SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
(MARK ONE)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2005
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________to__________________
Commission file number 1-7160
![Coachmen Logo](https://capedge.com/proxy/10-Q/0000021212-05-000123/coachmenlogo.jpg)
COACHMEN INDUSTRIES, INC. |
(Exact name of registrant as specified in its charter) |
INDIANA | 35-1101097 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification number) | |
2831 Dexter Drive, Elkhart, Indiana | 46514 | |
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code | 574-262-0123 |
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 the filing requirements for at least the past 90 days. Yes x No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
At October 31, 2005:
Common Shares, without par value 15,817,263 shares outstanding including an equivalent number of common share purchase rights.
FORM 10-Q
Page No. | |
Part I. Financial Information | |
Financial Statements: | |
3-4 | |
September 30, 2005 and December 31, 2004 | |
5 | |
Three and Nine Months Ended September 30, 2005 and 2004 | |
6 | |
Nine Months Ended September 30, 2005 and 2004 | |
7-16 | |
17-22 | |
23 | |
23 | |
Part II. Other Information | |
24 | |
25 | |
26 | |
Consolidated Balance Sheets
(in thousands)
September 30, | December 31, | ||||||
2005 | 2004 | ||||||
(Unaudited) | |||||||
Assets | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 16,175 | $ | 14,992 | |||
Marketable securities | - | 1,747 | |||||
Trade receivables, less allowance for | |||||||
doubtful receivables 2005 - $1,362 | |||||||
and 2004 - $919 | 43,366 | 58,805 | |||||
Other receivables | 2,415 | 4,209 | |||||
Refundable income taxes | 6,746 | 244 | |||||
Inventories | 129,738 | 136,088 | |||||
Prepaid expenses and other | 4,343 | 4,144 | |||||
Deferred income taxes | 10,054 | 6,014 | |||||
Total current assets | 212,837 | 226,243 | |||||
Property, plant and equipment, at cost | 153,657 | 163,709 | |||||
Less, accumulated depreciation | (79,862 | ) | (81,358 | ) | |||
Property, plant and equipment, net | 73,795 | 82,351 | |||||
Goodwill | 18,132 | 18,132 | |||||
Cash value of life insurance, net of loans of $15,000 | 28,293 | 25,162 | |||||
Real estate held for sale | - | 60 | |||||
Other | 5,582 | 5,775 | |||||
Total assets | $ | 338,639 | $ | 357,723 | |||
See Notes to Consolidated Financial Statements.
Coachmen Industries, Inc. and Subsidiaries
Consolidated Balance Sheets (continued)
(in thousands)
September 30, | December 31, | ||||||
2005 | 2004 | ||||||
(Unaudited) | |||||||
Liabilities | |||||||
Current liabilities: | |||||||
Short-term borrowings | $ | - | $ | 20,000 | |||
Accounts payable, trade | 49,459 | 33,805 | |||||
Accrued income taxes | - | 2,479 | |||||
Accrued expenses and other liabilities | 49,066 | 39,466 | |||||
Floorplan notes payable | 4,176 | 6,986 | |||||
Current portion of long-term debt | 2,217 | 2,195 | |||||
Total current liabilities | 104,918 | 104,931 | |||||
Long-term debt | 13,883 | 14,943 | |||||
Deferred income taxes | 1,157 | 3,512 | |||||
Postretirement deferred compensation benefits | 10,213 | 9,724 | |||||
Other | 38 | 195 | |||||
Total liabilities | 130,209 | 133,305 | |||||
Shareholders’ equity | |||||||
Common shares, without par value: | |||||||
authorized 60,000 shares; issued 2005 - 21,128 shares and 2004 - 21,108 shares | 92,102 | 91,850 | |||||
Additional paid-in capital | 5,769 | 8,894 | |||||
Retained earnings | 169,328 | 184,284 | |||||
Treasury shares, at cost: 2005 - 5,311 shares | |||||||
and 2004 - 5,384 shares | (58,558 | ) | (59,002 | ) | |||
Unearned compensation | (191 | ) | (1,700 | ) | |||
Accumulated other comprehensive income (loss) | (20 | ) | 92 | ||||
Total shareholders’ equity | 208,430 | 224,418 | |||||
Total liabilities and shareholders’ equity | $ | 338,639 | $ | 357,723 | |||
See Notes to Consolidated Financial Statements.
Consolidated Statements of Operations
(in thousands, except per share amounts)
(Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||
2005 | 2004 | 2005 | 2004 | ||||||||||
Net sales | $ | 198,036 | $ | 232,310 | $ | 612,131 | $ | 660,913 | |||||
Cost of sales | 180,391 | 195,035 | 549,215 | 563,683 | |||||||||
Gross profit | 17,645 | 37,275 | 62,916 | 97,230 | |||||||||
Operating expenses: | |||||||||||||
Delivery | 10,596 | 11,515 | 30,972 | 30,651 | |||||||||
Selling | 7,431 | 8,367 | 24,003 | 23,575 | |||||||||
General and administrative | 10,423 | 8,853 | 24,442 | 27,442 | |||||||||
Asset impairments | 6,986 | - | 6,986 | - | |||||||||
Gain on sale of properties, net | (255 | ) | (189 | ) | (304 | ) | (1,268 | ) | |||||
Total operating expenses | 35,181 | 28,546 | 86,099 | 80,400 | |||||||||
Operating income (loss) | (17,536 | ) | 8,729 | (23,183 | ) | 16,830 | |||||||
Nonoperating (income) expenses: | |||||||||||||
Interest expense | 971 | 551 | 2,899 | 1,442 | |||||||||
Investment income | (355 | ) | (533 | ) | (1,612 | ) | (1,808 | ) | |||||
Other income, net | (137 | ) | (234 | ) | (430 | ) | (320 | ) | |||||
Total nonoperating (income) expenses | 479 | (216 | ) | 857 | (686 | ) | |||||||
Income (loss) from continuing operations before income taxes | (18,015 | ) | 8,945 | (24,040 | ) | 17,516 | |||||||
Income taxes (credit) | (8,669 | ) | 3,060 | (11,838 | ) | 5,969 | |||||||
Net income (loss) from continuing operations | (9,346 | ) | 5,885 | (12,202 | ) | 11,547 | |||||||
Discontinued operations: | |||||||||||||
Income from operations of discontinued entity (net of taxes) | - | 55 | - | 220 | |||||||||
Net income (loss) | $ | (9,346 | ) | $ | 5,940 | $ | (12,202 | ) | $ | 11,767 | |||
Earnings per share - Basic | |||||||||||||
Continuing operations | $ | (.60 | ) | $ | .38 | $ | (.78 | ) | $ | .75 | |||
Discontinued operations | - | - | - | .01 | |||||||||
Net earnings per share | $ | (.60 | ) | $ | .38 | $ | (.78 | ) | $ | .76 | |||
Earnings per share - Diluted | |||||||||||||
Continuing operations | $ | (.60 | ) | $ | .38 | $ | (.78 | ) | $ | .75 | |||
Discontinued operations | - | - | - | .01 | |||||||||
Net earnings per share | $ | (.60 | ) | $ | .38 | $ | (.78 | ) | $ | .76 | |||
Number of common shares used in computation of earnings per share: | |||||||||||||
Basic | 15,556 | 15,479 | 15,545 | 15,469 | |||||||||
Diluted | 15,556 | 15,544 | 15,545 | 15,545 | |||||||||
Cash dividends per common share | $ | .06 | $ | .06 | $ | .18 | $ | .18 |
See Notes to Consolidated Financial Statements.
Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
Nine Months Ended September 30, | |||||||
2005 | 2004 | ||||||
Cash flows from operating activities: | |||||||
Net income (loss) | $ | (12,202 | ) | $ | 11,767 | ||
Adjustments to reconcile net income (loss) to net | |||||||
cash provided by (used in) operating activities: | |||||||
Depreciation | 6,638 | 6,973 | |||||
Provision for doubtful receivables, net of recoveries | 574 | 89 | |||||
Provision for write-down of property to net realizable value | 6,986 | - | |||||
Gain on sale of properties and other assets | (304 | ) | (1,268 | ) | |||
Increase in cash surrender value of life insurance policies | (923 | ) | (504 | ) | |||
Net realized and unrealized (gains) losses on marketable securities and derivatives | (325 | ) | 147 | ||||
Deferred income tax benefit | (6,395 | ) | (684 | ) | |||
Tax benefit from stock options exercised | 5 | 23 | |||||
Other | (876 | ) | 1,964 | ||||
Changes in certain assets and liabilities: | |||||||
Trade receivables | 16,659 | (7,036 | ) | ||||
Inventories | 6,350 | (48,514 | ) | ||||
Prepaid expenses and other | (199 | ) | (243 | ) | |||
Accounts payable, trade | 14,720 | 19,334 | |||||
Income taxes - accrued and refundable | (8,981 | ) | 1,417 | ||||
Accrued expenses and other liabilities | 6,790 | 5,518 | |||||
Net cash provided by (used in) operating activities | 28,517 | (11,017 | ) | ||||
Cash flows from investing activities: | |||||||
Proceeds from sales of marketable securities | 1,933 | 1,932 | |||||
Proceeds from sale of property and other assets | 395 | 2,618 | |||||
Investments in marketable securities | (2,181 | ) | (2,476 | ) | |||
Purchases of property and equipment | (5,046 | ) | (13,235 | ) | |||
Other | 140 | (1,281 | ) | ||||
Net cash used in investing activities | (4,759 | ) | (12,442 | ) | |||
Cash flows from financing activities: | |||||||
Proceeds from short-term borrowings | 232 | 28,500 | |||||
Payments of short-term borrowings | (20,232 | ) | (8,917 | ) | |||
Proceeds from long-term debt | 241 | 8,012 | |||||
Payments of long-term debt | (1,279 | ) | (572 | ) | |||
Issuance of common shares under stock incentive plans | 283 | 458 | |||||
Cash dividends paid | (1,887 | ) | (2,814 | ) | |||
Other | 67 | - | |||||
Net cash provided by (used in) financing activities | (22,575 | ) | 24,667 | ||||
Increase in cash and cash equivalents | 1,183 | 1,208 | |||||
Cash and cash equivalents: | |||||||
Beginning of period | 14,992 | 6,408 | |||||
End of period | $ | 16,175 | $ | 7,616 |
See Notes to Consolidated Financial Statements.
Notes to Consolidated Financial Statements
(Unaudited)
1. BASIS OF PRESENTATION
The condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine-month period ended September 30, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2004.
2. SEGMENT INFORMATION
The Company has determined that its reportable segments are those that are based on the Company’s method of internal reporting, which disaggregates its business by product category. The Company’s two reportable segments are Recreational Vehicles, including related parts and supplies, and Housing and Building. The Company evaluates the performance of its segments based primarily on net sales and pretax income and allocates resources to them based on performance. Differences between reported segment amounts and corresponding consolidated totals represent corporate expenses for administrative functions and income or expenses relating to property and equipment or other items that are not allocated to segments.
The table below presents information about segments used by the chief operating decision maker of the Company for the three and nine-month periods ended September 30, 2005 (in thousands):
Three Months Ended | Nine Months Ended | ||||||||||||
September 30, | September 30, | ||||||||||||
2005 | 2004 | 2005 | 2004 | ||||||||||
Net sales | |||||||||||||
Recreational Vehicles | $ | 133,545 | $ | 157,634 | $ | 436,590 | $ | 470,548 | |||||
Housing and Building | 64,491 | 74,676 | 175,541 | 190,365 | |||||||||
Total | $ | 198,036 | $ | 232,310 | $ | 612,131 | $ | 660,913 | |||||
Gross profit | |||||||||||||
Recreational Vehicles | $ | 2,215 | $ | 17,397 | $ | 22,643 | $ | 49,746 | |||||
Housing and Building | 15,430 | 19,878 | 40,273 | 47,282 | |||||||||
Other | - | - | - | 202 | |||||||||
Total | $ | 17,645 | $ | 37,275 | $ | 62,916 | $ | 97,230 | |||||
Operating expenses | |||||||||||||
Recreational Vehicles | $ | 17,252 | $ | 13,237 | $ | 45,053 | $ | 36,767 | |||||
Housing and Building | 19,817 | 15,360 | 46,496 | 42,146 | |||||||||
Other | (1,888 | ) | (51 | ) | (5,450 | ) | 1,487 | ||||||
Total | $ | 35,181 | $ | 28,546 | $ | 86,099 | $ | 80,400 |
Three Months Ended | Nine Months Ended | ||||||||||||
September 30, | September 30, | ||||||||||||
2005 | 2004 | 2005 | 2004 | ||||||||||
Operating income (loss) | |||||||||||||
Recreational Vehicles | $ | (15,037 | ) | $ | 4,160 | $ | (22,410 | ) | $ | 12,979 | |||
Housing and Building | (4,387 | ) | 4,518 | (6,223 | ) | 5,136 | |||||||
Other | 1,888 | 51 | 5,450 | (1,285 | ) | ||||||||
Total | $ | (17,536 | ) | $ | 8,729 | $ | (23,183 | ) | $ | 16,830 | |||
Pre-tax income (loss) from | |||||||||||||
continuing operations | |||||||||||||
Recreational Vehicles | $ | (15,373 | ) | $ | 4,147 | $ | (23,106 | ) | $ | 12,941 | |||
Housing and Building | (4,408 | ) | 4,738 | (6,386 | ) | 5,494 | |||||||
Other | 1,766 | 60 | 5,452 | (919 | ) | ||||||||
Total | $ | (18,015 | ) | $ | 8,945 | $ | (24,040 | ) | $ | 17,516 |
September 30, | December 31, | ||||||
2005 | 2004 | ||||||
Total assets | |||||||
Recreational Vehicles | $ | 156,530 | $ | 174,101 | |||
Housing and Building | 97,231 | 111,099 | |||||
Other | 84,878 | 72,523 | |||||
Total | $ | 338,639 | $ | 357,723 | |||
3. INVENTORIES
Inventories consist of the following (in thousands):
September 30, | December 31, | ||||||
2005 | 2004 | ||||||
Raw materials | $ | 37,365 | $ | 39,524 | |||
Work in process | 22,334 | 21,173 | |||||
Improved lots | 359 | 2,236 | |||||
Finished goods | 69,680 | 73,155 | |||||
Total | $ | 129,738 | $ | 136,088 | |||
4. ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consist of the following (in thousands):
September 30, | December 31, | ||||||
2005 | 2004 | ||||||
Wages, salaries, bonuses and commissions | $ | 3,918 | $ | 5,366 | |||
Dealer incentives, including volume | |||||||
bonuses, dealer trips, interest | |||||||
reimbursement, co-op advertising and | |||||||
other rebates | 3,202 | 5,119 | |||||
Warranty | 16,104 | 10,140 | |||||
Insurance-products and general liability, | |||||||
workers’ compensation, group health and other | 6,612 | 5,589 | |||||
Customer deposits and unearned revenues | 8,775 | 7,340 | |||||
Other current liabilities | 10,455 | 5,912 | |||||
Total | $ | 49,066 | $ | 39,466 | |||
