LCI Industries - 10-Q quarterly report FY

(Mark One)

OR

For the transition period from _________________ to _________________

(Address of principal executive offices) (Zip Code)

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report) N/A

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 21,491,729 shares of common stock as of October 31, 2008.

(UNAUDITED)

 

 

 

 

 

 

 

 

 

 

The Condensed Consolidated Financial Statements presented herein have been prepared by the Company in accordance with the accounting policies described in its December 31, 2007 Annual Report on Form 10-K and should be read in conjunction with the Notes to Consolidated Financial Statements which appear in that report.

In the opinion of management, the information furnished in this Form 10-Q reflects all adjustments necessary for a fair statement of the financial position and results of operations as of and for the nine and three month periods ended September 30, 2008 and 2007. All such adjustments are of a normal recurring nature. The Condensed Consolidated Financial Statements have been prepared in accordance with the instructions to Form 10-Q and therefore do not include some information and notes necessary to conform with annual reporting requirements.

 

More than 90 percent of the Company’s RV Segment sales are of products used in travel trailers and fifth wheel RVs. The balance represents sales of components for motorhomes, and sales of specialty trailers for hauling boats, personal watercraft, snowmobiles and equipment, as well as axles for specialty trailers.

 

 

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. 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 line for the Company. Lippert is in the process of closing two of Seating Technology's five leased facilities in Indiana, and consolidating those operations into existing facilities. The results of the acquired Seating Technology business have been included in the Company’s Condensed Consolidated Statement of Income beginning July 1, 2008.

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. JT's Strong Arm Jack Stabilizer represents a significant advance in the elimination of side-to-side and front-to-back movement of a parked travel trailer or fifth wheel RV. Total consideration for the acquisition was allocated on an estimated basis to amortizable intangible assets, pending the final valuations.

 

The Company has a $60 million “shelf-loan” facility with Prudential Investment Management, Inc. (“Prudential”) under which the Company had borrowed $35.0 million, of which $7.0 million was outstanding at September 30, 2008. Pursuant to the terms of the shelf-loan facility, the Company can issue, and Prudential’s affiliates may consider purchasing 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 million, to mature no more than seven years after the date of original issue of each transaction. Prudential and its affiliates have no obligation to purchase the additional Senior Promissory Notes. The shelf-loan facility expires on June 13, 2009. Simultaneous with the completion of the new long-term borrowing arrangement with JPMorganChase and Wells Fargo, the Company expects to complete an increase in its uncommitted “shelf-loan” facility with Prudential from $25.0 million to $125.0 million.

 

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.

 

 

 

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 allows plaintiffs to file a new motion for certification if plaintiffs are able to satisfy the Court’s concerns over the viability of plaintiffs’ case. Defendants’ initial motion seeking summary judgment against plaintiffs’ case, which was withdrawn pending further discovery, will be supplemented and refiled in November 2008.

 

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 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 claims

 

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 third motion for certification and it is granted, and if settlement is not reached and 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.

 

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. The matter has been scheduled for trial in December 2008. The Company and the Indiana Department of Revenue are currently in settlement negotiations.

In the normal course of business, the Company is subject to proceedings, lawsuits and other claims. All such matters are subject to uncertainties and outcomes that are not predictable with assurance. While these matters could materially affect operating results when resolved in future periods, it is management’s opinion that after final disposition, including anticipated insurance recoveries, any monetary liability or financial impact to the Company beyond that provided in the consolidated balance sheet as of September 30, 2008, would not be material to the Company’s financial position or annual results of operations.

 

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, payable over five years. The note was initially recorded net of a reserve of $3.4 million. In both January 2008 and 2007, the Company received scheduled payments of principal and interest, which had been previously fully reserved. Therefore, the Company recorded a pre-tax gain of $0.7 million in the first nine months 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.

 

 

As a result of the continued downturn in industry shipments of RVs, manufactured homes and small and medium sized boats, during the third quarter of 2008, the Company conducted an 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, a continued downturn in these 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 intangible 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.

In September 2006, the FASB issued Statement of Financial Accounting Standards (“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-financial assets and liabilities that are not remeasured at fair value on a recurring basis. The adoption of the applicable portions of this standard 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.

In December 2007, the FASB issued SFAS No. 141(R), “Business 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 evaluating the impact of adopting this standard.

