEMA purchases RVs or manufactured homes for use in connection with
natural disasters or other circumstances resulting in home displacements. Used
or unused RVs or manufactured homes may later be disposed of by FEMA by sale or
otherwise. Disposition of these RVs and manufactured homes in the market could
reduce demand for new RVs and manufactured homes causing manufacturers to reduce
production, which would result in reduced demand for our products.
The manufactured housing
industry has been experiencing a significant decline in shipments, which may
continue.
Our MH
Segment, which accounted for 21 percent of consolidated net sales for 2009,
operates in an industry which has been experiencing a decline in production of
new homes since 1998. The downturn was caused, in part, by limited availability
of financing, and has been exacerbated by economic conditions.
Moreover,
because of the weak market for conventional housing, retirees may not be able to
sell their primary residences, or may be unwilling to sell at currently
depressed prices, and purchase less expensive manufactured homes. In addition,
the availability of foreclosed site-built homes at reduced prices could impact
the demand for manufactured homes.
If these
conditions persist, it is not likely that the manufactured housing industry will
improve in the short-term, and certain of our customers could experience
financial difficulties. These factors could result in reduced demand for
products from our MH Segment, as well as difficulties in collecting accounts
receivable.
9
Changes in zoning
regulations for manufactured homes could lead to reduced demand for our
products.
Manufactured
housing communities and individual home placements are subject to local zoning
regulations. In the past, there has been resistance by local property owners and
zoning officials to zoning ordinances allowing the location of manufactured
homes in certain areas comprised of conventional residences. Continued
resistance to these zoning ordinances could have an adverse impact on sales and
production of manufactured homes, which would reduce demand for our
products.
Recently enacted legislation
and regulatory changes relating to the financial services industry could impact
the industries we serve which could result in reduced demand for our
products.
The Secure and Fair Enforcement for
Mortgage Licensing Act of 2008 (“SAFE Act”) was signed into law in July, 2008.
The SAFE Act is intended to establish, within one year from its passage, minimum
state standards for licensing and registration of mortgage lenders, brokers and
originators. According to the RVIA and the Manufactured Housing Institute, this
legislation could make loans for RVs and manufactured homes more difficult to
obtain, resulting in fewer sales of RVs and manufactured homes, and less demand
for our products.
Company-specific
Risk Factors
Volatile raw material costs
could adversely impact our financial condition and operating
results.
The
prices we pay for steel, which represents about 50 percent of our raw material
costs, and other key raw materials, have been volatile.
Because
competition and business conditions may limit the amount or timing of increases
in raw material costs that can be passed through to customers in the form of
price increases, future increases in raw material costs could adversely impact
our financial condition and operating results. Conversely, as raw material costs
decline, we may not be able to maintain selling prices consistent with higher
cost raw materials in our inventory, which could adversely affect our operating
results.
Inadequate supply of raw
materials used to make our products could adversely impact our financial
condition and operating results.
If raw
materials or components that are used in manufacturing our products,
particularly those which we import, become unavailable, or if the supply of
these raw materials and components is interrupted, our manufacturing operations
could be adversely affected. The Company currently imports approximately 15
percent of its raw materials and components.
We are involved in certain
litigation, which, if decided against us, could have a material adverse affect
on our financial condition.
A case is
pending against Kinro, purporting to be a class action, in which it is alleged
that certain bathtubs manufactured by Kinro for use in manufactured homes fail
to comply with certain safety standards relating to flame spread. Kinro denies
the allegations, is vigorously defending against the claims, and based on
extensive investigation, believes that the bathtubs are in compliance with
applicable regulations. Further detail regarding the litigation is provided in
this Form 10-K in Item 3. “Legal Proceedings.”
The loss of any customer
accounting for more than 10 percent of our consolidated net sales, and the
consolidation of customers in our industry, could have a material adverse impact
on our operating results.
One
customer of the RV Segment accounted for 25 percent, and another customer of
both the RV Segment and the MH Segment accounted for 24 percent, of our
consolidated net sales in 2009. The loss of either of these customers could have
a material adverse impact on our operating results.
In
addition, the concentration of sales of our products to fewer customers as a
result of consolidation of manufacturers in the industries we serve could
adversely impact our operating results.
10
The financial condition of
several of our significant customers could adversely impact our financial
condition and operating results.
Financial
difficulties experienced by certain of our significant customers as a result of
the sharp decline in sales of RVs and manufactured homes could result in reduced
demand for our products, as well as losses due to the inability to collect
accounts receivable.
Competitive pressures could
reduce demand for our products.
Domestic
and foreign competitors may lower prices on products which currently compete
with our products, or develop product improvements, which could reduce demand
for our products. In addition, the manufacture by our customers of products
supplied by us could reduce demand for our products.
Non-cash charges for
impairment of long-lived other intangible assets may be
required.
The
declines in the industries to which we sell our products have been severe, and
demand for our products has declined. Continuation of the decline in these
industries could result in non-cash impairment charges.
Item
1B. UNRESOLVED STAFF COMMENTS.
None.
Item
2. PROPERTIES.
The
Company’s manufacturing operations are conducted at facilities that are used for
both manufacturing and warehousing. In addition, the Company maintains
administrative facilities used for corporate and administrative functions. At
December 31, 2009, the Company's properties were as follows:
RV
SEGMENT
|
||||||||||||||
City
|
State
|
Square Feet
|
Owned
|
Leased
|
||||||||||
Rialto
(1)
|
California
|
56,430 |
P
|
|||||||||||
Fitzgerald
(1)
|
Georgia
|
15,800 |
P
|
|||||||||||
Burley
|
Idaho
|
17,000 |
P
|
|||||||||||
Goshen
(1)
|
Indiana
|
385,000 |
P
|
|||||||||||
Goshen
|
Indiana
|
171,000 |
P
|
|||||||||||
Goshen
|
Indiana
|
134,500 |
P
|
|||||||||||
Goshen
|
Indiana
|
87,800 |
P
|
|||||||||||
Goshen
(1)
|
Indiana
|
81,200 |
P
|
|||||||||||
Topeka
|
Indiana
|
67,560 |
P
|
|||||||||||
Goshen
|
Indiana
|
65,000 |
P
|
|||||||||||
Goshen
|
Indiana
|
53,500 |
|
P
|
||||||||||
Pendleton
|
Oregon
|
56,800 |
P
|
|||||||||||
McMinnville
(1)
|
Oregon
|
17,850 |
P
|
|||||||||||
Waxahachie
(1)
|
Texas
|
43,050 |
P
|
|||||||||||
Kaysville
|
Utah
|
75,000 |
P
|
|||||||||||
1,327,490 | (2) |
(1)
|
These
plants also produce products for manufactured homes. The square footage
indicated above represents that portion of the building that is utilized
for manufacture of products for RVs.
|
|
(2)
|
At
December 31, 2008, the Company’s RV Segment used an aggregate of 1,466,379
square feet for manufacturing and
warehousing.
|
11
MH
SEGMENT
|
||||||||||||||
City
|
State
|
Square Feet
|
Owned
|
Leased
|
||||||||||
Double
Springs
|
Alabama
|
109,000 |
P
|
|||||||||||
Rialto
(1)
|
California
|
6,270 |
P
|
|||||||||||
Ocala
|
Florida
|
47,100 |
P
|
|||||||||||
Cairo
|
Georgia
|
105,000 |
P
|
|||||||||||
Fitzgerald
(1)
|
Georgia
|
63,200 |
P
|
|||||||||||
Nampa
|
Idaho
|
83,500 |
P
|
|||||||||||
Goshen
|
Indiana
|
110,000 |
P
|
|||||||||||
Middlebury
|
Indiana
|
61,113 |
P
|
|||||||||||
Goshen
(1)
|
Indiana
|
25,000 |
P
|
|||||||||||
Goshen
(1)
|
Indiana
|
14,500 |
P
|
|||||||||||
Arkansas
City
|
Kansas
|
7,800 |
P
|
|||||||||||
McMinnville
(1)
|
Oregon
|
17,850 |
P
|
|||||||||||
Denver
|
Pennsylvania
|
40,200 |
P
|
|||||||||||
Chester
|
South
Carolina
|
78,579 |
P
|
|||||||||||
Waxahachie
(1)
|
Texas
|
156,950 |
P
|
|||||||||||
926,062 | (2) |
(1)
|
These
plants also produce products for RVs. The square footage indicated above
represents that portion of the building that is utilized for manufacture
of products for manufactured homes.
|
|
(2)
|
At
December 31, 2008, the Company’s MH Segment used an aggregate of 1,092,283
square feet for manufacturing and
warehousing.
|
ADMINISTRATIVE
|
||||||||||||||
City
|
State
|
Square Feet
|
Owned
|
Leased
|
||||||||||
White
Plains
|
New
York
|
4,059 |
P
|
|||||||||||
Goshen
|
Indiana
|
22,000 |
P
|
|||||||||||
Goshen
|
Indiana
|
15,500 |
P
|
|||||||||||
Arlington
|
Texas
|
10,473 |
P
|
|||||||||||
Phoenix
|
Arizona
|
1,000 |
P
|
|||||||||||
53,032 |
At
December 31, 2009, the Company owned the following facilities and vacant land
not currently used in production, having an aggregate book value of $12.2
million:
City
|
State
|
Square Feet
|
||||
Boaz
|
Alabama
|
86,600 | ||||
Phoenix
*
|
Arizona
|
61,000 | ||||
Fontana
*
|
California
|
108,800 | ||||
Elkhart
*
|
Indiana
|
100,000 | ||||
Bristol
|
Indiana
|
97,500 | ||||
Howe
|
Indiana
|
60,000 | ||||
Elkhart
|
Indiana
|
42,000 | ||||
Dayton
|
Tennessee
|
100,000 | ||||
Middlebury
|
Indiana
|
12
acres of land
|
||||
Arkansas
City
|
Kansas
|
5
acres of land
|
*
Currently leased to a third party.
12
Item
3. 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, 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 U.S. 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 because she no longer owned
the bathtub. 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.
On June
25, 2008, plaintiffs filed a renewed motion for class certification and the
Court again denied certification of a class. Plaintiffs filed a third motion for
class certification on December 23, 2008, and Defendants’ filed a motion seeking
summary judgment against plaintiffs’ case.
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 Defendant’s motion for 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.
On August
26, 2009, as a result of a decision by the California Supreme Court in an
unrelated case dealing with a similar UCL claim, the Court dismissed plaintiffs’
remaining UCL claim because plaintiffs did not actually rely on defendants’
labels when they bought the homes containing the bathtubs. 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 that certified a class to pursue a claim under the
“unfair prong” of the UCL. On December 11, 2009, the Appeals Court issued an
Order denying defendants’ permission to appeal the District Court’s ruling at
this point in the case, but the Appeals Court did not address the merits of the
case.
13
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 District Court’s rulings dismissing
plaintiffs’ six claims, and the ruling on “reliance” by the California Supreme
Court, Kinro believes that, notwithstanding the District Court’s finding that
plaintiffs may proceed with their claim that defendants may have violated the
“unfair prong” of the UCL, plaintiffs may not be able to prove the essential
elements of their claim. Defendants intend to vigorously defend against the
claim, and intend to move for summary judgment dismissing the claim. In
addition, Kinro believes that no remedial action is required or appropriate
under HUD safety standards.
If the
District Court maintains its rulings, denies defendants’ motion for summary
judgment as to the claim based on the “unfair prong” of the UCL, and maintains
its ruling granting plaintiffs’ motion for class certification with respect to
that claim, and if plaintiffs pursue their claim, 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 Consolidated Balance Sheet as of December 31, 2009, would not be material to
the Company’s financial position or annual results of operations.
14
Item
4. RESERVED.
DIRECTORS
AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The
following tables set forth certain information with respect to the Directors and
Executive Officers of the Company as of January 1, 2010. Additional information
with respect to the Company’s Directors is included in the Company’s Proxy
Statement for the Annual Meeting of Stockholders to be held on May 19,
2010.
Name
|
Position
|
|
Edward
W. Rose, III
(Age
68)
|
Lead
Director of the Board of Directors since January 2009. Director since
March 1984.
|
|
|
||
Leigh
J. Abrams
(Age
67)
|
Chairman
of the Board of Directors since January 2009. Director since March
1984.
|
|
Fredric
M. Zinn
(Age
58)
|
Chief
Executive Officer since January 2009, President and Director since May
2008.
|
|
James
F. Gero
(Age
64)
|
Director
since May 1992.
|
|
Frederick
B. Hegi, Jr.
(Age
66)
|
Director
since May 2002.
|
|
David
A. Reed
(Age
62)
|
Director
since May 2003.
|
|
John
B. Lowe, Jr.
(Age
70)
|
Director
since May 2005.
|
|
|
||
Jason
D. Lippert
(Age
37)
|
President
and Chief Executive Officer of Lippert Components, Inc. since
February 2003, and President and Chief Executive
Officer of Kinro, Inc. since January 2009. Director since May
2007.
|
|
|
||
Joseph
S. Giordano III
(Age
40)
|
Chief
Financial Officer since May 2008, Treasurer since May
2003.
|
|
|
||
Scott
T. Mereness
(Age
38)
|
|
Executive
Vice President and Chief Operating Officer of Lippert Components, Inc.
since February 2003, and Executive Vice President and Chief Operating
Officer of Kinro, Inc. since February
2010.
|
EDWARD W.
ROSE, III, was Chairman of the Board of Directors from March 1984 to December
31, 2008. For more than the past five years, Mr. Rose has been President and
sole stockholder of Cardinal Investment Company, Inc., an investment firm. Mr.
Rose also served as a director of ACE Cash Express, Inc., a publicly-owned
company engaged in check cashing services, until its sale in October 2006. From
April 1999 to January 2003, Mr. Rose was a director of TX C.C., Inc., a
privately-owned restaurant chain, against which an involuntary petition for
relief under Chapter 11 of the U.S. Bankruptcy Code was filed on February 21,
2003 in the U.S. Bankruptcy Court for the Northern District of Texas. A plan of
reorganization was confirmed on January 28, 2004. Cardinal Investment Company,
Inc., of which Mr. Rose is the sole stockholder, was an indirect General Partner
of MJ Designs, L.P., a privately-owned retailer of arts and crafts products,
which filed a petition for relief under Chapter 11 of the U.S. Bankruptcy Code
in January 2003 in the U.S. Bankruptcy Court for the Northern District of Texas,
later converted to a Chapter 7 liquidation.
LEIGH J.
ABRAMS, was Chief Executive Officer from March 1984 to December 31, 2008 and
President until May 2008. Since April 2001, Mr. Abrams has also been a director
of Impac Mortgage Holdings, Inc., a publicly-owned specialty finance company
organized as a real estate investment trust, and Lead Director of Impac Mortgage
Holdings, Inc. since June 2004. Mr. Abrams is a Certified Public
Accountant.
FREDRIC
M. ZINN, was Executive Vice President from February 2001 to May 2008 and Chief
Financial Officer from March 1984 to May 2008. Mr. Zinn is a Certified Public
Accountant.
15
JAMES F.
GERO, is a private investor. Mr. Gero also serves as Chairman of the Board of
Orthofix International, N.V., a publicly-owned international supplier of
orthopedic devices for bone fixation and stimulation, and as a director of
Intrusion.com, Inc., a publicly-owned supplier of security
software.
FREDERICK
B. HEGI, JR., is a founding partner of Wingate Partners, a private equity firm,
including the indirect general partner of each of Wingate Partners L.P. and
Wingate Partners II, L.P. Since May 1982, Mr. Hegi has served as President of
Valley View Capital Corporation, a private investment firm. Mr. Hegi is a
director of Texas Capital Bancshares, Inc., a publicly-owned regional bank; and
is Chairman of the Board of United Stationers, Inc., a publicly-owned wholesale
distributor of business products. From 1986 until its acquisition in 2007, Mr.
Hegi was a director of Lone Star Technologies, Inc., a diversified
publicly-owned company engaged in the manufacture of tubular products. From 1999
to 2001, Mr. Hegi was Chairman, President and Chief Executive Officer of Kevco,
Inc., a publicly-owned distributor of building products to the manufactured
housing and recreational vehicle industries, which filed for protection under
Chapter 11 of the United States Bankruptcy Code on February 5, 2001, later
converted to a Chapter 7 liquidation.
DAVID A.
REED, is President of Causeway Capital Management LLC, manager of a family
investment partnership. Mr. Reed retired as Senior Vice Chair for Ernst &
Young LLP in 2000 where he held several senior U.S. and global operating,
administrative and marketing roles in his 26-year tenure with the firm. He
served on Ernst & Young LLP’s Management Committee and Global Executive
Council from 1991-2000. Mr. Reed is a director of Penson Worldwide, Inc., a
publicly-owned company engaged in providing flexible technology-based processing
solutions to the investment industry. From 2005 until its acquisition in 2007,
Mr. Reed was a director of Lone Star Technologies, Inc., a diversified
publicly-owned company engaged in the manufacture of tubular
products.
JOHN B.
LOWE, JR., has been Chairman of TDIndustries, Inc., a national
mechanical/electrical/plumbing construction and facility service company, since
1981. From January 1981 to January 2005, Mr. Lowe also served as Chief Executive
Officer of TDIndustries. Mr. Lowe is Chairman of the Board of Zale Corporation,
a publicly-owned specialty retailer of fine jewelry, and is a director of KDC
Platform, LLC, engaged in real estate development. Mr. Lowe also serves on the
Board of Trustees of the Dallas Independent School District.
JASON D.
LIPPERT, was Executive Vice President and Chief Operating Officer of Lippert
Components, Inc., from May 2000 until February 2003, and served as Regional
Director of Operations of Lippert Components, Inc. from 1998 until 2000. Mr.
Lippert has been Chairman of Lippert Components, Inc. since January 2007, and
Chairman of Kinro, Inc. since January 2009.
JOSEPH S.
GIORDANO III, was Corporate Controller from May 2003 to May 2008. From July 1998
to August 2002, Mr. Giordano was a Senior Manager at KPMG LLP, and from August
2002 to April 2003, Mr. Giordano was a Senior Manager at Deloitte & Touche
LLP. Mr. Giordano is a Certified Public Accountant.
SCOTT T.
MERENESS, was Vice President of Operations of Lippert Components, Inc., from
February 2001 to 2003, and was Vice President of Kinro, Inc., from January 2009
until February 2010. Mr. Mereness was Regional Vice President for Manufactured
Housing for Lippert Components, Inc., from 1999 to 2001.
Other
Officers
HARVEY F.
MILMAN, has been Vice President-Chief Legal Officer of the Company since March
2005. Prior thereto, Mr. Milman was a partner of the firm of Phillips Nizer LLP,
counsel to the Company. Mr. Milman has served as Secretary of the Company since
May 2007, and as Assistant Secretary of the Company for more than five years
prior thereto.
CHRISTOPHER
L. SMITH, was Assistant Controller of the Company from August 2005 to May 2008,
and has been Corporate Controller since May 2008. From January 2000 to June
2005, Mr. Smith served as Assistant Controller of Key Components, LLC, and from
August 1997 to January 2000, Mr. Smith was Senior Associate at Ernst & Young
LLP. Mr. Smith is a Certified Public Accountant.
16
PART
II
Item
5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES.
As of
February 26, 2010, there were 558 holders of the Company’s
Common Stock, in addition to beneficial owners of shares held in broker and
nominee names. The Company’s Common Stock trades on the New York Stock Exchange
under the symbol “DW”.
Information
concerning the high and low closing prices of the Company’s Common Stock for
each quarter during 2009 and 2008 is set forth in Note 12 of Notes to
Consolidated Financial Statements in Item 8 of this Report.
Equity
Compensation Plan Information as of December 31, 2009
Number
of securities
to
be issued upon
exercise
of outstanding
options,
warrants
and
rights
|
Weighted
average
exercise
price of
outstanding
options,
warrants
and rights
|
Number
of securities
remaining
available for
future
issuance under
equity
compensation
plans
(excluding
securities
reflected
in
column (a))
|
||||||||||
Plan
category
|
(a)
|
(b)
|
(c)
|
|||||||||
Equity
compensation plans approved by security holders
|
1,891,053 | $ | 22.67 | 1,090,019 | ||||||||
Equity
compensation plans not approved by security holders
|
N/A | N/A | N/A | |||||||||
Total
|
1,891,053 | $ | 22.67 | 1,090,019 |
Pursuant
to the Drew Industries Incorporated 2002 Equity Award and Incentive Plan, as
amended (the “2002 Equity Plan”), which was approved by stockholders in May
2002, the Company may grant to its directors, employees, and consultants Common
Stock-based awards, such as stock options, restricted or deferred stock, and
deferred stock units. The number of shares available for granting awards under
the 2002 Equity Plan was 1,090,019 and 346,921 at December 31, 2009 and 2008,
respectively. At the Annual Meeting of Stockholders held in May 2009,
stockholders approved an amendment to the 2002 Equity Plan to increase the
number of shares available for awards by 900,000 shares. The 2002 Equity Plan is
the Company’s only equity compensation plan.
17
Item
6. SELECTED FINANCIAL DATA.
The following table summarizes certain
selected historical financial and operating information of the Company and is
derived from the Company’s Consolidated Financial Statements. Historical
financial data may not be indicative of the Company’s future performance. The
information set forth below should be read in conjunction with “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and
the Consolidated Financial Statements and Notes thereto included in Item 7 and
Item 8 of this Report, respectively.
Year Ended December 31,
|
||||||||||||||||||||
(In thousands, except per share
amounts)
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||
Operating Data:
|
||||||||||||||||||||
Net
sales
|
$ | 397,839 | $ | 510,506 | $ | 668,625 | $ | 729,232 | $ | 669,147 | ||||||||||
Goodwill
impairment
|
$ | 45,040 | $ | 5,487 | $ | - | $ | - | $ | - | ||||||||||
Executive
retirement
|
$ | - | $ | 2,667 | $ | - | $ | - | $ | - | ||||||||||
Operating
(loss) profit
|
$ | (35,581 | ) | $ | 19,898 | $ | 65,959 | $ | 55,295 | $ | 57,729 | |||||||||
(Loss)
income before income taxes
|
$ | (36,370 | ) | $ | 19,021 | $ | 63,344 | $ | 50,694 | $ | 54,063 | |||||||||
(Benefit)
provision for income taxes
|
$ | (12,317 | ) | $ | 7,343 | $ | 23,577 | $ | 19,671 | $ | 20,461 | |||||||||
Net
(loss) income
|
$ | (24,053 | ) | $ | 11,678 | $ | 39,767 | $ | 31,023 | $ | 33,602 | |||||||||
Net
(loss) income per common share:
|
||||||||||||||||||||
Basic
|
$ | (1.10 | ) | $ | 0.54 | $ | 1.82 | $ | 1.43 | $ | 1.60 | |||||||||
Diluted
|
$ | (1.10 | ) | $ | 0.53 | $ | 1.80 | $ | 1.42 | $ | 1.56 | |||||||||
Financial Data:
|
||||||||||||||||||||
Working
capital
|
$ | 113,744 | $ | 84,378 | $ | 89,861 | $ | 61,979 | $ | 76,146 | ||||||||||
Total
assets
|
$ | 288,065 | $ | 311,358 | $ | 345,737 | $ | 311,276 | $ | 307,428 | ||||||||||
Long-term
obligations
|
$ | 8,243 | $ | 9,763 | $ | 23,128 | $ | 47,327 | $ | 64,768 | ||||||||||
Stockholders’
equity
|
$ | 244,115 | $ | 258,878 | $ | 251,536 | $ | 204,888 | $ | 167,709 |
Dividend
Information
The
Company has not paid any cash dividends on its outstanding shares of Common
Stock. Future dividend policy with respect to the Common Stock will be
determined by the Board of Directors of the Company in light of prevailing
financial needs and earnings of the Company and other relevant factors. The
Company’s dividend policy is not subject to restrictions in its financing
agreements.
18
Item
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
This
Management’s Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the Company’s Consolidated
Financial Statements and Notes thereto included in Item 8 of this
Report.
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 December 31, 2009, the Company operated 24 plants in 12
states.
