v134000
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 26, 2008
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 1-7699
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) | |
incorporation or organization) | ||
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 x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer x | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes x 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 November 28, 2008 | |
Common stock, $.01 par value | 76,319,526 shares |
PART I FINANCIAL INFORMATION | 3 | ||
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS | 3 | ||
ITEM 1. | FINANCIAL STATEMENTS | 4 | |
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 28 | |
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | 43 | |
ITEM 4. | CONTROLS AND PROCEDURES | 43 | |
PART II OTHER INFORMATION | 43 | ||
ITEM 1. | LEGAL PROCEEDINGS | 43 | |
ITEM 5. | OTHER INFORMATION | 44 | |
ITEM 6. | EXHIBITS | 44 |
2
Unless otherwise indicated, “we,” “us,” “our,” “Fleetwood,” the “Company” and similar terms refer to Fleetwood Enterprises, Inc. and its subsidiaries. Throughout this report, we use the term “fiscal,” as it applies to a year, to represent the fiscal year ending on the last Sunday in April of that year.
This Quarterly Report on Form 10-Q of Fleetwood Enterprises, Inc. (Fleetwood) 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). These statements are based on the beliefs of Fleetwood’s management as well as assumptions made by it, and information currently available to it. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue,” or the negative of these terms or other comparable terminology. Forward-looking statements regarding future events and the future performance of Fleetwood involve risks and uncertainties that could cause actual results to differ materially. These risks and uncertainties include, without limitation, the following items:
• | the significant demands on our liquidity while current economic and credit conditions are severely affecting our operations, including the risk that we will not be able to satisfy the potential repurchase of the convertible senior subordinated debentures in December 2008; |
• | the lack of assurance that we will regain sustainable profitability in the foreseeable future; |
• | our potential inability to decrease our operating losses and negative cash flow despite our recent restructuring; |
• | the effect of ongoing weakness in both the manufactured housing and recreational vehicle markets, especially the recreational vehicle market which has deteriorated sharply in recent months; |
• | the effect of a decline in home equity values, volatile fuel prices and interest rates, global tensions, employment trends, stock market performance, the credit crisis and availability of financing generally, and other factors that can and have had a negative impact on consumer confidence, and which has reduced demand for our products, particularly recreational vehicles; |
• | the availability and cost of wholesale and retail financing for both manufactured housing and recreational vehicles; |
• | repurchase agreements with floorplan lenders, which has resulted in increased costs due to deteriorated market conditions; |
• | our ability to comply with the financial tests and covenants in our existing and future debt obligations; |
• | our ability to obtain, on reasonable terms if at all, the financing we will need in the future to execute our business strategies; |
• | the volatility of our stock price and the risk of delisting from the NYSE due to the current abnormally low trading price; |
• | the dilution associated with any future equity or equity-linked financings that we may undertake to raise additional capital and the risk that the equity pricing may not be favorable to us; |
• | the cyclical and seasonal nature of both the manufactured housing and recreational vehicle industries; |
• | dealers’ desire to reduce inventory levels in the manufactured housing and recreational vehicle industries; |
• | the effect on our sales, margins and market share from aggressive discounting by our competitors; and |
• | the highly competitive nature of our industries, where several of our competitors have stronger balance sheets than we do, and changes in our competitive landscape. |
Although our management believes that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. You should not place undue reliance 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 Item 1A and Exhibit 99.1 of this Form 10-Q.
3
Item 1. Financial Statements
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
Fleetwood Enterprises, Inc.
We have reviewed the condensed consolidated balance sheet of Fleetwood Enterprises, Inc. as of October 26, 2008, the related condensed consolidated statements of operations for the thirteen-week periods ended October 26, 2008 and October 28, 2007, the related condensed consolidated statements of operations and condensed consolidated statements of cash flows for the twenty-six-week periods ended October 26, 2008 and October 28, 2007, and condensed consolidated statement of changes in the shareholders’ equity for the twenty-six-week period ended October 26, 2008. These financial statements are the responsibility of the Company’s management.
We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Fleetwood Enterprises, Inc. as of April 27, 2008, and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for the year then ended (not presented herein) and in our report dated July 8, 2008, except for: (i) Notes 20 and 21, as to which the date is October 29, 2008; and (ii) the first four paragraphs of Note 1, as to which the date is November 25, 2008, 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 27, 2008, 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
November 25, 2008
4
FLEETWOOD ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands except per share data)
(Unaudited)
13 Weeks Ended | 26 Weeks Ended | ||||||||||||
October 26, 2008 | October 28, 2007 | October 26, 2008 | October 28, 2007 | ||||||||||
Net sales: | |||||||||||||
RV Group | $ | 116,609 | $ | 318,729 | $ | 283,869 | $ | 662,817 | |||||
Housing Group | 99,796 | 149,774 | 222,448 | 294,008 | |||||||||
216,405 | 468,503 | 506,317 | 956,825 | ||||||||||
Cost of products sold | 199,501 | 387,997 | 452,666 | 803,930 | |||||||||
Gross profit | 16,904 | 80,506 | 53,651 | 152,895 | |||||||||
Operating expenses | 61,835 | 73,267 | 121,897 | 144,549 | |||||||||
Other operating (income) expense, net | 6,908 | 3,110 | 6,826 | (1,476 | ) | ||||||||
68,743 | 76,377 | 128,723 | 143,073 | ||||||||||
Operating income (loss) | (51,839 | ) | 4,129 | (75,072 | ) | 9,822 | |||||||
Other income (expense): | |||||||||||||
Investment income | 828 | 1,222 | 1,689 | 2,539 | |||||||||
Interest expense | (5,581 | ) | (6,669 | ) | (10,573 | ) | (12,185 | ) | |||||
(4,753 | ) | (5,447 | ) | (8,884 | ) | (9,646 | ) | ||||||
Income (loss) from continuing operations before income taxes | (56,592 | ) | (1,318 | ) | (83,956 | ) | 176 | ||||||
Provision for income taxes | (196 | ) | (96 | ) | (602 | ) | (3,901 | ) | |||||
Loss from continuing operations | (56,788 | ) | (1,414 | ) | (84,558 | ) | (3,725 | ) | |||||
Income (loss) from discontinued operations, net | 63 | 201 | (1,245 | ) | 166 | ||||||||
Net loss | $ | (56,725 | ) | $ | (1,213 | ) | $ | (85,803 | ) | $ | (3,559 | ) | |
Basic and diluted loss per common share: | |||||||||||||
Loss from continuing operations | $ | (.74 | ) | $ | (.02 | ) | $ | (1.17 | ) | $ | (.06 | ) | |
Loss from discontinued operations | — | — | (.02 | ) | — | ||||||||
Net loss per common share | $ | (.74 | ) | $ | (.02 | ) | $ | (1.19 | ) | $ | (.06 | ) | |
Weighted average common shares | 76,286 | 64,243 | 72,381 | 64,201 |
See accompanying notes to condensed consolidated financial statements.
5
FLEETWOOD ENTERPRISES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands except share data)
October 26, 2008 | April 27, 2008 | ||||||
(Unaudited) | |||||||
ASSETS | |||||||
Cash and cash equivalents | $ | 45,613 | $ | 58,262 | |||
Restricted cash (Note 2) | — | 16,790 | |||||
Marketable investments | 25,022 | 25,087 | |||||
Receivables | 91,226 | 102,421 | |||||
Inventories | 130,413 | 139,813 | |||||
Deferred taxes | 10,650 | 10,374 | |||||
Assets of discontinued operations | — | 22,021 | |||||
Other current assets | 19,146 | 7,815 | |||||
Total current assets | 322,070 | 382,583 | |||||
Property, plant and equipment, net | 139,765 | 146,573 | |||||
Deferred taxes | 46,072 | 46,348 | |||||
Cash value of company-owned life insurance | 10,952 | 13,125 | |||||
Other assets | 39,417 | 36,942 | |||||
Total assets | $ | 558,276 | $ | 625,571 | |||
LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||
Accounts payable | $ | 22,458 | $ | 27,701 | |||
Employee compensation and benefits | 30,959 | 32,253 | |||||
Product warranty reserves | 27,625 | 32,898 | |||||
Insurance reserves | 12,289 | 12,508 | |||||
Accrued interest | 10,217 | 5,232 | |||||
Liabilities of discontinued operations | — | 21,037 | |||||
Short-term borrowings | 955 | 9,568 | |||||
5% convertible senior subordinated debentures | 100,000 | 100,000 | |||||
Other current liabilities | 43,813 | 33,690 | |||||
Total current liabilities | 248,316 | 274,887 | |||||
Deferred compensation and retirement benefits | 26,650 | 28,139 | |||||
Product warranty reserves | 12,443 | 15,283 | |||||
Insurance reserves | 33,368 | 34,838 | |||||
6% convertible subordinated debentures | 160,142 | 160,142 | |||||
Other long-term borrowings | 27,857 | 16,145 | |||||
Other non-current liabilities | 9,213 | 9,869 | |||||
Total liabilities | 517,989 | 539,303 | |||||
Commitments and contingencies | |||||||
Shareholders’ equity: | |||||||
Preferred stock, $1 par value, authorized 10,000,000 shares, none outstanding | — | — | |||||
Common stock, $.01 par value, authorized 300,000,000 shares, outstanding 76,320,000 at October 26, 2008, and 64,257,000 at April 27, 2008 | 763 | 643 | |||||
Additional paid-in capital | 602,681 | 562,656 | |||||
Accumulated deficit | (562,010 | ) | (476,207 | ) | |||
Accumulated other comprehensive loss | (1,147 | ) | (824 | ) | |||
40,287 | 86,268 | ||||||
Total liabilities and shareholders’ equity | $ | 558,276 | $ | 625,571 |
See accompanying notes to condensed consolidated financial statements.
6
FLEETWOOD ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
26 Weeks Ended | |||||||
October 26, 2008 | October 28, 2007 | ||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | |||||||
Loss from continuing operations | $ | (84,558 | ) | $ | (3,725 | ) | |
Adjustments to reconcile loss from continuing operations to net cash used in operating activities: | |||||||
Depreciation expense | 7,624 | 9,518 | |||||
Amortization of financing costs | 1,128 | 746 | |||||
Stock-based compensation expense | 1,674 | 1,883 | |||||
Loss (gain) on sale of property, plant and equipment | 41 | (6,436 | ) | ||||
Asset impairment | 1,400 | 3,875 | |||||
Deferred taxes | — | 2,813 | |||||
Changes in assets and liabilities: | |||||||
Receivables | 10,520 | 2,695 | |||||
Inventories | 9,400 | (9,045 | ) | ||||
Cash value of company-owned life insurance | 2,173 | 179 | |||||
Other assets | (14,210 | ) | 2,374 | ||||
Accounts payable | (5,243 | ) | (12,250 | ) | |||
Accrued interest | 4,985 | 464 | |||||
Employee compensation and benefits | (2,783 | ) | (7,230 | ) | |||
Product warranty reserve | (8,113 | ) | (4,662 | ) | |||
Other liabilities | 8,280 | (129 | ) | ||||
Net cash used in operating activities | (67,682 | ) | (18,930 | ) | |||
CASH FLOWS FROM INVESTING ACTIVITIES: | |||||||
Purchases of investment securities available-for-sale | (4,244 | ) | (6,860 | ) | |||
Proceeds from sale of investment securities available-for-sale | 3,971 | 6,242 | |||||
Purchases of property, plant and equipment | (3,191 | ) | (3,755 | ) | |||
Proceeds from sales of property, plant and equipment | 1,107 | 12,576 | |||||
Change in restricted cash | 16,790 | — | |||||
Net cash provided by investing activities | 14,433 | 8,203 | |||||
CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||
Issuance of common stock, net | 38,471 | — | |||||
Changes in short-term borrowings | (3,682 | ) | 2,664 | ||||
Borrowings of long-term debt | 26,599 | 3,928 | |||||
Payments made on long-term debt | (20,527 | ) | (2,547 | ) | |||
Proceeds from exercise of stock options | — | 836 | |||||
Net cash provided by financing activities | 40,861 | 4,881 | |||||
CASH FLOWS FROM DISCONTINUED OPERATIONS: | |||||||
Net cash provided by (used in) operating activities | (10,901 | ) | 628 | ||||
Net cash provided by (used in) investing activities | 10,640 | (11 | ) | ||||
Net cash provided by (used in) discontinued operations | (261 | ) | 617 | ||||
Foreign currency translation adjustment | — | 578 | |||||
Net change in cash and cash equivalents | (12,649 | ) | (4,651 | ) | |||
Cash and cash equivalents at beginning of period | 58,262 | 52,127 | |||||
Cash and cash equivalents at end of period | $ | 45,613 | $ | 47,476 |
See accompanying notes to condensed consolidated financial statements.
7
FLEETWOOD ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES
IN SHAREHOLDERS’ EQUITY
(Amounts in thousands)
(Unaudited)
Common Stock | Additional | Accumulated Other | Total | ||||||||||||||||
Number of Shares | Amount | Paid-In Capital | Accumulated Deficit | Comprehensive Loss | Shareholders’ Equity | ||||||||||||||
Balance April 27, 2008 | 64,257 | $ | 643 | $ | 562,656 | $ | (476,207 | ) | $ | (824 | ) | $ | 86,268 | ||||||
Comprehensive loss: | |||||||||||||||||||
Net loss | — | — | — | (85,803 | ) | — | (85,803 | ) | |||||||||||
Other comprehensive loss: | |||||||||||||||||||
Investment securities, net of taxes | — | — | — | — | (323 | ) | (323 | ) | |||||||||||
Comprehensive loss | (86,126 | ) | |||||||||||||||||
Common stock issued | 12,063 | 120 | 38,351 | — | — | 38,471 | |||||||||||||
Share-based compensation expense | — | — | 1,674 | — | — | 1,674 | |||||||||||||
Balance October 26, 2008 | 76,320 | $ | 763 | $ | 602,681 | $ | (562,010 | ) | $ | (1,147 | ) | $ | 40,287 |
See accompanying notes to condensed consolidated financial statements.
8
FLEETWOOD ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
October 26, 2008
(Unaudited)
1) | Basis of Presentation |
Fleetwood Enterprises, Inc. (“Fleetwood” or the “Company”) is a manufacturer of recreational vehicles and factory-built housing. In addition, Fleetwood operates two supply companies that provide materials 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, which reincorporated in Delaware in September 1977. Fleetwood conducts manufacturing activities in 11 states within the United States.
The consolidated financial statements have been prepared by Fleetwood according to the rules and regulations of the Securities and Exchange Commission. The accompanying financial statements consolidate the accounts of Fleetwood and its wholly owned subsidiaries and have been prepared on a going concern basis. All significant intercompany balances and transactions have been eliminated. Certain amounts previously reported have been reclassified to conform to Fleetwood’s fiscal 2009 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 reported amounts of assets and liabilities and the disclosure and reported amounts of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates made in preparing these financial statements include accrued warranty costs, depreciable lives, insurance reserves, accrued postretirement healthcare benefits, legal reserves, repurchase reserves, the deferred tax asset valuation allowance and the assumptions used to determine the expense recorded for share-based payments.
As a result of recent industry and macroeconomic conditions, including a significant tightening of retail and wholesale credit, high fuel prices, weak consumer confidence and contracting dealer inventory levels, Fleetwood has experienced a significant reduction in revenues, and this decline has adversely affected current results of operations and liquidity. Based on Fleetwood’s most recent operating plan for the fiscal year ending April 26, 2009, management believes that existing working capital and continued availability under the secured credit facility will provide Fleetwood with the ability to fund its operations throughout the period covered by the plan. This ability is based, in part, upon the successful execution of Fleetwood’s current operating plan and management’s belief that (i) it will be able to satisfactorily complete the exchange offer described in Note 11 and repurchase any untendered 5% convertible senior subordinated debentures with common stock, (ii) Fleetwood will be able to maintain ongoing compliance with all provisions of the secured credit facility, as described in Note 7, such that the secured credit facility will continue to be accessible (iii) Fleetwood’s dealer network continues to have adequate availability of wholesale floorplan financing and these dealers continue to service the related floorplan debt; and (iv) Fleetwood will not be subject to significant liquidity demands or losses due to repurchases of inventory under the floorplan repurchase commitments described in Note 10.
In the opinion of Fleetwood’s management, the accompanying consolidated financial statements include all normal recurring adjustments necessary for a fair presentation of the financial position at October 26, 2008, and the results of operations for the 13- and 26-week periods ended October 26, 2008 and October 28, 2007. The condensed consolidated financial statements do not include certain footnotes and financial information normally presented annually under U.S. generally accepted accounting principles and, therefore, should be read in conjunction with Fleetwood’s Annual Report on Form 10-K for the year ended April 27, 2008. Fleetwood’s businesses are seasonal and its results of operations for the 13- and 26-week periods ended October 26, 2008 and October 28, 2007, respectively, are not necessarily indicative of results for the full year.
