FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
X OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 29, 2001
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)
Registrant's telephone number, including area code (909) 351-3500 .
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No _____
Indicate the number of shares outstanding of each of the issuer's classes
of Common stock as of the close of the period covered by this report.
Class Outstanding at July 27, 2001
_________________________ _____________________________
Common stock, $1 par value 32,759,196 shares
Item 1. Condensed Financial Statements
The following unaudited interim condensed financial statements have
been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission. Such financial statements have been
reviewed by Arthur Andersen LLP in accordance with standards established by
the American Institute of Certified Public Accountants. As indicated in
their report included herein, Arthur Andersen LLP does not express an
opinion on these statements.
Certain information and note disclosures normally included in annual
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to those
rules and regulations, although the Company believes that the disclosures
made are adequate to make the information presented not misleading. In the
Company's opinion, the statements reflect all adjustments (which include
only normal recurring adjustments) necessary to present fairly the results
of operations for the periods ending July 29, 2001 and July 30, 2000, and
the balances as of July 29, 2001 and April 29, 2001. It is suggested that
these condensed financial statements be read in conjunction with the
financial statements and the notes thereto included in the Company's latest
annual report on Form 10-K.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the board of directors and shareholders of Fleetwood Enterprises, Inc.:
We have reviewed the accompanying condensed consolidated balance sheet
of FLEETWOOD ENTERPRISES, INC. (a Delaware Corporation) and subsidiaries as
of July 29, 2001, and the related condensed consolidated statements of
income and cash flows for the thirteen-week periods ended July 29, 2001 and
July 30, 2000, respectively, and the condensed consolidated statement of
changes in shareholders' equity for the thirteen-week period ended July 29,
2001. These financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical
procedures to financial data and making inquiries of persons responsible
for financial and accounting matters. It is substantially less in scope
than an audit conducted in accordance with generally accepted auditing
standards, 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 accounting principles
generally accepted in the United States.
We have previously audited, in accordance with auditing standards
generally accepted in the United States, the consolidated balance sheet of
Fleetwood Enterprises, Inc. and subsidiaries as of April 29, 2001, and the
related consolidated statements of income, cash flows and changes in
shareholders' equity for the year then ended (not presented herein), and,
in our report dated July 30, 2001, we expressed an unqualified opinion on
those consolidated financial statements. In our opinion, the information
set forth in the accompanying condensed consolidated balance sheet as of
April 29, 2001, is fairly stated, in all material respects, in relation to
the consolidated balance sheet from which it has been derived.
ARTHUR ANDERSEN LLP
Orange County, California
August 29, 2001
FLEETWOOD ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (CONDENSED)
(Amounts in thousands except per share data)
(Unaudited)
13 Weeks Ended
July 29, 2001 July 30, 2000
Net sales:
Manufacturing $490,347 $643,493
Retail 108,511 157,554
Less intercompany (34,726) (80,926)
-------- ---------
564,132 720,121
Cost of products sold 453,840 573,023
------- --------
Gross profit 110,292 147,098
Operating expenses 119,905 157,707
Other charges - 13,469
------- --------
119,905 171,176
------- -------
Operating loss (9,613) (24,078)
Other income (expense):
Investment income 1,007 1,993
Interest on senior unsecured
notes payable (3,922) (1,399)
Interest on inventory floor
plan financing (1,495) (3,036)
Interest on short-term borrowing (164) (75)
Other 23 28
------ ------
(4,551) (2,489)
------ -----
Loss before benefit for income taxes,
minority interest and cumulative
effect of accounting change (14,164) (26,567)
Benefit for income taxes 5,826 9,413
Minority interest in Fleetwood Capital
Trust, net of tax (2,789) (2,787)
------ ------
Loss before cumulative effect of
accounting change (11,127) (19,941)
Cumulative effect of accounting change,
net of tax -- (11,176)
------ -------
Net loss $(11,127) $(31,117)
======== ========
Basic Diluted Basic Diluted
Loss per Common share:
Loss before cumulative effect
of accounting change $(.34) $(.34) $(.61) $(.61)
Cumulative effect of accounting
change, net of tax - - (.34) (.34)
----- ----- ---- -----
Net loss per Common share $(.34) $(.34) $(.95) $(.95)
===== ====== ===== =====
Weighted average Common shares:
Basic 32,756 32,758
Diluted 32,756 32,758
====== ======
Dividends declared per share of Common
stock outstanding $.04 $.19
==== ====
See accompanying notes to financial statements.
