FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) |
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For the quarterly period ended July 31, 2005 | ||
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| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) |
For the transition period from to
Commission File Number 1-7699
FLEETWOOD ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
Delaware |
| 95-1948322 |
(State or other jurisdiction of |
| (I.R.S. Employer Identification Number) |
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3125 Myers Street, Riverside, California |
| 92503-5527 |
(Address of principal executive offices) |
| (Zip code) |
Registrant’s telephone number, including area code (951) 351-3500
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 Rule12b-2 of the Exchange Act).
Yes ý No o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes ý No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.
Class |
| Outstanding at September 1, 2005 |
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Common stock, $1 par value |
| 56,472,050 shares |
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
Fleetwood Enterprises, Inc.
We have reviewed the condensed consolidated balance sheet of Fleetwood Enterprises, Inc. and subsidiaries as of July 31, 2005, the related condensed consolidated statements of operations and condensed consolidated statements of cash flows for the fourteen-week period ended July 31, 2005 and the thirteen-week period ended July 25, 2004, and the condensed consolidated statement of changes in shareholders’ equity for the fourteen-week period ended July 31, 2005. These financial statements are the responsibility of the Company’s management.
We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Fleetwood Enterprises, Inc. and subsidiaries as of April 24, 2005, and the related consolidated statements of operations, changes in shareholders’ equity, and cash flows for the year then ended (not presented herein), and in our report dated July 5, 2005, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of April 24, 2005, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
| /s/ Ernst & Young LLP |
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Orange County, California | ||
August 30, 2005 |
1
FLEETWOOD ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in thousands, except per share data)
|
| 14 Weeks Ended |
| 13 Weeks Ended |
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| July 31, 2005 |
| July 25, 2004 |
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Net Sales: |
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RV Group |
| $ | 423,202 |
| $ | 485,703 |
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Housing Group |
| 204,331 |
| 195,687 |
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Supply Group |
| 13,730 |
| 14,060 |
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Intercompany sales |
| (24,788 | ) | (36,021 | ) | ||
|
| 616,475 |
| 659,429 |
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Cost of products sold |
| 516,412 |
| 538,173 |
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Gross profit |
| 100,063 |
| 121,256 |
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Operating expenses |
| 96,626 |
| 98,767 |
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Other, net |
| 4,330 |
| (26 | ) | ||
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Operating income (loss) |
| (893 | ) | 22,515 |
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Other income (expense): |
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Investment income |
| 1,005 |
| 487 |
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Interest expense |
| (7,399 | ) | (6,916 | ) | ||
Other, net |
| — |
| (2,724 | ) | ||
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| (6,394 | ) | (9,153 | ) | ||
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Income (loss) from continuing operations before income taxes |
| (7,287 | ) | 13,362 |
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Provision for income taxes |
| (10,126 | ) | (910 | ) | ||
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Income (loss) from continuing operations |
| (17,413 | ) | 12,452 |
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Loss from discontinued operations, net |
| (12,144 | ) | (6,900 | ) | ||
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Net income (loss) |
| $ | (29,557 | ) | $ | 5,552 |
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| Basic |
| Diluted |
| Basic |
| Diluted |
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Earnings (loss) per common share: |
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Income (loss) from continuing operations |
| $ | (.31 | ) | $ | (.31 | ) | $ | .23 |
| $ | .21 |
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Loss from discontinued operations |
| $ | (.22 | ) | $ | (.22 | ) | $ | (.13 | ) | $ | (.10 | ) |
Net income (loss) per common share |
| $ | (.53 | ) | $ | (.53 | ) | $ | .10 |
| $ | .11 |
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Weighted average common shares |
| 56,136 |
| 56,136 |
| 54,670 |
| 64,286 |
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See accompanying notes to condensed consolidated financial statements.
2
FLEETWOOD ENTERPRISES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share data)
|
| July 31, |
| April 24, |
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| (Unaudited) |
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Assets |
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Cash |
| $ | 2,077 |
| $ | 6,761 |
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Marketable investments - available for sale |
| 49,402 |
| 38,715 |
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Receivables |
| 186,234 |
| 164,609 |
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Inventories |
| 188,303 |
| 233,591 |
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Deferred taxes, net |
| 46,404 |
| 56,904 |
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Assets of discontinued operations |
| 145,511 |
| 145,784 |
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Other current assets |
| 25,947 |
| 23,974 |
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Total current assets |
| 643,878 |
| 670,338 |
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Property, plant and equipment, net |
| 230,832 |
| 232,125 |
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Deferred taxes, net |
| 17,859 |
| 17,859 |
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Cash value of Company-owned life insurance, net |
| 37,061 |
| 36,946 |
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Goodwill |
| 6,316 |
| 6,316 |
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Other assets |
| 47,363 |
| 46,663 |
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Total assets |
| $ | 983,309 |
| $ | 1,010,247 |
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Liabilities and Shareholders’ Equity |
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Accounts payable |
| $ | 72,191 |
| $ | 75,551 |
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Employee compensation and benefits |
| 71,665 |
| 77,924 |
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Product warranty reserve |
| 64,686 |
| 65,143 |
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Short-term borrowings |
| 13,044 |
| 56,661 |
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Accrued interest |
| 54,666 |
| 52,446 |
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Liabilities of discontinued operations |
| 81,025 |
| 84,702 |
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Other current liabilities |
| 115,363 |
| 82,290 |
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Total current liabilities |
| 472,640 |
| 494,717 |
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Deferred compensation and retirement benefits |
| 39,133 |
| 38,771 |
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Insurance reserves |
| 35,328 |
| 32,215 |
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Long-term debt |
| 128,156 |
| 108,946 |
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Convertible subordinated debentures |
| 210,142 |
| 210,142 |
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Total liabilities |
| 885,399 |
| 884,791 |
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Commitments and contingencies |
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Shareholders’ equity: |
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Preferred stock, $1 par value, authorized 10,000,000 shares, none outstanding |
| — |
| — |
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Common stock, $1 par value, authorized 150,000,000 shares, outstanding 56,352,000 at July 31, 2005, and 56,043,000 at April 24, 2005 |
| 56,352 |
| 56,043 |
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Additional paid-in capital |
| 426,279 |
| 424,782 |
| ||
Accumulated deficit |
| (386,353 | ) | (356,796 | ) | ||
Accumulated other comprehensive income |
| 1,632 |
| 1,427 |
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Total shareholders’ equity |
| 97,910 |
| 125,456 |
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Total liabilities and shareholders’ equity |
| $ | 983,309 |
| $ | 1,010,247 |
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See accompanying notes to condensed consolidated financial statements.
3
FLEETWOOD ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in thousands)
|
| 14 Weeks Ended |
| 13 Weeks Ended |
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|
| July 31, 2005 |
| July 25, 2004 |
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CASH FLOWS FROM OPERATING ACTIVITIES: |
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Income (loss) from continuing operations |
| $ | (17,413 | ) | $ | 12,452 |
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Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |
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Depreciation expense |
| 5,594 |
| 5,129 |
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Amortization of financing costs |
| 330 |
| 553 |
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Gains on investment securities transactions |
| (2 | ) | (10 | ) | ||
(Gains) losses on sale of property, plant and equipment |
| 55 |
| (26 | ) | ||
Non-cash charge for conversion of trust preferred securities |
| — |
| 1,135 |
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Changes in assets and liabilities: |
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Increase in receivables |
| (21,625 | ) | (18,344 | ) | ||
(Increase) decrease in inventories |
| 45,288 |
| (18,374 | ) | ||
(Increase) decrease in income tax receivable |
| 518 |
| (363 | ) | ||
Decrease in deferred taxes, net |
| 10,500 |
| — |
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(Increase) decrease in cash value of Company-owned life insurance |
| (115 | ) | 276 |
| ||
Increase in other assets |
| (3,521 | ) | (6,621 | ) | ||
Decrease in accounts payable |
| (3,360 | ) | (8,344 | ) | ||
Increase (decrease) in employee compensation and benefits |
| (5,897 | ) | 4,652 |
| ||
Increase (decrease) in product warranty reserve |
| (457 | ) | 3,138 |
| ||
Increase (decrease) in other liabilities |
| 7,236 |
| (7,292 | ) | ||
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Net cash provided by (used in) operating activities |
| 17,131 |
| (32,039 | ) | ||
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CASH FLOWS FROM DISCONTINUED OPERATIONS: |
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Loss from discontinued operations, net |
| (12,144 | ) | (6,900 | ) | ||
Impairment charges |
| 2,218 |
| — |
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Termination benefit liability |
| 3,000 |
| — |
| ||
Net proceeds from sale of finance loans receivable |
| 28,170 |
| (155 | ) | ||
Proceeds from sales of property, plant and equipment, net |
| 9 |
| 112 |
| ||
Increase in assets of discontinued operations |
| (1,954 | ) | (4,435 | ) | ||
Increase (decrease) in liabilities of discontinued operations |
| (3,677 | ) | 6,139 |
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Net cash provided by (used in) discontinued operations |
| 15,622 |
| (5,239 | ) | ||
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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Purchases of investment securities available-for-sale |
| (194,839 | ) | (201,093 | ) | ||
Proceeds from sale of investment securities available-for-sale |
| 184,175 |
| 262,536 |
| ||
Purchases of property, plant and equipment, net |
| (4,356 | ) | (10,487 | ) | ||
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Net cash provided by (used in) investing activities |
| (15,020 | ) | 50,956 |
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CASH FLOWS FROM FINANCING ACTIVITIES: |
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Decrease in short-term borrowings |
| (43,617 | ) | (4,182 | ) | ||
Increase in long-term debt |
| 19,210 |
| 7,151 |
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Redemption of convertible subordinated debentures |
| — |
| (20,767 | ) | ||
Proceeds from exercise of stock options |
| 1,806 |
| 871 |
| ||
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Net cash used in financing activities |
| (22,601 | ) | (16,927 | ) | ||
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Foreign currency translation adjustment |
| 184 |
| 710 |
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Decrease in cash |
| (4,684 | ) | (2,539 | ) | ||
Cash at beginning of period |
| 6,761 |
| 14,090 |
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Cash at end of period |
| $ | 2,077 |
| $ | 11,551 |
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See accompanying notes to condensed consolidated financial statements.
