10-Q 1 0001.txt SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Form 10-Q (MARK ONE) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2000 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 219-262-0123 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No _ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date: At July 31, 2000: Common Shares, without par value 15,583,513 shares outstanding including an equivalent number of common share purchase rights. PAGE <1> COACHMEN INDUSTRIES, INC. INDEX Page No. PART I. FINANCIAL INFORMATION Financial Statements: Condensed Consolidated Balance Sheets- June 30, 2000 and December 31, 1999 3 Condensed Consolidated Statements of Income- Three and Six Months Ended June 30, 2000 and 1999 4 Condensed Consolidated Statements of Cash Flows- Six Months Ended June 30, 2000 and 1999 5 Notes to Condensed Consolidated Financial Statements 6-8 Management's Discussion and Analysis of Financial Condition and Results of Operations 9-12 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders 13 Item 6. Exhibits and Reports on Form 8-K 13-14 SIGNATURES 15 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 availability and price of gasoline, which can impact sales 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; the functioning of the Company's enterprise-wide technology system, which can impact the Company's day-to-day operations; 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; and also on the state of the recreational vehicle and modular housing industries in the United States. Other factors affecting forward-looking statements include competition in these industries and the Company's ability to maintain or increase gross margins which are critical to the profitability whether there are or are not increased sales. At times, the Company's actual performance differs materially from its projections and estimates regarding the economy, the recreational vehicle and housing 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. 2 COACHMEN INDUSTRIES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands) JUNE 30, DECEMBER 31, 2000 1999 ASSETS CURRENT ASSETS Cash and temporary cash investments $ 13,935 $ 4,269 Marketable securities 21,419 32,550 Trade receivables, less allowance for doubtful receivables 2000 - $588 and 1999 - $550 30,022 39,398 Other receivables 2,218 2,892 Refundable income taxes 2,622 4,748 Inventories 116,231 100,008 Prepaid expenses and other 3,065 2,214 Deferred income taxes 4,743 4,743 Total current assets 194,255 190,822 PROPERTY AND EQUIPMENT, at cost 131,825 122,184 Less, accumulated depreciation 51,963 47,506 Property and equipment, net 79,862 74,678 INTANGIBLES, less accumulated amortization 2000 - $707 and 1999 - $644 4,363 4,426 OTHER 19,625 15,840 TOTAL ASSETS $298,105 $285,766 LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Current maturities of long-term debt $ 550 $ 1,543 Accounts payable, trade 33,330 25,041 Accrued income taxes 977 1,096 Accrued expenses and other liabilities 24,715 28,039 Total current liabilities 59,572 55,719 LONG-TERM DEBT 9,250 8,346 DEFERRED INCOME TAXES 1,489 1,489 OTHER 7,572 6,566 TOTAL LIABILITIES 77,883 72,120 SHAREHOLDERS' EQUITY Common shares, without par value: authorized 60,000 shares; issued 2000 - 21,004 shares and 1999 - 20,971 shares 90,725 90,405 Additional paid-in capital 4,642 4,623 Retained earnings 176,887 170,716 Treasury shares, at cost: 2000 - 5,433 Shares and 1999 - 5,443 shares (52,032) (52,098) TOTAL SHAREHOLDERS' EQUITY 220,222 213,646 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $298,105 $285,766 The accompanying notes are part of the condensed consolidated financial statements. 3 COACHMEN INDUSTRIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share data) THREE MONTHS SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, 2000 1999 2000 1999 Net sales $187,910 $203,199 $383,138 $414,224 Cost of goods sold 164,184 175,191 335,246 358,643 Gross profit 23,726 28,008 47,892 55,581 Operating expenses: Selling and delivery 10,270 9,721 20,174 19,841 General and administrative 7,974 7,032 15,792 14,004 Total operating expenses 18,244 16,753 35,966 33,845 Operating income 5,482 11,255 11,926 21,736 Nonoperating income (expense): Interest expense (626) (543) (1,055) (977) Investment income 388 937 261 1,284 Gain on sale of properties, net 6 1,392 36 1,395 Other income, net 105 717 387 1,049 Total nonoperating income (expense), net (127) 2,503 (371) 2,751 Income before income taxes 5,355 13,758 11,555 24,487 Income taxes 1,655 4,744 3,825 8,256 Net income $ 3,700 $ 9,014 $ 7,730 $ 16,231 Earnings per common share: Basic $ .24 $ .54 $ .50 $ .98 Diluted $ .24 $ .54 $ .50 $ .97 Number of common shares used in the computation of earnings per share: Basic 15,566 16,665 15,559 16,645 Diluted 15,581 16,744 15,571 16,711 Cash dividends per common share $ .05 $ .05 $ .10 $ .10 The accompanying notes are part of the condensed consolidated financial statements. 