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UNITED STATES
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 June 30, 2004
Or
| ¨ | 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: 0-24804
Featherlite, Inc.
(Exact name of registrant as specified in its charter)
| Minnesota | 41-1621676 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
Highways 63 and 9, P.O. Box 320, Cresco, IA 52136
(Address of principal executive offices)
563-547-6000
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
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 ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
7,238,561 shares as of August 10, 2004
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Form 10-Q
Quarter ended June 30, 2004
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Item 1: CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Condensed Consolidated Balance Sheets
(Unaudited)
(In thousands)
| June 30, 2004 | December 31, 2003 | |||||
| ASSETS | ||||||
Current assets | ||||||
Cash | $ | 913 | $ | 173 | ||
Receivables | 7,416 | 6,033 | ||||
Refundable income taxes | 235 | 783 | ||||
Inventories | ||||||
Raw materials | 6,841 | 6,176 | ||||
Work in process | 12,481 | 13,116 | ||||
Finished trailers/motorcoaches | 17,513 | 18,199 | ||||
Used trailers/motorcoaches | 16,740 | 18,147 | ||||
Total inventories | 53,575 | 55,638 | ||||
Leased promotional trailers | 1,618 | 1,501 | ||||
Prepaid expenses | 1,164 | 1,850 | ||||
Total current assets | 64,921 | 65,978 | ||||
Property and equipment, net | 16,109 | 16,231 | ||||
Other assets | 4,309 | 4,391 | ||||
| $ | 85,339 | $ | 86,600 | |||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||
Current liabilities | ||||||
Wholesale financing and other notes payable | $ | 19,053 | $ | 23,034 | ||
Current maturities of long-term debt | 1,606 | 2,113 | ||||
Checks issued, not yet presented | 1,934 | 2,076 | ||||
Motorcoach shell costs payable | 6,595 | 6,519 | ||||
Accounts payable | 4,400 | 3,088 | ||||
Trade creditor repayment plan | 929 | 2,064 | ||||
Accrued liabilities | 9,648 | 6,323 | ||||
Customer deposits | 1,132 | 2,613 | ||||
Total current liabilities | 45,297 | 47,830 | ||||
Bank line of credit | 5,382 | 6,454 | ||||
Long-term debt, net of current maturities | 11,504 | 11,964 | ||||
Other long term liabilities | 53 | 60 | ||||
Commitments and contingencies (Note 4) | ||||||
Shareholders’ equity (Note 5) | 23,103 | 20,292 | ||||
| $ | 85,339 | $ | 86,600 | |||
See notes to unaudited condensed consolidated financial statements
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Condensed Consolidated Statements of Income
(Unaudited)
(In thousands, except for per share data)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2004 | 2003 | 2004 | 2003 | |||||||||||||
Net sales | $ | 58,151 | $ | 47,354 | $ | 114,567 | $ | 89,050 | ||||||||
Cost of sales | 49,089 | 40,842 | 96,923 | 77,401 | ||||||||||||
Gross profit | 9,062 | 6,512 | 17,644 | 11,649 | ||||||||||||
Selling and administrative expenses | 6,243 | 4,653 | 12,464 | 10,182 | ||||||||||||
Income from operations | 2,819 | 1,859 | 5,180 | 1,467 | ||||||||||||
Other income (expense) | ||||||||||||||||
Interest | (580 | ) | (618 | ) | (1,129 | ) | (1,303 | ) | ||||||||
Other, net | 128 | 131 | 246 | 277 | ||||||||||||
Total other expense | (452 | ) | (487 | ) | (883 | ) | (1,026 | ) | ||||||||
Income before income taxes | 2,367 | 1,372 | 4,297 | 441 | ||||||||||||
Minority interest in subsidiary loss | 20 | 52 | 51 | 52 | ||||||||||||
Provision for income taxes | (884 | ) | (526 | ) | (1,609 | ) | (271 | ) | ||||||||
Net income | $ | 1,503 | $ | 898 | $ | 2,739 | $ | 222 | ||||||||
Net income per share – | ||||||||||||||||
Basic | $ | 0.21 | $ | 0.14 | $ | 0.38 | $ | 0.03 | ||||||||
Diluted | $ | 0.20 | $ | 0.12 | $ | 0.36 | $ | 0.03 | ||||||||
Average common shares outstanding- | ||||||||||||||||
Basic | 7,209 | 6,535 | 7,203 | 6,535 | ||||||||||||
Diluted | 7,684 | 7,219 | 7,625 | 7,268 | ||||||||||||
See notes to unaudited condensed consolidated financial statements
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Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
Six Months Ended June 30, | ||||||||
| 2004 | 2003 | |||||||
Cash provided by operating activities | ||||||||
Net income | $ | 2,739 | $ | 222 | ||||
Depreciation & amortization | 1,136 | 1,249 | ||||||
Other non cash adjustments, net | 126 | 68 | ||||||
Decrease in refundable income taxes | 548 | 1,015 | ||||||
Changes in working capital items, net | 4,356 | 4,944 | ||||||
Net cash provided by operating activities | 8,905 | 7,498 | ||||||
Cash used for investing activities | ||||||||
Purchases of property and equipment | (925 | ) | (519 | ) | ||||
Proceeds from property sales | 28 | 32 | ||||||
Net cash used for investing activities | (897 | ) | (487 | ) | ||||
Cash used for financing activities | ||||||||
Reduction in trade creditor payment plan | (1,135 | ) | (1,229 | ) | ||||
Proceeds from wholesale financing/bank line of credit | 115,189 | 95,920 | ||||||
Repayment of wholesale financing/bank line of credit | (119,532 | ) | (101,629 | ) | ||||
Repayment of other short-term debt | (709 | ) | (838 | ) | ||||
Proceeds from other long-term debt | — | 550 | ||||||
Repayment of other long-term debt | (967 | ) | (1,009 | ) | ||||
Issuance of common stock upon exercise of options | 28 | — | ||||||
Increase (decrease) in checks issued not yet presented | (142 | ) | 1,153 | |||||
Net cash used for financing activities | (7,268 | ) | (7,082 | ) | ||||
Net cash increase (decrease) for period | 740 | (71 | ) | |||||
Cash balance, beginning of period | 173 | 218 | ||||||
Cash balance, end of period | $ | 913 | $ | 147 | ||||
See notes to unaudited condensed consolidated financial statements
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1: Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Featherlite, Inc. (“Company”) have been prepared, without audit, in accordance with the instructions of Form 10-Q and therefore do not include all information and footnotes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with generally accepted accounting principles. Financial information as of December 31, 2003 has been derived from the audited consolidated financial statements of the Company, but does not include all disclosures required by accounting principles generally accepted in the United States of America.
The preparation of financial statements requires management to make decisions based upon estimates, assumptions, and factors it considers as relevant to the circumstances. Such decisions include the selection of applicable accounting principles and the use of judgment in their application, the results of which impact reported amounts and disclosures. The Company’s significant accounting policies with respect to these estimates are discussed more fully in its Annual Report on Form 10-K for the year ended December 31, 2003. Changes in economic conditions or other business circumstances may affect the outcomes of management’s estimates and assumptions. Accordingly, actual results could differ from those anticipated.
