Quality Components for
RecReational Vehicles & ManufactuRed hoMes
2009 Annual Report
Drew Industries Incorporated is a leading national supplier of components
for recreational vehicles and manufactured homes. Drew operates through
two wholly-owned subsidiaries, Lippert Components, Inc. and Kinro, Inc.
From 24 factories located throughout the United States, Drew supplies the leading manufacturers of
recreational vehicles and manufactured homes. In 2009, recreational vehicle products accounted for
79 percent of Drew’s consolidated net sales, of which nearly 93 percent are for travel trailer and fifth-
wheel RVs. Manufactured housing products accounted for 21 percent of Drew’s consolidated net sales.
Drew’s products include:
• Steel chassis
• Axles and suspension solutions
• RV slide-out mechanisms and solutions
• Thermoformed bath, kitchen and other products
• Toy hauler ramp doors
• Manual, electric and hydraulic stabilizer
and lifting systems
• Specialty trailers for hauling boats, personal watercraft,
snowmobiles and equipment
• Vinyl and aluminum windows and doors
• Chassis components
• Furniture and mattresses
• Entry and baggage doors
• Entry steps
• Other towable accessories
Management of Drew is committed to acting ethically and responsibly, and to providing full and accurate
disclosure to the Company’s stockholders, employees and other stakeholders.
Drew Industries Incorporated
Financial highlights
(In thousands, except per share amounts)
2009(1)
2008(1)
2007
2006
2005
Years Ended December 31,
Operating Data:
Net sales
Goodwill impairment
Executive retirement
Operating (loss) profit
$ 397,839
$ 510,506
$ 668,625
$ 729,232
$ 669,147
$ 45,040
$ 5,487
$
— $ 2,667
$
$
— $
— $
— $
— $
—
—
$ (35,581) $ 19,898
$ 65,959
$ 55,295
$ 57,729
(Loss) income before income taxes
$ (36,370) $ 19,021
$ 63,344
$ 50,694
$ 54,063
(Benefit) provision for income taxes
$ (12,317) $ 7,343
$ 23,577
$ 19,671
$ 20,461
Net (loss) income
$ (24,053) $ 11,678
$ 39,767
$ 31,023
$ 33,602
Net (loss) income per common share:
Basic
Diluted
Financial Data:
Working capital
Total assets
Long-term indebtedness
Other long-term obligations
Stockholders’ equity
$
$
(1.10) $
(1.10) $
0.54
0.53
$
$
1.82
1.80
$
$
1.43
1.42
$
$
1.60
1.56
$ 113,744
$ 84,378
$ 89,861
$ 61,979
$ 76,146
$ 288,065
$ 311,358
$ 345,737
$ 311,276
$ 307,428
$
— $ 2,850
$ 18,381
$ 45,966
$ 62,093
$ 8,243
$ 6,913
$ 4,747
$ 1,361
$ 2,675
$ 244,115
$ 258,878
$ 251,536
$ 204,888
$ 167,709
(1) The Company recorded after-tax charges for goodwill impairment of $29.4 million in 2009 and $3.3 million in 2008. In addition, during
2009 and 2008, the Company recorded after-tax expenses of $5.5 million and $1.5 million, respectively, due to plant closings and start-ups,
staff reductions and relocations, increased bad debts, and obsolete inventory and tooling, largely due to the unprecedented conditions in
the RV and manufactured housing industries, as well as executive retirement in 2008.
Excluding these charges, net income was $10.8 million, or $0.50 per diluted share, in 2009, and net income was $16.5 million, or
$0.75 per diluted share, in 2008. For a reconciliation to consolidated results, see Management’s Discussion and Analysis of Financial
Condition and Results of Operations in the accompanying Annual Report on Form 10-K.
TOTAL SALES
( in millions)
EQUITY PER
COMMON SHARE
YEAR-END
DEBT-TO-EQUITY
RATIO
ADJUSTED NET
INCOME PER
COMMON SHARE
(diluted)
$669.1
$729.2
$668.6
$510.5
$397.8
$7.81
$9.45
$11.47
$12.03
$11.11
0.4
0.3
0.1
0.0
0.0
$1.56
$1.42
$1.80
$0.75*
$0.50*
Recreational
Vehicle
Products
Segment
Manufactured
Housing
Products
Segment
2005
2006
2007
2008
2009
2005
2006
2007
2008
2009
2005
2006
2007
2008
2009
2005
2006
2007
2008
2009
* Excludes charges for impairment of goodwill and expenses due to plant closings and start-ups, staff reductions and relocations, increased
bad debts, and obsolete inventory and tooling, largely due to the unprecedented conditions in the RV and manufactured housing industries
in 2008 and 2009, as well as charges for executive retirement in 2008. For a reconciliation to consolidated results, see Management’s
Discussion and Analysis of Financial Condition and Results of Operations in the accompanying Annual Report on Form 10-K.
2009 Annual Report // page 1
Net Sales
(in millions)
Equity per
Common Share
Year-End Debt-to-
Equity Ratio
Net Income Per
Common Share
(diluted)
$1.80
$1.56
$1.42
$729.2
$669.1
$668.6
$11.47
$12.03
0.6
$530.9
$510.5
$9.45
$7.81
0.4
$1.18
$5.92
0.3
2004
2005
2006
2007
2008
2004
2005
2006
2007
2008
2004
2005
2006
2007
2008
2004
2005
2006
2007
2008
Recreational Vehicle
Products Segment
Manufactured Housing
Products Segment
$0.53
0.1
0.0
2.0
1.5
1.0
0.5
0.0
0.6
0.5
0.4
0.3
0.2
0.1
0.0
0.40
0.35
0.30
0.25
0.20
0.15
0.10
0.05
0.00
0.6
0.5
0.4
0.3
0.2
0.1
0.0
2.0
1.5
1.0
0.5
0.0
1000
800
600
400
200
0
800
700
600
500
400
300
200
100
0
15
12
9
6
3
0
1000
800
600
400
200
0
800
700
600
500
400
300
200
100
0
15
12
9
6
3
0
letter to stockholders
Before discussing Drew’s operations and the current conditions in the recreational vehicle
and manufactured housing industries, we want to express our sincere thanks to Drew’s
management team and our thousands of dedicated employees, whose extraordinary efforts
have enabled Drew to thrive, even during incredibly difficult economic times.
Last year at this time, Drew faced unprece-
no debt and $65 million of cash and secure short-
dented difficulties due to the recession and its severe
term investments. At the same time, our manage-
impact on the industries we serve. Industry-wide
ment team continued to expand our product lines
production of RVs and manufactured homes had
and gain market share. And, they accomplished all
plummeted in response to economic conditions. Our
this while maintaining our reputation for outstanding
management team was challenged to accomplish
product quality and customer service.
even more with fewer people. They met this chal-
Despite these accomplishments by our man-
lenge by expanding our cost savings initiatives,
agement team, Drew could not entirely avoid the
reducing fixed costs by an additional $9 million,
impact of the recession. For consumers, RVs and
bringing our total cost reductions to more than $24
manufactured homes are “big ticket,” discretionary
million since 2006. This was accomplished by fur-
purchases. Therefore, job losses, low consumer
ther streamlining Drew’s operating structure and
confidence, and extremely tight credit conditions
consolidating the sales, administrative and support
severely impacted purchases of these items. As
functions of our subsidiaries. In addition, manage-
a result, industry-wide production of travel trailer
ment improved asset utilization, enabling Drew to
and fifth-wheel RVs, Drew’s primary RV markets,
generate $65 million of cash flow even in a difficult
dropped from a high of 292,000 units in 2006, to
economic environment, so that we ended 2009 with
138,000 units in 2009, a decline of 53 percent.
Drew Industries Incorporated // page 2
During this same period, industry-wide production of
such data is available. During that period, industry-
manufactured homes declined by 58 percent.
wide production increased by 62 percent over the
Although we were able to offset a portion of
depressed year-earlier levels. Many of our custom-
these industry-wide contractions through new product
ers, the leading producers of RVs, have experienced
introductions, market share gains, and acquisitions,
significant increases in backlogs, which has caused
Drew’s consolidated sales fell 45 percent during this
them to increase production levels, and in some
three-year period, from $729 million in 2006, to
cases has led them to expand production capacity.
$398 million in 2009. For 2009, Drew reported a
Further, after a year and a half spent reducing
net loss of $24.1 million, or ($1.10) per diluted
their inventories of travel trailers and fifth-wheel RVs
share, due to a first quarter non-cash goodwill
by an estimated 70,000 units, RV dealers are now
impairment charge of $29.4 million, net of taxes, or
stabilizing their inventories, or in some cases adding
($1.34) per diluted share. Excluding the goodwill
to inventories. The fact that floor plan lenders to RV
impairment charge, net income was $5.2 million, or
dealers are confident enough to allow some dealers
$0.24 per diluted share. In 2009, Drew also incurred
to replenish their inventories is encouraging.
expenses totaling $5.5 million, net of taxes, or
Historically, following recessions the RV industry has
($0.25) per share, from plant closings and start-ups,
often recovered ahead of the general economy.
staff reductions and relocations, increased bad debt
As a result of these improvements in the RV
and obsolete inventory and tooling, largely due to the
industry, and our cost saving initiatives, Drew’s oper-
unprecedented conditions in the industries we serve.
ating results have also improved. Our sales in the
While these historical results are of concern, the
fourth quarter of 2009 increased 37 percent, or $28
present and the future are what matter most to our
million, from year-earlier levels, and EPS, before
stockholders, employees and other stakeholders.
special charges, improved from a loss of ($0.16) in
The state of the RV industry, which accounts for
the fourth quarter of 2008, to earnings of $0.20 in
nearly 80% of Drew’s sales, has improved in recent
the 2009 fourth quarter. Sales continued to trend up
months. Industry-wide production of travel trailers
in early 2010, with first quarter sales exceeding
and fifth-wheel RVs has shown significant year-over-
$145 million, more than double the amount of sales
year increases each month from August 2009
reported in the 2009 first quarter.
through February 2010, the latest month for which
2009 Annual Report // page 3
Of course, sustained improvement in the RV
to benefit from increased consumer demand for
industry and Drew’s results will depend to a large
more affordable housing.
extent on increases in retail sales of RVs. Data on
As the timing and extent of an economic recovery
retail sales of travel trailer and fifth-wheel RVs over
remain unclear, we continue to focus on controlling
the winter has been mixed. Compared to the same
costs and maintaining a strong balance sheet. At
periods in the prior year, retail sales in January 2010
the same time, we continue to explore growth
were down 9 percent, after being flat in November
opportunities, both within the RV and manufactured
2009 and up 5 percent in December 2009.
housing industries and in related markets such as
However, anecdotal reports from the numerous RV
components for mid-size buses and specialty trailers,
retail trade shows in early 2010 consistently cited
through which we can utilize our financial strength,
increased traffic and sales. The response by RV con-
manufacturing expertise, and talented management
sumers in the approaching spring and summer sea-
team to deliver superior results.
sons will be pivotal.
In February and March 2010, we announced
The manufactured housing industry has contin-
two transactions through which we acquired several
ued to decline, and there have been no tangible
exciting patent-pending RV products, including an
signs of recovery. Nevertheless, in 2009, Drew con-
innovative new type of slide-out mechanism which
tinued to be profitable in our manufactured housing
has been sold in the RV market for the last several
segment, as we have throughout the more than
months. We expect this new RV wall slide-out design
decade-long industry contraction. In addition, in late
to gain significant additional market share because it
2009, we introduced a new line of entry doors, and
is considerably lighter and more space efficient than
increased our efforts to gain a greater share of the
existing slide-out mechanisms. It also minimizes the
after-market for replacement windows, doors, and
need for manual adjustments by the RV user, sub-
thermoformed bath and kitchen products for the
stantially reducing one of the biggest warranty issues
millions of existing manufactured homes. Further,
for RV dealers. Other products acquired in these
we believe that when the overall housing market
transactions include an aluminum cylinder used in
recovers, the manufactured housing industry is likely
motorhome leveling devices, a new high-end leveling
Drew Industries Incorporated // page 4
system for fifth-wheel RVs, and a new tent camper
We continue to believe in our long-standing
system. We also expanded our R&D capabilities
strategy of organic growth, new product introduc-
through product development and consulting agree-
tions, strategic acquisitions, and operational efficien-
ments with the sellers of the wall-slide design, who
cies, and we remain committed to our goals of
are already working on a “new concept” leveling
delivering superior operating results and maximizing
device for motorhomes, and improvements to our
stockholder value.
power TV lifts.
Once again, we thank our dedicated employees,
We have an exciting lineup of other new prod-
and we are grateful to our customers, suppliers and
ucts designed to enhance the RV experience. For
other partners, all of whom are integral to Drew’s
example, we have developed safer, more attractive
continued success.
and more secure RV entry doors, easier and safer
couplers for connecting the towing vehicle to the RV,
a more convenient waste management system, and
sleeker, more appealing window designs. The typi-
cal RV buyer spends from $10,000 to more than
Edward W. Rose, III
$100,000 on an RV which they will use to enhance
Lead Director
their leisure time, and they are likely to want
the latest conveniences and comforts available. That
profile of the typical RVer should give Drew the
opportunity to continue to introduce new products
and grow our content per RV.
The steps we have taken to reduce costs and
improve efficiencies, along with the investments we
made, have put us in a great position to leverage our
profitability as the economy recovers. In addition, we
Leigh J. Abrams
Chairman of the Board
have the financial strength and management exper-
Fredric M. Zinn
tise to further expand our potential.
President and Chief Executive Officer
2009 Annual Report // page 5
RecReational Vehicle
PRoducts
RV Products Segment Revenue = $313 million
Drew’s RV Products Segment accounted for 79 percent
of consolidated net sales in 2009, of which nearly 93
percent were used in travel trailers and fifth-wheel RVs.
DREW SALES CONTENT PER TOWABLE
RV PRODUCED INDUSTRY-WIDE
Peak sales potential is $ 3,900 to $ 4,300 per RV
DREW SALES CONTENT PER
MANUFACTURED HOME PRODUCED
INDUSTRY-WIDE
Peak sales potential is $ 3,600 to $ 4,000 per manufactured home
2500
Through market share gains, new product introductions and strategic
acquisitions, Drew has consistently increased market share of compo-
nents for the RV industry. Since 2001, Drew’s RV Segment has achieved
a 15 percent compound annual growth rate in its content in the average
travel trailer and fifth wheel RV produced by the RV industry, from $670
in 2001 to $2,101 in 2009, an average increase of nearly $180 per year.
1500
2000
1000
Recent product introductions and enhancements, which were enthu-
siastically received at the December 2009 Louisville RV Trade Show,
have primarily focused on innovations that enhance the “RV experience”
by making the RV safer, more comfortable and more user-friendly.
The Company’s strong balance sheet and solid cash flow provide
the resources which will enable the Company to continue to pursue
growth opportunities in the RV market.
500
0
$670
$862
$1,012
$1,281
$1,374
$1,542
$1,697
$1,902
$2,101
$663
$796
$871
$1,281
$1,330
$1,666
$1,611
$1,489
$1,378
2001
2002
2003
2004
2005
2006
2007
2008
2009
2001
2002
2003
2004
2005
2006
2007
2008
2009
2000
1500
1000
500
0
Drew Industries Incorporated // page 6
ManufactuRed housing
PRoducts
MH Products Segment Revenue = $85 million
Drew’s MH Products Segment accounted for
DREW SALES CONTENT PER TOWABLE
RV PRODUCED INDUSTRY-WIDE
21 percent of consolidated net sales in 2009.
Peak sales potential is $ 3,900 to $ 4,300 per RV
$862
$670
The manufactured housing industry has experienced a decade-
long decline which resulted in an 87 percent drop in industry
$1,374
production of manufactured homes since 1998. Nevertheless,
Drew’s Manufactured Housing Segment has been profitable
each year throughout this very difficult period.
$2,101
$1,281
$1,902
$1,542
$1,012
$1,697
DREW SALES CONTENT PER
MANUFACTURED HOME PRODUCED
INDUSTRY-WIDE
Peak sales potential is $ 3,600 to $ 4,000 per manufactured home
$663
$796
$871
$1,281
$1,330
$1,666
$1,611
$1,489
$1,378
In late 2009, the Company expanded its manufactured housing
product line with the introduction of a line of entry doors, a new
$25 million to $30 million market for Drew, of which approxi-
mately half is in aftermarket entry doors for existing homes. At
the same time, the Company increased its focus on the after-
market for replacement windows, and thermoformed bath and
kitchen products for manufactured homes.
2001
2002
2003
2004
2005
2006
2007
2008
2009
2001
2002
2003
2004
2005
2006
2007
2008
2009
2009 Annual Report // page 7
2000
1500
1000
500
0
2500
2000
1500
1000
500
0
coRPoRate infoRMation
BOARD OF DIRECTORS
(LEFT TO RIGHT, TOP)
Edward W. Rose, III; Leigh J. Abrams;
Fredric M. Zinn; Jason D. Lippert
(LEFT TO RIGHT, BOTTOM)
James F. Gero; Frederick B. Hegi, Jr.;
David A. Reed; John B. Lowe, Jr.
B OA RD O F D IRE C T O RS
C O RP O R AT E O F FI C E RS
edward W. rose, iii(1)
Lead Director of the Board of
Drew Industries Incorporated
President of Cardinal Investment
Company, Inc.
leigh J. abrams
Chairman of the Board
of Drew Industries Incorporated
Fredric M. Zinn
President and Chief Executive Officer
of Drew Industries Incorporated
Jason d. lippert
Chairman, President and
Chief Executive Officer of
Lippert Components, Inc. and Kinro, Inc.
James F. gero(1)(2)(3)
Private Investor and
Chairman of Orthofix International, N.V.
Frederick B. hegi, Jr.(1)(2)(3)
Founding Partner, Wingate Partners
david a. reed(1)(2)(3)
President of Causeway
Capital Management LLC
John B. lowe, Jr.(1)(2)(3)
Chairman of TDIndustries, Inc.
Members of the Committees of the
Board of Directors, as follows:
(1) Compensation Committee
(2) Audit Committee
(3) Corporate Governance and
Nominating Committee
Fredric M. Zinn
President and Chief Executive Officer
Joseph s. giordano iii
Chief Financial Officer and Treasurer
harvey F. Milman, esq.
Vice President-Chief Legal Officer
and Secretary
christopher l. smith
Corporate Controller
E X E C U TI V E O F FI C E S
200 Mamaroneck Avenue
White Plains, NY 10601
(914) 428-9098
website: www.drewindustries.com
E-mail: drew@drewindustries.com
LIPPE R T C O M P O N E N T S , IN C .
Corporate Headquarters
2703 College Avenue
Goshen, IN 46528
(574) 535-1125
K IN R O, IN C .
Corporate Headquarters
4381 Green Oaks Boulevard West
Arlington, TX 76016
(817) 483-7791
IN D E PE N D E N T RE g IS T E RE D
PU B LI C A C C O U N TIN g FIRM
KPMG LLP
Stamford Square
3001 Summer Street
Stamford, CT 06905
TR A NS FER Ag EN T A ND REgIS TR A R
American Stock Transfer
& Trust Company
59 Maiden Lane
New York, NY 10038
(212) 936-5100
(800) 937-5449
website: www.amstock.com
C O RP O R AT E g OV E RN A N C E
Copies of the Company’s Governance
Principles, Guidelines for Business
Conduct, Code of Ethics for Senior
Financial Officers, and the Charters
and Key Practices of the Audit,
Compensation, and Corporate
Governance and Nominating
Committees are on the Company’s
website, and are available upon
request, without charge, by
writing to:
Secretary
Drew Industries Incorporated
200 Mamaroneck Avenue
White Plains, NY 10601
C E O / C FO C E R TIFI C ATI O N S
The most recent certifications by our
Chief Executive Officer and Chief
Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of
2002 are filed as exhibits to our
Form 10-K. We have also filed with
the New York Stock Exchange the
most recent Annual CEO Certification
as required by Section 303A.12 (a) of
the New York Stock Exchange Listed
Company Manual.
PAy- FO R- PE RFO RM A N C E
Through a combination of annual performance-based incentives and long-term stock options, Drew strives to attract, motivate and retain
talented, entrepreneurial and innovative management.
We have designed our pay-for-performance incentive compensation program to be the “workhorse” of our management compensation.
Performance-based incentive compensation has historically represented the major portion of the overall compensation of our key managers.
We believe that those key employees who have the greatest ability to inf luence the Company’s results should be compensated primarily based
on the financial results of those operations for which they are responsible.
Our stock option and deferred stock unit programs ensure that our managers have a continuing personal interest in the long-term success of
the Company and create a culture of ownership among management, while also rewarding long-term return to stockholders.
Drew Industries Incorporated // page 8
2009 Form 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended
December 31, 2009
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECUTITIES EXCHANGE ACT OF
1934 For the transition period from to ___________________
Commission file number: 001-13646
State or other jurisdiction of incorporation or organization
Delaware
13-3250533
(I.R.S. Employer Identification No.)
Drew Industries Incorporated
(Exact name of registrant as specified in its charter)
200 Mamaroneck Avenue, White Plains, NY
(Address of principal executive offices)
Registrant’s telephone number, including area code: (914) 428-9098
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, par value $0.01
Securities registered pursuant to section 12(g) of the Act: None
10601
(Zip Code)
Name of each exchange on which registered
New York Stock Exchange
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the securities Act.
(cid:133) Yes (cid:55) No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
(cid:133) Yes (cid:55) No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for the past 90 days. (cid:55) Yes (cid:133) No
Indicate by check mark whether the registrant submitted electronically and posted on its corporate Website, if any, every
Interactive Data File required to be submitted and posted pursuant to the Rule 405 of Regulations S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files). (cid:133) Yes (cid:133) No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is
not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any amendment of this Form 10-K. (cid:55)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a
smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting
company” in Rule 12(b)-2 of the Exchange Act. Accelerated filer (cid:55)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). (cid:133) Yes (cid:55) No
The aggregate market value of the voting common equity held by non-affiliates computed by reference to the price at which
the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the
registrant’s most recently completed second fiscal quarter was $225,918,593. Registrant has no non-voting common stock.
The number of shares outstanding of the registrant’s common stock, as of the latest practicable date (February 26, 2010) was
21,973,608 shares of common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement with respect to the 2010 Annual Meeting of Stockholders to be held on May 19, 2010 is incorporated by
reference into Items 10, 11, 12 and 14 of Part III.
1
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-K contains certain “forward-looking statements” within the meaning of the Private
Securities Litigation Reform Act of 1995 with respect to financial condition, results of operations, business
strategies, operating efficiencies or synergies, competitive position, growth opportunities for existing products,
plans and objectives of management, markets for the Company’s Common Stock and other matters. Statements in
this Form 10-K that are not historical facts are “forward-looking statements” for the purpose of the safe harbor
provided by Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”) and Section 27A of the
Securities Act of 1933 (the “Securities Act”).
Forward-looking statements, including, without limitation, those relating to our future business prospects,
revenues, expenses, income (loss), cash flow, and financial condition, whenever they occur in this Form 10-K are
necessarily estimates reflecting the best judgment of our senior management at the time such statements were
made, and involve a number of risks and uncertainties that could cause actual results to differ materially from those
suggested by forward-looking statements. The Company does not undertake to update forward-looking statements
to reflect circumstances or events that occur after the date the forward-looking statements are made. You should
consider forward-looking statements, therefore, in light of various important factors, including those set forth in
this Form 10-K, and in our subsequent filings with the Securities and Exchange Commission (“SEC”).
There are a number of factors, many of which are beyond the Company’s control, which could cause actual
results and events to differ materially from those described in the forward-looking statements. These factors
include, in addition to other matters described in this Form 10-K, pricing pressures due to domestic and foreign
competition, costs and availability of raw materials (particularly steel and related components, vinyl, aluminum,
glass and ABS resin), availability of credit for financing the retail and wholesale purchase of manufactured homes
and recreational vehicles (“RVs”), inventory levels of dealers and manufacturers, levels of repossessed
manufactured homes and RVs, the disposition into the market by the Federal Emergency Management Agency
(“FEMA”), by sale or otherwise, of RVs or manufactured homes purchased by FEMA, changes in zoning
regulations for manufactured homes, sales declines in either the RV or manufactured housing industries, the
financial condition of our customers, the financial condition of retail dealers of RVs and manufactured homes,
retention of significant customers, interest rates, oil and gasoline prices, and the outcome of litigation. In addition,
national and regional economic conditions and consumer confidence affect the retail sale of RVs and manufactured
homes.
PART I
Item 1. BUSINESS.
Summary
Drew Industries Incorporated (“Drew” or the “Company” or the “Registrant”) has two reportable operating
segments: the recreational vehicle (“RV”) products segment (the “RV Segment”), and the manufactured housing
products segment (the “MH Segment”). The RV Segment accounted for 79 percent of consolidated net sales for
2009, and the MH Segment accounted for 21 percent of consolidated net sales for 2009. Nearly 93 percent of the
Company’s RV Segment sales were of products for travel trailers and fifth-wheel RVs. The balance represents
sales of components for motorhomes and mid-size buses, and sales of specialty trailers for hauling boats, personal
watercraft, snowmobiles and equipment, as well as axles for specialty trailers. Drew’s operations are conducted
through its wholly-owned subsidiaries, Kinro, Inc. and its subsidiaries (collectively, “Kinro”), and Lippert
Components, Inc. and its subsidiaries (collectively, “Lippert”), each of which has operations in both the RV
Segment and the MH Segment.
Over the last ten years, the Company acquired a number of manufacturers of products for RVs,
manufactured homes, and specialty trailers, expanded its geographic market and product lines, consolidated
manufacturing facilities, and integrated manufacturing, distribution and administrative functions. At December 31,
2009, the Company operated 24 manufacturing facilities in 12 states, and achieved consolidated net sales of $398
million for the year.
2
The Company was incorporated under the laws of Delaware on March 20, 1984, and is the successor to
Drew National Corporation, which was incorporated under the laws of Delaware in 1962. The Company's principal
executive and administrative offices are located at 200 Mamaroneck Avenue, White Plains, New York 10601;
telephone number (914) 428-9098; website www.drewindustries.com; e-mail drew@drewindustries.com. The
Company makes available free of charge on its website its Annual Report on Form 10-K, Quarterly Reports on
Form 10-Q, Current Reports on Form 8-K (and amendments to those reports) filed with the Securities and
Exchange Commission as soon as reasonably practicable after such materials are electronically filed.
Recent Developments
Sales and Profits During the Recession
In Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” we
describe in detail the effect on our operations of the substantial decline in sales in both the RV Segment and the
MH Segment during 2009 and 2008.
Briefly, during 2008, as a result of the severe economic downturn and the resulting decline in shipments by
the RV and manufactured housing industries, the two industries to which we sell our products, we suffered a 24
percent decline in our sales from $669 million in 2007 to $511 million in 2008. Our net income declined 71 percent
from $39.8 million in 2007 to $11.7 million in 2008, after giving effect to $4.9 million of after-tax charges related
to goodwill impairment and executive retirement.
During the first six months of 2009, the economy and the industries we serve remained weak. As a result,
we experienced a 45 percent decline in our sales from $310 million in the first six months of 2008 to $172 million
in the first six months of 2009. In the first six months of 2009, we reported a net loss of $34.1 million, including a
non-cash after-tax charge of $29.4 million related to a goodwill impairment, as compared to net income of $18.3
million in the first six months of 2008.
The decline in our results for 2008 and the first six months of 2009 would have been substantially greater
had it not been for an aggressive program of cost-cutting measures and efficiency improvements implemented
beginning in the latter part of 2006, as well as the introduction of a variety of new products. The benefits of these
cost-cutting measures will be realized for years to come. Collectively, the fixed cost reductions since 2006 have
improved our annual operating profit by nearly $25 million as compared to what our results would have been if
these steps had not been taken.
During the second half of 2009, industry-wide wholesale shipments of travel trailer and fifth-wheel RVs,
the Company’s primary RV market, increased 32 percent compared to the second half of 2008, while manufactured
housing industry-wide production declined by 33 percent. As a result, our sales increased to $226 million in the
second half of 2009, or 13 percent over the same period in 2008, and we reported net income of $10.1 million in
the second half of 2009 as compared to a net loss of $6.6 million in the comparable period of 2008.
Our sales for the first two months of 2010 more than doubled to over $90 million, compared to less than
$44 million in the same period of 2009, when most RV producers were shut down for extended periods of time.
Nearly all of this increase was in sales of the Company’s RV products. Sales of manufactured housing products
increased approximately 3 percent as compared to the first two months of 2009.
On February 19, 2010, the Recreational Vehicle Industry Association (“RVIA”) published its latest
forecast of industry-wide wholesale shipments for 2010, which projects a 31 percent increase in the shipments of
travel trailers and fifth-wheel RVs as compared to 2009. There is no assurance that this RV industry-wide
wholesale shipments level will be achieved. There are no industry forecasts for the manufactured housing industry.
Liquidity
During 2009, in large part because of inventory reduction, as well as cost-cutting and efficiency
improvements, the Company generated significant cash flow. As a result, at December 31, 2009, the Company had
no debt and $65 million in cash and short-term investments.
3
The Company and its subsidiaries have a $50 million revolving line of credit facility with JPMorgan Chase
Bank, N.A. and Wells Fargo Bank, N.A., which expires in December 2011, and a $125 million “shelf-loan” facility
with Prudential Investment Management, Inc. and its affiliates, which expires in November 2011. Aggregate
borrowing availability under these facilities at December 31, 2009 was $37.8 million.
Acquisitions
On May 15, 2009, Lippert acquired the patents for the QuickBiteTM coupler, and other intellectual
properties and assets. The innovative design of the QuickBiteTM automatic dual-jaw locking system eliminates
several steps when coupling a trailer to a tow vehicle, while at the same time making coupling simpler through the
use of an integrated alignment system. The minimum aggregate purchase price was $0.5 million, of which $0.3
million was paid at closing from available cash, with the balance to be paid on May 15, 2010. In addition, Lippert
will pay an earn-out of $2.50 per unit sold, up to a maximum of $2.5 million, during the life of the patents.
On September 11, 2009, Lippert acquired the patent-pending design for a tool box containing a slide-out
storage tray. This newly-designed product, used in pick-up trucks, tow trucks and other mobile service vehicles, is
being produced at the Company’s existing manufacturing plants, with existing management, utilizing production
techniques with which the Company has extensive experience. The purchase price was $0.4 million, which was
paid at closing from available cash.
On September 29, 2009, Kinro acquired certain inventory and equipment used for the production of front
entry doors for manufactured homes, which will increase Kinro’s content per manufactured home and add a new
product category. Kinro began to manufacture entry doors at plants in Indiana and South Carolina in the 2009
fourth quarter. The purchase price was $0.9 million, which was paid at closing from available cash.
On February 18, 2010, Lippert acquired the patent-pending design for a six-point leveling system for fifth-
wheel RVs. The purchase price was $1.4 million paid at closing with available cash, plus an earn-out depending on
future unit sales of the system in excess of certain sales hurdles.
On February 18, 2010, the Company reported that Lippert agreed in principle to acquire certain intellectual
property and other assets from Michigan-based Schwintek, Inc. The purchase would include several products for
which patents are pending, including innovative RV wall slides that are considerably lighter, more space efficient,
and more reliable than previous slide-out designs. The purchase price, undisclosed at the time of the
announcement, is expected to include cash payable at closing, plus an earn-out depending on future unit sales. It is
expected that the cash portion of the purchase price payable at closing will be funded from available cash. Closing
of the transaction is subject to completion of due diligence, agreement on final terms and conditions, the execution
of definitive transaction documents, and satisfaction of customary closing conditions.
RV Segment
Through its wholly-owned subsidiaries, the Company manufactures and markets a number of components
used in the production of RVs, primarily travel trailers and fifth-wheel RVs, including:
●Towable RV steel chassis
●Towable RV axles and suspension solutions
●RV slide-out mechanisms and solutions
●Thermoformed bath, kitchen and other products
●Toy hauler ramp doors
●Manual, electric and hydraulic stabilizer
and lifting systems
●Aluminum windows and screens
●Chassis components
●Furniture and mattresses
●Entry and baggage doors
●Entry steps
●Other towable accessories
●Specialty trailers for hauling boats, personal
watercraft, snowmobiles and equipment
In 2009, the RV Segment represented 79 percent of the Company's consolidated net sales, and 84 percent
of consolidated segment operating profit. Nearly 93 percent of the Company’s RV Segment sales are of products
4
used in travel trailers and fifth-wheel RVs. The balance represents sales of components for motorhomes and mid-
size buses, and sales of specialty trailers, as well as axles for specialty trailers.