Changes in the Company’s warranty liability during the three and nine-month periods ended September 30 were as follows (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||
2005 | 2004 | 2005 | 2004 | ||||||||||
Balance of accrued warranty at beginning of period | $ | 10,780 | $ | 10,510 | $ | 10,140 | $ | 8,658 | |||||
Warranties issued during the period and changes in liability for pre-existing warranties | 12,114 | 5,024 | 23,657 | 16,862 | |||||||||
Cash settlements made during the period | (6,790 | ) | (5,114 | ) | (17,693 | ) | (15,100 | ) | |||||
Balance of accrued warranty at September 30 | $ | 16,104 | $ | 10,420 | $ | 16,104 | $ | 10,420 | |||||
5. EARNINGS PER SHARE
Basic earnings per share is based on the weighted average number of shares outstanding during the period. Diluted earnings per common share is based on the weighted average number of shares outstanding during the period, after consideration of the dilutive effect of stock options and awards. Basic and diluted earnings per share for the three and nine-month periods ended September 30 were calculated as follows (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2005 | 2004 | 2005 | 2004 | ||||||||||||
Numerator: | |||||||||||||||
Net income (loss) applicable to common stock | $ | (9,346 | ) | $ | 5,940 | $ | (12,202 | ) | $ | 11,767 | |||||
Denominator: | |||||||||||||||
Number of shares outstanding, end of period: | |||||||||||||||
Common stock | 15,817 | 15,706 | 15,817 | 15,706 | |||||||||||
Effect of weighted average contingently | |||||||||||||||
issuable shares outstanding during period | (268 | ) | (202 | ) | (244 | ) | (167 | ) | |||||||
Effect of weighted average shares | |||||||||||||||
outstanding during period | 7 | (25 | ) | (28 | ) | (70 | ) | ||||||||
Weighted average number of common shares | |||||||||||||||
used in basic EPS | 15,556 | 15,479 | 15,545 | 15,469 | |||||||||||
Effect of dilutive securities, stock options | |||||||||||||||
and awards | - | 65 | - | 76 | |||||||||||
Weighted average number of common shares | |||||||||||||||
used in diluted EPS | 15,556 | 15,544 | 15,545 | 15,545 | |||||||||||
As the Company reported a net loss for the three and nine-month periods ended September 30, 2005, the dilutive effect of stock options and awards did not enter into the computation of diluted earnings per share because their inclusion would have been antidilutive.
For both the three and nine-month periods ended September 30, 2004, outstanding stock options covering 85,400 shares were not included in the computation of diluted earnings per share because their exercise price was greater than the average market prices for the periods and their inclusion would have been antidilutive.
6. COMPREHENSIVE INCOME (LOSS)
The changes in components of comprehensive income (loss) for the three and nine-month periods ended September 30 are as follows (in thousands):
Three Months Ended | Nine Months Ended | ||||||||||||
September 30, | September 30, | ||||||||||||
2005 | 2004 | 2005 | 2004 | ||||||||||
Net income (loss) | $ | (9,346 | ) | $ | 5,940 | $ | (12,202 | ) | $ | 11,767 | |||
Unrealized losses on securities held for sale, net of taxes | - | (58 | ) | (204 | ) | ||||||||
Reclassification adjustment for realized gains included in net income | (188 | ) | |||||||||||
Unrealized gains (losses) on cash flow hedges, net of taxes | 44 | (44 | ) | 76 | 31 | ||||||||
Comprehensive income (loss) | $ | (9,302 | ) | $ | 5,838 | $ | (12,314 | ) | $ | 11,594 |
As of September 30, 2005 and 2004, the accumulated other comprehensive income (loss), net of tax, relating to unrealized gains (losses) on securities available for sale was $0 and $246,000, respectively, and relating to deferred losses on cash flow hedges was ($20,000) and ($129,000), respectively.
7. COMMITMENTS, CONTINGENCIES AND GUARANTEES
Obligation to Purchase Consigned Inventories
The Company obtains vehicle chassis for its recreational vehicle products directly from automobile manufacturers under converter pool agreements. The agreements generally provide that the manufacturer will provide a supply of chassis at the Company's various production facilities under the terms and conditions as set forth in the agreement. Chassis are accounted for as consigned inventory until either assigned to a unit in the production process or 90 days have passed. At the earlier of these dates, the Company is obligated to purchase the chassis and it is recorded as inventory. At September 30, 2005 and December 31, 2004, consigned chassis inventory approximated $31.4 million and $29.7 million, respectively.
Repurchase Agreements
The Company was contingently liable at September 30, 2005 to banks and other financial institutions on repurchase agreements in connection with financing provided by such institutions to most of the Company’s independent dealers in connection with their purchase of the Company’s recreational vehicle products. These agreements provide for the Company to repurchase its products from the financing institution in the event that they have repossessed them upon a dealer’s default. Products repurchased from dealers under these agreements are accounted for as a reduction in revenue at the time of repurchase. Although the estimated contingent liability approximates $293 million at September 30, 2005 ($298 million at December 31, 2004), the risk of loss resulting from these agreements is spread over the Company’s numerous dealers and is further reduced by the resale value of the products repurchased. Based on losses previously experienced under these obligations, the Company has established a reserve for estimated losses under repurchase agreements. At September 30, 2005, $0.4 million ($0.3 million at December 31, 2004) was recorded as an accrual for estimated losses under repurchase agreements.
The Company was also contingently liable at September 30, 2005 to a financial institution on repurchase agreements in connection with financing provided by the institution to certain of the Company’s independent home builders in connection with their purchase of the Company’s housing products. This agreement provides for the Company to repurchase its products from the financing institution in the event that they have repossessed them upon a builder’s default. Products repurchased from builders under this agreement are accounted for as a reduction in revenue at the time of repurchase. Although the estimated contingent liability approximates $12.6 million at September 30, 2005 ($4.5 million at December 31, 2004), the risk of loss resulting from these agreements is spread over the Company’s numerous builders and is further reduced by the resale value of the products repurchased. The Company has evaluated the potential for losses under this agreement and has recorded an accrual of $0.2 million at September 30, 2005 ($0.1 million at December 31, 2004) for estimated losses under the repurchase agreement.
