UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
ý |
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) |
|
|
|
For the quarterly period ended January 29, 2006 | ||
|
|
|
o |
| 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) |
|
|
|
3125 Myers Street, Riverside, California |
| 92503-5527 |
(Address of principal executive offices) |
| (Zip code) |
(951) 351-3500
(Registrant’s telephone number, including area code)
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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule12b-2 of the Exchange Act (Check one):
Large accelerated filer o Accelerated filer ý Non-accelerated filer 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 March 3, 2006 |
Common stock, $1 par value |
| 63,779,249 shares |
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 consolidated balance sheet of Fleetwood Enterprises, Inc. as of January 29, 2006, the related consolidated statements of operations for the thirteen-week periods ended January 29, 2006 and January 23, 2005, the related consolidated statements of operations and consolidated statements of cash flows for the forty-week period ended January 29, 2006 and the thirty-nine-week period ended January 23, 2005, and the consolidated statement of changes in shareholders’ equity for the forty-week period ended January 29, 2006. 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 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. 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 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 | |
Orange County, California |
| |
March 2, 2006 |
|
|
2
FLEETWOOD ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands except per share data)
(Unaudited)
|
| 13 Weeks Ended |
| 40 Weeks Ended |
| 39 Weeks Ended |
| ||||||
|
| January 29, |
| January 23, |
| January 29, |
| January 23, |
| ||||
Net Sales: |
|
|
|
|
|
|
|
|
| ||||
RV Group |
| $ | 365,342 |
| $ | 342,591 |
| $ | 1,182,015 |
| $ | 1,278,574 |
|
Housing Group |
| 208,812 |
| 183,734 |
| 638,124 |
| 593,298 |
| ||||
Supply Group |
| 9,712 |
| 12,711 |
| 35,330 |
| 42,943 |
| ||||
Intercompany sales |
| — |
| (29,875 | ) | (25,627 | ) | (100,292 | ) | ||||
|
| 583,866 |
| 509,161 |
| 1,829,842 |
| 1,814,523 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Cost of products sold |
| 472,635 |
| 431,349 |
| 1,506,531 |
| 1,494,475 |
| ||||
Gross profit |
| 111,231 |
| 77,812 |
| 323,311 |
| 320,048 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Operating expenses |
| 98,713 |
| 104,061 |
| 296,217 |
| 301,686 |
| ||||
Other, net |
| 582 |
| 12,822 |
| 5,916 |
| 12,794 |
| ||||
|
| 99,295 |
| 116,883 |
| 302,133 |
| 314,480 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Operating income (loss) |
| 11,936 |
| (39,071 | ) | 21,178 |
| 5,568 |
| ||||
Other income (expense): |
|
|
|
|
|
|
|
|
| ||||
Investment income |
| 1,921 |
| 976 |
| 4,077 |
| 1,891 |
| ||||
Interest expense |
| (8,142 | ) | (6,769 | ) | (22,824 | ) | (20,168 | ) | ||||
Other, net |
| — |
| — |
| — |
| (2,724 | ) | ||||
|
| (6,221 | ) | (5,793 | ) | (18,747 | ) | (21,001 | ) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Income (loss) from continuing operations before income taxes |
| 5,715 |
| (44,864 | ) | 2,431 |
| (15,433 | ) | ||||
(Provision) benefit for income taxes |
| (1,007 | ) | 331 |
| (11,345 | ) | (1,310 | ) | ||||
Income (loss) from continuing operations |
| 4,708 |
| (44,533 | ) | (8,914 | ) | (16,743 | ) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Loss from discontinued operations, net |
| (3,332 | ) | (10,156 | ) | (21,185 | ) | (24,259 | ) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Net income (loss) |
| $ | 1,376 |
| $ | (54,689 | ) | $ | (30,099 | ) | $ | (41,002 | ) |
|
| Basic |
| Diluted |
| Basic |
| Diluted |
| Basic |
| Diluted |
| Basic |
| Diluted |
| ||||||||
Earnings (loss) per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Income (loss) from continuing operations |
| $ | .08 |
| $ | .08 |
| $ | (.80 | ) | $ | (.80 | ) | $ | (.15 | ) | $ | (.15 | ) | $ | (.30 | ) | $ | (.30 | ) |
Loss from discontinued operations |
| (.06 | ) | (.06 | ) | (.19 | ) | (.19 | ) | (.37 | ) | (.37 | ) | (.44 | ) | (.44 | ) | ||||||||
Net income (loss) per common share |
| $ | .02 |
| $ | .02 |
| $ | (.99 | ) | $ | (.99 | ) | $ | (.52 | ) | $ | (.52 | ) | $ | (.74 | ) | $ | (.74 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Weighted average common shares |
| 61,838 |
| 62,622 |
| 55,492 |
| 55,492 |
| 58,103 |
| 58,103 |
| 55,193 |
| 55,193 |
|
See accompanying notes to consolidated financial statements.
3
FLEETWOOD ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share data)
|
| January 29, |
| April 24, |
| ||
|
| (Unaudited) |
|
|
| ||
Assets |
|
|
|
|
| ||
Cash |
| $ | 63,725 |
| $ | 27,849 |
|
Marketable investments |
| 18,108 |
| 17,627 |
| ||
Receivables |
| 227,632 |
| 164,609 |
| ||
Inventories |
| 225,886 |
| 233,591 |
| ||
Deferred taxes, net |
| 44,760 |
| 56,904 |
| ||
Assets of discontinued operations |
| — |
| 145,784 |
| ||
Other current assets |
| 18,983 |
| 23,974 |
| ||
|
|
|
|
|
| ||
Total current assets |
| 599,094 |
| 670,338 |
| ||
|
|
|
|
|
| ||
Property, plant and equipment, net |
| 220,790 |
| 232,125 |
| ||
Deferred taxes, net |
| 19,503 |
| 17,859 |
| ||
Cash value of Company-owned life insurance, net |
| 30,400 |
| 36,946 |
| ||
Goodwill |
| 6,316 |
| 6,316 |
| ||
Other assets |
| 46,110 |
| 46,663 |
| ||
|
|
|
|
|
| ||
Total assets |
| $ | 922,213 |
| $ | 1,010,247 |
|
|
|
|
|
|
| ||
Liabilities and Shareholders’ Equity |
|
|
|
|
| ||
Accounts payable |
| $ | 68,081 |
| $ | 75,551 |
|
Employee compensation and benefits |
| 75,630 |
| 77,924 |
| ||
Product warranty reserve |
| 66,751 |
| 65,143 |
| ||
Short-term borrowings |
| 5,016 |
| 56,661 |
| ||
Accrued interest |
| 63,702 |
| 52,446 |
| ||
Liabilities of discontinued operations |
| — |
| 84,702 |
| ||
Other current liabilities |
| 73,912 |
| 82,290 |
| ||
|
|
|
|
|
| ||
Total current liabilities |
| 353,092 |
| 494,717 |
| ||
|
|
|
|
|
| ||
Deferred compensation and retirement benefits |
| 33,776 |
| 38,771 |
| ||
Insurance reserves |
| 33,341 |
| 32,215 |
| ||
Long-term debt |
| 125,249 |
| 108,946 |
| ||
Convertible subordinated debentures |
| 210,142 |
| 210,142 |
| ||
|
|
|
|
|
| ||
Total liabilities |
| 755,600 |
| 884,791 |
| ||
|
|
|
|
|
| ||
Commitments and contingencies |
|
|
|
|
| ||
|
|
|
|
|
| ||
Shareholders’ equity: |
|
|
|
|
| ||
Preferred stock, $1 par value, authorized 10,000,000 shares, none outstanding |
| — |
| — |
| ||
Common stock, $1 par value, authorized 150,000,000 shares, outstanding 63,616,000 shares at January 29, 2006, and 56,043,000 shares at April 24, 2005 |
| 63,616 |
| 56,043 |
| ||
Additional paid-in capital |
| 487,041 |
| 424,782 |
| ||
Accumulated deficit |
| (386,895 | ) | (356,796 | ) | ||
Accumulated other comprehensive income |
| 2,851 |
| 1,427 |
| ||
|
|
|
|
|
| ||
Total shareholders’ equity |
| 166,613 |
| 125,456 |
| ||
|
|
|
|
|
| ||
Total liabilities and shareholders’ equity |
| $ | 922,213 |
| $ | 1,010,247 |
|
See accompanying notes to consolidated financial statements.
