UNITED STATES SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C. 20549

 

FORM 10-Q

 

 

MONACO COACH CORPORATION

 

 

Indicate by check mark whether the registrant  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and  (2) has been subject to such filing requirements for the past 90 days.

 

YES   ý                  NO   o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

 

YES   ý                  NO   o

 

The number of shares outstanding of common stock, $.01 par value, as of April 3, 2004:  29,330,476

 

 

MONACO COACH CORPORATION

 

FORM 10-Q

 

APRIL 3, 2004

 

INDEX

 

PART I - FINANCIAL INFORMATION
Item 1.  Financial Statements.
Condensed Consolidated Balance Sheets as of January 3, 2004 and April 3, 2004.
Condensed Consolidated Statements of Income for the quarters ended March 29, 2003 and April 3, 2004.
Condensed Consolidated Statements of Cash Flows for the quarters ended March 29, 2003 and April 3, 2004.
Notes to Condensed Consolidated Financial Statements.
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Item 3.  Quantitative and Qualitative Disclosures About Market Risk.
Item 4.  Controls and Procedures.
PART II - OTHER INFORMATION
Item 6.  Exhibits and Reports on Form 8-K.
Signatures.
Certifications under Section 302(a) and 906 of the Sarbanes-Oxley Act of 2002.

 

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PART I - FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

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MONACO COACH CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(dollars in thousands)

 

		January 3, 2004			April 3, 2004
		(audited)			(unaudited)
ASSETS
Current assets:
Cash		$	13,398		$	22,776
Trade receivables, net		89,170			114,617
Inventories		127,746			146,552
Resort lot inventory		13,978			10,618
Prepaid expenses		3,029			6,575
Deferred income taxes		33,836			33,676
Total current assets		281,157			334,814
Property, plant, and equipment, net		141,662			141,456
Debt issuance costs, net of accumulated amortization of $815 and $944, respectively		596			467
Goodwill		55,254			55,254
Total assets		$	478,669		$	531,991
LIABILITIES
Current liabilities:
Current portion of long-term note payable		$	15,000		$	15,000
Accounts payable		64,792			103,867
Product liability reserve		20,723			19,602
Product warranty reserve		29,643			30,712
Income taxes payable		3,395			6,362
Accrued expenses and other liabilities		26,373			29,930
Total current liabilities		159,926			205,473
Long-term notes payable		15,000			11,250
Deferred income taxes		17,495			17,794
Total liabilities		192,421			234,517
STOCKHOLDERS’ EQUITY
Preferred stock, $.01 par value, 1,934,783 shares authorized, no shares outstanding
Common stock, $.01 par value; 50,000,000 shares authorized, 29,246,143 and  29,330,476 issued and outstanding, respectively		292			293
Additional paid-in capital		54,919			55,687
Retained earnings		231,037			241,494
Total stockholders’ equity		286,248			297,474
Total liabilities and stockholders’ equity		$	478,669		$	531,991

 

See accompanying notes.

 

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MONACO COACH CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited: dollars in thousands, except share and per share data)

 

		Quarter Ended
		March 29, 2003			April 3, 2004
Net sales		$	273,574		$	354,976
Cost of sales		239,968			310,493
Gross profit		33,606			44,483
Selling, general, and administrative expenses		25,649			24,800
Operating income		7,957			19,683
Other income, net		206			86
Interest expense		(1,012		)	(405		)
Income before income taxes		7,151			19,364
Provision for income taxes		2,825			7,441
Net income		$	4,326		$	11,923
Earnings per common share:
Basic		$	.15		$	.41
Diluted		$	.15		$	.40
Weighted average common shares outstanding:
Basic		28,956,906			29,296,193
Diluted		29,340,788			29,967,452

 

See accompanying notes.