Raw materials used by the Company's RV Segment, consisting primarily of fabricated steel (coil, sheet,
tube and I-beam), extruded aluminum, glass, fabric and polyfoam are available from a number of sources, both
domestic and foreign.
Operations of the Company's RV Segment consist primarily of fabricating, welding, painting and
assembling components into finished products, and tempering glass. The Company's RV Segment operations are
conducted at 15 manufacturing and warehouse facilities throughout the United States, strategically located in
proximity to the customers they serve. Of these facilities, 6 also conduct operations in the Company's MH
Segment. See Item 2. “Properties.”
The Company's RV Segment products are sold primarily to major manufacturers of RVs such as Thor
Industries (symbol: THO), Forest River (a subsidiary of Berkshire Hathaway, symbol: BRKA), and Heartland
Recreational Vehicles.
The Company's RV Segment operations compete on the basis of price, customer service, product quality,
and reliability. Although definitive information is not readily available, the Company believes that (i) its market
share for most of its towable RV window and door products exceeds 75 percent; (ii) the two leading suppliers of
RV chassis and chassis parts are the Company and Dexter, a division of Tomkins plc, and the Company's market
share for RV chassis, chassis parts and slide-out mechanisms for travel trailers and fifth-wheel RVs is
approximately 70 percent; (iii) the leading suppliers of axles for towable RVs are the Company, Al-Ko Kober and
Dexter, and the Company’s market share for axles for towable RVs is approximately 50 percent; and (iv) its market
share for upholstered furniture for RVs is approximately 30 percent, and the Company competes with several other
manufacturers. See Item 1. “Business – Intellectual Property” for a description of the patent license agreement
applicable to certain of the Company’s slide-out mechanisms.
Detailed narrative information about the results of operations of the RV Segment is included in Item 7.
“Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
MH Segment
Through its wholly-owned subsidiaries, the Company manufactures and markets a number of components
for new and aftermarket manufactured homes and, to a lesser extent, modular housing and office units, including:
●Vinyl and aluminum windows and screens
●Thermoformed bath and kitchen products
●Axles
●Steel chassis
●Steel chassis parts
●Entry doors
In 2009, the MH Segment represented 21 percent of the Company's consolidated net sales, and 16 percent
of consolidated segment operating profit. Certain of the Company’s MH Segment customers manufacture both
manufactured homes and modular homes, and certain of the products manufactured by the Company are suitable
for both manufactured homes and modular homes. As a result, the Company is not always able to determine in
which type of home its products are installed. The MH Segment also supplies related products to other industries,
representing less than 5 percent of sales of this segment.
Raw materials used by the Company's MH Segment, consisting of fabricated steel (coil, sheet, and I-
beam), extruded aluminum and vinyl, glass, and ABS resin, are available from a number of sources, both domestic
and foreign.
Operations of the Company's MH Segment consist primarily of fabricating, welding, thermoforming,
painting and assembling components into finished products. The Company's MH Segment operations are
conducted at 15 manufacturing and warehouse facilities throughout the United States, strategically located in
proximity to the customers they serve. Of these facilities, 6 also conduct operations in the Company's RV Segment.
See Item 2. “Properties.”
5
The Company's manufactured housing products are sold primarily to major builders of manufactured
homes such as Clayton Homes (a subsidiary of Berkshire Hathaway, symbol: BRKA) and Skyline Corporation
(symbol: SKY) and, to a lesser extent, to distributors of aftermarket products.
The Company's MH Segment competes on the basis of price, customer service, product quality, and
reliability. Although definitive information is not readily available, the Company believes that (i) it is the leading
supplier of windows for manufactured homes, and the Company's market share for windows and screens exceeds
75 percent; (ii) the Company's manufactured housing chassis and chassis parts operations compete with several
other manufacturers of chassis and chassis parts, as well as with builders of manufactured homes, most of which
produce their own chassis and chassis parts, and the Company’s market share for chassis and chassis parts for
manufactured homes is approximately 25 percent; (iii) the Company’s thermoformed bath and kitchen unit
operation competes with three other manufacturers of bath and kitchen units and the Company’s market share for
bath and kitchen products in the product lines the Company supplies exceeds 50 percent.
Detailed narrative information about the results of operations of the MH Segment is included in Item 7.
“Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Sales and Marketing
Other than the activities of its sales personnel and maintenance of customer relationships through price,
quality of its products, service, and customer satisfaction, the Company does not engage in significant marketing
efforts, and does not incur significant marketing or advertising expenditures.
The Company has several supply agreements or other arrangements with certain of its customers that
provide for prices of various products to be fixed for periods generally not in excess of eighteen months; however,
in certain cases the Company has the right to renegotiate the prices on sixty-days’ notice. Both the RV Segment
and the MH Segment typically ship products on average within one to two weeks of receipt of orders from their
customers and, as a result, neither segment has any significant backlog.
The Company’s operations are somewhat seasonal, as sales are typically slower in the first and fourth
quarters, consistent with the industries which the Company supplies.
Capacity
In 2009, the Company’s facilities operated at an average of approximately 45 percent of their practical
capacity, and typically ran one shift of production per day. Therefore, when demand increased in the RV industry
in the latter part of 2009, the Company had the ability to increase production, and could substantially increase
production should demand increase further in the RV or manufactured housing industries. Due to seasonal demand,
capacity utilization varies during the year. Capacity utilization also varies significantly by product line and
geographic region. At December 31, 2009, the Company operated 24 facilities, and for most products has the
ability to fill demand in excess of capacity at individual facilities by shifting production to other facilities, but the
Company would incur additional freight costs. Capital expenditures for 2009 were $3.1 million. The ability to
expand capacity in certain product areas, if necessary, as well as the potential to reallocate existing resources, is
monitored regularly by management.
Intellectual Property
The Company manufactures and sells certain of its slide-out mechanisms pursuant to a non-exclusive
license granted by the exclusive licensee and owner of three patents until October 24, 2017, the date of the last to
expire of the patents. Pursuant to the license, remaining royalties are payable by the Company on an annual basis
until expiration of the patents at the rate of one percent of sales of certain slide-out mechanisms produced by the
Company. For 2009, the Company paid royalties of $0.2 million on sales of applicable slide-out systems. Pursuant
to the license, aggregate royalty payments subsequent to December 31, 2009 through the expiration of the patents
cannot exceed $4.3 million.
6
The Company holds several United States patents and patent applications that relate to various products
sold by the Company, and has granted certain licenses that permit third parties to manufacture and sell products in
consideration for royalty payments. While the Company believes that its patents are valuable, and vigorously
protects its patents when appropriate, none of the individual patent rights is essential to the Company or its
business segments.
From time to time, the Company has received notices that it may be infringing certain patent rights of
others, and the Company has given notices to others that they may be infringing certain patent rights of the
Company. Although the Company has asserted patent infringement claims against others, no material litigation is
currently pending as a result of these claims.
Regulatory Matters
Windows and entry doors produced by the Company for manufactured homes must comply with
performance and construction regulations promulgated by the U.S. Department of Housing and Urban
Development (“HUD”) and by the American Architectural Manufacturers Association relating to air and water
infiltration, structural integrity, thermal performance, emergency exit conformance, and hurricane resistance.
Certain of the Company’s products must also comply with the International Code Council standards, such as the
IRC (International Residential Code), the IBC (International Building Code), and the IECC (International Energy
Conservation Code) as well as state and local building codes. Thermoformed bath products manufactured by the
Company for manufactured homes must comply with performance and construction regulations promulgated by
HUD.
Windows and doors produced by the Company for the RV industry are regulated by The U.S. Department
of Transportation Federal Highway Administration (“DOT”) and National Highway Traffic Safety Administration
(“NHTSA”) division of the DOT governing safety glass performance, egressability, door hinge and lock systems,
egress window retention hardware, and baggage door ventilation.
New tires distributed by the Company are subject to regulations promulgated by DOT and by HUD
relating to weight tolerance, maximum speed, size and components.
Trailers produced by the Company for hauling boats, personal watercraft, snowmobiles and equipment
must comply with regulations promulgated by the NHTSA and Federal Motor Vehicle Safety Standards relating to
lighting, breaking, wheels, tires and other vehicle systems.
Rules promulgated under the Transportation Recall Enhancement, Accountability and Documentation Act
(the “Tread Act”) require manufacturers of motor vehicles and certain motor vehicle related equipment to regularly
make reports and submit documents and certain historical data to NHTSA to enhance motor vehicle safety, and to
respond to requests for information relating to specific complaints or incidents.
Upholstered products and mattresses produced by the Company for motorized RVs must comply with
Federal Motor Vehicle Safety Standards promulgated by NHTSA and regulations promulgated by the Consumer
Products Safety Commission regarding flammability. Plywood, particleboard and fiberboard used in these products
are required to comply with standards for formaldehyde emission levels promulgated by the California Air
Resources Board and adopted by the RVIA.
The Company's operations are also subject to certain Federal, state and local regulatory requirements
relating to the use, storage, discharge and disposal of hazardous chemicals used during their manufacturing
processes.
The Company believes that it is currently operating in compliance with applicable laws and regulations
and has made reports and submitted information as required. The Company does not believe that the expense of
compliance with these laws and regulations, as currently in effect, will have a material effect on the Company's
capital expenditures, earnings or competitive position.
7
Employees
The number of persons employed full-time by the Company and its subsidiaries at December 31, 2009 was
3,054, compared to 2,223 at December 31, 2008 and 3,499 at December 31, 2007. Of the total at December 31,
2009, 2,675 were in manufacturing and product research and development, 102 in transportation, 23 in sales, 61 in
customer support and servicing, and 193 in administration. None of the employees of the Company and its
subsidiaries are subject to collective bargaining agreements. The Company and its subsidiaries believe that
relations with its employees are good.
Item 1A. RISK FACTORS.
Industry Risk Factors
Economic and business conditions beyond our control have had a significant adverse impact on our
earnings, and these conditions may continue.
Our net sales in 2009 fell 22 percent compared to 2008, which adversely impacted our operating results.
We attribute this decline to a combination of factors, including the weak economy and resulting recession, tight
credit, low consumer confidence, and the deterioration in the real estate and mortgage markets. As a result of these
conditions, which may continue, dealers reduced inventories and consumers have been cautious about making
purchases of discretionary “big-ticket” items such as RVs and manufactured homes. See Item 7. “Management’s
Discussion and Analysis of Financial Condition and Results of Operations”.
The severe decline in the retail demand and wholesale production of RVs and manufactured homes has
reduced the demand for our products. Our annual results of operations could decline if industry conditions worsen.
Reductions in the availability of wholesale financing limits the inventories carried by retail dealers of RVs
and manufactured homes, which causes reduced production of RVs and manufactured homes and reduced demand
for our products.
Retail dealers of RVs and manufactured homes generally finance their purchases of inventory with
financing known as floor-plan financing provided by lending institutions. Reduction in the availability of floor-plan
financing would cause many dealers to reduce inventories of RVs and manufactured homes, which would result in
reduced production of RVs and manufactured homes, resulting in reduced demand for our products.
Moreover, dealers which are unable to obtain adequate financing could cease operations. Their remaining
inventories would likely be sold at deep discounts. Such sales would cause a decline in orders for new inventory,
which would reduce demand for our products.
The recession and conditions in the credit market have limited, and could continue to limit, the ability of
consumers to obtain financing for RVs and manufactured homes, resulting in reduced demand for our products.
As a result of the recession and the factors leading to it, there have been significant changes in the lending
practices of financial institutions, and many lenders have severely restricted loan availability. Limitations on the
availability of financing for RVs and manufactured homes limit the ability of consumers to purchase RVs and
manufactured homes, resulting in reduced production, and reduced demand for our products.
Limited availability of financing for manufactured homes and higher costs of this financing limits the
ability of consumers to purchase manufactured homes, which would result in reduced demand for our products.
Loans used to finance the purchase of manufactured homes usually have shorter terms and higher interest
rates, and are more difficult to obtain than mortgages for site-built homes. Historically, lenders required higher
down payment, higher credit scores and other criteria for these loans. Current lending criteria are even higher, and
many potential buyers of manufactured homes may not qualify.
8
The availability, cost, and terms of these loans are also dependent on economic conditions, lending
practices of financial institutions, governmental policies, and other factors, all of which are beyond our control.
Reductions in the availability of financing for manufactured homes and increases in the costs of this financing have
limited, and could continue to limit, the ability of consumers to purchase manufactured homes, resulting in reduced
production of manufactured homes and reduced demand for our products.
Excess inventories at dealers and manufacturers can cause a decline in the demand for our products.
As a result of the severe decline in sales of RVs and manufactured homes, dealers and manufacturers of
RVs and manufactured homes carried excess unsold inventory. Existence of excess inventory can cause a reduction
in orders for new RVs and manufactured homes, which would cause a decline in demand for our products.
High levels of repossessions of manufactured homes and RVs could cause manufacturers to reduce
production of new manufactured homes and RVs, resulting in reduced demand for our products.
Repossessed manufactured homes and RVs are resold by lenders, often at substantially reduced prices,
which reduces the demand for new manufactured homes and RVs. Economic conditions could result in loan
defaults and cause high levels of repossessions, which would cause manufacturers to reduce production of new
manufactured homes and RVs, resulting in reduced demand for our products.
Gasoline shortages, or high prices for gasoline, could lead to reduced demand for our products.
Travel trailer and fifth-wheel RVs, components for which represent nearly 93 percent of our RV Segment
sales, are usually towed by light trucks or SUVs. Generally, these vehicles use more fuel than automobiles,
particularly while towing RVs. High prices for gasoline, or anticipation of potential fuel shortages, can affect
consumer use and purchase of light trucks and SUVs, which would result in reduced demand for fifth-wheel RVs
and travel trailers, and therefore reduced demand for our products.
Disposition into the market by FEMA of RVs or manufactured homes could result in reduced demand for
our products.
From time to time, FEMA purchases RVs or manufactured homes for use in connection with natural
disasters or other circumstances resulting in home displacements. Used or unused RVs or manufactured homes may
later be disposed of by FEMA by sale or otherwise. Disposition of these RVs and manufactured homes in the
market could reduce demand for new RVs and manufactured homes causing manufacturers to reduce production,
which would result in reduced demand for our products.
The manufactured housing industry has been experiencing a significant decline in shipments, which may
continue.
Our MH Segment, which accounted for 21 percent of consolidated net sales for 2009, operates in an
industry which has been experiencing a decline in production of new homes since 1998. The downturn was caused,
in part, by limited availability of financing, and has been exacerbated by economic conditions.
Moreover, because of the weak market for conventional housing, retirees may not be able to sell their
primary residences, or may be unwilling to sell at currently depressed prices, and purchase less expensive
manufactured homes. In addition, the availability of foreclosed site-built homes at reduced prices could impact the
demand for manufactured homes.
If these conditions persist, it is not likely that the manufactured housing industry will improve in the short-
term, and certain of our customers could experience financial difficulties. These factors could result in reduced
demand for products from our MH Segment, as well as difficulties in collecting accounts receivable.
9
Changes in zoning regulations for manufactured homes could lead to reduced demand for our products.
Manufactured housing communities and individual home placements are subject to local zoning
regulations. In the past, there has been resistance by local property owners and zoning officials to zoning
ordinances allowing the location of manufactured homes in certain areas comprised of conventional residences.
Continued resistance to these zoning ordinances could have an adverse impact on sales and production of
manufactured homes, which would reduce demand for our products.
Recently enacted legislation and regulatory changes relating to the financial services industry could impact
the industries we serve which could result in reduced demand for our products.
The Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (“SAFE Act”) was signed into law
in July, 2008. The SAFE Act is intended to establish, within one year from its passage, minimum state standards
for licensing and registration of mortgage lenders, brokers and originators. According to the RVIA and the
Manufactured Housing Institute, this legislation could make loans for RVs and manufactured homes more difficult
to obtain, resulting in fewer sales of RVs and manufactured homes, and less demand for our products.
Company-specific Risk Factors
Volatile raw material costs could adversely impact our financial condition and operating results.
The prices we pay for steel, which represents about 50 percent of our raw material costs, and other key raw
materials, have been volatile.
Because competition and business conditions may limit the amount or timing of increases in raw material
costs that can be passed through to customers in the form of price increases, future increases in raw material costs
could adversely impact our financial condition and operating results. Conversely, as raw material costs decline, we
may not be able to maintain selling prices consistent with higher cost raw materials in our inventory, which could
adversely affect our operating results.
Inadequate supply of raw materials used to make our products could adversely impact our financial
condition and operating results.
If raw materials or components that are used in manufacturing our products, particularly those which we
import, become unavailable, or if the supply of these raw materials and components is interrupted, our
manufacturing operations could be adversely affected. The Company currently imports approximately 15 percent
of its raw materials and components.
We are involved in certain litigation, which, if decided against us, could have a material adverse affect on
our financial condition.
A case is pending against Kinro, purporting to be a class action, in which it is alleged that certain bathtubs
manufactured by Kinro for use in manufactured homes fail to comply with certain safety standards relating to
flame spread. Kinro denies the allegations, is vigorously defending against the claims, and based on extensive
investigation, believes that the bathtubs are in compliance with applicable regulations. Further detail regarding the
litigation is provided in this Form 10-K in Item 3. “Legal Proceedings.”
The loss of any customer accounting for more than 10 percent of our consolidated net sales, and the
consolidation of customers in our industry, could have a material adverse impact on our operating results.
One customer of the RV Segment accounted for 25 percent, and another customer of both the RV Segment
and the MH Segment accounted for 24 percent, of our consolidated net sales in 2009. The loss of either of these
customers could have a material adverse impact on our operating results.
In addition, the concentration of sales of our products to fewer customers as a result of consolidation of
manufacturers in the industries we serve could adversely impact our operating results.
10
The financial condition of several of our significant customers could adversely impact our financial
condition and operating results.
Financial difficulties experienced by certain of our significant customers as a result of the sharp decline in
sales of RVs and manufactured homes could result in reduced demand for our products, as well as losses due to the
inability to collect accounts receivable.
Competitive pressures could reduce demand for our products.
Domestic and foreign competitors may lower prices on products which currently compete with our
products, or develop product improvements, which could reduce demand for our products. In addition, the
manufacture by our customers of products supplied by us could reduce demand for our products.
Non-cash charges for impairment of long-lived other intangible assets may be required.
The declines in the industries to which we sell our products have been severe, and demand for our products
has declined. Continuation of the decline in these industries could result in non-cash impairment charges.
Item 1B. UNRESOLVED STAFF COMMENTS.
None.
Item 2. PROPERTIES.
The Company’s manufacturing operations are conducted at facilities that are used for both manufacturing
and warehousing. In addition, the Company maintains administrative facilities used for corporate and
administrative functions. At December 31, 2009, the Company's properties were as follows:
City
Rialto (1)
Fitzgerald (1)
Burley
Goshen (1)
Goshen
Goshen
Goshen
Goshen (1)
Topeka
Goshen
Goshen
Pendleton
McMinnville (1)
Waxahachie (1)
Kaysville
RV SEGMENT
State
California
Georgia
Idaho
Indiana
Indiana
Indiana
Indiana
Indiana
Indiana
Indiana
Indiana
Oregon
Oregon
Texas
Utah
Square Feet
56,430
15,800
17,000
385,000
171,000
134,500
87,800
81,200
67,560
65,000
53,500
56,800
17,850
43,050
75,000
1,327,490 (2)
Leased
Owned
(cid:51)
(cid:51)
(cid:51)
(cid:51)
(cid:51)
(cid:51)
(cid:51)
(cid:51)
(cid:51)
(cid:51)
(cid:51)
(cid:51)
(cid:51)
(cid:51)
(cid:51)
(1) These plants also produce products for manufactured homes. The square footage
indicated above represents that portion of the building that is utilized for manufacture
of products for RVs.
(2) At December 31, 2008, the Company’s RV Segment used an aggregate of 1,466,379
square feet for manufacturing and warehousing.
11
MH SEGMENT
City
Double Springs
Rialto (1)
Ocala
Cairo
Fitzgerald (1)
Nampa
Goshen
Middlebury
Goshen (1)
Goshen (1)
Arkansas City
McMinnville (1)
Denver
Chester
Waxahachie (1)
State
Alabama
California
Florida
Georgia
Georgia
Idaho
Indiana
Indiana
Indiana
Indiana
Kansas
Oregon
Pennsylvania
South Carolina
Texas
Square Feet
109,000
6,270
47,100
105,000
63,200
83,500
110,000
61,113
25,000
14,500
7,800
17,850
40,200
78,579
156,950
926,062 (2)
Owned
(cid:51)
(cid:51)
(cid:51)
(cid:51)
(cid:51)
(cid:51)
(cid:51)
(cid:51)
(cid:51)
(cid:51)
(cid:51)
(cid:51)
Leased
(cid:51)
(cid:51)
(cid:51)
(1) These plants also produce products for RVs. The square footage indicated above represents that
portion of the building that is utilized for manufacture of products for manufactured homes.
(2) At December 31, 2008, the Company’s MH Segment used an aggregate of 1,092,283 square feet
for manufacturing and warehousing.
.
ADMINISTRATIVE
City
White Plains
Goshen
Goshen
Arlington
Phoenix
State
New York
Indiana
Indiana
Texas
Arizona
Square Feet
Owned
4,059
22,000
15,500
10,473
1,000
53,032
(cid:51)
Leased
(cid:51)
(cid:51)
(cid:51)
(cid:51)
At December 31, 2009, the Company owned the following facilities and vacant land not currently
used in production, having an aggregate book value of $12.2 million:
City
Boaz
Phoenix *
Fontana *
Elkhart *
Bristol
Howe
Elkhart
Dayton
Middlebury
Arkansas City
State
Alabama
Arizona
California
Indiana
Indiana
Indiana
Indiana
Tennessee
Indiana
Kansas
Square Feet
86,600
61,000
108,800
100,000
97,500
60,000
42,000
100,000
12 acres of land
5 acres of land
* Currently leased to a third party.
12
Item 3. LEGAL PROCEEDINGS.
On or about January 3, 2007, an action was commenced in the United States District Court, Central District
of California, entitled Gonzalez vs. Drew Industries Incorporated, Kinro, Inc., Kinro Texas Limited Partnership
d/b/a Better Bath Components; Skyline Corporation, and Skylines Homes, Inc. (Case No. CV06-08233). The case
purports to be a class action on behalf of the named plaintiff and all others similarly situated in California. Plaintiff
initially alleged, but has not sought certification of, a national class.
On April 1, 2008, the Court issued an order granting Drew’s motion to dismiss for lack of personal
jurisdiction, resulting in the dismissal of Drew Industries Incorporated as one of the defendants in the case.
Plaintiff alleges that certain bathtubs manufactured by Kinro Texas Limited Partnership, a subsidiary of
Kinro, and sold under the name “Better Bath” for use in manufactured homes, fail to comply with certain safety
standards relating to flame spread established by the U.S. Department of Housing and Urban Development
(“HUD”). Plaintiff alleges, among other things, that sale of these products is in violation of various provisions of
the California Consumers Legal Remedies Act (Cal. Civ. Code Sec. 1770 et seq.), the Magnuson-Moss Warranty
Act (15 U.S.C. Sec. 2301 et seq.), the California Song-Beverly Consumer Warranty Act (Cal. Civ. Code Sec. 1790
et seq.), and the California Unfair Competition Law (Cal. Bus. & Prof. Code Sec. 17200 et seq.).
Plaintiff seeks to require defendants to notify members of the class of the allegations in the proceeding and
the claims made, to repair or replace the allegedly defective products, to reimburse members of the class for repair,
replacement and consequential costs, to cease the sale and distribution of the allegedly defective products, and to
pay actual and punitive damages and plaintiff’s attorneys fees.
On January 29, 2008, the Court issued an Order denying certification of a class with plaintiff Gonzalez as
the class representative because she no longer owned the bathtub. On March 10, 2008, plaintiff amended her
complaint to include an additional plaintiff, Robert Royalty. Plaintiff Royalty states that his bathtub was not tested
to determine whether it complies with HUD standards. Rather, his allegations are based on “information and
belief”, including the testing of plaintiff Gonzalez’s bathtub and other evidence. Kinro denies plaintiff Royalty’s
allegations.
On June 25, 2008, plaintiffs filed a renewed motion for class certification and the Court again denied
certification of a class. Plaintiffs filed a third motion for class certification on December 23, 2008, and Defendants’
filed a motion seeking summary judgment against plaintiffs’ case.
On May 18, 2009, the Court issued an Order granting partial summary judgment in favor of defendants,
dismissing five of the six claims asserted by plaintiffs, except for plaintiffs’ claim for violation of California’s
Unfair Competition Law (the “UCL”). The Court also granted plaintiffs’ motion for class certification as to that
one claim. The Court denied Defendant’s motion for summary judgment on the UCL claim on the ground that there
was a triable issue of fact as to whether the alleged misrepresentation on defendants’ labels regarding testing for
flame spread rate caused plaintiffs to purchase the manufactured homes containing bathtubs manufactured by
Kinro.
On August 26, 2009, as a result of a decision by the California Supreme Court in an unrelated case dealing
with a similar UCL claim, the Court dismissed plaintiffs’ remaining UCL claim because plaintiffs did not actually
rely on defendants’ labels when they bought the homes containing the bathtubs. However, the Court concluded that
simply selling bathtubs which may fail to satisfy Federal standards may violate the “unfair prong” of the UCL,
even if plaintiffs did not actually rely on defendant’s labels.
On September 11, 2009, defendants filed with the Ninth Circuit Court of Appeals a Petition for Permission
to Appeal, on an interlocutory basis, that part of the District Court’s ruling that certified a class to pursue a claim
under the “unfair prong” of the UCL. On December 11, 2009, the Appeals Court issued an Order denying
defendants’ permission to appeal the District Court’s ruling at this point in the case, but the Appeals Court did not
address the merits of the case.
13
Defendant Kinro has conducted a comprehensive investigation of the allegations made in connection with
the claims, including with respect to the HUD safety standards, prior test results, testing procedures, and the use of
labels. In addition, at Kinro’s initiative, independent laboratories conducted multiple tests on materials used by
Kinro in the manufacture of bathtubs, the results of which tests indicate that Kinro’s bathtubs are in compliance
with HUD regulations.
Based on the foregoing investigation and testing, the District Court’s rulings dismissing plaintiffs’ six
claims, and the ruling on “reliance” by the California Supreme Court, Kinro believes that, notwithstanding the
District Court’s finding that plaintiffs may proceed with their claim that defendants may have violated the “unfair
prong” of the UCL, plaintiffs may not be able to prove the essential elements of their claim. Defendants intend to
vigorously defend against the claim, and intend to move for summary judgment dismissing the claim. In addition,
Kinro believes that no remedial action is required or appropriate under HUD safety standards.
If the District Court maintains its rulings, denies defendants’ motion for summary judgment as to the claim
based on the “unfair prong” of the UCL, and maintains its ruling granting plaintiffs’ motion for class certification
with respect to that claim, and if plaintiffs pursue their claim, protracted litigation could result. Although the
outcome of such litigation cannot be predicted, if certain essential findings are ultimately unfavorable to Kinro, the
Company could sustain a material liability. The Company’s liability insurer denied coverage on the ground that
plaintiffs did not sustain any personal injury or property damage.
In the normal course of business, the Company is subject to proceedings, lawsuits and other claims. All
such matters are subject to uncertainties and outcomes that are not predictable with assurance. While these matters
could materially affect operating results when resolved in future periods, it is management’s opinion that after final
disposition, including anticipated insurance recoveries, any monetary liability or financial impact to the Company
beyond that provided in the Consolidated Balance Sheet as of December 31, 2009, would not be material to the
Company’s financial position or annual results of operations.
Item 4. RESERVED.
14
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following tables set forth certain information with respect to the Directors and Executive Officers of
the Company as of January 1, 2010. Additional information with respect to the Company’s Directors is included in
the Company’s Proxy Statement for the Annual Meeting of Stockholders to be held on May 19, 2010.
Name
Position
Edward W. Rose, III
(Age 68)
Leigh J. Abrams
(Age 67)
Fredric M. Zinn
(Age 58)
James F. Gero
(Age 64)
Lead Director of the Board of Directors since January 2009. Director
since March 1984.
Chairman of the Board of Directors since January 2009. Director since
March 1984.
Chief Executive Officer since January 2009, President and Director since
May 2008.
Director since May 1992.
Frederick B. Hegi, Jr.
(Age 66)
Director since May 2002.
David A. Reed
(Age 62)
John B. Lowe, Jr.
(Age 70)
Jason D. Lippert
(Age 37)
Joseph S. Giordano III
(Age 40)
Scott T. Mereness
(Age 38)
Director since May 2003.
Director since May 2005.
President and Chief Executive Officer of Lippert Components, Inc. since
February 2003, and President and Chief Executive Officer of Kinro,
Inc. since January 2009. Director since May 2007.
Chief Financial Officer since May 2008, Treasurer since May 2003.
Executive Vice President and Chief Operating Officer of Lippert
Components, Inc. since February 2003, and Executive Vice President
and Chief Operating Officer of Kinro, Inc. since February 2010.
EDWARD W. ROSE, III, was Chairman of the Board of Directors from March 1984 to December 31,
2008. For more than the past five years, Mr. Rose has been President and sole stockholder of Cardinal Investment
Company, Inc., an investment firm. Mr. Rose also served as a director of ACE Cash Express, Inc., a publicly-
owned company engaged in check cashing services, until its sale in October 2006. From April 1999 to January
2003, Mr. Rose was a director of TX C.C., Inc., a privately-owned restaurant chain, against which an involuntary
petition for relief under Chapter 11 of the U.S. Bankruptcy Code was filed on February 21, 2003 in the U.S.
Bankruptcy Court for the Northern District of Texas. A plan of reorganization was confirmed on January 28, 2004.
Cardinal Investment Company, Inc., of which Mr. Rose is the sole stockholder, was an indirect General Partner of
MJ Designs, L.P., a privately-owned retailer of arts and crafts products, which filed a petition for relief under
Chapter 11 of the U.S. Bankruptcy Code in January 2003 in the U.S. Bankruptcy Court for the Northern District of
Texas, later converted to a Chapter 7 liquidation.
LEIGH J. ABRAMS, was Chief Executive Officer from March 1984 to December 31, 2008 and President
until May 2008. Since April 2001, Mr. Abrams has also been a director of Impac Mortgage Holdings, Inc., a
publicly-owned specialty finance company organized as a real estate investment trust, and Lead Director of Impac
Mortgage Holdings, Inc. since June 2004. Mr. Abrams is a Certified Public Accountant.
FREDRIC M. ZINN, was Executive Vice President from February 2001 to May 2008 and Chief Financial
Officer from March 1984 to May 2008. Mr. Zinn is a Certified Public Accountant.
15
JAMES F. GERO, is a private investor. Mr. Gero also serves as Chairman of the Board of Orthofix
International, N.V., a publicly-owned international supplier of orthopedic devices for bone fixation and
stimulation, and as a director of Intrusion.com, Inc., a publicly-owned supplier of security software.
FREDERICK B. HEGI, JR., is a founding partner of Wingate Partners, a private equity firm, including the
indirect general partner of each of Wingate Partners L.P. and Wingate Partners II, L.P. Since May 1982, Mr. Hegi
has served as President of Valley View Capital Corporation, a private investment firm. Mr. Hegi is a director of
Texas Capital Bancshares, Inc., a publicly-owned regional bank; and is Chairman of the Board of United
Stationers, Inc., a publicly-owned wholesale distributor of business products. From 1986 until its acquisition in
2007, Mr. Hegi was a director of Lone Star Technologies, Inc., a diversified publicly-owned company engaged in
the manufacture of tubular products. From 1999 to 2001, Mr. Hegi was Chairman, President and Chief Executive
Officer of Kevco, Inc., a publicly-owned distributor of building products to the manufactured housing and
recreational vehicle industries, which filed for protection under Chapter 11 of the United States Bankruptcy Code
on February 5, 2001, later converted to a Chapter 7 liquidation.
