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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, 2003
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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.
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(Exact name of registrant as specified in its charter)
INDIANA 35-1101097
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification number)
2831 Dexter Drive, Elkhart, Indiana 46514
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 574-262-0123
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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 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 July 31, 2003:
Common Shares, without par value 15,524,687 shares outstanding including an
equivalent number of common share purchase rights.
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COACHMEN INDUSTRIES, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Financial Statements:
Consolidated Balance Sheets-
June 30, 2003 and December 31, 2002 3-4
Consolidated Statements of Operations-
Three and Six Months Ended June 30, 2003 and 2002 5
Consolidated Statements of Cash Flows-
Six Months Ended June 30, 2003 and 2002 6
Notes to Consolidated Financial Statements 7-13
Management's Discussion and Analysis of Financial
Condition and Results of Operations 14-18
Quantitative and Qualitative Disclosures About Market Risk 18-19
Controls and Procedures 19
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
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COACHMEN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
June 30, December 31,
2003 2002
---- ----
(Unaudited)
ASSETS
Current assets:
Cash and temporary cash investments $ 6,062 $ 16,549
Marketable securities 10,501 7,641
Trade receivables, less allowance for
doubtful receivables 2003 - $832
and 2002 - $861 34,488 29,408
Other receivables 2,027 1,572
Refundable income taxes 890 2,878
Inventories 96,585 85,010
Prepaid expenses and other 4,338 4,412
Deferred income taxes 6,448 6,885
-------- --------
Total current assets 161,339 154,355
-------- --------
Property, plant and equipment, at cost 153,269 148,439
Less, Accumulated depreciation 73,961 69,550
-------- --------
Property, plant and equipment, net 79,308 78,889
-------- --------
Goodwill 18,954 18,954
Cash value of life insurance 35,073 33,155
Real estate held for sale - 276
Other 4,067 7,656
-------- --------
Total assets $298,741 $293,195
======== ========
See Notes to Consolidated Financial Statements.
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COACHMEN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
June 30, December 31,
2003 2002
---- ----
(Unaudited)
LIABILITIES
Current liabilities:
Accounts payable, trade $ 30,747 $ 18,801
Accrued income taxes 879 1,222
Accrued expenses and other liabilities 37,608 39,856
Current portion of long-term debt 1,105 902
-------- --------
Total current liabilities 70,339 60,781
Long-term debt 9,974 10,097
Deferred income taxes 4,123 4,123
Other 9,776 8,768
-------- --------
Total liabilities 94,212 83,769
-------- --------
SHAREHOLDERS' EQUITY
Common shares, without par value: authorized
60,000 shares; issued 2003 - 21,073
shares and 2002 - 21,062 shares 91,394 91,283
Additional paid-in capital 6,962 6,133
Unearned compensation (1,104) -
Accumulated other comprehensive income (loss) 52 (661)
Retained earnings 167,214 169,054
Treasury shares, at cost: 2003 - 5,556
shares and 2002 - 5,395 shares (59,989) (56,383)
-------- --------
Total shareholders' equity 204,529 209,426
-------- --------
Total liabilities and shareholders' equity $298,741 $293,195
======== ========
See Notes to Consolidated Financial Statements.
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COACHMEN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
2003 2002 2003 2002
---- ---- ---- ----
Net sales $173,903 $170,725 $320,290 $323,571
Cost of sales 146,357 144,426 275,710 279,002
-------- -------- -------- --------
Gross profit 27,546 26,299 44,580 44,569
-------- -------- -------- --------
Operating expenses:
Delivery 8,371 7,974 15,360 14,963
Selling 6,394 5,289 12,113 10,323
General and administrative 7,665 8,121 16,388 15,779
-------- -------- -------- --------
Total operating expenses 22,430 21,384 43,861 41,065
-------- -------- -------- --------
Operating income 5,116 4,915 719 3,504
-------- -------- -------- --------
Nonoperating (income) expense:
Interest expense 372 421 734 961
Investment (income) loss, net 495 190 100 (42)
Gain on sale of
properties, net (34) (684) (39) (1,349)
Other (income) expense, net (38) (419) (100) (577)
-------- -------- -------- --------
Total nonoperating (income)
expense, net 795 (492) 695 (1,007)
-------- -------- -------- --------
Income before income taxes 4,321 5,407 24 4,511
Income taxes 1,485 1,844 8 1,538
-------- -------- -------- --------
Net income $ 2,836 $ 3,563 $ 16 $ 2,973
======== ======== ======== ========
Earnings per common share:
Basic $ .18 $ .22 $ - $ .19
Diluted $ .18 $ .22 $ - $ .18
Number of common shares used in
the computation of earnings
per common share:
Basic 15,379 16,112 15,442 16,065
------ ------ ------ ------
Diluted 15,414 16,228 15,484 16,188
------ ------ ------ ------
Cash dividends per common share $ .06 $ .05 $ .12 $ .10
See Notes to Consolidated Financial Statements.
