Industry-wide wholesale shipments of motorhomes, components for which represent about 3 percent of Drew’s RV Segment net sales, were down 7872 percent during the first quartersix months of 2009. Retail sales of motorhomes were down 5745 percent for the first two months ofthrough May 2009, the latest period for which retail information is available.
DREW INDUSTRIES INCORPORATED
ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
| | § | During the firstsecond quarter of 2009, the Company generated solidincreased cash flow, increasing cashand investments by $6$13 million, to more than $14nearly $27 million, and reducingreduced total debt by more than $2$5 million, to $6$1 million. This was accomplished by reducing inventory by $19over $16 million during the firstsecond 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$8 million to $20$10 million in addition to the $19$35 million reduction in the 2009 first quarter.six months of 2009. |
| | § | For the balance of 2009, the Company anticipates a continuing weakthat continued weakness in the 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 tomarkets, would cause consumers to be extremelyremain cautious, which would likely continue to impact the purchases of manufactured homes and 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 and the first quarter of 2009, and will likely continue for the balance of 2009. RVs. |
However, while there are uncertainties, it appears that many of the RV producers will continue to produce five days a week for the balance of the third quarter of 2009, as opposed to the lighter production schedules earlier in the year. It is difficult to anticipate production levels beyond September, particularly during the traditionally slower winter months. The RV and manufactured housing industries are likely to face additional challenges in the latter part of 2009 and the beginning of 2010. If retail sales slow further, RV manufacturers and manufactured home producers could reduce their output, which would negatively affect the Company.
| § | In response to the current economic environment, the Company has been extremely proactive, takingtaken the following steps: |
| · | Increased market share on existing products. |
| · | Introduced new products. |
| | · | Reduced its workforce and production capacity to be more in line with anticipated demand. |
| | · | Reduced fixed overhead costs. |
| | · | Implemented synergies between the operations of Kinro and LippertReduced costs by combining certain administrative functions and sales efforts.efforts of its subsidiaries. |
These factorsCost reduction measures benefitted the Company’s operating results in the firstsecond quarter of 2009 by nearlymore than $2 million, compared to the firstsecond quarter of 2008, and will benefit the full year 2009 operating results by nearly $9$10 million as compared to the full year 2008. These steps also lowered the Company’s breakeven sales level. Additional cost savingsreduction measures are expected to be implemented induring the second half of 2009.
Further, if exceptional opportunities for market share and product line expansion arise due to current economic conditions, the Company’s experienced operating management team, strong balance sheet with minimal debt, and available production capacity, putssolid cash flow should allow it in an excellent competitive position to take advantage of opportunitiesrespond quickly to increase market share and expand product lines.such opportunities.
| | § | Steel and aluminum are among the Company’s principal raw materials. Since late 2007, the costs of steel and aluminum have been volatile, and although the Company was able to raise sales prices, higher cost raw materials, net of sales price increases, reduced 2009 first quarter earnings by approximately $0.02 per diluted share. Raw material costs have recently declined from their peak levels. However, the Company still has higher priced raw materials in inventory, which will adversely impact operating results forvolatile. During the second quarter of 2009, althoughraw material costs temporarily declined, but have recently risen 5 percent to 15 percent, depending upon the impact is expected to be modest.type of raw material. |
DREW INDUSTRIES INCORPORATED
ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
While the Company has historically been able to obtain sales price increases to offset the majority of raw material cost increases, there can be no assurance that future cost increases, if any, can be partially or fully passed on to customers. 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.
| § | A competitor of the Company recently announced it was ceasing production of windows and most doors for manufactured homes. As a result, the Company has received requests for quotes from many of the competitor’s former manufactured housing window and door customers. This presents the potential for the Company to add $10 million or more in annual sales, even in the current environment. |
| § | Net sales in July 2009 are expected to be down approximately 11 percent year-over-year, an improvement over the 33 percent net sales decline in the 2009 second quarter. July 2009 had one more shipping day than July 2008. In 2009, the annual July 4th holiday shut-downs by RV and manufactured home producers generally lasted 1 week, compared to the 2 week furloughs taken in 2008 at that time. |
RV Segment – Second Quarter
Net sales of the RV Segment in the firstsecond quarter of 2009 decreased 5829 percent, or $72$32 million, as compared to the firstsecond quarter of 2008 due to:
| | · | An ‘organic’ sales decline of approximately $77$41 million, or 6439 percent, of RV-related products. This 64 percent decline was due largely to the 6144 percent decrease in industry-wide wholesale shipments of travel trailers and fifth-wheel RVs, the Company’s primary RV market. Fifth-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 3 percent of the Company’s RV Segment net sales, were down 78 percent during the first quarter of 2009. |
| | · | An ‘organic’ sales decline of approximately 7045 percent or $3$2 million in specialty trailers due primarily to a severe industry-wide decline in sales of small and medium size boats, particularly on the West Coast, the Company’s primary specialty trailer market. |
Partially offset by:
| | · | Sales generated from 2008 acquisitions, aggregating approximately $5$8 million. |
| | · | Sales price increases of approximately $3 million, primarily due to raw material cost 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.DREW INDUSTRIES INCORPORATED
ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
The trend in the Company’s average product content per RV is an indicator of the Company’s overall market share. Content per RV is also impacted by changes in selling prices for the Company’s products. The Company’s average product content per type of RV, calculated based upon the Company’s net sales of components for the different types of RVs, for the twelve months ended March 31,June 30, divided by the industry-wide wholesale shipments of the different types of RVs for the twelve months ended March 31,June 30, was as follows:
DREW INDUSTRIES INCORPORATED
ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
| | | 2009 | | | 2008 | | | Percent Change | | | 2009 | | | 2008 | | | Percent Change | |
| Content per Travel Trailer and Fifth-Wheel RV | | $ | 1,943 | | | $ | 1,715 | | | | 13% | | | $ | 2,071 | | | $ | 1,725 | | | | 20 | % |
| Content per Motorhome | | $ | 531 | | | $ | 463 | | | | 15% | | | $ | 471 | | | $ | 505 | | | | (7 | )% |
| Content per all RVs | | $ | 1,596 | | | $ | 1,353 | | | | 18% | | | $ | 1,718 | | | $ | 1,381 | | | | 24 | % |
The above product content per RV for the twelve months ended March 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 indicated twelve month period. Sales of certain RV components have been reclassified between travel trailer and fifth-wheel RVs, and motorhomes in prior periods.