4
FLEETWOOD ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in thousands)
|
| 40 Weeks Ended |
| 39 Weeks Ended |
| ||
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
| ||
Loss from continuing operations |
| $ | (8,914 | ) | $ | (16,743 | ) |
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |
|
|
|
|
| ||
Depreciation expense |
| 17,061 |
| 16,379 |
| ||
Amortization of financing costs |
| 1,041 |
| 1,109 |
| ||
Gains on investment securities transactions |
| (7 | ) | (26 | ) | ||
Gains on sale of property, plant and equipment |
| (609 | ) | (1,806 | ) | ||
Other asset impairment |
| 1,550 |
| — |
| ||
Non-cash charge for conversion of trust preferred securities |
| — |
| 1,134 |
| ||
Changes in assets and liabilities: |
|
|
|
|
| ||
Increase in receivables |
| (63,023 | ) | (23,993 | ) | ||
(Increase) decrease in inventories |
| 7,705 |
| (91,763 | ) | ||
(Increase) decrease in income tax receivable |
| 1,304 |
| (2,679 | ) | ||
Decrease in deferred taxes |
| 10,500 |
| — |
| ||
Decrease in cash value of Company-owned life insurance |
| 6,546 |
| 9,120 |
| ||
Decrease in other assets |
| 3,199 |
| 2,574 |
| ||
Decrease in accounts payable |
| (7,470 | ) | (17,472 | ) | ||
Decrease in employee compensation and benefits |
| (7,289 | ) | (5,580 | ) | ||
Increase in product warranty reserve |
| 1,608 |
| 6,720 |
| ||
Increase in other liabilities |
| 2,624 |
| 21,589 |
| ||
Net cash used in operating activities |
| (34,174 | ) | (101,437 | ) | ||
|
|
|
|
|
| ||
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
| ||
Purchases of investment securities available-for-sale |
| (1,589 | ) | (6,930 | ) | ||
Proceeds from sale of investment securities available-for-sale |
| 1,132 |
| 6,690 |
| ||
Purchases of property, plant and equipment, net |
| (12,574 | ) | (28,007 | ) | ||
Proceeds from sales of property, plant and equipment |
| 3,719 |
| 6,009 |
| ||
Net cash used in investing activities |
| (9,312 | ) | (22,238 | ) | ||
|
|
|
|
|
| ||
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
| ||
Issuance of common stock, net |
| 66,048 |
| — |
| ||
Increase (decrease) in short-term borrowings |
| (51,645 | ) | 55,164 |
| ||
Increase in long-term debt |
| 16,303 |
| 6,094 |
| ||
Redemption of convertible subordinated debentures |
| — |
| (20,767 | ) | ||
Proceeds from exercise of stock options |
| 3,784 |
| 2,044 |
| ||
Net cash provided by financing activities |
| 34,490 |
| 42,535 |
| ||
|
|
|
|
|
| ||
CASH FLOWS FROM DISCONTINUED OPERATIONS: |
|
|
|
|
| ||
Loss from discontinued operations, net |
| (21,185 | ) | (24,259 | ) | ||
Adjustments to reconcile net loss to net cash used in discontinued operations: |
|
|
|
|
| ||
Gain on sale of insurance assets |
| (2,417 | ) | — |
| ||
Impairment charges |
| 2,520 |
| — |
| ||
Termination benefit liability |
| 1,380 |
| — |
| ||
Changes in assets and liabilities: |
|
|
|
|
| ||
(Increase) decrease in assets of discontinued operations |
| 2,952 |
| (26,286 | ) | ||
Increase (decrease) in liabilities of discontinued operations |
| (6,602 | ) | (3,166 | ) | ||
Net cash used in operating activities of discontinued operations |
| (23,352 | ) | (53,711 | ) | ||
|
|
|
|
|
| ||
Proceeds from sale of insurance assets |
| 2,417 |
| — |
| ||
Proceeds from sale of retail business |
| 66,000 |
| — |
| ||
Proceeds from sale of manufactured housing loan portfolio |
| 76,500 |
| — |
| ||
Net cash provided by investing activities of discontinued operations |
| 144,917 |
| — |
| ||
|
|
|
|
|
| ||
Increase (decrease) in retail flooring |
| (31,500 | ) | 10,852 |
| ||
Increase (decrease) in warehouse line of credit |
| (46,600 | ) | 27,097 |
| ||
Net cash provided by (used in) financing activities of discontinued operations |
| (78,100 | ) | 37,949 |
| ||
|
|
|
|
|
| ||
Net cash provided by (used in) discontinued operations |
| 43,465 |
| (15,762 | ) | ||
|
|
|
|
|
| ||
Foreign currency translation adjustment |
| 1,407 |
| 2,189 |
| ||
|
|
|
|
|
| ||
Increase (decrease) in cash |
| 35,876 |
| (94,713 | ) | ||
Cash at beginning of period |
| 27,849 |
| 106,569 |
| ||
|
|
|
|
|
| ||
Cash at end of period |
| $ | 63,725 |
| $ | 11,856 |
|
See accompanying notes to consolidated financial statements.
5
FLEETWOOD ENTERPRISES, INC.
CONSOLIDATED STATEMENT OF CHANGES
IN SHAREHOLDERS’ EQUITY
(Unaudited)
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
| |||||
|
| Common Stock |
| Additional |
|
|
| Other |
| Total |
| |||||||
|
| Number |
| Amount |
| Paid-In |
| Accumulated |
| Comprehensive |
| Shareholders’ |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Balance April 24, 2005 |
| 56,043 |
| $ | 56,043 |
| $ | 424,782 |
| $ | (356,796 | ) | $ | 1,427 |
| $ | 125,456 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Net loss |
| — |
| — |
| — |
| (30,099 | ) | — |
| (30,099 | ) | |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Foreign currency translation, net of taxes of $978 |
| — |
| — |
| — |
| — |
| 1,407 |
| 1,407 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Investment securities, net of taxes of $1 |
| — |
| — |
| — |
| — |
| 17 |
| 17 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
| (28,675 | ) | |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Direct placement |
| 7,000 |
| 7,000 |
| 59,048 |
| — |
| — |
| 66,048 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Stock options exercised |
| 573 |
| 573 |
| 3,211 |
| — |
| — |
| 3,784 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Balance January 29, 2006 |
| 63,616 |
| $ | 63,616 |
| $ | 487,041 |
| $ | (386,895 | ) | $ | 2,851 |
| $ | 166,613 |
|
See accompanying notes to consolidated financial statements.
6
FLEETWOOD ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
January 29, 2006
(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 operated 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 and were sold during the second quarter of fiscal 2006. The accompanying 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 consolidated financial statements include all normal recurring adjustments necessary for a fair presentation of the financial position at January 29, 2006, and the results of operations for the thirteen and forty-week periods ended January 29, 2006, and the results of operations for the thirteen and thirty-nine-week periods ended January 23, 2005. The 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 businesses are seasonal and its results of operations for the thirteen and forty-week periods ended January 29, 2006, are not necessarily indicative of results to be expected for the full year.
Cash and Cash Equivalents:
For purposes of these statements, cash includes cash on hand, cash in banks, demand deposit accounts, money market funds and readily marketable securities with original maturities of 90 days or less.
In the quarter ending January 29, 2006, the company determined that certain institutional money market funds, previously classified as investments, should more appropriately be classified as cash and cash equivalents. The impact of this change was to characterize $102 million and $21 million of these funds as cash and cash equivalents rather than investments as of January 29, 2006 and January 23, 2005, respectively.
Recent Accounting Pronouncements:
Variable Interest Entities
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 fiscal 2004, the preferred securities of two of the trusts were either converted or redeemed, and the debentures cancelled. Under Interpretation No. (“FIN”) 46, “Variable Interest Entities,” 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, a revision of FIN 46 that 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
7
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 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 first quarter of fiscal 2007. Adoption of the standard is currently expected to reduce fiscal 2007 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 current estimates.
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 capitalized 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 believes that the adoption of SFAS No. 151 will not 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 quarter, stock options were determined to be dilutive to income from continuing operations and anti-dilutive for all other periods presented. Convertible securities were determined to be anti-dilutive for all periods presented.
The table below shows the components for the calculation of both basic and diluted earnings per share for the fiscal quarters ended January 29, 2006 and January 23, 2005 (amounts in thousands):
|
| 13 Weeks Ended |
| ||||
|
| January 29, 2006 |
| January 23, 2005 |
| ||
|
|
|
|
|
| ||
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE |
|
|
|
|
| ||
|
|
|
|
|
| ||
Income (loss) from continuing operations |
| $ | 4,708 |
| $ | (44,533 | ) |
Loss from discontinued operations |
| (3,332 | ) | (10,156 | ) | ||
|
|
|
|
|
| ||
Net income (loss) |
| $ | 1,376 |
| $ | (54,689 | ) |
|
|
|
|
|
| ||
Weighted average shares outstanding for basic income per share |
| 61,838 |
| 55,492 |
| ||
Effect of dilutive employee stock options |
| 784 |
| — |
| ||
Weighted average shares outstanding used for dilutive income per share |
| 62,622 |
| 55,492 |
|
8
|
| 40 Weeks Ended |
| 39 Weeks Ended |
| ||
|
| January 29, 2006 |
| January 23, 2005 |
| ||
|
|
|
|
|
| ||
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE |
|
|
|
|
| ||
|
|
|
|
|
| ||
Loss from continuing operations |
| $ | (8,914 | ) | $ | (16,743 | ) |
Loss from discontinued operations |
| (21,185 | ) | (24,259 | ) | ||
|
|
|
|
|
| ||
Net loss |
| $ | (30,099 | ) | $ | (41,002 | ) |
|
|
|
|
|
| ||
Weighted average shares outstanding for basic and diluted income per share |
| 58,103 |
| 55,193 |
|
Anti-dilutive securities outstanding as of the fiscal quarters ended January 29, 2006 and January 23, 2005, are as follows (amounts in thousands):
|
| 13 Weeks Ended |
| ||
|
| January 29, 2006 |
| January 23, 2005 |
|
|
|
|
|
|
|
Options and warrants |
| 2,223 |
| 5,888 |
|
|
|
|
|
|
|
Convertible 6% subordinated debentures |
| 4,131 |
| 4,131 |
|
|
|
|
|
|
|
Convertible 5% senior subordinated debentures |
| 8,503 |
| 8,503 |
|
|
| 40 Weeks Ended |
| 39 Weeks Ended |
|
|
| January 29, 2006 |
| January 23, 2005 |
|
|
|
|
|
|
|
Options and warrants |
| 4,467 |
| 5,888 |
|
|
|
|
|
|
|
Convertible 6% subordinated debentures |
| 4,131 |
| 4,131 |
|
|
|
|
|
|
|
Convertible 5% senior subordinated debentures |
| 8,503 |
| 8,503 |
|
Common stock reserved for future issuance at January 29, 2006 was 17,101 shares.
