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, 2008.
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
![COA Logo](https://capedge.com/proxy/10-Q/0000021212-08-000180/coalogo.jpg)
COACHMEN INDUSTRIES, INC. | ||||
(Exact name of registrant as specified in its charter) |
Indiana | 35-1101097 | |
(State of incorporation or organization) | (IRS Employer Identification No.) |
423 North Main Street, Middlebury, Indiana | 46540 | |
(Address of principal executive offices) | (Zip Code) |
Registrant's telephone number, including area code: | (574) 825-5821 |
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 such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨ | Accelerated filer x | Non-accelerated filer ¨ | Smaller reporting company ¨ |
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:
Number of shares of Common Stock, without par value, outstanding as of the close of business on September 30, 2008: 15,902,185
INDEX | |
Part I. Financial Information | Page |
Financial Statements: | |
3 | |
4 | |
5 | |
6-13 | |
14-20 | |
21 | |
21 | |
Part II. Other Information | |
22 | |
23 | |
24 |
Consolidated Balance Sheets
(in thousands)
September 30, | December 31, | ||||||
2008 | 2007 | ||||||
Assets | (Unaudited) | ||||||
CURRENT ASSETS | |||||||
Cash and cash equivalents | $ | 2,621 | $ | 1,549 | |||
Trade receivables, less allowance for doubtful receivables 2008 - $1,200 and 2007 - $744 | 15,722 | 9,122 | |||||
Other receivables | 4,351 | 3,819 | |||||
Refundable income taxes | 1,552 | 1,628 | |||||
Inventories | 55,937 | 79,268 | |||||
Prepaid expenses and other | 3,203 | 3,804 | |||||
Assets held for sale | 5,021 | - | |||||
Total current assets | 88,407 | 99,190 | |||||
Property, plant and equipment, net | 44,452 | 52,932 | |||||
Goodwill | 12,993 | 12,993 | |||||
Cash value of life insurance, net of loans | 22,623 | 33,936 | |||||
Other | 4,746 | 8,617 | |||||
TOTAL ASSETS | $ | 173,221 | $ | 207,668 | |||
Liabilities and Shareholders' Equity | |||||||
CURRENT LIABILITIES | |||||||
Short-term borrowings | $ | 15,000 | $ | 20,073 | |||
Accounts payable, trade | 13,332 | 15,042 | |||||
Accrued income taxes | 497 | 536 | |||||
Accrued expenses and other liabilities | 23,376 | 33,235 | |||||
Floorplan notes payable | 3,294 | 4,116 | |||||
Current maturities of long-term debt | 819 | 852 | |||||
Total current liabilities | 56,318 | 73,854 | |||||
Long-term debt | 2,807 | 3,010 | |||||
Deferred income taxes | 1,990 | 1,990 | |||||
Postretirement deferred compensation benefits | 6,590 | 7,632 | |||||
Other | 32 | 49 | |||||
Total liabilities | 67,737 | 86,535 | |||||
COMMITMENTS AND CONTINGENCIES (Note 9) | |||||||
SHAREHOLDERS' EQUITY | |||||||
Common shares, without par value: authorized 60,000 shares; issued 2008 - 21,221 shares and 2007 - 21,180 shares | 92,665 | 92,552 | |||||
Additional paid-in capital | 7,697 | 7,856 | |||||
Accumulated other comprehensive loss | (32 | ) | (48 | ) | |||
Retained earnings | 63,828 | 79,927 | |||||
Treasury shares, at cost, 2008 - 5,319 shares and 2007 - 5,402 shares | (58,674 | ) | (59,154 | ) | |||
Total shareholders' equity | 105,484 | 121,133 | |||||
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | $ | 173,221 | $ | 207,668 |
Consolidated Statements of Operations
(in thousands, except per share amounts)
(Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||
Net sales | $ | 74,822 | $ | 123,854 | $ | 292,848 | $ | 403,861 | ||||||
Cost of sales | 75,323 | 116,096 | 275,610 | 388,682 | ||||||||||
Gross profit (loss) | (501 | ) | 7,758 | 17,238 | 15,179 | |||||||||
Operating expenses: | ||||||||||||||
Selling | 4,842 | 5,720 | 14,260 | 17,472 | ||||||||||
General and administrative | 5,664 | 6,410 | 14,576 | 19,621 | ||||||||||
Gain on sale of assets, net | (66 | ) | (143 | ) | (313 | ) | (610 | ) | ||||||
Impairment charges | 3,448 | - | 3,448 | 3,872 | ||||||||||
13,888 | 11,987 | 31,971 | 40,355 | |||||||||||
Operating loss | (14,389 | ) | (4,229 | ) | (14,733 | ) | (25,176 | ) | ||||||
Nonoperating (income) expense: | ||||||||||||||
Interest expense | 996 | 808 | 3,134 | 2,595 | ||||||||||
Investment income | (298 | ) | (423 | ) | (852 | ) | (1,376 | ) | ||||||
Other income, net | (624 | ) | (271 | ) | (916 | ) | (486 | ) | ||||||
74 | 114 | 1,366 | 733 | |||||||||||
Loss before income taxes | (14,463 | ) | (4,343 | ) | (16,099 | ) | (25,909 | ) | ||||||
Income taxes (credit) | - | 1 | - | (994 | ) | |||||||||
Net loss | $ | (14,463 | ) | $ | (4,344 | ) | $ | (16,099 | ) | $ | (24,915 | ) | ||
Loss per share - Basic & Diluted | $ | (.92 | ) | $ | (.28 | ) | $ | (1.02 | ) | $ | (1.58 | ) | ||
Number of common shares used in the computation of loss per share: | ||||||||||||||
Basic | 15,815 | 15,736 | 15,787 | 15,725 | ||||||||||
Diluted | 15,815 | 15,736 | 15,787 | 15,725 | ||||||||||
Cash dividends declared per common share | $ | - | $ | - | $ | - | $ | .06 |
Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
Nine Months Ended September 30, | |||||||
2008 | 2007 | ||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | |||||||
Net loss | $ | (16,099 | ) | $ | (24,915 | ) | |
Adjustments to reconcile net loss to net cash used in operating activities: | |||||||