 

 

Other than sales of specialty trailers, which aggregated $12 million and $16 million in the first nine months of 2008 and 2007, respectively, and $21 million in all of 2007, sales of products other than components for RVs and manufactured homes are not considered significant. However, certain of the Company’s MH Segment customers produce both manufactured homes and modular homes, and certain of the products manufactured by the Company are suitable for both manufactured homes and modular homes. As a result, the Company is not always able to determine in which type of home its products are installed. Intersegment sales are insignificant.

 

In 2007, U.S industry-wide unit retail sales of travel trailers and fifth wheel RVs, the Company’s primary market, increased 2 percent, while industry-wide wholesale shipments declined 10 percent, an indication that dealers were reducing inventories. In the first nine months of 2008, industry-wide wholesale shipments of travel trailers and fifth wheel RVs declined 21 percent according to the Recreational Vehicle Industry Association (“RVIA”), while Statistical Surveys, Inc. reported that retail sales of travel trailers and fifth wheel RVs declined 20 percent for the first eight months of 2008. August 2008 is the last month for which retail information is available. Retail statistics reported by Statistical Surveys, Inc. do not include sales of RVs in Canada, however wholesale shipment statistics include shipments to Canada. The RVIA reported that nearly one in five towable RVs was shipped to Canada in 2007. Recent RV dealer surveys indicate that inventories, although below year-earlier levels, are still higher than dealers would prefer in this uncertain economic environment and in light of reduced demand.

While the Company tends to measure its RV sales against industry-wide wholesale shipment statistics, it believes the underlying health of the RV industry is determined by retail demand, which has declined throughout 2008. A comparison of the percentage change in industry-wide wholesale shipments and retail shipments of travel trailers and fifth wheel RVs for 2008 is as follows:

Industry-wide wholesale shipments of motorhomes, components for which represent about 5 percent of Drew’s RV segment net sales, were down 42 percent during the first nine months of 2008. Retail sales of motorhomes were down 37 percent for the first eight months of 2008. August 2008 is the last month for which retail industry information is available.

 

The RVIA has projected a 20 percent decline in wholesale shipments of travel trailers and fifth wheel RVs in 2008, and an additional 4 percent decline of wholesale shipments of travel trailers and fifth wheel RVs in 2009. Based upon the further decline in industry-wide wholesale shipments of travel trailers and fifth wheel RVs subsequent to the RVIA forecast, the actual decline for 2008 is likely to be greater than the 20 percent projected.

 

 

Net sales of the RV Segment in the third quarter of 2008 decreased 33 percent, or $41 million, as compared to the third quarter of 2007 due to:

 

 

The above product content per travel trailer and fifth wheel RV for the twelve months ended September 30, 2008 includes historical sales results for acquisitions, under the assumption the acquisitions had been completed at the beginning of that 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 September 30, was as follows:

 

Operating profit of the RV Segment in the third quarter of 2008 decreased 73 percent to $4.6 million due to the decline in sales, as well as a decrease of 8.0 percent 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, the decline in RV Segment operating profit was 26 percent of the decline in net sales, which is higher than we would typically expect, largely due to the impact of increased raw material costs.

As a result of the continued downturn in industry shipments of RVs and small and medium sized boats, during the third quarter of 2008, the Company conducted an 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, a continued downturn in these 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 intangible 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.

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:

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:

 

According to the IBTS, industry production for the twelve months ended September 30, was as follows:

 

Operating profit of the MH Segment in the third quarter of 2008 decreased 3 percent to $3.9 million primarily due to the impact of the decrease in net sales, partially offset by an increase in 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.

As a result of the continued downturn in industry shipments of manufactured homes, during the third quarter of 2008, the Company conducted an 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, 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 intangible assets in the future.

 

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:

Corporate expenses for both the first nine months and third quarter of 2008 were consistent with the same periods of 2007.

Other 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, payable over five years. The note was initially recorded net of a reserve of $3.4 million. In both January 2008 and 2007, the Company received scheduled payments of principal and interest, which had been previously fully reserved. Therefore, the Company recorded a pre-tax gain of $0.7 million in the first nine months 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.

 

The $1.4 million and $0.1 million decrease in interest expense, net, for the first nine months and third quarter of 2008, respectively, as compared to the same periods in 2007, 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 in interest income.

 

Net cash flows from operating activities in the first nine months of 2008 were $64.6 million less than in the same period in 2007, primarily as a result of lower net income and increased inventories in 2008 due to the Company’s strategic purchase of raw materials in advance of price increases and higher priced raw materials in inventory, 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 expects to lower inventory by year end 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 million for the full year in 2007, is expected to be approximately $17 million for the full year in 2008.