4
FLEETWOOD ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES
IN SHAREHOLDERS’ EQUITY
(Unaudited)
(Amounts in thousands)
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| Accumulated |
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| Other |
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| Common Stock |
| Additional |
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| Comprehensive |
| Total |
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| Number |
| Amount |
| Paid-In |
| Accumulated |
| Income |
| Shareholders’ |
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Balance April 24, 2005 |
| 56,043 |
| $ | 56,043 |
| $ | 424,782 |
| $ | (356,796 | ) | $ | 1,427 |
| $ | 125,456 |
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Comprehensive loss: |
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Net loss |
| — |
| — |
| — |
| (29,557 | ) | — |
| (29,557 | ) | |||||
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Other comprehensive income: |
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Foreign currency translation, net of taxes of $144 |
| — |
| — |
| — |
| — |
| 184 |
| 184 |
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Investment securities |
| — |
| — |
| — |
| — |
| 21 |
| 21 |
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Comprehensive loss |
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| (29,352 | ) | |||||
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Stock options exercised |
| 309 |
| 309 |
| 1,497 |
| — |
| — |
| 1,806 |
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Balance July 31, 2005 |
| 56,352 |
| $ | 56,352 |
| $ | 426,279 |
| $ | (386,353 | ) | $ | 1,632 |
| $ | 97,910 |
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See accompanying notes to condensed consolidated financial statements.
5
FLEETWOOD ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2005
(Unaudited)
1) Basis of Presentation
Fleetwood Enterprises, Inc. (the “Company”) is one of the nation’s leaders in producing both recreational vehicles and manufactured housing. In addition, the Company operates three supply companies that provide components for the recreational vehicle and housing operations, while also generating outside sales.
Fleetwood’s business began in 1950 through the formation of a California corporation. The present Company was incorporated in Delaware in September 1977, and succeeded by merger to all the assets and liabilities of the predecessor company. Fleetwood conducts manufacturing activities in 16 states within the U.S., and to a much lesser extent in Canada. The Company also operates a manufactured housing retail business, Fleetwood Retail Corp. (FRC), and a financial services subsidiary, HomeOne Credit Corp. (HomeOne). These businesses were designated as discontinued operations in March 2005 following an announcement that these businesses were to be sold. The accompanying condensed financial statements consolidate the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated. Certain amounts previously reported have been reclassified to conform to the Company’s fiscal 2006 presentation.
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the accompanying financial statements. Actual results could differ from those estimates. Significant estimates made in preparing these financial statements include accrued warranty costs, depreciable lives, insurance reserves, accrued post-retirement health care benefits, legal reserves and the deferred tax asset valuation allowance.
In the opinion of the Company’s management, the accompanying condensed consolidated financial statements include all normal recurring adjustments necessary for a fair presentation of the financial position at July 31, 2005, and the results of operations for the fourteen-week period ended July 31, 2005, and the thirteen-week period ended July 25, 2004. The condensed consolidated financial statements include the discontinued operations of FRC and HomeOne for the three month periods ended June 30, 2005 and 2004, respectively. The condensed consolidated financial statements do not include footnotes and certain financial information normally presented annually under U.S. generally accepted accounting principles and, therefore, should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended April 24, 2005. The Company’s business is seasonal and its results of operations for the fourteen-week period ended July 31, 2005, are not necessarily indicative of results to be expected for the full year.
Adjustment to Prior Year:
As disclosed in the Company’s Annual Report on Form 10-K for the year ended April 24, 2005, the statement of operations for the thirteen weeks ended July 25, 2004 has been revised related to a charge of $1.1 million to write-off costs associated with the redemption of the Fleetwood Capital Trust II securities. This charge was first recognized in the fourth quarter of fiscal 2005 but for presentation purposes has been included in the first fiscal quarter of fiscal 2005 to more correctly include the charge in the quarter in which the related transaction occurred.
New Accounting Pronouncements:
The Company owned three Delaware business trusts that were established for the purpose of issuing optionally redeemable convertible trust preferred securities. The obligations of the business trusts to the holders of the trust preferred securities were all supported by convertible subordinated debentures issued by Fleetwood to the respective business trusts. Subsequent to the end of the most recent fiscal year, the preferred securities of two of the trusts were either converted or redeemed, and the debentures cancelled. Under Interpretation No. 46, which was adopted by the Company as of January 25, 2004, the trust preferred securities continued to be presented as minority interests based on the fact that the Company had the ability to “call” the trust preferred securities and that no single party held a majority of the preferred securities; therefore, the Company was considered the primary beneficiary of the trusts. Under FIN 46R, which was adopted by the Company as of April 25, 2004, the call option embedded in the trust preferred securities was determined to be clearly and closely related to the underlying security. FIN 46R confirmed that the call option could no longer be separately evaluated as a determinant of the primary beneficiary of the trusts. As a result, the business trusts were now deemed to have no primary beneficiary and they
6
were deconsolidated, resulting in the presentation of the convertible subordinated debenture obligations to the underlying trusts as a long-term liability for all years presented. Amounts previously shown in the Statements of Operations as minority interest in Fleetwood Capital Trusts I, II and III, net of taxes, were reclassified for all periods presented to interest expense, with the related tax effect included in the tax provision. Other than as indicated, the Company does not believe that the adoption of FIN 46 or FIN 46R had a material impact on the Company’s financial position, results of operations or cash flows.
Share-Based Payment
In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 123R, “Share-Based Payment.” Under previous practice, the reporting entity could account for share-based payment under the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” and disclose share-based compensation as if accounted for under the provisions of SFAS No. 123, “Accounting for Stock-Based Compensation.” Under the provisions of SFAS No. 123R, a public entity is required to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost is recognized over the period during which an employee is required to provide service in exchange for the award.
The Company expects to adopt SFAS No. 123R, effective with the beginning of the quarter ended October 30, 2005. Adoption of the standard is currently expected to reduce fiscal 2006 earnings by an amount consistent with the reductions shown in recent pro forma disclosures provided under the provisions of SFAS No. 123. Application of this pronouncement requires significant judgment regarding the assumptions used in the selected option pricing model, including stock price volatility and employee exercise behavior. Most of these inputs are either highly dependent on the current economic environment at the date of grant or forward-looking over the expected term of the award. As a result, the actual impact of adoption on future earnings could differ significantly from our current estimate.
Inventory Costs
In November 2004, the FASB issued SFAS No. 151, Inventory Costs—An Amendment of ARB No. 43, Chapter 4. SFAS No. 151 clarifies that abnormal amounts of idle facility expense, freight, handling costs and spoilage should be expensed as incurred and not included in overhead. Further, SFAS No. 151 requires that allocation of fixed and production facilities overhead to conversion costs should be based on normal capacity of the production facilities. The provisions in SFAS No. 151 are effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company is currently evaluating the impact of the adoption of this standard, but does not believe that the adoption of SFAS No. 151 will have a significant effect on its results of operations or financial position.
2) Supplemental Financial Information
Earnings Per Share:
Basic earnings per share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding. In the current year, the effect of stock options and convertible securities was anti-dilutive and was, therefore, not considered in determining diluted earnings per share. In the prior year, stock options and the 5% convertible senior subordinated debentures were determined to be dilutive to net income from continuing operations.
7
The table below shows the calculation components of both basic and diluted earnings per share for the fiscal quarters ended July 31, 2005 and July 24, 2004 (amounts in thousands):
|
| 14 Weeks Ended |
| 13 Weeks Ended |
| ||
|
| July 31, 2005 |
| July 25, 2004 |
| ||
|
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|
| ||
BASIC EARNINGS (LOSS) PER SHARE |
|
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Income (loss) from continuing operations |
| $ | (17,413 | ) | $ | 12,452 |
|
Loss from discontinued operations |
| (12,144 | ) | (6,900 | ) | ||
|
|
|
|
|
| ||
Net income (loss) |
| $ | (29,557 | ) | $ | 5,552 |
|
|
|
|
|
|
| ||
Weighted average shares outstanding for basic income (loss) per share |
| 56,136 |
| 54,670 |
| ||
|
|
|
|
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DILUTED EARNINGS (LOSS) PER SHARE |
|
|
|
|
| ||
|
|
|
|
|
| ||
Income (loss) from continuing operations |
| $ | (17,413 | ) | $ | 12,452 |
|
5% convertible senior subordinated debentures |
| — |
| 1,250 |
| ||
|
|
|
|
|
| ||
Diluted income (loss) from continuing operations |
| $ | (17,413 | ) | $ | 13,702 |
|
|
|
|
|
|
| ||
Loss from discontinued operations |
| $ | (12,144 | ) | $ | (6,900 | ) |
|
|
|
|
|
| ||
Net income (loss) |
| $ | (29,557 | ) | $ | 5,552 |
|
5% convertible senior subordinated debentures |
| — |
| 1,250 |
| ||
|
|
|
|
|
| ||
Diluted net income (loss) |
| $ | (29,557 | ) | $ | 6,802 |
|
|
|
|
|
|
| ||
Weighted average shares outstanding used for basic income (loss) per share |
| 56,136 |
| 54,670 |
| ||
Effect of dilutive employee stock options |
| — |
| 1,113 |
| ||
Effect of dilutive 5% convertible senior subordinated debentures |
| — |
| 8,503 |
| ||
Weighted average shares outstanding used for dilutive income (loss) per share |
| 56,136 |
| 64,286 |
|
Anti-dilutive securities outstanding as of the fiscal quarters ended July 31, 2005 and July 25, 2004 are as follows (amounts in thousands):
|
| 14 Weeks Ended |
| 13 Weeks Ended |
|
|
| July 31, 2005 |
| July 25, 2004 |
|
|
|
|
|
|
|
Options and warrants |
| 4,981 |
| 1,874 |
|
|
|
|
|
|
|
Convertible 6% subordinated debentures |
| 4,131 |
| 4,131 |
|
|
|
|
|
|
|
Convertible 5% senior subordinated debentures |
| 8,503 |
| — |
|
Common stock reserved for future issuance at July 31, 2005 was 17,615 shares.