It is the opinion of management that the unaudited condensed consolidated financial statements include all adjustments, consisting of normal recurring accruals, necessary to fairly state the results of operations for the three month and six month periods ended June 30, 2004 and 2003. The results of interim periods may not be indicative of results to be expected for the year.
The unaudited condensed consolidated statements include the accounts of Featherlite, Inc., Featherlite Aviation Company, its wholly owned subsidiary, and Featherlite Chemicals Holdings, LLC (FCC), a 51 percent owned subsidiary.
Reclassifications: Certain prior year information has been reclassified to conform to the current year presentation. These reclassifications had no affect on net income or stockholders’ equity as previously reported.
Note 2: Other Assets
Other assets included in the accompanying condensed consolidated balance sheets as of June 30, 2004 and December 31, 2003 are as follows:
| 2004 | 2003 | |||||
Aircraft held for resale | $ | 2,723 | $ | 2,760 | ||
Deposits | 649 | 649 | ||||
Leased promotional trailers | 581 | 578 | ||||
Advertising and promotion | 230 | 238 | ||||
Other | 126 | 166 | ||||
Total | $ | 4,309 | $ | 4,391 | ||
There were no aircraft purchases or sales during the three-month and six month periods ended June 30, 2004 and 2003. The aircraft is recorded at estimated net realizable value.
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Note 3: Debt Financing Arrangements
Wholesale Financing and Other Notes Payable: Wholesale financing and other notes payable includes unpaid balances of $18.8 million and $22.1 million at June 30, 2004 and December 31, 2003, respectively, on the motorcoach wholesale financing agreements with GE Commercial Distribution Finance Company (GE) and Regions Bank (Regions), and $0.2 million and $0.9 million at June 30, 2004 and December 31, 2003, respectively, with an insurance premium finance company. The motorcoach wholesale financing agreement with GE provides for a $25 million line of credit to finance completed new and used motorcoaches held in inventory. Subject to the next sentence, amounts borrowed are limited to 90% of the cost of eligible new inventory and 70% of the defined value of eligible used inventory. On March 17, 2004, GE notified the Company that the terms of the agreement will bemodified as follows: (i) there will be a 1.5% per month reduction of amounts available on used coaches acquired after August 31, 2003 once they have been held more than 360 days; (ii) after 360 days new coaches will be treated as used coaches, with an advance rate of 70 percent versus 90 percent and 1.5% monthly curtailments thereafter; and (iii) advance rates will be eliminated in full on each coach (new or used) held more than 720 days. GE has not required the Company to be subject to these reduced advance rates, and has not provided a date for their future application. As of July 16, 2004, however, the Company had borrowings of $1.2 million which would have been due if such date was the effective date of this change. Reduced borrowing capacity resulting from these changes is expected to be covered by availability on the Company’s other existing lines of credit. Borrowings bear interest of 4.50%, which is prime plus 0.25% when prime is less than 6.25%, otherwise prime, and are secured by the financed motorcoaches and other assets of the Company. The agreement contains certain financial covenants, which are summarized in the table on the following page. The Company was in compliance with the covenants of this agreement at June 30, 2004. This agreement is subject to cancellation by GE at any time.
In 2003, the Company entered into a Floor Plan Financing Agreement with Regions Bank to provide up to $3.0 million of wholesale financing for 100 percent of the cost of new motorcoaches purchased by the Company for resale from Foretravel, Inc. There were borrowings of $1.5 million on this line at June 30, 2004 and December 31, 2003, respectively, which bear interest on a monthly basis at prime plus 0.5 percent (4.75 percent at June 30, 2004). The agreement requires certain covenants, which are summarized in the table on the following page. The Company was in compliance with these covenants at June 30, 2004.
Line of Credit: On July 31, 2002, the Company entered into an Amended and Restated Loan Agreement (Agreement) with U.S. Bank in an aggregate amount of $23.2 million, including $14 million in an asset-based revolving credit commitment, $7.2 million in term loans on existing real estate and equipment and $2.0 million as a term loan for new equipment purchases. On April 14, 2004, U.S. Bank amended the Agreement to: (i) provide the Company with a $1.0 million special advance for any 60 days in 2004 (none has been used in 2004); (ii) reduce the principal payment of the real estate term note by approximately $43,000 per month beginning May 1, 2004 during the remaining term of the note, which is a $516,000 reduction on an annualized basis; and (iii) amend certain financial and other covenants. On June 30, 2004, this Agreement was further amended to extend its original three-year period ending July 31, 2005 until April 1, 2006. It has interest accruing monthly on outstanding balances at an annual rate of prime plus 0.50%, which is 4.75% at June 30, 2004.
Advances under the revolving credit commitment range from 70 to 85 percent on eligible accounts receivable and from 30 to 70 percent on eligible inventory. As of June 30, 2004, net availability on the revolving credit line (excluding the special advance available in 2004) was approximately $11.1 million with approximately $5.4 million outstanding. The $7.2 million term notes are repayable
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over 44 months (extended from 36 months on June 30, 2004) with aggregate monthly principal payments of $34,000 plus interest with the remaining unpaid balance of $3.0 million due on April 1, 2006, which the Company expects will be refinanced for a longer period of time. Repayment of advances on the new equipment term note, which total $1.1 million at June 30, 2004, are based on a 60-month amortization, with the unpaid balance of $.5 million due on April 1, 2006, which the Company expects will be refinanced for a longer maturity.
The Agreement, as amended, requires the Company to comply with the financial covenants summarized in the table that follows. Although the Company was not in compliance with all of the restrictive financial covenants in the financing agreements with U.S. Bank and GE at December 31, 2003, both lenders waived events of default with respect to these violations at December 31, 2003 and have amended various of the financial covenants to reduce or eliminate their requirements for compliance in 2004.
The Company’s amended 2004 debt covenants, as previously discussed, and actual financial results as of and during the six month period ended June 30, 2004 are as follows:
Financial Covenant | Lender | June 30, 2004 | 2004 Covenant | |||||
Minimum Tangible Net Worth (000’s) | GE | $ | 20,237 | $ | 15,000 | |||
Maximum Leverage | GE& Regions | 3.08 : 1 | 5.00 : 1 | |||||
Minimum Current Tangible Ratio | GE | 1:26 : 1 | 1.15 : 1 | |||||
Minimum Current Ratio | Regions | 1.43 : 1 | 1.20 : 1 | |||||
Minimum Consolidated Fixed Charge Ratio | U.S. Bank | 1.78 : 1 | 1.00 : 1 | |||||
Maximum Total Liabilities to Tangible Net Worth Ratio | U.S. Bank | 2.91 : 1 | 4.25 : 1 | |||||
Minimum Annual EBITDA (in 000’s) | U.S. Bank | $ | 6,613 | $ | 6,500 | |||
Maximum Annual Capital Expenditures | U.S. Bank | $ | 925 | $ | 2,000 | |||
The Company was in compliance with all the above covenants for the quarter ended June 30, 2004.
Note 4: Commitments and Contingencies
Trade Creditor Repayment Plan
During the six months ended June 30, 2004, the Company has made quarterly payments totaling $1.1 million according to the trade creditor repayment plan (the “Plan”) worked out with its trade creditors in November 2001. The Company intends to make additional quarterly payments totaling $0.9 million in 2004, which will complete its repayment obligations under the Plan. There are no interest or service charges in connection with this arrangement. Vendors under the Plan have been continuing to supply the Company with materials; however, some vendors may require prepayments at the time of order. A substantial number of vendors have extended the Company more normal credit terms again as they received payments under the Plan.
