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, 1996 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 1-7160 COACHMEN INDUSTRIES, INC. (Exact name of registrant as specified in its charter) INDIANA 35-1101097 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification number) 601 EAST BEARDSLEY AVENUE, ELKHART, INDIANA 46514 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 219-262-0123 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 the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date: At August 7, 1996: Common Shares, without par value 15,064,852 shares outstanding Rights to purchase Common Shares 15,064,852 rights outstanding COACHMEN INDUSTRIES, INC. INDEX Page No. PART I. FINANCIAL INFORMATION Financial Statements: Consolidated Balance Sheets- June 30, 1996 and December 31, 1995.....................3-4 Consolidated Statements of Income- Three and Six Months Ended June 30, 1996 and 1995....... 5 Consolidated Statements of Cash Flows- Six Months Ended June 30, 1996 and 1995................. 6 Condensed Notes to Consolidated Financial Statements....7-8 Management's Discussion and Analysis of Financial Condition and Results of Operations........................9-12 PART II. OTHER INFORMATION.................................... 13 SIGNATURES..................................................... 14 Page 2 COACHMEN INDUSTRIES, INC. CONSOLIDATED BALANCE SHEETS June 30, DECEMBER 31, 1996 1995 ASSETS CURRENT ASSETS Cash and temporary cash investments $ 24,828,413 $17,020,744 Certificates of deposit 500,000 500,000 Trade receivables and current portion of notes receivable, less allowance for doubtful receivables 1996 - $1,004,000 and 1995 - $863,000 28,249,998 19,780,160 Other receivables 1,749,412 4,244,387 Refundable income taxes - 507,000 Inventories 59,957,297 55,434,497 Prepaid expenses and other 1,730,743 1,570,492 Deferred income taxes 2,665,000 2,665,000 Total current assets 119,680,863 101,722,280 PROPERTY AND EQUIPMENT, at cost Land and improvements 6,385,699 5,537,033 Buildings and improvements 30,283,467 27,405,744 Machinery and equipment 12,518,518 10,524,486 Transportation equipment 9,729,558 11,307,747 Office furniture and fixtures 4,584,314 4,269,837 Total property and equipment, at cost 63,501,556 59,044,847 Less, Accumulated depreciation 27,380,714 27,297,851 Net property and equipment 36,120,842 31,746,996 OTHER ASSETS Real estate held for sale 3,609,186 3,458,539 Rental properties 893,348 925,538 Intangibles, less accumulated amortization 1996 - $312,823 and 1995 - $244,771 5,131,453 5,199,505 Deferred income taxes 875,000 875,000 Other 8,544,976 6,320,899 Total other assets 19,053,963 16,779,481 TOTAL ASSETS $174,855,668 $150,248,757 The accompanying notes are part of the consolidated financial statements. Page 3 COACHMEN INDUSTRIES, INC. CONSOLIDATED BALANCE SHEETS (CONT'D) JUNE 30, DECEMBER 31, 1996 1995 LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Current maturities of long-term debt $ 2,117,683 $ 2,094,472 Accounts payable, trade 25,999,600 18,435,562 Accrued wages, salaries and commissions 3,986,525 3,583,423 Accrued dealer incentives 1,311,913 2,289,376 Accrued warranty expense 4,292,323 3,784,712 Accrued income taxes 2,781,997 981,800 Other liabilities 12,192,249 9,965,433 Total current liabilities 52,682,290 41,134,778 LONG-TERM DEBT 10,503,411 12,117,756 OTHER 6,228,266 5,958,995 Total liabilities 69,413,967 59,211,529 SHAREHOLDERS' EQUITY Common shares, without par value: authorized 60,000,000 shares; issued 1996 - 18,394,736 shares and 1995 - 18,282,672 shares 37,859,256 37,151,202 Additional paid-in capital 1,679,038 1,664,889 Retained earnings 81,485,037 67,824,816 121,023,331 106,640,907 Less, Cost of shares reacquired for the treasury 1996 - 3,341,752 shares and 1995 - 3,345,004 shares 15,581,630 15,603,679 Total shareholders' equity 105,441,701 91,037,228 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $174,855,668 $150,248,757 The accompanying notes are part of the consolidated financial statements. Page 4 COACHMEN INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF INCOME THREE MONTHS SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, 1996 1995 1996 1995 Net sales $166,715,051 $128,192,670 $315,355,074 $259,963,049 Cost of goods sold 141,753,074 110,231,712 271,241,577 225,439,979 Gross profit 24,961,977 17,960,958 44,113,497 34,523,070 Operating expenses: Selling and delivery 6,412,132 6,350,990 13,973,320 12,833,482 General and administrative 5,664,130 5,493,070 11,263,756 10,120,684 Total operating expenses 12,076,262 11,844,060 25,237,076 22,954,166 Operating income 12,885,715 6,116,898 18,876,421 11,568,904 Nonoperating income (expense): Interest expense (400,946) (784,764) (841,035) (1,513,096) Interest income 370,628 346,716 604,942 518,121 Gain on sale of properties, net 