1 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 September 30, 2003 ------------------ 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) 2831 DEXTER DRIVE, ELKHART, INDIANA 46514 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 574-262-0123 ------------ 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 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 October 31, 2003: Common Shares, without par value 15,534,765 shares outstanding including an equivalent number of common share purchase rights. - -------------------------------------------------------------------------------- 2 COACHMEN INDUSTRIES, INC. AND SUBSIDIARIES FORM 10-Q INDEX ----- Page No. -------- Part I. Financial Information - ------------------------------ Financial Statements: Consolidated Balance Sheets- September 30, 2003 and December 31, 2002 3-4 Consolidated Statements of Operations- Three and Nine Months Ended September 30, 2003 and 2002 5 Consolidated Statements of Cash Flows- Nine Months Ended September 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 6. Exhibits and Reports on Form 8-K 20 Signatures 21 2 3 COACHMEN INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands) September 30, December 31, 2003 2002 ---- ---- (Unaudited) ASSETS Current assets: Cash and temporary cash investments $ 5,048 $ 16,549 Marketable securities 10,565 7,641 Trade receivables, less allowance for doubtful receivables 2003 - $827 and 2002 - $861 49,634 29,408 Other receivables 1,915 1,572 Refundable income taxes 850 2,878 Inventories 102,828 85,010 Prepaid expenses and other 6,658 4,412 Deferred income taxes 6,316 6,885 -------- -------- Total current assets 183,814 154,355 -------- -------- Property, plant and equipment, at cost 154,521 148,439 Less, Accumulated depreciation 74,193 69,550 -------- -------- Property, plant and equipment, net 80,328 78,889 -------- -------- Goodwill 18,954 18,954 Cash value of life insurance 35,614 33,155 Real estate held for sale - 276 Other 3,945 7,566 -------- -------- Total assets $322,655 $293,195 ======== ======== See Notes to Consolidated Financial Statements. 3 4 COACHMEN INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands) September 30, December 31, 2003 2002 ---- ---- (Unaudited) LIABILITIES Current liabilities: Accounts payable, trade $ 46,771 $ 18,801 Accrued income taxes 3,481 1,222 Accrued expenses and other liabilities 37,953 39,856 Current portion of long-term debt 995 902 -------- -------- Total current liabilities 89,200 60,781 Long-term debt 9,961 10,097 Deferred income taxes 4,123 4,123 Other 9,854 8,768 -------- -------- Total liabilities 113,138 83,769 -------- -------- SHAREHOLDERS' EQUITY Common shares, without par value: authorized 60,000 shares; issued 2003 - 21,080 shares and 2002 - 21,062 shares 91,461 91,283 Additional paid-in capital 6,991 6,133 Unearned compensation on restricted stock (933) - Accumulated other comprehensive income (loss) 281 (661) Retained earnings 171,641 169,054 Treasury shares, at cost: 2003 - 5,545 shares and 2002 - 5,395 shares (59,924) (56,383) -------- -------- Total shareholders' equity 209,517 209,426 -------- -------- Total liabilities and shareholders' equity $322,655 $293,195 ======== ======== See Notes to Consolidated Financial Statements. 4 5 COACHMEN INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) (Unaudited) Three Months Nine Months Ended September 30, Ended September 30, 2003 2002 2003 2002 ---- ---- ---- ---- Net sales $200,809 $177,535 $521,099 $501,106 Cost of sales 167,679 148,090 443,389 427,092 -------- -------- -------- -------- Gross profit 33,130 29,445 77,710 74,014 -------- -------- -------- -------- Operating expenses: Delivery 8,896 7,757 24,256 22,720 Selling 8,047 6,806 20,160 17,129 General and administrative 8,216 8,153 24,604 23,932 -------- -------- -------- -------- Total operating expenses 25,159 22,716 69,020 63,781 -------- -------- -------- -------- Operating income 7,971 6,729 8,690 10,233 -------- -------- -------- -------- Nonoperating (income) expense: Interest expense 219 424 953 1,385 Investment income, net (275) (321) (175) (363) Gain on sale of properties, net (57) (22) (96) (1,371) Other (income) expense, net (44) 8 (144) (569) -------- -------- -------- -------- Total nonoperating (income) expense, net (157) 89 538 (918) -------- -------- -------- -------- Income before income taxes 8,128 6,640 8,152 11,151 Income taxes 2,770 2,344 2,778 3,882 -------- -------- -------- -------- Net income $ 5,358 $ 4,296 $ 5,374 $ 7,269 ======== ======== ======== ======== Earnings per common share: Basic $ .35 $ .27 $ .35 $ .45 Diluted $ .35 $ .27 $ .35 $ .45 Number of common shares used in the computation of earnings per common share: Basic 15,427 16,080 15,436 16,070 ------ ------ ------ ------ Diluted 15,464 16,175 15,475 16,186 ------ ------ ------ ------ Cash dividends per common share $ .06 $ .06 $ .18 $ .16 See Notes to Consolidated Financial Statements. 