| | Nine Months Ended | | Three Months Ended | |
| | September 30, | | September 30, | |
| | 2008 | | 2007 | | 2008 | | 2007 | |
Net sales: | | | | | | | | | |
RV Segment | | $ | 320,941 | | $ | 390,193 | | $ | 85,694 | | $ | 127,156 | |
MH Segment | | | 113,004 | | | 140,617 | | | 38,580 | | | 46,254 | |
Total net sales | | $ | 433,945 | | $ | 530,810 | | $ | 124,274 | | $ | 173,410 | |
| | | | | | | | | | | | | |
Operating profit: | | | | | | | | | | | | | |
RV Segment | | $ | 31,848 | | $ | 53,128 | | $ | 4,598 | | $ | 17,007 | |
MH Segment | | | 10,989 | | | 12,153 | | | 3,913 | | | 4,047 | |
Total segment operating profit | | | 42,837 | | | 65,281 | | | 8,511 | | | 21,054 | |
Amortization of intangibles | | | (3,670 | ) | | (3,014 | ) | | (1,547 | ) | | (1,111 | ) |
Corporate | | | (5,714 | ) | | (5,801 | ) | | (1,747 | ) | | (1,884 | ) |
Other items | | | 1,561 | | | (674 | ) | | (687 | ) | | 195 | |
Total operating profit | | $ | 35,014 | | $ | 55,792 | | $ | 4,530 | | $ | 18,254 | |
| | 2009 | | | 2008 | |
| | | | | | |
Net sales: | | | | | | |
RV Segment | | $ | 52,280 | | | $ | 123,955 | |
MH Segment | | | 18,739 | | | | 35,193 | |
Total net sales | | $ | 71,019 | | | $ | 159,148 | |
| | | | | | | | |
Operating (loss) profit: | | | | | | | | |
RV Segment | | $ | (4,662 | ) | | $ | 14,254 | |
MH Segment | | | (2,023 | ) | | | 2,510 | |
Total segment operating (loss) profit | | | (6,685 | ) | | | 16,764 | |
Amortization of intangibles | | | (1,389 | ) | | | (1,053 | ) |
Corporate | | | (1,530 | ) | | | (1,950 | ) |
Goodwill impairment | | | (45,040 | ) | | | - | |
Other items | | | (1,620 | ) | | | 1,216 | |
Total operating (loss) profit | | $ | (56,264 | ) | | $ | 14,977 | |
Consolidated Highlights
| § | Net sales for the third quarter of 2008, excludingExcluding the impact of sales price increases and acquisitions, decreased $66there was a $98 million (38(62 percent) from“organic” decline in net sales in the thirdfirst quarter of 2007,2009, as compared to the first quarter of 2008, primarily as a result of the 3861 percent decline in industry-wide wholesale shipments of travel trailers and fifth wheelfifth-wheel RVs in the thirdfirst quarter of 2008,2009, as well as a 1546 percent decline in industryindustry-wide wholesale shipmentsproduction of manufactured homes. In addition, 2008 third2009 first quarter sales were negatively affected by the 6278 percent decline in industry-wide wholesale shipments of motorhomes, and the severe industry-wide decline in sales of small and medium sizedmedium-sized boats, particularly on the West Coast, for which the Company supplies specialty trailers. |
DREW INDUSTRIES INCORPORATED
ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
For the remainder of 2008 and into 2009, the Company anticipates a weak economy, volatile fuel prices, low consumer confidence, a tight credit market, and continued weakness in the real estate and mortgage markets. All of these factors are expected to cause consumers to be extremely cautious, which in turn will likely impact the purchases of discretionary big-ticket items, such as RVs. In response to slow retail sales during 2008, RV manufacturers have significantly reduced their output, which has negatively affected the Company in 2008, and will likely continue into 2009.
| § | Net income for Partially offsetting the thirdindustry declines during the first quarter of 2008 decreased 77 percent from2009, the third quarter of 2007, primarily dueCompany continued to the decreaseachieve market share gains, led by recently-introduced products, in net salesparticular, suspension products, jack stabilizers and higher raw material costs.RV entry doors. |
| § | FacilityThe Company incurred a net loss in the first quarter of 2009 due to the sales decline, as well as: |
| · | A non-cash goodwill impairment charge of $45 million before taxes ($29 million after taxes, or $1.36 per diluted share). The non-cash goodwill impairment charge is largely the result of uncertainties in the economy, and in the RV and manufactured housing industries, as well as a substantial increase during the first quarter of 2009 in the discount rate used to determine the present value of projected cash flows. |
| · | Extra pre-tax expenses of $4.9 million, which increased the net loss by $3.0 million, or $0.14 per diluted share. These extra expenses were due to the unprecedented conditions in the RV and manufactured housing industries, and included increased bad debts, obsolete inventory and tooling, as well as costs related to plant consolidations and fixed overhead reductions improved operating profitstaff reductions. |
DREW INDUSTRIES INCORPORATED
ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
| § | During the first quarter of 2009, the Company generated solid cash flow, increasing cash by $6 million, to more than $14 million, and reducing total debt by more than $2 million, to $6 million. This was accomplished by reducing inventory by $19 million during the first quarter of 2009, which more than offset the seasonal increase in accounts receivable. The Company expects this strong cash flow to continue over the next several quarters, as the Company anticipates it will further reduce inventory levels by $15 million to $20 million in addition to the $19 million reduction in the third quarter of 2008 by approximately $1.1 million, compared to the third quarter of 2007, and are expected to improve operating profit by over $5 million for all of 2008 as compared to 2007. These fixed cost reductions are expected to further benefit 2009 operating profit as compared to 2008 by over $1 million.first quarter. |
| § | On July 1,For the balance of 2009, the Company anticipates a continuing weak economy, a tight credit market, low consumer confidence, an excess inventory of foreclosed site-built homes, and continued weakness in the real estate and mortgage markets. All of these factors are expected to cause consumers to be extremely cautious, which would likely impact the purchases of discretionary big-ticket items, such as RVs and manufactured homes. Because of slow retail sales, RV manufacturers and manufactured home producers significantly reduced their output, which negatively affected the Company in the latter half of 2008 Lippert acquired certain assets and the businessfirst quarter of Seating Technology, Inc.2009, and its affiliated companies (“Seating Technology”). Seating Technology had annual sales of $40 million in 2007. The purchase price was $28.4 million, which was financed from available cash. Seating Technology manufactures a wide variety of furniture products primarily for towable RVs, including folding sofas for toy hauler RVs, a full line of upholstered furniture, mattresses, decorative pillows, wood-backed valances and quilted soft good products. This acquisition has added an entirely new product linewill likely continue for the Company.balance of 2009. In response to the current economic environment, the Company has been extremely proactive, taking the following steps: |
| · | Reduced its workforce and production capacity to be more in line with anticipated demand. |
| · | Reduced fixed overhead costs. |
| · | Implemented synergies between the operations of Kinro and Lippert is in the process of closing two of Seating Technology's five leased facilities in Indiana,by combining certain administrative functions and consolidating those operations into existing facilities.sales efforts. |
These factors benefitted the Company’s operating results in the first quarter of 2009 by nearly $2 million, compared to the first quarter of 2008, and will benefit the full year 2009 operating results by nearly $9 million as compared to the full year 2008. These steps also lowered the Company’s breakeven sales level. Additional cost savings measures are expected to be implemented in 2009.