Stock-Based Incentive Compensation:
The Company accounts for stock-based incentive compensation plans using the intrinsic value 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 income (loss) and income (loss) per share would have been adjusted as indicated by the following table (amounts in thousands except per share data):
|
| 13 Weeks Ended |
| ||||
|
| January 29, 2006 |
| January 23, 2005 |
| ||
|
|
|
|
|
| ||
Net income (loss), as reported |
| $ | 1,376 |
| $ | (54,689 | ) |
|
|
|
|
|
| ||
Deduct: Total stock-based employee compensation expense determined under fair value-based method for all awards, net of related tax effects |
| (697 | ) | (1,017 | ) | ||
|
|
|
|
|
| ||
Pro forma net income (loss) |
| $ | 679 |
| $ | (55,706 | ) |
|
|
|
|
|
| ||
Basic and diluted income (loss) per share, as reported |
| $ | .02 |
| $ | (.99 | ) |
|
|
|
|
|
| ||
Basic and diluted income (loss) per share, pro forma |
| $ | .01 |
| $ | (1.00 | ) |
9
|
| 40 Weeks Ended |
| 39 Weeks Ended |
| ||
|
| January 29, 2006 |
| January 23, 2005 |
| ||
|
|
|
|
|
| ||
Net loss, as reported |
| $ | (30,099 | ) | $ | (41,002 | ) |
|
|
|
|
|
| ||
Deduct: Total stock-based employee compensation expense determined under fair value-based method for all awards, net of related tax effects |
| (2,614 | ) | (3,024 | ) | ||
|
|
|
|
|
| ||
Pro forma net loss |
| $ | (32,713 | ) | $ | (44,026 | ) |
|
|
|
|
|
| ||
Basic and diluted loss per share, as reported |
| $ | (.52 | ) | $ | (.74 | ) |
|
|
|
|
|
| ||
Basic and diluted loss per share, pro forma |
| $ | (.56 | ) | $ | (.80 | ) |
Inventory Valuation:
Inventories are valued at the lower of cost (first-in, first-out) or market. Manufacturing cost includes materials, labor and manufacturing overhead. Inventories consist of the following (amounts in thousands):
|
| January 29, 2006 |
| April 24, 2005 |
| ||
Manufacturing inventory- |
|
|
|
|
| ||
Raw materials |
| $ | 141,174 |
| $ | 139,520 |
|
Work in process |
| 40,998 |
| 40,736 |
| ||
Finished goods |
| 43,714 |
| 53,335 |
| ||
|
|
|
|
|
| ||
|
| $ | 225,886 |
| $ | 233,591 |
|
Product Warranty Reserve:
Fleetwood typically provides customers of its products with a one-year warranty covering defects in material or workmanship with longer warranties on certain structural components. The Company records a liability based on the best estimate of the amounts necessary to settle existing and future 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 |
| 65,749 |
| |
Settlements made during the period |
| (64,141 | ) | |
|
|
|
| |
Balance at January 29, 2006 |
| $ | 66,751 |
|
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 (loss). Based on the Company’s current activities, the only other components of comprehensive income (loss) 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):
|
| 13 Weeks Ended |
| 40 Weeks Ended |
| 39 Weeks Ended |
| ||||||
|
| Jan. 29, 2006 |
| Jan. 23, 2005 |
| Jan. 29, 2006 |
| Jan. 23, 2005 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net income (loss) |
| $ | 1,376 |
| $ | (54,689 | ) | $ | (30,099 | ) | $ | (41,002 | ) |
Foreign currency translation |
| 484 |
| 183 |
| 1,407 |
| 2,189 |
| ||||
Unrealized gain (loss) on investments |
| (2 | ) | (2 | ) | 17 |
| — |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Comprehensive income (loss) |
| $ | 1,858 |
| $ | (54,508 | ) | $ | (28,675 | ) | $ | (38,813 | ) |
10
Post-Retirement Health Care Benefits:
The Company provides health care benefits to certain retired employees from date of retirement 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):
|
| 13 Weeks Ended |
| 40 Weeks Ended |
| 39 Weeks Ended |
| ||||||
|
| Jan. 29, 2006 |
| Jan. 23, 2005 |
| Jan. 29, 2006 |
| Jan. 23, 2005 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Service cost - benefits earned during the year |
| $ | 139 |
| $ | 111 |
| $ | 428 |
| $ | 333 |
|
Interest cost on projected benefit obligation |
| 154 |
| 178 |
| 474 |
| 534 |
| ||||
Recognized net actuarial loss |
| 239 |
| 276 |
| 735 |
| 828 |
| ||||
Amortization of unrecognized prior service cost |
| (171 | ) | (379 | ) | (526 | ) | (1,136 | ) | ||||
Net periodic post-retirement benefit cost |
| $ | 361 |
| $ | 186 |
| $ | 1,111 |
| $ | 559 |
|
The total amount of employer’s contributions expected to be paid during the current fiscal year is $660,000.
3) Industry Segment Information
Information with respect to industry segments is shown below (amounts in thousands):
|
| 13 Weeks |
| 13 Weeks |
| 40 Weeks |
| 39 Weeks |
| |||||||
|
|
|
|
|
|
|
|
|
| |||||||
OPERATING REVENUES: |
|
|
|
|
|
|
|
|
| |||||||
|
|
|
|
|
|
|
|
|
| |||||||
RV Group |
| $ | 365,342 |
| $ | 342,591 |
| $ | 1,182,015 |
| $ | 1,278,574 |
| |||
Housing Group |
| 208,812 |
| 183,734 |
| 638,124 |
| 593,298 |
| |||||||
Supply Group |
| 9,712 |
| 12,711 |
| 35,330 |
| 42,943 |
| |||||||
Intercompany sales |
| — |
| (29,875 | ) | (25,627 | ) | (100,292 | ) | |||||||
|
|
|
|
|
|
|
|
|
| |||||||
|
| $ | 583,866 |
| $ | 509,161 |
| $ | 1,829,842 |
| $ | 1,814,523 |
| |||
|
|
|
|
|
|
|
|
|
| |||||||
OPERATING INCOME (LOSS): |
|
|
|
|
|
|
|
|
| |||||||
|
|
|
|
|
|
|
|
|
| |||||||
RV Group |
| $ | 3,806 |
| $ | (33,495 | ) | $ | (1,978 | ) | $ | (9,342 | ) | |||
Housing Group |
| 13,073 |
| (4,367 | ) | 32,249 |
| 13,418 |
| |||||||
Supply Group |
| (370 | ) | 590 |
| 2,229 |
| 3,362 |
| |||||||
Corporate and other |
| (4,573 | ) | (1,799 | ) | (11,322 | ) | (1,870 | ) | |||||||
|
|
|
|
|
|
|
|
|
| |||||||
|
| $ | 11,936 |
| $ | (39,071 | ) | $ | 21,178 |
| $ | 5,568 |
| |||
In addition to the third-party revenues shown above, the Supply Group also generated the following intercompany revenues with the RV and Housing Groups:
|
| 13 Weeks |
| 13 Weeks |
| 40 Weeks |
| 39 Weeks |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Supply intercompany revenues |
| $ | 40,789 |
| $ | 38,101 |
| $ | 125,870 |
| $ | 137,172 |
|
11
4) Other, net
Other, net consists of restructuring and impairment costs as well as gains from the sale of fixed assets. Restructuring costs relate to the reorganization of certain functions within the Company and consist primarily of severance costs. Impairment costs relate to the write-down of idle facilities held-for-sale. These charges are deducted in arriving at the Company’s operating income (loss).
5) Income Taxes
The year-to-date 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 during the first quarter. 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 the Company’s convertible trust preferred securities of Fleetwood Capital Trust I during the first quarter of fiscal 2006. At that time, 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. 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.
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, transition the Company back to its traditional focus on manufacturing operations and contribute to the Company’s progress towards sustained profitability.
In July 2005, during HomeOne’s second fiscal quarter, 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 repaid the outstanding balance on its warehouse line with Greenwich Capital Financial Products, Inc. (Greenwich) and terminated that facility. At that time, 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.
