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 January 27, 2002
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 January 27, 2002
_________________________ _____________________________
Common stock, $1 par value 34,969,141 shares
Preferred share purchase rights --
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited interim condensed consolidated 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 January 27, 2002 and January 28, 2001, and the
balances as of January 27, 2002 and April 29, 2001. You should read these
condensed consolidated financial statements in conjunction with the
consolidated 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 January 27, 2002, and the related condensed consolidated statements of
operations for the thirteen and thirty-nine week periods ended January 27,
2002 and January 28, 2001, the condensed consolidated statements of cash
flows for the thirty-nine week periods ended January 27, 2002, and January
28, 2001, and the condensed consolidated statement of changes in
shareholders' equity for the thirty-nine week period ended January 27, 2002.
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 the 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 operations, 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
February 26, 2002
FLEETWOOD ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (CONDENSED)
(Amounts in thousands except per share data)
(UNAUDITED)
13 Weeks Ended 39 Weeks Ended
Jan. 27, Jan. 28, Jan. 27, Jan. 28,
2002 2001 2002 2001
Net sales:
Manufacturing $488,585 $448,328 $1,524,192 $1,734,202
Retail 72,852 121,554 268,998 458,670
Less intercompany (39,056) (55,057) (115,921) (208,796)
------- --------- ----------- ---------
522,381 514,825 1,677,269 1,984,076
Cost of products sold 416,447 431,550 1,339,101 1,598,111
Gross profit 105,934 83,275 338,168 385,965
Operating expenses 120,144 139,411 373,318 442,741
Impairment of goodwill - 163,231 - 163,231
Other charges 4,800 10,851 5,800 28,253
------- ------- ------- -------
124,944 313,493 379,118 634,225
------- -------- ------- --------
Operating loss (19,010) (230,218) (40,950) (248,260)
Other income (expense):
Investment income 775 2,276 2,443 6,526
Interest on senior unsecured
notes payable - (1,421) (3,922) (4,236)
Interest on long-term debt (1,797) - (2,417) -
Interest on inventory floor
plan financing (1,302) (2,940) (3,661) (9,381)
Interest on short-term
borrowings (1,880) (916) (3,864) (1,881)
Other 11 2,144 (196) 858
------ ------- ------- ------
(4,193) (857) (11,617) (8,114)
------ ------ ------ -----
Loss before income
taxes, minority interest
and cumulative effect of
accounting change (23,203) (231,075) (52,567) (256,374)
Benefit for income taxes 8,562 28,907 19,943 36,434
Minority interest in Fleetwood
Capital Trust I, II and
III, net of tax (2,654) (2,790) (8,147) (8,369)
------- ------- ------- ------
Loss before cumulative effect
of accounting change (17,295) (204,958) (40,771) (228,309)
Cumulative effect of accounting
change, net of tax -- -- -- (11,176)
------- -------- --------- --------
Net loss $(17,295) $(204,958) $(40,771) $(239,485)
======= ======== ========= ========
Net income (loss) attributable
to Common shareholders,
basic $12,108 $(204,958) $(11,368) $(239,485)
======== ========= ======== =========
Earnings (loss) per Common share:
Basic Diluted Basic Diluted Basic Diluted Basic Diluted
Income (loss) before cumulative
effect of accounting
change $.35 $.31 $(6.26) $(6.26) $(.34) $(.34)$(6.97) $(6.97)
Cumulative effect of
accounting change,
net of tax -- -- -- -- - - (.34) (.34)
----- ----- ----- ----- ----- ----- ---- -----
Net income (loss) per
Common share $.35 $.31 $(6.26) $(6.26) $(.34) $(.34)$(7.31) $(7.31)
===== ====== ==== ==== ==== ====== ===== =====
Weighted average Common shares:
Basic 34,969 32,755 33,519 32,755
Diluted 48,179 32,755 33,519 32,755
======= ====== ====== =======
Dividends declared per share of
Common stock outstanding -- $.04 $.08 $.42
=== ==== ==== ====
See accompanying notes to financial statements.