9
Recent Accounting Pronouncements
GAAP Hierarchy
In May 2008, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 162, “The Hierarchy of Generally Accepted Accounting Principles.” SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (the GAAP hierarchy). SFAS No. 162 will become effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.” Fleetwood does not expect the adoption of SFAS No. 162 to have a material effect on its results of operations and financial position.
Convertible Debt
In May 2008, the FASB issued FASB Staff Position (FSP) Accounting Principles Board (APB) 14-1 “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement).” FSP APB 14-1 requires the issuer of certain convertible debt instruments that may be settled in cash (or other assets) on conversion to separately account for the liability (debt) and equity (conversion option) components of the instrument in a manner that reflects the issuer’s non-convertible debt borrowing rate. FSP APB 14-1 is effective for fiscal years beginning after December 15, 2008 on a retroactive basis and will be adopted by Fleetwood in the first quarter of fiscal 2010. Fleetwood is currently evaluating the potential impact, if any, of the adoption of FSP APB 14-1 on its results of operations and financial position.
Noncontrolling Interests
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment of Accounting Research Bulletin No. 51.” SFAS No. 160 establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest, and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. SFAS No. 160 also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS No. 160 is effective for fiscal years beginning after December 15, 2008 and will be adopted by Fleetwood in the first quarter of fiscal 2010. Fleetwood does not expect the adoption of SFAS No. 160 to have a material effect on its results of operations and financial position.
Fair Value Option
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an Amendment of FASB Statement No. 115,” which permits an entity to measure many financial assets and financial liabilities at fair value that are not currently required to be measured at fair value. Entities that elect the fair value option will report unrealized gains and losses in earnings at each subsequent reporting date. The fair value option may be elected on an instrument-by-instrument basis, with few exceptions. SFAS No. 159 amends previous guidance to extend the use of the fair value option to available-for-sale and held-to-maturity securities. The statement also establishes presentation and disclosure requirements to help financial statement users understand the effect of the election. This statement is effective for fiscal years beginning after November 15, 2007. SFAS No. 159 was effective for Fleetwood as of the beginning of fiscal 2009. Fleetwood has not elected to measure financial assets or liabilities at fair value that previously had not been recorded at fair value.
Fair Value Measurements
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This statement applies under other accounting pronouncements that require or permit fair value measurement where the FASB has previously determined that under those pronouncements fair value is the appropriate measurement. This statement does not require any new fair value measurements but may require companies to change current practice. This statement is effective for fiscal years beginning after November 15, 2007. Fleetwood adopted SFAS No. 157 as of the beginning of fiscal 2009, and its adoption did not have a material effect on its results of operations and financial position. In February 2008, the FASB issued FSP FAS 157-2, which delays the effective date of SFAS No. 157 for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). FSP FAS 157-2 became effective for Fleetwood upon adoption of SFAS No. 157 as of the beginning of fiscal 2009.
10
2) | Supplemental Financial Information |
Restricted Cash:
Restricted cash consisted of proceeds from the sale of property that was designated as collateral for Fleetwood’s secured credit facility. Following the perfection of liens on substitute collateral, all restrictions lapsed effective May 23, 2008, and the related cash balance was reclassified to “Cash and cash equivalents.”
Fair Value:
Fleetwood utilizes fair value measurements to record fair value adjustments to certain assets and to determine fair value disclosures. Marketable investments are recorded at fair value on a recurring basis. Additionally, from time to time, Fleetwood may be required to record at fair value other assets on a nonrecurring basis. These nonrecurring fair value adjustments typically involve application of lower-of-cost-or-market accounting or write-downs of individual assets. Under SFAS 157, Fleetwood groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:
Level 1 | Valuation is based upon unadjusted quoted prices for identical instruments traded in active markets. Fleetwood carries more than half of its marketable investments at Level 1 fair value. |
Level 2 | Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market. Fleetwood does carry a large portion of its marketable investments at Level 2 fair value. |
Level 3 | Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques. Fleetwood does not have any assets or liabilities carried at Level 3 fair value. |
The following table presents, for each of the fair value hierarchy levels required under SFAS No. 157, Fleetwood’s assets that are measured at fair value on a recurring basis at October 26, 2008:
Fair Value Measurements Using | |||||||||||||
Total | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||
(Amounts in millions) | |||||||||||||
Marketable investments | $ | 25.0 | $ | 13.0 | $ | 12.0 | $ | — |
Realized gains on the sales of marketable investments are included in Investment income. For the three months ended October 26, 2008 and October 28, 2007, there were no realized gains or losses. For the six months ended October 26, 2008 and October 28, 2007, there were no realized gains or losses. Unrealized gains and losses on marketable investments are included in accumulated other comprehensive loss. For the three months ended October 26, 2008, there was a net unrealized loss of $169,000 and for the three months ended October 28, 2007, there was a net unrealized gain of $19,000. For the six months ended October 26, 2008 and October 28, 2007, there was a net unrealized loss of $323,000 and $46,000, respectively.
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 for the period. Stock options, restricted stock units, and convertible securities were determined to be anti-dilutive for the quarter ended October 26, 2008. The table below shows the components for the calculation of basic and diluted loss per share for the fiscal quarters ended October 26, 2008 and October 28, 2007 (amounts in thousands):
11
13 Weeks Ended | 26 Weeks Ended | ||||||||||||
Oct. 26, 2008 | Oct. 28, 2007 | Oct. 26, 2008 | Oct. 28, 2007 | ||||||||||
Basic and diluted - | |||||||||||||
Loss from continuing operations | $ | (56,788 | ) | $ | (1,414 | ) | $ | (84,558 | ) | $ | (3,725 | ) | |
Income (loss) from discontinued operations | 63 | 201 | (1,245 | ) | 166 | ||||||||
Net loss | $ | (56,725 | ) | $ | (1,213 | ) | $ | (85,803 | ) | $ | (3,559 | ) | |
Weighted average shares outstanding used for basic and diluted loss per share | 76,286 | 64,243 | 72,381 | 64,201 |
Anti-dilutive securities outstanding for the three- and six-month periods ended October 26, 2008 and October 28, 2007 are as follows (amounts in thousands):
13 Weeks Ended | 26 Weeks Ended | ||||||||||||
Oct. 26, 2008 | Oct. 28, 2007 | Oct. 26, 2008 | Oct. 28, 2007 | ||||||||||
Options | 6,021 | 4,418 | 6,021 | 4,418 | |||||||||
Restricted stock and restricted stock units | 239 | 244 | 239 | 244 | |||||||||
6% convertible subordinated debentures | 3,104 | 3,104 | 3,104 | 3,104 | |||||||||
5% convertible senior subordinated debentures | 8,503 | 8,503 | 8,503 | 8,503 |
Equity offering:
On June 25, 2008, Fleetwood closed an underwritten public offering of 12,000,000 shares of common stock at a price of $3.40 per share. Fleetwood also granted the underwriter a 30-day option to purchase up to 1,800,000 additional shares of common stock to cover overallotments, which was not exercised.
Equity:
At the Annual Shareholders’ Meeting on September 18, 2008, the par value of the Company’s common stock was reduced from $1 per share to $.01 per share and the authorized shares of common stock were increased from 150 million to 300 million.
Postretirement Healthcare Benefits:
Fleetwood provides healthcare benefits to certain retired employees from date of retirement to when they become eligible for Medicare coverage or reach age 65, whichever is sooner. Employees become eligible for benefits after meeting certain age and service requirements. The cost of providing retiree healthcare benefits is actuarially determined and accrued over the service period of the active employee group.
The net periodic postretirement benefit cost was not significant for either of the quarters ended October 26, 2008 or October 28, 2007. The total amount of employer’s contributions expected to be paid during the current fiscal year is $501,000.
12
Inventory Valuation:
Inventories are valued at the lower of cost (first-in, first-out) or market. Work in process and finished goods costs include materials, labor, and manufacturing overhead. Inventories consist of the following (amounts in thousands):
Oct. 26, 2008 | April 27, 2008 | ||||||
Manufacturing inventory - | |||||||
Raw materials | $ | 71,037 | $ | 88,798 | |||
Work in process | 32,876 | 34,810 | |||||
Finished goods | 26,500 | 16,205 | |||||
$ | 130,413 | $ | 139,813 |
Property, Plant and Equipment, Net:
Property, plant and equipment is stated at cost, net of accumulated depreciation, and consists of the following (amounts in thousands):
Oct. 26, 2008 | April 27, 2008 | ||||||
Land | $ | 13,310 | $ | 13,479 | |||
Buildings and improvements | 232,704 | 234,472 | |||||
Machinery and equipment | 140,671 | 141,683 | |||||
386,685 | 389,634 | ||||||
Less accumulated depreciation | (246,920 | ) | (243,061 | ) | |||
$ | 139,765 | $ | 146,573 |
Included in the above table as of October 26, 2008, were five idle plants that met the held-for-sale criteria under the applicable accounting guidance. As such, those facilities were recorded at the lower of their carrying value or their estimated fair value, less expected costs to sell. In aggregate, the five facilities’ carrying costs included in the amounts above were $1.8 million of land and land improvements and $12.4 million of buildings and building improvements. Of the five facilities that were classified as held for sale, four were manufactured housing plants and one was an RV supply plant. All of these facilities are expected to be sold to third parties within the next year.
Product Warranty Reserve:
Fleetwood typically provides retail buyers of its products with a one-year warranty covering defects in material or workmanship, with longer warranties on certain structural components. This warranty period typically commences upon delivery to the end user of the product. Fleetwood 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. The historical warranty profile is used to estimate the classification of the reserve between long-term and short-term on the balance sheet.
Changes in Fleetwood’s product warranty liability are as follows (amounts in thousands):
26 Weeks Ended | |||||||
Oct. 26, 2008 | Oct. 28, 2007 | ||||||
Balance, beginning of period | $ | 48,181 | $ | 63,481 | |||
Warranties issued and changes in the estimated liability during the period | 20,256 | 25,322 | |||||
Settlements made during the period | (28,369 | ) | (29,984 | ) | |||
Balance, end of period | $ | 40,068 | $ | 58,819 |
Comprehensive Loss:
Comprehensive loss includes all revenues, expenses, gains, and losses that affect the capital of Fleetwood aside from issuing or retiring shares of stock. Net loss is one component of comprehensive loss. Based on Fleetwood’s current activities, the only other components of comprehensive loss consist of foreign currency translation gains or losses, changes in the unrealized gains or losses on marketable securities, and unrealized actuarial gains and losses relating to defined benefit plans.
13
The difference between net loss and total comprehensive loss is shown below (amounts in thousands):
13 Weeks Ended | 26 Weeks Ended | ||||||||||||
Oct. 26, 2008 | Oct. 28, 2007 | Oct. 26, 2008 | Oct. 28, 2007 | ||||||||||
Net loss | $ | (56,725 | ) | $ | (1,213 | ) | $ | (85,803 | ) | $ | (3,559 | ) | |
Foreign currency translation gain | — | 330 | — | 578 | |||||||||
Unrealized gain (loss) on investments | (169 | ) | 19 | (323 | ) | (46 | ) | ||||||
Comprehensive loss | $ | (56,894 | ) | $ | (864 | ) | $ | (86,126 | ) | $ | (3,027 | ) |
3) | Segment Information |
Information with respect to operating segments is shown below (amounts in thousands):
13 Weeks Ended | 26 Weeks Ended | ||||||||||||
Oct. 26, 2008 | Oct. 28, 2007 | Oct. 26, 2008 | Oct. 28, 2007 | ||||||||||
REVENUES: | |||||||||||||
RV Group | $ | 116,609 | $ | 318,729 | $ | 283,869 | $ | 662,817 | |||||
Housing Group | 99,796 | 149,774 | 222,448 | 294,008 | |||||||||
$ | 216,405 | $ | 468,503 | $ | 506,317 | $ | 956,825 | ||||||
OPERATING INCOME (LOSS): | |||||||||||||
RV Group | $ | (41,969 | ) | $ | 592 | $ | (65,778 | ) | $ | 2,475 | |||
Housing Group | (6,247 | ) | 5,132 | (3,763 | ) | 10,607 | |||||||
Corporate and other | (3,623 | ) | (1,595 | ) | (5,531 | ) | (3,260 | ) | |||||
$ | (51,839 | ) | $ | 4,129 | $ | (75,072 | ) | $ | 9,822 |
4) | Other Operating (Income) Expense, net |
Other operating (income) expense, net, for the quarter ended October 26, 2008 consisted of a $0.5 million loss from the sale of fixed assets, $1.4 million of impairment charges related to a recently closed Housing facility and $5.0 million in restructuring costs related primarily to the consolidation of four housing plants subsequent to quarter-end, one RV plant and the closure of one RV supply facility. The prior year amount consisted of $1.1 million in net gains primarily from the sale of an idle Housing facility, offset by $1.1 million in restructuring costs and $3.1 million of impairment charges related to idle Housing facilities.
For the six-month period ended October 26, 2008, other operating (income) expense, net, included approximately $1.4 million of impairment charges related to an idled Housing facility, $5.3 million in restructuring costs, and $0.1 million loss from the sale of fixed assets. Prior year other operating (income) expense, net, consisted of approximately $6.4 million of gains from the sale of idle facilities, offset by $1.1 million of restructuring costs and $3.9 million of impairment charges.
Subsequent to October 26, 2008, Fleetwood determined that it would close six Housing plants and two RV plants. Estimated restructuring costs, primarily severance, of $3 million are expected to be recognized in the third fiscal quarter.
5) | Income Taxes |
The current-quarter tax provision consisted of state tax liabilities in several states, with no offsetting tax benefits in others.
14
The prior-year first-quarter tax provision was principally due to a $2.8 million non-cash adjustment to the carrying amount of the deferred tax asset as a result of the decision to market for sale a property used by one of Fleetwood’s supply businesses. This reduced unrealized gains that would otherwise be available to support the carrying value of the deferred tax asset. The remainder of the tax provision related to state tax liabilities.
At October 26, 2008 and April 27, 2008, Fleetwood has identified unrealized sources of income, sufficient to support a deferred tax asset of $56.7 million.
Fleetwood had a $4.7 million reserve for uncertain income tax positions as of October 26, 2008. Changes to the reserve during the six months ended October 26, 2008 were not material. The net amount of $4.7 million, if recognized, would favorably affect Fleetwood’s effective tax rate. Included in the reserve was $1.2 million of interest and penalties related to uncertain tax positions. Fleetwood’s policy is to recognize interest and penalties accrued on uncertain tax positions as part of income tax expense.
Fleetwood strives to resolve open matters with each tax authority at the examination level and could reach agreement with them at any time. While Fleetwood has accrued for amounts it believes are the expected results, the final outcome with a taxing authority may be a tax liability that is more or less than that reflected in the financial statements. Furthermore, Fleetwood may later decide to challenge any assessments, if made, and may exercise its right to appeal.
Unrecognized tax positions are reviewed quarterly and adjusted as events occur that affect potential liabilities for additional taxes, such as lapsing of applicable statutes of limitations, proposed assessments by taxing authorities, negotiations between such authorities, and identification of new issues and issuance of new legislation, regulations or case law. Management believes that adequate taxes and related interest have been provided for any adjustments that may result from these uncertain tax positions.
The total liability for unrecognized tax benefits may change within the next 12 months due to either settlement of audits or expiration of statutes of limitations. Fleetwood estimates that it is reasonably possible that the liability for unrecognized tax benefits will decrease by approximately $1.4 million in the next 12 months as a result of normal statute expirations and anticipated settlements with taxing authorities. At October 26, 2008, Fleetwood has concluded all material U.S. federal income tax matters for all fiscal years through 2005. All material state and foreign income tax matters have been concluded through fiscal year 2004.
6) | Discontinued Operations |
On April 15, 2008, the folding trailer business was designated as held-for-sale and was subsequently sold on May 12, 2008. Fleetwood exited this business to stem losses and return to a traditional focus on core recreational vehicle operations.