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 holdback pending finalization of the adjustments and satisfaction of certain conditions. The holdback was approximately offset with the assumption by the buyer of $6 million of customer deposit liabilities and final purchase price adjustments. Upon closing the transaction, the Company paid off its retail flooring facilities in the aggregate amount of $31.5 million and additionally paid off 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. An additional $1.8 million was received from the buyer as an adjustment to the proceeds for the manufactured housing loan portfolio. As part of the sale, the Company assigned the majority of its leases for manufactured housing retail locations to the buyer. Although the Company received indemnification from the assignee, the Company would become liable for such leases if the assignee were to fail to continue making lease payments. The Company’s total lease guarantees are further described in Note 9.
In November 2005, the Company divested most of its remaining assets and assigned various remaining operating leases for retail store locations. In addition, sublease agreements were signed for various other operating leases for retail store locations. This transaction was not material to the Company’s financial position or results of operations.
12
Assets and liabilities at the balance sheet dates that were expected to be sold or extinguished were reclassified to current assets and liabilities from discontinued operations, respectively, and consisted of the following (amounts in thousands):
|
| January 29, 2006 |
| April 24, 2005 |
| ||
|
|
|
|
|
| ||
Current assets from discontinued operations: |
|
|
|
|
| ||
Inventories |
| $ | — |
| $ | 74,000 |
|
Property, plant and equipment, net |
| — |
| 916 |
| ||
Finance loans receivable |
| — |
| 70,868 |
| ||
|
|
|
|
|
| ||
|
| $ | — |
| $ | 145,784 |
|
Current liabilities from discontinued operations: |
|
|
|
|
| ||
Customer deposits |
| $ | — |
| $ | 6,345 |
|
Retail flooring liabilities |
| — |
| 37,608 |
| ||
Warehouse line of credit |
| — |
| 40,749 |
| ||
|
|
|
|
|
| ||
|
| $ | — |
| $ | 84,702 |
|
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):
|
| 13 Weeks Ended |
| ||||
|
| January 29, 2006 |
| January 23, 2005 |
| ||
|
|
|
|
|
| ||
Revenues |
| $ | 429 |
| $ | 55,755 |
|
Net loss before charges: |
|
|
|
|
| ||
Retail |
| $ | (2,231 | ) | $ | (9,637 | ) |
Financial services |
| (218 | ) | (519 | ) | ||
Gain on sale, impairment charges and termination benefits: |
|
|
|
|
| ||
One-time termination benefits |
| (883 | ) | — |
| ||
|
|
|
|
|
| ||
Discontinued operations, net |
| $ | (3,332 | ) | $ | (10,156 | ) |
|
| 40 Weeks Ended |
| 39 Weeks Ended |
| ||
|
| January 29, 2006 |
| January 23, 2005 |
| ||
|
|
|
|
|
| ||
Revenues |
| $ | 93,298 |
| $ | 190,834 |
|
Net loss before charges: |
|
|
|
|
| ||
Retail |
| $ | (15,530 | ) | $ | (23,085 | ) |
Financial services |
| (1,041 | ) | (1,174 | ) | ||
Gain on sale, impairment charges and termination benefits: |
|
|
|
|
| ||
Gain on sale of insurance assets |
| 2,417 |
| — |
| ||
Impairment adjustment to retail housing long-lived assets |
| 288 |
| — |
| ||
Impairment of finance loans receivable |
| (1,882 | ) | — |
| ||
Impairment of financial services long-lived assets |
| (926 | ) | — |
| ||
Severance costs |
| (1,642 | ) | — |
| ||
One-time termination benefits |
| (2,869 | ) | — |
| ||
|
|
|
|
|
| ||
Discontinued operations, net |
| $ | (21,185 | ) | $ | (24,259 | ) |
The net loss before impairment charges includes interest expense of $1.7 million and $2.4 million during the nine-month periods ended January 2006 and 2005 on the retail flooring liability and the warehouse line of credit, respectively, both of which were repaid upon sale of their related collateral. Of the $4.5 million of severance costs and one-time termination benefits expensed, $3.1 million had been paid by the end of the third quarter. Cumulative impairment charges and termination benefits, including charges recorded in the prior fiscal year, partially offset by the gain on sale, totaled $55.8 million. Additional impairment, one-time termination costs and contract termination costs are not expected to be significant; however, some ongoing general and administrative costs are expected to be incurred as part of the orderly liquidation of the remaining operations, which is expected to be substantially complete by fiscal year-end. Due to the significant operating losses incurred by the Company’s discontinued operations, no benefit for income taxes has been provided for them.
13
7) Short-term Borrowings
Secured Credit Facility:
During May 2004, the Company’s credit facility was renewed and extended until July 31, 2007. In March 2005, the Company 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 December through April to $200 million. In addition, a limitation on borrowing against inventory within the 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 domestic 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.
In the second fiscal quarter, in conjunction with the sale of the majority of the assets of the retail operations and the manufactured housing loan portfolio to Clayton Homes, Inc., the portion of the outstanding borrowings supported by the assets of the retail operation in the amount of $48.2 million was retired using the proceeds from the sale. Following the pay-down, borrowings under the facility are supported solely by assets of the Company’s manufacturing operations, designated as Fleetwood Holdings, Inc. (FHI). Total loan commitments under the credit agreement, however, were not reduced.
In November 2005, the facility was further amended to reset the designated EBITDA covenant requirements.
Borrowings are secured by receivables, inventory and certain other assets, primarily real estate, and are used for working capital and general corporate purposes. Under the senior credit agreement, Fleetwood Enterprises, Inc. is a guarantor of the borrowings and letters of credit of FHI.
The balance outstanding on the revolver as reflected on the balance sheet for the quarters ended January 2006 and 2005 in other short-term borrowings was $93,000 and $59.4 million, respectively. The revolving credit line bears interest, at the Company’s 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 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 January 29, 2006, the borrowing base totaled $217 million. After consideration of standby letters of credit of $64.3 million and the outstanding borrowings, including the real estate term loan, unused borrowing capacity was approximately $131.3 million.
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, which it elected to do beginning November 15, 2001. 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. The total amount of distributions accrued and deferred, including interest, was $61.2 million as of January 29, 2006. Under the terms of the governing instruments, the Company was permitted to defer distributions on the Trust I Securities through August 2006; however, the deferred distributions, plus interest, along with the current distribution were paid in full on February 15, 2006, subsequent to the end of the third fiscal quarter. The Company once again has the right to elect to defer distributions for up to 20 consecutive quarters.
14
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 resold 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 $155 million for inventory at manufactured housing dealers and $316 million for inventory at RV dealers as of January 29, 2006, 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 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 nine months of fiscal year 2006, the Company repurchased $2.0 million of product compared to $3.5 million for the same period in the prior year, with a repurchase loss of $613,000 incurred this year compared to a repurchase loss of $487,000 in the prior year.
Guarantees:
In November 2002, the FASB issued FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” Interpretation No. 45 discusses the necessary disclosures to be made by a guarantor in its financial statements about its obligations under certain guarantees that it has issued. It also discusses that the guarantor must recognize a liability, at fair value, at the inception of the guarantee for the obligation incurred in issuing the guarantee.
As part of the sale of the Company’s manufactured housing retail business, there are currently approximately 100 leased manufactured housing retail locations assigned to the buyers. Although the Company received indemnification from the assignees, if the assignees were to become unable to continue making payments under the assigned leases, the Company estimates its maximum potential obligation with respect to the assigned leases to be $15.4 million as of January 29, 2006. The Company shall remain liable for such lease obligations for the remaining lease terms, which range from one month to nine years. The fair value of the guarantee is not material at January 29, 2006.
Other:
As of January 29, 2006, the Company was a party to 11 limited guarantees, aggregating $4.4 million, to certain obligations of certain retailers to floorplan lenders and an additional two unsecured guarantees aggregating $3.5 million for other obligations.
Fleetwood is also a party to certain guarantees that relate to its credit arrangements. These are more fully discussed in Note 12 of 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 its 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 the results of operations and financial position.
In May 2003, 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 the Company’s request for a permanent injunction against Coleman prohibiting Coleman from licensing the Coleman name for recreational vehicles to companies other than Fleetwood. Coleman has appealed that
15
ruling. 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 is pursuing all available appellate remedies.
Brodhead et al v. Fleetwood Enterprises, Inc. was filed in federal court in the Central District of California on June 22, 2005. The complaint states a claim for damages growing out of certain California statutory claims with respect to alleged defects in a specific type of plastic roof installed on folding trailers from 1995 through 2003. The plaintiffs have clarified that the class for which they are seeking certification extends to all owners of folding trailers produced by Fleetwood Folding Trailers, Inc. with this type of roof, as well as any former owners who may have had to pay to have this type of roof repaired. The subject matter of the claim is similar to a putative class action previously filed in California state court in Griffin et al v. Fleetwood Enterprises, Inc. et al. The California trial court denied class action certification in the Griffin matter on April 28, 2005, and the plaintiffs have appealed that ruling. It is not possible at this time to properly assess the risk of an adverse verdict or the magnitude of any possible exposure with respect to either of the Brodhead or the Griffin complaints. Fleetwood intends to vigorously defend both matters.