 

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MONACO COACH CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited: dollars in thousands)

 

		Quarter Ended
		March 29, 2003			April 3, 2004
Increase (Decrease) in Cash:
Cash flows from operating activities:
Net income		$	4,326		$	11,923
Adjustments to reconcile net income to net cash provided (used) by operating activities:
Loss on sale of assets		16			78
Depreciation and amortization		2,262			2,536
Deferred income taxes		(1,009		)	459
Changes in working capital accounts:
Trade receivables, net		17,821			(25,447		)
Inventories		(24,292		)	(18,805		)
Resort lot inventory		2,606			3,360
Prepaid expenses		792			(3,547		)
Accounts payable		9,861			39,075
Product liability reserve		1,091			(1,120		)
Product warranty reserve		(1,071		)	1,068
Income taxes payable		2,592			2,967
Accrued expenses and other liabilities		(2,664		)	3,556
Net cash provided by operating activities		12,331			16,103
Cash flows from investing activities:
Additions to property, plant, and equipment		(8,439		)	(2,553		)
Proceeds from sale of assets		687			145
Net cash used in investing activities		(7,752		)	(2,408		)
Cash flows from financing activities:
Book overdraft		14,698			0
Payments on lines of credit, net		(15,713		)	0
Payments on long-term notes payable		(4,333		)	(3,750		)
Debt issuance costs		(11		)	129
Dividends paid		0			(1,465		)
Issuance of common stock		780			769
Net cash used by financing activities		(4,579		)	(4,317		)
Net change in cash		0			9,378
Cash at beginning of period		0			13,398
Cash at end of period		$	0		$	22,776

 

See accompanying notes.

 

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MONACO COACH CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.     Basis of Presentation

 

The interim condensed consolidated financial statements have been prepared by Monaco Coach Corporation (the “Company”) without audit.  In the opinion of management, the accompanying unaudited financial statements contain all adjustments necessary, consisting only of normal recurring adjustments, to present fairly the financial position of the Company as of January 3, 2004 and April 3, 2004, and the results of its operations and its cash flows for the quarters ended March 29, 2003 and April 3, 2004.  The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, and all significant intercompany accounts and transactions have been eliminated in consolidation.  The balance sheet data as of January 3, 2004 was derived from audited financial statements, but does not include all disclosures contained in the Company’s Annual Report to Stockholders.  These interim condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto appearing in the Company’s Annual Report to Stockholders for the year ended January 3, 2004.

 

2.     Inventories

 

Inventories are stated at lower of cost (first-in, first-out) or market.  The composition of inventory is as follows:

 

		January 3, 2004			April 3, 2004
		(in thousands)
Raw materials		$	60,946		$	67,412
Work-in-process		60,604			67,422
Finished units		6,196			11,718
		$	127,746		$	146,552

 

3.     Line of Credit

 

The Company’s line of credit facility consists of a revolving line of credit of up to $95.0 million (the “Revolving Loan”).  At the election of the Company, the Revolving Loan bears interest at variable rates based on the Prime Rate or LIBOR.  At April 3, 2004, the interest rate was 4.0%.  The Revolving Loan is due and payable in full on June 30, 2005, and requires monthly interest payments.  The balance outstanding under the Revolving Loan at April 3, 2004 was zero.  The revolving line of credit is collateralized by all the assets of the Company.  The agreement contains restrictive covenants as to the Company’s leverage ratio, current ratio, fixed charge coverage ratio, and tangible net worth.  As of April 3, 2004, the Company was in compliance with these covenants.

 

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4.     Long-term Notes Payable

 

The Company has long-term notes payable of $26.3 million outstanding at April 3, 2004.  The term notes bear interest at varying rates that fluctuate based on the Prime rate or LIBOR, and are determined based on the Company’s leverage ratio.  The term notes require monthly interest payments and quarterly principal payments and are collateralized by all the assets of the Company.  Additional prepayments for portions of the term notes are required in the event the Company sells substantially all or any motor coach resort location.  The term notes are due and payable in full on October 3, 2005.

 

The following table displays the scheduled future principal payments by fiscal year that will be due on the term loan.

