Wednesday, July 30, 2008

It's All in the Notes: Corporate Airplanes!

We've discussed here why it's important to read the notes to the financial statements of any company before investing in it. We've also seen how home builder M/I Homes (NYSE: MHO) may have gotten ahead of itself during the housing bubble when it bought itself a corporate airplane, as we discussed here.

Today, we see a combination of the two above situations! Buried in a footnote on page 24 of its quarterly financial statements, Monaco Coach (NYSE: MNC), a leader in the RV market, makes reference to obligations as part of an operating lease on an airplane. Since it's an operating lease, it's not included on the balance sheet, so you'd never know about it unless you read the notes.

A careful reading of the notes to the financial statements of last year's annual report reveals the company owes $1.3 million annually for this aircraft for the next four years. But the real kicker happens in Year 5. If the counter-party can't sell the aircraft for a certain price, Monaco is on the hook for up to $11 million. Considering both fuel prices as well as current economic conditions, it wouldn't be a surprise if aircraft are selling for a lot less than Monaco thought they would be when they originally signed this deal. If it turns out that Monaco does have to make this payment, the cash amount represents Monaco's combined earnings before tax of about the last 10 quarters!

If this plane is a required cost of doing business, then an investor can't really complain too much. But for an RV manufacturer which is already in an industry characterized by high fixed costs, it seems rather strange that an in-house airplane is required. Therefore on the surface this expense appears to be a remnant from when good times were rolling and management spending was over-the-top, and this obligation is something investors should be aware of.

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