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COACHMEN INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited) Six Months
Ended June 30,
2003 2002
---- ----
Cash flows from operating activities:
Net income $ 16 $ 2,973
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 4,759 4,947
Provision for doubtful receivables 93 85
Gain on sale of properties, net (39) (1,349)
Increase in cash surrender value of
life insurance policies (726) (701)
Valuation changes and realized and unrealized
losses on marketable securities and derivatives (2) 641
Deferred income taxes 437 1,105
Tax benefit related to exercise of stock options 4 110
Other 1,435 573
Changes in certain assets and liabilities:
Receivables (5,628) (10,078)
Inventories (11,575) 3,322
Prepaid expenses and other 74 (721)
Accounts payable, trade 11,946 14,209
Income taxes - accrued and refundable 1,645 2,367
Accrued expenses and other liabilities (2,248) 3,383
-------- --------
Net cash provided by
operating activities 191 20,866
-------- --------
Cash flows from investing activities:
Proceeds from sales of marketable securities 15,093 20,399
Proceeds from sale of property and equipment 1,489 5,894
Investments in marketable securities (15,076) (19,634)
Purchases of property and equipment (6,317) (2,300)
Other 110 226
-------- --------
Net cash provided by (used in)
investing activities (4,701) 4,585
-------- --------
Cash flows from financing activities:
Proceeds from short-term debt 14,000 -
Payments of short-term debt (14,000) -
Proceeds from long-term debt 302 -
Payments of long-term debt (222) (227)
Issuance of common shares under stock
incentive plans 153 684
Purchases of common shares for treasury (4,354) (17)
Cash dividends paid (1,856) (1,608)
-------- --------
Net cash used in
financing activities (5,977) (1,168)
-------- --------
Increase (decrease) in cash and temporary
cash investments (10,487) 24,283
Cash and temporary cash investments
Beginning of period 16,549 28,416
-------- --------
End of period $ 6,062 $ 52,699
======== ========
See Notes to Consolidated Financial Statements.
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COACHMEN INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
1. BASIS OF PRESENTATION
The consolidated balance sheet data as of December 31, 2002 was derived
from audited financial statements, but does not include all disclosures
required by accounting principles generally accepted in the United States.
The interim financial statements should be read in connection with the
financial statements in the Company's Annual Report on Form 10-K for the
year ended December 31, 2002.
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, 2003 are not
necessarily indicative of the results to be expected for the full year.
2. SEGMENT INFORMATION
The Company has determined that its reportable segments are those that are
based on the Company's method of internal reporting, which disaggregates
its business by product category. The Company's two reportable segments
are recreational vehicles, including related parts and supplies, and
modular housing and building. The Company evaluates the performance of its
segments and allocates resources to them based on pretax income.
Differences between reported segment amounts and corresponding
consolidated totals represent corporate expenses for administrative
functions and income or expenses relating to property and equipment that
are not allocated to segments.
The table below presents information about segments used by the chief
operating decision-maker of the Company for the three and six-month
periods ended June 30, 2003 and 2002:
Three Months Six Months
Ended June 30, Ended June 30,
2003 2002 2003 2002
---- ---- ---- ----
Net sales:
Recreational vehicles $115,516 $109,836 $222,912 $218,169
Modular housing and building 58,387 60,889 97,378 105,402
-------- -------- -------- --------
Consolidated total $173,903 $170,725 $320,290 $323,571
======== ======== ======== ========
Pretax income (loss):
Recreational vehicles $ 919 $ 1,110 $ (602) $ 537
Modular housing and building 3,794 3,970 1,756 3,458
Other reconciling items (392) 327 (1,130) 516
-------- -------- -------- --------
Consolidated total $ 4,321 $ 5,407 $ 24 $ 4,511
======== ======== ======== ========
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2. SEGMENT INFORMATION, Continued.