 

 

5.     Earnings Per Common Share

 

Basic earnings per common share is based on the weighted average number of shares outstanding during the period.  Diluted earnings per common share is based on the weighted average number of shares outstanding during the period, after consideration of the dilutive effect of stock options.   The weighted average number of common shares used in the computation of earnings per common share are as follows:

 

		Quarter Ended
		March 29, 2003		April 3, 2004
Basic
Issued and outstanding shares  (weighted average)		28,956,906		29,296,193
Effect of Dilutive Securities
Stock Options		383,882		671,259
Diluted		29,340,788		29,967,452

 

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6.              Stock Option Plans

 

At April 3, 2004, the Company had three stock-based employee compensation plans.  The Company accounts for those plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations.  No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant.  The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS 123, Accounting for Stock-based Compensation, to stock-based employee compensation.

 

		Quarter Ended
		March 29, 2003			April 3, 2004
		(In thousands, except per share data)
Net income - as reported		$	4,326		$	11,923
Deduct:  Total stock-based employee compensation expense Determined under fair value based method for all awards, net of related tax effects		168			209
		$	4,158		$	11,714
Earnings per share:
Basic - as reported		$	0.15		$	0.41
Basic - pro forma		$	0.14		$	0.40
Diluted - as reported		$	0.15		$	0.40
Diluted - pro forma		$	0.14		$	0.39

 

7.              Commitments and Contingencies

 

Repurchase Agreements

 

Many of the Company’s sales to independent dealers are made on a “floor plan” basis by a bank or finance company which lends the dealer all or substantially all of the wholesale purchase price and retains a security interest in the vehicles.  Upon request of a lending institution financing a dealer’s purchases of the Company’s product, the Company will execute a repurchase agreement.  These agreements provide that, for up to 18 months after a unit is shipped, the Company will repurchase a dealer’s inventory in the event of a default by a dealer to its lender.

 

The Company’s liability under repurchase agreements is limited to the unpaid balance owed to the lending institution by reason of its extending credit to the dealer to purchase its vehicles, reduced by the resale value of vehicles which may be repurchased.  The risk of loss is spread over numerous dealers and financial institutions.

 

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The approximate amount subject to contingent repurchase obligations arising from these agreements at April 3, 2004 is $522.0 million, with approximately 7.38% concentrated with one dealer.  If the Company were obligated to repurchase a significant number of units under any repurchase agreement, its business, operating results, and financial condition could be adversely affected.  The Company has included the disclosure requirements of FASB Interpretation No. 45 (FIN 45), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” in its financial statements, and has determined that the recognition provisions of FIN 45 apply to certain guarantees routinely made by the Company including contingent repurchase obligations to third party lenders for inventory financing of dealer inventories.  The Company has recorded a liability of approximately $750,000 for potential losses resulting from guarantees on repurchase obligations for products shipped to dealers.  This estimated liability, is based on the Company’s experience of losses associated with the repurchase and resale of units in prior years.  If the Company were obligated to repurchase a significant number of units under any repurchase agreement, its business, operating results, and financial condition could be adversely affected.

 

Product Liability

 

The Company is subject to regulations which may require the Company to recall products with design or safety defects, and such recall could have a material adverse effect on the Company’s business, results of operations, and financial condition.

 

The Company has from time to time been subject to product liability claims.  To date, the Company has been successful in obtaining product liability insurance on terms the Company considers acceptable.  The terms of the policy contain a self-insured retention amount of $500,000 per occurrence, with a maximum annual aggregate self-insured retention of $3.0 million.  Overall product liability insurance, including umbrella coverage, is available to a maximum amount of $100.0 million for each occurrence, as well as in the aggregate.  There can be no assurance that the Company will be able to obtain insurance coverage in the future at acceptable levels or that the cost of insurance will be reasonable.  Furthermore, successful assertion against the Company of one or a series of large uninsured claims, or of one or a series of claims exceeding any insurance coverage, could have a material adverse effect on the Company’s business, results of operations, and financial condition.