Depreciation | 3,872 | 4,389 | |||||
Provision for doubtful receivables, net of recoveries | 670 | 474 | |||||
Net realized and unrealized gains (losses) on derivatives | 16 | (6 | ) | ||||
Impairment charges | 3,448 | 3,872 | |||||
Gains on sale of properties and other assets, net | (313 | ) | (610 | ) | |||
Increase in cash surrender value of life insurance policies | (661 | ) | (1,495 | ) | |||
Deferred income tax benefit | - | (1,659 | ) | ||||
Other | (738 | ) | 1,199 | ||||
Changes in certain assets and liabilities: | |||||||
Trade receivables | (7,495 | ) | 74 | ||||
Inventories | 23,331 | 13,070 | |||||
Prepaid expenses and other | 601 | (56 | ) | ||||
Accounts payable, trade | (1,710 | ) | 9,178 | ||||
Income taxes - accrued and refundable | 37 | 7,905 | |||||
Accrued expenses and other liabilities | (9,859 | ) | (5,709 | ) | |||
Net cash (used in) provided by operating activities | (4,900 | ) | 5,711 | ||||
CASH FLOWS FROM INVESTING ACTIVITIES: | |||||||
Proceeds from sale of properties and other assets | 1,283 | 1,499 | |||||
Investments in life insurance policies | (1,026 | ) | (1,509 | ) | |||
Purchases of property and equipment | (1,441 | ) | (2,246 | ) | |||
Other | 174 | 466 | |||||
Net cash used in investing activities | (1,010 | ) | (1,790 | ) | |||
CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||
Proceeds from short-term borrowings | 16,813 | 10,659 | |||||
Payments of short-term borrowings | (22,708 | ) | (12,898 | ) | |||
Payments of long-term debt | (236 | ) | (395 | ) | |||
Proceeds from borrowings on cash value of life insurance policies | 32,000 | - | |||||
Payments of borrowings on cash value of life insurance policies | (19,000 | ) | - | ||||
Issuance of common shares under stock incentive plans | 113 | 130 | |||||
Cash dividends paid | - | (944 | ) | ||||
Purchases of common shares for treasury | - | (15 | ) | ||||
Net cash provided by (used in) financing activities | 6,982 | (3,463 | ) | ||||
Increase in cash and cash equivalents | 1,072 | 458 | |||||
CASH AND CASH EQUIVALENTS: | |||||||
Beginning of period | 1,549 | 2,651 | |||||
End of period | $ | 2,621 | $ | 3,109 | |||
Supplemental disclosures of cash flow information: | |||||||
Operating cash received during the period related to insurance settlements | $ | 988 | $ | - |
Notes to Consolidated Financial Statements
(Unaudited)
1. | BASIS OF PRESENTATION. |
The condensed consolidated financial statements have been prepared by Coachmen Industries, Inc. (“the Company”), without audit, in accordance with accounting principles generally accepted in the United States 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 accounting principles generally accepted in the United States for complete financial statements. Management believes the disclosures made in this document are adequate so as not to make the information presented misleading.
In the opinion of management, the accompanying unaudited condensed consolidated financial statements, taken as a whole, contain all adjustments which are of a normal recurring nature necessary to present fairly the financial position of the Company as of September 30, 2008, and the results of its operations and cash flows for the interim periods presented. Operating results for the nine-month period ended September 30, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008. It is suggested that these condensed financial statements be read in conjunction with the financial statements and notes thereto included in the Company’s Form 10-K for the year ended December 31, 2007.
Adoption of New Accounting Standards
The Company adopted the provisions of SFAS No. 157 Fair Value Measurements (SFAS No. 157) related to its financial assets and liabilities in the first quarter of 2008. The adoption did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows. SFAS No. 157 establishes a framework for measuring the fair value of assets and liabilities. This framework is intended to provide increased consistency in how fair value determinations are made under various existing accounting standards which permit, or in some cases require, estimates of fair market value. SFAS No. 157 also expands financial statement disclosure requirements about a company’s use of fair value measurements, including the effect of such measures on earnings. SFAS No. 157 was effective for fiscal years beginning after November 15, 2007.
Assets or liabilities that have recurring fair value measurements are shown below as of September 30, 2008 (in thousands):
Fair Value Measurements at Reporting Date Using | ||||||||||||||||
Quoted Prices in | ||||||||||||||||
Active Markets | Significant | Significant | ||||||||||||||
For Identical | Other Observable | Unobservable | ||||||||||||||
Assets | Inputs | Inputs | ||||||||||||||
Total as of | ||||||||||||||||
Description | September 30, 2008 | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
Cash | $ | 2,621 | $ | 2,621 | $ | - | $ | - | ||||||||
Interest Rate Swap (1) | (32 | ) | - | (32 | ) | - | ||||||||||
Net | $ | 2,589 | $ | 2,621 | $ | (32 | ) | $ | - |
(1) Included in other long-term liabilities on consolidated balance sheet.