8
Stock-Based Incentive Compensation:
The Company accounts for stock-based incentive compensation plans using the intrinsic method under which no compensation cost is recognized for stock option grants as the options are granted at fair market value at the date of grant. Had compensation costs for these plans been determined using the fair value method under which a compensation cost is recognized over the vesting period of the stock option based on its fair value at the date of grant (as determined using the Black-Scholes options pricing model), the Company’s net loss and loss per share would have been adjusted as indicated by the following table (amounts in thousands except per share data):
|
| 14 Weeks Ended |
| 13 Weeks Ended |
| |||
|
| July 31, 2005 |
| July 25, 2004 |
| |||
|
|
|
|
|
| |||
Net income (loss), as reported |
| $ | (29,557 | ) | $ | 5,552 |
| |
|
|
|
|
|
| |||
Deduct: | Total stock-based employee compensation expense determined under fair value-based method for all awards, net of related tax effects |
| 1,305 |
| 838 |
| ||
|
|
|
|
|
| |||
Pro forma net income (loss) |
| $ | (30,862 | ) | $ | 4,714 |
| |
|
|
|
|
|
| |||
Basic income (loss) per share, as reported |
| $ | (.53 | ) | $ | .10 |
| |
Basic income (loss) per share, pro forma |
| $ | (.55 | ) | $ | .09 |
| |
Diluted income (loss) per share, as reported |
| $ | (.53 | ) | $ | .11 |
| |
Diluted income (loss) per share, pro forma |
| $ | (.55 | ) | $ | .09 |
| |
Inventory Valuation:
Inventories are valued at the lower of cost (first-in, first-out) or market. Manufacturing cost includes materials, labor and manufacturing overhead. Retail finished goods are valued at intercompany purchase cost less intercompany manufacturing profit. Inventories consist of the following (amounts in thousands):
|
| July 31, 2005 |
| April 24, 2005 |
| ||
Manufacturing inventory- |
|
|
|
|
| ||
Raw materials |
| $ | 126,515 |
| $ | 139,520 |
|
Work in process |
| 41,438 |
| 40,736 |
| ||
Finished goods |
| 20,350 |
| 53,335 |
| ||
|
|
|
|
|
| ||
|
| $ | 188,303 |
| $ | 233,591 |
|
Product Warranty Reserve:
Fleetwood provides customers of our products with a warranty covering defects in material or workmanship for periods ranging from one to two years, with longer warranties on certain structural components. The Company records a liability based on the best estimate of the amounts necessary to settle future and existing claims on products sold as of the balance sheet date. Factors used in estimating the warranty liability include a history of units sold to customers, the average cost incurred to repair a unit and a profile of the distribution of warranty expenditures over the warranty period. Changes in the Company’s product warranty liability are as follows (amounts in thousands):
Balance at April 24, 2005 |
| $ | 65,143 |
|
Warranties issued and changes in the estimated liability during the period |
| 20,220 |
| |
Settlements made during the period |
| (20,677 | ) | |
|
|
|
| |
Balance at July 31, 2005 |
| $ | 64,686 |
|
9
Accumulated Other Comprehensive Income (Loss):
Comprehensive income (loss) includes all revenues, expenses, gains, and losses that affect the capital of the Company aside from issuing or retiring shares of stock. Net income or loss is one component of comprehensive income. Based on the Company’s current activities, the only other components of comprehensive income consist of foreign currency translation gains or losses and changes in the unrealized gains or losses on marketable securities.
The difference between net income (loss) and total comprehensive income (loss) is shown below (amounts in thousands):
|
| 14 Weeks Ended |
| 13 Weeks Ended |
| ||
|
| July 31, 2005 |
| July 25, 2004 |
| ||
Net income (loss) |
| $ | (29,557 | ) | $ | 5,552 |
|
Foreign currency translation |
| 184 |
| 710 |
| ||
Unrealized gain (loss) on investments |
| 21 |
| 2 |
| ||
|
|
|
|
|
| ||
Comprehensive income (loss) |
| $ | (29,352 | ) | $ | 6,264 |
|
Post-Retirement Health Care Benefits:
The Company provides health care benefits to certain retired employees from retirement age to when they become eligible for Medicare coverage. Employees become eligible for benefits after meeting certain age and service requirements. The cost of providing retiree health care benefits is actuarially determined and accrued over the service period of the active employee group.
The components of the net periodic post-retirement benefit cost are as follows (amounts in thousands):
|
| 14 Weeks Ended |
| 13 Weeks Ended |
| ||
|
| July 31, 2005 |
| July 25, 2004 |
| ||
Service cost - benefits earned during the year |
| $ | 150 |
| $ | 111 |
|
Interest cost on projected benefit obligation |
| 166 |
| 178 |
| ||
Recognized net actuarial gain or loss |
| 257 |
| 276 |
| ||
Amortization of unrecognized prior service cost |
| (185 | ) | (378 | ) | ||
|
|
|
|
|
| ||
Net periodic post-retirement benefit cost |
| $ | 388 |
| $ | 187 |
|
The total amount of employer’s contributions expected to be paid during the current fiscal year is $660,000.
10
3) Industry Segment Information
Information with respect to industry segments is shown below (amounts in thousands):
|
| 14 Weeks Ended |
| 13 Weeks Ended |
| ||
|
| July 31, 2005 |
| July 25, 2004 |
| ||
|
|
|
|
|
| ||
OPERATING REVENUES: |
|
|
|
|
| ||
|
|
|
|
|
| ||
RV Group |
| $ | 423,202 |
| $ | 485,703 |
|
Housing Group |
| 204,331 |
| 195,687 |
| ||
Supply Group |
| 13,730 |
| 14,060 |
| ||
Intercompany sales |
| (24,788 | ) | (36,021 | ) | ||
|
|
|
|
|
| ||
|
| $ | 616,475 |
| $ | 659,429 |
|
|
|
|
|
|
| ||
OPERATING INCOME (LOSS): |
|
|
|
|
| ||
|
|
|
|
|
| ||
RV Group |
| $ | (5,081 | ) | $ | 15,568 |
|
Housing Group |
| 5,020 |
| 6,063 |
| ||
Supply Group |
| 1,721 |
| 1,027 |
| ||
Corporate and Other |
| (2,553 | ) | (143 | ) | ||
|
|
|
|
|
| ||
|
| $ | (893 | ) | $ | 22,515 |
|
In addition to the third party revenues shown above, the Supply Group also generated the following intercompany revenues with the RV and Housing Groups:
|
| 14 Weeks Ended |
| 13 Weeks Ended |
| ||
|
| July 31, 2005 |
| July 25, 2004 |
| ||
|
|
|
|
|
| ||
Supply intercompany revenues |
| $ | 40,047 |
| $ | 49,466 |
|
4) Other, net
Other, net consists of restructuring costs relating to a reorganization of certain functions within the Company. These charges relate primarily to severance costs and are deducted in arriving at the operating loss.
5) Income Taxes
The current year’s tax provision results primarily from the effect of increasing the partial valuation allowance attributed to the Company’s deferred tax assets by $10.5 million. This change resulted from a reduction in the estimated benefit of various available tax strategies, which, if executed, would generate sufficient taxable income to realize the remaining net deferred tax asset. The primary reason for this reduction was an increase in the market value of our convertible trust preferred securities of Fleetwood Capital Trust I during the first fiscal quarter of fiscal 2006. Improved expectations of the Company’s outlook, the announcement of a proposed exchange offer transaction relating to the convertible trust preferred securities and some upward movement in the Company’s stock price, contributed to a lower discount from par value and diminished the magnitude of unrealized taxable gains in these securities at quarter-end. The Company determined that available tax strategies were sufficient to support a deferred tax asset of $64.3 million, a reduction of $10.5 million from fiscal year-end.
The provision also includes state tax liabilities in several states, with no offsetting tax benefits in other states, and foreign tax benefits.
11
6) Discontinued Operations
On March 30, 2005, the Company announced plans to exit its manufactured housing retail and financial services businesses. The action to exit these businesses was taken in order to stem losses sustained in the retail operations and transition the Company back to its traditional focus on manufacturing operations and contribute to the Company’s progress towards sustained profitability.
In July 2005, subsequent to the end of HomeOne’s June 30 fiscal quarter-end, substantially all of the manufactured housing loan portfolio was sold to an affiliate of Clayton Homes, Inc for proceeds of $74.7 million. Following the closing of the sale, HomeOne paid the outstanding balance on its warehouse line with Greenwich Capital Financial Products, Inc. (Greenwich) and terminated that facility. Outstanding borrowings under the line of credit were approximately $46.6 million, including a termination fee of $750,000, equal to one percent (1%) of the maximum amount of the credit line. The termination fee was pursuant to the terms of an amendment dated as of July 28, 2005 to the $75 million warehouse line of credit between HomeOne, HomeOne Funding I and Greenwich. The amendment also terminated Fleetwood’s guarantee of HomeOne’s obligations under the warehouse line. The net proceeds from the transaction of $28.2 million are shown as a liability of the Company at July 31, 2005 in other current liabilities, since the sale occurred subsequent to HomeOne’s fiscal quarter-end.
In August 2005, substantially all of the assets of the retail business were also sold to affiliates of Clayton Homes, Inc. The aggregate sale price was $74 million, subject to certain adjustments as set forth in the purchase and closing agreements, including a post-closing adjustment to reflect the actual amount of inventory on hand at the closing date. A portion of the purchase price, in the amount of $8 million, was subject to a hold back pending finalization of the amount and satisfaction of certain conditions. In addition, the Company anticipates making a payment of approximately $6 million relating to customer deposit liabilities that have been assumed by the buyer. Upon the closing of the transaction, the Company paid off its retail flooring facilities, in the aggregate amount of $31.3 million. Settlement of remaining working capital balances is expected to consume approximately $10 million of additional cash. An additional $1.8 million was received from the buyer as an adjustment to the proceeds for the manufactured housing loan portfolio.
After considering repayment of the portion of the Company’s secured credit facility supported by the assets of the retail housing business in the amount of $48.2 million, these transactions are expected to be approximately cash neutral.