 

Litigation

 

The Company is involved in various legal proceedings which are incidental to the industry and for which certain matters are covered in whole or in part by insurance or, otherwise, the Company has recorded accruals for estimated settlements.  Management believes that any liability which may result from these proceedings will not have a material adverse effect on the Company’s consolidated financial statements.

 

Aircraft Lease Commitment

 

The Company has an aircraft under an operating lease, with annual renewals for up to three years.  Currently the Company began it’s first year of renewal in February 2004, with two optional years remaining.  If at the end of the initial lease period the Company elects to return the aircraft, the Company has guaranteed up to $16 million in the event the lessor’s net sales proceeds are less than $18.5 million.

 

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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.  These statements include, but are not limited to, those below that have been marked with an asterisk (*).  In addition, we may from time to time make forward-looking statements through statements that include words such as “believes,” “expects,” “anticipates” or similar expressions.  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 under the caption “Factors That May Affect Future Operating Results” 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 under the caption “Factors That May Affect Future Operating Results.”  We caution the reader, however, that these factors may not be exhaustive.

 

GENERAL

 

Monaco Coach Corporation is a leading manufacturer of premium Class A and Class C motor coaches and towable recreational vehicles (“towables”).  Our product line currently consists of a broad line of motor coaches, fifth wheel trailers and travel trailers under the “Monaco,” “Holiday Rambler,” “Royale Coach,” “Beaver,” “Safari,” and “McKenzie” brand names.  Our products, which are typically priced at the high end of their respective product categories, range in suggested retail price from $70,000 to $1.4 million for motor coaches and from $25,000 to $65,000 for towables.

 

RESULTS OF OPERATIONS

 

The following table illustrates the results of operations for the quarters ended March 29, 2003, and April 3, 2004.  All dollars represented are in thousands.

 

 

		2003			% of Sales		2004			% of Sales		$ Change			% Change
Net sales		$	273,574		100.0	%	$	354,976		100.0	%	$	81,402		29.8	%
Cost of Sales		239,968			87.7	%	310,493			87.5	%	70,525			29.4	%
Gross Profit		33,606			12.3	%	44,483			12.5	%	10,877			32.4	%
Selling, general and administrative expenses		25,649			9.4	%	24,800			7.0	%	-849			-3.3	%
Operating income		$	7,957		2.9	%	$	19,683		5.5	%	$	11,726		147.4	%

 

Performance in the first quarter of 2004

 

We are pleased with the record revenues generated for the first quarter of 2004.  Profits for the first quarter of 2004 were improved over that of the similar quarter of 2003.  Improved gross profit margins helped fuel an $11 million improvement in gross profit.  However, margins were dampened by the increase in certain commodity product prices, such as steel, copper, aluminum, and wood.   Due to rising costs in these and related materials, along with changes in our mix, our own material costs were impacted by as much as 1.3% of first quarter sales.  In response to these rising costs, we are passing along proportional price increases in our products.  We will continue to monitor these, as well as other costs, and take appropriate actions to minimize the impact of additional commodity price increases.*

 

In addition to improved gross margins, we were also successful in reducing selling, general, and administrative (S,G&A) expenses.  The decrease in S,G&A was due to a lower level of legal settlement expenses, retail sales promotions, as well as show costs compared to the same period last year.  The decrease in settlement expense was a result of receiving a lower than normal number of new cases, combined with the closure of certain cases that were favorable when associated with their respective reserve amounts.  The reduction in retail sales

 

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promotions was due to improved demand for our product in the market place, while the show expense reduction was a result of a continuing effort to streamline show participation.

 

Quarter ended April 3, 2004 compared to Quarter ended March 29, 2003

 

First quarter net sales increased 29.8% to $355.0 million compared to $273.6 million for the same period last year. Gross diesel motorized sales were up 27.9%, gas motorized sales were up 34.8%, and towables were up 35.0%.  Diesel products accounted for 77% of our first quarter revenues while gas products were 14%, and towables were 9%.  The overall increase in revenues has been driven by improving market conditions, continued lower interest rates, and continuing increased interest in the recreational industry.  Our overall unit sales were up 32.5% in the first quarter of 2004 to 3,136 units, with diesel motorized unit sales up 23.1% to 1,506 units, gas motorized unit sales up 33.9% to 636 units, and towable unit sales up 48.6% to 994 units.  Our total average unit selling price decreased to $111,500 from $114,200 in the same period last year, reflecting our continued emphasis on increasing the sale of lower priced gas motor homes and towable product.