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 and Housing. The Company evaluates the performance of its segments based primarily on net sales and pre-tax income and allocates resources to them based on performance. There are no inter-segment revenues. The Company allocates certain corporate expenses to these segments based on three dimensions: revenues, subsidiary structure and number of employees. Differences between reported segment amounts and corresponding consolidated totals represent corporate income or expenses for administrative functions and income, costs or expenses relating to property and equipment 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 (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||
2008 | 2007 | 2008 | 2007 | ||||||||||
Net sales | |||||||||||||
Recreational vehicles | $ | 44,059 | $ | 91,778 | $ | 193,319 | $ | 307,158 | |||||
Housing | 30,763 | 32,076 | 99,529 | 96,703 | |||||||||
Consolidated total | $ | 74,822 | $ | 123,854 | $ | 292,848 | $ | 403,861 | |||||
Gross profit | |||||||||||||
Recreational vehicles | $ | (5,432 | ) | $ | 3,501 | $ | (490 | ) | $ | 2,566 | |||
Housing | 4,931 | 4,257 | 17,729 | 12,613 | |||||||||
Other reconciling items | - | - | (1 | ) | - | ||||||||
Consolidated total | $ | (501 | ) | $ | 7,758 | $ | 17,238 | $ | 15,179 | ||||
Operating expenses | |||||||||||||
Recreational vehicles | $ | 5,699 | $ | 7,758 | $ | 18,722 | $ | 27,011 | |||||
Housing | 4,347 | 4,907 | 12,664 | 14,944 | |||||||||
Other reconciling items | 3,842 | (678 | ) | 585 | (1,600 | ) | |||||||
Consolidated total | $ | 13,888 | $ | 11,987 | $ | 31,971 | $ | 40,355 | |||||
Operating income (loss) | |||||||||||||
Recreational vehicles | $ | (11,131 | ) | $ | (4,257 | ) | $ | (19,212 | ) | $ | (24,445 | ) | |
Housing | 584 | (650 | ) | 5,065 | (2,331 | ) | |||||||
Other reconciling items | (3,842 | ) | 678 | (586 | ) | 1,600 | |||||||
Consolidated total | $ | (14,389 | ) | $ | (4,229 | ) | $ | (14,733 | ) | $ | (25,176 | ) | |
Pre-tax income (loss) | |||||||||||||
Recreational vehicles | $ | (10,956 | ) | $ | (4,156 | ) | $ | (18,881 | ) | $ | (24,471 | ) | |
Housing | 572 | (690 | ) | 4,981 | (2,271 | ) | |||||||
Other reconciling items | (4,079 | ) | 503 | (2,199 | ) | 833 | |||||||
Consolidated total | $ | (14,463 | ) | $ | (4,343 | ) | $ | (16,099 | ) | $ | (25,909 | ) |
September 30, | December 31, | |||||
2008 | 2007 | |||||
Total assets | ||||||
Recreational vehicles | $ | 61,064 | $ | 86,816 | ||
Housing | 54,036 | 54,601 | ||||
Other reconciling items | 58,121 | 66,251 | ||||
Consolidated total | $ | 173,221 | $ | 207,668 |
3. | INVENTORIES. |
Inventories consist of the following (in thousands):
September 30, | December 31, | ||||||
2008 | 2007 | ||||||
Raw materials | |||||||
Recreational vehicles | $ | 10,939 | $ | 11,789 | |||
Housing | 4,534 | 5,989 | |||||
Consolidated total | 15,473 | 17,778 | |||||
Work in process | |||||||
Recreational vehicles | 5,060 | 12,913 | |||||
Housing | 3,121 | 2,941 | |||||
Consolidated total | 8,181 | 15,854 | |||||
Improved lots | |||||||
Housing | 670 | 645 | |||||
Consolidated total | 670 | 645 | |||||
Finished goods | |||||||
Recreational vehicles | 20,809 | 34,038 | |||||
Housing | 10,804 | 10,953 | |||||
Consolidated total | 31,613 | 44,991 | |||||
Consolidated total | $ | 55,937 | $ | 79,268 | |||
4. LONG-TERM ASSETS.
Property, Plant and Equipment
Property, plant and equipment consist of the following (in thousands):
September 30, 2008 | December 31, 2007 | ||||||
Land and improvements | $ | 10,591 | $ | 11,452 | |||
Buildings and improvements | 52,160 | 59,765 | |||||
Machinery and equipment | 24,342 | 24,429 | |||||
Transportation equipment | 13,495 | 14,654 | |||||
Office furniture and fixtures | 17,180 | 17,274 | |||||
Total | 117,768 | 127,574 | |||||
Less, accumulated depreciation | 73,316 | 74,642 | |||||
Property, plant and equipment, net | $ | 44,452 | $ | 52,932 |
At September 30, 2008, the Company had $5.0 million of long lived assets classified in assets held for sale. These assets were available and listed for sale during the first and second quarters of 2008. Housing Segment property and buildings accounted for the majority of these assets, including the former manufacturing facility in Zanesville, Ohio that was consolidated into a larger Indiana manufacturing plant, plus a warehouse and office building in Decatur, Indiana. In addition, with the relocation of the corporate offices to Middlebury, Indiana, the former corporate office building and land in Elkhart, Indiana are also held for sale.
4. LONG-TERM ASSETS, continued.
Notes Receivable – Variable Interest Entities
In December 2007, the Company entered into an agreement to produce ADA compliant low floor accessible buses for ARBOC Mobility LLC., a marketer of specialized transit and shuttle buses designed for users with mobility challenges. This bus incorporates patent pending technologies provided by ARBOC Mobility. In connection with the agreement with ARBOC Mobility LLC, the Company agreed to finance up to $1.0 million of start up costs. As of September 30, 2008, the Company has a note receivable of $0.9 million due from ARBOC Mobility LLC for start up costs. The note is on a month-by-month basis and bears interest at the rate of 1% per month on the principal balance. The note is included in other receivables on the Consolidated Balance Sheet.
Impairment Charges
Notes receivable and investments are reviewed quarterly to determine whether events or changes in circumstances indicate that the carrying amounts may not be recoverable. The primary factors considered in our determination are the financial condition, operating performance and near term prospects of the corresponding entities. If the decline in value is deemed to be other than temporary, an impairment loss is recognized. As a result of this review, the Company determined that it was probable several note balances and an investment would not be fully recoverable, and accordingly recorded an impairment charge of $3.4 million to reserve the notes and investment as of September 30, 2008.