DAVID A. REED, is President of Causeway Capital Management LLC, manager of a family investment
partnership. Mr. Reed retired as Senior Vice Chair for Ernst & Young LLP in 2000 where he held several senior
U.S. and global operating, administrative and marketing roles in his 26-year tenure with the firm. He served on
Ernst & Young LLP’s Management Committee and Global Executive Council from 1991-2000. Mr. Reed is a
director of Penson Worldwide, Inc., a publicly-owned company engaged in providing flexible technology-based
processing solutions to the investment industry. From 2005 until its acquisition in 2007, Mr. Reed was a director of
Lone Star Technologies, Inc., a diversified publicly-owned company engaged in the manufacture of tubular
products.
JOHN B. LOWE, JR., has been Chairman of TDIndustries, Inc., a national mechanical/electrical/plumbing
construction and facility service company, since 1981. From January 1981 to January 2005, Mr. Lowe also served
as Chief Executive Officer of TDIndustries. Mr. Lowe is Chairman of the Board of Zale Corporation, a publicly-
owned specialty retailer of fine jewelry, and is a director of KDC Platform, LLC, engaged in real estate
development. Mr. Lowe also serves on the Board of Trustees of the Dallas Independent School District.
JASON D. LIPPERT, was Executive Vice President and Chief Operating Officer of Lippert Components,
Inc., from May 2000 until February 2003, and served as Regional Director of Operations of Lippert Components,
Inc. from 1998 until 2000. Mr. Lippert has been Chairman of Lippert Components, Inc. since January 2007, and
Chairman of Kinro, Inc. since January 2009.
JOSEPH S. GIORDANO III, was Corporate Controller from May 2003 to May 2008. From July 1998 to
August 2002, Mr. Giordano was a Senior Manager at KPMG LLP, and from August 2002 to April 2003, Mr.
Giordano was a Senior Manager at Deloitte & Touche LLP. Mr. Giordano is a Certified Public Accountant.
SCOTT T. MERENESS, was Vice President of Operations of Lippert Components, Inc., from February
2001 to 2003, and was Vice President of Kinro, Inc., from January 2009 until February 2010. Mr. Mereness was
Regional Vice President for Manufactured Housing for Lippert Components, Inc., from 1999 to 2001.
Other Officers
HARVEY F. MILMAN, has been Vice President-Chief Legal Officer of the Company since March 2005.
Prior thereto, Mr. Milman was a partner of the firm of Phillips Nizer LLP, counsel to the Company. Mr. Milman
has served as Secretary of the Company since May 2007, and as Assistant Secretary of the Company for more than
five years prior thereto.
CHRISTOPHER L. SMITH, was Assistant Controller of the Company from August 2005 to May 2008,
and has been Corporate Controller since May 2008. From January 2000 to June 2005, Mr. Smith served as
Assistant Controller of Key Components, LLC, and from August 1997 to January 2000, Mr. Smith was Senior
Associate at Ernst & Young LLP. Mr. Smith is a Certified Public Accountant.
16
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES.
As of February 26, 2010, there were 558 holders of the Company’s Common Stock, in addition to
beneficial owners of shares held in broker and nominee names. The Company’s Common Stock trades on the New
York Stock Exchange under the symbol “DW”.
Information concerning the high and low closing prices of the Company’s Common Stock for each quarter
during 2009 and 2008 is set forth in Note 12 of Notes to Consolidated Financial Statements in Item 8 of this
Report.
Equity Compensation Plan Information as of December 31, 2009
Plan category
Number of securities
to be issued upon
exercise of outstanding
options, warrants
and rights
Weighted average
exercise price of
outstanding options,
warrants and rights
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected
in column (a))
Equity compensation plans
approved by security holders
Equity compensation plans not
approved by security holders
Total
(a)
1,891,053
N/A
1,891,053
(b)
$22.67
N/A
$22.67
(c)
1,090,019
N/A
1,090,019
Pursuant to the Drew Industries Incorporated 2002 Equity Award and Incentive Plan, as amended (the
“2002 Equity Plan”), which was approved by stockholders in May 2002, the Company may grant to its directors,
employees, and consultants Common Stock-based awards, such as stock options, restricted or deferred stock, and
deferred stock units. The number of shares available for granting awards under the 2002 Equity Plan was 1,090,019
and 346,921 at December 31, 2009 and 2008, respectively. At the Annual Meeting of Stockholders held in May
2009, stockholders approved an amendment to the 2002 Equity Plan to increase the number of shares available for
awards by 900,000 shares. The 2002 Equity Plan is the Company’s only equity compensation plan.
17
Item 6. SELECTED FINANCIAL DATA.
The following table summarizes certain selected historical financial and operating information of the
Company and is derived from the Company’s Consolidated Financial Statements. Historical financial data may not
be indicative of the Company’s future performance. The information set forth below should be read in conjunction
with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the
Consolidated Financial Statements and Notes thereto included in Item 7 and Item 8 of this Report, respectively.
(In thousands, except per share amounts)
2009
Year Ended December 31,
2007
2006
2008
2005
Operating Data:
Net sales
Goodwill impairment
Executive retirement
Operating (loss) profit
(Loss) income before income taxes
(Benefit) provision for income taxes
Net (loss) income
Net (loss) income per common share:
Basic
Diluted
Financial Data:
Working capital
Total assets
Long-term obligations
Stockholders’ equity
Dividend Information
$ 397,839
$ 45,040
$
-
$ (35,581)
$ (36,370)
$ (12,317)
$ (24,053)
$ 510,506
$ 5,487
$ 2,667
$ 19,898
$ 19,021
$ 7,343
$ 11,678
$ 668,625
-
$
$
-
$ 65,959
$ 63,344
$ 23,577
$ 39,767
$ 729,232
-
$
$
-
$ 55,295
$ 50,694
$ 19,671
$ 31,023
$ 669,147
-
$
$
-
$ 57,729
$ 54,063
$ 20,461
$ 33,602
$ (1.10)
$ (1.10)
$ 0.54
$ 0.53
$
$
1.82
1.80
$
$
1.43
1.42
$
$
1.60
1.56
$ 84,378
$ 113,744
$ 288,065
$ 311,358
$ 8,243 $ 9,763
$ 258,878
$ 244,115
$ 89,861
$ 345,737
$ 23,128
$ 251,536
$ 61,979
$ 311,276
$ 47,327
$ 204,888
$ 76,146
$ 307,428
$ 64,768
$ 167,709
The Company has not paid any cash dividends on its outstanding shares of Common Stock. Future
dividend policy with respect to the Common Stock will be determined by the Board of Directors of the Company in
light of prevailing financial needs and earnings of the Company and other relevant factors. The Company’s
dividend policy is not subject to restrictions in its financing agreements.
18
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be
read in conjunction with the Company’s Consolidated Financial Statements and Notes thereto included in Item 8 of
this Report.
The Company has two reportable segments, the recreational vehicle (“RV”) products segment (the “RV
Segment”) and the manufactured housing products segment (the “MH Segment”). The Company’s operations are
conducted through its wholly-owned operating subsidiaries, Kinro, Inc. and its subsidiaries (collectively, “Kinro”)
and Lippert Components, Inc. and its subsidiaries (collectively, “Lippert”). Each has operations in both the RV and
MH Segments. At December 31, 2009, the Company operated 24 plants in 12 states.
The RV Segment accounted for 79 percent of consolidated net sales for 2009 and 72 percent for 2008. The
RV Segment manufactures a variety of products used primarily in the production of RVs, including:
●Towable RV steel chassis
●Towable RV axles and suspension solutions
●RV slide-out mechanisms and solutions
●Thermoformed bath, kitchen and other products
●Toy hauler ramp doors
●Manual, electric and hydraulic stabilizer
and lifting systems
●Aluminum windows and screens
●Chassis components
●Furniture and mattresses
●Entry and baggage doors
●Entry steps
●Other towable accessories
●Specialty trailers for hauling boats, personal
watercraft, snowmobiles and equipment
Nearly 93 percent of the Company’s RV Segment sales are of products used in travel trailers and fifth-
wheel RVs. The balance represents sales of components for motorhomes and mid-size buses, and sales of specialty
trailers, as well as axles for specialty trailers. Travel trailers and fifth-wheel RVs accounted for 83 percent and 78
percent of all RVs shipped by the industry in 2009 and 2008, respectively, up from 61 percent in 2001.
The MH Segment, which accounted for 21 percent of consolidated net sales for 2009, and 28 percent for
2008, manufactures a variety of products used in the production of manufactured homes and to a lesser extent,
modular housing and office units, including:
●Vinyl and aluminum windows and screens
●Thermoformed bath and kitchen products
●Axles
●Steel chassis
●Steel chassis parts
●Entry doors
The Company also supplies replacement windows, doors, and thermoformed bath products for existing
manufactured homes.
Sales of products other than components for RVs and manufactured homes are not considered significant.
However, certain of the Company’s MH Segment customers manufacture both manufactured homes and modular
homes, and certain of the products manufactured by the Company are suitable for both manufactured homes and
modular homes. As a result, the Company is not always able to determine in which type of home its products are
installed. Intersegment sales are insignificant.
The Company’s operations are somewhat seasonal, as sales are typically slower in the first and fourth
quarters, consistent with the industries which the Company supplies.
19
INDUSTRY BACKGROUND
Recreational Vehicle Industry
An RV is a vehicle designed as temporary living quarters for recreational, camping, travel or seasonal
use. RVs may be motorized (motorhomes) or towable (travel trailers, fifth-wheel travel trailers, folding camping
trailers and truck campers).
During 2008, and continuing into the first six months of 2009, retail sales of RVs declined because of
severe economic conditions, including low consumer confidence, limited credit availability for both dealers and
consumers, and continued weakness in the real estate and mortgage markets. As a result, RV dealers reduced their
inventory levels, and RV manufacturers significantly reduced their output. According to the Recreation Vehicle
Industry Association (“RVIA”), industry-wide wholesale shipments of travel trailers and fifth-wheel RVs, the
Company’s primary RV markets, declined 53 percent to 59,400 units for the first six months of 2009, which
reduced sales by the Company of components for new RVs. However, during the second half of 2009, industry-
wide wholesale shipments of travel trailers and fifth-wheel RVs increased 32 percent compared to the second half
of 2008, to 78,900 units. This year over year increase in industry-wide wholesale shipments during the second half
of 2009 was reportedly due to a modest restocking of inventory by dealers, as compared to a significant inventory
reduction by RV dealers in the comparable period of 2008, as well as a modest improvement in retail demand in
November and December 2009.
While the Company measures its RV sales against industry-wide wholesale shipment statistics, it believes
the underlying health of the RV industry is determined by retail demand. Through the first 10 months of 2009 and
all of 2008, retail sales remained below prior year levels. However, in November and December 2009, monthly
retail sales of travel trailers and fifth-wheel RVs exceeded the comparable period in the prior year, the first
increases in 24 months. A comparison of the year over year percentage change in industry-wide wholesale
shipments and retail sales of travel trailers and fifth-wheel RVs, as reported by Statistical Surveys, Inc., is as
follows:
Quarter ended March 31, 2008
Quarter ended June 30, 2008
Quarter ended September 30, 2008
Quarter ended December 31, 2008
Quarter ended March 31, 2009
Quarter ended June 30, 2009
Quarter ended September 30, 2009
Quarter ended December 31, 2009
Wholesale
(8%)
(18%)
(38%)
(63%)
(61%)
(44%)
5%
88%
Year ended December 31, 2009
Year ended December 31, 2008
Year ended December 31, 2007
(25%)
(29%)
(10%)
Retail
(17%)
(19%)
(26%)
(34%)
(37%)
(29%)
(19%)
(8%)
(26%)
(23%)
4%
Retail statistics, reported by Statistical Surveys, Inc., do not include sales of RVs in Canada. The RVIA
reported that over one in five wholesale towable RV shipments were to dealers in Canada in 2008. Statistics for
wholesale towable RV shipments to Canada for 2009 are not yet available.
During 2008 and the first eight months of 2009, RV dealers and their lenders focused on reducing
inventories, resulting in a decline of an estimated 70,000 units. In 2009 alone, dealer inventories of travel trailers
and fifth-wheel RVs declined by an estimated 25,000 to 30,000 units, implying that retail demand significantly
exceeded industry-wide wholesale shipments. Over the past few months, it appears that dealer inventories have
stopped declining, and as a result, production levels have increased in order to meet demand. Recent dealer surveys
and analysts report a slight improvement in the availability of wholesale financing. In addition, reports of increased
consumer traffic and consumer purchases from January and February 2010 RV tradeshows, as well as the reported
increase in backlog by the leading producer of RVs, have been encouraging. While these positive factors may
indicate the beginning of a trend, there are still uncertainties relating to high unemployment, tight credit and a weak
20
economy. Retail sales in the traditionally strong spring selling season will be a key indicator of consumer demand
for RVs.
The RVIA has projected a 31 percent increase in industry-wide wholesale shipments of travel trailers and
fifth-wheel RVs for 2010, to 181,800 units. Following the last three recessions, industry-wide wholesale shipments
of RVs grew by more than 20 percent in the first year of the recovery. However, consumer confidence and the
availability of financing have historically been important factors in the overall growth in the RV industry, and there
can be no assurance these factors will improve.
In the long-term, the Company expects RV industry sales to be driven by positive demographics, as
demand for RVs is strongest from the over 50 age group, which is the fastest growing segment of the U.S.
population. U.S. Census Bureau projections released in March 2004 project that there will be in excess of 20
million more people over the age of 50 by 2014.
In 1997, the RVIA began a generic advertising campaign promoting the RV lifestyle. The current phase is
targeted at both parents aged 30-49 with children at home, as well as couples aged 50-64 with no children at home.
The popularity of traveling in RVs to NASCAR and other sporting events, and using RVs as second homes, also
appears to motivate consumer demand for RVs.
Manufactured Housing Industry
Manufactured homes are built entirely in a factory on permanent steel undercarriages or chassis,
transported to a home site, and installed pursuant to a federal building code administered by the U.S. Department of
Housing and Urban Development (“HUD”). The federal standards regulate manufactured housing design and
construction, strength and durability, transportability, fire resistance, energy efficiency and quality. The HUD Code
also sets performance standards for the heating, plumbing, air conditioning, thermal and electrical systems. It is the
only federally regulated national building code. On-site additions, such as garages, decks and porches, often add to
the attractiveness of manufactured homes and must be built to local, state or regional building codes. A
manufactured home may be sited on owned or leased land.
The Institute for Building Technology and Safety (“IBTS”) reported that for 2009, industry-wide
wholesale shipments of manufactured homes were 49,700 units, a decline of 39 percent compared to 2008.
However, estimates are that in 2009, manufactured housing dealers reduced inventory by approximately 10,000
units, implying that retail demand in 2009 was higher than wholesale shipments.
Since 1998, industry-wide wholesale shipments of manufactured homes have declined 87 percent. This
decade-plus decline was primarily the result of limited credit availability because of high credit standards applied
to purchases of manufactured homes, high down payment requirements, and high interest rate spreads between
conventional mortgages for site-built homes and loans for manufactured homes. In addition, in the several years
leading up to 2008, many traditional buyers of manufactured homes were able to purchase site-built homes instead
of manufactured homes, as subprime mortgages were readily available at unrealistic terms.
Manufactured homes contain one or more “floors” or sections which can be joined to make larger homes.
For 2009, larger multi-section manufactured homes represented 63 percent of the total manufactured homes
produced, consistent with 2008, but down significantly from the 80 percent in 2003. Multi-section manufactured
homes contain more of the Company’s products than single-section manufactured homes. The decline in multi-
section homes over the past few years may be partly due to the weak site-built housing market, as a result of which
many retirees have not been able to sell their primary residence, or may have been unwilling to sell at currently
depressed prices, and purchase a more affordable manufactured home as many retirees had done historically.
Legislation enacted in July 2008 increased Federal Housing Administration (“FHA”) insured lending limits
for chattel mortgages for manufactured homes (chattel loans are loans secured only by the home which is sited on
leased rather than owned land) from less than $49,000 to nearly $70,000, subject to future adjustments based on
inflation. The final regulations for the insured lending limits were put into place in March 2009. The American
Recovery and Reinvestment Act of 2009 also authorized a tax credit of the lesser of 10 percent of the purchase
price, or $8,000, for qualified first-time home buyers purchasing a principal residence during 2009, which applies
21
to manufactured housing. The Worker, Homeownership, and Business Assistance Act of 2009 extended the tax
credit until April 30, 2010, and also authorized a tax credit of up to $6,500 for qualified repeat home buyers. The
impact of these programs on manufactured housing has been modest so far, and any future impact on demand for
new manufactured homes cannot be determined at this time.
The Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (“SAFE Act”) was signed into law
in July, 2008. The SAFE Act is intended to establish, within one year from its passage, minimum state standards
for licensing and registration of mortgage lenders, brokers and originators. According to the RVIA and the
Manufactured Housing Institute, that legislation could make loans for RVs and manufactured homes more difficult
to obtain, resulting in fewer sales of RVs and manufactured homes.
The Company believes the manufactured housing industry may begin to experience a modest recovery
once the recession ends and home buyers begin to look for affordable housing. However, because of the current
real estate and economic environment, volatile consumer confidence, and tight retail and wholesale credit markets,
the Company currently expects industry-wide wholesale shipments of manufactured homes to remain low for at
least the first half of 2010. There are no industry forecasts for the manufactured housing industry.
The Company also believes that long-term growth prospects for manufactured housing may be positive
because of (i) the quality and affordability of the home, (ii) the favorable demographic trends, including the
increasing number of retirees who, in the past, had represented a significant market for manufactured homes, (iii)
pent-up demand by retirees who have been unable or unwilling to sell their primary residence and purchase a
manufactured home, and (iv) the unavailability of subprime mortgages for site-built homes.
RESULTS OF OPERATIONS
Net sales and operating (loss) profit were as follows for the years ended December 31, (in thousands):
Net sales:
RV Segment
MH Segment
Total net sales
Operating (loss) profit:
RV Segment
MH Segment
Total segment operating profit
Amortization of intangibles
Corporate
Goodwill impairment
Other items
Total operating (loss) profit
2009
2008
2007
$ 312,535
85,304
$ 397,839
$ 368,092
142,414
$ 510,506
$ 491,830
176,795
$ 668,625
$ 20,459
3,847
24,306
(5,561)
(6,411)
(45,040)
(2,875)
$ (35,581)
$ 28,725
11,016
39,741
(5,055)
(7,217)
(5,487)
(2,084)
$ 19,898
$ 63,132
15,061
78,193
(4,178)
(7,583)
-
(473)
$ 65,959
Net sales and operating profit by segment, as a percent of the total, were as follows for the years ended
December 31,:
Net sales:
RV Segment
MH Segment
Total net sales
Operating profit:
RV Segment
MH Segment
Total segment operating profit
2009
2008
2007
72 %
28 %
100 %
72 %
28 %
100 %
74 %
26 %
100 %
81 %
19 %
100 %
79 %
21 %
100 %
84 %
16 %
100 %
22
Operating profit margin by segment was as follows for the years ended December 31,:
RV Segment
MH Segment
2009
6.5 %
4.5 %
2008
7.8 %
7.7 %
2007
12.8 %
8.5 %
During 2009 and 2008, the Company recorded “extra” expenses resulting primarily from plant closings
and start-ups, staff reductions and relocations, increased bad debts and obsolete inventory and tooling. These
expenses were largely due to the unprecedented conditions in the RV and manufactured housing industries. In
addition, the Company recorded charges for goodwill impairment during 2009 and 2008, and charges for executive
retirement in 2008.
The following tables reconcile cost of sales, selling, general and administrative expenses, goodwill
impairment, executive retirement, operating (loss) profit, net (loss) income and net (loss) income per diluted share
for the years ended December 31, 2009 and 2008 to these same items before the “extra” expenses and charges for
goodwill impairment and executive retirement. The Company finds this information useful in analyzing and
reviewing the results of operations. These tables are intended to provide investors with this useful information on
the Company’s results of operations before the “extra” expenses and charges for goodwill impairment and
executive retirement to provide comparability between the years ended December 31, 2009 and 2008.
(In thousands)
Cost of sales
Selling, general and
administrative expenses
Goodwill impairment
Executive retirement
Operating (loss) profit
Net (loss) income
Net (loss) income per
diluted share
Year Ended December 31, 2009
GAAP
$ 319,129
Adjustments Non-GAAP
$ 4,786
$ 314,343
Year Ended December 31, 2008
GAAP
$ 403,000
Adjustments Non-GAAP
$ 402,836
$
164
$ 4,180
$ 69,489
$ 45,040
$ 45,040
$
-
$
-
$ (35,581) $ 54,006
$ (24,053) $ 34,891
$ 65,309
-
$
$
-
$ 18,425
$ 10,838
$
(1.10)
$ 1.60
$
0.50
$
$
$
$
$
$
80,129
5,487
2,667
19,898
11,678
$
$ 5,487
$ 2,667
$ 7,858
$ 4,825
(460) $ 80,589
-
$
$
-
$ 27,756
$ 16,503
0.53
$
0.22
$
0.75
The following tables reconcile RV Segment and MH Segment operating profit, goodwill impairment, other
items, and operating (loss) profit for the years ended December 31, 2009 and 2008 to these same items before the
“extra” expenses and charges for goodwill impairment and executive retirement. The Company finds this
information useful in analyzing and reviewing the results of operations. These tables are intended to provide
investors with this useful information on the Company’s results of operations before the “extra” expenses and
charges for goodwill impairment and executive retirement to provide comparability between the years ended
December 31, 2009 and 2008.
(In thousands)
Year Ended December 31, 2009
RV Segment operating profit
MH Segment operating profit $
Goodwill impairment
Other items
Operating (loss) profit
GAAP
$ 20,459
3,847
Adjustments Non-GAAP
$ 5,277
931
$
$ (45,040) $ 45,040
$
(2,875) $ 2,758
$ (35,581) $ 54,006
$ 25,736
4,778
$
-
$
$
(117)
$ 18,425
Year Ended December 31, 2008
GAAP
28,725
11,016
(5,487)
(2,084)
19,898
Adjustments Non-GAAP
$ 29,550
825
$
$ 11,420
$
404
-
$
$ 5,487
$
$ 1,142
(942)
$ 27,756
$ 7,858
$
$
$
$
$
Year Ended December 31, 2009 Compared to Year Ended December 31, 2008
Consolidated Highlights
(cid:131)
During the first six months of 2009, as a result of the economic downturn and the resulting severe
declines in industry-wide wholesale shipments by the RV and manufactured housing industries,
the Company experienced a 45 percent decline in net sales, from $310 million in the first six
months of 2008 to $172 million in the first six months of 2009. As a result, in the first six months
of 2009, the Company reported a net loss of $34.1 million, including an after-tax charge of $29.4
23
million for goodwill impairment, as compared to net income of $18.3 million in the first six
months of 2008.
During the second half of 2009, industry-wide wholesale shipments of travel trailer and fifth-
wheel RVs, the Company’s primary RV market, increased 32 percent compared to the second half
of 2008, offset by a decline in manufactured housing industry-wide wholesale shipments of 33
percent. As a result, the Company’s net sales increased to $226 million in the second half of 2009,
13 percent more than in the comparable period of 2008. The Company reported net income of
$10.1 million in the second half of 2009 as compared to a net loss of $6.6 million in the
comparable period of 2008, which included an after-tax charge of $3.3 million for goodwill
impairment recorded in the fourth quarter of 2008.
The Company’s net sales for the first two months of 2010 more than doubled to over $90 million,
compared to less than $44 million in the same period of 2009, when most RV producers were shut
down for extended periods of time. Nearly all of this increase was in sales of the Company’s RV
products. Sales of manufactured housing products increased approximately 3 percent as compared
to the first two months of 2009.
(cid:131)
(cid:131)
On February 19, 2010, the RVIA published its latest forecast of industry-wide wholesale
shipments for 2010, which projects a 31 percent increase in the shipments of travel trailers and
fifth-wheel RVs as compared to 2009. There is no assurance that this RV industry-wide wholesale
shipments level will be achieved. There are no industry forecasts for the manufactured housing
industry.
In response to the impact of the recession, the Company focused on increasing market share for
existing products, introducing new products, reducing fixed costs, improving efficiencies, and
strengthening its financial condition.
•
In 2009, the Company identified and introduced new and improved RV products that
focused on consumer safety and convenience, including the Quick-BiteTM coupler, an
improved suspension system, entry doors with alarm systems and keyless entry, and a
“new-look” line of windows. As a result, the Company’s RV Segment continued to
achieve market share gains.
The Company’s furniture products continued to gain market share. The Company’s
average furniture content per travel trailer and fifth-wheel produced by the RV
industry for 2009 was $211 per unit, an increase of $46 per unit, or 28 percent, from
the average content when Seating Technology, Inc. and its affiliates (“Seating
Technology”) was acquired in July 2008.
In July 2009, a supplier of manufactured housing windows and doors exited the
market. Since then, the Company has gained new window business of more than $7
million on an annualized basis. In addition, in September 2009, the Company
purchased production equipment and inventory for manufactured housing entry doors
from the same supplier, entering a new $25 million to $30 million market.
Approximately half of this new potential is in aftermarket replacement entry doors for
manufactured homes. The Company began production of manufactured housing entry
doors during the fourth quarter of 2009, and is gaining market share. The Company’s
MH Segment aftermarket sales, primarily comprised of windows and thermoformed
bath products, were approximately $12 million to $13 million for 2009, consistent
with 2008, and could increase as a result of the Company’s increased effort to gain
market share in aftermarket products.
On February 18, 2010 the Company reported that Lippert agreed in principle to
acquire certain intellectual property and other assets from Michigan-based Schwintek,
Inc. The purchase would include several products for which patents are pending,
24
including innovative RV wall slides that are considerably lighter, more space efficient,
and more reliable than previous slide-out designs. The purchase price, undisclosed at
the time of the announcement, is expected to include cash payable at closing, plus an
earn-out depending on future unit sales. It is expected that the cash portion of the
purchase price payable at closing will be funded from available cash. Closing of the
transaction is subject to completion of due diligence, agreement on final terms and
conditions, the execution of definitive transaction documents, and satisfaction of
customary closing conditions.
• The decline in the Company’s results for 2009 would have been substantially greater
had it not been for an aggressive program of cost-cutting measures and efficiency
improvements implemented beginning in the latter part of 2006. Cost reduction
measures benefitted the Company’s operating results in 2009 by $9 million, compared
to 2008, and will further benefit 2010 operating results by $3 million. Collectively, the
fixed cost reductions since 2006 have improved the Company’s annual operating
profit by nearly $25 million compared to results if these steps had not been taken. The
Company anticipates that a significant portion of the fixed cost reductions and
production efficiencies implemented will continue even as sales increase.
During 2009 and 2008, as a result of the unprecedented conditions in the RV and
manufactured housing industries, and the cost cutting measures taken by management,
the Company recorded $9.0 million and $2.4 million, respectively, of “extra”
expenses. These “extra” expenses resulted primarily from the following (in millions):
Plant closings and start-ups
Obsolete equipment, inventory
and tooling
Staff reductions and relocations
Executive retirement
Other
2009
$ 4.4
2008
$ (1.5)
3.1
1.1
-
0.4
$ 9.0
0.2
0.6
2.7
0.4
$ 2.4
• During 2009, the Company continued to generate significant cash flow, increasing
cash and short-term investments by nearly $57 million, to over $65 million, and
paying off the entire $9 million debt balance that existed at December 31, 2008. This
was largely accomplished by cash flows provided by operating activities of $63
million, including a reduction in inventory of more than $37 million.
(cid:131)
Steel and aluminum are among the Company’s principal raw materials. Since late 2007, the costs
of steel and aluminum have been volatile. During the first half of 2009, raw material costs
temporarily declined, but subsequently increased 10 percent to 30 percent in the second half of
2009, depending upon the type of raw material. The Company anticipates that these cost increases
will reduce operating profit in 2010, although the impact is expected to be modest.
While the Company has historically been able to obtain sales price increases to offset the majority
of raw material cost increases, there can be no assurance that future cost increases, if any, can be
partially or fully passed on to customers. The Company also continues to explore improved
product design, efficiency improvements, and alternative sources of raw materials and
components, both domestic and imported.
25
RV Segment
Net sales of the RV Segment in 2009 decreased 15 percent, or $56 million, compared to 2008 due to:
• An ‘organic’ sales decline (excluding the impact of acquisitions and sales price changes) of
approximately $68 million. This 19 percent ‘organic’ sales decline during 2009 was due to the 25
percent decrease in industry-wide wholesale shipments of travel trailers and fifth-wheel RVs, the
Company’s primary RV market. During the first six months of 2009 the ‘organic’ sales decline of
RV-related products was approximately $118 million, or 52 percent. However, this was partially
offset by an ‘organic’ sales increase of approximately $50 million, or 40 percent, of RV-related
products in the second half of 2009.
• An ‘organic’ sales decline of approximately 52 percent or $7 million in specialty trailers due
primarily to a severe industry-wide decline in sales of small and medium size boats, particularly on
the West Coast, the Company’s primary specialty trailer market.
Partially offset by:
• Full year impact in 2009 of acquisitions completed in 2008, aggregating approximately $13
million.
• Sales price increases of approximately $7 million, primarily due to raw material cost increases in
2008.
The Company’s RV Segment aftermarket sales were approximately $5 million for 2009, consistent with
2008, and could increase as a result of the Company’s increased effort to gain market share in new aftermarket
products.
The trend in the Company’s average product content per RV is an indicator of the Company’s overall
market share. Content per RV is also impacted by changes in selling prices for the Company’s products. The
Company’s average product content per type of RV, calculated based upon the Company’s net sales of components
for the different types of RVs, for the years ended December 31, divided by the industry-wide wholesale shipments
of the different types of RVs for the years ended December 31, was as follows:
Content per Travel Trailer and
Fifth-Wheel RV
Content per Motorhome
Content per all RVs
2009
$ 2,101
$
523
$ 1,795
2008
Percent Change
$ 1,902
$
574
$ 1,554
10%
(9)%
16%
The above product content per RV for the year ended December 31, 2008 includes historical sales results
for acquisitions, under the assumption the acquisitions had been completed at the beginning of that yearly period.
The Company’s average product content per type of RV does not include sales of replacement parts to aftermarket
customers. Prior periods have been adjusted to conform to this presentation.
According to the RVIA, industry-wide wholesale shipments for the years ended December 31, were as
follows:
Travel Trailer and Fifth-
Wheel RVs
Motorhomes
All RVs
2009
138,300
13,200
165,700
2008
Percent Change
185,100
28,300
237,000
(25)%
(53)%
(30)%
Operating profit of the RV Segment in 2009 decreased $8.3 million compared to 2008, largely due to the
$56 million decline in sales, and $5.3 million of “extra” expenses in 2009 related to plant closings and start-ups,
staff reductions and relocations, increased bad debts, and obsolete inventory and tooling, compared to $0.8 million
of “extra” expenses in 2008. Excluding “extra” expenses, the Company’s RV Segment had an operating profit of
$25.7 million in 2009, a decrease of $3.8 million from the segment operating profit of $29.6 million in 2008. This
26
adjusted decline in RV Segment operating profit was 6 percent of the ‘organic’ decline in net sales, a smaller
percentage decline than the Company would typically expect.
The operating margin of the RV Segment in 2009 was positively impacted by:
Implementation of cost-cutting measures which reduced cost of sales.
•
• Lower health insurance costs largely due to the implementation of a new plan.
• Lower warranty costs.
• Lower raw material costs in the second half of 2009 compared to the same period of 2008 when
raw material costs were unusually high, partially offset by higher raw material costs during the
first six months of 2009. Depending upon the type of raw material, costs have recently risen 10
percent to 30 percent.
Partially offset by:
• The spreading of fixed manufacturing costs over a smaller sales base.