Assets and liabilities expected to be sold or extinguished as of the balance sheet date have been reclassified to current assets and liabilities from discontinued operations, respectively, and consist of the following:
October 26, 2008 | April 27, 2008 | ||||||
(Amounts in thousands) | |||||||
Current assets from discontinued operations: | |||||||
Receivables | $ | — | $ | 6,175 | |||
Inventories | — | 8,904 | |||||
Property, plant and equipment, net | — | 5,857 | |||||
Goodwill | — | — | |||||
Other assets | — | 1,085 | |||||
— | 22,021 | ||||||
Current liabilities from discontinued operations: | |||||||
Accounts payable | — | 2,931 | |||||
Employee compensation | — | 2,387 | |||||
Product warranty | — | 3,430 | |||||
Other current liabilities | — | 12,289 | |||||
$ | — | $ | 21,037 |
15
Operating results of these businesses are classified as discontinued operations for all periods presented. Discontinued operations, net, consist of the following (amounts in thousands):
13 Weeks Ended | 26 Weeks Ended | ||||||||||||
Oct. 26, 2008 | Oct. 28, 2007 | Oct. 26, 2008 | Oct. 28, 2007 | ||||||||||
Sales | $ | — | $ | 21,637 | $ | 1,826 | $ | 43,558 | |||||
Income (loss) from discontinued operations: | |||||||||||||
Retail | (404 | ) | (69 | ) | (906 | ) | (425 | ) | |||||
Financial services | — | 1 | (1 | ) | (9 | ) | |||||||
Folding trailers | 467 | 269 | (338 | ) | 600 | ||||||||
Income (loss) from discontinued operations, net | $ | 63 | $ | 201 | $ | (1,245 | ) | $ | 166 |
Losses and other costs from discontinued operations in fiscal 2009 are not expected to be material.
7) | Borrowings |
In January 2007, the agreement governing Fleetwood’s credit facility with a syndicate of lenders led by Bank of America, N.A., as administrative agent, was renewed and extended until July 31, 2010. Fleetwood originally entered into the credit agreement in July 2001, and it has been amended on several occasions since. The new amended and restated agreement incorporated prior amendments and made additional changes, but continues to provide for a revolving credit facility, partially supported by a real estate subfacility.
The facility includes restrictions regarding additional indebtedness, business operations, liens, guaranties, transfers and sales of assets, and transactions with subsidiaries or affiliates. The facility also contains customary events of default that would permit the lenders to accelerate repayment of borrowings under the amended facility if not cured within applicable grace periods, including the failure to make timely payments under the amended facility or other material indebtedness and the failure to meet certain covenants.
During October 2008, in anticipation of the Company’s exchange offer discussed in Note 11, the credit facility was amended to eliminate the unamortized term loan commitments, and the then outstanding borrowings of $12.8 million were paid in full. Interest rates for several borrowing categories were also increased and loan commitments for the revolving credit facility were reduced from $160 million to $135 million. Fleetwood’s borrowing capacity, however, is governed by the amount of a borrowing base, consisting primarily of inventories and accounts receivable and a real estate subfacility. Inventories and accounts receivable can fluctuate significantly and the borrowing base is revised weekly for changes in receivables and monthly for changes in inventory balances. On the first day of each fiscal quarter, the ability to borrow under the real estate subfacility is reduced by $375,000. As of October 26, 2008, the net borrowing capacity under the subfacility was $12.4 million.
The balance on the revolver as of October 26, 2008 was $479,000 and the borrowing base totaled $94.4 million. After consideration of outstanding borrowings and standby letters of credit of $63.7 million, unused borrowing capacity (availability) was approximately $30.2 million. The revolving credit line bears interest, at Fleetwood’s option, at variable rates based on either Bank of America’s prime rate or one-, two- or three-month LIBOR.
Under the amended agreement, Fleetwood continues to be subject to a springing financial performance covenant that was also revised. The covenant only applies if either (a) average daily liquidity, defined as bank cash, cash equivalents, and unused borrowing capacity, falls below a prescribed minimum level of $45 million in any calendar month, or (b) liquidity falls below $25 million on any single day. Fleetwood is also subject to a new separate covenant under which liquidity cannot fall below $25 million on any three consecutive business days. During the quarter ended October 26, 2008, average daily liquidity for each calendar month reported by Fleetwood ranged from $111 million to $129 million. The amendment also reduced the total amount of real estate collateral held by the lenders from an approximate appraised value of $79 million to $58 million.
As of October 26, 2008, the entire $479,400 revolver balance was included in short-term borrowings, as compared to April 27, 2008 when a combined aggregate short-term balance outstanding under the revolver and the term loan stood at $7.3 million. An additional $14.9 million of the term loan was included in long-term borrowings as of April 27, 2008.
16
Borrowings are secured by receivables, inventory, and certain other assets, primarily real estate, and are used for working capital and general corporate purposes. The $58 million of real estate pledged as security includes excess (boot) collateral of $38 million. Under the senior credit agreement, Fleetwood Enterprises, Inc. is a guarantor of the borrowings and letters of credit of its wholly owned subsidiary, Fleetwood Holdings, Inc.
In November 2008, the facility was amended to change the definition of the Company’s Minimum Liquidity covenant to require that liquidity should not be less than $25 million for a three-day consecutive period, amend the definition of the Company’s Borrowing Base to include cash collateral and permit borrowing and liens against certain Life Insurance Policies, subject to some restrictions. The amendment also provides that when an amount is borrowed against the policies, the real estate subfacility will be reduced by $2 million.
On August 22, 2008, Fleetwood generated $26.5 million of cash from new mortgage financing collateralized by two operating properties. The borrowings bear interest at 9.95% and have a three-year term and can be extended for up to an additional two years. Additionally, remaining unencumbered real estate properties total $50 million to $60 million in estimated market value, of which $15 million is currently being marketed for sale and another $20 million will be provided in the form of first lien collateral to the new senior secured notes offered in the exchange offer described in Notes 11 and 12 of the financial statements included in this Form 10Q.
8) | 5% Convertible Senior Subordinated Debentures |
In December 2003, Fleetwood completed the sale of $100 million aggregate principal amount of 5% convertible senior subordinated debentures due in 2023. Interest on the debentures is payable semi-annually at the rate of 5.0%. The debentures are convertible, under certain circumstances, into Fleetwood’s common stock at an initial conversion rate of 85.034 shares per $1,000 principal amount of debentures, equivalent to an initial conversion price of $11.76 per share of common stock.
Holders of the debentures have the ability to require Fleetwood to repurchase the debentures, in whole or in part, on December 15, 2008, December 15, 2013 and December 15, 2018. Beginning in the third quarter of fiscal 2008, the debentures were reclassified on the balance sheet from long-term to current liabilities. The repurchase price is 100% of the principal amount of the debentures plus accrued and unpaid interest. Fleetwood was permitted, at its option, to elect to pay the repurchase price in cash, its common stock, or with a combination of cash and its common stock. Fleetwood elected to repay the purchase price in common stock and the number of shares of its common stock that it will deliver will be equal to the dollar amount being repurchased divided by 95% of the arithmetic average of the volume weighted average price of its common stock for each of the 20 trading days immediately preceding the repurchase date. If the debentures are still outstanding, Fleetwood has the option to redeem them anytime after December 15, 2008, in whole or in part, for cash, at a price equal to 100% of the principal amount plus accrued and unpaid interest. The debentures and the common stock potentially issuable upon conversion of the debentures are registered for resale under the Securities Act of 1933.
In view of the recent deterioration in market conditions and the likelihood of losses and negative operating cash flows for the balance of the fiscal year, Fleetwood has launched a preemptive exchange offer in advance of the December 2008 due date, as discussed in Note 11. Fleetwood’s intention is to conserve cash used in the redemption in order to maintain as much operating flexibility as possible in the current environment.
9) | 6% Convertible Subordinated Debentures |
As discussed further in Fleetwood’s Annual Report on Form 10-K, Fleetwood owns a Delaware business trust that issued optionally redeemable convertible trust preferred securities that are convertible into shares of Fleetwood’s common stock. The combined proceeds from the sale of the securities and from the purchase by Fleetwood of the common shares of the business trust were tendered to Fleetwood in exchange for convertible subordinated debentures. These debentures represent the sole assets of the business trust and are presented as a long-term liability in the accompanying balance sheets.
Distributions on the securities held by the trust are payable quarterly in arrears at an annual rate of 6%. Fleetwood has the right to elect to defer distributions for up to 20 consecutive quarters under the trust indenture governing the 6% convertible trust preferred securities. When Fleetwood 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 and from buying the securities on the open market.
Beginning with the third quarter of fiscal 2002, Fleetwood elected to defer the quarterly distributions through February 15, 2006. At that time deferred distributions and interest were repaid in full, along with the then current distribution. Fleetwood elected to defer distributions beginning May 15, 2008, and has the right to continue deferral for up to 20 consecutive quarters.
The securities are convertible, at the option of the holder, at any time at the rate of 1.02627 shares of Fleetwood common stock (i.e., a conversion price of $48.72 per common share), subject to adjustment in certain circumstances. The debentures have been redeemable in whole or in part, at the option of Fleetwood, at a price equal to the principal amount plus accrued and unpaid interest since February 15, 2006, excluding periods of deferral as described above. The securities are subject to mandatory redemption to the extent of any early redemption of the debentures and upon maturity of the debentures on February 15, 2028.
17
10) | 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. Fleetwood’s agreements generally provide that, in the event of a default by a dealer in its obligation to these credit sources, Fleetwood will repurchase vehicles or homes sold to the dealer that have not been resold to retail customers. With most repurchase agreements, Fleetwood’s obligation ceases when the amount for which Fleetwood 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 $104 million for inventory at manufactured housing dealers and $316 million for inventory at RV dealers as of October 26, 2008, 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 RV dealer inventories. The RV repurchase obligation is significantly more than the manufactured housing obligation due to a higher average cost per motor home and more units in dealer inventories. Past losses under these agreements have not been significant but generally increase during cyclical industry downturns. Given the tightening of credit standards by lenders, Fleetwood currently expects that repurchase activity will be higher than has historically been the case and it may be necessary to offer greater discounts in order to relocate such product to alternative dealers during current market conditions. To mitigate the potential repurchases, we monitor the viability of our dealers through a combination of credit monitoring and dealer due diligence. In addition, our sales teams are dedicated to increasing dealer points of distribution in new markets and replacing weaker dealers in existing markets. Further, to the extent dealers reduce their inventories, which they have been doing in recent months in both industries, our overall exposure to repurchase agreements is likewise reduced. As a result of various factors, actual results could differ from the estimates used by management. Lender repurchase demands have been funded out of working capital. Through the first six months of fiscal year 2009, Fleetwood repurchased product totaling $1.9 million and recorded a loss of $500,000 compared to no repurchases for the same period in the prior year.
Guarantees:
As part of the sale of Fleetwood’s manufactured housing retail business, there are currently approximately 49 leased manufactured housing retail locations assigned to the buyers. Although Fleetwood received indemnification from the assignees, if the assignees fail to make payments under the assigned leases, Fleetwood estimates its maximum potential obligation with respect to the assigned leases to be $5.8 million as of October 26, 2008. Fleetwood will remain contingently liable for such lease obligations for the remaining lease terms, which range from one month to six years.
Other:
As of October 26, 2008, Fleetwood was a party to seven limited guarantees, aggregating $3.0 million of obligations of certain retailers to floorplan lenders and an additional two unsecured guarantees of other obligations aggregating $3.8 million.
Fleetwood is also a party to certain guarantees that relate to its credit arrangements. These are more fully discussed in Note 11 of Fleetwood’s fiscal 2008 Annual Report on Form 10-K.
The fair value of the guarantees noted above was not material at October 26, 2008.
Legal Proceedings:
Fleetwood is regularly involved in legal proceedings in the ordinary course of business. For certain cases Fleetwood is self-insured; for others, including products liability, insurance covers a portion of Fleetwood’s liability under some of this litigation. In the majority of cases, including products liability cases, Fleetwood prepares estimates based on historical experience, the professional judgment of legal counsel, and other assumptions it believes to be reasonable. As additional information becomes available, Fleetwood reassesses the potential liability related to pending litigation and revises the related estimates. Such revisions and any actual liability that greatly exceeds Fleetwood’s estimates could materially impact Fleetwood’s results of operations and financial position.
18
Fleetwood has been named in several complaints, some of which are putative class actions, filed against manufacturers of travel trailers and manufactured homes supplied to the Federal Emergency Management Agency (FEMA) to be used for emergency living accommodations in the wake of Hurricane Katrina. The complaints, from numerous individual plaintiffs, were consolidated on November 5, 2007 in a case captioned In re FEMA Trailer Formaldehyde Products Liability Litigation, Case Number MDL 07-1873, in the United States District Court for the Eastern District of Louisiana. The complaints generally allege injury due to the presence of formaldehyde in the units for which the plaintiffs are seeking monetary damages. Fleetwood strongly disputes the allegations in these complaints, and intends to vigorously defend itself in all such matters.
A case has been filed in the United States District Court, Central District of California, Riverside, titled Jesse Browder et al v. Fleetwood Enterprises, Inc., in which plaintiffs allege a variety of claims relating to Fleetwood’s method of installing blown-in ceiling insulation in its manufactured homes. The District Court issued an order on September 4, 2008 granting plaintiffs’ motion for class certification. 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 this matter, but we intend to vigorously challenge the class certification and the merits of plaintiffs’ claims.
11) | Exchange Offer |
In October 2008, Fleetwood filed a registration statement on Form S-4 with respect to an offer by Fleetwood to exchange its currently outstanding $100 million of 5% convertible senior subordinated debentures (5% debentures) for new senior secured notes due 2011 (secured notes) and a certain amount of stock. Depending on the amount of 5% debentures validly tendered and accepted in accordance with the terms of the offer. Fleetwood will issue up to $103 million aggregate principal amount of the secured notes and up to $10.5 million in shares of common stock. The specific number of shares to be issued will not exceed 14 million shares and will be based on the average of the daily volume weighted average market prices of Fleetwood’s common stock for the 20 trading days immediately preceding the second trading day before the expiration date of the exchange offer (which is expected to occur in December 2008, unless extended or earlier terminated by Fleetwood), or $0.75 per share, whichever is greater. The secured notes will be issued by Fleetwood and guaranteed by certain wholly owned subsidiaries of Fleetwood.
Fleetwood’s operating plan assumes that a substantial majority of the debenture holders will accept the exchange offer, and Fleetwood would have sufficient authorized shares to redeem any debenture holders who do not accept the exchange offer. Fleetwood’s stock price has declined significantly which could affect its ability to repurchase, with authorized shares of common stock, any 5% convertible senior subordinated debentures that remain untendered following the planned exchange. This factor is subject to significant uncertainty and is largely outside Fleetwood’s control. If Fleetwood were to have insufficient authorized shares to satisfy the repurchase of untendered debentures, the debentures and the secured credit facility would be in default and lenders could accelerate debt or take other actions that could significantly restrict its ability to operate and could cause Fleetwood to seek court protection.
12) | Guarantor Condensed Consolidating Financial Statements |
As described in Note 11, Fleetwood has commenced an exchange offer to issue secured notes and up to $14 million shares of common stock, for any and all of its 5% debentures. The secured notes will be unconditionally guaranteed on a joint and several basis by Fleetwood’s subsidiaries that are borrowers or guarantors under its existing secured credit facility (“Guarantors”). Guarantors include substantially all existing, wholly owned subsidiaries of Fleetwood other than Fleetwood’s wholly owned insurance subsidiary, its subsidiary in Mexico, certain inactive subsidiaries and subsidiaries accounted for as discontinued operations. The Guarantors also are borrowers under or unconditionally guarantee Fleetwood’s secured credit facility as described in Note 7. There are no significant restrictions under the guarantee on the ability of guarantor subsidiaries to obtain funds from other subsidiary guarantors by dividend or loan. Distributions from Fleetwood Holdings, Inc. and the other guarantor subsidiaries to Fleetwood will be subject to certain restrictions under the agreements governing its secured credit facility.
The senior secured note guarantees will be subordinated in right of payment to the guarantor subsidiaries’ obligations under Fleetwood’s secured credit facility, but are secured by approximately $20 million of first lien collateral real estate. They will, however, rank senior in right of payment to all other existing and future subordinated indebtedness of these subsidiaries.
The following condensed consolidating financial information has been prepared and presented pursuant to SEC Regulation S-X Rule 3-10 “Financial statements of guarantors and issuers of guaranteed securities registered or being registered.” Fleetwood accounts for investment in Fleetwood Holdings, Inc. and its subsidiaries under the equity method of accounting.