Further, the Company’s strong balance sheet, with minimal debt, and available production capacity, puts it in an excellent competitive position to take advantage of opportunities to increase market share and expand product lines.
| § | Steel and aluminum are among the Company’s principal raw materials. Since late 2007, the costcosts of steel and aluminum hashave been volatile. Assuming the cost of raw materials remains at the current escalated levels, the Company’s cost of sales would increase by approximately $40 million on an annualized basis. Althoughvolatile, and although the Company was able to raise sales prices, the higher cost raw materials, net of sales price increases, reduced 2008 third2009 first quarter earnings by approximately $0.06 to $0.08$0.02 per diluted share. Raw material costs have recently declined from their peak levels, largely due to the global economic downturn, but remain well above prior-year levels. However, the Company still has higher priced raw materials in inventory, which will adversely impact operating results for the fourthsecond quarter of 2008,2009, although the impact is estimatedexpected to be less than it was in the third quarter of 2008.modest. |
The Company has implemented sales price increases to customers to offset most of the effect of raw material cost increases. DREW INDUSTRIES INCORPORATED
ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
While the Company has historically been able to obtain sales price increases to almost fully 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. There also can be no assurance that the Company can maintain sales prices for higher priced raw materials currently in inventory. The Company also continues to explore improved product design, efficiency improvements, and alternative sources of raw materials and components, both domestic and imported.
DREW INDUSTRIES INCORPORATED
ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
RV Segment - Third Quarter
Net sales of the RV Segment in the thirdfirst quarter of 20082009 decreased 3358 percent, or $41$72 million, as compared to the thirdfirst quarter of 20072008 due to:
| · | An organic‘organic’ sales decline of approximately $51$77 million, or 4264 percent, of RV-related products. This 4264 percent decline was due largely to the 3861 percent decrease in industry-wide wholesale shipments of travel trailers and fifth wheelfifth-wheel RVs, the Company’s primary RV market. Industry-wideFifth-wheel RVs, which typically contain more of the Company’s products, declined 67 percent during the first quarter of 2009. Also, many of the towable RVs produced by the industry over the last several months have included fewer of the features and options ordinarily provided by the Company. In addition, industry-wide wholesale shipments of motorhomes, components for which represent about 53 percent of the Company’s RV segmentSegment net sales, were down 6278 percent during the thirdfirst quarter of 2008.2009. |
| · | An organic‘organic’ sales decline of approximately 70 percent or $3 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 acquisitions aggregating approximately $7$5 million. |
| · | Sales price increases of approximately $5$3 million, primarily due to raw material cost increases.increases in 2008. |
Because the Company’s stock price on the New York Stock Exchange was below its book value, and due to the continued declines in industry shipments of RVs, the Company conducted an impairment analysis of its goodwill in the first quarter of 2009. The fair value of each reporting unit was determined using a discounted cash flow model utilizing observable market data to the extent available, and the Company’s weighted average cost of capital of approximately 16.5 percent. Based on the analysis, the carrying value of the RV reporting units exceeded their fair value, and as a result, the Company recorded a non-cash impairment charge to write-off the entire $35.8 million of goodwill of these reporting units. 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 twelve months ended September 30,March 31, divided by the industry-wide wholesale shipments of the different types of RVs for the twelve months ended September 30,March 31, was as follows:
| | 2008 | | 2007 | | Percent Change |
Content per Travel Trailer and Fifth Wheel RVs | | $ | 1,889 | | $ | 1,673 | | 13% |
Content per Motorhomes | | $ | 554 | | $ | 403 | | 37% |
Content per all RVs | | $ | 1,528 | | $ | 1,295 | | 18% |
DREW INDUSTRIES INCORPORATED ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
| | 2009 | | | 2008 | | | Percent Change | |
Content per Travel Trailer and Fifth-Wheel RV | | $ | 1,943 | | | $ | 1,715 | | | | 13% | |
Content per Motorhome | | $ | 531 | | | $ | 463 | | | | 15% | |
Content per all RVs | | $ | 1,596 | | | $ | 1,353 | | | | 18% | |
The above product content per travel trailer and fifth wheel RV for the twelve months ended September 30, 2008March 31, 2009 includes historical sales results for acquisitions completed during that period, under the assumption the acquisitions had been completed at the beginning of that twelve-monthindicated twelve month period. Sales of certain RV components have been reclassified between travel trailer and fifth wheelfifth-wheel RVs, and motorhomes in prior periods.
According to the RVIA, industry production for the twelve months ended September 30,March 31, was as follows:
| | 2008 | | 2007 | | Percent Change |
Travel Trailer and Fifth Wheel RVs | | | 218,900 | | | 261,600 | | (16)% |
Motorhomes | | | 37,300 | | | 55,900 | | (33)% |
All RVs | | | 284,200 | | | 355,500 | | (20)% |
DREW INDUSTRIES INCORPORATED | | 2009 | | | 2008 | | | Percent Change | |
Travel Trailer and Fifth-Wheel RVs | | | 146,300 | | | | 256,100 | | | | (43)% | |
Motorhomes | | | 19,700 | | | | 51,800 | | | | (62)% | |
All RVs | | | 184,700 | | | | 342,400 | | | | (46)% | |
ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Operating profit of theThe RV Segment reported an operating loss of $4.7 million in the thirdfirst quarter of 2008 decreased 73 percent to $4.6 million2009, largely due to the decline in sales as well asand $2.9 million of extra expenses related to plant consolidations, staff reductions, increased bad debts, and obsolete inventory and tooling. Excluding these extra expenses, the Company’s RV Segment had an operating loss of $1.8 million in the first quarter of 2009, a decrease of 8.0 percent$16.1 million from the segment operating profit of $14.3 million in the operating profit margin to 5.4 percent of net sales in the third quarter of 2008 from 13.4 percent of net sales in the third quarter of 2007. Excluding sales price increases, thesame period last year. This adjusted decline in RV Segment operating profitresults was 2620 percent of the ‘organic’ decline in net sales, which is higher than weconsistent with what the Company would typically expect, largely due to the impact of increased raw material costs.expect.
