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CRV > SEC Filings for CRV > Form 10-K on 29-Mar-2013All Recent SEC Filings

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Form 10-K for COAST DISTRIBUTION SYSTEM INC


29-Mar-2013

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management Overview

We believe that Coast is one of the largest wholesale suppliers of replacement parts, supplies and accessories for recreational vehicles ("RVs") in North America. We supply more than 11,000 products and serve more than 10,500 customers throughout the United States and Canada, from 13 regional distribution centers in the United States and 4 regional distribution centers in Canada. Our sales are made primarily to retail parts and supplies stores, service and repair establishments and new and used RV and boat dealers (collectively, "Aftermarket Customers").

Factors Generally Affecting Sales of RV and Boating Products

Our sales are affected primarily by:

The usage of RVs by the consumers to whom our Aftermarket Customers sell our products, because such usage affects the consumers' needs for and their purchases of replacement parts, repair services and supplies; and

Purchases of new and used RVs by consumers, because they often "accessorize" their RVs at or shortly after the time of purchase.

The usage and the purchase, by consumers, of RVs depend, in large measure, upon the extent of discretionary income available to consumers, their confidence about economic conditions and the availability and the costs to them of credit. As a result, recessionary conditions and a tightening in the availability or increases in the costs of borrowings to consumers often lead to declines in the purchase and, to a lesser extent, in the usage, of RVs and boats. Additionally, increases in the prices and shortages in the supply of gasoline can lead to declines in the usage and purchases of RVs and boats. Finally, the usage by consumers of RVs and, therefore their need for and purchases of the products we sell are affected by weather conditions.

Overview of Fiscal 2012 Operating Results

The following table provides information comparing our fiscal 2012 results of
operations to our fiscal 2011 and fiscal 2010 results of operations. Dollars are
in thousands, except per share data.



                                                                              Year Ended December 31,
                                                                        Increase (Decrease)                          Increase (Decrease)
                                                                           2012 vs. 2011                                2011 vs. 2010
                                          2012           2011                                          2010
                                         Amount         Amount          Amount        Percent         Amount         Amount        Percent
Net sales                               $ 113,521      $ 108,195      $    5,326           4.9 %     $ 108,600     $     (405 )        (0.4 )%
Cost of sales(1)                           96,219         90,166           6,053           6.7 %        88,985          1,181           1.3 %
Gross profit                               17,302         18,029            (727 )        (4.0 )%       19,615         (1,586 )        (8.1 )%
SG&A expenses                              19,435         18,573             862           4.6 %        18,330            243           1.3 %
Operating income (loss)                    (2,133 )         (544 )        (1,589 )      (292.1 )%        1,285         (1,829 )      (142.3 )%
Interest expense                              552            540              12           2.2 %           579            (39 )        (6.7 )%
Earnings (loss) before income taxes        (2,595 )       (1,141 )        (1,454 )      (127.4 )%          569         (1,710 )      (300.5 )%
Income tax provision (benefit)               (581 )         (255 )          (326 )      (127.8 )%          417           (672 )      (161.2 )%
Net earnings (loss)                        (2,014 )         (886 )        (1,128 )      (127.3 )%          152         (1,038 )      (682.9 )%
Net earnings (loss) per share-diluted       (0.44 )        (0.20 )         (0.24 )      (120.0 )%         0.03          (0.23 )      (766.7 )%

(1) Inclusive of distribution costs.

Even though sales increased by $5.3 million, or 4.9% in 2012, as compared to 2011, as the above table indicates, in 2012 we incurred a loss from operations of $2.1 million and a net loss of $2.0 million, or $0.44 per diluted share, as compared to an operating loss of $0.5 million and net loss of $0.9 million, or $0.20 per diluted share, in 2011. The increases in the loss from operations and in the net loss in 2012, as compared to 2011, were primarily attributable to
(i) a nearly $ 0.7 million, or 4.0%, decrease in gross profit and (ii) a $0.9 million or 4.6%, increase in selling, general and administrative ("SG&A") expenses.