Inventory Repurchase Agreements
Pursuant to inventory floor plan financing arrangements available to Featherlite trailer dealers, the Company may be required, in the event of default by a financed dealer, to repurchase trailers from financial institutions or to reimburse the institutions for unpaid balances, including finance charges plus costs and expenses. The Company was contingently liable under these arrangements for a
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maximum of $11.7 million at June 30, 2004. During the six months ended June 30, 2004, the Company made no repurchases under these arrangements. No reserve has been provided for this contingency because, in the opinion of management, there is sufficient historical evidence to support that the aggregate amount of such repurchases on an annual basis has been less than 1 percent of annual sales and the repossessed inventory has been resold to other dealers without a loss. The Company has no motorcoach dealers and has no repurchase obligations with respect to motorcoaches except as described further below under litigation.
Self Insurance
The Company is partially self-insured for a portion of certain health benefit and workers’ compensation insurance claims. The Company’s maximum annual claim exposure under these programs varies as follows: For health claims there is an annual stop loss of $125,000 per claim but no aggregate loss limit. For workers compensation claims, there is a $250,000 per occurrence limit and an aggregate annual loss limit of $2.2 million. At June 30, 2004, $1.6 million and $0.3 million, respectively, was accrued for estimated unpaid workers compensation and health claims, respectively, and is classified in accrued liabilities in the unaudited condensed consolidated balance sheet. The Company has obtained irrevocable standby letters of credit in the amount of approximately $2.9 million in favor of the workers’ compensation claim administrators to guaranty settlement of claims. These letters of credit have reduced amounts available for borrowing under the U.S. Bank Credit Facility discussed in Note 3.
Litigation
In the second quarter of 2003, a jury reached a verdict in favor of a plaintiff requiring the Company to repurchase a motorcoach. In 2003, the Company accrued a liability of $354,000 and charged cost of sales for this verdict pending the resale of the repurchased motorcoach. During the quarter ending June 30, 2004, the Company paid off this accrued liability and related interest and dropped its appeal of this decision
The Company, in the course of its business, has been named as a defendant in various legal actions. These actions are primarily product liability or workers’ compensation claims in which the Company is covered by insurance subject to applicable deductibles. Except as described above, the ultimate outcome of such claims cannot be ascertained or reasonably estimated at this time. However, it is the opinion of management, after consulting with counsel handling such matters, it is unlikely that the resolution of such suits will have a material adverse effect on the financial position of the Company or its operating results for any particular period..
Other Commitments
The Company leases certain office and production facilities under various operating leases that expire at varying dates through 2011. Rent expense for the six month periods ended June 30, 2004 and 2003 was $640,000 and $662,000, respectively. Annual rental payments under these operating leases are estimated to be $1.3 million as of June 30, 2004.
The Company has obtained fixed price commitments from certain suppliers for about 90 percent of its expected aluminum requirements in 2004 to reduce the risk related to fluctuations in the cost of aluminum, the principal commodity used in the Company’s trailer segment. In certain instances there may be a carrying charge added to the fixed price if the Company requests a deferral of a portion of its purchase commitment to the following year. The Company has not requested any such deferrals and has not been required to pay any carrying charges in the three or six month periods ended June 30, 2004 and 2003.
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The Company is not a guarantor of any obligations that would require it to recognize a liability for the fair value of the underlying obligation at its inception. However, it does have product warranty liabilities pursuant to a policy described in the summary of critical accounting policies described more fully in its Annual Report on Form 10-K for the year ended December 31, 2003. Following is a summary of the changes in these liabilities during the three month and six month periods ended June 30, 2004 and 2003(in thousands):
| Three Mos. | Six Mos. | |||||||||||||||
| 2004 | 2003 | 2004 | 2003 | |||||||||||||
Balance, beginning of period | $ | 1,181 | $ | 1,492 | $ | 1,225 | $ | 1,431 | ||||||||
Provision for units sold during the period | 440 | 423 | 954 | 866 | ||||||||||||
Claims paid during the period | (355 | ) | (354 | ) | (815 | ) | (824 | ) | ||||||||
Balance, end of period | $ | 1,266 | $ | 1,561 | $ | 1,266 | $ | 1,561 | ||||||||
Note 5: Shareholders’ Equity
The components of shareholders’ equity are detailed as follows (in thousands):
| June 30, 2004 | Dec. 31, 2003 | ||||||
Common stock - without par value; | |||||||
Authorized- 40 million shares; | |||||||
Issued- 7,209 shares at June 30, 2004 and | |||||||
7,196 shares at Dec. 31, 2003 | $ | 18,242 | $ | 18,214 | |||
Additional paid-in capital | 4,213 | 4,170 | |||||
Accumulated earnings (deficit) | 648 | (2,092 | ) | ||||
Total Shareholders’ equity | $ | 23,103 | $ | 20,292 | |||
In January 2002, the Company received $1.5 million from a private investor in the form of a subordinated convertible promissory note. In 2003, the holder of the note exercised the option to convert the note and accrued interest into common stock. This investor also holds a warrant to purchase 150,000 shares of the Company’s common stock that may be exercised at any time before January 31, 2007 at a price of $2.00 per share.
During the six month period ended June 30, 2004, 12,238 common shares were issued upon exercise of options and proceeds of $28,000 were received by the Company. As discussed below, options for 12,000 shares with an estimated value of $43,000 were issued in the second quarter and charged to selling and administrative expense and additional paid-in capital.
Note 6: Stock Option Plans
1994 Stock Option Plan: In accordance with the stock option plan established by the Company in July 1994, as amended in May 1998, the Board of Directors has granted options to purchase Company common stock to certain employees and directors. At June 30, 2004 and December 31, 2003, respectively, 782,572 and 808,900 options were outstanding under this plan. These options were granted at prices ranging from $1.11-$6.39 per share, and are exercisable at various dates not to exceed 10 years from the date of grant. Options totaling 12,328 shares were exercised at an average price of $2.30 per share with $28,000 of proceeds received by the Company, and options totaling 14,000 shares with an average price of $4.85 were forfeited during the six months ended June 30, 2004. No more options will be issued under this plan which expires on July 31, 2004. However, previously issued options may still be exercised.
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2004 Equity Incentive Plan:The shareholders approved this plan at the annual meeting on June 4, 2004 to replace the 1994 Stock Option Plan, which expires on July 31, 2004. This plan provides for the issuance of options for up to 600,000 shares of Company common stock. On June 4, 2004, fully vested options were issued to directors upon their election to purchase an aggregate of 12,000 shares of Company stock at $4.58 per share with a fair value of $43,000 as determined by the Black-Scholes option pricing model and were charged to selling and administrative expense during the second quarter of 2004.
