UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
ý Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended: September 29, 2001
or
o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the period from________to________
Commission File Number: 1-14725
MONACO COACH CORPORATION
Delaware |
| 35-1880244 |
(State of Incorporation) |
| (I.R.S. Employer Identification No.) |
|
|
|
91320 Industrial Way, Coburg, Oregon 97408 | ||
(Address of principal executive offices) | ||
| ||
(541) 686-8011 | ||
(Registrant's telephone number, including area code) | ||
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 ý NO o
The number of shares outstanding of common stock, $.01 par value, as of September 29, 2001: 28,586,011
MONACO COACH CORPORATION
FORM 10-Q
September 29, 2001
INDEX
PART I - FINANCIAL INFORMATION
MONACO COACH CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited: dollars in thousands)
|
| December 30, |
| September 29, |
| ||
|
| 2000 |
| 2001 |
| ||
ASSETS |
|
|
|
|
| ||
Current assets: |
|
|
|
|
| ||
Trade receivables, net |
| $ | 67,998 |
| $ | 74,406 |
|
Inventories |
| 114,397 |
| 126,583 |
| ||
Prepaid expenses |
| 1,046 |
| 1,041 |
| ||
Deferred income taxes |
| 13,197 |
| 28,570 |
| ||
Total current assets |
| 196,638 |
| 230,600 |
| ||
|
|
|
|
|
| ||
Notes receivable |
| 2,800 |
| 7,550 |
| ||
Property, plant and equipment, net |
| 103,590 |
| 120,942 |
| ||
Debt issuance costs |
|
|
| 994 |
| ||
Goodwill, net of accumulated amortization of $4,675 and $5,159, respectively |
| 18,582 |
| 51,983 |
| ||
|
|
|
|
|
| ||
Total assets |
| $ | 321,610 |
| $ | 412,069 |
|
|
|
|
|
|
| ||
LIABILITIES |
|
|
|
|
| ||
Current liabilities: |
|
|
|
|
| ||
Book overdraft |
| $ | 15,178 |
| $ | 15,038 |
|
Line of credit |
| 20,585 |
| 6,630 |
| ||
Current portion of long-term note payable |
|
|
| 10,000 |
| ||
Accounts payable |
| 53,098 |
| 68,737 |
| ||
Income taxes payable |
| 0 |
| 5,123 |
| ||
Accrued expenses and other liabilities |
| 38,478 |
| 65,712 |
| ||
Total current liabilities |
| 127,339 |
| 171,240 |
| ||
|
|
|
|
|
| ||
Long-term note payable |
|
|
| 30,000 |
| ||
Deferred income taxes |
| 7,646 |
| 6,028 |
| ||
|
| 134,985 |
| 207,268 |
| ||
|
|
|
|
|
| ||
Commitments and contingencies (Note 8) |
|
|
|
|
| ||
|
|
|
|
|
| ||
STOCKHOLDERS' EQUITY |
|
|
|
|
| ||
Common stock, $.01 par value; 50,000,000 shares authorized, 18,952,107 and 28,586,011 issued and outstanding respectively |
| 190 |
| 286 |
| ||
Additional paid-in capital |
| 47,032 |
| 47,812 |
| ||
Retained earnings |
| 139,403 |
| 156,703 |
| ||
Total stockholders' equity |
| 186,625 |
| 204,801 |
| ||
Total liabilities and stockholders' equity |
| $ | 321,610 |
| $ | 412,069 |
|
See accompanying notes.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited: dollars in thousands, except share and per share data)
|
| Quarter Ended |
| Nine Months Ended |
| ||||||||
|
| September 30, |
| September 29, |
| September 30, |
| September 29, |
| ||||
|
| 2000 |
| 2001 |
| 2000 |
| 2001 |
| ||||
Net sales |
| $ | 226,393 |
| $ | 240,831 |
| $ | 690,467 |
| $ | 675,483 |
|
Cost of sales |
| 195,485 |
| 210,283 |
| 590,128 |
| 593,643 |
| ||||
Gross profit |
| 30,908 |
| 30,548 |
| 100,339 |
| 81,840 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Selling, general and administrative expenses |
| 14,604 |
| 18,949 |
| 44,120 |
| 51,677 |
| ||||
Amortization of goodwill |
| 161 |
| 162 |
| 484 |
| 484 |
| ||||
Operating income |
| 16,143 |
| 11,437 |
| 55,735 |
| 29,679 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Other income, net |
| 1 |
| (42 | ) | 64 |
| 320 |
| ||||
Interest expense |
| (219 | ) | (539 | ) | (458 | ) | (1,638 | ) | ||||
Income before income taxes |
| 15,925 |
| 10,856 |
| 55,341 |
| 28,361 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Provision for income taxes |
