10-Q 1 r1oq-930.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 September 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 October 31, 2000: Common Shares, without par value 15,591,474 shares outstanding including an equivalent number of common share purchase rights. COACHMEN INDUSTRIES, INC. INDEX Page No. PART I. FINANCIAL INFORMATION Financial Statements: Condensed Consolidated Balance Sheets- September 30, 2000 and December 31, 1999 3 Condensed Consolidated Statements of Income- Three and Nine Months Ended September 30, 2000 and 1999 4 Condensed Consolidated Statements of Cash Flows- Nine Months Ended September 30, 2000 and 1999 5 Notes to Condensed Consolidated Financial Statements 6-9 Management's Discussion and Analysis of Financial Condition and Results of Operations 10-13 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 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 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. PAGE 2 COACHMEN INDUSTRIES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands) SEPTEMBER 30, DECEMBER 31, 2000 1999 ASSETS CURRENT ASSETS Cash and temporary cash investments $ 26,084 $ 4,269 Marketable securities 21,458 32,550 Trade receivables, less allowance for doubtful receivables 2000 - $569 and 1999 - $550 35,074 39,398 Other receivables 2,283 2,892 Refundable income taxes 2,007 4,748 Inventories 98,301 100,008 Prepaid expenses and other 2,138 2,214 Deferred income taxes 4,743 4,743 Total current assets 192,088 190,822 PROPERTY AND EQUIPMENT, at cost 131,311 122,184 Less, accumulated depreciation 52,905 47,506 Property and equipment, net 78,406 74,678 INTANGIBLES, less accumulated amortization 2000 - $739 and 1999 - $644 4,331 4,426 OTHER 19,814 15,840 TOTAL ASSETS $294,639 $285,766 LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Current maturities of long-term debt $ 550 $ 1,543 Accounts payable, trade 28,224 25,041 Accrued income taxes 721 1,096 Accrued expenses and other liabilities 25,058 28,039 Total current liabilities 54,553 55,719 LONG-TERM DEBT 9,100 8,346 DEFERRED INCOME TAXES 1,489 1,489 OTHER 7,623 6,566 TOTAL LIABILITIES 72,765 72,120 SHAREHOLDERS' EQUITY Common shares, without par value: authorized 60,000 shares; issued 2000 - 21,011 shares and 1999 - 20,971 shares 90,791 90,405 Additional paid-in capital 4,656 4,623 Retained earnings 178,380 170,716 Treasury shares, at cost: 2000 - 5,422 Shares and 1999 - 5,443 shares (51,953) (52,098) TOTAL SHAREHOLDERS' EQUITY 221,874 213,646 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $294,639 $285,766 The accompanying notes are part of the condensed consolidated financial statements. PAGE 3 COACHMEN INDUSTRIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share data) THREE MONTHS NINE MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, 2000 1999 2000 1999 Net sales $182,690 $226,114 $565,828 $640,338 Cost of sales 161,267 195,024 496,513 553,667 Gross profit 21,423 31,090 69,315 86,671 Operating expenses: Selling and delivery 11,278 10,362 31,452 30,203 General and administrative 8,228 5,843 24,020 19,847 Total operating expenses 19,506 16,205 55,472 50,050 Operating income 1,917 14,885 13,843 36,621 Nonoperating income (expense): Interest expense (545) (531) (1,600) (1,508) Investment income 569 249 830 1,533 Gain on sale of properties, net 1,216 37 1,252 1,432 Other income, net 119 81 506 1,130 Total nonoperating income (expense), net 1,359 (164) 988 2,587 Income before income taxes 3,276 14,721 14,831 39,208 Income taxes 1,003 5,196 4,828 13,452 Net income $ 2,273 $ 9,525 $ 10,003 $ 25,756 Earnings per common share: Basic $ .15 $ .58 $ .64 $ 1.55 Diluted $ .15 $ .58 $ .64 $ 1.55 Number of common shares used in the computation of earnings per share: Basic 15,574 16,496 15,566 16,595 Diluted 15,577 16,548 15,573 16,655 Cash dividends per common share $ .05 $ .05 $ .15 $ .15 The accompanying notes are part of the condensed consolidated financial statements. PAGE 4 COACHMEN INDUSTRIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) NINE MONTHS ENDED SEPTEMBER 30, 2000 1999 CASH FLOWS FROM OPERATING ACTIVITIES Net cash provided by operating activities $ 24,445 $ 18,612 CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from: Sale of marketable securities 101,820 134,703 Sale of properties 2,085 1,946 Sale of businesses 5,644 - Acquisitions of: Marketable securities (91,842) (137,391) Property and equipment (10,219) (17,491) Businesses, net of cash acquired (7,201) - Other 901 (637) Net cash provided by (used in) investing