According to the RVIA, industry production for the twelve months ended March 31,June 30, was as follows:
| | | 2009 | | | 2008 | | | Percent Change | | | 2009 | | | 2008 | | | Percent Change | |
| Travel Trailer and Fifth-Wheel RVs | | | 146,300 | | | | 256,100 | | | | (43)% | | |
| Travel Trailer and Fifth- Wheel RVs | | | | 119,000 | | | | 242,900 | | | | (51 | )% |
| Motorhomes | | | 19,700 | | | | 51,800 | | | | (62)% | | | | 13,600 | | | | 45,300 | | | | (70 | )% |
| All RVs | | | 184,700 | | | | 342,400 | | | | (46)% | | | | 147,200 | | | | 319,900 | | | | (54 | )% |
Operating profit of the RV Segment in the second quarter of 2009 decreased 51 percent to $6.3 million, compared to the second quarter of 2008, largely due to the decline in sales. The decline in RV Segment operating profit was 15 percent of the ‘organic’ decline in net sales, a smaller percentage decline than the Company would typically expect.
The operating margin of the RV Segment reported an operating lossin the second quarter of $4.7 million2009 was positively impacted by:
| · | Implementation of cost-cutting measures which reduced cost of sales. |
| · | Lower warranty, health insurance, supplies and repair costs. |
| · | A decrease in selling, general and administrative expenses to 11.6 percent of net sales in the second quarter of 2009 from 12.1 percent of net sales in the second quarter of 2008, largely due to the implementation of fixed cost reductions, partially offset by the spreading of fixed administrative costs over a smaller sales base. Also, incentive compensation was lower as a percent of sales in the second quarter of 2009 because year-to-date operating profit was below the previously established incentive compensation hurdles. |
Partially offset by:
| · | Higher raw material costs. |
| · | Labor inefficiencies due to the drop in sales. |
| · | The spreading of fixed manufacturing costs over a smaller sales base. |
RV Segment – Year to Date
Net sales of the RV Segment in the first quartersix months of 2009 decreased 44 percent, or $104 million, as compared to the same period of 2008 due to:
| · | An ‘organic’ sales decline of approximately $118 million, or 52 percent, of RV-related products. This decline was due largely to the 53 percent decrease in industry-wide wholesale shipments of travel trailers and fifth-wheel RVs, the Company’s primary RV market. Also, many of the towable RVs produced by the industry over the last year have included fewer of the features and options ordinarily provided by the Company. |
DREW INDUSTRIES INCORPORATED
ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
| · | An ‘organic’ sales decline of approximately 58 percent or $5 million in specialty trailers due primarily to a severe industry-wide decline in sales of small and medium size boats, particularly on the West Coast, the Company’s primary specialty trailer market. |
Partially offset by:
| · | Sales generated from acquisitions, aggregating approximately $13 million. |
| · | Sales price increases of approximately $6 million, primarily due to raw material cost increases in 2008. |
Operating profit of the RV Segment in the first six months of 2009 decreased 94 percent to $1.7 million, compared to the first six months of 2008, largely due to the decline in sales and $2.9 million of extra expenses, recorded in the first quarter of 2009, related to plant consolidations, staff reductions, increased bad debts, and obsolete inventory and tooling. Excluding these extra expenses, the Company’s RV Segment had an operating lossprofit of $1.8$4.6 million in the first quartersix months of 2009, a decrease of $16.1$22.7 million from the segment operating profit of $14.3$27.3 million in the same period last year. This adjusted decline in RV Segment operating resultsprofit was 2018 percent of the ‘organic’ decline in net sales, consistent with whata slightly smaller percentage decline than the Company would typically expect.
The operating margin of the RV Segment in the first quartersix months of 2009 was positively impacted by:
| · | Implementation of cost-cutting measures which reduced cost of sales. |
| · | Lower supplies and repair costs. |
Partially offset by:
| | · | Higher raw material costs. |
| | · | Labor inefficiencies due to the sharp drop in sales. |
| | · | The spreading of fixed manufacturing costs over a smaller sales base. |
| · | Higher warranty, workers compensation and health insurance costs. |
| | · | An increase in selling, general and administrative expenses to 16.613.6 percent of net sales in the first quartersix months of 2009 from 11.912.0 percent of net sales in the first quartersix months of 2008, largely due to an increase in bad debt expense, as well as the spreading of fixed administrative costs over a smaller sales base. Inbase, partially offset by the implementation of fixed cost reductions. Also, incentive compensation was lower as a percent of sales in the first quartersix months of 2009 therebecause year-to-date operating profit was nobelow the previously established incentive compensation recorded due to the operating loss.hurdles. |
Offset by:
| | · | Implementation of cost-cutting measures.MH Segment – Second Quarter |
| · | 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 first quarter of 2009, the Company reviewed 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, as a continued downturn in the RV 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.
Net sales of the MH Segment in the firstsecond quarter of 2009 decreased 4745 percent, or $16$18 million, from the firstsecond quarter of 2008. Excluding $2$1 million in sales price increases, net sales of the MH Segment declined 5247 percent, compared to a 4644 percent decrease in industry-wide production of manufactured homes. The $18 million47 percent ‘organic’ decrease in sales of the Company’s MH Segment was greater than the manufactured housing industry decline due partly to a reduction in the average size of the homes produced by the manufactured housing industry, which require less of the Company’s products, a decline in modular and office units, and partly due to customer mix.
