In 2000, the Company entered into an agreement with Outdoor Resorts of Las Vegas (“ORLV”) and ORLV’s parent company Outdoor Resorts of America (“ORA”), for the purpose of constructing a luxury motor coach resort in Las Vegas, Nevada. In the first quarter of 2001, two additional projects, one in Naples, Florida, and the other in Indio, California, were added. As of March 31, 2001, the Company had advanced $7.0 million in the form of a long term note receivable from ORA and its respective subsidiaries. As part of the financing structure for the projects, the Company also agreed to act as co-guarantor with ORLV’s parent company, ORA, on an $11.2 million construction loan for the Las Vegas resort. At March 31, 2001, ORLV and ORA had drawn approximately $8.9 million on the construction loan. In return for the Company’s loans and guarantee commitment, ORLV and ORA has agreed to pay interest and income participation to the Company.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements include, but are not limited to, those below that have been marked with an asterisk (*). In addition, the Company may from time to time make forward-looking statements through statements that include the words “believes”, “expects”, “anticipates” or similar expressions. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements of the Company to differ materially from those expressed or implied by such forward-looking statements, including those set forth below under the caption “Factors That May Affect Future Operating Results” and elsewhere in this Quarterly Report on Form 10-Q. The reader should carefully consider, together with the other matters referred to herein, the factors set forth under the caption “Factors That May Affect Future Operating Results". The Company cautions the reader, however, that these factors may not be exhaustive.
GENERAL
Monaco Coach Corporation is a leading manufacturer of premium Class A motor coaches and towable recreational vehicles ("towables"). The Company’s product line currently consists of a broad line of motor coaches, fifth wheel trailers and travel trailers under the “Monaco”, “Holiday Rambler”, “Royale Coach”, and “McKenzie Towables” brand names. The Company's products, which are typically priced at the high end of their respective product categories, range in suggested retail price from $60,000 to $1.2 million for motor coaches and from $24,000 to $49,000 for towables.
RESULTS OF OPERATIONS
Quarter ended April 1, 2000 Compared to Quarter ended March 31, 2001
First quarter net sales decreased 11.2% to $211.2 million compared to $238.0 million for the same period last year. Gross sales dollars on motorized products were down 10.9%, as increases in the Company’s products that were newly introduced in 2000 were more than offset by decreases in other motorized products. The Company’s gross towable sales were down only 2.7% as the McKenzie towable operations reported strong increases which nearly offset decreases on the Holiday Rambler towable products. The Company’s overall unit sales were down 18.3% in the first quarter of 2001 with motorized and towable unit sales being down 21.1% and 13.0% respectively. The Company’s average unit gross selling price increased in the first quarter of 2001 to $94,000 from $86,000 in the comparable 2000 quarter due to the Company’s strong mix of diesel motor coaches. The Company’s continued mix of less expensive diesel and gasoline motor coaches is expected to keep the overall average selling price below $100,000.*
Gross profit for the first quarter of 2001 decreased to $25.5 million, down from $37.3 million in 2000, and gross margin decreased from 15.7% in the first quarter of 2000 to 12.1% in the first quarter of 2001. Gross margin in the first quarter of 2001 was significantly impacted by above normal sales discounts, which net against gross sales. Other major contributors to the change in gross margin include production inefficiencies created from reduced production, shifting the volume among the production lines in the plants, and shifting the mix of products on those lines. The Company’s overall gross margin may fluctuate in future periods if the mix of products shifts from higher to lower gross margin units or if the Company encounters unexpected manufacturing difficulties or competitive pressures.
Selling, general, and administrative expenses increased by $461,000 from $15.8 million in the first quarter of 2000 to $16.2 million in the first quarter of 2001, and increased as a percentage of sales from 6.6% in 2000 to 7.7% in 2001. Selling, general and administrative expenses in the first quarter of 2001 included significant increases in spending related to retail promotion efforts. In addition, the lower sales volume in first quarter 2001 increased selling, general and administrative costs as a percentage of sales.
Operating income was $9.1 million, or 4.3% of sales in the first quarter of 2001 compared to $21.4 million, or 9.0% of sales in the similar 2000 period. The decrease in operating margins reflect the lower gross profit combined with higher selling, general and administrative costs.
Net interest expense was $684,000 in the first quarter of 2001 compared to $112,000 in the comparable 2000 period, reflecting a higher level of borrowing during the first quarter of 2001.