Note 7: Net Income Per Share
Following is a reconciliation of the weighted average shares outstanding used to determine basic and diluted net income per share for the three month and six month periods ended June 30, 2004 and 2003 (in thousands, except per share data):
| Three months | Six months | |||||||||||
| 2004 | 2003 | 2004 | 2003 | |||||||||
Net income | $ | 1,503 | $ | 898 | $ | 2,739 | $ | 222 | ||||
Weighted average number of basic shares Outstanding | 7,209 | 6,535 | 7,203 | 6,535 | ||||||||
Dilutive effect of | ||||||||||||
Stock options | 390 | 24 | 345 | 59 | ||||||||
Convertible promissory note and interest | — | 660 | — | 660 | ||||||||
Warrants | 85 | — | 77 | 14 | ||||||||
Weighted average number of diluted shares Outstanding | 7,684 | 7,219 | 7,625 | 7,268 | ||||||||
Net income per share – basic | $ | 0.21 | $ | 0.14 | $ | 0.38 | $ | 0.03 | ||||
Net income per share – diluted | $ | 0.20 | $ | 0.12 | $ | 0.36 | $ | 0.03 | ||||
Stock options for 17,000 shares at June 30, 2004 and 665,400 shares at June 30, 2003 were excluded from the dilutive effect of stock options because the exercise price of the options and warrants was greater than the market value of the stock at those dates.
In 2003, the Company adopted SFAS No. 123, “Accounting for Stock-Based Compensation” under the transition provisions allowed by SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure.” Prior to 2003, it accounted for these option plans in accordance with Accounting Principles Board (APB) Opinion No. 25 under which no compensation cost has been recognized. The following table illustrates the effect on net income and net income per share for the three month and six month periods ended June 30, 2004 and 2003, as if the Company had applied SFAS No. 123 in those periods:
| Three months | Six months | ||||||||||||||
| 2004 | 2003 | 2004 | 2003 | ||||||||||||
Net income (000’s) As reported | $ | 1,503 | $ | 898 | $ | 2,739 | $ | 222 | |||||||
Stock based compensation expense included in reported net income, net of related tax effects | 43 | — | 43 | — | |||||||||||
Stock-based compensation expense, determined under fair value method of all awards, net of related tax effects | (43 | ) | — | (63 | ) | (61 | ) | ||||||||
Pro forma net income | $ | 1,503 | $ | 898 | $ | 2,719 | $ | 161 | |||||||
Basic net income per share | |||||||||||||||
As reported | $ | 0.21 | $ | 0.14 | $ | 0.38 | $ | 0.03 | |||||||
Pro forma | 0.21 | 0.14 | 0.38 | 0.02 | |||||||||||
Diluted net income (loss) per share | |||||||||||||||
As reported | $ | 0.20 | $ | 0.12 | $ | 0.36 | $ | 0.03 | |||||||
Pro forma | 0.20 | 0.12 | 0.36 | 0.02 | |||||||||||
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Note 8: Segment Reporting
The Company has two principal business segments that manufacture and sell trailers and luxury motorcoaches and related parts, accessories and services to many different markets, including recreational, entertainment and agriculture. “Corporate and other” includes Featherlite Chemicals, LLC, aircraft operations, certain corporate officers’ salaries and other administration costs.
Management evaluates the performance of each segment based on income before income taxes. Management has a policy of not charging interest to the segments on intercompany borrowing balances and retains all interest expense related to the U.S. Bank line of credit in the “Corporate and other” segment.
Information on business segment net sales, income before income taxes and identifiable assets are as follows for the three-month and six-month periods ended June 30, 2004 and 2003 (in thousands):
| Trailers | Motorcoaches | Corporate and other | Total | ||||||||||
Three months ended June 30, | |||||||||||||
2004 | |||||||||||||
Net sales to unaffiliated customers | $ | 32,965 | $ | 25,180 | $ | 6 | $ | 58,151 | |||||
Income (loss) before income taxes * | 3,038 | 663 | (1,314 | ) | 2,387 | ||||||||
Identifiable assets | 32,857 | 47,796 | 4,686 | 85,339 | |||||||||
2003 | |||||||||||||
Net sales to unaffiliated customers | $ | 26,525 | $ | 20,818 | $ | 11 | $ | 47,354 | |||||
Income (loss) before income taxes * | 1,884 | 122 | (582 | ) | 1,424 | ||||||||
Identifiable assets | 28,097 | 53,684 | 5,510 | 87,291 | |||||||||
| Trailers | Motorcoaches | Corporate and other | Total | ||||||||||
Six months ended June 30, | |||||||||||||
2004 | |||||||||||||
Net sales to unaffiliated customers | $ | 64,317 | $ | 50,219 | $ | 31 | $ | 114,567 | |||||
Income (loss) before income taxes * | 5,274 | 1,292 | (2,218 | ) | 4,348 | ||||||||
Identifiable assets | 32,857 | 47,796 | 4,686 | 85,339 | |||||||||
2003 | |||||||||||||
Net sales to unaffiliated customers | $ | 50,253 | $ | 38,786 | $ | 11 | $ | 89,050 | |||||
Income (loss) before income taxes * | 1,652 | 457 | (1,616 | ) | 493 | ||||||||
Identifiable assets | 28,097 | 53,684 | 5,510 | 87,291 | |||||||||
| * | Minority interest in subsidiary loss of $20 and $50 included in “Corporate and Other” and in “Total” for the three months and six months ended June 30, 2004 and $52 included in “Corporate and Other” and in “Total” for the three months and six months ended June 30, 2003. |
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Item 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion pertains to the Company’s results of operations and financial condition for the three-month (second quarter) and six-month periods ended June 30, 2004 and 2003.
Results of Operations
Three-month period ended June 30, 2004 and 2003 (second quarter)
On a consolidated basis, the Company’s net income for the second quarter ended June 30, 2004 was $1.5 million or $0.20 cents per diluted share, compared with net income of $898,000, or $0.12 cents per diluted share for the second quarter of 2003. The improved second quarter results in 2004 were primarily a result of higher gross profit realized from increased unit sales volume and a greater average gross margin per unit sold due to changes in product mix and improved efficiencies resulting from the further implementation of lean manufacturing processes.
Consolidated net sales for the second quarter of 2004 increased by $10.8 million (22.8 percent) to $58.2 million compared to net sales of $47.4 million for the second quarter of 2003. This increase primarily reflects an increase of 20.6 percent in unit sales as well as a 1.9 percent increase in average net revenue per unit. For the trailer segment, sales of specialty trailers and transporters increased by 24.3 percent compared to the second quarter of 2003 as unit sales in 2004 improved over 2003 by 20.4 percent. There were increases in all product categories except utility and specialty transporters and average net revenue per unit improved by 3.2 percent in 2004 compared to 2003. The average net revenue improvements reflect a more favorable mix of products with higher average prices and the full effect of a 3.0 percent price increase in the second quarter of 2003, partially offset by an increase in sales program rebates and discounts in 2004. Motorcoach segment net sales increased by 20.9 percent over the same quarter of 2003 as total unit sales increased by 27.8 percent, with increases of 21.4 percent and 31.8 percent in unit sales of new and used motorcoaches, respectively. The effect of these increases was partially offset by a 5.3 percent decline in average net revenue per unit sold due to the significant increase in the number of lower priced used units sold.
Consolidated gross profit margin increased by $2.5 million to almost $9.1 million for the second quarter of 2004 from slightly more than $6.5 million for the same quarter in 2003. This improvement was attributable to increased sales volume in both segments in 2004 compared to 2003. As a percentage of sales, consolidated gross profit margin for the quarter was 15.6 percent in 2004 compared to 13.7 percent in 2003. Trailer margin percentages for the current quarter were 1.2 percentage points higher than the same quarter in 2003, primarily the result of manufacturing efficiency improvements and increased volume and changes in product mix, which increased the average gross margin per unit sold. Motorcoach gross profit margin increased by 2.7 percentage points in the second quarter of 2004 compared to 2003. This increase resulted primarily from improved percentage margins realized on sales of used coaches as well as reduced labor and overhead costs, including the non-recurrence in 2004 of a loss settlement accrual of $300,000 in the second quarter of 2003.