19
Condensed Consolidating Statement of Operations
(Amounts in thousands)
(Unaudited)
13 Weeks Ended October 26, 2008 | ||||||||||||||||
Parent Company | Guarantor Subsidiaries | Non- Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||
Net sales | $ | — | $ | 216,405 | $ | 1,558 | $ | (1,558 | ) | $ | 216,405 | |||||
Cost of products sold | — | 199,501 | — | — | 199,501 | |||||||||||
Gross profit | — | 16,904 | 1,558 | (1,558 | ) | 16,904 | ||||||||||
Operating expenses | — | 61,728 | 1,665 | (1,558 | ) | 61,835 | ||||||||||
Other operating income, net | — | 6,908 | — | — | 6,908 | |||||||||||
— | 68,636 | 1,665 | (1,558 | ) | 68,743 | |||||||||||
Operating loss | — | (51,732 | ) | (107 | ) | — | (51,839 | ) | ||||||||
Other income (expense): | ||||||||||||||||
Investment income | — | 632 | 196 | — | 828 | |||||||||||
Interest expense | — | (5,581 | ) | — | — | (5,581 | ) | |||||||||
— | (4,949 | ) | 196 | — | (4,753 | ) | ||||||||||
Income (loss) from continuing operations | — | (56,681 | ) | 89 | — | (56,592 | ) | |||||||||
Provision for income taxes | — | (178 | ) | (18 | ) | — | (196 | ) | ||||||||
Income (loss) from continuing operations before equity in income of consolidated subsidiaries | — | (56,859 | ) | 71 | — | (56,788 | ) | |||||||||
Equity loss from consolidated subsidiaries | (56,725 | ) | — | — | 56,725 | — | ||||||||||
Income (loss) after equity in losses of consolidated subsidiaries | (56,725 | ) | (56,859 | ) | 71 | 56,725 | (56,788 | ) | ||||||||
Income from discontinued operations, net | — | — | 63 | — | 63 | |||||||||||
Net income (loss) | $ | (56,725 | ) | $ | (56,859 | ) | $ | 134 | $ | 56,725 | $ | (56,725 | ) |
20
Condensed Consolidating Statement of Operations
(Amounts in thousands)
(Unaudited)
26 Weeks Ended October 26, 2008 | ||||||||||||||||
Parent Company | Guarantor Subsidiaries | Non- Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||
Net sales | $ | — | $ | 506,317 | $ | 3,116 | $ | (3,116 | ) | $ | 506,317 | |||||
Cost of products sold | — | 452,666 | — | — | 452,666 | |||||||||||
Gross profit | — | 53,651 | 3,116 | (3,116 | ) | 53,651 | ||||||||||
Operating expenses | — | 121,383 | 3,630 | (3,116 | ) | 121,897 | ||||||||||
Other operating income, net | — | 6,826 | — | — | 6,826 | |||||||||||
— | 128,209 | 3,630 | (3,116 | ) | 128,723 | |||||||||||
Operating loss | — | (74,558 | ) | (514 | ) | — | (75,072 | ) | ||||||||
Other income (expense): | ||||||||||||||||
Investment income | — | 1,295 | 394 | — | 1,689 | |||||||||||
Interest expense | — | (10,573 | ) | — | — | (10,573 | ) | |||||||||
— | (9,278 | ) | 394 | — | (8,884 | ) | ||||||||||
Loss from continuing operations | — | (83,836 | ) | (120 | ) | — | (83,956 | ) | ||||||||
Provision for income taxes | — | (584 | ) | (18 | ) | — | (602 | ) | ||||||||
Loss from continuing operations before equity in income of consolidated subsidiaries | — | (84,420 | ) | (138 | ) | — | (84,558 | ) | ||||||||
Equity loss from consolidated subsidiaries | (85,803 | ) | — | — | 85,803 | — | ||||||||||
Loss after equity in losses of consolidated subsidiaries | (85,803 | ) | (84,420 | ) | (138 | ) | 85,803 | (84,558 | ) | |||||||
Loss from discontinued operations, net | — | — | (1,245 | ) | — | (1,245 | ) | |||||||||
Net loss | $ | (85,803 | ) | $ | (84,420 | ) | $ | (1,383 | ) | $ | 85,803 | $ | (85,803 | ) |
21
Condensed Consolidating Statement of Operations
(Amounts in thousands)
(Unaudited)
13 Weeks Ended October 28, 2007 | ||||||||||||||||
Parent Company | Guarantor Subsidiaries | Non- Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||
Net sales | $ | — | $ | 468,503 | $ | 1,565 | $ | (1,565 | ) | $ | 468,503 | |||||
Cost of products sold | — | 387,997 | — | — | 387,997 | |||||||||||
Gross profit | — | 80,506 | 1,565 | (1,565 | ) | 80,506 | ||||||||||
Operating expenses | — | 72,615 | 2,217 | (1,565 | ) | 73,267 | ||||||||||
Other operating income, net | — | 3,110 | — | — | 3,110 | |||||||||||
— | 75,725 | 2,217 | (1,565 | ) | 76,377 | |||||||||||
Operating income (loss) | — | 4,781 | (652 | ) | — | 4,129 | ||||||||||
Other income (expense): | ||||||||||||||||
Investment income | — | 901 | 321 | — | 1,222 | |||||||||||
Interest expense | — | (6,669 | ) | — | — | (6,669 | ) | |||||||||
— | (5,768 | ) | 321 | — | (5,447 | ) | ||||||||||
Loss from continuing operations | — | (987 | ) | (331 | ) | — | (1,318 | ) | ||||||||
Provision for income taxes | 213 | (309 | ) | — | — | (96 | ) | |||||||||
Income (loss) from continuing operations before equity in income of consolidated subsidiaries | 213 | (1,296 | ) | (331 | ) | — | (1,414 | ) | ||||||||
Equity loss from consolidated subsidiaries | (1,426 | ) | — | — | 1,426 | — | ||||||||||
Loss after equity in losses of consolidated subsidiaries | (1,213 | ) | (1,296 | ) | (331 | ) | 1,426 | (1,414 | ) | |||||||
Income from discontinued operations, net | — | — | 201 | — | 201 | |||||||||||
Net loss | $ | (1,213 | ) | $ | (1,296 | ) | $ | (130 | ) | $ | 1,426 | $ | (1,213 | ) |
22
Condensed Consolidating Statement of Operations
(Amounts in thousands)
(Unaudited)
26 Weeks Ended October 28, 2007 | ||||||||||||||||
Parent Company | Guarantor Subsidiaries | Non- Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||
Net sales | $ | — | $ | 956,825 | $ | 3,131 | $ | (3,131 | ) | $ | 956,825 | |||||
Cost of products sold | — | 803,930 | — | — | 803,930 | |||||||||||
Gross profit | — | 152,895 | 3,131 | (3,131 | ) | 152,895 | ||||||||||
Operating expenses | — | 143,221 | 4,459 | (3,131 | ) | 144,549 | ||||||||||
Other operating income, net | — | (1,476 | ) | — | — | (1,476 | ) | |||||||||
— | 141,745 | 4,459 | (3,131 | ) | 143,073 | |||||||||||
Operating income (loss) | — | 11,150 | (1,328 | ) | — | 9,822 | ||||||||||
Other income (expense): | ||||||||||||||||
Investment income | — | 1,897 | 642 | — | 2,539 | |||||||||||
Interest expense | — | (12,185 | ) | — | — | (12,185 | ) | |||||||||
— | (10,288 | ) | 642 | — | (9,646 | ) | ||||||||||
Income (loss) from continuing operations | — | 862 | (686 | ) | — | 176 | ||||||||||
Provision for income taxes | 118 | (4,019 | ) | — | — | (3,901 | ) | |||||||||
Income (loss) from continuing operations before equity in income of consolidated subsidiaries | 118 | (3,157 | ) | (686 | ) | — | (3,725 | ) | ||||||||
Equity loss from consolidated subsidiaries | (3,677 | ) | — | — | 3,677 | — | ||||||||||
Loss after equity in losses of consolidated subsidiaries | (3,559 | ) | (3,157 | ) | (686 | ) | 3,677 | (3,725 | ) | |||||||
Income from discontinued operations, net | — | — | 166 | — | 166 | |||||||||||
Net loss | $ | (3,559 | ) | $ | (3,157 | ) | $ | (520 | ) | $ | 3,677 | $ | (3,559 | ) |
23
Condensed Consolidating Balance Sheet
(Amounts in thousands)
(Unaudited)
October 26, 2008 | ||||||||||||||||
Parent Company | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||
ASSETS | ||||||||||||||||
Cash and cash equivalents | $ | 52,617 | $ | 13,513 | $ | — | $ | (20,517 | ) | $ | 45,613 | |||||
Marketable investments | 462 | — | 24,560 | — | 25,022 | |||||||||||
Receivables | 1,025 | 90,197 | 4 | — | 91,226 | |||||||||||
Inventories | 1,056 | 129,357 | — | — | 130,413 | |||||||||||
Deferred taxes | 4,260 | 6,390 | — | — | 10,650 | |||||||||||
Other current assets | 446 | 17,919 | 781 | — | 19,146 | |||||||||||
Total current assets | 59,866 | 257,376 | 25,345 | (20,517 | ) | 322,070 | ||||||||||
Property, plant and equipment, net | 3,847 | 135,918 | — | — | 139,765 | |||||||||||
Deferred taxes | 18,429 | 27,643 | — | 46,072 | ||||||||||||
Other assets | 39,314 | 6,663 | 4,392 | — | 50,369 | |||||||||||
Investment in consolidated subsidiaries | 110,722 | — | — | (110,722 | ) | — | ||||||||||
Total assets | $ | 232,178 | $ | 427,600 | $ | 29,737 | $ | (131,239 | ) | $ | 558,276 | |||||
LIABILITIES AND SHAREHOLDERS’ EQUITY: | ||||||||||||||||
Accounts payable and bank overdraft | $ | 787 | $ | 21,669 | $ | 20,519 | $ | (20,517 | ) | $ | 22,458 | |||||
Employee compensation and benefits | 5,097 | 25,862 | — | — | 30,959 | |||||||||||
Product warranty reserves | — | 27,625 | — | — | 27,625 | |||||||||||
Insurance reserves | — | 12,289 | — | — | 12,289 | |||||||||||
Short-term borrowings | — | 955 | — | — | 955 | |||||||||||
5% convertible senior subordinated debentures | 100,000 | — | — | — | 100,000 | |||||||||||
Other current liabilities | 18,908 | 34,597 | 525 | — | 54,030 | |||||||||||
Total current liabilities | 124,792 | 122,997 | 21,044 | (20,517 | ) | 248,316 | ||||||||||
Deferred compensation and retirement benefits | 26,650 | — | — | — | 26,650 | |||||||||||
Product warranty reserves | — | 12,443 | — | — | 12,443 | |||||||||||
Insurance reserves | 2,835 | 4,311 | 26,222 | — | 33,368 | |||||||||||
6% convertible subordinated debentures | 160,142 | — | — | — | 160,142 | |||||||||||
Other long-term borrowings | — | 27,857 | — | — | 27,857 | |||||||||||
Intercompany payable (receivable) | (127,969 | ) | 42,930 | 85,039 | — | — | ||||||||||
Other non-current liabilities | 5,441 | 3,772 | — | — | 9,213 | |||||||||||
Total liabilities | 191,891 | 214,310 | 132,305 | (20,517 | ) | 517,989 | ||||||||||
Commitments and contingencies | ||||||||||||||||
Shareholders’ equity: | ||||||||||||||||
Preferred stock | — | — | — | — | — | |||||||||||
Common stock | 763 | 1,708 | 572 | (2,280 | ) | 763 | ||||||||||
Additional paid-in capital | 602,681 | 124,777 | 333,717 | (458,494 | ) | 602,681 | ||||||||||
Retained earnings (accumulated deficit) | (562,010 | ) | 86,805 | (436,314 | ) | 349,509 | (562,010 | ) | ||||||||
Accumulated other comprehensive loss | (1,147 | ) | — | (543 | ) | 543 | (1,147 | ) | ||||||||
40,287 | 213,290 | (102,568 | ) | (110,722 | ) | 40,287 | ||||||||||
Total liabilities and shareholders’ equity | $ | 232,178 | $ | 427,600 | $ | 29,737 | $ | (131,239 | ) | $ | 558,276 |
24
Condensed Consolidating Balance Sheet
(Amounts in thousands)
April 27, 2008 | ||||||||||||||||
Parent Company | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||
ASSETS | ||||||||||||||||
Cash and cash equivalents | $ | 22,624 | $ | 33,696 | $ | 1,942 | $ | — | $ | 58,262 | ||||||
Restricted cash | 16,790 | — | — | — | 16,790 | |||||||||||
Marketable investments | 462 | — | 24,625 | — | 25,087 | |||||||||||
Receivables | 1,717 | 100,702 | 2 | — | 102,421 | |||||||||||
Inventories | 997 | 138,816 | — | — | 139,813 | |||||||||||
Deferred taxes | 4,152 | 6,222 | — | — | 10,374 | |||||||||||
Assets of discontinued operations | — | — | 22,021 | — | 22,021 | |||||||||||
Other current assets | 608 | 6,420 | 787 | — | 7,815 | |||||||||||
Total current assets | 47,350 | 285,856 | 49,377 | — | 382,583 | |||||||||||
Property, plant and equipment, net | 5,342 | 141,231 | — | — | 146,573 | |||||||||||
Deferred taxes | 18,536 | 27,812 | — | — | 46,348 | |||||||||||
Other assets | 41,564 | 4,356 | 4,147 | — | 50,067 | |||||||||||
Investment in consolidated subsidiaries | 196,848 | — | — | (196,848 | ) | — | ||||||||||
Total assets | $ | 309,640 | $ | 459,255 | $ | 53,524 | $ | (196,848 | ) | $ | 625,571 | |||||
LIABILITIES AND SHAREHOLDERS’ EQUITY: | ||||||||||||||||
Accounts payable | $ | 1,348 | $ | 26,350 | $ | 3 | $ | — | $ | 27,701 | ||||||
Employee compensation and benefits | 5,977 | 26,276 | — | — | 32,253 | |||||||||||
Product warranty reserves | — | 32,898 | — | — | 32,898 | |||||||||||
Insurance reserves | — | 12,508 | — | — | 12,508 | |||||||||||
Liabilities of discontinued operations | — | — | 21,037 | — | 21,037 | |||||||||||
Short-term borrowings | — | 9,568 | — | — | 9,568 | |||||||||||
5% convertible senior subordinated debentures | 100,000 | — | — | — | 100,000 | |||||||||||
Other current liabilities | 12,764 | 25,603 | 555 | — | 38,922 | |||||||||||
Total current liabilities | 120,089 | 133,203 | 21,595 | — | 274,887 | |||||||||||
Deferred compensation and retirement benefits | 28,139 | — | — | — | 28,139 | |||||||||||
Product warranty reserves | — | 15,283 | — | — | 15,283 | |||||||||||
Insurance reserves | 2,899 | 6,386 | 25,553 | — | 34,838 | |||||||||||
6% convertible subordinated debentures | 160,142 | — | — | — | 160,142 | |||||||||||
Other long-term borrowings | — | 16,145 | — | — | 16,145 | |||||||||||
Intercompany payable (receivable) | (93,840 | ) | (13,398 | ) | 107,238 | — | — | |||||||||
Other non-current liabilities | 5,943 | 3,926 | — | — | 9,869 | |||||||||||
Total liabilities | 223,372 | 161,545 | 154,386 | — | 539,303 | |||||||||||
Commitments and contingencies | ||||||||||||||||
Shareholders’ equity: | ||||||||||||||||
Preferred stock | — | — | — | — | — | |||||||||||
Common stock | 643 | 1,708 | 573 | (2,281 | ) | 643 | ||||||||||
Additional paid-in capital | 562,656 | 124,777 | 333,717 | (458,494 | ) | 562,656 | ||||||||||
Retained earnings (accumulated deficit) | (476,207 | ) | 171,225 | (434,931 | ) | 263,706 | (476,207 | ) | ||||||||
Accumulated other comprehensive loss | (824 | ) | — | (221 | ) | 221 | (824 | ) | ||||||||
86,268 | 297,710 | (100,862 | ) | (196,848 | ) | 86,268 | ||||||||||
Total liabilities and shareholders’ equity | $ | 309,640 | $ | 459,255 | $ | 53,524 | $ | (196,848 | ) | $ | 625,571 |
25
Condensed Consolidating Statement of Cash Flows
(Amounts in thousands)
(Unaudited)
26 Weeks Ended October 26, 2008 | ||||||||||||||||
Parent Company | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||||||
Loss after equity in losses of consolidated subsidiaries | $ | (85,803 | ) | $ | (84,420 | ) | $ | (138 | ) | $ | 85,803 | $ | (84,558 | ) | ||
Adjustments to reconcile loss from continuing operations to net cash used in operating activities: | ||||||||||||||||
Depreciation expense | — | 7,624 | — | — | 7,624 | |||||||||||
Amortization of financing costs | — | 1,128 | — | — | 1,128 | |||||||||||
Stock-based compensation expense | — | 1,674 | — | — | 1,674 | |||||||||||
Loss on sale of property, plant and equipment | — | 41 | — | — | 41 | |||||||||||
Asset impairment | — | 1,400 | — | — | 1,400 | |||||||||||
Equity in earnings of consolidated subsidiaries | 85,803 | — | — | (85,803 | ) | — | ||||||||||
Changes to assets and liabilities— | — | |||||||||||||||
Receivables | 692 | 9,830 | (2 | ) | — | 10,520 | ||||||||||
Inventories | (59 | ) | 9,459 | — | — | 9,400 | ||||||||||
Other assets | 2,412 | (14,210 | ) | (239 | ) | — | (12,037 | ) | ||||||||
Other liabilities | 3,150 | (6,662 | ) | 21,155 | (20,517 | ) | (2,874 | ) | ||||||||
Net cash used in operating activities | 6,195 | (74,136 | ) | 20,776 | (20,517 | ) | (67,682 | ) | ||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||||||
Purchases and sales of investments, net | — | — | (273 | ) | — | (273 | ) | |||||||||
Purchases of property, plant and equipment | — | (3,191 | ) | — | — | (3,191 | ) | |||||||||
Proceeds from sales of property, plant and equipment | — | 1,107 | — | — | 1,107 | |||||||||||
Change in restricted cash | 16,790 | — | — | — | 16,790 | |||||||||||
Net cash provided by investing activities | 16,790 | (2,084 | ) | (273 | ) | — | 14,433 | |||||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||||||
Issuance of common stock, net | 38,471 | — | — | — | 38,471 | |||||||||||
Changes in short-term borrowings | — | (3,682 | ) | — | — | (3,682 | ) | |||||||||
Borrowings of long-term debt | — | 26,599 | — | — | 26,599 | |||||||||||
Payments made on long-term debt | — | (20,527 | ) | — | — | (20,527 | ) | |||||||||
Advances to affiliates | (31,463 | ) | 53,647 | (22,184 | ) | — | — | |||||||||
Net cash provided by financing activities | 7,008 | 56,037 | (22,184 | ) | — | 40,861 | ||||||||||
Net cash used in discontinued operations | — | �� | — | (261 | ) | — | (261 | ) | ||||||||
Net change in cash and cash equivalents | 29,993 | (20,183 | ) | (1,942 | ) | (20,517 | ) | (12,649 | ) | |||||||
Cash and cash equivalents at beginning of period | 22,624 | 33,696 | 1,942 | — | 58,262 | |||||||||||
Cash and cash equivalents at end of period | $ | 52,617 | $ | 13,513 | $ | — | $ | (20,517 | ) | $ | 45,613 |
26
Condensed Consolidating Statement of Cash Flows
(Amounts in thousands)
(Unaudited)
26 Weeks Ended October 28, 2007 | ||||||||||||||||
Parent Company | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||||||
Loss after equity in losses of consolidated subsidiaries | $ | (3,559 | ) | $ | (3,157 | ) | $ | (686 | ) | $ | 3,677 | $ | (3,725 | ) | ||
Adjustments to reconcile loss from continuing operations to net cash used in operating activities: | ||||||||||||||||
Depreciation expense | — | 9,518 | — | — | 9,518 | |||||||||||
Amortization of financing costs | — | 746 | — | — | 746 | |||||||||||
Stock-based compensation expense | — | 1,883 | — | — | 1,883 | |||||||||||
Gain on sale of property, plant and equipment | — | (6,436 | ) | — | — | (6,436 | ) | |||||||||
Asset impairment | — | 3,875 | — | — | 3,875 | |||||||||||
Equity in earnings of consolidated subsidiaries | 3,677 | — | — | (3,677 | ) | — | ||||||||||
Deferred taxes | — | 2,813 | — | — | 2,813 | |||||||||||