DREW INDUSTRIES INCORPORATED
ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
MH Segment sales in the 2009 firstsecond quarter included $1 million of components for homes purchased by the Federal Emergency Management Agency (“FEMA”). The Company expects approximately $3 million to $4$1 million of additional FEMA-related sales in the second and third quarters of 2009.
Because the Company’s stock price on the New York Stock Exchange was below its book value, and due to the continued declines in industry shipments of 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 March 31,June 30, divided by the number of manufactured homes and manufactured home floors produced by the industry, respectively, for the twelve months ended March 31,June 30, was as follows:
| | | 2009 | | | 2008 | | | Percent Change | | | 2009 | | | 2008 | | | Percent Change | |
| Content per Home Produced | | $ | 1,653 | | | $ | 1,680 | | | | (2)% | | | $ | 1,657 | | | $ | 1,615 | | | | 3 | % |
| Content per Floor Produced | | $ | 1,003 | | | $ | 993 | | | | 1% | | | $ | 1,010 | | | $ | 962 | | | | 5 | % |
According to the IBTS, industry production for the twelve months ended March 31,June 30, was as follows:
| | | 2009 | | | 2008 | | | Percent Change | | | 2009 | | | 2008 | | | Percent Change | |
| Total Homes Produced | | | 72,400 | | | | 95,100 | | | | (24)% | | | | 62,100 | | | | 92,300 | | | | (33 | )% |
| Total Floors Produced | | | 119,300 | | | | 161,000 | | | | (26)% | | | | 102,000 | | | | 154,900 | | | | (34 | )% |
Operating profit of the MH Segment in the second quarter of 2009 decreased 62 percent to $1.8 million, compared to the second quarter of 2008, primarily due to the decrease in net sales. The decline in MH Segment operating profit was 15 percent of the ‘organic’ decline in net sales, a smaller percentage decline than the Company would typically expect.
The operating margin of the MH Segment in the second quarter of 2009 was positively impacted by:
| · | A temporary decline in raw material costs. However, depending upon the type of raw material, costs have recently risen 5 percent to 15 percent. |
| · | Implementation of cost-cutting measures which reduced cost of sales. |
Partially offset by:
| · | The spreading of fixed manufacturing costs over a smaller sales base. |
| · | Labor inefficiencies due to the drop in sales. |
| · | An increase in selling, general and administrative expenses to 17.3 percent of net sales in the second quarter of 2009 from 15.7 percent of net sales in the second quarter of 2008 due largely to the spreading of fixed administrative costs over a smaller sales base, partially offset by fixed cost reductions. Also, incentive compensation was lower as a percent of sales in the second quarter of 2009 because year-to-date operating profit was below the previously established incentive compensation hurdles. |
DREW INDUSTRIES INCORPORATED
ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
MH Segment – Year to Date
Net sales of the MH Segment in the first six months of 2009 decreased 46 percent, or $34 million, from the same period of 2008. Excluding $3 million in sales price increases, net sales of the MH Segment declined 49 percent, compared to a 45 percent decrease in industry-wide production of manufactured homes. The 49 percent ‘organic’ decrease in sales of the Company’s MH Segment was greater than the manufactured housing industry decline due partly to a reduction in the average size of the homes produced by the manufactured housing industry, which require less of the Company’s products, a decline in modular and office units, and partly due to customer mix.
MH Segment sales in the first six months 2009 included $2 million of components for homes purchased by the Federal Emergency Management Agency (“FEMA”). The Company expects approximately $1 million of additional FEMA-related sales in the third quarter of 2009.
The MH Segment reported an operating loss of $2.0$0.3 million in the first quartersix months of 2009, compared to an operating profit of $7.1 million in the first six months of 2008, largely due to the decline in sales and $0.6 million of extra expenses, recorded in the first quarter of 2009, related to plant consolidations, staff reductions, and obsolete inventory. Excluding these extra expenses, the Company’s MH Segment had an operating lossprofit of $1.4$0.3 million in the first quartersix months of 2009, a decrease of $3.9$6.7 million from the segment operating profit of $2.5$7.1 million in the same period last year. The adjusted decline in MH Segment operating results was 2218 percent of the ‘organic’ decline in net sales, consistent with whata slightly smaller percentage decline than the Company would typically expect.
The operating margin of the MH Segment in the first quartersix months of 2009 was positively impacted by:
| · | Implementation of cost-cutting measures which reduced cost of sales. |
Partially offset by:
| | · | The spreading of fixed manufacturing costs over a smaller sales base. |
| | · | Labor inefficiencies due to the sharp drop in sales. |
| · | Higher health insurance costs. |
| | · | An increase in selling, general and administrative expenses to 22.819.8 percent of net sales in the first quartersix months of 2009 from 15.515.6 percent of net sales in the first quartersix months of 2008 due largely to an increase in bad debt expense, as well as the spreading of fixed administrative costs over a smaller sales base. Inbase, partially offset by fixed cost reductions. Also, incentive compensation was lower as a percent of sales in the first quartersix months of 2009 therebecause year-to-date operating profit was nobelow the previously established incentive compensation recorded due to the operating loss.hurdles. |
Corporate
Corporate expenses for the first six months of 2009 and the second quarter of 2009 decreased $0.8 million and $0.4 million as compared to the comparable periods in 2008, respectively, due primarily to a decrease in incentive-based compensation as a result of lower profits, as well as other cost reductions.
