UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
|
x
|
Quarterly
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
|
For
the quarterly period ended: September 27, 2008
or
|
o
|
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: 1-14725
MONACO
COACH CORPORATION
(
Exact name of
registrant as specified in its charter)
|
Delaware
|
|
35-1880244
|
|
(State
or other jurisdiction of incorporation
|
|
(I.R.S.
Employer Identification No.)
|
|
or
organization)
|
|
|
91320
Industrial Way
Coburg,
Oregon 97408
(Address
of principal executive offices)
(Zip
code)
Registrant’s
telephone number, including area code:
(541) 686-8011
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.
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definition of “large accelerated filer”, “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.
|
Large
accelerated filer
o
|
Accelerated
filer
x
|
Non-Accelerated
filer
o
|
Smaller
reporting company
o
|
(Do not
check if a smaller reporting company)
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
The
number of shares outstanding of common stock, $.01 par value, as of September
27, 2008: 29,939,313.
MONACO
COACH CORPORATION
FORM
10-Q
September
27, 2008
INDEX
PART I
- FINANCIAL INFORMATION
Item 1
- Financial Statements
MONACO
COACH CORPORATION
CONDENSED
CONSOLIDATED BALANCE
SHEETS
(in
thousands of dollars, except share and per share data)
|
|
|
December
29,
|
|
September
27,
|
|
|
|
|
2007
|
|
2008
|
|
|
|
|
|
|
(unaudited)
|
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
|
|
$
|
6,282
|
|
$
|
2,999
|
|
|
Trade
receivables, net
|
|
|
88,170
|
|
|
45,284
|
|
|
Inventories,
net
|
|
|
158,236
|
|
|
134,886
|
|
|
Resort
lot inventory
|
|
|
8,838
|
|
|
30,373
|
|
|
Prepaid
expenses
|
|
|
5,142
|
|
|
5,023
|
|
|
Income
taxes receivable
|
|
|
0
|
|
|
5,958
|
|
|
Debt
issuance costs, net
|
|
|
0
|
|
|
781
|
|
|
Deferred
income taxes
|
|
|
37,608
|
|
|
29,596
|
|
|
Total
current assets
|
|
|
304,276
|
|
|
254,900
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant, and equipment, net
|
|
|
144,291
|
|
|
118,237
|
|
|
Land
held for development
|
|
|
24,321
|
|
|
16,300
|
|
|
Investment
in joint venture
|
|
|
4,059
|
|
|
3,885
|
|
|
Deferred
income taxes
|
|
|
0
|
|
|
9,436
|
|
|
Debt
issuance costs, net
|
|
|
498
|
|
|
0
|
|
|
Goodwill
|
|
|
86,323
|
|
|
39,357
|
|
|
Total
assets
|
|
$
|
563,768
|
|
$
|
442,115
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Book
overdraft
|
|
$
|
1,601
|
|
$
|
0
|
|
|
Current
portion of long-term debt
|
|
|
5,714
|
|
|
24,785
|
|
|
Line
of credit
|
|
|
0
|
|
|
49,915
|
|
|
Income
taxes payable
|
|
|
3,726
|
|
|
0
|
|
|
Accounts
payable
|
|
|
82,833
|
|
|
56,337
|
|
|
Product
liability reserve
|
|
|
14,625
|
|
|
14,902
|
|
|
Product
warranty reserve
|
|
|
35,171
|
|
|
29,134
|
|
|
Accrued
expenses and other liabilities
|
|
|
48,609
|
|
|
33,216
|
|
|
Total
current liabilities
|
|
|
192,279
|
|
|
208,289
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt, less current portion
|
|
|
23,357
|
|
|
0
|
|
|
Deferred
income taxes
|
|
|
21,506
|
|
|
0
|
|
|
Deferred
revenue
|
|
|
683
|
|
|
533
|
|
|
Total
liabilities
|
|
|
237,825
|
|
|
208,822
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies (Note 11)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
|
Preferred
stock, $.01 par value; 1,934,783 shares authorized, no shares
outstanding
|
|
|
|
|
|
|
|
|
Common
stock, $.01 par value; 50,000,000 shares authorized, 29,989,534
and
|
|
|
|
|
|
|
|
|
29,939,313
issued and outstanding, respectively
|
|
|
300
|
|
|
299
|
|
|
Additional
paid-in capital
|
|
|
69,514
|
|
|
72,448
|
|
|
Retained
earnings
|
|
|
256,129
|
|
|
160,546
|
|
|
Total
stockholders’ equity
|
|
|
325,943
|
|
|
233,293
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
563,768
|
|
$
|
442,115
|
|
See
accompanying notes.
MONACO
COACH CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited:
in thousands of dollars, except share and per share data)
|
|
|
Quarter Ended
|
|
Nine
Months Ended
|
|
|
|
|
September
29,
|
|
September
27,
|
|
September
29,
|
|
September
27,
|
|
|
|
|
2007
|
|
2008
|
|
2007
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
322,422
|
|
$
|
166,267
|
|
$
|
979,985
|
|
$
|
620,530
|
|
|
Cost
of sales
|
|
|
286,243
|
|
|
165,485
|
|
|
871,212
|
|
|
594,769
|
|
|
Gross
profit
|
|
|
36,179
|
|
|
782
|
|
|
108,773
|
|
|
25,761
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general, and administrative expenses
|
|
|
29,661
|
|
|
22,870
|
|
|
89,885
|
|
|
73,763
|
|
|
Impairment
of goodwill
|
|
|
0
|
|
|
46,966
|
|
|
0
|
|
|
46,966
|
|
|
Restructuring
and impairment charges
|
|
|
0
|
|
|
21,531
|
|
|
0
|
|
|
23,497
|
|
|
Operating
income (loss)
|
|
|
6,518
|
|
|
(90,585
|
)
|
|
18,888
|
|
|
(118,465
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (loss), net
|
|
|
290
|
|
|
(27
|
)
|
|
783
|
|
|
559
|
|
|
Interest
expense
|
|
|
(829
|
)
|
|
(1,155
|
)
|
|
(2,743
|
)
|
|
(2,804
|
)
|
|
Loss
from investment in joint venture
|
|
|
(290
|
)
|
|
(720
|
)
|
|
(1,267
|
)
|
|
(173
|
)
|
|
Income
(loss) before income taxes
|
|
|
5,689
|
|
|
(92,487
|
)
|
|
15,661
|
|
|
(120,883
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for (benefit from) income taxes
|
|
|
2,008
|
|
|
(20,734
|
)
|
|
6,017
|
|
|
(30,973
|
)
|
|
Net
income (loss)
|
|
$
|
3,681
|
|
$
|
(71,753
|
)
|
$
|
9,644
|
|
$
|
(89,910
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.12
|
|
$
|
(2.40
|
)
|
$
|
0.32
|
|
$
|
(3.01
|
)
|
|
Diluted
|
|
$
|
0.12
|
|
$
|
(2.40
|
)
|
$
|
0.32
|
|
$
|
(3.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
29,963,223
|
|
|
29,916,424
|
|
|
29,913,118
|
|
|
29,824,560
|
|
|
Diluted
|
|
|
30,363,621
|
|
|
29,916,424
|
|
|
30,380,470
|
|
|
29,824,560
|
|
See
accompanying notes.
MONACO
COACH CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited:
in thousands of dollars)
|
|
|
Nine
Months Ended
|
|
|
|
|
September
29,
|
|
September
27,
|
|
|
|
|
2007
|
|
2008
|
|
|
|
|
|
|
|
|
|
Increase
(Decrease) in Cash:
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
9,644
|
|
$
|
(89,910
|
)
|
|
Adjustments
to reconcile net income to net cash provided by
|
|
|
|
|
|
|
|
|
(used
in) operating activities:
|
|
|
|
|
|
|
|
|
Loss
on sale of assets
|
|
|
289
|
|
|
84
|
|
|
Depreciation
and amortization
|
|
|
10,613
|
|
|
10,327
|
|
|
Deferred
income taxes
|
|
|
(285
|
)
|
|
(22,930
|
)
|
|
Stock-based
compensation expense
|
|
|
3,247
|
|
|
3,513
|
|
|
Net
loss from joint venture
|
|
|
1,267
|
|
|
173
|
|
|
Impairment
of goodwill
|
|
|
0
|
|
|
46,966
|
|
|
Restructuring
and impairment charges
|
|
|
0
|
|
|
19,203
|
|
|
Changes
in working capital accounts:
|
|
|
|
|
|
|
|
|
Trade
receivables, net
|
|
|
1,982
|
|
|
42,886
|
|
|
Inventories,
net
|
|
|
3,718
|
|
|
23,350
|
|
|
Resort
lot inventory
|
|
|
(400
|
)
|
|
(10,677
|
)
|
|
Prepaid
expenses
|
|
|
504
|
|
|
119
|
|
|
Income
taxes payable (receivable)
|
|
|
9,120
|
|
|
(9,684
|
)
|
|
Land
held for development
|
|
|
(8,022
|
)
|
|
(2,836
|
)
|
|
Accounts
payable
|
|
|
22,837
|
|
|
(26,496
|
)
|
|
Product
liability reserve
|
|
|
(138
|
)
|
|
277
|
|
|
Product
warranty reserve
|
|
|
2,868
|
|
|
(6,037
|
)
|
|
Accrued
expenses and other liabilities
|
|
|
4,643
|
|
|
(16,198
|
)
|
|
Deferred
revenue
|
|
|
(150
|
)
|
|
(150
|
)
|
|
Discontinued
operations
|
|
|
(18
|
)
|
|
0
|
|
|
Net
cash provided by (used in) operating activities
|
|
|
61,719
|
|
|
(38,020
|
)
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Additions
to property, plant, and equipment
|
|
|
(4,194
|
)
|
|
(2,527
|
)
|
|
Investment
in joint venture
|
|
|
(366
|
)
|
|
0
|
|
|
Proceeds
from sale of assets
|
|
|
64
|
|
|
84
|
|
|
Net
cash used in investing activities
|
|
|
(4,496
|
)
|
|
(2,443
|
)
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Book
overdraft
|
|
|
(16,626
|
)
|
|
(1,601
|
)
|
|
Advance
(payments) on lines of credit, net
|
|
|
(2,036
|
)
|
|
49,915
|
|
|
Payments
on long-term notes payable
|
|
|
(4,285
|
)
|
|
(4,286
|
)
|
|
Debt
issuance costs
|
|
|
(257
|
)
|
|
(649
|
)
|
|
Dividends
paid
|
|
|
(5,395
|
)
|
|
(3,599
|
)
|
|
Issuance
of common stock
|
|
|
1,429
|
|
|
917
|
|
|
Repurchase
of common stock
|
|
|
0
|
|
|
(2,829
|
)
|
|
Tax
effect of stock-based award activity
|
|
|
194
|
|
|
(352
|
)
|
|
Stock-based
awards withheld for taxes
|
|
|
0
|
|
|
(336
|
)
|
|
Net
cash (used in) provided by financing activities
|
|
|
(26,976
|
)
|
|
37,180
|
|
|
|
|
|
|
|
|
|
|
|
Net
change in cash
|
|
|
30,247
|
|
|
(3,283
|
)
|
|
Cash
at beginning of period
|
|
|
4,984
|
|
|
6,282
|
|
|
Cash
at end of period
|
|
$
|
35,231
|
|
$
|
2,999
|
|
See
accompanying notes.
MONACO
COACH CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
1 - Basis of Presentation
The
interim condensed consolidated financial statements have been prepared by Monaco
Coach Corporation (the “Company”) without audit. In the opinion of
management, the accompanying unaudited condensed consolidated financial
statements contain all adjustments necessary to present fairly the financial
position of the Company as of December 29, 2007 and September 27, 2008, and the
results of its operations for the quarters and nine months ended September 29,
2007 and September 27, 2008 and its cash flows for the nine months ended
September 29, 2007 and September 27, 2008. The condensed consolidated
financial statements include the accounts of the Company and its wholly-owned
subsidiaries, and all significant intercompany accounts and transactions have
been eliminated in consolidation. The consolidated statement of
income for the nine months ended September 27, 2008 is not necessarily
indicative of the results to be expected for the full year. The
balance sheet data as of December 29, 2007 was derived from audited financial
statements, but does not include all disclosures contained in the Company’s
Annual Report to Stockholders on Form 10-K for the year ended December 29, 2007,
nor does it include all the information and footnotes required by generally
accepted accounting principles for complete financial
statements. These interim condensed consolidated financial statements
should be read in conjunction with the audited financial statements and notes
thereto appearing in the Company’s Annual Report to Stockholders on Form 10-K
for the year ended December 29, 2007.
Note
2 – Restructuring and Impairment Charges
On
July 16, 2008, the Company announced plans to relocate service and
production operations in Wakarusa, Elkhart and Nappanee, Indiana and to
permanently cease operations at these locations. Most of the production of
the motorized units manufactured in these locations have been relocated to our
Coburg, Oregon operations. The remaining motorized models and towable
models have been relocated to our plants in Warsaw, Indiana. As of September 27,
2008 the restructuring was substantially completed.
In
connection with the restructuring we recorded charges of $5.0 million which
included severance and benefit costs ($2.5 million) and other closure costs
($2.5 million). Other closure costs include transportation,
freight surcharges and other transition costs as we moved production to other
plants. These charges included an accrual for severance and benefits,
contract terminations and other transition costs of $781,000. These
other costs were expensed as incurred in accordance with SFAS No. 146,
Accounting for Costs Associated with
Exit or Disposal Activities
.
Related
to our restructuring plans, we also wrote down various fixed assets which were
accounted for in accordance with SFAS No. 144,
Accounting for the Impairment or
Disposal of Long-Lived Assets,
based on current market values for the
plants and equipment idled as a part of the restructuring. The
impairment charge for the plants represents management’s best estimate of the
fair value of the properties based on preliminary appraisal
information. The impairment is subject to revision as the appraisals
will be finalized in the fourth quarter of 2008. The properties are
being actively marketed for sale, but it is anticipated the sales cycle will
exceed twelve months. The total impairment charge related to the
third quarter analysis was $13.4 million for land and buildings and $3.1 million
for machinery, furniture and equipment. We had an impairment charge of $2.0
million in the second quarter of 2008 related to one of the plants in Elkhart
that was previously idled.
In
addition, we recorded $1.6 million of tax provision related to the uncertainty
of a state tax credit, which was included in the net tax benefit recognized in
the third quarter of 2008.
We expect
to incur additional costs in the fourth quarter of 2008 of approximately
$600,000 to $700,000 related to additional clean up of facilities and employee
relocation assistance. In addition, we expect to incur costs until
the properties are sold related to taxes, utilities and insurance of
approximately $300,000 to $400,000 per quarter.
Total
severance and restructuring charges were as follows (in thousands):
|
|
|
|
|
|
Cash
Payments
|
|
|
|
|
|
March
29,
|
|
Charges
to
|
|
or
Asset
|
|
September
27,
|
|
|
|
2008
|
|
Expense
|
|
Write-offs
|
|
2008
|
|
|
|
(in
thousands)
|
|
|
Severance
charges
|
$
|
0
|
|
$
|
2,524
|
|
$
|
(2,146
|
)
|
$
|
378
|
|
|
Plant
and equipment impairments
|
|
0
|
|
|
18,426
|
|
|
(18,426
|
)
|
|
0
|
|
|
Other
closure costs
|
|
0
|
|
|
2,547
|
|
|
(2,144
|
)
|
|
403
|
|
|
Total
restructuring charges
|
$
|
0
|
|
$
|
23,497
|
|
$
|
(22,716
|
)
|
$
|
781
|
|
The plant
and equipment impairment expense included $2.0 million recognized in the second
quarter of 2008 related to the towables segment. The remaining
restructuring charges were recognized in the third quarter of 2008 and related
to the motorized segment.
Note
3 - Impairment of Goodwill
In
accordance with SFAS No. 142,
Goodwill and Other Intangible
Assets
(“SFAS 142”), we apply a fair value-based impairment test to the
net book value of goodwill and indefinite-lived intangible assets on an annual
basis and, if certain events or circumstances indicate that an impairment loss
may have been incurred, on an interim basis. The analysis of potential
impairment of goodwill requires a two-step process. The first step is the
comparison of fair value to net carrying value. If step one indicates that an
impairment potentially exists, the second step is performed to measure the
amount of impairment, if any. Goodwill impairment exists when the estimated fair
value of goodwill is less than its carrying value.
During
the September 2008 quarter, we experienced a significant decline in market
capitalization driven primarily by record-high fuel prices and overall
recreational vehicle industry conditions. We determined that these factors
combined with the deterioration of the credit market were an indicator that a
goodwill impairment test was required pursuant to SFAS 142. As a result, we
estimated fair value based on a discounted projection of future cash flows for
both the motorized and towable reportable segments and reconciled these fair
values to our market capitalization at September 27, 2008. We determined that
goodwill was impaired for the motorized segment and recorded a non-cash charge
of $47 million to write off all goodwill associated with that segment. We
reconciled our segment values to our current market capitalization and
determined that the fair value supported the goodwill for our towable
segment.