Corporate Guarantees
During 2003, the Company entered into an agreement with a financial institution to form a private-label financing program to provide wholesale inventory financing to the Company’s dealers in the Recreational Vehicles Segment. The agreement provides for a preferred program that provides financing that is subject to the standard repurchase agreement described above. In addition, the agreement provides for a reserve pool whereby the financial institution makes available an aggregate line of credit not to exceed $40 million that will provide financing for dealers that may not otherwise qualify for credit approval under the preferred program. No dealer being provided financing from the reserve pool can receive an aggregate line of credit exceeding $5 million. In addition to the standard repurchase agreement described above, for the remainder of 2005 the Company will be liable to the financial institution for a maximum of $2.8 million of aggregate losses, as defined by the agreement, incurred by the financial institution on designated dealers with higher credit risks that are accepted into the reserve pool financing program. Thereafter, the Company will be liable to the financial institution for the first $2 million of aggregate losses annually. The total amount financed under the reserve pool arrangement totaled approximately $13.4 million at September 30, 2005 ($19.2 million at December 31, 2004). The Company has recorded a loss reserve of $0.2 million at September 30, 2005 ($0.3 million at December 31, 2004) associated with these guarantees.
During the first quarter of 2004, the Company entered into an agreement to guarantee the indebtedness incurred by a recreational vehicle dealer towards the purchase of a dealership facility. The guarantee is in the principal amount of $1 million for a period of five years or until all indebtedness has been fully paid, whichever occurs first. The Company has evaluated the potential for losses under this agreement and has determined that the resolution of any claims that may arise in the future would not materially affect the Company’s financial statements.
In addition, the Company is liable under a guarantee to a financial institution for model home financing provided to certain independent builders doing business with the Company’s Housing and Building Segment. The amount outstanding under this agreement at September 30, 2005 is $0.6 million ($1.2 million at December 31, 2004). Any losses incurred under this guarantee would be offset by the proceeds from the resale of the model home and losses are limited to 20% of the original contract price, and cannot exceed $2.0 million. As of September 30, 2005, no losses have been incurred by the Company under the model home financing program.
Financing Obligation
During 2004, the Company entered into an agreement to provide financing of up to $4.9 million to a developer for the construction of a hotel. After the construction loan financing period, as defined in the agreement, the construction loan may be converted to a term loan for a period of two years, provided the terms and conditions of the agreement are met. The loans are collateralized by a first priority interest in all tangible and intangible property of the borrower. As of September 30, 2005, the Company has provided $2.1 million in financing to the developer.
Litigation
In January 2004, the Company entered into a long-term exclusive licensing agreement with The Coleman Company, Inc. to design, produce and market a full line of new Coleman® brand recreational vehicles. In November 2004, the judge presiding over the legal dispute between Fleetwood Enterprises, Inc. and The Coleman Company, Inc. entered an order granting Fleetwood’s request for an injunction against Coleman, prohibiting their use of the trademark registration “Coleman” in the recreational vehicle industry. To protect its rights under its existing license agreement with Coleman, Consolidated Leisure Industries, LLC, doing business as the Coachmen RV Group, filed suit against The Coleman Company, Inc. in federal court in Kansas City, Kansas, to enforce its rights under the License Agreement.
On March 21, 2005, the Company entered into a settlement agreement with The Coleman Company, Inc. to resolve the licensing agreement suit. Pursuant to the settlement agreement, the Company has received $4,425,000 from The Coleman Company, Inc. in exchange for releasing all claims in the suit. The settlement of $4,425,000 was paid in two installments of $2,212,500, one of which was received by the Company on March 23, 2005 and the second of which was received on April 20, 2005, plus interest. In addition, the agreement provides for the potential of an additional payment of $500,000 if certain provisions of the agreement are breached. The settlement of $4,425,000 was reflected in the first quarter results as a reduction of $1,721,000 to cost of sales and a reduction of $461,000 to operating expenses at the RV Segment plus a reduction of $2,243,000 to the Company’s general and administrative expenses.
During the three months ended June 30, 2005, the Company settled a personal injury suit for $5,000,000, $1,000,000 of which has been paid by the Company’s primary insurance carrier. The Company’s self-insured retention is $250,000. Although the excess carrier has currently denied coverage, the Company initially believed it was probable that the excess carrier would ultimately be required to honor its obligation to fund the remaining settlement costs of $3,750,000. As of June 30, 2005, the Company had paid $1,500,000 in addition to the amount paid by its primary carrier and had recorded an other current liability of $2,500,000 to recognize the remaining amount to be paid on the settlement and the $250,000 retention. Due to the probable coverage of the claim by the excess carrier, a receivable of $3,750,000 had been recorded as an other current receivable as of June 30, 2005.
During the third quarter, the Company’s suit against the excess carrier was moved from state court to federal court. This change in jurisdiction results in the Company’s assessment of prevailing against the excess carrier to now be less than probable. As a result, the $3,750,000 receivable that had been recorded in the second quarter was written off and charged to general and administrative expense in the third quarter.
The Company is involved in various legal proceedings, most of which are ordinary disputes incidental to the industry and most of which are covered in whole or in part by insurance. Management believes that the ultimate outcome of these matters and any liabilities in excess of insurance coverage and self-insurance accruals will not have a material adverse impact on the Company’s consolidated financial position, future business operations or cash flows.
8. STOCK-BASED COMPENSATION
In 2003, the Company adopted the Performance Based Restricted Stock Plan to permit grants of shares, subject to restrictions, to key employees of the Company as a means of retaining and rewarding them for long-term performance and to increase their ownership in the Company. The plan is accounted for in accordance with the variable plan accounting provisions of FASB Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation, and therefore awards are expensed based upon the fair value of the estimated shares to be earned over the vesting period. The exact number of shares that each employee will receive is dependent on the Company’s performance, with respect to net income, over a three-year period. The weighted-average grant-date fair value was $13.60 in 2005 and $16.65 in 2004, for the shares awarded under the plan during the respective years. The market value of the shares awarded is recognized as unearned compensation in the consolidated statements of shareholders’ equity and is amortized to operations over the vesting period.
During the first quarter of 2005, the Company determined that it was probable that the performance requirements of the 2003 Plan would not be achieved and as a result, reversed the expenses that had been previously recorded related to this plan. During the third quarter of 2005, the Company determined that it was probable that the performance requirements of the 2004 and 2005 Plans would not be achieved and as a result, reversed the expenses that had been previously recorded related to these two plans. For the three months ended September 30, 2005, the Company reduced compensation expense, which is a component of general and administrative expenses, by $690,000 related to these programs. For the nine months ended September 30, 2005, the Company reduced compensation expense by $1,400,000 related to these three programs. The Company amortized $216,000 and $651,000 to compensation expense for the three and nine-month periods ended September 30, 2004.
Three Months Ended | Nine Months Ended | |||||||||||||
September 30, | September 30, | |||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||
(in thousands, except per share amounts) | ||||||||||||||
Net income (loss), as reported | $ | (9,346 | ) | $ | 5,940 | $ | (12,202 | ) | $ | 11,767 | ||||
Add: Stock-based compensation expense (credit) under variable plan included in reporting net income, net of taxes | (353 | ) | 141 | (865 | ) | 429 | ||||||||
Deduct: Total stock-based employee compensation expense (credit) determined under fair value based method for all awards, net of taxes | 505 | (206 | ) | 795 | (621 | ) | ||||||||
Pro forma net income (loss) | $ | (9,194 | ) | $ | 5,875 | $ | (12,272 | ) | $ | 11,575 | ||||
Net earnings per share: | ||||||||||||||
Basic - as reported | $ | (.60 | ) | $ | .38 | $ | (.78 | ) | $ | .76 | ||||
Basic - pro forma | $ | (.59 | ) | $ | .38 | $ | (.79 | ) | $ | .75 | ||||
Diluted - as reported | $ | (.60 | ) | $ | .38 | $ | (.78 | ) | $ | .76 | ||||
Diluted - pro forma | $ | (.59 | ) | $ | .38 | $ | (.79 | ) | $ | .74 |
9. RESTRUCTURING CHARGES
During the third quarter, the Company’s Board of Directors approved a comprehensive operational and cost structure realignment and restructuring plan (the Intensive Recovery Plan), which is intended to improve operating performance and ensure financial strength. Determinations of the fair value of long-lived assets were based upon comparable market values for similar assets.