5 6 COACHMEN INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (Unaudited) Nine Months Ended September 30, 2003 2002 ---- ---- Cash flows from operating activities: Net income $ 5,374 $ 7,269 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 7,112 7,244 Provision for doubtful receivables 153 167 Gain on sale of properties, net (96) (1,371) Increase in cash surrender value of life insurance policies (726) (1,066) Valuation changes and realized and unrealized losses on marketable securities and derivatives (185) 868 Deferred income taxes 569 1,037 Tax benefit related to exercise of stock options 8 124 Other 1,839 695 Changes in certain assets and liabilities: Receivables (20,722) (13,667) Inventories (17,818) (6,076) Prepaid expenses and other (2,246) 473 Accounts payable, trade 27,970 19,681 Income taxes - accrued and refundable 4,287 3,170 Accrued expenses and other liabilities (1,903) 4,050 -------- -------- Net cash provided by operating activities 3,616 22,598 -------- -------- Cash flows from investing activities: Proceeds from sales of marketable securities 25,215 24,776 Proceeds from sale of property and equipment 2,393 5,941 Investments in marketable securities (25,505) (24,133) Purchases of property and equipment (10,520) (3,396) Other 215 (435) -------- -------- Net cash provided by (used in) investing activities (8,202) 2,753 -------- -------- Cash flows from financing activities: Proceeds from short-term debt 23,000 - Payments of short-term debt (23,000) - Proceeds from long-term debt 571 - Payments of long-term debt (614) (390) Repay borrowing against cash value of life insurance policies - (18,458) Issuance of common shares under stock incentive plans 269 804 Purchases of common shares for treasury (4,354) (3,850) Cash dividends paid (2,787) (2,576) -------- -------- Net cash used in financing activities (6,915) (24,470) -------- -------- Increase (decrease) in cash and temporary cash investments (11,501) 881 Cash and temporary cash investments Beginning of period 16,549 28,419 -------- -------- End of period $ 5,048 $ 29,297 ======== ======== See Notes to Consolidated Financial Statements. 6 7 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 nine-month periods ended September 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 nine-month periods ended September 30, 2003 and 2002: Three Months Nine Months Ended September 30, Ended September 30, 2003 2002 2003 2002 ---- ---- ---- ---- Net sales: Recreational vehicles $136,241 $113,643 $359,153 $331,812 Modular housing and building 64,568 63,892 161,946 169,294 -------- -------- -------- -------- Consolidated total $200,809 $177,535 $521,099 $501,106 ======== ======== ======== ======== Pretax income: Recreational vehicles $ 2,872 $ 2,578 $ 2,270 $ 3,115 Modular housing and building 5,528 3,550 7,284 7,008 Other reconciling items (272) 512 (1,402) 1,028 -------- -------- -------- -------- Consolidated total $ 8,128 $ 6,640 $ 8,152 $ 11,151 ======== ======== ======== ======== 7 8 2. SEGMENT INFORMATION, Continued. September 30, December 31, 2003 2002 ---- ---- Total assets: Recreational vehicles $129,132 $ 93,571 Modular housing and building 110,854 97,765 Other reconciling items 82,669 101,859 -------- -------- Consolidated total $322,655 $293,195 ======== ======== 3. INVENTORIES Inventories consist of the following: September 30, December 31, 2003 2002 ---- ---- Raw materials $ 37,368 $ 28,432 Work in process 16,805 11,054 Improved lots 1,889 - Finished goods 46,766 45,524 -------- -------- Total $102,828 $ 85,010 ======== ======== During the quarter ended September 30, 2003, the Company purchased developed single family residential lots to be resold to builders for the purpose of setting and completing the Company's modular homes. This inventory item has been classified under a new category called "Improved lots." 4. ACCRUED EXPENSES AND OTHER LIABILITIES Accrued expenses and other liabilities consist of the following: September 30, December 31, 2003 2002 ---- ---- Wages, salaries, bonuses and commissions $ 5,652 $ 5,661 Dealer incentives, including volume bonuses, dealer trips, interest reimbursement, co-op advertising and other rebates 3,710 4,368 Warranty 7,854 8,796 Insurance-products and general liability, workers compensation, group health and other 5,728 7,434 Customer