The Company reported a provision for income taxes of $3.3 million, or an effective tax rate of 39.0% in the first quarter of 2001, compared to $8.3 million, or an effective tax rate of 39.25% for the comparable 2000 period.
Net income was $5.2 million in the first quarter of 2001 compared to $12.9 million in the first quarter of 2000 due to the decrease in sales combined with a lower operating margin and an increase in interest expense.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity are internally generated cash from operations and available borrowings under its credit facilities. During the first quarter of 2001, the Company used cash flows of $1.0 million from operating activities. The Company generated $6.8 million from net income and non-cash expenses such as depreciation and amortization. The increase in income taxes payable added to this cash flow, however, the combined cash flow was more than offset by an increase in accounts receivable combined with a decrease in accrued liabilities.
The Company has credit facilities consisting of a revolving line of credit of up to $50.0 million (the “Revolving Loan”). At the election of the Company, the Revolving Loan bears interest at varying rates that fluctuate based on the Prime rate or LIBOR, and are determined based on the Company's leverage ratio. The Company also pays interest monthly on the unused available portion of the Revolving Loan at varying rates, determined by the Company’s leverage ratio. The Revolving loan is due and payable in full on April 30, 2003, and requires monthly interest payments. The balance outstanding under the Revolving Loan at March 31, 2001 was $21.7 million. The Revolving Loan is collateralized by all the assets of the Company and includes various restrictions and financial covenants. The Company utilizes “zero balance” bank disbursement accounts in which an advance on the line of credit is automatically made for checks clearing each day. Since the balance of the disbursement account at the bank returns to zero at the end of each day the outstanding checks of the Company are reflected as a liability. The outstanding check liability is combined with the Company’s positive cash balance accounts to reflect a net book overdraft or a net cash balance for financial reporting.
The Company's principal working capital requirements are for purchases of inventory and, to a lesser extent, financing of trade receivables. The Company's dealers typically finance product purchases under wholesale floor plan arrangements with third parties as described below. At March 31, 2001, the Company had working capital of approximately $70.6 million, an increase of $1.3 million from working capital of $69.3 million at December 30, 2000. The Company has been using short-term credit facilities and cash flow to finance its capital expenditures.
The Company believes that cash flow from operations and funds available under its credit facilities will be sufficient to meet the Company's liquidity requirements for the next 12 months.* The Company's capital expenditures were $2.1 million in the first quarter of 2001, primarily for completing the Company’s warranty and service center projects. The Company anticipates that capital expenditures for all of 2001 will be approximately $12 to $15 million, which includes $4 to $5 million of routine capital expenditures for computer system upgrades and additions, smaller scale plant remodeling projects and normal replacement of outdated or worn-out equipment.* The Company may require additional equity or debt financing to address working capital and facilities expansion needs, particularly if the Company significantly increases the level of working capital assets such as inventory and accounts receivable. The Company may also from time to time seek to acquire businesses that would complement the Company's current business, and any such acquisition could require additional financing. There can be no assurance that additional financing will be available if required or on terms deemed favorable by the Company.
As is common in the recreational vehicle industry, the Company enters into repurchase agreements with the financing institutions used by its dealers to finance their purchases. These agreements obligate the Company to repurchase a dealer's inventory under certain circumstances in the event of a default by the dealer to its lender. If the Company were obligated to repurchase a significant number of its products in the future, it could have a material adverse effect on the Company's financial condition, business and results of operations. The Company’s contingent obligations under repurchase agreements vary from period to period and totaled approximately $321 million as of March 31, 2001, with approximately 8.3% concentrated with one dealer.
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
POTENTIAL FLUCTUATIONS IN OPERATING RESULTS The Company’s net sales, gross margin and operating results may fluctuate significantly from period to period due to factors such as the mix of products sold, the ability to utilize and expand manufacturing resources efficiently, material shortages, the introduction and consumer acceptance of new models offered by the Company, competition, the addition or loss of dealers, the timing of trade shows and rallies, and factors affecting the recreational vehicle industry as a whole. In addition, the Company’s overall gross margin on its products may decline in future periods to the extent the Company increases its sales of lower gross margin towable products or if the mix of motor coaches sold shifts to lower gross margin units. Due to the relatively high selling prices of the Company's products (in particular, its High-Line Class A motor coaches), a relatively small variation in the number of recreational vehicles sold in any quarter can have a significant effect on sales and operating results for that quarter. Demand in the overall recreational vehicle industry generally declines during the winter months, while sales and revenues are generally higher during the spring and summer months. With the broader range of recreational vehicles now offered by the Company, seasonal factors could have a significant impact on the Company's operating results in the future. In addition, unusually severe weather conditions in certain markets could delay the timing of shipments from one quarter to another.