• Higher overtime and labor inefficiencies due to rapid changes in sales volumes.
• Excluding the “extra” expenses, an increase in selling, general and administrative expenses to 12.3
percent of net sales in 2009 from 12.2 percent of net sales in 2008, largely due to the spreading of
fixed administrative costs over a smaller sales base, partially offset by the implementation of fixed
cost reductions. In addition, incentive compensation was lower as a percent of sales in 2009
because incentive compensation is only recorded on operating profit in excess of pre-established
hurdles.
MH Segment
Net sales of the MH Segment in 2009 decreased 40 percent, or $57 million, from 2008. Excluding $2
million in sales price increases, net sales of the MH Segment declined 41 percent compared to the 39 percent
decrease in industry-wide wholesale shipments of manufactured homes. The Company’s sales decline was greater
than the manufactured housing industry decline due partly to a decline in modular and office units. In addition,
changes in market share by certain producers of manufactured homes have had a negative impact on sales of the
Company’s products.
In July 2009, a supplier of manufactured housing windows and doors exited the market. Since then, the
Company has gained new window business of more than $7 million annually, partially offsetting the other
declines. In addition, in September 2009, the Company purchased production equipment and inventory for
manufactured housing entry doors from the same supplier, entering a new $25 million to $30 million market.
Approximately half of this new potential is in aftermarket replacement entry doors for manufactured homes. The
Company began production of manufactured housing entry doors during the fourth quarter of 2009, and is gaining
market share. The Company’s MH Segment aftermarket sales, primarily comprised of windows and thermoformed
bath products, were approximately $12 million to $13 million for 2009, consistent with 2008, and could increase as
a result of the Company’s increased effort to gain market share in aftermarket products.
The trend in the Company’s average product content per manufactured home produced is an indicator of
the Company’s overall market share. Manufactured homes contain one or more “floors” or sections which can be
joined to make larger homes. Content per manufactured home and content per floor is also impacted by changes in
selling prices for the Company’s products. The Company’s average product content per manufactured home
produced by the industry and total manufactured home floors produced by the industry, calculated based upon the
Company’s net sales of components for manufactured homes produced for the years ended December 31, divided
by the number of manufactured homes and manufactured home floors produced by the industry, respectively, for
the years ended December 31, was as follows:
Content per Home Produced
Content per Floor Produced
2009
$ 1,378
837
$
2008
$ 1,489
901
$
Percent Change
(7)%
(7)%
27
The Company’s average product content per manufactured home does not include sales of replacement
parts to aftermarket customers. Prior periods have been adjusted to conform to this presentation.
According to the IBTS, industry-wide wholesale shipments for the years ended December 31, were as
follows:
Total Homes Produced
Total Floors Produced
2009
49,700
81,900
2008
81,900
135,300
Percent Change
(39)%
(39)%
Operating profit of the MH Segment in 2009 decreased $7.2 million compared to 2008, largely due to the
$57 million decline in sales. In addition, the Company had $0.9 million and $0.4 million of “extra” expenses in
2009 and 2008, respectively, related to plant closings and start-ups, staff reductions and relocations, and obsolete
inventory. Excluding “extra” expenses, the Company’s MH Segment had an operating profit of $4.8 million in
2009, a decrease of $6.6 million from the segment operating profit of $11.4 million in the same period last year.
The adjusted decline in MH Segment operating profit was 11 percent of the ‘organic’ decline in net sales, a smaller
percentage decline than the Company would typically expect.
The operating margin of the MH Segment in 2009 was positively impacted by:
Implementation of cost-cutting measures which reduced cost of sales.
•
• Lower raw material costs. However, depending upon the type of raw material, costs have recently
risen 10 percent to 30 percent.
• Lower health insurance costs largely due to the implementation of a new plan.
Partially offset by:
• The spreading of fixed manufacturing costs over a smaller sales base.
• Labor inefficiencies due to the sharp drop in sales.
• Excluding the “extra” expenses, an increase in selling, general and administrative expenses to 19.0
percent of net sales in 2009 from 16.1 percent of net sales in 2008 due largely to the spreading of
fixed administrative costs over a smaller sales base, partially offset by fixed cost reductions. Also,
incentive compensation was lower as a percent of sales in 2009 because year-to-date operating
profit for certain MH Segment operations were below the previously established annual incentive
compensation hurdles.
The Company has remained profitable in the MH Segment despite the 87 percent decline in manufactured
housing industry shipments since 1998. The Company did not have an impairment of other intangible assets or
long-lived assets in 2009 related to its manufactured housing operations; however, the Company will continue to
monitor these assets for potential impairment, as a continued downturn in this industry or in the profitability of the
Company’s operations, could result in a non-cash impairment charge of these assets in the future. At December 31,
2009, the other intangible assets of the MH Segment aggregated $3.9 million.
Corporate
Corporate expenses for 2009 decreased $0.8 million compared to 2008 due primarily to fixed cost
reductions.
Goodwill Impairment
During the first quarter of 2009, because the Company’s stock price on the New York Stock Exchange was
below its book value, and due to the continued declines in industry-wide wholesale shipments of RVs and
manufactured homes, the Company conducted an impairment analysis of the goodwill of each of its reporting units.
The fair value of each reporting unit was estimated with a discounted cash flow model utilizing internal forecasts
and observable market data, to the extent available, to estimate future cash flows, and the Company’s weighted
average cost of capital of 16.5 percent. The forecast included an estimate of long-term future growth rates based on
management’s most recent views of the long-term outlook for each reporting unit.
28
Based on the analyses, the carrying value of the RV and manufactured housing reporting units exceeded
their fair value. As a result, the Company performed the second step of the impairment test, which required the
Company to determine the fair value of each reporting unit’s assets and liabilities, including all of the tangible and
identifiable intangible assets of each reporting unit, excluding goodwill. The results of the second step implied that
the fair value of goodwill was zero, therefore during the first quarter of 2009, the Company recorded a non-cash
impairment charge to write-off the entire $45.0 million of goodwill of these reporting units.
Other Non-Segment Items
Other non-segment items include the following (in thousands):
Selling, general and administrative expenses:
Legal proceedings
Gain on sold facilities
Loss on sold facilities and write-downs to estimated
current fair value of facilities to be sold
Incentive compensation impact of other non-segment items
Other
Executive retirement
Other (income) from the collection of a previously reserved note
Total other non-segment items
Year Ended
December 31,
2009
2008
$
416
(89)
$ 2,109
(3,523)
3,349
(533)
12
-
(280)
$ 2,875
1,602
(96)
-
2,667
(675)
$ 2,084
Year Ended December 31, 2008 Compared to Year Ended December 31, 2007
Consolidated Highlights
(cid:131)
(cid:131)
(cid:131)
Net sales for 2008, excluding the impact of sales price increases and acquisitions, decreased $202
million (30 percent) from 2007, primarily as a result of the 29 percent decline in industry-wide
wholesale shipments of travel trailers and fifth-wheel RVs in 2008, as well as a 14 percent decline
in industry-wide wholesale shipments of manufactured homes. In addition, 2008 sales were
negatively affected by the 49 percent decline in industry-wide wholesale shipments of
motorhomes, and the severe industry-wide decline in sales of small and medium-sized boats,
particularly on the West Coast, for which the Company supplies specialty trailers.
Net income for 2008 decreased 71 percent from 2007, primarily due to the decrease in net sales
and higher raw material costs. In addition, the Company recorded a non-cash charge for
impairment of goodwill, as well as an executive retirement charge, aggregating $4.9 million after
taxes.
In response to reduced retail sales during 2008 and inventory reductions by RV dealers, RV
manufacturers significantly reduced their output, which negatively affected the Company in 2008.
In response to the difficult economic environment, the Company was extremely proactive and took
the following steps:
• Reduced its workforce and production capacity to be more in line with anticipated
demand.
• Closed facilities and reduced fixed overhead costs.
•
Implemented synergies between the operations of Kinro and Lippert by combining certain
administrative functions and sales efforts.
29
(cid:131)
(cid:131)
(cid:131)
These factors positively affected the Company’s operating profit in 2008 by approximately $5
million, compared to 2007. These steps also lowered the Company’s breakeven sales level.
On November 25, 2008, the Company entered into an agreement for a $50.0 million line of credit
with JPMorgan Chase Bank, N.A. and Wells Fargo Bank, N.A. Simultaneously, the Company
entered into a $125.0 million “shelf-loan” facility with Prudential Investment Management, Inc.
and its affiliates. At December 31, 2008, the collective availability under these facilities was
$117.2 million.
On July 1, 2008, Lippert acquired certain assets and liabilities, and the business of Seating
Technology, a manufacturer of a wide variety of furniture products primarily for towable RVs,
including a full line of upholstered furniture and mattresses. Seating Technology had annual sales
of $40 million in 2007. The purchase price was $28.7 million, which was paid at closing from
available cash. Subsequent to the acquisition, Lippert closed two of Seating Technology's five
leased facilities in Indiana, and consolidated those operations into existing facilities.
Steel and aluminum are among the Company’s principal raw materials. Since late 2007, the costs
of steel and aluminum have been volatile, and although the Company was able to raise sales
prices, higher cost raw materials, net of sales price increases, reduced 2008 earnings by
approximately $0.10 to $0.13 per diluted share.
RV Segment
Net sales of the RV Segment in 2008 decreased 25 percent, or $124 million, as compared to 2007 due to:
• An ‘organic’ sales decline of approximately $141 million, or 30 percent, of RV-related products.
This 30 percent decline was due largely to the 29 percent decrease in industry-wide wholesale
shipments of travel trailers and fifth-wheel RVs, the Company’s primary RV market. In addition,
industry-wide wholesale shipments of motorhomes, components for which represent about 5
percent of the Company’s RV Segment net sales, were down 49 percent during 2008.
• An ‘organic’ sales decline of approximately $14 million in specialty trailers, due primarily to a
severe industry-wide decline in sales of small and medium size boats, particularly on the West
Coast, the Company’s primary specialty trailer market.
Partially offset by:
• Sales generated from 2008 and 2007 acquisitions aggregating approximately $19 million.
• Sales price increases of approximately $12 million, primarily due to raw material cost increases.
In 2008, the severe industry-wide decline in sales of small and medium-sized boats, particularly on the
West Coast, for which the Company supplies specialty trailers, caused the Company to record an impairment of the
entire $5.5 million of goodwill of this reporting unit, which is included in the RV Segment. The goodwill
impairment charge is reported in Other non-segment items.
The trend in the Company’s average product content per RV is an indicator of the Company’s overall
market share. Content per RV is also impacted by changes in selling prices for the Company’s products. The
Company’s average product content per type of RV, calculated based upon the Company’s net sales of components
for the different types of RVs, for the years ended December 31, divided by the industry-wide wholesale shipments
of the different types of RVs for the years ended December 31, was as follows:
Content per Travel Trailer and
Fifth-Wheel RV
Content per Motorhome
Content per all RVs
2007
Percent Change
$ 1,697
$
429
$ 1,324
12%
34%
17%
2008
$ 1,902
$
574
$ 1,554
30
The above product content per RV for the year ended December 31, 2008 includes historical sales results
for acquisitions, under the assumption the acquisitions had been completed at the beginning of that yearly period.
Sales of certain RV components have been reclassified between travel trailer and fifth-wheel RVs, and motorhomes
in prior periods. The Company’s average product content per type of RV does not include sales of replacement
parts to aftermarket customers. Prior periods have been adjusted to conform to this presentation.
According to the RVIA, industry-wide wholesale shipments for the years ended December 31, were as
follows:
Travel Trailer and Fifth-
Wheel RVs
Motorhomes
All RVs
2008
185,100
28,300
237,000
2007
Percent Change
261,700
55,400
353,400
(29)%
(49)%
(33)%
Operating profit of the RV Segment in 2008 decreased 55 percent to $28.7 million largely due to the
decline in sales, which was also a factor in the decrease of 5.0 percentage points in the operating profit margin to
7.8 percent of net sales in 2008 from 12.8 percent of net sales in 2007. The decline in RV Segment operating profit
was 25 percent of the decline in net sales, excluding sales price increases, which is higher than we would typically
expect, largely due to the impact of increased raw material costs.
The operating profit margin of the RV Segment in 2008 was adversely impacted by:
• Higher raw material costs.
• Labor inefficiencies due to the sharp drop in sales during the latter part of 2008.
• The spreading of fixed manufacturing costs over a smaller sales base.
• Higher health insurance costs.
• Higher than expected integration costs of the Seating Technology acquisition, and costs incurred
for prototype expenses for potential new customer accounts. New customer accounts were gained
as a result.
• An increase in selling, general and administrative expenses to 12.4 percent of net sales in 2008
from 11.3 percent of net sales in 2007, largely due to an increase in bad debt expense, and higher
fuel and delivery costs, as well as the spreading of fixed administrative costs over a smaller sales
base. This was partially offset by lower incentive compensation expense as a percent of net sales
due to reduced operating profit margins.
Partially offset by:
•
• Lower overtime and warranty costs.
Implementation of cost-cutting measures.
MH Segment
Net sales of the MH Segment in 2008 decreased 19 percent, or $34 million, from 2007. Excluding $13
million in sales price increases, net sales of the MH Segment declined 27 percent, compared to a 14 percent
decrease in industry-wide wholesale shipments of manufactured homes. The ‘organic’ decrease in sales of the
Company’s MH Segment was greater than the manufactured housing industry decline due partly to a reduction in
the average size of the homes produced by the manufactured housing industry, which require less of the
Company’s products, and partly due to business the Company exited in the latter half of 2007 because of
inadequate margins. However, in the latter half of 2008, the Company gained market share in the MH Segment.
MH Segment sales in the 2008 fourth quarter included $3 million of components for homes purchased by
the Federal Emergency Management Agency.
The trend in the Company’s average product content per manufactured home produced is an indicator of
the Company’s overall market share. Manufactured homes contain one or more “floors” or sections which can be
31
joined to make larger homes. Content per manufactured home and content per floor is also impacted by changes in
selling prices for the Company’s products. The Company’s average product content per manufactured home
produced by the industry and total manufactured home floors produced by the industry, calculated based upon the
Company’s net sales of components for manufactured homes produced for the years ended December 31, divided
by the number of manufactured homes and manufactured home floors produced by the industry, respectively, for
the years ended December 31, was as follows:
Content per Home Produced
Content per Floor Produced
2008
$ 1,489
901
$
2007
$ 1,611
942
$
Percent Change
(8)%
(4)%
The Company’s average product content per manufactured home does not include sales of replacement
parts to aftermarket customers. Prior periods have been adjusted to conform to this presentation.
According to the IBTS, industry-wide wholesale shipments for the years ended December 31, were as
follows:
Total Homes Produced
Total Floors Produced
2008
81,900
135,300
2007
95,800
163,700
Percent Change
(14)%
(17)%
Operating profit of the MH Segment in 2008 decreased 27 percent to $11.0 million largely due to the
impact of the decrease in net sales, which was also a factor in the decline in the operating profit margin to 7.7
percent of net sales in 2008, compared to 8.5 percent of net sales in 2007.
The operating profit margin of the MH Segment in 2008 was adversely impacted by:
• The spreading of fixed manufacturing costs over a smaller sales base.
• Higher health insurance costs.
• An increase in selling, general and administrative expenses to 16.5 percent of net sales in 2008
from 14.6 percent of net sales in 2007 due to higher fuel and delivery costs as a percent of net
sales, as well as the spreading of fixed administrative costs over a smaller sales base.
Partially offset by:
• Changes in product mix.
• The elimination of certain low margin business exited in the latter half of 2007.
•
•
Implementation of cost-cutting measures.
Improved production efficiencies.
Corporate
Corporate expenses for 2008 decreased $0.4 million compared to 2007 due primarily to a decrease in
incentive-based compensation as a result of lower profits, partly offset by higher professional fees.
Goodwill Impairment
The Company conducted its annual impairment analysis of the goodwill in all reporting units during the
fourth quarter of 2008. The fair value of each reporting unit was estimated using a discounted cash flow model
utilizing internal forecasts and observable market data, to the extent available, and the Company’s weighted
average cost of capital of 13.0 percent. Based on the analysis, the carrying value of the specialty trailer reporting
unit exceeded its fair value, and as a result, the Company recorded an impairment of the entire $5.5 million of
goodwill of this reporting unit. This business has been impacted by prolonged declines in industry shipments of
small and medium-sized boats that worsened late in 2008.
32
Other Non-Segment Items
In February 2004, the Company sold certain intellectual property rights for $4.0 million, consisting of cash
of $0.1 million at closing and a note of $3.9 million (the “Note”), payable over five years. The Note was initially
recorded net of a reserve of $3.4 million. In each of 2008 and 2007, the Company received payments of $0.8
million including interest, which had been previously fully reserved, and the Company therefore recorded a pre-tax
gain in Other Income. The balance of the note was $1.0 million at December 31, 2008, which was fully reserved.
Other non-segment items include the following (in thousands):
Cost of sales:
Other
Selling, general and administrative expenses:
Legal proceedings
Gain on sold facilities
Loss on sold facilities and write-downs to estimated
current market value of facilities to be sold
Incentive compensation impact of other non-segment items
Executive retirement
Other (income) from the collection of the previously reserved Note
Year Ended
December 31,
2008
2007
$
-
$
(236)
2,109
(3,523)
1,616
(2,253)
1,602
(96)
2,667
(675)
$ 2,084
$
2,231
(178)
-
(707)
473
Effective in the third quarter of 2008, gains or losses on sold manufacturing facilities and charges for
write-downs to estimated current market value of manufacturing facilities to be sold have been reclassified from
cost of goods sold to selling, general, and administrative expenses in the Consolidated Statements of Operations.
Prior periods have been reclassified to conform to this presentation.
Interest Expense, Net
The $0.1 million decrease in interest expense, net, for 2009 as compared to 2008, was partially due to a
decrease in the average debt levels during the last 12 months. In addition, the Company earned less than $0.1
million in interest income in 2009, while the Company earned $0.5 million in interest income in 2008.
The $1.7 million decrease in interest expense, net, for 2008 as compared to 2007, was primarily due to a
decrease in the average debt levels during the last 12 months. For 2008, the Company earned $0.5 million in
interest income, as compared to $1.0 million in 2007.
Provision for Income Taxes
The effective tax rate for 2009 was 33.9 percent, which is a combination of a 34.8 percent rate on the
goodwill impairment charge, and a 38.5 percent rate for the remaining pre-tax income. A portion of the goodwill
impairment charge is not deductible for tax purposes, which reduced the tax benefit recorded. The 38.5 percent rate
on the remaining pre-tax income was consistent with the 38.6 percent rate for 2008, as the tax rate benefits from
federal tax credits and tax reserve adjustments were offset by the negative impact of lower pre-tax income on
permanent tax differences.
The effective tax rate for 2008 was 38.6 percent, compared to 37.2 percent in 2007. The increase in the
effective tax rate for 2008 as compared to 2007 was due primarily to the effect of lower profits on state and federal
tax rates, as well as a change in pre-tax income between legal entities and states, and an increase in the Company’s
tax reserves.
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
33
proposed tax adjustments, including interest and penalties. After two hearings with the Indiana Department of
Revenue, the audit findings were upheld. The Company filed an appeal in December 2006 with the Indiana Tax
Court and the matter was scheduled for trial in December 2008. In November 2008, the Company and the Indiana
Department of Revenue settled tax years 1998 to 2000 for $0.6 million, as well as tax years 2001 to 2006 for $4.0
million including interest. The aggregate settlement amount was fully reserved prior to 2009, and was paid in April
of 2009. In connection with the settlement, the Indiana Department of Revenue reserved the right to examine tax
years 2001 through 2006.
New Accounting Pronouncements
In May 2009, the Financial Accounting Standards Board (“FASB”) issued new accounting and disclosure
guidance for recognized and non-recognized subsequent events that occur after the balance sheet date but before
financial statements are issued. The provisions of the new accounting guidance were effective for interim or annual
periods ending after June 15, 2009. The adoption of this new accounting guidance had no impact on the Company.
In December 2007, the FASB amended its guidance on accounting for business combinations. The new
accounting guidance requires assets acquired and liabilities assumed in connection with a business combination to
be measured at fair value as of the acquisition date, acquisition related costs incurred prior to the acquisition to be
expensed, and contractual contingencies to be recognized at fair value as of the acquisition date. The provisions of
the new accounting guidance were effective for fiscal years beginning after December 15, 2008. The adoption of
this standard on January 1, 2009 did not have a material impact on the Company.
In September 2006, the FASB issued new accounting guidance which establishes a framework for
reporting fair value and expands disclosures about fair value measurements. The provisions of the new accounting
guidance were effective for fiscal years beginning after November 15, 2007. However, in February 2008, the FASB
delayed the effective date of the new accounting guidance until fiscal years beginning after November 15, 2008, as
it relates to fair value measurement requirements for nonfinancial assets and liabilities that are not remeasured at
fair value on a recurring basis. The Company adopted the applicable provisions of the new accounting guidance on
January 1, 2008 and 2009, respectively. See Note 1 of the Notes to Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
The Consolidated Statements of Cash Flows reflect the following for the years ended December 31, (in
thousands):
Net cash flows provided by operating activities
Net cash flows used for investing activities
Net cash flows used for financing activities
Net increase (decrease) in cash
2009
$ 63,256
(16,445)
(3,138)
$ 43,673
$
2008
4,657
(25,492)
(26,686)
$ (47,521)
2007
$ 84,910
(11,641)
(23,841)
$ 49,428
Cash Flows from Operations
Net cash flows from operating activities in 2009 were $58.6 million more than in 2008, primarily as a
result of:
- A $37.5 million reduction in inventories in 2009, compared to a $12.7 million increase in 2008.
Inventories increased in 2008 due to the Company’s strategic purchase of raw materials in advance of
price increases, as well as higher priced raw materials in inventory. During 2009, the Company
reduced inventory through consumption of higher priced inventory on hand, and reduced inventory
purchases.
- A $2.2 million decrease in accounts payable, accrued expenses and other liabilities in 2009, compared to
a decrease of $23.5 million in 2008 due largely to the timing of payments for inventory purchases.
34
Partially offset by:
- A $4.6 million increase in accounts receivable in 2009, compared to a $9.5 million decrease in 2008.
Accounts receivable increased in 2009 due to an increase in sales in December 2009 as compared to
December 2008.
During the first few months of 2010, the Company expects to use $10 million to $15 million of cash to
fund seasonal working capital growth.
Depreciation and amortization was $18.5 million in 2009, and are expected to aggregate $16 million in
2010. Non-cash stock-based compensation was $3.7 million in 2009, and is expected to be $4 million to $5 million
in 2010.
Net cash flows from operating activities in 2008 were $80.3 million less than 2007, primarily as a result of
(i) lower net income in 2008 (ii) increased inventories in 2008 due to the Company’s strategic purchase of raw
materials in advance of price increases and higher priced raw materials in inventory, and (iii) the timing of
payments for inventory purchases. This was partially offset by a decrease in accounts receivable due to the decline
in sales.
Depreciation and amortization, decreased by $0.5 million to $17.1 million in 2008, while non-cash stock-
based compensation increased by $1.1 million to $3.6 million in 2008.
Cash Flows from Investing Activities
Cash flows used for investing activities of $16.4 million in 2009 included capital expenditures of $3.1
million, which was financed with available cash. The Company estimates that capital expenditures will be $5
million to $7 million in 2010, and are expected to be funded by cash flows from operations.
During 2009, the Company purchased $15.0 million in short-term U.S. Treasury Bills, of which $2.0
million matured in December 2009, and the balance matures at various dates through June 2010. The Company has
chosen to invest in U.S. Treasury Bills primarily due to the high levels of security and liquidity provided by these
instruments.
On May 15, 2009, Lippert acquired the patents for the QuickBiteTM coupler, and other intellectual
properties and assets. The innovative design of the QuickBiteTM automatic dual-jaw locking system eliminates
several steps when coupling a trailer to a tow vehicle, while at the same time making coupling simpler through the
use of an integrated alignment system. The minimum aggregate purchase price was $0.5 million, of which $0.3
million was paid at closing from available cash, with the balance to be paid on May 15, 2010. In addition, Lippert
will pay an earn-out of $2.50 per unit sold, up to a maximum of $2.5 million, during the life of the patents.
Therefore, the aggregate purchase price could increase to a maximum of $3.0 million. In 2009, Lippert paid earn-
out of less than $0.1 million.
On September 11, 2009, Lippert acquired the patent-pending design for a tool box containing a slide-out
storage tray. This newly-designed product, used in pick-up trucks, tow trucks and other mobile service vehicles, is
being produced at the Company’s existing manufacturing plants, with existing management, utilizing production
techniques with which the Company has extensive experience. The purchase price was $0.4 million, which was
paid at closing from available cash.
On September 29, 2009, Kinro acquired certain inventory and equipment used for the production of front
entry doors for manufactured homes. This acquisition will increase Kinro’s content per manufactured home and
also add a new product category. The Company estimates that the current annual market for front entry doors for
manufactured homes is about $25 million to $30 million, and that half of this new potential is in aftermarket
replacement doors for the millions of existing manufactured homes. Kinro began manufacturing entry doors at
plants in Indiana and South Carolina in the 2009 fourth quarter. The purchase price was $0.9 million, which was
paid at closing from available cash.
35
At December 31, 2009, the Company was in the process of selling seven owned facilities and vacant land
with an aggregate carrying value of $6.0 million, which are not currently being used in production or are in the
process of shutting down operations. In addition, the Company has leased three owned facilities with a combined
carrying amount of $7.7 million, for one to three year terms, for a combined $70,000 per month. Each of these
three leases also contains an option for the lessee to purchase the facility at an amount in excess of carrying value.
In addition to the owned facilities, the Company is attempting to sublease four vacant leased facilities.
On February 18, 2010, the Company reported that Lippert agreed in principle to acquire certain intellectual
property and other assets from Michigan-based Schwintek, Inc. The purchase would include several products for
which patents are pending, including innovative RV wall slides that are considerably lighter, more space efficient,
and more reliable than previous slide-out designs. The purchase price, undisclosed at the time of the
announcement, is expected to include cash payable at closing, plus an earn-out depending on future unit sales. It is
expected that the cash portion of the purchase price payable at closing will be funded from available cash. Closing
of the transaction is subject to completion of due diligence, agreement on final terms and conditions, the execution
of definitive transaction documents, and satisfaction of customary closing conditions.
In a separate transaction on February 18, 2010, Lippert acquired the patent-pending design for a six-point
leveling system for fifth-wheel RVs. The purchase price was $1.4 million paid at closing with available cash, plus
an earn-out depending on future unit sales of the system.
The Company’s priorities for its cash are liquidity and security. At December 31, 2009, all but $0.2 million
of the Company’s cash balances were in fully FDIC insured accounts. Subsequent to December 31, 2009, these
accounts no longer have unlimited FDIC insurance. As a result, beginning in 2010, the Company diversified a
portion of its cash balances, and purchased additional U.S. Treasury Bills.
Cash flows used for investing activities of $25.5 million in 2008 included $31.8 million for an acquisition
of a business and other investments, which were financed from available cash.
On July 1, 2008, Lippert acquired certain assets and liabilities, and the business of Seating Technology, a
manufacturer of a wide variety of furniture products primarily for towable RVs, including a full line of upholstered
furniture and mattresses. Seating Technology had annual sales of $40 million in 2007. The purchase price was
$28.7 million, which was paid at closing from available cash. Subsequent to the acquisition, Lippert closed two of
Seating Technology's five leased facilities in Indiana and consolidated those operations into existing facilities.
On July 1, 2008, Lippert acquired the patent for “JT's Strong Arm Jack Stabilizer,” and other intellectual
properties and assets. The purchase price was $3.1 million, which was paid at closing from available cash. “JT's
Strong Arm Jack Stabilizer” represents a significant advance in the elimination of side-to-side and front-to-back
movement of a parked travel trailer or fifth-wheel RV.
In addition, cash flows from investing activities in 2008 included proceeds of $10.5 million received from
the sale of seven facilities and other fixed assets in connection with the Company’s consolidation of production
operations. The Company used $4.2 million for capital expenditures in 2008, which was financed with available
cash.
Cash Flows from Financing Activities
Cash flows used for financing activities for 2009 of $3.1 million were primarily due to net debt payments
of $8.7 million, partially offset by $5.6 million in cash and the related tax benefits from the exercise of stock
options. At December 31, 2009, the Company had no debt outstanding.
Cash flows used for financing activities for 2008 of $26.7 million were primarily due to $18.6 million of
net debt payments and $8.3 million for the purchase of treasury stock. At December 31, 2008, the Company had
$3.8 million of cash invested in U.S. Treasury short-term money market instruments.
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”),
36
to replace the Company’s previous $70.0 million line of credit that was scheduled to expire in June 2009. The
maximum borrowings under the Company’s line of credit can be increased by $20.0 million upon approval of the
Lenders. Interest on borrowings under the line of credit is designated from time to time by the Company as either
the Prime Rate, but not less than 2.5 percent, plus additional interest up to 0.8 percent (0 percent at December 31,
2009), or LIBOR plus additional interest ranging from 2.0 percent to 2.8 percent (2.0 percent at December 31,
2009) depending on the Company’s performance and financial condition. The Credit Agreement expires December
1, 2011. At December 31, 2009, the Company had $7.8 million in outstanding letters of credit under the line of
credit, and availability under the Company’s line of credit, after considering the maximum leverage ratio covenant
limitation, was $37.8 million.
Simultaneously, the Company entered into a $125.0 million “shelf-loan” facility with Prudential
Investment Management, Inc. and its affiliates (“Prudential”), to replace the Company’s previous $60.0 million
“shelf-loan” facility with Prudential, of which $6.0 million was outstanding at December 31, 2008. The facility
provides for Prudential to consider purchasing, at the Company’s request, in one or a series of transactions, Senior
Promissory Notes of the Company in the aggregate principal amount of up to $125.0 million, to mature no more
than twelve years after the date of original issue of each Senior Promissory Note. Prudential has no obligation to
purchase the Senior Promissory Notes. Interest payable on the Senior Promissory Notes will be at rates determined
by Prudential within five business days after the Company issues a request to Prudential. The “shelf-loan” facility
expires November 25, 2011. In June 2009, the Company paid in full the remaining outstanding Senior Promissory
Notes before their scheduled maturity date.
Both the line of credit pursuant to the Credit Agreement and the “shelf-loan” facility are subject to a
maximum leverage ratio covenant which limits the amount of consolidated outstanding indebtedness to 2.5 times
the trailing twelve-month EBITDA, as defined; provided however, that if the Company’s trailing twelve-month
EBITDA is less than $50 million, the maximum leverage ratio covenant declines to 1.25 times the trailing twelve-
month EBITDA. Since the Company’s trailing twelve-month EBITDA was less than $50 million at December 31,
2009, the maximum leverage ratio covenant limits the remaining availability under these facilities collectively to
$37.8 million. The $65.4 million in cash and short-term investments at December 31, 2009, together with the
borrowing availability under our line of credit and “shelf-loan” facility, are more than adequate to finance the
Company’s anticipated working capital and capital expenditure requirements.
Pursuant to the Credit Agreement, Senior Promissory Notes, and certain other loan agreements, the
Company is required to maintain minimum net worth, interest and fixed charge coverages, and to meet certain
other financial requirements. At December 31, 2009, the Company was in compliance with all such requirements,
and expects to remain in compliance for the next twelve months.
On November 29, 2007, the Board of Directors authorized the Company to repurchase up to 1 million
shares of the Company’s Common Stock from time to time in the open market, privately negotiated transactions, or
block trades. Of this authorization, 447,400 shares were repurchased in 2008 at an average price of $18.58 per
share, or $8.3 million in total. The aggregate cost of repurchases was funded from the Company’s available cash.
The number of shares ultimately repurchased, and the timing of the purchases, will depend upon market conditions,
share price, and other factors. At present the Company believes it is prudent to conserve cash, and does not intend
to repurchase shares. However, changing conditions may cause the Company to reconsider this position.