FLEETWOOD ENTERPRISES, INC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONDENSED)
(Amounts in thousands except share data)
ASSETS
(Unaudited)
July 29, April 29,
2001 2001
Cash $ 51,542 $ 36,602
Marketable investments 32,225 29,283
Receivables 128,990 122,944
Inventories 261,147 273,385
Deferred tax benefits - current 34,908 34,413
Income tax receivable 4,842 48,289
Other current assets 28,271 27,206
-------- --------
Total current assets 541,925 572,122
Property, plant and equipment, net 292,062 294,813
Marketable investments maturing
after one year 3,784 7,218
Deferred tax benefits - non-current 66,598 71,945
Cash value of Company-owned
life insurance 64,719 64,129
Goodwill and intangible assets 87,002 86,908
Other assets 46,801 45,326
-------- ---------
$1,102,891 $1,142,461
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $85,152 $ 75,394
Employee compensation and benefits 61,325 64,379
Retail flooring liability 60,030 85,861
Motor home chassis inventory financing - 11,135
Senior unsecured notes payable 68,188 80,000
Other current liabilities 166,321 154,577
-------- --------
Total current liabilities 441,016 471,346
-------- -------
Deferred compensation and
retirement benefits 70,892 68,944
Insurance reserves 28,429 28,523
------- ------
Total liabilities 540,337 568,813
------- ------
Contingent liabilities
Company-obligated manditorily redeemable convertible
preferred securities of Fleetwood Capital Trust holding
solely 6% convertible subordinated debentures
of the Company 287,500 287,500
------- ------
Contingent liabilities
Shareholders' equity:
Preferred stock, $1 par value, authorized
10,000,000 shares, none outstanding -- --
Common stock, $1 par value, authorized
75,000,000 shares, outstanding 32,759,000
at July 29, 2001 and 32,740,000 at
April 29, 2001 32,759 32,740
Capital surplus 194,762 194,338
Retained earnings 49,774 62,212
Accumulated other comprehensive loss (2,241) (3,142)
------- --------
275,054 286,148
-------- --------
$1,102,891 $1,142,461
========== ==========
See accompanying notes to financial statements.
FLEETWOOD ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONDENSED)
(UNAUDITED)
(Amounts in thousands)
13 Weeks Ended
July 29, 2001 July 30, 2000
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(11,127) $(31,117)
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation expense 6,892 7,280
Amortization of intangibles and
goodwill - 1,662
Other asset impairment charges - 9,400
Gain on sales of property,
plant and equipment (955) (28)
Changes in assets and liabilities:
(Increase) decrease in receivables (6,046) 98,376
(Increase) decrease in inventories 12,238 (79,550)
Decrease in income tax receivable 43,447 --
(Increase) decrease in deferred
tax benefits 4,852 (4,607)
Increase in cash value of Company-owned
life insurance (590) (5,747)
Increase in other assets (2,634) (1,734)
Increase (decrease) in accounts
payable 9,758 (35,286)
Decrease in employee compensation
and benefits (1,106) (1,769)
Increase (decrease) in other
liabilities 12,050 (3,278)
------- -------
Net cash provided by (used in)
operating activities 66,779 (46,398)
------- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment securities
available-for-sale (550,634) (737,828)
Proceeds from sale of investment
securities available-for-sale 551,091 770,592
Purchases of property, plant and
equipment, net (3,186) (8,759)
Acquisition of retail companies, net
of cash acquired -- (650)
------- -------
Net cash provided by (used in)
investing activities (2,729) 23,355
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends to Common shareholders (1,311) (6,219)
Motor home chassis inventory financing (11,135) --
Retail flooring (25,831) 12,250
Short-term bank borrowings -- 25,000
Payment of senior unsecured notes
payable (11,812) --
Proceeds from exercise of stock options 43 --
------- -------
Net cash provided by (used in)
financing activities (50,046) 31,031
------ -------
Foreign currency translation adjustment 936 231
------ -------
Increase in cash 14,940 8,219
Cash at beginning of period 36,602 43,649
------ -------
Cash at end of period $51,542 $51,868
======== =======
FLEETWOOD ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONDENSED)
(UNAUDITED)
PAGE 2
(Amounts in thousands)
13 Weeks Ended
July 29, 2001 July 30, 2000
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for -
Interest $ 3,772 $ 4,375
Income taxes 796 1,268
======= =======
DETAILS OF ACQUISITIONS:
Fair value of assets acquired -- $28,826
Liabilities assumed -- 28,176
------- -------
Acquisitions price - 650
Less cash acquired -- --
------- -------
Net cash paid for acquisitions -- $650
======= =======
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Common stock issued in settlement of
acquisition-related liability $400 $618
======= =======
See accompanying notes to financial statements.