Assets and liabilities at the balance sheet dates that were expected to be sold or extinguished have been reclassified to current assets and liabilities from discontinued operations, respectively, and consist of the following (amounts in thousands):
|
| July 31, 2005 |
| April 24, 2005 |
| ||
|
|
|
| ||||
Current assets from discontinued operations: |
|
|
|
|
| ||
Inventories |
| $ | 69,074 |
| $ | 74,000 |
|
Property, plant and equipment, net |
| — |
| 916 |
| ||
Finance loans receivable |
| 76,437 |
| 70,868 |
| ||
|
|
|
|
|
| ||
|
| $ | 145,511 |
| $ | 145,784 |
|
Current liabilities from discontinued operations: |
|
|
|
|
| ||
Customer deposits |
| $ | 5,476 |
| $ | 6,345 |
|
Retail flooring liabilities |
| 32,607 |
| 37,608 |
| ||
Warehouse line of credit |
| 42,942 |
| 40,749 |
| ||
|
|
|
|
|
| ||
|
| $ | 81,025 |
| $ | 84,702 |
|
12
The carrying value of assets from discontinued operations has been reduced by additional non-cash impairment charges in the first quarter of fiscal 2006 based on expectations of proceeds from the subsequent sale. Operating results of these businesses, including impairment charges, severance costs and one-time termination benefits are classified as discontinued operations for all periods presented. Discontinued operations, net consist of the following (amounts in thousands):
|
| 14 Weeks Ended |
| 13 Weeks Ended |
| ||
|
| July 31, 2005 |
| July 25, 2004 |
| ||
|
|
|
|
|
| ||
Revenues |
| $ | 71,268 |
| $ | 68,330 |
|
Net income (loss) before charges: |
|
|
|
|
| ||
Retail |
| $ | (7,134 | ) | $ | (6,465 | ) |
Financial services |
| 208 |
| (435 | ) | ||
Impairment charges and termination benefits: |
|
|
|
|
| ||
Loss on financial services long-lived assets |
| 926 |
| — |
| ||
Severance costs |
| 1,800 |
| — |
| ||
One-time termination benefits |
| 1,000 |
| — |
| ||
Finance loans receivable write-down |
| 1,492 |
| — |
| ||
|
|
|
|
|
| ||
Discontinued operations, net |
| $ | (12,144 | ) | $ | (6,900 | ) |
The net loss before impairment charges includes interest expense on the retail flooring liability and the warehouse line of credit, which were repaid upon sale of their related collateral, of $1.2 million and $0.6 million, in fiscal quarters ended July 2005 and 2004, respectively. The Company will incur ongoing operating losses until the disposition of the businesses is complete. Of the $2.8 million of severance costs and one-time termination benefits accrued, none had been paid by quarter-end. Including impairment charges that were recorded in fiscal 2005, the total impairment costs and termination benefits recorded through July 31, 2005 were $56 million. Additional costs and charges could be incurred, including one-time termination costs and contract termination costs are currently estimated to be $1 million to 3 million. Due to the significant operating losses incurred by our discontinued operations, no benefit for income taxes has been provided for their operating losses.
7) Short-term Borrowings
Secured Credit Facility:
During May 2004, our credit facility was renewed and extended until July 31, 2007. In March 2005, we entered into an amendment to the facility to provide greater borrowing flexibility by raising the overall limit on borrowings from $150 million to $175 million, with an additional seasonal increase from October to April to $200 million. In addition, a limitation on borrowing against inventory within our asset borrowing base was raised from $85 million to $110 million, with a seasonal increase to $135 million for the December through April time period. The amendment also reset the designated cumulative EBITDA covenant requirements that are invoked in the event that average monthly liquidity, defined as cash, cash equivalents and unused borrowing capacity, falls below $60 million within the borrowing subsidiaries or $90 million including the parent company. The interest rate for revolving loans under the line was increased slightly, but may be reduced to prior levels in future quarters based on improvements in a fixed charge coverage ratio.
In May 2005, the borrowing base was supplemented by $15 million of additional real estate collateral provided to the bank group. In July 2005, the agreement governing the credit facility was further amended and restated, to incorporate prior amendments and increase total loan commitments to accommodate the previous $15 million addition to the revolver borrowing base and fund a new term loan collateralized by real estate in the amount of $22 million. These additions raise total loan commitments to $212 million from May through November, with a seasonal uplift to $237 million from December through April. The loan commitments for both the addition to the revolver and the term loan decrease on the first day of each fiscal quarter beginning October 31, 2005 in the amounts of $750,000 and $785,715, respectively.
Borrowings are secured by receivables, inventory and certain other assets, primarily real estate and are used for working capital and general corporate purposes.
The balance outstanding on the revolver as reflected on the balance sheet at the end of fiscal July 2005 and 2004 in other short-term borrowings was $9.0 million and $1.6 million, respectively. The revolving credit line bears interest, at our option, at variable rates based on either Bank of America’s prime rate or one, two or three month LIBOR. As amended, the facility is secured by virtually all of the Company’s receivables and a significant portion of its inventories and personal property, plus $108 million in appraised value of real estate. Advances under the revolving credit line are limited by the available borrowing
13
base of eligible accounts receivable and inventories. The borrowing base is revised weekly for changes in receivables and monthly for changes in inventory balances. At July 31, 2005, the borrowing base totaled $195 million. After consideration of collateral reserves of $1.1 million, $66.3 million in standby letters of credit and the outstanding borrowings, unused borrowing capacity was approximately $93.8 million.
Under the senior credit agreement, Fleetwood Enterprises, Inc. is a guarantor of the borrowings of Fleetwood Holdings, Inc. (FHI) and Fleetwood Retail Corp. (FRC). FHI includes most of the wholly owned manufacturing subsidiaries. At quarter-end, only the FRC parent company and seven of the retail subsidiaries were borrowers under the loan and covered under the guarantee. In addition, Fleetwood Enterprises, Inc. guaranteed FRC’s floorplan obligations to Textron and Bombardier Capital, Inc. pursuant to FRC’s wholesale financing agreements with the two flooring institutions. Subsequent to quarter-end, substantially all of the operating assets of FRC were sold to affiliates of Clayton Homes, Inc. and the portion of the senior credit agreement supported by assets of FRC in the amount of $48.2 million was repaid in full, along with the floorplan obligations to Textron and Bombardier Capital, Inc.
8) Convertible Subordinated Debentures
As discussed further in the Company’s Annual Report on Form 10-K, the Company owned three Delaware business trusts that each issued a separate series of optionally redeemable convertible trust preferred securities convertible into shares of the Company’s common stock. The combined proceeds from the sale of the securities and from the purchase by the Company of the common shares of the business trusts were tendered to the Company in exchange for a separate series of convertible subordinated debentures. These debentures represented the sole assets of the business trusts. Two of the trusts have now been dissolved and the debentures issued by the remaining trust, Fleetwood Capital Trust (Trust I) are presented as a long-term liability in the accompanying balance sheets.
Distributions on the remaining securities held by Trust I are payable quarterly in arrears at an annual rate of 6 percent. The Company has the right to elect to defer distributions for up to 20 consecutive quarters under the trust indenture governing the existing 6% convertible trust preferred securities. When the Company defers a distribution on the 6% convertible trust preferred securities, it is prevented from declaring or paying dividends on its common stock during the period of the deferral. In light of the business environment and recent operating results, the Company presently intends to continue to defer the distribution on the Trust I Securities through August 2006, which would be the last of these consecutive quarterly distributions that could be deferred under the terms of the governing instruments. The total amount deferred, including accrued interest, was $53.4 million as of July 31, 2005. The entire amount deferred would become due and payable on or before the November 2006 distribution date. The amount due at the time would be $71 million.
9) Commitments and Contingencies
Repurchase Commitments:
Producers of recreational vehicles and manufactured housing customarily enter into repurchase agreements with lending institutions that provide wholesale floorplan financing to independent dealers. These agreements generally provide that, in the event of a default by a dealer in its obligation to these credit sources, the Company will repurchase vehicles or homes sold to the dealer that have not been re-sold to retail customers. With most repurchase agreements the Company’s obligation ceases when the amount for which the Company is contingently liable to the lending institution has been outstanding for more than 12, 18 or 24 months, depending on the terms of the agreement. The contingent liability under these agreements approximates the outstanding principal balance owed by the dealer for units subject to the repurchase agreement, less any scheduled principal payments waived by the lender. Although the maximum potential contingent repurchase liability approximated $180 million for inventory at manufactured housing dealers and $399 million for inventory at RV dealers as of July 31, 2005, the risk of loss is reduced by the potential resale value of any products that are subject to repurchase, and is spread over numerous dealers and financial institutions. The gross repurchase obligation will vary depending on the season and the level of dealer inventories. Typically, the fiscal third quarter repurchase obligation is greater than other periods due to higher dealer inventories. The RV repurchase obligation is significantly greater than the manufactured housing obligation due to motor homes having a higher average selling price per unit and dealers holding more units in inventory. Past losses under these agreements have not been significant and lender repurchase demands have been funded out of working capital. Through the first three months of fiscal year 2006, the Company repurchased $775,000 of product compared to $347,000 for the same period in the prior year, with a repurchase loss of $253,000 incurred this year compared to a repurchase loss of $111,000 in the prior year.
Other:
As of July 31, 2005, the Company was a party to 12 limited guarantees, aggregating $4.7 million, to certain obligations of certain retailers to floorplan lenders and an additional two unsecured guarantees aggregating $3.5 million for other obligations.
14
Fleetwood is also a party to certain guarantees that relate to its credit arrangements. These are more fully discussed in footnote 7 and in the Company’s fiscal 2005 Annual Report on Form 10-K.
Legal Proceedings:
The Company is regularly involved in legal proceedings in the ordinary course of our business. Because of the uncertainties related to the outcome of the litigation and range of loss on cases other than breach of warranty, the Company is generally unable to make a reasonable estimate of the liability that could result from an unfavorable outcome. In other cases, including products liability and personal injury cases, the Company prepares estimates based on historical experience, the professional judgment of our legal counsel, and other assumptions that are believed to be reasonable. As additional information becomes available, the Company reassesses the potential liability related to pending litigation and revises the related estimates. Such revisions and any actual liability that greatly exceed the Company’s estimates could materially impact our results of operations and financial position.
The Company filed a complaint in state court in Kansas, in the 18th Judicial District, District Court, Sedgewick County, Civil Department, against The Coleman Company, Inc. (Coleman) in connection with a dispute over the use of the “Coleman” brand name. The lawsuit sought declaratory and injunctive relief. On June 6, 2003, Coleman filed an answer and counterclaimed alleging various counts, including breach of contract and trademark infringement. On November 17, 2004, after a hearing, the Court granted our request for a permanent injunction against Coleman prohibiting Coleman from licensing the Coleman name for recreational vehicles to companies other than Fleetwood. At the conclusion of trial, on December 16, 2004, the jury awarded monetary damages against Fleetwood on Coleman’s counterclaim in the amount of $5.2 million. On January 21, 2005, the Court granted Coleman’s request for treble damages, making the total amount of the award approximately $14.6 million. A charge to record this award was reflected in the Company’s results for the third fiscal quarter of 2005. Payment will be stayed pending Fleetwood’s appeal, which has been filed. Pending the appeal, Fleetwood was required to post a letter of credit for $18 million, representing the full amount of the judgment plus an allowance for attorneys’ fees and interest. The Company will pursue all available appellate remedies.