| 6,118 |
| 4,234 |
| 21,468 |
| 11,061 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net income |
| $ | 9,807 |
| $ | 6,622 |
| $ | 33,873 |
| $ | 17,300 |
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Earnings per common share: |
|
|
|
|
|
|
|
|
| ||||
Basic |
| $ | .35 |
| $ | .23 |
| $ | 1.19 |
| $ | .61 |
|
Diluted |
| $ | .34 |
| $ | .23 |
| $ | 1.17 |
| $ | .59 |
|
|
|
|
|
|
|
|
|
|
| ||||
Weighted average common shares outstanding: |
|
|
|
|
|
|
|
|
| ||||
Basic |
| 28,403,017 |
| 28,550,019 |
| 28,362,291 |
| 28,506,844 |
| ||||
Diluted |
| 28,960,539 |
| 29,390,018 |
| 28,975,945 |
| 29,241,263 |
| ||||
See accompanying notes.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited: dollars in thousands)
|
| Nine-months Ended |
| ||||
|
| Sep 30, 2000 |
| Sep 29, 2001 |
| ||
Increase (Decrease) in Cash: |
|
|
|
|
| ||
|
|
|
|
|
| ||
Cash flows from operating activities: |
|
|
|
|
| ||
Net income |
| $ | 33,873 |
| $ | 17,300 |
|
Adjustments to reconcile net income to net cash provided (used) by operating activities: |
|
|
|
|
| ||
Gain on sale of assets |
|
|
| (74 | ) | ||
Depreciation and amortization |
| 4,664 |
| 5,212 |
| ||
Deferred income taxes |
| 2,613 |
| 567 |
| ||
Changes in working capital accounts: |
|
|
|
|
| ||
Trade receivables, net |
| (34,671 | ) | (3,497 | ) | ||
Inventories |
| (18,585 | ) | 13,174 |
| ||
Prepaid expenses |
| (849 | ) | 319 |
| ||
Accounts payable |
| 14,964 |
| (8,440 | ) | ||
Income taxes payable |
| (476 | ) | 5,123 |
| ||
Accrued expenses and other liabilities |
| (129 | ) | (2,345 | ) | ||
Net cash provided by operating activities |
| 1,404 |
| 27,339 |
| ||
Cash flows from investing activities: |
|
|
|
|
| ||
Additions to property, plant and equipment |
| (14,581 | ) | (6,262 | ) | ||
Proceeds from sale of assets |
|
|
| 106 |
| ||
Payment for business acquisition |
|
|
| (24,320 | ) | ||
Issuance of notes receivable |
| (2,800 | ) | (4,750 | ) | ||
Net cash used in investing activities |
| (17,381 | ) | (35,226 | ) | ||
Cash flows from financing activities: |
|
|
|
|
| ||
Book overdraft |
| 3,417 |
| (1,691 | ) | ||
(Payments) borrowings on lines of credit, net |
| 11,889 |
| (30,304 | ) | ||
Borrowings on long-term note payable |
|
|
| 40,000 |
| ||
Debt issuance costs |
|
|
| (994 | ) | ||
Issuance of common stock |
| 671 |
| 876 |
| ||
Net cash provided (used) by financing activities |
| 15,977 |
| 7,887 |
| ||
Net change in cash |
| 0 |
| 0 |
| ||
Cash at beginning of period |
| 0 |
| 0 |
| ||
Cash at end of period |
| $ | 0 |
| $ | 0 |
|
See accompanying notes.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The interim condensed consolidated financial statements have been prepared by Monaco Coach Corporation (the "Company") without audit. In the opinion of management, the accompanying unaudited financial statements contain all adjustments necessary, consisting only of normal recurring adjustments, to present fairly the financial position of the Company as of December 30, 2000 and September 29, 2001, and the results of its operations for the quarters and nine-month periods ended September 30, 2000 and September 29, 2001, and cash flows of the Company for the nine-month periods ended September 30, 2000 and September 29, 2001. The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, and all significant intercompany accounts and transactions have been eliminated in consolidation. The balance sheet data as of December 30, 2000 was derived from audited financial statements, but does not include all disclosures contained in the Company's Annual Report to Stockholders. These interim condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto appearing in the Company's Annual Report to Stockholders for the year ended December 30, 2000.