Note
4 - Inventories, net
Inventories
are stated at lower of cost (first-in, first-out) or market. The
composition of inventory is as follows:
|
|
|
December
29,
|
|
September
27,
|
|
|
|
|
2007
|
|
2008
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
Raw
materials
|
|
$
|
79,640
|
|
$
|
78,590
|
|
|
Work-in-process
|
|
|
54,760
|
|
|
19,795
|
|
|
Finished
units
|
|
|
33,241
|
|
|
42,725
|
|
|
Raw
material reserves
|
|
|
(9,405
|
)
|
|
(6,224
|
)
|
|
|
|
$
|
158,236
|
|
$
|
134,886
|
|
Pursuant
to FAS No. 151, “Inventory Costs”, overhead costs related to excess
manufacturing capacity have been expensed, in the third quarter and nine month
period of 2008, resulting in an $613,000 and $2.1 million charge,
respectively.
Note
5 - Credit Facilities
The
Company’s credit facilities consist of a revolving line of credit (the “Line of
Credit”) of up to $105.0 million and a term loan (“Term Debt”). As of
September 27, 2008, there was $49.9 million outstanding under the Line of Credit
and $24.3 million outstanding on the Term Debt. At the election of
the Company, the credit facilities bear interest at rates that fluctuate based
on the prime rate or LIBOR and are determined based on the Company’s leverage
ratio. The Company also pays interest quarterly on the unused
available portion of the Line of Credit at varying rates, determined by the
Company’s leverage ratio. The amounts outstanding under the Line of
Credit are due and payable in full on November 17, 2009 and interest is paid
monthly. The Term Debt requires quarterly interest and principal
payments of $1.4 million, with a final balloon payment of $12.9 million due on
November 18, 2010. At September 27, 2008, the weighted-average
interest rate on the Revolving Loan and the Term Debt was 6.0% and 5.8%,
respectively. The credit facilities are collateralized by all of the
assets of the Company. The Company also has four stand-by letters of
credit outstanding totaling $3.1 million as of September 27, 2008.
The
credit facilities require the Company to maintain a maximum leverage ratio,
minimum current ratio, minimum debt service coverage ratio, and minimum tangible
net worth. The Company was in violation of its required leverage
ratio, debt service coverage ratio, and tangible net worth covenant as of
September 27, 2008. The Company does not have a waiver for the
covenant violations. Accordingly, the Company has presented its
long-term debt and related debt issue costs current as of September 27,
2008.
As
of September 27, 2008, the Company's unamortized debt issue costs related to the
credit facilities was $782,000. If the current credit
facilities are refinanced, the Company expects that the
transaction would be accounted for as an extinguishment, requiring unamortized
debt issue costs at the refinancing date to be expensed in the period
of refinancing.
The
Company is currently negotiating with Bank of America, N.A. (which is the agent
of a consortium of banks) to provide a working capital loan from the
consortium (the “Working Capital Loan”) which will replace its existing
Line of Credit. In addition, the Company is also concurrently
negotiating the provisions of a term loan (the “Term Loan”) from Ableco Finance
LLC, a Delaware limited liability company, to provide additional capital for the
Company's
operations. As
of November 6, 2008, these two agreements have not been
funded. It could have a material adverse effect on the Company’s
business, results of operations and financial condition if the Company is
unsuccessful in securing access to the Working Capital Loan and the Term Loan,
or in obtaining a waiver from its current group of lenders related to its
existing Line of Credit.
Note
6 - Income Taxes
As of
September 27, 2008, the Company’s total unrecognized tax benefits were
approximately $2.2 million and all of these benefits, if recognized, would
positively affect the Company’s effective tax rate. The Company also
had accrued interest related to these unrecognized tax benefits of approximately
$122,000 as of September 27, 2008. The total amount of unrecognized
federal and state tax benefits is uncertain due to the subjectivity in the
measurement of certain deductions claimed for United States income tax purposes
and certain state income tax credits.
As of
September 27, 2008, the Company’s income tax returns that remain subject to
examination are tax years 2005 through 2007 for U.S. federal income tax and tax
year 2007 for major state income tax returns. The statute of
limitations for state income taxes for the 2003 and 2004 tax years will expire
during the fourth quarter of 2008.
Unrecognized
tax benefits decreased during the third quarter of 2008 by approximately
$102,000 due to the expiration of federal and state statutes of limitations for
the 2004 tax year and the change in the associated accrued
interest. In addition, unrecognized tax benefits increased by
approximately $1.6 million related to the uncertainty of a state tax credit
related to the shutdown of the Indiana facilities.
Due to
the loss before income taxes of $120.9 million in the nine months ended
September 27, 2008, management assessed the need to record a valuation allowance
for the deferred tax assets. It was determined that no valuation
allowance was necessary at this time. The Company is implementing
initiatives to return to profitability, including the restructuring plan
discussed in Note 2. The need for an allowance will be reassessed
during the remainder of fiscal 2008. If the Company does not return
to profitability or there is no evidence that indicates we will in the near
future, it may be necessary to record a valuation allowance.
The tax
benefit of $31.0 million for the nine month period ended September 27, 2008, was
due to the loss before income taxes and a one-time tax benefit related to the
reduction of the resort lot participation accrual as a result of the settlement
with the prior owners of the property. The tax benefit was partially
offset by an adjustment to a valuation allowance for state tax credits expected
to expire before being used, a permanent difference of $13.8 million related to
the goodwill impairment charge, and $1.6 million related to the uncertainty of a
state tax credit.
Note
7 - Earnings Per Common 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 outstanding stock-based
awards. The weighted-average number of common shares used in the
computation of earnings per common share were as follows:
|
|
|
Quarter Ended
|
|
Nine
Months Ended
|
|
|
|
|
September
29,
|
|
September
27,
|
|
September
29,
|
|
September
27,
|
|
|
|
|
2007
|
|
2008
|
|
2007
|
|
2008
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
Issued
and outstanding shares
|
|
|
29,963,223
|
|
|
29,916,424
|
|
|
29,913,118
|
|
|
29,824,560
|
|
|
(weighted-average)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of Dilutive Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
awards
|
|
|
400,398
|
|
|
-
|
|
|
467,352
|
|
|
-
|
|
|
Diluted
|
|
|
30,363,621
|
|
|
29,916,424
|
|
|
30,380,470
|
|
|
29,824,560
|
|
|
|
Quarter Ended
|
|
Nine
Months Ended
|
|
|
|
September
29,
|
|
September
27,
|
|
September
29,
|
|
September
27,
|
|
|
|
2007
|
|
2008
|
|
2007
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
dividends per common share
|
$
|
0.06
|
|
$
|
0
|
|
$
|
0.18
|
|
$
|
0.12
|
|
|
Cash
dividends paid
(in
thousands)
|
$
|
1,798
|
|
$
|
0
|
|
$
|
5,395
|
|
$
|
3,599
|
|
Note
8 - Repurchase of Common Stock
In
January 2008, the Board of Directors approved a stock repurchase program whereby
up to an aggregate of $30 million worth of the Company’s outstanding shares of
Common Stock may be repurchased from time to time. There is no time
restriction on this authorization to purchase our Common Stock. The
program provides for the Company to repurchase shares through the open market
and other approved transactions at prices deemed appropriate by
management. The timing and amount of repurchase transactions under
the program will depend upon market conditions and corporate and regulatory
considerations. During January 2008, the Company repurchased 313,400
shares of Common Stock on the open market at an average purchase price of $9.03
per share. The Company recognized a reduction to additional paid in
capital and retained earnings of approximately $727,000 and $2.1 million,
respectively.
Note
9 - Stock-Based Award Plans
The
Company has a 2007 Employee Stock Purchase Plan (the “Purchase Plan”), a
non-employee 1993 Director Stock Plan (the “Director Plan”), and an amended and
restated 1993 Stock Plan (the “Stock Plan”). The Purchase Plan was
approved by the Board of Directors in 2007 and stockholder approval was obtained
at the May 14, 2008 Annual Meeting of Stockholders. The compensation
expense recognized in the quarters ended September 29, 2007 and September 27,
2008 for the plans was $763,000 and $679,000, respectively ($3.2 million and
$3.5 million for the nine month period of 2007 and 2008,
respectively). A detailed description of all the plans and the
respective accounting treatment is included in the “Notes to the Consolidated
Financial Statements” included in the Company’s Annual Report on Form 10-K for
the year ended December 29, 2007.
Restricted
Stock Units
During
the quarter ended September 27, 2008, there were no grants of restricted stock
units (RSU’s) under the Stock Plan. In addition, no RSU’s from
previously granted awards vested during the same period. The
compensation expense recognized for RSU’s in the third quarter of 2007 and 2008
was $419,000 and $435,000, respectively ($1.8 million and $2.0 million for the
nine month period of 2007 and 2008, respectively).
Performance
Share Awards
During
the quarter ended September 27, 2008, there were no grants of performance share
awards (PSA’s) under the Stock Plan. In addition, no PSA’s from a
previous award vested during the same period. A portion of the PSA’s
require achievement of performance based on Return on Net Assets-adjusted (RONA)
compared to a group of peer companies. The Company reassesses at each
reporting date whether achievement of this performance condition is
probable. The assessments at June 28, 2008 and September 27, 2008
indicated it was not probable the RONA goal will be met for any of the
outstanding grants. Thus, the previously recognized compensation
expense of $274,100 was reversed in the second quarter of 2008. The
amount recognized for PSA’s during the quarter ended September 27, 2008 was
$215,000 ($275,400 of compensation expense in the quarter ended September 29,
2007). The amount recognized for PSA’s in the nine month period of
2007 and 2008 was $1.3 million and $911,000, respectively.
Note
10 – Segment Reporting
The
following table provides the results of operations of the three segments of the
Company for the quarters and nine months ended September 29, 2007 and September
27, 2008, respectively. All dollars are in thousands.
|
|
|
Quarter Ended
|
|
Nine
Months Ended
|
|
|
|
|
September
29,
|
|
September
27,
|
|
September
29,
|
|
|
September
27,
|
|
|
|
|
2007
|
|
2008
|
|
2007
|
|
|
2008
|
|
|
Motorized
Recreational Vehicle Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
257,982
|
|
$
|
128,504
|
|
$
|
754,192
|
|
|
$
|
471,811
|
|
|
Cost
of sales
|
|
|
228,565
|
|
|
128,614
|
|
|
672,029
|
|
|
|
454,439
|
|
|
Gross
profit (deficit)
|
|
|
29,417
|
|
|
(110
|
)
|
|
82,163
|
|
|
|
17,372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general, and administrative expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
corporate overhead
|
|
|
22,570
|
|
|
16,147
|
|
|
65,760
|
|
|
|
52,262
|
|
|
Impairment
of goodwill
|
|
|
0
|
|
|
46,966
|
|
|
0
|
|
|
|
46,966
|
|
|
Restructuring
and impairment charges
|
|
|
0
|
|
|
21,531
|
|
|
0
|
|
|
|
21,531
|
|
|
Operating
income (loss)
|
|
$
|
6,847
|
|
$
|
(84,754
|
)
|
$
|
16,403
|
|
|
$
|
(103,387
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Towable Recreational Vehicle
Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
64,221
|
|
$
|
37,106
|
|
$
|
214,669
|
|
|
$
|
145,374
|
|
|
Cost
of sales
|
|
|
57,531
|
|
|
36,459
|
|
|
194,970
|
|
|
|
138,592
|
|
|
Gross
profit
|
|
|
6,690
|
|
|
647
|
|
|
19,699
|
|
|
|
6,782
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general, and administrative expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
corporate overhead
|
|
|
5,819
|
|
|
5,065
|
|
|
18,053
|
|
|
|
17,416
|
|
|
Impairment
charges
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
|
1,966
|
|
|
Operating
income (loss)
|
|
$
|
871
|
|
$
|
(4,418
|
)
|
$
|
1,646
|
|
|
$
|
(12,600
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Motorhome
Resorts Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
219
|
|
$
|
657
|
|
$
|
11,124
|
|
|
$
|
3,345
|
|
|
Cost
of sales
|
|
|
147
|
|
|
412
|
|
|
4,213
|
|
|
|
1,738
|
|
|
Gross
profit
|
|
|
72
|
|
|
245
|
|
|
6,911
|
|
|
|
1,607
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general, and administrative expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
corporate overhead
|
|
|
1,272
|
|
|
1,658
|
|
|
6,072
|
|
|
|
4,085
|
|
|
Operating
income (loss)
|
|
$
|
(1,200
|
)
|
$
|
(1,413
|
)
|
$
|
839
|
|
|
$
|
(2,478
|
)
|
|
|
|
Quarter Ended
|
|
|
Nine
Months Ended
|
|
|
|
|
September
29,
|
|
|
September
27,
|
|
|
September
29,
|
|
|
September
27,
|
|
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
Reconciliation to Net Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Motorized
recreational vehicle segment
|
|
$
|
6,847
|
|
|
$
|
(84,754
|
)
|
|
$
|
16,403
|
|
|
$
|
(103,387
|
)
|
|
Towable
recreational vehicle segment
|
|
|
871
|
|
|
|
(4,418
|
)
|
|
|
1,646
|
|
|
|
(12,600
|
)
|
|
Motorhome
resorts segment
|
|
|
(1,200
|
)
|
|
|
(1,413
|
)
|
|
|
839
|
|
|
|
(2,478
|
)
|
|
Total
operating income (loss)
|
|
|
6,518
|
|
|
|
(90,585
|
)
|
|
|
18,888
|
|
|
|
(118,465
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (loss), net
|
|
|
290
|
|
|
|
(27
|
)
|
|
|
783
|
|
|
|
559
|
|
|
Interest
expense
|
|
|
(829
|
)
|
|
|
(1,155
|
)
|
|
|
(2,743
|
)
|
|
|
(2,804
|
)
|
|
Loss
from investment in joint venture
|
|
|
(290
|
)
|
|
|
(720
|
)
|
|
|
(1,267
|
)
|
|
|
(173
|
)
|
|
Income
(loss) before income taxes
|
|
|
5,689
|
|
|
|
(92,487
|
)
|
|
|
15,661
|
|
|
|
(120,883
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for (benefit from) income taxes
|
|
|
2,008
|
|
|
|
(20,734
|
)
|
|
|
6,017
|
|
|
|
(30,973
|
)
|
|
Net income (loss)
|
|
$
|
3,681
|
|
|
$
|
(71,753
|
)
|
|
$
|
9,644
|
|
|
$
|
(89,910
|
)
|
Note
11 – Commitments and Contingencies
Repurchase
Agreements
Most of
the Company’s sales to independent dealers are made on a “floor plan” basis by a
bank or finance company which lends the dealer all or substantially all of the
wholesale purchase price and retains a security interest in the
vehicles. Upon request of a lending institution financing a dealer’s
purchases of the Company’s product, the Company will execute a repurchase
agreement. These agreements provide that, for up to 15 months after a
unit is shipped, the Company will repurchase a dealer’s inventory in the event
of a default by a dealer to its lender.
The
Company’s liability under repurchase agreements is limited to the unpaid balance
owed to the lending institution by reason of its extending credit to the dealer
to purchase its vehicles, reduced by the resale value of vehicles which may be
repurchased. The risk of loss is spread over numerous dealers and
financial institutions.
The
amount subject to contingent repurchase obligations arising from these
agreements at September 27, 2008 is approximately $449.9 million, with
approximately 5.0% concentrated with one dealer. If the Company were
obligated to repurchase a significant number of units under any repurchase
agreement, its business, operating results and financial condition could be
adversely affected. The Company has included the disclosure
requirements of FASB Interpretation No. 45 (FIN 45), “Guarantor’s Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others” in its financial statements, and has determined that the
recognition provisions of FIN 45 apply to certain guarantees routinely made by
the Company, including contingent repurchase obligations to third party lenders
for inventory financing of dealer inventories. The Company has
recorded a liability of approximately $362,000 for potential losses resulting
from guarantees on repurchase obligations for products shipped to
dealers. This estimated liability is based on the Company’s
experience of losses associated with the repurchase and resale of units in prior
years. The Company continually monitors our dealers for conditions
that may potentially lead to the repurchase of units per the repurchase
agreement.
Product
Liability
The
Company is subject to regulations which may require the Company to recall
products with design or safety defects, and such recall could have a material
adverse effect on the Company’s business, results of operations, and financial
condition.