37
Future minimum commitments relating to the Company's contractual obligations at December 31, 2009 are
as follows (in thousands):
Payments due by period
Operating leases
Capital leases
Employment contracts and
deferred compensation (a)
Royalty agreements and
earn-out payments (b)
Purchase obligations (c)
Taxes (d)
Total
Less than
1 year
Total
$ 13,842 $ 4,668 $ 6,824 $ 1,887 $
3-5 years
1-3 years
20
20
-
9,476
4,677
2,999
-
99
More than
5 years
463
-
1,701
4,386
53,561
3,876
1,341
1,544
-
$ 85,161 $ 62,884 $ 13,094 $ 4,134 $ 5,049
710
48,933
3,876
1,511
1,760
-
824
1,324
-
(a)
(b)
(c)
(d)
This includes amounts payable under employment contracts and arrangements, retirement and severance
agreements, and deferred compensation. These amounts do not include $0.3 million in deferred compensation, as
the timing of payment is based upon the employees’ separation from service.
These amounts are comprised of minimum required future payments, as well as estimated future payments for
which a liability has been recorded, in connection with acquisitions over the past few years. Excluded from these
amounts, because they are not ascertainable, are a license agreement that provides for the Company to pay a
royalty of 1 percent of sales of certain slide-out systems, the remaining aggregate of which cannot exceed $4.3
million, and an earn-out of up to $2.6 million related to an acquisition in 2007 if certain sales targets for the
acquired products are achieved over the five years subsequent to the acquisition.
These contractual obligations are primarily comprised of purchase orders issued in the normal course of business.
Also included are several longer term purchase commitments, for which the Company has estimated the expected
future obligation based on current prices and usage.
These amounts include $1.3 million of estimated income tax payments for 2009, and $2.6 million for unrecognized
tax benefits and related interest and penalties.
These commitments are described more fully in the Notes to Consolidated Financial Statements.
CORPORATE GOVERNANCE
The Company is in compliance with the corporate governance requirements of the Securities and Exchange
Commission (“SEC”) and the New York Stock Exchange. The Company’s governance documents and committee
charters and key practices have been posted to the Company’s website (www.drewindustries.com) and are updated
periodically. The website also contains, or provides direct links to, all SEC filings, press releases and investor
presentations. The Company has also established a toll-free hotline (877-373-9123) to report complaints about the
Company’s accounting, internal controls, auditing matters or other concerns.
CONTINGENCIES
On or about January 3, 2007, an action was commenced in the United States District Court, Central District
of California, entitled Gonzalez vs. Drew Industries Incorporated, Kinro, Inc., Kinro Texas Limited Partnership
d/b/a Better Bath Components; Skyline Corporation, and Skylines Homes, Inc. (Case No. CV06-08233). The case
purports to be a class action on behalf of the named plaintiff and all others similarly situated in California. Plaintiff
initially alleged, but has not sought certification of, a national class.
On April 1, 2008, the Court issued an order granting Drew’s motion to dismiss for lack of personal
jurisdiction, resulting in the dismissal of Drew Industries Incorporated as one of the defendants in the case.
Plaintiff alleges that certain bathtubs manufactured by Kinro Texas Limited Partnership, a subsidiary of
Kinro, and sold under the name “Better Bath” for use in manufactured homes, fail to comply with certain safety
standards relating to flame spread established by the U.S. Department of Housing and Urban Development
(“HUD”). Plaintiff alleges, among other things, that sale of these products is in violation of various provisions of
38
the California Consumers Legal Remedies Act (Cal. Civ. Code Sec. 1770 et seq.), the Magnuson-Moss Warranty
Act (15 U.S.C. Sec. 2301 et seq.), the California Song-Beverly Consumer Warranty Act (Cal. Civ. Code Sec. 1790
et seq.), and the California Unfair Competition Law (Cal. Bus. & Prof. Code Sec. 17200 et seq.).
Plaintiff seeks to require defendants to notify members of the class of the allegations in the proceeding and
the claims made, to repair or replace the allegedly defective products, to reimburse members of the class for repair,
replacement and consequential costs, to cease the sale and distribution of the allegedly defective products, and to
pay actual and punitive damages and plaintiff’s attorneys fees.
On January 29, 2008, the Court issued an Order denying certification of a class with plaintiff Gonzalez as
the class representative because she no longer owned the bathtub. On March 10, 2008, plaintiff amended her
complaint to include an additional plaintiff, Robert Royalty. Plaintiff Royalty states that his bathtub was not tested
to determine whether it complies with HUD standards. Rather, his allegations are based on “information and
belief”, including the testing of plaintiff Gonzalez’s bathtub and other evidence. Kinro denies plaintiff Royalty’s
allegations.
On June 25, 2008, plaintiffs filed a renewed motion for class certification and the Court again denied
certification of a class. Plaintiffs filed a third motion for class certification on December 23, 2008, and Defendants’
filed a motion seeking summary judgment against plaintiffs’ case.
On May 18, 2009, the Court issued an Order granting partial summary judgment in favor of defendants,
dismissing five of the six claims asserted by plaintiffs, except for plaintiffs’ claim for violation of California’s
Unfair Competition Law (the “UCL”). The Court also granted plaintiffs’ motion for class certification as to that
one claim. The Court denied Defendant’s motion for summary judgment on the UCL claim on the ground that there
was a triable issue of fact as to whether the alleged misrepresentation on defendants’ labels regarding testing for
flame spread rate caused plaintiffs to purchase the manufactured homes containing bathtubs manufactured by
Kinro.
On August 26, 2009, as a result of a decision by the California Supreme Court in an unrelated case dealing
with a similar UCL claim, the Court dismissed plaintiffs’ remaining UCL claim because plaintiffs did not actually
rely on defendants’ labels when they bought the homes containing the bathtubs. However, the Court concluded that
simply selling bathtubs which may fail to satisfy Federal standards may violate the “unfair prong” of the UCL,
even if plaintiffs did not actually rely on defendant’s labels.
On September 11, 2009, defendants filed with the Ninth Circuit Court of Appeals a Petition for Permission
to Appeal, on an interlocutory basis, that part of the District Court’s ruling that certified a class to pursue a claim
under the “unfair prong” of the UCL. On December 11, 2009, the Appeals Court issued an Order denying
defendants’ permission to appeal the District Court’s ruling at this point in the case, but the Appeals Court did not
address the merits of the case.
Defendant Kinro has conducted a comprehensive investigation of the allegations made in connection with
the claims, including with respect to the HUD safety standards, prior test results, testing procedures, and the use of
labels. In addition, at Kinro’s initiative, independent laboratories conducted multiple tests on materials used by
Kinro in the manufacture of bathtubs, the results of which tests indicate that Kinro’s bathtubs are in compliance
with HUD regulations.
Based on the foregoing investigation and testing, the District Court’s rulings dismissing plaintiffs’ six
claims, and the ruling on “reliance” by the California Supreme Court, Kinro believes that, notwithstanding the
District Court’s finding that plaintiffs may proceed with their claim that defendants may have violated the “unfair
prong” of the UCL, plaintiffs may not be able to prove the essential elements of their claim. Defendants intend to
vigorously defend against the claim, and intend to move for summary judgment dismissing the claim. In addition,
Kinro believes that no remedial action is required or appropriate under HUD safety standards.
If the District Court maintains its rulings, denies defendants’ motion for summary judgment as to the claim
based on the “unfair prong” of the UCL, and maintains its ruling granting plaintiffs’ motion for class certification
with respect to that claim, and if plaintiffs pursue their claim, protracted litigation could result. Although the
39
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,
including interest. The aggregate settlement amount was fully reserved prior to 2009, and was paid in April of
2009. In connection with the settlement, the Indiana Department of Revenue reserved the right to examine tax
years 2001 through 2006.
In the normal course of business, the Company is subject to proceedings, lawsuits and other claims. All
such matters are subject to uncertainties and outcomes that are not predictable with assurance. While these matters
could materially affect operating results when resolved in future periods, it is management’s opinion that after final
disposition, including anticipated insurance recoveries, any monetary liability or financial impact to the Company
beyond that provided in the Consolidated Balance Sheet as of December 31, 2009, would not be material to the
Company’s financial position or annual results of operations.
CRITICAL ACCOUNTING POLICIES
The Company's Consolidated Financial Statements have been prepared in conformity with accounting
principles generally accepted in the United States of America which requires that certain estimates and assumptions
be made that affect the amounts and disclosures reported in those financial statements and the related
accompanying notes. Actual results could differ from these estimates and assumptions. The following critical
accounting policies, some of which are impacted significantly by judgments, assumptions and estimates, affect the
Company's Consolidated Financial Statements. Management has discussed the development and selection of its
critical accounting policies with the Audit Committee of the Company’s Board of Directors and the Audit
Committee has reviewed the disclosure presented below relating to the critical accounting policies.
Accounts Receivable
The Company maintains an allowance for doubtful accounts that reduces accounts receivables to amounts
that are expected to be collected. In assessing the collectability of its accounts receivable, the Company considers
such factors as the current overall economic conditions, industry-specific economic conditions, historical and
anticipated customer performance, historical experience with write-offs and the level of past-due amounts. This
estimation process is subjective, and to the extent that future actual results differ from original estimates,
adjustments to recorded accruals may be required.
Inventories
Inventories (finished goods, work in process and raw materials) are stated at the lower of cost, determined
on a first-in, first-out basis, or market. Cost is determined based solely on those charges incurred in the acquisition
and production of the related inventory (i.e. material, labor and manufacturing overhead costs). The Company
estimates an inventory reserve for excess quantities and obsolete items based on specific identification and
historical write-offs, taking into account future demand and market conditions. To the extent that actual demand or
market conditions in the future differ from original estimates, adjustments to recorded inventory reserves may be
required.
Self-Insurance
The Company is self-insured for certain health and workers' compensation benefits up to certain stop-loss
limits. Such costs are accrued based on known claims and an estimate of incurred, but not reported (“IBNR”)
claims. IBNR claims are estimated using historical lag information and other data provided by claims
40
administrators. This estimation process is subjective, and to the extent that future actual results differ from original
estimates, adjustments to recorded accruals may be required.
Warranty
The Company provides warranty terms based upon the type of product that is sold. The Company
estimates the warranty accrual based upon various factors, including the Company’s (i) historical warranty
experience, (ii) product mix, and (iii) sales patterns. The accounting for warranty accruals requires the Company to
make assumptions and judgments, and to the extent that future actual results differ from original estimates,
adjustments to recorded accruals may be required.
Income Taxes
The Company's tax (benefit) provision is based on pre-tax (loss) income, statutory tax rates and tax
planning strategies. Significant management judgment is required in determining the tax (benefit) provision and in
evaluating the Company's tax position. The Company establishes additional provisions for income taxes when,
despite the belief that the tax positions are fully supportable, there remain certain tax positions that are likely to be
challenged and may or may not be sustained on review by tax authorities. The Company adjusts these tax accruals
in light of changing facts and circumstances. The effective tax rate in a given financial statement period may be
materially impacted by changes in the expected outcome of tax audits.
The Company's accompanying Consolidated Balance Sheets also include deferred tax assets resulting from
deductible temporary differences, which are expected to reduce future taxable income. These assets are based on
management's estimate of realizability based upon forecasted taxable income. Realizability of these assets is
reassessed at the end of each reporting period based upon the Company's forecast of future taxable income. Failure
to achieve forecasted taxable income could affect the ultimate realization of certain deferred tax assets, and may
result in the recognition of a valuation reserve. For additional information, see Note 9 of the Notes to Consolidated
Financial Statements.
Impairment of Long-Lived Assets
The Company periodically evaluates whether events or circumstances have occurred that indicate that
long-lived assets may not be recoverable or that the remaining useful life may warrant revision. When such events
or circumstances occur, the Company assesses the recoverability of long-lived assets by determining whether the
carrying value will be recovered through the expected undiscounted future cash flows resulting from the use of the
asset. In the event the sum of the expected undiscounted future cash flows is less than the carrying value of the
asset, an impairment loss equal to the excess of the asset's carrying value over its fair value would be recorded. The
long-term nature of these assets requires the estimation of their cash inflows and outflows several years into the
future. Actual results and events could differ significantly from management estimates.
Impairment of Goodwill and Other Intangible Assets
Goodwill and other intangible assets are evaluated for impairment at the reporting unit level on an annual
basis and between annual tests whenever events or circumstances indicate that the carrying value of a reporting unit
may exceed its fair value. The Company conducts its required annual impairment test as of November 30th each
fiscal year. The impairment test uses a discounted cash flow model to estimate the fair value of a reporting unit.
This model requires the use of long-term forecasts and assumptions regarding industry-specific economic
conditions that are outside the control of the Company. Actual results and events could differ significantly from
management estimates.
In 2008, the Company conducted its annual impairment analysis of the goodwill in all reporting units,
which resulted in the impairment and non-cash write-off of the entire $5.5 million of goodwill related to the
specialty trailer reporting unit. During the first quarter of 2009, because the Company’s stock price on the New
York Stock Exchange was below its book value, and due to the continued declines in industry-wide wholesale
shipments of RVs and manufactured homes, the Company also conducted an impairment analysis of the goodwill
41
of each of its reporting units, resulting in the impairment and non-cash write-off of the remaining $45.0 million of
goodwill.
In both periods, the fair value of each reporting unit was estimated with a discounted cash flow model
utilizing internal forecasts and observable market data, to the extent available, to estimate future cash flows. The
forecast included an estimate of long-term future growth rates based on management’s most recent views of the
long-term outlook for each reporting unit.
At March 31, 2009 and December 31, 2008, the discount rate used in the discounted cash flow model
prepared for the goodwill impairment analysis was 16.5 percent and 13.0 percent, respectively, derived by applying
the weighted average cost of capital model which weights the cost of debt and equity financing. The Company also
considered the relationship of debt to equity of other companies similar to the respective reporting units, as well as
the risks and uncertainty inherent in the markets generally and in the Company’s internally developed forecasts.
Based on the analyses, the carrying value of the RV, manufactured housing and specialty trailer reporting
units exceeded their fair value. As a result, the Company performed the second step of the impairment test, which
required the Company to determine the fair value of each reporting unit’s assets and liabilities, including all of the
tangible and identifiable intangible assets of each reporting unit, excluding goodwill. The results of the second step
implied that the fair value of goodwill was zero, therefore the Company recorded a non-cash impairment charge to
write-off the entire goodwill of these reporting units.
These non-cash goodwill impairment charges were largely the result of uncertainties in the economy, and
in the RV, manufactured housing and marine and leisure industries, as well as the discount rates used to determine
the present value of projected cash flows. Estimating the fair value of reporting units, and the reporting unit’s asset
and liabilities, involves the use of estimates and significant judgments that are based on a number of factors
including actual operating results, future business plans, economic projections and market data. Actual results may
differ from forecasted results.
Legal Contingencies
The Company is subject to proceedings, lawsuits and other claims in the normal course of business. Each
quarter, the Company formally evaluates pending proceedings, lawsuits and other claims with counsel. These
contingencies require the judgment of management in assessing the likelihood of adverse outcomes and the
potential range of probable losses. Liabilities for legal matters are accrued for when it is probable that a liability has
been incurred and the amount of the liability can be reasonably estimated, based upon current law and existing
information. Estimates of contingencies may change in the future due to new developments or changes in legal
approach. Actual results and events could differ significantly from management estimates.
Other Estimates
The Company makes a number of other estimates and judgments in the ordinary course of business
including, but not limited to, those related to product returns, accounts receivable, notes receivable, lease
terminations, asset retirement obligations, post-retirement benefits, stock-based compensation, segment allocations,
earn-out payments, and contingencies. Establishing reserves for these matters requires management's estimate and
judgment with regard to risk and ultimate liability or realization. As a result, these estimates are based on
management's current understanding of the underlying facts and circumstances and may also be developed in
conjunction with outside advisors, as appropriate. Because of uncertainties related to the ultimate outcome of these
issues or the possibilities of changes in the underlying facts and circumstances, actual results and events could
differ significantly from management estimates.
INFLATION
The prices of key raw materials, consisting primarily of steel, vinyl, aluminum, glass and ABS resin are
influenced by demand and other factors specific to these commodities, such as the price of oil, rather than being
directly affected by inflationary pressures. Prices of certain commodities have historically been volatile. The
Company did not experience any significant increase in its labor costs in 2009 related to inflation.
42
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
The Company has historically been exposed to changes in interest rates primarily as a result of its
financing activities. At December 31, 2009, the Company had no outstanding borrowings.
At December 31, 2009, the Company had $3.0 million of cash equivalents and $13.0 million of short-term
investments in U.S. Treasuries with a current yield of approximately 0.1 percent. Assuming there is an increase of
100 basis points in the interest rate for these fixed rate investments subsequent to December 31, 2009, and total
investments of $16.0 million, future cash flows would be $0.2 million lower per annum than if the fixed rate
investment could be obtained at current market rates.
If the actual change in interest rates is substantially different than 100 basis points, or the outstanding
borrowings change significantly, the net impact of interest rate risk on the Company’s cash flow may be materially
different than that disclosed above.
Additional information required by this item is included under the caption “Inflation” in Item 7 of this
Report.
43
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Drew Industries Incorporated:
We have audited the accompanying consolidated balance sheets of Drew Industries Incorporated and
subsidiaries as of December 31, 2009 and 2008, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2009. We
also have audited the Company’s internal control over financial reporting as of December 31, 2009, based on
criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these
consolidated financial statements, for maintaining effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over financial reporting, included in the accompanying
“Management’s Annual Report on Internal Control over Financial Reporting.” Our responsibility is to express an
opinion on these consolidated financial statements and an opinion on the Company's internal control over financial
reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance
about whether the financial statements are free of material misstatement and whether effective internal control over
financial reporting was maintained in all material respects. Our audits of the consolidated financial statements
included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by management, and evaluating the overall
financial statement presentation. Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our
audits also included performing such other procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company's internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material
respects, the financial position of Drew Industries Incorporated and subsidiaries as of December 31, 2009 and
2008, and the results of their operations and their cash flows for each of the years in the three-year period ended
December 31, 2009, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the
Company maintained, in all material respects, effective internal control over financial reporting as of December 31,
2009, based on criteria established in Internal Control – Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO).
/s/ KPMG LLP
Stamford, Connecticut
March 11, 2010
44
Drew Industries Incorporated
Consolidated Statements of Operations
(In thousands, except per share amounts)
Net sales
Cost of sales
Gross profit
Selling, general and administrative expenses
Goodwill impairment
Executive retirement
Other (income)
Operating (loss) profit
Interest expense, net
(Loss) income before income taxes
(Benefit) provision for income taxes
Net (loss) income
Net (loss) income per common share:
Basic
Diluted
Weighted average common shares outstanding:
Basic
Diluted
Year Ended December 31,
2009
2008
2007
$ 397,839
319,129
78,710
69,489
45,040
-
(238)
(35,581)
789
(36,370)
(12,317)
$ (24,053)
$ 510,506
403,000
107,506
80,129
5,487
2,667
(675)
19,898
877
19,021
7,343
$ 11,678
$ 668,625
509,875
158,750
93,498
-
-
(707)
65,959
2,615
63,344
23,577
$ 39,767
$
$
(1.10)
(1.10)
$
$
0.54
0.53
$
$
1.82
1.80
21,807
21,807
21,808
21,917
21,893
22,126
The accompanying notes are an integral part of these Consolidated Financial Statements.
45
Drew Industries Incorporated
Consolidated Balance Sheets
(In thousands, except shares and per share amount)
ASSETS
Current assets
Cash and cash equivalents
Short-term investments
Accounts receivable, trade, less allowances of
$1,232 in 2009 and $1,666 in 2008
Inventories
Prepaid expenses and other current assets
Total current assets
Fixed assets, net
Goodwill
Other intangible assets
Deferred taxes
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable, including current maturities
of long-term indebtedness
Accounts payable, trade
Accrued expenses and other current liabilities
Total current liabilities
Long-term indebtedness
Other long-term liabilities
Total liabilities
Stockholders' equity
Common stock, par value $.01 per share: authorized
30,000,000 shares; issued 24,561,358 shares at December 31, 2009
and 24,122,054 shares at December 31, 2008
Paid-in capital
Retained earnings
Treasury stock, at cost - 2,596,725 shares at December 31, 2009 and 2008
Total stockholders' equity
Total liabilities and stockholders' equity
December 31,
2009
2008
$ 52,365
12,995
$
8,692
-
12,541
57,757
13,793
149,451
80,276
-
39,171
16,532
2,635
$ 288,065
7,913
93,934
16,556
127,095
88,731
44,113
42,787
306
8,326
$ 311,358
$
-
7,513
28,194
35,707
-
8,243
43,950
$
5,833
4,660
32,224
42,717
2,850
6,913
52,480
246
74,239
197,430
271,915
(27,800)
244,115
$ 288,065
241
64,954
221,483
286,678
(27,800)
258,878
$ 311,358
The accompanying notes are an integral part of these Consolidated Financial Statements.
46
Drew Industries Incorporated
Consolidated Statements of Cash Flows
(In thousands)
Cash flows from operating activities:
Net (loss) income
Adjustments to reconcile net (loss) income to cash flows
provided by operating activities:
Year Ended December 31,
2009 2008
2007
$ (24,053)
$ 11,678
$ 39,767
Depreciation and amortization
Deferred taxes
Loss (gain) on disposal of fixed assets and other non-cash items
Stock-based compensation expense
Goodwill impairment
Changes in assets and liabilities, net of business acquisitions:
18,468
(16,685)
2,836
3,744
45,040
Accounts receivable, net
Inventories
Prepaid expenses and other assets
Accounts payable, accrued expenses and other liabilities
Net cash flows provided by operating activities
(4,628)
37,505
3,226
(2,197)
63,256
Cash flows from investing activities:
Capital expenditures
Acquisition of businesses
Proceeds from sales of fixed assets
Purchase of short-term investments
Proceeds from sales of short-term investments
Other investing activities
Net cash flows used for investing activities
Cash flows from financing activities:
Proceeds from line of credit and other borrowings
Repayments under line of credit and other borrowings
Exercise of stock options
Purchase of treasury stock
Other financing activities
Net cash flows used for financing activities
(3,107)
(1,679)
1,367
(14,992)
2,000
(34)
(16,445)
5,775
(14,458)
5,562
-
(17)
(3,138)
17,078
(2,145)
(2,393)
3,636
5,487
9,497
(12,695)
(1,980)
(23,506)
4,657
(4,199)
(28,764)
10,541
-
-
(3,070)
(25,492)
14,600
(33,179)
402
(8,333)
(176)
(26,686)
17,557
(1,488)
(351)
2,489
-
3,061
8,994
1,478
13,403
84,910
(8,770)
(17,299)
14,492
-
-
(64)
(11,641)
23,800
(52,218)
4,577
-
-
(23,841)
Net increase (decrease) in cash
43,673
(47,521)
49,428
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
8,692
$ 52,365
56,213
$ 8,692
6,785
$ 56,213
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest
Income taxes, net of refunds
499
$
$ 3,290
$ 1,319
$ 13,852
$ 3,426
$ 16,881
The accompanying notes are an integral part of these Consolidated Financial Statements.
47
Drew Industries Incorporated
Consolidated Statements of Stockholders' Equity
(In thousands, except shares)
Accumulated
Other
Total
Common Paid-in Retained Comprehensive Treasury Stockholders’
Stock
Capital Earnings
Income
Equity
Stock
Balance - December 31, 2006
Net income
Unrealized loss on interest rate
swaps, net of taxes
Comprehensive income
Issuance of 249,929 shares of
common stock pursuant to stock
options and deferred stock units
Income tax benefit relating to
issuance of common stock
pursuant to stock options
Stock-based compensation expense
Balance - December 31, 2007
Net income
Unrealized loss on interest rate
swaps, net of taxes
Comprehensive income
Issuance of 39,080 shares of
common stock pursuant to stock
options and deferred stock units
Income tax benefit relating to
issuance of common stock
pursuant to stock options
Stock-based compensation expense
Purchase of 447,400 shares of
treasury stock
Balance - December 31, 2008
Net loss
Issuance of 439,304 shares of
common stock pursuant to stock
options and deferred stock units
Income tax benefit relating to
issuance of common stock
pursuant to stock options
Stock-based compensation expense
Balance - December 31, 2009
$ 238
$ 53,973 $ 170,038
39,767
$
106
$ (19,467) $ 204,888
39,767
(68)
209,805
11,678
38
(19,467)
(38)
(68)
39,699
2,513
1,947
2,489
251,536
11,678
(38)
11,640
340
59
3,636
3
2,510
1,947
2,489
60,919
241
340
59
3,636
241
64,954
221,483
(24,053)
(8,333)
(27,800)
-
(8,333)
258,878
(24,053)
5
5,010
5,015
531
3,744
$ 246
$ 74,239 $ 197,430
$
-
531
3,744
$ (27,800) $ 244,115
The accompanying notes are an integral part of these Consolidated Financial Statements.
48
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The Consolidated Financial Statements include the accounts of Drew Industries Incorporated and its
wholly-owned subsidiaries (“Drew” or the “Company”). Drew has no unconsolidated subsidiaries. Drew’s wholly-
owned active subsidiaries are Kinro, Inc. and its subsidiaries (collectively “Kinro”), and Lippert Components, Inc.
and its subsidiaries (collectively “Lippert”). Drew, through its wholly-owned subsidiaries, manufactures a broad
array of components for recreational vehicles (“RVs”) and manufactured homes, including:
●Steel chassis
●Axles and suspension solutions
●RV slide-out mechanisms and solutions
●Thermoformed bath, kitchen and other products
●Toy hauler ramp doors
●Manual, electric and hydraulic stabilizer
and lifting systems
●Vinyl and aluminum windows and doors
●Chassis components
●Furniture and mattresses
●Entry and baggage doors
●Entry steps
●Other towable accessories
●Specialty trailers for hauling boats, personal
watercraft, snowmobiles and equipment
The recreational vehicle products segment (the “RV Segment”) accounted for 79 percent of the Company's
sales in 2009, and the manufactured housing products segment (the “MH Segment”) accounted for 21 percent.
Nearly 93 percent of the Company’s RV Segment sales are of products used in travel trailers and fifth-wheel RVs.
The balance represents sales of components for motorhomes and mid-size buses, and sales of specialty trailers, as
well as axles for specialty trailers. At December 31, 2009, the Company operated 24 plants in 12 states.
The Company’s operations are somewhat seasonal, as sales are typically slower in the first and fourth
quarters, consistent with the industries which the Company supplies. All significant intercompany balances and
transactions have been eliminated. Certain prior year balances have been reclassified to conform to current year
presentation.
Subsequent to the balance sheet date but prior to the filing of this report, the Company announced that
Lippert agreed in principle to acquire certain intellectual property and other assets from Michigan-based
Schwintek, Inc. See Note 3 of the Notes to Consolidated Financial Statements. The Company is not aware of any
other significant events that occurred subsequent to the balance sheet date but prior to the filing of this report that
would have a material impact on the Consolidated Financial Statements.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three months or less at the time of
purchase to be cash equivalents. At December 31, 2009, the cash and cash equivalents included $49.2 million of
cash in fully FDIC insured accounts, and $3.0 million of U.S. Treasury Bills that mature in March 2010. The U.S.
Treasury Bills are recorded at cost which approximated fair value.
At December 31, 2008, the Company had $3.8 million invested in high-quality, short-term money market
instruments issued and payable in U.S funds, recorded at cost which approximated fair value.
Short-term Investments
At December 31, 2009, the Company had $13.0 million of short-term investments consisting of U.S.
Treasury Bills that mature at various dates through June 2010. These investments are recorded at cost which
approximated fair value.
49
Accounts Receivable
Accounts receivable are stated at the historical carrying amount, net of write-offs and allowances. The
Company establishes allowances based upon historical experience and any specific customer collection issues
identified by the Company. Uncollectible accounts receivable are written off when a settlement is reached or when
the Company has determined that the balance will not be collected.
The following table provides a reconciliation of the activity related to the Company’s allowance for
doubtful accounts receivable, for the years ended December 31, (in thousands):
Balance at beginning of period
Provision for doubtful accounts
Additions related to acquired companies
Accounts written off, net of recoveries
Balance at end of period
2009
$ 1,486
998
-
(1,481)
$ 1,003
2008
$
803
1,066
30
(413)
$ 1,486
2007
$ 1,081
(163)
85
(200)
803
$
In addition to the allowance for doubtful accounts receivable, the Company had an allowance for prompt
payment discounts in the amount of $0.2 million, $0.2 million, and $0.4 million at December 31, 2009, 2008, and
2007, respectively.
Inventories
Inventories are stated at the lower of cost (using the first-in, first-out method) or market. Cost includes
material, labor and overhead; market is replacement cost or realizable value after allowance for costs of
distribution.
Fixed Assets
Fixed assets are stated at cost less accumulated depreciation, and are depreciated on a straight-line basis
over the estimated useful lives of properties and equipment. Leasehold improvements and leased equipment are
amortized over the shorter of the lives of the leases or the underlying assets. Maintenance and repairs are charged
to operations as incurred; significant betterments are capitalized.
Income Taxes
Deferred tax assets and liabilities are determined based on the temporary differences between the financial
reporting and tax bases of assets and liabilities, applying enacted statutory tax rates in effect for the year in which
the differences are expected to reverse.
The Company accounts for uncertainty in tax positions in accordance with the current accounting
guidance, which requires that a company recognize in its financial statements the impact of a tax position, only if
that position is more likely than not of being sustained on audit, based on the technical merits of the position. The
Company adopted the provisions of the current accounting guidance on January 1, 2007, as a result of which, the
Company did not recognize a material adjustment to the liability for unrecognized income tax benefits.
The Company classifies interest and penalties related to income taxes as income tax expense in its
Consolidated Financial Statements.
Goodwill and Other Intangible Assets
Goodwill represents the excess of purchase price over the fair value assigned to the net tangible and
identifiable intangible assets of businesses acquired. Goodwill and other intangible assets with indefinite lives are
not amortized, but instead are tested at the reporting unit level for impairment annually, or more frequently if
certain circumstances indicate a possible impairment may exist. The impairment tests are based on fair value,
50
determined using discounted cash flows, appraised values or management’s estimates, depending upon the nature
of the assets.
In 2008, the Company conducted its annual impairment analysis of the goodwill in all reporting units,
which resulted in the impairment and non-cash write-off of the entire $5.5 million of goodwill related to the
specialty trailer reporting unit. During the first quarter of 2009, because the Company’s stock price on the New
York Stock Exchange was below its book value, and due to the continued declines in industry-wide wholesale
shipments of RVs and manufactured homes, the Company also conducted an impairment analysis of the goodwill
of each of its reporting units, resulting in the impairment and non-cash write-off of the remaining $45.0 million of
goodwill. The impairment analysis of goodwill conducted during the first quarter of 2009 was completed using
Level 3 fair value inputs.
In both periods, the fair value of each reporting unit was estimated with a discounted cash flow model
utilizing internal forecasts and observable market data, to the extent available, to estimate future cash flows. The
forecast included an estimate of long-term future growth rates based on management’s most recent views of the
long-term outlook for each reporting unit.
At March 31, 2009 and December 31, 2008, the discount rate used in the discounted cash flow model
prepared for the goodwill impairment analysis was 16.5 percent and 13.0 percent, respectively, derived by applying
the weighted average cost of capital model which weights the cost of debt and equity financing. The Company also
considered the relationship of debt to equity of other companies similar to the respective reporting units, as well as
the risks and uncertainty inherent in the markets generally and in the Company’s internally developed forecasts.
Based on the analyses, the carrying value of the RV, manufactured housing and specialty trailer reporting
units exceeded their fair value. As a result, the Company performed the second step of the impairment test, which
required the Company to determine the fair value of each reporting unit’s assets and liabilities, including all of the
tangible and identifiable intangible assets of each reporting unit, excluding goodwill. The results of the second step
implied that the fair value of goodwill was zero, therefore the Company recorded a non-cash impairment charge to
write-off the entire goodwill of these reporting units.
These non-cash goodwill impairment charges were largely the result of uncertainties in the economy, and
in the RV, manufactured housing and marine and leisure industries, as well as the discount rates used to determine
the present value of projected cash flows. Estimating the fair value of reporting units, and the reporting unit’s asset
and liabilities, involves the use of estimates and significant judgments that are based on a number of factors
including actual operating results, future business plans, economic projections and market data. Actual results may
differ from forecasted results.