 

Gross profit for the first quarter of 2004 increased to $44.5 million, up from $33.6 million in 2003, and gross margin increased from 12.3% in the first quarter of 2003 to 12.5% in the first quarter of 2004.  The increase in gross margin over the prior year was due to a combination of factors, including a reduction in discounts off of wholesale invoices of approximately 0.2% of sales.  In addition, other direct costs, such as labor and warranty improved by 1.2% of sales.  These benefits were offset by a higher material usage rate of 1.3% due to increases in commodity prices, as well as shifts in product mix.  Additional improvements in indirect costs as a percentage of sales amounted to 0.1%.  Our overall gross margin may decline in future periods if the mix of products continues to shift from higher to lower gross margin units or if we encounter unexpected manufacturing difficulties or competitive pressures.

 

Selling, general, and administrative expenses (S,G&A) decreased by $849 thousand to $24.8 million in the first quarter of 2004 and decreased as a percentage of sales from 9.4% in 2003 to 7.0% in 2004.  Selling, general, and administrative expenses in the first quarter of 2004 included decreases in litigation settlement costs of 1.4% as a percentage of sales, decreases in retail promotions of 0.6% as a percentage of sales, and decrease in show expense of 0.3% as a percentage of sales.  Certain of these costs, such as litigation settlement expenses, were lower than normal, and, accordingly, we expect S,G&A expenses for future quarters to increase to more normalized rates of between 7.2% and 7.4% of sales.*

 

Operating income was $19.7 million, or 5.5% of sales in the first quarter of 2004 compared to $8.0 million, or 2.9% of sales in the similar 2003 period.  The increase in operating margins reflects improved gross margins as well as reduced S,G&A as a percentage of sales.

 

Net interest expense was $405 thousand in the first quarter of 2004 compared to $1.0 million in the comparable 2003 period, reflecting a lower level of borrowing during the first quarter of 2004.

 

We reported a provision for income taxes of $7.4 million, or an effective tax rate of 38.4% in the first quarter of 2004, compared to $2.8 million, or an effective tax rate of 39.5% for the comparable 2003 period.  The decrease in the effective tax rate was due primarily to benefits received from foreign sales activities, as well as favorable tax law changes at certain state levels.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Our primary sources of liquidity are internally generated cash from operations and available borrowings under its credit facilities.  During  the first quarter of 2004, we generated cash of $16.1 million from operating activities.  We generated $14.5 million from net income and non-cash expenses such as depreciation and amortization. Other sources of cash included a $39.1 million increase in trade payables, $3.6 million increase in accrued liabilities, a $3.4 million decrease in resort lot inventory, and a $4.0 million increase in tax and warranty liabilities.  Trade payables increased primarily due to increased production levels as well as timing associated with the regularly scheduled shut down of the plants that occurs at year end.  Other liabilities increased due to payroll accruals also associated with the plant shut downs at the end of 2003.  Reduced resort lot inventories reflect the strong sales of the first quarter, and increases in tax and warranty liabilities are the result of improved profits, and increases in production that drive the warranty reserves.  These sources of cash were mostly offset by a  $25.4 million increase in receivables, an $18.8 million increase in inventories, a $3.5 million increase in prepaid expenses, and an

 

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$1.1 million decrease in the product liability reserve.  Trade receivables increased due to lower shipment levels occurring at the end of the fourth quarter 2003 (which were a result of scheduled plant shut downs) versus shipment levels at the end of the first quarter 2004.  Inventory increases are the result of increased production, as well as the below normal finished good levels that existed at the end of 2003.  Prepaid expenses were up due to the renewal of certain liability insurance policies that expired during the quarter.  Product liability reserves decreased, reflecting the closure of various litigation and settlement claims.