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The decrease in gross profit in 2012 was due to a number of factors, primarily consisting of (i) price reductions on selected products in response to increased price competition in our market, (ii) a weakening of the Canadian dollar, as compared to the U.S. dollar, in the first half of 2012, which increased the costs to our Canadian subsidiary of purchasing products from suppliers in the United States, (iii) increases in shipping costs, (iv) an increase in the costs of quality control testing of new models of portable generators and new trailer hitches and towing equipment that we introduced into the market in 2012, and
(v) an increase in warranty expense in order to increase our reserves for warranty claims primarily as a result of increased sales of portable generators in 2012 as compared to 2011.

The increase in our SG&A expenses was primarily attributable to increased marketing programs, including for our proprietary products, such as generators, as well as traditional RV products, and the addition of field salespeople, in order to increase sales and gain market share.

Outlook for 2013

Although the Recreational Vehicle Industry Association ("RVIA") is forecasting a 6% increase in sales of travel trailers, fifth wheels and motor home shipments in 2013, as compared to 2012, we are continuing to see fluctuations in consumer demand for RV products, which we attribute to continued high unemployment and continuing uncertainties about the strength and duration of the economic recovery, and recent increases in the prices of gasoline. As a result, we expect that conditions in the RV market will remain unstable and difficult until there is a more sustained economic recovery that leads to steady decreases in rates of unemployment and increases in the availability of credit to small businesses and consumers, and a stabilizing of gasoline prices.

Our strategic goals for 2013 are to achieve a return to profitability by
(i) capturing additional market share in the RV marketplace, (ii) selling more of our proprietary products to specialty retailers and mass merchandisers, and
(iii) improving our gross margin, primarily by increasing our sales of higher-margin proprietary products. However, we are not able to predict whether we will succeed in achieving our goals for 2013, as this will depend in large measure on whether or not there is a meaningful improvement in economic conditions generally and in the RV market in particular during 2013.

Critical Accounting Policies and Use of Estimates

General

In accordance with accounting principles generally accepted in the United States of America ("GAAP"), we record most of our assets at the lower of cost or fair value. In the case of some of our assets, principally accounts receivable, inventories and deferred income taxes, we make adjustments to their cost or fair values to arrive at what we expect to be able to collect on outstanding accounts receivables, the amounts for which we expect to be able to sell our inventories and the amount of our deferred tax asset (which consists of available tax loss and credit carryforwards and tax deductions) that we will be able to use to reduce our taxes in the future. Those adjustments are made on the basis of a number of different factors, including the assumptions and judgments we make regarding economic and market conditions and trends and their impact on our financial performance. However, those assumptions and judgments are necessarily based on current information available to us. If those conditions or trends were to change in ways that we did not expect, then based on our assessment of how those changes will affect the prospects for realizing the values at which we had recorded these assets, pursuant to GAAP we may be required to further adjust those carrying values for financial reporting purposes. Any resulting downward adjustments are commonly referred to as "write-downs" of the assets affected by the changed conditions.

It is our practice to establish reserves or allowances against which we are able to charge any such downward adjustments or "write-downs" to these assets. Examples include an allowance established for uncollectible accounts receivable (sometimes referred to as "bad debt reserves"), an allowance for inventory obsolescence and a valuation allowance against our deferred tax asset to the extent necessary to reduce its carrying value to the amount of that asset which we believe we are likely to be able to use to reduce our taxes in the future. The amounts at which those allowances or reserves are established and maintained are based on our historical experience and also on our assumptions and judgments about economic or market conditions or trends and any other factors that are expected to affect the values at which we had recorded such assets. We periodically increase or replenish the allowances following write-downs of uncollectible accounts or to take account of increased risks due to changes in economic or market conditions or trends. Increases in the allowances are effectuated by charges to income or increases in expense in the periods when those allowances are increased. As a result, our judgments or assumptions about market and economic conditions or trends and about their effects on our financial performance can and will affect not only the amounts at which we record these assets on our balance sheet, but also our results of operations.


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The decisions as to the timing of (i) adjustments or write-downs of this nature and (ii) the increases we make to our allowances or reserves, also require subjective evaluations or assessments about the effects and duration of changes in economic or market conditions or trends. For example, it is difficult to predict whether events or changes in economic or market conditions, such as increasing gasoline prices or interest rates or economic downturns, will be of short or long-term duration, and it is not uncommon for it to take some time after the onset of such changes for their full effects on our business to be recognized. Therefore, we make such estimates based upon the information available to us at that time and reevaluate and adjust the reserves and allowances for potential write-downs on a quarterly basis.

