ITEM 2. Managements 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 $80,000 for towables. Based upon retail
registrations in the first eight months of 2007, we believe we had a 25.7%
share of the market for diesel Class A motor coaches, a 5.9% share of the
market for gas Class A motor coaches, a 16.1% share of the market for all Class A
motor coaches, a 2.8% share of the market for Class C motor coaches, a
3.6% share of the market for fifth wheel towables and a 4.6% share of the
market for travel trailers.
Motorhome Resort Segment
In
addition to the manufacturing of premium recreational vehicles, the Company
also owns and operates two motorhome resort properties (the Resorts), located
in Las Vegas, Nevada, and Indio, California. In addition, the Company has
acquired land to develop properties in LaQuinta, California, and in Naples,
Florida. The Resorts offer sales of individual lots to owners, and also offer
common interests in the amenities at the resort. Lot prices for remaining
unsold lots at the two 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
During
the first quarter of 2007, we completed the formation of a joint venture with
International Truck and Engine Corporation (ITEC) for the purpose of
manufacturing rear diesel chassis. This joint venture, known as Custom Chassis
Products LLC (CCP), will enable us to take advantage of purchasing synergies,
access engineering and design expertise from ITEC, and improve the utilization
of our Roadmaster chassis manufacturing facility in Elkhart, Indiana. Our
ownership interest is 49%, and we are accounting for the activity of this
operation using the equity method of accounting.
17
RESULTS OF CONSOLIDATED OPERATIONS
Quarter ended September 29, 2007
Compared to Quarter ended September 29, 2006
The following table illustrates the results of consolidated operations
for the quarters ended September 30, 2006 and September 29, 2007. All
dollar amounts are in thousands.
|
|
Quarter Ended
|
|
%
|
|
Quarter Ended
|
|
%
|
|
$
|
|
%
|
|
|
|
September 30, 2006
|
|
of Sales
|
|
September 29, 2007
|
|
of Sales
|
|
Change
|
|
Change
|
|
Net sales
|
|
$
|
292,473
|
|
100.0
|
%
|
$
|
322,422
|
|
100.0
|
%
|
$
|
29,949
|
|
10.2
|
%
|
Cost of sales
|
|
273,940
|
|
93.7
|
%
|
286,243
|
|
88.8
|
%
|
(12,303
|
)
|
(4.5
|
)%
|
Gross profit
|
|
18,533
|
|
6.3
|
%
|
36,179
|
|
11.2
|
%
|
17,646
|
|
95.2
|
%
|
Selling, general, and
administrative expenses
|
|
29,474
|
|
10.0
|
%
|
29,661
|
|
9.2
|
%
|
(187
|
)
|
(0.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$
|
(10,941
|
)
|
(3.7
|
)%
|
$
|
6,518
|
|
2.0
|
%
|
$
|
17,459
|
|
159.6
|
%
|
Motorized and Towable Recreational
Vehicle Segments
The recreational vehicle (RV) market in the third
quarter of 2007 displayed some signs of modest growth compared to the third
quarter of 2006. Fuel prices, while still at or near historical highs,
experienced a slow down in growth during the third quarter of 2007. However,
even though retail sales by our independent dealers on a year-over-year basis
have shown some improvement, the overall wholesale contraction in the RV
market, up 0.3% through August 2007, continues to put pressure on our
business. We believe that this trend will likely continue through most of
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. Higher interest rates are placing pressures on
our dealers. Floorplan interest charges are a significant cost of carrying
inventory, and as interest rates rise, our dealers, whom we share with our
competitors, are more cautious in the amount of inventory that they are willing
to carry. Consequently, we have been very diligent in monitoring the wholesale
versus retail shipments of our products. This has enabled us to manage our
finished goods inventory levels without the use of extensive wholesale
discounting. While our gross margins have improved due to the reduced levels of
discounting and improvements in our plant efficiencies, they are still not at
optimal levels due to the lower run rates within our production facilities. We
continue to research ways to consolidate component manufacturing operations to
improve our indirect costs of sales. We expect that we will have more of these
projects over the next several quarters.*
Despite the current cyclical downturn in the motorized
market, we continue to remain optimistic on the prospects for long-term growth
in this sector, as the demographics for our customer base show a continuing
increase in the number of new entrants into our target age and economic group.*
The towable market in 2007 has slowed somewhat compared
to 2006. During the first eight months of 2007, retail unit sales for the
industry finished up 2.8% from the same period in 2006. However, the
low-to-mid-priced products are performing better than the higher-end products. We
recently introduced several new floorplans and new lightweight and inexpensive
models to compete in this market sector. We believe that these new offerings,
which became available at the end of the second quarter of 2007, will enable us
to compete more effectively in these more challenging market conditions. *
As in the case of our motorized production, we also
have excess capacity at our towable facilities. As a result, we announced our
planned consolidation of the Elkhart towable production into our Wakarusa and
Warsaw, Indiana production facilities. This move will increase plant
utilization in the remaining facilities and decrease indirect costs of
sales.* We expect to complete the
consolidation in the fourth quarter of 2007.*
Expenses associated with relocation costs should be approximately
$900,000, and are being incurred during the fourth quarter of 2007. Synergies
associated with the relocation are expected to more than offset the related
costs in the fourth quarter.*
The
recreational vehicle industry is extremely competitive, and retail customers
have many choices available to them. To distinguish ourselves within the
industry, we introduced our Franchise For The Future (FFTF) program for our
motorized products in June of 2005. This program is designed to introduce
the concept to our dealer partners that our specific brands have intrinsic
values as a selling tool. To support this, and to encourage our dealers to
participate in FFTF, we have worked
18
with
outside marketing consultants to develop brand signage, informational computer
kiosks, and brand specific displays that are placed within our various
independent dealer locations. In 2006, we followed this up with Monaco
Financial Services (MFS). MFS is a branded financing program from General
Electric Commercial Distribution Finance (GECDF) and General Electric Consumer
Finance (GECF). Through MFS, our dealer partners earn rebates from GECDF and
GECF for wholesale floorplanning and retail financing for customers. We believe
that these concepts, along with other features designed to encourage our
dealers to focus selling efforts on our various product offerings, will assist
them in their sales efforts through the strength of improved brand identity. *
Motorhome Resort Segment
We are nearing the end of the resort projects in both
Indio and Las Vegas. Currently we have 68 lots available between the two
resorts. Third quarter sales were slower than the prior year, but this was due
to having fewer lots available for sale, which impacts sales absorption of new
lots as they compete with resales of owner lots. In addition, the third quarter
is traditionally the slower sales season due to their location in the
southwestern portion of the United States. While the current troubles in the greater
real estate market may not directly influence sales of lots, it does have
an impact on demand, but we remain confident that these resort properties will
continue to sell through a majority of their remaining lots by the end of the first
quarter of 2008.* To ensure the
continued growth of this segment, we have acquired property in LaQuinta
California, and in Naples, Florida. We have complied with a large amount of the
permitting requirements for both projects, and have begun clearing ground in
Naples. We expect that we will begin ground work in LaQuinta during the fourth
quarter of 2007. We expect to have completed lots available for sale in both
resorts in the second quarter of 2008.*
Overall Company Performance in the
Third Quarter of 2007
Third quarter net sales increased 10.2% to $322.4
million compared to $292.5 million for the same period last year. The sales
increase was due to increased MRV segment sales that offset slower sales in the
TRV and MR segments. Gross diesel motorized sales were up 10.0%, gas motorized
sales were up 79.8%, and towables were down 8.8%. Diesel products accounted for
69.9% of our third quarter revenues while gas products were 8.5%, and towables
were 21.6%. Our overall unit sales were up 1.7% in the third quarter of 2007 to
5,410 units, with diesel motorized unit sales down 0.7% to 1,080 units, gas
motorized unit sales up 54.2% to 390 units, and towable unit sales down 0.9% to
3,940 units. Our total average unit selling price increased to $59,800 from
$55,900 in the same period last year, reflecting a shift in the mix of products
sold.