The restructuring plans discussed below by segment are all in addition to previous corrective actions implemented during the second quarter, which consisted primarily of reductions in workforce and consolidation of facilities and operations.
During the nine-month period ended September 30, 2005, approximately 130 salaried positions were eliminated throughout the Company. Severance costs related to the eliminations were $0.7 million, of which $0.5 million had been paid as of September 30 and $0.2 million was accrued at September 30 and will predominantly be paid by December 31, 2005.
Housing and Building Segment
As a part of the Intensive Recovery Plan, the Company has decided to evaluate its strategic alternatives with its Miller Building Systems, Inc. commercial structures subsidiary, acquired in 2000, and is exploring options for its sale. As a result of this decision, an asset impairment charge of $4.3 million was recorded in the third quarter, and it may be necessary to recognize an additional non-cash charge of up to $9.0 million upon the determination that Miller meets the requirements to be classified as held for sale, largely due to the goodwill that will be allocated to the operating unit at that time.
The Company has also signed a binding letter of intent to sell its housing operation in Osage City, Kansas to a local investor group, with an anticipated closing in the fourth quarter, upon completion of current in-process production. As a result of this impending sale, an asset impairment charge of $1.6 million has been recorded in the third quarter.
In conjunction with the asset impairments noted above, management performed a goodwill impairment test of the Housing and Building Segment in the third quarter of 2005 and determined that there was no goodwill impairment as of September 30, 2005.
Recreational Vehicle Segment
In September, the Company announced the relocation of Georgie Boy Manufacturing (GBM), LLC from Edwardsburg, Michigan to a newer, more efficient motorhome production facility within its Middlebury, Indiana manufacturing complex. GBM will continue to control and focus on its independent product design, sales, and marketing efforts to ensure the continued strength of the GBM brand with consumers and its separate dealer body, while realizing operating and administrative synergies. The relocation will be completed late in the fourth quarter after which the old GBM manufacturing complex will be sold; however, no loss on disposal is anticipated.
Finally, consistent with its determination to focus on its two core businesses, in October the Company reached an agreement to sell its Prodesign thermoformed plastics subsidiary to an investor group. The transaction is expected to close in the fourth quarter and no loss on disposal is anticipated from this transaction.
10. INCOME TAXES
For the third quarter ended September 30, 2005, the effective tax rate was a credit of (48.1)% and the year-to-date effective tax rate was a credit of (49.2)% compared to the 2004 third quarter and year-to-date effective tax rate from continuing operations of 34.3% and 34.1%, respectively. The Company’s effective tax rate fluctuates based upon income levels, the states where sales occur, the amount of export sales, nontaxable dividends on investments, nontaxable increases in cash value of life insurance contracts and recognized federal and state tax credits. The impact of nontaxable income and tax credits in profitable years reduces the effective tax rate; however, in loss years the impact of these items causes an increase in the effective tax rate credit.
The Company’s effective tax rate credit for 2005 was favorably impacted by 1.7% for estimated current year's research and development (R&D) tax credits. In addition, during the 2005 second quarter the Company completed a project to identify eligible R&D expenditures for the purpose of filing amended Federal and Indiana income tax returns to claim tax credits for eligible R&D activities. The Company is in the process of preparing those amended income tax returns for 1999 - 2003 which will reflect refund claims for R&D tax credits. The Company’s 2004 Federal and Indiana income tax returns also included R&D tax credits which were not considered in the calculation of the 2004 income tax provision. In the 2005 second quarter, the Company recorded $1.5 million for prior years’ R&D tax credits which has increased the Company’s effective tax benefit rate by 6.5% for the 2005 year-to-date period.
During the third quarter of 2005, the Company recorded an increase in current deferred tax assets of $4.0 million to recognize the tax impact of increases in reserves and accruals discussed in Note 4. The Company also reduced its net long-term deferred tax liability by $2.4 million for asset impairments recognized during the quarter, offset by a write-down in the liability for the Company’s long-term incentive compensation plan.
11. NEW ACCOUNTING PRONOUNCEMENTS
On December 16, 2004, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 123 (revised 2004), Share-Based Payment, which is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation. Statement 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends FASB Statement No. 95, Statement of Cash Flows. Generally, the approach in Statement 123(R) is similar to the approach described in Statement 123. However, Statement 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative.
Statement 123(R) must be adopted no later than January 1, 2006 for the Company. Early adoption will be permitted in periods in which financial statements have not yet been issued. The Company expects to adopt Statement 123(R) on January 1, 2006.
Statement 123(R) permits public companies to adopt its requirements using one of two methods:
1. A “modified prospective” method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of Statement 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of Statement 123 for all awards granted to employees prior to the effective date of Statement 123(R) that remain unvested on the effective date.
2. A “modified retrospective” method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under Statement 123 for purposes of pro forma disclosures for all prior periods presented.
The Company is still evaluating the adoption alternatives available to adopt Statement 123(R).
As permitted by Statement 123, the Company currently accounts for share-based payments to employees using the intrinsic value method of APB Opinion 25 and, as such, generally recognizes no compensation cost for employee stock options. Accordingly, the adoption of Statement 123(R)’s fair value method will have an impact on our results of operations, although it will have no impact on our overall financial position. The impact of adoption of Statement 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had we adopted Statement 123(R) in prior periods, the impact of that standard would have approximated the impact of Statement 123 as described in the disclosure of pro forma net income and earnings per share as previously noted. Statement 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption.
Management’s Discussion and Analysis
Of Financial Condition and Results of Operations
The following is management’s discussion and analysis of certain significant factors, which have affected the Company’s financial condition, results of operations and cash flows during the periods included in the accompanying consolidated financial statements.
A summary of the changes in the principal items included in the consolidated statements of operations is shown below (dollar amounts in thousands).
