Business as Usual At Genmar*

On Monday June 1, Genmar
Holdings, Inc. filed for Chapter 11 Reorganization Protection. The 14 brands owned
by Genmar account for roughly 20% of the fiberglass boats built in America by the
major builders. Most of the company’s brands are major players in their respective
categories. Irwin Jacobs, CEO and the major stockholder in the company, said in
a corporate press release on Monday, “We believe that Genmar will have access to
sufficient cash and has current assets available to support our on-going business
to service and build dealer boat orders and pay our vendor suppliers on future purchases
promptly.” Jacobs also said, “It is important that every interested party affected
by Genmar’s situation knows that we plan on successfully reorganizing and ultimately
coming out of Chapter 11 as a stronger and better company with a bright and stable
future ahead in the recreational boating industry.”


*“Business as usual” in the current economic times should not be confused with the
way it was conducted a couple of years ago. However, the Genmar companies BoatTEST.com
deals with on a daily basis appear to be carrying on business pretty much like virtually
all of the other major boat builders in the industry these days. Times are tough
all over.

Genmar Holdings Inc. owns 14 boat companies and its brands are major players in virtually every category in American boat building

In an audio interview recorded by Soundings Trade Only and played this morning,
it sounded to us as if Jacobs put his company into Chapter 11 more to protect it
from his banks than from his creditors. After all, his creditors have been through
sharp dips in the boating sales cycle before and personally know Jacobs, his commitment
to the boating industry, and his tenacity as a successful businessman. “The banks
were sweeping our accounts,” he said, “and we can’t have that.” He went on to say
that his current bank debt is far less than it was during the 1989-93 down cycle
caused by the 10% luxury tax.



Most veteran industry observers expect Genmar and most of its brands to come out
of Chapter 11 with time.

A bankruptcy court session is expected to take place on Thursday that will address
items like unpaid debts, the handling of pre- and post-warranty claims, continuation
of the GE floor-planning program and the continuation of employee salaries, Irwin
Jacobs said in a recent Boating Industry interview.


Worse than the Great Depression



In a nutshell, with the world-wide financial meltdown that occurred last September,
boat sales, which were already depressed for the whole industry in 2008, came to
a virtual stop.



Surprisingly, the tremendous drop in boat sales that has hit the U.S. in the last
nine months has been far quicker and far worse than what happened to the industry
after the stock market crash in 1929. BoatTEST.com recently conducted a study of
the boating industry’s health for the period 1928 to 1935 as reflected in boating
magazine ad pages. While the business was quite different at that time, the study
revealed that ad sales dropped by 32% from 1929’s high to 1931. But the biggest
drop did not occur until 1933 – three years after the stock market crash – when
ad sales plummeted 53% from 1931 levels, and 68% from the 1929 high.



As any boater who regularly reads boating magazines knows, ad pages have dropped
about 80% in the last 12 months. Boat builders have simply cut advertising along
with everything else as boat sales have dropped precipitously.



Boat sales have fallen as far and as fast as the magazine ad pages. For example,
Brunswick recently reported sales off over 50% for the first quarter of 2009 over
2008, which was off 20% from 2007. These kinds of sales drops are typical for the
whole industry.



Genmar joins several other major international boat builders in receivership, including
the Ferretti Group of Italy and Riviera Yachts, the largest Australian boat builder.
All three companies are currently reorganizing or are being recapitalized.



Most industry observers expect all three builders to continue operations.


It’s All About Cash Flow



Boat sales were few and far between for all builders until the second week of March
this year when sales generally picked up. Some dealers have reported sales on a
par with the previous year since late March. Nevertheless, with large overhangs
of non-current inventory in the field, few dealers of any brand have been ordering
new boats for stock which means that cash flow into the boat companies has been
a trickle for the last nine months.


Consumer Impact


"Genmar will be asking the bankruptcy court for approval to allow Genmar to pay
appropriate dealer warranty and rebate claims,” the Genmar release stated. 
This is normal operating procedure in cases such as this.