Gross profit for the third quarter of 2007 increased to
$36.2 million, up from $18.5 million in the third quarter of 2006, and gross
margin increased from 6.3% in the third quarter of 2006 to 11.2% in the third
quarter of 2007. Changes in the components of cost of sales are set forth in
the following table (dollars in thousands):
|
|
Quarter Ended
|
|
%
|
|
Quarter Ended
|
|
%
|
|
Change in
|
|
|
|
September 30, 2006
|
|
of Sales
|
|
September 29, 2007
|
|
of Sales
|
|
% of Sales
|
|
Direct materials
|
|
$
|
187,665
|
|
64.2
|
%
|
$
|
200,708
|
|
62.2
|
%
|
(2.0
|
)%
|
Direct labor
|
|
31,532
|
|
10.8
|
%
|
31,888
|
|
9.9
|
%
|
(0.9
|
)%
|
Warranty
|
|
7,952
|
|
2.7
|
%
|
10,540
|
|
3.3
|
%
|
0.6
|
%
|
Other direct
|
|
18,068
|
|
6.2
|
%
|
14,688
|
|
4.6
|
%
|
(1.6
|
)%
|
Indirect
|
|
28,723
|
|
9.8
|
%
|
28,419
|
|
8.8
|
%
|
(1.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of sales
|
|
$
|
273,940
|
|
93.7
|
%
|
$
|
286,243
|
|
88.8
|
%
|
(4.9
|
)%
|
Direct materials decreases in 2007, as a percent
of sales, were 2.0% or $6.4 million. Subsequent to the end of the second
quarter of 2006, the Company implemented a series of price increases to
correct an unfavorable material usage rate. This resulted in a decrease to
direct materials of $5.1 million in 2007. The total cost of diesel chassis now
purchased from the CCP joint venture are included in this line item for 2007
whereas in 2006 only the materials portion of the overall chassis cost was
included. This increases material usage by $1.1 million for 2007. The remaining
decrease of $2.4 million is due to the change in the product mix of sales.
Direct labor decreases in 2007, as a percent of
sales, were 0.9% or $2.9 million. This decrease was the result of improvements
in our plants as we realigned production facilities and consolidated component
facilities to meet demand, which included the impact of the joint venture
operations as discussed above.
Increases in warranty expense in 2007, as a
percent of sales, were 0.6% or $1.9 million. These increases were due to major
production changes that occurred in mid 2006, which involved combining production
lines and shifting the plant locations where units were built. We have been
experiencing higher warranty claims related to the products produced during the
period of change.
19
Decreases in other direct costs in 2007, as a
percent of sales, were 1.6% or $5.2 million. This decrease was primarily the
result of improvements in costs associated with workers compensation expense
and other employee related benefit costs.
Decreases
in indirect costs in 2007 were $304,000. These decreases were the result of
improvements in efficiencies at our plants as a result of consolidation of
component facilities, including the changes due to the joint venture operations.
The decrease in total dollars associated with indirect costs resulted in an
improvement of 1.0% as a percentage of sales in 2007 compared to 2006.
Selling, general, and administrative expenses
(S,G,&A) increased by $187,000 in the third quarter of 2007 to $29.7
million compared to the third quarter of 2006 and decreased as a percentage of
sales from 10.0% in the third quarter of 2006 to 9.2% in the third quarter of
2007. Changes in S,G,&A expenses are set forth in the following table
(dollars in thousands):
|
|
Quarter Ended
|
|
%
|
|
Quarter Ended
|
|
%
|
|
Change in
|
|
|
|
September 30, 2006
|
|
of Sales
|
|
September 29, 2007
|
|
of Sales
|
|
% of Sales
|
|
Salaries, bonus, and benefit
expenses
|
|
$
|
4,536
|
|
1.6
|
%
|
$
|
7,176
|
|
2.2
|
%
|
0.6
|
%
|
Selling expenses
|
|
9,695
|
|
3.3
|
%
|
7,778
|
|
2.4
|
%
|
(0.9
|
)%
|
Settlement expense
|
|
3,114
|
|
1.0
|
%
|
3,513
|
|
1.1
|
%
|
0.1
|
%
|
Marketing expenses
|
|
3,233
|
|
1.1
|
%
|
3,172
|
|
1.0
|
%
|
(0.1
|
)%
|
Other
|
|
8,896
|
|
3.0
|
%
|
8,022
|
|
2.5
|
%
|
(0.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
Total S,G,&A expenses
|
|
$
|
29,474
|
|
10.0
|
%
|
$
|
29,661
|
|
9.2
|
%
|
(0.8
|
)%
|
Increases in salaries, bonus and benefit
expenses in 2007 were $2.6 million. This increase was due to an increase in
management bonus expense of $3.1 million that was partially offset by decreases
in salaries and benefit expenses.
Decreases in selling expenses in 2007 were $1.9
million. This decrease was due to lower costs for selling programs at our
dealers lots of $1.8 million. The remaining difference was comprised of
various other related selling expenses.
Increase in settlement expense (litigation
settlement expense) in 2007, as a percent of sales, was 0.1% or $322,000. The
increase was the result of increased litigation related to warranty claims.
Decreases in marketing expenses in 2007, as a
percent of sales, were 0.1% or 322,000. These reductions were the result of
savings due to lower expenses associated with shows and rallies as well as
reductions in co-op advertising, partially offset by an increase in printed
materials costs.
Decreases in other expenses in 2007 were
$874,000. This decrease is predominately a result of reductions in bad debt
expense of $662,000 and contract services of $203,000.
Operating income was $6.5 million, or 2.0% of sales, in
the third quarter of 2007 compared to a loss of $10.9 million, or 3.7% of
sales, in the similar 2006 period. The increase in operating income was due
predominantly to increased sales, improved gross margins, and lower S,G&A
costs as a percent of sales.
Net interest expense was $829,000 in the third quarter
of 2007 versus $1.3 million in the comparable 2006 period, reflecting lower
corporate borrowing during the third quarter of 2007.
We
reported a provision for income taxes of $2.0 million, or an effective tax rate
of 35.3%, in the third quarter of 2007, compared to a benefit from income taxes
of $5.0 million, in the third quarter of 2006. The income tax benefit in the
third quarter of 2006 was due to the favorable outcome of a state income tax
audit that occurred during 2006.
Net income for the third quarter of 2007 was $3.7
million compared to a loss of $7.1 million for the third quarter of 2006 due
primarily to higher sales and gross margin.
20
Third Quarter 2007 versus Third
Quarter 2006 for the Motorized Recreational Vehicle Segment
The
following table illustrates the results of the MRV segment for the quarters
ended September 30, 2006, and September 29, 2007 (dollars in
thousands):
|
|
Quarter Ended
|
|
%
|
|
Quarter Ended
|
|
%
|
|
$
|
|
%
|
|
|
|
September 30, 2006
|
|
of Sales
|
|
September 29, 2007
|
|
of Sales
|
|
Change
|
|
Change
|
|
Net sales
|
|
$
|
220,159
|
|
100.0
|
%
|
$
|
257,982
|
|
100.0
|
%
|
$
|
37,823
|
|
17.2
|
%
|
Cost of sales
|
|
207,960
|
|
94.5
|
%
|
228,565
|
|
88.6
|
%
|
(20,605
|
)
|
(9.9
|
)%
|
Gross profit
|
|
12,199
|
|
5.5
|
%
|
29,417
|
|
11.4
|
%
|
17,218
|
|
141.1
|
%
|
Selling, general, and
administrative expenses and corporate overhead
|
|
19,931
|
|
9.0
|
%
|
22,570
|
|
8.7
|
%
|
(2,639
|
)
|
(13.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$
|
(7,732
|
)
|
(3.5
|
)%
|
$
|
6,847
|
|
2.7
|
%
|
$
|
14,579
|
|
188.6
|
%
|
Total net sales for the MRV segment were up from $220.2
million in the third quarter of 2006 to $258.0 million in the third quarter of
2007. Gross diesel motorized revenues were up 10.0% and gas motorized revenues
were up 79.8%, which were due to the introduction of new gas models that
increased sales as dealers filled shelf space. Diesel products accounted for
89.1% of the MRV segments third quarter of 2007 gross revenues while gas
products were 10.9%. The overall increase in revenues is due to the Companys
increase in retail market share. Our overall MRV segment unit sales were up
9.6% year over year from 1,341 units in the third quarter of 2006 to 1,470
units in the third quarter of 2007. Diesel motorized unit sales were down 0.7%
to 1,080 units and gas motorized unit sales were up 54.2% to 390 units.