729,857 754,554 726,569 773,146 Other, net 107,469 275,682 448,799 448,475 Total nonoperating income 807,008 592,188 939,275 226,646 Income before income taxes and cumulative effect of accounting change 13,692,723 6,709,086 19,815,696 11,795,550 Income taxes 5,007,000 2,497,000 7,173,000 4,380,000 Income before cumulative effect of accounting change $ 8,685,723 $ 4,212,086 $ 12,642,696 $ 7,415,550 Cumulative effect of accounting change for Company-owned life insurance policies 2,293,983 Net income $ 8,685,723 $ 4,212,086 $ 14,936,679 $ 7,415,550 Earnings per common share: Income before cumulative effect of accounting change $ .58 $ .28 $ .84 $ .50 Cumulative effect of accounting change $ $ $ .16 $ Net income $ .58 $ .28 $ 1.00 $ .50 Weighted average number of common shares outstanding 15,035,436 14,885,296 15,007,966 14,858,780 Cash dividends per common share $ .05 $ .035 $ .085 $ .07 The accompanying notes are part of the consolidated financial statements. Page 5 COACHMEN INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS SIX MONTHS ENDED JUNE 30, 1996 1995 CASH FLOWS FROM OPERATING ACTIVITIES Net cash provided by operating activities $15,181,045 $ 7,726,808 CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from: Sale of property and equipment, real estate held for sale and rental properties 1,157,040 2,025,203 Sale of investments - 263,888 Acquisitions of property and equipment (7,222,704) (8,826,711) Acquisition of a business, net of cash acquired - (4,654,877) Unexpended industrial revenue bond proceeds - 3,337,122 Proceeds from life insurance death benefit 171,770 - Other 680,056 128,918 Net cash (used in) investing activities (5,213,838) (7,726,457) CASH FLOWS FROM FINANCING ACTIVITIES Payments of short-term borrowings - (900,000) Payments of long-term debt (1,591,134) (804,700) Cash dividends paid (1,276,458) (1,040,067) Proceeds from sale of common shares 708,054 315,938 Net cash (used in) financing activities (2,159,538) (2,428,829) Increase (decrease) in cash and temporary cash investments 7,807,669 (2,428,478) CASH AND TEMPORARY CASH INVESTMENTS Beginning of period 17,020,744 19,534,385 End of period $ 24,828,413 $17,105,907 Noncash investing and financing activities: Liabilities assumed in acquisition of a business - $ 8,757,472 Long-term debt issued in conjunction with acquisition of a business - $ 6,141,129 The accompanying notes are part of the consolidated financial statements. Page 6 COACHMEN INDUSTRIES, INC. CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. The consolidated balance sheet data as of December 31, 1995 was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. 2. In the opinion of management, the information furnished herein includes all adjustments of a normal and recurring nature necessary to reflect a fair statement of the interim periods reported. The results of operations for the three and six-month periods ended June 30,1996 are not necessarily indicative of the results to be expected for the full year. 3. Inventories consist of the following: June 30, December 31, 1996 1995 Raw material $ 21,473,580 $ 16,580,013 Work in-process 7,474,784 7,268,705 Finished goods 31,008,933 31,585,779 Total inventories $ 59,957,297 $ 55,434,497 4. Effective January 1, 1996, the Company changed its method of accounting for its investment in life insurance contracts which were purchased to fund liabilities under deferred compensation agreements with executives and other key employees. Prior to January 1, 1996, the Company accounted for its investments in life insurance contracts by capitalizing premiums under the ratable charge method (a method of accounting which was acceptable when the insurance contracts were originally acquired and continued to be acceptable for contracts acquired prior to November 14, 1985). Effective January 1, 1996, the Company changed to the cash surrender value method of accounting which is the preferred method under generally accepted accounting principles, as this method more accurately reflects the economic value of the contracts. On January 1, 1996, the Company recorded a $2.3 million noncash credit for the cumulative effect of this accounting change. This change also increased net income for the six months ended June 30, 1996 by $486,601 or $.03 per share. On a pro forma basis, net income and net income per share for the six months ended June 30, 1995 would have been $7,787,246 and $.52, respectively, if this accounting change had been made prior to 1995. 