The RV Segment accounted for 79 percent
of consolidated net sales for 2009 and 72 percent 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
bath, kitchen and other 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
|
Nearly 93 percent of the Company’s RV
Segment sales are of products used in travel trailers and fifth-wheel RVs. The
balance represents sales of components for motorhomes and mid-size buses, and
sales of specialty trailers, as well as axles for specialty trailers. Travel
trailers and fifth-wheel RVs accounted for 83 percent and 78 percent of all RVs
shipped by the industry in 2009 and 2008, respectively, up from 61 percent in
2001.
The MH Segment, which accounted for 21
percent of consolidated net sales for 2009, and 28 percent for 2008,
manufactures a variety of products used in the production of manufactured homes
and to a lesser extent, modular housing and office units,
including:
●Vinyl
and aluminum windows and screens
|
●Steel
chassis
|
|
●Thermoformed
bath and kitchen products
|
●Steel
chassis parts
|
|
●Axles
|
|
●Entry
doors
|
The Company also supplies replacement
windows, doors, and thermoformed bath products for existing 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.
The Company’s operations are somewhat
seasonal, as sales are typically slower in the first and fourth quarters,
consistent with the industries which the Company supplies.
19
INDUSTRY
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).
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 dealers reduced their inventory
levels, and RV manufacturers significantly reduced their output. 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, during
the second half of 2009, industry-wide wholesale shipments of travel trailers
and fifth-wheel RVs increased 32 percent compared to the second half of 2008, to
78,900 units. This year over year increase in industry-wide wholesale shipments
during the second half of 2009 was reportedly due to a modest restocking of
inventory by dealers, as compared to a significant inventory reduction by RV
dealers in the comparable period of 2008, as well as a modest improvement in
retail demand in November and December 2009.
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. Through the first 10 months of 2009 and all of 2008, retail
sales remained below prior year levels. However, in November and December 2009,
monthly retail sales of travel trailers and fifth-wheel RVs exceeded the
comparable period in the prior year, the first increases in 24 months. A
comparison of the year over year percentage change in industry-wide wholesale
shipments and retail sales of travel trailers and fifth-wheel RVs, as reported
by Statistical Surveys, Inc., is as follows:
Wholesale
|
Retail
|
|||||||
Quarter
ended March 31, 2008
|
(8 | )% | (17 | )% | ||||
Quarter
ended June 30, 2008
|
(18 | )% | (19 | )% | ||||
Quarter
ended September 30, 2008
|
(38 | )% | (26 | )% | ||||
Quarter
ended December 31, 2008
|
(63 | )% | (34 | )% | ||||
Quarter
ended March 31, 2009
|
(61 | )% | (37 | )% | ||||
Quarter
ended June 30, 2009
|
(44 | )% | (29 | )% | ||||
Quarter
ended September 30, 2009
|
5 | % | (19 | )% | ||||
Quarter
ended December 31, 2009
|
88 | % | (8 | )% | ||||
Year
ended December 31, 2009
|
(25 | )% | (26 | )% | ||||
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 wholesale towable RV
shipments were to dealers in Canada in 2008. Statistics for wholesale towable RV
shipments to Canada for 2009 are not yet available.
During
2008 and the first eight months of 2009, RV dealers and their lenders focused on
reducing inventories, resulting in a decline of an estimated 70,000 units. In
2009 alone, dealer inventories of travel trailers and fifth-wheel RVs declined
by an estimated 25,000 to 30,000 units, implying that retail demand
significantly exceeded industry-wide wholesale shipments. Over the past few
months, it appears that dealer inventories have stopped declining, and as a
result, production levels have increased in order to meet demand. Recent dealer
surveys and analysts report a slight improvement in the availability of
wholesale financing. In addition, reports of increased consumer traffic and
consumer purchases from January and February 2010 RV tradeshows, as well as the
reported increase in backlog by the leading producer of RVs, have been
encouraging. While these positive factors may indicate the beginning of a trend,
there are still uncertainties relating to high unemployment, tight credit and a
weak economy. Retail sales in the traditionally strong spring selling season
will be a key indicator of consumer demand for RVs.
20
The RVIA has projected a 31 percent
increase in industry-wide wholesale shipments of travel trailers and fifth-wheel
RVs for 2010, to 181,800 units. Following the last three recessions,
industry-wide wholesale shipments of RVs grew by more than 20 percent in the
first year of the recovery. However, consumer confidence and the availability of
financing have historically been important factors in the overall growth in the
RV industry, and there can be no assurance these factors will
improve.
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 2009, industry-wide wholesale shipments of
manufactured homes were 49,700 units, a decline of 39 percent compared to 2008.
However, estimates are that in 2009, manufactured housing dealers reduced
inventory by approximately 10,000 units, implying that retail demand in 2009 was
higher than wholesale shipments.
Since 1998, industry-wide wholesale
shipments of manufactured homes have declined 87 percent. This decade-plus
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 loans for manufactured homes. In addition, in the several
years leading up to 2008, many traditional buyers of manufactured homes were
able to purchase site-built homes instead of manufactured homes, as subprime
mortgages were readily available at unrealistic terms.
Manufactured homes contain one or more
“floors” or sections which can be joined to make larger homes. For 2009, larger
multi-section manufactured homes represented 63 percent of the total
manufactured homes produced, consistent with 2008, but down significantly from
the 80 percent in 2003. Multi-section manufactured homes contain more of the
Company’s products than single-section manufactured homes. The decline in
multi-section homes over the past few years may be 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.
Legislation enacted in July 2008
increased Federal Housing Administration (“FHA”) insured lending limits for
chattel mortgages for manufactured homes (chattel loans are loans secured only
by the home which is sited on leased rather than owned land) 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 on manufactured housing has been modest so far, and any
future impact on demand for new manufactured homes cannot be determined at this
time.
21
The Secure and Fair Enforcement for
Mortgage Licensing Act of 2008 (“SAFE Act”) was signed into law in July, 2008.
The SAFE Act is intended to establish, within one year from its passage, minimum
state standards for licensing and registration of mortgage lenders, brokers and
originators. According to the RVIA and the Manufactured Housing Institute, that
legislation could make loans for RVs and manufactured homes more difficult to
obtain, resulting in fewer sales of RVs and manufactured homes.
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, volatile consumer confidence,
and tight retail and wholesale credit markets, the Company currently expects
industry-wide wholesale shipments of manufactured homes to remain low for at
least the first half of 2010. There are no industry forecasts for the
manufactured housing industry.
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.
RESULTS
OF OPERATIONS
Net sales and operating (loss) profit
were as follows for the years ended December 31, (in thousands):
2009
|
2008
|
2007
|
||||||||||
Net
sales:
|
||||||||||||
RV
Segment
|
$ | 312,535 | $ | 368,092 | $ | 491,830 | ||||||
MH
Segment
|
85,304 | 142,414 | 176,795 | |||||||||
Total
net sales
|
$ | 397,839 | $ | 510,506 | $ | 668,625 | ||||||
Operating
(loss) profit:
|
||||||||||||
RV
Segment
|
$ | 20,459 | $ | 28,725 | $ | 63,132 | ||||||
MH
Segment
|
3,847 | 11,016 | 15,061 | |||||||||
Total
segment operating profit
|
24,306 | 39,741 | 78,193 | |||||||||
Amortization
of intangibles
|
(5,561 | ) | (5,055 | ) | (4,178 | ) | ||||||
Corporate
|
(6,411 | ) | (7,217 | ) | (7,583 | ) | ||||||
Goodwill
impairment
|
(45,040 | ) | (5,487 | ) | - | |||||||
Other
items
|
(2,875 | ) | (2,084 | ) | (473 | ) | ||||||
Total
operating (loss) profit
|
$ | (35,581 | ) | $ | 19,898 | $ | 65,959 |
Net sales
and operating profit by segment, as a percent of the total, were as follows for
the years ended December 31,:
2009
|
2008
|
2007
|
||||||||||
Net
sales:
|
||||||||||||
RV
Segment
|
79 | % | 72 | % | 74 | % | ||||||
MH
Segment
|
21 | % | 28 | % | 26 | % | ||||||
Total
net sales
|
100 | % | 100 | % | 100 | % | ||||||
Operating
profit:
|
||||||||||||
RV
Segment
|
84 | % | 72 | % | 81 | % | ||||||
MH
Segment
|
16 | % | 28 | % | 19 | % | ||||||
Total
segment operating profit
|
100 | % | 100 | % | 100 | % |
22
Operating
profit margin by segment was as follows for the years ended December
31,:
2009
|
2008
|
2007
|
||||||||||
RV
Segment
|
6.5 | % | 7.8 | % | 12.8 | % | ||||||
MH
Segment
|
4.5 | % | 7.7 | % | 8.5 | % |
During 2009 and 2008, the Company
recorded “extra” expenses resulting primarily from plant closings and start-ups,
staff reductions and relocations, increased bad debts and obsolete inventory and
tooling. These expenses were largely due to the unprecedented conditions in the
RV and manufactured housing industries. In addition, the Company recorded
charges for goodwill impairment during 2009 and 2008, and charges for executive
retirement in 2008.
The following tables reconcile cost of
sales, selling, general and administrative expenses, goodwill impairment,
executive retirement, operating (loss) profit, net (loss) income and net (loss)
income per diluted share for the years ended December 31, 2009 and 2008 to
these same items before the “extra” expenses and charges for goodwill impairment
and executive retirement. The Company finds this information useful in analyzing
and reviewing the results of operations. These tables are intended to provide
investors with this useful information on the Company’s results of operations
before the “extra” expenses and charges for goodwill impairment and executive
retirement to provide comparability between the years ended December 31,
2009 and 2008.
Year
Ended December 31, 2009
|
Year
Ended December 31, 2008
|
|||||||||||||||||||||||
(In
thousands)
|
GAAP
|
Adjustments
|
Non-GAAP
|
GAAP
|
Adjustments
|
Non-GAAP
|
||||||||||||||||||
Cost
of sales
|
$ | 319,129 | $ | 4,786 | $ | 314,343 | $ | 403,000 | $ | 164 | $ | 402,836 | ||||||||||||
Selling,
general and administrative expenses
|
$ | 69,489 | $ | 4,180 | $ | 65,309 | $ | 80,129 | $ | (460 | ) | $ | 80,589 | |||||||||||
Goodwill
impairment
|
$ | 45,040 | $ | 45,040 | $ | - | $ | 5,487 | $ | 5,487 | $ | - | ||||||||||||
Executive
retirement
|
$ | - | $ | - | $ | - | $ | 2,667 | $ | 2,667 | $ | - | ||||||||||||
Operating
(loss) profit
|
$ | (35,581 | ) | $ | 54,006 | $ | 18,425 | $ | 19,898 | $ | 7,858 | $ | 27,756 | |||||||||||
Net
(loss) income
|
$ | (24,053 | ) | $ | 34,891 | $ | 10,838 | $ | 11,678 | $ | 4,825 | $ | 16,503 | |||||||||||
Net
(loss) income per diluted share
|
$ | (1.10 | ) | $ | 1.60 | $ | 0.50 | $ | 0.53 | $ | 0.22 | $ | 0.75 |
The following tables reconcile RV
Segment and MH Segment operating profit, goodwill impairment, other items, and
operating (loss) profit for the years ended December 31, 2009 and 2008 to
these same items before the “extra” expenses and charges for goodwill impairment
and executive retirement. The Company finds this information useful in analyzing
and reviewing the results of operations. These tables are intended to provide
investors with this useful information on the Company’s results of operations
before the “extra” expenses and charges for goodwill impairment and executive
retirement to provide comparability between the years ended December 31,
2009 and 2008.
Year
Ended December 31, 2009
|
Year
Ended December 31, 2008
|
|||||||||||||||||||||||
(In
thousands)
|
GAAP
|
Adjustments
|
Non-GAAP
|
GAAP
|
Adjustments
|
Non-GAAP
|
||||||||||||||||||
RV
Segment operating profit
|
$ | 20,459 | $ | 5,277 | $ | 25,736 | $ | 28,725 | $ | 825 | $ | 29,550 | ||||||||||||
MH
Segment operating profit
|
$ | 3,847 | $ | 931 | $ | 4,778 | $ | 11,016 | $ | 404 | $ | 11,420 | ||||||||||||
Goodwill
impairment
|
$ | (45,040 | ) | $ | 45,040 | $ | - | $ | (5,487 | ) | $ | 5,487 | $ | - | ||||||||||
Other
items
|
$ | (2,875 | ) | $ | 2,758 | $ | (117 | ) | $ | (2,084 | ) | $ | 1,142 | $ | (942 | ) | ||||||||
Operating
(loss) profit
|
$ | (35,581 | ) | $ | 54,006 | $ | 18,425 | $ | 19,898 | $ | 7,858 | $ | 27,756 |
Year
Ended December 31, 2009 Compared to Year Ended December 31, 2008
Consolidated
Highlights
|
§
|
During
the first six months of 2009, as a result of the economic downturn and the
resulting severe declines in industry-wide wholesale shipments by the RV
and manufactured housing industries, the Company experienced a 45 percent
decline in net sales, from $310 million in the first six months of 2008 to
$172 million in the first six months of 2009. As a result, in the first
six months of 2009, the Company reported a net loss of $34.1 million,
including an after-tax charge of $29.4 million for goodwill impairment, as
compared to net income of $18.3 million in the first six months of
2008.
|
23
During
the second half of 2009, industry-wide wholesale shipments of travel trailer and
fifth-wheel RVs, the Company’s primary RV market, increased 32 percent compared
to the second half of 2008, offset by a decline in manufactured housing
industry-wide wholesale shipments of 33 percent. As a result, the Company’s net
sales increased to $226 million in the second half of 2009, 13 percent more than
in the comparable period of 2008. The Company reported net income of $10.1
million in the second half of 2009 as compared to a net loss of $6.6 million in
the comparable period of 2008, which included an after-tax charge of $3.3
million for goodwill impairment recorded in the fourth quarter of
2008.
The
Company’s net sales for the first two months of 2010 more than doubled to over
$90 million, compared to less than $44 million in the same period of 2009, when
most RV producers were shut down for extended periods of time. Nearly all of
this increase was in sales of the Company’s RV products. Sales of manufactured
housing products increased approximately 3 percent as compared to the first two
months of 2009.
|
§
|
On
February 19, 2010, the RVIA published its latest forecast of industry-wide
wholesale shipments for 2010, which projects a 31 percent increase in the
shipments of travel trailers and fifth-wheel RVs as compared to 2009.
There is no assurance that this RV industry-wide wholesale shipments level
will be achieved. There are no industry forecasts for the manufactured
housing industry.
|
|
§
|
In
response to the impact of the recession, the Company focused on increasing
market share for existing products, introducing new products, reducing
fixed costs, improving efficiencies, and strengthening its financial
condition.
|
|
·
|
In
2009, the Company identified and introduced new and improved RV products
that focused on consumer safety and convenience, including the
Quick-BiteTM
coupler, an improved suspension system, entry doors with alarm systems and
keyless entry, and a “new-look” line of windows. As a result, the
Company’s RV Segment continued to achieve market share
gains.
|
The
Company’s furniture products continued to gain market share. The Company’s
average furniture content per travel trailer and fifth-wheel produced by the RV
industry for 2009 was $211 per unit, an increase of $46 per unit, or 28 percent,
from the average content when Seating Technology, Inc. and its affiliates
(“Seating Technology”) was acquired in July 2008.
In July
2009, a supplier of manufactured housing windows and doors exited the market.
Since then, the Company has gained new window business of more than $7 million
on an annualized basis. In addition, in September 2009, the Company purchased
production equipment and inventory for manufactured housing entry doors from the
same supplier, entering a new $25 million to $30 million market. Approximately
half of this new potential is in aftermarket replacement entry doors for
manufactured homes. The Company began production of manufactured housing entry
doors during the fourth quarter of 2009, and is gaining market share. The
Company’s MH Segment aftermarket sales, primarily comprised of windows and
thermoformed bath products, were approximately $12 million to $13 million for
2009, consistent with 2008, and could increase as a result of the Company’s
increased effort to gain market share in aftermarket products.
24
On
February 18, 2010 the Company reported that Lippert agreed in principle to
acquire certain intellectual property and other assets from Michigan-based
Schwintek, Inc. The purchase would include several products for which patents
are pending, including innovative RV wall slides that are considerably lighter,
more space efficient, and more reliable than previous slide-out designs. The
purchase price, undisclosed at the time of the announcement, is expected to
include cash payable at closing, plus an earn-out depending on future unit
sales. It is expected that the cash portion of the purchase price payable at
closing will be funded from available cash. Closing of the transaction is
subject to completion of due diligence, agreement on final terms and conditions,
the execution of definitive transaction documents, and satisfaction of customary
closing conditions.
|
·
|
The
decline in the Company’s results for 2009 would have been substantially
greater had it not been for an aggressive program of cost-cutting measures
and efficiency improvements implemented beginning in the latter part of
2006. Cost reduction measures benefitted the Company’s operating results
in 2009 by $9 million, compared to 2008, and will further benefit 2010
operating results by $3 million. Collectively, the fixed cost reductions
since 2006 have improved the Company’s annual operating profit by nearly
$25 million compared to results if these steps had not been taken. The
Company anticipates that a significant portion of the fixed cost
reductions and production efficiencies implemented will continue even as
sales increase.
|
During
2009 and 2008, as a result of the unprecedented conditions in the RV and
manufactured housing industries, and the cost cutting measures taken by
management, the Company recorded $9.0 million and $2.4 million, respectively, of
“extra” expenses. These “extra” expenses resulted primarily from the following
(in
millions):
2009
|
2008
|
|||||||
Plant
closings and start-ups
|
$ | 4.4 | $ | (1.5 | ) | |||
Obsolete
equipment, inventory and tooling
|
3.1 | 0.2 | ||||||
Staff
reductions and relocations
|
1.1 | 0.6 | ||||||
Executive
retirement
|
- | 2.7 | ||||||
Other
|
0.4 | 0.4 | ||||||
|
$ | 9.0 | $ | 2.4 |
|
·
|
During
2009, the Company continued to generate significant cash flow, increasing
cash and short-term investments by nearly $57 million, to over $65
million, and paying off the entire $9 million debt balance that existed at
December 31, 2008. This was largely accomplished by cash flows provided by
operating activities of $63 million, including a reduction in inventory of
more than $37 million.
|
|
§
|
Steel
and aluminum are among the Company’s principal raw materials. Since late
2007, the costs of steel and aluminum have been volatile. During the first
half of 2009, raw material costs temporarily declined, but subsequently
increased 10 percent to 30 percent in the second half of 2009, depending
upon the type of raw material. The Company anticipates that these cost
increases will reduce operating profit in 2010, although the impact is
expected to be modest.
|
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.
25
RV
Segment
Net sales
of the RV Segment in 2009 decreased 15 percent, or $56 million, compared to 2008
due to:
|
·
|
An
‘organic’ sales decline (excluding the impact of acquisitions and sales
price changes) of approximately $68 million. This 19 percent ‘organic’
sales decline during 2009 was due to the 25 percent decrease in
industry-wide wholesale shipments of travel trailers and fifth-wheel RVs,
the Company’s primary RV market. During the first six months of 2009 the
‘organic’ sales decline of RV-related products was approximately $118
million, or 52 percent. However, this was partially offset by an ‘organic’
sales increase of approximately $50 million, or 40 percent, of RV-related
products in the second half of
2009.
|
|
·
|
An
‘organic’ sales decline of approximately 52 percent or $7 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:
|
·
|
Full
year impact in 2009 of acquisitions completed in 2008, aggregating
approximately $13 million.
|
|
·
|
Sales
price increases of approximately $7 million, primarily due to raw material
cost increases in 2008.
|
The Company’s RV Segment aftermarket
sales were approximately $5 million for 2009, consistent with 2008, and could
increase as a result of the Company’s increased effort to gain market share in
new aftermarket products.
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 years ended December 31, divided by the industry-wide wholesale shipments of
the different types of RVs for the years ended December 31, was as
follows:
|
2009
|
2008
|
Percent Change
|
|||||||||
Content
per Travel Trailer and Fifth-Wheel RV
|
$ | 2,101 | $ | 1,902 | 10 | % | ||||||
Content
per Motorhome
|
$ | 523 | $ | 574 | (9 | )% | ||||||
Content
per all RVs
|
$ | 1,795 | $ | 1,554 | 16 | % |
The above product content per RV for
the year ended December 31, 2008 includes historical sales results for
acquisitions, under the assumption the acquisitions had been completed at the
beginning of that yearly period. 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-wide wholesale shipments for the years ended December 31,
were as follows:
2009
|
2008
|
Percent Change
|
||||||||||
Travel
Trailer and Fifth-Wheel RVs
|
138,300 | 185,100 | (25 | )% | ||||||||
Motorhomes
|
13,200 | 28,300 | (53 | )% | ||||||||
All
RVs
|
165,700 | 237,000 | (30 | )% |
Operating
profit of the RV Segment in 2009 decreased $8.3 million compared to 2008,
largely due to the $56 million decline in sales, and $5.3 million of “extra”
expenses in 2009 related to plant closings and start-ups, staff reductions and
relocations, increased bad debts, and obsolete inventory and tooling, compared
to $0.8 million of “extra” expenses in 2008. Excluding “extra” expenses, the
Company’s RV Segment had an operating profit of $25.7 million in 2009, a
decrease of $3.8 million from the segment operating profit of $29.6 million in
2008. This adjusted decline in RV Segment operating profit was 6 percent of the
‘organic’ decline in net sales, a smaller percentage decline than the Company
would typically expect.
26
The
operating margin of the RV Segment in 2009 was positively impacted
by:
|
·
|
Implementation
of cost-cutting measures which reduced cost of
sales.
|
|
·
|
Lower
health insurance costs largely due to the implementation of a new
plan.
|
|
·
|
Lower
warranty costs.
|
|
·
|
Lower
raw material costs in the second half of 2009 compared to the same period
of 2008 when raw material costs were unusually high, partially offset by
higher raw material costs during the first six months of 2009. Depending
upon the type of raw material, costs have recently risen 10 percent to 30
percent.
|
Partially offset by:
|
·
|
The
spreading of fixed manufacturing costs over a smaller sales
base.
|
|
·
|
Higher
overtime and labor inefficiencies due to rapid changes in sales
volumes.
|
|
·
|
Excluding
the “extra” expenses, an increase in selling, general and administrative
expenses to 12.3 percent of net sales in 2009 from 12.2 percent of net
sales in 2008, largely due to the spreading of fixed administrative costs
over a smaller sales base, partially offset by the implementation of fixed
cost reductions. In addition, incentive compensation was lower as a
percent of sales in 2009 because incentive compensation is only recorded
on operating profit in excess of pre-established
hurdles.
|
MH
Segment
Net sales of the MH Segment in 2009
decreased 40 percent, or $57 million, from 2008. Excluding $2 million in sales
price increases, net sales of the MH Segment declined 41 percent compared to the
39 percent decrease in industry-wide wholesale shipments of manufactured homes.
The Company’s sales decline was greater than the manufactured housing industry
decline due partly to a decline in modular and office units. In addition,
changes in market share by certain producers of manufactured homes have had a
negative impact on sales of the Company’s 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 more than $7 million annually,
partially offsetting the other declines. In addition, in September 2009, the
Company purchased production equipment and inventory for manufactured housing
entry doors from the same supplier, entering a new $25 million to $30 million
market. Approximately half of this new potential is in aftermarket replacement
entry doors for manufactured homes. The Company began production of manufactured
housing entry doors during the fourth quarter of 2009, and is gaining market
share. The Company’s MH Segment aftermarket sales, primarily comprised of
windows and thermoformed bath products, were approximately $12 million to $13
million for 2009, consistent with 2008, and could increase as a result of the
Company’s increased effort to gain market share in aftermarket
products.