Consolidated selling and administrative expenses increased by almost $1.6 million in the second quarter of 2004, to $6.2 million, a 32.2 percent increase, from $4.6 million in the second quarter of 2003. As a percentage of sales, these expenses increased to 10.7 percent in 2004 from 9.8 percent in 2003. Trailer segment expenses increased by 13.7 percent in 2004 compared to 2003 due primarily to
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increased marketing related costs related to higher volume. Motorcoach segment expenses increased by 32 percent in 2004 compared to 2003 mainly due to increases in marketing costs related to higher volume. Corporate and other expenses increased by $764,000 in 2004 compared to the second quarter of 2003, primarily reflecting increased executive management bonus accruals of $510,000 based on the pro rata achievement of performance goals defined by the Compensation Committee and the non-recurrence in 2004 of a favorable litigation settlement in the amount of $130,000 and a $70,000 restructuring credit realized in the second quarter of 2003.
Consolidated interest expense decreased by $38,000 in the second quarter of 2004 compared to 2003 as the result of lower average borrowing levels in 2004. Other income, net, decreased by $3,000 in the second quarter of 2004 compared to the same quarter in 2003.
Minority interest in the Company’s 51 percent owned subsidiary’s loss was $20,000 in the second quarter of 2004. This amount represents the equity interest of the 49 percent minority owner in Featherlite Chemicals, LLC (FCC) that was formed in 2003 to market car care products. The accompanying condensed consolidated statement of operations for the quarter includes the accounts of FCC, which reflected a total operating loss of $41,000 for the second quarter of 2004.
Consolidated income before taxes (IBT) increased by approximately $1.0 million in the second quarter of 2004 to $2.4 million compared to $1.4 million the same quarter in 2003. This increase reflects an increase in trailer segment IBT of $1.1 million, an increase in motorcoach segment IBT of $653,000 offset by a increase in corporate and other net expense by $871,000.
An income tax provision rate of approximately 37 percent was used in 2004 and 2003, primarily reflecting the federal corporate tax rate.
Six month periods ended June 30, 2004 and 2003 (six months)
On a consolidated basis, the Company’s net income for the six months ended June 30, 2004 was $2.7 million or $0.36 cents per diluted share, compared with net income of $222,000, or $0.03 cents per diluted share in the same period of 2003. The improved six month period results in 2004 were primarily a result of gross profit realized from increased unit sales volume and a greater average gross margin per unit sold due to changes in product mix and increased manufacturing efficiencies.
Consolidated net sales for the six months of 2004 increased by $25.5 million (28.7 percent) to $114.6 million compared to net sales of $89.1 million for the same six months of 2003. This increase primarily reflects an increase of 18.9 percent in unit sales as well as an 8.2 percent increase in average net revenue per unit. For the trailer segment, sales of specialty trailers and transporters increased by 28.0 percent compared to the same period of 2003 as unit sales in 2004 improved over 2003 by 18.6 percent. There were increases in all product categories except utility trailers, and average net revenue per unit improved by 7.9 percent in 2004 compared to 2003. The average net revenue improvements reflect a more favorable mix of products with higher average prices and the full effect of a 3.0 percent price increase in the second quarter of 2003, partially offset by an increase in sales program rebates and discounts in 2004. Motorcoach segment net sales increased by 29.5 percent over the same six months of 2003 as total unit sales increased by 38.0 percent, with increases of 19.2 percent and 48.9 percent in unit sales of new and used motorcoaches, respectively. The effect of these increases was partially offset by a 6.2 percent decline in average net revenue per unit sold due to the significant increase in the number of lower price used units sold.
Consolidated gross profit margin increased by $6.0 million to over $17.6 million for the six months of 2004 from $11.6 million for the same period in 2003. This
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improvement was attributable to increased sales volume in both segments in 2004 compared to 2003. As a percentage of sales, consolidated gross profit margin for the six months of 2004 was 15.4 percent in 2004 compared to 13.1 percent in 2003. Trailer margin percentages for the current six months were 3.9 percentage points higher than the same six months in 2003, primarily the result of manufacturing efficiency improvements due to increased volume, changes in product mix and the further implementation of lean manufacturing processes, which increased the average gross margin per unit sold. Motorcoach gross profit margin increased by 0.4 percentage points in the six months of 2004 compared to 2003. This increase resulted primarily from improved percentage margins realized on sales of used coaches as well as reduced labor and overhead costs, including the non-recurrence in 2004 of a loss settlement accrual of $300,000 in the second quarter of 2003.
Consolidated selling and administrative expenses increased by $2.3 million in the six months of 2004, to $12.5 million, a 22.4 percent increase, from $10.2 million in the six months of 2003. As a percentage of sales, these expenses decreased to 10.9 percent in 2004 from 11.4 percent in 2003. Trailer segment expenses increased by 14.4 percent in 2004 compared to 2003 due primarily to increased marketing related costs related to higher volume. Motorcoach segment expenses increased by 25 percent in 2004 compared to 2003 mainly due to increases in marketing costs related to higher volume. Corporate and other expenses increased by $667,000 in 2004 compared to the six months of 2003, primarily reflecting increased executive management bonus accruals of $720,000 based on the pro rata achievement of performance goals defined by the Compensation Committee, the non-recurrence of a favorable litigation settlement in the amount of $130,000 and a non-recurring $70,000 restructuring credit realized in the second quarter of 2003.
Consolidated interest expense decreased by $174,000 in the six months of 2004 compared to 2003 as the result of lower average borrowing levels in 2004.
Minority interest in the Company’s 51 percent owned subsidiary’s loss was $51,000 in the six months of 2004 compared to 52,000 in 2003. This amount represents the equity interest of the 49 percent minority owner in Featherlite Chemicals, LLC (FCC) that was formed in 2003 to market car care products. The accompanying condensed consolidated statement of operations for the quarter includes the accounts of FCC, which reflected a total operating loss of $103,000 for the six months of 2004 compared to $106,000 for the same period of 2003.
Consolidated income before taxes (IBT) increased by almost $3.9 million in the six months of 2004 to $4.3 million compared to $0.4 million the same period in 2003. This increase reflects an increase in trailer segment IBT of $3.6 million, an increase in motorcoach segment IBT of $889,000 offset by an increase in corporate and other net expense by $667,000.
An income tax provision rate of approximately 37 percent was used in 2004 primarily reflecting the federal corporate tax rate. A provision rate of 55 percent was provided in 2003 reflecting the exclusion of certain expenses that are not deductible for income purposes.
Outlook
The Company remains optimistic about the rate of sales growth in 2004. At June 30, 2004, the trailer order backlog was $21.6 million compared to $18.3 million at December 31, 2003 and $12.6 million at June 30, 2003. At June 30, 2004, the motorcoach backlog was $5.6 million compared to $11.5 million at December 31, 2003 and $7.2 million at June 30, 2003. Management expects that sales will continue to be strong as the national economic business conditions improve and consumer uncertainty diminishes. There is continuing focus by the Company on the sales and marketing related activities that have been effective in increasing sales in the past, but there is no assurance they will be successful in generating orders sufficient to maintain sales volume levels experienced in the six months of 2004.