5. | ACCRUED EXPENSES AND OTHER LIABILITIES. |
Accrued expenses and other liabilities consist of the following (in thousands):
September 30, 2008 | December 31, 2007 | ||||||
Wages, salaries, bonuses and commissions | $ | 1,863 | $ | 2,432 | |||
Dealer incentives, including volume bonuses, dealer trips, interest reimbursement, co-op advertising and other rebates | 941 | 1,577 | |||||
Warranty | 5,324 | 8,123 | |||||
Insurance-products and general liability, workers compensation, group health and other | 5,456 | 8,519 | |||||
Customer deposits and unearned revenues | 2,909 | 4,208 | |||||
Litigation | 370 | 930 | |||||
Interest | 583 | 751 | |||||
Sales and property taxes | 1,871 | 1,837 | |||||
Deferred gain on sale of real estate | 814 | 1,145 | |||||
Other current liabilities | 3,245 | 3,713 | |||||
Total | $ | 23,376 | $ | 33,235 |
5. | ACCRUED EXPENSES AND OTHER LIABILITIES, continued. |
Changes in the Company's warranty liability during the three and nine-month periods ended September 30, 2008 and 2007 were as follows (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||
2008 | 2007 | 2008 | 2007 | ||||||||||
Balance of accrued warranty at beginning of period | $ | 6,511 | $ | 9,766 | $ | 8,123 | $ | 11,099 | |||||
Warranties issued during the period and changes in liability for pre-existing warranties | 1,838 | 4,074 | 7,594 | 14,184 | |||||||||
Settlements made during the period | (3,025 | ) | (4,303 | ) | (10,393 | ) | (15,746 | ) | |||||
Balance of accrued warranty at September 30 | $ | 5,324 | $ | 9,537 | $ | 5,324 | $ | 9,537 |
The decrease in the warranty accrual for 2008 was primarily the result of improvements in quality and lower sales levels.
6. COMPREHENSIVE INCOME (LOSS).
The changes in the components of comprehensive loss for the three and nine-month periods ended September 30 are as follows (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||
2008 | 2007 | 2008 | 2007 | ||||||||||
Net loss | $ | (14,463 | ) | $ | (4,344 | ) | $ | (16,099 | ) | $ | (24,915 | ) | |
Unrealized gains (losses) on cash flow hedges, net of taxes | 12 | (16 | ) | 16 | (6 | ) | |||||||
Comprehensive loss | $ | (14,451 | ) | $ | (4,360 | ) | $ | (16,083 | ) | $ | (24,921 | ) |
As of September 30, 2008 and 2007, the accumulated other comprehensive loss, net of tax, relating to deferred losses on cash flow hedges was ($32,000) and ($16,000), respectively.
7. EARNINGS PER SHARE AND COMMON STOCK MATTERS.
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 and shares held in deferred compensation plans. Basic and diluted earnings per share for the three and nine-month periods ended September 30 were calculated using the average shares as follows (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||
2008 | 2007 | 2008 | 2007 | ||||||||||
Numerator: | |||||||||||||
Net loss available to common stockholders | $ | (14,463 | ) | $ | (4,344 | ) | $ | (16,099 | ) | $ | (24,915 | ) | |
Denominator: | |||||||||||||
Number of shares outstanding, end of period: | |||||||||||||
Weighted average number of common shares used in basic EPS | 15,815 | 15,736 | 15,787 | 15,725 | |||||||||
Effect of dilutive securities | - | - | - | - | |||||||||
Weighted average number of common shares used in dilutive EPS | 15,815 | 15,736 | 15,787 | 15,725 |
As the Company reported a net loss for the three and nine-month periods ended September 30, 2008 and 2007, 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.
The Company accounts for income taxes based upon Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes” (“FAS 109”). Under this method, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company continues to carry a full valuation allowance on all of its deferred tax assets.
As of the beginning of fiscal year 2008, the Company had an unrecognized tax benefit liability of $2.4 million including interest and penalties. There has been no significant change in the amount of the unrecognized tax benefit liability through September 30, 2008.
The Company is subject to periodic audits by U.S. federal and state taxing authorities. Currently, the Company is undergoing an audit by the Internal Revenue Service for a claim for research and development credits. It is reasonably possible that the amounts recorded as an unrecognized tax benefit liability could change in the next twelve months as a result of the audit.
For the majority of tax jurisdictions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years prior to 2004.
Due to the Company’s cumulative losses in recent years, a valuation allowance of $5.9 million and $6.4 million, respectively, was recognized to offset potential net operating loss tax benefits associated with losses for the three and nine-month periods ended September 30, 2008, essentially reducing the effective tax rate to zero for the respective periods. In 2007, valuation allowances of $1.7 million and $8.2 million were recognized to offset potential net operating loss tax benefits associated with the losses for the three and nine-month periods ended September 30, 2007.
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 assigned to a unit in the production process. At that point, the Company is obligated to purchase the chassis and it is recorded as inventory. At September 30, 2008 and December 31, 2007, chassis inventory, accounted for as consigned inventory, approximated $13.5 million and $14.5 million, respectively.
Repurchase Agreements
The Company was contingently liable at September 30, 2008 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 and cost of sales at the time of repurchase. Although the estimated contingent liability approximates $138.0 million at September 30, 2008 ($176.0 million at December 31, 2007), 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 both September 30, 2008 and December 31, 2007, $0.7 million was recorded as an accrual for estimated losses under repurchase agreements.
The Company was also contingently liable at September 30, 2008 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 and cost of sales at the time of repurchase. Although the estimated contingent liability approximates $6.9 million at September 30, 2008 ($14.6 million at December 31, 2007), 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 $0.1 million as of September 30, 2008 and $0.2 million at December 31, 2007 for estimated losses under the repurchase agreement.
9. COMMITMENTS AND CONTINGENCIES, continued.
Corporate Guarantees
The Company was contingently liable under guarantees to financial institutions of their loans to independent dealers for amounts totaling approximately $7.6 million at September 30, 2008 and $2.6 million at December 31, 2007. The Company has 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 Vehicle 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, at September 30, 2008 the Company was contingently liable to the financial institutions up to a maximum of $2.0 million of aggregate losses, as defined by the agreement, incurred by the financial institutions on designated dealers with higher credit risks that are accepted into the reserve pool financing program. The Company has recorded a loss reserve of $0.1 million at September 30, 2008 and December 31, 2007 associated with these guarantees.