DREW INDUSTRIES INCORPORATED
ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Other non-segment items
Offset by:Because the Company’s stock price on the New York Stock Exchange was below its book value, and due to the continued declines in industry shipments of RVs and manufactured homes, the Company conducted an impairment analysis of its goodwill in the first quarter of 2009. The fair value of each reporting unit was determined using a discounted cash flow model utilizing observable market data to the extent available, and the Company’s weighted average cost of capital of approximately 16.5 percent. Based on the analysis, the carrying value of the RV and manufactured housing reporting units exceeded their fair value and, as a result, the Company recorded a non-cash impairment charge to write-off the entire $45.0 million of goodwill of these reporting units during the first quarter of 2009.
| · | Implementation of cost-cutting measures. |
During the first quarter of 2009, the Company reviewed the recoverability of the carrying value of other intangible assets and other long-lived assets, in this segment, and determined that there was no impairment. However, theThe Company will continuecontinues to monitor these assets for potential impairment, as a continued downturn in the RV, manufactured housing, industry,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.
Corporate
Corporate expenses for the first quarter of 2009 decreased $0.4 million compared to the first quarter of 2008 due primarily to a decrease in incentive-based compensation as a result of lower profits, as well as other cost reductions.
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 January 2008, the Company received a scheduled payment of principal and interest of $0.8 million, which had been previously fully reserved, and therefore recorded a pre-tax gain. The Company did not receive the final scheduled payment in January 2009; however, in both February and March 2009 the Company received principal payments of $0.1 million, which were previously fully reserved, and therefore recorded a pre-tax gain of $0.2 million. The Company is currently attempting to collect the balance due of $0.8 million.
DREW INDUSTRIES INCORPORATED
ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Other non-segment items include the following for the three months ended March 31, (in thousands):
| | | | Six Months Ended | | | Three Months Ended | |
| | | | June 30, | | | June 30, | |
| | | 2009 | | | 2008 | | | 2009 | | | 2008 | | | 2009 | | | 2008 | |
| | | | | | | | | | | | | | | | | | | |
| Selling, general and administrative expenses: | | | | | | | | | | | | | | | | | | |
| Legal proceedings | | 293 | | | 355 | | | $ | 345 | | | $ | 853 | | | $ | 52 | | | $ | 498 | |
| Gain on sold facilities | | - | | | (1,194 | ) | | (22 | ) | | (3,275 | ) | | (22 | ) | | (2,081 | ) |
| Loss on sold facilities and write-downs to estimated current fair value of facilities to be sold | | 1,249 | | | 145 | | |
| Loss on sold facilities and write- downs to estimated current fair value of facilities to be sold | | | 2,150 | | | 447 | | | 900 | | | 302 | |
| Other | | 278 | | | - | | | 277 | | | - | | | - | | | - | |
| Incentive compensation impact of other non-segment items | | - | | | 238 | | | - | | | 487 | | | - | | | 249 | |
| Other (income) from the collection of the previously reserved Note | | | (200 | ) | | | (760 | ) | | | (200 | ) | | | (760 | ) | | | - | | | | - | |
| | | $ | 1,620 | | | $ | (1,216 | ) | | $ | 2,550 | | | $ | (2,248 | ) | | $ | 930 | | | $ | (1,032 | ) |
Effective in the third quarter of 2008, gains or losses on sold manufacturing facilities and charges for write-downs to estimated current fair value of manufacturing facilities to be sold have been reclassified from cost of goods sold to selling, general, and administrative expenses in the Condensed Consolidated Statements of Operations. Prior periods have been reclassified to conform to this presentation.
Taxes
Our tax rate in the second quarter of 2009 was 35.4 percent, lower than the 38.6 percent rate for all of 2008, due to tax reserve adjustments.
DREW INDUSTRIES INCORPORATED
ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
The tax rate in the first quartersix months of 2009 was 35.0 percent, which is a combination of a 34.8 percent rate on the goodwill impairment charge, and a 35.936.2 percent rate onfor the remaining operating results. A portion of the goodwill impairment charge is not deductible for tax purposes, thus lowering the tax benefit recorded. The 35.936.2 percent rate on the remaining operations was lower than the 38.6 percent rate for all of 2008, as the tax benefit on the losses incurred in the first quartersix months of 2009 was slightlypartially offset by the effect of permanent tax differences and tax reserve adjustments.
Interest Expense, Net
The $0.1$0.2 million increase in interest expense, net, for the first quartersix months of 2009, was primarily due to lower interest income. Interest expense in the second quarter of 2009 was consistent with the second quarter of 2008.
LIQUIDITY AND CAPITAL RESOURCES
The Statements of Cash Flows reflect the following for the threesix months ended March 31,June 30, (in thousands):
| | | 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)| | | 2009 | | | 2008 | |
| Net cash flows provided by (used for) operating activities | | $ | 26,338 | | | $ | (6,620 | ) |
| Net cash flows (used for) provided by investment activities | | $ | (2,693 | ) | | $ | 5,608 | |
| Net cash flows used for financing activities | | $ | (7,418 | ) | | $ | (11,804 | ) |
Cash Flows from Operations
Net cash flows from operating activities in the first quartersix months of 2009 were $14.5$33.0 million better than in the first quartersix months of 2008, primarily as a result of (i) lowera $35 million reduction in inventories in the first quartersix months of 2009, dueas compared to an increase in the comparable period in 2008, partially offset by (i) a significant reduction in inventory purchases and (ii) a smallerlarger seasonal increase in accounts receivable due to the decline in sales, partially offset byof $6 million, and (ii) lower after-tax operating results in the first quartersix months of 2009 and a smaller seasonal increase in accounts payable.2009. Inventories increased in 2008 due to the Company’s strategic purchase of raw materials in advance of price increases, as well as higher priced raw materials in inventory. During the first quarter of 2009, theThe Company reduced inventory by $19 million and expects to lower inventory over the balance of 2009 by an additional $15$8 million to $20$10 million through consumption of higher priced inventory on hand, and reduced inventory purchases. However, raw material costs have recently risen by 5 percent to 15 percent, depending upon the type of raw material, which may impact the Company’s ability to reduce inventory in the future.