deposits and unearned revenues 5,893 5,598 Other current liabilities 9,116 7,999 -------- -------- Total $ 37,953 $ 39,856 ======== ======== 8 9 4. ACCRUED EXPENSES AND OTHER LIABILITIES, Continued. Changes in the Company's warranty liability during the three and nine months ended September 30, 2003 were as follows: Three Months Nine Months Ended Ended September 30, September 30, 2003 2003 ---- ---- Balance of accrued warranty at beginning of period $ 7,530 $ 8,796 Warranties issued during the period and changes in liability for pre-existing warranties 4,502 11,194 Cash settlements made during the period (4,178) (12,136) ------- ------- Balance of accrued warranty at September 30, 2003 $ 7,854 $ 7,854 ======= ======= 5. EARNINGS PER SHARE Basic earnings per common share is based on the weighted average number of shares outstanding during the period. Diluted earnings per common share is based on the weighted average number of shares outstanding during the period, after consideration of the dilutive effect of stock options and awards. Basic and diluted earnings per share for the three and nine months ended September 30, 2003 and 2002 were calculated as follows: Three Months Nine Months Ended Ended September 30, September 30, 2003 2002 2003 2002 ---- ---- ---- ---- Numerator: Net income available to common stockholders $ 5,358 $ 4,296 $ 5,374 $ 7,269 Denominator: Number of shares outstanding, end of period: Common stock 15,535 15,908 15,535 15,908 Effect of weighted average shares outstanding during period (108) 172 (99) 162 ------ ------ ------ ------ Weighted average number of common shares used in basic EPS 15,427 16,080 15,436 16,070 Effect of dilutive securities Stock options and awards 37 85 39 106 Deferred compensation plans - 10 - 10 ------ ------ ------ ------ Weighted average number of common shares used in diluted EPS 15,464 16,175 15,475 16,186 ====== ====== ====== ====== For the three and nine months ended September 30, 2003 and 2002, 296 and 287 shares and 335 and 335 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 three quarters may not equal year-to-date earnings per share due to rounding and changes in diluted potential common shares. 9 10 6. OTHER COMPREHENSIVE INCOME (LOSS) The changes in components of other comprehensive income for the three and nine months ended September 30, 2003 and 2002 are as follows: Three Months Nine Months Ended Ended September 30, September 30, 2003 2002 2003 2002 ---- ---- ---- ---- Net income $ 5,358 $ 4,296 $ 5,374 $ 7,269 Unrealized gains (losses) on securities available for sale, net of taxes 199 (101) 1,129 306 Unrealized gains (losses) on cash flow hedges, net of taxes 30 - (187) - ------- ------- ------- ------- Total comprehensive income $ 5,587 $ 4,195 $ 6,316 $ 7,575 ======= ======= ======= ======= As of September 30, 2003 and 2002, the accumulated other comprehensive income (loss), net of tax, relating to unrealized losses on securities available for sale was $468 and ($625), respectively, and relating to deferred losses on cash flow hedges was ($187) and $0, respectively. During the quarter and nine months ended September 30, 2003, the Company recognized an other-than-temporary impairment charge of approximately $91 and $579, respectively, which has been reflected as an investment loss in the accompanying September 30, 2003 Statement of Operations. 7. RECLASSIFICATION Certain information in the accompanying consolidated statements of operations for the three and nine months ended September 30, 2002 has been reclassified to conform to the 2003 presentation. The reclassifications had no effect on net income as previously reported. 8. COMMITMENTS, CONTINGENCIES AND GUARANTEES The Company was contingently liable at September 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, sold within the last 12 months, 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 repurchase agreements cover approximately $208 million of products at September 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. The Company has recorded an accrual of approximately $.3 million for the fair value of the guarantees issued during the last twelve months. 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 10 11 8. COMMITMENTS, CONTINGENCIES AND GUARANTEES, Continued. 