Gross profit for the MRV segment for the third quarter
of 2007 increased to $29.4 million, up from $12.2 million in the third quarter
of 2006, and gross margin increased from 5.5% in the third quarter of 2006 to
11.4% in the third quarter of 2007. Changes in the components of cost of sales
are set forth in the following table (dollars in thousands):
|
|
Quarter Ended
|
|
%
|
|
Quarter Ended
|
|
%
|
|
Change in
|
|
|
|
September 30, 2006
|
|
of Sales
|
|
September 29, 2007
|
|
of Sales
|
|
% of Sales
|
|
Direct materials
|
|
$
|
142,160
|
|
64.6
|
%
|
$
|
161,595
|
|
62.6
|
%
|
(2.0
|
)%
|
Direct labor
|
|
23,248
|
|
10.6
|
%
|
24,346
|
|
9.5
|
%
|
(1.1
|
)%
|
Warranty
|
|
5,876
|
|
2.7
|
%
|
8,612
|
|
3.3
|
%
|
0.6
|
%
|
Other direct
|
|
12,399
|
|
5.6
|
%
|
10,168
|
|
4.0
|
%
|
(1.6
|
)%
|
Indirect
|
|
24,277
|
|
11.0
|
%
|
23,844
|
|
9.2
|
%
|
(1.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of sales
|
|
$
|
207,960
|
|
94.5
|
%
|
$
|
228,565
|
|
88.6
|
%
|
(5.9
|
)%
|
Direct materials decreases in 2007, as a percent
of sales, were 2.0% or $5.2 million. Subsequent to the end of the second
quarter of 2006, the Company implemented a series of price increases to
correct an unfavorable material usage rate. This resulted in a decrease to
direct materials of $5.1 million in 2007. The total cost of diesel chassis now
purchased from the CCP joint venture are included in this line item for 2007
whereas in 2006 only the materials portion of the overall chassis cost was
included. This increases material usage by $1.1 million for 2007. The remaining
decrease of $1.2 million is due to a change in the product mix of sales.
Direct labor decreases in 2007, as a percent of
sales, were 1.1% or $2.8 million. This decrease was the result of improvements
in our plants as we realigned production facilities and consolidated component
facilities to meet demand, which included the impact of the joint venture
operations as discussed above.
Increases in warranty costs in 2007, as a
percent of sales, were 0.6% or $1.5 million. These increases were due to major
production changes that occurred in mid 2006, which involved combining
production lines and shifting the plant locations where units were built. We
have been experiencing higher warranty claims related to the products produced
during the period of change.
Decreases in other direct costs in 2007, as a
percent of sales, were 1.6% or $4.1 million. This decrease was the result of
improvements of $2.3 million in costs associated with workers compensation
expense and other employee related benefit costs. The remainder of the
reduction related mostly to costs associated with out-of-warranty repairs of
$1.0 million, and delivery expense of $774,000.
Decreases in indirect costs in 2007 were
$433,000. These decreases were the result of improvements in efficiencies at
our plants as a result of consolidation of component facilities, and the impact
of the joint venture operations as previously discussed.
21
S,G,&A
expenses for the MRV segment decreased as a percent of sales due to higher
sales levels and decreases in selling expenses. In addition, in the fourth
quarter of 2006 we completed a study on the allocation of corporate overhead,
and allocated certain costs on an activity basis. These costs are now
classified in a single line item for S,G,&A expense and corporate overhead
allocation. Corporate overhead allocation is comprised of certain shared
services such as executive, financial, information systems, legal, and investor
relations expenses.
Operating income increased due to higher sales, higher
gross margins, and lower S,G,&A expenses as a percent of sales.
Third Quarter 2007 versus Third
Quarter 2006 for the Towable Recreational Vehicle Segment
The following
table illustrates the results of the TRV Segment for the quarters ended
September 30, 2006, and September 29, 2007 (dollars in thousands):
|
|
Quarter Ended
|
|
%
|
|
Quarter Ended
|
|
%
|
|
$
|
|
%
|
|
|
|
September 30, 2006
|
|
of Sales
|
|
September 29, 2007
|
|
of Sales
|
|
Change
|
|
Change
|
|
Net sales
|
|
$
|
70,450
|
|
100.0
|
%
|
$
|
64,221
|
|
100.0
|
%
|
$
|
(6,229
|
)
|
(8.8
|
)%
|
Cost of sales
|
|
65,346
|
|
92.8
|
%
|
57,531
|
|
89.6
|
%
|
7,815
|
|
11.9
|
%
|
Gross profit
|
|
5,104
|
|
7.2
|
%
|
6,690
|
|
10.4
|
%
|
1,586
|
|
31.1
|
%
|
Selling,
general, and administrative expenses and corporate overhead
|
|
7,409
|
|
10.5
|
%
|
5,819
|
|
9.0
|
%
|
1,590
|
|
21.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
(loss)
|
|
$
|
(2,305
|
)
|
(3.3
|
)%
|
$
|
871
|
|
1.4
|
%
|
$
|
3,176
|
|
137.8
|
%
|
Total net sales
for the TRV segment were down from $70.5 million in the third quarter of 2006 to
$64.2 million in the third quarter of 2007. This decrease is mostly due to
softer market conditions in the towable sector, as well as to decreases in
market share for some of our products. The Companys unit sales were down 0.9%
to 3,940 units. Average unit selling price decreased to $17,700 in the third
quarter of 2007 from $19,200 in the same period last year.
Gross profit for the third quarter of 2007 increased to
$6.7 million, up from $5.1 million in the third quarter of 2006, and gross
margin increased from 7.2% in the third quarter of 2006 to 10.4% in the third
quarter of 2007. Changes in the components of cost of sales are set forth in
the following table (dollars in thousands):
|
|
Quarter Ended
|
|
%
|
|
Quarter Ended
|
|
%
|
|
Change in
|
|
|
|
September 30, 2006
|
|
of Sales
|
|
September 29, 2007
|
|
of Sales
|
|
% of Sales
|
|
Direct materials
|
|
$
|
44,747
|
|
63.5
|
%
|
$
|
39,055
|
|
60.8
|
%
|
(2.7
|
)%
|
Direct labor
|
|
8,263
|
|
11.8
|
%
|
7,542
|
|
11.8
|
%
|
0.0
|
%
|
Warranty
|
|
2,076
|
|
3.0
|
%
|
1,928
|
|
3.0
|
%
|
0.0
|
%
|
Other direct
|
|
5,667
|
|
8.0
|
%
|
4,520
|
|
7.0
|
%
|
(1.0
|
)%
|
Indirect
|
|
4,593
|
|
6.5
|
%
|
4,486
|
|
7.0
|
%
|
0.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of
sales
|
|
$
|
65,346
|
|
92.8
|
%
|
$
|
57,531
|
|
89.6
|
%
|
(3.2
|
)%
|
Direct material decreases in 2007, as a percent
of sales, were 2.7% or $1.7 million. Approximately half of this decrease was
due to changes in the mix of products and half due to improvements in
commodities purchasing initiatives in the third quarter of 2007 versus 2006.
Direct labor, as a percent of sales, was
consistent with the prior year at 11.8%.
Warranty expense, as a percent of sales, was
consistent with the prior year at 3.0%.
Decreases in other direct costs, as a percent of
sales, were 1.0% or $642,000. This decrease was the result of improvements of
$193,000 in employee benefit and workers compensation costs and a decrease of
$449,000 in delivery expenses.
Decreases of indirect costs in 2007 of $107,000
were due to decreases in the variable portion of costs relative to the
reduction in sales.
S,G,&A
expenses for the TRV segment decreased as both a percent of sales and in total
dollars due to decreases in selling expenses. In addition, in the fourth
quarter of 2006 we completed a study on the allocation of corporate overhead,
and allocated certain costs on an activity basis. These costs are now classified
in a single line item for S,G,&A expense and corporate overhead allocation.
Corporate overhead allocation is comprised of certain shared services such as
executive, financial, information systems, legal, and investor relations
expenses.
22
Operating income increased due to higher gross margins
and lower S,G,&A expenses as a percent of sales and in total dollars, which
more than offset the reduction in sales.