15
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Special Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains statements that may constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (Exchange Act). Forward-looking statements regarding future events and the future performance of the Company involve risks and uncertainties that could cause actual results to differ materially. These risks and uncertainties include, without limitation, the following items:
• the cyclical nature of both the manufactured housing and recreational vehicle industries;
• ongoing weakness in the manufactured housing market;
• continued acceptance of Fleetwood’s products;
• the potential impact on demand for Fleetwood’s products as a result of declining consumer confidence;
• the effect of global tensions on consumer confidence;
• expenses and uncertainties associated with the manufacturing and introduction of new products;
• the future availability of manufactured housing retail financing as well as housing and RV wholesale financing;
• the price of gasoline, particularly as it might impact retail recreational vehicle sales;
• availability and pricing of raw materials;
• changes in retail inventory levels in the manufactured housing and recreational vehicle industries;
• competitive pricing pressures;
• the ability to attract and retain quality dealers, executive officers and other personnel;
• the Company’s ability to successfully meet its ongoing obligations with respect to Section 404 of the Sarbanes-Oxley Act; and
• the Company’s ability to obtain financing needed in order to execute its business strategies.
Although management believes that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Undue reliance should not be placed on these forward-looking statements, which speak only as of the date of this report. Fleetwood undertakes no obligation to publicly release the results of any revisions to these forward-looking statements that may arise from changing circumstances or unanticipated events. Additionally, other risks and uncertainties are described in our Annual Report on Form 10-K for the fiscal year ended April 24, 2005, filed with the Securities and Exchange Commission, under “Item 1. Business,” including the section therein entitled “Risks Relating to Our Business,” and “Item 7. Management’s Discussion and Analysis of Results of Operations and Financial Condition,” including the section therein entitled “Business Outlook.”
Overview
Fleetwood is one of the nation’s leaders in producing both recreational vehicles and manufactured housing. The RV Group or segment consists of the motor home, travel trailer and folding trailer divisions. The Housing Group or segment consists of the wholesale manufacturing operation.
In fiscal 2005, we sold 50,746 recreational vehicles. In calendar 2004, we had a 15.3 percent share of the overall recreational vehicle market, consisting of a 17.9 percent share of the motor home market, an 11.7 percent share of the travel trailer market and a 38.7 percent share of the folding trailer market.
In fiscal 2005, we shipped 23,962 manufactured homes, and were the second largest producer of HUD-Code homes in the United States in terms of units sold. In calendar 2004, we had a 17.6 percent share of the manufactured housing wholesale market.
Our business began in 1950 producing travel trailers and quickly evolved to what are now termed manufactured homes. We re-entered the recreational vehicle business with the acquisition of a travel trailer operation in 1964. Our manufacturing activities are conducted in 16 states within the U.S., and to a much lesser extent in Canada. We distribute our manufactured products primarily through a network of independent dealers throughout the United States and Canada. In fiscal 1999, we entered the manufactured housing retail business through a combination of key acquisitions and internal development of new retail sales centers. We later established a financial services subsidiary to provide finance and insurance products to the retail operation. In March 2005, we announced that the retail and finance businesses were to be sold so we could focus on our core businesses, RV and housing manufacturing, and in July and August 2005, the majority of the assets of these businesses were sold.
16
Critical Accounting Policies
Our financial statements are prepared in accordance with U.S. generally accepted accounting principles. This requires us to make estimates and assumptions that affect the amounts reported in the financial statements and notes. We evaluate these estimates and assumptions on an ongoing basis and use historical experience factors and various other assumptions that we believe are reasonable under the circumstances. The results of these estimates form the basis for making judgments about the carrying values of assets and liabilities. Actual results could differ from these estimates under different assumptions or conditions.
The following is a list of the accounting policies that we believe reflect our more significant judgments and estimates, and that could potentially result in materially different results under different assumptions and conditions.
Revenue Recognition
Revenue for manufacturing operations is generally recorded when all of the following conditions have been met:
• an order for a product has been received from a dealer;
• written or verbal approval for payment has been received from the dealer’s flooring institution;
• a common carrier signs the delivery ticket accepting responsibility for the product as agent for the dealer; and
• the product is removed from Fleetwood’s property for delivery to the dealer who placed the order.
Most manufacturing sales are made on cash terms, with most dealers financing their purchases under flooring arrangements with banks or finance companies. Products are not ordinarily sold on consignment; dealers do not ordinarily have the right to return products; and dealers are typically responsible for interest costs to floorplan lenders. On average, we receive payments from floorplan lenders on products sold to independent dealers within 15 days of the invoice date.
Warranty
Fleetwood provides customers of our products with a warranty covering defects in material or workmanship for periods ranging from one to two years, with longer warranties on certain structural components. We record a liability based on our best estimate of the amounts necessary to settle future and existing claims on products sold as of the balance sheet date. Factors we use in estimating the warranty liability include a history of units sold to customers, the average cost incurred to repair a unit and a profile of the distribution of warranty expenditures over the warranty period. A significant increase in dealer shop rates, the cost of parts or the frequency of claims could have a material adverse impact on our operating results for the period or periods in which such claims or additional costs materialize.
Insurance Reserves
Generally, we are self-insured for health benefit, workers’ compensation, products liability and personal injury insurance. Under these plans, liabilities are recognized for claims incurred (including those incurred but not reported), changes in the reserves related to prior claims and an administration fee. At the time a claim is filed, a liability is estimated to settle the claim. The liability for workers’ compensation claims is guided by state statute. Factors considered in establishing the estimated liability for products liability and personal injury claims are the nature of the claim, the geographical region in which the claim originated, loss history, severity of the claim, the professional judgment of our legal counsel, and inflation. Any material change in the aforementioned factors could have an adverse impact on our operating results. We maintain excess liability insurance with outside insurance carriers to minimize our risks related to catastrophic claims.
Deferred Taxes
Deferred tax assets and liabilities are determined based on temporary differences between income and expenses reported for financial reporting and tax reporting. We are required to record a valuation allowance to reduce our net deferred tax assets to the amount that we believe is more likely than not to be realized. In assessing the need for a valuation allowance, we historically have considered all positive and negative evidence, including scheduled reversals of deferred tax liabilities, prudent and feasible tax planning strategies, projected future taxable income and recent financial performance. Since we have had cumulative losses in recent years, the accounting guidance suggests that we should not look to future earnings to support the realizability of the net deferred tax asset. As a result, we concluded that a partial valuation allowance against our deferred tax asset was appropriate. Accordingly, beginning in fiscal 2003, the deferred tax asset was partially reduced by a valuation allowance with a corresponding adjustment to the provision for income taxes. The remaining book value of the net deferred tax asset was supported by the availability of various tax strategies, which, if executed, were expected to generate sufficient taxable income to realize the remaining asset. In the first quarter of fiscal 2006, the Company determined that the estimated benefits from available tax strategies were sufficient to support a deferred tax asset of $64.3 million and recorded an adjustment to the valuation allowance of $10.5 million with a corresponding change to the provision to income taxes. The
17
primary reason for this reduction was an increase in the market value of our convertible trust preferred securities of Fleetwood Capital Trust I. Improved expectations of the Company’s outlook, the announcement of a proposed exchange offer transaction relating to the convertible trust preferred securities and some upward movement in our stock price contributed to a lower discount from par value and diminished the magnitude of unrealized taxable gains in these securities at quarter-end. We continue to believe that the combination of all positive and negative factors will enable us to realize the full value of the deferred tax assets; however, it is possible that the extent and availability of tax planning strategies will change over time and impact this evaluation. If, after future assessments of the realizability of our deferred tax assets, we determine an adjustment is required, we would record the provision or benefit in the period of such determination.
Legal Proceedings
We are regularly involved in legal proceedings in the ordinary course of our business. Because of the uncertainties related to the outcome of the litigation and range of loss on cases other than breach of warranty, we are generally unable to make a reasonable estimate of the liability that could result from an unfavorable outcome. In other cases, including products liability (discussed above) and personal injury cases, we prepare estimates based on historical experience, the professional judgment of our legal counsel, and other assumptions that we believe are reasonable. As additional information becomes available, we reassess the potential liability related to pending litigation and revise our estimates. Such revisions and any actual liability that greatly exceeds our estimates could materially impact our results of operations and financial position.