Changes to assets and liabilities— | ||||||||||||||||
Receivables | 325 | 2,370 | — | — | 2,695 | |||||||||||
Inventories | (123 | ) | (8,922 | ) | — | — | (9,045 | ) | ||||||||
Other assets | 1,964 | (188 | ) | 777 | — | 2,553 | ||||||||||
Other liabilities | 182 | (22,860 | ) | 18,921 | (20,050 | ) | (23,807 | ) | ||||||||
Net cash used in operating activities | 2,466 | (20,358 | ) | 19,012 | (20,050 | ) | (18,930 | ) | ||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||||||
Purchases and sales of investments, net | — | — | (618 | ) | — | (618 | ) | |||||||||
Purchases of property, plant and equipment | — | (3,755 | ) | — | — | (3,755 | ) | |||||||||
Proceeds from sales of property, plant and equipment | — | 12,576 | — | — | 12,576 | |||||||||||
Net cash provided by investing activities | — | 8,821 | (618 | ) | — | 8,203 | ||||||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||||||
Changes in short-term borrowings | — | 2,664 | — | — | 2,664 | |||||||||||
Borrowings of long-term debt | — | 3,928 | — | — | 3,928 | |||||||||||
Payments made on long-term debt | — | (2,547 | ) | — | — | (2,547 | ) | |||||||||
Advances to affiliates | (3,112 | ) | 22,339 | (19,227 | ) | — | — | |||||||||
Proceeds from exercise of stock options | 836 | — | — | — | 836 | |||||||||||
Net cash provided by financing activities | (2,276 | ) | 26,384 | (19,227 | ) | — | 4,881 | |||||||||
Net cash provided by discontinued operations | — | — | 617 | — | 617 | |||||||||||
Foreign currency translation adjustment | — | 578 | — | — | 578 | |||||||||||
Net change in cash and cash equivalents | 190 | 15,425 | (216 | ) | (20,050 | ) | (4,651 | ) | ||||||||
Cash and cash equivalents at beginning of period | 11,533 | 40,378 | 216 | — | 52,127 | |||||||||||
Cash and cash equivalents at end of period | $ | 11,723 | $ | 55,803 | $ | — | $ | (20,050 | ) | $ | 47,476 |
Overview
We are one of the nation’s leaders in the production of both recreational vehicles and factory-built housing. We also operate two supply companies that provide components for the recreational vehicle and housing operations, while also generating outside sales.
Our business began in 1950 as a California corporation producing travel trailers and quickly evolved to the production of what are now termed manufactured homes. We re-entered the recreational vehicle business with the acquisition of a travel trailer operation in 1964. The present company was reincorporated in Delaware in 1977. Our manufacturing activities are conducted in 11 states within the United States. We distribute our manufactured products primarily through a network of independent dealers throughout the U.S. and Canada.
Fleetwood formerly operated a folding trailer division, Fleetwood Folding Trailers, Inc. On April 15, 2008, the folding trailer business was designated as “held for sale” and accounted for as a discontinued operation beginning in the fourth quarter of fiscal 2008. The folding trailer business was subsequently sold on May 12, 2008.
As described immediately below and in “Business Outlook,” both the recreational vehicle and the manufactured housing industries have been severely affected by the fallout from the housing crisis, including limitations in availability of retail and wholesale financing, unfavorable financing terms, and declining consumer confidence. Further, as described below in “Liquidity,” we face the repurchase of $100 million 5% senior subordinated debentures in December 2008. However, as we indicate in the discussion below, we have been aggressively managing these market issues and have implemented plans, which are ongoing, for the debenture repurchase.
Recreational Vehicles
The RV Group manufactures recreational vehicles and consists of the motor home and travel trailer divisions. In fiscal 2008, we sold 18,730 recreational vehicles. In calendar year 2007, we had a 16.4% share of the motor home market and a 5.9% share of the travel trailer retail market.
The recreational vehicle markets are both cyclical and seasonal and are also highly competitive. Product demand is sensitive to changes in consumer confidence, which is influenced by global tensions, employment statistics, volatile fuel prices, changing interest rates, stock market performance, and availability of financing in general, among other factors.
The motor home market has declined over the last three years, initially caused by the rising cost of oil, volatile fuel prices and declining consumer confidence and that trend accelerated during the course of the first quarter of fiscal 2009. In addition, as a result of soft retail demand, dealers have been reducing inventories leading to an industry-wide contraction of wholesale demand and, in turn, manufacturing capacity. In this regard, the division recently announced a consolidation of one of its manufacturing facilities. Our own overall market share has declined slightly due to a particularly steep decline in the sales of the higher-priced Class A products, where we have an industry-leading position. An increase in our market share in calendar 2008 for the smaller, more fuel-efficient Class C products partially offset this trend.
The travel trailer market has also experienced recent weakness and is particularly competitive, as dealers seek to reduce inventory levels and purge previous model-year units. In recent years, our travel trailer market share had been in a steady decline in the face of increased competition and product lines that were less competitive in terms of features and price. Many of these issues resulted from a shift toward a more centralized, functional organization structure that caused management to be less focused and less entrepreneurial. Over the last three years, we have undertaken a major restructuring of the division, which included a more decentralized organization, the closure of several manufacturing facilities in calendar 2007 and the recent announcement of two additional plant consolidations, and a renewed focus on product. The reduction in capacity has more closely matched our production capabilities with the demand for our products. We introduced completely redesigned core products with enhanced features and benefits at a more competitive price, added lower-priced sport utility trailers, and in 2008 introduced lighter-weight models with additional features. We intend to be more selective as to which market segments we pursue in order to optimize our competitiveness and profitability and believe that our current products, combined with others under development and more cost-effective operations, will allow us to achieve these objectives.
Favorable demographics suggest that sustainable growth in the number of RV buyers will likely be realized in the future as baby boomers reach the age brackets that historically have accounted for the bulk of retail RV sales. Additionally, in recent years, younger buyers have shown greater interest in the RV lifestyle. These projections received strong support from the University of Michigan 2005 national survey of recreational vehicle owners, and also more recent consumer surveys sponsored by the Recreation Vehicle Industry Association. In the near term, these trends are likely to be overshadowed by current economic trends and outlook.
28
Housing
The Housing Group consists of manufacturing operations, which design and produce factory-built manufactured homes in accordance with federal HUD-Code regulations and, to a lesser extent, factory-built modular homes in accordance with the same state or local building codes that are used in conventional site-built homes. In fiscal 2008, we shipped 12,337 manufactured homes, and were the second largest producer of HUD-Code homes in the United States in terms of retail units sold to end customers. In calendar year 2007, we had a 13.4% share of the manufactured housing wholesale market. In late fiscal 2007, we introduced our Trendsetter division, which builds modular housing from a manufacturing location in Texas, mainly supplying military housing on a contractual basis as a sub-contractor.
Improvements in engineering and design as well as efficiencies in production techniques continue to position manufactured and modular homes as viable options in meeting the demand for affordable housing in new markets, such as suburban tracts and military sites, as well as in existing markets such as rural areas and manufactured housing communities and parks. The markets for affordable factory-built housing are very competitive as well as both cyclical and seasonal. The industry is most affected by the availability of financing, general economic conditions, and consumer confidence. The manufactured housing market has experienced a steep decline that began in 1999, hitting a 46-year low in shipments in 2007. During the 1990s, growth was fueled, in part, by liberal credit standards and by lenders eager to participate in a growing market. The majority of manufactured housing loans at the time were chattel, or personal property financing, secured only by the home and not by the underlying land on which the home was sited. The growth trend quickly reversed when borrower default and repossession rates soared, causing industry shipments to fall dramatically. Shipments have continued to decline over the past several years due in part to limited availability of retail financing and until recently competition from subprime financing of site-built housing. Due to the scarcity of chattel financing nationwide, the industry has trended toward more “land and home” or conventional mortgage-type financing.
Interest rates for the financing of manufactured homes are generally higher and the terms of loans shorter than for site-built homes. In addition, manufactured housing lenders have maintained conservative lending practices in recent years and some lenders have stopped extending loans to manufactured home buyers altogether. This has had the effect of making financing for manufactured homes more expensive and even more difficult to obtain relative to site-built homes, which, until recently, had enjoyed a period of sustained low interest rates and liberal lending practices. Lender reaction to the turmoil in the subprime sector of site-built home financing is beginning to redress the balance to be less unfavorable for manufactured housing borrowers than it has been for the several years. However, in the near term, an oversupply of new conventional homes and foreclosures has actually increased competition with our products.
Business Outlook
Recreational Vehicles
Industry conditions in calendar 2008 have been adversely affected by financial turmoil initiated by the housing crisis and rising fuel prices, resulting in tighter lending practices, diminished home equity values, and declining consumer confidence. More recently, several floorplan lenders have tightened lending terms and have increased dealer borrowing costs, which may potentially limit floorplan financing for some dealers. Continued deterioration of these conditions resulted in greater-than-anticipated market declines late in the first half of fiscal year 2009. Motor home and travel trailer wholesale shipments in October this year declined 52.8% from this same month last year to 12,000 RVs according to the October Recreational Vehicle Industry Association’s survey of manufacturers, bringing the year-to-date total for 2008 to 200,800 units. This was the sixth consecutive monthy decline and the lowest total for all RV shipments since 1990. Motor home retail sales for the industry were off by 38.8% for the first nine months of calendar 2008. Also, for the typically seasonally stronger summer months of June through September, industry retail sales fell by 52.4% from the prior year. Industry wholesale shipments for the same period fell 60.7%, evidencing that dealers are not reordering when motor homes are sold at retail. We anticipate continued weakness in all segments at least for the balance of fiscal year 2009. Most of the weakness is occurring in the higher-end Class A and mid-priced Class C segments. Travel trailer industry retail sales for the June through September period were down by 25.1%; however, dealers have been reducing their inventories in the face of economic uncertainty, and, as a result, industry wholesale shipments declined by 34.2% for the same period. Given the tightening of credit statements by lenders, Fleetwood currently expects that repurchase activity will be higher than has historically been the case and it may be necessary to offer greater discounts in order to relocate such product to alternative dealers during current market conditions.
Our retail overall market position in motor homes has declined slightly from 16.3% to 16.0% for the first nine months of calendar 2008, which management believes was due to aggressive discounting by competitors that appear to have overproduced inventory. We have experienced market share growth in the Class C market to a level of 12.4% in the first nine months of calendar 2008 compared to 9.6% in the equivalent period in 2007 due to recently introduced lower-priced and fuel-efficient products. For some time in this depressed market, we have been operating with excess capacity at our three motor home plants. However, with the prospect of sustained weakness in the economy and the continuation of tight lending conditions, we made the decision during the quarter to consolidate our Pennsylvania operations into our largest factory in Indiana.
29
Our travel trailer retail and wholesale market shares continue to decline, exacerbated by the restructuring of the business in calendar 2007. Dealers continue to sell older model-year units still in stock before replacing them with newer products. Also, we have experienced reduced sales of lower-margin, entry-level products in the Eastern U.S. due to discontinued production of those products in that region. As a result of adjustments we made to our manufacturing capacity in the prior year, fixed costs were reduced and manufacturing efficiencies have increased.
Due to the continued weak market conditions and excess capacity, we announced the closure of two additional travel trailer plants after the end of the quarter in order to further improve capacity utilization and lower fixed cost in this difficult environment. Our travel trailer market share for the first nine months of 2008 was 4.1%, down from 6.0% in the prior year.
We expect that any improvement in demand will be limited until market conditions improve and dealers sell down their inventories of older model-year products. Based on past trends, if fuel prices stabilize, consumer confidence recovers and credit availability improves, we expect to see a rebound in sales from dealers ordering units for stock and expect to benefit from our ability to ramp up production in an industry with less capacity than before. A longer-term positive outlook for the recreational vehicle industry is supported by favorable demographics, as baby boomers reach the age brackets that historically have accounted for the bulk of retail RV sales, and an increase in interest in the RV lifestyle among both older and younger segments of the population than have traditionally participated.
Housing
Many of the factors that have historically affected manufactured housing volumes have been in flux recently. Industry shipments for the first nine months of calendar year 2008 were down 10.1% from what was previously a forty-six year low point for the industry, with most states reporting year-over-year declines, while a pronounced weakness in traditionally strong manufactured housing markets persists. Generally, the manufactured housing market continues to be adversely affected by more limited availability of and more costly retail and wholesale financing, pronounced weakness in traditional retirement markets caused by overall housing market slump and some competition from excess supply of homes from conventional builders. Over the longer-term, sales of manufactured homes as a percentage of total sales of new single-family homes could rise from the recent level of 8% now that the gap between credit standards for site-built housing and manufactured housing has narrowed due to more stringent standards applied to site-built homes. In addition, recently passed housing reform legislation may benefit the manufactured housing industry through the FHA Title I program, which, among other benefits, will increase loan limits for home-only financing from $48,600 to $69,678, and will be indexed to inflation in future years. These benefits are expected to take effect beginning in the first half of calendar 2009. In the meantime, the overall slowing of the housing market and an increase in conventional housing inventories will negatively impact manufactured housing conditions for some time.