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 years ended December 31, divided by the
number of manufactured homes and manufactured home floors produced by the
industry, respectively, for the years ended December 31, was as
follows:
2009
|
2008
|
Percent Change
|
||||||||||
Content
per Home Produced
|
$ | 1,378 | $ | 1,489 | (7 | )% | ||||||
Content
per Floor Produced
|
$ | 837 | $ | 901 | (7 | )% |
27
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-wide wholesale shipments for the years ended December 31,
were as follows:
2009
|
2008
|
Percent Change
|
||||||||||
Total
Homes Produced
|
49,700 | 81,900 | (39 | )% | ||||||||
Total
Floors Produced
|
81,900 | 135,300 | (39 | )% |
Operating
profit of the MH Segment in 2009 decreased $7.2 million compared to 2008,
largely due to the $57 million decline in sales. In addition, the Company had
$0.9 million and $0.4 million of “extra” expenses in 2009 and 2008,
respectively, related to plant closings and start-ups, staff reductions and
relocations, and obsolete inventory. Excluding “extra” expenses, the Company’s
MH Segment had an operating profit of $4.8 million in 2009, a decrease of $6.6
million from the segment operating profit of $11.4 million in the same period
last year. The adjusted decline in MH Segment operating profit was 11 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 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 largely due to the implementation of a new
plan.
|
Partially offset by:
|
·
|
The
spreading of fixed manufacturing costs over a smaller sales
base.
|
|
·
|
Labor
inefficiencies due to the sharp drop in
sales.
|
|
·
|
Excluding
the “extra” expenses, an increase in selling, general and administrative
expenses to 19.0 percent of net sales in 2009 from 16.1 percent of net
sales in 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 2009
because year-to-date operating profit for certain MH Segment operations
were below the previously established annual incentive compensation
hurdles.
|
The
Company has remained profitable in the MH Segment despite the 87 percent decline
in manufactured housing industry shipments since 1998. The Company did not have
an impairment of other intangible assets or long-lived assets in 2009 related to
its manufactured housing operations; however, the Company will continue to
monitor these assets for potential impairment, as a continued downturn in this
industry or in the profitability of the Company’s operations, could result in a
non-cash impairment charge of these assets in the future. At December 31, 2009,
the other intangible assets of the MH Segment aggregated $3.9
million.
Corporate
Corporate
expenses for 2009 decreased $0.8 million compared to 2008 due primarily to fixed
cost reductions.
Goodwill
Impairment
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-wide wholesale
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, and the Company’s weighted average cost of capital
of 16.5 percent. 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.
28
Based on the analyses, 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 of 2009, the Company recorded a non-cash impairment charge to
write-off the entire $45.0 million of goodwill of these reporting
units.
Other
Non-Segment Items
Other non-segment items include the
following (in
thousands):
Year
Ended
|
||||||||
December 31,
|
||||||||
2009
|
2008
|
|||||||
Selling,
general and administrative expenses:
|
||||||||
Legal
proceedings
|
$ | 416 | $ | 2,109 | ||||
Gain
on sold facilities
|
(89 | ) | (3,523 | ) | ||||
Loss
on sold facilities and write-downs to estimated current fair value of
facilities to be sold
|
3,349 | 1,602 | ||||||
Incentive
compensation impact of other non-segment items
|
(533 | ) | (96 | ) | ||||
Other
|
12 | - | ||||||
Executive
retirement
|
- | 2,667 | ||||||
Other
(income) from the collection of a previously reserved note
|
(280 | ) | (675 | ) | ||||
Total
other non-segment items
|
$ | 2,875 | $ | 2,084 |
Year
Ended December 31, 2008 Compared to Year Ended December 31, 2007
Consolidated
Highlights
|
§
|
Net
sales for 2008, excluding the impact of sales price increases and
acquisitions, decreased $202 million (30 percent) from 2007, primarily as
a result of the 29 percent decline in industry-wide wholesale shipments of
travel trailers and fifth-wheel RVs in 2008, as well as a 14 percent
decline in industry-wide wholesale shipments of manufactured homes. In
addition, 2008 sales were negatively affected by the 49 percent decline in
industry-wide wholesale shipments of motorhomes, and the severe
industry-wide decline in sales of small and medium-sized boats,
particularly on the West Coast, for which the Company supplies specialty
trailers.
|
|
§
|
Net
income for 2008 decreased 71 percent from 2007, primarily due to the
decrease in net sales and higher raw material costs. In addition, the
Company recorded a non-cash charge for impairment of goodwill, as well as
an executive retirement charge, aggregating $4.9 million after
taxes.
|
|
§
|
In
response to reduced retail sales during 2008 and inventory reductions by
RV dealers, RV manufacturers significantly reduced their output, which
negatively affected the Company in 2008. In response to the difficult
economic environment, the Company was extremely proactive and took the
following steps:
|
|
·
|
Reduced
its workforce and production capacity to be more in line with anticipated
demand.
|
|
·
|
Closed
facilities and reduced fixed overhead
costs.
|
|
·
|
Implemented
synergies between the operations of Kinro and Lippert by combining certain
administrative functions and sales
efforts.
|
29
These
factors positively affected the Company’s operating profit in 2008 by
approximately $5 million, compared to 2007. These steps also lowered the
Company’s breakeven sales level.
|
§
|
On
November 25, 2008, the Company entered into an agreement for a $50.0
million line of credit with JPMorgan Chase Bank, N.A. and Wells Fargo
Bank, N.A. Simultaneously, the Company entered into a $125.0 million
“shelf-loan” facility with Prudential Investment Management, Inc. and its
affiliates. At December 31, 2008, the collective availability under these
facilities was $117.2 million.
|
|
§
|
On
July 1, 2008, Lippert acquired certain assets and liabilities, and the
business of Seating Technology, a manufacturer of a wide variety of
furniture products primarily for towable RVs, including a full line of
upholstered furniture and mattresses. Seating Technology had annual sales
of $40 million in 2007. The purchase price was $28.7 million, which was
paid at closing from available cash. Subsequent to the acquisition,
Lippert closed two of Seating Technology's five leased facilities in
Indiana, and consolidated those operations into existing
facilities.
|
|
§
|
Steel
and aluminum are among the Company’s principal raw materials. Since late
2007, the costs of steel and aluminum have been volatile, and although the
Company was able to raise sales prices, higher cost raw materials, net of
sales price increases, reduced 2008 earnings by approximately $0.10 to
$0.13 per diluted share.
|
RV
Segment
Net sales
of the RV Segment in 2008 decreased 25 percent, or $124 million, as compared to
2007 due to:
|
·
|
An
‘organic’ sales decline of approximately $141 million, or 30 percent, of
RV-related products. This 30 percent decline was due largely to the 29
percent decrease in industry-wide wholesale shipments of travel trailers
and fifth-wheel RVs, the Company’s primary RV market. In addition,
industry-wide wholesale shipments of motorhomes, components for which
represent about 5 percent of the Company’s RV Segment net sales, were down
49 percent during 2008.
|
|
·
|
An
‘organic’ sales decline of approximately $14 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 2008 and 2007 acquisitions aggregating approximately $19
million.
|
|
·
|
Sales
price increases of approximately $12 million, primarily due to raw
material cost increases.
|
In 2008,
the severe industry-wide decline in sales of small and medium-sized boats,
particularly on the West Coast, for which the Company supplies specialty
trailers, caused the Company to record an impairment of the entire $5.5 million
of goodwill of this reporting unit, which is included in the RV Segment. The
goodwill impairment charge is reported in Other non-segment items.
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 years ended December 31, divided by the industry-wide wholesale shipments of
the different types of RVs for the years ended December 31, was as
follows:
2008
|
2007
|
Percent Change
|
||||||||||
Content
per Travel Trailer and Fifth-Wheel RV
|
$ | 1,902 | $ | 1,697 | 12 | % | ||||||
Content
per Motorhome
|
$ | 574 | $ | 429 | 34 | % | ||||||
Content
per all RVs
|
$ | 1,554 | $ | 1,324 | 17 | % |
30
The above product content per RV for
the year ended December 31, 2008 includes historical sales results for
acquisitions, under the assumption the acquisitions had been completed at the
beginning of that yearly period. 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-wide wholesale shipments for the years ended December 31,
were as follows:
2008
|
2007
|
Percent Change
|
||||||||||
Travel
Trailer and Fifth-Wheel RVs
|
185,100 | 261,700 | (29 | )% | ||||||||
Motorhomes
|
28,300 | 55,400 | (49 | )% | ||||||||
All
RVs
|
237,000 | 353,400 | (33 | )% |
Operating
profit of the RV Segment in 2008 decreased 55 percent to $28.7 million largely
due to the decline in sales, which was also a factor in the decrease of 5.0
percentage points in the operating profit margin to 7.8 percent of net sales in
2008 from 12.8 percent of net sales in 2007. The decline in RV Segment operating
profit was 25 percent of the decline in net sales, excluding sales price
increases, which is higher than we would typically expect, largely due to the
impact of increased raw material costs.
The
operating profit margin of the RV Segment in 2008 was adversely impacted
by:
|
·
|
Higher
raw material costs.
|
|
·
|
Labor
inefficiencies due to the sharp drop in sales during the latter part of
2008.
|
|
·
|
The
spreading of fixed manufacturing costs over a smaller sales
base.
|
|
·
|
Higher
health insurance costs.
|
|
·
|
Higher
than expected integration costs of the Seating Technology acquisition, and
costs incurred for prototype expenses for potential new customer accounts.
New customer accounts were gained as a
result.
|
|
·
|
An
increase in selling, general and administrative expenses to 12.4 percent
of net sales in 2008 from 11.3 percent of net sales in 2007, largely due
to an increase in bad debt expense, and higher fuel and delivery costs, as
well as the spreading of fixed administrative costs over a smaller sales
base. This was partially offset by lower incentive compensation expense as
a percent of net sales due to reduced operating profit
margins.
|
Partially
offset by:
|
·
|
Implementation
of cost-cutting measures.
|
|
·
|
Lower
overtime and warranty costs.
|
MH
Segment
Net sales of the MH Segment in 2008
decreased 19 percent, or $34 million, from 2007. Excluding $13 million in sales
price increases, net sales of the MH Segment declined 27 percent, compared to a
14 percent decrease in industry-wide wholesale shipments of manufactured homes.
The ‘organic’ decrease in sales of the Company’s MH Segment was greater than the
manufactured housing industry decline due partly to a reduction in the average
size of the homes produced by the manufactured housing industry, which require
less of the Company’s products, and partly due to business the Company exited in
the latter half of 2007 because of inadequate margins. However, in the latter
half of 2008, the Company gained market share in the MH Segment.
MH Segment sales in the 2008 fourth
quarter included $3 million of components for homes purchased by the Federal
Emergency Management Agency.
31
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 years ended December 31, divided by the
number of manufactured homes and manufactured home floors produced by the
industry, respectively, for the years ended December 31, was as
follows:
2008
|
2007
|
Percent Change
|
||||||||||
Content
per Home Produced
|
$ | 1,489 | $ | 1,611 | (8 | )% | ||||||
Content
per Floor Produced
|
$ | 901 | $ | 942 | (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-wide wholesale shipments for the years ended December 31,
were as follows:
2008
|
2007
|
Percent Change
|
||||||||||
Total
Homes Produced
|
81,900 | 95,800 | (14 | )% | ||||||||
Total
Floors Produced
|
135,300 | 163,700 | (17 | )% |
Operating
profit of the MH Segment in 2008 decreased 27 percent to $11.0 million largely
due to the impact of the decrease in net sales, which was also a factor in the
decline in the operating profit margin to 7.7 percent of net sales in 2008,
compared to 8.5 percent of net sales in 2007.
The
operating profit margin of the MH Segment in 2008 was adversely impacted
by:
|
·
|
The
spreading of fixed manufacturing costs over a smaller sales
base.
|
|
·
|
Higher
health insurance costs.
|
|
·
|
An
increase in selling, general and administrative expenses to 16.5 percent
of net sales in 2008 from 14.6 percent of net sales in 2007 due to higher
fuel and delivery costs as a percent of net sales, as well as the
spreading of fixed administrative costs over a smaller sales
base.
|
Partially
offset by:
|
·
|
Changes
in product mix.
|
|
·
|
The
elimination of certain low margin business exited in the latter half of
2007.
|
|
·
|
Implementation
of cost-cutting measures.
|
|
·
|
Improved
production efficiencies.
|
Corporate
Corporate
expenses for 2008 decreased $0.4 million compared to 2007 due primarily to a
decrease in incentive-based compensation as a result of lower profits, partly
offset by higher professional fees.
Goodwill
Impairment
The Company conducted its annual
impairment analysis of the goodwill in all reporting units during the fourth
quarter of 2008. The fair value of each reporting unit was estimated using a
discounted cash flow model utilizing internal forecasts and observable market
data, to the extent available, and the Company’s weighted average cost of
capital of 13.0 percent. Based on the analysis, the carrying value of the
specialty trailer reporting unit exceeded its fair value, and as a result, the
Company recorded an impairment of the entire $5.5 million of goodwill of this
reporting unit. This business has been impacted by prolonged declines in
industry shipments of small and medium-sized boats that worsened late in
2008.
32
Other
Non-Segment Items
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 each of 2008 and 2007, the Company received
payments of $0.8 million including interest, which had been previously fully
reserved, and the Company therefore recorded a pre-tax gain in Other Income. The
balance of the note was $1.0 million at December 31, 2008, which was fully
reserved.
Other non-segment items include the
following (in
thousands):
Year
Ended
|
||||||||
December 31,
|
||||||||
2008
|
2007
|
|||||||
Cost
of sales:
|
||||||||
Other
|
$ | - | $ | (236 | ) | |||
Selling,
general and administrative expenses:
|
||||||||
Legal
proceedings
|
2,109 | 1,616 | ||||||
Gain
on sold facilities
|
(3,523 | ) | (2,253 | ) | ||||
Loss
on sold facilities and write-downs to estimated current market value of
facilities to be sold
|
1,602 | 2,231 | ||||||
Incentive
compensation impact of other non-segment items
|
(96 | ) | (178 | ) | ||||
Executive
retirement
|
2,667 | - | ||||||
Other
(income) from the collection of the previously reserved
Note
|
(675 | ) | (707 | ) | ||||
$ | 2,084 | $ | 473 |
Effective in the third quarter of 2008,
gains or losses on sold manufacturing facilities and charges for write-downs to
estimated current market value of manufacturing facilities to be sold have been
reclassified from cost of goods sold to selling, general, and administrative
expenses in the Consolidated Statements of Operations. Prior periods have been
reclassified to conform to this presentation.
Interest
Expense, Net
The $0.1
million decrease in interest expense, net, for 2009 as compared to 2008, was
partially due to a decrease in the average debt levels during the last 12
months. In addition, the Company earned less than $0.1 million in interest
income in 2009, while the Company earned $0.5 million in interest income in
2008.
The $1.7
million decrease in interest expense, net, for 2008 as compared to 2007, was
primarily due to a decrease in the average debt levels during the last 12
months. For 2008, the Company earned $0.5 million in interest income, as
compared to $1.0 million in 2007.
Provision
for Income Taxes
The effective tax rate for 2009 was
33.9 percent, which is a combination of a 34.8 percent rate on the goodwill
impairment charge, and a 38.5 percent rate for the remaining pre-tax income. A
portion of the goodwill impairment charge is not deductible for tax purposes,
which reduced the tax benefit recorded. The 38.5 percent rate on the remaining
pre-tax income was consistent with the 38.6 percent rate for 2008, as the tax
rate benefits from federal tax credits and tax reserve adjustments were offset
by the negative impact of lower pre-tax income on permanent tax
differences.
The effective tax rate for 2008 was
38.6 percent, compared to 37.2 percent in 2007. The increase in the effective
tax rate for 2008 as compared to 2007 was due primarily to the effect of lower
profits on state and federal tax rates, as well as a change in pre-tax income
between legal entities and states, and an increase in the Company’s tax
reserves.
33
In connection with a tax audit by the
Indiana Department of Revenue pertaining to calendar years 1998 to 2000, the
Company received an initial examination report asserting, in the aggregate,
approximately $1.2 million of proposed tax adjustments, including interest and
penalties. After two hearings with the Indiana Department of Revenue, the audit
findings were upheld. The Company filed an appeal in December 2006 with the
Indiana Tax Court and the matter was scheduled for trial in December 2008. In
November 2008, the Company and the Indiana Department of Revenue settled tax
years 1998 to 2000 for $0.6 million, as well as tax years 2001 to 2006 for $4.0
million including interest. The aggregate settlement amount was fully reserved
prior to 2009, and was paid in April of 2009. In connection with the settlement,
the Indiana Department of Revenue reserved the right to examine tax years 2001
through 2006.
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 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, 2008 and 2009, respectively. See
Note 1 of the Notes to Consolidated Financial Statements.
LIQUIDITY
AND CAPITAL RESOURCES
The
Consolidated Statements of Cash Flows reflect the following for the years ended
December 31, (in
thousands):
2009
|
2008
|
2007
|
||||||||||
Net
cash flows provided by operating activities
|
$ | 63,256 | $ | 4,657 | $ | 84,910 | ||||||
Net
cash flows used for investing activities
|
(16,445 | ) | (25,492 | ) | (11,641 | ) | ||||||
Net
cash flows used for financing activities
|
(3,138 | ) | (26,686 | ) | (23,841 | ) | ||||||
Net
increase (decrease) in cash
|
$ | 43,673 | $ | (47,521 | ) | $ | 49,428 |
Cash
Flows from Operations
Net cash
flows from operating activities in 2009 were $58.6 million more than in 2008,
primarily as a result of:
|
-
A
|
$37.5
million reduction in inventories in 2009, compared to a $12.7 million
increase in 2008. 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. During 2009, the Company
reduced inventory through consumption of higher priced inventory on hand,
and reduced inventory purchases.
|
|
-
A
|
$2.2
million decrease in accounts payable, accrued expenses and other
liabilities in 2009, compared to a decrease of $23.5 million in 2008 due
largely to the timing of payments for inventory
purchases.
|
34
|
Partially
offset by:
|
|
-
A
|
$4.6
million increase in accounts receivable in 2009, compared to a $9.5
million decrease in 2008. Accounts receivable increased in 2009 due to an
increase in sales in December 2009 as compared to December
2008.
|
During
the first few months of 2010, the Company expects to use $10 million to $15
million of cash to fund seasonal working capital growth.
Depreciation
and amortization was $18.5 million in 2009, and are expected to aggregate $16
million in 2010. Non-cash stock-based compensation was $3.7 million in 2009, and
is expected to be $4 million to $5 million in 2010.
Net cash
flows from operating activities in 2008 were $80.3 million less than 2007,
primarily as a result of (i) lower net income in 2008 (ii) increased inventories
in 2008 due to the Company’s strategic purchase of raw materials in advance of
price increases and higher priced raw materials in inventory, and (iii) the
timing of payments for inventory purchases. This was partially offset by a
decrease in accounts receivable due to the decline in sales.
Depreciation
and amortization, decreased by $0.5 million to $17.1 million in 2008, while
non-cash stock-based compensation increased by $1.1 million to $3.6 million in
2008.
Cash
Flows from Investing Activities
Cash
flows used for investing activities of $16.4 million in 2009 included capital
expenditures of $3.1 million, which was financed with available cash. The
Company estimates that capital expenditures will be $5 million to $7 million in
2010, and are expected to be funded by cash flows from operations.
During
2009, the Company purchased $15.0 million in short-term U.S. Treasury Bills, of
which $2.0 million matured in December 2009, and the balance matures at various
dates through June 2010. The Company has chosen to invest in U.S. Treasury Bills
primarily due to the high levels of security and liquidity provided by these
instruments.
On May
15, 2009, Lippert acquired the patents for the QuickBiteTM
coupler, 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 from available cash,
with the balance to be paid on May 15, 2010. 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. In 2009, Lippert paid earn-out of less than $0.1
million.
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, is being 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 from available
cash.
On
September 29, 2009, Kinro acquired 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 began manufacturing entry doors at plants in
Indiana and South Carolina in the 2009 fourth quarter. The purchase price was
$0.9 million, which was paid at closing from available cash.
35
At
December 31, 2009, the Company was in the process of selling seven owned
facilities and vacant land with an aggregate carrying value of $6.0 million,
which are not currently being used in production or are in the process of
shutting down operations. In addition, the Company has leased three owned
facilities with a combined carrying amount of $7.7 million, for one to three
year terms, for a combined $70,000 per month. Each of these three leases 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 four vacant leased facilities.
On
February 18, 2010, the Company reported that Lippert agreed in principle to
acquire certain intellectual property and other assets from Michigan-based
Schwintek, Inc. The purchase would include several products for which patents
are pending, including innovative RV wall slides that are considerably lighter,
more space efficient, and more reliable than previous slide-out designs. The
purchase price, undisclosed at the time of the announcement, is expected to
include cash payable at closing, plus an earn-out depending on future unit
sales. It is expected that the cash portion of the purchase price payable at
closing will be funded from available cash. Closing of the transaction is
subject to completion of due diligence, agreement on final terms and conditions,
the execution of definitive transaction documents, and satisfaction of customary
closing conditions.
In a separate transaction on February
18, 2010, Lippert acquired the patent-pending design for a six-point leveling
system for fifth-wheel RVs. The purchase price was $1.4 million paid at closing
with available cash, plus an earn-out depending on future unit sales of the
system.
The
Company’s priorities for its cash are liquidity and security. At December 31,
2009, all but $0.2 million of the Company’s cash balances were in fully FDIC
insured accounts. Subsequent to December 31, 2009, these accounts no longer have
unlimited FDIC insurance. As a result, beginning in 2010, the Company
diversified a portion of its cash balances, and purchased additional U.S.
Treasury Bills.
Cash
flows used for investing activities of $25.5 million in 2008 included $31.8
million for an acquisition of a business and other investments, which were
financed from available cash.
On July
1, 2008, Lippert acquired certain assets and liabilities, and the business of
Seating Technology, a manufacturer of a wide variety of furniture products
primarily for towable RVs, including a full line of upholstered furniture and
mattresses. Seating Technology had annual sales of $40 million in 2007. The
purchase price was $28.7 million, which was paid at closing from available cash.
Subsequent to the acquisition, Lippert closed two of Seating Technology's five
leased facilities in Indiana and consolidated those operations into existing
facilities.
On July
1, 2008, Lippert acquired the patent for “JT's Strong Arm Jack Stabilizer,” and
other intellectual properties and assets. The purchase price was $3.1 million,
which was paid at closing from available cash. “JT's Strong Arm Jack Stabilizer”
represents a significant advance in the elimination of side-to-side and
front-to-back movement of a parked travel trailer or fifth-wheel
RV.
In
addition, cash flows from investing activities in 2008 included proceeds of
$10.5 million received from the sale of seven facilities and other fixed assets
in connection with the Company’s consolidation of production operations. The
Company used $4.2 million for capital expenditures in 2008, which was financed
with available cash.
Cash
Flows from Financing Activities
Cash
flows used for financing activities for 2009 of $3.1 million were primarily due
to net debt payments of $8.7 million, partially offset by $5.6 million in cash
and the related tax benefits from the exercise of stock options. At December 31,
2009, the Company had no debt outstanding.
Cash
flows used for financing activities for 2008 of $26.7 million were primarily due
to $18.6 million of net debt payments and $8.3 million for the purchase of
treasury stock. At December 31, 2008, the Company had $3.8 million of cash
invested in U.S. Treasury short-term money market instruments.
36
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”), to replace the Company’s previous $70.0 million line of credit
that was scheduled to expire in June 2009. 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 December 31, 2009), or
LIBOR plus additional interest ranging from 2.0 percent to 2.8 percent (2.0
percent at December 31, 2009) depending on the Company’s performance and
financial condition. The Credit Agreement expires December 1, 2011. At December
31, 2009, the Company had $7.8 million in outstanding letters of credit under
the line of credit, and availability under the Company’s line of credit, after
considering the maximum leverage ratio covenant limitation, was $37.8
million.
Simultaneously,
the Company entered into a $125.0 million “shelf-loan” facility with Prudential
Investment Management, Inc. and its affiliates (“Prudential”), to replace the
Company’s previous $60.0 million “shelf-loan” facility with Prudential, of which
$6.0 million was outstanding at December 31, 2008. 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 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 December 31, 2009, the maximum leverage ratio covenant limits the
remaining availability under these facilities collectively to $37.8 million. The
$65.4 million in cash and short-term investments at December 31, 2009, together
with the borrowing availability under our line of credit and “shelf-loan”
facility, 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, interest and fixed charge coverages, and
to meet certain other financial requirements. At December 31, 2009, the Company
was in compliance with all such requirements, 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 from time to time in the
open market, privately negotiated transactions, or block trades. Of this
authorization, 447,400 shares were repurchased in 2008 at an average price of
$18.58 per share, or $8.3 million in total. The aggregate cost of repurchases
was funded from the Company’s available cash. The number of shares ultimately
repurchased, and the timing of the purchases, will depend upon market
conditions, share price, and other factors. At present 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.