2. Acquisition of SMC Corporation
The Company announced on June 25, 2001 that it had reached an agreemeent with Oregon based motorhome manufacturer SMC Corporation (“SMC”) to acquire all of the outstanding shares of SMC pursuant to a cash tender offer at a price of $3.70 per share. On August 6, 2001, the Company completed the back-end merger, and owned 100% of the shares.
The cash paid for SMC, including transaction costs of $3,062,000, totalled $24,320,000. The total assets acquired and liabilities assumed of SMC based on estimated fair values at August 6, 2001, is as follows:
|
| (in thousands) |
| |
Receivables |
| $ | 2,911 |
|
Inventories |
| 25,360 |
| |
Deferred tax asset |
| 17,558 |
| |
Property and equipment |
| 15,850 |
| |
Prepaids and other assets |
| 314 |
| |
Goodwill |
| 33,885 |
| |
Total assets acquired |
| 95,878 |
| |
|
|
|
| |
Book overdraft |
| (1,551 | ) | |
Notes payable |
| (16,349 | ) | |
Accounts payable |
| (24,079 | ) | |
Accrued liabilities |
| (29,579 | ) | |
Total liabilities assumed |
| $ | (71,558 | ) |
|
|
|
| |
Total assets acquired and liabilities assumed |
| $ | 24,320 |
|
3. Inventories
Inventories are stated at lower of cost (first-in, first-out) or market. The composition of inventory is as follows:
|
| December 30, |
| September 29, | ||
|
| 2000 |
| 2001 | ||
|
| (in thousands) | ||||
Raw materials |
| $ | 45,187 |
| $ | 50,326 |
Work-in-process |
| 31,739 |
| 42,144 | ||
Finished units |
| 37,471 |
| 34,113 | ||
|
| $ | 114,397 |
| $ | 126,583 |
4. Goodwill
Goodwill, which represents the excess of the cost of acquisition over the fair value of net assets acquired, is being amortized on a straight-line basis over 20 and 40 years, except for goodwill arising from the acquisition of SMC on August 6, 2001 which is not being amortized (See Note 9 “Recent Accounting Pronouncements”). Management assesses whether there has been permanent impairment in the value of goodwill and the amount of such impairment by comparing anticipated undiscounted future cash flows from operating activities with the carrying value of the goodwill. The factors considered by management in performing this assessment include current operating results, trends and prospects, as well as the effects of obsolescence, demand, competition and other economic factors.
5. Line of Credit
The Company has a bank line of credit consisting of a revolving line of credit of up to $70.0 million. At the election of the Company, the line of credit 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 line at varying rates, determined by the Company’s leverage ratio. The revolving line of credit is due and payable in full on June 30, 2004, and requires monthly interest payments. The balance outstanding under the line of credit at September 29, 2001 was $6.6 million. The line of credit is collateralized by all the assets of the Company and includes various restrictions and financial covenants.
6. Long-term Note Payable
The Company has a long-term note payable of $40 million outstanding at September 29, 2001. The term note 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 term note requires monthly interest payments and quarterly principal payments and is collateralized by all the assets of the Company. The term note is due and payable in full on September 28, 2005.
7. Earnings Per Common Share
Basic earnings per common 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. The weighted average number of common shares used in the computation of earnings per common share are as follows:
|
| Quarter Ended |
| Nine Months Ended | ||||
|
| September 30, |
| September 29, |
| September 30, |
| September 29, |
|
| 2000 |
| 2001 |
| 2000 |
| 2001 |
Basic |
|
|
|
|
|
|
|
|
Issued and outstanding shares (weighted average) |
| 28,403,017 |
| 28,550,019 |
| 28,362,291 |
| 28,506,844 |
|
|
|
|
|
|
|
|
|
Effect of Dilutive Securities |
|
|
|
|
|
|
|
|
Stock Options |
| 557,522 |
| 839,999 |
| 613,654 |
| 734,419 |
Diluted |
| 28,960,539 |
| 29,390,018 |
| 28,975,945 |
| 29,241,263 |
8. Commitments and Contingencies
Repurchase Agreements
Substantially all of the Company's sales to independent dealers are made on terms requiring cash on delivery. However, most dealers finance units on a "floor plan" basis with a bank or finance company lending the dealer all or substantially all of the wholesale purchase price and retaining a security interest in the vehicles. Upon request of a lending institution financing a dealer's purchases of the Company's product, the Company will execute a repurchase agreement. These agreements provide that, for varying periods of up to 18 months after a unit is shipped, the Company will repurchase its products from the financing institution in the event that they have repossessed them upon a dealer’s default. The risk of loss resulting from these agreements is further reduced by the resale value of the products repurchased. The Company's contingent obligations under repurchase agreements vary from period to period and totaled approximately $361.6 million as of September 29, 2001, with approximately 6.6% concentrated with one dealer.