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The Company believes its name recognition and close affiliation with the motorsports industry will continue to have a positive impact on its sales of specialty trailers, transporters and luxury motorcoaches. With more than 75 percent of its revenue from end users in motorsports and leisure and entertainment categories, which also includes equestrian events, and with its strong position in the livestock trailer market, the Company believes it is strategically well-positioned to continue to benefit from these markets. The Company will continue to introduce new models and models with enhanced features.
As discussed in Note 7 to the Company’s consolidated financial statements for the year ended December 31, 2003, a deferred tax asset valuation allowance equal to the deferred tax asset of $0.8 million was recorded at December 31, 2003 because the Company was uncertain that future taxable income will be sufficient to realize the asset within a reasonable period of time. Because of the improvement in the Company’s operating results in 2004 and its optimistic outlook for the future, it is more likely than not that this entire allowance will be eliminated in the third quarter of 2004 by a reduction of the provision for income taxes for the quarter.
Liquidity and Capital Resources
General
The Company’s liquidity is primarily affected most directly by its cash flow from operations together with amounts available to borrow on its approved lines of credit with U.S Bank and with GE. During the six months ended June 30, 2004, the Company’s operating activities provided net cash of $8.9 million, including net income of $2.7 million as compared to $7.5 million of cash flow from operations in the prior year second quarter. This cash, net of amounts used for capital expenditures and net non-line of credit debt reduction, decreased amounts borrowed on the Company’s revolving lines of credit. At June 30, 2004, the Company had approximately $7.8 million available to borrow on its credit lines with U.S. Bank and GE compared to $6.7 million at December 31, 2003.
The Company’s liquidity can be measured by two key indicators, its current ratio and its ratio of debt to shareholders’ equity. The Company’s ratio of current assets to current liabilities was 1.43 to 1 at June 30, 2004, compared with a ratio of 1.38 to 1 at December 31, 2003.The ratio of total debt to shareholders’ equity decreased to 1.63 to 1 at June 30, 2004 from 2.15 to 1 at December 31, 2003 primarily as a result of the Company’s net income in the first and second quarters and reduction of debt levels by $6 million during the six month period.
Increased expenditures for working capital items may be required to support production levels in excess of sales from time to time. A significant increase in trailer backlog in the fourth quarter 2003 and in the first and second quarters of 2004 has resulted in the purchase of additional raw materials and a build up of work in process. In March 2004, U.S Bank agreed to provide the Company with advances in excess of credit availability in an aggregate amount of $1.0 million for a maximum of 60 days during 2004 and to reduce monthly principal payments on existing real estate term notes as discussed further below.
To maintain a level production schedule, production may begin on coaches before an order has been received from a specific buyer. As of June 30, 2004, approximately 94 percent of the coaches in production and to be completed over the next four months have not been sold to specific customers as compared to 59 percent at December 31, 2003 and 68 percent at June 30, 2003. For the year ended December 31,
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2003, total units sold exceeded units produced by 3 units and for the six month period ended June 30, 2004, units sold exceeded by 2 the number of units produced. While it is the Company’s expectation that substantially all of these motorcoaches will be sold to specific customers before production is completed, or shortly thereafter, there is no assurance this will occur. Accordingly, this could adversely impact the liquidity of the Company.
The Company has scheduled payments for debt principal and interest, trade creditor repayment plan and other fixed obligations that will require cash flows of $4.1 million during the third quarter of 2004. Additional payments may be required for the commitments and contingencies referred to in Note 4 to condensed consolidated financial statements. These payments are expected to be funded by cash generated from operations and available borrowing capacity on its lines of credit and if necessary, utilization of the special advance described above.
Statement of Cash Flows
Following is a discussion of the principal components of the Company’s cash flow for the six month period ended June 30, 2004, as reflected in the condensed consolidated statement of cash flow:
Operating activities provided net cash of $8.9 million. The Company’s net income of $2.7 million included non-cash depreciation and amortization of $1.1 million and other non-cash items in an aggregate net amount of $126,000. Net reductions in working capital accounts generated net cash of $4.4 million. Net changes in receivables, inventories and prepaid assets provided cash of $1.5 million primarily as the result of inventory reductions of $1.8 million, which were partially offset by an increase in receivables of $835,000 and a $680,000 reduction in prepaids. Total inventory levels decreased $1.8 million as a $3.1 million decrease in new and used motorcoach inventories was partially offset by increases of $1.3 million in new trailer inventories. Trade receivables increased by $1.4 million due to an increased sales volume and were partially reduced by the utilization of $548,000 of the tax refund receivable as a tax deposit during the quarter. The remaining portion of this change resulted from an increase of $121,000 in leased promotional trailers and a decrease of $680,000 in prepaid expenses, primarily due to insurance premium amortization. Net increases in accounts payable, customer deposits and other current liabilities provided cash of $3.4 million. Changes in these liabilities included, among other items: an increase of $1.4 million in accounts payable (due to increased material purchases and improved terms from vendors); an increase of $3.5 million in accrued liabilities (increase in accrued payroll and related costs, accrued income taxes and bonuses); and a decrease of $1.5 million in customer deposits as a result of the invoicing of the related trailers and coaches.
The Company’s investing activities used cash of $897,000, net of $28,000 proceeds from property sales. The Company’s capital expenditures for plant and equipment were $925,000. In 2002, U.S. Bank renewed the availability of a capital expenditure financing under a $2.0 million Capital Expenditure Term Note to finance certain of the Company’s capital expenditures for machinery and equipment. Aggregate borrowings against this term note were approximately $1.1 million at June 30, 2004, with about $900,000 available to finance capital expenditures in 2004. No borrowings on the Capital Expenditure Term Note were requested during the six months ended June 30, 2004. During the six months ended June 30, 2004 the Company made an additional $85,000 capital contribution to Featherlite Chemicals, LLC (FCC), which was eliminated in the consolidation of the accounts of FCC with the Company.
The Company’s financing activities used net cash of $7.3 million, including $5.1 million of net reductions in line of credit and floorplan borrowings, a $967,000 net reduction in other short and long term debt and $1.1 million for Trade Creditor
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Repayment Plan payments. Proceeds of almost $28,000 were received from the sale of common stock due to the exercise of stock options. Checks issued but not presented for payment decreased by $141,000. Borrowings on the U.S. Bank line of credit are used to fund these checks, which aggregate $1.9 million at June 30, 2004, as they are presented for payment at the bank.
Management believes that continued improvement in the national economy, and the Company’s efforts to increase revenues and improve efficiencies and control costs, will provide sufficient cash flow (along with available borrowing capacity) to fund continued operations and capital requirements for the next twelve months.
For the foreseeable future, the Company does not plan to pay dividends but instead will follow the policy of reinvesting any earnings in order to finance the expansion and development of its business. The Company is a party to certain loan agreements that prohibit the payment of dividends without the lenders’ consent.
Off-Balance Sheet Arrangements
The Company did not have any material off-balance sheet arrangements during the six months ended June 30, 2004.