FLEETWOOD ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS (CONDENSED)
(UNAUDITED)
ASSETS
(Amounts in thousands) January 27, April 29,
2002 2001
Current assets:
Cash $ 13,427 $ 36,602
Marketable investments 126,410 29,283
Receivables 137,758 122,944
Inventories 222,536 273,385
Deferred tax benefits - current 26,305 34,413
Income tax receivable 13,533 48,289
Other current assets 25,001 27,206
-------- --------
Total current assets 564,970 572,122
Property, plant and equipment, net 285,558 294,813
Marketable investments maturing
after one year 460 7,218
Deferred tax benefits 67,851 71,945
Cash value of Company-owned
life insurance 64,338 64,129
Goodwill and intangible assets 87,002 86,908
Other assets 45,480 45,326
-------- ---------
$1,115,659 $1,142,461
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $85,996 $ 75,394
Employee compensation and benefits 54,738 64,379
Retail flooring liability 33,874 85,861
Motor home chassis inventory financing -- 11,135
Senior unsecured notes payable -- 80,000
Other short-term borrowings 9,827 --
Other current liabilities 171,111 154,577
-------- --------
Total current liabilities 355,546 471,346
Deferred compensation and
retirement benefits 62,542 68,944
Insurance reserves 25,370 28,523
Long-term debt 6,000 --
-------- --------
Total liabilities 449,458 568,813
-------- --------
Company-obligated mandatorily redeemable convertible
preferred securities of Fleetwood Capital Trust I,
II and III holding solely convertible subordinated
debentures of the Company 373,765 287,500
-------- --------
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 34,969,000
at January 27, 2002 and 32,740,000 at
April 29, 2001 34,969 32,740
Capital surplus 242,669 194,338
Retained earnings 18,819 62,212
Accumulated other comprehensive loss (4,021) (3,142)
------- --------
292,436 286,148
-------- --------
$1,115,659 $1,142,461
========== ==========
See accompanying notes to financial statements.
FLEETWOOD ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONDENSED)
(Amounts in thousands)
(UNAUDITED)
39 Weeks Ended 39 Weeks Ended
January 27, 2002 January 28, 2001
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(40,771) $(239,485)
Adjustments to reconcile net loss to net
cash provided by (used in)
operating activities:
Depreciation expense 20,441 21,963
Amortization of goodwill and
intangibles -- 5,060
Amortization of financing costs 2,145 -
Impairment of goodwill - 163,231
Other asset impairment charges 4,800 19,975
Gains on sales of property,
plant and equipment (724) (858)
Non cash charge for warrants issued
for services 850 --
Changes in assets and liabilities:
(Increase) decrease in receivables (14,814) 137,829
Decrease in inventories 50,849 38,916
Decrease in income tax receivable 18,006 --
(Increase) decrease in deferred
tax benefits 12,202 (19,707)
(Increase) decrease in cash value of
Company-owned life insurance (209) 170
Increase in other assets (8,643) (28,577)
Increase (decrease) in accounts payable 10,602 (71,742)
Decrease in employee compensation
and benefits (16,043) (21,633)
Increase (decrease) in other liabilities 13,781 (5,155)
------- -------
Net cash provided by (used in)
operating activities 52,472 (13)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment securities
available-for-sale (894,054) (3,048,883)
Proceeds from sale of investment securities
available-for-sale 803,632 3,076,773
Acquisition of retail companies - (650)
Purchases of property, plant and
equipment (13,962) (26,546)
------- -------
Net cash provided by (used in) investing
activities (104,384) 694
------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends to shareholders (2,622) (13,750)
Common stock issued-private placement 19,864 --
Proceeds from issuance of trust preferred
securities, net 141,763 --
Costs related to exchange of
trust preferred securities (2,190) --
Motor home chassis inventory financing (11,135) 26,851