10) Direct Placement
On November 19, 2005, the Company completed a direct equity placement of 7,000,000 shares of registered common stock at $10.10 per share, with net proceeds to the Company of approximately $66 million after deducting commissions and offering expenses. On February 15, 2006, a portion of the net proceeds in the amount of $58.8 million were used to repay in full deferred distributions on the Company’s 6% convertible trust preferred securities, plus accrued interest on the deferral amount. Remaining proceeds were intended for general corporate purposes.
16
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, fuel prices and other factors 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;
• availability and pricing of raw materials and components;
• 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 2005, we had a 12.5 percent share of the overall recreational vehicle market, consisting of a 17.5 percent share of the motor home market, an 8.7 percent share of the travel trailer market and a 38 percent share of the folding trailer market.
In fiscal 2005, we sold 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 2005, we had a 16.3 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 in Canada. In fiscal 1999, we entered the manufactured housing retail business through a combination of acquisitions and internal development of new retail sales centers. We later established a financial services subsidiary to provide finance and insurance products to customers of 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 of RV and housing manufacturing and in July and August 2005, the majority of the assets of these businesses were sold.
Critical Accounting Policies
Our financial statements are prepared in accordance with U.S. generally accepted accounting principles. These principles require 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
17
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 dealers within 15 days of the invoice date.
Warranty
We typically provide customers of our products with a one-year warranty covering defects in material or workmanship with longer warranties on certain structural components. We record a liability based on our best estimate of the amounts necessary to resolve 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 benefits, 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 relevant 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 as part of our periodic assessment of the adequacy of the valuation allowance, 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 primary reason for this reduction was an increase in the market value of our convertible trust preferred securities of Fleetwood Capital Trust. At that time, 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 relevant 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 that further adjustment is required, we will record the provision or benefit in the period of such determination.
18
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 $155 million for inventory at manufactured housing dealers and $316 million for inventory at RV dealers as of January 29, 2006, 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 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. In the past three fiscal years we have had the following repurchase activity (dollars in millions):
|
| 40 Weeks Ended |
| 39 Weeks Ended |
| Fiscal Years |
| ||||||
|
| January 29, 2006 |
| January 23, 2005 |
| 2005 |
| 2004 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Units |
| 61 |
| 105 |
| 174 |
| 177 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Repurchase amount |
| $ | 2.0 |
| $ | 3.5 |
| $ | 6.3 |
| $ | 3.7 |
|
|
|
|
|
|
|
|
|
|
| ||||
Loss recognized |
| $ | 0.6 |
| $ | 0.5 |
| $ | 1.2 |
| $ | 0.6 |
|
19
Results of Operations
The following table sets forth certain statements of operations data expressed as a percentage of net sales for the periods indicated (certain amounts in this section may not recompute due to rounding):
|
| 13 Weeks Ended |
| 40 Weeks Ended |
| 39 Weeks Ended |
| ||
|
| Jan. 29, 2006 |
| Jan. 23, 2005 |
| Jan. 29, 2006 |
| Jan. 23, 2005 |
|
|
|
|
|
|
|
|
|
|
|
Net sales |
| 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % |
Cost of products sold |
| 80.9 |
| 84.7 |
| 82.3 |
| 82.4 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
| 19.1 |
| 15.3 |
| 17.7 |
| 17.6 |
|
Operating expenses |
| (16.9 | ) | (20.4 | ) | (16.2 | ) | (16.6 | ) |
Other, net |
| (0.1 | ) | (2.5 | ) | (0.3 | ) | (0.7 | ) |
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
| 2.1 |
| (7.6 | ) | 1.2 |
| 0.3 |
|
Other income (expense) |
|
|
|
|
|
|
|
|
|
Investment income |
| 0.3 |
| 0.2 |
| 0.2 |
| 0.1 |
|
Interest expense |
| (1.4 | ) | (1.4 | ) | (1.3 | ) | (1.1 | ) |
Other, net |
| — |
| — |
| — |
| (0.2 | ) |
Income (loss) from continuing operations before income taxes |
| 1.0 |
| (8.8 | ) | 0.1 |
| (0.9 | ) |
(Provision) benefit for income taxes |
| (0.2 | ) | 0.1 |
| (0.6 | ) | (0.1 | ) |
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
| 0.8 |
| (8.7 | ) | (0.5 | ) | (1.0 | ) |
Discontinued operations |
| (0.6 | ) | (2.0 | ) | (1.2 | ) | (1.3 | ) |
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
| 0.2 | % | (10.7 | )% | (1.7 | )% | (2.3 | )% |
Current Quarter Compared to Corresponding Quarter of Last Year
Consolidated Results:
The following table presents consolidated net sales by segment for the quarters ended January 29, 2006 and January 23, 2005 (amounts in thousands):
|
| 13 Weeks Ended |
|
|
|
|
| |||||||||
|
|
|
| % of |
|
|
| % of |
| Change |
| |||||
|
| Jan. 29, 2006 |
| Net Sales |
| Jan. 23, 2005 |
| Net Sales |
| Amount |
| % |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
RV Group |
| $ | 365,342 |
| 62.5 |
| $ | 342,591 |
| 67.3 |
| $ | 22,751 |
| 6.6 |
|
Housing Group |
| 208,812 |
| 35.8 |
| 183,734 |
| 36.1 |
| 25,078 |
| 13.6 |
| |||
Supply Group |
| 9,712 |
| 1.7 |
| 12,711 |
| 2.5 |
| (2,999 | ) | (23.6 | ) | |||
Intercompany sales |
| — |
| — |
| (29,875 | ) | (5.9 | ) | 29,875 |
| (100.0 | ) | |||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Net sales |
| $ | 583,866 |
| 100.0 |
| $ | 509,161 |
| 100.0 |
| $ | 74,705 |
| 14.7 |
|
Consolidated revenues improved by 14.7 percent consisting of a 6.6 percent increase in sales for the RV Group and a 13.6 percent increase in Housing Group sales. Substantially all of the Company’s manufactured housing retail business was sold in the second quarter of the current fiscal year. The prior year third quarter consolidated revenues excluded $29.9 million in intercompany sales of manufactured homes to the Company’s former retail stores, while the current quarter had none. The sale of travel trailers and manufactured homes for disaster relief purposes provided substantial revenue uplift in what is normally a seasonally weak quarter. Revenues from these sales to government agencies were approximately $129.2 million, compared to similar disaster relief sales of $8.9 million in the prior year. Fulfillment of orders for some traditional dealer business was pushed into the fourth fiscal quarter, especially travel trailer production where order backlogs continue to be elevated. Motor home sales continued their recent downward trend and suffered a decline broadly consistent with the year-over-year slowdown in industry sales. Our motor home sales declines have been further exacerbated by dealers reducing their own inventory levels by approximately 12 percent.
Gross margin strengthened to 19.1 percent of sales from 15.3 percent, primarily due to improved operating leverage from the incremental disaster relief production, combined with elevated sales incentives in the prior year that targeted excess inventory levels experienced during that period.
20
Operating expenses, which include selling, warranty and service, and general and administrative expenses, decreased by $5.3 million in the third quarter compared to the prior year and decreased as a percentage of sales from 20.4 percent to 16.9 percent. The decrease from the prior year was primarily due to lower selling expenses in both the RV and housing businesses, as well as lower warranty costs attributable to disaster relief products, partially offset by an increase in general and administrative costs caused by higher incentive compensation costs.
Other operating expenses in the current quarter of $0.6 million consisted of impairment costs related to the write-down of idle facilities held for sale and the disposal or sale of fixed assets. The prior year expense included a $14.6 million charge related to the judgment in the Coleman litigation, which remains subject to appeal.
The resulting operating income for the third quarter was $11.9 million compared to a loss of $39.1 million in the prior year.
Other income (expense) consists of interest income and expense, which, in the net, increased slightly to an expense of $6.2 million.
The current quarter tax provision resulted primarily from state tax liabilities in several states, with no offsetting tax benefits in other states, partially offset by foreign tax benefits.
Recreational Vehicles:
The following table presents RV Group net sales by division for the periods ended January 29, 2006 and January 23, 2005 (amounts in thousands):
|
| 13 Weeks Ended |
|
|
|
|
| |||||||||
|
|
|
| % of |
|
|
| % of |
| Change |
| |||||
|
| Jan. 29, 2006 |
| Net Sales |
| Jan. 23, 2005 |
| Net Sales |
| Amount |
| % |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Motor homes |
| $ | 180,677 |
| 49.5 |
| $ | 231,073 |
| 67.5 |
| $ | (50,396 | ) | (21.8 | ) |
Travel trailers |
| 169,256 |
| 46.3 |
| 95,334 |
| 27.8 |
| 73,922 |
| 77.5 |
| |||
Folding trailers |
| 15,409 |
| 4.2 |
| 16,184 |
| 4.7 |
| (775 | ) | (4.8 | ) | |||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Net sales |
| $ | 365,342 |
| 100.0 |
| $ | 342,591 |
| 100.0 |
| $ | 22,751 |
| 6.6 |
|
Recreational vehicle sales increased by 6.6 percent when compared to last year’s January quarter. Motor home sales decreased by 21.8 percent to $180.7 million compared to $231.1 million in the prior year. Retail market share for motor homes for calendar 2005 was 17.5 percent, down slightly from 17.9 percent in the prior year. Declining consumer confidence, stemming from increasing interest rates, volatile fuel prices, and global tensions and hostilities, has resulted in a reduction of calendar year 2005 retail sales by approximately 9 percent and has caused dealers to reduce their inventories. In the prior year, dealer inventories increased, compounding the year-over-year shortfall of wholesale shipments.