The operating profit margin of the RV Segment in the thirdfirst quarter of 20082009 was adversely impacted by:
| · | Higher raw material costs. |
| · | Labor inefficiencies due to the sharp drop in sales. |
| · | The spreading of fixed manufacturing costs over a smaller sales base. |
| · | Higher warranty, workers compensation and 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 have already been gained. |
| · | An increase in selling, general and administrative expenses to 12.516.6 percent of net sales in the thirdfirst quarter of 20082009 from 11.011.9 percent of net sales in the thirdfirst quarter of 2007,2008, 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. ThisIn the first quarter of 2009 there was partially offset by lowerno incentive compensation as a percent of net salesrecorded due to reducedthe operating profit margins.loss. |
Partially offsetOffset by:
| · | Implementation of cost-cutting measures. |
| · | Lower overtime, supplies and repair costs. |
DREW INDUSTRIES INCORPORATED
ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
During the continued downturn in industry shipments of RVs and small and medium sized boats, during the thirdfirst quarter of 2008,2009, the Company conducted anreviewed the recoverability of other intangible assets and other long-lived assets in this segment, and determined that there was no impairment. However, the Company will continue to monitor these assets for potential impairment, analysis on these operations. The estimated fair value of these operations currently exceeds the corresponding book values, thus no impairment has been recorded. However,as a continued downturn in thesethe RV or marine and leisure industries, in particular small and medium sized boats, or in the profitability of the Company’s operations, could result in a non-cash impairment charge for goodwill and other intangibleof these assets in the future. At September 30, 2008, the Company had $10.7 million of goodwill and other intangible assets related to its marine and leisure operation, which sells trailers and axles for small and medium sized boats.
RV Segment - Year to Date
Net sales of the RV Segment in the first nine months of 2008 decreased 18 percent, or $69 million, as compared to the same period in 2007 due to:
| · | An organic sales decline of approximately $82 million, or 22 percent, of RV related products. This 22 percent decline was due largely to the 21 percent decrease in industry-wide wholesale shipments of travel trailers and fifth wheel RVs. Industry-wide wholesale shipments of motorhomes, components for which represent about 5 percent of the Company’s RV segment net sales, were down 42 percent during the first nine months of 2008. |
DREW INDUSTRIES INCORPORATED
ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
| · | An organic sales decline of approximately $11 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 2007 and 2008 acquisitions aggregating approximately $15 million. |
| · | Sales price increases of approximately $9 million, primarily due to raw material cost increases. |
Operating profit of the RV Segment in the first nine months of 2008 decreased 40 percent to $31.8 million due to the decline in sales, as well as a decrease of 3.7 percent in the operating profit margin to 9.9 percent of net sales in the first nine months of 2008 from 13.6 percent of net sales in the comparable period of 2007.
The operating profit margin of the RV Segment in the first nine months of 2008 was adversely impacted by:
| · | Higher raw material costs. |
| · | Labor inefficiencies due to the sharp drop in sales. |
| · | The spreading of fixed manufacturing costs over a smaller sales base. |
| · | Higher health insurance costs. |
| · | An increase in selling, general and administrative expenses to 12.1 percent of net sales in the first nine months of 2008 from 11.1 percent of net sales in the same period of 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 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 - Third Quarter
Net sales of the MH Segment in the thirdfirst quarter of 20082009 decreased 1747 percent, or $8$16 million, from the thirdfirst quarter of 2007.2008. Excluding $4$2 million in sales price increases, net sales of the MH Segment declined 2652 percent, compared to a 1546 percent decrease in industry-wide production of manufactured homes. The organic$18 million ‘organic’ decrease in sales of the Company’s MH Segment was greater than the manufactured housing industry decline due partly to a reduction in the average size of the homes produced by the manufactured housing industry, which require less of the Company’s products, a decline in modular and office units, and partly due to business the Company exited in the latter half of 2007 because of inadequate margins. The Company recently received an order to supply certain components for more than 2,500 park model homes being purchased by FEMA. This should result in incremental sales in excess of $5 million through early 2009.
DREW INDUSTRIES INCORPORATEDcustomer mix.
ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OFMH Segment sales in the 2009 first quarter included $1 million of components for homes purchased by the Federal Emergency Management Agency (“FEMA”). The Company expects approximately $3 million to $4 million of additional FEMA-related sales in the second and third quarters of 2009.
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Because the Company’s stock price on the New York Stock Exchange was below its book value, and due to the continued declines in industry shipments of manufactured homes, the Company conducted an impairment analysis of its goodwill in the first quarter of 2009. The fair value of each reporting unit was determined using a discounted cash flow model utilizing observable market data to the extent available, and the Company’s weighted average cost of capital of approximately 16.5 percent. Based on the analysis, the carrying value of the manufactured housing reporting units exceeded their fair value, and as a result, the Company recorded a non-cash impairment charge to write-off the entire $9.3 million of goodwill of these reporting units. The goodwill impairment charge is reported in Other non-segment items.
The trend in the Company’s average product content per manufactured home is an indicator of the Company’s overall market share. Manufactured homes contain one or more “floors” or sections which can be joined to make larger homes. Content per manufactured home and content per floor is also impacted by changes in selling prices for the Company’s products. The Company’s average product content per manufactured home produced by the industry and total manufactured home floors produced by the industry, calculated based upon the Company’s net sales of components for manufactured homes for the twelve months ended September 30,March 31, divided by the number of manufactured homes and manufactured home floors produced by the industry, respectively, for the twelve months ended September 30,March 31, was as follows:
| | 2008 | | 2007 | | Percent Change |
Content per Home Produced | | $ | 1,603 | | $ | 1,826 | | (12)% |
Content per Floor Produced | | $ | 961 | | $ | 1,056 | | (9)% |
| | 2009 | | | 2008 | | | Percent Change | |
Content per Home Produced | | $ | 1,653 | | | $ | 1,680 | | | | (2)% | |
Content per Floor Produced | | $ | 1,003 | | | $ | 993 | | | | 1% | |
According to the IBTS, industry production for the twelve months ended September 30,March 31, was as follows:
| | 2008 | | 2007 | | Percent Change |
Total Homes Produced | | | 88,400 | | | 96,500 | | (8)% |
Total Floors Produced | | | 147,400 | | | 166,900 | | (12)% |
| | 2009 | | | 2008 | | | Percent Change | |
Total Homes Produced | | | 72,400 | | | | 95,100 | | | | (24)% | |
Total Floors Produced | | | 119,300 | | | | 161,000 | | | | (26)% | |
DREW INDUSTRIES INCORPORATED
ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Operating profit of theThe MH Segment reported an operating loss of $2.0 million in the thirdfirst quarter of 2008 decreased 3 percent to $3.9 million primarily2009, largely due to the impactdecline in sales and $0.6 million of extra expenses related to plant consolidations, staff reductions, and obsolete inventory. Excluding these extra expenses, the Company’s MH Segment had an operating loss of $1.4 million in the first quarter of 2009, a decrease of $3.9 million from the segment operating profit of $2.5 million in the same period last year. The adjusted decline in MH Segment operating results was 22 percent of the decrease‘organic’ decline in net sales, partially offset by an increase inconsistent with what the operating profit margin to 10.1 percent of net sales in the third quarter of 2008, compared to 8.7 percent of net sales in the third quarter of 2007.Company would typically expect.