June 30, December 31,
2003 2002
---- ----
Total assets:
Recreational vehicles $109,229 $ 93,571
Modular housing and building 105,144 97,765
Other reconciling items 84,368 101,859
-------- --------
Consolidated total $298,741 $293,195
======== ========
3. INVENTORIES
Inventories consist of the following:
June 30, December 31,
2003 2002
---- ----
Raw materials $ 30,051 $ 28,432
Work in process 18,739 11,054
Finished goods 47,795 45,524
-------- --------
Total $ 96,585 $ 85,010
======== ========
4. ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consist of the following:
June 30, December 31,
2003 2002
---- ----
Wages, salaries, bonuses and
Commissions $ 4,041 $ 5,661
Dealer incentives, including volume
bonuses, dealer trips, interest
reimbursement, co-op advertising and
other rebates 2,901 4,368
Warranty 7,530 8,796
Insurance-products and general liability,
workers compensation, group health and
other 7,002 7,434
Customer deposits and unearned revenues 6,575 5,598
Other current liabilities 9,559 7,999
-------- --------
Total $ 37,608 $ 39,856
======== ========
Changes in the Company's warranty liability during the three and six months
ended June 30, 2003 were as follows:
Three Months Six Months
Ended June 30, Ended June 30,
2003 2003
---- ----
Balance of accrued warranty at beginning of period $ 7,868 $ 8,796
Warranties issued during the period and changes in
liability for pre-existing warranties 3,700 6,692
Cash settlements made during the period (4,038) (7,958)
------- -------
Balance of accrued warranty at June 30, 2003. $ 7,530 $ 7,530
======= =======
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5. EARNINGS PER SHARE
Basic earnings per share is based on the weighted average number of
shares outstanding during the period. Diluted earnings per common share
is based on the weighted average number of shares outstanding during the
period, after consideration of the dilutive effect of stock options and
awards. Basic and diluted earnings per share for the three and six months
ended June 30, 2003 and 2002 were calculated as follows:
Three Months Six Months
Ended Ended
June 30, June 30,
2003 2002 2003 2002
---- ---- ---- ----
Numerator:
Net income available to common
stockholders $ 2,836 $ 3,563 $ 16 $ 2,973
Denominator:
Number of shares outstanding, end of period:
Common stock 15,517 16,130 15,517 16,130
Effect of weighted average shares
outstanding during period (138) (18) (75) (65)
------ ------ ------ ------
Weighted average number of common
shares used in basic EPS 15,379 16,112 15,442 16,065
Effect of dilutive securities
Stock options and awards 35 106 42 112
Deferred compensation plans - 10 - 11
------ ------ ------ ------
Weighted average number of common
shares used in diluted EPS 15,414 16,228 15,484 16,188
====== ====== ====== ======
For the three and six months ended June 30, 2003 and 2002, 297 and 288
shares and 241 and 267 shares, respectively, of outstanding stock options
were not included in the computation of diluted earnings per share because
their exercise price was greater than the average market prices for the
periods and their inclusion would have been antidilutive.
The sum of quarterly earnings per share for the two quarters may not equal
year-to-date earnings per share due to rounding and changes in diluted
potential common shares.
6. OTHER COMPREHENSIVE INCOME (LOSS)
The changes in components of other comprehensive income for the three and
six months ended June 30, 2003 and 2002 are as follows:
Three Months Six Months
Ended Ended
June 30, June 30,
2003 2002 2003 2002
---- ---- ---- ----
Net income $ 2,836 $ 3,563 $ 16 $ 2,973
Unrealized gains on securities held
for sale, net of taxes 834 353 930 407
Unrealized losses on cash flow hedges,
net of taxes (93) - (217) -
------- ------- ------- -------
Total comprehensive income $ 3,577 $ 3,916 $ 729 $ 3,380
======= ======= ======= =======
As of June 30, 2003 and 2002, the accumulated other comprehensive income
(loss), net of tax, relating to unrealized losses on securities held for
sale was $269 and ($524), respectively, and relating to deferred losses on
cash flow hedges was ($217) and $0, respectively.
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6. OTHER COMPREHENSIVE INCOME (LOSS), Continued.
During the quarter ended June 30, 2003, the Company recognized an
other-than-temporary impairment charge of approximately $488 which has
been reflected as an investment loss in the accompanying June 30, 2003
Statement of Operations.
7. RECLASSIFICATION
Certain information in the accompanying consolidated statements of
operations for the three and six months ended June 30, 2002 has been
reclassified to conform to the 2003 presentation. The reclassifications
had no effect on net income as previously reported.
8. COMMITMENTS AND CONTINGENCIES
The Company was contingently liable under guarantees to financial
institutions of their loans to independent dealers for amounts totaling
approximately $.1 million at June 30, 2003.
The Company was contingently liable at June 30, 2003 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 require the Company to
repurchase its products from the financing institution in the event that
they have repossessed them upon a dealer's default. Products repurchased
from dealers under these agreements are accounted for as a reduction in
revenue at the time of repurchase. Although the estimated guarantee
approximates $203 million at June 30, 2003, 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.
Historically, the Company has experienced some losses under these
agreements and accordingly, has recorded an accrual for the fair value of
the guarantees of approximately $.3 million for estimated future losses
under repurchase agreements.
The Company obtains vehicle chassis for its recreational and specialized
vehicle products directly from automobile manufacturers under converter
pool agreements. The agreements generally provide that the manufacturer
will provide a supply of chassis at the Company's various production
facilities under the terms and conditions as set forth in the agreement.