Under GAAP, most businesses also must make estimates or judgments regarding the periods during which sales are recorded and also the amounts at which they are recorded. In the case of product distribution businesses, which customarily grant to their customers contractual rights to return products sold to them, GAAP requires that a reserve or allowance be established for product returns by means of a reduction in the amount at which sales are recorded, based primarily on the nature, extensiveness and duration of those rights and historical return experience.

In making our estimates and assumptions we follow GAAP and accounting practices applicable to our business that we believe will enable us to make fair and consistent estimates of the carrying values of those assets and to establish adequate reserves or allowances for downward adjustments that we may have to make to those values in future periods.

Our Critical Accounting Policies

Set forth below is a summary of the accounting policies that we believe are material to an understanding of our financial condition and results of operations.

Revenue Recognition and the Allowance for Product Returns. We recognize revenue from the sale of a product upon its shipment to the customer. Shipping and handling costs that are billed to our customers are included in revenue and our shipping and handling costs are included in cost of sales. We provide our customers with limited rights to return products that we sell to them. We establish an allowance for potential returns that reduces the amounts of our reported sales. We estimate the allowance based on historical experience with returns of like products and current economic and market conditions and trends, which can affect the level at which customers submit products for return.

Accounts Receivable and the Allowance for Doubtful Accounts. In the normal course of our business we extend 30 day payment terms to our customers and, due to the seasonality of our business, during late fall and winter we sometimes grant payment terms of longer duration to those of our customers that have good credit records. We regularly review our customers' accounts and estimate the amount of, and establish an allowance for, uncollectible accounts receivable in each reporting period. The amount of the allowance is based on several factors, including the age of unpaid amounts, a review of significant past due accounts and current economic and market trends that can affect the ability of customers to keep their accounts current. Estimates of uncollectible amounts are reviewed periodically to determine if the allowance should be increased, and any increases are recorded in the accounting period in which the events or circumstances that require such increases become known. For example, if the financial condition of some of our customers or economic or market conditions were to deteriorate, adversely affecting the ability of customers to make payments to us on a timely basis, it could become necessary for us to increase the allowance for uncollectible accounts. Since the allowance is increased or replenished by recording a charge which is included in, and has the effect of increasing, selling, general and administrative expenses, an increase in the allowance will reduce income in the period when the increase is recorded.

Inventory and Reserve for Excess, Slow-Moving and Obsolete Inventory. We are a wholesale distributor and not a manufacturer of products and, therefore, all of our inventory consists of finished goods. Inventories are valued at the lower of cost (first-in, first-out) or net realizable value and that value is reduced by an allowance for excess and slowing-moving or obsolete inventories. The amount of the allowance is determined on the basis of historical experience with different product lines and estimates or assumptions concerning future economic and market conditions and trends. If there were to be an economic downturn or a decline in sales, causing inventories of some products to accumulate, it could become necessary for us to increase the allowance. Other factors that can require increases in the allowance or inventory write downs are reductions in pricing or introduction of new or competitive products by manufacturers; however, due to the relative maturity of the markets in which we operate, usually these are not significant factors for us. Increases in this allowance also will cause a decline in operating results as such increases are effectuated by charges against income. Our reserves for excess and obsolete inventory were $1,439,000, or approximately 4.5% of total inventories, at December 31, 2012, as compared to $1,401,000, or approximately 5.3% of total inventories, at December 31, 2011.