The operating profit margin of the MH Segment in the thirdfirst quarter of 20082009 was positively impacted by:
| · | The elimination of certain low margin business exited in the latter half of 2007. |
| · | Improved production efficiencies. |
Partially offset by:
| · | The spreading of fixed manufacturing costs over a smaller sales base. |
| · | Labor inefficiencies due to the sharp drop in sales. |
| · | Higher health insurance costs. |
| · | An increase in selling, general and administrative expenses to 16.022.8 percent of net sales in the thirdfirst quarter of 20082009 from 14.315.5 percent of net sales in thirdthe first quarter of 20072008 due largely to higher fuel and delivery costs as a percent of net sales,an increase in bad debt expense, as well as the spreading of fixed administrative costs over a smaller sales base. In the first quarter of 2009 there was no incentive compensation recorded due to the operating loss. |
Offset by:
| · | Implementation of cost-cutting measures. |
As a result ofDuring the continued downturn in industry shipments of manufactured homes, during the thirdfirst quarter of 2008,2009, the Company conducted anreviewed the recoverability of other intangible assets and other long-lived assets in this segment, and determined that there was no impairment. However, the Company will continue to monitor these assets for potential impairment, analysis on this operation. The estimated fair value of this operation currently exceeds the corresponding book value, thus no impairment has been recorded. However,as a continued downturn in the manufactured housing industry, or in the profitability of the Company’s operations, could result in a non-cash impairment charge for goodwill and other intangibleof these assets in the future.
MH Segment - Year to Date
Net sales of the MH Segment in the first nine months of 2008 decreased 20 percent, or $28 million, from the same period in 2007. Excluding $9 million in sales price increases, net sales of the MH Segment declined 26 percent, compared to a 10 percent decrease in industry-wide production 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.
DREW INDUSTRIES INCORPORATED
ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Operating profit of the MH Segment in the first nine months of 2008 decreased 10 percent to $11.0 million primarily due to the impact of the decrease in net sales, partially offset by an increase in the operating profit margin to 9.7 percent of net sales in the first nine months of 2008, compared to 8.6 percent of net sales in the same period of 2007.
The operating profit margin of the MH Segment in the first nine months of 2008 was positively impacted by:
| · | The elimination of certain low margin business exited in the latter half of 2007. |
| · | Improved production efficiencies. |
Partially offset 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 15.7 percent of net sales in the first nine months of 2008 from 14.3 percent of net sales in same period of 2007 due to higher fuel and delivery costs as a percent of net sales, as well as the spreading of fixed costs over a smaller sales base. |
Corporate
Corporate expenses for both the first nine months and thirdquarter of 2009 decreased $0.4 million compared to the first quarter of 2008 were consistent with the same periodsdue primarily to a decrease in incentive-based compensation as a result of 2007.
Other Itemslower profits, as well as other cost reductions.
Other non-segment items is comprised of certain income and expenses that are part of consolidated operating income which the Company does not include in the analysis of segment operating results, as follows:
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 noteNote was initially recorded net of a reserve of $3.4 million. In both January 2008, and 2007, the Company received a scheduled paymentspayment of principal and interest of $0.8 million, which had been previously fully reserved. Therefore,reserved, and therefore recorded a pre-tax gain. The Company did not receive the final scheduled payment in January 2009; however, in both February and March 2009 the Company received principal payments of $0.1 million, which were previously fully reserved, and therefore recorded a pre-tax gain of $0.7 million in$0.2 million. The Company is currently attempting to collect the first nine monthsbalance due of both 2008 and 2007. The balance of the note is $1.0 million at September 30, 2008, which is fully reserved. Final payment on the note is due in January 2009.$0.8 million.
DREW INDUSTRIES INCORPORATED
ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
In addition, otherOther non-segment items include the following for the three months ended March 31, (in thousands):
| | Nine Months Ended | | Three Months Ended | |
| | September 30, | | September 30, | |
| | 2008 | | 2007 | | 2008 | | 2007 | |
Cost of sales: | | | | | | | | | |
Other | | $ | - | | $ | (236 | ) | $ | - | | $ | - | |
Selling, general and administrative expenses: | | | | | | | | | | | | | |
Legal proceedings | | | 1,382 | | | 1,048 | | | 530 | | | 698 | |
(Gain) on sold facilities | | | (3,523 | ) | | (1,279 | ) | | (248 | ) | | (1,050 | ) |
Loss on sold facilities and write- | | | | | | | | | | | | | |
downs to estimated current market | | | | | | | | | | | | | |
value of facilities to be sold | | | 1,005 | | | 2,080 | | | 558 | | | 160 | |
Other | | | - | | | (5 | ) | | - | | | (4 | ) |
Incentive compensation impact of | | | | | | | | | | | | | |
above items | | | 250 | | | (227 | ) | | (123 | ) | | 52 | |
| | $ | (886 | ) | $ | 1,381 | | $ | 717 | | $ | (144 | ) |
| | 2009 | | | 2008 | |
| | | | | | |
Selling, general and administrative expenses: | | | | | | |
Legal proceedings | | | 293 | | | | 355 | |
Gain on sold facilities | | | - | | | | (1,194 | ) |
Loss on sold facilities and write-downs to estimated current fair value of facilities to be sold | | | 1,249 | | | | 145 | |
Other | | | 278 | | | | - | |
Incentive compensation impact of other non-segment items | | | - | | | | 238 | |
Other (income) from the collection of the previously reserved Note | | | (200 | ) | | | (760 | ) |
| | $ | 1,620 | | | $ | (1,216 | ) |
Effective in the third quarter of 2008, gains or losses on sold manufacturing facilities and charges for write-downs to estimated current marketfair value of manufacturing facilities to be sold have been reclassifiedreclassified from cost of goods sold to selling, general, and administrative expenses in the condensed consolidated statementsConsolidated Statements of income.Operations. Prior periods have been reclassified to conform to this presentationpresentation..
Taxes
The effective tax rate for the first nine months of 2008 was 39.3 percent, compared to 38.1 percent in the first nine monthsquarter of 2007.2009 was 35.0 percent, which is a combination of a 34.8 percent rate on the goodwill impairment charge, and a 35.9 percent rate on the remaining operating results. A portion of the goodwill impairment charge is not deductible for tax purposes, thus lowering the tax benefit recorded. The effective tax35.9 percent rate on the remaining operations was lower than the 38.6 percent rate for all of 2008, as the thirdtax benefit on the losses incurred in the first quarter of 20082009 was 38.4 percent as compared to 37.5 percent for the third quarter of 2007. The effective tax rate for the full year 2007 was 37.2 percent. The increase in the effective tax rate for both the nine months and three months ended September 30, 2008 as compared to the same periods in 2007 was due primarily to the estimated annual effect of lower profits on state and federal tax rates as well as by a change in pre-tax income between legal entities and states, partiallyslightly offset by the expirationeffect of statutes of limitations for certain statepermanent tax differences and federal tax returns, and the completion of a 2005 federal tax audit with noreserve adjustments.