FLEETWOOD ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES
IN SHAREHOLDERS' EQUITY (CONDENSED)
(UNAUDITED)
(Amounts in thousands)
Accumulated
Other
Compre-
Common Stock hensive Total
Number Capital Retained Income Shareholders'
of Shares Amount Surplus Earnings (Loss) Equity
Balance April 29,
2001 32,740 $32,740 $194,338 $62,212 $(3,142) $286,148
--------
Comprehensive income (loss):
Net loss -- -- -- (11,127) -- (11,127)
Other comprehensive income:
Foreign currency translation,
net of taxes of
$624 -- -- -- -- 936 936
Investment securities,
net of taxes
of $21 -- -- -- -- (35) (35)
------
Comprehensive income (loss) (10,226)
------
Cash dividends declared on
Common stock -- -- -- (1,311) -- (1,311)
Stock options exercised (including related
tax benefits 4 4 39 -- -- 43
Stock issued for
acquisitions 15 15 385 -- -- 400
---- ---- ------ ----- ----- ------
Balance July 29,
2001 32,759 $32,759 $194,762 $49,774 $(2,241) $275,054
====== ======= ======== ======== ======= ========
See accompanying notes to financial statements.
FLEETWOOD ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 29, 2001
(Unaudited)
1) Reference to Annual Report
Reference is made to the Notes to Consolidated Financial Statements
included in the Company's Form 10-K annual report for the year ended
April 29, 2001.
2) Industry Segment Information
Information with respect to industry segments for the periods ending
July 29, 2001 and July 30, 2000 is shown below (amounts in
thousands):
13 Weeks Ended
July 29, 2001 July 30, 2000
OPERATING REVENUES:
Manufactured housing -
Manufacturing $216,232 $317,499
Less intercompany (34,726) (80,926)
--------- --------
181,506 236,573
Retail 108,511 157,554
------- -------
290,017 394,127
Recreational vehicles 266,308 317,514
Supply operations 7,807 8,480
--------- --------
$564,132 $720,121
======== ========
OPERATING INCOME (LOSS):
Manufactured housing* $21,029 $(2,006)
Housing - retail** (12,019) (5,437)
Recreational vehicles (17,810) (13,281)
Supply operations 2,207 2,156
Corporate and other (3,020) (5,510)
--------- --------
$(9,613) $(24,078)
========= ========
* After deduction (addition) for intercompany profit in inventory as
follows:
$(4,838) $4,089
===== =======
** Before deduction of interest expense on inventory floor plan
financing as follows:
$1,495 $3,036
====== ======
3) Earnings Per Share
Basic earnings per share is computed by dividing income available to
Common stockholders by the weighted average number of Common shares
outstanding. The effect of stock options and preferred securities were
anti-dilutive and were, therefore, not added back to determine diluted
earnings (loss). The table below shows the calculation components of
earnings per share for both basic and diluted earnings per share
(amounts in thousands):
13 Weeks Ended 13 Weeks Ended
July 29, 2001 July 30, 2000
---------------- ----------------
Weighted Weighted
Average Average
Loss Shares Loss Shares
------ ------- ------ -------
Basic and diluted loss
before cumulative effect of
accounting change $(11,127) 32,756 $(19,941) 32,758
Cumulative effect of accounting
change -- -- (11,176) 32,758
--------- ------ ------ ------
Basic and diluted loss $(11,127) 32,756 $(31,117) 32,758
======= ====== ======= ======
4) Inventory Valuation
Inventories are valued at the lower of cost (first-in, first-out) or
market. Manufacturing cost includes materials, labor and manufacturing
overhead. Retail finished goods are valued at cost less intercompany
manufacturing profit. Inventories consist of the following:
July 29, 2001 April 29, 2001
---------------- --------------
(Amounts in thousands)
Manufacturing inventory-
Raw materials $89,955 $82,884
Work in process 21,691 21,171
Finished goods 19,133 6,124
------- --------
130,779 110,179
------- --------
Retail inventory-
Finished goods 159,353 197,029
Less manufacturing profit (28,985) (33,823)
------- --------
130,368 163,206
------- --------
$261,147 $273,385
======== ========
5) Other Charges
The other charges incurred in the first quarter of fiscal year 2001
included $9.4 million for the writedown of impaired assets, $1.8
million for restructuring costs and $2.3 million for other non-
recurring charges. In the first quarter of fiscal year 2002 there
were not any restructuring or impairment charges, and all but $690,000
of previous restructuring costs have been paid.