Cash flows used for investing activities of $25.1 million in the first nine months of 2008 included $31.6 million for an acquisition of a business and other investments, which 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 million received from the sale of fixed assets in connection with the Company’s consolidation of production operations, partially offset by $3.3 million for capital expenditures. 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.

 

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 used for financing activities for the first nine months of 2008 of $18.4 million were primarily due to debt payments of $10.2 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 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 was primarily due to net debt payments of $13.3 million.

At September 30, 2008, the Company had $7.5 million of cash invested in U.S. Treasury short-term money market instruments with a current yield of approximately 1 percent. At September 30, 2007, the Company had $40.8 million invested in tax free municipal money market funds.

 

Borrowings under the Company’s $70.0 million line of credit at September 30, 2008 were $5.0 million. The Company’s excess cash was not used to pay down these borrowings under the line of credit, as these borrowings are associated with an interest rate swap which results in a favorable fixed interest rate of 4.4 percent. The Company also had $6.8 million in outstanding letters of credit under the line of credit. Availability under 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 enter 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 million “shelf-loan” facility with Prudential Investment Management, Inc. (“Prudential”) under which the Company had borrowed $35.0 million, of which $7.0 million was outstanding at September 30, 2008. Pursuant to the terms of the shelf-loan facility, the Company can issue, and Prudential’s affiliates may consider purchasing 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 million, to mature no more than seven years after the date of original issue of each transaction. Prudential and its affiliates have no obligation to purchase the additional Senior Promissory Notes. The shelf-loan facility expires on June 13, 2009. Simultaneous with the completion of the new long-term borrowing arrangement with JPMorganChase and Wells Fargo, the Company expects to complete an increase in its uncommitted “shelf-loan” facility with Prudential from $25.0 million to $125.0 million.

At September 30, 2008, 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.

 

On November 29, 2007, the Board of Directors authorized the Company to repurchase up to 1 million shares of the Company’s Common Stock. The Company is authorized to purchase shares from time to time in the open market, or privately negotiated transactions, or block trades. During the third quarter of 2008, 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, 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.

Additional information required by this item is included under Item 1 of Part II of this quarterly report on Form 10-Q.

In September 2006, the FASB issued Statement of Financial Accounting Standards (“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-financial assets and liabilities that are not remeasured at fair value on a recurring basis. The adoption of the applicable portions of this standard 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.

 

 

 

 

This Form 10-Q may contain 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”).

 

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 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, the disposition into the market by 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, a sales decline in either the RV or manufactured housing industries, the financial condition of our customers, retention of significant customers, interest rates, oil and gasoline prices, the outcome of pending litigation, and adverse weather conditions impacting retail sales. In addition, national and regional economic conditions and consumer confidence may affect the retail sale of recreational vehicles and manufactured homes.

 

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, the Company had $11.1 million of fixed rate debt plus $5.0 million outstanding under the line of credit associated with the interest rate swap. Assuming there is a decrease of 100 basis points in the interest rate for borrowings of a similar nature subsequent to September 30, 2008, 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 million lower per annum than if the fixed rate financing could be obtained at current market rates.

At September 30, 2008, the Company had $1.0 million of variable rate debt, excluding the $5.0 million outstanding under the line of credit associated with the interest rate swap. 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, 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 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 balances 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.

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.

There were no changes in the Company’s internal controls over financial reporting during the quarter ended September 30, 2008 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 controls over financial reporting.

 

 

 

 

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 allows plaintiffs to file a new motion for certification if plaintiffs are able to satisfy the Court’s concerns over the viability of plaintiffs’ case. Defendants’ initial motion seeking summary judgment against plaintiffs’ case, which was withdrawn pending further discovery, will be supplemented and refiled in November 2008.

 

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 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 claims

 

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 third motion for certification and it is granted, and if settlement is not reached and 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.

 

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. The matter has been scheduled for trial in December 2008. The Company and the Indiana Department of Revenue are currently in settlement negotiations.

In the normal course of business, the Company is subject to proceedings, lawsuits and other claims. All such matters are subject to uncertainties and outcomes that are not predictable with assurance. While these matters could materially affect operating results when resolved in future periods, it is management’s opinion that after final disposition, including anticipated insurance recoveries, any monetary liability or financial impact to the Company beyond that provided in the consolidated balance sheet as of September 30, 2008, would not be material to the Company’s financial position or annual results of operations.

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.

 

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.

 

 

 

November 10, 2008