The
Company has from time to time been subject to product liability
claims. To date, the Company has been successful in obtaining product
liability insurance on terms the Company considers acceptable. The
terms of the policy contain a self-insured retention amount of $500,000 per
occurrence, with a maximum annual aggregate self-insured retention of $3.0
million. Overall product liability insurance, including umbrella
coverage, is available up to a maximum amount of $110.0 million for each
occurrence, as well as in the aggregate. There can be no assurance
that the Company will be able to obtain insurance coverage in the future at
acceptable levels or that the cost of insurance will be
reasonable. Furthermore, successful assertion against the Company of
one or a series of large uninsured claims, or of one or a series of claims
exceeding any insurance coverage could have a material adverse effect on the
Company’s business, results of operations, and financial
condition. The following table discloses significant changes in the
product liability reserve:
|
|
|
Quarter Ended
|
|
|
|
|
September
29,
|
|
September
27,
|
|
|
|
|
2007
|
|
2008
|
|
|
|
|
(in
thousands)
|
|
|
Beginning
balance
|
|
$
|
15,833
|
|
$
|
15,195
|
|
|
Expense
|
|
|
3,513
|
|
|
3,029
|
|
|
Payments/adjustments
|
|
|
(3,720
|
)
|
|
(3,322
|
)
|
|
Ending
balance
|
|
$
|
15,626
|
|
$
|
14,902
|
|
Product
Warranty
Estimated
warranty costs are provided for at the time of sale of products with warranties
covering the products for up to one year from the date of retail sale (five
years for the front and sidewall frame structure, and three years on the
Roadmaster chassis). These estimates are based on historical average
repair costs, as well as other reasonable assumptions deemed appropriate by
management. The following table discloses significant changes in the
product warranty reserve:
|
|
|
Quarter Ended
|
|
|
|
|
September
29,
|
|
September
27,
|
|
|
|
|
2007
|
|
2008
|
|
|
|
|
(in
thousands)
|
|
|
Beginning
balance
|
|
$
|
36,126
|
|
$
|
31,015
|
|
|
Expense
|
|
|
10,540
|
|
|
5,290
|
|
|
Payments/adjustments
|
|
|
(9,721
|
)
|
|
(7,171
|
)
|
|
Ending
balance
|
|
$
|
36,945
|
|
$
|
29,134
|
|
Litigation
The
Company is involved in various legal proceedings which are incidental to the
industry and for which certain matters are covered in whole or in part by
insurance or, for those matters not covered by insurance, the Company has
recorded accruals for estimated settlements. Management believes that
any liability which may result from these proceedings will not have a material
adverse effect on the Company’s consolidated financial statements.
Item 2
- Management’s Discussion and Analysis of Financial
Condition and Results of Operations
This
Quarterly Report on Form 10-Q contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. These
statements include, but are not limited to, those in this report that have been
marked with an asterisk (*). In addition, statements containing words
such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,”
“seeks,” and variations of such words and similar expressions are intended to
identify forward-looking statements. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors that may cause
our actual results, performance or achievements to differ materially from those
expressed or implied by such forward-looking statements, including those set
forth below in Part II, Item 1A under the caption “Risk Factors” and elsewhere
in this Quarterly Report on Form 10-Q. The reader should carefully
consider, together with the other matters referred to herein, the factors set
forth in Part II, Item 1A under the caption “Risk Factors,” as well as in other
documents we file with the Securities and Exchange Commission. We
caution the reader, however, that these factors may not be
exhaustive. In addition, we do not undertake the obligation to
publicly update or revise any “forward-looking statements,” whether as a result
of new information, future events or otherwise, except as required by law or the
rules of the New York Stock Exchange.
GENERAL
OVERVIEW
Background
Monaco
Coach Corporation (the “Company”) is a leading manufacturer of premium
recreational vehicles including Class A, B, and C motor coaches, as well as
towable recreational vehicles. The Company also develops and sells
luxury motorcoach resort facilities. These three operations, while
closely tied into the recreational lifestyle, are segmented for reporting
purposes as the Motorized Recreational Vehicle (MRV) segment, the Towable
Recreational Vehicle (TRV) segment, and the Motorhome Resort (MR)
segment.
Motorized
and Towable Recreational Vehicle Segment Products
Our
products range in suggested retail price from $45,000 to $700,000 for motor
coaches and from $11,000 to $70,000 for towables. Based upon retail
registrations for the first eight months of 2008, we believe we had a 26.5%
share of the market for diesel Class A motor coaches, a 7.5% share of the market
for gas Class A motor coaches, a 17.2% share of the market for all
Class A motor coaches, a 2.7% share of the market for Class C motor
coaches, a 4.3% share of the market for travel trailers and a 2.4% share of the
market for fifth wheel towables.
The
recreational vehicle (“RV”) market in the third quarter of 2008 continued to
decline compared to 2007. Record-high fuel prices and shrinking
consumer credit markets continue to dampen consumer demand. The
market saw wholesale shipments of Class A units decline 63.6% during the quarter
compared to the same period last year. We experienced a 48.8%
decrease in Class A sales to dealers in the third quarter of 2008 compared to
the same period last year. The overall wholesale contraction in the
RV market continues to put pressure on our business, and the Class A wholesale
market is projected by the RV Industry Association (“RVIA”) to decline by 24.5%
for the full year 2008 compared to 2007.* However, we believe the
long-term potential of the RV market is still rooted in solid
demographics. This is most readily evidenced by the so-called “baby
boomer” generation, which as it ages will continue to expand our target market
well into 2015 and should provide a consumer base that is enthusiastic to
embrace the RV lifestyle.*
The
motorized market has been significantly impacted by the current market
conditions. The tightening of the retail credit market is placing
pressures on the retail customers and our dealers continue to be cautious in the
amount of inventory they are willing to carry. Consequently, we have
been very diligent in monitoring the wholesale versus retail shipments of our
products. The decline in wholesale demand has exerted extreme
pressure on our pricing to dealers. This is a major factor in the
decrease of our gross margins and partially offsets the improvements we have
made in our plant efficiencies.
Wholesale
shipments of towable recreational vehicles were down 38.4% in the third quarter
of 2008 as compared to the same period in 2007. In 2008, we
introduced several new floorplans and new lightweight and inexpensive models to
compete in this market sector. We believe that these new offerings
will enable us to compete more effectively in these more challenging market
conditions.*
As the
market has declined, we announced in July 2008, that we were ceasing all
operations in Wakarusa, Elkhart and Nappanee, Indiana. The operations
have been relocated to our facilities in Coburg, Oregon and Warsaw,
Indiana. The shutdown of our operations in Wakarusa, Elkhart and
Nappanee, Indiana were substantially completed by September 27,
2008. We anticipate that this move will increase plant utilization in
the remaining facilities and decrease indirect costs of sales.*
Motorhome
Resort Segment
The
Company also owns and operates three motorhome resort properties (the
“Resorts”), located in Las Vegas, Nevada, Indio, California, and Bay Harbor,
Michigan. The development of a motorhome resort located in Naples,
Florida is nearing completion. Lots at the Bay Harbor, Michigan
location were available for sale in the third quarter of 2008 and lots at the
Naples, Florida location are expected to be available for sale in the fourth
quarter of 2008.* In addition, the Company also has land to develop
in La Quinta, California. The Resorts offer sales of individual lots
to owners, and also offer common interests in the amenities at each resort. Lot
prices for remaining unsold lots at the resorts range from $114,900 to
$329,900. Amenities at the Resorts include: club house
facilities, tennis, swimming, and golf. The Resorts provide
destination locations for premium Class A motor coach owners, and help to
promote the recreational lifestyle.
Business
Changes
In March
2007, we completed the formation of a joint venture with Navistar, Inc. (NAV)
for the purpose of manufacturing rear diesel chassis. This joint
venture, known as Custom Chassis Products LLC (CCP), enables us to take
advantage of purchasing synergies, access engineering and design expertise from
NAV. Our ownership interest is 49%, and we are accounting for the
activity of this operation using the equity method of accounting.
In
October 2007, the Company ceased operations of towable products at one of our
facilities located in Elkhart, Indiana. The manufacturing of these
products was relocated to our plants in Wakarusa and Warsaw,
Indiana. The property was listed for either sale or lease and
continues to be marketed as such. Management assessed the fair value
of the property at December 29, 2007 based on projected cash flows generated
from a lease transaction and determined there was no
impairment. Based on the decline of the real estate market during
2008, management has reassessed the fair value of the property as of June 28,
2008 and the Company recognized an asset impairment charge of $2.0 million in
the second quarter of 2008. During the third quarter of 2008, the
Company conducted another appraisal and determined that further write-downs were
not necessary on this facility. The impairment charge is reported
under the Towable Recreational Vehicle segment.
On July
17, 2008, the Company announced the closure of most of its production and
service center operations in Wakarusa, Elkhart and Nappanee,
Indiana. Production of the majority of the motorized units
manufactured in these locations have been relocated to our Coburg, Oregon
operations. Production of the remaining motorized units, together
with production of towable units, have been relocated to our Warsaw, Indiana
location. The shutdown was substantially completed by September 27,
2008.
Approximately
1,400 hourly and salaried employees were impacted by the shutdown, representing
33% of the Company’s total workforce. The Company will continue to
maintain a significant presence in the northern Indiana area with approximately
700 employees at its operations in Warsaw, Milford and Goshen,
Indiana.
The
decision to reduce operations was made in light of continued deteriorating
market conditions for the RV industry. In recent quarters, in order to
align production with retail demand, the Company has reduced production by
taking days and weeks off. The closure of the Company’s two production
facilities in Indiana is expected to decrease the Company’s Class A
motorized production capacity from approximately 180 units per week to
90.*
The
Company recorded restructuring and impairment charges in the third quarter of
2008 of $21.5 million. These charges included (i) $16.5 million for
property and other fixed asset impairments, (ii) $2.1 million for expenses
associated with the closure of the facilities; (iii) $2.5 million for
personnel related costs, including severance benefits, transfer bonuses, and
relocation assistance costs; (iv) $157,000 of charges for the physical
relocation of inventory; and (v) $329,000 for contract termination fees and
penalties We expect to incur additional costs in the fourth quarter
of 2008 of approximately $600,000 to $700,000 related to additional clean up of
facilities and employee relocation assistance. In addition, we expect
to incur costs until the properties are sold related to taxes, utilities and
insurance of approximately $300,000 to $400,000 per quarter.* The
restructuring and impairment charges are reported under the Motorized
Recreational Vehicle segment. We expect these changes to provide a
benefit from savings ranging from $8.0 to $11.0 million on a quarterly
basis.*
The
Company recorded a non-cash charge of $47 million for impairment of
goodwill in the third quarter of 2008. During the third quarter
of 2008, we experienced a significant decline in market capitalization driven
primarily by record-high fuel prices and overall recreation vehicle industry
conditions. We determined that these factors combined with the deterioration of
the credit market were an indicator that a goodwill impairment test was required
pursuant to SFAS 142. As a result, we estimated fair value based on a
discounted projection of future cash flows. We determined that goodwill was
impaired and recorded a non-cash charge, which entirely related to the motorized
segment. We estimated fair value based on a discounted projection of future cash
flows for both the motorized and towable reportable segments and reconciled
these fair values to our market capitalization as of September 27,
2008. We determined that goodwill was impaired for the motorized
segment and recorded the non-cash charge to write off all goodwill associated
with that segment. Next, we reconciled our segment values to our
current market capitalization and determined that the fair value supported the
goodwill for our towable segment. Any further decline of our market
capitalization or projections of future cash flows could result in future
write downs of the remaining goodwill.
RESULTS
OF CONSOLIDATED OPERATIONS
Quarter
ended September 29, 2007 Compared to Quarter ended September 27,
2008
The
following table illustrates the results of consolidated operations for the
quarters ended September 29, 2007 and September 27, 2008. All dollar
amounts are in thousands.
|
|
Quarter Ended
|
|
|
|
|
Quarter Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
29,
|
|
%
|
|
|
September
27,
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
|
2007
|
|
of Sales
|
|
|
2008
|
|
|
of Sales
|
|
|
Change
|
|
|
Change
|
|
|
Net
sales
|
$
|
322,422
|
|
100.0
|
%
|
|
$
|
166,267
|
|
|
100.0
|
%
|
|
$
|
(156,155
|
)
|
|
(48.4
|
)%
|
|
Cost
of sales
|
|
286,243
|
|
88.8
|
%
|
|
|
165,485
|
|
|
99.5
|
%
|
|
|
120,758
|
|
|
42.2
|
%
|
|
Gross
profit
|
|
36,179
|
|
11.2
|
%
|
|
|
782
|
|
|
0.5
|
%
|
|
|
(35,397
|
)
|
|
(97.8
|
)%
|
|
Selling,
general, and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
administrative
expenses
|
|
29,661
|
|
9.2
|
%
|
|
|
22,870
|
|
|
13.7
|
%
|
|
|
6,791
|
|
|
22.9
|
%
|
|
Impairment
of goodwill
|
|
0
|
|
0.0
|
%
|
|
|
46,966
|
|
|
28.3
|
%
|
|
|
(46,966
|
)
|
|
(100.0
|
)%
|
|
Restructuring
and impairment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
charges
|
|
0
|
|
0.0
|
%
|
|
|
21,531
|
|
|
13.0
|
%
|
|
|
(21,531
|
)
|
|
(100.0
|
)%
|
|
Operating income (loss)
|
$
|
6,518
|
|
2.0
|
%
|
|
$
|
(90,585
|
)
|
|
(54.5
|
)%
|
|
$
|
(97,103
|
)
|
|
(1,489.8
|
)%
|
Overall
Company Performance in the Third Quarter of 2008
Third
quarter net sales decreased 48.4% to $166.3 million compared to $322.4 million
for the same period last year. Gross diesel motorized sales were down
52.4%, gas motorized sales were down 7.7%, and towables were down
40.9%. Diesel products accounted for 61.7% of our third quarter
revenues while gas products were 14.6%, and towables were 23.7%. Our
overall unit sales were down 39.3% in the third quarter of 2008 to 3,282 units,
with diesel motorized unit sales down 54.2% to 495 units, gas motorized unit
sales down 18.5% to 318 units, and towable unit sales down 37.3% to 2,469
units. Our total gross average unit selling price decreased to
$53,100 from $59,800 in the same period last year, reflecting a shift in the mix
of products sold.
Gross
profit for the third quarter of 2008 decreased to $782,000, down from $36.2
million in the third quarter of 2007, and gross margin decreased from 11.2% in
the third quarter of 2007 to 0.5% in the third quarter of
2008. Changes in the components of cost of sales are set forth in the
following table (dollars in thousands):
|
|
Quarter Ended
|
|
|
|
|
Quarter Ended
|
|
|
|
|
|
|
|
|
September
29,
|
|
%
|
|
|
September
27,
|
|
%
|
|
|
Change in
|
|
|
|
2007
|
|
of Sales
|
|
|
2008
|
|
of Sales
|
|
|
% of Sales
|
|
|
Direct
materials
|
$
|
200,708
|
|
62.2
|
%
|
|
$
|
108,749
|
|
65.3
|
%
|
|
3.1
|
%
|
|
Direct
labor
|
|
31,888
|
|
9.9
|
%
|
|
|
16,807
|
|
10.1
|
%
|
|
0.2
|
%
|
|
Warranty
|
|
10,540
|
|
3.3
|
%
|
|
|
5,290
|
|
3.2
|
%
|
|
(0.1
|
)%
|
|
Other
direct
|
|
14,688
|
|
4.6
|
%
|
|
|
10,570
|
|
6.4
|
%
|
|
1.8
|
%
|
|
Indirect
|
|
28,419
|
|
8.8
|
%
|
|
|
24,069
|
|
14.5
|
%
|
|
5.7
|
%
|
|
Total
cost of sales
|
$
|
286,243
|
|
88.8
|
%
|
|
$
|
165,485
|
|
99.5
|
%
|
|
10.7
|
%
|
|
|
·
|
Direct
materials increases in 2008, as a percent of sales, were 3.1% or $5.2
million. The increase was due mainly to the impact of increased
sales discounts, which caused direct material, as a percent of sales, to
increase by 3.7% or $6.3 million. The negative impact of
discounts on direct material, as a percent of sales, was offset by
decreases in material costs due to initiatives the Company implemented
during the last fifteen months to improve efficiencies in production
plants and obtain better raw materials
pricing.
|
|
|
·
|
Direct
labor increases in 2008, as a percent of sales, were 0.2% or
$333,000. The increase was due to the impact of increased sales
discounts, which resulted in direct labor, as a percent of sales, to
increase by 0.6% or $988,000. This increase was partially
offset by labor saving initiatives the Company implemented during the
third quarter of 2008 to control labor
costs.
|
|
|
·
|
Decreases
in warranty expense in 2008, as a percent of sales, were 0.1% or
$166,000. The remaining decrease of $5.3 million was due to
lower sales volumes.