We have been successful in reducing fixed costs and, in some cases, consolidating management teams at adjacent plants. We continue to manage our capacity relative to current market conditions as evidenced by our recent announcement to close six of the 19 housing plants in order to improve capacity utilization. The remaining plants will be able to serve all of our manufactured housing markets. We will continue to focus on developing industry leading designs built with the highest levels of quality and backed by superior warranty service. In addition, we will also continue to respond appropriately to feedback solicited and received from our retailers and ultimate customers.
Manufactured housing markets in California, Arizona, and Florida, traditionally among our strongest, are the states most affected by the slump in the site-built housing market and continue to be down sharply. The outlook in most areas continues to be unfavorable. We anticipate that manufactured housing industry conditions are unlikely to significantly improve during calendar 2009.
We are pursuing other opportunities to supplement our business, such as sales of modular products particularly in the area of military housing. Since opening the Trendsetter Division in late fiscal 2007, we have substantially completed three large contracts to provide military housing. On September 17, 2008, we announced that our Trendsetter division has been selected to build living units for new U.S. Army housing at Fort Sam Houston in San Antonio, Texas, the world’s largest military medical training facility. Although we have had some success in the military housing business, significant expansion may be constrained by the substantial bonding requirements of such government contracts. The Trendsetter division accounted for only approximately 5% of Housing Group sales in fiscal 2008 and less than 2% of total sales; it will consist of one manufacturing facility and its sales, operating results and capital expenditures will not be material to the Company as a whole.
30
Notwithstanding the recent pricing pressure and oversupply of housing in certain regions due to the retrenchment in the mortgage industry, we expect longer-term demand for affordable housing to grow as a result of overall population growth; baby boomers reaching retirement age; the development of new products and markets in the modular arena, the continued relative high cost of site-built homes, and, greater parity in the retail financing of a manufactured home as compared to a site-built home.
Summary
We expect the remainder of fiscal 2009 will be challenging as market conditions in all segments have deteriorated, particularly for motor homes. Dealers will likely continue to conservatively manage their inventories in the coming months. In addition, lenders have tightened credit for dealers and consumers. We believe heavy discounting by manufacturers may begin to subside as industry production volumes have declined due to plant closures, short work weeks, and layoffs. Difficult market conditions will continue to negatively impact near-term margins, particularly in motor homes, and result in operating losses for the balance of the fiscal year. Fleetwood has responded by recently announcing significant restructuring within its RV and housing businesses that we anticipate will increase capacity utilization, reduce fixed costs and decrease working capital demands. In combination with the expected reduction to raw materials, work in process and finished goods inventories enabled by operating with a smaller more efficient manufacturing footprint, Fleetwood expects cash flows from operations to be at approximately break even levels for the second half of the fiscal year. We cannot be certain when market and economic conditions will improve; however, we have experienced turbulent economic downturns in the past and have successfully managed through them.
Critical Accounting Policies
Our financial statements are prepared in accordance with U.S. generally accepted accounting principles. This requires us to make estimates and assumptions that affect the amounts reported in the financial statements and notes. We evaluate these estimates and assumptions on an ongoing basis using historical experience factors and various other assumptions that we believe are reasonable under the circumstances. The results of these estimates form the basis for making judgments about the carrying values of assets and liabilities. Actual results could differ from these estimates under different assumptions or conditions.
The following is a list of the accounting policies that we believe reflect our more significant judgments and estimates, and that could potentially result in materially different results under different assumptions and conditions.
Revenue Recognition
Revenue for manufacturing operations is generally recorded when all of the following conditions have been met:
• | an order for a product has been received from a dealer; |
• | written or oral approval for payment has been received from the dealer’s flooring institution; |
• | a carrier has signed the delivery ticket accepting responsibility for the product as agent for the dealer; and |
• | the product has been 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 have the right to return products, and dealers are responsible for interest costs to floorplan lenders. On average, we receive payments from floorplan lenders on products sold to dealers within approximately 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. This warranty period typically commences upon delivery to the end user of the product. 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 RV dealer shop rates, the cost of parts, or the frequency of claims could have an adverse impact on our operating results for the period or periods in which such claims or additional costs materialize.
31
Insurance Reserves
We generally maintain excess liability insurance with outside insurance carriers to minimize our risks related to catastrophic claims or unexpectedly large cumulative claims. Generally, we are self-insured for health benefits, workers’ compensation, and products liability insurance. Liabilities are recognized for claims incurred (including those incurred but not reported), changes in the reserves related to prior claims, and an administration fee. The liability for workers’ compensation claims is guided by state statute. Factors considered in establishing the estimated liability for products liability 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 these factors could have an adverse impact on our operating results.
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 asset to the amount that we believe is more likely than not to be realized. In assessing the need for a valuation allowance, we historically had 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. Beginning in fiscal 2003, we concluded that a partial valuation allowance against our deferred tax asset was appropriate and have since made adjustments to the allowance as necessary, generally to give effect to changes in the amount of asset that can be supported by available tax planning strategies. Presently, the net deferred tax asset continues to be supported by tax planning strategies that, if executed, are expected to generate sufficient taxable income to realize the book value of the remaining asset. Although 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 asset, 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.
Legal Proceedings
We are regularly involved in legal proceedings in the ordinary course of our business. Insurance covers part of Fleetwood’s liability under some of this litigation. In the majority of cases, including products liability 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 or 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. Our agreements generally provide that, in the event of a default by a dealer in its obligation to these credit sources, we 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 $104 million for inventory at manufactured housing dealers and $316 million for inventory at RV dealers as of October 26, 2008, 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 higher RV dealer inventories. Losses and related repurchase reserves under these agreements have not been significant but generally increase during cyclical industry downturns. Given the tightening of credit standards by lenders, Fleetwood currently expects that repurchase activity will be higher than has historically been the case and it may be necessary to offer greater discounts in order to relocate such product to alternative dealers during current market conditions.To mitigate the potential repurchases, we monitor the viability of our dealers through a combination of credit monitoring and dealer due diligence. In addition, our sales teams are dedicated to increasing dealer points of distribution in new markets and replacing weaker dealers in existing markets. Further, to the extent dealers reduce their inventories, which they have been doing in recent months in both industries, our overall exposure to repurchase agreements is likewise reduced. As a result of various factors, actual results could differ from the estimates used by management. Historically, lender repurchase demands have been funded out of working capital. A summary of recent repurchase activity is set forth below (dollars in millions):
32
26 Weeks Ended | Fiscal Years | ||||||||||||
Oct. 26, 2008 | Oct. 28, 2007 | 2008 | 2007 | ||||||||||
Units | 74 | 25 | 159 | 96 | |||||||||
Repurchase amount | $ | 1.9 | $ | 0.7 | $ | 4.8 | $ | 2.4 | |||||
Loss recognized | $ | 0.5 | $ | 0.2 | $ | 0.7 | $ | 0.7 |
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 | 26 Weeks Ended | ||||||||||||
Oct. 26, 2008 | Oct. 28, 2007 | Oct. 26, 2008 | Oct. 28, 2007 | ||||||||||
Net sales | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | |||||
Cost of products sold | 92.2 | 82.8 | 89.4 | 84.0 | |||||||||
Gross profit | 7.8 | 17.2 | 10.6 | 16.0 | |||||||||
Operating expenses | (28.6 | ) | (15.6 | ) | (24.1 | ) | (15.1 | ) | |||||
Other operating income, net | (3.2 | ) | (0.7 | ) | (1.3 | ) | (0.1 | ) | |||||
Operating income (loss) | (24.0 | ) | 0.9 | (14.8 | ) | 1.0 | |||||||
Other income (expense) | |||||||||||||
Investment income | 0.4 | 0.3 | 0.3 | 0.3 | |||||||||
Interest expense | (2.5 | ) | (1.4 | ) | (2.1 | ) | (1.3 | ) | |||||
Loss from continuing operations before income taxes | (26.1 | ) | (0.3 | ) | (16.6 | ) | — | ||||||
Provision for income taxes | (0.1 | ) | — | (0.1 | ) | (0.4 | ) | ||||||
Loss from continuing operations | (26.2 | ) | (0.3 | ) | (16.7 | ) | (0.4 | ) | |||||
Loss from discontinued operations | — | — | (0.3 | ) | — | ||||||||
Net loss | (26.2 | )% | (0.3 | )% | (17.0 | )% | (0.4 | )% |
33
Current Quarter Compared to Corresponding Quarter of Last Year
Consolidated Results
The following table presents consolidated net sales and operating income (loss) by segment for the quarters ended October 26, 2008 and October 28, 2007 (amounts in thousands):
13 Weeks Ended | |||||||||||||||||||
% of | % of | Change | |||||||||||||||||
Oct. 26, 2008 | Net Sales | Oct 28, 2007 | Net Sales | Amount | % | ||||||||||||||
REVENUES: | |||||||||||||||||||
RV Group | $ | 116,609 | 53.9 | $ | 318,729 | 68.0 | $ | (202,120 | ) | (63.4 | ) | ||||||||
Housing Group | 99,796 | 46.1 | 149,774 | 32.0 | (49,978 | ) | (33.4 | ) | |||||||||||
Net sales | $ | 216,405 | 100.0 | $ | 468,503 | 100.0 | $ | (252,098 | ) | (53.8 | ) | ||||||||
GROSS PROFIT: | |||||||||||||||||||
RV Group | $ | (2,126 | ) | (1.8 | ) | $ | 45,608 | 14.3 | $ | (47,734 | ) | NM | |||||||
Housing Group | 19,030 | 19.1 | 34,898 | 23.3 | (15,868 | ) | (45.5 | ) | |||||||||||
Gross profit | $ | 16,904 | 7.8 | $ | 80,506 | 17.2 | $ | (63,602 | ) | (79.0 | ) | ||||||||
OPERATING EXPENSES: | |||||||||||||||||||
RV Group | $ | 39,843 | 34.2 | $ | 45,016 | 14.1 | $ | (5,173 | ) | (11.5 | ) | ||||||||
Housing Group | 25,277 | 25.3 | 29,766 | 19.9 | (4,489 | ) | (15.1 | ) | |||||||||||
Corporate and other | 3,623 | NM | 1,595 | NM | 2,028 | 127.1 | |||||||||||||
Operating expenses | $ | 68,743 | 31.8 | $ | 76,377 | 16.3 | $ | (7,634 | ) | (10.0 | ) | ||||||||
OPERATING INCOME (LOSS): | |||||||||||||||||||
RV Group | $ | (41,969 | ) | (36.0 | ) | $ | 592 | 0.2 | $ | (42,561 | ) | NM | |||||||
Housing Group | (6,247 | ) | (6.3 | ) | 5,132 | 3.4 | (11,379 | ) | NM | ||||||||||
Corporate and other | (3,623 | ) | — | (1,595 | ) | — | (2,028 | ) | (127.1 | ) | |||||||||
Operating income (loss) | $ | (51,839 | ) | (24.0 | ) | $ | 4,129 | 0.9 | $ | (55,968 | ) | NM |
NM - Not Meaningful
Consolidated revenues were severely affected by the fallout from the housing crisis, limitations in availability of retail and wholesale financing, unfavorable financing terms, and declining consumer confidence.
Gross margin was less than half of the prior year mainly due to the significant decline in motor home sales, particularly the higher-priced products which typically have higher margins. Also contributing to the decrease was an increase in sales incentives along with higher labor costs related to plant shutdowns for several periods during the quarter as a result of the weak demand.
Operating expenses, which include selling, warranty and service, and general and administrative expenses, declined compared with the prior year due to efforts to reduce headcount and fixed costs, as well as lower variable costs such as warranty expense that were affected by lower sales. Expenses rose as a percentage of lower sales due to fixed costs not decreasing at the same rate as revenues.
Other operating expense, net in the current year was $6.9 million, mainly attributed to estimated severance costs for the announced consolidation of a motor home facility and four housing plants. The prior year amount consisted of a $3.1 million expense for impairments on idle housing facilities held-for-sale and $1.1 million of severance related to closed plants, partially offset by a gain from the sale of an idle housing facility.
Other income (expense) consists of investment and other income and interest expense.
The current and prior-year tax provisions consisted of state tax liabilities in several states, with no offsetting tax benefits in others.
34
Recreational Vehicles
The following table presents RV Group net sales and operating income (loss) by division for the periods ended October 26, 2008 and October 28, 2007 (amounts in thousands):
13 Weeks Ended | |||||||||||||||||||
% of | % of | Change | |||||||||||||||||
Oct. 26, 2008 | Net Sales | Oct. 28, 2007 | Net Sales | Amount | % | ||||||||||||||
REVENUES: | |||||||||||||||||||
Motor homes | $ | 87,581 | 75.1 | $ | 263,776 | 82.8 | $ | (176,195 | ) | (66.8 | ) | ||||||||
Travel trailers | 24,075 | 20.6 | 47,972 | 15.1 | (23,897 | ) | (49.8 | ) | |||||||||||
RV supply | 4,953 | 4.2 | 6,981 | 2.2 | (2,028 | ) | (29.1 | ) | |||||||||||
RV Group | $ | 116,609 | 100.0 | $ | 318,729 | 100.0 | $ | (202,120 | ) | (63.4 | ) | ||||||||
GROSS PROFIT: | |||||||||||||||||||
Motor homes | $ | 509 | 0.6 | $ | 39,832 | 15.1 | $ | (39,323 | ) | (98.7 | ) | ||||||||
Travel trailers | 1,140 | 4.7 | 3,439 | 7.2 | (2,299 | ) | (66.9 | ) | |||||||||||
RV supply | (3,775 | ) | (50.0 | ) | 2,337 | 14.6 | (6,112 | ) | NM | ||||||||||
RV Group | $ | (2,126 | ) | (1.8 | ) | $ | 45,608 | 14.3 | $ | (47,734 | ) | NM | |||||||
OPERATING EXPENSES: | |||||||||||||||||||
Motor homes | $ | 27,527 | 31.4 | $ | 30,728 | 11.6 | $ | (3,201 | ) | (10.4 | ) | ||||||||
Travel trailers | 10,220 | 42.5 | 11,773 | 24.5 | (1,553 | ) | (13.2 | ) | |||||||||||
RV supply | 2,096 | 27.7 | 2,515 | 15.7 | (419 | ) | (16.7 | ) | |||||||||||
RV Group | $ | 39,843 | 34.2 | $ | 45,016 | 14.1 | $ | (5,173 | ) | (11.5 | ) | ||||||||
OPERATING INCOME (LOSS): | |||||||||||||||||||
Motor homes | $ | (27,018 | ) | (30.8 | ) | $ | 9,104 | 3.5 | $ | (36,122 | ) | NM | |||||||
Travel trailers | (9,080 | ) | (37.7 | ) | (8,334 | ) | (17.4 | ) | (746 | ) | (9.0 | ) | |||||||
RV supply | (5,871 | ) | (77.7 | ) | (178 | ) | 1.1 | (5,693 | ) | 32.0 | |||||||||
RV Group | $ | (41,969 | ) | (36.0 | ) | $ | 592 | 0.2 | $ | (42,561 | ) | NM |
The significant drop in RV Group sales was the result of financial turmoil initiated by the housing crisis and rising fuel prices, resulting in tighter lending practices and declining consumer confidence. During the seasonally strong summer months of June through September, the industry retail market fell 52% and 25% for motor homes and travel trailers, respectively. The national retail market for motor homes for the first nine months of calendar year 2008 was down 38% compared with a decrease in Fleetwood retail activity of 40%, resulting in a slight decrease in market share from 16.3% to 16.0% for the period. Additionally, dealers made sizable reductions to their own inventories, further reducing our wholesale shipments. Consumer concerns negatively affected the market, particularly the higher-priced Class As and mid-priced Class Cs, where Fleetwood has a relatively stronger market position. The gains we have made in the Class C market because of last year’s introduction of more fuel-efficient and lower-priced product were not enough to offset the declines in Class A products.
In addition, Fleetwood’s travel trailer dealers trimmed prior-model-year products from their inventories but have been slow to replenish their inventories with new product in the current market. In the first nine months of calendar year 2008, industry retail sales declined 21.2%, compared to a 2.7% increase in calendar year 2007. Fleetwood’s retail sales the first nine months were down by 46.6%, mainly due to diminished geographical reach in the East and especially weak market conditions in parts of the West.