Depreciation and amortization was $5.1$9.3 million in the 2009 first quarter, including $0.8 millionsix months of extra expenses related to tooling,2009, and are expected to aggregate $17 million to $18 million in 2009. In addition, non-cash stock-based compensation was $1.4$2.1 million in the first quartersix months of 2009, and is expected to be nearly $4 million for the full year.
Cash Flows from Investing Activities
Cash flows used for investing activities of $0.5$2.7 million in the first quartersix months of 2009 consisted primarilyincluded capital expenditures of capital expenditures.$1.1 million. Capital expenditures for 2009 are expected to be approximately $4less than $3 million, and are expected to be funded by cash flows from operations.
DREW INDUSTRIES INCORPORATED
ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
In June 2009, the Company purchased $2.0 million of 6 month U.S. Treasury Bills that mature in December 2009.
On May 15, 2009, Lippert acquired the patents for the QuickBite CouplerTM, and other intellectual properties and assets. The innovative design of the QuickBiteTM automatic dual jaw locking system eliminates several steps when coupling a trailer to a tow vehicle, while at the same time making coupling simpler through the use of an integrated alignment system. The minimum aggregate purchase price was $0.5 million, of which $0.3 million was paid at closing and the balance will be paid on May 15, 2010. The acquisition was financed with available cash. In addition, Lippert will pay an earn-out of $2.50 per unit sold, up to a maximum of $2.5 million, during the life of the patents. As such, the aggregate purchase price could increase to a maximum of $3.0 million.
At March 31,June 30, 2009, the Company had seven facilities and vacant land listed for sale, with an aggregate carrying value of $8.9$9.8 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 facilityIn addition, the Company is under contractattempting to be sold in the second quarter at its carrying value of $0.4 million.sublease three vacant leased facilities. In April 2009, the Company entered into a two year lease at $25,000 per month for one of these facilities,another vacant owned facility, which has a carrying value of $3.0 million. This lease also contains an option for the lessee to purchase the facility for $3.4 million.
Cash flows provided by investing activities of $3.2$5.6 million in the first threesix months of 2008 included proceeds of $4.4$8.1 million received from the sale of fixed assets in connection with the Company’s consolidation of production operations, partially offset by $1.2$2.4 million for capital expenditures.
Cash Flows from Financing Activities
Cash flows used for financing activities for the first quartersix months of 2009 and 2008 of $2.3$7.4 million and $2.9$11.8 million, respectively, were primarily due to net debt payments.payments of $7.5 million and $7.4 million, respectively. Cash flows used for financing activities for the first six months of 2008 also included the purchase of treasury stock of $4.5 million.
The Company’s priorities for cash are liquidity and security. At March 31,June 30, 2009, all but $0.1 million of the Company’s cash balances were in fully FDIC insured accounts. Investments of $46.2 million at March 31, 2008, were in high-quality, short-term money market instruments 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 entered into an agreement (the “Credit Agreement”) for a $50.0 million line of credit with JPMorgan Chase Bank, N.A., and Wells Fargo Bank N.A. (collectively, the “Lenders”). The maximum borrowings under the Company’s line of credit can be increased by $20.0 million upon approval of the Lenders. Interest on borrowings under the line of credit is designated from time to time by the Company as either the Prime Rate, but not less than 2.5 percent, plus additional interest up to 0.8 percent (0 percent at March 31,June 30, 2009), or LIBOR plus additional interest ranging from 2.0 percent to 2.8 percent (2.0 percent at March 31,June 30, 2009) depending on the Company’s performance and financial condition. The Credit Agreement expires December 1, 2011. At March 31,June 30, 2009, the Company had $7.6 million in outstanding letters of credit under the line of credit.
DREW INDUSTRIES INCORPORATED
ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Simultaneously, the Company entered into a $125.0 million “shelf-loan” facility with Prudential Investment Management, Inc., and its affiliates (“Prudential”), of which $5.0 million is outstanding at March 31, 2009.. The facility provides for Prudential to consider purchasing, at the Company’s request, in one or a series of transactions, Senior Promissory Notes of the Company in the aggregate principal amount of up to $125.0 million, to mature no more than twelve years after the date of original issue of each Senior Promissory Note. Prudential has no obligation to purchase the Senior Promissory Notes. Interest payable on the Senior Promissory Notes will be at rates determined by Prudential within five business days after the Company issues a request to Prudential. The shelf-loan facility expires November 25, 2011. In June 2009, the Company paid in full the remaining $4.0 million of outstanding Senior Promissory Notes before their scheduled maturity date.
Both the line of credit pursuant to the Credit Agreement and the shelf-loan facility are subject to a maximum leverage ratio covenant which limits the amount of consolidated outstanding indebtedness to 2.5 times the trailing twelve-month EBITDA;EBITDA, as defined; provided however, that if the Company’s trailing twelve-month EBITDA declines tois 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 towas less than $50 million at March 31,June 30, 2009, the maximum leverage ratio covenant limits the remaining availability under these facilities collectively to $23.3$13.7 million. However, dueIn addition 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$27 million in cash and anticipated cash flows from operationsinvestments at June 30, 2009, the borrowing availability under our credit and shelf-loan facilities is expected to be adequate to finance the Company’s anticipated working capital and capital expenditure requirements.
At March 31,June 30, 2009, the Company was in compliance with all of its debt covenants and expects to remain in compliance for the next twelve months. Certain of theThe Company’s loan agreements contain prepayment penalties.
On November 29, 2007 the Board of Directors authorized the Company to repurchase up to 1 million shares of the Company’s Common Stock, of which 447,400 shares were repurchased in 2008. The Company is authorized to purchase shares from time to time in the open market, or privately negotiated transactions, or block trades. The number of shares ultimately repurchased, and the timing of the purchases, will depend upon market conditions, share price, and other factors. At present, due to current economic conditions, the Company believes it is prudent to conserve cash, and does not intend to repurchase shares. However, changing conditions may cause the Company to reconsider this position.