Financing Obligation
During the second quarter of 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 for which the Company was to provide modular units. As of September 30, 2008, the Company provided $2.3 million in financing to the developer under this arrangement. The loans are collateralized by a first priority interest in all tangible and intangible property of the borrower. The developer was unable to obtain a building permit, so the Company is pursuing its legal remedies through litigation to recoup the financing extended to date. No additional funding has been or will be provided. During the fourth quarter of 2006, the Company obtained title to the real estate that was partial collateral for this note. In the event the sale of the property does not generate proceeds sufficient to cover the financing previously provided, the Company will continue pursuing its legal remedies to recover any shortfall. The Company has recorded the property at its estimated fair value less costs to sell.
Litigation
The Company has been named as a defendant in a number of lawsuits alleging that the plaintiffs were exposed to levels of formaldehyde in FEMA-supplied trailers manufactured by the Company's subsidiaries (and other manufacturers) and that such exposure entitles plaintiffs to an award, including injunctive relief, a court-supervised medical monitoring fund, removal of formaldehyde-existing materials, repair and testing, compensatory, punitive and other damages, including attorneys’ fees and costs. Currently, the litigation is proceeding through the class certification process. All independent filings served on the Company have been consolidated into a single cause of action in which the issue of class certification will be determined. In the pending action, we do not believe that a liability is probable or reasonably estimable with respect to these claims and we have not recorded a provision for these claims in our financial statements.
In the third quarter of 2008, as a result of the favorable settlement of a lawsuit involving an insurance recovery, the Company recorded income of approximately $0.4 million. During the second quarter of 2008, as a result of the favorable settlement of two lawsuits involving insurance recoveries, the Company recorded income of approximately $1.0 million. During the first quarter of 2008, the Company also recorded income of approximately $1.0 million as a result of the favorable settlement of two lawsuits involving insurance recoveries. These favorable settlements are classified as a reduction to general and administrative expenses on the consolidated statement of operations.
The Company is involved in various other 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.
10. | STOCK-BASED COMPENSATION. |
Stock options generally vest over a four-year service period. The Company has not granted any stock option awards since 2003. Compensation expense related to the Company's Employee Stock Purchase Plan was not significant for either the three or nine-month periods ended September 30, 2008. Since the adoption of SFAS 123R, there have been no modifications to outstanding stock-based awards.
On January 4, 2008, the Company granted Restricted Stock Awards to certain key employees as a means of retaining and rewarding them for performance and to increase their ownership in the Company. The awards are governed by the Company’s 2000 Omnibus Stock Plan. Participants will earn the restricted shares awarded to them based on attainment of certain performance goals for the first quarter of 2008 and for the full calendar year 2008. If the Company meets the minimum or maximum target levels of pre-tax profits, the participants will earn corresponding levels of awards. To the extent the Company meets the performance goals for the first quarter and/or the full year, and the participant remains employed by the Company during the vesting period, the earned restricted shares will vest and be delivered to the participants over a three-year vesting period: one-third on January 1, 2009, one-third on January 1, 2010 and one-third on January 1, 2011. A total of 237,375 shares, assuming 100% of the performance goal is achieved, could be granted. At March 31, 2008, the Company determined that the minimum target of the performance goal for the first quarter of 2008 would be achieved; therefore, compensation expense in the amount of $0.1 million was recorded related to this plan for the quarter ended March 31, 2008. As of September 30, 2008, the Company determined that it is not yet probable that the performance conditions associated with the restricted stock grants for the full calendar year 2008 will be achieved; therefore, no additional compensation expense was recorded.
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):
Three Months Ended | |||||||||||||
Percentage Change | |||||||||||||
Percentage | Percentage | 2008 | |||||||||||
September 30, | of | September 30, | of | to | |||||||||
2008 | Net Sales | 2007 | Net Sales | 2007 | |||||||||
Net sales: | |||||||||||||
Recreational vehicles | $ | 44,059 | 58.9 | % | $ | 91,778 | 74.1 | % | (52.0 | )% | |||
Housing | 30,763 | 41.1 | 32,076 | 25.9 | (4.1 | ) | |||||||
Consolidated total | 74,822 | 100.0 | 123,854 | 100.0 | (39.6 | ) | |||||||
Gross profit: | |||||||||||||
Recreational vehicles | (5,432 | ) | (7.3 | ) | 3,501 | 2.8 | (255.2 | ) | |||||
Housing | 4,931 | 6.6 | 4,257 | 3.4 | 15.8 | ||||||||
Consolidated total | (501 | ) | (0.7 | ) | 7,758 | 6.2 | (106.5 | ) | |||||
Operating expenses: | |||||||||||||
Selling | 4,842 | 6.5 | 5,720 | 4.6 | (15.3 | ) | |||||||
General and administrative | 5,664 | 7.6 | 6,410 | 5.2 | (11.6 | ) | |||||||
Gain on sale of assets, net | (66 | ) | (0.1 | ) | (143 | ) | (0.1 | ) | (53.8 | ) | |||
Impairment charges | 3,448 | 4.6 | - | - | 100.0 | ||||||||
Consolidated total | 13,888 | 18.6 | 11,987 | 9.7 | 15.9 | ||||||||
Nonoperating expense | 74 | - | 114 | - | (35.1 | ) | |||||||
Loss before income taxes | (14,463 | ) | (19.3 | ) | (4,343 | ) | (3.5 | ) | (233.0 | ) | |||
Income taxes | - | - | 1 | - | - | ||||||||
Net loss | $ | (14,463 | ) | (19.3 | )% | $ | (4,344 | ) | (3.5 | )% | (233.0 | )% |
Nine Months Ended | |||||||||||||
Percentage Change | |||||||||||||
Percentage | Percentage | 2008 | |||||||||||
September 30, | of | September 30, | of | to | |||||||||
2008 | Net Sales | 2007 | Net Sales | 2007 | |||||||||
Net sales: | |||||||||||||
Recreational vehicles | $ | 193,319 | 66.0 | % | $ | 307,158 | 76.1 | % | (37.1 | )% | |||
Housing | 99,529 | 34.0 | 96,703 | 23.9 | 2.9 | ||||||||
Consolidated total | 292,848 | 100.0 | 403,861 | 100.0 | (27.5 | ) | |||||||
Gross profit: | |||||||||||||
Recreational vehicles | (490 | ) | (0.2 | ) | 2,566 | 0.7 | (119.1 | ) | |||||
Housing | 17,729 | 6.1 | 12,613 | 3.1 | 40.6 | ||||||||