Gross margin for the quarter dropped from 14.3% to a negative 1.8% mainly due to the sharp increase in sales incentives in both businesses, which almost doubled on one-third of the revenue. In addition, the Group recorded a $4.6 million write-down of excess inventory related to the closure of one of the supply operations. Excluding sales incentives and discounts, gross margin as a percentage of sales decreased by 6.5% from the prior year, of which 3.3% can be attributed to higher labor costs caused by temporary motor home plant shutdowns to adjust production to match demand and the remaining gross margin decline resulted from manufacturing overheads increasing as a percentage of sales by 2% from the prior year due to fixed costs increasing as a percentage of declining sales. Higher travel trailer labor efficiencies partially offset the overall trend.
35
Operating expenses for the RV Group declined from the prior year, but increased as a percentage of sales for the current quarter due to the fixed nature of some of the expenses and the significant decrease in revenue. The lower expenses were mostly due to lower warranty and service costs of $4.0 million, resulting from lower volumes, and a $3.4 million decline in general and administrative expenses related to earlier downsizing actions. Other operating expense, net, of $2.9 million, was mostly severance related to the consolidation of two motor home plants into one operation. In the prior year, the $0.7 million expense was additional severance related to a travel trailer plant closure.
Manufactured Housing
The following table presents Housing Group net sales and operating income for the quarters ended October 26, 2008 and October 28, 2007 (amounts in thousands):
13 Weeks Ended | |||||||||||||||||||
% of Net | % of Net | Change | |||||||||||||||||
Oct. 26, 2008 | Sales | Oct. 28, 2007 | Sales | Amount | % | ||||||||||||||
Net sales | $ | 99,796 | 100.0 | $ | 149,774 | 100.0 | $ | (49,978 | ) | (33.4 | ) | ||||||||
Gross profit | $ | 19,030 | 19.1 | $ | 34,898 | 23.3 | $ | (15,868 | ) | (45.5 | ) | ||||||||
Operating expenses | $ | 25,277 | 25.3 | $ | 29,766 | 19.9 | $ | (4,489 | ) | (15.1 | ) | ||||||||
Operating income (loss) | $ | (6,247 | ) | (6.3 | ) | $ | 5,132 | 3.4 | $ | (11,379 | ) | NM |
Housing Group revenues for the quarter declined from the prior year mainly due to the more limited availability of and more costly retail and wholesale financing, pronounced weakness in traditional retirement markets caused by the overall housing market slump and some competition from excess supply of homes from conventional builders. Manufactured housing sales to traditional dealers fell 34.6% as the manufactured housing market continued to weaken. Included in revenue in the current October quarter was $8.8 million of revenue from modular sales, mostly to the military for base housing.
Manufactured homes are sold as single-section or multi-section units. Multi-section units typically are built in two, three, or four sections. The average selling price of manufactured homes built to the HUD Code decreased by about 4% to $36,836, offset by an increase of 8% to $37,603 to the price of modular units sold to the military.
Manufacturing unit volume for the current year declined 31.2% to 2,703 homes (including 234 modular sections), while the total number of sections sold decreased 34.6% to 4,350 units. Fleetwood’s market share, based on wholesale shipments for the first nine months of calendar year 2008, declined from 13.3% for the same period in the prior year to 11.5%. The Group’s wholesale shipment share for multi-section homes decreased from 14.5% to 12.4% while its share of the single-section market was down from 10.6% to 9.9%. The declines were mainly the result of significant weakness, caused by the conventional housing slump, in the Sun Belt states of California, Arizona and Florida, in which we have a strong presence.
Industry shipments for the first nine months of calendar year 2008 were down 10.1%. Traditionally larger manufactured housing markets continued to be particularly weak, with shipments off by more than 30% in California and Arizona and by 26% in Florida for the first nine months of calendar 2008. Generally, the manufactured housing market continues to be adversely affected by limited availability of retail financing, competition from conventional builders due to the overall weak housing market and more recently, tougher regional competition in the southern region of the country.
The erosion of the second-quarter gross profit margin in the current year was mainly due to higher raw material costs and a shift in product mix to smaller lower-margin units, combined with higher installation costs related to the military housing contracts.
Operating expenses were lower than the prior year, led by a $3.5 million reduction in general and administrative expense, primarily resulting from lower incentive compensation and cost-reduction actions implemented in the prior year. In addition, selling, warranty, and service expenses declined by $1.4 million mainly due to lower volume.
36
Current Year-to-Date Compared to Corresponding Period of Last Year
Consolidated Results:
The following table presents consolidated net sales and operating income (loss) by segment for the six-month periods ended October 26, 2008 and October 28, 2007 (amounts in thousands):
26 Weeks Ended | |||||||||||||||||||
% of Net | % of Net | Change | |||||||||||||||||
Oct. 26, 2008 | Sales | Oct. 28, 2007 | Sales | Amount | % | ||||||||||||||
REVENUES: | |||||||||||||||||||
RV Group | $ | 283,869 | 56.1 | $ | 662,817 | 69.3 | $ | (378,948 | ) | (57.2 | ) | ||||||||
Housing Group | 222,448 | 43.9 | 294,008 | 30.7 | (71,560 | ) | (24.3 | ) | |||||||||||
Net sales | $ | 506,317 | 100.0 | $ | 956,825 | 100.0 | $ | (450,508 | ) | (47.1 | ) | ||||||||
GROSS PROFIT: | |||||||||||||||||||
RV Group | $ | 9,884 | 3.5 | $ | 85,169 | 12.8 | $ | (75,285 | ) | (88.4 | ) | ||||||||
Housing Group | 43,767 | 19.7 | 67,726 | 23.0 | (23,959 | ) | (35.4 | ) | |||||||||||
Gross profit | $ | 53,651 | 10.6 | $ | 152,895 | 16.0 | $ | (99,244 | ) | (64.9 | ) | ||||||||
OPERATING EXPENSES: | |||||||||||||||||||
RV Group | $ | 75,662 | 26.7 | $ | 82,694 | 12.5 | $ | (7,032 | ) | (8.5 | ) | ||||||||
Housing Group | 47,530 | 21.3 | 57,119 | 19.5 | (9,589 | ) | (16.8 | ) | |||||||||||
Corporate and other | 5,531 | — | 3,260 | — | 2,271 | 69.7 | |||||||||||||
Operating expenses | $ | 128,723 | 25.4 | $ | 143,073 | 15.0 | $ | (14,350 | ) | (10.0 | ) | ||||||||
OPERATING INCOME (LOSS): | |||||||||||||||||||
RV Group | $ | (65,778 | ) | (23.2 | ) | $ | 2,475 | 0.4 | $ | (68,253 | ) | NM | |||||||
Housing Group | (3,763 | ) | (1.7 | ) | 10,607 | 3.6 | (14,370 | ) | (135.5 | ) | |||||||||
Corporate and other | (5,531 | ) | — | (3,260 | ) | — | (2,271 | ) | (69.7 | ) | |||||||||
Operating income (loss) | $ | (75,072 | ) | (14.8 | ) | $ | 9,822 | 1.0 | $ | (84,894 | ) | NM |
Consolidated revenues were severely affected by the fallout from the housing crisis, limitations in availability and terms of retail and wholesale financing and declining consumer confidence.
Gross margin fell from the prior year primarily due to RV Group sales incentives that were about the same as the prior year but on half the sales, in addition to higher labor costs from plant shutdowns, and the fixed nature of some of the manufactured overheads on declining volume.
Operating expenses, which include selling, warranty and service, and general and administrative expenses, fell compared to the prior year but increased as a percentage of sales due to the declining sales and the fixed nature of some of the expenses. General and administrative expenses declined by $11.0 million due to headcount reductions associated with restructuring efforts, significant declines in incentive compensation, and lower corporate expenses. Also contributing was an $8.9 million drop in warranty expenses, mainly due to the lower volume.
For the first six months, other operating expense, net, was $6.8 million consisting of severance related to the announced consolidation of four housing plants and three RV plants and an impairment charge on one housing plant. Last year, other operating income, net included $6.4 million of gains primarily from the sale of two facilities, partially offset by $3.9 million of impairments charges on idle housing facilities and $1.1 million of severance expenses related to closed plants.
Other income (expense) consists of investment income, interest expense, and miscellaneous other income. Investment income decreased from $2.5 million in the prior year to $1.7 million, due to lower invested funds and interest rates in the current year. Interest expense decreased from $12.2 million in the prior year to $10.6 million due to a reduction in bank borrowings.
37
The year-to-date tax provision was $0.6 million due to state tax provisions. In the prior year, the year-to-date tax provision was principally due to a $2.8 million non-cash adjustment to the carrying amount of the deferred tax asset as a result of the decision to market for sale a closed manufacturing facility previously used by one of our supply businesses. This reduced unrealized gains that would otherwise have been available to support the carrying value of the deferred tax asset. The remainder of the tax provision related to state tax liabilities.
Recreational Vehicles:
The following table presents RV Group net sales and operating income (loss) by division for the periods ended October 26, 2008 and October 28, 2007 (amounts in thousands):
26 Weeks Ended | |||||||||||||||||||
% of | % of | Change | |||||||||||||||||
Oct. 26, 2008 | Net Sales | Oct. 28, 2007 | Net Sales | Amount | % | ||||||||||||||
REVENUES: | |||||||||||||||||||
Motor homes | $ | 209,390 | 73.8 | $ | 537,457 | 81.1 | $ | (328,067 | ) | (61.0 | ) | ||||||||
Travel trailers | 63,906 | 22.5 | 111,624 | 16.8 | (47,718 | ) | (42.7 | ) | |||||||||||
RV supply | 10,573 | 3.7 | 13,736 | 2.1 | (3,163 | ) | (23.0 | ) | |||||||||||
RV Group | $ | 283,869 | 100.0 | $ | 662,817 | 100.0 | $ | (378,948 | ) | (57.2 | ) | ||||||||
GROSS PROFIT: | |||||||||||||||||||
Motor homes | $ | 9,174 | 4.4 | $ | 77,935 | 14.5 | $ | (68,761 | ) | (88.2 | ) | ||||||||
Travel trailers | 4,593 | 7.2 | 2,339 | 2.1 | 2,254 | 96.4 | |||||||||||||
RV supply | (3,883 | ) | (22.4 | ) | 4,895 | 14.4 | (8,778 | ) | (179.3 | ) | |||||||||
RV Group | $ | 9,884 | 3.5 | $ | 85,169 | 12.8 | $ | (75,285 | ) | (88.4 | ) | ||||||||
OPERATING EXPENSES: | |||||||||||||||||||
Motor homes | $ | 52,260 | 25.0 | $ | 59,828 | 11.1 | $ | (7,568 | ) | (12.6 | ) | ||||||||
Travel trailers | 19,321 | 30.2 | 18,098 | 16.2 | 1,223 | 6.8 | |||||||||||||
RV supply | 4,081 | 23.6 | 4,768 | 14.0 | (687 | ) | (14.4 | ) | |||||||||||
RV Group | $ | 75,662 | 26.7 | $ | 82,694 | 12.5 | $ | (7,032 | ) | (8.5 | ) | ||||||||
OPERATING INCOME (LOSS): | |||||||||||||||||||
Motor homes | $ | (43,086 | ) | (20.6 | ) | $ | 18,107 | 3.4 | $ | (61,193 | ) | NM | |||||||
Travel trailers | (14,728 | ) | (23.0 | ) | (15,759 | ) | (14.1 | ) | 1,031 | 6.5 | |||||||||
RV supply | (7,964 | ) | (75.3 | ) | 127 | 0.9 | (8,091 | ) | NM | ||||||||||
RV Group | $ | (65,778 | ) | (23.2 | ) | $ | 2,475 | 0.4 | $ | (68,253 | ) | NM |
Recreational vehicle sales fell in the first six months as a result of economic turmoil, tight lending, and declining consumer confidence. Motor home sales for the first half of fiscal 2008 were impacted by a significant decline in shipments of diesel and higher-priced Class A products. Partially offsetting the decline in higher-priced products were increases in recently introduced lower-priced Class C products. The travel trailer segment was negatively impacted by plant closures, some of which constrained our ability to provide certain products to dealers in some regions of the country. Market share declined in both businesses due to dealer and consumer concerns about Fleetwood’s ability to satisfy the demands of the holders of the $100 million of 5% senior subordinated convertible debentures, who have an option to require the Company to repurchase the securities on December 15, 2008.
Gross margin for the first six months decreased mainly due to higher sales incentives necessitated by very competitive market conditions. In addition, higher labor costs resulting from plant shutdowns and higher fixed costs relative to declining sales also contributed to margin erosion.
RV Group operating expenses for the first six months of this fiscal year were down from the prior period, but increased as a percentage of sales. The drop was mostly due to a $6.2 million decrease in general and administrative expenses from headcount and benefit reductions and the closure of five travel trailer plants in the prior year. Warranty and service costs decreased by $5.9 million due to lower volumes and the migration of responsibility for previously centralized service operations to plant locations that historically have had the lowest incurred warranty costs. Other operating expense, net, was $3.0 million, stemming from the consolidation of two motor home plants into one operation and the closure of a supply business. In the prior year, other operating expense, net, was a $4.0 million gain from the sale of an idle facility, partially offset by about $1.3 million of restructuring costs from impairment and severance charges at closed travel trailer plants.
38
Housing Group:
The following table presents Housing Group sales and operating income for the six-month periods ended October 26, 2008 and October 28, 2007 (amounts in thousands):
26 Weeks Ended | |||||||||||||||||||
% of Net | % of Net | Change | |||||||||||||||||
Oct. 26, 2008 | Sales | Oct. 28, 2007 | Sales | Amount | % | ||||||||||||||
Net sales | $ | 222,448 | 100.0 | $ | 294,008 | 100.0 | $ | (71,560 | ) | (24.3 | ) | ||||||||
Gross profit | $ | 43,767 | 19.7 | $ | 67,726 | 23.0 | $ | (23,959 | ) | (35.4 | ) | ||||||||
Operating expenses | $ | 47,530 | 21.3 | $ | 57,119 | 19.5 | $ | (9,589 | ) | (16.8 | ) | ||||||||
Operating income (loss) | $ | (3,763 | ) | (1.7 | ) | $ | 10,607 | 3.6 | $ | (14,370 | ) | NM |
Housing Group revenues for the first half of fiscal 2008 decreased due to restricted availability of credit for retail customers and the housing crisis which significantly impacted the California, Arizona, and Florida markets, three of the strongest manufactured housing markets for Fleetwood. Included in revenue in the current period was $33.0 million of revenue from military sales, compared to $19.2 million in the prior year. Manufacturing unit volume for the first six months was off 23% to 5,995 homes (including 833 modular sections), while the total number of sections sold decreased by 3,710 to 9,506 sections.
Gross profit margin for the first half of the year decreased from the prior year due to a shift to lower-priced, smaller multi-wide units and, to a lesser extent, rising raw material costs that were not covered by selling price increases.
Overall, operating expenses increased over the prior year due to severance costs related to the closure of four housing plants and an impairment charge on one of the closed facilities. Other expense, net of $2.4 million in the prior year consisted of $3.1 million of impairment charges on idle facilities and $0.4 million of restructuring costs, partially offset by the gain on the sale of an idle housing facility of $1.1 million.
Liquidity and Financial Position
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 $67.7 million was used by operating activities during the first six months of fiscal 2009 compared with $18.9 million for the similar period one year ago. In the current period, the loss from continuing operations, adjusted for non-cash items, but excluding the effects of changes in assets and liabilities, used $72.7 million of operating cash. Changes in assets and liabilities during this period generated $5.0 million of cash, primarily due to lower receivables and inventories. Inventory levels were down from year-end by $9.4 million and $41.6 million below the second quarter of the prior year, primarily due to a reduction in raw material inventories related to reduced production. In the prior year, cash used by operations resulted mainly from lower liabilities.
Funds of $14.4 million were provided from investing activities this year compared to $8.2 million for the first six months of the prior year. This was mostly related to the release of $16.8 million of restricted cash from sale proceeds of the corporate complex. Last year, $12.6 million of funds were provided from the sale of properties, compared to $1.1 million for the current year. Capital expenditures were $3.2 million during the first six months compared with $3.8 million in the same period last year.
Borrowings under our secured syndicated credit facility, led by Bank of America, N.A., as administrative agent, including the term loan, declined by $21.8 million during the first six months of the fiscal year, primarily as a result of the reduction and ultimate payoff of the term loan. These borrowings are discussed in more detail below. Borrowings also decreased due to a $2.4 million repayment of capital leases. In the first six months of fiscal 2009, we also raised approximately $38.5 million from a public offering of common stock and $26.5 million from new mortgage financing.
39
As a result of the above-mentioned changes, cash and cash equivalents decreased during the fiscal year by $12.6 million from $58.3 million as of April 27, 2008, to $45.6 million as of October 26, 2008.