4 COACHMEN INDUSTRIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) SIX MONTHS ENDED JUNE 30, 2000 1999 CASH FLOWS FROM OPERATING ACTIVITIES Net cash provided by operating activities $ 12,982 $ 16,402 CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from: Sale of marketable securities 72,844 91,322 Sale of properties 79 1,872 Sale of businesses 2,351 - Acquisitions of: Marketable securities (62,794) (93,860) Property and equipment (6,497) (13,296) Businesses, net of cash acquired (7,201) - Other 866 (549) Net cash used in investing activities (352) (14,511) CASH FLOWS FROM FINANCING ACTIVITIES Payments of long-term debt (1,796) (1,525) Issuance of common shares under stock option and stock purchase plans 320 904 Tax benefit from stock options exercised 71 358 Cash dividends paid (1,559) (1,662) Net cash used in financing activities (2,964) (1,925) Increase(decrease)in cash and temporary cash investments 9,666 (34) CASH AND TEMPORARY CASH INVESTMENTS Beginning of period 4,269 23,009 End of period $ 13,935 $ 22,975 Noncash investing and financing activities: Liabilities assumed in acquisition of a business $ 5,275 $ - Other noncash reduction of long-term debt $ 693 $ - The accompanying notes are part of the condensed consolidated financial statements. 5 COACHMEN INDUSTRIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (in thousands) 1. BASIS OF PRESENTATION The consolidated balance sheet data at December 31, 1999 was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. In the opinion of management, the information furnished herein includes all adjustments of a normal and recurring nature necessary to reflect a fair statement of the interim periods reported. The results of operations for the three and six-month periods ended June 30, 2000 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: Vehicles (recreational, including related parts and supplies, and Housing (modular). 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 costs or expenses relating to property and equipment that are not allocated to segments. The table below presents information about segments used by the chief operating decision maker of the Company for the three and six month periods ended June 30, 2000 and 1999: Three Months Six Months Ended June 30, Ended June 30, 2000 1999 2000 1999 Net sales: Vehicles $146,218 $164,056 $305,683 $342,851 Housing 41,692 39,143 77,455 71,373 Consolidated total $187,910 $203,199 $383,138 $414,224 Pretax income: Vehicles $ 3,096 $ 7,084 $ 8,963 $ 16,080 Housing 4,173 5,138 6,027 7,482 Other reconciling items (1,914) 1,536 (3,435) 925 Consolidated total $ 5,355 $ 13,758 $ 11,555 $ 24,487 As of June 30, 2000 1999 Total assets: Vehicles $161,686 $171,557 Housing 57,584 41,902 Other reconciling items 78,835 89,062 Consolidated total $298,105 $302,521 3. INVENTORIES Inventories consist of the following: 6 June 30, December 31, 2000 1999 Raw materials $ 37,378 $ 39,926 Work in process 13,514 11,131 Finished goods 65,339 48,951 Total $116,231 $100,008 4. COMMITMENTS AND CONTINGENCIES The Company was contingently liable at June 30, 2000 to banks and other financial institutions on repurchase agreements in connection with financing provided by such institutions to most of the Company's independent dealers in connection with their purchase of the Company's recreational vehicle products. These agreements provide for the Company to repurchase its products from the financing institution in the event that they have repossessed them upon a dealer's default. The risk of loss resulting from these agreements is spread over the Company's numerous dealers and is further reduced by the resale value of the products repurchased. The Company is involved in various legal proceedings which are ordinary litigations incidental to the industry and which are covered in whole or in part by insurance. Management believes that any liability which may result from these proceedings will not be significant. In addition, the Company was contingently liable at June 30, 2000 under guarantees to financial institutions of their loans to independent dealers for amounts totaling approximately $4.8 million. On February 3, 2000, the Company entered into Change of Control Agreements with 25 key executives. Under the terms of these agreements, in the event of a change in control of the Company, as defined, the Company would be obligated to pay these key executives for severance and other benefits aggregating approximately $16 million based on salaries and benefits at June 30, 2000. Also, on February 3, 2000, the Company established a qualified rabbi trust, which in the event of a change of control, as defined, will be funded to cover the Company's obligations under its deferred compensation plan and the Company's obligation under change of control agreements. The Company's obligations under the deferred compensation plan aggregated $6.6 million at June 30, 2000. On May 4, 2000, shareholders approved the 2000 Omnibus Stock Incentive Program (the "Stock Incentive Program") which provides an additional one million shares be reserved for grant under the Company's stock options, appreciation rights and award programs. The Stock Incentive Program also provides that, in the event of a change in control of the Company, as defined, all outstanding stock options and stock appreciation rights shall become immediately exercisable, all stock awards shall immediately vest and all performance goals shall be deemed fully achieved. The Board of Directors later amended the Stock Incentive Program to make it clear that the option price of options cannot be changed after the options are granted. 7 5. ACQUISITION OF A BUSINESS Effective June 30, 2000, the Company acquired all of the issued and outstanding capital stock of Mod-U-Kraf Homes, Inc. ("Mod-U-Kraf"), a manufacturer of modular housing located in Virginia. The purchase price aggregated $14,975,000 and consisted of $9,700,000 of cash paid at closing and the assumption of $5,275,000 of liabilities. The purchase price approximated the fair value of acquired assets. The acquisition was accounted for as a purchase and, accordingly, the operating results of Mod-U-Kraf will be included in the Company's consolidated financial statements from the date of acquisition. Mod-U-Kraf will operate as a separate subsidiary under the Company's housing segment. Unaudited pro forma financial information as if this acquisition had occurred at the beginning of each period, is not presented as it is not materially different from the Company's historic results. 6. RECENTLY ISSUED ACCOUNTING STANDARDS In December 1999, the staff of the Securities and Exchange Commission issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements." SAB No. 101 outlines the basic criteria that must be met to recognize revenue and provides guidelines for disclosure related to revenue recognition policies. This guidance is required to be implemented in the fourth quarter of 2000. The Company is currently reviewing the guidance to determine the impact, if any, on its consolidated financial statements. 8 COACHMEN INDUSTRIES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (in thousands, except per share data) The following is management's discussion and analysis of certain significant factors which have affected the Company's financial condition, results of operations and cash flows during the periods included in the accompanying condensed consolidated financial statements. A summary of the changes in the principal items included in the condensed consolidated statements of income is shown below. Comparison of Three Months Six Months Ended June 30, 2000 and 1999 ($ in thousands) Increases (Decreases) Net sales $ (15,289) (7.5)% $(31,086) (7.5)% Cost of goods sold (11,007) (6.3) (23,397) (6.5) Selling and delivery expenses 549 5.6 333 1.7 General and administrative expenses 942 13.4 1,788 12.8 Interest expense 83 15.3 78 8.0 Investment income (549) (58.6) (1,023) (79.7) Gain on sale of properties, net (1,386) (99.6) (1,359) (97.4) Other income, net (612) (85.4) (662) (63.1) Income before income taxes (8,403) (61.1) (12,932) (52.8) Income taxes (3,089) (65.1) (4,431) (53.7) Net income (5,314) (59.0) (8,501) (52.4) 9 NET SALES Consolidated net sales for the quarter ended June 30, 2000 were $187.9 million, a decrease of 7.5% from the $203.2 million reported for the corresponding quarter last year. Net sales for the six months were $383.1 million, representing a decrease of 7.5% from the $414.2 million reported for the same period in 1999. The Company's vehicle segment, which includes the parts & supply businesses, experienced a net sales decrease of 10.9% for the quarter and a decrease of 