6) Cumulative Effect of Accounting Change
In the first quarter of fiscal year 2001, we changed our revenue
recognition policy on credit retail housing sales to a method based on
loan funding, which generally occurs with customer acceptance. Prior to
fiscal year 2001, we followed the industry practice of recording credit
retail sales when a written contract and down payment were secured. We
recorded the cumulative effect of this accounting change on the amount
of retained earnings at the beginning of fiscal year 2001 as a charge
against net income in the first quarter of fiscal 2001. The after-tax
amount of the cumulative effect was $11.2 million, or 34 cents per
diluted share.
7) New Accounting Pronouncements
During the fourth quarter of fiscal 2001, the Company adopted Emerging
Issues Task Force (EITF) No. 00-10, "Accounting for Shipping and
Handling Fees and Costs" and No. 00-14, "Accounting for Certain Sales
Incentives." The adoption of EITF No. 00-10 affected the classification
of revenues from shipments to customers and certain expenses related to
shipping and handling of our product and did not affect our net loss.
The adoption of EITF No. 00-14 required certain sales incentives that
were previously accounted for as selling expenses to be treated as a
reduction in revenue and did not affect our net loss. The net effect of
these pronouncements has been an overall increase in reported sales
figures of approximately 1 percent. All periods presented have been
adjusted to reflect the requirements of EITF No.'s 00-10 and 00-14.
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 133, "Accounting
for Derivative Instruments and Hedging Activities." SFAS No. 133
requires companies to record derivatives on the balance sheet as assets
or liabilities measured at fair value. Effective with fiscal year 2002,
we have adopted SFAS No. 133 and concurrently (as permitted by SFAS No.
133) have reclassified the held-to-maturity investment portfolio to the
available-for-sale portfolio.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 142 addresses financial accounting and reporting for
acquired goodwill and other intangible assets and is effective for fiscal
years beginning after December 15, 2001, with early adoption permitted
for entities with fiscal years beginning after March 15, 2001, provided
that the first interim financial statements have not previously been
issued. Effective April 30, 2001, we adopted SFAS No. 142, "Goodwill and
Other Intangible Assets," which requires that goodwill not be amortized
but instead be tested at least annually for impairment and expensed against
earnings when the implied fair value of a reporting unit, including
goodwill, is less than its carrying amount. Since the new requirements
were recently published the fair values of the respective reporting units
have not been determined. We are permitted six months from the adoption
date to complete a preliminary review of goodwill for impairment and will
record any necessary adjustments prior to the end of fiscal year 2002. The
results of the fair value evaluation are expected to be completed in the
second quarter. The adoption of the new standard resulted in net loss
decreasing by $1.5 million or $0.05 per share for the quarter ended
July 29, 2001. Comparative pro forma results for the three months ended
July 30, 2000 would have reduced loss before cumulative effect of change
in accounting principle and net loss by $1.7 million or $0.05 per share.
We had $87.0 million and $253.7 million of goodwill on our balance sheet
at July 29, 2001 and July 30, 2000, respectively.