activities 1,188 (18,870) CASH FLOWS FROM FINANCING ACTIVITIES Payments of long-term debt (1,946) (1,725) Issuance of common shares under stock option and stock purchase plans 386 1,063 Tax benefit from stock options exercised 81 394 Purchases of treasury shares - (11,972) Cash dividends paid (2,339) (2,491) Net cash (used in) financing activities (3,818) (14,731) Increase(decrease)in cash and temporary cash investments 21,815 (14,989) CASH AND TEMPORARY CASH INVESTMENTS Beginning of period 4,269 23,009 End of period $ 26,084 $ 8,020 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. PAGE 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 nine-month periods ended September 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 nine-month periods ended September 30, 2000 and 1999: Three Months Nine Months Ended September 30, Ended September 30, 2000 1999 2000 1999 Net sales: Vehicles $137,888 $182,885 $443,571 $525,736 Housing 44,802 43,229 122,257 114,602 Consolidated total $182,690 $226,114 $565,828 $640,338 Pretax income: Vehicles $ 543 $ 9,285 $ 9,506 $ 25,365 Housing 3,873 4,228 9,900 11,710 Other reconciling items _ (1,140) 1,208 (4,575) 2,133 Consolidated total $ 3,276 $ 14,721 $ 14,831 $ 39,208 As of September 30, 2000 1999 Total assets: Vehicles $144,453 $186,641 Housing 57,389 41,244 Other reconciling items 92,797 78,625 Consolidated total $294,639 $306,510 PAGE 6 3. INVENTORIES Inventories consist of the following: September 30, December 31, 2000 1999 Raw materials $ 34,132 $ 39,926 Work in process 13,177 11,131 Finished goods 50,992 48,951 Total $ 98,301 $100,008 4. EARNINGS PER SHARE Basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding plus the dilutive effect of stock options and stock awards. 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 the diluted potential common shares. 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 are included in the Company's consolidated financial statements from the date of acquisition. Mod-U-Kraf operates 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. SALE OF A BUSINESS During the quarter ended September 30, 2000, the Company exited the furniture business with the sale of the business operations and assets of its Lux Company subsidiary. The pretax gain on sale, which was primarily attributable to the sale of real property, approximated $1.2 million. 7. COMMITMENTS AND CONTINGENCIES The Company was contingently liable at September 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 PAGE 7 ordinary litigation 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 September 30, 2000 under guarantees to financial institutions of their loans to independent dealers for amounts totaling approximately $15.3 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 September 30, 2000. Also, on February 3, 2000, the Company established a 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 $7.6 million at September 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. 8. SUBSEQUENT EVENTS On October 6, 2000, the Company entered into a three-year credit Agreement with Banc One, N.A., as agent. The credit agreement provides for unsecured borrowings of $155.0 million which borrowings will bear interest at a floating rate or eurodollar rate. On October 31, 2000, the Company completed the acquisition of Miller Building Systems, Inc. ("Miller") for approximately $27 million in cash plus the assumption of liabilities. Miller designs, manufactures and markets factory-built buildings for use as commercial modular buildings and telecommunication shelters. For its fiscal year ended July 1, 2000, Miller had net sales of $71.0 million. The acquisition will be accounted for as a purchase. 9. RECENTLY ISSUED ACCOUNTING STANDARDS In December 1999, the staff of the Securities and Exchange Commission issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements." SAB No. 101 outlines the basic criteria that must be met to recognize revenue and provides guidelines for disclosure related to revenue recognition PAGE 8 policies. This guidance is required to be implemented in the fourth quarter of 2000. The Company is currently reviewing the guidance to determine the impact, if any, on its consolidated financial statements. PAGE 9 COACHMEN INDUSTRIES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (in thousands, except per share data) The following is management's discussion and analysis of certain significant factors which have affected the Company's financial condition, results of operations and cash flows