|
|
|
·
|
Increases
in other direct costs in 2008, as a percent of sales, were 1.8% or $3.0
million. This increase was the result of higher compensation
and other employee-related benefit costs of $1.3 million, out-of-policy
warranty repairs of $499,000, and delivery freight expense of $1.2
million.
|
|
|
·
|
Decreases
in indirect costs in 2008 were $4.4 million in total
dollars. These decreases were partially the result of
consolidation of component facilities and consolidation of a towable
production line and a motorized production line into one facility in late
2007. In addition, these decreases were due to the decline in
the volume of units produced as the restructuring of the production
operations progressed during the third quarter of 2008. The
decreases were partially offset by a charge in 2008 of $613,000 related to
fixed overhead costs not absorbed, on a percent of sales basis, in certain
production facilities as plant utilization was below historical normal
capacity levels. Indirect costs, as a percent of sales, were
also impacted by increased sales discounts in 2008. The
increase in sales discounts in 2008 resulted in indirect costs increasing,
as a percent of sales, by 0.8% or
$971,000.
|
Selling,
general, and administrative expenses (S,G,&A) decreased by $6.8 million in
the third quarter of 2008 to $22.9 million compared to the third quarter of 2007
and increased as a percentage of sales from 9.2% in the third quarter of 2007 to
13.7% in the third quarter of 2008. Changes in S,G,&A expenses
are set forth in the following table (dollars in thousands):
|
|
Quarter Ended
|
|
|
|
|
Quarter Ended
|
|
|
|
|
|
|
|
|
September
29,
|
|
%
|
|
|
September
27,
|
|
%
|
|
|
Change in
|
|
|
|
2007
|
|
of Sales
|
|
|
2008
|
|
of Sales
|
|
|
% of Sales
|
|
|
Salaries,
bonus, and benefit expenses
|
$
|
7,176
|
|
2.2
|
%
|
|
$
|
4,738
|
|
2.9
|
%
|
|
0.7
|
%
|
|
Selling
expenses
|
|
7,778
|
|
2.4
|
%
|
|
|
6,002
|
|
3.6
|
%
|
|
1.2
|
%
|
|
Settlement
expense
|
|
3,513
|
|
1.1
|
%
|
|
|
3,029
|
|
1.8
|
%
|
|
0.7
|
%
|
|
Marketing
expenses
|
|
3,172
|
|
1.0
|
%
|
|
|
1,902
|
|
1.1
|
%
|
|
0.1
|
%
|
|
Other
|
|
8,022
|
|
2.5
|
%
|
|
|
7,199
|
|
4.3
|
%
|
|
1.8
|
%
|
|
Total
S,G,&A expenses
|
$
|
29,661
|
|
9.2
|
%
|
|
$
|
22,870
|
|
13.7
|
%
|
|
4.5
|
%
|
|
|
·
|
Decreases
in salaries, bonus and benefit expenses in 2008 were $2.4
million. These decreases were due to reductions in
management bonus expense of $1.7 million and in administrative wages of
$764,000.
|
|
|
·
|
Decreases
in selling expenses in 2008 were $1.8 million. These decreases
were predominately due to lower costs for selling programs at our dealers’
lots of $1.0 million, and a $575,000 reduction in sales commissions as a
result of reduced sales.
|
|
|
·
|
Settlement
expense (litigation settlement expense) in 2008 decreased by
$483,000. The total dollar decrease was the result of a
decrease in the number of litigation cases in 2008 compared to
2007.
|
|
|
·
|
Decreases
in marketing expenses in 2008 were $1.3 million. These
decreases were the result of lower expenses associated with advertising
costs of $299,000, a reduction in printed materials and magazines of
$438,000, and a decrease in shows and rallies expenses of
$534,000.
|
|
|
·
|
Decreases
in other expenses in 2008 were $822,000. These
decreases were predominately the result of reductions in contract
services of $415,000, general insurance of $204,000, travel expenses of
$357,000, and supplies and postage of $277,000, offset by an increase in
bad debt expense of $332,000 and depreciation expense of
$51,000. The remainder of the change was due to decreases in
various other expenses.
|
A
non-cash charge of $47.5 million for the impairment of motorized goodwill
occurred as a result of an impairment test performed as of the third quarter of
2008. During the quarter we experienced a significant decline in
market capitalization driven primarily by record-high fuel prices and overall
recreation vehicle industry conditions. The declines in fair value no
longer supported the value of motorized goodwill recorded.
The
restructuring and impairment charges of $21.5 million primarily reflect the
costs incurred to cease production and service center operations in Wakarusa,
Elkhart and Nappanee, Indiana. The restructuring plan was announced
on July 17, 2008 and was substantially completed by September 27,
2008. The charges consist of $13.4 million for property impairment,
$3.1 million for equipment and other fixed asset impairment, $2.1 million for
expenses associated with the closure of the facilities, $2.5 million for
personnel related costs, including severance benefits and relocation assistance
costs, $157,000 for relocation of inventory, and $329,000 for contract
termination fees and penalties. In addition, we recognized $1.6
million of tax provision related to the uncertainty of a state tax
credit. We expect to incur additional costs in the fourth quarter of
2008 of approximately $600,000 to $700,000 related to additional clean up of
facilities and employee relocation assistance. In addition, we expect
to incur costs until the properties are sold related to taxes, utilities and
insurance of approximately $300,000 to $400,000 per quarter.*
The
operating loss was $90.6 million, or 54.5% of sales, in the third quarter of
2008 compared to an operating income of $6.5 million, or 2.0% of sales, in the
same 2007 period.
The decrease in
operating income was due predominantly to decreased sales, lower gross margins,
higher S,G,&A costs as a percent of sales, goodwill impairment charges, and
restructuring and asset impairment costs.
Net
interest expense was $1.2 million in the third quarter of 2008 (net of
capitalized interest of $286,000) versus $829,000 in the comparable 2007 period,
reflecting higher overall corporate borrowings during the third quarter of 2008
partially offset by lower interest rates as compared to the same period in
2007.
We
reported a benefit from income taxes of $20.7 million, or an effective tax rate
of 22.4%, in the third quarter of 2008, compared to a provision for income taxes
of $2.0 million, or an effective tax rate of 35.3%, in the third quarter of
2007. The income tax benefit in 2008 was due to the loss before income
taxes. The tax benefit was partially offset by a permanent difference
of $13.8 million related to the goodwill impairment charge and $1.6 million
related to the uncertainty of a state tax credit.
Net loss
for the third quarter of 2008 was $71.8 million compared to net income of $3.7
million for the third quarter of 2007 due primarily to lower sales, lower gross
margin, higher S,G,&A expenses as a percentage of sales, goodwill impairment
charges, and restructuring and asset impairment costs, which was partially
offset by the income tax benefit.
Third
Quarter 2007 versus Third Quarter 2008 for the Motorized Recreational Vehicle
Segment
The
following table illustrates the results of the MRV segment for the quarters
ended September 29, 2007 and September 27, 2008 (dollars in
thousands):
|
|
Quarter Ended
|
|
|
|
|
Quarter Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
29,
|
|
%
|
|
|
September
27,
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
|
2007
|
|
of Sales
|
|
|
2008
|
|
|
of Sales
|
|
|
Change
|
|
|
Change
|
|
|
Net
sales
|
$
|
257,982
|
|
100.0
|
%
|
|
$
|
128,504
|
|
|
100.0
|
%
|
|
$
|
(129,478
|
)
|
|
(50.2
|
)%
|
|
Cost
of sales
|
|
228,565
|
|
88.6
|
%
|
|
|
128,614
|
|
|
100.1
|
%
|
|
|
99,951
|
|
|
43.7
|
%
|
|
Gross
profit (deficit)
|
|
29,417
|
|
11.4
|
%
|
|
|
(110
|
)
|
|
(0.1
|
)%
|
|
|
(29,527
|
)
|
|
(100.4
|
)%
|
|
Selling,
general, and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
administrative
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
corporate overhead
|
|
22,570
|
|
8.7
|
%
|
|
|
16,147
|
|
|
12.6
|
%
|
|
|
6,423
|
|
|
28.5
|
%
|
|
Impairment
of goodwill
|
|
0
|
|
0.0
|
%
|
|
|
46,966
|
|
|
36.5
|
%
|
|
|
(46,966
|
)
|
|
(100.0
|
)%
|
|
Restructuring
and impairment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
charges
|
|
0
|
|
0.0
|
%
|
|
|
21,531
|
|
|
16.8
|
%
|
|
|
(21,531
|
)
|
|
(100.0
|
)%
|
|
Operating income (loss)
|
$
|
6,847
|
|
2.7
|
%
|
|
$
|
(84,754
|
)
|
|
(66.0
|
)%
|
|
$
|
(91,601
|
)
|
|
(1,337.8
|
)%
|
Total net
sales for the MRV segment were down from $258.0 million in the third quarter of
2007 to $128.5 million in the third quarter of 2008. Gross diesel
motorized revenues were down 52.4% and gross gas motorized revenues were down
7.7%. Diesel products accounted for 80.9% of the MRV segment’s third
quarter of 2008 gross revenues while gas products were 19.1%. The
overall decrease in revenues was due to the decline in the motorized retail
market, as well as the increase of gas motorized units sold in our overall MRV
segment mix. Our MRV segment unit sales were down 44.7% year over
year from 1,470 units in the third quarter of 2007 to 813 units in the third
quarter of 2008. Diesel motorized unit sales were down 54.2% to 495
units and gas motorized unit sales were down 18.5% to 318 units.
Gross
profit for the MRV segment for the third quarter of 2007 of $29.4 million
decreased to a gross deficit of $110,000 for the third quarter of 2008, and
gross margin decreased from 11.4% in the third quarter of 2007 to a negative
0.7% in the third quarter of 2008. Changes in the components of cost
of sales are set forth in the following table (dollars in
thousands):
|
|
Quarter Ended
|
|
|
|
|
Quarter Ended
|
|
|
|
|
|
|
|
|
September
29,
|
|
%
|
|
|
September
27,
|
|
%
|
|
|
Change in
|
|
|
|
2007
|
|
of Sales
|
|
|
2008
|
|
of Sales
|
|
|
% of Sales
|
|
|
Direct
materials
|
$
|
161,595
|
|
62.6
|
%
|
|
$
|
84,776
|
|
66.0
|
%
|
|
3.4
|
%
|
|
Direct
labor
|
|
24,346
|
|
9.5
|
%
|
|
|
12,516
|
|
9.7
|
%
|
|
0.2
|
%
|
|
Warranty
|
|
8,612
|
|
3.3
|
%
|
|
|
3,801
|
|
3.0
|
%
|
|
(0.3
|
)%
|
|
Other
direct
|
|
10,168
|
|
4.0
|
%
|
|
|
7,388
|
|
5.7
|
%
|
|
1.7
|
%
|
|
Indirect
|
|
23,844
|
|
9.2
|
%
|
|
|
20,133
|
|
15.7
|
%
|
|
6.5
|
%
|
|
Total
cost of sales
|
$
|
228,565
|
|
88.6
|
%
|
|
$
|
128,614
|
|
100.1
|
%
|
|
11.5
|
%
|
|
|
·
|
Direct
materials increases in 2008, as a percent of sales, were 3.4% or $4.4
million. The increase was due to the impact of increased sales
discounts, which caused direct material, as a percent of sales, to
increase by 4.2% or $5.8 million. The negative impact of
discounts on direct material, as a percent of sales, was offset by
decreases in material costs due to initiatives the Company has implemented
during the last fifteen months to obtain better raw materials
pricing.
|
|
|
·
|
Direct
labor increases in 2008, as a percent of sales, were 0.2%, or
$257,000. The increase was due to the impact of increased sales
discounts, which resulted in direct labor increasing, as a percent of
sales, by 0.6% or $728,000. This increase was partially offset
by labor saving initiatives the Company implemented during the third
quarter of 2008 to control labor
costs.
|
|
|
·
|
Decrease
in warranty expense in 2008, as a percent of sales, was 0.3% or
$386,000. The remaining decrease of $4.4 million was due to
lower sales volumes.
|
|
|
·
|
Increase
in other direct costs in 2008, as a percent of sales, were 1.7% or $2.2
million. This change was due to an increase in out-of-warranty
repairs of $514,000, compensation and other employee related benefit costs
of $1.2 million and delivery expense of
$514,000.
|
|
|
·
|
Decreases
in indirect costs in 2008 were $3.7 million. These
decreases were partially the result of consolidation of component
facilities and consolidation of a towable production line and a motorized
production line into one facility in late 2007. In addition,
these decreases were due to the decline in the volume of units produced as
the restructuring of the production operations progressed during the third
quarter of 2008. The decreases were partially offset by a
charge in 2008 of $613,000 related to fixed overhead costs not absorbed,
on a percent of sales basis, in certain production facilities as plant
utilization was below historical normal capacity
levels. Indirect costs, as a percent of sales, were also
impacted by increased sales discounts in 2008. The increase in
sales discounts in 2008 resulted in indirect costs increasing, as a
percent of sales, by 1.0% or
$939,000.
|
S,G,&A
expenses for the MRV segment decreased in total dollars by $6.4 million as
compared to 2007. As a percent of sales, the S,G,&A expenses
increased due to lower sales levels and increases in sales
discounts.
A
non-cash charge of $47.5 million for the impairment of motorized goodwill
occurred as a result of an impairment test performed as of the third quarter of
2008. During the quarter we experienced a significant decline in
market capitalization driven primarily by record-high fuel prices and overall
recreation vehicle industry conditions. The declines in fair value no
longer supported the value of motorized goodwill recorded.
The
restructuring and impairment charges of $21.5 million primarily reflect the
costs incurred to cease production and service center operations Wakarusa,
Elkhart and Nappanee, Indiana. The restructuring plan announced
on July 17, 2008 was substantially completed by September 27,
2008. The charges consist of $13.4 million for property impairment,
$3.1 million for equipment and other fixed asset impairment, $2.1 million for
expenses associated with the closure of the facilities, $2.5 million for
personnel related costs, including severance benefits and relocation assistance
costs, $157,000 for relocation of inventory, and $329,000 for contract
termination fees and penalties.
The
operating loss was due to lower sales, higher sales discounts, lower gross
margins, higher S,G,&A expenses as a percent of sales, and the non-cash
goodwill impairment and restructuring charges.
Third
Quarter 2007 versus Third Quarter 2008 for the Towable Recreational Vehicle
Segment
The
following table illustrates the results of the TRV Segment for the quarters
ended September 29, 2007 and September 27, 2008 (dollars in
thousands):
|
|
Quarter Ended
|
|
|
|
|
Quarter Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
29,
|
|
%
|
|
|
September
27,
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
|
2007
|
|
of Sales
|
|
|
2008
|
|
|
of Sales
|
|
|
Change
|
|
|
Change
|
|
|
Net
sales
|
$
|
64,221
|
|
100.0
|
%
|
|
$
|
37,106
|
|
|
100.0
|
%
|
|
$
|
(27,115
|
)
|
|
(42.2
|
)%
|
|
Cost
of sales
|
|
57,531
|
|
89.6
|
%
|
|
|
36,459
|
|
|
98.3
|
%
|
|
|
21,072
|
|
|
36.6
|
%
|
|
Gross
profit
|
|
6,690
|
|
10.4
|
%
|
|
|
647
|
|
|
1.7
|
%
|
|
|
(6,043
|
)
|
|
(90.3
|
)%
|
|
Selling,
general, and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
administrative
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
corporate overhead
|
|
5,819
|
|
9.0
|
%
|
|
|
5,065
|
|
|
13.7
|
%
|
|
|
754
|
|
|
13.0
|
%
|
|
Operating income (loss)
|
$
|
871
|
|
1.4
|
%
|
|
$
|
(4,418
|
)
|
|
(12.0
|
)%
|
|
$
|
(5,289
|
)
|
|
(607.2
|
)%
|
Total net
sales for the TRV segment were down from $64.2 million in the third quarter of
2007 to $37.1 million in the third quarter of 2008. This decrease is
due to softer market conditions in the towable sector. The Company’s unit
sales were down 37.3% to 2,469 units. Average unit selling price
decreased to $16,700 in the third quarter of 2008 from $17,700 in the same
period last year.