Current accounting guidance also requires that intangible assets with estimable useful lives be amortized
over their respective estimated useful lives to their estimated residual values, and reviewed for impairment. The
amortization of other intangible assets is done using a method, straight-line or accelerated, which best reflects the
pattern in which the estimated future economic benefits of the asset will be consumed.
During 2009, the Company reviewed the recoverability of the carrying value of other intangible assets, and
determined that there was no impairment. The Company continues to monitor these assets for potential impairment,
as a downturn in the RV, manufactured housing, or marine and leisure industries, or in the profitability of the
Company’s operations, could result in a non-cash impairment charge of these assets in the future.
Impairment of Long-Lived Assets
The Company evaluates long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. Upon such an occurrence, recoverability of
assets to be held and used is measured by comparing the carrying amount of an asset to forecasted undiscounted
future net cash flows expected to be generated by the asset. If the carrying amount of the asset exceeds its
estimated undiscounted future cash flows, an impairment charge is recognized for the amount by which the
carrying amount of the asset exceeds the fair value of the asset. For long-lived assets held for sale, assets are
51
written down to fair value, less cost to sell. Fair value is determined based on discounted cash flows, appraised
values or management’s estimates, depending upon the nature of the assets.
In 2009, the Company reviewed the recoverability of the carrying value of facilities and vacant land not
currently being used in production, as well as facilities in the process of shutting down operations, using broker
quotes and management’s estimates, which are Level 3 fair value inputs. In 2009, the Company recorded
impairment charges of $2.5 million on facilities that have an adjusted carrying value of $6.2 million at December
31, 2009. The Company also reviewed the recoverability of other facilities with a net carrying value of $7.5 million
at December 31, 2009, using Level 3 fair value inputs, and determined no impairment charge was required. In 2008
and 2007, the Company recorded impairment charges for facilities of $1.0 million and $2.2 million, respectively.
These impairment charges for 2009, 2008, and 2007 are included in selling, general and administrative expenses in
the Consolidated Statements of Operations.
The Company recorded additional charges to operations of $0.8 million and $0.6 million in 2009 and 2008,
respectively, related to the exit of leased facilities, which are recorded in selling, general and administrative
expenses in the Consolidated Statements of Operations.
During 2009, the Company reviewed the recoverability of the carrying value of remaining other long-lived
assets, and determined that there was no impairment. The Company continues to monitor these assets for potential
impairment, as a downturn in the RV, manufactured housing, or marine and leisure industries, or in the profitability
of the Company’s operations, could result in a non-cash impairment charge of these assets in the future.
Financial Instruments
The carrying values of cash and cash equivalents, accounts receivable and accounts payable approximated
fair values due to the short-term nature of these instruments.
Stock-Based Compensation
All stock options granted are being expensed on a straight-line basis over the requisite service period,
which is generally the stock option vesting period, based on fair value, determined using the Black-Scholes option-
pricing model, at the date the stock options were granted. The accounting for stock options resulted in charges to
operations of $2.8 million, $3.2 million and $2.1 million for the years ended December 31, 2009, 2008 and 2007,
respectively. In addition, for the years ended December 31, 2009, 2008 and 2007, the Company issued deferred
stock units to certain executive officers and non-employee directors in lieu of cash remuneration of $0.9 million,
$0.4 million and $0.3 million, respectively. Stock-based compensation expense is recorded in the Consolidated
Statements of Operations in the same line that cash compensation to those employees is recorded, primarily in
selling, general and administrative expenses.
The fair value of each stock option grant is estimated on the date of the grant using the Black-Scholes
option-pricing model with the following weighted average assumptions:
Risk-free interest rate
Expected volatility
Expected life
Contractual life
Dividend yield
Fair value of stock options granted
2009
2008
2007
2.12%
53.2%
4.8 years
6.0 years
N/A
$9.87
2.17%
42.5%
4.8 years
6.0 years
N/A
$4.68
3.83%
33.8%
5.0 years
6.0 years
N/A
$11.68
Revenue Recognition
The Company recognizes revenue when products are shipped and the customer takes ownership and
assumes risk of loss, collectability is reasonably assured, and the sales price is fixed or determinable. Sales taxes
52
collected, which are not significant, from customers and remitted to governmental authorities are accounted for on
a net basis and therefore are excluded from revenues in the Consolidated Statements of Operations.
Shipping and Handling Costs
The Company records shipping and handling costs within selling, general and administrative expenses.
Such costs aggregated $15.4 million, $21.4 million and $25.6 million in 2009, 2008 and 2007, respectively.
Legal Costs
The Company expenses all legal costs associated with litigation as incurred.
Use of Estimates
The preparation of these financial statements in conformity with accounting principles generally accepted
in the United States of America requires the Company to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On
an ongoing basis, the Company evaluates its estimates, including, but not limited to, those related to product
returns, accounts receivable, inventories, notes receivable, goodwill and other intangible assets, income taxes,
warranty obligations, self-insurance obligations, lease terminations, asset retirement obligations, long-lived assets,
post-retirement benefits, stock-based compensation, segment allocations, earn-out payments, and contingencies and
litigation. The Company bases its estimates on historical experience, other available information and on various
other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis
for making judgments about the carrying values of assets and liabilities that are not readily apparent from other
resources. Actual results and events could differ significantly from management estimates.
Fair Value Measurements
Effective January 1, 2008, the Company adopted new accounting guidance for all financial assets and
liabilities and for non-financial assets and liabilities that are recognized or disclosed in the financial statements at
fair value on a recurring basis. Additionally, effective January 1, 2009, the Company adopted new accounting
guidance for non-financial assets and liabilities that are recognized or disclosed in the financial statements at fair
value on a non-recurring basis. Although such adoption did not have a material impact on the Company’s
Consolidated Financial Statements for 2009 or 2008, the pronouncement may impact the Company’s accounting
for future business combinations, impairment charges and restructuring charges.
This new accounting guidance established a new framework for measuring fair value and expanded related
disclosures. The framework requires fair value to be determined based on the exchange price that would be
received for an asset, or paid to transfer a liability (an exit price), in the principal or most advantageous market for
the asset or liability in an orderly transaction between market participants.
The valuation techniques required are based upon observable and unobservable inputs. Observable inputs
reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market
assumptions. The accounting guidance requires the following fair value hierarchy:
•
•
Level 1 - Quoted prices (unadjusted) for identical assets and liabilities in active markets that the
Company has the ability to access at the measurement date.
Level 2 - Quoted prices for similar assets and liabilities in active markets; quoted prices for
identical or similar assets and liabilities in markets that are not active; and inputs other than quoted
prices that are observable for the asset or liability, including interest rates, yield curves and credit
risks, or inputs that are derived principally from or corroborated by observable market data
through correlation.
53
•
Level 3 - Values determined by models, significant inputs to which are unobservable and are
primarily based on internally derived assumptions regarding the timing and amount of expected
cash flows.
Long-lived assets, including goodwill and other intangible assets, may be measured at fair value if such
assets are held for sale or if there is a determination that the asset is impaired. The determination of fair value is
based on the best information available, including internal cash flow estimates discounted at an appropriate interest
rate, quoted market prices when available, market prices for similar assets, broker quotes and independent
appraisals, as appropriate.
During 2009, the Company acquired patents, tradenames, and other assets in business combinations. The
Company used Level 3 inputs to value the assets acquired, as well as the liabilities for future earn-out payments.
See Note 3 of the Notes to Consolidated Financial Statements.
New Accounting Pronouncements
In May 2009, the Financial Accounting Standards Board (“FASB”) issued new accounting and disclosure
guidance for recognized and non-recognized subsequent events that occur after the balance sheet date but before
financial statements are issued. The provisions of the new accounting guidance were effective for interim or annual
periods ending after June 15, 2009. The adoption of this new accounting guidance had no impact on the Company.
In December 2007, the FASB amended its guidance on accounting for business combinations. The new
accounting guidance requires assets acquired and liabilities assumed in connection with a business combination to
be measured at fair value as of the acquisition date, acquisition related costs incurred prior to the acquisition to be
expensed, and contractual contingencies to be recognized at fair value as of the acquisition date. The provisions of
the new accounting guidance were effective for fiscal years beginning after December 15, 2008. The adoption of
this standard on January 1, 2009 did not have a material impact on the Company.
2. SEGMENT REPORTING
The Company has two reportable segments, the RV Segment and the MH Segment.
The RV Segment, which accounted for 79 percent, 72 percent and 74 percent of consolidated net sales for
2009, 2008 and 2007, respectively, manufactures a variety of products used primarily in the production of RVs,
including:
●Towable RV steel chassis
●Towable RV axles and suspension solutions
●RV slide-out mechanisms and solutions
●Thermoformed bath, kitchen and other products
●Toy hauler ramp doors
●Manual, electric and hydraulic stabilizer
and lifting systems
●Aluminum windows and screens
●Chassis components
●Furniture and mattresses
●Entry and baggage doors
●Entry steps
●Other towable accessories
●Specialty trailers for hauling boats, personal
watercraft, snowmobiles and equipment
Nearly 93 percent of the Company’s RV Segment sales are of products used in travel trailers and fifth-
wheel RVs. The balance represents sales of components for motorhomes and mid-size buses, and sales of specialty
trailers, as well as axles for specialty trailers.
The MH Segment, which accounted for 21 percent, 28 percent and 26 percent of consolidated net sales for
2009, 2008 and 2007, respectively, manufactures a variety of products used in the production of manufactured
homes and to a lesser extent, modular housing and office units, including:
●Vinyl and aluminum windows and screens
●Thermoformed bath and kitchen products
●Axles
●Steel chassis
●Steel chassis parts
●Entry doors
54
The Company also supplies replacement windows, doors and thermoformed bath products for existing
manufactured homes.
Sales of products other than components for RVs and manufactured homes are not considered significant.
However, certain of the Company’s MH Segment customers manufacture both manufactured homes and modular
homes, and certain of the products manufactured by the Company are suitable for both manufactured homes and
modular homes. As a result, the Company is not always able to determine in which type of home its products are
installed. Intersegment sales are insignificant.
Decisions concerning the allocation of the Company's resources are made by the Company's key
executives. This group evaluates the performance of each segment based upon segment operating profit or loss,
defined as income (loss) before interest, amortization of intangibles, corporate expenses, goodwill impairment,
other items and income taxes. Decisions concerning the allocation of resources are also based on each segment’s
utilization of operating assets. Management of debt is a corporate function. The accounting policies of the RV and
MH Segments are the same as those described in Note 1 of the Notes to Consolidated Financial Statements.
Information relating to segments follows (in thousands):
RV
Segments
MH
Total
Corporate
and Other
Intangible
Assets
Total
Year ended December 31, 2009
Revenues from external
customers(a)
Operating profit (loss)(b)(e)
Total assets(c)
Expenditures for long-lived
assets(d)
Depreciation and amortization
Year ended December 31, 2008
Revenues from external
customers(a)
Operating profit (loss)(b)(e)
Total assets(c)
Expenditures for long-lived
assets(d)
Depreciation and amortization
Year ended December 31, 2007
Revenues from external
customers(a)
Operating profit (loss)(b)(e)
Total assets(c)
Expenditures for long-lived
assets(d)
Depreciation and amortization
$ 312,535 $ 85,304
3,847
41,671
20,459
108,724
$ 397,839
24,306
150,395
$ -
(9,286)
98,347
$ -
(50,601)
39,323
$ 397,839
(35,581)
288,065
2,398
9,534
865
3,309
3,263
12,843
110
64
-
5,561
3,373
18,468
$ 368,092 $ 142,414
11,016
47,241
28,725
143,205
$ 510,506
39,741
190,446
$ -
(9,301)
33,747
$ -
(10,542)
87,165
$ 510,506
19,898
311,358
5,488
8,636
719
3,353
6,207
11,989
31
34
-
5,055
6,238
17,078
$ 491,830 $ 176,795
15,061
51,969
63,132
140,531
$ 668,625
78,193
192,500
$ -
(8,056)
80,803
$ -
(4,178)
72,434
$ 668,625
65,959
345,737
8,080
9,017
1,002
4,346
9,082
13,363
119
16
-
4,178
9,201
17,557
a) Thor Industries, Inc., a customer of the RV Segment, accounted for 25 percent, 21 percent and 23 percent of the
Company’s consolidated net sales in the years ended December 31, 2009, 2008 and 2007, respectively. Berkshire
Hathaway Inc. (through its subsidiaries Forest River, Inc. and Clayton Homes, Inc.), a customer of both segments,
accounted for 24 percent, 22 percent and 20 percent of the Company’s consolidated net sales in the years ended
December 31, 2009, 2008 and 2007, respectively. No other customer accounted for more than 10 percent of
consolidated net sales in the years ended December 31, 2009, 2008 and 2007.
55
b) Certain general and administrative expenses of Kinro and Lippert are allocated between the segments based upon
sales or operating profit, depending upon the nature of the expense.
c) Segment assets include accounts receivable, inventories and fixed assets. Corporate and other assets include cash
and cash equivalents, short-term investments, prepaid expenses and other current assets, deferred taxes, and other
assets. Intangibles include goodwill, other intangible assets and deferred charges which are not considered in the
measurement of each segment’s performance.
d) Segment expenditures for long-lived assets include capital expenditures and fixed assets purchased as part of the
acquisition of businesses. The Company purchased $0.3 million, $2.0 million and $0.4 million of fixed assets as part
of the acquisitions of businesses in 2009, 2008 and 2007, respectively. Expenditures for other long-lived assets,
goodwill and other intangible assets are not included in the segment since they are not considered in the
measurement of each segment’s performance.
e) The operating loss for the Corporate and Other column is comprised of Corporate expenses of $6.4 million, $7.2
million and $7.6 million for 2009, 2008 and 2007, respectively, and Other non-segment items of $2.9 million, $2.1
million and $0.5 million for 2009, 2008 and 2007, respectively.
Net sales by product were as follows for the years ended December 31, (in thousands):
Recreational Vehicles:
Chassis, chassis parts and
slide-out mechanisms
Windows, doors and screens
Furniture
Axles
Specialty trailers
Other
Manufactured Housing:
Windows, doors and screens
Chassis and chassis parts
Shower and bath units
Axles and tires
Other
2009
2008
2007
$ 178,563
64,684
30,290
26,343
6,810
5,845
312,535
46,961
24,892
12,636
757
58
85,304
$ 228,310
79,279
11,726
30,024
13,773
4,980
368,092
62,924
56,869
18,108
3,811
702
142,414
$ 315,875
107,693
-
42,025
20,749
5,488
491,830
72,580
70,428
19,921
10,502
3,364
176,795
Net Sales
$ 397,839
$ 510,506
$ 668,625
3. ACQUISITIONS, GOODWILL AND OTHER INTANGIBLE ASSETS
Over the last ten years, the Company has acquired numerous manufacturers of products for RVs,
manufactured homes and specialty trailers, expanded its geographic market and product lines, consolidated
manufacturing facilities, and integrated manufacturing, distribution and administrative functions. In a number of
these acquisitions the Company acquired a significant amount of goodwill, as the value of the acquired business to
the Company exceeded the fair value of the net tangible and other identifiable intangible assets acquired in the
transaction. In the fourth quarter of 2008 and the first quarter of 2009, the Company conducted an impairment
analysis of the goodwill of each of its reporting units, resulting in the impairment and non-cash write-off of all
existing goodwill. See Note 1 of the Notes to Consolidated Financial Statements.
56
Recently Announced Acquisitions
Wall Slide and Other RV Products
On February 18, 2010, the Company reported that Lippert agreed in principle to acquire certain intellectual
property and other assets from Michigan-based Schwintek, Inc. The purchase would include several products for
which patents are pending, including innovative RV wall slides that are considerably lighter, more space efficient,
and more reliable than previous slide-out designs. The purchase price, undisclosed at the time of the
announcement, is expected to include cash payable at closing, plus an earn-out depending on future unit sales. It is
expected that the cash portion of the purchase price payable at closing will be funded from available cash. Closing
of the transaction is subject to completion of due diligence, agreement on final terms and conditions, the execution
of definitive transaction documents, and satisfaction of customary closing conditions.
Level-UpTM System
In a separate transaction on February 18, 2010, Lippert acquired the patent-pending design for a six-point
leveling system for fifth-wheel RVs. The purchase price was $1.4 million paid at closing with available cash, plus
an earn-out depending on future unit sales of the system.
Acquisitions in 2009
QuickBiteTM
On May 15, 2009, Lippert acquired the patents for the QuickBiteTM coupler, and other intellectual
properties and assets. The innovative design of the QuickBiteTM automatic dual-jaw locking system eliminates
several steps when coupling a trailer to a tow vehicle, while at the same time making coupling simpler through the
use of an integrated alignment system. The minimum aggregate purchase price was $0.5 million, of which $0.3
million was paid at closing from available cash, with the balance to be paid on May 15, 2010. In addition, Lippert
will pay an earn-out of $2.50 per unit sold, up to a maximum of $2.5 million, during the life of the patents.
Therefore, the aggregate purchase price could increase to a maximum of $3.0 million. In 2009, Lippert paid earn-
out of less than $0.1 million. The results of the acquired QuickBiteTM business have been included in the
Company’s Consolidated Statements of Operations beginning May 15, 2009.
Slide-out storage box for pick-up trucks
On September 11, 2009, Lippert acquired the patent-pending design for a tool box containing a slide-out
storage tray. This newly-designed product, used in pick-up trucks, tow trucks and other mobile service vehicles, is
being produced at the Company’s existing manufacturing plants, with existing management, utilizing production
techniques with which the Company has extensive experience. The purchase price was $0.4 million, which was
paid at closing from available cash. The results of the acquired business have been included in the Company’s
Consolidated Statements of Operations beginning September 11, 2009.
Front entry doors for manufactured homes
On September 29, 2009, Kinro acquired certain inventory and equipment used for the production of front
entry doors for manufactured homes. This acquisition will increase Kinro’s content per manufactured home and
also add a new product category. The Company estimates that the current annual market for front entry doors for
manufactured homes is about $25 million to $30 million, and that half of this new potential is in aftermarket
replacement doors for existing manufactured homes. Kinro began manufacturing entry doors at plants in Indiana
and South Carolina in the 2009 fourth quarter. The purchase price was $0.9 million, which was paid at closing
from available cash. The results of the acquired business have been included in the Company’s Consolidated
Statements of Operations beginning September 29, 2009.
57
The aggregate consideration for the acquisitions of the QuickBiteTM coupler, slide-out storage box for pick-
up trucks, and front entry doors for manufactured homes was recorded as follows (in thousands):
Net tangible assets acquired
Intangible assets
Less: Present value of future estimated earn-out payments
Less: Other
Total cash consideration
$ 1,370
1,780
3,150
(1,204)
(267)
$ 1,679
Acquisitions in 2008
Seating Technology
On July 1, 2008, Lippert acquired certain assets and liabilities, and the business of Seating Technology,
Inc. and its affiliated companies (“Seating Technology”), a manufacturer of a wide variety of furniture products
primarily for towable RVs, including a full line of upholstered furniture and mattresses. Seating Technology had
annual sales of $40 million in 2007. The purchase price was $28.7 million, which was paid at closing from
available cash. The Company acquired intangible assets from Seating Technology primarily related to customer
relationships, which are being amortized over their estimated remaining useful life, which at the date of acquisition
was approximately 11 years. Subsequent to the acquisition, Lippert closed two of Seating Technology's five leased
facilities in Indiana and consolidated those operations into existing facilities. The results of the acquired Seating
Technology business have been included in the Company’s Consolidated Statements of Operations beginning July
1, 2008.
Total consideration for the acquisition was allocated as follows (in thousands):
Net tangible assets acquired
Customer relationships
Other identifiable intangible assets
Goodwill (tax deductible)
Total cash consideration
$ 5,766
9,400
2,575
10,918
$ 28,659
Patent for “JT’s Strong Arm Jack Stabilizer”
On July 1, 2008, Lippert acquired the patent for “JT's Strong Arm Jack Stabilizer” and other intellectual
properties and assets. The purchase price was $3.1 million, which was paid at closing from available cash. “JT's
Strong Arm Jack Stabilizer” represents a significant advance in the elimination of side-to-side and front-to-back
movement of a parked travel trailer or fifth-wheel RV. Total consideration for the acquisition was allocated to
amortizable intangible assets.
Acquisitions in 2007
Extreme Engineering
On July 6, 2007, Lippert acquired certain assets and liabilities, and the business of Extreme Engineering,
Inc. (“Extreme Engineering”), a manufacturer of specialty trailers for high-end boats, along with its affiliate, Pivit
Hitch, Inc. (“Pivit Hitch”). Extreme Engineering and Pivit Hitch had combined annual sales of $12 million prior to
the acquisition. The purchase price for the two companies was $10.8 million, including transaction costs, which
was paid at closing from available cash. The results of the acquired Extreme Engineering and Pivit Hitch
businesses have been included in the Company’s Consolidated Statements of Operations beginning July 6, 2007.
58
Total consideration for the acquisitions was allocated as follows (in thousands):
Net tangible assets acquired
Identifiable intangible assets
Goodwill (tax deductible)
Total cash consideration
$ 1,238
5,600
3,974
$ 10,812
Coach Step
On May 21, 2007, Lippert acquired certain assets and liabilities, and the business of Coach Step, a
manufacturer of patented electric steps for motorhomes. Coach Step had annual sales of $2 million prior to the
acquisition. The purchase price was $3.0 million, which was paid at closing from available cash. Upon acquisition,
the Company integrated Coach Step’s business into existing Lippert facilities. The results of the acquired Coach
Step business have been included in the Company’s Consolidated Statements of Operations beginning May 21,
2007.
Total consideration for the acquisition was allocated as follows (in thousands):
Net tangible assets acquired
Identifiable intangible assets
Goodwill (tax deductible)
Total cash consideration
$
604
1,830
598
$ 3,032
Trailair and Equa-Flex
On January 2, 2007, Lippert acquired Trailair, Inc. (“Trailair”) and certain assets and liabilities, and the
business of Equa-Flex, Inc. (“Equa-Flex”), two affiliated companies, which manufacture several patented products,
including innovative suspension systems used primarily for towable RVs. Trailair and Equa-Flex had combined
annual sales of $3 million prior to the acquisition. The minimum aggregate purchase price was $5.7 million, of
which $3.5 million was paid at closing and the balance is being paid annually over the five years subsequent to the
acquisition. The aggregate purchase price could increase to a maximum of $8.3 million if certain sales targets for
these products are achieved by Lippert over the five years subsequent to the acquisition. In the aggregate, less than
$0.1 million has been paid subsequent to the acquisition based on such sales targets. The annual payments to be
made over the five years subsequent to the acquisition bear interest at the stated rate of 3 percent per annum from
the date of the acquisition. The acquisition was financed with borrowings under the Company's line of credit. Upon
acquisition, the Company integrated Trailair and Equa-Flex’s business into existing Lippert facilities. The results
of the acquired Trailair and Equa-Flex businesses have been included in the Company’s Consolidated Statements
of Operations beginning January 2, 2007.
Total consideration for the acquisitions was allocated as follows (in thousands):
Net tangible assets acquired
Identifiable intangible assets
Goodwill (tax deductible)
Goodwill (non tax deductible)
Total consideration
Less present value of future minimum payments
Total cash consideration
$
625
4,160
267
426
5,478
(1,961)
$ 3,517
59
Goodwill and Other Intangible Assets
Goodwill by reportable segment is as follows (in thousands):
MH Segment
RV Segment
Total
Balance - January 1, 2008
Acquisitions
Impairments
Balance - December 31, 2008
Adjustment to 2008 Seating
Technology acquisition
Impairments
Balance - December 31, 2009
$ 9,251
-
-
9,251
-
(9,251)
-
$
$ 30,296
10,053
(5,487)
34,862
$ 39,547
10,053
(5,487)
44,113
927
(35,789)
-
$
927
(45,040)
-
$
In 2008, the Company conducted its annual impairment analysis of the goodwill in all reporting units,
which resulted in the impairment and non-cash write-off of the entire $5.5 million of goodwill related to the
specialty trailer reporting unit. During the first quarter of 2009, because the Company’s stock price on the New
York Stock Exchange was below its book value, and due to the continued declines in industry-wide wholesale
shipments of RVs and manufactured homes, the Company also conducted an impairment analysis of the goodwill
of each of its reporting units, resulting in the impairment and non-cash write-off of the remaining $45.0 million of
goodwill. See Note 1 of the Notes to Consolidated Financial Statements.
If the Company records goodwill on acquisitions completed subsequent to December 31, 2009, the
Company will perform its annual impairment test as of November 30, and will continue to monitor such assets for
potential impairment during interim periods.
Other intangible assets consist of the following at December 31, 2009 (in thousands):
Non-compete agreements
Customer relationships
Tradenames
Patents
Other intangible assets
Gross
$ 2,830
24,870
6,151
22,693
$ 56,544
Accumulated
Amortization
Net
Estimated Useful
Life in Years
$ 1,031
8,851
2,390
5,101
$ 17,373
$ 1,799
16,019
3,761
17,592
$ 39,171
3 to 7
8 to 16
5 to 15
5 to 19
Other intangible assets consist of the following at December 31, 2008 (in thousands):
Non-compete agreements
Customer relationships
Tradenames
Patents
Other intangible assets
Gross
$ 3,231
24,870
6,251
21,183
$ 55,535
Accumulated
Amortization
Net
Estimated Useful
Life in Years
$ 1,130
6,225
1,846
3,547
$ 12,748
$ 2,101
18,645
4,405
17,636
$ 42,787
3 to 7
8 to 16
5 to 15
5 to 19
The carrying value of other intangible assets in the RV and MH Segments were $35.3 million and $3.9
million at December 31, 2009, respectively, and $38.3 million and $4.5 million at December 31, 2008,
respectively. Amortization expense related to intangible assets amounted to $5.4 million, $4.8 million and $3.9
million for 2009, 2008 and 2007, respectively. Estimated amortization expense for the next five fiscal years is as
follows: $5.3 million (2010), $5.0 million (2011), $4.7 million (2012), $4.1 million (2013) and $3.6 million (2014).
60
During 2009, the Company reviewed the recoverability of the carrying value of other intangible assets, and
determined that there was no impairment. The Company continues to monitor these assets for potential impairment,
as a downturn in the RV, manufactured housing, or marine and leisure industries, or in the profitability of the
Company’s operations, could result in a non-cash impairment charge of these assets in the future.
4. INVENTORIES
Inventories consist of the following at December 31, (in thousands):
Finished goods
Work in process
Raw materials
Total
2009
$ 9,264
1,576
46,917
$ 57,757
2008
$ 10,801
2,946
80,187
$ 93,934
5. FIXED ASSETS
Fixed assets, at cost, consist of the following at December 31, (in thousands):
Land
Buildings and improvements
Leasehold improvements
Machinery and equipment
Transportation equipment
Furniture and fixtures
Construction in progress
Less accumulated depreciation and amortization
Fixed assets, net
Estimated Useful
Life in Years
10 to 40
2 to 15
3 to 10
3 to 7
3 to 8
$
2009
9,917
65,574
1,164
73,995
2,590
8,625
464
162,329
82,053
$ 80,276
$
2008
8,323
63,508
1,182
77,653
2,985
8,356
1,294
163,301
74,570
$ 88,731
Depreciation and amortization of fixed assets is as follows for the years ended December 31, (in
thousands):
Charged to cost of sales
Charged to selling, general and
administrative expenses
Total
2009
$ 11,155
1,752
$ 12,907
2008
$ 10,292
1,731
$ 12,023
2007
$ 11,497
1,882
$ 13,379
6. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following at December 31, (in thousands):
Accrued employee compensation and benefits
Accrued warranty
Other accrued expenses and current liabilities
Total
2009
$ 11,815
3,340
13,039
$ 28,194
2008
$ 13,010
4,510
14,704
$ 32,224
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Estimated costs related to product warranties are accrued at the time products are sold. In estimating its
future warranty obligations, the Company considers various factors, including the Company’s (i) historical
warranty experience, (ii) product mix, and (iii) sales patterns. The following table provides a reconciliation of the
activity related to the Company’s accrued warranty, including both the current and long-term portions, for the years
ended December 31, (in thousands):
Balance at beginning of period
Provision for warranty expense
Warranty costs paid
Total accrued warranty
Less long-term portion
Current accrued warranty
2009
$ 5,419
2,279
(3,012)
4,686
1,346
$ 3,340
2008
$ 5,762
3,984
(4,327)
5,419
909
$ 4,510
2007
$ 3,990
6,335
(4,563)
5,762
1,402
$ 4,360
7. RETIREMENT AND OTHER BENEFIT PLANS
Defined Contribution Plans
Prior to November 2009, the Company maintained multiple discretionary defined contribution 401(k)
profit sharing plans. In November 2009, the Company combined its plans into one plan, covering all eligible
employees. The Company contributed $0.9 million, $1.3 million and $1.4 million to these plans during the years
ended December 31, 2009, 2008 and 2007, respectively.
Deferred Compensation Plan
The Company has an Executive Non-Qualified Deferred Compensation Plan (the “Plan”). Pursuant to the
Plan, certain management employees are eligible to defer all or a portion of their regular salary and incentive
compensation. Participants deferred $0.3 million, $1.9 million and $1.0 million in 2009, 2008 and 2007,
respectively. Each Plan participant is fully vested in their deferred compensation and earnings credited to his or her
account as all contributions to the Plan are made by the participant. The Company is responsible for certain costs of
Plan administration, which are not significant, but will not make any contributions to the Plan. Pursuant to the Plan,
payments to the Plan participants are made from the general unrestricted assets of the Company, and the
Company’s obligations pursuant to the Plan are unfunded and unsecured. Participants withdrew $0.5 million from
the Plan in 2009. At December 31, 2009 and 2008, $2.0 million and $1.9 million, respectively, have been recorded
in other long-term liabilities, and $0.1 million and $0.5 million, respectively, have been recorded in accrued
expenses and other current liabilities in the Consolidated Balance Sheets.
Executive Retirement
The Company has a management succession plan designed to ensure an effective transition of management
of the Company’s operations to qualified executives upon the retirement of senior executives. In November 2008,
in accordance with the management succession plan, Edward W. Rose, III, Chairman of the Board of Directors
since 1984, was appointed Lead Director; Leigh J. Abrams, President from 1984 to May 2008, and Chief Executive
Officer and a Director since 1984, was appointed Chairman of the Board of Directors; and Fredric M. Zinn,
Executive Vice President from 2001, Chief Financial Officer from 1984, and President and a Director since May
2008, was, in addition to President, appointed Chief Executive Officer. Each of these appointments became
effective January 1, 2009.
In connection with the retirement, effective December 31, 2008, of David L. Webster as a Director of the
Company and as Chairman, President and Chief Executive Officer of Kinro, after approximately 30 years with
Kinro, and in accordance with the Company’s executive succession plan, the Board of Directors appointed Jason
D. Lippert to assume responsibility for the operations of Kinro while continuing his duties as Chairman, President
and Chief Executive Officer of Lippert. Mr. Lippert was appointed Chairman, President and Chief Executive
Officer of Kinro effective January 1, 2009.
62
In connection with the management succession, the Company and Mr. Abrams entered into an Executive
Compensation and Benefits Agreement, effective as of January 1, 2009 (the “Abrams Agreement”). The Board of
Directors granted retirement compensation and benefits to Mr. Abrams in recognition of his 40-year commitment
to the success of the Company, the Company’s performance during his 29-year tenure as President and Chief
Executive Officer, and the overall increase in stockholder value during that period. In addition, as Chairman of the
Board, Mr. Abrams will continue to render services to the Company, for which he will be compensated in
accordance with the Abrams Agreement, and he has agreed to non-competition restrictions on his future business
activities.
Also in connection with the management succession, the Company and Mr. Webster entered into an
Executive Compensation and Benefits Agreement, effective as of January 1, 2009 (the “Webster Agreement”). Mr.
Webster’s existing employment agreement, which was to expire December 31, 2009, was cancelled as of the
effective date of the Webster Agreement. The Board of Directors granted retirement compensation and benefits to
Mr. Webster in recognition of his contribution to the Company’s business, growth and reputation during a 30-year
period. In addition, Mr. Webster agreed to non-competition restrictions on his future business activities.