5. The Company was contingently liable at June 30, 1996 to banks and other financial institutions on repurchase agreements in connection with financing provided by such institutions to most of the Company's independent dealers in connection with their purchase of the Company's recreational vehicle products. These agreements provide for the Company to repurchase its products from the financing institution in the event that they have repossessed them Page 7 upon a dealer's default. The risk of loss resulting from these agreements is spread over the Company's numerous dealers and is further reduced by the resale value of the products repurchased. The Company is involved in various legal proceedings which are ordinary litigations incidental to the industry and which are covered in whole or in part by insurance. Management believes that any liability which may result from these proceedings will not be significant. 6. On July 17, 1996, the Company's Board of Directors approved a two- for-one split of its common stock for shareholders of record on August 7, 1996. The split has an effective date of August 28, 1996. All share and per share amounts in the accompanying consolidated financial statements have been retroactively adjusted to give effect to the stock split. Page 8 COACHMEN INDUSTRIES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is management's discussion and analysis of certain significant factors which have affected the Company's financial condition, results of operations and cash flows during the periods included in the accompanying consolidated financial statements. A summary of the changes in the principal items included in the consolidated statements of income is shown below. Comparison of Three Months Six Months Ended June 30, 1996 and 1995 Increases (Decreases) Net sales $ 38,522,381 30.1% $ 55,392,025 21.3% Cost of goods sold 31,521,362 28.6 45,801,598 20.3 Selling and delivery expense 61,142 1.0 1,139,838 8.9 General and administrative expense 171,060 3.1 1,143,072 11.3 Interest expense (383,818)(48.9) (672,061)(44.4) Interest income 23,912 6.9 86,821 16.8 Gain on sale of properties, net (24,697) (3.3) (46,577) (6.0) Other, net (168,213)(61.0) 324 .1 Income before income taxes and cumulative effect of accounting change 6,983,637 104.1 8,020,146 68.0 Income taxes 2,510,000 100.5 2,793,000 63.8 Cumulative effect of accounting change for Company-owned life insurance policies - - 2,293,983 * Net income 4,473,637 106.2 7,521,129 101.4 * Not meaningful Page 9 NET SALES Consolidated net sales for the quarter ended June 30, 1996 were $166,715,051, an increase of 30.1% over the $128,192,670 reported for the corresponding quarter last year. Net sales for the six months were $315,355,074 representing an increase of 21.3% over the $259,963,049 reported for the same period in 1995. The Company's vehicle segment, which includes the parts and supply group of companies, experienced net sales increases of 29.4% and 21.4% for the quarter and six months, respectively. The Company's housing segment had a net sales increase for the 1996 quarter of 33.6% and 20.9% for the six months. Both vehicles and housing experienced increases in unit sales and increases in market share. COST OF GOODS SOLD Cost of goods sold increased 28.6% or $31,521,362 for the three months and 20.3% or $45,801,598 for the six months ended June 30, 1996. The increase for both periods is generally in line with the increase in net sales. The slightly lower increase than the increase in net sales represents the spreading of fixed costs over higher production volume. The housing segment of the Company continues to experience expected lower profitability levels from recent expansion into North Carolina and Tennessee. SELLING AND DELIVERY EXPENSES As a percentage of net sales, selling and delivery expenses were 3.8% and 5.0% for the 1996 and 1995 quarter and 4.4% and 4.9% for the comparable six-month periods. For selling expense, this represents decreases, as a percentage of net sales, of .6% for the quarter and .9% for the six months, primarily resulting from increased demand for the Company's products. Delivery expenses tend to fluctuate with sales mix, as well as changes in geographical areas to which products are delivered. As a percentage of net sales, there was an overall increase in delivery expense of .1% for the six months. GENERAL AND ADMINISTRATIVE EXPENSE General and administrative expense was $5,664,130 or 3.4% of net sales for the second quarter compared to $5,493,070 or 4.3% for the 1995 corresponding three months and $11,263,756 or 3.6% of net sales for the six months compared to $10,120,684 or 3.9% for the 1995 six months. A decrease in the percent usually accompanies an increase in net sales due to the fixed nature of the expenses in this category. The most significant portion of the increase in dollars for both periods is increased incentive compensation earned at an earlier point in the year as a result of increased profits. INTEREST EXPENSE Interest expense was $400,946 and $841,035 for the three and six-month periods in 1996 compared to $784,764 and $1,513,096 in the same periods last year. These decreases are primarily the result of