10.8% for the six months. For motorized products, both the number of units and sales dollars reflected decreases from the 1999 periods. There has been an industry-wide decrease in sales of motorized products during the three and six-month comparable periods. The Company's housing segment had a net sales increase for the 2000 quarter of 6.5% and 8.5% for the six months. Although there was a second quarter decrease in the number of units sold, there was an increase in sales dollars. COST OF GOODS SOLD Cost of goods sold decreased 6.3% or $11.0 million for the three months and 6.5% or $23.4 million for the six months ended June 30, 2000. The decrease for both periods is less than the decrease in net sales. As a percentage of net sales, cost of goods sold increased 1.2% and .9% for the quarter and six months, respectively, from the comparable prior year periods. Both the RV segment and Housing segment experienced an increase in cost of sales as a percentage of net sales. Increases in capacity for both the RV segment and Housing segment were not utilized to the extent anticipated as net sales were below planned levels. The decrease in production due to the overall decrease in net sales resulted in higher fixed costs being spread over lower production volumes. OPERATING EXPENSES As a percentage of net sales, operating expenses, which include selling, delivery, general and administrative expenses, were 9.7% and 9.4% for the 2000 quarter and six months compared to 8.2% for both the quarter and six months of 1999. Selling and delivery expenses as a percentage of net sales increased by .7% for the 2000 quarter and .5% for the six months. The increase for both periods is primarily due to an overall increase in dealer sales incentives, as well as, increased dealer volume sales incentives attributable to increased sales in the Housing segment. General and administrative expenses were 4.2% of net sales for the second quarter compared to 3.5% for the 1999 corresponding quarter and 4.1% of net sales for the six-month period compared to 3.4% for 1999. These increases in both the quarter and six-month periods reflect higher than normal professional fee expenses in connection with an unsolicited acquisition proposal from Thor Industries, Inc., and related proxy contest, increase in depreciation expense of the new technology system and the substantial decrease in capitalization of compensation and related costs with the implementation of the new technology system. INTEREST EXPENSE Interest expense was $626,000 and $1,055,000 for the three and six-month periods in 2000 compared to $543,000 and $977,000 in the same periods last year. Interest expense varies with the amount of long-term debt and the increase in cash surrender value for the Company's investment in life insurance contracts. These life insurance contracts were purchased to fund obligations under deferred compensation agreements with executives and other key employees. The interest costs associated with deferred compensation obligations and with the borrowings against the 10 cash value of the insurance policies are partially offset by the increases in cash surrender values. INVESTMENT INCOME Investment income decreased $549,000 and $1,023,000 for the 2000 three and six-month periods, respectively. This decrease in investment income is principally attributable to unrealized losses on open US Treasury bond futures options, as well as, a reduction of interest and dividend income resulting from less funds being invested in the 2000 periods. GAIN ON THE SALE OF PROPERTIES, NET There was a net gain on the sale of properties for the second quarter of 2000 of $6,000 compared with a gain of $1,392,000 in the same quarter of 1999. The net gain on the sale of properties for the first six months of 2000 and 1999 was $36,000 and $1,395,000, respectively. The gains for the 1999 periods were principally related to the sale of Real estate in Indiana, including the former corporate administrative building. Assets are continually analyzed and every effort is made to sell or dispose of properties that are determined to be unproductive. OTHER INCOME, NET Other income, net, represents income of $105,000 for the second quarter and $387,000 for the six months compared to income of $717,000 and $1,049,000 for the 1999 second quarter and six months, respectively. The most significant item of income for the 1999 quarter was from the sale of a Company-owned dealership in the state of Georgia. The larger amount in the 1999 six-month period is principally attributed to the