Third Quarter 2007 versus Third
Quarter 2006 for the Motorhome Resort Segment
The
following table illustrates the results of the Motorhome Resort Segment (MR
segment) for the quarters ended September 30, 2006, and September 29, 2007
(dollars in thousands):
|
|
Quarter Ended
|
|
%
|
|
Quarter Ended
|
|
%
|
|
$
|
|
%
|
|
|
|
September
30, 2006
|
|
of Sales
|
|
September
29, 2007
|
|
of Sales
|
|
Change
|
|
Change
|
|
Net sales
|
|
$
|
1,864
|
|
100.0
|
%
|
$
|
219
|
|
100.0
|
%
|
$
|
(1,645
|
)
|
(88.3
|
)%
|
Cost of sales
|
|
634
|
|
34.0
|
%
|
147
|
|
67.1
|
%
|
487
|
|
76.8
|
%
|
Gross profit
|
|
1,230
|
|
66.0
|
%
|
72
|
|
32.9
|
%
|
(1,158
|
)
|
(94.1
|
)%
|
Selling, general,
and administrative expenses and corporate overhead
|
|
2,134
|
|
114.5
|
%
|
1,272
|
|
580.8
|
%
|
862
|
|
40.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
$
|
(904
|
)
|
(48.5
|
)%
|
$
|
(1,200
|
)
|
(547.9
|
)%
|
$
|
(296
|
)
|
(32.7
|
)%
|
Net
sales decreased 88.3% to $219,000 compared to $1.9 million for the same period
last year. Slower sales in the second quarter led to fewer lots available in
escrow to close in the third quarter, which has seasonally fewer prospective
owners visiting the southwest desert region during the summer months. To a
large degree, the reductions in sales are a function of shrinking inventories
of available lots, as well as from competition within the Companys own resorts
from owner resales. In addition, while the current troubles in the greater real
estate market may not directly influence sales of lots, it does have an impact
on demand. The Company still expects that while sales may remain slower than
expected, the needs for luxury resort locations within the industry will remain
strong.*
Gross
profit for the MR segment decreased to 32.9% of sales in the third quarter of
2007 compared to 66.0% of sales in the same period last year. This was due to
the mix of lot sales. In the third quarter 2007, all sales were from the Las
Vegas resort which has a lower gross margin.
S,G,&A expenses decreased in total dollars due to
the reduction in sales, as well as to the reduction in participation expense
accrued, which was a result of lower profits. In addition, in the fourth
quarter of 2006 we completed a study on the allocation of corporate overhead,
and allocated certain costs on an activity basis. These costs are now located
in a single line item for S,G,&A expense and corporate overhead allocation.
Corporate overhead allocation is comprised of certain shared services such as
executive, financial, information systems, legal and investor relations
expenses.
Operating
income decreased due to lower sales and gross margin, and to higher S,G,&A
costs and corporate overhead allocation as a percent of sales
.
Nine months Ended
September 29, 2007 Compared to Nine
months ended September 30, 2006
The
following table illustrates the results of consolidated operations for the nine
months ended September 30, 2006 and September 29, 2007 (dollars in thousands):
|
|
Nine
Months Ended
|
|
%
|
|
Nine
Months Ended
|
|
%
|
|
$
|
|
%
|
|
|
|
September
30, 2006
|
|
of Sales
|
|
September
29, 2007
|
|
of Sales
|
|
Change
|
|
Change
|
|
Net sales
|
|
$
|
998,823
|
|
100.0
|
%
|
$
|
979,985
|
|
100.0
|
%
|
$
|
(18,838
|
)
|
(1.9
|
)%
|
Cost of sales
|
|
901,351
|
|
90.2
|
%
|
871,212
|
|
88.9
|
%
|
30,139
|
|
3.3
|
%
|
Gross profit
|
|
97,472
|
|
9.8
|
%
|
108,773
|
|
11.1
|
%
|
11,301
|
|
11.6
|
%
|
Selling, general,
and administrative expenses
|
|
92,882
|
|
9.3
|
%
|
89,885
|
|
9.2
|
%
|
2,997
|
|
3.2
|
%
|
Plant relocation
costs
|
|
269
|
|
0.0
|
%
|
0
|
|
0.0
|
%
|
269
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
4,321
|
|
0.5
|
%
|
$
|
18,888
|
|
1.9
|
%
|
$
|
14,567
|
|
337.1
|
%
|
23
Consolidated
sales for the nine months ended September 29, 2007 were $980.0 million versus
$998.8 million, representing a 1.9% decrease. This decrease was due to the
impact of FEMA travel trailer orders filled in the first quarter of 2006, the
softer market conditions in the towable sector in 2007, and a decrease in
motorhome resort lot sales. The resort revenues were lower due to shrinking
inventories of available lots, as well as competition within the Companys own
resorts from owner resales in the first quarter of 2007. These reductions were
partially offset by an increase of sales in the motorized sector.
Gross
profit for the nine month period in 2007 increased to $108.8 million, up from
$97.5 million in the same period of 2006 and gross margins increased from 9.8%
in 2006 to 11.1% in 2007. The changes in the components of cost of sales are
set forth in the following table (dollars in thousands):
|
|
Nine Months Ended
|
|
%
|
|
Nine Months Ended
|
|
%
|
|
Change in
|
|
|
|
September 30, 2006
|
|
of Sales
|
|
September 29, 2007
|
|
of Sales
|
|
% of Sales
|
|
Direct materials
|
|
$
|
618,558
|
|
61.9
|
%
|
$
|
608,147
|
|
62.1
|
%
|
0.2
|
%
|
Direct labor
|
|
103,729
|
|
10.4
|
%
|
96,512
|
|
9.8
|
%
|
(0.6
|
)%
|
Warranty
|
|
28,787
|
|
2.9
|
%
|
31,887
|
|
3.3
|
%
|
0.4
|
%
|
Other direct
|
|
60,687
|
|
6.1
|
%
|
47,933
|
|
4.9
|
%
|
(1.2
|
)%
|
Indirect
|
|
89,590
|
|
8.9
|
%
|
86,733
|
|
8.8
|
%
|
(0.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of
sales
|
|
$
|
901,351
|
|
90.2
|
%
|
$
|
871,212
|
|
88.9
|
%
|
(1.3
|
)%
|
Direct materials increases in 2007, as a percent
of sales, were 0.2% or $2.0 million. Subsequent to the end of the second
quarter of 2006, the Company implemented a series of price increases to correct
an unfavorable material usage rate. This resulted in a decrease to direct
materials of $5.1 million in 2007. The total cost of diesel chassis now
purchased from the CCP joint venture are included in this line item for 2007
whereas in 2006 only the materials portion of the overall chassis cost was
included. This increased material usage by $2.2 million for 2007. The remaining
increase of $4.9 million is due to a change in the product mix of sales.
Direct labor decreases in 2007, as a percent of
sales, were 0.6% or $5.9 million. This decrease was primarily the result of
improvements in our plants as we realigned production facilities and
consolidated component facilities to meet demand, which included the joint
venture operations as discussed above.
Increases in warranty expense in 2007, as a
percent of sales, were 0.4% or $3.9 million. These increases were due to major
production changes that occurred from July 2005 to June 2006, which involved
combining production lines and shifting the plant locations where units were
built. We have been experiencing higher warranty claims related to the products
produced during the period of change.
Decreases in other direct costs in 2007, as a
percent of sales, were 1.2% or $11.8 million. This decrease was primarily the
result of improvements in costs associated with workers compensation expense
and other employee benefits of $5.9 million, as well as reductions in
out-of-policy goodwill repairs of $2.0 million and delivery expenses of $3.9
million.
Decreases in indirect costs in 2007 were $2.9
million. These decreases were the result of improvements in efficiencies at our
plants due to consolidation of component facilities, including the changes due
to the joint venture operations.
S,G,&A
decreased by $3.0 million to $89.9 million for the nine month period of 2007,
and decreased as a percentage of sales from 9.3% in 2006 to 9.2% in 2007.