a change to the cash Page 10 surrender value method of accounting for the Company's investment in life insurance contracts. These life insurance contracts were purchased to fund liabilities under deferred compensation agreements with executives and other key employees. The interest costs associated with deferred compensation obligations and with the borrowings against the cash value of the insurance policies are now partially offset by the increases in cash surrender values each accounting period. Previously, the increases in cash surrender values were not recognized, since the investment in life insurance contracts consisted only of the capitalized insurance premiums. INTEREST INCOME Interest income increased $23,912 and $86,821, respectively, for the 1996 three and six-month periods. The amount is indicative of the increase in cash and temporary cash investments in 1996 over 1995. This increase in cash and temporary cash investments was basically generated from operating activities throughout 1995 and the first six months of 1996. GAIN ON THE SALE OF PROPERTY, NET The net gain on the sale of property for the second quarter of 1996 was $24,697 lower and for the six months was $46,577 lower than in the same periods in 1995. These variances are the result of the amount of gain recognized upon the disposition of various small properties. Assets are continually analyzed and every effort is made to sell or dispose of properties that are idle or determined to be unproductive. OTHER, NET Other income, net, represented income of $107,469 for the second quarter and $448,799 for the six months compared to income of $275,682 and $448,475 for the 1995 second quarter and six months, respectively. The most significant variance for the second quarter was due to an increase in interest participation in finance company transactions. INCOME TAXES For the second quarter ended June 30, 1996, the effective tax rate was 36.6% and a year-to-date rate of 36.2% compared to a second quarter effective tax rate in 1995 of 37.2% and a year-to-date rate of 37.1%. The decrease in the rate for 1996 is due to the amount of nontaxable income recognized over the prior year. CUMULATIVE EFFECT OF ACCOUNTING CHANGE FOR COMPANY-OWNED LIFE INSURANCE POLICIES See Note 4 of Condensed Notes to Consolidated Financial Statements on page 7 herein. Page 11 LIQUIDITY AND CAPITAL RESOURCES The Company generally relies on funds from operations as its primary source of liquidity. In addition, the Company maintains an unsecured committed line of credit, which totaled $30 million at June 30, 1996, to meet its seasonal working capital needs. At June 30, 1996, there were no borrowings against this line of credit. For the six months, the major source of cash was from operating activities. The most significant items in this category were net income and depreciation. Significant increases in receivables and inventories were largely offset by increases in accounts payable and accrued expenses, including income taxes. Investing activities reflected a net cash use of $5,213,838. The principal use of cash in investing activities was the investment in property and equipment. The negative cash flow for financing activities was primarily from cash dividends and payments of long-term debt. At June 30, 1996, the working capital increased $6.4 million over December 31, 1995 to $67.0 million. Page 12 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders a) The annual meeting of the shareholders of Coachmen Industries, Inc. was held on May 2, 1996. b) The following nominees were elected Directors for a one-year term: Thomas H. Corson Keith D. Corson Gary L. Groom Claire C. Skinner Philip C. Barker R. James Harring William P. Johnson Philip G. Lux William G. Milliken c) The tabulation of votes for each Director nominee was as follows: For Withheld Election of Directors: Thomas H. Corson 6,557,591 23,513 Keith D. Corson 6,558,725 22,397 Gary L. Groom 6,558,811 22,293 Claire C. Skinner 6,558,591 22,513 Philip C. Barker 6,557,525 23,579 R. James Harring 6,555,905 25,199 William P. Johnson 6,558,891 22,213 Philip G. Lux 6,557,791 23,313 William G. Milliken 6,556,016 25,088 Item 6. Exhibits and Reports on Form 8-K a) Exhibits None b) Reports on Form 8-K A Current Report on Form 8-K was filed on August 6, 1996 relating to the July 17, 1996 approval by the Board of Directors of a two-for-one stock split to shareholders of record on August 7, 1996. Page 13 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. COACHMEN INDUSTRIES, INC. (Registrant) Date: August 14, 1996 GARY L. GROOM _______________________________ Gary L. Groom, Executive Vice President - Finance (Principal Financial Officer) Date: August 14, 1996 WILLIAM M. ANGELO _______________________________ William M. Angelo, Corporate Controller (Principal Accounting Officer) Page 14