Interest Expense, Net
The $1.4 million and $0.1 million decreaseincrease in interest expense, net, for the first nine months and third quarter of 2008, respectively, as compared to the same periods in 2007,2009, was primarily due to a decrease in the average debt levels as a result of strong operating cash flows, which more than offset the $31 million the Company has invested in acquisitions during the last 12 months. In addition, for the first nine months of 2008, the Company earned $0.5 million inlower interest income.
DREW INDUSTRIES INCORPORATED
ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
LIQUIDITY AND CAPITAL RESOURCES
The Statements of Cash Flows reflect the following for the ninethree months ended September 30, March 31, (in thousands):
| | 2008 | | 2007 | |
Net cash flows (used for) provided by operating activities | | $ | (3,508 | ) | $ | 61,138 | |
Net cash flows used for investing activities | | $ | (25,111 | ) | $ | (15,595 | ) |
Net cash flows used for financing activities | | $ | (18,409 | ) | $ | (8,684 | ) |
| | 2009 | | | 2008 | |
Net cash flows provided by (used for) operating activities | | $ | 8,374 | | | $ | (6,113 | ) |
Net cash flows (used for) provided by investment activities | | $ | (467 | ) | | $ | 3,165 | |
Net cash flows used for financing activities | | $ | (2,273 | ) | | $ | (2,851 | ) |
DREW INDUSTRIES INCORPORATED
ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Cash Flows from Operations
Net cash flows from operating activities in the first nine monthsquarter of 20082009 were $64.6$14.5 million lessbetter than in the same period in 2007,first quarter of 2008, primarily as a result of (i) lower net incomeinventories in the first quarter of 2009 due to a significant reduction in inventory purchases and (ii) a smaller seasonal increase in accounts receivable due to the decline in sales, partially offset by lower after-tax operating results in the first quarter of 2009 and a smaller seasonal increase in accounts payable. Inventories increased inventories in 2008 due to the Company’s strategic purchase of raw materials in advance of price increases, andas well as higher priced raw materials in inventory. During the first quarter of 2009, the Company reduced inventory as well as the timing of payments for inventory purchases. This was partially offset by a smaller seasonal increase in accounts receivable due to the decline in sales. The Company$19 million and expects to lower inventory over the balance of 2009 by year endan additional $15 million to $20 million through consumption of higher priced inventory on hand, and reduced inventory purchases. In 2007, the seasonal increase in inventory was mitigated by management’s efforts to reduce inventory levels.
Depreciation and amortization which was $17.6$5.1 million in the 2009 first quarter, including $0.8 million of extra expenses related to tooling, and are expected to aggregate $17 million to $18 million in 2009. In addition, non-cash stock-based compensation was $1.4 million in the first quarter of 2009, and is expected to be nearly $4 million for the full year in 2007, is expected to be approximately $17 million for the full year in 2008.year.
Cash Flows from Investing Activities
Cash flows used for investing activities of $25.1$0.5 million in the first ninequarter of 2009 consisted primarily of capital expenditures. Capital expenditures for 2009 are expected to be approximately $4 million, and are expected to be funded by cash flows from operations.
At March 31, 2009, the Company had seven facilities and vacant land listed for sale, with an aggregate carrying value of $8.9 million. One of these facilities, with a carrying value of $0.5 million, was sold at a gain of $0.1 million in April 2009, and another facility is under contract to be sold in the second quarter at its carrying value of $0.4 million. In April 2009, the Company entered into a two year lease at $25,000 per month for one of these facilities, which has a carrying value of $3.0 million. This lease also contains an option for the lessee to purchase the facility for $3.4 million.
Cash flows provided by investing activities of $3.2 million in the first three months of 2008 included $31.6 million for an acquisition of a business and other investments, which was financed from available cash.
On July 1, 2008, Lippert acquired certain assets and the business of Seating Technology, Inc. and its affiliated companies (“Seating Technology”). Seating Technology had annual sales of $40 million in 2007. The purchase price was $28.4 million, which was financed from available cash. The purchase price will be adjusted for changes in working capital as of the closing date.
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 $3.0 million, which was financed from available cash.
In addition, cash flows from investing activities included proceeds of $9.8$4.4 million received from the sale of fixed assets in connection with the Company’s consolidation of production operations, partially offset by $3.3$1.2 million for capital expenditures. Capital expenditures were financed with available cash. Capital expenditures for 2008 are anticipated to be less than $5 million and are expected to be funded by cash flows from operations.
At September 30, 2008, the Company had five vacant facilities and vacant land listed for sale, with an aggregate book value of $3.7 million. Three of the facilities with a book value of $1.1 million are under contract to be sold in the fourth quarter at book value.
DREW INDUSTRIES INCORPORATED
ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Cash flows used for investing activities of $15.6 million in the first nine months of 2007 include $17.3 million for the acquisition of businesses and $7.5 million for capital expenditures, partially offset by proceeds of $9.2 million received from the sale of fixed assets. Capital expenditures and the acquisitions were financed with borrowings under the Company’s line of credit and cash flows from operations.
Cash Flows from Financing Activities
Cash flows used for financing activities for the first nine monthsquarter of 2009 and 2008 of $18.4 million were primarily due to debt payments of $10.2$2.3 million and the purchase of treasury stock of $8.3 million.
Cash flows used for financing activities for the first nine months of 2007 of $8.7$2.9 million, included a net decrease in debt of $13.0 million, partially offset by cash flows provided by the exercise of employee stock options of $4.4 million, which includes the related tax benefits. The decrease in debt wasrespectively, were primarily due to net debt payments of $13.3 million.payments.
At September 30, 2008, the Company had $7.5March 31, 2009, all but $0.1 million of the Company’s cash investedbalances were in U.S. Treasuryfully FDIC insured accounts. Investments of $46.2 million at March 31, 2008, were in high-quality, short-term money market instruments with a current yield of approximately 1 percent. At September 30, 2007,issued and payable in U.S funds.
DREW INDUSTRIES INCORPORATED
ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
On November 25, 2008, the Company had $40.8 million invested in tax free municipal money market funds.
Borrowings under the Company’s $70.0entered into an agreement (the “Credit Agreement”) for a $50.0 million line of credit at September 30, 2008 were $5.0 million.with JPMorgan Chase Bank, N.A., and Wells Fargo Bank N.A. (collectively, the “Lenders”). The maximum borrowings under the Company’s excess cash was not used to pay down theseline 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 these borrowings are associated with aneither the Prime Rate, but not less than 2.5 percent, plus additional interest rate swap which results in a favorable fixedup to 0.8 percent (0 percent at March 31, 2009), or LIBOR plus additional interest rate of 4.4 percent.ranging from 2.0 percent to 2.8 percent (2.0 percent at March 31, 2009) depending on the Company’s performance and financial condition. The Credit Agreement expires December 1, 2011. At March 31, 2009, the Company also had $6.8$7.6 million in outstanding letters of credit under the line of credit. Availability under
Simultaneously, the Company’s line of credit was $58.2 million at September 30, 2008. Such availability, along with available cash and anticipated cash flows from operations, is expected to be adequate to finance the Company’s anticipated working capital and anticipated capital expenditure requirements. The maximum borrowings under the line of credit can be increased by an additional $20.0 million, upon approval of the Lenders. The Credit Agreement expires June 30, 2009, and as such, the $5.0 million of borrowings under the line of credit are classified as current debt in the balance sheet. The Company expects to enterentered into a new $50.0 million long-term borrowing arrangement with JPMorganChase and Wells Fargo by the end of November 2008.