during the periods included in the accompanying condensed consolidated financial statements. The table below describes the increases/decreases in the various items listed. A summary of the changes in the principal items included in the condensed consolidated statements of income is shown below. Comparison of Three Months Nine Months Ended September 30, 2000 and 1999 ($ in thousands) Increases (Decreases) Net sales $ (43,424) (19.2)% $(74,510) (11.6)% Cost of sales (33,757) (17.3) (57,154) (10.3) Selling and delivery expenses 916 8.8 1,249 4.1 General and administrative expenses 2,385 40.8 4,173 21.0 Interest expense 14 2.6 92 6.1 Investment income 320 128.5 (703) (45.9) Gain on sale of properties, net 1,179 * (180) (12.6) Other income, net 38 46.9 (624) (55.2) Income before income taxes (11,445) (77.7) (24,377) (62.2) Income taxes (4,193) (80.7) (8,624) (64.1) Net income (7,252) (76.1) (15,753) (61.2) * Not meaningful PAGE 10 NET SALES Consolidated net sales for the quarter ended September 30, 2000 were $182.7 million, a decrease of 19.2% from the $226.1 million reported for the corresponding quarter last year. Net sales for the nine months were $565.8 million, representing a decrease of 11.6% from the $640.3 million reported for the same period in 1999. The Company's vehicle segment, which includes the parts & supply business, experienced a net sales decrease of 24.6% for the quarter and a decrease of 15.6% for the nine 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 nine-month comparable periods. For towable products, the number of units sold by the Company as well as the sales dollars, are down for both comparable periods. The Company's housing segment reported a net sales increase for the 2000 quarter of 3.6% and 6.7% for the nine months. Although there was an increase in sales dollars for both periods, the number of units sold in both periods decreased. COST OF SALES Cost of sales decreased 17.3% or $33.8 million for the three months and 10.3% or $57.2 million for the nine months ended September 30, 2000. The decrease for both periods is less than the decrease in net sales. As a percentage of net sales, cost of sales increased 2.0% and 1.2% for the quarter and nine 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. Gross profit was adversely impacted by inefficiencies attributable to reduced production as higher fixed costs are spread over lower production volumes. Increases in capacity for both the RV segment and Housing segment were not utilized to the extent anticipated as net sales continued to be below planned levels. OPERATING EXPENSES As a percentage of net sales, operating expenses, which include selling, delivery, general and administrative expenses, were 10.7% and 9.8% for the 2000 quarter and nine months compared to 7.2% for the quarter and 7.8% for the nine months of 1999. Selling and delivery expenses as a percentage of net sales increased by 1.6% for the 2000 quarter and .9% for the nine months. The increase for both periods is primarily due to an overall increase in dealer sales incentives, in both the RV and Housing segments. The Company responded to discounting in the RV marketplace with strong incentives and marketing programs designed to stimulate retail sales. General and administrative expenses were 4.5% of net sales for the third quarter compared to 2.6% for the 1999 corresponding quarter and 4.2% of net sales for the nine-month period compared to 3.1% for 1999. The increases in the percentages of general and administrative expenses as a percent of net sales also results from the fixed nature of the costs being spread over lower sales volumes. In addition, during 1999 certain compensation and other related costs were capitalized in connection with the implementation of the new technology system which decreased 1999 compensation costs. In 2000, these compensation costs are period costs. along with increased amortization and depreciation expense associated with the new technology system. General and administrative expenses for the nine-month period of 2000 also include costs in connection with an unsolicited acquisition proposal and a related proxy contest. PAGE 11 INTEREST EXPENSE Interest expense was $545,000 and $1,600,000 for the three and nine- month periods in 2000 compared to $531,000 and $1,508,000 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 are used 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 cash value of the insurance policies are partially offset by the increases in cash surrender values. INVESTMENT