8) Subsequent Event - New Credit Facility
On July 27, 2001, we entered into an agreement for a senior secured
credit facility to be funded by a syndicate of banks led by Bank of
America. The loan is structured as a three-year revolving credit line
for up to $230 million plus a $30 million two-year term loan. At the
current time, syndicate commitments for an aggregate of $220 million,
which includes the $30 million term loan, have been finalized. The
revolving credit line bears interest, at our option, at variable rates
based on either Bank of America's prime rate or one, two or three month
LIBOR. Substantially all of our existing and future assets except
certain inventories and the cash value of the Company-owned life
insurance secure the facility. Advances under the revolving credit line
are limited by the available borrowing base of eligible accounts
receivable and inventories and were subject to a minimum excess
availability of $80 million at funding, reducing thereafter to $50
million. The credit agreement contains customary affirmative and
negative covenants, some of which require the maintenance of specified
financial ratios and compliance with certain financial tests, including
a cumulative year-to-date EBITDA requirement commencing with our second
quarter - (see Management's Discussion and Analysis). A portion of the
proceeds from the new credit facility was used to retire the senior
unsecured notes payable held by the Prudential Insurance Company of
America (Prudential). A principal payment of $68.2 million,
prepayment penalties of $2.3 million, and accrued interest of $663,000
was remitted to Prudential on July 30, 2001, as part of the funding
of the new facility.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Preliminary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains statements which may constitute
"forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities and Exchange Act of
1934. Forward-looking statements regarding future events and the future
performance of the Company involve risks and uncertainties that could cause
actual results to differ materially. These risks and uncertainties include,
without limitation, continued weakness in the manufactured housing and the
recreational vehicle markets, the availability of wholesale and retail
financing in the future and changes in retail inventory levels in the
manufactured housing and recreational vehicle industries. Additionally,
other risks and uncertainties are described in our Annual Report on Form 10-K
for the fiscal year ended April 29, 2001 filed with the Securities and
Exchange Commission, under "Item 1-Business," including the section therein
entitled "Risks Relating to Our Business," and "Item 7-Management's
Discussion and Analysis of Results of Operations and Financial Condition,"
including the section therein entitled "Business Outlook."
The following is an analysis of changes in key items included in the
consolidated statements
of income for the 13-week period ended July 29, 2001, compared to the 13-week
period ended July 30, 2000.
13 Weeks Ended
July 29, 2001
(Unaudited)
Increase %
(Amounts in thousands) (Decrease) Change
Sales $(155,989) (21.7)%
Cost of products sold (119,183) (20.8)
--------- ----
Gross profit (36,806) (25.0)
Selling expenses (17,923) (25.5)
General and administrative expenses (19,879) (22.8)
Other charges (13,469) --
-------- ----
Operating expenses and other charges (51,271) (30.0)
Operating loss (14,465) (60.1)
Other expense 2,062 82.8
------- ----
Loss before taxes, minority interest and
cumulative effect of accounting change (12,403) (46.7)
Benefit for income taxes (3,587) (38.1)
Minority interest in Fleetwood Capital Trust,
net of tax 2 --
------- ---
Loss before cumulative effect
of accounting change (8,814) (44.2)
Cumulative effect of accounting change,
net of tax (11,176) --
------ ----
Net loss $(19,990) (64.2)%
======== =====
Current Quarter Compared to Same Quarter Last Year
Consolidated Results:
We incurred a net loss in the first quarter of fiscal 2001 of $11.1 million or
34 cents per diluted share compared to a loss of $31.1 million or 95 cents per
diluted share in last year's July quarter. The loss in the current period
primarily resulted from a 22 percent decrease in sales, along with an erosion
in gross profit margin from 20.4 percent to 19.6 percent. Partially
offsetting the lower sales and reduced margin was a 24 percent decline in
operating expenses before other charges. In addition, last year's loss
included restructuring and impairment charges of $13.5 million and an $11.2
million (after tax) charge for the cumulative effect of a change in accounting
policy related to revenue recognition. In terms of earnings per share for the
prior year, the restructuring and impairment charges and the cumulative effect
of the change in accounting amounted to 27 cents and 34 cents, respectively.
Consolidated revenues fell $156.0 million to $564.1 million compared to $720.1
million in last year's first quarter. All business segments experienced lower
sales due to weak market conditions, with the housing business suffering
additional adverse effects from restrictive financing.
Manufacturing gross margin fell from 18.1 percent to 17.6 percent mainly due
to lower RV margins. Gross profit for the RV segment declined from 13.4
percent to 10.8 percent of sales in the current year, due to higher freight
and direct labor costs resulting from new product introductions. Gross
margins for the manufactured housing segment improved from 22.5 percent to
25.3 percent due to lower material costs.
Operating expenses decreased $51.3 million to $119.9 million, and fell as a
percentage of sales from 23.8 percent to 21.3 percent. The dollar decrease
was primarily due to lower sales, downsizing of manufacturing and retail
operations and the absence of $13.5 million of other charges related to
restructuring and impairment from the prior year. Selling expenses decreased
$17.9 million, or 26 percent, due to lower warranty and advertising costs.