Contractual Obligations
Following is a summary of the Company’s contractual obligations as of December 31, 2003, which have not changed significantly as of June 30, 2004 except for scheduled reductions:
Contractual obligation In 000’s | Total | 1 year or less | 2-3 Years | 4-5 Years | More Than 5 years | ||||||||||
Long-term debt (1) | $ | 9,408 | $ | 1,878 | $ | 7,519 | $ | 11 | $ | — | |||||
Capitalized lease (1) | 4,669 | 235 | 530 | 622 | $ | 3,282 | |||||||||
Operating leases (2) | 4,281 | 1,138 | 1,642 | 885 | 616 | ||||||||||
Purchase obligations (3) | 19,200 | 19,200 | — | — | — | ||||||||||
Total | $ | 37,558 | $ | 22,451 | $ | 9,691 | $ | 1,518 | $ | 3,898 | |||||
| (1) | See Note 8 to consolidated financial statements included in the 2003 annual report on Form 10-K. |
| (2) | See Note 9 to consolidated financial statements included in the 2003 annual report on Form 10-K. |
| (3) | The Company has contracts with certain suppliers to buy a specified quantity of aluminum in 2004 at agreed upon prices. |
Forward-looking Information and Risks
We have made, and may continue to make, various written or verbal forward-looking statements with respect to our business, including statements contained in this quarterly report on Form 10-Q, other filings with the Securities and Exchange Commission, and reports to stockholders.
The Private Securities Litigation Reform Act of 1995 (the “Reform Act”) provides a safe harbor for forward-looking statements made by us or on our behalf. Forward-looking statements are those involving the outcome of future events that are based upon current expectations, estimates, forecasts and projects as well as the current beliefs and assumptions of our management. Any statement that is not a historical fact, including any statement regarding estimates, projections, future trends and the outcome of events that have not occurred, is a forward-looking statement.
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The words “believe,” “estimate,” “expect,” “intend,” “may,” “could,” “will,” “plan,” “anticipate’” and similar words and expressions are intended to identify forward-looking statements. Forward-looking statements speak only as of the date of the date made, are based on current expectations, are inherently uncertain and should be viewed with caution. The Company makes no commitment to update any forward-looking statement or to disclose any facts, events, or circumstances after the date hereof that may affect the accuracy of any forward-looking statement, other than as required by law.
Forward-looking statements cannot be guaranteed and actual results may vary materially due to the uncertainties and risks, known and unknown, associated with such statements. Featherlite wishes to caution readers that the following important factors, among others, in some cases have affected, and in the future could affect, Featherlite’s actual results and could cause Featherlite’s actual consolidated results to differ materially from those expressed in any forward-looking statements made by, or on behalf of, Featherlite:
1. Our strategy involves, to a substantial degree, increasing revenues while at the same time reducing and controlling operating expenses. In furtherance of this strategy, we have engaged in ongoing, company-wide efficiency activities intended to increase productivity and reduce costs. These activities have included personnel reductions, reduction or elimination of non-personnel expenses, facility closures and realigning and streamlining operations. We cannot assure you that our efforts will result in increased profitability for any meaningful period of time.
2. A large portion of our sales involve discretionary spending by our trailer and motorcoach customers, and may be delayed or cancelled in times of economic uncertainty. In recent years, we have experienced declining revenues as the national economy has weakened and become more uncertain. However, in the first six months of 2004, sales increased by 29 percent and unfilled order backlog at June 30, 2004 was 71 percent greater than at June 30, 2003. We are optimistic about the rate of sales growth in 2004, but a return to a static or declining growth rate in the overall demand for our products may harm our future sales and hinder our ability to improve our liquidity.
3. The industries in which we operate are competitive, and we face continued pressure to increase selling prices to reduce the impact on margins of increasing aluminum and other materials costs, labor rates and overhead costs related to the expanded production facilities and organization to support expected increases in sales. Our product mix from period to period can have an important impact on our gross profit since products include varying combinations of material and labor costs. To the extent we are unable to improve or maintain our profit margins, our liquidity may be harmed.
4. The Company takes trade-ins on both new and used motorcoach sales. These trade-in units are marketed on a retail basis to other customers. In the three years ended December 31, 2003, the Company experienced a significant decline in the market value of trade-in units and certain non-current new models and wrote down the carrying value of the used inventory by an aggregate amount of $4.4 million in order to facilitate their sale, including write-downs of $1.3 million, $632,000 and $2.5 million in 2003, 2002 and 2001, respectively. There is a risk that additional write-downs of this inventory will occur if these trade-in units are not sold at current selling prices, which could adversely impact the Company’s future operating results.
5. During 2002, the Company signed long-term financing agreements with its principal lenders (U.S. Bank and GE). Each of these agreements contains affirmative and restrictive covenants. The Company was not in compliance with certain of these covenants as of December 31, 2003, although the Company obtained waivers of these
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defaults. As disclosed and discussed further in Note 3 in the accompanying unaudited condensed consolidated financial statements, both lenders have amended their credit agreements to reduce the requirements of certain covenants for compliance in 2004 and beyond. The Company cannot provide assurance that it will maintain compliance with these covenants in the future. Although management believes it will be able to achieve such covenants in 2004, violations could occur allowing the lenders the option to accelerate payment of the debt.
6. Advance rates under the Company’s financing arrangement with GE have been based on 90 percent of the cost of eligible new motorcoach inventory and 70 percent of the defined value of eligible used motorcoach inventory. On March 17, 2004, GE advised the Company that the terms of the existing agreement will be modified as follows: (i) there will be a 1.5% per month reduction of amounts available on used coaches acquired after August 31, 2003 once they have been held more than 360 days; (ii) after 360 days new coaches will be treated as used coaches, with an advance rate of 70 percent versus 90 percent and 1.5% monthly curtailments thereafter; and (iii) advance rates will be eliminated in full on each coach (new or used) held more than 720 days. GE has not required the Company to be subject to these reduced advance rates, and has not provided a date for their future application. Future aggregate availability under this agreement will be reduced if the Company is unable to sell certain new or used coaches before financing rates are reduced or eliminated. Either event may require the Company to obtain additional financing from other sources. There can be no assurance such financing will be available.
7. We may have difficulty receiving our requirements for aluminum (our principal raw material component) if we lose one of our major suppliers of aluminum. In the past, this risk has been relatively nominal as there have been alternate sources of supply. In recent years, however, the number of alternate sources of supply has been reduced due to mergers within the aluminum industry. Also, additional time may be required to replace an extruded aluminum supplier due to the fact that dies are required and would have to be made. The Company routinely tries to keep at least three suppliers of each shape so it has a backup supplier if necessary. However, if the number of suppliers of aluminum is further reduced, or if the Company is otherwise unable to obtain its aluminum requirements on a timely basis and on favorable terms, the Company’s operations may be harmed.
8. There is a risk related to the loss or interruption in the supply of bus conversion shells from the Company’s sole supplier of these shells. The Company purchases all of its bus conversion shells from Prevost. Although the Company has insurance to cover certain losses it may sustain due to fire or other catastrophe at Prevost’s plant, the Company may not be able to obtain conversion shells from another manufacturer on favorable terms or at all. Additionally, if the Company is unable to maintain a good working relationship with Prevost, it may be required to locate a new supplier of its conversion shells. In the event of any significant loss or interruptions in Prevost’s ability to provide such services, the Company’s operations may be harmed.