Other | (1 | ) | - | - | - | - | |||||||
Consolidated total | 17,238 | 5.9 | 15,179 | 3.8 | 13.6 | ||||||||
Operating expenses: | |||||||||||||
Selling | 14,260 | 4.8 | 17,472 | 4.3 | (18.4 | ) | |||||||
General and administrative | 14,576 | 5.0 | 19,621 | 4.9 | (25.7 | ) | |||||||
Gain on sale of assets, net | (313 | ) | (0.1 | ) | (610 | ) | (0.2 | ) | 48.7 | ||||
Impairment charge | 3,448 | 1.2 | 3,872 | 1.0 | (11.0 | ) | |||||||
Consolidated total | 31,971 | 10.9 | 40,355 | 10.0 | (20.8 | ) | |||||||
Nonoperating expense | 1,366 | 0.5 | 733 | 0.2 | 86.4 | ||||||||
Loss before income taxes | (16,099 | ) | (5.5 | ) | (25,909 | ) | (6.4 | ) | 37.9 | ||||
Income tax credit | - | - | (994 | ) | (0.2 | ) | - | ||||||
Net loss | $ | (16,099 | ) | (5.5 | )% | $ | (24,915 | ) | (6.2 | )% | 35.4 | % | |
The following table presents key items impacting the results of operations for the periods presented (in thousands):
Three Months | Three Months | Nine Months | Nine Months | ||||||||||
Ended | Ended | Ended | Ended | ||||||||||
September 30, | September 30, | September 30, | September 30, | ||||||||||
2008 | 2007 | 2008 | 2007 | ||||||||||
Gain on sale of assets | $ | (66 | ) | $ | (143 | ) | $ | (313 | ) | $ | (610 | ) | |
Legal/Insurance expense recoveries | (388 | ) | - | (2,428 | ) | - | |||||||
Goodwill impairment charge | - | - | - | 3,872 | |||||||||
Impairment charges | $ | 3,448 | $ | - | $ | 3,448 | $ | - |
NET SALES
Consolidated net sales for the quarter ended September 30, 2008 were $74.8 million, a decrease of $49.1 million, or 39.6%, from the $123.9 million reported for the corresponding quarter last year. Net sales for the nine months ended September 30, 2008 were $292.8 million, representing a decrease of $111.1 million, or 27.5%, from the $403.9 million reported for the same period of 2007. The Company’s Recreational Vehicle Segment experienced a net sales decrease of 52.0% for the quarter and a decrease of 37.1% for the nine-month period, as significant deterioration in the RV market continued and even worsened in the third quarter. Through August 31, 2008 total industry shipments of all types of recreational vehicles declined 22.7%, with towables declining 19.7% and motorhomes declining 39.3%. For the quarter, RV Segment wholesale unit shipments of all product types decreased by 44.7% to 1,546 units and decreased 33.4% to 7,148 units for the nine-month period. RV Segment wholesale shipments of motorhomes were down 48.9% and towables declined 27.2% during the first nine months of 2008 compared to 2007.
The Company’s Housing Segment experienced a net sales decrease for the quarter ended September 30, 2008 of 4.1%, from $32.1 million during the third quarter of 2007 to $30.8 million for the third quarter of 2008. Net sales for the nine months ended September 30, 2008 were $99.5 million, representing an increase of $2.8 million, or 2.9%, from net sales of $96.7 million for the same period of 2007. The small decrease in sales during the third quarter and small increase in sales for the nine-month period were primarily attributable to the impact of major project revenues offsetting the weakness in traditional single-family housing markets. The Company’s All American Building Systems (AABS) commercial business unit began deliveries for the military housing project at Fort Carson in Colorado early in 2008 and deliveries were largely completed by the middle of the third quarter, significantly contributing to net sales volume.
The national housing market continues to decline as evidenced by U.S. Census Bureau data showing single-family housing starts declining 39.7% in the first eight months of 2008, following a full year 2007 decline of 28.6%. The Housing Segment continues its efforts to grow its traditional business by enhancing the design and marketing of single-family homes, with new products including the introduction of the products available in the All American Homes Green Catalog, recognizing the increasing need for energy efficiency and the use of sustainable materials in the construction of new homes. In addition, the Company has an agreement with Solar Village to market a line of solar energy powered homes that were introduced to the builders in the third quarter. The Housing Segment continues to aggressively pursue major project opportunities in the multi-family residential, military housing and commercial markets.
COST OF SALES
Cost of sales decreased 35.1%, or $40.8 million, for the three months ended September 30, 2008, and 29.1% or $113.1 million for the nine months ending September 30, 2008. As a percentage of net sales, cost of sales was 100.7% and 94.1% for the three and nine-month periods ending September 30, 2008 compared to 93.8% and 96.2% for the comparable time periods of 2007. Cost of sales decreased in dollars due to the decline in net sales, decreasing corresponding gross profit to $(0.5) million or (0.7)% for the three-month period ended September 30, 2008 compared to $7.8 million or 6.2% for the three months ended September 30, 2007. The negative variance in cost of sales and gross profit percentages for the three months ended September 30, 2008 compared to the three-month period ended September 30, 2007 was due to the significant levels of discounting required in the current RV market and the lack of opportunity to take full advantage of plant consolidations by increasing operating leverage due to significantly lower production levels. Consolidated production volumes declined 51.1% in the third quarter of 2008 compared to the third quarter of 2007, and are down 29.3% for the nine months ended September 30, 2008 compared to 2007. Improvement in the year-to-date cost of sales and corresponding gross profit percentage is the result of action plans implemented by management during 2007 and continuing in 2008, including the strategic sourcing project reducing material costs, continued product quality initiatives, reduction of warranty expenses, and consolidating manufacturing facilities in order to reduce expenses and improve profitability through improved capacity utilization of fewer facilities. In late 2007, the RV Segment consolidated Class A production into a single facility, relocated a paint facility in Elkhart, Indiana to the main complex in Middlebury, Indiana, and consolidated two towable assembly plants into a single facility, while the Housing Segment consolidated its All American Homes production facility located in Zanesville, Ohio with its larger facility located in Decatur, Indiana. These improvements in cost of sales were offset by the additional discounting required to reduce recreational vehicle finished goods inventory, as well as the reduction in recreational vehicle production and revenues during the third quarter, adversely affecting gross profit.