Litigation
The Company is involved in legal proceedings arising in the ordinary course of its business, including a variety of product liability and warranty claims typical in the recreational vehicle industry. Management does not believe that the outcome of its pending legal proceedings will have a material adverse effect on the business, financial condition, or results of operations of the Company.
Debt Guarantee
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 September 29, 2001, the Company had advanced $7.5 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 September 29, 2001, ORLV and ORA had drawn approximately $7.6 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.
9. Recent Accounting Pronouncements
The Financial Accounting Standards Board (FASB) recently issued No. 141, “Business Combinations” and No. 142, “Goodwill and Other Intangible Assets.” The Company applied the provisions of FAS 141 for the acquisition of SMC on August 6, 2001. The Company had $18.1 million of goodwill at September 29, 2001, which has been amortized in prior periods. The annual amortization of $645,000 of this goodwill will be discontinued with the future adoption of FAS 142 for fiscal year 2002. The remaining goodwill at September 29, 2001 of $33.9 million, which arose from the acquisition of SMC, has not been amortized in accordance with the transition rules of FAS 142. In accordance with FAS 142, the Company will review the carrying values of goodwill for impairment of value, if any, at least annually.
On October 3, 2001, the FASB issued Statement of Financial Accounting Standards No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144). SFAS 144 supersedes SFAS 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS 144 applies to all long-lived assets (including discontinued operations) and consequently amends Accounting Principles Board Opinion No. 30 (APB 30), “Reporting Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transaction.” SFAS 144 develops one accounting model for long-lived assets that are to be disposed of by sale. SFAS 144 requires that long-lived assets that are to be disposed of by sale be measured at the lower of book value or fair value less cost to sell. Additionally, SFAS 144 expands the scope of discontinued operations to include all components of an entity with operations that (1) can be distinguished from the rest of the entity and (2) will be eliminated from the ongoing operations of the entity in a disposal transaction. The provisions of this Statement are effective for financial statements issued for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years, with early application encouraged. The Company is in the process of evaluating the effect of SFAS 144 on its financial statements.
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”, “Beaver”, “Safari”, “Royale Coach”, and “McKenzie” 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 September 29, 2001 Compared to Quarter ended September 30, 2000
Third quarter net sales were up 6.4% to $240.8 million compared to $226.4 million for the same period last year. Sales of newly acquired Beaver and Safari brands were responsible for the increase, with sales of these brands contributing incremental gross revenue of $24.9 million. Gross sales dollars on motorized products were up 3.1%, reflecting a continued soft market. The Company’s gross towable sales were up 10.3% as the Holiday Rambler towable operations reported increases that more than offset decreases on the McKenzie towable sales. The Company’s overall unit sales were down 2.4% in the third quarter of 2001 with motorized unit sales down 2.8% to 1,606 units, and towable unit sales off by 1.7% to 765 units. The Company’s average unit selling prices increased in the third quarter of 2001 to $136,500 from $128,600 for motorized and to $28,600 from $25,600 for towables. The Company’s total average unit selling price increased to $101,700 from $95,600 in the same period last year. The Company’s continued expansion into new product price points and shifts in model mix, is expected to keep the average selling price around $100,000 in the future.*
Gross profit for the third quarter of 2001 decreased to $30.5 million, down from $30.9 million in 2000, and gross margin decreased from 13.7% in the third quarter of 2000 to 12.7% in the third quarter of 2001. The decrease in gross margin was due to a combination of factors. The positive effect of a reduction in sales discounts from the prior year was more than offset by increased indirect production costs, and inefficiencies created from reduced production. Gross margins were dampened during the integration of the Safari production line into our plant in Coburg, as well as from product development efforts. 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 $4.3 million to $18.9 million in the third quarter of 2001 and increased as a percentage of sales from 6.5% in 2000 to 7.9% in 2001. Selling, general and administrative expenses in the third quarter of 2001 included significant increases in spending related to retail promotion efforts. The Company’s selling, general, and administrative expense may fluctuate in future periods depending on the Company’s strategy of retail promotions as a result of difficult market conditions or competitive pressures.*
Amortization of goodwill was $162,000 in the third quarter of 2001 and $161,000 in the same period of 2000. At September 29, 2001, total goodwill, net of accumulated amortization was $52.0 million. Goodwill of $33.9 million was added in the third quarter from the acquisition of SMC which is not being amortized.