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 September 30, 2003, chassis held as consigned inventory approximated $11.4 million. During the third quarter of 2003, the Company entered into an agreement with Transamerica Commercial Finance Corporation ("TCFC") to form a private label financing program that provides exclusive financing services to the Company's recreational vehicle dealers. The program, operating under the name "Coachmen Financial Services", will initially focus primarily on wholesale inventory financing, providing the Company's dealers with dedicated lines of credit to purchase products at competitive rates and terms. The agreement provides for a preferred program that provides financing that is subject to the standard repurchase agreement described above. In addition, the agreement provides for a reserve pool whereby TCFC makes available an aggregate line of credit not to exceed $40 million that will provide financing for dealers that may not otherwise qualify for credit approval under the preferred program. No dealer being provided financing from the reserve pool can receive an aggregate line of credit exceeding $5 million. Per each contract year, in addition to the standard repurchase agreement described above, the Company will be liable to TCFC for the first $2 million of aggregate losses, as defined by the agreement, incurred by TCFC on designated dealers with higher credit risks that are accepted into the reserve pool financing program. As of September 30, 2003, no dealer financing had been extended from the reserve pool. 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 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 nine month periods ended September 30, 2003 was $83 and $259, respectively. The Company also 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, 11 12 9. STOCK-BASED COMPENSATION, Continued. "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 and net income per share for the three and nine-month periods ended September 30, 2003 and 2002 would have been: Three Months Nine Months Ended Ended September 30, September 30, 2003 2002 2003 2002 ---- ---- ---- ---- Net income, as reported $ 5,358 $ 4,296 $ 5,374 $ 7,269 Add: Stock-based compensation expense under variable plan included in reporting net income, net of taxes 56 - 171 - Deduct: Total stock-based employee compensation expense determined under fair-value based method for all awards, net of taxes (204) (98) (601) (420) ------- ------- ------- ------- Pro forma net income $ 5,210 $ 4,198 $ 4,944 $ 6,849 ======= ======= ======= ======= Income per share: Basic - as reported $ .35 $ .27 $ .35 $ .45 Basic - pro forma .34 .26 .32 .43 Diluted - as reported .35 .27 .35 .45 Diluted - pro forma .34 .26 .32 .42 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. 12 13 10. NEW ACCOUNTING PRONOUNCEMENTS, Continued. 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 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 was adopted for all new agreements entered into in periods beginning after June 15, 2003. The new recognition and measurement provisions did not have a significant impact on the Company's consolidated financial position and results of operations. 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 for the quarter ending December 31, 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. 13 14 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 Nine Months Ended September 30, 2003 and 2002 Increases (Decreases) --------------------- Amount Percentage Amount Percentage ------ ---------- ------ ---------- Net sales $ 23,274 13.1% $ 19,993 4.0% Cost of sales 19,589 13.2 16,297 3.8 Delivery expense 1,139 14.7 1,536 6.8 Selling expenses 1,241 18.2 3,031 17.7 General and administrative expenses 63 .8 672 2.8 Interest expense (205) (48.3) (432) (31.2) Investment (income) loss 46 (14.3) 188 (51.8) Gain on sale of properties, net (35) 159.1 1,275 (93.0) Other income, net 52 650.0 (425) (74.7) Income before income taxes 1,488 22 4 (2,999) (26.9) Income taxes 426 18.2 (1,104) (28.4) Net income 1,062 24.7 (1,895) (26.1) 14 15 NET SALES Consolidated net sales for the quarter ended September 30, 2003 were $200.8 million, an increase of $23.3 million, or 13.1%, from the $177.5 million reported for the corresponding quarter last year. Net sales for the nine months were $521.1 million, representing an increase of 4.0% over the $501.1 million reported for the same period in 2002. The Company's recreational vehicle segment experienced a net sales increase of 19.9% for the quarter and an increase of 8.2% for the nine months. Compared to 2002 third quarter and year-to-date, respectively, Class A unit shipments increased 33.0% and 9.8%, Class C unit shipments decreased 19.8% and 13.6%, travel trailer units shipments declined 14.1% and 4.6% and fifth wheel unit shipments increased 107.5% and 35.5%. Camping trailers experienced the most significant decline for towable products in unit shipments, off 16.2% and 16.9% for the quarter