CYCLICALITY The recreational vehicle industry has been characterized by cycles of growth and contraction in consumer demand, reflecting prevailing economic, demographic and political conditions that affect disposable income for leisure-time activities. Unit sales of recreational vehicles (excluding conversion vehicles) reached a peak of approximately 259,000 units in 1994 and declined to approximately 247,000 units in 1996. The industry peaked again in 1999 at approximately 321,000 units and began declining thereafter as unit sales in 2000 were approximately 300,000 units. Furthermore, the Company offers a broad range of recreational vehicle products and is susceptible to the cyclicality inherent in the recreational vehicle industry. Factors affecting cyclicality in the recreational vehicle industry include fuel availability and fuel prices, prevailing interest rates, the level of discretionary spending, the availability of credit and overall consumer confidence. In particular, the decline in consumer confidence and/or a slowing of the overall economy has had a material adverse effect on the recreational vehicle market. An extended continuance of these conditions could have a material adverse effect on the Company's business, results of operations and financial condition.
MANAGEMENT OF GROWTH Over the past several years the Company has experienced significant growth in the number of its employees and the scope of its business. This growth has resulted in the addition of new management personnel and increased responsibilities for existing management personnel, and has placed added pressure on the Company's operating, financial and management information systems. While management believes it has been successful in managing this expansion there can be no assurance that the Company will not encounter problems in the future associated with the continued growth of the Company. Failure to adequately support and manage the growth of its business could have a material adverse effect on the Company's business, results of operations and financial condition.
MANUFACTURING EXPANSION The Company has significantly increased its manufacturing capacity over the last few years. The integration of the Company's facilities and the expansion of the Company's manufacturing operations involve a number of risks including unexpected building and production difficulties. In the past the Company experienced startup inefficiencies in manufacturing a new model and also has experienced difficulty in increasing production rates at a plant. There can be no assurance that the Company will successfully integrate its manufacturing facilities or that it will achieve the anticipated benefits and efficiencies from its expanded manufacturing operations. In addition, the Company’s operating results could be materially and adversely affected if sales of the Company's products do not increase at a rate sufficient to offset the Company's increased expense levels resulting from this expansion.
The setup of new models and scale-up of production facilities involve various risks and uncertainties, including timely performance of a large number of contractors, subcontractors, suppliers and various government agencies that regulate and license construction, each of which is beyond the control of the Company. The setup of production for new models involves risks and costs associated with the development and acquisition of new production lines, molds and other machinery, the training of employees, and compliance with environmental, health and safety and other regulatory requirements. The inability of the Company to complete the scale-up of its facilities and to commence full-scale commercial production in a timely manner could have a material adverse effect on the Company's business, results of operations and financial condition. In addition, the Company may from time to time experience lower than anticipated yields or production constraints that may adversely affect its ability to satisfy customer orders. Any prolonged inability to satisfy customer demand could have a material adverse effect on the Company's business, results of operations and financial condition.
CONCENTRATION OF SALES TO CERTAIN DEALERS Although the Company’s products were offered by 338 dealerships located primarily in the United States and Canada at the end of 2000, a significant percentage of the Company’s sales have been and will continue to be concentrated among a relatively small number of independent dealers. Sales to Lazy Days RV Center, Inc. accounted for 10.0% of the Company’s sales in 1999 and 12.1% in 2000. The Company’s 10 largest dealers, including Lazy Days RV Center, Inc., accounted for a combined 33.0% of sales in 1999 and 36.0% in 2000. The loss of a significant dealer or a substantial decrease in sales by such a dealer could have a material adverse effect on the Company's business, results of operations and financial condition.
POTENTIAL LIABILITY UNDER REPURCHASE AGREEMENTS As is common in the recreational vehicle industry, the Company enters into repurchase agreements with the financing institutions used by its dealers to finance their purchases. These agreements obligate the Company to repurchase a dealer's inventory under certain circumstances in the event of a default by the dealer to its lender. If the Company were obligated to repurchase a significant number of its products in the future, it could have a material adverse effect on the Company's financial condition, business and results of operations. The Company’s contingent obligations under repurchase agreements vary from period to period and totaled approximately $321 million as of March 31, 2001, with approximately 8.3% concentrated with one dealer. See “Liquidity and Capital Resources” and Note 6 of Notes to the Company’s Condensed Consolidated Financial Statements.