Gross
profit for the TRV segment for the third quarter of 2008 decreased to $647,000,
down from $6.7 million in the third quarter of 2007, and gross margin decreased
from 10.4% in the third quarter of 2007 to 1.7% in the third quarter of
2008. Changes in the components of cost of sales are set forth in the
following table (dollars in thousands):
|
|
Quarter Ended
|
|
|
|
|
Quarter Ended
|
|
|
|
|
|
|
|
|
September
29,
|
|
%
|
|
|
September
27,
|
|
%
|
|
|
Change in
|
|
|
|
2007
|
|
of Sales
|
|
|
2008
|
|
of Sales
|
|
|
% of Sales
|
|
|
Direct
materials
|
$
|
39,055
|
|
60.8
|
%
|
|
$
|
23,635
|
|
63.7
|
%
|
|
2.9
|
%
|
|
Direct
labor
|
|
7,542
|
|
11.8
|
%
|
|
|
4,260
|
|
11.5
|
%
|
|
(0.3
|
)%
|
|
Warranty
|
|
1,928
|
|
3.0
|
%
|
|
|
1,488
|
|
4.0
|
%
|
|
1.0
|
%
|
|
Other
direct
|
|
4,520
|
|
7.0
|
%
|
|
|
3,180
|
|
8.6
|
%
|
|
1.6
|
%
|
|
Indirect
|
|
4,486
|
|
7.0
|
%
|
|
|
3,896
|
|
10.5
|
%
|
|
3.5
|
%
|
|
Total
cost of sales
|
$
|
57,531
|
|
89.6
|
%
|
|
$
|
36,459
|
|
98.3
|
%
|
|
8.7
|
%
|
|
|
·
|
Direct
material increases in 2008, as a percent of sales, were 2.9% or $1.1
million. The increase was primarily due to the impact of
increased sales discounts, which caused direct material, as a percent of
sales, to increase by 2.0% or
$731,000.
|
|
|
·
|
Direct
labor decreases in 2008, as a percent of sales, were 0.3% or
$111,000. The decrease was partially offset by an increase in
sales discounts, which caused direct labor, as a percent of sales, to
increase by 0.4% or $126,000.
|
|
|
·
|
Warranty
expense increases in 2008, as a percent of sales, were 1.0% or
$371,000. The net decrease of $811,000 was due to lower sales
volumes.
|
|
|
·
|
Other
direct costs increases in 2008, as a percent of sales, were 1.6% or
$594,000. The change was due to an increase in delivery expense
of $446,000 and other employee related benefit costs of
$148,000.
|
|
|
·
|
Decreases
in indirect costs in 2008 of $590,000 were due to the overall decrease in
production. Indirect costs, as a percent of sales, were also
impacted by increased sales discounts in 2008. The increase in
sales discounts in 2008 resulted in indirect costs increasing, as a
percent of sales, by 0.3% or
$78,000.
|
S,G,&A
expenses for the TRV segment decreased in total dollars by $754,000 as compared
to 2007. As a percent of sales, the S,G,&A expenses increased due
to lower sales levels and increases in sales discounts.
The
operating loss was due to lower sales, higher sales discounts, lower gross
margins, and higher S,G,&A expenses as a percent of sales.
Third
Quarter 2008 versus Third Quarter 2007 for the Motorhome Resort
Segment
The
following table illustrates the results of the Motorhome Resort Segment (MR
segment) for the quarters ended September 29, 2007 and September 27, 2008
(dollars in thousands):
|
|
Quarter Ended
|
|
|
|
|
|
Quarter Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
29,
|
|
|
%
|
|
|
September
29,
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
|
2007
|
|
|
of Sales
|
|
|
2008
|
|
|
of Sales
|
|
|
Change
|
|
|
Change
|
|
|
Net
sales
|
$
|
219
|
|
|
100.0
|
%
|
|
$
|
657
|
|
|
100.0
|
%
|
|
$
|
438
|
|
|
200.0
|
%
|
|
Cost
of sales
|
|
147
|
|
|
67.1
|
%
|
|
|
412
|
|
|
62.7
|
%
|
|
|
(265
|
)
|
|
(180.3
|
)%
|
|
Gross
profit
|
|
72
|
|
|
32.9
|
%
|
|
|
245
|
|
|
37.3
|
%
|
|
|
173
|
|
|
240.3
|
%
|
|
Selling,
general, and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
administrative
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
corporate overhead
|
|
1,272
|
|
|
580.8
|
%
|
|
|
1,658
|
|
|
252.4
|
%
|
|
|
(386
|
)
|
|
(30.4
|
)%
|
|
Operating loss
|
$
|
(1,200
|
)
|
|
(547.9
|
)%
|
|
$
|
(1,413
|
)
|
|
(215.1
|
)%
|
|
$
|
(213
|
)
|
|
(17.8
|
)%
|
Net sales
increased 200.0% to $657,000 compared to $219,000 for the same period last
year. The decline in overall real estate values and the declining
sales in the RV market had an impact on the demand for resort
lots. We are currently selling lots at our Indio, California, Las
Vegas, Nevada and Bay Harbor, Michigan resorts as well as developing a resort in
Naples, Florida. The Bay Harbor location had lots available for sale
as of the end of the third quarter of 2008 and the Naples location should have
lots available for sale in the fourth quarter of 2008. The Company
still expects that while sales may remain slower than expected, the need for
luxury resort locations within the industry will remain strong.*
Gross
profit for the MR segment increased to 37.3% of sales in the third quarter of
2008 compared to 32.9% of sales in the same period last year. The
gross margin increase was due to increased sales on resort lots, as well as the
sales of higher priced lots with more favorable profit margins.
S,G,&A
expenses decreased, as a percentage of sales, due to higher sales
volumes.
The
operating loss was due to low sales volumes and an increase in S,G&A
expenses in total dollars.
Nine
Months Ended September 29, 2007 Compared to Nine Months ended September 27,
2008
The
following table illustrates the results of consolidated operations for the nine
months ended September 29, 2007 and September 27, 2008 (dollars in
thousands):
|
|
Nine
Months Ended
|
|
|
|
|
Nine
Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
29,
|
|
%
|
|
|
September
27,
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
|
2007
|
|
of Sales
|
|
|
2008
|
|
|
of Sales
|
|
|
Change
|
|
|
Change
|
|
|
Net
sales
|
$
|
979,985
|
|
100.0
|
%
|
|
$
|
620,530
|
|
|
100.0
|
%
|
|
$
|
(359,455
|
)
|
|
(36.7
|
)%
|
|
Cost
of sales
|
|
871,212
|
|
88.9
|
%
|
|
|
594,769
|
|
|
95.8
|
%
|
|
|
276,433
|
|
|
31.7
|
%
|
|
Gross
profit
|
|
108,773
|
|
11.1
|
%
|
|
|
25,761
|
|
|
4.2
|
%
|
|
|
(83,012
|
)
|
|
(76.3
|
)%
|
|
Selling,
general, and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
administrative
expenses
|
|
89,885
|
|
9.2
|
%
|
|
|
73,763
|
|
|
11.9
|
%
|
|
|
16,122
|
|
|
17.9
|
%
|
|
Impairment
of goodwill
|
|
0
|
|
0.0
|
%
|
|
|
46,966
|
|
|
7.6
|
%
|
|
|
(46,966
|
)
|
|
(100.0
|
)%
|
|
Restructuring
and impairment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
charges
|
|
0
|
|
0.0
|
%
|
|
|
23,497
|
|
|
3.8
|
%
|
|
|
(23,497
|
)
|
|
(100.0
|
)%
|
|
Operating income (loss)
|
$
|
18,888
|
|
1.9
|
%
|
|
$
|
(118,465
|
)
|
|
(19.1
|
)%
|
|
$
|
(137,353
|
)
|
|
(727.2
|
)%
|
Consolidated
sales for the nine months ended September 27, 2008 were $620.5 million versus
$980.0 million, representing a 36.7% decrease. This decrease was due
to the continued decline in the recreational vehicle retail
market. The resort revenues were lower due to the declining real
estate market, as well as due to shrinking inventories of available lots and
competition within the Company’s own resorts from owner resales in
2008.
Gross
profit for the nine month period of 2008 decreased to $25.8 million, down from
$108.8 million in the same period of 2007 and gross margins decreased from 11.1%
in 2007 to 4.2% in 2008. The changes in the components of cost of
sales are set forth in the following table (dollars in thousands):
|
|
Nine
Months
|
|
|
|
|
Nine
Months
|
|
|
|
|
|
|
|
|
Ended
|
|
|
|
|
Ended
|
|
|
|
|
|
|
|
|
September
29,
|
|
%
|
|
|
September
27,
|
|
%
|
|
|
Change in
|
|
|
|
2007
|
|
of Sales
|
|
|
2008
|
|
of Sales
|
|
|
% of Sales
|
|
|
Direct
materials
|
$
|
608,147
|
|
62.1
|
%
|
|
$
|
398,281
|
|
64.2
|
%
|
|
2.1
|
%
|
|
Direct
labor
|
|
96,512
|
|
9.8
|
%
|
|
|
63,157
|
|
10.2
|
%
|
|
0.4
|
%
|
|
Warranty
|
|
31,887
|
|
3.3
|
%
|
|
|
22,183
|
|
3.5
|
%
|
|
0.2
|
%
|
|
Other
direct
|
|
47,933
|
|
4.9
|
%
|
|
|
36,319
|
|
5.8
|
%
|
|
0.9
|
%
|
|
Indirect
|
|
86,733
|
|
8.8
|
%
|
|
|
74,829
|
|
12.1
|
%
|
|
3.3
|
%
|
|
Total
cost of sales
|
$
|
871,212
|
|
88.9
|
%
|
|
$
|
594,769
|
|
95.8
|
%
|
|
6.9
|
%
|
|
|
·
|
Direct
materials increases in 2008, as a percent of sales, were 2.1% or $13.0
million. The increase was due to the impact of increased sales
discounts, which caused direct material, as a percent of sales, to
increase by 1.9% or $11.7 million. The remaining increase was
due to a change in the product mix, as gross sales of gas motorized units,
which have higher material usage rates, were a larger portion of
sales.
|
|
|
·
|
Direct
labor increases in 2008, as a percent of sales, were 0.4% or $2.5
million. The increase was mostly due to the impact of increased
sales discounts, which resulted in direct labor, as a percent of sales, to
increase by 0.3% or $2.3 million. The remaining increase was
due to a change in the product mix of
sales.
|
|
|
·
|
Increases
in warranty in 2008, as a percent of sales, were 0.2% or $1.2
million. The Company refined the estimate of units still under
warranty and the improved data resulted in a one-time reduction to the
product warranty reserve of $2.8 million. Excluding this
benefit, the increase in sales discounts caused warranty expense, as a
percent of sales, to increase by 0.1% or
$620,000.
|
|
|
·
|
Increases
in other direct costs in 2008, as a percent of sales, were 0.9% or $5.6
million. The change was the result of increases in
out-of-warranty repairs of $1.9 million, compensation and other employee
related benefit costs of $1.8 million and delivery expenses of $1.9
million.
|
|
|
·
|
Decreases
in indirect costs in 2008 were $11.9 million. These decreases
were partially the result of consolidation of component facilities and
consolidation of a towable production line and a motorized production line
into one facility in late 2007. In addition, these decreases
were due to the decline in the volume of units produced, which decreased
indirect variable costs. The decreases were partially offset by
a charge in 2008 of $2.1 million related to fixed overhead costs not
absorbed, on a percent of sales basis, in certain production facilities as
plant utilization dropped below historical normal capacity
levels. Indirect costs, as percent of sales, were also impacted
by increased sales discounts in 2008. The increase in sales
discounts in 2008 resulted in indirect costs increasing, as a percent of
sales, by 0.4% or $2.3 million.
|
S,G,&A
expenses decreased by $16.1 million to $73.8 million for the nine month period
of 2008, but increased as a percentage of sales from 9.2% in 2007 to 11.9% in
2008. Changes in S,G,&A expenses are set forth in the following
table (dollars in thousands):
|
|
Nine
Months
|
|
|
|
|
Nine
Months
|
|
|
|
|
|
|
|
|
Ended
|
|
|
|
|
Ended
|
|
|
|
|
|
|
|
|
September
29,
|
|
%
|
|
|
September
27,
|
|
%
|
|
|
Change in
|
|
|
|
2007
|
|
of Sales
|
|
|
2008
|
|
of Sales
|
|
|
% of Sales
|
|
|
Salaries,
bonus, and benefit expenses
|
$
|
21,906
|
|
2.3
|
%
|
|
$
|
16,718
|
|
2.7
|
%
|
|
0.4
|
%
|
|
Selling
expenses
|
|
25,788
|
|
2.6
|
%
|
|
|
18,154
|
|
2.9
|
%
|
|
0.3
|
%
|
|
Settlement
expense
|
|
10,004
|
|
1.0
|
%
|
|
|
10,852
|
|
1.7
|
%
|
|
0.7
|
%
|
|
Marketing
expenses
|
|
6,837
|
|
0.7
|
%
|
|
|
6,571
|
|
1.1
|
%
|
|
0.4
|
%
|
|
Other
|
|
25,350
|
|
2.6
|
%
|
|
|
21,468
|
|
3.5
|
%
|
|
0.9
|
%
|
|
Total
S,G,&A expenses
|
$
|
89,885
|
|
9.2
|
%
|
|
$
|
73,763
|
|
11.9
|
%
|
|
2.7
|
%
|
|
|
·
|
Decreases
in salaries, bonus and benefit expenses in 2008 were $5.2
million. These decreases were due to a reduction in management
bonus expense of $4.3 million and administrative wages of $1.1 million,
offset by an increase in long-term incentive stock-based program expenses
of $250,000.
|
|
|
·
|
Decreases
in selling expenses in 2008 were $7.6 million. These decreases
were due to lower costs for selling programs at our resort properties of
$414,000, lower sales commissions of $1.1 million due to reduced sales,
and lower costs of $6.1 million related to selling
expenses. The decrease in selling expenses includes a reduction
to accruals of $3.9 million related to modifications made to the terms of
the Company’s sales and promotion
programs.
|
|
|
·
|
Settlement
expense (litigation settlement expense) in 2008 increased by
$848,000. The total dollar increase was the result of increases
in the number of litigation cases in 2008 versus 2007 as well as increases
in the amounts reserved for certain pending
litigation.
|
|
|
·
|
Decreases
in marketing expenses in 2008 were $266,000. These decreases
were mostly the result of lower expenses associated with printed materials
of $314,000 and magazines of $145,000, partially offset by an increase in
costs related to our in-house printing shop of
$169,000.
|
|
|
·
|
Decreases
in other expenses in 2008 were $3.9 million. These
decreases were predominately due to reductions in contract services
expense of $1.5 million and resort lot participation accrual of $1.6
million. The decrease of the resort lot participation accrual
expense as a result of the Company reaching a settlement related to a
profit sharing agreement with the prior owners of the Indio, California
and Las Vegas, Nevada resorts. The remainder of the change was
due to a decrease in various other
expenses.
|
A
non-cash charge of $47.5 million for the impairment of motorized goodwill
occurred as a result of an impairment test performed as of the third quarter of
2008. During the quarter we experienced a significant decline in
market capitalization driven primarily by record-high fuel prices and overall
recreation vehicle industry conditions. The declines in fair value no
longer supported the value of motorized goodwill recorded.
The restructuring and impairment charges included $21.5 million
primarily related to the costs incurred to cease production and service center
operations in Wakarusa, Elkhart and Nappanee, Indiana. The
restructuring plan announced on July 17, 2008 was substantially completed
by September 27, 2008. The charges consisted of $13.4 million for
property impairment, $3.1 million for equipment and other fixed asset
impairment, $2.1 million for expenses associated with the closure of the
facilities, $2.5 million for personnel related costs, including severance
benefits and relocation assistance costs, $157,000 for relocation of inventory,
and $329,000 for contract termination fees and penalties. In addition
we recognized $1.6 million of tax provision related to the uncertainty of a
state tax credit. We expect to incur additional costs in the fourth
quarter of 2008 of approximately $600,000 to $700,000 related to additional
clean up of facilities and employee relocation assistance. In
addition, we expect to incur costs until the properties are sold related to
taxes, utilities and insurance of approximately $300,000 to $400,000 per
quarter.*
The
restructuring charges also included $2.0 million related to an impairment charge
recognized in the second quarter of 2008 on our production facility in Elkhart,
Indiana. In October 2007, the Company ceased operations at this
facility. The towable products previously produced at this location
were relocated to facilities in Wakarusa and Warsaw, Indiana. Based
on the declining real estate market in the second quarter of 2008, the Company
reassessed the fair market value of the building and determined it was
appropriate to recognize the impairment charge.
The
operating loss was $118.5 million, or 19.1% of sales, for the nine month period
of 2008 compared to operating income of $18.9 million, or 1.9% of sales, in the
similar 2007 period.
The operating loss was
due to the reduction in sales, lower gross margins, higher S,G,&A expenses
as a percentage of sales, goodwill impairment charges, and restructuring
costs.
Net
interest expense was $2.8 million for the nine month period of 2008 (net of
capitalized interest of $646,000) versus $2.7 million in the comparable 2007
period, reflecting higher overall corporate borrowings during the nine month
period of 2008, partially offset by lower interest rates as compared to the same
period in 2007.