The Company has a $60$125.0 million “shelf-loan” facility with Prudential Investment Management, Inc., and its affiliates (“Prudential”) under which the Company had borrowed $35.0 million,, of which $7.0$5.0 million wasis outstanding at September 30, 2008. PursuantMarch 31, 2009. The facility provides for Prudential to the terms of the shelf-loan facility, the Company can issue, and Prudential’s affiliates may 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 an additional $25.0$125.0 million, to mature no more than seventwelve years after the date of original issue of each transaction.Note. Prudential and its affiliates havehas no obligation to purchase the additional Senior Promissory Notes. Interest payable on the 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 on June 13, 2009. Simultaneous withNovember 25, 2011.
Both the completionline of credit pursuant to the new long-term borrowing arrangement with JPMorganChaseCredit Agreement and Wells Fargo, the Company expectsshelf-loan facility are subject to complete an increase in its uncommitted “shelf-loan” facility with Prudentiala maximum leverage ratio covenant which limits the amount of consolidated outstanding indebtedness to 2.5 times the trailing twelve-month EBITDA; provided however, that if the Company’s trailing twelve-month EBITDA declines to less than $50 million, the maximum leverage ratio covenant declines to 1.25 times the trailing twelve-month EBITDA. Since the Company’s trailing twelve-month EBITDA declined to less than $50 million at March 31, 2009, the maximum leverage ratio covenant limits the remaining availability under these facilities collectively to $23.3 million. However, due to the current cash position, and the cash expected to be generated over the balance of 2009, it is anticipated that this restriction will not affect the Company. Available cash and anticipated cash flows from $25.0 millionoperations is expected to $125.0 million.be adequate to finance the Company’s anticipated working capital and capital expenditure requirements.
At September 30, 2008,March 31, 2009, the Company was in compliance with all of its debt covenants and expects to remain in compliance for the next twelve months. Certain of the Company’s loan agreements contain prepayment penalties.
DREW INDUSTRIES INCORPORATED
ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
On November 29, 2007 the Board of Directors authorized the Company to repurchase up to 1 million shares of the Company’s Common Stock.Stock, of which 447,400 shares were repurchased in 2008. The Company is authorized to purchase shares from time to time in the open market, or privately negotiated transactions, or block trades. DuringThe number of shares ultimately repurchased, and the third quartertiming of 2008,the purchases, will depend upon market conditions, share price, and other factors. At present, due to current economic conditions, the Company repurchased 250,000 shares at an average cost of $15.38 per share, or $3.9 million in total. During the nine months ended September 30, 2008,believes it is prudent to conserve cash, and does not intend to repurchase shares. However, changing conditions may cause the Company repurchased a total of 447,400 shares at an aggregate cost of $8.3 million, or an average price $18.58 per share. The repurchases were funded from the Company’s available cash.to reconsider this position.
CORPORATE GOVERNANCE
The Company is in compliance with the corporate governance requirements of the Securities and Exchange Commission 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.comwww.drewindustries.com) and are updated periodically. The website also contains, or provides direct links to, all SEC filings, press releases and investor presentations. The Company has also established a toll-free hotline (877-373-9123) to report complaints about the Company’s accounting, internal controls, auditing matters or other concerns.
DREW INDUSTRIES INCORPORATED
ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
CONTINGENCIES
Additional information required by this item is included under Item 1 of Part II of this quarterly report on Form 10-Q.
INFLATION
The prices of key raw materials, consisting primarily of steel, vinyl, aluminum, glass and ABS resin, are influenced by demand and other factors specific to these commodities, such as the price of oil, rather than being directly affected by inflationary pressures. Prices of certain commodities have historically been volatile. The cost of certain raw materials has increased 25 to 100 percent or more in 2008; only declining somewhat from these historical highs in recent weeks. The Company did not experience any significant increase in its labor costs in the thirdfirst quarter of 20082009 related to inflation.
NEW ACCOUNTING PRONOUNCEMENTS
In September 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”)SFAS No. 157, “Fair Value Measurements”, which establishes a framework for reporting fair value and expands disclosures about fair value measurements. The provisions of SFAS No. 157 are effective for fiscal years beginning after November 15, 2007. However, the FASB deferred the effective date of SFAS No. 157, until fiscal years beginning after November 15, 2008, as it relates to fair value measurement requirements for non-financialnonfinancial assets and liabilities that are not remeasured at fair value on a recurring basis. The adoptionAdoption of the applicable portionsprovisions of this standard on January 1, 2009 and 2008, respectively, did not have a material impact on the Company, and the balance of the standard is not expected to have a material impact on the Company.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment of FASB Statement No. 115.” SFAS No. 159 permits companies to choose to measure many financial instruments and certain other items at fair value at specified election dates, and report unrealized gains and losses on items for which the fair value option has been elected in earnings. The provisions of SFAS No. 159 are effective for fiscal years beginning after November 15, 2007. The Company has elected not to measure any financial instruments or other items at fair value, and as such the adoption of this standard did not have an impact on the Company.
DREW INDUSTRIES INCORPORATED
ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations.”Combinations”. SFAS No. 141(R) requires assets acquired and liabilities assumed in connection with a business combination to be measured at fair value as of the acquisition date, acquisition related costs incurred prior to the acquisition to be expensed, and contractual contingencies to be recognized at fair value as of the acquisition date. The provisions of SFAS No. 141(R) are effective for fiscal years beginning after December 15, 2008. The Company is currently evaluatingadoption of this standard on January 1, 2009 did not have a material impact on the impact of adopting this standard.Company.
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-insuranceself insurance obligations, lease terminations, asset retirement obligations, long-lived assets, post-retirement benefits, stock-based compensation, segment allocations, and contingencies and litigation. The Company bases its estimates on historical experience, other available information and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other resources. Actual results may differ from these estimates under different assumptions or conditions.
DREW INDUSTRIES INCORPORATED
ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
During the first quarter of 2009, the Company reviewed the recoverability of other intangible assets and other long-lived assets, and determined that there was no impairment. However, the Company will continue to monitor these assets for potential impairment, as a continued downturn in the RV, marine and leisure or manufactured housing industries, or in the profitability of the Company’s operations, could result in a non-cash impairment charge of these assets in the future.
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
This Form 10-Q may containcontains certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to financial condition, results of operations, business strategies, operating efficiencies or synergies, competitive position, growth opportunities for existing products, plans and objectives of management, markets for the Company’s common stock and other matters. Statements in this Form 10-Q that are not historical facts are “forward-looking statements” for the purpose of the safe harbor provided by Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”) and Section 27A of the Securities Act of 1933 (the “Securities Act”).