Travel trailer sales increased by 77.5 percent to $169.3 million versus $95.3 million in the prior year. For the second consecutive quarter, the travel trailer division produced significant quantities of disaster relief products. In the third quarter, FEMA trailers accounted for $71.8 million of revenues, compared with $8.9 million from similar products in the comparable quarter last year. Immediate needs of our traditional dealer network were also accommodated; however, order backlogs related to units for the spring selling season are elevated. The higher production levels established to meet disaster relief production are expected to enable us to quickly fulfill in the fourth quarter traditional dealer orders that were deferred. Retail market share, which excludes FEMA products, declined from 11.6 percent in calendar 2004 to 8.7 percent in calendar 2005. The Company lost market share as a result of less competitive product offerings and erosion in dealer confidence during 2005. New models have gradually been introduced over recent months and the product offering will be further refreshed with the release of new 2007 model year products targeted for this spring and summer. Dealer and consumer acceptance of these units will become apparent throughout calendar 2006. Folding trailer sales declined by 4.8 percent to $15.4 million during the current quarter compared to the prior year, due to ongoing industry weakness in this segment. Market share improved very slightly to 38 percent in calendar 2005.
Gross margin for the quarter was up from 11.0 percent to 15.3 percent. In the prior year, margins, particularly in travel trailers, were impacted by the high cost of sales incentives used to mitigate excess inventory levels. In the current quarter, increased production levels positively influenced material costs, while higher labor rates were contained by improved labor efficiencies. The additional costs of shipping disaster relief products, which were passed on to customers and included in both revenues and cost of goods sold, had the effect of increasing margins relative to the prior-year period.
Operating expenses for the RV Group were $4.4 million lower and decreased as a percentage of sales from 16.4 percent in the prior year to 14.2 percent for the current quarter. The decrease was due to lower selling costs, coupled with a reduction in certain general and administrative costs, including product development and marketing initiatives. Other expense for the prior year quarter included a charge of $14.6 million related to a judgment in the Coleman litigation that is currently under appeal.
21
The RV Group generated a $3.8 million operating profit compared to a loss of $33.5 million in the prior year. The motor home division incurred a loss of $4.1 million in the third quarter, while the travel trailer division generated a record operating profit for the third quarter of $11.2 million. The folding trailer division suffered an operating loss of $3.3 million.
Manufactured Housing:
The following table presents Housing Group net sales for the periods ended January 29, 2006 and January 23, 2005 (amounts in thousands):
|
| 13 Weeks Ended |
| Change |
| |||||||
|
| Jan. 29, 2006 |
| Jan. 23, 2005 |
| Amount |
| % |
| |||
|
|
|
|
|
|
|
|
|
| |||
Housing sales |
| $ | 208,812 |
| $ | 183,734 |
| $ | 25,078 |
| 13.6 |
|
Results for the Housing Group consisted of factory wholesale revenues, which in the prior year quarter included sales to our retail business prior to its divestiture in August 2005. Sales to these Company-owned stores and any resulting intercompany profit were eliminated in consolidation. Activities of the retail business are presented separately in the results of discontinued operations.
Housing Group revenues for the quarter increased by 13.6 percent to $208.8 million from $183.7 million in the prior year. Prior year revenues included $29.9 million of intercompany sales to Company-owned retail stores. Current year sales included $57.3 million of product created to accommodate disaster relief orders with none in the comparable quarter last year.
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 a slightly higher average selling price per home, bolstered by higher unit volume. Manufacturing unit volume increased from last year by 10.3 percent to 6,104 homes while the total number of sections sold decreased by 2.3 percent to 9,398. The Company’s market share, based on wholesale shipments, for calendar 2005 decreased to 16.3 percent from 17.6 percent last year. Fleetwood’s market share for multi-section homes has increased while our share of the single-section market has declined. The reduction in single-section market share was attributed to large disaster relief shipments by the industry in the current year and a reduction in the volume of our business with community and park developers. Despite some traditional dealer business being deferred into the fourth quarter, quarter-end backlogs were lower than expected, even adjusting for seasonal weakness. Market conditions in certain regions of the country, notably California and Arizona, have been good. Traditional manufactured housing markets, such as Texas and parts of the Midwest and Southeast, continued to show weakness and anticipated improvements from rebuilding efforts in the Gulf have been slow to gain momentum. The underlying manufactured housing market continued to be adversely affected by limited availability of retail financing, lower dealer inventory levels and competition from conventional builders benefiting from low mortgage rates.
The third quarter gross profit margin was 25.5 percent, an improvement over both the second quarter and the 21.2 percent achieved in the prior year. The current year results reflect high volume of disaster relief production, which gave rise to improved material and labor cost percentages.
Operating expenses were $2.8 million lower, driven by a reduction in selling and warranty and service expenses, partially offset by higher incentive compensation costs related to higher profits.
The Housing Group operating income of $13.1 million was $17.4 million higher than the prior year, mainly due to the impact of higher sales and production volumes combined with efforts to lower operating expenses.
Supply Operations:
The Supply Group contributed gross third quarter revenues of $50.5 million compared to $50.8 million a year ago, of which $9.7 million and $12.7 million, respectively, were sales to third-party customers. Operating losses totaled $0.4 million in the current quarter compared to an operating profit of $0.6 million in the prior year.
Discontinued Operations:
In March 2005, we announced our intention to exit the manufactured housing retail and financial services businesses and most of these operations were sold during our second fiscal quarter. The businesses are presented as discontinued operations in the Company’s financial statements. Losses from discontinued operations were $3.3 million in the current quarter, compared to a loss of $10.2 million in the comparable quarter last year. The current quarter loss consists of general and administrative costs associated with wind-down and closure activities.
22
Current Year-to-Date Compared to Corresponding Period of Last Year
Consolidated Results:
The following table presents consolidated net sales by segment for the nine-month periods ended January 29, 2006 and January 23, 2005 (amounts in thousands):
|
| 40 Weeks Ended |
| 39 Weeks Ended |
|
|
|
|
| |||||||
|
|
|
| % of |
|
|
| % of |
| Change |
| |||||
|
| Jan. 29, 2006 |
| Net Sales |
| Jan. 23, 2005 |
| Net Sales |
| Amount |
| % |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
RV Group |
| $ | 1,182,015 |
| 64.6 |
| $ | 1,278,574 |
| 70.4 |
| $ | (96,559 | ) | (7.6 | ) |
Housing Group |
| 638,124 |
| 34.9 |
| 593,298 |
| 32.7 |
| 44,826 |
| 7.6 |
| |||
Supply Group |
| 35,330 |
| 1.9 |
| 42,943 |
| 2.4 |
| (7,613 | ) | (17.7 | ) | |||
Intercompany sales |
| (25,627 | ) | (1.4 | ) | (100,292 | ) | (5.5 | ) | 74,665 |
| 74.4 |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Net sales |
| $ | 1,829,842 |
| 100.0 |
| $ | 1,814,523 |
| 100.0 |
| $ | 15,319 |
| 0.8 |
|
Consolidated revenues increased 0.8 percent due to a 7.6 percent improvement in Housing Group sales offset by a 7.6 percent decline in the RV business. The Company’s retail business was sold in the second quarter of the current fiscal year. In the prior year, $100.3 million of intercompany sales were excluded versus $25.6 million in the current year, contributing to the increase in consolidated net sales. Significant sales of disaster relief travel trailer units and manufactured homes partially offset by a softer motor home market and weaker sales of traditional RV towable products characterized year-to-date revenues.
Gross margin improved slightly to 17.7 percent from 17.6 percent of sales mainly due to improved operating leverage in the travel trailer and housing businesses, partially offset by the effect of product mix changes and lower sales volumes of motor homes.
Operating expenses, which include selling, warranty and service, and general and administrative expenses, were down by $5.5 million in the first nine months and decreased as a percentage of sales from 16.6 percent to 16.2 percent. Other expenses for the current period of $5.9 million included approximately $4.9 million of severance costs related to restructuring efforts, $1.5 million of impairment charges on idle facilities held for sale and a $0.6 million gain on sale of fixed assets. In the prior period, Other expense included a charge of $14.6 million related to an adverse judgment in the Coleman litigation that is currently under appeal, partially offset by a $2.3 million gain on sale from the disposition of a lumber-milling operation.
Operating income for the first nine months was $21.2 million compared to operating income of $5.6 million in the prior-year period.