General and administrative expenses declined $19.9 million and decreased as a
percentage of sales from 12.1 percent to 12.0 percent due to staff reductions
resulting from manufacturing plant and retail store closures.
Non-operating expense rose $2.1 million to $4.6 million, mainly due to higher
interest expense on the unsecured debt and lower investment income. Included
in the $3.9 million of interest on senior unsecured notes payable was $2.3
million for yield maintenance charges related to the early retirement of the
senior unsecured notes on July 30, 2001. Investment income was down 49
percent from the prior year as a result of lower interest rates and lower
invested balances.
Manufactured Housing:
Gross manufacturing revenues of $216.2 million were off 32 percent from the
prior year and included $34.7 million of intercompany sales to Company-owned
retail home centers. Manufacturing unit volume declined 35 percent to 7,769
homes, but the number of sections was off a lesser 32 percent to 14,082 due
to the continuing shift in sales mix toward multi-section homes. Multi-
section homes represented 78 percent of factory sales versus 70 percent last
year.
Sales volume was below the prior year because of a weaker manufactured
housing market, which has been adversely affected by excessive retail
inventories, competition from repossessed units, and restrictive retail
financing conditions. During the past 30 months, lenders have increased
credit standards and down payment requirements for retail buyers. These
actions, combined with an increase in interest rates, have eliminated many
potential buyers of new manufactured homes. We anticipate that industry
wholesale shipments will continue to be weak until the current inventory
imbalance is resolved, the timing of which depends on the availability and
terms of retail financing.
Operating income, before elimination of intercompany profit, increased from
$2.1 million to $16.2 million, and operating margin rose from less than .7
percent to 7.5 percent of sales. Excluding asset impairment charges from
the prior year results, operating margin for the housing group would have
been 3.6 percent of sales. Last year, asset impairment charges related to
plant closings reduced operating earnings by $9.4 million. The increase to
earnings, despite the decline in volume due to the aforementioned weak
market conditions, was due to improved gross margin and reduced operating
expenses. Gross profit margin for the housing group improved from 22.5
percent to 25.3 percent of sales, mainly as a result of lower raw material
costs. More efficient material usage and improved product pricing
contributed to the higher gross margin. Housing group operating costs,
excluding asset impairment and restructuring charges, fell 35 percent as a
result of reductions in product warranty costs and advertising expenses.
Recreational Vehicles:
Recreational vehicle sales declined 16 percent to $266.3 million compared to
$317.5 million for last year's first quarter. Travel trailer revenues were
$106.6 million, down $35.3 million or 25 percent on a 28 percent decline in
unit volume, reflecting weak market conditions and a delayed introduction of
new fifth-wheel floor plans. Motor home revenues for the quarter fell 9
percent to $134.1 million on a 16 percent drop in shipments. Deliveries of
Class A products rose 9 percent to 1,572 units while Class C shipments fell
73 percent to 161 units, reflecting the closure of two Class C manufacturing
plants toward the end of the fourth quarter and the related lag in achieving
full production in the facility to which the product was transferred.
Folding trailer sales fell 10 percent to $25.7 million on a 19 percent dip
in unit volume. The disproportionate drop in folding trailer shipments to
revenues reflects the introduction of the larger, higher- priced Caravan
into the sales mix since last July.
The RV group incurred an operating loss of $17.8 million in the first
quarter compared to a loss of $13.3 million a year ago. The $4.5 million
increase was primarily caused by the decline in sales and gross profit
margin erosion, largely due to lower travel trailer margins. Operating
expenses declined $9.3 million and decreased from 17.6 percent of sales to
17.5 percent in the current year. The largest decline was in employee
compensation due to staff reductions resulting from downsizing actions.
Supply Operations:
The supply group contributed first quarter revenues of $7.8 million compared
to $8.5 million a year ago. Operating income remained constant at $2.2
million despite lower sales due to improved gross margins resulting from
lower material cost as a percentage of sales.
Retail Housing Operations:
Retail housing revenues decreased 31 percent to $108.5 million in the first
quarter. Last year, sales were adjusted downward by approximately $18
million due to a change in accounting for credit retail sales. Also as a
result of the accounting change, we incurred a one-time cumulative charge
against earnings of $11.2 million after taxes. Unit sales from Fleetwood
retail stores declined from last year by about 29 percent to 2,646 homes.
The retail division incurred an operating loss of $12.0 million for the
current quarter compared to a loss of $5.4 million a year ago. The increased
operating loss was the result of a weak market environment and lower gross
margins stemming from competitive conditions and discounting aged inventory.