OPERATING EXPENSES
As a percentage of net sales, operating expenses, which include selling, general and administrative expenses, were 14.1% and 9.8% for the three and nine-month periods ended September 30, 2008, respectively, and 9.8% and 9.2% for the corresponding periods in 2007.
The $0.9 million reduction in selling expenses for the three-month period of 2008 versus 2007 and $3.2 million reduction for the nine months was primarily due to reduced payroll related costs and lower sales promotion expenses as a result of planned cut backs and the overall lower revenues.
General and administrative expenses were 7.6% of net sales for the 2008 third quarter compared to 5.2% for the 2007 corresponding quarter, and 5.0% for the first nine months of 2008 compared to 4.9% in 2007. The decrease of $0.7 million in general and administrative expenses for the three-month period of 2008 versus 2007 was primarily the result of legal settlements and insurance recoveries of $0.4 million, and other various expense reductions including professional services and payroll related expenses while the increase as a percentage of sales was due to overall lower revenues. General and administrative expenses declined $5.0 million for the nine-month period of 2008 versus 2007 as a result of legal settlements and insurance recoveries of $2.4 million, and other various expense reductions including professional services and payroll related expenses.
GAIN ON THE SALE OF ASSETS, NET
For both the three months ended September 30, 2008 and 2007, the gain on the sale of assets was approximately $0.1 million. For the nine-month period ended September 30, 2008, the gain on the sale of assets was $0.3 million compared to $0.6 million in the same period of 2007.
IMPAIRMENT CHARGES
Notes receivable and investments are reviewed quarterly to determine whether events or changes in circumstances indicate that the carrying amounts may not be recoverable. The primary factors considered in our determination are the financial condition, operating performance and near term prospects of the corresponding entities. If the decline in value is deemed to be other than temporary, an impairment loss is recognized. As a result of this review, the Company determined that it was probable several note balances and an investment would not be fully recoverable, and accordingly recorded an impairment charge of $3.4 million to reserve the notes and investment as of September 30, 2008.
INTEREST EXPENSE
Interest expense was $1.0 million and $3.1 million for the three and nine-month periods ended September 30, 2008 compared to $0.8 million and $2.6 million for the three and nine-month periods ended September 30, 2007, respectively. Interest expense increased due to higher borrowings during the quarter and nine-month period.
INVESTMENT INCOME
There was net investment income of $0.3 million and $0.9 million for the three and nine-month periods ended September 30, 2008 compared to $0.4 million and $1.4 million in the same periods of 2007. Investment income is principally attributable to earnings of the life insurance policies held.
OTHER INCOME, NET
Other income, net, represents income of $0.6 million and $0.9 million for the three and nine-month periods of 2008 and income of $0.3 million and $0.5 million for the same periods of the previous year.
PRE-TAX INCOME (LOSS)
Pre-tax loss for the three and nine-month periods ended September 30, 2008 was $14.5 million and $16.1 million compared with pre-tax loss of $4.3 million and $25.9 million in the corresponding periods of 2007. The Company's RV Segment generated a pre-tax loss of $11.0 million, compared with a pre-tax loss of $4.2 million. The Housing Segment recorded a pre-tax income of $0.6 million in the third quarter of 2008 compared with a pre-tax loss of $0.7 million in the third quarter of 2007 (see Note 2 of Notes to Consolidated Financial Statements).
INCOME TAXES
Due to the Company’s cumulative losses in recent years, a valuation allowance of $5.9 million and $6.4 million, respectively, was recognized to offset potential net operating loss tax benefits associated with losses for the three and nine-month periods ended September 30, 2008, essentially reducing the effective tax rate to zero for the respective periods. In 2007, valuation allowances of $1.7 million and $8.2 million were recognized to offset potential net operating loss tax benefits associated with the losses for the three and nine-month periods ended September 30, 2007, also essentially reducing the effective tax rate to zero for the respective periods (see Note 8 of Notes to Consolidated Financial Statements).
NET INCOME (LOSS)
Net loss for the three and nine months ended September 30, 2008 was $14.5 million (a loss of $0.92 per diluted share) and $16.1 million (a loss of $1.02 per diluted share), respectively, compared to a net loss for the three and nine months ended September 30, 2007 of $4.3 million (a loss of $0.28 per diluted share) and $24.9 million (a loss of $1.58 per diluted share).
LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL CONDITION
The Company generally relies on funds from operations as its primary source of working capital and liquidity. In addition, the Company maintains a $55.0 million secured line of credit to meet its seasonal working capital needs. At September 30, 2008 there was $15.0 million in outstanding borrowings. At September 30, 2007, there was $7.4 million in borrowings. At September 30, 2008 the Company had approximately $22.5 million available for additional borrowings under the terms of the secured line of credit; although borrowing the full amount may be subject to covenant triggers. The Company also has the ability to borrow against the accumulated cash surrender value of life insurance policies. As of September 30, 2008 and December 31, 2007, $30.5 million and $17.6 million, respectively, had been borrowed against the cash surrender value of Company-owned life insurance contracts. As of September 30, 2008, the cash surrender value of life insurance is approximately $53.1 million, with $30.5 million borrowed, resulting in a cash surrender value net of loans of $22.6 million. As of September 30, 2008, the Company had capacity to borrow an additional maximum amount of $20.0 million against the net cash surrender value.
At September 30, 2008, working capital increased to $32.1 million from $25.3 million at December 31, 2007. The $10.8 million decrease in current assets at September 30, 2008 versus December 31, 2007 was primarily due to a significant $23.3 million decrease in inventories, offset partially by increases in accounts receivable of $6.6 million and assets held for sale of $5.0 million. The $17.5 million decrease in current liabilities at September 30, 2008 versus December 31, 2007 was primarily due to a $9.9 million decrease in accrued expenses and other liabilities, primarily accrued warranty and insurance and a $5.1 million reduction in short term borrowings.