Chassis are accounted for as consigned inventory until either assigned to
a unit in the production process or 90 days have passed. At the earlier of
these dates, the Company is obligated to purchase the chassis and it is
recorded as inventory. At June 30, 2003, chassis held as consigned
inventory approximated $15.6 million.
During the first quarter of 2003, the Company made commitments for the
construction of a new Class C manufacturing facility to be located on its
complex in Middlebury, Indiana. The estimated completed cost of this
project was $4.0 million. Production in this facility is expected to begin
in August 2003. As of June 30, 2003, the remaining outstanding commitments
to this project approximated $1.1 million.
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8. COMMITMENTS, CONTINGENCIES AND GUARANTEES, Continued.
The Company also entered into a commitment to purchase developed single
family residential lots located in a subdivision in Ohio. The purchase is
expected to close in August 2003. These lots are to be resold to builders
for the purpose of setting and completing the Company's modular homes. The
total purchase price of the developed real estate approximated $2.1
million of which a commitment of $1.9 million was still outstanding as of
June 30, 2003.
The Company is involved in various legal proceedings, most of which are
ordinary disputes incidental to the industry and most of which are covered
in whole or in part by insurance. Management believes that the ultimate
outcome of these matters and any liabilities in excess of insurance
coverage and self-insurance accruals will not have a material adverse
impact on the Company's consolidated financial position, future business
operations or cash flows.
9. STOCK-BASED COMPENSATION
The Company has stock option plans and an employee stock purchase plan.
The Company accounts for these plans under the recognition and measurement
principles of APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. No stock-based employee
compensation cost is reflected in net earnings for these plans, as all
options granted under these plans have an exercise price equal to the
market value of the underlying common stock at the date of grant. The
following table illustrates the effect on net income and earnings per
share if the Company had applied the fair value recognition provisions of
SFAS No. 123, "Accounting for Stock-Based Compensation," to stock-based
compensation.
Had the Company adopted the provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation," the Company's pro forma net income (loss) and
net income (loss) per share for the three and six-month periods ended June
30, 2003 and 2002 would have been:
Three Months Six Months
Ended Ended
June 30, June 30,
2003 2002 2003 2002
---- ---- ---- ----
Net income, as reported $ 2,836 $ 3,563 $ 16 $ 2,973
Deduct total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of taxes (172) (161) (282) (322)
------- ------- ------- -------
Pro forma net income (loss) $ 2,664 $ 3,402 $ (266) $ 2,651
======= ======= ======= =======
Income (loss) per share:
Basic - as reported .18 .22 - .19
Basic - pro forma .17 .21 (.02) .17
Diluted - as reported .18 .22 - .18
Diluted - pro forma .17 .21 (.02) .16
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9. STOCK-BASED COMPENSATION, Continued.
On March 1, 2003, the Company adopted the Performance Based Restricted
Stock Plan initiated to motivate and reward participants for superior
achievement of the Company's pre-established long-term financial
performance goals. This new plan, effective as of January 1, 2003,
utilizes variable plan accounting, meaning that awards are expensed based
upon the fair value of the estimated shares to be earned throughout the
vesting period. During the quarter ended March 31, 2003, a total of 88.5
contingent shares were awarded to key employees under the plan. The exact
number of shares that each employee will receive is dependent on the
Company's performance, with respect to net income, over a three-year
period. The amount expensed during the three and six months ended June 30,
2003 was $79 and $176, respectively.
10. NEW ACCOUNTING PRONOUNCEMENTS
FASB Interpretation No. (FIN) 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness
of Others," changes current practice in accounting for, and disclosure of,
guarantees. FIN 45 requires certain guarantees to be recorded as
liabilities at fair value on the Company's balance sheet. FIN 45 also
requires a guarantor to make significant new disclosures, even when the
likelihood of making any payments under the guarantee is remote, which is
another change from current practice. The disclosure requirements of FIN
45 are effective immediately and are included in Notes 4 and 8. The
initial recognition and measurement provisions are applicable on a
prospective basis to guarantees issued or modified after December 31,
2002. The recognition and measurement provisions were adopted,
prospectively, as of January 1, 2003 and did not have a significant impact
on the Company's consolidated financial position or results of operations.
In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of FASB Statement
No. 123." SFAS 148 amends SFAS. 123, "Accounting for Stock-Based
Compensation," to provide alternative methods of transition for a
voluntary change to the fair-value based method of accounting for
stock-based employee compensation. In addition, SFAS 148 amends the
disclosure requirements of Statement No. 123 to require disclosure in
interim financial statements regarding the method used on reported
results. The Company does not intend to adopt a fair-value based method of
accounting for stock-based employee compensation until a final standard is
issued by the FASB that requires this accounting. Pro forma disclosures of
quarterly earnings are included in Note 9 of this quarterly statement.