37
Future
minimum commitments relating to the Company's contractual obligations at
December 31, 2009 are as follows (in thousands):
Payments due by period
|
||||||||||||||||||||
Less
than
|
More
than
|
|||||||||||||||||||
Total
|
1 year
|
1-3 years
|
3-5 years
|
5 years
|
||||||||||||||||
Operating
leases
|
$ | 13,842 | $ | 4,668 | $ | 6,824 | $ | 1,887 | $ | 463 | ||||||||||
Capital
leases
|
20 | 20 | - | - | - | |||||||||||||||
Employment
contracts and deferred compensation (a)
|
9,476 | 4,677 | 2,999 | 99 | 1,701 | |||||||||||||||
Royalty
agreements and earn-out payments (b)
|
4,386 | 710 | 1,511 | 824 | 1,341 | |||||||||||||||
Purchase
obligations (c)
|
53,561 | 48,933 | 1,760 | 1,324 | 1,544 | |||||||||||||||
Taxes
(d)
|
3,876 | 3,876 | - | - | - | |||||||||||||||
Total
|
$ | 85,161 | $ | 62,884 | $ | 13,094 | $ | 4,134 | $ | 5,049 |
|
(a)
|
This
includes amounts payable under employment contracts and arrangements,
retirement and severance agreements, and deferred compensation. These
amounts do not include $0.3 million in deferred compensation, as the
timing of payment is based upon the employees’ separation from
service.
|
|
(b)
|
These
amounts are comprised of minimum required future payments, as well as
estimated future payments for which a liability has been recorded, in
connection with acquisitions over the past few years. Excluded from these
amounts, because they are not ascertainable, are a license agreement that
provides for the Company to pay a royalty of 1 percent of sales of certain
slide-out systems, the remaining aggregate of which cannot exceed $4.3
million, and an earn-out of up to $2.6 million related to an acquisition
in 2007 if certain sales targets for the acquired products are achieved
over the five years subsequent to the acquisition.
|
|
(c)
|
These
contractual obligations are primarily comprised of purchase orders issued
in the normal course of business. Also included are several longer term
purchase commitments, for which the Company has estimated the expected
future obligation based on current prices and usage.
|
|
(d)
|
These
amounts include $1.3 million of estimated income tax payments for 2009,
and $2.6 million for unrecognized tax benefits and related interest and
penalties.
|
These commitments are described more
fully in the Notes to Consolidated Financial Statements.
CORPORATE
GOVERNANCE
The Company is in compliance with the
corporate governance requirements of the Securities and Exchange Commission
(“SEC”) and the New York Stock Exchange. The Company’s governance documents and
committee charters and key practices have been posted to the Company’s website
(www.drewindustries.com)
and are updated periodically. The website also contains, or provides direct
links to, all SEC filings, press releases and investor presentations. The
Company has also established a toll-free hotline (877-373-9123) to report
complaints about the Company’s accounting, internal controls, auditing matters
or other concerns.
CONTINGENCIES
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, 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 U.S. 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.).
38
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 because she no longer owned
the bathtub. 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.
On June
25, 2008, plaintiffs filed a renewed motion for class certification and the
Court again denied certification of a class. Plaintiffs filed a third motion for
class certification on December 23, 2008, and Defendants’ filed a motion seeking
summary judgment against plaintiffs’ case.
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 Defendant’s motion for 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.
On August
26, 2009, as a result of a decision by the California Supreme Court in an
unrelated case dealing with a similar UCL claim, the Court dismissed plaintiffs’
remaining UCL claim because plaintiffs did not actually rely on defendants’
labels when they bought the homes containing the bathtubs. 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 that certified a class to pursue a claim under the
“unfair prong” of the UCL. On December 11, 2009, the Appeals Court issued an
Order denying defendants’ permission to appeal the District Court’s ruling at
this point in the case, but the Appeals Court did not address the merits of the
case.
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 District Court’s rulings dismissing
plaintiffs’ six claims, and the ruling on “reliance” by the California Supreme
Court, Kinro believes that, notwithstanding the District Court’s finding that
plaintiffs may proceed with their claim that defendants may have violated the
“unfair prong” of the UCL, plaintiffs may not be able to prove the essential
elements of their claim. Defendants intend to vigorously defend against the
claim, and intend to move for summary judgment dismissing the claim. In
addition, Kinro believes that no remedial action is required or appropriate
under HUD safety standards.
If the
District Court maintains its rulings, denies defendants’ motion for summary
judgment as to the claim based on the “unfair prong” of the UCL, and maintains
its ruling granting plaintiffs’ motion for class certification with respect to
that claim, and if plaintiffs pursue their claim, 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.
39
In connection with a tax audit by the
Indiana Department of Revenue pertaining to calendar years 1998 to 2000, the
Company received an initial examination report asserting, in the aggregate,
approximately $1.2 million of proposed tax adjustments, including interest and
penalties. After two hearings with the Indiana Department of Revenue, the audit
findings were upheld. The Company filed an appeal in December 2006 with the
Indiana Tax Court and the matter was scheduled for trial in December 2008. In
November 2008, the Company and the Indiana Department of Revenue settled tax
years 1998 to 2000 for $0.6 million, as well as 2001 to 2006 for $4.0 million,
including interest. The aggregate settlement amount was fully reserved prior to
2009, and was paid in April of 2009. In connection with the settlement, the
Indiana Department of Revenue reserved the right to examine tax years 2001
through 2006.
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 Consolidated Balance Sheet as of December 31, 2009, would not be material to
the Company’s financial position or annual results of operations.
CRITICAL
ACCOUNTING POLICIES
The Company's Consolidated Financial
Statements have been prepared in conformity with accounting principles generally
accepted in the United States of America which requires that certain estimates
and assumptions be made that affect the amounts and disclosures reported in
those financial statements and the related accompanying notes. Actual results
could differ from these estimates and assumptions. The following critical
accounting policies, some of which are impacted significantly by judgments,
assumptions and estimates, affect the Company's Consolidated Financial
Statements. Management has discussed the development and selection of its
critical accounting policies with the Audit Committee of the Company’s Board of
Directors and the Audit Committee has reviewed the disclosure presented below
relating to the critical accounting policies.
Accounts
Receivable
The Company maintains an allowance for
doubtful accounts that reduces accounts receivables to amounts that are expected
to be collected. In assessing the collectability of its accounts receivable, the
Company considers such factors as the current overall economic conditions,
industry-specific economic conditions, historical and anticipated customer
performance, historical experience with write-offs and the level of past-due
amounts. This estimation process is subjective, and to the extent that future
actual results differ from original estimates, adjustments to recorded accruals
may be required.
Inventories
Inventories (finished goods, work in
process and raw materials) are stated at the lower of cost, determined on a
first-in, first-out basis, or market. Cost is determined based solely on those
charges incurred in the acquisition and production of the related inventory
(i.e. material, labor and manufacturing overhead costs). The Company estimates
an inventory reserve for excess quantities and obsolete items based on specific
identification and historical write-offs, taking into account future demand and
market conditions. To the extent that actual demand or market conditions in the
future differ from original estimates, adjustments to recorded inventory
reserves may be required.
Self-Insurance
The Company is self-insured for certain
health and workers' compensation benefits up to certain stop-loss limits. Such
costs are accrued based on known claims and an estimate of incurred, but not
reported (“IBNR”) claims. IBNR claims are estimated using historical lag
information and other data provided by claims administrators. This estimation
process is subjective, and to the extent that future actual results differ from
original estimates, adjustments to recorded accruals may be
required.
40
Warranty
The Company provides warranty terms
based upon the type of product that is sold. The Company estimates the warranty
accrual based upon various factors, including the Company’s (i) historical
warranty experience, (ii) product mix, and (iii) sales patterns. The accounting
for warranty accruals requires the Company to make assumptions and judgments,
and to the extent that future actual results differ from original estimates,
adjustments to recorded accruals may be required.
Income Taxes
The Company's tax (benefit) provision
is based on pre-tax (loss) income, statutory tax rates and tax planning
strategies. Significant management judgment is required in determining the tax
(benefit) provision and in evaluating the Company's tax position. The Company
establishes additional provisions for income taxes when, despite the belief that
the tax positions are fully supportable, there remain certain tax positions that
are likely to be challenged and may or may not be sustained on review by tax
authorities. The Company adjusts these tax accruals in light of changing facts
and circumstances. The effective tax rate in a given financial statement period
may be materially impacted by changes in the expected outcome of tax
audits.
The Company's accompanying Consolidated
Balance Sheets also include deferred tax assets resulting from deductible
temporary differences, which are expected to reduce future taxable income. These
assets are based on management's estimate of realizability based upon forecasted
taxable income. Realizability of these assets is reassessed at the end of each
reporting period based upon the Company's forecast of future taxable income.
Failure to achieve forecasted taxable income could affect the ultimate
realization of certain deferred tax assets, and may result in the recognition of
a valuation reserve. For additional information, see Note 9 of the Notes to
Consolidated Financial Statements.
Impairment of Long-Lived
Assets
The Company periodically evaluates
whether events or circumstances have occurred that indicate that long-lived
assets may not be recoverable or that the remaining useful life may warrant
revision. When such events or circumstances occur, the Company assesses the
recoverability of long-lived assets by determining whether the carrying value
will be recovered through the expected undiscounted future cash flows resulting
from the use of the asset. In the event the sum of the expected undiscounted
future cash flows is less than the carrying value of the asset, an impairment
loss equal to the excess of the asset's carrying value over its fair value would
be recorded. The long-term nature of these assets requires the estimation of
their cash inflows and outflows several years into the future. Actual results
and events could differ significantly from management estimates.
Impairment of Goodwill and Other
Intangible Assets
Goodwill and other intangible assets
are evaluated for impairment at the reporting unit level on an annual basis and
between annual tests whenever events or circumstances indicate that the carrying
value of a reporting unit may exceed its fair value. The Company conducts its
required annual impairment test as of November 30th each fiscal year. The
impairment test uses a discounted cash flow model to estimate the fair value of
a reporting unit. This model requires the use of long-term forecasts and
assumptions regarding industry-specific economic conditions that are outside the
control of the Company. Actual results and events could differ significantly
from management estimates.
In 2008, the Company conducted its
annual impairment analysis of the goodwill in all reporting units, which
resulted in the impairment and non-cash write-off of the entire $5.5 million of
goodwill related to the specialty trailer reporting unit. 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-wide wholesale shipments of RVs and manufactured homes, the Company
also conducted an impairment analysis of the goodwill of each of its reporting
units, resulting in the impairment and non-cash write-off of the remaining $45.0
million of goodwill.
41
In both periods, 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 and December 31,
2008, the discount rate used in the discounted cash flow model prepared for the
goodwill impairment analysis was 16.5 percent and 13.0 percent, respectively,
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,
as well as the risks and uncertainty inherent in the markets generally and in
the Company’s internally developed forecasts.
Based on the analyses, the carrying
value of the RV, manufactured housing and specialty trailer 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 the Company recorded a non-cash impairment charge to write-off the
entire goodwill of these reporting units.
These non-cash goodwill impairment
charges were largely the result of uncertainties in the economy, and in the RV,
manufactured housing and marine and leisure industries, as well as the discount
rates 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.
Legal
Contingencies
The Company is subject to proceedings,
lawsuits and other claims in the normal course of business. Each quarter, the
Company formally evaluates pending proceedings, lawsuits and other claims with
counsel. These contingencies require the judgment of management in assessing the
likelihood of adverse outcomes and the potential range of probable losses.
Liabilities for legal matters are accrued for when it is probable that a
liability has been incurred and the amount of the liability can be reasonably
estimated, based upon current law and existing information. Estimates of
contingencies may change in the future due to new developments or changes in
legal approach. Actual
results and events could differ significantly from management
estimates.
Other
Estimates
The Company makes a number of other
estimates and judgments in the ordinary course of business including, but not
limited to, those related to product returns, accounts receivable, notes
receivable, lease terminations, asset retirement obligations, post-retirement
benefits, stock-based compensation, segment allocations, earn-out payments, and
contingencies. Establishing reserves for these matters requires management's
estimate and judgment with regard to risk and ultimate liability or realization.
As a result, these estimates are based on management's current understanding of
the underlying facts and circumstances and may also be developed in conjunction
with outside advisors, as appropriate. Because of uncertainties related to the
ultimate outcome of these issues or the possibilities of changes in the
underlying facts and circumstances, actual results and events could differ
significantly from management estimates.
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 2009 related to
inflation.
42
Item
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
RISK.
The
Company has historically been exposed to changes in interest rates primarily as
a result of its financing activities. At December 31, 2009, the Company had no
outstanding borrowings.
At
December 31, 2009, the Company had $3.0 million of cash equivalents and $13.0
million of short-term investments in U.S. Treasuries with a current yield of
approximately 0.1 percent. Assuming there is an increase of 100 basis points in
the interest rate for these fixed rate investments subsequent to December 31,
2009, and total investments of $16.0 million, future cash flows would be $0.2
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
Item 7 of this Report.
43
Item 8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA.
Report
of Independent Registered Public Accounting Firm
The Board
of Directors and Stockholders
Drew
Industries Incorporated:
We have
audited the accompanying consolidated balance sheets of Drew
Industries Incorporated and subsidiaries as of December 31, 2009 and 2008, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
2009. We also have audited the Company’s internal control over financial
reporting as of December 31, 2009, based on criteria established in Internal
Control – Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Company’s management is
responsible for these consolidated financial statements, for maintaining
effective internal control over financial reporting, and for its assessment of
the effectiveness of internal control over financial reporting, included in the
accompanying “Management’s Annual Report on Internal Control over Financial
Reporting.” Our
responsibility is to express an opinion on these consolidated financial
statements and an opinion on the Company's internal control over financial
reporting based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material
respects. Our audits of the consolidated financial
statements included examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. Our audit of internal control over financial
reporting included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on
the assessed risk. Our audits also included performing such other procedures as
we considered necessary in the circumstances. We believe that our audits provide
a reasonable basis for our opinions.
A
company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, the consolidated
financial statements referred to above present fairly, in all material respects,
the financial position of Drew Industries Incorporated and subsidiaries as of
December 31, 2009 and 2008, and the results of their operations and their cash
flows for each of the years in the three-year period ended December 31, 2009, in
conformity with U.S. generally accepted accounting principles. Also in our
opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2009, based on criteria
established in Internal Control – Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO).
/s/ KPMG
LLP
Stamford,
Connecticut
March 11,
2010
44
Drew
Industries Incorporated
Consolidated
Statements of Operations
(In
thousands, except per share amounts)
Year Ended December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Net
sales
|
$ | 397,839 | $ | 510,506 | $ | 668,625 | ||||||
Cost
of sales
|
319,129 | 403,000 | 509,875 | |||||||||
Gross
profit
|
78,710 | 107,506 | 158,750 | |||||||||
Selling,
general and administrative expenses
|
69,489 | 80,129 | 93,498 | |||||||||
Goodwill
impairment
|
45,040 | 5,487 | - | |||||||||
Executive
retirement
|
- | 2,667 | - | |||||||||
Other
(income)
|
(238 | ) | (675 | ) | (707 | ) | ||||||
Operating
(loss) profit
|
(35,581 | ) | 19,898 | 65,959 | ||||||||
Interest
expense, net
|
789 | 877 | 2,615 | |||||||||
(Loss)
income before income taxes
|
(36,370 | ) | 19,021 | 63,344 | ||||||||
(Benefit)
provision for income taxes
|
(12,317 | ) | 7,343 | 23,577 | ||||||||
Net
(loss) income
|
$ | (24,053 | ) | $ | 11,678 | $ | 39,767 | |||||
Net
(loss) income per common share:
|
||||||||||||
Basic
|
$ | (1.10 | ) | $ | 0.54 | $ | 1.82 | |||||
Diluted
|
$ | (1.10 | ) | $ | 0.53 | $ | 1.80 | |||||
Weighted
average common shares outstanding:
|
||||||||||||
Basic
|
21,807 | 21,808 | 21,893 | |||||||||
Diluted
|
21,807 | 21,917 | 22,126 |
The
accompanying notes are an integral part of these Consolidated Financial
Statements.
45
Drew
Industries Incorporated
Consolidated
Balance Sheets
(In
thousands, except shares and per share amount)
December 31,
|
||||||||
2009
|
2008
|
|||||||
ASSETS
|
||||||||
Current
assets
|
||||||||
Cash
and cash equivalents
|
$ | 52,365 | $ | 8,692 | ||||
Short-term
investments
|
12,995 | - | ||||||
Accounts
receivable, trade, less allowances of $1,232 in 2009 and $1,666 in
2008
|
12,541 | 7,913 | ||||||
Inventories
|
57,757 | 93,934 | ||||||
Prepaid
expenses and other current assets
|
13,793 | 16,556 | ||||||
Total
current assets
|
149,451 | 127,095 | ||||||
Fixed
assets, net
|
80,276 | 88,731 | ||||||
Goodwill
|
- | 44,113 | ||||||
Other
intangible assets
|
39,171 | 42,787 | ||||||
Deferred
taxes
|
16,532 | 306 | ||||||
Other
assets
|
2,635 | 8,326 | ||||||
Total
assets
|
$ | 288,065 | $ | 311,358 | ||||
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
Current
liabilities
|
||||||||
Notes
payable, including current maturities of long-term
indebtedness
|
$ | - | $ | 5,833 | ||||
Accounts
payable, trade
|
7,513 | 4,660 | ||||||
Accrued
expenses and other current liabilities
|
28,194 | 32,224 | ||||||
Total
current liabilities
|
35,707 | 42,717 | ||||||
Long-term
indebtedness
|
- | 2,850 | ||||||
Other
long-term liabilities
|
8,243 | 6,913 | ||||||
Total
liabilities
|
43,950 | 52,480 | ||||||
Stockholders'
equity
|
||||||||
Common
stock, par value $.01 per share: authorized 30,000,000 shares; issued
24,561,358 shares at December 31, 2009 and 24,122,054 shares at December
31, 2008
|
246 | 241 | ||||||
Paid-in
capital
|
74,239 | 64,954 | ||||||
Retained
earnings
|
197,430 | 221,483 | ||||||
271,915 | 286,678 | |||||||
Treasury
stock, at cost - 2,596,725 shares at December 31, 2009 and
2008
|
(27,800 | ) | (27,800 | ) | ||||
Total
stockholders' equity
|
244,115 | 258,878 | ||||||
Total
liabilities and stockholders' equity
|
$ | 288,065 | $ | 311,358 |
The
accompanying notes are an integral part of these Consolidated Financial
Statements.
46
Drew
Industries Incorporated
Consolidated
Statements of Cash Flows
(In
thousands)
Year Ended December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Cash
flows from operating activities:
|
||||||||||||
Net
(loss) income
|
$ | (24,053 | ) | $ | 11,678 | $ | 39,767 | |||||
Adjustments
to reconcile net (loss) income to cash flows provided by operating
activities:
|
||||||||||||
Depreciation
and amortization
|
18,468 | 17,078 | 17,557 | |||||||||
Deferred
taxes
|
(16,685 | ) | (2,145 | ) | (1,488 | ) | ||||||
Loss
(gain) on disposal of fixed assets and other non-cash
items
|
2,836 | (2,393 | ) | (351 | ) | |||||||
Stock-based
compensation expense
|
3,744 | 3,636 | 2,489 | |||||||||
Goodwill
impairment
|
45,040 | 5,487 | - | |||||||||
Changes
in assets and liabilities, net of business acquisitions:
|
||||||||||||
Accounts
receivable, net
|
(4,628 | ) | 9,497 | 3,061 | ||||||||
Inventories
|
37,505 | (12,695 | ) | 8,994 | ||||||||
Prepaid
expenses and other assets
|
3,226 | (1,980 | ) | 1,478 | ||||||||
Accounts
payable, accrued expenses and other liabilities
|
(2,197 | ) | (23,506 | ) | 13,403 | |||||||
Net
cash flows provided by operating activities
|
63,256 | 4,657 | 84,910 | |||||||||
Cash
flows from investing activities:
|
||||||||||||
Capital
expenditures
|
(3,107 | ) | (4,199 | ) | (8,770 | ) | ||||||
Acquisition
of businesses
|
(1,679 | ) | (28,764 | ) | (17,299 | ) | ||||||
Proceeds
from sales of fixed assets
|
1,367 | 10,541 | 14,492 | |||||||||
Purchase
of short-term investments
|
(14,992 | ) | - | - | ||||||||
Proceeds
from sales of short-term investments
|
2,000 | - | - | |||||||||
Other
investing activities
|
(34 | ) | (3,070 | ) | (64 | ) | ||||||
Net
cash flows used for investing activities
|
(16,445 | ) | (25,492 | ) | (11,641 | ) | ||||||
Cash
flows from financing activities:
|
||||||||||||
Proceeds
from line of credit and other borrowings
|
5,775 | 14,600 | 23,800 | |||||||||
Repayments
under line of credit and other borrowings
|
(14,458 | ) | (33,179 | ) | (52,218 | ) | ||||||
Exercise
of stock options
|
5,562 | 402 | 4,577 | |||||||||
Purchase
of treasury stock
|
- | (8,333 | ) | - | ||||||||
Other
financing activities
|
(17 | ) | (176 | ) | - | |||||||
Net
cash flows used for financing activities
|
(3,138 | ) | (26,686 | ) | (23,841 | ) | ||||||
Net
increase (decrease) in cash
|
43,673 | (47,521 | ) | 49,428 | ||||||||
Cash
and cash equivalents at beginning of year
|
8,692 | 56,213 | 6,785 | |||||||||
Cash
and cash equivalents at end of year
|
$ | 52,365 | $ | 8,692 | $ | 56,213 | ||||||
Supplemental
disclosure of cash flow information:
|
||||||||||||
Cash
paid during the year for:
|
||||||||||||
Interest
|
$ | 499 | $ | 1,319 | $ | 3,426 | ||||||
Income
taxes, net of refunds
|
$ | 3,290 | $ | 13,852 | $ | 16,881 |
The
accompanying notes are an integral part of these Consolidated Financial
Statements.
47
Drew
Industries Incorporated
Consolidated
Statements of Stockholders' Equity
(In
thousands, except shares)
Accumulated
|
||||||||||||||||||||||||
Other
|
Total
|
|||||||||||||||||||||||
Common
|
Paid-in
|
Retained
|
Comprehensive
|
Treasury
|
Stockholders’
|
|||||||||||||||||||
Stock
|
Capital
|
Earnings
|
Income
|
Stock
|
Equity
|
|||||||||||||||||||
Balance
- December 31, 2006
|
$ | 238 | $ | 53,973 | $ | 170,038 | $ | 106 | $ | (19,467 | ) | $ | 204,888 | |||||||||||
Net
income
|
39,767 | 39,767 | ||||||||||||||||||||||
Unrealized
loss on interest rate swaps, net of taxes
|
(68 | ) | (68 | ) | ||||||||||||||||||||
Comprehensive
income
|
39,699 | |||||||||||||||||||||||
Issuance
of 249,929 shares of common stock pursuant to stock options and deferred
stock units
|
3 | 2,510 | 2,513 | |||||||||||||||||||||
Income
tax benefit relating to issuance of common stock pursuant to stock
options
|
1,947 | 1,947 | ||||||||||||||||||||||
Stock-based
compensation expense
|
2,489 | 2,489 | ||||||||||||||||||||||
Balance
- December 31, 2007
|
241 | 60,919 | 209,805 | 38 | (19,467 | ) | 251,536 | |||||||||||||||||
Net
income
|
11,678 | 11,678 | ||||||||||||||||||||||
Unrealized
loss on interest rate swaps, net of taxes
|
(38 | ) | (38 | ) | ||||||||||||||||||||
Comprehensive
income
|
11,640 | |||||||||||||||||||||||
Issuance
of 39,080 shares of common stock pursuant to stock options and deferred
stock units
|
340 | 340 | ||||||||||||||||||||||
Income
tax benefit relating to issuance of common stock pursuant to stock
options
|
59 | 59 | ||||||||||||||||||||||
Stock-based
compensation expense
|
3,636 | 3,636 | ||||||||||||||||||||||
Purchase
of 447,400 shares of treasury stock
|
(8,333 | ) | (8,333 | ) | ||||||||||||||||||||
Balance
- December 31, 2008
|
241 | 64,954 | 221,483 | - | (27,800 | ) | 258,878 | |||||||||||||||||
Net
loss
|
(24,053 | ) | (24,053 | ) | ||||||||||||||||||||
Issuance
of 439,304 shares of common stock pursuant to stock options and deferred
stock units
|
5 | 5,010 | 5,015 | |||||||||||||||||||||
Income
tax benefit relating to issuance of common stock pursuant to stock
options
|
531 | 531 | ||||||||||||||||||||||
Stock-based
compensation expense
|
3,744 | 3,744 | ||||||||||||||||||||||
Balance
- December 31, 2009
|
$ | 246 | $ | 74,239 | $ | 197,430 | $ | - | $ | (27,800 | ) | $ | 244,115 |
The
accompanying notes are an integral part of these Consolidated Financial
Statements.
