Monaco Coach's Corporate Airplane

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.

Comments

[User 56824:]

MNC would have been better to have invested in a quality control program rather than am attitude of "Build them as fast as you can and let the dealer take care of the problems"

2008 Jul 30 09:16 AM

[OU812?:]

I'm assuming this annual cost doesn't include the cost of fuel, hanger storage, and a qualified pilot in Oregon? Even if it did, there are 16 passengers that can fly on that jet at any one time. At $1,000 per ticket and lets say liberally 25 trips to the plant in Indiana, various FMCA RV shows, dealer meetings, etc., that adds up to $400,000 annually, far less than the $1.3M annual lease. Add to that the added (and unneccessary) risk to the company of having the Chairman, President, CFO, and various Vice Presidents traveling on the same aircraft at the same time, it's a very pricey and unneccessary luxury.

2008 Jul 30 03:54 PM

[selene:]

However, since the nearest commercial airport is 2 hours' drive away in Portland, I can understand the appeal of being able to fly out of Eugene.

2008 Jul 30 04:01 PM

[2uptop's bi...:]

This outfit sounds like quite the joke. I heard that nearly 1/3 of the workforce are supervisors and that one of their department heads can be seen cruising around in a Corvette with his shirt off listening to the Spice Girls!

2008 Aug 01 01:18 AM

[glad2bgone:]

This statement is far from the truth. There is a commerical airport in EUGENE OREGON just minutes from the corporate offices which provides several daily flights in and out of EUGENE OREGON! This is just another example of out-of-control spending. How sickening.



On Jul 30 04:01 PM selene wrote:

> However, since the nearest commercial airport is 2 hours' drive away
> in Portland, I can understand the appeal of being able to fly out
> of Eugene.

2008 Nov 14 09:50 PM

[JustWonderin:]

Justwonderin is just wonderin about buying a MNC diesel pusher. Am I stupid or what (or both). I always thought this company was a pretty good one - boy did I get my baloon popped. Reading the last conference call was some kind of experience. I guess the airplane deal was the deal breaker for me.

2008 Dec 08 10:54 PM

[SkriderRV:]

Since Navistar is in the move of controling monaco MNC for at the most 6 years than their position on the jet will count most of all and be very advantageos for the company outcome. This is good for MNC and for the future owners of this company

Mar 20 02:08 PM