INCOME Investment income increased $320,000 for the 2000 three-month period. This increase is attributable to additional interest income on increased temporary cash investments and a decrease in unrealized losses on investment securities from the prior year period. The decrease of $703,000 in investment income for the 2000 nine-month period 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 for the comparable period in 1999. GAIN ON THE SALE OF PROPERTIES, NET There was a net gain on the sale of properties for the third quarter of 2000 of $1,216,000 compared with a gain of $37,000 in the same quarter of 1999. The net gain on the sale of properties for the first nine months of 2000 and 1999 was $1,252,000 and $1,432,000, respectively. The gains for both the 2000 and 1999 periods were principally related to the sale of real estate in Indiana. The gain in 2000 included the sale of the Lux Company's property and the gain in 1999 included the sale of 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 $119,000 for the third quarter and $506,000 for the nine months compared to income of $81,000 and $1,130,000 for the 1999 third quarter and nine months, respectively. The most significant item of income for the 1999 nine-month period was from the sale of a Company-owned dealership in the state of Georgia and the receipt of nontaxable income realized from Corporate-owned life insurance proceeds. INCOME TAXES For the third quarter ended September 30, 2000, the effective tax rate was 30.6% and a year-to-date rate of 32.6% compared with a 1999 third quarter and year-to-date effective tax rate of 35.3% and 34.3%, 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. PAGE 12 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 September 30, 2000, to meet its seasonal working capital needs. At September 30, 2000, there were no borrowings against this line of credit. As disclosed in Note 8 of Notes to Condensed Consolidated Financial Statements, in October 2000 the Company entered into a three-year credit agreement which provides for unsecured borrowings up to $155.0 million. For the nine months ended September 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 other accrued expenses. The main source of cash from investing activities represented sales, net of purchases, of marketable securities and the sale of businesses. The Company liquidated approximately $10.1 million of its marketable securities in June 2000 to be used in the acquisition of Mod-U-Kraf. This acquisition was a major use of cash (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 cash flow from financing activities was primarily for cash dividends and repayment of long-term debt. At September 30, 2000, working capital increased to $137.5 million from $135.1 million at December 31, 1999. The $1.3 million increase in current assets at September 30, 2000 versus December 31, 1999, results from a $21.8 million increase in cash and temporary cash investments, offset by an $11.1 million decrease in marketable securities, a $4.3 million decrease in trade receivables, a $1.7 million decrease in inventories and other decreases in current assets. The $1.2 million decrease in current liabilities was primarily due to a $1.0 million decrease in current maturities of long-term debt and a $3.3 decrease in accrued expenses and other liabilities including income taxes, offset by a $3.2 million increase in trade accounts payable. PAGE 13 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit 27 - Financial Data Schedule (b) Reports on Form 8-K during the quarter ended September 30, 2000 Form 8-K, dated July 5, 2000, reporting an Item 5 event (a press release confirming the expectation of lowered second quarter earnings). Form 8-K, dated August 24, 2000, reporting an Item 5 event (a press release announcing the signing of a contract to acquire Miller Building Systems, Inc.). Form 8-K, dated September 6, 2000, reporting an Item 5 Event (a press release announcing an agreement and plan of merger with Miller Building Systems, Inc.). Form 8-K, dated September 7, 2000, reporting an Item 5 event (a press release announcing the retirement of K.D. Corson, President of the Company, effective September 1, 2000). PAGE 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) Date: November 14, 2000 _______________________________ James E. Jack, Executive Vice President & Chief Financial Officer Date: November 14, 2000 _______________________________ William M. Angelo, Vice President & Chief Accounting Officer PAGE 15