Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
The following table sets forth, for the periods indicated, selected consolidated statement of operations data, expressed as a percentage of sales, and the percentage change in such data from the comparable prior period.
| | Three months ended | |
| | March 31,
2000
| March 31,
2001
| Percentage change
in dollar amounts
|
| | | | | |
| Sales | 100.0% | 100.0% | (15.0)% | |
| Cost of sales | 89.7
| 94.5
| (10.6) | |
| Gross profit | 10.3 | 5.5 | (54.2) | |
| Selling, general and administrative expenses | 9.3 | 9.0 | (17.6) | |
| Legal and settlement costs | .9
| 1.9
| 86.5 | |
| Income (loss) from operations | .1 | (5.4) | (4,421.4) | |
| Interest expense | .9 | .9 | (14.3) | |
| Other income | -
| .4
| (2,087.5) | |
| Pretax loss | (.8) | (6.7) | 593.1 | |
| Benefit for income taxes | (.3)
| (2.5)
| 539.7 | |
| Net loss | (.5)% | (4.2)% | 628.8 | |
Sales decreased 15.0% to $45.1 million for the first quarter of 2001 from $53.1 million for the comparable period in 2000. Sales decreased primarily in the high end Safari lines. Beaver sales increased by approximately 20% primarily in the recently redesigned Monterey and Contessa models. Harney sales decreased as lower Riata revenues were partially offset by higher revenues of the Renegade.
Retail sales for class A units decreased by 7.2%in the first quarter of 2001 while the industry as a whole experienced a 25.1% decline. During the same period, according to data published be Statistical Survey, Inc., market share of SMC increased by 24.0%.
Gross profits were lower in the first quarter of 2001 when compared to the first quarter of 2000 primarily as the result of lower sales volumes. Lower productions volumes at the plants accounted for decreased efficiencies. Warranty costs, however, were lower in the first quarter of 2001 by over $400,000.
Administrative and finance costs declined during the period by almost $900,000 due to decreases in accounting and administrative costs of $444,000 and lower sales and marketing costs of $429,000. Legal costs rose by approximately $400,000 in recognition of the Company’s commitment to resolve product disputes in a more expeditious manner.
Interest expense decreased as a result of lower debt levels, however, other nonoperating expenses were higher.
Given the factors affecting gross margin and selling, general and administrative expenses, operating income decreased to a loss of $2.4 million for the first quarter of 2001 from income of $56,000 in the comparable period of 2000.
The effective tax rate of 37.0% in the first quarter of 2001 is a decrease from the effective tax rate of 40.0% in the first quarter of 2000. Net loss after tax for the first quarter of 2001 was $1.9 million, down from first quarter 2000 net loss of $260,000.
The Company's revenues historically have been subject to some seasonal fluctuation. Demand for high-line motor coaches tends to increase with the beginning of the new model year, which occurs during the Company's third quarter that begins July 1.
Liquidity and Capital Resources
During the first quarter of 2001, SMC generated cash flow from operations of $3.4 million. This compares to cash flow from operations of $4.8 million from the first quarter of 2000. The reduction in cash flow is attributable to the increase in net loss of approximately $1.6 million. Inventories were reduced by over $7 million from year end levels with relatively equal reductions in raw material, work in process, and finished goods inventory.
The Company used $3.2 million to pay down long term and notes payable debt in the first quarter of 2001. This compares to a $4.5 million decrease in net borrowing during the first quarter of 2000.
Capital expenditures decreased $194,000 in the first quarter of 2001 compared to the first quarter of 2000.
The Company anticipates that its aggregate capital expenditures for 2001 will be approximately $500,000. The Company plans to use cash generated from operations, borrowings under its credit arrangements and long term lease obligations to fund these expenditures.
The Company has an operating line of credit of $10 million and a real estate term facility of $8 million. As of March 31, 2001, $5.7 million was available on the operating line of credit and $837,000 was available on the real estate term facility. The amount outstanding on the operating line is at an interest rate of 10.00%and the amount outstanding on the real estate term facility is based on the prime rate of 8.0%. These amounts are collateralized by all assets not specifically identified in other financing obligations. The terms of the revolving credit and real estate financing agreements required compliance with certain financial covenants and other covenants. As of May 1, 2001, the Company has a continuing commitment from its bank. New covenants are presently being negotiated with a final agreement anticipated by May 15, 2001, and no debt covenants were in effect at March 31, 2001.
Most dealer purchases of motor coaches from the Company are financed under flooring financing arrangements between the dealer and a bank or finance company. Under these flooring arrangements, the financing institution lends the dealer all or substantially all of the wholesale purchase price of a motor coach and retains a security interest in the coach purchased. These financing arrangements provide that, for a period of time after a coach is financed (generally 12 to 18 months), if the dealer defaults on its payment or other obligations to the lender, the Company is obligated to repurchase the dealer’s inventory for the amount then due from the dealer plus, in certain circumstances, costs incurred by the lender in connection with repossession of the inventory. The repurchase price may be more than the resale value of the coach. The Company’s contingent liability under its repurchase obligations varies from time to time. As of March 31, 2001, the Company estimates its total contingent liability under repurchase obligations was approximately $82.7 million. The Company cannot predict with certainty its future losses, if any, pursuant to repurchase obligations, and these amounts may vary materially from the expenditures historically made by the Company. Furthermore, even in circumstances where losses in connection with repurchase obligations are not material, a repurchase obligation can represent a significant cash requirement for the Company.
Other Items
On April 20, 2001, Michael R. Jacque, President, Chief Operating Officer and a director of the Company, resigned all positions. On April 27, 2001, the Board of Directors requested that the Chairman of the Board of Directors, Mathew M. Perlot, defer his retirement and return to active management to direct the Sales, Marketing, and Design functions. Mr. Perlot agreed.
In addition to the above, the Company has suspended most manufacturing activities at its Harney Coach Works operations due to a decrease in factory orders for the Renegade and Riata products. Production for orders in house are being completed with a greatly reduced staff and any future production is expected to require only a fraction of the personnel. The Company is continuing the operations at its Composite Technology, Inc. subsidiary that occupies the same facility as Harney Coach Works and is not expected to be significantly impacted by the suspension of activities at Harney. Harney Coach Works employees will be given top priority as positions become available at Composite Technologies, Inc.
Forward Looking Statements: The statements in this report concerning anticipated expenditures, the status of negotiations with the Company’s lenders, and the likely conclusion of pending litigation constitute forward looking statements. Factors that could materially affect the above items include, but are not limited to, competitive market pressures (including increased competition, new product offerings by competitors and price pressures), and unfavorable business conditions in the RV industry and general economy.
Part II - - Other Information
Item 1 Legal Proceedings
In the case involving certain employment practices referenced in the 2000 Form 10K, the judge has set aside the original verdict of $1.0 million and has ordered a new trial for the punitive damage assessment. The Company can not determine at this time to what extent punitive damages could be assessed. For further information, refer to the 2000 Form 10K.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11 Statement of Calculation of Average Common Shares Outstanding
(b) Reports on Form 8-K
A Form 8–K was filed by the Registrant on January 10, 2001.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | SMC CORPORATION |
| | |
| | |
| | |
| Date: May 9, 2001 | By: WILLIAM L. RICH
| |
| | William L. Rich |
| | Chief Financial Officer |
| | (Principal Financial Officer) |
Exhibit Index
| Exhibit | | |
No.
| Description
| |
| | | |
| 11 | | Statement of Calculation of Average Common Shares Outstanding |
| | | |