48
Notes
to Consolidated Financial Statements
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
The 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, including:
●Steel
chassis
|
●Vinyl
and aluminum windows and doors
|
●Axles
and suspension solutions
|
●Chassis
components
|
●RV
slide-out mechanisms and solutions
|
●Furniture
and mattresses
|
●Thermoformed
bath, kitchen and other 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
|
The recreational vehicle products
segment (the “RV Segment”) accounted for 79 percent of the Company's sales in
2009, and the manufactured housing products segment (the “MH Segment”) accounted
for 21 percent. Nearly 93 percent of the Company’s RV Segment sales are of
products used in travel trailers and fifth-wheel RVs. The balance represents
sales of components for motorhomes and mid-size buses, and sales of specialty
trailers, as well as axles for specialty trailers. At December 31, 2009, the
Company operated 24 plants in 12 states.
The
Company’s operations are somewhat seasonal, as sales are typically slower in the
first and fourth quarters, consistent with the industries which the Company
supplies. All significant intercompany balances and transactions have been
eliminated. Certain prior year balances have been reclassified to conform to
current year presentation.
Subsequent
to the balance sheet date but prior to the filing of this report, the Company
announced that Lippert agreed in principle to acquire certain intellectual
property and other assets from Michigan-based Schwintek, Inc. See Note 3 of the
Notes to Consolidated Financial Statements. The Company is not aware of any
other 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 the
Consolidated Financial Statements.
Cash
and Cash Equivalents
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 December 31, 2009, the cash and cash equivalents
included $49.2 million of cash in fully FDIC insured accounts, and $3.0 million
of U.S. Treasury Bills that mature in March 2010. The U.S. Treasury Bills are
recorded at cost which approximated fair value.
At December 31, 2008, the Company had
$3.8 million invested in high-quality, short-term money market instruments
issued and payable in U.S funds, recorded at cost which approximated fair
value.
Short-term
Investments
At December 31, 2009, the Company had
$13.0 million of short-term investments consisting of U.S. Treasury Bills that
mature at various dates through June 2010. These investments are recorded at
cost which approximated fair value.
49
Accounts
Receivable
Accounts receivable are stated at the
historical carrying amount, net of write-offs and allowances. The Company
establishes allowances based upon historical experience and any specific
customer collection issues identified by the Company. Uncollectible accounts
receivable are written off when a settlement is reached or when the Company has
determined that the balance will not be collected.
The following table provides a
reconciliation of the activity related to the Company’s allowance for doubtful
accounts receivable, for the years ended December 31, (in thousands):
2009
|
2008
|
2007
|
||||||||||
Balance
at beginning of period
|
$ | 1,486 | $ | 803 | $ | 1,081 | ||||||
Provision
for doubtful accounts
|
998 | 1,066 | (163 | ) | ||||||||
Additions
related to acquired companies
|
- | 30 | 85 | |||||||||
Accounts
written off, net of recoveries
|
(1,481 | ) | (413 | ) | (200 | ) | ||||||
Balance
at end of period
|
$ | 1,003 | $ | 1,486 | $ | 803 |
In addition to the allowance for
doubtful accounts receivable, the Company had an allowance for prompt payment
discounts in the amount of $0.2 million, $0.2 million, and $0.4 million at
December 31, 2009, 2008, and 2007, respectively.
Inventories
Inventories are stated at the lower of
cost (using the first-in, first-out method) or market. Cost includes material,
labor and overhead; market is replacement cost or realizable value after
allowance for costs of distribution.
Fixed
Assets
Fixed assets are stated at cost less
accumulated depreciation, and are depreciated on a straight-line basis over the
estimated useful lives of properties and equipment. Leasehold improvements and
leased equipment are amortized over the shorter of the lives of the leases or
the underlying assets. Maintenance and repairs are charged to operations as
incurred; significant betterments are capitalized.
Income
Taxes
Deferred tax assets and liabilities are
determined based on the temporary differences between the financial reporting
and tax bases of assets and liabilities, applying enacted statutory tax rates in
effect for the year in which the differences are expected to
reverse.
The
Company accounts for uncertainty in tax positions in accordance with the current
accounting guidance, which requires that a company recognize in its financial
statements the impact of a tax position, only if that position is more likely
than not of being sustained on audit, based on the technical merits of the
position. The Company adopted the provisions of the current accounting
guidance on January 1, 2007, as a result of which, the Company did not recognize
a material adjustment to the liability for unrecognized income tax
benefits.
The Company classifies interest and
penalties related to income taxes as income tax expense in its Consolidated
Financial Statements.
Goodwill
and Other Intangible Assets
Goodwill represents the excess of
purchase price 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.
50
In 2008, the Company conducted its
annual impairment analysis of the goodwill in all reporting units, which
resulted in the impairment and non-cash write-off of the entire $5.5 million of
goodwill related to the specialty trailer reporting unit. 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-wide wholesale shipments of RVs and manufactured homes, the Company
also conducted an impairment analysis of the goodwill of each of its reporting
units, resulting in the impairment and non-cash write-off of the remaining $45.0
million of goodwill. The impairment analysis of goodwill conducted during the
first quarter of 2009 was completed using Level 3 fair value
inputs.
In both periods, 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 and December 31,
2008, the discount rate used in the discounted cash flow model prepared for the
goodwill impairment analysis was 16.5 percent and 13.0 percent, respectively,
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,
as well as the risks and uncertainty inherent in the markets generally and in
the Company’s internally developed forecasts.
Based on the analyses, the carrying
value of the RV, manufactured housing and specialty trailer 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 the Company recorded a non-cash impairment charge to write-off the
entire goodwill of these reporting units.
These non-cash goodwill impairment
charges were largely the result of uncertainties in the economy, and in the RV,
manufactured housing and marine and leisure industries, as well as the discount
rates 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.
Current accounting guidance also
requires that intangible assets with estimable useful lives be amortized over
their respective estimated useful lives to their estimated residual values, and
reviewed for impairment. The amortization of other intangible assets is done
using a method, straight-line or accelerated, which best reflects the pattern in
which the estimated future economic benefits of the asset will be
consumed.
During 2009, the Company reviewed the
recoverability of the carrying value of other intangible 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.
Impairment
of Long-Lived Assets
The Company evaluates long-lived assets
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Upon such an occurrence,
recoverability of assets to be held and used is measured by comparing the
carrying amount of an asset to forecasted undiscounted future net cash flows
expected to be generated by the asset. If the carrying amount of the asset
exceeds its estimated undiscounted future cash flows, an impairment charge is
recognized for the amount by which the carrying amount of the asset exceeds the
fair value of the asset. For long-lived assets held for sale, assets are written
down to fair value, less cost to sell. Fair value is determined based on
discounted cash flows, appraised values or management’s estimates, depending
upon the nature of the assets.
51
In 2009, the Company reviewed the
recoverability of the carrying value of facilities and vacant land not currently
being used in production, as well as facilities in the process of shutting down
operations, using broker quotes and management’s estimates, which are Level 3
fair value inputs. In 2009, the Company recorded impairment charges of $2.5
million on facilities that have an adjusted carrying value of $6.2 million at
December 31, 2009. The Company also reviewed the recoverability of other
facilities with a net carrying value of $7.5 million at December 31, 2009, using
Level 3 fair value inputs, and determined no impairment charge was required. In
2008 and 2007, the Company recorded impairment charges for facilities of $1.0
million and $2.2 million, respectively. These impairment charges for 2009, 2008,
and 2007 are included in selling, general and administrative expenses in the
Consolidated Statements of Operations.
The Company recorded additional charges
to operations of $0.8 million and $0.6 million in 2009 and 2008, respectively,
related to the exit of leased facilities, which are recorded in selling, general
and administrative expenses in the Consolidated Statements of
Operations.
During 2009, the Company reviewed the
recoverability of the carrying value of remaining 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.
Financial
Instruments
The carrying values of cash and cash
equivalents, accounts receivable and accounts payable approximated fair values
due to the short-term nature of these instruments.
Stock-Based
Compensation
All stock options granted are being
expensed on a straight-line basis over the requisite service period, which is
generally the stock option vesting period, based on fair value, determined using
the Black-Scholes option-pricing model, at the date the stock options were
granted. The accounting for stock options resulted in charges to operations of
$2.8 million, $3.2 million and $2.1 million for the years ended December 31,
2009, 2008 and 2007, respectively. In addition, for the years ended December 31,
2009, 2008 and 2007, the Company issued deferred stock units to certain
executive officers and non-employee directors in lieu of cash remuneration of
$0.9 million, $0.4 million and $0.3 million, respectively. Stock-based
compensation expense is recorded in the Consolidated Statements of Operations in
the same line that cash compensation to those employees is recorded, primarily
in selling, general and administrative expenses.
The fair value of each stock option
grant is estimated on the date of the grant using the Black-Scholes
option-pricing model with the following weighted average
assumptions:
2009
|
2008
|
2007
|
||||||||||
Risk-free
interest rate
|
2.12 | % | 2.17 | % | 3.83 | % | ||||||
Expected
volatility
|
53.2 | % | 42.5 | % | 33.8 | % | ||||||
Expected
life
|
4.8
years
|
4.8
years
|
5.0
years
|
|||||||||
Contractual
life
|
6.0
years
|
6.0
years
|
6.0
years
|
|||||||||
Dividend
yield
|
N/A | N/A | N/A | |||||||||
Fair
value of stock options granted
|
$ | 9.87 | $ | 4.68 | $ | 11.68 |
Revenue
Recognition
The Company recognizes revenue when
products are shipped and the customer takes ownership and assumes risk of loss,
collectability is reasonably assured, and the sales price is fixed or
determinable. Sales taxes collected, which are not significant, from customers
and remitted to governmental authorities are accounted for on a net basis and
therefore are excluded from revenues in the Consolidated Statements of
Operations.
52
Shipping
and Handling Costs
The Company records shipping and
handling costs within selling, general and administrative expenses. Such costs
aggregated $15.4 million, $21.4 million and $25.6 million in 2009, 2008 and
2007, respectively.
Legal
Costs
The Company expenses all legal costs
associated with litigation as incurred.
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, earn-out payments, 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 and events could
differ significantly from management estimates.
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 Consolidated Financial
Statements for 2009 or 2008, the pronouncement may impact the Company’s
accounting for future business combinations, impairment charges and
restructuring charges.
This new accounting guidance
established a new framework for measuring fair value and expanded 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 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.
|
53
|
·
|
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 2009, the Company acquired
patents, tradenames, and other 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 of the Notes to Consolidated Financial
Statements.
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 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.
2.
SEGMENT REPORTING
The Company has two reportable
segments, the RV Segment and the MH Segment.
The RV Segment, which accounted for 79
percent, 72 percent and 74 percent of consolidated net sales for 2009, 2008 and
2007, 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
bath, kitchen and other 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
|
Nearly 93 percent of the Company’s RV
Segment sales are of products used in travel trailers and fifth-wheel RVs. The
balance represents sales of components for motorhomes and mid-size buses, and
sales of specialty trailers, as well as axles for specialty
trailers.
The MH Segment, which accounted for 21
percent, 28 percent and 26 percent of consolidated net sales for 2009, 2008 and
2007, respectively, manufactures a variety of products used in the production of
manufactured homes and to a lesser extent, modular housing and office units,
including:
●Vinyl
and aluminum windows and screens
|
●Steel
chassis
|
|
●Thermoformed
bath and kitchen products
|
●Steel
chassis parts
|
|
●Axles
|
|
●Entry
doors
|
54
The Company also supplies replacement
windows, doors and thermoformed bath products for existing 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 the Notes to Consolidated Financial Statements.
Information relating to segments
follows (in
thousands):
Segments
|
Corporate
|
Intangible
|
||||||||||||||||||||||
RV
|
MH
|
Total
|
and
Other
|
Assets
|
Total
|
|||||||||||||||||||
Year
ended December 31, 2009
|
||||||||||||||||||||||||
Revenues
from external customers(a)
|
$ | 312,535 | $ | 85,304 | $ | 397,839 | $ | - | $ | - | $ | 397,839 | ||||||||||||
Operating
profit (loss)(b)(e)
|
20,459 | 3,847 | 24,306 | (9,286 | ) | (50,601 | ) | (35,581 | ) | |||||||||||||||
Total
assets(c)
|
108,724 | 41,671 | 150,395 | 98,347 | 39,323 | 288,065 | ||||||||||||||||||
Expenditures
for long-lived assets(d)
|
2,398 | 865 | 3,263 | 110 | - | 3,373 | ||||||||||||||||||
Depreciation
and amortization
|
9,534 | 3,309 | 12,843 | 64 | 5,561 | 18,468 | ||||||||||||||||||
Year
ended December 31, 2008
|
||||||||||||||||||||||||
Revenues
from external customers(a)
|
$ | 368,092 | $ | 142,414 | $ | 510,506 | $ | - | $ | - | $ | 510,506 | ||||||||||||
Operating
profit (loss)(b)(e)
|
28,725 | 11,016 | 39,741 | (9,301 | ) | (10,542 | ) | 19,898 | ||||||||||||||||
Total
assets(c)
|
143,205 | 47,241 | 190,446 | 33,747 | 87,165 | 311,358 | ||||||||||||||||||
Expenditures
for long-lived assets(d)
|
5,488 | 719 | 6,207 | 31 | - | 6,238 | ||||||||||||||||||
Depreciation
and amortization
|
8,636 | 3,353 | 11,989 | 34 | 5,055 | 17,078 | ||||||||||||||||||
Year
ended December 31, 2007
|
||||||||||||||||||||||||
Revenues
from external customers(a)
|
$ | 491,830 | $ | 176,795 | $ | 668,625 | $ | - | $ | - | $ | 668,625 | ||||||||||||
Operating
profit (loss)(b)(e)
|
63,132 | 15,061 | 78,193 | (8,056 | ) | (4,178 | ) | 65,959 | ||||||||||||||||
Total
assets(c)
|
140,531 | 51,969 | 192,500 | 80,803 | 72,434 | 345,737 | ||||||||||||||||||
Expenditures
for long-lived assets(d)
|
8,080 | 1,002 | 9,082 | 119 | - | 9,201 | ||||||||||||||||||
Depreciation
and amortization
|
9,017 | 4,346 | 13,363 | 16 | 4,178 | 17,557 |
|
a)
|
Thor
Industries, Inc., a customer of the RV Segment, accounted for 25 percent,
21 percent and 23 percent of the Company’s consolidated net sales in the
years ended December 31, 2009, 2008 and 2007, respectively. Berkshire
Hathaway Inc. (through its subsidiaries Forest River, Inc. and Clayton
Homes, Inc.), a customer of both segments, accounted for 24 percent, 22
percent and 20 percent of the Company’s consolidated net sales in the
years ended December 31, 2009, 2008 and 2007, respectively. No other
customer accounted for more than 10 percent of consolidated net sales in
the years ended December 31, 2009, 2008 and
2007.
|
55
|
b)
|
Certain
general and administrative expenses of Kinro and Lippert are allocated
between the segments based upon sales or operating profit, depending upon
the nature of the expense.
|
|
c)
|
Segment
assets include accounts receivable, inventories and fixed assets.
Corporate and other assets include cash and cash equivalents, short-term
investments, prepaid expenses and other current assets, deferred taxes,
and other assets. Intangibles include goodwill, other intangible assets
and deferred charges which are not considered in the measurement of each
segment’s performance.
|
|
d)
|
Segment
expenditures for long-lived assets include capital expenditures and fixed
assets purchased as part of the acquisition of businesses. The Company
purchased $0.3 million, $2.0 million and $0.4 million of fixed assets as
part of the acquisitions of businesses in 2009, 2008 and 2007,
respectively. Expenditures for other long-lived assets, goodwill and other
intangible assets are not included in the segment since they are not
considered in the measurement of each segment’s
performance.
|
|
e)
|
The
operating loss for the Corporate and Other column is comprised of
Corporate expenses of $6.4 million, $7.2 million and $7.6 million for
2009, 2008 and 2007, respectively, and Other non-segment items of $2.9
million, $2.1 million and $0.5 million for 2009, 2008 and 2007,
respectively.
|
Net sales
by product were as follows for the years ended December 31, (in thousands):
2009
|
2008
|
2007
|
||||||||||
Recreational
Vehicles:
|
||||||||||||
Chassis,
chassis parts and slide-out mechanisms
|
$ | 178,563 | $ | 228,310 | $ | 315,875 | ||||||
Windows,
doors and screens
|
64,684 | 79,279 | 107,693 | |||||||||
Furniture
|
30,290 | 11,726 | - | |||||||||
Axles
|
26,343 | 30,024 | 42,025 | |||||||||
Specialty
trailers
|
6,810 | 13,773 | 20,749 | |||||||||
Other
|
5,845 | 4,980 | 5,488 | |||||||||
312,535 | 368,092 | 491,830 | ||||||||||
Manufactured
Housing:
|
||||||||||||
Windows,
doors and screens
|
46,961 | 62,924 | 72,580 | |||||||||
Chassis
and chassis parts
|
24,892 | 56,869 | 70,428 | |||||||||
Shower
and bath units
|
12,636 | 18,108 | 19,921 | |||||||||
Axles
and tires
|
757 | 3,811 | 10,502 | |||||||||
Other
|
58 | 702 | 3,364 | |||||||||
85,304 | 142,414 | 176,795 | ||||||||||
Net
Sales
|
$ | 397,839 | $ | 510,506 | $ | 668,625 |
3.
ACQUISITIONS, GOODWILL AND OTHER INTANGIBLE ASSETS
Over the last ten years, the Company
has acquired numerous manufacturers of products for RVs, manufactured homes and
specialty trailers, expanded its geographic market and product lines, consolidated manufacturing
facilities, and integrated manufacturing, distribution and administrative
functions. In a number of these acquisitions the Company acquired a significant
amount of goodwill, as the value of the acquired business to the Company
exceeded the fair value of the net tangible and other identifiable intangible
assets acquired in the transaction. In the fourth quarter of 2008 and the first
quarter of 2009, the Company conducted an impairment analysis of the goodwill of
each of its reporting units, resulting in the impairment and non-cash write-off
of all existing goodwill. See Note 1 of the Notes to Consolidated
Financial Statements.
56
Recently
Announced Acquisitions
Wall
Slide and Other RV Products
On
February 18, 2010, the Company reported that Lippert agreed in principle to
acquire certain intellectual property and other assets from Michigan-based
Schwintek, Inc. The purchase would include several products for which patents
are pending, including innovative RV wall slides that are considerably lighter,
more space efficient, and more reliable than previous slide-out designs. The
purchase price, undisclosed at the time of the announcement, is expected to
include cash payable at closing, plus an earn-out depending on future unit
sales. It is expected that the cash portion of the purchase price payable at
closing will be funded from available cash. Closing of the transaction is
subject to completion of due diligence, agreement on final terms and conditions,
the execution of definitive transaction documents, and satisfaction of customary
closing conditions.
Level-UpTM
System
In a separate transaction on February
18, 2010, Lippert acquired the patent-pending design for a six-point leveling
system for fifth-wheel RVs. The purchase price was $1.4 million paid at closing
with available cash, plus an earn-out depending on future unit sales of the
system.
Acquisitions
in 2009
QuickBiteTM
On May
15, 2009, Lippert acquired the patents for the QuickBiteTM
coupler, 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 from available cash,
with the balance to be paid on May 15, 2010. 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. In 2009, Lippert paid earn-out of less than $0.1
million. The results of the acquired QuickBiteTM
business have been included in the Company’s Consolidated Statements 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, is being 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 from available
cash. The results of the acquired business have been included in the Company’s
Consolidated Statements of Operations beginning September 11, 2009.
Front
entry doors for manufactured homes
On
September 29, 2009, Kinro acquired 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 existing
manufactured homes. Kinro began manufacturing entry doors at plants in Indiana
and South Carolina in the 2009 fourth quarter. The purchase price was $0.9
million, which was paid at closing from available cash. The results of the
acquired business have been included in the Company’s Consolidated Statements of
Operations beginning September 29, 2009.
57
The
aggregate consideration for the acquisitions of the QuickBiteTM
coupler, slide-out storage box for pick-up trucks, and front entry doors for
manufactured homes was recorded as follows (in thousands):
Net
tangible assets acquired
|
$ | 1,370 | ||
Intangible
assets
|
1,780 | |||
3,150 | ||||
Less:
Present value of future estimated earn-out payments
|
(1,204 | ) | ||
Less:
Other
|
(267 | ) | ||
Total
cash consideration
|
$ | 1,679 |
Acquisitions
in 2008
Seating
Technology
On July
1, 2008, Lippert acquired certain assets and liabilities, and the business of
Seating Technology, Inc. and its affiliated companies (“Seating Technology”), a
manufacturer of a wide variety of furniture products primarily for towable RVs,
including a full line of upholstered furniture and mattresses. Seating
Technology had annual sales of $40 million in 2007. The purchase price was $28.7
million, which was paid at closing from available cash. The Company acquired
intangible assets from Seating Technology primarily related to customer
relationships, which are being amortized over their estimated remaining useful
life, which at the date of acquisition was approximately 11 years. Subsequent to
the acquisition, Lippert closed two of Seating Technology's five leased
facilities in Indiana and consolidated those operations into existing
facilities. The results of the acquired Seating Technology business have been
included in the Company’s Consolidated Statements of Operations beginning July
1, 2008.
Total
consideration for the acquisition was allocated as follows (in thousands):
Net
tangible assets acquired
|
$ | 5,766 | ||
Customer
relationships
|
9,400 | |||
Other
identifiable intangible assets
|
2,575 | |||
Goodwill
(tax deductible)
|
10,918 | |||
Total
cash consideration
|
$ | 28,659 |
Patent
for “JT’s Strong Arm Jack Stabilizer”
On July
1, 2008, Lippert acquired the patent for “JT's Strong Arm Jack Stabilizer” and
other intellectual properties and assets. The purchase price was $3.1 million,
which was paid at closing from available cash. “JT's Strong Arm Jack Stabilizer”
represents a significant advance in the elimination of side-to-side and
front-to-back movement of a parked travel trailer or fifth-wheel RV. Total
consideration for the acquisition was allocated to amortizable intangible
assets.
Acquisitions
in 2007
Extreme
Engineering
On July
6, 2007, Lippert acquired certain assets and liabilities, and the business of
Extreme Engineering, Inc. (“Extreme Engineering”), a manufacturer of specialty
trailers for high-end boats, along with its affiliate, Pivit Hitch, Inc. (“Pivit
Hitch”). Extreme Engineering and Pivit Hitch had combined annual sales of $12
million prior to the acquisition. The purchase price for the two companies was
$10.8 million, including transaction costs, which was paid at closing from
available cash. The results of the acquired Extreme Engineering and Pivit Hitch
businesses have been included in the Company’s Consolidated Statements of
Operations beginning July 6, 2007.