 

We have credit facilities consisting of a revolving line of credit of up to $95.0 million of which no borrowings were outstanding at April 3, 2004 (the “Revolving Loan”) and term loans with balances of $26.3 million at April 3, 2004 (the “Term Loans”).  At our election, the Revolving Loan and Term Loans bear interest at varying rates that fluctuate based on the Prime rate or LIBOR, and are determined based on our leverage ratio.  We also pay interest monthly on the unused available portion of the Revolving Loan at varying rates, determined by our leverage ratio.  The Revolving loan is due and payable in full on June 30, 2005, and requires monthly interest payments.  Additional prepayments for portions of the term notes are required in the event we sell substantially all, or any, motor coach resort location.  The Term Loans require monthly interest payments and principal payments that total $3.75 million per quarter.  The Revolving Loan and Term Loans are collateralized by all of our assets and include various restrictions and financial covenants.  We utilize “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, our outstanding checks are reflected as a liability.  The outstanding check liability is combined with our positive cash balance accounts to reflect a net cash balance for financial reporting.

 

Our principal working capital requirements are for purchases of inventory and financing of trade receivables.  Many of our dealers finance product purchases under wholesale floor plan arrangements with third parties as described below.  At April 3, 2004, we had working capital of approximately $129.3 million, an increase of $8.1 million from working capital of $121.2 million at January 3, 2004.  We have been using cash flow from operations to finance our capital expenditures.

 

We believe that cash flow from operations and funds available under our credit facilities will be sufficient to meet our liquidity requirements for the next 12 months.*  Our capital expenditures were $2.6 million in the first quarter of 2004, which included costs related to installation of certain automated machinery, enhancements to the Company’s information system infrastructure, as well as various other routine capital expenditures.  We anticipate that capital expenditures for all of 2004 will be approximately $12 to $15 million, which includes expenditures to purchase additional machinery and equipment in both our Coburg, Oregon and Wakarusa, Indiana facilities, as well as upgrades to existing information systems infrastructures.*  We may require additional equity or debt financing to address working capital and facilities expansion needs, particularly if we significantly increase the level of working capital assets such as inventory and accounts receivable.  We may also from time to time seek to acquire businesses that would complement our 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 us.

 

As is typical in the recreational vehicle industry, many of our retail dealers utilize wholesale floor plan financing arrangements with third party lending institutions to finance their purchases of our 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 fails to meet its commitments to the lender, subject to certain conditions.  We have agreements with several institutional lenders under which we currently have repurchase obligations.  Our contingent obligations under these repurchase agreements are reduced by the proceeds received upon the sale of any repurchased units.  Our obligations under these repurchase agreements vary from period to period up to 18 months.  At April 3, 2004, approximately $522.0 million of products sold by us to independent dealers were subject to potential repurchase under existing floor plan financing agreements with approximately 7.38% concentrated with one dealer.  Historically, we have been successful in mitigating losses associated with repurchase obligations.  During the first quarter of 2004, the losses associated with the exercise of repurchase agreements were less than $100,000.  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.

 

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As part of the normal course of business, we incur certain contractual obligations and commitments which will require future cash payments. The following tables summarize the significant obligations and commitments.

 

		PAYMENTS DUE BY PERIOD
Contractual Obligations (in thousands)		1 year or less			1 to 3 years			4 to 5 years			Thereafter			Total
Long-term Debt(1)		$	15,000		$	11,250		$	0		$	0		$	26,250
Operating Leases(2)		2,203			2,479			1,957			3,599			10,238
Total Contractual Cash Obligations		$	17,203		$	13,729		$	1,957		$	3,599		$	36,488

 

		AMOUNT OF COMMITMENT EXPIRATION BY PERIOD
Other Commitments (in thousands)		1 year or less			1 to 3 years			4 to 5 years			Thereafter			Total
Lines of Credit(3)		$	0		$	95,000		$	0		$	0		$	95,000
Guarantees					16,000		(2)	0			0			16,000
Repurchase Obligations(4)		0			521,973			0			0			521,973
Total Commitments		$	0		$	632,973		$	0		$	0		$	632,973

 

(1)  See Note 4 to the financials.