As further discussed in Note 11, Fleetwood launched an offer to exchange the existing debentures for new senior secured notes due 2011 as an alternative to repurchasing the debentures with common stock on December 15, 2008. Our intention is to minimize the use of cash as part of the repurchase in order to maintain as much operating flexibility as possible in the current environment.
5% Convertible Senior Subordinated Debentures
Holders of the 5% convertible senior subordinated debentures have the ability to require Fleetwood to repurchase the debentures, in whole or in part, on December 15, 2008, December 15, 2013 and December 15, 2018. The repurchase price is 100% of the principal amount of the debentures plus accrued and unpaid interest. Fleetwood was permitted, at its option, to elect to pay the repurchase price in cash, its common stock, or a combination of the two. In anticipation of the upcoming potential repurchase obligation, Fleetwood commenced an exchange offer to the holders, described in Note 11. For any holder that does not accept the exchange offer and instead puts the debentures to the Company, Fleetwood has elected to repay the purchase price in common stock, and the number of shares of its common stock that it will deliver will be equal to the dollar amount being repurchased divided by 95% of the arithmetic average of the volume weighted average price of its common stock for each of the 20 trading days immediately preceding the repurchase date. If the debentures are still outstanding, Fleetwood has the option to redeem them anytime after December 15, 2008, in whole or in part, for cash, at a price equal to 100% of the principal amount plus accrued and unpaid interest.
Credit Agreements
In January 2007, the agreement governing Fleetwood’s credit facility with a syndicate of lenders led by Bank of America, N.A., as administrative agent, was renewed and extended until July 31, 2010. Fleetwood originally entered into the credit agreement in July 2001, and it has been amended on several occasions since. The new amended and restated agreement incorporated prior amendments and made additional changes, but continues to provide for a revolving credit facility, including a real estate subfacility.
The facility includes restrictions regarding additional indebtedness, business operations, liens, guaranties, transfers and sales of assets, and transactions with subsidiaries or affiliates. The facility also contains customary events of default that would permit the lenders to accelerate repayment of borrowings under the amended facility if not cured within applicable grace periods, including the failure to make timely payments under the amended facility or other material indebtedness and the failure to meet certain covenants.
During October 2008, in anticipation of the Company’s exchange offer discussed in Note 11, the credit facility was amended to eliminate the unamortized term loan commitments, and the then outstanding borrowings of $12.8 million were paid in full. Loan commitments for the revolving credit facility were also reduced from $160 million to $135 million and interest rates for several borrowing categories were increased. Fleetwood’s borrowing capacity, however, is governed by the amount of a borrowing base, consisting primarily of inventories and accounts receivable and a real estate subfacility. Inventories and accounts receivable can fluctuate significantly and the borrowing base is revised weekly for changes in receivables and monthly for changes in inventory balances. On the first day of each fiscal quarter, the ability to borrow under the real estate subfacility is reduced by $375,000. As of October 26, 2008, the net borrowing capacity under the subfacility was $12.4 million.
The balance on the revolver as of October 26, 2008 was $479,000 and the borrowing base totaled $94.4 million. After consideration of outstanding borrowings and standby letters of credit of $63.7 million, unused borrowing capacity (availability) was approximately $30.2 million. The revolving credit line bears interest, at Fleetwood’s option, at variable rates based on either Bank of America’s prime rate or one-, two- or three-month LIBOR.
Under the amended agreement, Fleetwood continues to be subject to a springing financial performance covenant that was also revised. The covenant only applies if either (a) average daily liquidity, defined as bank cash, cash equivalents, and unused borrowing capacity, falls below a prescribed minimum level of $45 million in any calendar month, or (b) liquidity falls below $25 million on any single day. Fleetwood is also subject to a new separate covenant under which liquidity cannot fall below $25 million on any three consecutive business days. During the quarter ended October 26, 2008, average daily liquidity for each calendar month reported by Fleetwood ranged from $111 million to $129 million. The amendment also reduced the total amount of real estate collateral held by the lenders from an approximate appraised value of $79 million to $58 million.
40
As of October 26, 2008, the entire $479,400 revolver balance was included in short-term borrowings, as compared to April 27, 2008 when a combined aggregate short-term balance outstanding under the revolver and the term loan stood at $7.3 million. An additional $14.9 million of the term loan was included in long-term borrowings as of April 27, 2008.
Borrowings are secured by receivables, inventory, and certain other assets, primarily real estate, and are used for working capital and general corporate purposes. The $58 million of real estate pledged as security includes excess (boot) collateral of $38 million. Under the senior credit agreement, Fleetwood Enterprises, Inc. is a guarantor of the borrowings and letters of credit of its wholly owned subsidiary, Fleetwood Holdings, Inc.
In November 2008, the facility was amended to change the definition of the Company’s Minimum Liquidity covenant to require that liquidity should not be less than $25 million for a three-day consecutive period, amend the definition of the Company’s Borrowing Base to include cash collateral and permit borrowing and liens against certain Life Insurance Policies, subject to some restrictions. The amendment also provides that when an amount is borrowed against the policies, the real estate subfacility will be reduced by $2 million.
On August 22, 2008, Fleetwood generated $26.5 million of cash from new mortgage financing collateralized by two operating properties. The borrowings bear interest at 9.95% and have a three-year term and can be extended for up to an additional two years. Additionally, remaining unencumbered real estate properties total $50 million to $60 million in estimated market value, of which $15 million is currently being marketed for sale and another $20 million will be provided in the form of first lien collateral to the new senior secured notes offered in the exchange offer described in Notes 11 and 12 of the financial statements included in this Form 10Q.
Dividends and Distributions
On October 30, 2001, we announced that we would discontinue the payment of dividends. Our board of directors does not currently contemplate resuming the payment of dividends on our common stock. Additionally, we cannot declare or pay any dividends on our common stock if we are deferring distributions on the 6% convertible trust preferred securities. In April 2008, we elected to defer payment of the distributions on the convertible trust preferred securities, the terms of which provide for the option to defer distributions for up to 20 consecutive quarters.
Summary
As noted, we expect difficult market conditions will result in operating losses for at least the next two fiscal quarters. Fleetwood has responded by recently announcing significant restructuring within its RV and housing businesses that we believe will increase capacity utilization, reduce fixed costs and decrease working capital demands. In combination with the expected reduction to raw materials, work in process and finished goods inventories enabled by operating with a smaller more efficient manufacturing footprint, Fleetwood expects cash flows from operations to be at approximately break even levels for the second half of the fiscal year. In the opinion of management, some combination of existing cash resources, proceeds from property dispositions, available lines of credit, and the successful execution of our plans to address the 5% convertible senior subordinated debentures will be sufficient to satisfy our foreseeable cash requirements for the next 12 months, including up to $10 million for capital expenditures in fiscal 2009, to be utilized primarily for enhancements to manufacturing facilities.
Stock-Based Incentive Compensation Plans
Fleetwood grants stock options, restricted stock, and performance-based restricted stock units under the 2007 Stock Incentive Plan, at no cost, to its officers, key employees, and non-employee directors. In the 13 weeks ended October 26, 2008, Fleetwood granted 1.2 million stocks options to officers and key employees and 189,000 restricted stock awards to non-employee directors. Total stock-based compensation expense included in the statements of income for the quarters ended October 26, 2008 and October 28, 2007 was $1.1 million and $1.4 million, respectively.
As of October 26, 2008, there was a total of $2.0 million of unrecognized compensation cost related to nonvested stock options granted under Fleetwood’s stock-based incentive compensation plans that will be recognized over the remaining weighted average vesting period of 2.3 years. We also have $400,000 of unrecognized compensation cost related to nonvested restricted stock awards that will be recognized over the remaining weighted average vesting period of 1.3 years.
Contractual Obligations
Below is a table showing payment obligations for long-term debt, capital leases, operating leases, and purchase obligations for the next five years and beyond as of October 26, 2008 and the effects such obligations are expected to have on liquidity and cash flow in future periods (amounts in thousands):
41
Payments Due By Period | ||||||||||||||||
Contractual Obligations | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | |||||||||||
5% convertible senior subordinated debentures(1)(2) | $ | 100,687 | $ | 100,687 | $ | — | $ | — | $ | — | ||||||
6% convertible subordinated debentures(1)(3) | 335,401 | 9,075 | 18,150 | 18,150 | 290,026 | |||||||||||
Long-term debt (excluding capital lease obligations)(1) | 36,254 | 3,066 | 32,632 | 335 | 221 | |||||||||||
Capital lease obligations(1) | 188 | 123 | 65 | — | — | |||||||||||
Operating leases(4) | 12,899 | 3,365 | 4,360 | 3,089 | 2,085 | |||||||||||
Other long-term liabilities: | ||||||||||||||||
Deferred compensation and non-qualified retirement plans(1) | 38,942 | 4,828 | 6,256 | 5,175 | 22,683 | |||||||||||
Insurance reserves | 45,658 | 12,289 | 33,369 | — | — | |||||||||||
Warranty | 40,068 | 27,625 | 12,443 | — | — | |||||||||||
Total | $ | 610,097 | $ | 161,058 | $ | 107,275 | $ | 26,749 | $ | 315,015 |
_______________________
(1) | The 5% convertible senior subordinated debentures, 6% convertible subordinated debentures, long-term debt obligations, capital lease obligations, and deferred compensation and non-qualified retirement plans include both principal and interest commitments for the periods presented. The interest commitment on the deferred compensation is based on an estimated average of the prime rate of 5.7%. The interest commitment on our 5% convertible senior subordinated debentures and our 6% convertible subordinated debentures is based on their stated fixed rates. | |
(2) | Convertible senior subordinated debentures include the $100 million aggregate principal amount of the 5% convertible senior subordinated debentures due in 2023, which are more fully described in Note 12 to Fleetwood’s Annual Report on Form 10-K. Holders of these debentures have the ability, in whole or in part, to require us to repurchase these debentures as early as December 15, 2008, and the payment maturity above has been presented accordingly. We have elected to pay the repurchase price in common stock if the holders require us to repurchase. | |
(3) | Includes $8.9 million of obligation that represents the purchase by us of the common shares of the underlying trust. Our net obligation to third parties is reduced by a similar amount. Beginning with the May 15, 2008 distribution, Fleetwood elected to defer the distribution. Fleetwood has the option to defer payment of the distribution for up to 20 consecutive quarters, as long as Fleetwood is not in default in the payment of interest on the debentures and does not pay dividends on the common stock while the deferral is in effect. The convertible subordinated debentures are more fully described in Note 13 to Fleetwood’s Annual Report on Form 10-K. |
(4) | Some of our facilities are leased under terms that range from monthly to 5 years. Also included in the above amounts are equipment leases. Management expects that in the normal course of business, leases will be renewed or replaced by other leases to support continuing operations. |
In addition to the amounts shown in the table above, Fleetwood had a $4.7 million reserve as of October 26, 2008 for uncertain income tax positions recorded as a liability in accordance with FIN 48, and we are uncertain as to if or when such amounts may be settled.
Off-Balance Sheet Arrangements
We describe our aggregate contingent repurchase obligation in Note 10 to our financial statements in this report and under “Critical Accounting Policies” in this Item above.
We describe our guarantees in Note 10 to our 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.
42
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 majority of our marketable investments are in fixed rate securities with an average life, after consideration of call features, of two years 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, an immediate change of one percentage point in the applicable interest rate would have caused an increase or decrease in interest expense of approximately $5,000 on an annual basis. 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.
Based on our management’s evaluation, with the participation of our chief executive officer and chief financial officer, as of October 26, 2008, the end of the period covered by this report, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”)) were effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC and is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
There have been no changes in our internal control over financial reporting identified in the evaluation that occurred during our fiscal quarter ended October 26, 2008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Fleetwood is regularly involved in legal proceedings in the ordinary course of business. For certain cases Fleetwood is self-insured; for others, including products liability, insurance covers a portion of Fleetwood’s liability under some of this litigation. In the majority of cases, including products liability cases, Fleetwood prepares estimates based on historical experience, the professional judgment of legal counsel, and other assumptions it believes to be reasonable. As additional information becomes available, Fleetwood reassesses the potential liability related to pending litigation and revises the related estimates. Such revisions or any actual liability that greatly exceeds Fleetwood’s estimates could materially impact Fleetwood’s results of operations and financial position.
Fleetwood has been named in several complaints, some of which are putative class actions, filed against manufacturers of travel trailers and manufactured homes supplied to the Federal Emergency Management Agency (FEMA) to be used for emergency living accommodations in the wake of Hurricane Katrina. The complaints, from numerous individual plaintiffs, were consolidated on November 5, 2007 in a case captioned In re FEMA Trailer Formaldehyde Products Liability Litigation, Case Number MDL 07-1873, in the United States District Court for the Eastern District of Louisiana. The complaints generally allege injury due to the presence of formaldehyde in the units for which the plaintiffs are seeking monetary damages. Fleetwood strongly disputes the allegations in these complaints, and intends to vigorously defend itself in all such matters.
A case has been filed in the United States District Court, Central District of California, Riverside, titled Jesse Browder et al v. Fleetwood Enterprises, Inc., in which plaintiffs allege a variety of claims relating to Fleetwood’s method of installing blown-in ceiling insulation in its manufactured homes. The District Court issued an order on September 4, 2008 granting plaintiffs’ motion for class certification. 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 this matter, but we intend to vigorously challenge the class certification and the merits of plaintiffs’ claims.
43
Item 1A. Risk Factors.
We recently restated and updated our risk factors from the risk factors previously disclosed in our Form 10-K. The revised risk factors appear at pages 17-26 of a registration statement on Form S-4/A, registration number 333-154840, filed with the SEC on November 28, 2008. These risk factors are attached to this report as Exhibit 99.1 and are incorporated herein by reference.
The information required by this Item has been provided in Item 8.01 of a Current Report on Form 8-K filed September 22, 2008, which is incorporated herein by reference.
On August 19, 2008, Moody’s announced that it had lowered Fleetwood’s corporate credit rating from Caa1 to Caa3, with a negative outlook. At the same time, Moody’s lowered its rating on Fleetwood’s convertible trust preferred securities from Caa3 to Ca. In addition, on September 10, 2008, Standard & Poor’s announced that it had lowered Fleetwood’s corporate credit rating from CCC+ to CCC- with a negative outlook. On the same date, Standard & Poor’s also lowered its rating on Fleetwood’s 5% senior subordinated debentures from CCC- to C.
No. | Description | |
10.1 | Seventh Amendment to Third Amended and Restated Credit Agreement dated as of August 6, 2008, by and among Fleetwood Enterprises, Inc., Fleetwood Holdings Inc. and its subsidiaries listed on the signature pages thereof, the banks and other financial institutions signatory thereto that are parties as Lenders (the “Lenders”), and Bank of America, N.A., as administrative agent for the Lenders. [Incorporated by reference to Exhibit 10.1 to Fleetwood’s Current Report on Form 8-K filed on August 8, 2008.] | |
10.2 | Eighth Amendment to Third Amended and Restated Credit Agreement dated as of October 21, 2008, by and among Fleetwood Enterprises, Inc., Fleetwood Holdings Inc. and its subsidiaries listed on the signature pages thereof, the banks and other financial institutions signatory thereto that are parties as Lenders (the “Lenders”), and Bank of America, N.A., as administrative agent for the Lenders. [Incorporated by reference to Exhibit 10.1 to Fleetwood’s Current Report on Form 8-K filed on October 27, 2008.] | |
10.3 | Ninth Amendment to Third Amended and Restated Credit Agreement dated as of October 29, 2008, by and among Fleetwood Enterprises, Inc., Fleetwood Holdings Inc. and its subsidiaries listed on the signature pages thereof, the banks and other financial institutions signatory thereto that are parties as Lenders (the “Lenders”), and Bank of America, N.A., as administrative agent for the Lenders. [Incorporated by reference to Exhibit 10.1 to Fleetwood’s Current Report on Form 8-K filed on October 30, 2008.] | |
10.4 | Tenth Amendment to Third Amended and Restated Credit Agreement dated as of November 26, 2008, by and among Fleetwood Enterprises, Inc., Fleetwood Holdings Inc. and its subsidiaries listed on the signature pages thereof, the banks and other financial institutions signatory thereto that are parties as Lenders (the “Lenders”), and Bank of America, N.A., as administrative agent for the Lenders. [Incorporated by reference to Exhibit 10.1 to Fleetwood’s Current Report on Form 8-K filed on December 2, 2008.] | |
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. | |
99.1 | Updated risk factors. |
44
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
FLEETWOOD ENTERPRISES, INC. | |
/s/ ANDREW M. GRIFFITHS | |
Andrew M. Griffiths | |
Senior Vice President and Chief Financial Officer | |
December 4, 2008 |
45