Retail flooring (51,987) (18,437)
Short-term borrowings 9,827 --
Long-term debt 6,000 --
Payment of senior unsecured notes
payable (80,000) --
Proceeds from exercise of stock options 43 --
------- -------
Net cash provided by (used in)
financing activities 29,563 (5,336)
------- --------
Foreign currency translation adjustment (826) (517)
------- -------
Decrease in cash (23,175) (5,172)
Cash at beginning of period 36,602 43,649
------ -------
Cash at end of period $13,427 $38,477
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
CASH PAID DURING THE PERIOD FOR:
Interest $12,971 $15,226
Income taxes 2,146 8,064
======= ======
DETAILS OF ACQUISITIONS:
Fair value of assets -- $28,826
Liabilities assumed -- 28,176
------- -------
Acquisition price -- 650
Less cash acquired -- --
-------- -------
Net cash paid for acquisitions -- $650
======= =======
NON-CASH FINANCING ACTIVITIES:
Common stock issued in settlement of
acquisition-related liability $400 $869
======= ======
Stock warrants issued for services $850 --
======= ======
Contribution from exchange of
convertible trust preferred securities,
net of income taxes $29,403 --
======= ======
See accompanying notes to financial statements.
FLEETWOOD ENTERPRISES, INC.
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 -- -- -- (40,771) -- (40,771)
Other comprehensive income:
Foreign currency translation,
net of taxes of
$609 -- -- -- -- (826) (826)
Investment securities,
net of taxes
of $30 -- -- -- -- (53) (53)
------
Comprehensive loss (41,650)
------
Cash dividends declared on
Common stock -- -- -- (2,622) -- (2,622)
Stock warrants
issued -- -- 850 -- -- 850
Stock options exercised
(including related
tax benefits) 4 4 39 -- -- 43
Contribution from exchange of
convertible trust preferred
securities, net of taxes
of $16,750 -- -- 29,403 -- -- 29,403
Common stock issued - private
placement 2,210 2,210 17,654 -- -- 19,864
Stock issued for
acquisitions 15 15 385 -- -- 400
---- ---- ------ ----- ----- -------
Balance January 27,
2002 34,969 $34,969 $242,669 $18,819 $(4,021) $292,436
====== ======= ======== ======== ====== ========
See accompanying notes to financial statements.
FLEETWOOD ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 27, 2002
(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, as amended, for the
year ended April 29, 2001.
2) Industry Segment Information
Information with respect to industry segments for the periods ending
January 27, 2002, and January 28, 2001, is shown below (amounts in
thousands):
13 Weeks 13 Weeks 39 Weeks 39 Weeks
Ended Ended Ended Ended
Jan. 27, Jan. 28, Jan. 27, Jan. 28,
2002 2001 2002 2001
OPERATING REVENUES:
Manufactured housing -
Manufacturing $202,120 $190,647 $658,417 $792,403
Retail 72,852 121,554 268,998 458,670
Less intercompany (39,056) (55,057) (115,921) (208,796)
-------- -------- -------- --------
235,916 257,144 811,494 1,042,277
------- -------- ------- -------
Recreational vehicles 278,348 250,404 841,511 917,232
Supply operations 8,117 7,277 24,264 24,567
-------- ------- -------- --------
$522,381 $514,825 $1,677,269 $1,984,076
======== ======== ========== ===========
OPERATING INCOME (LOSS):
Manufactured housing* $3,922 $7,767 $41,531 $20,763
Housing retail** (9,603) (35,839) (30,569) (47,354)
Recreational vehicles (9,161) (29,718) (37,047) (43,138)
Supply operations 1,738 793 5,909 5,109
Corporate and other (5,906) (173,221) (20,774) (183,640)
------- ----- ------- -------
$(19,010) $(230,218) $(40,950) $(248,260)
======== ======== ======== =========
* After addition (deduction) for intercompany profit in inventory as
follows:
$1,212 $35 $7,721 $(449)
======= ======= ======= ====
** Before deduction of interest expense on inventory floor plan
financing as follows:
$1,302 $2,940 $3,661 $9,381
===== ====== ====== ======
3) Earnings Per Share
Basic earnings per share is computed by dividing income attributable to