58
Total
consideration for the acquisitions was allocated as follows (in thousands):
Net
tangible assets acquired
|
$ | 1,238 | ||
Identifiable
intangible assets
|
5,600 | |||
Goodwill
(tax deductible)
|
3,974 | |||
Total
cash consideration
|
$ | 10,812 |
Coach
Step
On May
21, 2007, Lippert acquired certain assets and liabilities, and the business of
Coach Step, a manufacturer of patented electric steps for motorhomes. Coach Step
had annual sales of $2 million prior to the acquisition. The purchase price was
$3.0 million, which was paid at closing from available cash. Upon acquisition,
the Company integrated Coach Step’s business into existing Lippert facilities.
The results of the acquired Coach Step business have been included in the
Company’s Consolidated Statements of Operations beginning May 21,
2007.
Total
consideration for the acquisition was allocated as follows (in thousands):
Net
tangible assets acquired
|
$ | 604 | ||
Identifiable
intangible assets
|
1,830 | |||
Goodwill
(tax deductible)
|
598 | |||
Total
cash consideration
|
$ | 3,032 |
Trailair
and Equa-Flex
On
January 2, 2007, Lippert acquired Trailair, Inc. (“Trailair”) and certain assets
and liabilities, and the business of Equa-Flex, Inc. (“Equa-Flex”), two
affiliated companies, which manufacture several patented products, including
innovative suspension systems used primarily for towable RVs. Trailair and
Equa-Flex had combined annual sales of $3 million prior to the acquisition. The
minimum aggregate purchase price was $5.7 million, of which $3.5 million was
paid at closing and the balance is being paid annually over the five years
subsequent to the acquisition. The aggregate purchase price could increase to a
maximum of $8.3 million if certain sales targets for these products are achieved
by Lippert over the five years subsequent to the acquisition. In the aggregate,
less than $0.1 million has been paid subsequent to the acquisition based on such
sales targets. The annual payments to be made over the five years subsequent to
the acquisition bear interest at the stated rate of 3 percent per annum from the
date of the acquisition. The acquisition was financed with borrowings under the
Company's line of credit. Upon acquisition, the Company integrated Trailair and
Equa-Flex’s business into existing Lippert facilities. The results of the
acquired Trailair and Equa-Flex businesses have been included in the Company’s
Consolidated Statements of Operations beginning January 2, 2007.
Total
consideration for the acquisitions was allocated as follows (in thousands):
Net
tangible assets acquired
|
$ | 625 | ||
Identifiable
intangible assets
|
4,160 | |||
Goodwill
(tax deductible)
|
267 | |||
Goodwill
(non tax deductible)
|
426 | |||
Total
consideration
|
5,478 | |||
Less
present value of future minimum payments
|
(1,961 | ) | ||
Total
cash consideration
|
$ | 3,517 |
59
Goodwill
and Other Intangible Assets
Goodwill
by reportable segment is as follows (in thousands):
MH Segment
|
RV Segment
|
Total
|
||||||||||
Balance
- January 1, 2008
|
$ | 9,251 | $ | 30,296 | $ | 39,547 | ||||||
Acquisitions
|
- | 10,053 | 10,053 | |||||||||
Impairments
|
- | (5,487 | ) | (5,487 | ) | |||||||
Balance
- December 31, 2008
|
9,251 | 34,862 | 44,113 | |||||||||
Adjustment
to 2008 Seating Technology acquisition
|
- | 927 | 927 | |||||||||
Impairments
|
(9,251 | ) | (35,789 | ) | (45,040 | ) | ||||||
Balance
- December 31, 2009
|
$ | - | $ | - | $ | - |
In 2008,
the Company conducted its annual impairment analysis of the goodwill in all
reporting units, which resulted in the impairment and non-cash write-off of the
entire $5.5 million of goodwill related to the specialty trailer reporting unit.
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-wide wholesale shipments of RVs and manufactured homes, the Company
also conducted an impairment analysis of the goodwill of each of its reporting
units, resulting in the impairment and non-cash write-off of the remaining $45.0
million of goodwill. See Note 1 of the Notes to Consolidated Financial
Statements.
If the
Company records goodwill on acquisitions completed subsequent to December 31,
2009, the Company will perform its annual impairment test as of November 30, and
will continue to monitor such assets for potential impairment during interim
periods.
Other
intangible assets consist of the following at December 31, 2009 (in thousands):
Accumulated
|
Estimated Useful
|
||||||||||||
Gross
|
Amortization
|
Net
|
Life in Years
|
||||||||||
Non-compete
agreements
|
$ | 2,830 | $ | 1,031 | $ | 1,799 |
3
to 7
|
||||||
Customer
relationships
|
24,870 | 8,851 | 16,019 |
8
to 16
|
|||||||||
Tradenames
|
6,151 | 2,390 | 3,761 |
5
to 15
|
|||||||||
Patents
|
22,693 | 5,101 | 17,592 |
5
to 19
|
|||||||||
Other
intangible assets
|
$ | 56,544 | $ | 17,373 | $ | 39,171 |
Other
intangible assets consist of the following at December 31, 2008 (in thousands):
Accumulated
|
Estimated Useful
|
||||||||||||
Gross
|
Amortization
|
Net
|
Life in Years
|
||||||||||
Non-compete
agreements
|
$ | 3,231 | $ | 1,130 | $ | 2,101 |
3
to 7
|
||||||
Customer
relationships
|
24,870 | 6,225 | 18,645 |
8
to 16
|
|||||||||
Tradenames
|
6,251 | 1,846 | 4,405 |
5
to 15
|
|||||||||
Patents
|
21,183 | 3,547 | 17,636 |
5
to 19
|
|||||||||
Other
intangible assets
|
$ | 55,535 | $ | 12,748 | $ | 42,787 |
The
carrying value of other intangible assets in the RV and MH Segments were $35.3
million and $3.9 million at December 31, 2009, respectively, and $38.3 million
and $4.5 million at December 31, 2008, respectively. Amortization expense
related to intangible assets amounted to $5.4 million, $4.8 million and $3.9
million for 2009, 2008 and 2007, respectively. Estimated amortization expense
for the next five fiscal years is as follows: $5.3 million (2010), $5.0 million
(2011), $4.7 million (2012), $4.1 million (2013) and $3.6 million
(2014).
60
During
2009, the Company reviewed the recoverability of the carrying value of other
intangible assets, and determined that there was no impairment. The Company
continues to monitor these assets for potential impairment, as a downturn in the
RV, manufactured housing, or marine and leisure industries, or in the
profitability of the Company’s operations, could result in a non-cash impairment
charge of these assets in the future.
4.
INVENTORIES
Inventories
consist of the following at December 31, (in thousands):
2009
|
2008
|
|||||||
Finished
goods
|
$ | 9,264 | $ | 10,801 | ||||
Work
in process
|
1,576 | 2,946 | ||||||
Raw
materials
|
46,917 | 80,187 | ||||||
Total
|
$ | 57,757 | $ | 93,934 |
5. FIXED
ASSETS
Fixed
assets, at cost, consist of the following at December 31, (in thousands):
Estimated Useful
|
|||||||||||
2009
|
2008
|
Life in Years
|
|||||||||
Land
|
$ | 9,917 | $ | 8,323 | |||||||
Buildings
and improvements
|
65,574 | 63,508 |
10
to 40
|
||||||||
Leasehold
improvements
|
1,164 | 1,182 |
2
to 15
|
||||||||
Machinery
and equipment
|
73,995 | 77,653 |
3
to 10
|
||||||||
Transportation
equipment
|
2,590 | 2,985 |
3
to 7
|
||||||||
Furniture
and fixtures
|
8,625 | 8,356 |
3
to 8
|
||||||||
Construction
in progress
|
464 | 1,294 | |||||||||
162,329 | 163,301 | ||||||||||
Less
accumulated depreciation and amortization
|
82,053 | 74,570 | |||||||||
Fixed
assets, net
|
$ | 80,276 | $ | 88,731 |
Depreciation
and amortization of fixed assets is as follows for the years ended December 31,
(in
thousands):
2009
|
2008
|
2007
|
||||||||||
Charged
to cost of sales
|
$ | 11,155 | $ | 10,292 | $ | 11,497 | ||||||
Charged
to selling, general and administrative expenses
|
1,752 | 1,731 | 1,882 | |||||||||
Total
|
$ | 12,907 | $ | 12,023 | $ | 13,379 |
6.
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued
expenses and other current liabilities consist of the following at December 31,
(in
thousands):
2009
|
2008
|
||||||||||
Accrued
employee compensation and benefits
|
$ | 11,815 | $ | 13,010 | |||||||
Accrued
warranty
|
3,340 | 4,510 | |||||||||
Other
accrued expenses and current liabilities
|
13,039 | 14,704 | |||||||||
Total
|
$ | 28,194 | $ | 32,224 |
61
Estimated
costs related to product warranties are accrued at the time products are sold.
In estimating its future warranty obligations, the Company considers various
factors, including the Company’s (i) historical warranty experience, (ii)
product mix, and (iii) sales patterns. The following table provides a
reconciliation of the activity related to the Company’s accrued warranty,
including both the current and long-term portions, for the years ended December
31, (in
thousands):
2009
|
2008
|
2007
|
||||||||||
Balance
at beginning of period
|
$ | 5,419 | $ | 5,762 | $ | 3,990 | ||||||
Provision
for warranty expense
|
2,279 | 3,984 | 6,335 | |||||||||
Warranty
costs paid
|
(3,012 | ) | (4,327 | ) | (4,563 | ) | ||||||
Total
accrued warranty
|
4,686 | 5,419 | 5,762 | |||||||||
Less
long-term portion
|
1,346 | 909 | 1,402 | |||||||||
Current
accrued warranty
|
$ | 3,340 | $ | 4,510 | $ | 4,360 |
7.
RETIREMENT AND OTHER BENEFIT PLANS
Defined
Contribution Plans
Prior to
November 2009, the Company maintained multiple discretionary defined
contribution 401(k) profit sharing plans. In November 2009, the Company combined
its plans into one plan, covering all eligible employees. The Company
contributed $0.9 million, $1.3 million and $1.4 million to these plans during
the years ended December 31, 2009, 2008 and 2007, respectively.
Deferred
Compensation Plan
The
Company has an Executive Non-Qualified Deferred Compensation Plan (the “Plan”).
Pursuant to the Plan, certain management employees are eligible to defer all or
a portion of their regular salary and incentive compensation. Participants
deferred $0.3 million, $1.9 million and $1.0 million in 2009, 2008 and 2007,
respectively. Each Plan participant is fully vested in their deferred
compensation and earnings credited to his or her account as all contributions to
the Plan are made by the participant. The Company is responsible for certain
costs of Plan administration, which are not significant, but will not make any
contributions to the Plan. Pursuant to the Plan, payments to the Plan
participants are made from the general unrestricted assets of the Company, and
the Company’s obligations pursuant to the Plan are unfunded and unsecured.
Participants withdrew $0.5 million from the Plan in 2009. At December 31, 2009
and 2008, $2.0 million and $1.9 million, respectively, have been recorded in
other long-term liabilities, and $0.1 million and $0.5 million, respectively,
have been recorded in accrued expenses and other current liabilities in the
Consolidated Balance Sheets.
Executive
Retirement
The
Company has a management succession plan designed to ensure an effective
transition of management of the Company’s operations to qualified executives
upon the retirement of senior executives. In November 2008, in accordance with
the management succession plan, Edward W. Rose, III, Chairman of the Board of
Directors since 1984, was appointed Lead Director; Leigh J. Abrams, President
from 1984 to May 2008, and Chief Executive Officer and a Director since 1984,
was appointed Chairman of the Board of Directors; and Fredric M. Zinn, Executive
Vice President from 2001, Chief Financial Officer from 1984, and President and a
Director since May 2008, was, in addition to President, appointed Chief
Executive Officer. Each of these appointments became effective January 1,
2009.
In
connection with the retirement, effective December 31, 2008, of David L. Webster
as a Director of the Company and as Chairman, President and Chief Executive
Officer of Kinro, after approximately 30 years with Kinro, and in accordance
with the Company’s executive succession plan, the Board of Directors appointed
Jason D. Lippert to assume responsibility for the operations of Kinro while
continuing his duties as Chairman, President and Chief Executive Officer of
Lippert. Mr. Lippert was appointed Chairman, President and Chief Executive
Officer of Kinro effective January 1, 2009.
62
In
connection with the management succession, the Company and Mr. Abrams entered
into an Executive Compensation and Benefits Agreement, effective as of January
1, 2009 (the “Abrams Agreement”). The Board of Directors granted retirement
compensation and benefits to Mr. Abrams in recognition of his 40-year commitment
to the success of the Company, the Company’s performance during his 29-year
tenure as President and Chief Executive Officer, and the overall increase in
stockholder value during that period. In addition, as Chairman of the Board, Mr.
Abrams will continue to render services to the Company, for which he will be
compensated in accordance with the Abrams Agreement, and he has agreed to
non-competition restrictions on his future business activities.
Also in
connection with the management succession, the Company and Mr. Webster entered
into an Executive Compensation and Benefits Agreement, effective as of January
1, 2009 (the “Webster Agreement”). Mr. Webster’s existing employment agreement,
which was to expire December 31, 2009, was cancelled as of the effective date of
the Webster Agreement. The Board of Directors granted retirement compensation
and benefits to Mr. Webster in recognition of his contribution to the Company’s
business, growth and reputation during a 30-year period. In addition, Mr.
Webster agreed to non-competition restrictions on his future business
activities.
During
the fourth quarter of 2008, as a result of the Abrams Agreement and Webster
Agreement, the Company recognized $2.7 million of executive retirement expense
in the Consolidated Statements of Operations. At December 31, 2009 and 2008,
$0.5 million and $1.7 million, respectively, have been recorded in other
long-term liabilities, and $1.2 million and $1.0 million, respectively, have
been recorded in accrued expenses and other current liabilities in the
Consolidated Balance Sheets.
8.
LONG-TERM INDEBTEDNESS
Long-term
indebtedness consists of the following at December 31, (in thousands):
2009
|
2008
|
|||||||
Senior
Promissory Notes
|
$ | - | $ | 6,000 | ||||
Notes
payable pursuant to a Credit Agreement
|
- | - | ||||||
Industrial
Revenue Bonds, secured by certain real estate and
equipment
|
- | 1,662 | ||||||
Other
loans primarily secured by certain real estate and
equipment
|
- | 1,021 | ||||||
|
- | 8,683 | ||||||
Less
current portion
|
- | 5,833 | ||||||
Total
long-term indebtedness
|
$ | - | $ | 2,850 |
The
weighted average interest rate for the Company’s indebtedness was 4.85 percent
at December 31, 2008.
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”), to replace the
Company’s previous $70.0 million line of credit that was scheduled to expire in
June 2009. 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 December 31, 2009 and 2008), or LIBOR plus
additional interest ranging from 2.0 percent to 2.8 percent (2.0 percent at
December 31, 2009 and 2008) depending on the Company’s performance and financial
condition. The Credit Agreement expires December 1, 2011. At December 31, 2009
and 2008, the Company had $7.8 million and $7.6 million, respectively, in
outstanding letters of credit under the line of credit, and availability under
the Company’s line of credit, after considering the maximum leverage ratio
covenant limitation, was $37.8 million and $42.4 million,
respectively.
63
Simultaneously,
the Company entered into a $125.0 million “shelf-loan” facility with Prudential
Investment Management, Inc. and its affiliates (“Prudential”), to replace the
Company’s previous $60.0 million “shelf-loan” facility with Prudential, of which
$6.0 million was outstanding at December 31, 2008. 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 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 December 31,
2009, the maximum leverage ratio covenant limits the remaining availability
under these facilities collectively to $37.8 million. The $65.4 million in cash
and short-term investments at December 31, 2009, together with the borrowing
availability under our line of credit and “shelf-loan” facility, 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, interest and
fixed charge coverages, and to meet certain other financial requirements. At
December 31, 2009 and 2008, 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.
The
Company has unsecured letters of credit outstanding, unrelated to the Credit
Agreement, which aggregate $0.4 million and $0.6 million at December 31, 2009
and 2008, respectively.
9. INCOME
TAXES
The
income tax (benefit) provision in the Consolidated Statements of Operations is
as follows for the years ended December 31, (in thousands):
2009
|
2008
|
2007
|
||||||||||
Current:
|
||||||||||||
Federal
|
$ | 3,700 | $ | 7,312 | $ | 20,774 | ||||||
State
|
668 | 2,176 | 4,291 | |||||||||
Total
current
|
4,368 | 9,488 | 25,065 | |||||||||
Deferred:
|
||||||||||||
Federal
|
(13,485 | ) | (1,721 | ) | (1,137 | ) | ||||||
State
|
(3,200 | ) | (424 | ) | (351 | ) | ||||||
Total
deferred
|
(16,685 | ) | (2,145 | ) | (1,488 | ) | ||||||
Total
income tax (benefit) provision
|
$ | (12,317 | ) | $ | 7,343 | $ | 23,577 |
64
The
(benefit) provision for income taxes differs from the amount computed by
applying the federal statutory rate to (loss) income before income taxes for the
following reasons for the years ended December 31, (in thousands):
2009
|
2008
|
2007
|
||||||||||
Income
tax at federal statutory rate
|
$ | (12,366 | ) | $ | 6,657 | $ | 22,171 | |||||
State
income taxes, net of federal income tax impact
|
(1,671 | ) | 1,139 | 2,561 | ||||||||
Non-deductible
goodwill
|
2,030 | - | - | |||||||||
Research
and development credit
|
(354 | ) | - | (64 | ) | |||||||
Other
non-deductible expenses
|
100 | 169 | 135 | |||||||||
Manufacturing
credit pursuant to Jobs Creation Act
|
(50 | ) | (407 | ) | (1,123 | ) | ||||||
Tax-free
interest income
|
- | (7 | ) | (277 | ) | |||||||
Other
|
(6 | ) | (208 | ) | 174 | |||||||
(Benefit)
provision for income taxes
|
$ | (12,317 | ) | $ | 7,343 | $ | 23,577 |
At
December 31, 2009, federal and state income taxes payables of $3.9 million are
included in accrued expenses and other current liabilities. At December 31,
2008, federal overpayments of $2.2 million are included in prepaid expenses and
other current assets, and state income taxes payable of $5.6 million are
included in accrued expenses and other current liabilities.
Net
deferred tax assets are classified in the Consolidated Balance Sheets as follows
at December 31, (in
thousands):
2009
|
2008
|
|||||||
Prepaid
expenses and other current assets
|
$ | 9,879 | $ | 9,436 | ||||
Other
long-term assets
|
16,532 | 306 | ||||||
Net
deferred tax assets
|
$ | 26,411 | $ | 9,742 |
The tax
effects of temporary differences that give rise to significant portions of the
deferred tax assets and deferred tax liabilities are as follows at December 31,
(in
thousands):
2009
|
2008
|
|||||||
Deferred
tax assets:
|
||||||||
Goodwill
and other intangible assets
|
$ | 16,299 | $ | 2,741 | ||||
Employee
benefits
|
3,887 | 3,765 | ||||||
Inventories
|
2,145 | 1,759 | ||||||
Deferred
compensation
|
1,460 | 1,270 | ||||||
Accrued
insurance
|
1,247 | 996 | ||||||
Post
retirement
|
986 | 1,474 | ||||||
Accounts
receivable
|
559 | 758 | ||||||
Other
|
2,226 | 1,812 | ||||||
Total
deferred tax assets
|
28,809 | 14,575 | ||||||
Deferred
tax liabilities:
|
||||||||
Fixed
assets
|
2,398 | 4,833 | ||||||
Net
deferred tax assets
|
$ | 26,411 | $ | 9,742 |
The
Company concluded that it is more likely than not that the deferred tax assets
at December 31, 2009 will be realized in the ordinary course of operations based
on future taxable income and scheduling of deferred tax
liabilities.
Tax
benefits on stock option exercises of $0.5 million, $0.1 million and $1.9
million were credited directly to stockholders' equity for 2009, 2008 and 2007,
respectively, relating to tax benefits which exceeded the compensation cost for
stock options recognized in the Consolidated Financial
Statements.
65
At
December 31, 2009, the Company had deferred tax assets of $3.6 million related
to unexercised stock options. The Company’s stock price at December 31, 2009,
was below the exercise price of certain of the unexercised stock options. If the
stock price remains below the exercise price of these stock options, the related
deferred tax assets will not be realized. The reversal of such deferred tax
assets will be recorded as a reduction of stockholders' equity, to the extent
there are available excess tax benefits from prior stock option exercises, with
any remaining deficiency recorded as additional income tax expense in the
Consolidated Statements of Operations. At December 31, 2009 the available excess
tax benefits from prior stock option exercises in stockholders' equity was $11.7
million.
Unrecognized
Tax Benefits
The
following table reconciles the total amounts of unrecognized tax benefits, at
December 31, (in thousands):
2009
|
2008
|
2007
|
||||||||||
Balance
at beginning of period
|
$ | 5,782 | $ | 4,829 | $ | 3,752 | ||||||
Changes
in tax positions of prior years
|
(287 | ) | 819 | 373 | ||||||||
Additions
based on tax positions related to the current year
|
661 | 363 | 791 | |||||||||
Payments
|
(3,891 | ) | - | - | ||||||||
Expiration
of statute of limitations
|
(106 | ) | (229 | ) | (87 | ) | ||||||
Balance
at end of period
|
$ | 2,159 | $ | 5,782 | $ | 4,829 |
In
addition, the total amount of accrued interest and penalties related to taxes
was $0.4 million, $1.0 million and $1.3 million at December 31, 2009, 2008 and
2007, respectively.
The total
amount of unrecognized tax benefits, net of federal income tax benefits, of $1.6
million $3.8 million, and $3.2 million at December 31, 2009, 2008 and 2007,
respectively, would, if recognized, increase the Company’s earnings, and lower
the Company’s annual effective tax rate in the year of recognition.
The
Company periodically undergoes examinations by the Internal Revenue Service
(“IRS”), as well as various state jurisdictions. The IRS and other taxing
authorities routinely challenge certain deductions and positions reported by the
Company on its income tax returns. During the third quarter of 2008, the IRS
completed an audit of the Company’s 2005 federal tax return, and found no
changes. For federal income tax purposes, the tax years 2006 through 2008 remain
subject to examination.
In
connection with a tax audit by the Indiana Department of Revenue pertaining to
calendar years 1998 to 2000, the Company received an initial examination report
asserting, in the aggregate, approximately $1.2 million of proposed tax
adjustments, including interest and penalties. After two hearings with the
Indiana Department of Revenue, the audit findings were upheld. The Company filed
an appeal in December 2006 with the Indiana Tax Court and the matter was
scheduled for trial in December 2008. In November 2008, the Company and the
Indiana Department of Revenue settled tax years 1998 to 2000 for $0.6 million,
as well as tax years 2001 to 2006 for $4.0 million, including interest. The
aggregate settlement amount was fully reserved prior to 2009, and was paid in
April of 2009. In connection with the settlement, the Indiana Department of
Revenue reserved the right to examine tax years 2001 through 2006. In addition,
for Indiana state income tax purposes, the tax years 2007 and 2008 remain
subject to examination.
The
Company has assessed its risks associated with all tax return positions, and
believes that its tax reserve estimates reflect its best estimate of the
deductions and positions that it will be able to sustain, or that it may be
willing to concede as part of a settlement. At this time, the Company cannot
estimate the range of reasonably possible change in its tax reserve estimates in
2010. While these tax matters could materially affect operating results when
resolved in future periods, it is management’s opinion that after final
disposition, any monetary liability or financial impact to the Company beyond
that provided in the Consolidated Balance Sheet as of December 31, 2009, would
not be material to the Company’s financial position or annual results of
operations.
66
10.
COMMITMENTS AND CONTINGENCIES
Leases
The
Company's lease commitments are primarily for real estate, machinery and
equipment, and vehicles. The significant real estate leases provide for renewal
options and require the Company to pay for property taxes and all other costs
associated with the leased property.