Operating expenses declined 23 percent due to lower volume, store closures
and reduced staffing. Interest expense on inventory financing decreased by
50 percent from $3.0 million to $1.5 million, reflecting the 37 percent drop
in inventories and lower interest rates. The retail housing segment was
operating 156 stores at the end of July compared to 240 at the end of July a
year ago.
Business Outlook
We currently expect fiscal 2002 second quarter results to approach
breakeven. Results for the second quarter that will end on October 28,
2001, are expected to be adversely affected by continuing weakness in the
manufactured housing and RV markets. For more than two years, the
manufactured housing industry has been affected by excessive retail
inventories and a slowing of retail sales caused by restrictive financing
conditions. Encouraging progress has occurred with respect to reducing
industry inventory levels and production capacity, but weak market
conditions are expected to continue until the inventory imbalance is fully
resolved. Within the RV sector, retail demand began to soften late in
fiscal year 2000 and dealers began to reduce their inventories, which were
relatively high. Today, inventory levels are more appropriately sized for
current market conditions. Until the economy and consumer demand improves,
we anticipate RV sales will show only modest improvement. Over the previous
15 months we have closed 14 manufacturing plants and have closed or
transferred nearly 100 retail housing stores and reduced our staffing by
over one third. We have downsized our operations to meet current demand.
Even though we do not expect to see a significant turnaround in sales in the
near future, we believe our operations are sized properly for the current
conditions in order to return to profitability in fiscal year 2002.
Under the terms of the bank credit agreement, we are required to generate
cumulative EBITDA for the first two quarters of fiscal 2002 of $15 million.
As indicated in the accompanying financial statements, EBITDA for our first
quarter was a negative $2.7 million, necessitating that we generate EBITDA
in the second quarter of $17.7 million to be in compliance with the bank
covenant. Given our business outlook for the second quarter, which
anticipates continuing weakness in the manufactured housing and RV markets,
we may be unable to generate sufficient earnings to comply with the
covenant. If this were to occur, the Company would be in default under the
credit agreement and could be subject to the remedies available to the
lenders. In the event we find ourselves at risk of default, we will make
every effort to negotiate a satisfactory solution with our lenders but
cannot be certain that we will be able to do so.
Liquidity and Capital Resources
We have historically relied upon internally generated cash flows to satisfy
working capital needs and to fund capital expenditures. In recent periods,
however, primarily due to operating losses, we have used external funding
sources to supplement internal cash flows. Cash totaling $66.8 million was
generated from operating activities during the quarter compared to cash used
in the comparable period in the prior year of $46.4 million. The increased
cash flow from operations resulted primarily from a $50.3 million refund of
Federal taxes paid in prior periods. In addition, a $12.2 million reduction
in inventories in the first quarter contributed to the positive cash flow.
Cash and cash equivalents increased from $73.1 million as of April 29, 2001,
to $87.6 million at the end of July 2001. The increase in cash and cash
equivalents occurred despite reducing retail inventory financing by $25.8
million, paying $11.8 million of principal to the holder of the senior
unsecured debt and paying off the $11.1 million balance due on motor home
chassis financing.
Additional cash outlays in the current quarter included $1.3 million in
dividends to shareholders and $3.2 million for capital expenditures.
Dividends for fiscal year 2001 were $6.2 million and capital expenditures
totaled $8.8 million. Distributions on the convertible trust preferred
securities were $4.3 million, the same as the July quarter one year ago.
Over the past year we have been negotiating with several financial
institutions for additional financing in order to refinance the senior
unsecured notes owed to Prudential, to replace some of the existing
inventory floor plan debt and to support expected future working capital
needs. On July 27, 2001, we entered into an agreement for a senior secured
credit facility to be funded by a syndicate of banks led by Bank of America.
The facility was funded on July 30, 2001, and we used part of the proceeds
to retire our senior unsecured notes payable to Prudential and to pay down
the retail flooring line. The loan is structured as a three-year revolving
credit line of $230 million with an additional two-year term loan of $30
million. At the current time, syndicate commitments for an aggregate of
$220 million, which includes the $30 million term loan, have been finalized.