Repurchase Commitments
Producers of recreational vehicles and manufactured housing customarily enter into repurchase agreements with lending institutions that provide wholesale floorplan financing to independent dealers. The Company’s agreements generally provide that, in the event of a default by a dealer in its obligation to these credit sources, Fleetwood will repurchase product. With most repurchase agreements, our obligation ceases when the amount for which we are contingently liable to the lending institution has been outstanding for more than 12, 18 or 24 months, depending on the terms of the agreement. The contingent liability under these agreements approximates the outstanding principal balance owed by the dealer for units subject to the repurchase agreement less any scheduled principal payments waived by the lender. Although the maximum potential contingent repurchase liability approximated $180 million for inventory at manufactured housing dealers and $399 million for inventory at RV dealers as of July 31, 2005, the risk of loss is reduced by the potential resale value of any products that are subject to repurchase, and is spread over numerous dealers and financial institutions. The gross repurchase obligation will vary depending on the season and the level of dealer inventories. Typically, the fiscal third quarter repurchase obligation will be greater than other periods due to high dealer inventories. The RV repurchase obligation is significantly more than the manufactured housing obligation due to motor homes having a higher average selling price per unit and dealers holding more units in inventory. Past losses under these agreements have not been significant and lender repurchase demands have been funded out of working capital. In the past three fiscal years we have had the following repurchase activity (dollars in millions):
|
| 14 Weeks Ended |
| 13 Weeks Ended |
| Fiscal Years |
| ||||||
|
| July 31, 2005 |
| July 25, 2004 |
| 2005 |
| 2004 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Units |
| 21 |
| 20 |
| 174 |
| 177 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Repurchase amount |
| $ | 0.8 |
| $ | 0.3 |
| $ | 6.3 |
| $ | 3.7 |
|
|
|
|
|
|
|
|
|
|
| ||||
Loss recognized |
| $ | 0.3 |
| $ | 0.1 |
| $ | 1.2 |
| $ | 0.6 |
|
18
Results of Operations
The following table sets forth certain statements of operations data expressed as a percentage of net sales for the periods indicated:
|
| 14 Weeks Ended |
| 13 Weeks Ended |
|
|
| July 31, 2005 |
| July 25, 2004 |
|
|
|
|
|
|
|
Net sales |
| 100.0 | % | 100.0 | % |
Cost of products sold |
| 83.8 |
| 81.6 |
|
|
|
|
|
|
|
Gross profit |
| 16.2 |
| 18.4 |
|
Operating expenses |
| (15.6 | ) | (15.0 | ) |
Other, net |
| (0.7 | ) | — |
|
|
|
|
|
|
|
Operating income (loss) |
| (0.1 | ) | 3.4 |
|
Other income (expense) |
|
|
|
|
|
Investment income |
| 0.1 |
| 0.1 |
|
Interest expense |
| (1.2 | ) | (1.1 | ) |
Other, net |
| — |
| (0.4 | ) |
Income (loss) from continuing operations before income taxes |
| (1.2 | ) | 2.0 |
|
Provision for income taxes |
| (1.6 | ) | (0.1 | ) |
|
|
|
|
|
|
Income (loss) from continuing operations |
| (2.8 | ) | 1.9 |
|
Discontinued operations |
| (2.0 | ) | (1.1 | ) |
|
|
|
|
|
|
Net income (loss) |
| (4.8 | )% | 0.8 | % |
Current Quarter Compared to Corresponding Quarter of Last Year
Consolidated Results:
The following table presents consolidated net sales by segment for the periods ended July 31, 2005 and July 25, 2004 (amounts in thousands):
|
| 14 Weeks Ended |
| 13 Weeks Ended |
|
|
|
|
| |||||||
|
|
|
| % of |
|
|
| % of |
| Change |
| |||||
|
| July 31, 2005 |
| Net Sales |
| July 25, 2004 |
| Net Sales |
| Amount |
| % |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
RV Group |
| $ | 423,202 |
| 68.7 |
| $ | 485,703 |
| 73.7 |
| $ | (62,501 | ) | (12.9 | ) |
Housing Group |
| 204,331 |
| 33.1 |
| 195,687 |
| 29.7 |
| 8,644 |
| 4.4 |
| |||
Supply Group |
| 13,730 |
| 2.2 |
| 14,060 |
| 2.1 |
| (330 | ) | (2.3 | ) | |||
Intercompany Sales |
| (24,788 | ) | (4.0 | ) | (36,021 | ) | (5.5 | ) | 11,233 |
| (31.2 | ) | |||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Net sales |
| $ | 616,475 |
| 100.0 |
| $ | 659,429 |
| 100.0 |
| $ | (42,954 | ) | (6.5 | ) |
Consolidated revenues fell 6.5 percent based on a 12.9 percent reduction of sales in the RV Group, partially offset by 4.4 percent growth in Housing Group sales. The Housing Group has continued to build market share, and certain regions of the country are performing well, although the central region and parts of the Southeast are experiencing significant year over year declines. The RV Group suffered declines in both motor home and towable sales, generally reflecting a slowdown in industry sales, with further erosion from market share declines for towable products.
Gross margin weakened from 18.4 percent to 16.2 percent of sales due, in part, to a shift towards lower-margin travel trailer products, a loss of operating leverage caused by lower RV sales, especially in the travel trailer division, with some offset from improvements in the Housing Group.
Operating expenses, which include selling, warranty and service, and general and administrative expenses, decreased by $2.1 million in the first quarter, but increased as a percentage of sales from 15.0 percent to 15.6 percent. The decrease from the prior year was primarily due to lower selling and warranty and service expenses relating to both the RV and Housing businesses, offset by a small increase in general and administrative costs.
19
Other operating expenses in the current quarter of $4.3 million consisted of restructuring costs, primarily severance, related to changes in the Company’s organization structure.
The resulting loss from operations for the first quarter was $893,000 compared to income of $22.5 million in the prior year.
Other expense, net, consists of interest income and expense, which decreased $2.8 million in the first quarter to $6.4 million.
The current quarter tax provision resulted primarily from the effect of increasing the partial valuation allowance attributed to the Company’s deferred tax assets by $10.5 million. This change resulted from a reduction in the estimated benefit of various available tax strategies, which, if executed, would generate sufficient taxable income to realize the remaining net deferred tax asset. The provision also includes state tax liabilities in several states, with no offsetting tax benefits in other states, and foreign tax benefits.
Recreational Vehicles:
The following table presents RV Group net sales by division for the periods ended July 31, 2005 and July 25, 2004 (amounts in thousands):
|
| 14 Weeks Ended |
| 13 Weeks Ended |
|
|
|
|
| |||||||
|
|
|
| % of |
|
|
| % of |
| Change |
| |||||
|
| July 31, 2005 |
| Net Sales |
| July 25, 2004 |
| Net Sales |
| Amount |
| % |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Motor homes |
| $ | 297,790 |
| 70.4 |
| $ | 317,913 |
| 65.5 |
| $ | (20,123 | ) | (6.3 | ) |
Travel trailers |
| 104,835 |
| 24.8 |
| 146,414 |
| 30.1 |
| (41,579 | ) | (28.4 | ) | |||
Folding trailers |
| 20,577 |
| 4.8 |
| 21,376 |
| 4.4 |
| (799 | ) | (3.7 | ) | |||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Net sales |
| $ | 423,202 |
| 100.0 |
| $ | 485,703 |
| 100.0 |
| $ | (62,501 | ) | (12.9 | ) |
Recreational vehicle sales decreased by 12.9 percent when compared to last year’s July quarter. Sales incentives, which are deducted from revenues, decreased by $0.8 million on a year-over-year basis but increased as a percentage of sales in order to assist with model year changes and to facilitate targeted reductions to finished goods inventories during the quarter.
Motor home sales decreased by 6.3 percent to $297.8 million compared to $317.9 million in the prior year. Calendar retail market share for the first half of 2005 was 17.1 percent, down slightly from 17.3 percent for the same period in the prior year and dealer inventories of motor homes have stabilized. Travel trailer sales declined by 28.4 percent to $104.8 million versus $146.4 million in the prior year. Market share in the travel trailer segment has decreased to 9.0 percent for the first half of calendar 2005 compared to 12.0 percent in the prior year. The Company has lost market share as a result of competitive product offerings and erosion in dealer confidence regarding quality and service capability. New model introductions were made during the first fiscal quarter so dealer acceptance of these units will not become apparent until later in the calendar year. Changes include ongoing rationalization of floorplans and options that should reduce product complexity and improve manufacturing efficiencies. Additionally, we are returning responsibility for service operations to factory locations. Folding trailer sales declined by 3.7 percent from the prior year to $20.6 million due to ongoing industry weakness in this segment.
Gross margin decreased from 14.9 percent to 11.2 percent. Margin pressure resulted from lower sales volumes compared to the prior year, but were further impacted by production levels that were intentionally lower than sales in order to reduce finished goods inventories to normal levels. Other factors contributing to lower margins included a change in mix towards travel trailer products with higher materials costs, as well as changes in production compensation arrangements and model year changeover activities that unfavorably impacted labor costs.
Operating expenses for the RV Group were $4.2 million lower but increased as a percentage of sales from 11.6 percent in the prior year to 12.4 percent for the current quarter. The dollar decrease was due to lower selling and warranty costs on reduced volumes coupled with a reduction to certain product development initiatives and variable compensation costs. The RV Group incurred a $5.1 million operating loss compared to a $15.6 million profit in the prior year. Motor home operating income decreased to $5.2 million in the first quarter as a result of lower sales. The travel trailer division incurred an operating loss of $8.7 million and folding trailers division had an operating loss of $1.6 million.
20
Manufactured Housing:
The following table presents Housing Group net sales for the periods ended July 31, 2005 and July 25, 2004 (amounts in thousands):
|
| 14 Weeks Ended |
| 13 Weeks Ended |
| Change |
| |||||
|
| July 31, 2005 |
| July 25, 2004 |
| Amount |
| % |
| |||
|
|
|
|
|
|
|
|
|
| |||
Wholesale sales |
| $ | 204,331 |
| $ | 195,687 |
| $ | 8,644 |
| 4.4 |
|
Results for the Housing Group consist of factory wholesale revenues, including sales to our retail business. Transactions between these operating divisions are eliminated in consolidation, including any intercompany profit in Company-owned retail stores. Revenues for the retail business are included in the results of discontinued operations.
Housing Group revenues for the quarter increased by 4.4 percent to $204.3 million, and included $24.8 million of intercompany sales to Company-owned retail stores. Manufactured homes are sold as single-section or multi-section units. Multi-section units typically are built in two, three or four sections. The improvement in sales reflects higher average selling price per home offset by slightly lower unit volume. Manufacturing unit volume decreased by 3.4 percent to 5,858 homes. The total number of sections sold also decreased by 1.3 percent from last year to 10,409. The Company’s market share, based on wholesale shipments, for the first half of calendar 2005 increased to 17.2 percent from 16.9 percent in the same period last year. Market conditions in certain regions of the country, notably California and Arizona, are performing well. Some of the traditional manufactured housing markets, such as Texas and parts of the Southeast, continued to deteriorate and the previously strong Florida market also showed signs of slowing down. Despite modest improvements in Company sales driven primarily by higher average selling price, the underlying manufactured housing market continued to be adversely affected by limited availability of retail financing and competition from repossessed units, as well as competition from conventional builders due to low mortgage rates.
Gross profit margins increased to 23.1 percent from 22.9 percent. A shift to more complex higher margin products improved material cost percentages while labor costs remained flat as a percentage of sales. Operating expenses included other expenses of $3 million relating to restructuring charges, primarily severance costs. The restructuring reflects the realignment of the sales and service organizations and eliminates certain management positions. All other operating expenses remained consistent with prior year levels.
The Housing Group operating profit of $5.0 million was $1.0 million less than the prior year since the improvement to gross profit was more than offset by the restructuring charges.
Supply Operations:
The Supply Group contributed gross first quarter revenues of $53.8 million compared to $63.5 million a year ago, of which $13.7 million and $14.1 million, respectively, were sales to third party customers. Operating income increased from $1.0 million in the prior year to $1.7 million in the current quarter.