In November 2002, the Emerging Issues Task Force reached a consensus on
Issue 00-21, "Accounting for Revenue Arrangements with Multiple
Deliverables," which addresses how to account for arrangements that may
involve the delivery or performance of multiple products, services, and/or
rights to use assets. Revenue arrangements with multiple deliverables
should be divided into separate units of accounting if the deliverables in
the arrangement meet the following criteria: (1) value to the customer
exists on a stand alone basis,(2) there is objective and reliable evidence
of the fair value of the undelivered items and (3) the arrangement
includes a general right of
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10. NEW ACCOUNTING PRONOUNCEMENTS, Continued.
return, where delivery or performance of the undelivered items is
considered probable and substantially in the control of the vendor.
Arrangement consideration should be allocated among the separate
deliverables based on their relative fair values. The accounting for
revenue arrangements under EITF 00-21 is applicable for all new agreements
entered into in periods beginning after June 15, 2003. The Company has not
yet determined what effect, if any, the new recognition and measurement
provisions will have on the Company's future financial results.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable
Interest Entities". This standard clarifies the application of Accounting
Research Bulletin No. 51, "Consolidated Financial Statements", and
addresses consolidation by business enterprises of variable interest
entities. FIN 46 requires existing unconsolidated variable interest
entities to be consolidated by their primary beneficiaries if the entities
do not effectively disperse risk among the parties involved. FIN 46 also
enhances the disclosure requirements related to variable interest
entities. This statement is effective immediately for variable interest
entities created or in which an enterprise obtains an interest after
January 31, 2003. FIN 46 will be effective for the Company beginning July
1, 2003 for all interest in variable interest entities acquired before
February 1, 2003. The Company has not yet determined what effect, if any,
the new recognition and measurement provisions will have on the Company's
future financial results.
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COACHMEN INDUSTRIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis
Of Financial Condition and Results of Operations
(in thousands, except per share amounts)
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
condensed consolidated financial statements.
A summary of the changes in the principal items included in the consolidated
statements of operations is shown below.
Comparison of
Three Months Six Months
Ended June 30, 2003 and 2002
Increases (Decreases)
---------------------
Amount Percentage Amount Percentage
------ ---------- ------ ----------
Net sales $ 3,178 1.9% $ (3,281) (1.0)%
Cost of sales 1,931 1.3 (3,292) (1.2)
Delivery expense 397 5.0 397 2.7
Selling expenses 1,105 20.9 1,790 17.3
General and
administrative expenses (456) (5.6) 609 3.9
Interest expense (49) (11.6) (227) (23.6)
Investment (income) loss 305 160.5 142 (338.1)
Gain on sale of
properties, net (650) (95.0) (1,310) (97.1)
Other income, net (381) (90.9) (477) (82.7)
Income before income taxes (1,086) (20.1) (4,487) (99.5)
Income taxes (359) (19.5) (1,530) (99.5)
Net income (727) (20.4) (2,957) (99.5)
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NET SALES
Consolidated net sales for the quarter ended June 30, 2003 were $173.9 million,
an increase of $3.2 million, or 1.9%, from the $170.7 million reported for the
corresponding quarter last year. Net sales for the six months were $320.3
million, representing a decrease of 1.0% from the $323.6 million reported for
the same period in 2002. The Company's recreational vehicle segment experienced
a net sales increase of 5.2% for the quarter and an increase of 2.2% for the six
months. Both the motorized and towable products had increases in sales dollars
and decreases in unit shipments from the 2002 periods. Product mix, specifically
Class A's, accounted for higher sales dollars on fewer units for motorized
products. For towable products, camping trailers experienced the most
significant decline in unit shipments, off 16.1% and 16.9% for the quarter and
six months ending June 30, 2003, respectively, from the same periods of the
previous year. This inexpensive product type has seen substantial erosion
throughout the industry, with wholesale shipments being down 24.0% through May.
Both travel trailer and fifth wheel unit shipments were up slightly over the
previous year for both the quarter and six-month periods. Compared to 2002,
there was an overall decrease in unit shipments of approximately 6.9% and 5.2%
for the quarter and six months ended June 30, 2003, respectively. The Company's
modular housing and building segment experienced a net sales decrease for the
2003 quarter of 4.1% and a decrease of 7.6% for the six months. This decrease
was principally attributable to weak demand for commercial structures and
softness in certain residential housing markets where the Company participates.
In addition, unusually heavy rains in the eastern part of the country inhibited
the Company's ability to deliver ordered product, as builders were unable to
complete foundations and site preparation. However, shipments for housing and
commercial structures strengthened during the second quarter, with June
shipments and backlogs reaching their highest level for the year.