Changes in S,G,&A expenses are set forth in the following table (dollars in
thousands):
|
|
Nine Months Ended
|
|
%
|
|
Nine Months Ended
|
|
%
|
|
Change in
|
|
|
|
September 30, 2006
|
|
of Sales
|
|
September 29, 2007
|
|
of Sales
|
|
% of Sales
|
|
Salaries, bonus,
and benefit expenses
|
|
$
|
19,404
|
|
1.9
|
%
|
$
|
21,906
|
|
2.3
|
%
|
0.4
|
%
|
Selling expenses
|
|
30,604
|
|
3.1
|
%
|
25,788
|
|
2.6
|
%
|
(0.5
|
)%
|
Settlement
expense
|
|
9,081
|
|
0.9
|
%
|
10,004
|
|
1.0
|
%
|
0.1
|
%
|
Marketing
expenses
|
|
7,514
|
|
0.8
|
%
|
6,837
|
|
0.7
|
%
|
(0.1
|
)%
|
Other
|
|
26,279
|
|
2.6
|
%
|
25,350
|
|
2.6
|
%
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Total S,G,&A
expenses
|
|
$
|
92,882
|
|
9.3
|
%
|
$
|
89,885
|
|
9.2
|
%
|
(0.1
|
)%
|
Increases in salaries, bonus and benefit
expenses in 2007 were $2.5 million. This increase was due to increases in
management bonus expense of $2.4 million and long-term incentive stock-based
program expenses of $604,000, partially offset by a decrease in wages and other
benefits of $495,000.
24
Decreases in selling expenses in 2007 were $4.8
million. This decrease was due to lower costs for selling programs at our
resort properties of $779,000, lower sales commissions of $284,000, and lower
costs of $3.5 million related to sales programs. The remaining difference was
comprised of various other related selling expenses.
Settlement expense (litigation settlement
expense) in 2007 increased by $923,000. The total dollar increase was the
result of increases in the number of litigation cases in 2007 versus 2006 as
well as increases in the amounts reserved for certain pending litigation.
Decreases in marketing expenses in 2007 were
$677,000. These reductions were the result of savings due to lower expenses
associated with shows and rallies.
Decreases in other expenses in 2007 were
$929,000. This decrease was predominately due to reductions in bad debt expense
of $1.0 million and resort lot participation accrual of $917,000, partially
offset by an increase in depreciation of $820,000.
Operating income was $18.9 million, or 1.9% of sales,
for the nine month period of 2007 compared to $4.3 million, or 0.5% of sales,
in the similar 2006 period. Increases
in operating income
were due
predominantly to higher gross margins and improvements in S,G,&A costs,
partially offset by a reduction in sales.
Net interest expense was $2.7 million for the nine
month period of 2007 versus $3.5 million in the comparable 2006 period,
reflecting a lower level of borrowing during the nine month period of 2006.
We reported a provision for income taxes of $6.0
million, or an effective tax rate of 38.4% for the nine month period of 2007,
compared to a benefit from income taxes of $343,000, or an effective tax rate
of 25.8% for the comparable 2006 period. The increase in the effective
tax rate was due primarily to the lack of certain non-recurring income tax
benefits that were recorded during the first nine months of 2006. These
non-recurring benefits included a favorable outcome from a state income tax
audit and a benefit attributable to certain state income tax law changes.
Net income for the nine month period of 2007 was $9.6
million compared to $1.6 million for the comparable period in 2006 (including
losses from discontinued operations of $107,000 in 2006, net of taxes, related
to the closure of the Royale Coach facility) due to a higher operating margin,
and reduction in total S,G,&A expenses, partially offset by a reduction in
sales.
Nine Months of 2007
versus Nine Months of 2006 for the Motorized Recreational Vehicle Segment
The following table
illustrates the results of the MRV segment for the nine month period ended
September 30, 2006 and September 29, 2007 (dollars in thousands):
|
|
Nine Months Ended
|
|
%
|
|
Nine Months Ended
|
|
%
|
|
$
|
|
%
|
|
|
|
September 30, 2006
|
|
of Sales
|
|
September 29, 2007
|
|
of Sales
|
|
Change
|
|
Change
|
|
Net sales
|
|
$
|
700,728
|
|
100.0
|
%
|
$
|
754,192
|
|
100.0
|
%
|
$
|
53,464
|
|
7.6
|
%
|
Cost of sales
|
|
647,910
|
|
92.5
|
%
|
672,029
|
|
89.1
|
%
|
(24,119
|
)
|
(3.7
|
)%
|
Gross profit
|
|
52,818
|
|
7.5
|
%
|
82,163
|
|
10.9
|
%
|
29,345
|
|
55.6
|
%
|
Selling,
general, and administrative expenses and corporate overhead
|
|
58,718
|
|
8.4
|
%
|
65,760
|
|
8.7
|
%
|
(7,042
|
)
|
(12.0
|
)%
|
Plant relocation
costs
|
|
269
|
|
0.0
|
%
|
0
|
|
0.0
|
%
|
269
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
(loss)
|
|
$
|
(6,169
|
)
|
(0.9
|
)%
|
$
|
16,403
|
|
2.2
|
%
|
$
|
22,572
|
|
365.9
|
%
|
Net sales for the MRV segment were up from $700.7
million in the nine month period of 2006 to $754.2 million in the nine month
period of 2007. Gross diesel motorized revenues were up 7.3%, and gas motorized
revenues were down 6.5%. Diesel products accounted for 89.4% of our nine months
MRV segment revenues while gas products were 10.6%. The overall increase in
revenues reflects the Companys increase in retail market share in 2007 as well
as an increase in diesel Class A unit sales volume as a percentage of total
motorized sales. Our overall MRV segment unit sales were up 1.9% in the nine
month period of 2007 to 4,448 units, with diesel motorized unit sales up 2.4%
to 3,288 units, and gas motorized unit sales up 0.6% to 1,160 units. Our
average unit selling price increased to $167,800 for the nine month period of
2007 from $162,000 in the same period last year.
25
Gross profit for the nine month period of 2007
increased to $82.2 million, up from $52.8 million in 2006, and gross margin
increased from 7.5% in the nine month period of 2006 to 10.9% in the nine month
period of 2007. The changes in the components of cost of sales are set forth in
the following table (dollars in thousands):
|
|
Nine Months Ended
|
|
%
|
|
Nine Months Ended
|
|
%
|
|
Change in
|
|
|
|
September 30, 2006
|
|
of Sales
|
|
September 29, 2007
|
|
of Sales
|
|
% of Sales
|
|
Direct materials
|
|
$
|
441,657
|
|
63.1
|
%
|
$
|
471,470
|
|
62.5
|
%
|
(0.6
|
)%
|
Direct labor
|
|
72,440
|
|
10.3
|
%
|
71,717
|
|
9.5
|
%
|
(0.8
|
)%
|
Warranty
|
|
21,320
|
|
3.1
|
%
|
24,785
|
|
3.3
|
%
|
0.2
|
%
|
Other direct
|
|
38,151
|
|
5.4
|
%
|
31,485
|
|
4.2
|
%
|
(1.2
|
)%
|
Indirect
|
|
74,342
|
|
10.6
|
%
|
72,572
|
|
9.6
|
%
|
(1.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of
sales
|
|
$
|
647,910
|
|
92.5
|
%
|
$
|
672,029
|
|
89.1
|
%
|
(3.4
|
)%
|
Direct materials decreases in 2007, as a percent
of sales, were 0.6% or $4.5 million. Subsequent to the end of the second
quarter of 2006, the Company implemented a series of price increases to correct
an unfavorable material usage rate. This resulted in a decrease to direct
materials of $5.1 million in 2007. The total cost of diesel chassis now
purchased from the CCP joint venture are included in this line item for 2007
whereas in 2006 only the materials portion of the overall chassis cost was
included. This increases material usage by $2.2 million for 2007. The remaining
decrease of $1.6 million is due to a change in the product mix of sales.
Direct labor decreases in 2007, as a percent of
sales, were 0.8% or $6.0 million. This decrease was the result of improvements
in our plants as we realigned production facilities and consolidated component
facilities to meet demand, which included the joint venture operations as
discussed above.
Increases in warranty expense in 2007, as a
percent of sales, were 0.2% or $1.5 million. These increases were due to major
production changes that occurred from July 2005 to June 2006, which involved
combining productions lines and shifting the plant locations where units were
built. We have been experiencing higher warranty claims related to the products
produced during the period of change.
Decreases in other direct costs in 2007, as a
percent of sales, were 1.2% or $9.1 million. This decrease was primarily the
result of improvements in costs associated with workers compensation expense
and employee benefits of $5.3 million, and reductions in out-of-policy goodwill
expenses of $3.0 million.