receipt of nontaxable income realized from Corporate-owned life insurance proceeds. INCOME TAXES For the second quarter ended June 30, 2000, the effective tax rate was 30.9% and a year-to-date rate of 33.1% compared with a 1999 second quarter and year-to-date effective tax rate of 34.5% and 33.7%, 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 level of nontaxable income recognized from investing activities. LIQUIDITY AND CAPITAL RESOURCES The Company generally relies on funds from operations as its primary source of liquidity. In addition, the Company maintains an unsecured committed line of credit, which totaled $30 million at June 30, 2000, to meet its seasonal working capital needs. At June 30, 2000, there were no borrowings against this line of credit. For the six months ended June 30, 2000, the major source of cash was from operating activities. The significant items in operating activities were net income, depreciation, a decrease in trade accounts receivable and an increase in trade accounts payable. The positive cash flow from these items was partially offset by increases in inventories and other accrued expenses. The main source of cash with investing activities represented sales, net of purchases, of marketable securities and the sale of a business. The Company liquidated approximately $10.1 million of its marketable securities in anticipation of the acquisition of Mod-U-Kraf,which occurred in June 2000. This acquisition was a major use of cash during the second quarter (see Note 5 of Notes to Condensed Consolidated Financial Statements). The remaining use of cash in investment activities was the acquisition of property and equipment. The negative 11 cash flow from financing activities was primarily for cash dividends and repayment of long-term debt. At June 30, 2000, working capital decreased to $134.7 million from $135.1 million at December 31, 1999. The $3.4 million increase in current assets at June 30, 2000 versus December 31, 1999, results from a $9.4 million decrease in trade receivables and other decreases in current assets, offset by the $16.2 million increase in inventories of which $3.8 million is attributable to Mod-U-Kraf. The $3.9 million increase in current liabilities was primarily due to increased trade accounts payable, which was partially due to the acquisition of Mod-U- Kraf. 12 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders a) The annual meeting of the shareholders of Coachmen Industries, Inc. was held on May 4, 2000. b) The following nominees were elected Directors for a one-year term: Claire C. Skinner Thomas H. Corson Keith D. Corson Fredrick M. Miller William P. Johnson Philip G. Lux Edwin W. Miller Robert J. Deputy Donald W. Hudler Geoffrey B. Bloom c) The tabulation of votes for each Director nominee was as follows: For Withheld Election of Directors: Claire C. Skinner 7,716,375 5,292,315 Thomas H. Corson 7,716,736 5,291,954 Keith D. Corson 7,716,775 5,291,915 Fredrick M. Miller 7,715,500 5,293,190 William P. Johnson 7,715,875 5,292,815 Philip G. Lux 7,716,498 5,292,192 Edwin W. Miller 7,715,050 5,293,640 Robert J. Deputy 7,715,475 5,293,215 Donald W. Hudler 7,717,150 5,291,540 Geoffrey B. Bloom 7,714,475 5,294,215 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit 10 - Amended 2000 Omnibus Stock Incentive Program Exhibit 27 - Financial Data Schedule (b) Reports on Form 8-K during the quarter ended June 30, 2000 Form 8-K, dated April 20, 2000, reporting an Item 5 event (a press release confirming receipt of an unsolicited merger proposal from Thor Industries, Inc.). Form 8-K, dated April 20, 2000, reporting an Item 5 event (a press release responding to recent statements made by Thor Industries, Inc.). Form 8-K, dated May 2, 2000, reporting an Item 5 event (a press release announcing the signing of a contract to acquire Mod-U-Kraf Homes, Inc.). Form 8-K, dated May 8, 2000, reporting an Item 5 event 13 (a press release announcing first quarter results; shareholders' election of board; and approval of stock incentive plan.). Form 8-K, dated June 28, 2000, reporting an Item 5 event (a press release announcing the expansion of its modular home sector through the acquisition of Mod-U-Kraf Homes, Inc.). 14 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) /S/ JAMES E. JACK Date: August 14, 2000 _______________________________ James E. Jack, Executive Vice President & Chief Financial Officer /S/ WILLIAM M. ANGELO Date: August 14, 2000 _______________________________ William M. Angelo, Vice President & Chief Accounting Officer 15