Comparison of | ||||||||||||||||
Three Months | Nine Months | |||||||||||||||
Ended September 30, 2005 and 2004 | ||||||||||||||||
Increase (Decrease) | ||||||||||||||||
Amount | Percentage | Amount | Percentage | |||||||||||||
Net sales | $ | (34,274 | ) | (14.8 | )% | $ | (48,782 | ) | (7.4 | )% | ||||||
Cost of sales | (14,644 | ) | (7.5 | ) | (14,468 | ) | (2.6 | ) | ||||||||
Delivery expenses | (919 | ) | (8.0 | ) | 321 | 1.0 | ||||||||||
Selling expenses | (936 | ) | (11.2 | ) | 428 | 1.8 | ||||||||||
General and administrative expenses | 1,570 | 17.7 | (3,000 | ) | (10.9 | ) | ||||||||||
Asset impairments | 6,986 | 100 | 6,986 | 100 | ||||||||||||
Gain on sale of properties, net | 66 | 34.9 | (964 | ) | (76.0 | ) | ||||||||||
Interest expense | 420 | 76.2 | 1,457 | 101.0 | ||||||||||||
Investment income | (178 | ) | (33.4 | ) | (196 | ) | (10.8 | ) | ||||||||
Other income, net | (97 | ) | (41.5 | ) | 110 | 34.4 | ||||||||||
Income (loss) from continuing operations before income taxes | (26,960 | ) | (301.4 | ) | (41,556 | ) | (237.2 | ) | ||||||||
Income taxes (credit) | (11,729 | ) | (383.3 | ) | (17,807 | ) | (298.3 | ) | ||||||||
Net income (loss) from continuing operations | (15,231 | ) | (258.8 | ) | (23,749 | ) | (205.7 | ) | ||||||||
Income from operations of discontinued entity, net of taxes | (55 | ) | (100.0 | ) | (219 | ) | (100.0 | ) | ||||||||
Net income (loss) | (15,286 | ) | (257.3 | ) | (23,968 | ) | (203.7 | ) |
NET SALES
Consolidated net sales for the quarter ended September 30, 2005 were $198.0 million, a decrease of $34.3 million, or 14.8%, from the $232.3 million reported for the corresponding quarter last year. Net sales for the nine months were $612.1 million, representing a decrease of 7.4%, or $48.8 million, reported for the same period in 2004. The Company’s Recreational Vehicles Segment experienced a net sales decrease of 15.3% for the quarter and a decrease of 7.2% for the nine-month period. Wholesale unit shipments for the RV Segment decreased 26.8% during the third quarter of 2005 and 16.8% for the nine-month period. Wholesale unit shipments of motorized products decreased 28.8% and 19.4% for the three and nine-month periods ended September 30, 2005, respectively, while wholesale unit shipments of towable products were down 25.9% and 15.7% for the three and nine-month periods ended September 30, 2005, respectively. Year to date through August, total industry wholesale shipments of Recreational Vehicles as reported by the Recreational Vehicle Industry Association (RVIA) have declined 0.6%, wholesale shipments of motorized products declined 13.1% year to date, while shipments of towable products increased 2.4% during the same period. Backlog for the RV Segment increased 129.7% to $103.3 million from $45.0 million at the end of the third quarter of 2004.
The Company’s Housing and Building Segment experienced a net sales decrease for the quarter ended September 30, 2005 of 13.6% and a decrease of 7.8% for the nine-month period. The decreases in sales dollars were principally attributable to wholesale unit shipments being down 22.9% for the quarter and down 17.3% for the nine-month period ended September 30. Weakness in a number of markets for the Housing and Building Group, particularly in the Midwest, contributed to the decline in unit shipments during the three and nine-month periods ended September 30, 2005. The Housing and Building Segment continued to experience an increase in the average sales price per unit, thereby partially offsetting the reductions in shipments. Backlog for the Housing and Building Segment as of September 30, 2005 has decreased 15.5% to $54.0 million, compared with $63.9 million at September 30, 2004.
In order to supplement the Company’s single-family residential housing business, the Housing and Building Segment continues to pursue opportunities for larger projects in multifamily residential and commercial markets. In September, the Company was awarded its first military contract to provide barracks for Fort Bliss in Texas. This contract, worth approximately $4.4 million is the division’s initial penetration into the multi-billion dollar military housing market. In August, the Housing and Building Segment began construction of a 4-story, 56,000 square-foot seniors condominium project in Morgantown, West Virginia, which is the largest single building produced by the Company in its history.
Both the RV Segment and Housing and Building Segment have been presented with numerous opportunities to assist with the relief and reconstruction efforts in the areas impacted by Hurricane Katrina. This includes recreational vehicles as temporary shelters and modular homes as new permanent residences, as well as replacement commercial structures. Working in conjunction with the Company’s dealers, the RV Segment has received confirmed orders for approximately 3,000 travel trailers to be delivered in the fourth quarter, with a total value of approximately $30 million. Production schedules have been shifted to support these needs, together with regular orders from the dealer body. Management expects the hurricane relief units to be modestly accretive to earnings. The RV Segment also has additional unconfirmed orders for a comparable number of units, pending confirmation of delivery requirements.
The Housing and Building Segment is also providing a number of more permanent structures to aid in the relief and recovery efforts. The Segment has received orders for approximately $4.0 million in structures to be used as temporary medical clinics, on-site offices for construction contractors, and permanent offices for banks located in the region, which it expects to produce and deliver in the fourth quarter. On a longer-term basis, the Housing and Building Segment has opportunities to participate in the large-scale reconstruction efforts, especially with the rapid production times inherent with its modular construction techniques. All American Homes offers single-family residences that can ideally serve the market for affordable permanent housing in reconstructed areas. For larger multi-family residential projects, the Segment is able to offer a turn-key solution to provide structures for apartments, condominiums, assisted living centers or dormitories. The Company expects the initial bidding process for some of these longer-term rebuilding projects to commence in the fourth quarter.
COST OF SALES
Cost of sales decreased 7.5%, or $14.6 million, for the three months ended September 30, 2005. For the nine-month period, cost of sales decreased $14.5 million or 2.6%. As a percentage of net sales, cost of sales was 91.1% and 89.7% for the three and nine-month periods ended September 30, 2005 compared to 84.0% and 85.3% for the three and nine months ended September 30, 2004. The change in the dollar amount of cost of sales in the current quarter and nine-month periods is attributable to the decrease in sales dollars offset by higher labor, which included severance expenses, insurance, and workers’ compensation costs. In addition, reductions in the production levels caused lower overhead absorption and labor inefficiencies.
OPERATING EXPENSES
As a percentage of net sales, operating expenses, which include delivery, selling, general and administrative expenses, were 14.4% and 13.0% for the 2005 quarter and nine-month periods compared to 12.4% for both the 2004 quarter and nine-month periods. As a percentage of sales, delivery expenses increased by 0.4 and 0.5 percentage points for the three and nine-month periods of 2005 as compared to the prior year three and nine-month periods. The increase in delivery expense as a percent of sales during the quarter and nine-month period was primarily related to higher fuel costs and higher utilization of outside carriers for delivery services, offset by reductions in payroll related costs.
Selling expenses were 3.8% of net sales for the 2005 quarter compared to 3.6% of net sales for the three-month period ended September 30, 2004. For the nine-month periods, selling expenses were 3.9% of net sales for 2005 compared to 3.6% of net sales for 2004. The increase in selling expense as a percentage of net sales during the quarter and nine months ended September 30, 2005 is related to increased expenses related to travel, new product shows, and promotional expenses, partially offset by reduced payroll related costs from the third quarter as a result of the reductions in force.