CORPORATE GOVERNANCE
The Company is in compliance with the corporate governance requirements of the Securities and Exchange Commission (“SEC”) and the New York Stock Exchange. The Company’s governance documents and committee charters and key practices have been posted to the Company’s website (www.drewindustries.com) and are updated periodically. The website also contains, or provides direct links to, all SEC filings, press releases and investor presentations. The Company has also established a toll-free hotline (877-373-9123) to report complaints about the Company’s accounting, internal controls, auditing matters or other concerns.
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 reportQuarterly Report on Form 10-Q.
INFLATION
The prices of key raw materials, consisting primarily of steel, vinyl, aluminum, glass and ABS resin, are influenced by demand and other factors specific to these commodities, such as the price of oil, rather than being directly affected by inflationary pressures. Prices of certain commodities have historically been volatile. The Company did not experience any significant increase in its labor costs in the firstsecond quarter of 2009 related to inflation.
DREW INDUSTRIES INCORPORATED
ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
NEW ACCOUNTING PRONOUNCEMENTS
In May 2009, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 165, "Subsequent Events." SFAS No. 165 establishes authoritative accounting and disclosure guidance for recognized and non-recognized subsequent events that occur after the balance sheet date but before financial statements are issued. SFAS No. 165 also requires disclosure of the date through which an entity has evaluated subsequent events and the basis for that date. The provisions of SFAS No. 165 are effective for interim or annual periods ending after June 15, 2009. The adoption of this standard for the quarterly period ended June 30, 2009 had no impact on the Company.
In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations.” SFAS 141(R) requires assets acquired and liabilities assumed in connection with a business combination to be measured at fair value as of the acquisition date, acquisition related costs incurred prior to the acquisition to be expensed, and contractual contingencies to be recognized at fair value as of the acquisition date. The provisions of SFAS No. 141(R) are effective for fiscal years beginning after December 15, 2008. The adoption of this standard on January 1, 2009 did not have a material impact on the Company.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”, which establishes a framework for reporting fair value and expands disclosures about fair value measurements. The provisions of SFAS No. 157 are effective for fiscal years beginning after November 15, 2007. However, the FASB deferred the effective date of SFAS 157, until fiscal years beginning after November 15, 2008, as it relates to fair value measurement requirements for nonfinancial assets and liabilities that are not remeasured at fair value on a recurring basis. Adoption ofThe Company adopted the applicable provisions of this standard on January 1, 2009 and 2008, respectively, did not have a material impact on the Company.
In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations”. SFAS 141(R) requires assets acquired and liabilities assumed in connection with a business combinationrespectively. See Note 9 to be measured at fair value as of the acquisition date, acquisition related costs incurred priorNotes to the acquisition to be expensed, and contractual contingencies to be recognized at fair value as of the acquisition date. The provisions of SFAS No. 141(R) are effective for fiscal years beginning after December 15, 2008. The adoption of this standard on January 1, 2009 did not have a material impact on the Company.Condensed Consolidated Financial Statements.
USE OF ESTIMATES
The preparation of these financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, the Company evaluates its estimates, including, but not limited to, those related to product returns, accounts receivable, inventories, notes receivable, goodwill and other intangible assets, income taxes, warranty obligations, self 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 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 stockCommon Stock and other matters. Statements in this Form 10-Q that are not historical facts are “forward-looking statements” for the purpose of the safe harbor provided by Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”) and Section 27A of the Securities Act of 1933 (the “Securities Act”).
DREW INDUSTRIES INCORPORATED
ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Forward-looking statements, including, without limitation, those relating to our future business prospects, revenues, expenses and income (loss), whenever they occur in this Form 10-Q are necessarily estimates reflecting the best judgment of our senior management at the time such statements were made, and involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by forward-looking statements. The Company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made. You should consider forward-looking statements, therefore, in light of various important factors, including those set forth in this Form 10-Q, and in our subsequent Form 10-Qs filedfilings with the Securities and Exchange Commission (“SEC”).
There are a number of factors, many of which are beyond the Company’s control, which could cause actual results and events to differ materially from those described in the forward-looking statements. These factors include, in addition to other matters described in this Form 10-Q, pricing pressures due to domestic and foreign competition, costs and availability of raw materials (particularly steel and related components, vinyl, aluminum, glass and ABS resin), availability of credit for financing the retail and wholesale purchase of manufactured homes and recreational vehicles, availability and costs of labor, inventory levels of retailers and manufacturers, levels of repossessed manufactured homes and RVs, the disposition into the market by the Federal Emergency Management Agency (“FEMA”), by sale or otherwise, of RVs or manufactured homes purchased by FEMA, changes in zoning regulations for manufactured homes, continuing sales declinedeclines in the RV or manufactured housing industries, the financial condition of our customers, the financial condition of retail dealers of RVs and manufactured homes, retention of significant customers, interest rates, oil and gasoline prices, and the outcome of litigation. In addition, national and regional economic conditions and consumer confidence may affect the retail sale of RVs and manufactured homes.
DREW INDUSTRIES INCORPORATED
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to changes in interest rates primarily as a result of its financing activities.
At March 31,June 30, 2009, the Company had $5.5$0.3 million of fixed rate debt outstanding. Assuming there is a decrease of 100 basis points in the interest rate for borrowings of a similar nature subsequent to March 31,June 30, 2009, which the Company becomes unable to capitalize on in the short-term as a result of the structure of its fixed rate financing, future cash flows would be less than $0.1 million lower per annum than if the fixed rate financing could be obtained at current market rates.