Operating income was $11.4 million, or 4.7% of sales in the third quarter of 2001 compared to $16.1 million, or 7.1% 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 $539,000 in the third quarter of 2001 compared to $219,000 in the comparable 2000 period, reflecting a higher level of borrowing during the third quarter of 2001 due to the acquisition of SMC.
The Company reported a provision for income taxes of $4.2 million, or an effective tax rate of 39.0% in the third quarter of 2001, compared to $6.1 million, or an effective tax rate of 38.4% for the comparable 2000 period.
Net income for the third quarter of 2001 was $6.6 million compared to $9.8 million in 2000 due to the lower operating margin and an increase in interest expense.
Nine Months ended September 29, 2001 Compared to Nine Months ended September 30, 2000
Net sales decreased 2.2% to $675.5 million compared to $690.5 million for the same period last year. Gross sales dollars on motorized and towable products were down 3.0% and up 3.4%, respectively for the first nine months of 2001. Overall unit sales for the Company were down 10.5% in the first nine months of 2001 compared to the similar period in 2000 with motorized unit sales down 11.7% to 4,578 units and towable unit sales down 8.1% to 2,484. The Company’s average unit selling prices increased in the first nine months of 2001 compared to the similar 2000 period to $134,800 from $122,700 for motorized and to $27,700 from $24,700 for towables.
Gross profit for the nine-month period ended September 29, 2001 decreased to $81.8 million from $100.3 million in 2000, and gross margin decreased to 12.1% in 2001 from 14.5% in 2000. Gross margin in the first nine months of 2001 was significantly impacted by above normal sales discounts, which net against gross sales as well as increased indirect production costs, and inefficiencies created from reduced production. Other major contributors to the change in gross margin include production inefficiencies created from shifting the volume among the production lines in the plants, and shifting the mix of products on those lines.
Selling, general, and administrative expenses increased by $7.6 million to $51.7 million in the first nine months of 2001 and increased as a percentage of sales from 6.4% in 2000 to 7.7% in 2001. Selling, general and administrative expenses in the first nine months of 2001 included significant increases in spending related to retail promotion efforts.
Amortization of goodwill was $484,000 in both the first nine months of 2001 and the same period of 2000.
Operating income decreased to $29.7 million in the first nine months of 2001 from $55.7 million in 2000. The Company’s higher selling, general, and administrative expense as a percentage of sales combined with the decline in the Company’s gross margin, resulted in a decrease in operating margin to 4.4% in the first nine months of 2001 compared to 8.1% in the first nine months of 2000.
Net interest expense was $1.6 million in the first nine months of 2001 compared to $458,000 in the comparable 2000 period, reflecting a higher level of borrowing during the first nine months of 2001.
The Company reported a provision for income taxes of $11.1 million, or an effective tax rate of 39.0% for the first nine months of 2001, compared to $21.5 million, or an effective tax rate of 38.8% for the comparable 2000 period.
Net income for the first nine months of 2001 was $17.3 million compared to $33.9 million in 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 nine months of 2001, the Company had cash flows of $27.3 million from operating activities. The Company generated $22.4 million from net income and non-cash expenses such as depreciation and amortization. The increase in income taxes payable and the decrease in inventories added to this cash flow, and these increases were only partially offset by an increase in accounts receivable combined with decreases in accounts payable and accrued liabilities.
The Company has credit facilities consisting of a revolving line of credit of up to $70.0 million (the “Revolving Loan”) and a term note of $40.0 million (the “Term Loan”). At the election of the Company, the Revolving Loan and Term Loan bear 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 June 30, 2004, while the Term Loan is due and payable in full on September 28, 2005 and both require monthly interest payments. The balance outstanding under the Revolving Loan at September 29, 2001 was $6.6 million and the balance on the Term Loan was $40.0 million. The Revolving Loan and Term Loan are collateralized by all the assets of the Company and include 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 September 29, 2001, the Company had working capital of approximately $59.4 million, a decrease of $9.9 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 anticipated credit facilities will be sufficient to meet the Company's liquidity requirements for the next 12 months.* The Company's capital expenditures were $6.3 million in the first nine months 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 $9 to $11 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 $ 361.6 million as of September 29, 2001, with approximately 6.6 % concentrated with one dealer.