General and administrative expenses were 5.3% of net sales for the quarter compared to 3.8% for the 2004 corresponding quarter and 4.0% of net sales for the nine-month period compared to 4.2% for 2004. The increase in expenses for the three-month period was primarily a result of increased legal reserves of $3,750,000 related to a personal injury case, partially offset by reduced payroll related costs. Payroll costs were reduced during the quarter due to the reversal of expenses related to the Performance Based Restricted Stock Plan grants for 2004 and 2005 due to the probable failure to meet the Plan’s required thresholds for payment which reduced expenses by $690,000. In addition, payroll costs were reduced from 2004 due to reductions in force which occurred in the second and third quarters of 2005, as well as, to a reduction in performance based compensation due to the operating results of the Company. The decrease in general and administrative expenses for the nine-month period was primarily related to the first quarter 2005 settlement of the Company’s dispute over an RV licensing agreement with The Coleman Company, Inc., which reduced operating expenses by $2,704,000, the first and third quarter 2005 reversal of expenses related to the Performance Based Restricted Stock Plan grants for 2003, 2004 and 2005 due to the probable failure to meet the Plan’s required thresholds for payment, which reduced operating expenses by $1,400,000, and reduced payroll related costs due to the reductions in force, which occurred in the second and third quarters of 2005, as well as, to a reduction in performance based compensation due to the operating results of the Company. These expense reductions were partially offset by an increase of $3,750,000 of legal reserves related to a personal injury case.
ASSET IMPAIRMENTS
In August, the Company closed its All American Homes operation in Springfield, Tennessee. Pending completion of current backlogs, the closure should be completed by the end of 2005. In connection with the closure, an asset impairment charge of $1.1 million was recorded in the third quarter. No markets will be abandoned as a result of this closure, as all existing builders in that region will continue to be served by the Company’s housing operations in Indiana, Ohio and North Carolina.
During the third quarter the Company signed a binding letter of intent to sell its housing operation in Osage City, Kansas to a local investor group, with an anticipated closing in the fourth quarter subsequent to the completion of certain production. The impending sale resulted in an impairment charge of $1.6 million, which has been recorded in the third quarter.
The Company has also decided to evaluate its strategic alternatives with its Miller Building Systems, Inc. commercial structures subsidiary, acquired in 2000, and is exploring options for its sale. As a result of this decision, an asset impairment charge of $4.3 million was recorded in the third quarter, and it may be necessary to recognize an additional non-cash charge of up to $9.0 million upon the determination that Miller meets the requirements to be classified as held for sale, largely due to the goodwill that will be allocated to the operating unit at that time.
In conjunction with the asset impairments noted above, management performed a goodwill impairment test of the Housing and Building Segment in the third quarter of 2005 and determined that there was no goodwill impairment as of September 30, 2005.
GAIN ON THE SALE OF PROPERTIES, NET
There were no significant gains or losses from property transactions for the three or nine months ended September 30, 2005. For the nine months ended September 30, 2004, the gain on the sale of properties was $1.3 million. In late March 2004, Coachmen RV Company sold its 70,000 square-foot facility in Goshen, Indiana, and moved production to a newly acquired replacement facility located five miles north of its Middlebury, Indiana complex. There were no significant gains or losses from property transactions for the three months ended September 30, 2004.
INTEREST EXPENSE
Interest expense was $971,000 and $2,899,000 for the three and nine-month periods ended September 30, 2005 compared to $551,000 and $1,442,000 in the same periods last year. Interest expense increased based on the higher amount of average outstanding long-term debt, borrowings on the Company’s revolving credit facility and higher applicable interest rates.
INVESTMENT INCOME
There was a net investment income of $355,000 for the quarter ended September 30, 2005 compared to $533,000 in the same quarter of 2004. For the nine-month period, the net investment income of $1,612,000 compared to investment income of $1,808,000 in the previous year. The investment income for the three-month period ended September 30, 2005 was principally attributable to earnings of the life insurance policies held while the investment income for the three-month period ended September 30, 2004 was principally attributable to earnings of the life insurance policies held and realized gains on the sale of preferred stock. The investment income for the nine-month period ended September 30, 2005 was also attributable to earnings of the life insurance policies held and realized gains on the sale of preferred stock. The investment income for the nine-month period ended September 30, 2004 was attributable to a cumulative preferred dividend of $536,000 from a utility company emerging from bankruptcy, earnings of the life insurance policies held and realized gains on the sale of preferred stock.
OTHER INCOME, NET
Other income, net, represents income of $137,000 for the third quarter of 2005 and income of $234,000 for the same quarter of the previous year. For the nine-month period, other income, net for 2005 was $430,000 compared to income of $320,000 in 2004. No items of significance caused the variances between the comparable quarters.
INCOME TAXES
For the third quarter ended September 30, 2005, the effective tax rate was a credit of (48.1)% and the year-to-date effective tax rate was a credit of (49.2)% compared to the 2004 third quarter and year-to-date effective tax rate from continuing operations of 34.3% and 34.1%, respectively. The Company’s effective tax rate fluctuates based upon income levels, the states where sales occur, the amount of export sales, nontaxable dividends on investments, nontaxable increases in cash value of life insurance contracts and recognized federal and state tax credits. The impact of nontaxable income and tax credits in profitable years reduces the effective tax rate; however, in loss years the impact of these items causes an increase in the effective tax rate credit.
The Company’s effective tax rate credit for 2005 was favorably impacted by 1.7% for estimated current year's research and development (R&D) tax credits. In addition, during the 2005 second quarter the Company completed a project to identify eligible R&D expenditures for the purpose of filing amended Federal and Indiana income tax returns to claim tax credits for eligible R&D activities. The Company is in the process of preparing those amended income tax returns for 1999 - 2003 which will reflect refund claims for R&D tax credits. The Company’s 2004 Federal and Indiana income tax returns also included R&D tax credits which were not considered in the calculation of the 2004 income tax provision. In the 2005 second quarter, the Company recorded $1.5 million for prior years’ R&D tax credits which has increased the Company’s effective tax benefit rate by 6.5% for the 2005 year-to-date period.
During the third quarter of 2005, the Company recorded an increase in current deferred tax assets of $4.0 million to recognize the tax impact of increases in reserves and accruals discussed in Note 4. The Company also reduced its net long-term deferred tax liability by $2.4 million for asset impairments recognized during the quarter, offset by a write-down in the liability for the Company’s long-term incentive compensation plan.
LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL CONDITION
The Company generally relies on funds from operations as its primary source of liquidity. In addition, the Company maintains a $35 million, unsecured revolving credit facility, which expires on June 30, 2006, to meet its seasonal working capital needs. At September 30, 2005, there were no outstanding borrowings against this bank line of credit. The Company was in compliance with all debt covenant requirements under the revolving credit agreement, as amended, at September 30, 2005. At December 31, 2004, there were short-term borrowings of $20.0 million outstanding. During 2004, the Company also borrowed against the cash surrender value of the Company’s investments in life insurance contracts. As of September 30, 2005 and December 31, 2004, $15 million had been borrowed against the cash surrender value of Company-owned life insurance contracts.
At September 30, 2005, working capital decreased to $107.9 million from $121.3 million at December 31, 2004. The $13.4 million decrease in current assets at September 30, 2005 versus December 31, 2004 was primarily due to decreased inventories and trade receivables, offset by increases in refundable income taxes and deferred income taxes. Current liabilities at September 31, 2005 and December 31, 2004 were both $104.9 million; however, trade payables and other accrued expenses were higher at September 30, 2005 than at December 31, 2004 offset by a decrease in short-term borrowings, floorplan notes payable and accrued income taxes.
Management believes that the Company’s existing cash and cash equivalents as of September 30, 2005, together with its available revolving credit facility and cash expected to be generated from future operations, will be sufficient to fund future planned capital expenditures and other operating cash requirements for the foreseeable future.