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Deferred Tax Asset and Valuation Allowance. We record as a "deferred tax asset" on our balance sheet an amount equal to the tax credit and tax loss carryforwards and tax deductions ("tax benefits") that we believe will be available to us to offset or reduce our income taxes in future periods. Under applicable federal and state income tax laws and regulations, in most cases, such tax benefits will expire if not used within specified periods of time. Accordingly, the ability to fully use our deferred tax asset depends on the amount of taxable income that we generate during those time periods. At least once each year, we make estimates of future taxable income that we believe we are likely to generate during those future periods. If we conclude, on the basis of those estimates and the aggregate amount of the tax benefits available to us, that it is more likely, than not, that we will be able to fully utilize those tax benefits prior to their expiration, we recognize the deferred tax asset in full on our balance sheet. If, on the other hand, we conclude that it has become more likely, than not, that we will be unable to utilize those tax benefits in their entirety to reduce future taxes prior to their expiration, then we would establish (or increase any existing) valuation allowance to reduce the deferred tax asset on our balance sheet to the amount that we believe we are likely to be able to utilize. That reduction would be implemented by recognizing a non-cash charge that would have the effect of increasing the provision, or reducing any credit, for income taxes that would be recorded in our statement of operations. At December 31, 2012, the aggregate amount of our net deferred tax asset was approximately $3.1 million, as compared to $2.9 million at December 31, 2011. This increase was largely attributable to an increase in our NOL carryforwards in 2012.

Long-Lived Assets. Long-lived assets are reviewed for possible impairment at least annually or if and when events or changes in circumstances indicate the carrying amount of any of those assets may not be recoverable in full, by comparing the fair value of the long-lived asset to its carrying amount.

Foreign Currency Translation. The financial position and results of operations of our Canadian and other foreign subsidiaries are measured using local currency as the functional currency. Assets and liabilities of each foreign subsidiary are translated into U.S. dollars at the rate of exchange in effect at the end of each reporting period. Revenues and expenses are translated into U.S. dollars at the average exchange rate for the reporting period. Foreign currency translation gains and losses not impacting cash flows are credited to or charged against other comprehensive earnings. Foreign currency translation gains and losses arising from cash transactions are credited to or charged against current earnings.

Stock-Based Compensation Expense. We account for stock-based compensation expense in accordance with ASC 718, Stock Compensation, which requires us to recognize the fair value of the compensation paid in stock or other equity awards as an expense in the calculation of our net earnings or loss. We recognize stock-based compensation expense over the period in which the employee is required to provide service, which is generally over the vesting period of the individual equity award. Stock options issued in lieu of cash to non-employees, such as directors, for services performed for us are recorded at the fair value of the options at the time they are issued and are expensed as service is provided. Stock-based compensation expense in the years ended December 31, 2012 and 2011 totaled $456,000 and $440,000, respectively.

Warranty Costs. We generally do not independently warrant the products that we distribute. Instead, in almost all cases, the manufacturers of the products that we distribute warrant the products and allow us to return defective products, including those that have been returned to us by our customers. However, we sell a line of portable generators under a product supply arrangement which obligates us to provide warranty services for these products and to share the costs of providing those services with the manufacturer. The duration of the warranty period for these products is 24 months following the retail sale of these products to the consumer. We established a reserve for warranty claims with respect to these products of $690,000 and $564,000 at December 31, 2012 and 2011, respectively. Those amounts were determined on the basis of a number of factors, including our sales of those products and our historical and expected future warranty claims experience. In the event changes occur in the conditions or circumstances upon which those assumptions and estimates were made, it could become necessary for us to increase the reserve by means of a charge to our income.

Recent Accounting Pronouncements

Changes to accounting principles generally accepted in the United States of America ("U.S. GAAP") are established by the Financial Accounting Standards Board ("FASB") in the form of Accounting Standards Updates ("ASU's") to the FASB's Accounting Standards Codification.


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We consider the applicability of new ASUs and evaluate their expected impact on our financial condition and reported operating results following their issuance. We have determined that the following recently announced ASUs are applicable to us and could have an impact on our recorded results of operations.

In July 2012, the FASB issued amended guidance for impairment of indefinite-lived intangible assets. The guidance allows for an option to first access qualitative factors to determine whether the existence of events or circumstances leads to a determination that is more likely than not that the fair value of the indefinite-lived intangible asset exceeds its carrying amount. If the qualitative factors leads us to conclude it is more likely than not that the fair value exceeds the carrying value of the indefinite-lived intangible asset, then the fair value does not need to be calculated. This update was effective for annual and interim impairment tests performed for the fiscal years beginning after September 15, 2012. Accordingly, the amended guidance will be effective for the year ending December 31, 2013. We do not expect that the adoption of this guidance will have a material impact on our results of operations as we do not have a material amount of indefinite-lived intangible assets on our books.