9. The Company begins production of most of the luxury motorcoaches before a customer order is received. While it is the Company’s expectation that substantially all of these motorcoaches will be sold to specific customers before production is completed, or shortly thereafter, there is no assurance this will occur. Failure to sell these motorcoaches on a timely basis at prevailing prices could further decrease the liquidity of the Company.
10. The Company uses one subcontractor to provide paint and graphic design work to meet customer specifications on certain custom trailers and specialty transporters. There is a risk to the timely delivery of these trailers in the event of an unforeseen interruption in the subcontractor’s ability to provide these services or if the customer delays providing the specifications to the subcontractor. Any long-term interruptions in the subcontractor’s ability to provide such services may harm the Company’s operations.
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11. As discussed in Note 5 to the December 31, 2003 consolidated financial statements included in its annual report on Form 10-K, the Company discontinued use of its Pryor, Oklahoma manufacturing facility in 2001. It accrued the estimated rental and other costs of holding this facility through December 31, 2002. In 2002, the Company began formulating a plan to use this facility as a sales facility for used coaches owned by others and held on consignment by the Company. The anticipated use of this facility has since been expanded to include the sale of Featherlite trailers, RV travel trailers and service facilities. Implementation of this plan was delayed until the third quarter of 2003 and an additional accrual was made for the estimated lease and other costs to be incurred until this facility can be profitable. This facility reopened in October 2003 and the remaining balance in the accrual account was written off to operations to offset startup costs of approximately $154,000. In the event the facility cannot generate sufficient income to absorb the annual lease cost and other costs of operation by December 31, 2004, the Company may be required to continue to accrue additional costs related to this facility. This could have an adverse impact on the Company’s future operating results and liquidity.
12. Our success largely depends on the continued service of our management team and key personnel. If one or more of these individuals, particularly Conrad D. Clement, our President and Chief Executive Officer, were to resign or otherwise terminate their employment with us, we could experience a loss of sales, industry affiliations, vendor relationships and management resources.
13. The market price of our common stock has been, and we expect will continue to be, subject to substantial volatility. The market price of our common stock may decline regardless of our operating performance or prospects. Factors affecting our market price include:
| • | our ability to continue to demonstrate sufficient capital liquidity to remain solvent; |
| • | Our ability to manufacture and market a favorable mix of products that results in favorable gross profit margins; |
| • | Our ability to continue to manage our costs and experience manufacturing efficiencies; |
| • | trends and events affecting our consumers’ disposable income available for recreational activities and consumer confidence generally; |
| • | variations in our operating results and whether we achieve key business targets; |
| • | changes in, or our failure to meet, analysts’ earnings expectations; and |
| • | changes in securities analysts’ buy/sell recommendations; and general economic, political and stock market conditions. |
ITEM 3. QUANTITATIVE & QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Commodity Risk
The Company is exposed to market risks related to changes in the cost of aluminum. Aluminum is a commodity that is traded daily on the commodity markets and fluctuates in price. The average Midwest delivered cash price per pound for
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ingot aluminum during the three years ended December 31, 2003, as reported to the Company by its suppliers was $0.68 in 2003, $0.65 in 2002, and $0.69 in 2001. The Company’s cost of aluminum varies from these market prices due to vendor processing charges, timing of purchases, and contractual commitments with suppliers for specific prices and other factors. The Company has obtained commitments from suppliers to provide, at an agreed upon fixed price, about 90 percent of its anticipated requirements for 2004, which reduces a portion of the risk of aluminum cost fluctuations for the year. There is a potential risk of loss related to fixed price contracts if there is a substantial drop in the actual cost of aluminum in relation to the contract price, which would affect the competitive price of the Company’s product. If the Company is unable to obtain such commitments from suppliers or otherwise reduce the price risk related to the balance of the purchases to meet the balance of its requirements in 2004 and in the years beyond 2004, this could have an adverse impact on the Company’s operating results if the cost of aluminum increases significantly above levels in 2003.
Interest Rate Risk
The Company is exposed to market risks related to changes in U.S. and international interest rates. Substantially all of the Company’s debt bears interest at a variable rate. An interest rate increase by one percentage point would reduce the Company’s future annual net income by approximately $230,000 at current debt levels.
Item 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. After evaluating the effectiveness of the design and operation of Company’s “disclosure controls and procedures” pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934 (the Exhange Act) as of the end of the period covered by this report, our chief executive officer and chief financial officer, with the participation of the Company’s management, have concluded that the Company’s disclosure controls and procedures are effective to ensure that information that is required to be disclosed by the Company in reports that it files under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules of the Securities Exchange Commission.
(b) Changes in internal controls. There were no changes in our internal control over financial reporting that occurred during the period covered by this quarterly report that have materially affected, or are reasonably likely to materially affect the Company’s internal control over financial reporting.
Item 4. Submission of Matters to a Vote of Security-Holders
(a) The Annual Meeting of the Registrant’s shareholders was held on Friday, June 4, 2004.
(b) At the Annual Meeting a proposal to set the number of directors at seven was adopted by a vote of 6,077,672 shares in favor, with 24,549 shares against, and 2,985 shares abstaining.
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(c) Proxies for the Annual Meeting were solicited pursuant to Regulation 14A under the Securities Act of 1934. The following persons were elected directors of the Registrant to serve until the next annual meeting of shareholders and until their successors shall have been duly elected and qualified:
Nominee | Number of Votes For | Number of Votes Withheld | ||
Conrad D. Clement | 6,029,095 | 76,111 | ||
Jeffery A. Mason | 6,029,995 | 75,211 | ||
Tracy J. Clement | 6,028,095 | 77,111 | ||
Thomas J. Winkel | 6,029,995 | 75,211 | ||
Kenneth D. Larson | 6,029,495 | 75,711 | ||
Terry E. Branstad | 6,028,315 | 76,891 | ||
Charles A. Elliott | 6,026,164 | 79,042 |
(d) At the Annual Meeting a proposal to adopt the 2004 Equity Incentive Plan was adopted by a vote of 4,272,555 shares in favor, 237,012 shares against, 5,812 shares abstaining and 1,589,627 shares broker non-vote.
Item 6.EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits. See Exhibit Index on page following signatures.
(b) Reports on Form 8-K. A report on Form 8-K dated April 30, 2004 was furnished pursuant to Item 12 and related to the issuance of a press release announcing the results for the Company’s first quarter ended March 31, 2004.
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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.
FEATHERLITE, INC. | ||
(Registrant) | ||
Date: August 13, 2004 | /S/ CONRAD D. CLEMENT | |
Conrad D. Clement | ||
President & CEO | ||
Date: August 13, 2004 | /S/ JEFFERY A. MASON | |
Jeffery A. Mason | ||
Chief Financial Officer | ||
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Table of Contents
Form 10-Q
Quarter ended June 30, 2004
| Exhibit No. | Description | |
| 10.1 | Fourth amendment to Amended and Restated Loan Agreement Between U.S. Bank National Association and the Company dated June 30, 2004 | |
| 10.2 | 2004 Equity Incentive Plan* | |
| 10.3 | Incentive Stock Option Agreement* | |
| 10.4 | Nonqualified Stock Option Agreement* | |
| 31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 32.1 | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 32.2 | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| ** | Management contract or compensatory plan or arrangement required to be filed as an exhibit to this form 10-Q. |
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