CRITICAL ACCOUNTING POLICIES
The preparation of the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States, requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. On an ongoing basis, management evaluates these estimates. Estimates are based on historical experience 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 sources. Historically, actual results have not been materially different from the Company's estimates. However, actual results may differ from these estimates under different assumptions or conditions. A summary of the Company’s more significant accounting policies that require the use of estimates and judgments in preparing the financial statements is provided in the Company’s 10-K report for the year ended December 31, 2004. During the first nine months of fiscal 2005, there was no material change in the accounting policies and assumptions previously disclosed.
FORWARD-LOOKING STATEMENTS
This Form 10-Q Report contains certain statements that are "forward-looking" statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are based on management’s expectations and beliefs concerning future events. Forward-looking statements are necessarily subject to risks and uncertainties, and are dependent on various factors, many of which are outside the control of the Company. These uncertainties and other factors include, but are not limited to, the potential fluctuations in the Company’s operating results; the availability for floorplan financing for the Company's recreational vehicle dealers and corresponding availability of cash to the Company; uncertainties and timing with respect to sales resulting from recovery efforts in the Gulf Coast; uncertainties regarding the impact on sales of the disclosed restructuring steps in both the recreational vehicle and housing and building segments, the ability to sell and close the operations for sale as described, the accuracy of the estimates of the costs to remedy the disclosed recreational vehicle warranty issues; the impact of performance on the valuation of intangible assets; the availability and price of gasoline and diesel fuel, which can impact the sale of recreational vehicles; price volatility of raw materials used in production; the Company's dependence on chassis and appliance suppliers, which are used in the production of many of the Company's recreational vehicle products; interest rates, which affect the affordability of the Company's products; the availability and cost of real estate for residential housing; the ability of the Housing and Building Segment to perform in new market segments where it has limited experience; potential liabilities under repurchase agreements and guarantees; changing government regulations, such as those covering accounting standards; environmental matters or product warranties and recalls, which may affect costs of operations, revenues, product acceptance and profitability; legislation governing the relationships of the Company with its recreational vehicle dealers, which may affect the Company’s options and liabilities in the event of a general economic downturn; consolidation of distribution channels in the recreational vehicle industry; the impact of consumer confidence and economic uncertainty on high-cost discretionary product purchases, which can hinder the sales of recreational vehicles; the demand for commercial structures in the various industries that the Housing and Building Segment serves; and also on the state of the recreational vehicle and housing industries in the United States. Other factors affecting forward-looking statements include changes in property taxes and energy costs, changes in federal income tax laws and federal mortgage financing programs, changes in public policy, competition in these industries, the Company’s ability to increase gross margins which are critical to profitability whether there are or are not increased sales, the Company’s use of incentives at either the wholesale or retail level, further developments in the war on terrorism and related international crises, oil supplies, uncertainties of matters in litigation and other risks and uncertainties. In addition, investors should be aware that generally accepted accounting principles prescribe when a company must disclose or reserve for particular risks, including litigation exposures. Accordingly, results for a given reporting period could be significantly affected if and when a reserve is established for a major contingency. Reported results may therefore appear to be volatile in certain accounting periods. The foregoing lists are not exhaustive, and the Company disclaims any obligation to subsequently revise any forward-looking statements to reflect events or circumstances after the date of such statements.
At times, the Company's actual performance differs materially from its projections and estimates regarding the economy, the recreational vehicle and building industries and other key performance indicators. Readers of this Report are cautioned that reliance on any forward-looking statements involves risks and uncertainties. Although the Company believes that the assumptions on which the forward-looking statements contained herein are reasonable, any of those assumptions could prove to be inaccurate given the inherent uncertainties as to the occurrence or nonoccurrence of future events. There can be no assurance that the forward-looking statements contained in this Report will prove to be accurate. The inclusion of a forward-looking statement herein should not be regarded as a representation by the Company that the Company's objectives will be achieved.
In the normal course of business, operations of the Company are exposed to fluctuations in interest rates. These fluctuations can vary the costs of financing and investing yields. During the first nine months of 2005, the Company has utilized its revolving credit facility to meet short-term working capital needs. The Company had no outstanding borrowings against the revolving credit facility on September 30, 2005.
In January of 2003, the Company entered into various interest rate swap agreements that became effective beginning in October of 2003. These swap agreements, which are designated as cash flow hedges for accounting purposes, effectively convert a portion of the Company’s variable-rate borrowings to a fixed-rate basis through November of 2011, thus reducing the impact of changes in interest rates on future interest expense. The fair value of the Company’s interest rate swap agreements represents the estimated receipts or payments that would be made to terminate the agreements. A gain of $44,000, net of taxes, attributable to changes in the fair value of interest rate swap agreements was recorded as a component of accumulated other comprehensive income (loss) during the third quarter of 2005. Total accumulated gain on the swap agreements for the nine-month period ended September 30, 2005 was $76,000. If in the future the interest rate swap agreements were determined to be ineffective or were terminated before the contractual termination dates, or if it became probable that the hedged variable cash flows associated with the variable-rate borrowings would stop, the Company would be required to reclassify into earnings all or a portion of the unrealized losses on cash flow hedges included in accumulated other comprehensive income (loss).
The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures as of September 30, 2005. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2005.
During the second quarter of 2005, the Company established a shared service center for the processing of accounts payable for its Recreational Vehicle Segment. During the third quarter, the Housing and Building Segment began using the shared service center for the processing of their accounts payable. Other than the expansion of this shared service center to the Housing and Building Segment, there have been no changes during the quarter ended September 30, 2005 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
PART II. OTHER INFORMATION
See Index to Exhibits incorporated by reference herein.
Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
COACHMEN INDUSTRIES, INC.
(Registrant)
Date: November 2, 2005 | By: | /s/ Claire C. Skinner |
Claire C. Skinner, Chairman of the | ||
Board and Chief Executive Officer | ||
Date: November 2, 2005 | By: | /s/ Joseph P. Tomczak |
Joseph P. Tomczak, Executive Vice | ||
President and Chief Financial Officer | ||
Date: November 2, 2005 | By: | /s/ Colleen A. Zuhl |
Colleen A. Zuhl, Vice President | ||
and Controller |
Number Assigned
In Regulation
S-K, Item 601 Description of Exhibit
3(a)(i) Articles of Incorporation of the Company as amended on May 30, 1995 (incorporated by reference to Exhibit 3(i) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995)
3(a)(ii) Articles of Amendment to Articles of Incorporation (incorporated by reference to Exhibit 4.2 to the Company's Form S-3 Registration Statement, File No. 333-14579)
3(b) By-Laws as modified through September 9, 2005 (incorporated by reference to the Company's Form 8-K filed September 15, 2005)
10(a) Amendment No. 7 to Credit Agreement dated September 30, 2005 by and among Coachmen Industries, Inc., the Lenders named therein, and JPMorgan Chase Bank, N.A., as successor to Bank One, Indiana, N.A.
31.1 Certification of Chief Executive Officer Pursuant to Exchange Act Rules 13(a)-14(a)/15(d)-14(a)
31.2 Certification of Chief Financial Officer Pursuant to Exchange Act Rules 13(a)-14(a)/15(d)-14(a)
32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350
32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350
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