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
ACQUISITION OF SMC CORPORATION The Company announced on June 25, 2001 that it had agreed with Oregon based motorhome manufacturer SMC Corporation to acquire all of the outstanding shares of SMC pursuant to a cash tender offer at a price of $3.70 per share. On August 6, the Company had completed it’s purchase of all SMC Corporation shares. The anticipated benefits of this acquisition may not be achieved unless Monaco successfully integrates SMC into Monaco’s operations. SMC incurred a net loss from operations of $5.4 million for 2000 and $1.9 million for the first quarter of 2001. Unless Monaco is able to increase sales or reduce the operating expenses of SMC substantially from historical expense levels, the acquisition could have a material adverse affect on the financial condition and results of operations of Monaco. The process of integration may result in unforseen operating difficulties and expenditures and may absorb significant management attention that would otherwise be available for the ongoing development of Monaco’s business. This may cause an interruption or a loss of momentum in the operating activities of Monaco which in turn would have a material adverse affect on Monaco’s operating results and financial condition. Moreover, the acquisition involves a number of additional risks, such as the assimilation of the operations and personnel of the acquired business, the incorporation of acquired products into Monaco’s existing product line, adverse short-term effects of reported operating results, the amortization of acquired assets, the loss of key employees of SMC as a result of the acquisition, and the difficulty of integrating disparate corporate cultures and presenting a unified corporate image. Accordingly, the anticipated benefits may not be realized or the acquisition may have a material adverse affect on Monaco’s operating results and financial condition.
CARRYING VALUES OF INTANGIBLE ASSETS MAY BE SUBJECT TO PERIODIC WRITE-DOWN Goodwill and other intangible assets are reviewed for impairment whenever an event or change in circumstances indicates that the carrying amount may not be recoverable. If the carrying value of our intangible assets exceeds the expected undiscounted future cash flows, a loss would be recognized to the extent the carrying amount of assets exceeds their fair values. This loss may negatively impact results of operation.
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 $ 361.6 million as of September 29, 2001, with approximately 6.6 % concentrated with one dealer. See “Liquidity and Capital Resources” and Note 8 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. From time to time, Allison has put all chassis manufacturers on allocation with respect to certain 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.
RECENT ACCOUNTING PRONOUNCEMENTS
On June 29, 2001, the Financial Accounting Standards Board (FASB or the “Board”) unanimously voted in favor of issuing two Statements: Statement No. 141 (FAS 141), Business Combinations, and Statement No. 142 (FAS 142), Goodwill and Other Intangible Assets.
FAS 141 requires the use of the purchase method of accounting for all business combinations, thereby eliminating the pooling-of-interests method. Additionally, it provides new criteria for determining whether intangible assets acquired in a business combination should be recognized separately from goodwill. FAS 141 is effective for all business combinations (as defined in the Statement) initiated after June 30, 2001 and for all business combinations accounted for by the purchase method that are completed after June 30, 2001 (that is, the date of acquisition is July 1, 2001, or later).
FAS 142 primarily addresses the accounting for goodwill and intangible assets subsequent to their acquisition (i.e., the post-acquisition accounting). FAS 142 supercedes APB 17, Intangible Assets. FAS 142 eliminates the amortization of goodwill and indefinite intangible assets, and requires, at minimum, an annual test for impairment at the reporting unit level. In addition, the amortization period of intangible assets with finite lives is no longer limited to forty years. FAS 142 is effective for fiscal years beginning after December 15, 2001 to all goodwill and other intangible assets recognized in an entity's statement of financial position at that date, regardless of when those assets were initially recognized. Early application is permitted for entities with fiscal years beginning after March 15, 2001 provided that the first interim period financial statements have not been issued previously. Retroactive application is not permitted.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Credit Agreement with U.S. Bank National Association dated September 28, 2001.
(b) Reports on Form 8-K
No reports on Form 8-K were required to be filed during the quarter ended September 29, 2001, for which this report is filed.
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: | November 13, 2001 |
| /s/: P. Martin Daley | |
|
|
|
| P. Martin Daley |
|
|
|
| Vice President and Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer) |