Discontinued Operations:
In March 2005, we announced our intention to exit the manufactured housing retail and financial services businesses. These businesses are presented as discontinued operations in the Company’s financial statements. Revenues from discontinued operations increased 4.3 percent to $71.3 million in the first quarter of fiscal 2006 from $68.3 million from the prior year. Unit sales for the retail operation were down 8 percent to 1,089 homes. The average unit price increased by 3 percent to $61,030 for the current year due to the sale of more multi-section homes and higher prices. Operating losses from discontinued operations were $11 million in the current quarter, before interest expense on inventory financing, compared to an operating loss of $6.3 million in the comparable quarter last year. The current quarter loss includes additional impairment charges of $2.4 million to record loans held-for-sale at their estimated fair value less costs to sell and to write-down fixed assets. Additionally, severance costs and one-time termination benefits totaling $2.8 million were recognized. Interest expense on inventory financing increased slightly from $0.5 million to $0.7 million and interest expense on the warehouse line increased from $82,000 to $572,000.
Subsequent to the June 30 fiscal quarter-ends of these businesses, substantially all of their operating assets were sold to affiliates of Clayton Homes, Inc. These transactions are discussed further in Note 6 of the Condensed Consolidated Financial Statements and under Liquidity and Capital Resources in this Part II, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in this Report.
21
Business Outlook
Industry motor home sales have slowed from last year’s record pace but should still compare favorably to other years in recent history. Recent increases in gasoline prices and rising interest rates have had a negative impact on consumer confidence and created uncertainty surrounding the overall market. Dealer and wholesale inventory levels appear to be adjusting to current retail sales volumes. Underlying retail unit sales have also slowed and were down 8.4 percent in the first half of calendar 2005 compared to the same period in the prior year. Our market share decreased only slightly during this period and we believe that the potential for inroads in 2005 has been generated by innovations such as the full-wall slide technology and the resumption of Class C motor home production in the eastern part of the U.S., enabling more cost-effective distribution. Our own inventories of finished goods are now at normalized levels and production rates appear to be in line with underlying retail sales.
Travel and folding trailer shipments have continued recent trends of lower sales on a year-over-year basis. Industry travel trailer retail sales are flat in the first half of the calendar year compared to the prior year and indications are that reductions for the full year are likely. Our market share has deteriorated 25.4 percent over this same period, generally as a result of less competitive product offerings that have caused some contraction in our distribution network in certain markets. We have been unable to consistently balance content with value and have often exceeded price points sought by customers. These issues have been compounded by excess capacity, as well as products and floorplans that have been overly complex to manufacture, contributing to additional warranty costs. These factors have adversely affected the strength of our dealer distribution, particularly in the central part of the country. Initiatives to reverse these trends have been underway for some time but progress from these actions has not materialized as soon as we had expected. New offerings in the ultralite and hybrid classes, as well as introductions of redesigned core Prowler, Wilderness and Terry products for the 2006 model year, are being released throughout 2005. Development of new cost-competitive feature-rich products is also underway. Quality processes have been overhauled for the entire RV business and although improvements are already apparent in our finished products, the financial benefits will only be realized over the longer term. Finally, we have renewed our focus on dealer development activities in order to address a decline in the strength of our distribution network for travel trailers, especially in the central United States.
Our goal is to restore manufacturing efficiencies within the travel trailer division in the near term and we believe that our efforts, over the longer term, will be rewarded by improved shipments and a rebound in market share. Favorable demographics suggest sustainable growth will likely be realized for our RV product line through the end of the decade as baby boomers begin to reach the age brackets that historically have accounted for the bulk of retail RV sales. Additionally, younger buyers are also becoming interested in the RV lifestyle.
The manufactured housing market entered into a steep decline that began in 1999 before stabilizing over the most recent two years. Competition from repossessed homes, relatively high retail interest rates for manufactured housing, more stringent lending standards and a shortage of retail financing have adversely affected the industry. Industry home shipments for the first half of calendar 2005 were up 3.2 percent compared to the prior year. Overall, the industry seems to have stabilized, but market conditions by region are mixed. Some markets in the West, typically those that were less affected by high repossession levels and retail financing losses, are showing signs of a sustained recovery, while more traditional manufactured housing markets, such as Texas and parts of the Southeast, continue to deteriorate, while Florida’s recent strength appears to be moderating.
There are indications that inventories of foreclosed homes are declining. However, we expect to continue to compete with sales of repossessed homes in weaker geographical areas in the near term. New or existing lenders have begun providing more manufactured housing retail financing, although in limited amounts and using more stringent underwriting practices and higher interest rates than for a traditional site-built mortgage. Depending on the extent of the financing actually generated, it is anticipated that manufactured housing industry conditions should improve, albeit slowly. We will continue to pursue other opportunities, such as sales to community and park operators. In the near term, demand for both manufactured housing and recreational vehicles is likely to be generated by hurricane damage and the need for shelter in the Gulf States. Longer term, the demand for affordable housing is expected to grow as a result of increased immigration, greater numbers of baby boomers reaching retirement age and the escalating cost of site-built homes. Improvements in engineering and design continue to position manufactured homes as viable options in meeting the demands for affordable housing in new markets, such as suburban and inner-city sites, as well as in existing markets such as rural areas and in manufactured housing communities and parks.
During fiscal 2006, we are shifting our focus back to our core manufacturing operations. Individual businesses or regions will be provided with greater autonomy on product and operations. Restructuring efforts are generally complete resulting in a more cost-effective management structure with greater emphasis on sustainable profitability.
We currently expect modest improvement in our operating results for the second quarter of fiscal 2006, compared to the first quarter, as well as significantly reduced losses from discontinued operations following the sale of the retail housing business. The outlook remains uncertain due to the potential effects of hurricane relief efforts, moderating demand for motor homes amid concerns over consumer confidence and ongoing travel trailer losses.
22
Liquidity and Capital Resources
We use external funding sources, including the issuance of debt and equity instruments, to supplement working capital, fund capital expenditures and meet internal cash flow requirements on an as-needed basis. Cash totaling $17.1 million was generated by operating activities during our first quarter of fiscal 2006 compared to cash used of $32.0 million for the similar period one year ago. In the current quarter, the most significant source of cash related to lower inventories, which generated $45.3 million in cash, principally due to a reduction of motor home finished goods. This was offset by the seasonal increase in receivables and the loss from continuing operations, substantially reduced by the non-cash deferred tax expense.
Net cash generated by discontinued operations during the current quarter was $15.6 million compared to cash used of $5.2 million in the prior year. The sale of the manufactured housing portfolio in July 2005, after repayment of the related warehouse line borrowings, generated $28.2 million of net proceeds, partially offset by operating losses. The prior year cash used in operations generally related to operating losses for that period.
Capital expenditures, net were $4.4 million in the current quarter compared to $10.5 million in the same period last year.
At quarter-end, short-term borrowings under our secured syndicated credit facility, led by Bank of America, N.A., as administrative agent, were $9.0 million. Lender commitments to the facility totaled $200 million. Our borrowing capacity, however, is governed by the amount of a borrowing base, consisting of inventories and accounts receivable, that fluctuates significantly from week to week. The borrowing base is revised weekly for changes in receivables and monthly for changes in inventory balances. At the end of the quarter, the borrowing base totaled $195 million. After consideration of collateral reserves of $1.1 million, $66.3 million in standby letters of credit and the outstanding borrowings, unused borrowing capacity was approximately $93.8 million. Long-term debt increased by approximately $19.2 million, primarily as a result of the $22 million term loan which was fully drawn upon during the quarter.
As a result of the above-mentioned changes, cash and marketable investments increased $6.0 million from $45.4 million as of April 25, 2004, to $51.4 million as of July 31, 2005.
Credit Agreements
During May 2004, our credit facility was renewed and extended until July 31, 2007. On March 2, 2005, we entered into an amendment to the facility to provide greater borrowing flexibility by raising the overall limit on borrowings from $150 million to $175 million, with an additional seasonal increase from October to April to $200 million. In addition, a limitation on borrowing against inventory within our asset borrowing base was raised from $85 million to $110 million, with a seasonal increase to $135 million for the December through April time period. The amendment also reset the designated cumulative EBITDA covenant requirements that are invoked in the event that average monthly liquidity, defined as cash, cash equivalents and unused borrowing capacity, falls below $60 million within the borrowing subsidiaries or $90 million including the parent company. The interest rate for revolving loans under the line was increased slightly, but may be reduced to prior levels in future quarters based on improvements in a fixed charge coverage ratio.
In May 2005, the borrowing base was supplemented by $15 million of additional real estate collateral provided to the bank group. Borrowings are secured by receivables, inventory and certain other assets, primarily real estate, and are used for working capital and general corporate purposes. In July 2005, the agreement governing the credit facility was further amended and restated, to incorporate prior amendments and increase total loan commitments to accommodate the previous $15 million addition to the revolver borrowing base and fund a new term loan collateralized by real estate in the amount of $22 million. These additions raise total loan commitments to $212 million from May through November, with a seasonal uplift to $237 million from December through April. The loan commitments for both the addition to the revolver and the term loan reduce on the first day of each fiscal quarter beginning October 31, 2005 in the amounts of $750,000 and $785,715, respectively.
In March 2005, the Company’s financial services subsidiary, HomeOne Credit Corp. (HomeOne), renewed and extended an agreement with Greenwich Capital Financial Products, Inc. (Greenwich) that provided up to $75 million in warehouse funding, with an expiration of March 15, 2006. The Company and HomeOne agreed to guarantee the facility in an aggregate amount not to exceed 10 percent of the amount of principal and interest outstanding. The Company’s guaranty included financial and other covenants, including maintenance of specified levels of tangible net worth, total indebtedness to tangible net worth and liquidity. In anticipation that the Company would not be able to comply with certain of these covenant requirements, commencing in June 2005, Greenwich agreed to amend the covenant requirements to levels that the Company expected would be achievable. In July 2005, the Company closed the sale of substantially all of its manufactured housing loan portfolio. Following the closing of the sale, HomeOne paid the outstanding balance on its warehouse line with Greenwich and terminated that facility. Outstanding borrowings that were repaid under the line of credit were approximately $46.6 million, including the termination fee. The termination was pursuant to the terms of an amendment dated as of July 28, 2005 to the $75 million warehouse line of credit between HomeOne, HomeOne Funding I and Greenwich. The amendment also terminated Fleetwood’s guarantee of HomeOne’s obligations under the warehouse line. Fleetwood paid Greenwich a termination fee of $750,000, equal to one percent (1%) of the maximum amount of the credit line.