At March 31,June 30, 2009, the Company had $0.9 million of variable rate debt outstanding. Assuming there is an increase of 100 basis points in the interest rate for borrowings under these variable rate loans subsequent to March 31,June 30, 2009, and outstanding borrowings of $0.9 million, future cash flows would be reduced by less than $0.1 million per annum.
At June 30, 2009, the Company had $2.0 million of short-term investments in U.S. Treasuries with a current yield of approximately 0.3 percent. Assuming there is an increase of 100 basis points in the interest rate for these fixed rate investments subsequent to June 30, 2009, and total investments of $2.0 million, future cash flows would be less than $0.1 million lower per annum than if the fixed rate investment could be obtained at current market rates.
If the actual change in interest rates is substantially different than 100 basis points, or the outstanding borrowings change significantly, the net impact of interest rate risk on the Company’s cash flow may be materially different than that disclosed above.
Additional information required by this item is included under the caption “Inflation” in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of this Report.
DREW INDUSTRIES INCORPORATED
Item 4. CONTROLS AND PROCEDURES
| | a) | Evaluation of Disclosure Controls and Procedures |
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure, in accordance with the definition of “disclosure controls and procedures” in Rule 13a-15 under the Exchange Act. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, cannot provide absolute assurance of achieving the desired control objectives. Management included in its evaluation the cost-benefit relationship of possible controls and procedures. The Company continually evaluates its disclosure controls and procedures to determine if changes are appropriate based upon changes in the Company’s operations or the business environment in which it operates.
As of the end of the period covered by this Form 10-Q, the Company performed an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on the foregoing, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective.
| | b) | Changes in Internal Controls |
There were no changes in the Company’s internal controls over financial reporting during the quarter ended March 31,June 30, 2009 or subsequent to the date the Company completed its evaluation, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
During 2005, Lippert installed enterprise resource planning (“ERP”) software and subsequently implemented certain functions of the ERP software. Over the last few years, the internal controls of Lippert have incrementally been strengthened due both to the ERP software and business process changes. In the secondthird quarter of 2009, the Company anticipates that it will beginhas begun to implement certain functions of the ERP software and business process changes for Kinro. Implementation of additional functions of the ERP software and business process changes are planned for the upcoming quarters for Kinro. The Company also anticipates that it will continue to implement certainother additional functionalities of the ERP software at both Lippert and Kinro to further strengthen the Company’s internal control.
DREW INDUSTRIES INCORPORATED
PART II – OTHER INFORMATION
Item 1 – LEGAL PROCEEDINGS
On or about January 3, 2007, an action was commenced in the United States District Court, Central District of California, entitled Gonzalez vs. Drew Industries Incorporated, Kinro, Inc., Kinro Texas Limited Partnership d/b/a Better Bath Components; Skyline Corporation, and Skylines Homes, Inc. (Case No. CV06-08233). The case purports to be a class action on behalf of the named plaintiff and all others similarly situated in California. Plaintiff initially alleged, but has not sought certification of, a national class.
On April 1, 2008, the Court issued an order granting Drew’s motion to dismiss for lack of personal jurisdiction, resulting in the dismissal of Drew Industries Incorporated as one of the defendants in the case.
Plaintiff alleges that certain bathtubs manufactured by Kinro Texas Limited Partnership, a subsidiary of Kinro, Inc., and sold under the name “Better Bath” for use in manufactured homes, fail to comply with certain safety standards relating to flame spread established by the United States Department of Housing and Urban Development (“HUD”). Plaintiff alleges, among other things, that sale of these products is in violation of various provisions of the California Consumers Legal Remedies Act (Sec.(Cal. Civ. Code Sec. 1770 et seq.), the Magnuson-Moss Warranty Act (Sec.(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 Song-Beverly Consumer Warranty Act (Sec. 1790Unfair Competition Law (Cal. Bus. & Prof. Code Sec. 17200 et seq.).
Plaintiff seeks to require defendants to notify members of the class of the allegations in the proceeding and the claims made, to repair or replace the allegedly defective products, to reimburse members of the class for repair, replacement and consequential costs, to cease the sale and distribution of the allegedly defective products, and to pay actual and punitive damages and plaintiff’s attorneys fees.
On January 29, 2008, the Court issued an Order denying certification of a class with plaintiff Gonzalez as the class representative. The Court ruled that plaintiff may not be an appropriate class representative for injunctive relief because her bathtub had been replaced. The Court granted plaintiff leave to amend the complaint to add a different plaintiff.
On March 10, 2008, plaintiff amended her complaint to include an additional plaintiff, Robert Royalty. Plaintiff Royalty states that his bathtub was not tested to determine whether it complies with HUD standards. Rather, his allegations are based on “information and belief”, including the testing of plaintiff Gonzalez’s bathtub and other evidence. Kinro denies plaintiff Royalty’s allegations, and intends to continue its vigorous defense against both plaintiffs’ claims.
On June 25, 2008, plaintiffs filed a renewed motion for class certification. On October 20, 2008, the Court again denied certification of a class, without prejudice, which allowed plaintiffs to file a new motion for certification if plaintiffs are able to satisfy the Court’s concerns over the viability of plaintiffs’ case.certification. Plaintiffs filed a third motion for class certification on December 23, 2008. Defendants’ initial motion seeking summary judgment against plaintiffs’ case, which was withdrawn pending further discovery, was supplemented and refiled on December 23, 2008.
On May 18, 2009, the Court issued an Order granting partial summary judgment in favor of defendants, dismissing five of the six claims asserted by plaintiffs, except for plaintiffs’ claim for violation of California’s Unfair Competition Law (the “UCL”). The Court also granted plaintiffs’ motion for class certification as to that one claim.
The Court denied summary judgment on the UCL claim on the ground that there was a triable issue of fact as to whether the alleged misrepresentation on defendants’ labels regarding testing for flame spread rate caused plaintiffs to purchase the manufactured homes containing bathtubs manufactured by Kinro.