COST OF SALES
Cost of sales increased 1.3%, or $1.9 million, for the three months and
decreased 1.2%, or $3.3 million, for the six months ended June 30, 2003. The
increase in cost of sales of 1.3% was less than the 1.9% increase in net sales
for the quarter. For the six-month period, the decrease in cost of sales of 1.2%
was greater than the 1.0% decrease in net sales. The improvement in cost of
sales as a percentage of sales for the most recent quarter and six-month period
was mainly the benefit of fixed cost savings in the modular housing and building
segment resulting from the closing of two of Miller Building Systems' commercial
manufacturing facilities.
OPERATING EXPENSES
As a percentage of net sales, operating expenses, which include delivery,
selling, general and administrative expenses, were 12.9% and 13.7% for the 2003
quarter and six-month period compared to 12.5% and 12.7% for the quarter and
six-month period of 2002. As a percentage of sales, delivery expenses increased
by .1 percentage point for the three-month period and .2 percentage points for
the six-month period as compared to the prior year three- and six-month periods.
The increase in delivery expense as a percentage of sales in 2003 versus 2002
was mainly due to increased fuel costs and resulting increased rates from
outside carriers. Selling expenses, at 3.7% of net sales for the quarter and
3.8% of net sales for the six months ended June 30, 2003, were .6 percentage
points higher than the comparable quarter and six months of the previous year.
The increase
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in selling expenses as a percentage of sales was primarily related to increased
payroll cost and travel-related expenses along with increased expenses related
to new product shows. General and administrative expenses were 4.4% of net sales
for the second quarter compared to 4.8% for the 2002 corresponding quarter and
5.1% of net sales for the six-month period compared to 4.9% for 2002. The
decrease for the quarter was primarily the result of reduced administrative
salaries and lower management bonus accruals. For the six-month period, the .2
percentage point increase over the prior year was primarily the result of
personnel-related expenses and professional services from the first quarter of
2003 that are not expected to occur in future periods, as indicated by the
improvement in the second quarter.
INTEREST EXPENSE
Interest expense was $372 and $734 for the quarter and six-month periods in 2003
compared to $421 and $961 in the same periods last year. Interest expense varies
with the amount of long-term debt, borrowings from the Company's line of credit
and the amounts borrowed against the cash value of the Company's investment in
life insurance contracts. These life insurance contracts were purchased to fund
obligations under deferred compensation agreements with executives and other key
employees. In September of 2002, as a better utilization of the Company's
available cash at that time, $18.5 million in loans against the cash value of
life insurance policies were repaid. While the Company was required to utilize
its line of credit during certain periods in 2003, the resulting overall
reduction in interest expense for quarter and six months ended June 30, 2003 was
the direct result of paying off the life insurance loans.
INVESTMENT INCOME (LOSS)
There was a net investment loss of $495 for the quarter ended June 30, 2003
compared to an investment loss of $190 in the same quarter of 2002. For the
six-month period, the net investment loss of $100 compared to investment income
of $42 the previous year. The investment losses for the quarter were principally
attributable to realized losses incurred from the sale of preferred stocks and
an other-than-temporary impairment charge of $488 to adjust to market value the
carrying cost of certain preferred stocks currently held by the Company.
GAIN ON THE SALE OF PROPERTIES, NET
There was a net gain on the sale of properties for the second quarter of 2003 of
$34 compared with a gain of $684 in the same quarter of 2002. The net gain on
the sale of properties for the first six months of 2003 and 2002 was $39 and
$1,349, respectively. No significant properties were sold during the quarter
ended June 30, 2003.
OTHER INCOME, NET
Other income, net, represents income of $38 for the second quarter of 2003 and
income of $419 for the same period of the previous year. For the six-month
period, other income, net for 2003 was $100 compared to income of $577 in 2002.
There were no significant items for the most recent quarter. The most
significant item of income for 2002 was a gain of $208 on the redemption of a
life insurance policy contract in the second quarter.
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INCOME TAXES
For the second quarter ended June 30, 2003, the effective tax rate was 34.4% and
the year-to-date rate was 34.6% compared with a 2002 second quarter and
year-to-date rate of 34.1%. The Company's effective tax rate fluctuates based
upon the states where sales occur, with the level of export sales and also with
the amount of nontaxable dividend income on investments.
LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL CONDITION
The Company generally relies on funds from operations as its primary source of
liquidity. In addition, as of June 30, 2003 the Company entered into a new
three-year credit agreement for a $35 million unsecured bank line of credit to
meet its seasonal working capital needs. The loan agreement contains covenants
whereby the Company must maintain certain financial ratios. At June 30, 2003,
there were no borrowings against this bank line of credit. For the six months
ended June 30, 2003, the major use of cash was for investing and financing
activities. Cash used in investing activities consisted primarily of purchases
of property and equipment. Cash used in financing activities included the
purchase of common shares for treasury and payment of cash dividends.