Future
minimum lease payments under operating leases at December 31, 2009 are
summarized as follows (in
thousands):
2010
|
$ | 4,668 | ||
2011
|
3,991 | |||
2012
|
2,833 | |||
2013
|
1,381 | |||
2014
|
506 | |||
Thereafter
|
463 | |||
Total
minimum lease payments
|
$ | 13,842 |
Rent
expense for operating leases was $6.7 million, $7.2 million and $6.1 million for
the years ended December 31, 2009, 2008 and 2007, respectively. Included in 2009
and 2008 was $0.8 million and $0.6 million, respectively, of charges related to
vacated leased facilities.
Employment
Agreements
At
December 31, 2009 the Company had employment contracts with twelve of its
employees and three consultants, which expire on various dates through 2013. The
minimum commitments under these contracts are $4.5 million in 2010, $2.8 million
in 2011, and $0.2 million in 2012 and $0.1 million in 2013. Included in these
minimum commitments are certain amounts payable to two retired senior executives
which have been accrued as of December 31, 2009. See Note 7 of the Notes to
Consolidated Financial Statements for further information regarding executive
retirement charges.
Included
in the foregoing are contracts with four employees which provide for incentives
to be paid based on some or all of the following; (i) profits, as defined, (ii)
return on net assets, as defined, (iii) return on invested capital, as defined,
and (iv) the Company’s financial performance as compared to the RV, and
manufactured housing and related industries, as defined.
Royalty
In
February 2003, the Company entered into an agreement for a non-exclusive license
for patents related to certain slide-out systems. The agreement provides for the
Company to pay a royalty of 1 percent on sales of certain slide-out systems
commencing January 1, 2007 through the expiration of the patents, with aggregate
payments subsequent to January 1, 2007 not to exceed $5.0 million. The expense
related to this royalty agreement of $0.2 million, $0.2 million and $0.4 million
for 2009, 2008 and 2007, respectively, is classified in the Consolidated
Statements of Operations in Cost of Sales. Aggregate payments subsequent to
December 31, 2009 cannot exceed $4.3 million.
Contingent
Consideration
In
connection with the 2007 acquisition of Trailair and Equa-Flex, the Company
could pay an earn-out of up to $2.6 million if certain sales targets for the
acquired products are achieved by Lippert over the five years subsequent to the
acquisition. In the aggregate, less than $0.1 million has been paid subsequent
to the acquisition based on such sales targets. The annual payments to be made
over the five years subsequent to the acquisition bear interest at the stated
rate of 3 percent per annum from the date of the acquisition. In accordance with
the accounting guidance in effect at the time, the Company did not record a
liability for the fair value estimate of such earn-out payments, but rather
these payments are recorded directly to goodwill.
67
In
connection with the 2009 acquisitions of the QuickBiteTM coupler
and the slide-out storage box for pick-up trucks, the Company could pay an
earn-out of up to $2.6 million if certain sales targets for the acquired
products are achieved by Lippert. In the aggregate, less than $0.1 million has
been paid subsequent to these acquisitions based on such sales targets. In
accordance with the current accounting guidance in effect, the Company recorded
a liability at present value for the fair value estimate of such earn-out
payments. At December 31, 2009, the Company had $0.1 million and $1.3 million
for future earn-out payments recorded in accrued expenses and other current
liabilities, and other long-term liabilities, respectively. To the extent the
fair value estimate of such future earn-out payments change, the revision would
be recorded in the current period in the Consolidated Statements of
Operations.
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, 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 U.S. 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 because she no longer owned
the bathtub. 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.
On June
25, 2008, plaintiffs filed a renewed motion for class certification and the
Court again denied certification of a class. Plaintiffs filed a third motion for
class certification on December 23, 2008, and Defendants’ filed a motion seeking
summary judgment against plaintiffs’ case.
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 Defendant’s motion for 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.
68
On August
26, 2009, as a result of a decision by the California Supreme Court in an
unrelated case dealing with a similar UCL claim, the Court dismissed plaintiffs’
remaining UCL claim because plaintiffs did not actually rely on defendants’
labels when they bought the homes containing the bathtubs. 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 that certified a class to pursue a claim under the
“unfair prong” of the UCL. On December 11, 2009, the Appeals Court issued an
Order denying defendants’ permission to appeal the District Court’s ruling at
this point in the case, but the Appeals Court did not address the merits of the
case.
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 District Court’s rulings dismissing
plaintiffs’ six claims, and the ruling on “reliance” by the California Supreme
Court, Kinro believes that, notwithstanding the District Court’s finding that
plaintiffs may proceed with their claim that defendants may have violated the
“unfair prong” of the UCL, plaintiffs may not be able to prove the essential
elements of their claim. Defendants intend to vigorously defend against the
claim, and intend to move for summary judgment dismissing the claim. In
addition, Kinro believes that no remedial action is required or appropriate
under HUD safety standards.
If the
District Court maintains its rulings, denies defendants’ motion for summary
judgment as to the claim based on the “unfair prong” of the UCL, and maintains
its ruling granting plaintiffs’ motion for class certification with respect to
that claim, and if plaintiffs pursue their claim, 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 Consolidated Balance Sheet as of December 31, 2009, would not be material to
the Company’s financial position or annual results of operations.
Sale-Leaseback
In April
2008, the Company sold for $3.1 million a mortgage note it had received in a
2006 sale of a facility, which note had been in default. In connection with the
collection of this $3.1 million in cash, the Company recorded a gain of $2.1
million during 2008. This gain is classified in selling, general and
administrative expenses in the Consolidated Statements of
Operations.
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 35 facilities and reduced staff levels. The Company
incurred severance and relocation costs of $1.6 million, $1.6 million, and $0.8
million in 2009, 2008 and 2007, respectively, which were recorded in selling,
general and administrative expenses in the Consolidated Statements of
Operations. At December 31, 2009, 2008 and 2007, the Company had $0.7 million,
$0.9 million, and $0.3 million, respectively, of a remaining liability for these
costs recorded in accrued expenses and other current liabilities in the
Consolidated Balance Sheets. The Company operated 24 facilities at December 31,
2009, and is continuing to explore additional facility consolidation
opportunities, although the Company does not anticipate incurring further
significant severance and relocation costs.
69
At
December 31, 2009, the Company was in the process of selling seven owned
facilities and vacant land with an aggregate carrying value of $6.0 million,
which are not being used in production or are in the process of shutting down
operations. In addition, the Company has leased three owned facilities with a
combined carrying amount of $7.7 million, for one to three year terms, for a
combined $70,000 per month. Each of these three leases also contains an option
for the lessee to purchase the facility at an amount in excess of carrying
value. As of December 31, 2009, all of these owned facilities are classified in
fixed assets in the Consolidated Balance Sheet since it is not probable that
these assets will be sold within a year due to uncertainty in the real estate
markets. In addition to the owned facilities, the Company is attempting to
sublease four vacant leased facilities.
At
December 31, 2008, the Company was in the process of selling four closed
facilities and vacant land with an aggregate carrying value of $5.9 million. As
of December 31, 2008, all of these owned facilities were classified in other
assets in the Consolidated Balance Sheets. None of theses facilities were sold
in 2009.
To
reflect the net losses and gains on sold facilities, and the write-downs to
estimated fair value of facilities to be sold, the Company recorded a net loss
of $3.3 million in 2009. For similar items, the Company recorded a net gain of
$1.9 million in 2008 and a net gain of less than $0.1 million in
2007.
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 each of 2008 and 2007, the Company received
payments of $0.8 million including interest, which had been previously fully
reserved, and the Company therefore recorded a pre-tax gain in Other Income. The
Company did not receive the final scheduled payment of $1.0 million in January
2009; however, in 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 in Other Income. The Company is currently attempting to collect the
balance due of $0.7 million plus interest.
11.
STOCKHOLDERS' EQUITY
Stock-Based
Awards
Pursuant
to the Drew Industries Incorporated 2002 Equity Award and Incentive Plan, as
amended (the “2002 Equity Plan”), which was approved by stockholders in May
2002, the Company may grant to its directors, employees, and consultants Common
Stock-based awards, such as stock options, restricted or deferred stock, and
deferred stock units. The number of shares available for granting awards under
the 2002 Equity Plan was 1,090,019 and 346,921 at December 31, 2009 and 2008,
respectively. At the Annual Meetings of Stockholders held in May 2009 and May
2008, stockholders ratified amendments to the 2002 Equity Plan to increase the
number of shares available for awards by 900,000 and 500,000 shares,
respectively.
The 2002
Equity Plan provides for the grant of stock options that qualify as incentive
stock options under Section 422 of the Internal Revenue Code, and non-qualified
stock options. Under the 2002 Equity Plan, the Compensation Committee of Drew’s
Board of Directors (the “Committee”) determines the period for which each stock
option may be exercisable, but in no event may a stock option be exercisable
more than 10 years from the date of grant. The number of shares available under
the 2002 Equity Plan, and the exercise price of stock options granted under the
2002 Equity Plan, are subject to adjustments by the Committee to reflect stock
splits, stock dividends, recapitalization, mergers, or other major corporate
actions.
The
exercise price for stock options granted under the 2002 Equity Plan must be at
least equal to 100 percent of the fair market value of the shares subject to
such stock option on the date of grant. The exercise price may be paid in cash
or in shares of Drew Common Stock which have been held for a minimum of six
months. Stock options granted under the 2002 Equity Plan must be approved by,
and become exercisable in annual installments as determined by, the Committee.
Historically, upon exercise of stock options, new shares have been issued,
instead of treasury shares.
70
The
Company had historically granted stock options to employees in November every
other year and to Directors every year in December. In 2008 the Company began
granting stock options to employees on an annual basis, and in 2009 the Company
granted stock options to Directors in November on the same day stock options
were granted to employees. Outstanding stock options expire six years from the
date of grant, and vest over service periods of one year for Directors and five
years for employees.
Transactions
in stock options under the 2002 Equity Plan are summarized as
follows:
Weighted
|
||||||||||||
Average
|
||||||||||||
Number
of
|
Stock
Option
|
Exercise
|
||||||||||
Option Shares
|
Exercise Price
|
Price
|
||||||||||
Outstanding
at December 31, 2006
|
1,364,080 | $ | 4.55 – $28.71 | $ | 19.33 | |||||||
Granted
|
586,000 | $ | 28.09 – $32.61 | $ | 32.32 | |||||||
Exercised
|
(248,840 | ) | $ | 4.55 – $28.71 | $ | 10.10 | ||||||
Forfeited
|
(41,600 | ) | $ | 12.78 – $28.33 | $ | 24.84 | ||||||
Outstanding
at December 31, 2007
|
1,659,640 | $ | 7.88 – $32.61 | $ | 25.16 | |||||||
Granted
|
515,500 | $ | 11.59 – $14.22 | $ | 11.92 | |||||||
Exercised
|
(38,200 | ) | $ | 7.88 – $12.78 | $ | 8.93 | ||||||
Forfeited
|
(60,600 | ) | $ | 12.78 – $32.61 | $ | 26.18 | ||||||
Outstanding
at December 31, 2008
|
2,076,340 | $ | 11.59 – $32.61 | $ | 22.14 | |||||||
Granted
|
327,900 | $ | 20.99 | $ | 20.99 | |||||||
Exercised
|
(389,100 | ) | $ | 11.59 – $16.15 | $ | 12.88 | ||||||
Forfeited
/ cancelled
|
(255,200 | ) | $ | 11.59 – $32.61 | $ | 25.70 | ||||||
Outstanding
at December 31, 2009
|
1,759,940 | $ | 11.59 – $32.61 | $ | 23.46 | |||||||
Exercisable
at December 31, 2009
|
755,710 | $ | 11.59 – $32.61 | $ | 26.01 |
The total
intrinsic value, defined as the excess of market value over the exercise price,
of stock options exercised during the years ended December 31, 2009, 2008 and
2007 was $2.9 million, $0.2 million and $6.1 million, respectively.The Company
received cash of $5.0 million, $0.3 million and $2.5 million for years ended
December 31, 2009, 2008 and 2007, respectively, upon the exercise of stock
options. In addition, the Company recognized income tax benefits from the
exercise of stock options of $1.1 million, $0.1 million and $2.3 million for the
years ended December 31, 2009, 2008 and 2007, respectively. The total fair value
of stock options that vested during the years ended December 31, 2009, 2008 and
2007 was $2.5 million, $3.1 million and $1.9 million, respectively.
The
following table summarizes information about stock options outstanding at
December 31, 2009:
Option
|
|
Option
|
||||||||||||
Exercise
|
Shares
|
Remaining
|
Shares
|
|||||||||||
Price
|
Outstanding
|
Life (Years)
|
Exercisable
|
|||||||||||
$ | 16.16 | 12,000 |
0.9
|
12,000 | ||||||||||
$ | 16.15 | 30,000 |
1.0
|
30,000 | ||||||||||
$ | 28.33 | 375,640 |
1.9
|
297,360 | ||||||||||
$ | 28.71 | 37,500 |
2.0
|
37,500 | ||||||||||
$ | 26.39 | 37,500 |
3.0
|
37,500 | ||||||||||
$ | 32.61 | 444,450 |
3.9
|
178,200 | ||||||||||
$ | 28.09 | 37,500 |
4.0
|
37,500 | ||||||||||
$ | 11.59 | 392,950 |
4.9
|
62,750 | ||||||||||
$ | 13.03 | 2,000 |
4.9
|
400 | ||||||||||
$ | 14.22 | 62,500 |
5.0
|
62,500 | ||||||||||
$ | 20.99 | 327,900 |
5.9
|
- |
At
December 31, 2009, the aggregate intrinsic value was $4.2 million for
outstanding in-the-money stock options and $1.2 million for exercisable
in-the-money stock options. The weighted average remaining contractual term was
4.0 years for all outstanding stock options and 3.0 years for all exercisable
stock options.
71
As of
December 31, 2009, there was $7.7 million of total unrecognized compensation
costs related to unvested stock options, which is expected to be recognized over
a weighted average remaining period of 3.4 years.
In 2009,
2008 and 2007 pursuant to the 2002 Equity Plan, certain non-employee directors
elected to receive deferred stock units in lieu of cash fees. The number of
deferred stock units issued was determined by dividing 115 percent of the fee
earned by the closing price of the Common Stock on the day before the fees were
earned. These deferred stock units are 100 percent vested upon
issuance.
Beginning
in 2009, a portion of certain senior executives’ salary or incentive
compensation was paid in deferred stock units in lieu of cash compensation at
100 percent of the compensation earned. The number of deferred stock units
issued was determined by using the closing price of the Common Stock on the date
of the award for salary, and the closing price of the Common Stock on the day
before for incentive compensation. In accordance with the executive compensation
and employment agreement with the Company’s Chief Executive Officer, all or a
portion of 14,595 deferred stock units issued to him in 2009 are forfeitable if
the Company’s three year return on invested capital is below a pre-defined peer
group. Conversely, for every one percentage point that the Company’s three year
return on invested capital exceeds the peer group, the Company’s Chief Executive
Officer will earn an additional 10,000 deferred stock units, up to a maximum of
100,000 deferred stock units.
Transactions
in deferred stock units under the 2002 Equity Plan are summarized as
follows:
Stock
Price
|
||||||||
Number
of
|
at
Date
|
|||||||
Shares
|
of Issuance
|
|||||||
Outstanding
at December 31, 2006
|
66,497 | $ | 6.87 – $37.35 | |||||
Issued
|
10,589 | $ | 26.01 – $43.02 | |||||
Exercised
|
(1,089 | ) | $ | 7.61 – $12.78 | ||||
Outstanding
at December 31, 2007
|
75,997 | $ | 6.87 – $43.02 | |||||
Issued
|
21,995 | $ | 11.59 – $27.40 | |||||
Exercised
|
(880 | ) | $ | 25.01 – $37.35 | ||||
Outstanding
at December 31, 2008
|
97,112 | $ | 6.87 – $43.02 | |||||
Issued
|
84,202 | $ | 5.50 – $21.90 | |||||
Exercised
|
(50,201 | ) | $ | 7.43 – $43.02 | ||||
Outstanding
at December 31, 2009
|
131,113 | $ | 5.50 – $40.68 |
Weighted
Average Common Shares Outstanding
The
following reconciliation details the denominator used in the computation of
basic and diluted earnings per share for the years ended December
31,:
2009
|
2008
|
2007
|
||||||||||
Weighted
average shares outstanding for basic earnings per share
|
21,807,413 | 21,808,073 | 21,892,656 | |||||||||
Common
stock equivalents pertaining to stock options and contingently issuable
deferred stock units
|
- | 109,048 | 233,244 | |||||||||
Total
for diluted shares
|
21,807,413 | 21,917,121 | 22,125,900 |
The
weighted average diluted shares outstanding for the year ended December 31,
2009, 2008 and 2007, excludes the effect of 1,856,390 stock options and
contingently issuable deferred stock units, 1,392,440 stock options and 146,500
stock options, respectively, because to include them in the calculation of total
diluted shares would have been anti-dilutive.
At the Annual Meeting of
Stockholders held in May 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.
At the Annual
Meeting of Stockholders held in May 2008, stockholders ratified an
amendment to the Company’s Restated Certificate of Incorporation to increase the
authorized number of shares of Common Stock from 30 million shares to 50 million
shares.
72
On
November 29, 2007 the Board of Directors authorized the Company to repurchase up
to 1 million shares of the Company’s Common Stock from time to time in the open
market, in privately negotiated transactions, or in block trades. Of this
authorization, 447,400 shares were repurchased in 2008 at an average price of
$18.58 per share, or $8.3 million in total. The aggregate cost of repurchases
was funded from the Company’s available cash. The number of shares ultimately
repurchased, and the timing of the purchases, will depend upon market
conditions, share price, and other factors. At present 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.
12.
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Interim
unaudited financial information follows (in thousands, except per share
amounts):
First
|
Second
|
Third
|
Fourth
|
|||||||||||||||||
Quarter
|
Quarter
|
Quarter
|
Quarter
|
Year
|
||||||||||||||||
Year
ended December 31, 2009
|
||||||||||||||||||||
Net
sales
|
$ | 71,019 | $ | 100,563 | $ | 121,666 | $ | 104,591 | $ | 397,839 | ||||||||||
Gross
profit
|
5,826 | 20,553 | 27,974 | 24,357 | 78,710 | |||||||||||||||
(Loss)
income before income taxes
|
(56,464 | ) | 3,958 | 11,134 | 5,002 | (36,370 | ) | |||||||||||||
Net
(loss) income
|
$ | (36,702 | ) | $ | 2,556 | $ | 7,189 | $ | 2,904 | $ | (24,053 | ) | ||||||||
Net
(loss) income per common share:
|
||||||||||||||||||||
Basic
|
$ | (1.70 | ) | $ | 0.12 | $ | 0.33 | $ | 0.13 | $ | (1.10 | ) | ||||||||
Diluted
|
$ | (1.70 | ) | $ | 0.12 | $ | 0.33 | $ | 0.13 | $ | (1.10 | ) | ||||||||
Stock
market price
|
||||||||||||||||||||
High
|
$ | 12.30 | $ | 15.40 | $ | 23.00 | $ | 23.56 | $ | 23.56 | ||||||||||
Low
|
$ | 5.50 | $ | 8.50 | $ | 10.36 | $ | 19.14 | $ | 5.50 | ||||||||||
Close
(at end of quarter)
|
$ | 8.68 | $ | 12.17 | $ | 21.69 | $ | 20.65 | $ | 20.65 | ||||||||||
Year
ended December 31, 2008
|
||||||||||||||||||||
Net
sales
|
$ | 159,148 | $ | 150,523 | $ | 124,274 | $ | 76,561 | $ | 510,506 | ||||||||||
Gross
profit
|
36,579 | 36,804 | 24,982 | 9,141 | 107,506 | |||||||||||||||
Income
(loss) before income taxes
|
14,895 | 15,310 | 4,207 | (15,391 | ) | 19,021 | ||||||||||||||
Net
income (loss)
|
$ | 9,105 | $ | 9,190 | $ | 2,593 | $ | (9,210 | ) | $ | 11,678 | |||||||||
Net
income (loss) per common share:
|
||||||||||||||||||||
Basic
|
$ | 0.41 | $ | 0.42 | $ | 0.12 | $ | (0.43 | ) | $ | 0.54 | |||||||||
Diluted
|
$ | 0.41 | $ | 0.42 | $ | 0.12 | $ | (0.43 | ) | $ | 0.53 | |||||||||
Stock
market price
|
||||||||||||||||||||
High
|
$ | 28.69 | $ | 26.81 | $ | 20.58 | $ | 16.05 | $ | 28.69 | ||||||||||
Low
|
$ | 21.47 | $ | 15.95 | $ | 14.80 | $ | 9.65 | $ | 9.65 | ||||||||||
Close
(at end of quarter)
|
$ | 24.46 | $ | 15.95 | $ | 17.11 | $ | 12.00 | $ | 12.00 |
The sum
of per share amounts for the four quarters may not equal the total per share
amounts for the year as a result of changes in the weighted average common
shares outstanding or rounding.
73
Item
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
Item
9A. 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-K, 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.
|
(a)
|
Management’s Annual
Report on Internal Control over Financial
Reporting.
|
Management's
Responsibility for Financial Statements
We are
responsible for the preparation and integrity of the Consolidated Financial
Statements appearing in the Annual Report on Form 10-K. The Consolidated
Financial Statements were prepared in conformity with accounting principles
generally accepted in the United States and include amounts based on
management’s estimates and judgments.
We are
also responsible for establishing and maintaining adequate internal control over
financial reporting. We maintain a system of internal control that is designed
to provide reasonable assurance as to the fair and reliable preparation and
presentation of the Consolidated Financial Statements, as well as to safeguard
assets from unauthorized use or disposition. The Company continually evaluates
its system of internal control over financial reporting to determine if changes
are appropriate based upon changes in the Company’s operations or the business
environment in which it operates.
Our
control environment is the foundation for our system of internal control over
financial reporting and is embodied in our Guidelines for Business Conduct. It
sets the tone of our organization and includes factors such as integrity and
ethical values. Our internal control over financial reporting is supported by
formal policies and procedures which are reviewed, modified and improved as
changes occur in business conditions and operations.
We
conducted an evaluation of the effectiveness of our internal control over
financial reporting based on the framework in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). This evaluation included review of the documentation of
controls, evaluation of the design effectiveness of controls, testing of the
operating effectiveness of controls and a conclusion on this evaluation.
Although there are inherent limitations in the effectiveness of any system of
internal control over financial reporting, based on our evaluation, we have
concluded that our internal control over financial reporting was effective as of
December 31, 2009.
74
KPMG LLP,
an independent registered public accounting firm, has audited the Consolidated
Financial Statements included in this Report and, as part of their audit, has
issued their report on the effectiveness of our internal control over financial
reporting, included elsewhere in this Form 10-K.
/s/
Fredric M. Zinn
|
/s/
Joseph S. Giordano III
|
President
and
|
Chief
Financial Officer and
|
Chief
Executive Officer
|
Treasurer
|
(b) Report of the Independent
Registered Public Accounting Firm.
The
report of the independent registered public accounting firm is included in Item
8. “Financial Statements and Supplementary Data.”
(c) Changes in Internal Control
over Financial Reporting.
There
were no changes in the Company’s internal controls over financial reporting
during the quarter ended December 31, 2009 or subsequent to the date the Company
completed its evaluation, that have materially affected, or are reasonably
likely to materially affect, the Company’s internal control over financial
reporting.
Over the
last few years, the internal controls of Lippert have been incrementally
strengthened due both to the installation of enterprise resource planning
(“ERP”) software and business process changes. In the second half 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 at Kinro. The Company also
anticipates that it will continue to implement additional functionalities of the
ERP software at both Lippert and Kinro to further strengthen the Company’s
internal control.
Item
9B. OTHER INFORMATION.
None.
PART
III
Item
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE.
Information
with respect to the Company’s Directors, Executive Officers and Corporate
Governance is incorporated by reference from the information contained under the
caption “Proposal 1. Election of Directors” in the Company’s Proxy
Statement for the Annual Meeting of Stockholders to be held on May 19, 2010 (the
“2010 Proxy Statement”) and from the information contained under “Directors and
Executive Officers of the Registrant” in Part I of this Report.
Information
regarding Section 16 reporting compliance is incorporated by reference from the
information contained under the caption “Voting Securities – Compliance with
Section 16(a) of the Exchange Act” in the Company’s 2010 Proxy
Statement.