Because sales have been so light the last six months, industry sources told us that
they didn’t think rebate claims would be substantial and the company should be able
to easily meet its obligations, and certainly on a going-forward basis rebates would
have to be paid because the mandate of the court.



Jacobs confirmed to Boating Industry dealer reports that Genmar is behind on warranty
and said “that will be taken care of on Thursday” [during the Chapter 11 court .



Typical warranty issues involving boat builders most directly are electrical, fit
and finish, plumbing, pumps and the like.



Most big claims involve engine and transmission problems which are covered by the
respective engine and drive train manufacturers even in normal circumstances. Most
equipment and components in boats also carry warranties by their OEMs that are generally
one year in length from the commissioning of the boat.



Boat builders typically warranty their hulls and decks for five to ten years and
some for a lifetime. The reason they carry such long warranties is because there
are relatively few failures or problems, and those few that have occurred are usually
the fault of the resin supplier, who is held liable by the builder.


New Boat Sales



Because of the court’s protection new boat sales are expected to continue apace.
Genmar dealers have inventory of boats that are as good this week as they were last
week, and the deals available from all dealers have simply gotten more attractive
as the season has gone on.



Typically, most boat companies terminate their incentive programs by mid-July in
preparation for the new model year. 



While small boats will be inventoried by many dealers, generally these days the
larger boats are not ordered by a dealer until it has received a consumer deposit.
Many companies these days are only building to order no matter what size the boat.



Genmar seems not to be letting its economic situation put it on the defensive, and
rather, is trying to take advantage of a strategic opportunity in this down market,
as witnessed by the launch this spring of the FinCraft line of freshwater fishing
boats.


Dealer Prospects



Many of Genmar’s brands are leaders or very strong players in their respective categories,
and these boats are sold by about 1,000 dealers across the U.S., according to Jacobs.
During the last year several major lenders which traditionally provided “floor plan” financing
to the boating industry have withdrawn from the boating industry.



In his prepared release, Jacobs said “I have every reason to believe that GE Finance
will continue their Genmar dealer floor plan financing program subject to the Court’s
approval, which will take place over the next few days.”



During the past year Genmar has lost about 20% of its dealers according to and article in the Minneapolis the Star-
Tribune article, a situation which is typical of the boating industry in general
during the last 12 months.


Emerging from Ch. 11 Protection



Chapter 11 is a federal statute that allows companies to reorganize under the supervision
of a federal bankruptcy judge who protects the on-going business from its previous
creditors and oversees the execution of an approved business plan to satisfy those
creditors as well as conduct an on-going business. Jacobs said he will be filing
that plan within a few days.



On a going-forward basis the judge makes sure that the company is able to pay for
its new obligations in a timely manner. Typically, venders prefer to sell to a company
already in Chapter 11 because they are assured by the court that they will be paid.



“We will definitely emerge in one piece,” Jacobs said in an interview published
in Boating Industry, a trade publication. He emphasizes his personal investment
of more than $40 million in recent months as evidence of his commitment to the company’s
success.



Jacobs said, “We’re committed to attempting to do everything humanly possible throughout
the Chapter 11 proceedings in trying to help each Genmar dealer, vendor, and employee
as best we can.”


Famous Companies Emerge from Ch. 11



There is a laundry list of well-known companies which have reorganized under Chapter
11 protection and gone on successfully. Some of the better known names are Dow Corning,
Delta Airlines, United Airlines, Dana, and K-Mart, among many others.



Even famous Americans have survived bankruptcy to go on to greater accomplishments.
Thomas Jefferson declared bankruptcy three times; William McKinley went bankrupt
in 1893 and was elected president three years later. Henry Ford went bankrupt in
1901 with the Detroit Automotive Company, then reorganized and started the Ford
Motor Company. Walt Disney declared bankruptcy in 1923, went back into business
and invented Mickey Mouse in 1928.



Irwin Jacobs said in his release, “It’s our intention to do everything we can to
protect and support our valuable Genmar brands which will ultimately allow Genmar
to exit Chapter 11 and continue to be a leader in the recreational boating industry.”