Forward-looking statements, including, without limitation, those relating to our future business prospects, revenues, expenses and income (loss), whenever they occur in this Form 10-Q are necessarily estimates reflecting the best judgment of our senior management at the time such statements were made, and involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by forward-looking statements. The Company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made. You should consider forward-looking statements, therefore, in light of various important factors, as identifiedincluding those set forth in ourthis Form 10-K for the year ended December 31, 2007,10-Q, and in our subsequent Form 10-Qs filed with the SEC.Securities and Exchange Commission (“SEC”).
DREW INDUSTRIES INCORPORATED
ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
There are a number of factors, many of which are beyond the Company’s control, which could cause actual results and events to differ materially from those described in the forward-looking statements. These factors include, in addition to other matters described in this Form 10-Q, pricing pressures due to domestic and foreign competition, costs and availability of raw materials (particularly steel and related components, vinyl, aluminum, glass and ABS resin), availability of credit for financing the retail and wholesale purchase of manufactured homes and recreational vehicles, availability and costs of labor, inventory levels of retailers and manufacturers, levels of repossessed manufactured homes and RVs, the disposition into the market by FEMA,the Federal Emergency Management Agency (“FEMA”), by sale or otherwise, of RVs or manufactured homes purchased by FEMA, in connection with natural disasters, changes in zoning regulations for manufactured homes, acontinuing sales decline 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 pending litigation, and adverse weather conditions impacting retail sales.litigation. In addition, national and regional economic conditions and consumer confidence may affect the retail sale of recreational vehiclesRVs and manufactured homes.
DREW INDUSTRIES INCORPORATED
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
| Item 3.
| QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
The Company is exposed to changes in interest rates primarily as a result of its financing activities.
On October 18, 2004, the Company entered into a five-year interest rate swap with KeyBank National Association with an initial notional amount of $20.0 million from which it will receive periodic payments at the 3 month LIBOR rate (2.804 percent at September 30, 2008 based upon the August 15, 2008 reset date), and make periodic payments at a fixed rate of 3.35 percent, with settlement and rate reset dates every November 15, February 15, May 15 and August 15. The notional amount of the interest rate swap decreases by $1.0 million on each quarterly reset date. At September 30, 2008, the notional amount was $5.0 million. The fair value of the swap was zero at inception and ($7,000) at September 30, 2008. The Company has designated this swap as a cash flow hedge of certain borrowings under the line of credit and recognized the effective portion of the change in fair value as part of other comprehensive (loss) income, with the ineffective portion, which was insignificant, recognized in earnings currently.
At September 30, 2008,March 31, 2009, the Company had $11.1$5.5 million of fixed rate debt plus $5.0 million outstanding under the line of credit associated with the interest rate swap.outstanding. Assuming there is a decrease of 100 basis points in the interest rate for borrowings of a similar nature subsequent to September 30, 2008,March 31, 2009, which the Company becomes unable to capitalize on in the short-term as a result of the structure of its fixed rate financing, future cash flows would be $0.2$0.1 million lower per annum than if the fixed rate financing could be obtained at current market rates.
At September 30, 2008,March 31, 2009, the Company had $1.0$0.9 million of variable rate debt excluding the $5.0 million outstanding under the line of credit associated with the interest rate swap.outstanding. Assuming there is an increase of 100 basis points in the interest rate for borrowings under these variable rate loans subsequent to September 30, 2008,March 31, 2009, and outstanding borrowings of $1.0 million, future cash flows would be reduced by less than $0.1 million per annum.
At September 30, 2008, the Company had $7.5 million of temporary investments in U.S. Treasury short-term money market instruments with a current yield of approximately 1 percent. Assuming there is a decrease of 100 basis points in the interest rate for these variable rate investments subsequent to September 30, 2008, and total investments of $7.5$0.9 million, future cash flows would be reduced by less than $0.1 million per annum.
If the actual change in interest rates is substantially different than 100 basis points, or the outstanding balancesborrowings change significantly, the net impact of interest rate risk on the Company’s cash flow may be materially different than that disclosed above.
Additional information required by this item is included under the caption “Inflation” in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of this Report.
DREW INDUSTRIES INCORPORATED
| Item 4.
| Item 4. CONTROLS AND PROCEDURES |
| a) | Evaluation of Disclosure Controls and Procedures |
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer President, 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 system of internaldisclosure controls over financial reportingand procedures to determine if changes are appropriate based upon changes in the Company’s operations or the business environment in which it operates.
As of the end of the period covered by this Form 10-Q, the Company performed an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer the Company’s President, 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 President and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this Form 10-Q.effective.
| b) | Changes in Internal Controls |
There were no changes in the Company’s internal controls over financial reporting during the quarter ended September 30, 2008March 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 controlscontrol over financial reporting.
During 2005, one of the Company’s subsidiariesLippert installed new computerenterprise resource planning (“ERP”) software and subsequently implemented certain functions of the newERP software. Over the last few years, the internal controls of the CompanyLippert have incrementally been strengthened due both to both the newERP software and business process changes. In the second quarter of 2009, the Company anticipates that it will begin to implement certain functions of the ERP software and business process changes for Kinro. The Company also anticipates that it will continue to implement certain additional functionalities of the new computerERP software at both Lippert and Kinro to further strengthen the Company’s internal controls.control.
DREW INDUSTRIES INCORPORATED
PART II – OTHER INFORMATION
PART II - OTHER INFORMATION
Item 1 -– LEGAL PROCEEDINGS
On or about January 3, 2007, an action was commenced in the United States District Court, Central District of California entitled Gonzalez vs. Drew Industries Incorporated, Kinro, Inc., Kinro Texas Limited Partnership d/b/a Better Bath Components; Skyline Corporation, and Skylines Homes, Inc. (Case No. CV06-08233). The case purports to be a class action on behalf of the named plaintiff and all others similarly situated in California. Plaintiff initially alleged, but has not sought certification of, a national class.
On April 1, 2008, the Court issued an order granting Drew’s motion to dismiss for lack of personal jurisdiction, resulting in the dismissal of Drew Industries Incorporated as one of the defendants in the case.
Plaintiff alleges that certain bathtubs manufactured by Kinro Texas Limited Partnership, a subsidiary of Kinro, Inc., and sold under the name “Better Bath” for use in manufactured homes, fail to comply with certain safety standards relating to flame spread established by the United States Department of Housing and Urban Development (“HUD”). Plaintiff alleges, among other things, that sale of these products is in violation of various provisions of the California Consumers Legal Remedies Act (Sec. 1770 et seq.), the Magnuson-Moss Warranty Act (Sec. 2301 et seq.), and the California Song-Beverly Consumer Warranty Act (Sec. 1790 et seq.).