We
reported a benefit from income taxes of $31.0 million, or an effective tax rate
of 25.6% for the nine month period of 2008, compared to a provision for income
taxes of $6.0 million, or an effective tax rate of 38.4% for the comparable 2007
period. The income tax benefit in 2008 was due to the loss before income
taxes and a one time tax benefit related to the reduction of the resort lot
participation accrual as a result of the settlement with the prior owners of the
properties. The tax benefit was partially offset by an adjustment to
a valuation allowance for state tax credits expected to expire before being
used, a permanent difference of $13.8 million related to the goodwill impairment
charge and $1.6 million related to the uncertainty of a state tax
credit.
Net loss
for the nine month period of 2008 was $89.9 million compared to net income of
$9.6 million for the comparable period in 2007 due to a reduction in sales,
lower operating margin, goodwill impairment charges, and restructuring
costs.
Nine
Months of 2007 versus Nine Months of 2008 for the Motorized Recreational Vehicle
Segment
The
following table illustrates the results of the MRV segment for the nine month
period ended September 29, 2007 and September 27, 2008 (dollars in
thousands):
|
|
Nine
Months
|
|
|
|
|
Nine
Months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
29,
|
|
%
|
|
|
September
27,
|
|
|
%
|
|
|
$
|
|
|
|
%
|
|
|
|
2007
|
|
of Sales
|
|
|
2008
|
|
|
of Sales
|
|
|
Change
|
|
|
Change
|
|
|
Net
sales
|
$
|
754,192
|
|
100.0
|
%
|
|
$
|
471,811
|
|
|
100.0
|
%
|
|
$
|
(282,381
|
)
|
|
(37.4)
|
%
|
|
Cost
of sales
|
|
672,029
|
|
89.1
|
%
|
|
|
454,439
|
|
|
96.3
|
%
|
|
|
217,590
|
|
|
32.4
|
%
|
|
Gross
profit
|
|
82,163
|
|
10.9
|
%
|
|
|
17,372
|
|
|
3.7
|
%
|
|
|
(64,791
|
)
|
|
(78.9)
|
%
|
|
Selling,
general, and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
administrative
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
corporate overhead
|
|
65,760
|
|
8.7
|
%
|
|
|
52,262
|
|
|
11.1
|
%
|
|
|
13,498
|
|
|
20.5
|
%
|
|
Impairment
of goodwill
|
|
0
|
|
0.0
|
%
|
|
|
46,966
|
|
|
10.0
|
%
|
|
|
(46,966
|
)
|
|
(100.0)
|
%
|
|
Restructuring
and impairment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
charges
|
|
0
|
|
0.0
|
%
|
|
|
21,531
|
|
|
4.6
|
%
|
|
|
(21,531
|
)
|
|
(100.0)
|
%
|
|
Operating income (loss)
|
$
|
16,403
|
|
2.2
|
%
|
|
$
|
(103,387
|
)
|
|
(22.0
|
)%
|
|
$
|
(119,790
|
)
|
|
(730.3)
|
%
|
Net sales
for the MRV segment were down from $754.2 million in the nine month period of
2007 to $471.8 million in the nine month period of 2008. Gross diesel
motorized revenues were down 41.3%, and gas motorized revenues were up
6.3%. Diesel products accounted for 82.3% of the MRV segment revenues
while gas products were 17.7%. The overall decrease in revenues
reflects a decline in the motorized retail market, as well as the increase of
gas motorized units sold in our overall MRV segment mix. Our overall
MRV segment unit sales were down 34.1% in the nine month period of 2008 to 2,933
units, with diesel motorized unit sales down 45.0% to 1,808 units, and gas
motorized unit sales down 3.0% to 1,125 units. Our average unit
selling price decreased to $162,300 for the nine month period of 2008 from
$167,800 in the same period last year.
Gross
profit for the nine month period of 2008 decreased to $17.4 million, down from
$82.2 million in 2007, and gross margin decreased from 10.9% in the nine month
period of 2007 to 3.7% in the nine month period of 2008. The changes
in the components of cost of sales are set forth in the following table (dollars
in thousands):
|
|
Nine
Months
|
|
|
|
|
Nine
Months
|
|
|
|
|
|
|
|
|
Ended
|
|
|
|
|
Ended
|
|
|
|
|
|
|
|
|
September
29,
|
|
%
|
|
|
September
27,
|
|
%
|
|
|
Change in
|
|
|
|
2007
|
|
of Sales
|
|
|
2008
|
|
of Sales
|
|
|
% of Sales
|
|
|
Direct
materials
|
$
|
471,470
|
|
62.5
|
%
|
|
$
|
305,849
|
|
64.8
|
%
|
|
2.3
|
%
|
|
Direct
labor
|
|
71,717
|
|
9.5
|
%
|
|
|
46,083
|
|
9.8
|
%
|
|
0.3
|
%
|
|
Warranty
|
|
24,785
|
|
3.3
|
%
|
|
|
16,345
|
|
3.5
|
%
|
|
0.2
|
%
|
|
Other
direct
|
|
31,485
|
|
4.2
|
%
|
|
|
25,030
|
|
5.3
|
%
|
|
1.1
|
%
|
|
Indirect
|
|
72,572
|
|
9.6
|
%
|
|
|
61,132
|
|
12.9
|
%
|
|
3.3
|
%
|
|
Total
cost of sales
|
$
|
672,029
|
|
89.1
|
%
|
|
$
|
454,439
|
|
96.3
|
%
|
|
7.2
|
%
|
|
|
·
|
Direct
materials increases in 2008, as a percent of sales, were 2.3% or $10.9
million. The increase was primarily due to the impact of
increased sales discounts, which caused direct materials, as a percent of
sales, to increase by 1.9% or $8.9 million. The remaining
increase of $1.9 million was due to a change in the product mix, as gross
sales of gas motorized units, which have higher material usage rates, were
a larger portion of the overall MRV segment sales
mix.
|
|
|
·
|
Direct
labor increases in 2008, as a percent of sales, were 0.3% or $1.4
million. The increase was mostly due to the impact of increased
sales discounts.
|
|
|
·
|
Increases
in warranty expense in 2008, as a percent of sales, were 0.2% or
$944,000. The Company refined the estimate of units still under
warranty and the improved data resulted in a one-time reduction to the
product warranty reserve of $2.8 million. The remaining overall
decrease was due to lower sales
volumes.
|
|
|
·
|
Increases
in other direct costs in 2008, as a percent of sales, were 1.1% or $5.2
million. The change was due to increases in out-of-warranty
repairs of $1.9 million, compensation and other employee related benefit
costs of $1.4 million, and delivery expenses of $1.9
million.
|
|
|
·
|
Decreases
in indirect costs in 2008 were $11.4 million. These decreases
were partially the result of consolidation of component facilities and
consolidation of a towable production line and a motorized production line
into one facility in late 2007. In addition, these decreases
were due to the decline in the volume of units produced, which decreased
indirect variable costs. The decreases were partially offset by
a charge in 2008 of $2.0 million related to fixed overhead costs not
absorbed, on a percent of sales basis, in certain production facilities as
plant utilization was below historical normal capacity
levels. Indirect costs, as a percent of sales, were also
impacted by increased sales discounts in 2008. The increase in
sales discounts in 2008 resulted in indirect costs increasing, as a
percent of sales, by 0.4% or $1.2
million.
|
S,G,&A
expenses for the MRV segment increased, as a percent of sales, due to lower
sales levels and increases in salaries and benefit expenses, settlement expense,
marketing expenses, and other S,G,&A expenses as a percent of sales,
partially offset by decreases in selling expenses as a percent of
sales. The decrease in selling expenses includes a reduction to
accruals of $3.9 million related to modifications made to the terms of the
Company’s sales and promotion programs.
A
non-cash charge of $47.5 million for the impairment of motorized goodwill
occurred as a result of an impairment test performed as of the third quarter of
2008. During the quarter we experienced a significant decline in
market capitalization driven primarily by record-high fuel prices and overall
recreation vehicle industry conditions. The declines in fair value no
longer supported the value of motorized goodwill recorded.
The
restructuring and impairment charges of $21.5 million primarily reflect the
costs incurred to cease production and service center operations in Wakarusa,
Elkhart and Nappanee, Indiana. The restructuring plan announced on
July 17, 2008 was substantially completed by September 27, 2008. The
charges consist of $13.4 million for property impairment, $3.1 million for
equipment and other fixed asset impairment, $2.1 million for expenses associated
with the closure of the facilities, $2.5 million for personnel related costs,
including severance benefits and relocation assistance costs, $157,000 for
relocation of inventory, and $329,000 for contract termination fees and
penalties.
The
operating loss was due to lower sales, higher sales discounts, lower gross
margins, higher S,G,&A expenses as a percent of sales, and the non-cash
goodwill impairment and restructuring charges.
Nine
Months of 2007 versus Nine Months of 2008 for the Towable Recreational Vehicle
Segment
The
following table illustrates the results of the TRV segment for the nine months
ended September 29, 2007 and September 27, 2008 (dollars in
thousands):
|
|
Nine
Months
|
|
|
|
|
Nine
Months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
29,
|
|
%
|
|
|
September
27,
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
|
2007
|
|
of Sales
|
|
|
2008
|
|
|
of Sales
|
|
|
Change
|
|
|
Change
|
|
|
Net
sales
|
$
|
214,669
|
|
100.0
|
%
|
|
$
|
145,374
|
|
|
100.0
|
%
|
|
$
|
(69,295
|
)
|
|
(32.3
|
)%
|
|
Cost
of sales
|
|
194,970
|
|
90.8
|
%
|
|
|
138,592
|
|
|
95.3
|
%
|
|
|
56,378
|
|
|
28.9
|
%
|
|
Gross
profit
|
|
19,699
|
|
9.2
|
%
|
|
|
6,782
|
|
|
4.7
|
%
|
|
|
(12,917
|
)
|
|
(65.6
|
)%
|
|
Selling,
general, and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
administrative
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
corporate overhead
|
|
18,053
|
|
8.4
|
%
|
|
|
17,416
|
|
|
12.0
|
%
|
|
|
637
|
|
|
3.5
|
%
|
|
Impairment
charges
|
|
0
|
|
0.0
|
%
|
|
|
1,966
|
|
|
1.4
|
%
|
|
|
(1,966
|
)
|
|
(100.0
|
)%
|
|
Operating income (loss)
|
$
|
1,646
|
|
0.8
|
%
|
|
$
|
(12,600
|
)
|
|
(8.7
|
)%
|
|
$
|
(14,246
|
)
|
|
(865.5)
|
%
|
Net sales
for the TRV segment were down from $214.7 million in the nine month period of
2007 to $145.4 million in the nine month period of 2008. The decrease
was due to softer market conditions in the towable sector. The Company’s
unit sales were down 25.2% to 10,057 units. The average unit selling
price decreased to $16,200 in the nine month period of 2008 from $17,500 in the
same period last year.
Gross
profit for the nine month period of 2008 decreased to $6.8 million, down from
$19.7 million in 2007, and gross margin decreased from 9.2% in the nine month
period of 2007 to 4.7% in the nine month period of 2008. The changes
in the components of cost of sales are set forth in the following table (dollars
in thousands):
|
|
Nine
Months
|
|
|
|
|
Nine
Months
|
|
|
|
|
|
|
|
|
Ended
|
|
|
|
|
Ended
|
|
|
|
|
|
|
|
|
September
29,
|
|
%
|
|
|
September
27,
|
|
%
|
|
|
Change in
|
|
|
|
2007
|
|
of Sales
|
|
|
2008
|
|
of Sales
|
|
|
% of Sales
|
|
|
Direct
materials
|
$
|
133,035
|
|
62.0
|
%
|
|
$
|
90,937
|
|
62.5
|
%
|
|
0.5
|
%
|
|
Direct
labor
|
|
24,542
|
|
11.4
|
%
|
|
|
16,978
|
|
11.7
|
%
|
|
0.3
|
%
|
|
Warranty
|
|
7,102
|
|
3.3
|
%
|
|
|
5,838
|
|
4.0
|
%
|
|
0.7
|
%
|
|
Other
direct
|
|
16,416
|
|
7.6
|
%
|
|
|
11,280
|
|
7.8
|
%
|
|
0.2
|
%
|
|
Indirect
|
|
13,875
|
|
6.5
|
%
|
|
|
13,559
|
|
9.3
|
%
|
|
2.8
|
%
|
|
Total
cost of sales
|
$
|
194,970
|
|
90.8
|
%
|
|
$
|
138,592
|
|
95.3
|
%
|
|
4.5
|
%
|
|
|
·
|
Direct
material increases in 2008, as a percent of sales, were 0.5% or
$727,000. These increases were a result of an increase in sales
discounts, which caused direct materials, as a percent of sales, to
increase by 1.6% or $2.2 million. This was partially
offset by a decrease due to the change in product mix to units with lower
material usage rates.
|
|
|
·
|
Direct
labor increases in 2008, as a percent of sales, were 0.3% or
$407,000. These increases were mostly due to the impact of
increased sales discounts, which resulted in direct labor, as a percent of
sales, to increase by 0.3% or
$473,000.
|
|
|
·
|
Increases
in warranty expense in 2008, as a percent of sales, were 0.7% or $1.0
million. The increase was partially due to the impact of
increased sales discounts, which resulted in warranty expense, as a
percent of sales, to increase by 0.1% or
$141,000.
|
|
|
·
|
Increases
in other direct costs in 2008, as a percent of sales, were 0.2% or
$291,000. An increase in sales discounts, which caused other
direct costs, as a percent of sales, to increase by 0.2% or $411,000, was
partially offset by a decrease in delivery
expenses.
|
|
|
·
|
Decreases
in indirect costs in 2008 of $316,000 were partially due to a charge of
$125,000 related to fixed overhead costs not absorbed on a percent of
sales basis in certain production facilities as plant utilization dropped
below historically normal levels. Additionally, there were
decreases in the variable portion of costs relative to the reduction in
sales. Indirect costs, as a percent of sales, were also
impacted by increased sales discounts in 2008. The increase in
sales discounts in 2008 resulted in indirect costs increasing, as a
percent of sales, by 0.2% or
$191,000.
|
S,G,&A
expenses for the TRV segment increased as a percent of sales due to lower sales
levels and increases in selling expenses, marketing expenses, and other
S,G,&A expenses as a percent of sales, partially offset by a decrease in
salaries and benefit expenses as a percent of sales.
In
October 2007 the Company ceased operations at a production facility in Elkhart,
Indiana. The towable products previously produced at this location
were relocated to facilities in Wakarusa and Warsaw, Indiana. Based
on the declining real estate market in the second quarter of 2008, the Company
reassessed the fair market value of the building and determined it was
appropriate to recognize an impairment charge of $2.0 million on the
facility.
The
operating loss was due to lower sales and gross profit, higher S,G,&A
expenses as a percent of sales, and the asset impairment charge.
Nine
Months of 2007 versus Nine Months of 2008 for the Motorhome Resorts
Segment
The
following table illustrates the results of the Motorhome Resorts Segment (MR
segment) for the nine month period ended September 29, 2007 and September 27,
2008 (dollars in thousands):
|
|
Nine
Months
|
|
|
|
|
Nine
Months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
29,
|
|
%
|
|
|
September
27,
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
|
2007
|
|
of Sales
|
|
|
2008
|
|
|
of Sales
|
|
|
Change
|
|
|
Change
|
|
|
Net
sales
|
$
|
11,124
|
|
100.0
|
%
|
|
$
|
3,345
|
|
|
100.0
|
%
|
|
$
|
(7,779
|
)
|
|
(69.9
|
)%
|
|
Cost
of sales
|
|
4,213
|
|
37.9
|
%
|
|
|
1,738
|
|
|
52.0
|
%
|
|
|
2,475
|
|
|
58.7
|
%
|
|
Gross
profit
|
|
6,911
|
|
62.1
|
%
|
|
|
1,607
|
|
|
48.0
|
%
|
|
|
(5,304
|
)
|
|
(76.7
|
)%
|
|
Selling,
general, and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
administrative
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
corporate overhead
|
|
6,072
|
|
54.6
|
%
|
|
|
4,085
|
|
|
122.1
|
%
|
|
|
1,987
|
|
|
32.7
|
%
|
|
Operating
income (loss)
|
$
|
839
|
|
7.5
|
%
|
|
$
|
(2,478
|
)
|
|
(74.1
|
)%
|
|
$
|
(3,317
|
)
|
|
(395.4
|
)%
|
Net sales
decreased 69.9% to $3.3 million compared to $11.1 million for the same period
last year. The decline in overall real estate values and the
declining sales in the RV market have had an impact on the demand for resort
lots. The decrease was also due to fewer lots available for sale in
the current year as the Indio, California and Las Vegas, Nevada resorts are near
the end of their sales cycle.