Decreases in indirect costs in 2007 were $1.8
million. These decreases were the result of improvements in efficiencies at our
plants as a result of consolidation of component facilities, and the impact of
the joint venture operations as previously discussed.
S,G,&A for the MRV segment increased slightly due
to higher management bonus levels allocated to the MRV segment as a result of
improved profits for the Company as a whole. In addition, in the fourth quarter
of 2006 we completed a study on the allocation of corporate overhead, and
allocated certain costs on an activity basis. These costs are now located in a
single line item for S,G,&A expense and corporate overhead allocation.
Corporate overhead allocation is comprised of certain shared services such as
executive, financial, information systems, legal and investor relations
expenses.
Plant relocation costs were related to the costs
incurred to relocate the Bend, Oregon manufacturing facility to the Coburg,
Oregon plant in prior years. We believe this relocation will continue to result
in improved margins for the Oregon operations.*
Operating income increased as both a percent of sales
and in total dollars due to higher sales and higher gross margins, which were
partially offset by higher S,G,&A expenses as a percent of sales.
26
Nine Months of 2007
versus Nine Months of 2006 for the Towable Recreational Vehicle Segment
The following table illustrates the results of the TRV
segment for the nine months ended September 30, 2006 and September 29, 2007
(dollars in thousands):
|
|
Nine Months Ended
|
|
%
|
|
Nine Months Ended
|
|
%
|
|
$
|
|
%
|
|
|
|
September 30, 2006
|
|
of Sales
|
|
September 29, 2007
|
|
of Sales
|
|
Change
|
|
Change
|
|
Net sales
|
|
$
|
274,092
|
|
100.0
|
%
|
$
|
214,669
|
|
100.0
|
%
|
$
|
(59,423
|
)
|
(21.7
|
)%
|
Cost of sales
|
|
244,839
|
|
89.3
|
%
|
194,970
|
|
90.8
|
%
|
49,869
|
|
20.4
|
%
|
Gross profit
|
|
29,253
|
|
10.7
|
%
|
19,699
|
|
9.2
|
%
|
(9,554
|
)
|
(32.7
|
)%
|
Selling,
general, and administrative expenses and corporate overhead
|
|
24,953
|
|
9.1
|
%
|
18,053
|
|
8.4
|
%
|
6,900
|
|
27.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
4,300
|
|
1.6
|
%
|
$
|
1,646
|
|
0.8
|
%
|
$
|
(2,654
|
)
|
(61.7
|
)%
|
Net sales for the TRV segment were down from $274.1
million in the nine month period of 2006 to $214.7 million in the nine month
period of 2007. The overall decrease in revenues reflected the FEMA travel
trailer sales filled in the first quarter or 2006, as well as the softer market
conditions in 2007 and decreases in market share for some of our products. The
Companys unit sales were down 20.1% to 13,439 units. The average unit selling
price increased to $17,500 in the nine month period of 2007 from $17,200 in the
same period last year.
Gross profit for the nine month period of 2007
decreased to $19.7 million, down from $29.3 million in 2006, and gross margin
decreased from 10.7% in the nine month period of 2006 to 9.2% in the nine month
period of 2007. The changes in the components of cost of sales are set forth in
the following table (dollars in thousands):
|
|
Nine Months Ended
|
|
%
|
|
Nine Months Ended
|
|
%
|
|
Change in
|
|
|
|
September 30, 2006
|
|
of Sales
|
|
September 29, 2007
|
|
of Sales
|
|
% of Sales
|
|
Direct materials
|
|
$
|
169,014
|
|
61.7
|
%
|
$
|
133,035
|
|
62.0
|
%
|
0.3
|
%
|
Direct labor
|
|
30,944
|
|
11.3
|
%
|
24,542
|
|
11.4
|
%
|
0.1
|
%
|
Warranty
|
|
7,467
|
|
2.7
|
%
|
7,102
|
|
3.3
|
%
|
0.6
|
%
|
Other direct
|
|
22,497
|
|
8.2
|
%
|
16,416
|
|
7.6
|
%
|
(0.6
|
)%
|
Indirect
|
|
14,917
|
|
5.4
|
%
|
13,875
|
|
6.5
|
%
|
1.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of
sales
|
|
$
|
244,839
|
|
89.3
|
%
|
$
|
194,970
|
|
90.8
|
%
|
1.5
|
%
|
Direct material increases in 2007, as a percent
of sales, were 0.3% or $644,000. This increase was a result of the changes in
the mix of products sold. In 2006 versus 2007 there was a substantial amount of
sales to FEMA for travel trailers in the first quarter. These units had a lower
direct material cost.
Direct labor increases in 2007, as a percent of
sales, were 0.1% or $215,000. This increase was the result of inefficiencies in
our plants due to lower run rates in 2007 versus 2006.
Increases in warranty expense in 2007, as a
percent of sales, were 0.6% or $1.3 million. These increases were due to major
production changes that occurred from July 2005 to June 2006, which involved
combining production lines and shifting the plant locations where units were
built. We have been experiencing higher warranty claims related to the products
produced during the period of change.
Decreases in other direct costs in 2007, as a
percent of sales, were 0.6% or $1.3 million. This decrease was primarily the
result of improvements in costs associated with workers compensation expense
and employee benefits of $429,000, as well as delivery expenses of $1.1
million.
Decreases of indirect costs in 2007 of $1.0
million were due to decreases in the variable portion of costs relative to the
reduction in sales.
S,G,&A expenses for the TRV segment decreased, as
both a percent of sales and in total dollars due to decreases in selling
expenses. In addition, in the fourth quarter of 2006 we completed a study on
the allocation of corporate overhead, and allocated certain costs on an
activity basis. These costs are now located in a single line item for
S,G,&A expense and corporate overhead allocation. Corporate overhead
allocation is comprised of certain shared services such as executive,
financial, information systems, legal and investor relations expenses.
Operating income decreased as both a percent of sales
and in total dollars due to lower sales and gross profit which was only
partially offset by a decrease in S,G,&A expenses as a percent of sales.
27
Nine Months of 2007
versus Nine Months of 2006 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 30, 2006 and September 29, 2007 (dollars in
thousands):
|
|
Nine Months Ended
|
|
%
|
|
Nine Months Ended
|
|
%
|
|
$
|
|
%
|
|
|
|
September 30, 2006
|
|
of Sales
|
|
September 29, 2007
|
|
of Sales
|
|
Change
|
|
Change
|
|
Net sales
|
|
$
|
24,003
|
|
100.0
|
%
|
$
|
11,124
|
|
100.0
|
%
|
$
|
(12,879
|
)
|
(53.7
|
)%
|
Cost of sales
|
|
8,602
|
|
35.8
|
%
|
4,213
|
|
37.9
|
%
|
4,389
|
|
51.0
|
%
|
Gross profit
|
|
15,401
|
|
64.2
|
%
|
6,911
|
|
62.1
|
%
|
(8,490
|
)
|
(55.1
|
)%
|
Selling,
general, and administrative expenses and corporate overhead
|
|
9,211
|
|
38.4
|
%
|
6,072
|
|
54.6
|
%
|
3,139
|
|
34.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
6,190
|
|
25.8
|
%
|
$
|
839
|
|
7.5
|
%
|
$
|
(5,351
|
)
|
(86.4
|
)%
|
Net sales decreased 53.7% to $11.1 million compared to
$24.0 million for the same period last year. This is due in part to weather
conditions in the first quarter of 2007, as well as a limited number of lots
available for sale in the current year. To a large degree, the reductions in
sales are a function of shrinking inventories of available lots, as well as
from competition within the Companys own resorts from owner resales. In
addition, while the current troubles in the greater real estate market may not
directly influence sales of lots, it does have an impact on demand. 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 62.1% of
sales compared to 64.2% of sales in the same period last year. Gross margin
decreases were due to the additions of some amenities designed to enhance the
appeal of the resorts and demand for lots, but also added slightly to the cost
of sales.
S,G,&A expenses increased as a percent of sales
due to lower sales that was not entirely offset by a reduction in total
S,G,&A dollars. In addition, in the fourth quarter of 2006 we completed a
study on the allocation of corporate overhead, and allocated certain costs on
an activity basis. These costs are now located in a single line item for
S,G,&A expense and corporate overhead allocation. Corporate overhead allocation
is comprised of certain shared services such as executive, financial, information
systems, legal and investor relations expenses.