23
Dividends and Distributions
On October 30, 2001, the board of directors discontinued the payment of dividends on our common stock in conjunction with an election to defer distributions on our existing 6% convertible trust preferred securities. The Company has the right to elect to defer distributions for up to 20 consecutive quarters under the trust indenture governing the existing 6% convertible trust preferred securities. When the Company defers a distribution on the 6% convertible trust preferred securities, it is prevented from declaring or paying dividends on its common stock during the period of the deferral. In light of the business environment and recent operating results, the Company presently intends to continue to defer the distribution on the Trust I Securities through August 2006, which would be the last of these consecutive quarterly distributions that could be deferred under the terms of the governing instruments. The total amount deferred, including accrued interest, was $53.4 million as of July 31, 2005. The entire amount deferred would become due and payable on or before the November 2006 distribution date. The amount due at that time would be $71 million.
Discontinued Operations
In March 2005, we announced that the manufactured housing retail and financial services businesses were to be sold. In July, subsequent to the end of HomeOne’s fiscal quarter of June 30, substantially all of the manufactured housing loan portfolio was sold to an affiliate of Clayton Homes, Inc. The sale generated proceeds of $74.7 million of which $46.6 million was used to repay the outstanding balance on the warehouse line of credit, including a $750,000 termination fee. The net proceeds from the transaction of $28.2 million are shown as a liability of the Company at July 31, 2005, since the sale occurred subsequent to HomeOne’s fiscal quarter of June 30, 2005. In August 2005, substantially all of the assets of the retail business were also sold to affiliates of Clayton Homes, Inc. The aggregate sale price was $74 million, subject to certain adjustments as set forth in the purchase and closing agreements, including a post-closing adjustment to reflect the actual amount of inventory on hand at the closing date. A portion of the purchase price, in the amount of $8 million, was subject to a hold back pending finalization of the amount and satisfaction of certain conditions. In addition, the Company anticipates making a payment of approximately $6 million relating to customer deposit liabilities that have been assumed by the buyer. Settlement of working capital balances is expected to consume approximately $10 million of additional cash. Upon the closing of the transaction, the Company paid off its retail flooring facilities in the aggregate amount of $31.3 million. An additional $1.8 million was received from the buyer as an adjustment to the proceeds for the manufactured housing loan portfolio.
After considering the repayment of the portion of the Company’s secured credit facility supported by the amounts of the retail housing business in the amount of $48.2 million, these transactions are expected to be approximately cash neutral.
24
Other
In the opinion of management, the combination of existing cash resources, expected future cash flows from operations, and available lines of credit will be sufficient to satisfy our foreseeable cash requirements for the next 12 months, including up to $30 million for capital expenditures in fiscal 2006, to be utilized primarily for enhancements to manufacturing facilities.
Contracts and Commitments
Below is a table showing payment obligations for long-term debt, capital leases, operating leases and purchase obligations for the next five years and beyond (amounts in thousands):
|
| Payments Due By Period |
| |||||||||||||
Contractual Obligations |
| Total |
| Less than |
| 1-3 years |
| 3-5 years |
| More than |
| |||||
|
|
|
| |||||||||||||
Long-term debt (excluding capital lease obligations and convertible subordinated debentures) |
| $ | 125,537 |
| $ | 2,357 |
| $ | 20,493 |
| $ | 524 |
| $ | 102,163 |
|
Capital lease obligations |
| 8,463 |
| 1,847 |
| 4,266 |
| 2,350 |
| — |
| |||||
Operating leases(1) |
| 17,923 |
| 4,023 |
| 7,841 |
| 6,059 |
| — |
| |||||
Other long-term liabilities: |
|
|
|
|
|
|
|
|
|
|
| |||||
Deferred compensation and non-qualified retirement plans |
| 39,133 |
| 5,974 |
| 10,740 |
| 8,160 |
| 14,259 |
| |||||
Insurance reserves |
| 35,328 |
| 35,328 |
| — |
| — |
| — |
| |||||
Convertible subordinated debentures |
| 210,142 |
| — |
| — |
| — |
| 210,142 |
| |||||
Total |
| $ | 436,526 |
| $ | 49,529 |
| $ | 43,340 |
| $ | 17,093 |
| $ | 326,564 |
|
(1) Most of the Company’s retail sales locations and certain of its other facilities are leased under terms that range from monthly to 5 years. Also included in the above amounts are equipment leases. Management expects that in the normal course of business, leases will be renewed or replaced by other leases to support continuing operations. Leases relating to discontinued operations that were sold subsequent to quarter-end are excluded from these amounts.
Off-Balance Sheet Arrangements
We describe our aggregate contingent repurchase obligation in Note 16 to the Company’s financial statements and under Critical Accounting Policies in this Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in this Report.
Under the senior credit agreement, Fleetwood Enterprises, Inc. is a guarantor of the borrowings of Fleetwood Holdings, Inc. (FHI) and Fleetwood Retail Corp. (FRC). FHI includes most of the wholly owned manufacturing subsidiaries. At quarter-end, only the FRC parent company and seven of the retail subsidiaries were borrowers under the loan and covered under the guarantee. In addition, Fleetwood Enterprises, Inc. guaranteed FRC’s floorplan obligations to Textron and Bombardier Capital, Inc. pursuant to FRC’s wholesale financing agreements with the two flooring institutions. Subsequent to quarter-end, substantially all of the operating assets of FRC were sold to affiliates of Clayton Homes, Inc. and the FRC portion of the senior credit agreement was repaid in full along with the floorplan obligations to Textron and Bombardier Capital, Inc.
Under the warehouse line of credit, initiated in December 2003, between HomeOne and Greenwich, Fleetwood Enterprises, Inc. was a limited guarantor of the borrowings. Subsequent to HomeOne’s quarter-end of June 30, this agreement was terminated upon the sale of substantially all of the loan portfolio and the repayment in full of the warehouse line of credit.
Fleetwood Enterprises, Inc. has also entered into 12 limited guarantees aggregating $4.7 million to certain obligations of certain retailers to floorplan lenders and an additional two unsecured guarantees aggregating $3.5 million for other obligations.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risks related to fluctuations in interest rates on marketable investments, investments underlying a Company-owned life insurance program (COLI), variable rate debt under the secured credit facility, the liability for flooring of retail housing inventories and the warehouse line of credit. With respect to the COLI program, the underlying investments are subject to both interest rate risk and equity market risk. Market-related changes to our 6% convertible trust preferred securities indirectly may impact the amount of the deferred tax valuation allowance, which is currently dependent on available tax strategies, including the unrealized gains on these securities. We do not currently use interest rate swaps, futures contracts or options on futures, or other types of derivative financial instruments.
The vast majority of our marketable investments are in institutional money market funds or fixed rate securities with average original maturity dates of two weeks or less, minimizing the effect of interest rate fluctuations on their fair value.
For variable rate debt, changes in interest rates generally do not influence fair market value, but do affect future earnings and cash flows. Based upon the amount of variable rate debt outstanding at the end of the year, and holding the variable rate debt balance constant, each one percentage point increase in interest rates occurring on the first day of an annual period would result in an increase in interest expense of approximately $310,000. For fixed-rate debt, changes in interest rates generally affect the fair market value, but not earnings or cash flows. Changes in fair market values as a result of interest rate changes are not currently expected to be material.
We do not believe that future market equity or interest rate risks related to our marketable investments or debt obligations will have a material impact on our results.
Item 4. Controls and Procedures
The Company’s management evaluated, under the supervision and with the participation of its Chief Executive Officer and Chief Financial Officer, the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this Report. Based on their evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of July 31, 2005.
There have been no changes in the Company’s internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the Company’s fiscal quarter ended July 31, 2005 that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.
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PART II OTHER INFORMATION
Item 1. Legal Proceedings
The Company filed a complaint in state court in Kansas, in the 18th Judicial District, District Court, Sedgewick County, Civil Department, against The Coleman Company, Inc. (Coleman) in connection with a dispute over the use of the “Coleman” brand name. The lawsuit sought declaratory and injunctive relief. On June 6, 2003, Coleman filed an answer and counterclaimed against us alleging various counts, including breach of contract and trademark infringement. On November 17, 2004, after a hearing, the Court granted our request for a permanent injunction against Coleman prohibiting Coleman from licensing the Coleman name for recreational vehicles to companies other than Fleetwood. At the conclusion of trial, on December 16, 2004, the jury awarded monetary damages against Fleetwood on Coleman’s counterclaim in the amount of $5.2 million. On January 21, 2005, the Court granted Coleman’s request for treble damages, making the total amount of the award approximately $14.6 million. A charge to record this award was reflected in the Company’s results for the third fiscal quarter of 2005. Payment will be stayed pending Fleetwood’s appeal, which has been filed. Pending the appeal, Fleetwood was required to post a letter of credit for $18 million, representing the full amount of the judgment plus an allowance for attorneys’ fees and interest. The Company will pursue all available appellate remedies.
The Company is also subject to other litigation from time to time in the ordinary course of business. The Company’s liability under some of this litigation is covered in whole or in part by insurance. Although the amount of any liability with respect to such claims and litigation over and above our insurance coverage cannot currently be determined, in the opinion of our management such liability is not expected to have a material adverse effect on our financial condition or results of operations.
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Item 6. Exhibits
2.1 |
| Purchase and Sale Agreement is entered into as of July 29, 2005, by and between HomeOne Credit Corp., a Delaware corporation, Fleetwood Enterprises, Inc., a Delaware corporation, and Vanderbilt Mortgage and Finance, Inc., a Tennessee corporation |
|
|
|
15.1 |
| Letter of Acknowledgment of Use of Report on Unaudited Interim Financial Information |
|
|
|
31.1 |
| Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
31.2 |
| Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
32.1 |
| Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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SIGNATURE
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.
| FLEETWOOD ENTERPRISES, INC. | |
|
| |
|
| |
| /s/ Boyd R. Plowman |
|
| Boyd R. Plowman | |
| Executive Vice President and | |
| Chief Financial Officer | |
|
| |
September 8, 2005 |
|
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