The
Company has adopted Governance Principles, Guidelines for Business Conduct, and
a Code of Ethics for Senior Financial Officers (“Code of Ethics”), each of
which, as well as the Charter and Key Practices of the Company’s Audit
Committee, Compensation Committee, and Corporate Governance and Nominating
Committee, are available on the Company’s website at www.drewindustries.com.
A copy of any of these documents will be furnished, without charge, upon written
request to Secretary, Drew Industries Incorporated, 200 Mamaroneck Avenue, White
Plains, New York 10601.
If the
Company makes any substantive amendment to the Code of Ethics or the Guidelines
for Business Conduct, or grants a waiver to a Director or Executive Officer from
a provision of the Code of Ethics or the Guidelines for Business Conduct, the
Company will disclose the nature of such amendment or waiver on its website or
in a Current Report on Form 8-K. There have been no waivers to Directors or
Executive Officers of any provisions of the Code of Ethics or the Guidelines for
Business Conduct.
75
Item
11. EXECUTIVE COMPENSATION.
The
information required by this item is incorporated by reference from the
information contained under the caption “Proposal 1. Election of
Directors – Executive Compensation” and “Director Compensation” in the Company’s 2010 Proxy Statement.
Directors – Executive Compensation” and “Director Compensation” in the Company’s 2010 Proxy Statement.
Item
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS.
The
information required by this item is incorporated by reference from the
information contained under the caption “Voting Securities – Security Ownership
of Management” and “Equity Award and Incentive Plan” in the Company’s 2010 Proxy
Statement.
Item
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE.
No
executive officer of the Company serves on the Company’s Compensation Committee,
and there are no “interlocks” as defined by the Securities and Exchange
Commission.
The
information required by this item with respect to transactions with related
persons and director independence is incorporated by reference from the
information contained under the captions “Proposal 1. Election of Directors –
Transactions with Related Persons” and “Proposal 1. Election of Directors –
Corporate Governance and Related Matters – Board of Directors” in the Company’s
2010 Proxy Statement.
Item
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The
information required by this item is incorporated by reference from the
information contained under “Proposal 2. Appointment of Auditors” in the
Company’s 2010 Proxy Statement.
PART
IV
Item
15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
(a) Documents
Filed:
(1)
|
Financial
Statements.
|
(2)
|
Exhibits. See
Item 15 (b) – “List of Exhibits” incorporated herein by
reference.
|
(b) Exhibits
– List of Exhibits.
Exhibit
Number
|
Description
|
|
3
|
Articles
of Incorporation and By-laws.
|
|
3.1
|
Drew
Industries Incorporated Restated Certificate of
Incorporation.
|
|
3.2
|
|
Drew
Industries Incorporated By-laws, as
amended.
|
Exhibit
3.1 is incorporated by reference to Exhibit III to the Proxy
Statement-Prospectus constituting Part I of the Drew National Corporation and
Drew Industries Incorporated Registration Statement on Form S-14 (Registration
No. 2-94693).
Exhibit
3.2 is incorporated by reference to the Exhibit bearing the same number included
in the Company’s Form 8-K filed on November 19, 2008.
76
Exhibit
Number
|
Description
|
|
10
|
Material
Contracts.
|
|
10.194*
|
Drew
Industries Incorporated 2002 Equity Award and Incentive Plan, as
amended.
|
|
10.195
|
License
Agreement, dated February 28, 2003, by and among Versa Technologies, Inc.,
VT Holdings II, Inc. and Engineered Solutions LP, and Lippert Components,
Inc.
|
|
10.197*
|
Amended
Change of Control Agreement by and between Fredric M. Zinn and Registrant,
dated March 3, 2006, as amended on July 18, 2006 and December 23,
2008.
|
|
10.198
|
Amended
and Restated Credit Agreement dated as of February 11, 2005 by and among
Kinro, Inc., Lippert Components, Inc., KeyBank, National Association, HSBC
Bank USA, National Association, and JPMorgan Chase Bank, N.A.,
individually and as Administrative Agent.
|
|
10.199
|
Amended
and Restated Subsidiary Guarantee Agreement dated as of February 11, 2005
by and among Lippert Tire & Axle, Inc., Kinro Holding, Inc., Lippert
Tire & Axle Holding, Inc., Lippert Holding, Inc., Kinro Manufacturing,
Inc., Lippert Components Manufacturing, Inc., Kinro Texas Limited
Partnership, Kinro Tennessee Limited Partnership, Lippert Tire & Axle
Texas Limited Partnership, Lippert Components Texas Limited Partnership,
BBD Realty Texas Limited Partnership, LD Realty, Inc., LTM Manufacturing,
L.L.C., Coil Clip, Inc., Zieman Manufacturing Company, with and in favor
of JPMorgan Chase Bank, N.A., as Administrative Agent for the
Lenders.
|
|
10.200
|
Amended
and Restated Company Guarantee Agreement dated as of February 11, 2005 by
and among Drew Industries Incorporated, with and in favor of JPMorgan
Chase Bank, N.A., as Administrative Agent for the
Lenders.
|
|
10.201
|
Amended
and Restated Subordination Agreement dated as of February 11, 2005 by and
among Kinro, Inc., Lippert Tire & Axle, Inc., Lippert Components,
Inc., Kinro Holding, Inc., Lippert Tire & Axle Holding, Inc., Lippert
Holding, Inc., Kinro Manufacturing, Inc., Lippert Components
Manufacturing, Inc., Lippert Components of Canada, Inc., Coil Clip, Inc.,
Zieman Manufacturing Company, Kinro Texas Limited Partnership, Kinro
Tennessee Limited Partnership, Lippert Tire & Axle Texas Limited
Partnership, BBD Realty Texas Limited Partnership, Lippert Components
Texas Limited Partnership, LD Realty, Inc., LTM Manufacturing, L.L.C.,
with and in favor of JPMorgan Chase Bank, N.A., as Administrative
Agent.
|
|
10.202
|
Amended
and Restated Pledge Agreement dated as of February 11, 2005 by and among
Drew Industries Incorporated, Kinro, Inc., Lippert Tire & Axle, Inc.,
Kinro Holding, Inc., Lippert Tire & Axle Holding, Inc., Lippert
Components, Inc., Lippert Holding, Inc., with and in favor of JPMorgan
Chase Bank, N.A., as Administrative Agent.
|
|
10.203
|
Revolving
Credit Note dated as of February 11, 2005 by and among Kinro, Inc.,
Lippert Components, Inc., payable to the order of JPMorgan Chase Bank,
N.A. in the principal amount of Twenty-Five Million ($25,000,000)
Dollars.
|
|
10.204
|
Revolving
Credit Note dated as of February 11, 2005 by and among Kinro, Inc.,
Lippert Components, Inc., payable to the order of KeyBank National
Association in the principal amount of Twenty Million ($20,000,000)
Dollars.
|
|
10.205
|
|
Revolving
Credit Note dated as of February 11, 2005 by and among Kinro, Inc.,
Lippert Components, Inc., payable to the order of HSBC USA, National
Association in the principal amount of Fifteen Million ($15,000,000)
Dollars.
|
77
Exhibit
|
||
Number
|
Description
|
|
10.206
|
Note
Purchase and Private Shelf Agreement dated as of February 11, 2005 by and
among Kinro, Inc., Lippert Components, Inc., Drew Industries Incorporated
and Prudential Investment Management, Inc.
|
|
10.207
|
Form
of Senior Note (Shelf Note).
|
|
10.208
|
Parent
Guarantee Agreement dated as of February 11, 2005 by and among Drew
Industries Incorporated, Prudential Investment Management, Inc. and the
Noteholders.
|
|
10.209
|
Subsidiary
Guaranty dated as of February 11, 2005 by and among Lippert Tire &
Axle, Inc., Kinro Holding, Inc., Lippert Tire & Axle Holding, Inc.,
Lippert Holding, Inc., Kinro Manufacturing, Inc., Lippert Components
Manufacturing, Inc., Kinro Texas Limited Partnership, Kinro Tennessee
Limited Partnership, Lippert Tire & Axle Texas Limited Partnership,
Lippert Components Texas Limited Partnership, BBD Realty Texas Limited
Partnership, LD Realty, Inc., LTM Manufacturing, L.L.C., Coil Clip, Inc.,
Zieman Manufacturing Company, with and in favor of Prudential Investment
Management, Inc. and the Noteholders listed thereto.
|
|
10.210
|
Intercreditor
Agreement dated as of February 11, 2005 by and among Prudential Investment
Management, Inc., JPMorgan Bank, N.A. (as Lender and Administrative
Agent), KeyBank, National Association, HSBC Bank USA, National Association
and JPMorgan Bank, N.A. (as Trustee and Administrative
Agent).
|
|
10.211
|
Subordination
Agreement dated as of February 11, 2005 by and among Drew Industries
Incorporated, Kinro, Inc., Lippert Tire & Axle, Inc., Lippert
Components, Inc., Kinro Holding, Inc., Lippert Tire & Axle Holding,
Inc., Lippert Holding, Inc., Kinro Manufacturing, Inc., Lippert Components
Manufacturing, Inc., Lippert Components of Canada, Inc., Coil Clip, Inc.,
Zieman Manufacturing Company, Kinro Texas Limited Partnership, Kinro
Tennessee Limited Partnership, Lippert Tire & Axle Texas Limited
Partnership, BBD Realty Texas Limited Partnership, Lippert Components
Texas Limited Partnership, LD Realty, Inc., LTM Manufacturing, L.L.C.,
with and in favor of Prudential Investment Management,
Inc.
|
|
10.212
|
Pledge
Agreement dated as of February 11, 2005 by and among Drew Industries
Incorporated, Kinro, Inc., Lippert Tire & Axle, Inc., Kinro Holding,
Inc., Lippert Tire & Axle Holding, Inc., Lippert Components, Inc.,
Lippert Holding, Inc. in favor of JPMorgan Chase Bank, N.A. as security
trustee.
|
|
10.213
|
Collateralized
Trust Agreement dated as of February 11, 2005 by and among Kinro, Inc.,
Lippert Components, Inc., Prudential Investment Management, Inc. and
JPMorgan Chase Bank, N.A. as security trustee for the
Noteholders.
|
|
10.221
|
Form
of Indemnification Agreement between Registrant and its officers and
independent directors.
|
|
10.223*
|
Amended
Change in Control Agreement by and between Harvey F. Milman and
Registrant, dated March 3, 2006, as amended and
supplemented.
|
|
10.230
|
Second
Amendment to Amended and Restated Credit Agreement dated as of March 10,
2006 by and among Kinro, Inc., Lippert Components, Inc., KeyBank, National
Association, HSBC Bank USA, National Association, and JPMorgan Chase Bank,
N.A., individually and as Administrative Agent.
|
|
10.231*
|
|
Executive
Non-Qualified Deferred Compensation Plan, as
amended.
|
78
Exhibit
Number
|
Description
|
|
10.233
|
Second
Amended and Restated Credit Agreement dated as of November 25, 2008 by and
among Kinro, Inc., Lippert Components, Inc., JPMorgan Chase Bank, N.A.,
individually and as Administrative Agent, and Wells Fargo Bank, N.A.
individually and as Documentation Agent.
|
|
10.234
|
Second
Amended and Restated Subsidiary Guarantee Agreement dated as of November
25, 2008 by and among Lippert Tire & Axle, Inc., Kinro Holding, Inc.,
Lippert Tire & Axle Holding, Inc., Lippert Holding, Inc., Kinro
Manufacturing, Inc., Lippert Components Manufacturing, Inc., Kinro Texas
Limited Partnership, Kinro Tennessee Limited Partnership, Lippert Tire
& Axle Texas Limited Partnership, Lippert Components Texas Limited
Partnership, BBD Realty Texas Limited Partnership, LD Realty, Inc., LTM
Manufacturing, L.L.C., Trailair, Inc., Coil Clip, Inc., Zieman
Manufacturing Company, with and in favor of JPMorgan Chase Bank, N.A., as
Administrative Agent for the Lenders.
|
|
10.235
|
Second
Amended and Restated Company Guarantee Agreement dated as of November 25,
2008 by and among Drew Industries Incorporated, with and in favor of
JPMorgan Chase Bank, N.A., as Administrative Agent for the
Lenders.
|
|
10.236
|
Second
Amended and Restated Subordination Agreement dated as of November 25, 2008
by and among Drew Industries Incorporated, Kinro, Inc., Lippert Tire &
Axle, Inc., Lippert Components, Inc., Kinro Holding, Inc., Lippert Tire
& Axle Holding, Inc., Lippert Holding, Inc., Kinro Manufacturing,
Inc., Lippert Components Manufacturing, Inc., Coil Clip, Inc., Zieman
Manufacturing Company, Kinro Texas Limited Partnership, Kinro Tennessee
Limited Partnership, Lippert Tire & Axle Texas Limited Partnership,
BBD Realty Texas Limited Partnership, Lippert Components Texas Limited
Partnership, LD Realty, Inc., LTM Manufacturing, L.L.C., Trailair, Inc,
with and in favor of JPMorgan Chase Bank, N.A., as Administrative
Agent.
|
|
10.237
|
Second
Amended and Restated Pledge and Security Agreement dated as of November
25, 2008 by and among Drew Industries Incorporated, Kinro, Inc., Lippert
Tire & Axle, Inc., Kinro Holding, Inc., Lippert Tire & Axle
Holding, Inc., Lippert Components, Inc., Lippert Holding, Inc., with and
in favor of JPMorgan Chase Bank, N.A., as Administrative
Agent.
|
|
10.238
|
Second
Amended and Restated Revolving Credit Note dated as of November 25, 2008
by and among Kinro, Inc., Lippert Components, Inc., payable to the order
of JPMorgan Chase Bank, N.A. in the principal amount of Thirty Million
($30,000,000) Dollars.
|
|
10.239
|
Revolving
Credit Note dated as of November 25, 2008 by and among Kinro, Inc.,
Lippert Components, Inc., payable to the order of Wells Fargo Bank, N.A.
in the principal amount of Twenty Million ($20,000,000)
Dollars.
|
|
10.240
|
Second
Amended and Restated Note Purchase and Private Shelf Agreement dated as of
November 25, 2008 by and among Prudential Investment Management, Inc. and
Affiliates, and Kinro, Inc. and Lippert Components, Inc., guaranteed by
Drew Industries Incorporated.
|
|
10.241
|
Form
of Fixed Rate Shelf Note.
|
|
10.242
|
Form
of Floating Rate Shelf Note.
|
|
10.243
|
|
Confirmation,
Reaffirmation and Amendment of Parent Guarantee Agreement dated as of
November 25, 2008 by and among Drew Industries Incorporated, Prudential
Investment Management, Inc. and the Noteholders listed
thereto.
|
79
Exhibit
Number
|
Description
|
|
10.245
|
Amended
and Restated Intercreditor Agreement dated as of November 25, 2008 by and
among Prudential Investment Management, Inc. and Affiliates, JPMorgan
Bank, N.A. (as Lender), Wells Fargo Bank, N.A. (as Lender), and JPMorgan
Bank, N.A. (as Administrative Agent, Collateral Agent and
Trustee).
|
|
10.246
|
Confirmation,
Reaffirmation and Amendment of Subordination Agreement dated as of
November 25, 2008 by and among Drew Industries Incorporated, Kinro, Inc.,
Lippert Tire & Axle, Inc., Lippert Components, Inc., Kinro Holding,
Inc., Lippert Tire & Axle Holding, Inc., Lippert Holding, Inc., Kinro
Manufacturing, Inc., Lippert Components Manufacturing, Inc., Coil Clip,
Inc., Zieman Manufacturing Company, Kinro Texas Limited Partnership, Kinro
Tennessee Limited Partnership, Lippert Tire & Axle Texas Limited
Partnership, BBD Realty Texas Limited Partnership, Lippert Components
Texas Limited Partnership, LD Realty, Inc., LTM Manufacturing, L.L.C.,
with and in favor of Prudential Investment Management, Inc. and
Affiliates.
|
|
10.247
|
Confirmation,
Reaffirmation and Amendment of Pledge Agreement dated as of November 25,
2008 by and among Drew Industries Incorporated, Kinro, Inc., Lippert Tire
& Axle, Inc., Kinro Holding, Inc., Lippert Tire & Axle Holding,
Inc., Lippert Components, Inc., Lippert Holding, Inc. in favor of JPMorgan
Chase Bank, N.A. as trustee.
|
|
10.248
|
Collateralized
Trust Agreement dated as of November 25, 2008 by and among Kinro, Inc.,
Lippert Components, Inc., Prudential Investment Management, Inc. and
Affiliates and JPMorgan Chase Bank, N.A. as security trustee for the
Noteholders.
|
|
10.249*
|
Amended
Change of Control Agreement by and between Joseph S. Giordano III and
Registrant dated July 18, 2006, as amended on December 23,
2008.
|
|
10.250*
|
Amended
Change of Control Agreement by and between Christopher L. Smith and
Registrant dated July 17, 2006, as amended on December 23, 2008 and March
5, 2009.
|
|
10.251*
|
Corrected
Executive Compensation and Benefits Agreement between Registrant and David
L. Webster, dated December 31, 2008.
|
|
10.252*
|
Executive
Compensation and Benefits Agreement between Registrant and Leigh J.
Abrams, dated April 6, 2009.
|
|
10.253*
|
Executive
Employment and Non-Competition Agreement between Registrant and Jason D.
Lippert, dated May 6, 2009.
|
|
10.254*
|
Executive
Compensation and Non-Competition Agreement between Registrant and Fredric
M. Zinn, dated May 28, 2009.
|
|
10.255*
|
Executive
Employment and Non-Competition Agreement between Registrant and Scott T.
Mereness, dated June 24, 2009.
|
|
10.256*
|
|
Severance
Agreement between Registrant and Joseph S. Giordano III, dated November
18,
2009.
|
*Denotes
a compensatory plan or arrangement.
80
Exhibit
10.194 is incorporated by reference to Exhibit 10.1 to the Company’s Form
8-K dated January 8, 2009.
|
|
Exhibit
10.195 is incorporated by reference to the Exhibits bearing the same
numbers included in the Company’s Annual Report on Form 10-K for the year
ended December 31, 2003.
|
|
Exhibits
10.198-10.213 are incorporated by reference to Exhibits 10.1-10.16
included in the Company’s Form 8-K filed on February 16,
2005.
|
|
Exhibit
10.221 is incorporated by reference to Exhibit 99.1 included in the
Company’s Form 8-K filed on February 9, 2005.
|
|
Exhibits
10.197 and 10.223 are incorporated by reference to Exhibits 10.1-10.2
included in the Company’s Form 8-K filed on January 8,
2009.
|
|
Exhibit
10.230 is incorporated by reference to Exhibit 10.1 included in the
Company’s Form 8-K filed on March 14, 2006.
|
|
Exhibit
10.231 is incorporated by reference to Exhibit 10.1 included in the
Company’s Form 8-K filed on January 9, 2009.
|
|
Exhibits
10.233 – 10.248 are incorporated by reference to Exhibits 10.1 - 10.16
included in the Company’s Form 8-K filed on December 2,
2008.
|
|
Exhibit
10.249 is incorporated by reference to Exhibits 10.3 included in the
Company’s Form 8-K filed on January 8, 2009.
|
|
Exhibit
10.250 is incorporated by reference to Exhibit 10.4 included in the
Company’s Form 8-K filed on January 8, 2009 and to Exhibit 10.1 included
in the Company’s Form 8-K filed on March 6, 2009.
|
|
Exhibit
10.251 is incorporated by reference to Exhibit 10 (iii)(A) included in the
Company’s Form 8-K/A filed on January 6, 2009.
|
|
Exhibit
10.252 is incorporated by reference to Exhibit 10 (iii)(A) included in the
Company’s Form 8-K/A filed on April 8, 2009.
|
|
Exhibit
10.253 is incorporated by reference to Exhibit 10 (iii)(A) included in the
Company’s Form 8-K/A filed on May 6, 2009.
|
|
Exhibit
10.254 is incorporated by reference to Exhibit 10 (iii)(A) included in the
Company’s Form 8-K/A filed on May 28, 2009.
|
|
Exhibit
10.255 is incorporated by reference to Exhibit 10 (iii)(A) included in the
Company’s Form 8-K/A filed on June 25, 2009.
|
|
Exhibit
10.256 is incorporated by reference to Exhibit 10 (iii)(A) included in the
Company’s Form 8-K filed on November 19,
2009.
|
81
Exhibit
|
||
Number
|
Description
|
|
14
|
Code
of Ethics.
|
|
14.1
|
Code
of Ethics for Senior Financial Officers.
|
|
Exhibit
14.1 is incorporated by reference to Exhibit 14 included in the Company’s
Annual Report on Form 10-K for the year ended December 31,
2003.
|
||
14.2
|
Guidelines
for Business Conduct.
|
|
Exhibit
14.2 is filed herewith.
|
||
21
|
Subsidiaries
of the Registrant.
|
|
Exhibit
21 is filed herewith.
|
||
23
|
Consent
of Independent Registered Public Accounting Firm.
|
|
Exhibit
23 is filed herewith.
|
||
24
|
Powers
of Attorney.
|
|
Powers
of Attorney of persons signing this Report are included as part of this
Report.
|
||
31
|
Rule
13a-14(a)/15d-14(a) Certifications.
|
|
31.1
|
Rule
13a-14(a) Certificate of Chief Executive Officer.
|
|
31.2
|
Rule
13a-14(a) Certificate of Chief Financial Officer.
|
|
32
|
Section
1350 Certifications.
|
|
32.1
|
Section
1350 Certificate of Chief Executive Officer.
|
|
32.2
|
Section
1350 Certificate of Chief Financial Officer.
|
|
|
Exhibits
31.1 - 32.2 are filed
herewith.
|
82
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended, Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date:
March 11, 2010
|
DREW
INDUSTRIES INCORPORATED
|
|
By:
|
/s/ Fredric M. Zinn
|
|
Fredric
M. Zinn, President and Chief Executive
Officer
|
Pursuant
to the requirements of the Securities and Exchange Act of 1934, as amended, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and dates indicated.
Each
person whose signature appears below hereby authorizes Fredric M. Zinn and
Joseph S. Giordano III, or either of them, to file one or more amendments to the
Annual Report on Form 10-K which amendments may make such changes in such Report
as either of them deems appropriate, and each such person hereby
appoints Fredric M. Zinn and Joseph S. Giordano III, or either of
them, as attorneys-in-fact to execute in the name and on behalf of each such
person individually, and in each capacity stated below, such amendments to such
Report.
Date
|
Signature |
Title
|
|||
March
11, 2010
|
By:
|
/s/ Fredric M. Zinn
|
Director,
President and Chief
Executive Officer
|
||
(Fredric
M. Zinn)
|
|
||||
March
11, 2010
|
By:
|
/s/ Joseph S. Giordano III
|
Chief
Financial Officer and Treasurer
|
||
(Joseph
S. Giordano III)
|
|||||
March
11, 2010
|
By:
|
/s/ Christopher L. Smith
|
Corporate
Controller
|
||
(Christopher
L. Smith)
|
|||||
March
11, 2010
|
By:
|
/s/ Edward W. Rose, III
|
Lead
Director
|
||
(Edward
W. Rose, III)
|
|||||
March
11, 2010
|
By:
|
/s/ Leigh J. Abrams
|
Chairman
of the Board of Directors
|
||
(Leigh
J. Abrams)
|
|||||
March
11, 2010
|
By:
|
/s/ James F. Gero
|
Director
|
||
(James
F. Gero)
|
|||||
March
11, 2010
|
By:
|
/s/ Frederick B. Hegi, Jr.
|
Director
|
||
(Frederick
B. Hegi, Jr.)
|
|||||
March
11, 2010
|
By:
|
/s/ David A. Reed
|
Director
|
||
(David
A. Reed)
|
|||||
March
11, 2010
|
By:
|
/s/ John B. Lowe, Jr.
|
Director
|
||
(John
B. Lowe, Jr.)
|
|||||
March
11, 2010
|
|
By:
|
/s/ Jason D.
Lippert
|
|
Director
|
(Jason
D. Lippert)
|
83