Plaintiff seeks to require defendants to notify members of the class of the allegations in the proceeding and the claims made, to repair or replace the allegedly defective products, to reimburse members of the class for repair, replacement and consequential costs, to cease the sale and distribution of the allegedly defective products, and to pay actual and punitive damages and plaintiff’s attorneys fees.
On January 29, 2008, the Court issued an Order denying certification of a class with plaintiff Gonzalez as the class representative. The Court ruled that plaintiff may not be an appropriate class representative for injunctive relief because her bathtub had been replaced. The Court granted plaintiff leave to amend the complaint to add a different plaintiff.
On March 10, 2008, plaintiff amended her complaint to include an additional plaintiff, Robert Royalty. Plaintiff Royalty states that his bathtub was not tested to determine whether it complies with HUD standards. Rather, his allegations are based on “information and belief”, including the testing of plaintiff Gonzalez’s bathtub and other evidence. Kinro denies plaintiff Royalty’s allegations, and intends to continue its vigorous defense against both plaintiffs’ claims.
On June 25, 2008, plaintiffs filed a renewed motion for class certification. On October 20, 2008, the Court again denied certification of a class, without prejudice, which allowsallowed plaintiffs to file a new motion for certification if plaintiffs are able to satisfy the Court’s concerns over the viability of plaintiffs’ case. Plaintiffs filed a third motion for class certification on December 23, 2008. Defendants’ initial motion seeking summary judgment against plaintiffs’ case, which was withdrawn pending further discovery, will bewas supplemented and refiled in Novemberon December 23, 2008. A hearing on these motions was held on March 2, 2009, but a decision by the court has not yet been received.
Defendant Kinro has conducted a comprehensive investigation of the allegations made in connection with the claims, including with respect to the HUD safety standards, prior test results, testing procedures, and the use of labels. In addition, at Kinro’s initiative, independent laboratories conducted multiple tests on materials used by Kinro in the manufacture of bathtubs, the results of which tests indicate that Kinro’s bathtubs are in compliance with HUD regulations.
Although discovery by plaintiffs and by defendants is continuing, at this point, based
Based on the foregoing investigation and testing, Kinro believes that plaintiffs may not be able to prove the essential elements of their claims, and defendants intend to vigorously defend against the claimsclaims.
Moreover, Kinro believes that, because test results received by Kinro confirm that it is in compliance with HUD safety standards, no remedial action is required or appropriate.
In October 2007, the parties participated in voluntary non-binding mediation in an effort to reach a settlement. Kinro made an offer of settlement consistent with its belief regarding the merits of plaintiffs’ allegations. Although no settlement was reached, the parties have since had intermittent discussions. The outcome of such settlement efforts cannot be predicted.
If plaintiffs file a thirdplaintiffs’ motion for class certification and it is granted, and if settlementdefendants’ motion for summary judgment is not reacheddenied, and if plaintiffs pursue their claims, protracted litigation could result. Although the outcome of such litigation cannot be predicted, if certain essential findings are ultimately unfavorable to Kinro, the Company could sustain a material liability. The Company’s liability insurer denied coverage on the ground that plaintiffs did not sustain any personal injury or property damage.
In 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 believes that it has properly reported its income and paid taxes in Indiana in accordance with applicable laws, and filed an appeal in December 2006 with the Indiana Tax Court. TheCourt and the matter has beenwas scheduled for trial in December 2008. TheIn November 2008, the Company and the Indiana Department of Revenue are currentlysettled tax years 1998 to 2000 for $0.6 million, as well as 2001 to 2006 for $4.0 million. This amount was fully reserved prior to 2009, and was paid in settlement negotiations.April of 2009.
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 sheetCondensed Consolidated Balance Sheet as of September 30, 2008,March 31, 2009, would not be material to the Company’s financial position or annual results of operations.
Item 1A -– 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 the third quarter of 2008 fell 28 percent compared to the third quarter of 2007, and net income for the third quarter of 2008 declined 77 percent compared to the third quarter of 2007. Our net sales in the third quarter of 2008 fell 17 percent compared to the second quarter of 2008, and net income for the third quarter of 2008 declined 72 percent compared to the second quarter of 2008.
We attribute these declines to a combination of factors, including the deterioration in the real estate market, tighter credit terms, volatile oil and gas prices, and low consumer confidence. See Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.
These factors have caused a decline in the demand for RVs and manufactured homes, which has reduced the demand for our products, and therefore significantly reduced our sales during the quarter. In addition, higher than anticipated costs of raw materials have impacted our operating results.
Our results of operations may not improve if these conditions persist unabated, and may continue to decline.
A change in senior management has been implemented at our subsidiary Kinro, Inc. which could affect our operating results.
David L. Webster will retire as Chairman, President and Chief Executive Officer of Kinro, Inc., Drew’s subsidiary, by December 31, 2008. Jason D. Lippert has assumed responsibility for the operations of Kinro, and will continue as Chairman, President and CEO of Drew’s subsidiary, Lippert Components. Although we anticipate that the transition will result in savings due to synergies, and could provide additional opportunities for sale of each company’s products, there can be no assurance at this time that these benefits will be realized or that the transition will be successful.
There have been no other material changes to the matters discussed in Part I, Item 1A -– Risk Factors in our Annual Report on Form 10-K as filed with the Securities and Exchange Commission on March 17, 2008.
Item 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS12, 2009.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers.Item 6 – EXHIBITS
Issuer Purchases of Equity Securities |
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| (a) | (b) | (c) | (d) |
Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs |
August 1 - 31, 2008 | 250,000 | $15.38 | 250,000 | 552,600 |
On November 29, 2007, the Company announced a stock repurchase of up to 1,000,000 shares, of which 447,400 shares have been repurchased at an average price of $18.58 per share, or $8.3 million in total.
The aggregate cost of the repurchases during the third quarter in the amount of $3.9 million was funded from the Company’s available cash. Additionally, during the quarter ended June 30, 2008, the Company repurchased 197,400 shares at an average cost of $22.62 per share. The aggregate cost of repurchases during the second quarter in the amount of $4.5 million was funded from the Company’s available cash.
Item 6 - EXHIBITS
| a) | Exhibits as required by item 601 of Regulation S-K:8-K: |
| 1) | 31.1 Certification of Chief Executive Officer pursuant to 13a-14(a) under the Securities Exchange Act of 1934. Exhibit 31.1 is filed herewith. |
| 2) | 31.2 Certification of Chief Financial Officer pursuant to 13a-14(a) under the Securities Exchange Act of 1934. Exhibit 31.2 is filed herewith. |
| 3) | 32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350. Exhibit 32.1 is32.1is filed herewith. |
| 4) | 32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350. Exhibit 32.2 is filed herewith. |
DREW INDUSTRIES INCORPORATED
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
DREW INDUSTRIES INCORPORATED |
Registrant |
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By | DREW INDUSTRIES INCORPORATED
Registrant
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| By: | /s/ Joseph S. Giordano III |
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Joseph S. Giordano III |
Chief Financial Officer and Treasurer |
November 10, 2008May 8, 2009