Other income (expense), which includes interest income and expense, was a net expense of $18.7 million compared to an expense of $21.0 million in the prior-year period. Net interest expense has not changed significantly. During the first quarter of the prior year, we completed various transactions related to the call for redemption of certain convertible preferred securities and paid a premium of $2.7 million in excess of interest accrued, related to either the redemption premium or privately negotiated incentive payments to convert certain holdings prior to the redemption date.
The current period 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 was the consequence of 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 January 29, 2006 and January 23, 2005 (amounts in thousands):
|
| 40 Weeks Ended |
| 39 Weeks Ended |
|
|
|
|
| |||||||
|
|
|
| % of |
|
|
| % of |
| Change |
| |||||
|
| Jan. 29, 2006 |
| Net Sales |
| Jan. 23, 2005 |
| Net Sales |
| Amount |
| % |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Motor homes |
| $ | 727,207 |
| 61.5 |
| $ | 851,282 |
| 66.6 |
| $ | (124,075 | ) | (14.6 | ) |
Travel trailers |
| 393,425 |
| 33.3 |
| 361,374 |
| 28.2 |
| 32,051 |
| 8.9 |
| |||
Folding trailers |
| 61,383 |
| 5.2 |
| 65,918 |
| 5.2 |
| (4,535 | ) | (6.9 | ) | |||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Net sales |
| $ | 1,182,015 |
| 100.0 |
| $ | 1,278,574 |
| 100.0 |
| $ | (96,559 | ) | (7.6 | ) |
Recreational vehicle sales fell 7.6 percent to $1.18 billion in the first nine months compared to $1.28 billion in the same period of the prior year. Motor home sales were down 14.6 percent and were the primary cause of the overall decrease, partially offset by an
23
improvement in travel trailer sales that resulted from the production of a significant number of units for disaster relief orders. The decline in motor homes was in line with overall industry experience of lower shipments compared to peak sales in calendar 2004. Travel trailer sales to the traditional dealer base declined due to lost market share that resulted from less competitive product offerings and erosion in dealer confidence. Folding trailer sales were down 6.9 percent from the prior year, largely tracking the overall industry decline in this segment.
Gross margin declined from 13.5 percent to 13.2 percent. A shift towards lower-priced motor home products, along with inefficiencies related to lower production volume, resulted in lower margins. Recent improvements in material and labor costs for travel trailer products associated with increased capacity utilization in the second and third quarters related to disaster relief production partially offset the decline in motor home margins. Labor costs were generally higher as a result of changes to production compensation programs that were made in the latter part of calendar 2004. Improved labor efficiencies within the travel trailer division minimized the impact of these rate increases but these improvements may not be fully sustainable.
Operating expenses for the RV Group declined $10.2 million and increased as a percentage of sales from 13.1 percent in the prior year to 13.3 percent for the current period. The dollar decrease was mainly the result of lower selling expenses following the reorganization of this function, as well as lower volumes, combined with lower general and administrative expenses, due in part to the elimination of certain product initiatives and marketing efforts, as well as lower incentive compensation. Other expense for the prior year period included a charge of $14.6 million related to a judgment in the Coleman litigation that is currently under appeal.
The RV Group incurred a $2.0 million operating loss for the first nine months, compared to a $9.3 million loss in the prior year period. In the same period, motor home operating income decreased by $28.9 million to $4.0 million, the travel trailer operating loss was $1.3 million, a $21.2 million improvement, and the folding trailer division incurred an operating loss of $4.6 million, which was an improvement of $15.1 million over the prior-year period.
Manufactured Housing:
The following table presents Housing Group sales for the nine-month periods ended January 29, 2006 and January 23, 2005 (amounts in thousands):
|
| 40 Weeks Ended |
| 39 Weeks Ended |
| Change |
| |||||
|
| Jan. 29, 2006 |
| Jan. 23, 2005 |
| Amount |
| % |
| |||
|
|
|
|
|
|
|
|
|
| |||
Housing sales |
| $ | 638,124 |
| $ | 593,298 |
| $ | 44,826 |
| 7.6 |
|
Results for the Housing Group consisted of factory wholesale revenues, including sales to our retail business prior to its divestiture in August 2005. Sales to these Company-owned stores and any resulting intercompany profit were eliminated in consolidation. Activities of the former retail business are presented separately in the results of discontinued operations.
Housing Group revenues for the first nine months increased by 7.6 percent to $638.1 million. The improvement in sales reflected a higher average selling price per home on slightly higher shipments compared to the prior year. Unit volume increased 1.6 percent to 18,572 homes. The total number of sections sold decreased by 1.4 percent from last year to 30,382, as a result of a shift in sales mix to more single-section homes for disaster relief. Despite increased sales due to the impact of natural disasters over the past two years, the underlying manufactured housing market continued to be adversely affected by limited availability of retail financing, lower levels of dealer inventories and competition from conventional builders due to low mortgage rates.
Gross profit margins increased from 23.2 percent to 24.4 percent, due in part to lower materials and labor costs permitted by improved volumes and higher efficiencies from disaster relief sales, as well as efforts to reduce manufacturing overheads.
Operating expenses were down $4.0 million and 2.1 percent as a percentage of sales. The decrease was attributable to lower selling and warranty expenses, partially offset by higher general and administrative expenses that included increased incentive compensation. Other expenses in the current year consisted primarily of restructuring and impairment charges.
The Housing Group generated an operating profit of $32.2 million, which was $18.8 million higher than the prior year due to disaster relief sales and cost reduction efforts.
Supply Operations:
The Supply Group contributed revenues of $161.2 million for the first nine months compared to $180.1 million in the prior year, of which $35.3 million and $42.9 million, respectively, were sales to third party customers. Operating income decreased from $3.4 million in the prior year to $2.2 million in the first nine months mainly due to the lower sales.
24
Discontinued Operations:
As previously mentioned, we announced our intention to exit the manufactured housing retail and financial services businesses in March 2005. These businesses are presented as discontinued operations in the Company’s financial statements. Revenues from discontinued operations were $93.3 million in the first nine months, generated prior to the second quarter sale of the businesses, compared to $190.8 million in the prior year. Losses from discontinued operations were $21.2 million in the current period, compared to a loss of $24.3 million in the comparable period last year. The current year-to-date loss includes a gain on sale of $2.4 million from the sale of insurance assets. Additionally, impairment charges of $2.5 million and severance costs and one-time termination benefits totaling $4.5 million were recognized.
Business Outlook
Industry motor home sales slowed considerably in 2005 from 2004’s record pace. Results of early spring 2006 retail shows have been mixed, but overall suggest continued weakness. We believe that sales are being adversely affected by concerns about rising interest rates and volatile fuel prices. Our experience has followed that of the overall industry, as calendar 2005 unit shipments were down 14 percent as dealers adjusted their inventory levels in anticipation of a softer market. Our market share decreased only slightly during this period, and as calendar 2006 unfolds, we expect to benefit from recently announced product innovations such as availability of the full-wall slide technology in three diesel brands, which have now begun to retail, and a number of improved floor plans. Also, the resumption of Class C motor home production in the eastern part of the U.S. should enable more cost-effective distribution and give a boost to our competitive posture. Our own inventories of finished goods continue to be at reasonable levels and production rates have been adjusted to support underlying retail sales.
Travel trailer operations received an uplift from disaster relief orders that should continue through the end of the fiscal year, although declining during the fourth quarter. The underlying trend for dealer business, however, continues to be one of lower shipments of Fleetwood’s travel trailers. Industry travel trailer retail sales were 3 percent higher in calendar 2005 compared to the prior year. Our market share has deteriorated from 11.6 percent to 8.7 percent over this period, generally as a result of less competitive product offerings and erosion in dealer confidence that have caused some contraction in our shelf space on dealers’ lots 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 products and floor plans that have been overly complex to manufacture, contributing to higher labor and warranty costs. These factors have adversely affected the strength of our dealer distribution network, particularly in the central part of the country.
Initiatives to reverse these trends are underway and are expected to take effect over time. We have recently introduced new ultralite and hybrid models as well as new innovative toy hauler floor plans under the GearBox and Nitrous brands. Additionally, the development of new cost and feature-competitive products is underway for model year ‘07, and we expect to see improvements as these products are introduced into the market between April and August 2006. We reopened a travel trailer plant in Edgerton, Ohio, which will initially take on a large portion of the remaining FEMA trailer order. In the longer run, however, the additional line will allow us to simplify the production at two neighboring plants as each will specialize in building trailers of a specific construction type. Our goal is to restore manufacturing efficiencies within the travel trailer division in the near term, and we believe that all our initiatives will be rewarded over the longer term by improved shipments, higher margins, and a recovery in market share.
Quality processes continue to be 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. We have renewed our focus on dealer development activities in order to address the decline in the strength of our distribution network, especially for travel trailers and east coast Class C products. Our market share in folding trailers improved slightly in calendar 2005 to 38 percent, despite the fact that retail sales are down 16 percent, proportionate to the industry as a whole. We continue to take significant actions to downsize the cost structure and streamline operations in response to the continued weakness in the overall industry segment.