In addition, there is
competition within the Company’s own resorts from owner resales. We
are currently developing resorts in Naples, Florida and Bay Harbor,
Michigan. The Company still expects that while sales may remain
slower than expected, that the needs for luxury resort locations within the
industry will remain strong.*
Gross
profit for the MR segment decreased to 48.0% of sales compared to 62.1% of sales
in the same period last year. Gross margin decreases were due to an
increase in sales discounts and the additions of amenities designed to enhance
the appeal of the resorts and demand for lots, but also added to the cost of
sales.
S,G,&A
expenses increased as a percent of sales due to lower sales that were not
entirely offset by a reduction in total S,G,&A dollars. The
expenses included a reduction of $1.6 million to the resort lot participation
accrual expense as the result of the Company reaching a settlement related to a
profit sharing agreement with the prior owners of the Indio, California and Las
Vegas, Nevada resorts.
The operating loss was due to lower lot sales volumes, a decrease in gross
margins, and an increase in S,G&A expenses as a percentage of sales.
LIQUIDITY AND CAPITAL
RESOURCES
The
Company’s primary sources of liquidity are internally generated cash from
operations and available borrowings under its credit
facilities. During the nine month period of 2008, the Company used
cash of $38.4 million for operating activities and had a net cash balance of
$3.0 million at September 27, 2008. The Company used $27.1 million of
cash from the net loss offset by non-cash expenses such as depreciation,
amortization, stock-based compensation, impairment of goodwill, and
restructuring and impairment charges. Major uses of cash flows for
operating activities included an increase of $10.7 million in resort lot
inventory, an increase of $2.8 million in land held for development, an increase
in income tax receivable of $15.2 million, a decrease of $26.5 million in trade
accounts payable, a decrease of $6.0 million in product warranty reserve, and a
decrease in accrued expenses and other liabilities of $16.5
million. The major sources of cash were from a decrease of $42.9
million in trade accounts receivable and a decrease of $23.4 million in
inventories. The increase in resort lot inventory was due to the
construction in progress at the Naples, Florida and Bay Harbor, Michigan
properties. The increase in land held for development was due to the
purchase of the Bay Harbor, Michigan property for resort development in March
2008. The increase in income tax receivable was due to the net loss
recognized in the first nine months of 2008. The decrease in trade
accounts payable related to the decline in purchases of raw materials towards
the end of the nine month period ended September 27, 2008 as we ceased
operations in Wakarusa, Elkhart and Nappanee, Indiana. As the nine
months progressed, production output was reduced and raw materials that had
built up towards the beginning of the year were used. The decrease in
product warranty reserve was due in part to the reduction of $2.8 million
related to refining the estimate of warranty as well as lower
sales. The decrease in accrued expenses and other liabilities was
associated primarily with decreases of accruals for management bonus, promotions
and advertising, employee benefits, resort lot participation accrual, and
various miscellaneous accruals. The decrease in trade accounts
receivable was due to improved collections and the decline in sales experienced
in the third quarter of 2008 as compared to the fourth quarter of 2007. The
decrease in inventories was due to reduced production as the Company worked to
align production with declining retail demand in the RV market.
The
Company’s credit facilities consist of a revolving line of credit (the “Line of
Credit”) of up to $105.0 million and a term loan (“Term Debt”). As of
September 27, 2008, there was $49.9 million outstanding under the Line of Credit
and $24.3 million outstanding on the Term Debt. At the election of
the Company, the credit facilities bear interest at rates that fluctuate based
on the prime rate or LIBOR and are determined based on the Company’s leverage
ratio. The Company also pays interest quarterly on the unused
available portion of the Line of Credit at varying rates, determined by the
Company’s leverage ratio. The amounts outstanding under the Line of
Credit are due and payable in full on November 17, 2009 and interest is paid
monthly. The Term Debt requires quarterly interest and principal
payments of $1.4 million, with a final balloon payment of $12.9 million due on
November 18, 2010. At September 27, 2008, the weighted-average
interest rate on the Revolving Loan and the Term Debt was 6.0% and 5.8%,
respectively. The credit facilities are collateralized by all of the
assets of the Company. The Company also has four stand-by letters of
credit outstanding totaling $3.1 million as of September 27, 2008.
The
credit facilities require the Company to maintain a maximum leverage ratio,
minimum current ratio, minimum debt service coverage ratio, and minimum tangible
net worth. The Company was in violation of its required leverage
ratio, debt service coverage ratio, and tangible net worth covenant as of
September 27, 2008. The Company does not have a waiver for the
covenant violations. Accordingly, the Company has presented its
long-term debt and related debt issue costs current as of September 27,
2008.
As
of September 27, 2008, the Company's unamortized debt issue costs related to the
credit facilities was $782,000. If the current credit
facilities are refinanced, the Company expects that the
transaction would be accounted for as an extinguishment, requiring unamortized
debt issue costs at the refinancing date to be expensed in the period
of refinancing.
The
Company is currently negotiating with Bank of America, N.A. (which is the agent
of a consortium of banks) to provide a working capital loan from the
consortium (the “Working Capital Loan”) which will replace its existing
Line of Credit. In addition, the Company is also concurrently
negotiating the provisions of a term loan (the “Term Loan”) from Ableco Finance
LLC, a Delaware limited liability company, to provide additional capital for the
Company's
operations. As
of November 6, 2008, these two agreements have not been
funded. It could have a material adverse effect on the Company’s
business, results of operations and financial condition if the Company is
unsuccessful in securing access to the Working Capital Loan and the Term Loan,
or in obtaining a waiver from its current group of lenders related to its
existing Line of Credit.
In
November 2005, the Company obtained a term loan of $500,000 from the State
of Oregon in connection with the relocation of jobs to the Coburg, Oregon
production facilities from the Bend, Oregon facility. The principal
and interest is due on April 30, 2009. The loan bears a 5%
annual interest rate.
The
Company’s principal working capital requirements are for purchases of inventory
and financing of trade receivables. Many of the Company’s dealers
finance product purchases under wholesale floor plan arrangements with third
parties as described below. At September 27, 2008, the Company had
working capital of approximately $46.6 million, a decrease of $65.4 million from
working capital of $112.0 million at December 29, 2007 due in large part to the
reclassification of the total term debt to current and the increase of the line
of credit balance. The Company has been using short-term credit
facilities and operating cash flow to finance its capital
expenditures.
The
Company believes that cash flow from operations and funds available under its
anticipated credit facilities will be sufficient to meet the Company’s liquidity
requirements for the next 12 months.* The Company’s capital
expenditures were $2.5 million in the nine month period of 2008, which included
upgrades to its information systems infrastructure, hardware and software,
relocation of our printing shop, purchase of a small building, and other various
capitalized upgrades to existing facilities. The Company anticipates
that capital expenditures for all of 2008 will be approximately $5 million,
which includes expenditures to purchase additional machinery and equipment in
the Company’s Coburg, Oregon facilities, moving operations from Indiana to
Oregon, purchase of signage and hardware for dealer support programs, and
upgrades to existing information systems infrastructures.*
As is
typical in the recreational vehicle industry, many of the Company’s retail
dealers utilize wholesale floor plan financing arrangements with third party
lending institutions to finance their purchases of the Company’s
products. Under the terms of these floor plan arrangements,
institutional lenders customarily require the recreational vehicle manufacturer
to agree to repurchase any unsold units if the dealer defaults on its credit
facility from the lender, subject to certain conditions. The Company
has agreements with several institutional lenders under which the Company
currently has repurchase obligations. The Company’s contingent
obligations under these repurchase agreements are reduced by the proceeds
received upon the sale of any repurchased units. The Company’s
obligations under these repurchase agreements vary from period to period up to
15 months. At September 27, 2008, approximately $449.9 million of
products sold by the Company to independent dealers were subject to potential
repurchase under existing floor plan financing agreements with approximately
6.5% concentrated with one dealer. Historically, the Company has been
successful in mitigating losses associated with repurchase
obligations. During the third quarter of 2008, the
losses associated with the exercise of repurchase agreements were
approximately $111,000. Dealers for the Company undergo a credit
review prior to becoming a dealer and periodically
thereafter. Financial institutions that provide floor plan financing
also perform credit reviews and floor checks on an on-going basis. We
closely monitor sales to dealers that are a higher credit risk. The
repurchase period is limited, usually up to a maximum of 15
months. We believe these activities help to minimize the number of
required repurchases. Additionally, the repurchase agreement
specifies that the dealer is required to make principal payments during the
repurchase period. Since the Company repurchases the units based on
the schedule of principal payments, the repurchase amount is typically less than
the original invoice amount. This lower repurchase amount helps
mitigate our loss when we offer the inventory to another dealer at an amount
lower than the original invoice as an incentive for the dealer to take the
repurchased inventory.
OFF-BALANCE SHEET
ARRANGEMENTS
As of
September 27, 2008, the Company did not have any off-balance sheet arrangements
that have, or are reasonably likely to have, a current or future material effect
on the Company’s consolidated financial condition, results of operations,
liquidity, capital expenditures or capital resources.
CONTRACTUAL
OBLIGATIONS
As part
of the normal course of business, we incur certain contractual obligations and
commitments that will require future cash payments. The following
tables summarize the significant obligations and commitments (in
thousands).
|
|
|
PAYMENTS DUE BY PERIOD
|
|
|
Contractual Obligations
|
|
1 year or less
|
|
1 to 3 years
|
|
4 to 5 years
|
|
Thereafter
|
|
Total
|
|
|
Long-term
debt (1)
|
|
$
|
24,785
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
24,785
|
|
|
Operating
leases (2)
|
|
|
2,247
|
|
|
4,186
|
|
|
2,468
|
|
|
604
|
|
|
9,505
|
|
|
Total
contractual cash obligations
|
|
$
|
27,032
|
|
$
|
4,186
|
|
$
|
2,468
|
|
$
|
604
|
|
$
|
34,290
|
|
|
|
|
AMOUNT OF COMMITMENT EXPIRATION BY PERIOD
|
|
|
|
|
|
Other Commitments
|
|
1 year or less
|
|
1 to 3 years
|
|
4 to 5 years
|
|
Thereafter
|
|
Total
|
|
|
Line
of credit (3)
|
|
$
|
55,085
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
$
|
55,085
|
|
|
Guarantees
(4)
|
|
|
0
|
|
|
0
|
|
|
10,930
|
|
|
0
|
|
|
10,930
|
|
|
Repurchase
obligations (5)
|
|
|
406,505
|
|
|
43,374
|
|
|
0
|
|
|
0
|
|
|
449,879
|
|
|
Total
commitments
|
|
$
|
461,590
|
|
$
|
43,374
|
|
$
|
10,930
|
|
$
|
0
|
|
$
|
515,894
|
|
|
(1)
|
See
Notes 5 to the Condensed Consolidated Financial
Statements.
|
|
(2)
|
Various
leases including manufacturing facilities, aircraft, and machinery and
equipment.
|
|
(3)
|
See
Note 5 to the Condensed Consolidated Financial Statements. The amount
listed represents available borrowings on the line of credit at September
27, 2008.
|
|
(4)
|
Guarantees
related to aircraft operating lease.
|
|
(5)
|
Reflects
obligations under manufacturer repurchase commitments. See Note 11 to the
Condensed Consolidated Financial
Statements.
|
INFLATION
During
2007 and to a lesser extent during 2008, the Company experienced increases in
the prices of certain commodity items that we use in manufacturing our
products. These include, but are not limited to, steel, copper,
aluminum, petroleum, and wood. Price increases for these raw
materials are indicative of widespread inflationary trends, and they have had an
impact on the Company’s production costs. To date, the Company has
been successful in passing along most of these increases by increasing the
selling prices of its products. However, there is no certainty that
the Company will be able to pass these along successfully in the
future. The current trend in these prices, if it continues, could
have a materially adverse impact on the Company’s business going
forward.
CRITICAL ACCOUNTING
POLICIES
The
discussion and analysis of our financial condition and results of operations are
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires us to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, we evaluate our estimates,
including those related to warranty costs, product liability, and impairment of
goodwill. We base our estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances. Actual results may differ from these estimates under
different assumptions or conditions and such differences could be
material. We believe the following critical accounting policies and
related judgments and estimates affect the preparation of our consolidated
financial statements.
Income
Taxes
In
conjunction with preparing its consolidated financial statements, the Company
must estimate its income taxes in each of the jurisdictions in which it
operates. This process involves estimating actual current tax expense
together with assessing temporary differences resulting from differing treatment
of items for tax and accounting purposes. These differences result in
deferred tax assets and liabilities, which are included in the consolidated
balance sheets. The Company must then assess the likelihood that the
deferred tax assets will be recovered from future taxable income, and to the
extent management believes that recovery is not likely, a valuation allowance
must be established. Significant management judgment is required in
determining the Company’s provision for income taxes, deferred tax assets and
liabilities, and any valuation allowance recorded against net deferred tax
assets.
The
Company has experienced significant losses from operations during the current
year. Per SFAS No. 109,
Accounting for Income Taxes
,
the Company is required to evaluate its ability to substantiate significant
deferred tax asset valuations when it is uncertain that these assets will be
realized in the near future. Presently, based on the Company’s
expected benefits from its restructuring, which commenced in the third quarter,
management believes it will realize the deferred asset recorded on the Company’s
books. However, this will be reviewed each quarter, and there can be
no guarantee that this amount will not be written down in future
periods.
Warranty
Costs
Estimated
warranty costs are provided for at the time of sale of products with warranties
covering the products for up to one year from the date of retail sale (five
years for the front and sidewall frame structure, and three years on the
Roadmaster chassis). These estimates are based on historical average
repair costs, as well as other reasonable assumptions as have been deemed
appropriate by management.
Product
Liability
The
Company provides an estimate for accrued product liability based on current
pending cases, as well as for those cases which are incurred but not
reported. This estimate is developed by legal counsel based on
professional judgment, as well as historical experience.
Impairment
of Goodwill
The
Company assesses the potential impairment of goodwill in accordance with
Financial Accounting Standards Board (FASB) Statement
No. 142. This annual test involves management comparing the fair
value of each of the Company’s reporting units, to the respective carrying
amounts, including goodwill, of the net book value of the reporting unit, to
determine if goodwill has been impaired. Due to the occurrence of
trigger events, an interim test was performed as of September 27,
2008. We estimated fair value based on a discounted projection of
future cash flows for both the motorized and towable reportable segments and
reconciled these fair values to our market capitalization at September 27, 2008.
We determined that goodwill was impaired for the motorized segment and recorded
a non-cash charge of $47 million to write-off all goodwill associated with that
segment. We reconciled our segment values to our current market capitalization
and determined that the value continued to support the goodwill for our towable
segment.
Impairment
of Long-Lived Assets
The
Company assesses the potential impairment of long-lived assets in accordance
with Financial Accounting Standards Board (FASB) Statement No.
144. This test involves management comparing the fair value of
long-lived assets to the respective carrying amounts when a triggering event
necessitates the assessment. Management reviewed several of its
long-lived assets related to the Indiana operations at September 27,
2008. Due to the restructuring that occurred and the decline in real
estate markets, an impairment charge of $16.5 million was recognized on property
and other fixed assets based on preliminary appraisals, subject to final
revision in the fourth quarter of 2008.
Inventory
Allowance
The
Company writes down its inventory for obsolescence, and the difference between
the cost of inventory and its estimated fair market value. These
write-downs are based on assumptions about future sales demand and market
conditions. If actual sales demand or market conditions change from
those projected by management, additional inventory write-downs may be
required.
Incentive
Stock-Based Compensation
The
Company, like many other companies, sponsors an incentive stock-based
compensation plan for key members of the organization. The related
expenses recognized are subject to complex calculations based on a variety of
assumptions for variables such as risk-free rates of return, stock volatility,
expected terminations, and achievements of financial performance
measures. To the extent certain of these variables can not be known,
management uses estimates to calculate the resulting liability.
Repurchase
Obligation
Upon
request of a lending institution financing a dealer’s purchases of the Company’s
product, the Company will execute a repurchase agreement. The Company
has recorded a liability associated with the disposition of repurchased
inventory. To determine the appropriate liability, the Company
calculates a reserve, based on an estimate of potential net losses, along with
qualitative and quantitative factors, including dealer inventory turn rates, and
the financial strength of individual dealers.
NEWLY ISSUED FINANCIAL
REPORTING PRONOUNCEMENTS
None.
Item 3
- Quantitative and Qualitative Disclosures About Market
Risk
No
material change since December 29, 2007.