Even though the Court expressly found that plaintiffs did not actually rely on the alleged misrepresentations on defendants’ labels, the Court concluded that California law did not require plaintiffs to establish actual reliance in order to assert a UCL claim. However, on the same day that the Court issued its Order, the California Supreme Court issued a long-awaited ruling on the issue of reliance under the UCL. In its opinion in In re Tobacco II Cases (S147345, May 18, 2009), the California Supreme Court held, contrary to the Court’s ruling on the summary judgment motion in this case, that actual reliance is required to assert a UCL claim similar to the claim made by plaintiffs. Defendants believe that the ruling of the California Supreme Court compels the Court in this case to grant summary judgment to defendants dismissing the final claim and denying class certification to plaintiffs as to that claim.
As a result of this development, on May 29, 2009, defendants made a motion for reconsideration of the Court’s ruling on defendants’ motion for summary judgment to dismiss the final claim, and on plaintiffs’ motion for class certification as to that claim. Plaintiffs also filed a motion for reconsideration, arguing that the California Supreme Court’s ruling required the Court to deny defendants’ motion for summary judgment as to plaintiffs’ claim for violation of the Consumer Legal Remedies Act, as well as the UCL claim. A hearing on these motions was held on March 2, 2009, but a decision by the courtCourt on the motions for reconsideration has not yet been received.
Defendant Kinro has conducted a comprehensive investigation of the allegations made in connection with the claims, including with respect to the HUD safety standards, prior test results, testing procedures, and the use of labels. In addition, at Kinro’s initiative, independent laboratories conducted multiple tests on materials used by Kinro in the manufacture of bathtubs, the results of which tests indicate that Kinro’s bathtubs are in compliance with HUD regulations.
Based on the foregoing investigation and testing, the Court’s ruling on the summary judgment motion, and the ruling by the California Supreme Court, Kinro believes that plaintiffs may not be able to prove the essential elements of their claims, and defendants intend to vigorously defend against the claims.
Moreover, In addition, 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.appropriate under HUD safety standards.
In October 2007, the parties participated in voluntary non-binding mediation in an effort to reach a settlement. Kinro made an offer of settlement consistent with its belief regarding the merits of plaintiffs’ allegations. Although no settlement was reached, the parties have since had intermittent discussions. The outcome of such settlement efforts cannot be predicted.
If defendants’ motion for reconsideration is denied, so that the Court maintains its rulings denying defendants’ motion for summary judgment as to the UCL claim and granting plaintiffs’ motion for class certification is granted, and defendants’ motion for summary judgment is denied,with respect to that claim or others, and if plaintiffs pursue their claims, protracted litigation could result. Although the outcome of such litigation cannot be predicted, if certain essential findings are ultimately unfavorable to Kinro, the Company could sustain a material liability. The Company’s liability insurer denied coverage on the ground that plaintiffs did not sustain any personal injury or property damage.
In 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. This amount was fully reserved prior to 2009, and was paid in 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 Condensed Consolidated Balance Sheet as of March 31,June 30, 2009, would not be material to the Company’s financial position or annual results of operations.
Item 1A – RISK FACTORS
There have been no material changes to the matters discussed in Part I, Item 1A – Risk Factors in our Annual Report on Form 10-K as filed with the Securities and Exchange Commission on March 12, 2009.
Item 4 – SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Stockholders on May 20, 2009. Of the 21,575,533 shares of common stock entitled to vote at such meeting, holders of at least 19,536,850 shares were present in person or by proxy. At the meeting, stockholders elected to the Board of Directors Leigh J. Abrams, Edward W. Rose, III, Fredric M. Zinn, Jason D. Lippert, James F. Gero, Frederick B. Hegi, Jr., David A. Reed and John B. Lowe, Jr., each with a term expiring in 2010. There was no solicitation in opposition to management’s nominees, all of whom were elected, and each nominee received 75 percent or more, of the votes cast, in favor of his election. There were no abstentions or broker non-votes.
The stockholders also ratified an amendment to the Company’s Restated Certificate of Incorporation to decrease the authorized number of shares of Common Stock from 50,000,000 shares to 30,000,000. Voting for the resolution ratifying the amendment were 19,461,769 shares. Voting against were 65,303 shares. Abstaining were 9,778 shares. There were no broker non-votes.
The stockholders also ratified an amendment to the 2002 Equity Award and Incentive Plan to increase the number of shares of Common Stock available for issuance pursuant to grants by 900,000 shares. Voting for the resolution ratifying the amendment were 16,707,006 shares. Voting against were 1,418,938 shares. Abstaining were 2,187 shares. There were 1,408,719 broker non-votes.
The stockholders also ratified the appointment of KPMG LLP as independent auditors for stockholders of the Company for 2009. Voting for the resolution ratifying the appointment were 19,402,459 shares. Voting against were 131,002 shares. Abstaining were 3,389 shares. There were no broker non-votes.
Item 6 – EXHIBITS
| a) | Exhibits as required by item 601 of Regulation 8-K: |
| | 1) | 31.1 Certification of Chief Executive Officer pursuant to 13a-14(a) under the Securities Exchange Act of 1934. Exhibit 31.1 is filed herewith. |
| | 2) | 31.2 Certification of Chief Financial Officer pursuant to 13a-14(a) under the Securities Exchange Act of 1934. Exhibit 31.2 is filed herewith. |
| | 3) | 32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350. Exhibit 32.1is32.1 is filed herewith. |
| | 4) | 32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350. Exhibit 32.2 is filed herewith. |
DREW INDUSTRIES INCORPORATED
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| DREW INDUSTRIES INCORPORATED | |
| Registrant | |
| | | | |
| By | /s/ Joseph S. Giordano III | |
| Joseph S. Giordano III | |
| Chief Financial Officer and Treasurer | |
May 8,August 7, 2009