Common stockholders by the weighted average number of Common shares
outstanding. Diluted earnings per share for the January 27, 2002,
quarter included the effect of potential shares outstanding from
dilutive stock options and dilutive preferred securities. The effect
of stock options and preferred securities was anti-dilutive in the
first half of fiscal 2002 and in fiscal 2001, and was, therefore, not
considered in determining diluted earnings or loss. However, during
the quarter ended January 27, 2002, the Company exchanged new 9.5%
convertible trust preferred securities with a liquidation value of
$37.95 million for existing 6% convertible trust preferred securities
with a liquidation value of $86.25 million. In accordance with
generally accepted accounting principles, the $29.4 million after-tax
difference between the liquidation value of the two securities was not
included in the net loss as shown on the income statement. However,
the gain did increase shareholders' equity and was therefore treated as
additional income attributable to Common shareholders for purposes of
computing basic and diluted earnings per share. The table below shows
the calculation components of both basic and diluted earnings per share
(amounts in thousands):
13 Weeks Ended 13 Weeks Ended
January 27, 2002 January 28, 2001
---------------- ----------------
Weighted Weighted
Average Average
Income Shares Income Shares
Net loss $(17,295) 34,969 $(204,958) 32,755
After-tax difference on exchange
of convertible trust preferred
securities 29,403 - - -
------ ------ --------- ------
Basic earnings (loss) 12,108 34,969 (204,958) 32,755
Effect of dilutive securities:
Stock options - 74 - -
Preferred securities 2,654 13,136 - -
------ ------ -------- -----
Diluted earnings (loss) $14,762 48,179 $(204,958) 32,755
======= ====== ========= ======
39 Weeks Ended 39 Weeks Ended
January 27, 2002 January 28, 2001
---------------- ----------------
Weighted Weighted
Average Average
Income Shares Income Shares
Net loss $(40,771) 33,519 $(228,309) 32,755
After-tax difference on exchange
of convertible trust preferred
securities 29,403 - - -
------- ------ -------- ------
Basic and diluted loss before
cumulative effect of
accounting change (11,368) 33,519 (228,309) 32,755
Cumulative effect of accounting
change - - (11,176) -
------- ------ -------- ------
Basic and diluted loss $(11,368) 33,519 $(239,485) 32,755
======= ====== ========= ======
Anti-dilutive options and warrants were 3,206,396 and 3,927,017 for
the thirteen and thirty-nine weeks ended January 27, 2002,
respectively. Anti-dilutive options were 2,773,517 as of January 28,
2001. Anti-dilutive convertible trust preferred securities were
8,495,477 and 21,630,980 for the thirteen and thirty-nine weeks
ended January 27, 2002, respectively. Anti-dilutive convertible trust
preferred securities were 5,901,053 as of January 28, 2001.
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:
January 27, 2002 April 29, 2001
---------------- --------------
(Amounts in thousands)
Manufacturing inventory-
Raw materials $85,680 $82,884
Work in process 21,833 21,171
Finished goods 7,648 6,124
-------- -------
115,161 110,179
-------- -------
Retail inventory-
Finished goods 133,476 197,029
Less manufacturing profit (26,101) (33,823)
-------- -------
107,375 163,206
-------- -------
$222,536 $273,385
======== ========
5) Other Charges
In the third quarter of fiscal 2002, the Company determined that the
current net book value of two closed manufactured housing facilities
and a parcel of land, each held for sale, exceeded their net
realizable values. Net realizable values were determined based upon
estimated recoverability upon sale. In accordance with SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," the Company recorded a pre-tax charge for
asset impairment of $4.8 million to reduce the net book value of these
assets to estimated net realizable value.