Operating income decreased due to lower lot sales
volumes and an increase in S,G&A expenses as a percentage of sales.
LIQUIDITY AND CAPITAL
RESOURCES
The Companys primary sources of liquidity are
internally generated cash from operations and available borrowings under its
credit facilities. During the first nine months of 2007, the Company generated
cash of $61.7 million from operating activities and had a cash balance of $35.2
million at September 29, 2007. The Company generated $24.8 million from net
income and had non-cash expenses such as depreciation and amortization, losses
on sales of assets, expenses associated with stock-based compensation, and
losses in equity investment. Other sources of cash included a $22.8 million
increase in accounts payable, a $2.0 million decrease in trade receivables, a
decrease of $3.7 million in inventory levels, a $504,000 decrease in prepaid
expenses, a $2.9 million increase in accruals for product warranty, a $4.6
million increase in accrued liabilities, and a $9.1 million increase in income
tax payable. The uses of cash in this period included an increase of $400,000
in resort inventory, an $8.0 million increase in land held for development, a
$138,000 decrease in accruals for product liability reserve, a decrease of
$150,000 in deferred revenue, and a decrease in assets from discontinued
operations of $18,000. Increases in accounts payable are due mostly to timing
of shipments of raw materials to our plants. At the end of 2006, we had a
regularly scheduled Christmas shutdown, and accordingly the amounts of raw
materials scheduled for delivery were reduced. At the end of the third quarter
2007, we had a normal schedule of deliveries. Decreases in trade accounts
receivable reflect strong collections near the end of the third quarter of
2007, versus the end of fiscal year 2006. Decreases in inventories are a result
of the Company continuing to focus on reducing these levels to meet demand. Decreases
in prepaid expenses reflect the amortization of certain prepaid expenses for
costs such as insurance. Increases in warranty reserves were the result of
increases in experience for warranty costs on some of our current model year
products. Increases in accrued expenses and other liabilities are associated
with increases for accruals for management bonus, and property taxes, offset by
decreases for accruals for promotions and advertising, and interest expense. Increases
in income taxes payable reflect the provision for expected income taxes due. Increases
in resort lot inventories are the result of construction costs at the Companys
resort properties. Increases in land held for development reflect the purchases
of property for resort development in Naples, Florida. Decreases in accrued
product liability reserves reflect the increase in activity on pending
litigation claims, and the ultimate
28
settlement of those claims. Decreases in deferred revenues are related
to revenue associated with Monaco Financial Services that the Company received
in 2006 and is amortizing over the length of the contract with GECDF and GECF. Decreases
in assets related to discontinued operations are for the sales of all remaining
Royale Coach discontinued products.
On November 18, 2005, the Company amended its
credit facilities to borrow $40.0 million of term debt (the Term Debt) to
complete the acquisition of R-Vision. The revolving line of credit remains at
$105.0 million. At September 29, 2007, there were no borrowings outstanding on
the revolving line of credit (the Revolving Loan), and Term Debt borrowings
were $30.0 million. At the election of the Company, the Revolving Loan and the
Term Debt bear interest at varying rates that fluctuate based on the prime rate
or LIBOR, and are determined based on the Companys leverage ratio. The Company
also pays interest quarterly on the unused available portion of the Revolving
Loan at varying rates, determined by the Companys leverage ratio. The
Revolving Loan is due and payable in full on November 17, 2009 and
requires interest payments quarterly. The Term Debt requires quarterly interest
payments and quarterly principal payments of $1.4 million, with a final balloon
payment of $12.9 million due on November 18, 2010. Both the Revolving Loan
and Term Debt are collateralized by all the assets of the Company and the
credit facilities include various restrictions and financial covenants. The
Company was in compliance with these covenants at September 29, 2007. The
Company utilizes zero balance bank disbursement accounts in which an advance
on the line of credit is automatically made for checks clearing each day. Since
the balance of the disbursement account at the bank returns to zero at the end
of each day, the outstanding checks of the Company are reflected as a
liability. The outstanding check liability is combined with the Companys
positive cash balance accounts to reflect a net book overdraft or a net cash
balance for financial reporting. At September 29, 2007, cash is a positive net
balance and thus no book overdraft is reported.
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 Companys principal working capital requirements
are for purchases of inventory and financing of trade receivables. Many of the
Companys dealers finance product purchases under wholesale floor plan
arrangements with third parties as described below. At September 29, 2007 and
December 30, 2006, the Company had working capital of approximately $109.8
million. 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 Companys liquidity requirements for the next 12 months.* The
Companys capital expenditures were $4.2 million in the first nine months of
2007, which included costs related to additions of automated machinery in many
of its production facilities, upgrades to its information systems
infrastructure, and other various capitalized upgrades to existing facilities.
The Company anticipates that capital expenditures for all of 2007 will be approximately
$6 to $8 million, which includes expenditures to purchase additional machinery
and equipment in both the Companys Coburg, Oregon and Wakarusa, Indiana
facilities, as well as upgrades to existing information systems infrastructures.*
The Company may require additional equity or debt financing to address working
capital and facilities expansion needs, particularly if the Company
significantly increases the level of working capital assets such as inventory
and accounts receivable. The Company may also from time to time seek to acquire
businesses that would complement the Companys current business, and any such
acquisition could require additional financing. There can be no assurance that
additional financing will be available if required or on terms deemed favorable
by the Company.
As is typical in the recreational vehicle industry,
many of the Companys retail dealers utilize wholesale floor plan financing
arrangements with third party lending institutions to finance their purchases
of the Companys 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 Companys contingent obligations under these
repurchase agreements are reduced by the proceeds received upon the sale of any
repurchased units. The Companys obligations under these repurchase agreements
vary from period to period up to 15 months. At September 29, 2007,
approximately $515.5 million of products sold by the Company to independent
dealers were subject to potential repurchase under existing floor plan
financing agreements with approximately 5.8% concentrated with one dealer.
Historically, the Company has been successful in mitigating losses associated
with repurchase obligations. During the third quarter of 2007, there were no
losses associated with the exercise of repurchase agreements. 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 ongoing 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
29
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 incentive for
the dealer to take the repurchased inventory.
OFF-BALANCE SHEET
ARRANGEMENTS
As of September 29, 2007, 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 Companys 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)
|
|
$
|
5,714
|
|
$
|
11,928
|
|
$
|
12,858
|
|
$
|
0
|
|
$
|
30,500
|
|
Operating Leases
(2)
|
|
2,271
|
|
4,154
|
|
3,479
|
|
1,381
|
|
11,285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Contractual Cash Obligations
|
|
$
|
7,985
|
|
$
|
16,082
|
|
$
|
16,337
|
|
$
|
1,381
|
|
$
|
41,785
|
|
|
|
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)
|
|
$
|
0
|
|
$
|
105,000
|
|
$
|
0
|
|
$
|
0
|
|
$
|
105,000
|
|
Guarantees (4)
|
|
0
|
|
0
|
|
10,930
|
|
0
|
|
10,930
|
|
Repurchase
Obligations (5)
|
|
0
|
|
515,506
|
|
0
|
|
0
|
|
515,506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Commitments
|
|
$
|
0
|
|
$
|
620,506
|
|
$
|
10,930
|
|
$
|
0
|
|
$
|
631,436
|
|
(1)
|
|
See Note 6 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 29, 2007.
|
(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
2006 and to a lesser extent in the first nine months of 2007, 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. While price increases for these raw
materials are not necessarily indicative of widespread inflationary trends,
they had an impact on the Companys 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
Companys 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
30
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.
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 Companys
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. The Company uses an estimate of discounted future cash flows to
determine fair value for each reporting unit.
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.
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 Companys
provision for income taxes, deferred tax assets and liabilities, and any
valuation allowance recorded against net deferred tax assets.
The Company adopted FIN 48, Accounting for
Uncertainty in Income Taxes an Interpretation of FAS 109, as of the
beginning of fiscal year 2007. See Note 7 to the Companys condensed
consolidated quarterly financial statements included in this Quarterly Report
on Form 10-Q.