and nine months ending September 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 for the industry being down 24.2% through August. Compared to 2002, the Company experienced an overall decrease in recreational vehicle unit shipments of approximately 2.4% and 4.3% for the quarter and nine months ended September 30, 2003, respectively. The Company's modular housing and building segment experienced a net sales increase for the 2003 quarter of 1.1% and a decrease of 4.3% for the nine months. This decrease for the nine-month period 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 hindered the Company's ability to deliver ordered product, as builders were unable to complete foundations and site preparation. However, as indicated by the results of the most recent quarter, shipments for housing and commercial structures strengthened and backlogs continue to remain strong. COST OF SALES Cost of sales increased 13.2%, or $19.6 million, for the three months and 3.8%, or $16.3 million, for the nine months ended September 30, 2003 as compared to the corresponding periods in 2002. The increase in cost of sales was .1 percentage point greater than the 13.1% increase in net sales for the quarter. For the nine-month period, the increase in cost of sales of 3.8% was .2 percentage points less than the 4.0% increase in net sales. The improvement in cost of sales as a percentage of sales for the nine-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. 15 16 OPERATING EXPENSES As a percentage of net sales, operating expenses, which include delivery, selling, general and administrative expenses, were 12.5% and 13.2% for the 2003 quarter and nine-month period compared to 12.8% and 12.7% for the quarter and nine-month period of 2002. As a percentage of sales, delivery expenses for the three-month period were unchanged at 4.4% as compared to 2002 while the nine-month period of 4.7% increased by .2 percentage points as compared to the prior year. The increase in delivery expense as a percentage of sales in 2003 versus 2002 was mainly due to fluctuating fuel costs and resulting surcharges from outside carriers. Selling expenses, at 4.0% of net sales for the quarter and 3.9% of net sales for the nine months ended September 30, 2003, were .2 and ..5 percentage points higher than the comparable quarter and nine months of the previous year, respectively. The increase in selling expenses as a percentage of sales was primarily related to increased staffing costs and travel-related expenses along with increased expenses related to new product shows. General and administrative expenses were 4.1% of net sales for the third quarter compared to 4.6% for the 2002 corresponding quarter and 4.7% of net sales for the nine-month period compared to 4.8% for 2002. The decrease as a percentage of sales for the quarter and nine-month period was primarily the result of lower management bonus accruals and the favorable settlement of a sales tax dispute during the third quarter which resulted in the reduction of an estimated reserve. INTEREST EXPENSE Interest expense was $219 and $953 for the quarter and nine-month periods in 2003 compared to $424 and $1,385 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. The overall reduction in interest expense for quarter and nine months ended September 30, 2003 was primarily due to paying off life insurance loans in September 2002. INVESTMENT INCOME There was net investment income of $275 for the quarter ended September 30, 2003 compared to $321 in the same quarter of 2002. For the nine-month period, net investment income of $175 compared to income of $363 the previous year. Net investment income for the quarter was principally attributable to realized gains incurred from the sale of preferred stocks. For the nine-month period, these gains were offset by an other-than-temporary impairment charge of $579 to adjust to market value the carrying cost of certain preferred stocks held by the Company. GAIN ON THE SALE OF PROPERTIES, NET There was no significant gain on the sale of properties realized during the third quarter of 2003 or 2002. The net gain on the sale of properties for the first nine months of 2003 and 2002 was $96 and $1,371, respectively. 16 17 OTHER INCOME AND EXPENSE, NET Other income, net, represents income of $44 for the third quarter of 2003 and expense of $8 for the same period of the previous year. For the nine-month period, other income, net for 2003 was $144 compared to income of $569 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. INCOME TAXES For the third quarter and nine months ended September 30, 2003, the effective tax rate was 34.1% compared with the 2002 third quarter and year-to-date rate of 35.3% and 34.8%, respectively. 