At June 30, 2003, working capital decreased to $91.0 million from $93.6 million
at December 31, 2002. The $7.0 million increase in current assets at June 30,
2003 versus December 31, 2002 was primarily due to increases in net trade
receivables of $5.1 million and increases in inventories of $11.6 million during
the six-month period, offset by a $10.5 million decrease in cash. The increase
in current liabilities of $9.6 million was primarily due to increases in
accounts payable of $11.9 million, offset by decreases in accrued expenses and
other liabilities.
During the first quarter of 2003, the Company entered into an agreement for the
construction of a new Class C manufacturing facility to be located on its
complex in Middlebury, Indiana. The estimated completed cost of this project was
$4.0 million. Production in this facility is expected to begin in August 2003.
The Company also entered into a capital lease commitment during the first
quarter of 2003 for a facility located in Fitzgerald, Georgia to be used for
towable recreational vehicle production. Total cost to convert this facility to
towable production was estimated at $1.5 million. Production began in this
facility during the second quarter of 2003. The Company also entered into a
commitment to purchase developed single family residential lots located in a
subdivision in Ohio. These lots are to be resold to builders for the purpose of
setting and completing the Company's modular homes. The total purchase price of
the developed real estate approximates $2.1 million.
FORWARD-LOOKING STATEMENTS
This Form 10-Q contains certain statements that are "forward-looking" statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934, as amended. These forward-looking
statements involve risks and uncertainties, and are dependent on factors, which
may include, but are not limited to the potential fluctuations in the Company's
operating results; the condition of the telecommunications industry which
purchases modular structures; the availability and price of gasoline and diesel
products, which can
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impact the sale of recreational vehicles; availability of chassis, which are
used in the production of many of the Company's recreational vehicle products;
interest rates, which affect the affordability of the Company's products;
changing accounting standards and government regulations, such as those covering
accounting practices, environmental matters or product warranties and recalls,
which may affect costs of operations, revenues, product acceptance and
profitability; legislation governing the relationships of the Company with its
recreational vehicle dealers, which may affect the Company's options and
liabilities in the event of a general economic downturn; the impact of economic
uncertainty on high-cost discretionary product purchases, which can hinder the
sales of recreational vehicles; the demand for commercial structures in the
various industries that the modular housing and building segment serves; the
ability of the housing and building segment to perform in new market segments
where it has limited experience; and also on the state of the recreational
vehicle and modular housing industries in the United States. Other factors
affecting forward-looking statements include the cyclical and seasonal nature of
the Company's businesses, adverse weather, changes in property taxes and energy
costs, changes in federal income tax laws and federal mortgage financing
programs, changes in public policy, competition in these industries and the
Company's ability to maintain or increase gross margins which are critical to
profitability whether there are or are not increased sales, further developments
in the war on terrorism and related international crises; and other risks and
uncertainties.
At times, the Company's actual performance differs materially from its
projections and estimates regarding the economy, the recreational vehicle and
modular housing and building industries and other key performance indicators.
Readers of this Report are cautioned that reliance on any forward-looking
statements involves risks and uncertainties. Although the Company believes that
the assumptions on which the forward-looking statements contained herein are
reasonable, any of those assumptions could prove to be inaccurate given the
inherent uncertainties as to the occurrence or nonoccurrence of future events.
There can be no assurance that the forward-looking statements contained in this
Report will prove to be accurate. The inclusion of a forward-looking statement
herein should not be regarded as a representation by the Company that the
Company's objectives will be achieved. For further discussion of the elements
involved in this report, see the notes and other materials included with the
Company's latest Annual Report on Form 10-K.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, operations of the Company are exposed to
fluctuations in interest rates. These fluctuations can vary the costs of
financing and investing yields. Although the Company has periodically utilized
its short-term credit facilities during 2003, changes in interest rates would
primarily impact the Company's long-term debt. At June 30, 2003, the Company had
$11.1 million of long-term debt, including current maturities. Long-term debt
consists mainly of industrial development revenue bonds that have variable or
floating rates. In January of 2003, the Company entered into various interest
rate swap agreements that become effective beginning in October of 2003. These
swap agreements, which are designated as cash flow hedges for accounting
purposes, effectively convert a portion of the Company's variable-rate
borrowings to a fixed-rate basis through November of 2011, thus reducing the
impact of changes in interest rates on future interest expense. The fair value
of the Company's interest rate swap agreements represents the estimated receipts
or payments that would be made to terminate the
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agreements. A loss of $.2 million, net of taxes, attributable to changes in the
fair value of interest rate swap agreements was recorded as a component of
accumulated other comprehensive gain (loss) as of June 30, 2003. If in the
future the interest rate swap agreements are determined to be ineffective or are
terminated before the contractual termination dates, or if it becomes probable
that the hedged variable cash flows associated with the variable-rate borrowings
will stop, the Company will be required to reclassify into earnings all or a
portion of the unrealized losses on cash flow hedges included in accumulated
other comprehensive gain (loss).