During the fourth quarter of 2008, as a result of the Abrams Agreement and Webster Agreement, the
Company recognized $2.7 million of executive retirement expense in the Consolidated Statements of Operations.
At December 31, 2009 and 2008, $0.5 million and $1.7 million, respectively, have been recorded in other long-
term liabilities, and $1.2 million and $1.0 million, respectively, have been recorded in accrued expenses and other
current liabilities in the Consolidated Balance Sheets.
8. LONG-TERM INDEBTEDNESS
Long-term indebtedness consists of the following at December 31, (in thousands):
Senior Promissory Notes
Notes payable pursuant to a Credit Agreement
Industrial Revenue Bonds, secured by certain real estate
and equipment
Other loans primarily secured by certain real estate and
equipment
2009
$
Less current portion
Total long-term indebtedness
$
-
-
-
-
-
-
-
$
2008
6,000
-
1,662
1,021
8,683
5,833
2,850
$
The weighted average interest rate for the Company’s indebtedness was 4.85 percent at December 31,
2008.
On November 25, 2008, the Company entered into an agreement (the “Credit Agreement”) for a $50.0
million line of credit with JPMorgan Chase Bank, N.A. and Wells Fargo Bank, N.A. (collectively, the “Lenders”),
to replace the Company’s previous $70.0 million line of credit that was scheduled to expire in June 2009. The
maximum borrowings under the Company’s line of credit can be increased by $20.0 million upon approval of the
Lenders. Interest on borrowings under the line of credit is designated from time to time by the Company as either
the Prime Rate, but not less than 2.5 percent, plus additional interest up to 0.8 percent (0 percent at December 31,
2009 and 2008), or LIBOR plus additional interest ranging from 2.0 percent to 2.8 percent (2.0 percent at
December 31, 2009 and 2008) depending on the Company’s performance and financial condition. The Credit
Agreement expires December 1, 2011. At December 31, 2009 and 2008, the Company had $7.8 million and $7.6
million, respectively, in outstanding letters of credit under the line of credit, and availability under the Company’s
line of credit, after considering the maximum leverage ratio covenant limitation, was $37.8 million and $42.4
million, respectively.
Simultaneously, the Company entered into a $125.0 million “shelf-loan” facility with Prudential
Investment Management, Inc. and its affiliates (“Prudential”), to replace the Company’s previous $60.0 million
“shelf-loan” facility with Prudential, of which $6.0 million was outstanding at December 31, 2008. The facility
63
provides for Prudential to consider purchasing, at the Company’s request, in one or a series of transactions, Senior
Promissory Notes of the Company in the aggregate principal amount of up to $125.0 million, to mature no more
than twelve years after the date of original issue of each Senior Promissory Note. Prudential has no obligation to
purchase the Senior Promissory Notes. Interest payable on the Senior Promissory Notes will be at rates determined
by Prudential within five business days after the Company issues a request to Prudential. The “shelf-loan” facility
expires November 25, 2011. In June 2009, the Company paid in full the remaining outstanding Senior Promissory
Notes before their scheduled maturity date.
Both the line of credit pursuant to the Credit Agreement and the “shelf-loan” facility are subject to a
maximum leverage ratio covenant which limits the amount of consolidated outstanding indebtedness to 2.5 times
the trailing twelve-month EBITDA, as defined; provided however, that if the Company’s trailing twelve-month
EBITDA is less than $50 million, the maximum leverage ratio covenant declines to 1.25 times the trailing twelve-
month EBITDA. Since the Company’s trailing twelve-month EBITDA was less than $50 million at December 31,
2009, the maximum leverage ratio covenant limits the remaining availability under these facilities collectively to
$37.8 million. The $65.4 million in cash and short-term investments at December 31, 2009, together with the
borrowing availability under our line of credit and “shelf-loan” facility, are more than adequate to finance the
Company’s anticipated working capital and capital expenditure requirements.
Pursuant to the Credit Agreement, Senior Promissory Notes, and certain other loan agreements, the
Company is required to maintain minimum net worth, interest and fixed charge coverages, and to meet certain
other financial requirements. At December 31, 2009 and 2008, the Company was in compliance with all such
requirements, and expects to remain in compliance for the next twelve months.
Borrowings under both the line of credit and the “shelf-loan” facility are secured on a pari passu basis by
first priority liens on the capital stock or other equity interests of each of the Company’s direct and indirect
subsidiaries.
The Company has unsecured letters of credit outstanding, unrelated to the Credit Agreement, which
aggregate $0.4 million and $0.6 million at December 31, 2009 and 2008, respectively.
9. INCOME TAXES
The income tax (benefit) provision in the Consolidated Statements of Operations is as follows for the years
ended December 31, (in thousands):
Current:
Federal
State
Total current
Deferred:
Federal
State
Total deferred
Total income tax (benefit) provision
2009
2008
2007
$ 3,700
668
4,368
(13,485)
(3,200)
(16,685)
$ (12,317)
$ 7,312
2,176
9,488
(1,721)
(424)
(2,145)
$ 7,343
$ 20,774
4,291
25,065
(1,137)
(351)
(1,488)
$ 23,577
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The (benefit) provision for income taxes differs from the amount computed by applying the federal
statutory rate to (loss) income before income taxes for the following reasons for the years ended December 31, (in
thousands):
2009
2008
2007
Income tax at federal statutory rate
State income taxes, net of federal income tax impact
Non-deductible goodwill
Research and development credit
Other non-deductible expenses
Manufacturing credit pursuant to Jobs Creation Act
Tax-free interest income
Other
(Benefit) provision for income taxes
$ (12,366)
(1,671)
2,030
(354)
100
(50)
-
(6)
$ (12,317)
$ 6,657
1,139
-
-
169
(407)
(7)
(208)
$ 7,343
$ 22,171
2,561
-
(64)
135
(1,123)
(277)
174
$ 23,577
At December 31, 2009, federal and state income taxes payables of $3.9 million are included in accrued
expenses and other current liabilities. At December 31, 2008, federal overpayments of $2.2 million are included in
prepaid expenses and other current assets, and state income taxes payable of $5.6 million are included in accrued
expenses and other current liabilities.
Net deferred tax assets are classified in the Consolidated Balance Sheets as follows at December 31, (in
thousands):
2009
2008
Prepaid expenses and other current assets
Other long-term assets
Net deferred tax assets
$ 9,879
16,532
$ 26,411
$ 9,436
306
$ 9,742
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and
deferred tax liabilities are as follows at December 31, (in thousands):
Deferred tax assets:
Goodwill and other intangible assets
Employee benefits
Inventories
Deferred compensation
Accrued insurance
Post retirement
Accounts receivable
Other
Total deferred tax assets
Deferred tax liabilities:
Fixed assets
Net deferred tax assets
2009
2008
$ 16,299
3,887
2,145
1,460
1,247
986
559
2,226
28,809
2,398
$ 26,411
$ 2,741
3,765
1,759
1,270
996
1,474
758
1,812
14,575
4,833
$ 9,742
The Company concluded that it is more likely than not that the deferred tax assets at December 31, 2009
will be realized in the ordinary course of operations based on future taxable income and scheduling of deferred tax
liabilities.
Tax benefits on stock option exercises of $0.5 million, $0.1 million and $1.9 million were credited directly
to stockholders' equity for 2009, 2008 and 2007, respectively, relating to tax benefits which exceeded the
compensation cost for stock options recognized in the Consolidated Financial Statements.
65
At December 31, 2009, the Company had deferred tax assets of $3.6 million related to unexercised stock
options. The Company’s stock price at December 31, 2009, was below the exercise price of certain of the
unexercised stock options. If the stock price remains below the exercise price of these stock options, the related
deferred tax assets will not be realized. The reversal of such deferred tax assets will be recorded as a reduction of
stockholders' equity, to the extent there are available excess tax benefits from prior stock option exercises, with any
remaining deficiency recorded as additional income tax expense in the Consolidated Statements of Operations. At
December 31, 2009 the available excess tax benefits from prior stock option exercises in stockholders' equity was
$11.7 million.
Unrecognized Tax Benefits
The following table reconciles the total amounts of unrecognized tax benefits, at December 31, (in
thousands):
Balance at beginning of period
Changes in tax positions of prior years
Additions based on tax positions
related to the current year
Payments
Expiration of statute of limitations
Balance at end of period
2009
2008
2007
$ 5,782
(287)
$ 4,829
819
661
(3,891)
(106)
$ 2,159
363
-
(229)
$ 5,782
$ 3,752
373
791
-
(87)
$ 4,829
In addition, the total amount of accrued interest and penalties related to taxes was $0.4 million, $1.0
million and $1.3 million at December 31, 2009, 2008 and 2007, respectively.
The total amount of unrecognized tax benefits, net of federal income tax benefits, of $1.6 million $3.8
million, and $3.2 million at December 31, 2009, 2008 and 2007, respectively, would, if recognized, increase the
Company’s earnings, and lower the Company’s annual effective tax rate in the year of recognition.
The Company periodically undergoes examinations by the Internal Revenue Service (“IRS”), as well as
various state jurisdictions. The IRS and other taxing authorities routinely challenge certain deductions and
positions reported by the Company on its income tax returns. During the third quarter of 2008, the IRS completed
an audit of the Company’s 2005 federal tax return, and found no changes. For federal income tax purposes, the tax
years 2006 through 2008 remain subject to examination.
In connection with a tax audit by the Indiana Department of Revenue pertaining to calendar years 1998 to
2000, the Company received an initial examination report asserting, in the aggregate, approximately $1.2 million of
proposed tax adjustments, including interest and penalties. After two hearings with the Indiana Department of
Revenue, the audit findings were upheld. The Company filed an appeal in December 2006 with the Indiana Tax
Court and the matter was scheduled for trial in December 2008. In November 2008, the Company and the Indiana
Department of Revenue settled tax years 1998 to 2000 for $0.6 million, as well as tax years 2001 to 2006 for $4.0
million, including interest. The aggregate settlement amount was fully reserved prior to 2009, and was paid in
April of 2009. In connection with the settlement, the Indiana Department of Revenue reserved the right to examine
tax years 2001 through 2006. In addition, for Indiana state income tax purposes, the tax years 2007 and 2008
remain subject to examination.
The Company has assessed its risks associated with all tax return positions, and believes that its tax reserve
estimates reflect its best estimate of the deductions and positions that it will be able to sustain, or that it may be
willing to concede as part of a settlement. At this time, the Company cannot estimate the range of reasonably
possible change in its tax reserve estimates in 2010. While these tax matters could materially affect operating
results when resolved in future periods, it is management’s opinion that after final disposition, any monetary
liability or financial impact to the Company beyond that provided in the Consolidated Balance Sheet as of
December 31, 2009, would not be material to the Company’s financial position or annual results of operations.
66
10. COMMITMENTS AND CONTINGENCIES
Leases
The Company's lease commitments are primarily for real estate, machinery and equipment, and vehicles.
The significant real estate leases provide for renewal options and require the Company to pay for property taxes
and all other costs associated with the leased property.
Future minimum lease payments under operating leases at December 31, 2009 are summarized as follows
(in thousands):
2010
2011
2012
2013
2014
Thereafter
Total minimum lease payments
$ 4,668
3,991
2,833
1,381
506
463
$ 13,842
Rent expense for operating leases was $6.7 million, $7.2 million and $6.1 million for the years ended
December 31, 2009, 2008 and 2007, respectively. Included in 2009 and 2008 was $0.8 million and $0.6 million,
respectively, of charges related to vacated leased facilities.
Employment Agreements
At December 31, 2009 the Company had employment contracts with twelve of its employees and three
consultants, which expire on various dates through 2013. The minimum commitments under these contracts are
$4.5 million in 2010, $2.8 million in 2011, and $0.2 million in 2012 and $0.1 million in 2013. Included in these
minimum commitments are certain amounts payable to two retired senior executives which have been accrued as of
December 31, 2009. See Note 7 of the Notes to Consolidated Financial Statements for further information
regarding executive retirement charges.
Included in the foregoing are contracts with four employees which provide for incentives to be paid based
on some or all of the following; (i) profits, as defined, (ii) return on net assets, as defined, (iii) return on invested
capital, as defined, and (iv) the Company’s financial performance as compared to the RV, and manufactured
housing and related industries, as defined.
Royalty
In February 2003, the Company entered into an agreement for a non-exclusive license for patents related to
certain slide-out systems. The agreement provides for the Company to pay a royalty of 1 percent on sales of certain
slide-out systems commencing January 1, 2007 through the expiration of the patents, with aggregate payments
subsequent to January 1, 2007 not to exceed $5.0 million. The expense related to this royalty agreement of $0.2
million, $0.2 million and $0.4 million for 2009, 2008 and 2007, respectively, is classified in the Consolidated
Statements of Operations in Cost of Sales. Aggregate payments subsequent to December 31, 2009 cannot exceed
$4.3 million.
Contingent Consideration
In connection with the 2007 acquisition of Trailair and Equa-Flex, the Company could pay an earn-out of
up to $2.6 million if certain sales targets for the acquired products are achieved by Lippert over the five years
subsequent to the acquisition. In the aggregate, less than $0.1 million has been paid subsequent to the acquisition
based on such sales targets. The annual payments to be made over the five years subsequent to the acquisition bear
interest at the stated rate of 3 percent per annum from the date of the acquisition. In accordance with the accounting
guidance in effect at the time, the Company did not record a liability for the fair value estimate of such earn-out
payments, but rather these payments are recorded directly to goodwill.
67
In connection with the 2009 acquisitions of the QuickBiteTM coupler and the slide-out storage box for pick-
up trucks, the Company could pay an earn-out of up to $2.6 million if certain sales targets for the acquired products
are achieved by Lippert. In the aggregate, less than $0.1 million has been paid subsequent to these acquisitions
based on such sales targets. In accordance with the current accounting guidance in effect, the Company recorded a
liability at present value for the fair value estimate of such earn-out payments. At December 31, 2009, the
Company had $0.1 million and $1.3 million for future earn-out payments recorded in accrued expenses and other
current liabilities, and other long-term liabilities, respectively. To the extent the fair value estimate of such future
earn-out payments change, the revision would be recorded in the current period in the Consolidated Statements of
Operations.
Litigation
On or about January 3, 2007, an action was commenced in the United States District Court, Central District
of California, entitled Gonzalez vs. Drew Industries Incorporated, Kinro, Inc., Kinro Texas Limited Partnership
d/b/a Better Bath Components; Skyline Corporation, and Skylines Homes, Inc. (Case No. CV06-08233). The case
purports to be a class action on behalf of the named plaintiff and all others similarly situated in California. Plaintiff
initially alleged, but has not sought certification of, a national class.
On April 1, 2008, the Court issued an order granting Drew’s motion to dismiss for lack of personal
jurisdiction, resulting in the dismissal of Drew Industries Incorporated as one of the defendants in the case.
Plaintiff alleges that certain bathtubs manufactured by Kinro Texas Limited Partnership, a subsidiary of
Kinro, and sold under the name “Better Bath” for use in manufactured homes, fail to comply with certain safety
standards relating to flame spread established by the U.S. Department of Housing and Urban Development
(“HUD”). Plaintiff alleges, among other things, that sale of these products is in violation of various provisions of
the California Consumers Legal Remedies Act (Cal. Civ. Code Sec. 1770 et seq.), the Magnuson-Moss Warranty
Act (15 U.S.C. Sec. 2301 et seq.), the California Song-Beverly Consumer Warranty Act (Cal. Civ. Code Sec. 1790
et seq.), and the California Unfair Competition Law (Cal. Bus. & Prof. Code Sec. 17200 et seq.).
Plaintiff seeks to require defendants to notify members of the class of the allegations in the proceeding and
the claims made, to repair or replace the allegedly defective products, to reimburse members of the class for repair,
replacement and consequential costs, to cease the sale and distribution of the allegedly defective products, and to
pay actual and punitive damages and plaintiff’s attorneys fees.
On January 29, 2008, the Court issued an Order denying certification of a class with plaintiff Gonzalez as
the class representative because she no longer owned the bathtub. On March 10, 2008, plaintiff amended her
complaint to include an additional plaintiff, Robert Royalty. Plaintiff Royalty states that his bathtub was not tested
to determine whether it complies with HUD standards. Rather, his allegations are based on “information and
belief”, including the testing of plaintiff Gonzalez’s bathtub and other evidence. Kinro denies plaintiff Royalty’s
allegations.
On June 25, 2008, plaintiffs filed a renewed motion for class certification and the Court again denied
certification of a class. Plaintiffs filed a third motion for class certification on December 23, 2008, and Defendants’
filed a motion seeking summary judgment against plaintiffs’ case.
On May 18, 2009, the Court issued an Order granting partial summary judgment in favor of defendants,
dismissing five of the six claims asserted by plaintiffs, except for plaintiffs’ claim for violation of California’s
Unfair Competition Law (the “UCL”). The Court also granted plaintiffs’ motion for class certification as to that
one claim. The Court denied Defendant’s motion for summary judgment on the UCL claim on the ground that there
was a triable issue of fact as to whether the alleged misrepresentation on defendants’ labels regarding testing for
flame spread rate caused plaintiffs to purchase the manufactured homes containing bathtubs manufactured by
Kinro.
On August 26, 2009, as a result of a decision by the California Supreme Court in an unrelated case dealing
with a similar UCL claim, the Court dismissed plaintiffs’ remaining UCL claim because plaintiffs did not actually
68
rely on defendants’ labels when they bought the homes containing the bathtubs. However, the Court concluded that
simply selling bathtubs which may fail to satisfy Federal standards may violate the “unfair prong” of the UCL,
even if plaintiffs did not actually rely on defendant’s labels.
On September 11, 2009, defendants filed with the Ninth Circuit Court of Appeals a Petition for Permission
to Appeal, on an interlocutory basis, that part of the District Court’s ruling that certified a class to pursue a claim
under the “unfair prong” of the UCL. On December 11, 2009, the Appeals Court issued an Order denying
defendants’ permission to appeal the District Court’s ruling at this point in the case, but the Appeals Court did not
address the merits of the case.
Defendant Kinro has conducted a comprehensive investigation of the allegations made in connection with
the claims, including with respect to the HUD safety standards, prior test results, testing procedures, and the use of
labels. In addition, at Kinro’s initiative, independent laboratories conducted multiple tests on materials used by
Kinro in the manufacture of bathtubs, the results of which tests indicate that Kinro’s bathtubs are in compliance
with HUD regulations.
Based on the foregoing investigation and testing, the District Court’s rulings dismissing plaintiffs’ six
claims, and the ruling on “reliance” by the California Supreme Court, Kinro believes that, notwithstanding the
District Court’s finding that plaintiffs may proceed with their claim that defendants may have violated the “unfair
prong” of the UCL, plaintiffs may not be able to prove the essential elements of their claim. Defendants intend to
vigorously defend against the claim, and intend to move for summary judgment dismissing the claim. In addition,
Kinro believes that no remedial action is required or appropriate under HUD safety standards.
If the District Court maintains its rulings, denies defendants’ motion for summary judgment as to the claim
based on the “unfair prong” of the UCL, and maintains its ruling granting plaintiffs’ motion for class certification
with respect to that claim, and if plaintiffs pursue their claim, protracted litigation could result. Although the
outcome of such litigation cannot be predicted, if certain essential findings are ultimately unfavorable to Kinro, the
Company could sustain a material liability. The Company’s liability insurer denied coverage on the ground that
plaintiffs did not sustain any personal injury or property damage.
In the normal course of business, the Company is subject to proceedings, lawsuits and other claims. All
such matters are subject to uncertainties and outcomes that are not predictable with assurance. While these matters
could materially affect operating results when resolved in future periods, it is management’s opinion that after final
disposition, including anticipated insurance recoveries, any monetary liability or financial impact to the Company
beyond that provided in the Consolidated Balance Sheet as of December 31, 2009, would not be material to the
Company’s financial position or annual results of operations.
Sale-Leaseback
In April 2008, the Company sold for $3.1 million a mortgage note it had received in a 2006 sale of a
facility, which note had been in default. In connection with the collection of this $3.1 million in cash, the Company
recorded a gain of $2.1 million during 2008. This gain is classified in selling, general and administrative expenses
in the Consolidated Statements of Operations.
Facilities Consolidation
In response to the slowdowns in both the RV and manufactured housing industries, over the past few years
the Company has consolidated the operations previously conducted at more than 35 facilities and reduced staff
levels. The Company incurred severance and relocation costs of $1.6 million, $1.6 million, and $0.8 million in
2009, 2008 and 2007, respectively, which were recorded in selling, general and administrative expenses in the
Consolidated Statements of Operations. At December 31, 2009, 2008 and 2007, the Company had $0.7 million,
$0.9 million, and $0.3 million, respectively, of a remaining liability for these costs recorded in accrued expenses
and other current liabilities in the Consolidated Balance Sheets. The Company operated 24 facilities at December
31, 2009, and is continuing to explore additional facility consolidation opportunities, although the Company does
not anticipate incurring further significant severance and relocation costs.
69
At December 31, 2009, the Company was in the process of selling seven owned facilities and vacant land
with an aggregate carrying value of $6.0 million, which are not being used in production or are in the process of
shutting down operations. In addition, the Company has leased three owned facilities with a combined carrying
amount of $7.7 million, for one to three year terms, for a combined $70,000 per month. Each of these three leases
also contains an option for the lessee to purchase the facility at an amount in excess of carrying value. As of
December 31, 2009, all of these owned facilities are classified in fixed assets in the Consolidated Balance Sheet
since it is not probable that these assets will be sold within a year due to uncertainty in the real estate markets. In
addition to the owned facilities, the Company is attempting to sublease four vacant leased facilities.
At December 31, 2008, the Company was in the process of selling four closed facilities and vacant land
with an aggregate carrying value of $5.9 million. As of December 31, 2008, all of these owned facilities were
classified in other assets in the Consolidated Balance Sheets. None of theses facilities were sold in 2009.
To reflect the net losses and gains on sold facilities, and the write-downs to estimated fair value of
facilities to be sold, the Company recorded a net loss of $3.3 million in 2009. For similar items, the Company
recorded a net gain of $1.9 million in 2008 and a net gain of less than $0.1 million in 2007.
Other Income
In February 2004, the Company sold certain intellectual property rights for $4.0 million, consisting of cash
of $0.1 million at closing and a note of $3.9 million (the “Note”), payable over five years. The Note was initially
recorded net of a reserve of $3.4 million. In each of 2008 and 2007, the Company received payments of $0.8
million including interest, which had been previously fully reserved, and the Company therefore recorded a pre-tax
gain in Other Income. The Company did not receive the final scheduled payment of $1.0 million in January 2009;
however, in 2009 the Company received principal payments of $0.3 million, which were previously fully reserved,
and therefore recorded a pre-tax gain of $0.3 million in Other Income. The Company is currently attempting to
collect the balance due of $0.7 million plus interest.
11. STOCKHOLDERS' EQUITY
Stock-Based Awards
Pursuant to the Drew Industries Incorporated 2002 Equity Award and Incentive Plan, as amended (the
“2002 Equity Plan”), which was approved by stockholders in May 2002, the Company may grant to its directors,
employees, and consultants Common Stock-based awards, such as stock options, restricted or deferred stock, and
deferred stock units. The number of shares available for granting awards under the 2002 Equity Plan was 1,090,019
and 346,921 at December 31, 2009 and 2008, respectively. At the Annual Meetings of Stockholders held in May
2009 and May 2008, stockholders ratified amendments to the 2002 Equity Plan to increase the number of shares
available for awards by 900,000 and 500,000 shares, respectively.
The 2002 Equity Plan provides for the grant of stock options that qualify as incentive stock options under
Section 422 of the Internal Revenue Code, and non-qualified stock options. Under the 2002 Equity Plan, the
Compensation Committee of Drew’s Board of Directors (the “Committee”) determines the period for which each
stock option may be exercisable, but in no event may a stock option be exercisable more than 10 years from the
date of grant. The number of shares available under the 2002 Equity Plan, and the exercise price of stock options
granted under the 2002 Equity Plan, are subject to adjustments by the Committee to reflect stock splits, stock
dividends, recapitalization, mergers, or other major corporate actions.
The exercise price for stock options granted under the 2002 Equity Plan must be at least equal to 100
percent of the fair market value of the shares subject to such stock option on the date of grant. The exercise price
may be paid in cash or in shares of Drew Common Stock which have been held for a minimum of six months.
Stock options granted under the 2002 Equity Plan must be approved by, and become exercisable in annual
installments as determined by, the Committee. Historically, upon exercise of stock options, new shares have been
issued, instead of treasury shares.
70
The Company had historically granted stock options to employees in November every other year and to
Directors every year in December. In 2008 the Company began granting stock options to employees on an annual
basis, and in 2009 the Company granted stock options to Directors in November on the same day stock options
were granted to employees. Outstanding stock options expire six years from the date of grant, and vest over service
periods of one year for Directors and five years for employees.
Transactions in stock options under the 2002 Equity Plan are summarized as follows:
Outstanding at December 31, 2006
Granted
Exercised
Forfeited
Outstanding at December 31, 2007
Granted
Exercised
Forfeited
Outstanding at December 31, 2008
Granted
Exercised
Forfeited / cancelled
Outstanding at December 31, 2009
Exercisable at December 31, 2009
Number of
Option Shares
1,364,080
586,000
(248,840)
(41,600)
1,659,640
515,500
(38,200)
(60,600)
2,076,340
Stock Option
Exercise Price
$4.55 – $28.71
$28.09 – $32.61
$4.55 – $28.71
$12.78 – $28.33
$7.88 – $32.61
$11.59 – $14.22
$7.88 – $12.78
$12.78 – $32.61
$11.59 – $32.61
327,900 $20.99
(389,100)
(255,200)
1,759,940
755,710
$11.59 – $16.15
$11.59 – $32.61
$11.59 – $32.61
$11.59 – $32.61
Weighted
Average
Exercise
Price
$ 19.33
$ 32.32
$ 10.10
$ 24.84
$ 25.16
$ 11.92
$ 8.93
$ 26.18
$ 22.14
$ 20.99
$ 12.88
$ 25.70
$ 23.46
$ 26.01
The total intrinsic value, defined as the excess of market value over the exercise price, of stock options
exercised during the years ended December 31, 2009, 2008 and 2007 was $2.9 million, $0.2 million and $6.1
million, respectively. The Company received cash of $5.0 million, $0.3 million and $2.5 million for years ended
December 31, 2009, 2008 and 2007, respectively, upon the exercise of stock options. In addition, the Company
recognized income tax benefits from the exercise of stock options of $1.1 million, $0.1 million and $2.3 million for
the years ended December 31, 2009, 2008 and 2007, respectively. The total fair value of stock options that vested
during the years ended December 31, 2009, 2008 and 2007 was $2.5 million, $3.1 million and $1.9 million,
respectively.
The following table summarizes information about stock options outstanding at December 31, 2009:
Option
Exercise
Price
$ 16.16
$ 16.15
$ 28.33
$ 28.71
$ 26.39
$ 32.61
$ 28.09
$ 11.59
$ 13.03
$ 14.22
$ 20.99
Shares
Outstanding
12,000
30,000
375,640
37,500
37,500
444,450
37,500
392,950
2,000
62,500
327,900
Option
Remaining
Life (Years)
0.9
1.0
1.9
2.0
3.0
3.9
4.0
4.9
4.9
5.0
5.9
Shares
Exercisable
12,000
30,000
297,360
37,500
37,500
178,200
37,500
62,750
400
62,500
-
At December 31, 2009, the aggregate intrinsic value was $4.2 million for outstanding in-the-money stock
options and $1.2 million for exercisable in-the-money stock options. The weighted average remaining contractual
term was 4.0 years for all outstanding stock options and 3.0 years for all exercisable stock options.
71
As of December 31, 2009, there was $7.7 million of total unrecognized compensation costs related to
unvested stock options, which is expected to be recognized over a weighted average remaining period of 3.4 years.
In 2009, 2008 and 2007 pursuant to the 2002 Equity Plan, certain non-employee directors elected to
receive deferred stock units in lieu of cash fees. The number of deferred stock units issued was determined by
dividing 115 percent of the fee earned by the closing price of the Common Stock on the day before the fees were
earned. These deferred stock units are 100 percent vested upon issuance.
Beginning in 2009, a portion of certain senior executives’ salary or incentive compensation was paid in
deferred stock units in lieu of cash compensation at 100 percent of the compensation earned. The number of
deferred stock units issued was determined by using the closing price of the Common Stock on the date of the
award for salary, and the closing price of the Common Stock on the day before for incentive compensation. In
accordance with the executive compensation and employment agreement with the Company’s Chief Executive
Officer, all or a portion of 14,595 deferred stock units issued to him in 2009 are forfeitable if the Company’s three
year return on invested capital is below a pre-defined peer group. Conversely, for every one percentage point that
the Company’s three year return on invested capital exceeds the peer group, the Company’s Chief Executive
Officer will earn an additional 10,000 deferred stock units, up to a maximum of 100,000 deferred stock units.
Transactions in deferred stock units under the 2002 Equity Plan are summarized as follows:
Outstanding at December 31, 2006
Issued
Exercised
Outstanding at December 31, 2007
Issued
Exercised
Outstanding at December 31, 2008
Issued
Exercised
Outstanding at December 31, 2009
Number of
Shares
66,497
10,589
(1,089)
75,997
21,995
(880)
97,112
84,202
(50,201)
131,113
Stock Price
at Date
of Issuance
$6.87 – $37.35
$26.01 – $43.02
$7.61 – $12.78
$6.87 – $43.02
$11.59 – $27.40
$25.01 – $37.35
$6.87 – $43.02
$5.50 – $21.90
$7.43 – $43.02
$5.50 – $40.68
Weighted Average Common Shares Outstanding
The following reconciliation details the denominator used in the computation of basic and diluted earnings
per share for the years ended December 31,:
Weighted average shares outstanding for
basic earnings per share
Common stock equivalents pertaining to
stock options and contingently
issuable deferred stock units
Total for diluted shares
2009
2008
2007
21,807,413
21,808,073
21,892,656
-
21,807,413
109,048
21,917,121
233,244
22,125,900
The weighted average diluted shares outstanding for the year ended December 31, 2009, 2008 and 2007,
excludes the effect of 1,856,390 stock options and contingently issuable deferred stock units, 1,392,440 stock
options and 146,500 stock options, respectively, because to include them in the calculation of total diluted shares
would have been anti-dilutive.
At the Annual Meeting of Stockholders held in May 2009, stockholders ratified an amendment to the
Company’s Restated Certificate of Incorporation to decrease the authorized number of shares of Common Stock
from 50 million shares to 30 million shares. At the Annual Meeting of Stockholders held in May 2008,
72
stockholders ratified an amendment to the Company’s Restated Certificate of Incorporation to increase the
authorized number of shares of Common Stock from 30 million shares to 50 million shares.
On November 29, 2007 the Board of Directors authorized the Company to repurchase up to 1 million
shares of the Company’s Common Stock from time to time in the open market, in privately negotiated transactions,
or in block trades. Of this authorization, 447,400 shares were repurchased in 2008 at an average price of $18.58 per
share, or $8.3 million in total. The aggregate cost of repurchases was funded from the Company’s available cash.
The number of shares ultimately repurchased, and the timing of the purchases, will depend upon market conditions,
share price, and other factors. At present the Company believes it is prudent to conserve cash, and does not intend
to repurchase shares. However, changing conditions may cause the Company to reconsider this position.
12. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Interim unaudited financial information follows (in thousands, except per share amounts):
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Year
Year ended December 31, 2009
Net sales
Gross profit
(Loss) income before income taxes
Net (loss) income
Net (loss) income per common share:
$ 71,019
5,826
(56,464)
$ (36,702)
$100,563
20,553
3,958
$ 2,556
$121,666
27,974
11,134
$ 7,189
$104,591
24,357
5,002
$ 2,904
$397,839
78,710
(36,370)
$ (24,053)
Basic
Diluted
$ (1.70)
$ (1.70)
$
$
0.12
0.12
$
$
0.33
0.33
$
$
0.13
0.13
$ (1.10)
$ (1.10)
Stock market price
High
Low
Close (at end of quarter)
$ 12.30
5.50
$
8.68
$
$ 15.40
$ 8.50
$ 12.17
$ 23.00
$ 10.36
$ 21.69
$ 23.56
$ 19.14
$ 20.65
$ 23.56
$
5.50
$ 20.65
Year ended December 31, 2008
Net sales
Gross profit
Income (loss) before income taxes
Net income (loss)
Net income (loss) per common share:
Basic
Diluted
$159,148
36,579
14,895
$ 9,105
$
$
0.41
0.41
$150,523
36,804
15,310
$ 9,190
$
$
0.42
0.42
$124,274
24,982
4,207
$ 2,593
$ 76,561
9,141
(15,391)
$ (9,210)
$510,506
107,506
19,021
$ 11,678
$
$
0.12
0.12
$ (0.43)
$ (0.43)
$
$
0.54
0.53
Stock market price
High
Low
Close (at end of quarter)
$ 28.69
$ 21.47
$ 24.46
$ 26.81
$ 15.95
$ 15.95
$ 20.58
$ 14.80
$ 17.11
$ 16.05
$
9.65
$ 12.00
$ 28.69
$
9.65
$ 12.00
The sum of per share amounts for the four quarters may not equal the total per share amounts for the year
as a result of changes in the weighted average common shares outstanding or rounding.
73
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
Item 9A. CONTROLS AND PROCEDURES.
The Company maintains disclosure controls and procedures that are designed to ensure that information
required to be disclosed in the Company’s Exchange Act reports is recorded, processed, summarized and reported
within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and
communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required disclosure, in accordance with the definition of
“disclosure controls and procedures” in Rule 13a-15 under the Exchange Act. In designing and evaluating the
disclosure controls and procedures, management recognized that any controls and procedures, no matter how well
designed and operated, cannot provide absolute assurance of achieving the desired control objectives. Management
included in its evaluation the cost-benefit relationship of possible controls and procedures. The Company
continually evaluates its disclosure controls and procedures to determine if changes are appropriate based upon
changes in the Company’s operations or the business environment in which it operates.
As of the end of the period covered by this Form 10-K, the Company performed an evaluation, under the
supervision and with the participation of the Company’s management, including the Company’s Chief Executive
Officer and the Company’s Chief Financial Officer, of the effectiveness of the design and operation of the
Company’s disclosure controls and procedures. Based on the foregoing, the Company’s Chief Executive Officer
and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective.
(a)
Management’s Annual Report on Internal Control over Financial Reporting.
Management's Responsibility for Financial Statements
We are responsible for the preparation and integrity of the Consolidated Financial Statements appearing in
the Annual Report on Form 10-K. The Consolidated Financial Statements were prepared in conformity with
accounting principles generally accepted in the United States and include amounts based on management’s
estimates and judgments.
We are also responsible for establishing and maintaining adequate internal control over financial reporting.
We maintain a system of internal control that is designed to provide reasonable assurance as to the fair and reliable
preparation and presentation of the Consolidated Financial Statements, as well as to safeguard assets from
unauthorized use or disposition. The Company continually evaluates its system of internal control over financial
reporting to determine if changes are appropriate based upon changes in the Company’s operations or the business
environment in which it operates.
Our control environment is the foundation for our system of internal control over financial reporting and is
embodied in our Guidelines for Business Conduct. It sets the tone of our organization and includes factors such as
integrity and ethical values. Our internal control over financial reporting is supported by formal policies and
procedures which are reviewed, modified and improved as changes occur in business conditions and operations.
We conducted an evaluation of the effectiveness of our internal control over financial reporting based on
the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO). This evaluation included review of the documentation of controls,
evaluation of the design effectiveness of controls, testing of the operating effectiveness of controls and a
conclusion on this evaluation. Although there are inherent limitations in the effectiveness of any system of internal
control over financial reporting, based on our evaluation, we have concluded that our internal control over financial
reporting was effective as of December 31, 2009.
74
KPMG LLP, an independent registered public accounting firm, has audited the Consolidated Financial
Statements included in this Report and, as part of their audit, has issued their report on the effectiveness of our
internal control over financial reporting, included elsewhere in this Form 10-K.
/s/ Fredric M. Zinn
President and
Chief Executive Officer
/s/ Joseph S. Giordano III
Chief Financial Officer and
Treasurer
(b)
Report of the Independent Registered Public Accounting Firm.
The report of the independent registered public accounting firm is included in Item 8. “Financial
Statements and Supplementary Data.”
(c)
Changes in Internal Control over Financial Reporting.
There were no changes in the Company’s internal controls over financial reporting during the quarter
ended December 31, 2009 or subsequent to the date the Company completed its evaluation, that have materially
affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Over the last few years, the internal controls of Lippert have been incrementally strengthened due both to
the installation of enterprise resource planning (“ERP”) software and business process changes. In the second half
of 2009, the Company implemented certain significant functions of the ERP software and business process changes
at Kinro. Implementation of additional functions of the ERP software and business process changes are planned at
Kinro. The Company also anticipates that it will continue to implement additional functionalities of the ERP
software at both Lippert and Kinro to further strengthen the Company’s internal control.
Item 9B. OTHER INFORMATION.
None.
PART III
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
Information with respect to the Company’s Directors, Executive Officers and Corporate Governance is
incorporated by reference from the information contained under the caption “Proposal 1. Election of Directors” in
the Company’s Proxy Statement for the Annual Meeting of Stockholders to be held on May 19, 2010 (the “2010
Proxy Statement”) and from the information contained under “Directors and Executive Officers of the Registrant”
in Part I of this Report.
Information regarding Section 16 reporting compliance is incorporated by reference from the information
contained under the caption “Voting Securities – Compliance with Section 16(a) of the Exchange Act” in the
Company’s 2010 Proxy Statement.
The Company has adopted Governance Principles, Guidelines for Business Conduct, and a Code of Ethics
for Senior Financial Officers (“Code of Ethics”), each of which, as well as the Charter and Key Practices of the
Company’s Audit Committee, Compensation Committee, and Corporate Governance and Nominating Committee,
are available on the Company’s website at www.drewindustries.com. A copy of any of these documents will be
furnished, without charge, upon written request to Secretary, Drew Industries Incorporated, 200 Mamaroneck
Avenue, White Plains, New York 10601.
If the Company makes any substantive amendment to the Code of Ethics or the Guidelines for Business
Conduct, or grants a waiver to a Director or Executive Officer from a provision of the Code of Ethics or the
Guidelines for Business Conduct, the Company will disclose the nature of such amendment or waiver on its
website or in a Current Report on Form 8-K. There have been no waivers to Directors or Executive Officers of any
provisions of the Code of Ethics or the Guidelines for Business Conduct.
75
Item 11. EXECUTIVE COMPENSATION.
The information required by this item is incorporated by reference from the information contained under
the caption “Proposal 1. Election of Directors – Executive Compensation” and “Director Compensation” in the
Company’s 2010 Proxy Statement.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
The information required by this item is incorporated by reference from the information contained under
the caption “Voting Securities – Security Ownership of Management” and “Equity Award and Incentive Plan” in
the Company’s 2010 Proxy Statement.
Item 13.
INDEPENDENCE.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
No executive officer of the Company serves on the Company’s Compensation Committee, and there are no
“interlocks” as defined by the Securities and Exchange Commission.
The information required by this item with respect to transactions with related persons and director
independence is incorporated by reference from the information contained under the captions “Proposal 1. Election
of Directors – Transactions with Related Persons” and “Proposal 1. Election of Directors – Corporate Governance
and Related Matters – Board of Directors” in the Company’s 2010 Proxy Statement.
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The information required by this item is incorporated by reference from the information contained under
“Proposal 2. Appointment of Auditors” in the Company’s 2010 Proxy Statement.
PART IV
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
(a)
Documents Filed:
Financial Statements.
Exhibits. See Item 15 (b) – “List of Exhibits” incorporated herein by reference.
(1)
(2)
(b)
Exhibits – List of Exhibits.
Description
Articles of Incorporation and By-laws.
Drew Industries Incorporated Restated Certificate of Incorporation.
Drew Industries Incorporated By-laws, as amended.
Exhibit
Number
3
3.1
3.2
Exhibit 3.1 is incorporated by reference to Exhibit III to the Proxy Statement-Prospectus constituting Part I
of the Drew National Corporation and Drew Industries Incorporated Registration Statement on Form S-14
(Registration No. 2-94693).
Exhibit 3.2 is incorporated by reference to the Exhibit bearing the same number included in the Company’s
Form 8-K filed on November 19, 2008.
76
Exhibit
Number
Description
10
Material Contracts.
10.194*
Drew Industries Incorporated 2002 Equity Award and Incentive Plan, as amended.
10.195
10.197*
10.198
10.199
10.200
10.201
10.202
10.203
10.204
10.205
License Agreement, dated February 28, 2003, by and among Versa Technologies, Inc., VT
Holdings II, Inc. and Engineered Solutions LP, and Lippert Components, Inc.
Amended Change of Control Agreement by and between Fredric M. Zinn and Registrant, dated
March 3, 2006, as amended on July 18, 2006 and December 23, 2008.
Amended and Restated Credit Agreement dated as of February 11, 2005 by and among Kinro, Inc.,
Lippert Components, Inc., KeyBank, National Association, HSBC Bank USA, National
Association, and JPMorgan Chase Bank, N.A., individually and as Administrative Agent.
Amended and Restated Subsidiary Guarantee Agreement dated as of February 11, 2005 by and
among Lippert Tire & Axle, Inc., Kinro Holding, Inc., Lippert Tire & Axle Holding, Inc., Lippert
Holding, Inc., Kinro Manufacturing, Inc., Lippert Components Manufacturing, Inc., Kinro Texas
Limited Partnership, Kinro Tennessee Limited Partnership, Lippert Tire & Axle Texas Limited
Partnership, Lippert Components Texas Limited Partnership, BBD Realty Texas Limited
Partnership, LD Realty, Inc., LTM Manufacturing, L.L.C., Coil Clip, Inc., Zieman Manufacturing
Company, with and in favor of JPMorgan Chase Bank, N.A., as Administrative Agent for the
Lenders.
Amended and Restated Company Guarantee Agreement dated as of February 11, 2005 by and
among Drew Industries Incorporated, with and in favor of JPMorgan Chase Bank, N.A., as
Administrative Agent for the Lenders.
Amended and Restated Subordination Agreement dated as of February 11, 2005 by and among
Kinro, Inc., Lippert Tire & Axle, Inc., Lippert Components, Inc., Kinro Holding, Inc., Lippert Tire
& Axle Holding, Inc., Lippert Holding, Inc., Kinro Manufacturing, Inc., Lippert Components
Manufacturing, Inc., Lippert Components of Canada, Inc., Coil Clip, Inc., Zieman Manufacturing
Company, Kinro Texas Limited Partnership, Kinro Tennessee Limited Partnership, Lippert Tire &
Axle Texas Limited Partnership, BBD Realty Texas Limited Partnership, Lippert Components
Texas Limited Partnership, LD Realty, Inc., LTM Manufacturing, L.L.C., with and in favor of
JPMorgan Chase Bank, N.A., as Administrative Agent.
Amended and Restated Pledge Agreement dated as of February 11, 2005 by and among Drew
Industries Incorporated, Kinro, Inc., Lippert Tire & Axle, Inc., Kinro Holding, Inc., Lippert Tire &
Axle Holding, Inc., Lippert Components, Inc., Lippert Holding, Inc., with and in favor of
JPMorgan Chase Bank, N.A., as Administrative Agent.
Revolving Credit Note dated as of February 11, 2005 by and among Kinro, Inc., Lippert
Components, Inc., payable to the order of JPMorgan Chase Bank, N.A. in the principal amount of
Twenty-Five Million ($25,000,000) Dollars.
Revolving Credit Note dated as of February 11, 2005 by and among Kinro, Inc., Lippert
Components, Inc., payable to the order of KeyBank National Association in the principal amount
of Twenty Million ($20,000,000) Dollars.
Revolving Credit Note dated as of February 11, 2005 by and among Kinro, Inc., Lippert
Components, Inc., payable to the order of HSBC USA, National Association in the principal
amount of Fifteen Million ($15,000,000) Dollars.
77
Exhibit
Number
10.206
Description
Note Purchase and Private Shelf Agreement dated as of February 11, 2005 by and among Kinro,
Inc., Lippert Components, Inc., Drew Industries Incorporated and Prudential Investment
Management, Inc.
10.207
Form of Senior Note (Shelf Note).
10.208
10.209
10.210
10.211
10.212
10.213
Parent Guarantee Agreement dated as of February 11, 2005 by and among Drew Industries
Incorporated, Prudential Investment Management, Inc. and the Noteholders.
Subsidiary Guaranty dated as of February 11, 2005 by and among Lippert Tire & Axle, Inc., Kinro
Holding, Inc., Lippert Tire & Axle Holding, Inc., Lippert Holding, Inc., Kinro Manufacturing,
Inc., Lippert Components Manufacturing, Inc., Kinro Texas Limited Partnership, Kinro Tennessee
Limited Partnership, Lippert Tire & Axle Texas Limited Partnership, Lippert Components Texas
Limited Partnership, BBD Realty Texas Limited Partnership, LD Realty, Inc., LTM
Manufacturing, L.L.C., Coil Clip, Inc., Zieman Manufacturing Company, with and in favor of
Prudential Investment Management, Inc. and the Noteholders listed thereto.
Intercreditor Agreement dated as of February 11, 2005 by and among Prudential Investment
Management, Inc., JPMorgan Bank, N.A. (as Lender and Administrative Agent), KeyBank,
National Association, HSBC Bank USA, National Association and JPMorgan Bank, N.A. (as
Trustee and Administrative Agent).
Subordination Agreement dated as of February 11, 2005 by and among Drew Industries
Incorporated, Kinro, Inc., Lippert Tire & Axle, Inc., Lippert Components, Inc., Kinro Holding,
Inc., Lippert Tire & Axle Holding, Inc., Lippert Holding, Inc., Kinro Manufacturing, Inc., Lippert
Components Manufacturing, Inc., Lippert Components of Canada, Inc., Coil Clip, Inc., Zieman
Manufacturing Company, Kinro Texas Limited Partnership, Kinro Tennessee Limited Partnership,
Lippert Tire & Axle Texas Limited Partnership, BBD Realty Texas Limited Partnership, Lippert
Components Texas Limited Partnership, LD Realty, Inc., LTM Manufacturing, L.L.C., with and in
favor of Prudential Investment Management, Inc.
Pledge Agreement dated as of February 11, 2005 by and among Drew Industries Incorporated,
Kinro, Inc., Lippert Tire & Axle, Inc., Kinro Holding, Inc., Lippert Tire & Axle Holding, Inc.,
Lippert Components, Inc., Lippert Holding, Inc. in favor of JPMorgan Chase Bank, N.A. as
security trustee.
Collateralized Trust Agreement dated as of February 11, 2005 by and among Kinro, Inc., Lippert
Components, Inc., Prudential Investment Management, Inc. and JPMorgan Chase Bank, N.A. as
security trustee for the Noteholders.
10.221
Form of Indemnification Agreement between Registrant and its officers and independent directors.
10.223*
10.230
Amended Change in Control Agreement by and between Harvey F. Milman and Registrant, dated
March 3, 2006, as amended and supplemented.
Second Amendment to Amended and Restated Credit Agreement dated as of March 10, 2006 by
and among Kinro, Inc., Lippert Components, Inc., KeyBank, National Association, HSBC Bank
USA, National Association, and JPMorgan Chase Bank, N.A., individually and as Administrative
Agent.
10.231*
Executive Non-Qualified Deferred Compensation Plan, as amended.
78
Exhibit
Number
Description
10.233 Second Amended and Restated Credit Agreement dated as of November 25, 2008 by and among Kinro,
Inc., Lippert Components, Inc., JPMorgan Chase Bank, N.A., individually and as Administrative Agent,
and Wells Fargo Bank, N.A. individually and as Documentation Agent.
10.234
Second Amended and Restated Subsidiary Guarantee Agreement dated as of November 25, 2008 by and
among Lippert Tire & Axle, Inc., Kinro Holding, Inc., Lippert Tire & Axle Holding, Inc., Lippert
Holding, Inc., Kinro Manufacturing, Inc., Lippert Components Manufacturing, Inc., Kinro Texas
Limited Partnership, Kinro Tennessee Limited Partnership, Lippert Tire & Axle Texas Limited
Partnership, Lippert Components Texas Limited Partnership, BBD Realty Texas Limited Partnership,
LD Realty, Inc., LTM Manufacturing, L.L.C., Trailair, Inc., Coil Clip, Inc., Zieman Manufacturing
Company, with and in favor of JPMorgan Chase Bank, N.A., as Administrative Agent for the Lenders.
10.235 Second Amended and Restated Company Guarantee Agreement dated as of November 25, 2008 by and
among Drew Industries Incorporated, with and in favor of JPMorgan Chase Bank, N.A., as
Administrative Agent for the Lenders.
10.236 Second Amended and Restated Subordination Agreement dated as of November 25, 2008 by and among
Drew Industries Incorporated, Kinro, Inc., Lippert Tire & Axle, Inc., Lippert Components, Inc., Kinro
Holding, Inc., Lippert Tire & Axle Holding, Inc., Lippert Holding, Inc., Kinro Manufacturing, Inc.,
Lippert Components Manufacturing, Inc., Coil Clip, Inc., Zieman Manufacturing Company, Kinro Texas
Limited Partnership, Kinro Tennessee Limited Partnership, Lippert Tire & Axle Texas Limited
Partnership, BBD Realty Texas Limited Partnership, Lippert Components Texas Limited Partnership,
LD Realty, Inc., LTM Manufacturing, L.L.C., Trailair, Inc, with and in favor of JPMorgan Chase Bank,
N.A., as Administrative Agent.
10.237 Second Amended and Restated Pledge and Security Agreement dated as of November 25, 2008 by and
among Drew Industries Incorporated, Kinro, Inc., Lippert Tire & Axle, Inc., Kinro Holding, Inc., Lippert
Tire & Axle Holding, Inc., Lippert Components, Inc., Lippert Holding, Inc., with and in favor of
JPMorgan Chase Bank, N.A., as Administrative Agent.
10.238 Second Amended and Restated Revolving Credit Note dated as of November 25, 2008 by and among
Kinro, Inc., Lippert Components, Inc., payable to the order of JPMorgan Chase Bank, N.A. in the
principal amount of Thirty Million ($30,000,000) Dollars.
10.239 Revolving Credit Note dated as of November 25, 2008 by and among Kinro, Inc., Lippert Components,
Inc., payable to the order of Wells Fargo Bank, N.A. in the principal amount of Twenty Million
($20,000,000) Dollars.
10.240 Second Amended and Restated Note Purchase and Private Shelf Agreement dated as of November 25,
2008 by and among Prudential Investment Management, Inc. and Affiliates, and Kinro, Inc. and Lippert
Components, Inc., guaranteed by Drew Industries Incorporated.
10.241
Form of Fixed Rate Shelf Note.
10.242
Form of Floating Rate Shelf Note.
10.243 Confirmation, Reaffirmation and Amendment of Parent Guarantee Agreement dated as of November 25,
2008 by and among Drew Industries Incorporated, Prudential Investment Management, Inc. and the
Noteholders listed thereto.
79
Exhibit
Number
Description
10.245 Amended and Restated Intercreditor Agreement dated as of November 25, 2008 by and among
Prudential Investment Management, Inc. and Affiliates, JPMorgan Bank, N.A. (as Lender), Wells Fargo
Bank, N.A. (as Lender), and JPMorgan Bank, N.A. (as Administrative Agent, Collateral Agent and
Trustee).
10.246 Confirmation, Reaffirmation and Amendment of Subordination Agreement dated as of November 25,
2008 by and among Drew Industries Incorporated, Kinro, Inc., Lippert Tire & Axle, Inc., Lippert
Components, Inc., Kinro Holding, Inc., Lippert Tire & Axle Holding, Inc., Lippert Holding, Inc., Kinro
Manufacturing, Inc., Lippert Components Manufacturing, Inc., Coil Clip, Inc., Zieman Manufacturing
Company, Kinro Texas Limited Partnership, Kinro Tennessee Limited Partnership, Lippert Tire & Axle
Texas Limited Partnership, BBD Realty Texas Limited Partnership, Lippert Components Texas Limited
Partnership, LD Realty, Inc., LTM Manufacturing, L.L.C., with and in favor of Prudential Investment
Management, Inc. and Affiliates.
10.247 Confirmation, Reaffirmation and Amendment of Pledge Agreement dated as of November 25, 2008 by
and among Drew Industries Incorporated, Kinro, Inc., Lippert Tire & Axle, Inc., Kinro Holding, Inc.,
Lippert Tire & Axle Holding, Inc., Lippert Components, Inc., Lippert Holding, Inc. in favor of
JPMorgan Chase Bank, N.A. as trustee.
10.248 Collateralized Trust Agreement dated as of November 25, 2008 by and among Kinro, Inc., Lippert
Components, Inc., Prudential Investment Management, Inc. and Affiliates and JPMorgan Chase Bank,
N.A. as security trustee for the Noteholders.
10.249*
10.250*
10.251*
10.252*
10.253*
10.254*
10.255*
Amended Change of Control Agreement by and between Joseph S. Giordano III and Registrant
dated July 18, 2006, as amended on December 23, 2008.
Amended Change of Control Agreement by and between Christopher L. Smith and Registrant
dated July 17, 2006, as amended on December 23, 2008 and March 5, 2009.
Corrected Executive Compensation and Benefits Agreement between Registrant and David L.
Webster, dated December 31, 2008.
Executive Compensation and Benefits Agreement between Registrant and Leigh J. Abrams, dated
April 6, 2009.
Executive Employment and Non-Competition Agreement between Registrant and Jason D.
Lippert, dated May 6, 2009.
Executive Compensation and Non-Competition Agreement between Registrant and Fredric M.
Zinn, dated May 28, 2009.
Executive Employment and Non-Competition Agreement between Registrant and Scott T.
Mereness, dated June 24, 2009.
Severance Agreement between Registrant and Joseph S. Giordano III, dated November 18, 2009.
10.256*
__________________________________
*Denotes a compensatory plan or arrangement.
80
Exhibit 10.194 is incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K dated
January 8, 2009.
Exhibit 10.195 is incorporated by reference to the Exhibits bearing the same numbers included in
the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.
Exhibits 10.198-10.213 are incorporated by reference to Exhibits 10.1-10.16 included in the
Company’s Form 8-K filed on February 16, 2005.
Exhibit 10.221 is incorporated by reference to Exhibit 99.1 included in the Company’s Form 8-K
filed on February 9, 2005.
Exhibits 10.197 and 10.223 are incorporated by reference to Exhibits 10.1-10.2 included in the
Company’s Form 8-K filed on January 8, 2009.
Exhibit 10.230 is incorporated by reference to Exhibit 10.1 included in the Company’s Form 8-K
filed on March 14, 2006.
Exhibit 10.231 is incorporated by reference to Exhibit 10.1 included in the Company’s Form 8-K
filed on January 9, 2009.
Exhibits 10.233 – 10.248 are incorporated by reference to Exhibits 10.1 - 10.16 included in the
Company’s Form 8-K filed on December 2, 2008.
Exhibit 10.249 is incorporated by reference to Exhibits 10.3 included in the Company’s Form 8-K
filed on January 8, 2009.
Exhibit 10.250 is incorporated by reference to Exhibit 10.4 included in the Company’s Form 8-K
filed on January 8, 2009 and to Exhibit 10.1 included in the Company’s Form 8-K filed on March
6, 2009.
Exhibit 10.251 is incorporated by reference to Exhibit 10 (iii)(A) included in the Company’s Form
8-K/A filed on January 6, 2009.
Exhibit 10.252 is incorporated by reference to Exhibit 10 (iii)(A) included in the Company’s Form
8-K/A filed on April 8, 2009.
Exhibit 10.253 is incorporated by reference to Exhibit 10 (iii)(A) included in the Company’s Form
8-K/A filed on May 6, 2009.
Exhibit 10.254 is incorporated by reference to Exhibit 10 (iii)(A) included in the Company’s Form
8-K/A filed on May 28, 2009.
Exhibit 10.255 is incorporated by reference to Exhibit 10 (iii)(A) included in the Company’s Form
8-K/A filed on June 25, 2009.
Exhibit 10.256 is incorporated by reference to Exhibit 10 (iii)(A) included in the Company’s Form
8-K filed on November 19, 2009.
81
Exhibit
Number
14
14.1
14.2
21
23
24
31
31.1
31.2
32
32.1
32.2
Description
Code of Ethics.
Code of Ethics for Senior Financial Officers.
Exhibit 14.1 is incorporated by reference to Exhibit 14 included in the Company’s Annual Report
on Form 10-K for the year ended December 31, 2003.
Guidelines for Business Conduct.
Exhibit 14.2 is filed herewith.
Subsidiaries of the Registrant.
Exhibit 21 is filed herewith.
Consent of Independent Registered Public Accounting Firm.
Exhibit 23 is filed herewith.
Powers of Attorney.
Powers of Attorney of persons signing this Report are included as part of this Report.
Rule 13a-14(a)/15d-14(a) Certifications.
Rule 13a-14(a) Certificate of Chief Executive Officer.
Rule 13a-14(a) Certificate of Chief Financial Officer.
Section 1350 Certifications.
Section 1350 Certificate of Chief Executive Officer.
Section 1350 Certificate of Chief Financial Officer.
Exhibits 31.1 - 32.2 are filed herewith.
82
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended,
Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: March 11, 2010
DREW INDUSTRIES INCORPORATED
By: /s/ Fredric M. Zinn
Fredric M. Zinn, President and Chief Executive Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934, as amended, this Report has been
signed below by the following persons on behalf of the Registrant and in the capacities and dates indicated.
Each person whose signature appears below hereby authorizes Fredric M. Zinn and Joseph S. Giordano III,
or either of them, to file one or more amendments to the Annual Report on Form 10-K which amendments may
make such changes in such Report as either of them deems appropriate, and each such person hereby appoints
Fredric M. Zinn and Joseph S. Giordano III, or either of them, as attorneys-in-fact to execute in the name and on
behalf of each such person individually, and in each capacity stated below, such amendments to such Report.
Date
Signature
Title
March 11, 2010
March 11, 2010
March 11, 2010
March 11, 2010
March 11, 2010
March 11, 2010
March 11, 2010
March 11, 2010
March 11, 2010
March 11, 2010
By: /s/ Fredric M. Zinn
(Fredric M. Zinn)
By: /s/ Joseph S. Giordano III
(Joseph S. Giordano III)
By: /s/ Christopher L. Smith
(Christopher L. Smith)
By: /s/ Edward W. Rose, III
(Edward W. Rose, III)
By: /s/ Leigh J. Abrams
(Leigh J. Abrams)
By: /s/ James F. Gero
(James F. Gero)
By: /s/ Frederick B. Hegi, Jr.
(Frederick B. Hegi, Jr.)
By: /s/ David A. Reed
(David A. Reed)
By: /s/ John B. Lowe, Jr.
(John B. Lowe, Jr.)
By: /s/ Jason D. Lippert
(Jason D. Lippert)
Director, President and
Chief Executive Officer
Chief Financial Officer and Treasurer
Corporate Controller
Lead Director
Chairman of the Board of Directors
Director
Director
Director
Director
Director
83
EXHIBIT 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 13a-14(a)
UNDER THE SECURITIES EXCHANGE ACT OF 1934
I, Fredric M. Zinn, President and CEO, certify that:
1)
2)
3)
4)
I have reviewed this annual report on Form 10-K of Drew Industries Incorporated;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control
over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in
this report our conclusions about the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in
the case of an annual report) that has materially affected, or is reasonably likely to materially
affect, the registrant’s internal control over financial reporting; and
5)
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant's internal control over financial reporting.
Date: March 11, 2010
By: /s/ Fredric M. Zinn
Fredric M. Zinn, President and CEO
84
EXHIBIT 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 13a-14(a)
UNDER THE SECURITIES EXCHANGE ACT OF 1934
I, Joseph S. Giordano III, Chief Financial Officer, certify that:
1)
2)
3)
4)
I have reviewed this annual report on Form 10-K of Drew Industries Incorporated;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control
over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in
this report our conclusions about the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in
the case of an annual report) that has materially affected, or is reasonably likely to materially
affect, the registrant’s internal control over financial reporting; and
5)
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant's internal control over financial reporting.
Date: March 11, 2010
By: /s/ Joseph S. Giordano III
Joseph S. Giordano III, Chief Financial Officer
85
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18. U.S.C.
SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
EXHIBIT 32.1
In connection with the annual report on Form 10-K of Drew Industries Incorporated (the “Company”) for
the period ended December 31, 2009, as filed with the Securities and Exchange Commission on the date hereof (the
“Report”), Fredric M. Zinn, President and Chief Executive Officer of the Company, hereby certifies, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1)
(2)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial
condition and results of operations of the Company.
A signed original of this written statement required by Section 906 has been provided to the Company and
will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon
request.
By: /s/ Fredric M. Zinn
Fredric M. Zinn
President and Chief Executive Officer
Principal Executive Officer
March 11, 2010
86
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18. U.S.C.
SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
EXHIBIT 32.2
In connection with the annual report on Form 10-K of Drew Industries Incorporated (the “Company”) for
the period ended December 31, 2009, as filed with the Securities and Exchange Commission on the date hereof (the
“Report”), Joseph S. Giordano III Chief Financial Officer of the Company, hereby certifies, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1)
(2)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial
condition and results of operations of the Company.
A signed original of this written statement required by Section 906 has been provided to the Company and
will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon
request.
By: /s/ Joseph S. Giordano III
Joseph S. Giordano III
Chief Financial Officer
Principal Financial Officer
March 11, 2010
87
Consent of Independent Registered Public Accounting Firm
The Board of Directors
Drew Industries Incorporated:
EXHIBIT 23
We consent to the incorporation by reference in the Registration Statements (Nos. 333-37194, 333-91174,
333-141276, 333-152873 and 333-161242) on Form S-8 and the Registration Statement on Form S-3 (No. 333-
128537) of Drew Industries Incorporated and subsidiaries of our report dated March 11, 2010, with respect to the
consolidated balance sheets of Drew Industries Incorporated and subsidiaries as of December 31, 2009 and 2008,
and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the years in
the three-year period ended December 31, 2009 and the effectiveness of internal control over financial reporting as
of December 31, 2009, which report appears in the December 31, 2009 annual report on Form 10-K of Drew
Industries Incorporated and subsidiaries.
/s/ KPMG LLP
Stamford, Connecticut
March 11, 2010
88
200
175
150
125
100
75
50
25
0
The following graph compares the cumulative 5-year total return to shareholders on Drew Industries Incorporated’s common
stock relative to the cumulative total returns of the Russell 2000 index, and a customized peer group of four companies
that includes: Decorator Industries Inc., Patrick Industries Inc., Spartan Motors Inc. and Universal Forest Products Inc.
The graph assumes that the value of the investment in the company’s common stock, in the peer group, and the index
(including reinvestment of dividends) was $100 on 12/31/2004 and tracks it through 12/31/2009.
Comparison of 5–Year Cumulative Total Return(1)
Among Drew Industries Incorporated, The Russell 2000 Index and a Peer Group
Drew Industries Incorporated Russell 2000 Peer Group
$200
175
150
125
100
75
50
25
0
12/04
12/05
12/06
12/07
12/08
12/09
(1) $100 invested on 12/31/04 in stock or index, including reinvestment of dividends.
Fiscal year ending December 31.
12/04
12/05
12/06
12/07
12/08
12/09
Drew Industries Incorporated
$100.00
$155.88
$143.82
$151.51
$66.35
$114.18
Russell 2000
Peer Group
$100.00
$104.55
$123.76
$121.82
$80.66
$102.58
$100.00
$120.01
$121.24
$ 81.57
$62.64
$ 85.34
The stock price performance included in this graph is not necessarily indicative of future stock price performance.
200 Mamaroneck Avenue, White Plains, NY 10601
www.drewindustries.com