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