At June 30, 2003, the Company had $10.5 million invested in marketable
securities. The Company's marketable securities consist of public utility
preferred stocks which typically pay quarterly fixed rate dividends. These
financial instruments are subject to market risk in that available energy
supplies and changes in available interest rates would impact the market value
of the preferred stocks. The Company utilizes U.S. Treasury bond futures options
as a protection against the impact of increases in interest rates on the fair
value of the Company's investments in these fixed rate preferred stocks.
Outstanding options are marked to market with market value changes recognized in
current earnings. The U.S. Treasury bond futures options generally have terms
ranging from 90 to 180 days. Based on the Company's overall interest rate
exposure at June 30, 2003, including variable or floating rate debt and
derivatives used to hedge the fair value of fixed rate preferred stocks, a
hypothetical 10 percent change in interest rates applied to the fair value of
the financial instruments as of June 30, 2003, would have no material impact on
earnings, cash flows or fair values of interest rate risk sensitive instruments
over a one-year period.
ITEM 4. CONTROLS AND PROCEDURES
As of June 30, 2003, an evaluation was performed under the supervision and with
the participation of the Company's management, including the Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures. Based on and as
of the time of such evaluation, the Company's management, including the Chief
Executive Officer and Chief Financial Officer, concluded that the Company's
disclosure controls and procedures were effective as of June 30, 2003, to ensure
that material information relating to the Company (including its consolidated
subsidiaries) would be made known to them in connection with the filing of this
quarterly report on Form 10-Q. There have been no significant changes in the
Company's internal controls or in other factors that could significantly affect
internal controls subsequent June 30, 2003 nor any significant deficiencies or
material weaknesses in such controls requiring corrective actions. As a result,
no corrective actions were required or taken.
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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 1, 2003.
b) The following nominees were elected Directors for three-year terms
expiring in 2006:
Claire C. Skinner
Donald W. Hudler
Philip G. Lux
c) The tabulation of votes for each Director nominee was as follows:
For Withheld
--- --------
Election of Directors:
Claire C. Skinner 14,273,431 128,896
Donald W. Hudler 14,280,977 121,350
Philip G. Lux 12,239,373 2,162,953
The terms of office of the following directors continued after the
meeting:
Geoffrey B. Bloom, Keith D. Corson, Thomas H. Corson, Robert J.
Deputy, William P. Johnson, Rex Martin and Edwin W. Miller
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
See Index to Exhibits
(b) Reports on Form 8-K during the quarter ended June 30, 2003
Form 8-K, filed on, and dated, April 28, 2003 with respect to
Item 9 and furnished pursuant to Item 12 (a press release
announcing first quarter results).
Form 8-K, filed on, and dated, May 5, 2003, reporting an Item
5 event (a press release announcing the declaration of an
$.06 per share regular quarterly dividend).
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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 8, 2003 By: /s/ Claire C. Skinner
-----------------------------------
Claire C. Skinner, Chairman of the
Board and Chief Executive Officer
Date: August 8, 2003 By: /s/ Joseph P. Tomczak
----------------------------------
Joseph P. Tomczak, Executive Vice
President and Chief Financial Officer
Date: August 8, 2003 By: /s/ Gary L. Near
----------------------------------
Gary L. Near, Vice President
and Controller
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INDEX TO EXHIBITS
Number Assigned
In Regulation
S-K, Item 601 Description of Exhibit
3(a)(i) Articles of Incorporation of the Company as amended on May 30,
1995 (incorporated by reference to Exhibit 3(i) to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1995).
3(a)(ii) Articles of Amendment to Articles of Incorporation (incorporated
by reference to Exhibit 4.2 to the Company's Form S-3 Registration
Statement, File No. 333-14579).
3(b) By-Laws as modified through January 31, 2002 (incorporated by
reference to the Company's Form 8-K filed February 20, 2002).
4(a) Credit Agreement dated as of June 30, 2003 among Coachmen
Industries, Inc., the Lenders named therein, and Bank One,
Indiana, N.A. and related Subsidiary Guaranty dated as of
June 30, 2003 (filed herewith).
*10(a) Long-Term Incentive Performance Based Restricted Stock Plan
effective as of March 1, 2003 (filed herewith).
99.1 Certification of Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act
99.2 Certification of Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act
99.3 Certification of Chief Executive Officer Pursuant to 18
U.S.C. Section 1350
99.4 Certification of Chief Financial Officer Pursuant to 18
U.S.C. Section 1350
* Management Contract or Compensatory Plan.
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