Item 4
- Controls and Procedures
Evaluation
of Disclosure Controls and Procedures
Our
management evaluated, with the participation of our Chief Executive Officer and
our Chief Financial Officer, the effectiveness of our disclosure controls and
procedures as of the end of the period covered by this Quarterly Report on Form
10-Q. Based on this evaluation, our Chief Executive Officer and our
Chief Financial Officer have concluded that our disclosure controls and
procedures are effective to ensure that information we are required to disclose
in reports that we file or submit under the Securities Exchange Act of 1934, as
amended, is accumulated and communicated to our management including our
principal executive and principal financial officers, as appropriate to allow
timely decisions regarding required disclosure, and that such information is
recorded, processed, summarized and reported within the time periods specified
in Securities and Exchange Commission rules and forms.
Our
management, including our Chief Executive Officer and Chief Financial Officer,
does not expect that our disclosure controls and procedures will prevent all
error and all fraud. Because of inherent limitations in any system of
disclosure controls and procedures, no evaluation of controls can provide
absolute assurance that all instances of error or fraud, if any, within the
Company may be detected. However, our management, including our Chief
Executive Officer and our Chief Financial Officer, has designed our disclosure
controls and procedures to provide reasonable assurance of achieving their
objectives and have, pursuant to the evaluation discussed above, concluded that
our disclosure controls and procedures are, in fact, effective at this
reasonable assurance level.
There was
no change in our internal control over financial reporting 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, our internal control
over financial reporting.
PART II
- OTHER INFORMATION
Item 1A
- Risk Factors
We have
listed below various risks and uncertainties relating to our
businesses. This list is not inclusive of all the risks and
uncertainties we face, but any of these could cause our actual results to differ
materially from the results contemplated by the forward-looking statements
contained in this report or that we may issue from time to time in the
future.
If
we are unable to negotiate a new credit facility, our outstanding debt could
become immediately payable.
As of
September 27, 2008, we had $49.5 million outstanding under our $105 million line
of credit and $24.8 million outstanding on our term debt. As of
September 27, 2008, we were in violation of certain financial covenants under
these credit facilities and we have not obtained a waiver.
While we
have been working with other financial institutions to obtain a new credit
facility to replace our existing bank agreement, we do not have that completed
as of November 6, 2008. If we are unsuccessful in securing
replacement financing, or in obtaining a waiver from our current lenders, the
existing loans could become immediately due and payable. Under such
circumstances, the Company would experience severe liquidity problems resulting
in a material adverse effect on our business, results of operations and
financial condition.
If the difficulties in the wholesale and retail credit
markets persist, we may not be able to maintain our current sales
volumes.
The
reduction in
access to readily available credit for both our dealers and the ultimate retail
customer has
been negativ
ely impacted by the current state of the
economy. If this trend continues, we may experience a material
adverse effect on the results of our future operations.
*
If we are unable to return to profitability, the
deferred tax assets may not be realized
.
The
Company has experienced significant losses from operations during the current
year. Per SFAS No. 109,
Accounting for Income Taxes
,
the Company is required to evaluate its ability to substantiate significant
deferred tax asset valuations when it is uncertain that these assets will be
realized in the near future. Presently, based on the Company’s
expected benefits from its restructuring, management believes it will realize
the deferred tax assets, which currently total $39.0
million. However, this will be reviewed each quarter, and there can
be no guarantee that this amount will not be written down in future
periods.
The
relocation of our Indiana operations may cost more than originally estimated and
may not provide the cost savings we anticipate.
We moved
certain operations from Indiana to our Oregon facility, as described in
“Business Changes”. In the future, we may incur additional costs
related to the restructuring. We may incur losses on the sale of the
various Indiana properties that exceed the impairment charge of $15.3 million
already recognized in the first nine months of 2008. The
restructuring also may not fully result in the expected cost savings of $8 to
$11 million each quarter. In addition, if the restructuring does not
provide the expected on-going future benefits, we may have to record a valuation
allowance for deferred tax assets which currently total $39.0
million. Additional costs and negative financial results could have a
material adverse effect on the Company.
We
may experience unanticipated fluctuations in our operating results for a
variety of reasons.
Our net
sales, gross margin, and operating results may fluctuate significantly from
period to period due to a number of factors, many of which are not readily
predictable. These factors include the following:
|
|
Factors
affecting the recreational vehicle industry as a whole, including economic
and seasonal factors, such as fuel prices, interest rates and credit
availability.
|
|
|
The
varying margins associated with the mix of products we sell in any
particular period.
|
|
|
The
fact that we typically ship a large amount of products near quarter
end.
|
|
|
Our
ability to utilize and expand our manufacturing resources
efficiently.
|
|
|
Shortages
of materials used in our products.
|
|
|
The
effects of inflation on the costs of materials used in our
products.
|
|
|
A
determination by us that goodwill or other intangible assets are impaired
and have to be written down to their fair values, resulting in a charge to
our results of operations.
|
|
|
Our
ability to introduce new models that achieve consumer
acceptance.
|
|
|
The
introduction, marketing and sale of competing products by others,
including significant discounting offered by our
competitors.
|
|
|
The
addition or loss of our dealers.
|
|
|
The
timing of trade shows and rallies, which we use to market and sell our
products.
|
|
|
Our
inability to acquire and develop key pieces of property for on-going
resort activity.
|
|
|
Fluctuations
in demand for our resort lots due to changing economic and other
conditions.
|
Our
overall gross margin may decline in future periods to the extent that we
increase the percent of sales of lower gross margin towable products or if the
mix of motor coaches we sell shifts to lower gross margin units. In
addition, a relatively small variation in the number of recreational vehicles we
sell in any quarter can have a significant impact on total sales and operating
results for that quarter.
Demand in
the recreational vehicle industry generally declines during the winter months,
while sales are generally higher during the spring and summer
months. With the broader range of products we now offer, seasonal
factors could have a significant impact on our operating results in the
future. Additionally, unusually severe weather conditions in certain
markets could delay the timing of shipments from one quarter to
another.
We
attempt to forecast orders for our products accurately and commence purchasing
and manufacturing prior to receipt of such orders. However, it is
highly unlikely that we will consistently be able to accurately forecast the
timing, rate, and mix of orders. This aspect of our business makes
our planning inexact and, in turn, affects our shipments, costs, inventories,
operating results, and cash flow for any given quarter.
Our business
segments are cyclical and susceptible to slowdowns in the general
economy
.
The
recreational vehicle industry has been characterized by cycles of growth and
contraction in consumer demand, reflecting prevailing economic, demographic, and
political conditions that affect disposable income for leisure-time
activities. Our business is subject to the cyclical nature of the RV
industry and principally the Class A segment. Some of the factors
that contribute to this cyclicality include fuel availability and costs,
interest rate levels, the level of discretionary spending, and availability of
credit and overall consumer confidence. Increasing interest rates and
fuel prices over the last three years have adversely affected the Class A
recreational vehicle market. An extended continuation of these
conditions would materially affect the results of our operations and financial
condition.
Class A
unit shipments peaked at approximately 37,300 units in 1994 and declined to
approximately 33,000 units in 1995. The Class A segment then went on
a steady climb and in 1999 recorded the highest year, in recent history, of
Class A shipments, approximately 49,400. Over the next two years
motorhome shipments declined to 33,400 in 2001. Class A shipments then rose for
the next three years and in 2004 reached, 46,300. Over the last three
years, however, shipments of Class A motorhomes have dropped reaching pre-1994
levels of 32,900 in 2007.
The
towable segment moved through many of the same cyclical peaks and troughs
historically. The shipment level peaked in 1994 at 201,100
dropping-off to 192,200 in 1996 and then growing to 249,600 in
1999. Towable unit shipments suffered a two-year drop-off like Class
A motorhomes in 2000 and 2001, dropping to 207,600. Since then, the
market has expanded significantly reaching 334,600 in 2006, but falling in 2007
to 297,900. Unlike the Class A market, the towables segment did not
experience a slow down in 2005 and 2006, because manufacturers have successfully
introduced popular new models and the segment was significantly aided by units
sold to support the hurricane relief efforts in the gulf coast. The
decline in 2007 reflects consumers’ uneasiness surrounding the economy, fuel
prices and declining real estate values.
Our
recreational vehicle resort properties are also impacted by the overall
recreational vehicle industry. In addition, our real estate
investments in the resort properties are subject to the impacts of lending
challenges and general market declines in the real estate market. As
a result, we may experience delays in developing and selling our
resorts. These delays may result in losses that could materially
affect our results of operations and financial condition.
We
may experience a decrease in sales of our products due to an increase in
the price or a decrease in the supply of fuel.
An
interruption in the supply or significant continued increases in the price or
tax on the sale, of diesel fuel or gasoline on a regional or national basis
could significantly affect our business. Diesel fuel and gasoline
have, at various times in the past, been either expensive or difficult to obtain
and are currently at an all time high. We cannot predict the
long-term impact continued high prices will have on the RV market.
The
expected benefits of the joint venture, CCP, may not be realized.
During
the first quarter of 2007, we completed the formation of a joint venture (CCP)
with Navistar, Inc. (NAV) for the purpose of manufacturing diesel
chassis. The on-going and anticipated advantages of the joint
venture, which are purchasing synergies, access to engineering and design
expertise from NAV, and improvement of the utilization of our Roadmaster chassis
manufacturing facility in Elkhart, Indiana, may not be realized, in particular
in light of the restructuring changes we are under taking in our
Indiana operations as described in “Business Changes”.
We
depend on single or limited sources to provide us with certain important
components that we use in the production of our products.
A number
of important components for our products are purchased from a single or a
limited number of sources. These include chassis from Workhorse and
Ford for gas motor coaches and diesel chassis from our newly formed joint
venture with International Truck and Engine Corporation. The joint
venture sources turbo diesel engines from Cummins and Caterpillar, substantially
all transmissions from Allison and axles from Dana. We have no
long-term supply contracts with these suppliers or their distributors, and we
cannot be certain that these suppliers will be able to meet our future
requirements. Consequently, the Company has periodically been placed on
allocation of these and other key components. The last significant allocation
occurred in 1997 from Allison, and in 1999 from Ford. An extended
delay or interruption in the supply of any components that we obtain from a
single supplier or from a limited number of suppliers could adversely affect our
business, results of operations, and financial condition.
We
rely on a relatively small number of dealers for a significant percentage of our
sales.
Although
our products were offered by over 700 dealerships located primarily in the
United States and Canada as of September 27, 2008, a significant percentage of
our sales are concentrated among a relatively small number of independent
dealers. For the quarter ended September 27, 2008, sales to one
dealer, Freedom Roads, accounted for 20.3% of total sales compared to 6.4% of
sales to Lazy Days RV Center in the same period ended last year. For
quarters ended September 29, 2007 and September 27, 2008, sales to our 10
largest dealers, including Freedom Roads, accounted for a total of 31.8% and
44.9% of total sales, respectively. The loss of a significant dealer
or a substantial decrease in sales by any of these dealers could have a material
impact on our business, results of operations, and financial
condition.
We
may have to repurchase a dealer’s inventory of our products in the event
that the dealer does not repay its lender.
As is
common in the recreational vehicle industry, we enter into repurchase agreements
with the financing institutions used by our dealers to finance their purchases
of our products. These agreements require us to repurchase the dealer’s
inventory in the event that the dealer defaults on its credit facility with its
lender. Obligations under these agreements vary from period to period, but
totaled approximately $449.9 million as of September 27, 2008, with
approximately 6.5% concentrated with one dealer. If we were obligated to
repurchase a significant number of units under any repurchase agreement, our
business, operating results and financial condition could be adversely
affected.
Our
accounts receivable balance is subject to risk.
We sell
our product to dealers who are predominantly located in the United States and
Canada. The terms and conditions of payment are a combination of open
trade receivables and commitments from dealer floor plan lending
institutions. For our RV dealers, terms are net 30 days for units
that are financed by a third party lender. Terms of open trade
receivables are granted by us, on a very limited basis, to dealers who have been
subjected to evaluative credit processes conducted by us. For open
receivables, terms vary from net 30 days to net 180 days, depending on the
specific agreement. Agreements for payment terms beyond 30 days
generally require additional collateral, as well as security interest in the
inventory sold. As of September 27, 2008, total trade receivables
were $45.3 million, with approximately 100% of the outstanding accounts
receivable balance concentrated among floor plan lenders. For resort
lot customers, funds are required at the time of closing.
Our
industry is very competitive. We must continue to introduce new models and new
features to remain competitive.
The
market for our products is very competitive. We currently compete
with a number of manufacturers of motor coaches, fifth wheel trailers, and
travel trailers. Some of these companies have greater financial
resources than we have and extensive distribution networks. These
companies, or new competitors in the industry, may develop products that
customers in the industry prefer over our products due to features of the
products or the pricing of the products.
We
believe that the introduction of new products and new features is critical to
our success. Delays in the introduction of new models or product
features, quality problems associated with these introductions, or a lack of
market acceptance of new models or features could affect us
adversely. For example, unexpected costs associated with model
changes have affected our gross margin in the past. Further, new
product introductions can divert revenues from existing models and result in
fewer sales of existing products.
Our
products could fail to perform according to specifications or prove to be
unreliable, causing damage to our customer relationships and our reputation and
resulting in loss of sales.
Our
customers require demanding specifications for product performance and
reliability. Because our products are complex and often use advanced
components, processes and techniques, undetected errors and design flaws may
occur. Product defects result in higher product service, warranty and
replacement costs and may cause serious damage to our customer relationships and
industry reputation, all of which would negatively affect our sales and
business.
Our
business is subject to various types of litigation, including product liability
and warranty claims.
We are
subject to litigation arising in the ordinary course of our business, typically
for product liability and warranty claims that are common in the recreational
vehicle industry. While we do not believe that the outcome of any
pending litigation, net of insurance coverage, will materially adversely affect
our business, results of operations, or financial condition, we cannot provide
assurances in this regard because litigation is an inherently uncertain
process.*
To date,
we have been successful in obtaining product liability insurance on terms that
we consider acceptable. The terms of the policy contain a
self-insured retention amount of $500,000 per occurrence, with a maximum annual
aggregate self-insured retention of $3.0 million. Overall product
liability insurance, including umbrella coverage, is available to a maximum
amount of $100.0 million for each occurrence, as well as in the
aggregate. We cannot be certain we will be able to obtain insurance
coverage in the future at acceptable levels or that the costs of such insurance
will be reasonable. Further, successful assertion against us of one
or a series of large uninsured claims, or of a series of claims exceeding our
insurance coverage, could have a material adverse effect on our business,
results of operations, and financial condition.
In
order to be successful, we must attract, retain and motivate management
personnel and other key employees, and our failure to do so could have an
adverse effect on our results of operations.
The
Company’s future prospects depend upon retaining and motivating key management
personnel, including Kay L. Toolson, the Company’s Chairman and Chief Executive
Officer, and John W. Nepute, the Company’s President. The loss of one
or more of these key management personnel could adversely affect the Company’s
business. The prospects of the Company also depend in part on its
ability to attract and retain highly skilled engineers and other qualified
technical, manufacturing, financial, managerial, and marketing
personnel. Competition for such personnel is intense, and there can
be no assurance that the Company will be successful in attracting and retaining
such personnel.
Our
stock price has historically fluctuated and may continue to
fluctuate.
The
market price of our Common Stock is subject to wide fluctuations in response to
quarter-to-quarter variations in operating results, changes in earnings
estimates by analysts, announcements of new products by us or our competitors,
general conditions in the recreational vehicle market, and other events or
factors. In addition, the stocks of many recreational vehicle
companies have experienced price and volume fluctuations which have not
necessarily been directly related to the companies’ operating performance, and
the market price of our Common Stock could experience similar
fluctuations. Most recently we have experienced a significant decline
in the market price of our Common Stock, which has been consistent with the
overall RV market.
Item 6
- Exhibits
|
31.1
|
|
Sarbanes-Oxley
Section 302(a) Certification.
|
|
|
|
|
|
31.2
|
|
Sarbanes-Oxley
Section 302(a) Certification.
|
|
|
|
|
|
32.1
|
|
Certification
of Chief Executive Officer and Chief Financial Officer Pursuant to 18
U.S.C. Section 1350, and Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
|
MONACO
COACH CORPORATION
|
|
|
|
|
|
|
|
Dated:
November 6, 2008
|
/s/
P. Martin Daley
|
|
|
|
P.
Martin Daley
|
|
|
Vice
President and
|
|
|
Chief
Financial Officer (Duly
|
|
|
Authorized
Officer and Principal
|
|
|
Financial
Officer)
|
EXHIBITS
INDEX
|
Exhibit
|
|
|
|
Number
|
|
Description
of Document
|
|
|
|
|
|
31.1
|
|
Sarbanes-Oxley
Section 302(a) Certification.
|
|
|
|
|
|
31.2
|
|
Sarbanes-Oxley
Section 302(a) Certification.
|
|
|
|
|
|
32.1
|
|
Certification
of Chief Executive Officer and Chief Financial Officer Pursuant to 18
U.S.C. Section 1350, and Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
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