In the second quarter of fiscal year 2002, there was a $1.0 million
charge for restructuring related to closing two manufacturing
facilities. The impairment and other charges incurred in the first
nine months of fiscal year 2001 included $163.2 million for the write-
down of impaired goodwill, $20.0 million for the write-down of other
impaired assets, $6.0 million for restructuring costs and $2.3 million
for other charges. There remains $604,000 of severance accrued in the
prior year that was not paid as of January 27, 2002.
6) Convertible Trust Preferred Securities
Reference is made to Note 8 in the notes to audited consolidated
financial statements included in the Company's Annual Report on Form
10-K for the fiscal year ended April 29, 2001. During fiscal 1998,
Fleetwood Capital Trust (Trust I), a Delaware business trust wholly
owned by the Company, completed a $287.5 million private placement of
5,750,000 shares of 6% Convertible Trust Preferred Securities. The
combined proceeds from the transaction and from the purchase by the
Company of the Common shares of Trust I were tendered to the Company
in exchange for 6% convertible subordinated debentures (Trust I
Debentures) in the aggregate principal amount of $296.4 million,
maturing on February 15, 2028. The Trust I Debentures are the sole
assets of Trust I and eliminate in consolidation.
In December 2001, Fleetwood Capital Trust III (Trust III), also a
Delaware business trust wholly owned by the Company, completed a
$150.0 million private placement of 3,000,000 shares of 9.5%
Convertible Trust Preferred Securities with a face value of $50 per
share. The combined proceeds from the transaction and from the
purchase by the Company of the Common shares of Trust III were
tendered to the Company in exchange for 9.5% convertible subordinated
debentures (Trust III Debentures) in the aggregate principal amount
of $154.6 million, maturing on February 15, 2013. The Trust III
Debentures are the sole assets of Trust III and eliminate in
consolidation.
In January 2002, Fleetwood Capital Trust II (Trust II), another wholly
owned Delaware business trust, issued 1,725,000 shares of 9.5%
Convertible Trust Preferred Securities with a face value of $22 per
share and an aggregate liquidation value of $37.95 million to Trust I
securities holders in exchange for 1,725,000 shares of 6% Trust I
Securities with a $50 face value and an aggregate liquidation value of
$86.25 million. The Trust I shares and the proceeds from the purchase
by the Company of the Common shares of Trust II were tendered to the
Company in exchange for new convertible subordinated debentures (Trust
II Debentures) in the amount of $39.12 million. In turn, the Company
tendered the $86.25 million of Trust I securities to Trust I to be
retired in exchange for the cancellation of a like amount of Trust I
Debentures. The Trust II Debentures, which mature on February 15,
2013, are the sole assets of Trust II and eliminate in consolidation.
Distributions on the new securities can be paid in cash or, at our
election, prior to February 15, 2004, in our Common stock, at a rate
of 9.5% per year of the liquidation amount of $22 per exchange
preferred security and $50 per cash offer preferred security. After
February 15, 2004, we can defer interest payments on the new securities
for up to 20 consecutive quarterly periods.
The new trust preferred securities are convertible, at the option of
the holder, at any time at the rate of 4.826 shares of Fleetwood Common
stock (i.e., a conversion price of $10.36 per Common share) for the
cash offer security ($50 per share face value) and 1.752 shares of
Fleetwood Common stock (i.e., a conversion price of $12.56 per Common
share) for the exchange preferred security ($22 face value per share).
Each new security is mandatorily redeemable upon maturity on February
15, 2013. In addition, after February 15, 2004, we may elect to redeem
the new securities for a price equal to 100% of the liquidation amount
plus accrued interest, upon not less than 30 but no more than 60 days'
notice. Prior to February 15, 2004, we may only elect to redeem the
new securities for a price equal to 100% of the liquidation amount
plus accrued interest if our Common stock price has exceeded 200% of
the conversion price for least 20 days during a 30-day trading period
ending five trading days prior to the notice of redemption.