In June 2011, the FASB issued an amendment to an existing accounting standard which requires companies to present net income and other comprehensive income in one continuous statement or in two separate, but consecutive, statements. In addition, in December 2011, the FASB issued an amendment to an existing accounting standard which defers the requirement to present components of reclassifications of other comprehensive income on the face of the income statement. The Company adopted this standard in the first quarter of 2012 and it did not have a material impact on the Company's consolidated financial statements for the year ended December 31, 2012.

Results of Operations

The following table sets forth certain financial data, expressed as percentage of net sales, derived from our statements of operations for the respective periods indicated below:

                                                 Year Ended December 31,
                                            2012          2011          2010
          Net sales                          100.0 %       100.0 %       100.0 %
          Cost of sales                       84.8          83.3          81.9 %
          Gross profit                        15.2          16.7          18.1
          SG&A expenses                       17.1          17.2          16.9
          Operating income (loss)             (1.9 )        (0.5 )         1.2
          Interest expense                    (0.5 )        (0.5 )         0.5
          Earnings (loss) before taxes        (2.3 )        (1.1 )         0.5
          Income tax provision (benefit)      (0.5 )        (0.2 )         0.4
          Net earnings (loss)                 (1.8 )%       (0.8 )%        0.1

Net Sales

Net sales consist of revenues from the sales of the products we supply or
distribute, net of an allowance for product returns. The following table sets
forth certain information regarding the changes in our net sales in fiscal 2012
and 2011, in each case as compared to the immediately preceding year. Dollars in
the table are in thousands.



                                     % Change                   % Change
              2012        2011     2012 vs. 2011     2010     2011 vs. 2010
            $ 113,521   $108,195       4.9%        $108,600      (0.4)%

2012 vs. 2011. We believe that the increase in net sales in 2012 as compared to 2011 was due primarily to: (i) a strengthening of economic conditions and an increase in consumer confidence which led to modest increases in purchases and the usage of RVs and, therefore, in the products we sell, (ii) new marketing programs that we initiated in 2012, and (iii) an increase in sales of generators and other proprietary products to specialty retailers and mass merchandisers, which represents a new distribution channel for us.

2011 vs. 2010. We believe that the decrease in net sales in 2011 as compared to 2010 was due to (i) continuing uncertainties about the strength of the economy and persistently high rates of unemployment, which adversely affected consumer confidence and the willingness of consumers to make discretionary expenditures involved in purchasing and using RVs, and (ii) rising gasoline prices, particularly during the last four months of 2011, which increased the costs and reduced the willingness of consumers to use their RVs and boats. Also contributing to the decline in the net sales during 2011 were unusually severe weather conditions in the Northeastern U.S. and Canada in the first half of 2011, which led to reductions in the usage of RVs by consumers in those regions and, therefore, in their need for and their purchases of the products we sell.


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Gross Profit

Gross profit is calculated by subtracting cost of sales from net sales. Cost of
sales consist primarily of the amounts paid to manufacturers and suppliers for
the products that we purchase for resale, inbound freight charges, merchandise
receiving, handling and storage costs, and out-bound freight charges. Gross
margin is gross profit stated as a percentage of net sales.



                                        Year Ended December 31,
                                    2012          2011          2010
                                         (Dollars in thousands)
                   Gross profit   $ 17,302      $ 18,029      $ 19,615
                   Gross margin       15.2 %        16.7 %        18.1 %

2012 vs. 2011. The declines in our gross profit and our gross margin in 2012, as compared to 2011, was primarily due to (i) selected price reductions we made in response to aggressive price competition by competitors seeking to increase their sales in the face of weak consumer demand in the RV markets, (ii) a weakening of the Canadian dollar, as compared to the U.S. dollar, in the first half of 2012, which increased the costs to our Canadian subsidiary of purchasing products from suppliers in the United States, (iii) increases in shipping costs,
(iv) an increase in costs associated with quality control testing of new models of portable generators and trailer hitches and other towing products that we introduced and began selling in 2012, and (v) an increase in reserves that we . . .

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