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 OBLIGATIONS
Upon
request of a lending institution financing a dealers purchases of the Companys
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
FIN 48
In June 2006, the FASB issued FIN 48, Accounting
for Uncertainty in Income Taxes (the Interpretation). The Interpretation
clarifies the accounting for uncertainty in income taxes recognized in
accordance with FASB 109, Accounting for Income Taxes by defining a criterion
that an individual tax position must be met for any part of the benefit to be
recognized in the financial statements. The Interpretation is effective for
fiscal years beginning after December 15, 2006. See Note 7 to the Companys
consolidated quarterly financial statements included with this Quarterly Report
on Form 10-Q.
31
We have adopted the Interpretation as of the beginning
of fiscal year 2007 and there was no significant impact to the financial
statements.
FAS 157
In September 2006, the FASB issued SFAS No. 157, Fair
Value Measurements. The Statement defines fair value, establishes a framework
for measuring fair value, and expands disclosure requirements regarding fair
value measurements. SFAS No. 157 is effective for fiscal years beginning after
November 15, 2007. While we are still analyzing the effects of SFAS No.
157, we believe that the adoption for SFAS No. 157 will not have a material
effect on our financial position or results of operations.
FAS 159
In February 2007, the FASB issued SFAS No. 159, Fair
Value Option for Financial Assets and Financial Liabilities. This statement
permits entities to choose to measure many financial instruments and certain
other items at fair value. SFAS No. 159 is effective as of the beginning of an
entitys first fiscal year that begins after November 15, 2007. We are
currently analyzing the effects of adopting SFAS No. 159.
ITEM 3. Quantitative and Qualitative Disclosures About Market
Risk
No
material change since December 30, 2006.
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, have 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.
32
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:
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.
Commodity pricing and the effects of
inflation on the costs of materials used in our products.
Fuel costs and fuel availability.
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.
Factors affecting the recreational
vehicle industry as a whole, including economic and seasonal factors.
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, such as changes in the sub
prime lending rates, new housing starts, and availability of credit.
Our overall gross margin may decline in future periods
to the extent that we increase the percentage 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.
THE RECREATIONAL VEHICLE INDUSTRY IS 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 particularly influenced by cycle swings in the
Class A market. While there has been strong secular demand for recreational
vehicles since the early 90s, it has been driven by demand for towable
recreational products. Since 2004 there has been a notable divergence in growth
rates between towable and motorized recreational vehicles.
33
Class A unit shipments reached 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 3 years and in 2004 reached 46,300. Over the last two
years, however, shipments of Class A motorhomes have dropped, reaching a pre-1994
level of 32,700 in 2006. Currently, Class A shipments through August 2007, are
at 22,800, or an expected annualized rate of 34,600.*
The towable segment moved through many of the same
cyclical peaks and troughs historically. The shipment level reached
approximately 201,100 in 1994, dropping-off to 192,200 in 1996 and then growing
to 249,600 in 1999. Towable unit shipments suffered a two-year decline in 2000
and 2001, dropping to 207,600. Since then the market has expanded significantly
reaching 334,600 in 2006. Like the Class A market, the towables segment
has also begun to experience a slow down during 2007. Through August 2007,
shipments were 213,200, or an expected annualized rate of 296,700.*
Our business is subject to the cyclical nature of this
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 two years have adversely affected the Class A recreational vehicle
market. An extended continuation of these conditions would materially 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 29, 2007, a significant percentage of our
sales are concentrated among a relatively small number of independent dealers.
For the quarter ended September 29, 2007, sales to one dealer, Lazy Days RV
Center, accounted for 6.4% of total sales compared to 5.4% of sales in the same
period ended last year. For quarters ended September 30, 2006 and September 29,
2007, sales to our 10 largest dealers, including Lazy Days RV Center, accounted
for a total of 30.3% and 31.8% 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 DEALERS
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 dealers 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 $515.5
million as of September 29, 2007, with approximately 5.8% 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 29, 2007, total trade
receivables were $79.6 million, with approximately $60.6 million, or 76.2% of
the outstanding accounts receivable balance concentrated among floor plan
lenders. The remaining $19.0 million of trade receivables were concentrated
substantially all with one dealer. For resort lot customers, funds are required
at the time of closing.
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 a significant increase 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.
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
34
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.
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.
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
Companys future prospects depend upon retaining and motivating key management
personnel, including Kay L. Toolson, the Companys Chairman and Chief Executive
Officer, and John W. Nepute, the Companys President. The loss of one or more
of these key management personnel could adversely affect the Companys
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 RECENT GROWTH HAS PUT PRESSURE ON THE
CAPABILITIES OF OUR OPERATING, FINANCIAL, AND MANAGEMENT INFORMATION SYSTEMS
In
the past few years, we have significantly expanded the complexity of our
business. As a result, our management personnel have assumed additional
responsibilities. The increase in complexity over a relatively short period of
time has put pressure on our operating, financial, and management information
systems. If we continue to expand, such growth would put additional pressure on
these systems and may cause such systems to malfunction or to experience
significant delays.
35
WE MAY EXPERIENCE UNEXPECTED PROBLEMS AND
EXPENSES ASSOCIATED WITH OUR MANUFACTURING EQUIPMENT AUTOMATION PLAN
As
we continue to work towards involving automated machinery and equipment to
improve efficiencies and quality, we will be subject to certain risks involving
implementing new technologies into our facilities.
The expansion into new machinery and equipment
technologies involves risks, including the following:
We must rely on timely performance by
contractors, subcontractors, and government agencies, whose performance we may
be unable to control.
The development of new processes involves
costs associated with new machinery, training of employees, and compliance with
environmental, health, and other government regulations.
The newly developed products may not be
successful in the marketplace.
We may be unable to complete a planned
machinery and equipment implementation in a timely manner, which could result
in lower production levels and an inability to satisfy customer demand for our
products.
WE MAY EXPERIENCE UNEXPECTED PROBLEMS AND
EXPENSES ASSOCIATED WITH OUR ENTERPRISE RESOURCE PLANNING SYSTEM (ERP)
IMPLEMENTATION
Throughout 2007, we will continue to implement
a new ERP system and will be subject to certain risks including the following:
We must rely on timely performance by
contractors whose performance we may be unable to control.
The implementation could result in
significant and unexpected increases in our operating expenses and capital
expenditures, particularly if the project takes longer than we expect.
The project could complicate and prolong
our internal data gathering and analysis processes.
We may need to restructure or develop our
internal processes to adapt to the new system.
We could require extended work hours from
our employees and use temporary outside resources, resulting in increased
expenses, to resolve any software configuration issues or to process
transactions manually until issues are resolved.
As management focuses attention on the
implementation, they could be diverted from other issues.
The project could disrupt our operations
if the transition to the ERP system creates new or unexpected difficulties or
if the system does not perform as expected.
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.
36
ITEM 6. Exhibits
10.1
|
|
Form of 1993
Stock Plan Performance Share Agreement revised August 1, 2007.
|
|
|
|
10.2
|
|
Form of 1993
Stock Plan Restricted Stock Unit Agreement for Kay L. Toolson and John W.
Nepute revised August 1, 2007.
|
|
|
|
10.3
|
|
Form of 1993
Stock Plan Restricted Stock Unit Agreement for Directors revised August 1,
2007.
|
|
|
|
10.4
|
|
Form of 1993
Stock Plan Restricted Stock Unit Agreement revised August 1, 2007.
|
|
|
|
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.
|
37
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
8, 2007
|
/s/ P. Martin
Daley
|
|
|
P. Martin Daley
|
|
Vice President
and
|
|
Chief Financial
Officer (Duly
|
|
Authorized
Officer and Principal
|
|
Financial
Officer)
|
38
EXHIBITS INDEX
Exhibit
|
|
|
Number
|
|
Description
of Document
|
|
|
|
10.1
|
|
Form of 1993
Stock Plan Performance Share Agreement revised August 1, 2007.
|
|
|
|
10.2
|
|
Form of 1993
Stock Plan Restricted Stock Unit Agreement for Kay L. Toolson and John W.
Nepute revised August 1, 2007.
|
|
|
|
10.3
|
|
Form of 1993
Stock Plan Restricted Stock Unit Agreement for Directors revised August 1,
2007.
|
|
|
|
10.4
|
|
Form of 1993
Stock Plan Restricted Stock Unit Agreement revised August 1, 2007.
|
|
|
|
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.
|
39
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