The revolving credit line and term loan are secured by substantially all of
the Company's assets, excluding assets of retail subsidiaries subject to a
floor plan financing agreement with another lender, those assets at our
retail subsidiaries' sites managed by a third party, and the cash value of
company-owned life insurance. Revolving loans will bear interest, at our
option, at Bank of America's prime rate or one, two or three month LIBOR,
plus a margin. Borrowings under the term loan will initially bear interest
at Bank of America's prime rate plus 3 percent for the first year of the
loan, with escalations and amortizations for the remainder of the term.
Part of the revolving loan with Bank of America will provide funding for the
purchase of retail housing inventory at Company-owned stores in seven
states. The majority of the retail housing inventory is intended to be
financed through one or more wholesale floor plan arrangements. Simultaneous
with the signing of the new credit agreement with Bank of America, we
entered into a new floor plan agreement with Conseco. We believe that the
combination of the Bank of America revolving loan and the floor plan
financing will provide sufficient capital to sustain and ultimately expand
the retail housing business.
We believe the combination of estimated future cash flows from operations and
the available lines of credit will be sufficient to satisfy our foreseeable
cash requirements for the next nine months, including up to $30 million for
capital expenditures.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risks related to fluctuations in interest rates on
marketable investments, investments underlying a Company-owned life
insurance program (COLI), variable rate debt under the secured credit
facility and the liability for flooring of manufactured housing retail
inventories. With respect to the COLI program, the underlying investments
are subject to both interest rate risk and equity market risk. We do not
use interest rate swaps, futures contracts or options on futures, or other
types of derivative financial instruments.
The vast majority of the our marketable investments are in fixed rate
securities with average original maturity dates of approximately two weeks,
minimizing the effect of interest rate fluctuations on their fair value.
In the future, this risk should be less, as the investment in marketable
securities will be less under the new borrowing arrangement.
For fixed rate debt, changes in interest rates generally affect the fair
market value, but not earnings or cash flows. Conversely, for variable rate
debt, changes in interest rates generally do not influence fair market
value, but do affect future earnings and cash flows. With the refinancing
and new credit facility, we will not have any remaining fixed rate debt.
Based upon the amount of variable rate debt outstanding at the end of the
first quarter, and holding the variable rate debt balance constant, each one
percentage point increase in interest rates occurring on the first day of an
annual period would result in an increase in interest expense of
approximately $1.0 million.
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.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
In Part I, Item 3 of our Annual Report on Form 10-K for the fiscal year
ended April 29, 2001, we reported that in February 2000 we and two of our
subsidiaries were served with a purported class action filed on behalf of
nine present or former associates of our Idaho manufactured housing
facility. The complaint in the matter of Bristow et al., v. Fleetwood
Enterprises, Inc. et al., was filed in the U.S. District Court in Idaho and
alleges violations of the federal Fair Labor Standards Act, and similar
state laws, and requests compensation, punitive damages, litigation
expenses, and attorneys' fees. On February 20, 2001, a Magistrate Judge
conditionally certified a class of plaintiffs composed of certain production
associates and supervisors of our housing and recreational vehicle groups.
During July 2001, notice of the action was issued to potential class
members. We continue to deny the material allegations in the complaint and
are asserting a vigorous defense to that end.
In Part I, Item 3 of our Annual Report on Form 10-K for the fiscal year
ended April 29, 2001, we reported that on August 14, 2000, another purported
class action complaint was filed by Ms. Bristow along with a Jane Doe
alleging sexual harassment. On January 19, 2001, an amended complaint,
entitled Bogen, et al., v. Fleetwood Enterprises, Inc., was filed in the
U.S. District Court in Idaho by six plaintiffs, including Ms. Bristow,
alleging gender discrimination and sexual harassment as a result of a
sexually hostile environment at four manufacturing centers. The plaintiffs
are attempting to establish a national class action and are requesting
compensatory and punitive damages, litigation expenses and attorneys' fees.
We have denied the material allegations in the amended complaint and plan to
assert a vigorous defense. The plaintiffs' deadline for filing a motion for
class certification is September 28, 2001.
We are also subject to other litigation from time to time in the ordinary
course of business. Our liability under some of this litigation is covered
in whole or in part by insurance. Although the amount of any liability with
respect to such claims and litigation over and above our insurance coverage
cannot presently be determined, in the opinion of our management such
liability is not expected to have a material adverse effect on our financial
condition or results of operations.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FLEETWOOD ENTERPRISES, INC.
_______________________________
Boyd R. Plowman
Senior Vice President and
Chief Financial Officer
August 30, 2001