7) 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.
8) Secured 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. 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. As amended, the
senior secured credit facility is structured as a three-year revolving
credit line for up to $190 million plus a $30 million two-year term
loan. 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, inventories and property, plant and
equipment and are subject to a minimum excess availability of $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. Two
amendments to the credit agreement were executed on December 4, 2001,
mainly to redefine several financial performance covenants. Among the
modifications to the credit agreement, the EBITDA (earnings before
interest, taxes, depreciation and amortization) covenant was replaced
with a Free Cash Flow covenant, which takes into consideration a range
of additional factors, including capital expenditures, service on junior
subordinated debt and certain new capital proceeds. In addition, the
entire credit facility was permanently reduced to its current commitment
level of $220 million. The December 4, 2001, amendments also gave Bank
of America, as agent, the right to require daily reporting of our
borrowing base. Under daily reporting, our required minimum
availability would vary between $40 and $45 million, depending on the
day of the week on which the measurement is made. As of the end of each
week, however, we would still be required to attain a minimum level of
$50 million. These amendments are effective as of October 28, 2001.
With the $141.8 million of net proceeds received from the sale of the
9.5% convertible trust preferred securities in December 2001, $24.0
million was used to pay down the bank term loan to a balance of $6.0
million and another approximately $4.0 million was used to pay off the
balance then outstanding on the revolving loan. The balance outstanding
on the revolver as reflected on the balance sheet at the end of January
in other short-term borrowings was $9.8 million.
9) 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 was
adopted by the Company effective April 30, 2001. The statement
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. We were permitted six months from the adoption date to
complete a preliminary review of goodwill. Because the preliminary
review indicated potential impairment, a second phase of review has
commenced to determine the amount of the impairment. In connection
with our preliminary review, we engaged outside consultants to assist
with the determination of the estimated fair value for our two
reporting units with goodwill. Based on preliminary findings, it is
likely that the estimated fair value of one of the reporting units,
retail housing, is less than its carrying amount. Although the second
phase of our review is not complete, we believe that the impairment is
likely to be substantial, thus resulting in a non-cash write-down. We
would expect to finalize this process in the fourth quarter of fiscal
2002. In the future, we will evaluate the estimated fair value of the
two subject reporting units at the end of each fiscal year and whenever
circumstances dictate that a review should be completed. Before
considering any potential effects of impairment discussed above, the
adoption of the new standard resulted in net loss decreasing by $4.3
million or $0.13 per share for the nine months ended January 27, 2002,
due to the elimination of goodwill amortization. Comparative pro forma
results for the nine months ended January 28, 2001, would have reduced
both the loss before cumulative effect of change in accounting principle
and net loss by $5.1 million or $0.15 per share. We had $87.0 million
and $90.9 million of goodwill on our balance sheet at January 27, 2002,
and January 28, 2001, respectively.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. SFAS 143
is effective for financial statements issued for fiscal years beginning
after June 15, 2002, and we do not expect the adoption of SFAS 143 to
have a material impact on our financial condition and results of
operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS 144 addresses
financial accounting and reporting for the impairment or disposal of
long-lived assets. SFAS 144 supersedes SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of," and the accounting and reporting provisions of APB
Opinion No. 30, "Reporting the Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions," for the
disposal of a segment of a business (as previously defined in that
Opinion). The provisions of SFAS 144 are effective for financial
statements issued for fiscal years beginning after December 15, 2001,
and we do not expect the adoption of SFAS 144 to have a material impact
on our financial condition and results of operations.
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, ongoing weakness in the manufactured housing and the
recreational vehicle markets, continued acceptance of the Company's products,
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 (a) our Annual Report on Form 10-K, as amended, 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" and (b) our Registration Statement on Form S-3 and
S-4, as filed with the Securities and Exchange Commission on December 11,
2001, under the caption "Risk Factors."