AVAILABILITY AND COST OF FUEL An interruption in the supply, or a significant increase in the price or tax on the sale, of diesel fuel or gasoline on a regional or national basis could have a material adverse effect on the Company's business, results of operations and financial condition. Diesel fuel and gasoline have, at various times in the past, been difficult to obtain, and there can be no assurance that the supply of diesel fuel or gasoline will continue uninterrupted, that rationing will not be imposed, or that the price of or tax on diesel fuel or gasoline, which have increased in price in the past year, will not significantly increase in the future, any of which could have a material adverse effect on the Company's business, results of operations and financial condition.
DEPENDENCE ON CERTAIN SUPPLIERS A number of important components for certain of the Company's products are purchased from single or limited sources, including its turbo diesel engines (Cummins), substantially all of its transmissions (Allison), axles (Dana) for all diesel motor coaches other than the Holiday Rambler Endeavor Diesel model and chassis (Workhorse and Ford) for certain of its motorhome products. The Company has no long term supply contracts with these suppliers or their distributors, and there can be no assurance that these suppliers will be able to meet the Company’s future requirements for these components. In 1997, Allison put all chassis manufacturers on allocation with respect to one of the transmissions the Company uses, and in 1999 Ford put one of its gasoline powered chassis on allocation. The Company presently believes that its allocation by suppliers of all components is sufficient to meet planned production volumes, and the Company does not foresee any operating difficulties as a result of vendor supply issues.* Nevertheless, there can be no assurance that Allison, Ford, or any of the Company’s other suppliers will be able to meet the Company’s future requirements for transmissions, chassis or other key components. An extended delay or interruption in the supply of any components obtained from a single or limited source supplier could have a material adverse effect on the Company's business, results of operations and financial condition.
NEW PRODUCT INTRODUCTIONS The Company believes that the introduction of new features and new models will be critical to its future success. Delays in the introduction of new models or product features or a lack of market acceptance of new models or features and/or quality problems with new models or features could have a material adverse effect on the Company's business, results of operations and financial condition. For example, unexpected costs associated with model changes have adversely affected the Company’s gross margin in the past. Future product introductions could divert revenues from existing models and adversely affect the Company's business, results of operations and financial condition.
COMPETITION The market for the Company’s products is highly competitive. The Company currently competes with a number of other manufacturers of motor coaches, fifth wheel trailers and travel trailers, many of which have significant financial resources and extensive distribution capabilities. There can be no assurance that either existing or new competitors will not develop products that are superior to, or that achieve better consumer acceptance than, the Company’s products, or that the Company will continue to remain competitive.
RISKS OF LITIGATION The Company is subject to litigation arising in the ordinary course of its business, including a variety of product liability and warranty claims typical in the recreational vehicle industry. Although the Company does not believe that the outcome of any pending litigation, net of insurance coverage, will have a material adverse effect on the business, results of operations or financial condition of the Company, due to the inherent uncertainties associated with litigation there can be no assurance in this regard.*
To date, the Company has been successful in obtaining product liability insurance on terms the Company considers acceptable. The Company’s current policies jointly provide coverage against claims based on occurrences within the policy periods up to a maximum of $65.0 million for each occurrence and $66.0 million in the aggregate. There can be no assurance that the Company will be able to obtain insurance coverage in the future at acceptable levels or that the costs of insurance will be reasonable. Furthermore, successful assertion against the Company of one or a series of large uninsured claims, or of one or a series of claims exceeding any insurance coverage, could have a material adverse effect on the Company's business, results of operations and financial condition.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Credit Agreement dated January 12, 2001 with U.S. Bank National Association.
(b) Reports on Form 8-K
No reports on Form 8-K were required to be filed during the quarter ended March 31, 2001,
for which this report is filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | MONACO COACH CORPORATION |
| | | |
| | | |
Dated: May 15, 2001
| | /s/: P. Martin Daley
|
| | | P. Martin Daley |
| | | Vice President and |
| | | Chief Financial Officer (Duly |
| | | Authorized Officer and Principal |
| | | Financial Officer) |