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. At September 30, 2003, there were no borrowings against this bank line of credit. The Company believes that its cash and investments, anticipated operating cash flows and available borrowing capacity are sufficient to meet its requirements for the foreseeable future. Cash used in investing activities consisted primarily of purchases of property and equipment. As of September 30, 2003, the Company had completed construction of a new Class C manufacturing facility located on its complex in Middlebury, Indiana. Production in this facility began 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. Production began in this facility during the second quarter of 2003. Cash used in financing activities included the purchase of common shares for treasury and payment of cash dividends. At September 30, 2003, working capital increased to $94.6 million from $93.6 million at December 31, 2002. The $29.5 million increase in current assets at September 30, 2003 versus December 31, 2002 was primarily due to increases in net trade receivables of $20.2 million and increases in inventories of $17.8 million during the nine-month period, offset by a $11.5 million decrease in cash. The increase in current liabilities of $28.4 million was primarily due to increases in accounts payable of $28.0. The commercial modular business has experienced a mild recovery in its telecommunications shelter business, enabling positive cash flow to be reported recently from its operating units. The goodwill associated with the commercial modular business, along with all other recorded goodwill, will be evaluated for possible impairment during the fourth quarter of 2003 in accordance with the Company's normal procedure. 17 18 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 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 September 30, 2003, the Company had $11.0 million of long-term debt, 18 19 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 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 September 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 September 30, 2003, the Company had $10.6 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 September 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 September 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 September 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 September 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 was no change in the Company's internal control over financial reporting that was identified in connection with such evaluation that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. 19 20 PART II. OTHER INFORMATION 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 September 30, 2003 Form 8-K, filed on, and dated, July 7, 2003, reporting an Item 5 event (a press release announcing that All American Homes, LLC, a subsidiary of the Company, plans to become a subdivision builder). Form 8-K, filed on, and dated, July 28, 2003 with respect to Item 9 and furnished pursuant to Item 12 (a press release announcing second quarter results). Form 8-K, filed on, and dated, August 15, 2003, reporting an Item 5 event (a press release announcing the declaration of a $.06 per share regular quarterly dividend). Form 8-K, filed on August 19, 2003 and dated August 18, 2003, reporting an Item 5 event (a press release announcing the results of a recent dealer seminar held by Georgie Boy Manufacturing, LLC, a subsidiary of the Company). Form 8-K, filed on August 27, 2003 and dated August 25, 2003, reporting an Item 5 event (a press release announcing the results of a recent dealer seminar held by Coachmen RV Company, LLC, a subsidiary of the Company). 20 21 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: November 7, 2003 By: /s/ Claire C. Skinner ------------------------------------- Claire C. Skinner, Chairman of the Board and Chief Executive Officer Date: November 7, 2003 By: /s/ Joseph P. Tomczak ------------------------------------ Joseph P. Tomczak, Executive Vice President and Chief Financial Officer Date: November 7, 2003 By: /s/ Gary L. Near ------------------------------------ Gary L. Near, Vice President and Controller 21 22 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. (incorporated by reference to the Company's Form 10-Q filed on August 8, 2003). 31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act 31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act 32 Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 22