(2)  Various leases including manufacturing facilities, aircraft, and machinery and equipment.  See Note 7 to the financials.

(3)  See Note 3  to the financials.  The amount listed represents available borrowings on the line of credit at April 3, 2004.

(4)  Reflects obligations under manufacturer repurchase commitments.  See Note 7 to the financials.

 

INFLATION

 

In the first quarter of 2004, we experienced significant increases in the prices of certain commodity items that we use in the manufacturing of our products.  These include, but are not limited to, steel, copper, aluminum, petroleum, and wood.  While these raw materials are not necessarily indicative of widespread inflationary trends, they have had a material impact on our production costs, and accordingly, we have passed along price increases to offset these increased costs.  However, even though we have been able to pass along past price increases, there is no guarantee that we will be able to pass along future increases.  This, combined with potential future increases in raw material costs could have a materially adverse impact on our 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 ongoing basis, we evaluate our estimates, including those related to warranty costs, product liability, and impairment of goodwill.  We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances.  Actual results may differ from these estimates under different assumptions or conditions.  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 We provide 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 We assess the potential impairment of goodwill in accordance with Financial Accounting Standards Board (FASB) Statement No. 142.  This initial test involves management

 

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comparing our market capitalization, to the carrying amount, including goodwill, of our net book value, to determine if goodwill has been impaired.

 

INVENTORY RESERVES We write down our inventory for obsolescence, and the difference between the cost of inventory and its estimated 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 our consolidated financial statements, we must estimate our income taxes in each of the jurisdictions in which we operate. 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. We 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 our provision for income taxes, deferred tax assets and liabilities, and any valuation allowance recorded against net deferred tax assets.

 

FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS

 

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 margins associated with the mix of products we sell in any particular period.

 

•                  Our ability to utilize and expand our manufacturing resources efficiently.

 

•                  Shortages of materials used in our products.

 

•                  A determination by us that goodwill or other intangible assets are impaired and have to be written down to their fair values, resulting in a charge to our results of operations.

 

•                  Our ability to introduce new models that achieve consumer acceptance.

 

•                  The introduction, marketing and sale of competing products by others, including significant discounting offered by our competitors.

 

•                  The addition or loss of our dealers.

 

•                  The timing of trade shows and rallies, which we use to market and sell our products.

 

•                  Factors affecting the recreational vehicle industry as a whole, including economic and seasonal factors.

 

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 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.

 

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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.  For example, unit sales of recreational vehicles (excluding conversion vehicles) peaked at approximately 259,000 units in 1994 and declined to approximately 247,000 units in 1996.  The industry peaked again in 1999 at approximately 321,000 units and declined in 2001 to 257,000 units.  In 2003, the industry rebounded up to approximately 321,000 units.  Our business is subject to the cyclical nature of this industry.  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.  The recent decline in consumer confidence and slowing of the overall economy has adversely affected the 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 332 dealerships located primarily in the United States and Canada as of April 3, 2004, a significant percentage of our sales are concentrated among a relatively small number of independent dealers.  For the quarter ended April 3, 2004, sales to one dealer, Lazy Days RV Center, accounted for 12.2% of total sales compared to 12.4% of sales in the same period ended last year.  For quarters ended March 29, 2003 and April 3, 2004, sales to our 10 largest dealers, including Lazy Days RV Center, accounted for a total of 43.4% and 41.6% of total sales, respectively.  The loss of a significant dealer or a substantial decrease in sales by any of these dealers could have a material impact on our business, results of operations, and financial condition.