Given the deterioration of already weak RV and housing markets, management has and continues to proactively consolidate operations to align capacity, overhead costs and operating expenses with market demand which also more closely aligns cash outflows with inflows. Management aggressively reduced inventories during the third quarter of 2008, and continues to monitor inventory levels.
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, 2007. During the first nine months of fiscal 2008, there was no material change in the accounting policies and assumptions previously disclosed.
New Accounting Pronouncements
In December 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 141 (revised 2007), Business Combinations, (SFAS No. 141R). SFAS No. 141R provides revised guidance on how acquirers recognize and measure the consideration transferred, identifiable assets acquired, liabilities assumed, noncontrolling interests, and goodwill acquired in a business combination. SFAS No. 141R also expands required disclosures surrounding the nature and financial effects of business combinations. SFAS No. 141R is effective, on a prospective basis, for fiscal years beginning after December 15, 2008. The Company believes that the adoption of SFAS 141 (revised 2007) could have an impact on the accounting for any future acquisition, if one were to occur.
In December 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, (SFAS No. 160). SFAS No. 160 changes the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests and classified as a component of equity. SFAS No. 160 is effective for fiscal years beginning after December 15, 2008. The adoption of this statement is not expected to have a material effect on the Company's financial statements.
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 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 ability of the management team to achieve desired results; |
• | interest rates, which affect the affordability of the Company's products; |
• | consumer confidence and the availability of consumer credit; |
• | the Company’s ability to utilize manufacturing resources efficiently; |
• | the Company’s ability to introduce new models that achieve consumer acceptance; |
• | the margins associated with the mix of products the Company sells in a particular period; |
• | the availability of floorplan financing for the Company's recreational vehicle dealers and corresponding availability of cash to the Company; |
• | oil supplies and the availability and price of gasoline and diesel fuel, which can impact the sale of recreational vehicles; |
• | the Company's dependence on chassis and other suppliers; |
• | potential liabilities under repurchase agreements and guarantees; |
• | consolidation of distribution channels in the recreational vehicle industry; |
• | 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; |
• | the price volatility of materials used in production and the ability to pass on rapidly increasing costs of product components and raw materials to end buyers; |
• | the availability and cost of real estate for residential housing; |
• | the increased size and scope of work of military housing projects, and other major projects, as compared to the Company's traditional single-family homes business, with increased reliance on third parties for performance which could impact the Company; |
• | the ability to perform in new market segments or geographic areas where it has limited experience; |
• | the impact of performance on the valuation of intangible assets; |
• | the supply of existing homes within the Company’s markets; |
• | the impact of home values on housing demand; |
• | uncertainties and timing with respect to sales resulting from recovery efforts in the Gulf Coast; |
• | adverse weather conditions affecting home deliveries; |
• | changing government regulations, including those covering accounting standards; |
• | environmental matters or product warranties and recalls, which may affect costs of operations, revenues, product acceptance and profitability; |
• | the state of the recreational vehicle and housing industries in the United States; |
• | changes in property taxes and energy costs; |
• | changes in federal income tax laws and federal mortgage financing programs; |
• | competition in the industries in which the Company operates; |
• | further developments in the war on terrorism and related international crises; |
• | uncertainties of matters in litigation and other risks and uncertainties; |
• | the ability of the Company to generate taxable income in future years to utilize deferred tax assets and net operating loss carryforwards that are available; |
• | the availability of financing under the Company’s line of credit; |
• | the Company’s ability to increase gross margins which are critical whether or not there are increased sales; |
• | the Company’s use of incentives at either the wholesale or retail level; |
• | the availability of credit for the consumers of both housing and RV markets; |
• | the dependence on key customers within certain product types; |
• | the potential fluctuation in the Company’s operating results; |
• | the addition or loss of our dealers or builders; |
• | the introduction and marketing of competitive product by others, including significant discounting offered by our competitors; |
• | uncertainties regarding the impact of the disclosed restructuring steps in both the Recreational Vehicle and Housing Segments; |
• | uncertainties concerning obligations to 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; |
• | the availability of and repurchase terms related to wholesale financing for our dealers. |
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 housing 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 2008, the Company has utilized its secured line of credit to meet short-term working capital needs. The Company had $15.0 million outstanding against the revolving credit facility on September 30, 2008. The Company had $7.4 million outstanding borrowings against the line of credit on September 30, 2007.
At September 30, 2008, the Company had one interest rate swap agreement with a notional amount of $2.4 million that was used to convert the variable interest rates on an industrial development revenue bond to a fixed rate. In accordance with the terms of the swap agreement, the Company pays a 3.71% interest rate, and receives the Bond Market Association Index (BMA), calculated on the notional amount, with net receipts or payments being recognized as adjustments to interest expense. This swap agreement is designated as a cash flow hedge for accounting purposes and effectively converts a portion of the Company's variable-rate borrowing 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 agreement represents the estimated receipts or payments that would be made to terminate the agreements. A cumulative gain of approximately $12,000, 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) for the quarter ended September 30, 2008. Total accumulated gain on the swap agreement for the nine-month period ending September 30, 2008 was approximately $16,000. If in the future the interest rate swap agreement was determined to be ineffective or was terminated before the contractual termination date, 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 gain (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, 2008. 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, 2008.
There have been no changes during the quarter ended September 30, 2008 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
Item 6. Exhibits
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: October 28, 2008 | By: | /s/ Richard M. Lavers |
Richard M. Lavers, Chief Executive Officer | ||
Date: October 28, 2008 | By: | /s/ Colleen A. Zuhl |
Colleen A. Zuhl, Chief Financial Officer | ||
Date: October 28, 2008 | By: | /s/ Stephen L. Patterson |
Stephen L. Patterson, Corporate 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 May 1, 2008 (incorporated by reference to Exhibit 3(b) to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2008). |
(31.1) | |
(31.2) | |
(32.1) | |
(32.2) |
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