Favorable demographics suggest sustainable growth will likely be realized for RVs through the end of the decade as baby boomers 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. These conclusions receive strong support from the University of Michigan 2005 national survey of recreation vehicle owners, sponsored by the Recreation Vehicle Industry Association.
The manufactured housing market entered into a steep decline that began in 1999 before stabilizing at or near a 40-year low in 2003 and 2004. Industry shipments, which were almost flat for the first nine months of calendar 2005, increased by 11.7 percent for the full year as a direct result of homes that were made to FEMA specifications for disaster relief. However, excluding FEMA sales, the market was again essentially flat in 2005. Industry shipments of units for disaster relief in the last two months of calendar 2005 caused our market share to decline from 17.6 percent to 16.3 percent. The sale of the retail business and related store closures, as well as a lack of orders from major community developers also had a negative market share impact that is expected to continue, at least in the near term. Competition from repossessed homes, as well as relatively high retail interest rates, more stringent lending standards and a shortage of retail financing for manufactured housing have adversely affected the industry. Overall, the industry has stabilized,
25
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, remain healthy, while more traditional manufactured housing markets, such as Texas, the Midwest and parts of the Southeast, have deteriorated. Disaster relief orders from government agencies kept plants near capacity through the end of the calendar year, but current demand in the Gulf Coast region has been lower than usual as residents wait for the completion of clean up efforts, insurance reimbursements and floodplain determinations. The outlook in remaining areas continues to be uncertain. We are encouraged, however, by the excellent reviews our new regionally designed homes are receiving from dealers and consumers alike, although dealers have been slow to replace existing inventory with our new models.
Inventories of foreclosed homes have continued to decline; 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 mortgage on a traditional site-built home. 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 modular business and sales to community and park operators, land developers and the military. Longer-term demand for affordable housing is expected to grow as a result of the massive rebuilding requirements in the Gulf States, greater numbers of baby boomers reaching retirement age and the escalating cost of site-built homes and conventional mortgage interest rates. 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 tracts and military sites, as well as in existing markets such as rural areas and in manufactured housing communities and parks.
Following the recent sale of our captive retail housing and financial services businesses, the shift in focus back to our core manufacturing operations is essentially complete. At the same time, regions and individual manufacturing facilities are being given greater autonomy regarding product and operational decisions. Restructuring actions to date have resulted in a more cost-effective management structure with a greater emphasis on sustainable profitability. However, sluggish demand for motor homes and manufactured housing suggest that results for the fourth quarter will not show significant improvement over the third quarter.
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 $34.2 million was used in operating activities during the first nine months of fiscal 2006 compared to cash used of $101.4 million for the similar period one year ago. In the current period, the loss from continuing operations, adjusted for depreciation and amortization, gains from sales, the change in the deferred tax valuation allowance, and impairment charges, generated $20.6 million of operating cash. Changes in remaining working capital balances during this period used $54.8 million in cash. Most of this change related to an increase in receivables associated with disaster relief sales, which are typically outstanding for a longer period than traditional sales. Since the quarter-end, a substantial portion of these receivables have been collected. In the prior year, cash consumed by operations resulted from the adverse changes to inventory and receivables offset only slightly by income, as adjusted, from continuing operations.
Net cash provided by discontinued operations during the first nine months was $43.5 million compared to cash used of $15.8 million in the prior year. The cash generated in the current period resulted from the sale of the retail housing and financial services businesses, offset by the repayment of the retail flooring lines, the warehouse line of credit and losses from operations. The prior year cash used in discontinued operations generally related to operating losses for that period with some offset from working capital changes.
Capital expenditures, net were $12.6 million in the first nine months compared to $28 million in the same period last year, which included the addition of two new motor home paint facilities.
Net cash provided by financing activities was $34.5 million during the first nine months of the year. The Company generated $66 million of net proceeds from the sale of common stock in a private placement transaction in November 2005. Short-term borrowings decreased by $51.6 million during the first nine months of the fiscal year. At the end of the third quarter, short-term borrowings under our secured syndicated credit facility, led by Bank of America, N.A., as administrative agent, were $93,000. Borrowings decreased during the first nine months by $54.9 million, primarily as a result of the repayment of the portion of the facility that was supported by the assets of the retail housing business. Lender commitments to the facility totaled $237 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 $217 million. After consideration of standby letters of credit of $64.3 million and the outstanding borrowings, unused borrowing capacity was approximately $131.3 million. Long-term debt increased by approximately $16.3 million during the first nine months of the fiscal year, primarily as a result of a term loan in the original amount of $22 million, which was fully drawn upon during the first quarter and reduced by a payment of $0.8 million in the third quarter. Stock option exercises generated $3.8 million of proceeds in the first nine months of fiscal 2006.
As a result of the above-mentioned changes, cash and marketable investments increased $36.3 million from $45.5 million as of April 25, 2005, to $81.8 million as of January 29, 2006.
26
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 December through 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 $786,000, respectively. In November, 2005, the facility was further amended to reset the designated EBITDA covenant requirements.
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 its entire manufactured housing loan portfolio. Following the closing of the sale, HomeOne repaid all outstanding borrowings on its warehouse line with Greenwich and terminated that facility. The outstanding balance that was repaid under the line of credit was 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.
Direct Equity Placement
On November 19, 2005, we completed a direct equity placement of 7,000,000 shares of registered common stock at $10.10 per share, with net proceeds to the Company of approximately $66 million, after deducting commissions and offering expenses. On February 15, 2006, subsequent to the end of the third fiscal quarter, $58.8 million of proceeds were used to repay deferred distributions on the Company’s 6% convertible trust preferred securities, plus accrued interest on the deferral amount. The remaining proceeds are being used for general corporate purposes. See Dividends and Distributions for additional details.
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. We have 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 we defer a distribution on the 6% convertible trust preferred securities, we are prevented from declaring or paying dividends on its common stock during the period of the deferral. The total amount of distributions accrued and deferred, including interest, was $61.2 million as of January 29, 2006. On February 15, 2006, we repaid the outstanding cumulative deferred obligation, as well as the current distribution due on that date, for a total of approximately $61.9 million. Once again we have the right to elect to defer distributions for up to 20 consecutive quarters.
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 the entire 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. 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
27
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 holdback pending finalization of the adjustments and satisfaction of certain conditions. The holdback was approximately offset with the subsequent assumption by the buyer of $6 million of customer deposit liabilities and final purchase price adjustments. Upon closing the transaction, we paid off its retail flooring facilities in the aggregate amount of $31.5 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 our secured credit facility supported by the amounts of the retail housing business in the amount of $48.2 million and other working capital items, these transactions were approximately cash neutral.
Other
In our opinion, 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, to be utilized primarily for enhancements to manufacturing facilities.
Contracts and Commitments
Payment obligations for long-term debt, capital leases, operating leases and purchase obligations have not changed significantly from those disclosed at the end of the second quarter.
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.
We describe our lease guarantees in Note 9 to the Company’s financial statements in this Report.
Under the senior credit agreement, Fleetwood Enterprises, Inc. is a guarantor of the borrowings of Fleetwood Holdings, Inc. which includes most of the wholly owned manufacturing subsidiaries.
Fleetwood Enterprises, Inc. has also entered into 11 limited guarantees aggregating $4.4 million to certain obligations of certain retailers to floorplan lenders and an additional two unsecured guarantees aggregating $3.5 million for other obligations.
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) and variable rate debt under the secured credit facility. 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 meet the definition of cash equivalents and are in 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 quarter, 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 $213,000. 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 January 29, 2006.
An evaluation was also performed under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of any change in our internal control over financial reporting that occurred during our last fiscal
28
quarter and that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. That evaluation has included certain internal control areas in which we have made and are continuing to make changes to improve and enhance controls. Management believes that we have maintained adequate internal control over financial reporting.
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 January 29 2006, that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.
29
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
In May 2003, 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. Coleman has appealed that ruling. 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 is pursuing all available appellate remedies.
Brodhead et al v. Fleetwood Enterprises, Inc. was filed in federal court in the Central District of California on June 22, 2005. The complaint states a claim for damages growing out of certain California statutory claims with respect to alleged defects in a specific type of plastic roof installed on folding trailers from 1995 through 2003. The plaintiffs have clarified that the class for which they are seeking certification extends to all owners of folding trailers produced by Fleetwood Folding Trailers, Inc. with this type of roof, as well as any former owners who may have had to pay to have this type of roof repaired. A hearing on the class certification has been scheduled for April 17, 2006. The subject matter of the claim is similar to a putative class action previously filed in California state court in Griffin et al v. Fleetwood Enterprises, Inc. et al. The California trial court denied class action certification in the Griffin matter on April 28, 2005, and the plaintiffs have appealed that ruling. The appeal is scheduled for oral argument before the State of California – Court of Appeal on April 12, 2006. It is not possible at this time to properly assess the risk of an adverse verdict or the magnitude of any possible exposure with respect to either of the Brodhead or the Griffin complaints. Fleetwood intends to vigorously defend both matters.
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.
30
Item 6. Exhibits
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 |
31
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 | |
|
|
| |
March 9, 2006 |
|
|
32