 

WE MAY HAVE TO REPURCHASE A DEALER’S INVENTORY OF OUR PRODUCTS IN THE EVENT THAT THE DEALER DOES NOT REPAY ITS LENDER  As is common in the recreational vehicle industry, we enter into repurchase agreements with the financing institutions used by our dealers to finance their purchases of our products.  These agreements require us to repurchase the dealer’s inventory in the event that the dealer does not repay its lender.  Obligations under these agreements vary from period to period, but totaled approximately $522.0 million as of April 3, 2004, with approximately 7.38% 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 CONCENTRATION 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.  As of April 3, 2004, total trade receivables were $114.6 million, with approximately $84.1 million, or 73.4% of the outstanding accounts receivable balance concentrated among floor plan lenders. The remaining $30.5 million of trade receivables were concentrated substantially all with one dealer.

 

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 certain of our products are purchased from single or a limited number of sources. These include turbo diesel engines (Cummins and Caterpillar), substantially all of our transmissions (Allison), axles (Dana and Meritor) for all diesel motor coaches and chassis (Workhorse and Ford) for gas motor coaches.  We have no long-term supply contracts with these suppliers or their distributors, and we cannot be certain that these suppliers will be able to meet our future requirements.  Consequently, we have 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.

 

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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 and warranty and replacement costs and may cause serious damage to our customer relationships and industry reputation, all of which will 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.

 

WE MAY BE UNABLE TO ATTRACT AND RETAIN KEY EMPLOYEES, DELAYING PRODUCT DEVELOPMENT AND MANUFACTURING  Our success depends in part upon attracting and retaining highly skilled professionals.  A number of our employees are highly skilled engineers and other technical professionals, and our failure to continue to attract and retain such individuals could adversely affect our ability to compete in the industry.

 

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 size and scope of our business, which has required us to hire additional employees.  Some of these new employees include new management personnel.  In addition, our current management personnel have assumed additional responsibilities.   The increase in our size 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.

 

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:

 

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•                  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.

 

NEWLY ISSUED FINANCIAL REPORTING PRONOUNCEMENTS

 

SFAS 150

 

In May of 2003, the Financial Accounting Standards Board (the Board), issued SFAS 150 Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity (SFAS 150).  This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances).  Many of those instruments would previously have been classified as an equity.

 

This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatorily redeemable financial instruments of nonpublic entities.

 

We have reviewed the provisions of SFAS 150, and believe that it does not have any financial instruments requiring reclassifications under SFAS 150.

 

FIN 46

 

In January 2003, the Board issued FASB Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities - an Interpretation of ARB No. 51, Consolidated Financial Statements.  The Interpretation addresses how variable interest entities are to be identified and how an enterprise assesses its interests in a variable interest entity to decide whether to consolidate that entity.  The Interpretation also requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risks among the parties involved.

 

FIN 46 is effective in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which a company holds a variable interest that is acquired before February 1, 2003.

 

The provisions of FIN 46 have been reviewed, and we do not believe that we have any entities requiring consolidation.

 

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Item 3.  Quantitative and Qualitative Disclosures About Market Risk

 

Not applicable.

 

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 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.

 

Changes in Internal Controls Over Financial Reporting

 

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.

 

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PART II - OTHER INFORMATION

 

Item 6.  Exhibits and Reports on Form 8-K

 

(a)		Exhibits
		31.1	Sarbanes-Oxley Section 302(a) Certification.
		31.2	Sarbanes-Oxley Section 302(a) Certification.
		32.1	Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b)		Reports on Form 8-K
		i.	On February 3, 2004, the Company filed a Form 8-K which furnished a copy of a press release announcing the Company’s results of operations for fourth quarter and full fiscal year ended January 3, 2004.

 

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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:	May 13, 2004		/s/	P. Martin Daley
			P. Martin Daley
			Vice President and Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer)

 

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EXHIBITS INDEX

 

Exhibit Number		Description of Document
31.1		Sarbanes-Oxley Section 302(a) Certification.
31.2		Sarbanes-Oxley Section 302(a) Certification.
32.1		Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.