The following is an analysis of changes in key items included in the
consolidated statements of operation for the 13-week and 39-week periods ended
January 27, 2002, compared to the 13-week and 39-week periods ended January
28, 2001.
13 Weeks Ended 39 Weeks Ended
January 27, 2002 January 27, 2002
(Unaudited) (Unaudited)
Increase % Increase %
(Amounts in thousands) (Decrease) Change (Decrease) Change
------- ----- -------- ----
Sales $7,556 1.5% $(306,807) (15.5)%
Cost of products sold (15,103) (3.5) (259,010) (16.2)
------ --- -------- ----
Gross profit 22,659 (27.2) (47,797) (12.4)
Selling expenses 1,001 1.8 (23,664) (12.4)
General and administrative
expenses (20,268) (24.4) (45,759) (18.2)
Goodwill impairment (163,231) - (163,231) -
Other charges (6,051) (55.8) (22,453) (79.5)
------ --- -------- ----
Operating expenses (188,549) (60.1) (255,107) (40.2)
------ --- -------- ----
Operating loss (211,208) (91.7) (207,310) (83.5)
Other expense 3,336 389.3 3,503 43.2
------ --- -------- ----
Loss before taxes, minority interest
and cumulative effect of accounting
change (207,872) (90.0) (203,807) (79.5)
Benefit for income taxes (20,345) (70.4) (16,491) (45.3)
Minority interest in Fleetwood
Capital Trust I, II and III,
net of tax (136) (4.9) (222) (2.7)
------ --- -------- ----
Loss before cumulative effect
of accounting changes (187,663) (91.6) (187,538) (82.1)
Cumulative effect of accounting
change, net of taxes - - (11,176) -
Net loss $(187,663) (91.6)% $(198,714) (83.0)%
======== ==== ======== ====
Current Quarter Compared to Same Quarter Last Year
Consolidated Results:
We incurred a net loss in the third quarter of $17.3 million compared to a net
loss of $205.0 million in the prior year. Last year, the loss included a
$163.2 million non-cash charge related to the revaluation of goodwill that
originated with acquisitions of retail housing businesses in prior years. In
addition, last year we recorded other charges totaling $10.9 million, which
were almost entirely related to the downsizing of retail housing operations.
The loss in the current period primarily resulted from a 40% decline in retail
housing sales and a 12% decrease in travel trailer sales. In addition to the
sales decline, both businesses were negatively impacted by low gross margins,
despite improvement in overall gross margins, due to competitive conditions
described below.
As the result of the required accounting treatment for the after-tax gain on
the recent exchange transaction of convertible trust preferred securities, we
reported positive earnings of $0.31 per diluted share. In the exchange offer,
as previously reported, we exchanged new 9.5% convertible trust preferred
securities with a liquidation value of $37.95 million for existing 6%
convertible trust preferred securities with a liquidation value of $86.25
million. The $29.4 million after-tax difference between the liquidation
values of the two securities was not included in the net loss as reported on
the income statement. However, the gain did increase shareholders' equity,
and was therefore treated as additional income attributable to Common
shareholders in calculating earnings per share. Last year we reported a $6.26
loss per diluted share, which included $4.86 per share related to the goodwill
impairment and $0.21 per share for other charges, net of tax.
Consolidated revenues rose 1% to $522.4 million compared to $514.8 million in
last year's third fiscal quarter. Quarterly sales improved in the
manufacturing operations of both of our primary businesses, with recreational
vehicle sales up 11% and manufactured housing revenues rising 6%. Housing
retail sales continued to decline, dropping 40% from the prior year, largely
due to a similar percentage reduction in the number of Company-operated retail
stores, resulting from a restrictive financing environment.
Gross profit margin increased to 20.3% of sales compared to 16.2% a year ago
due to improved margins in all segments, as further specifically described
below.
In the current quarter, we incurred a $4.8 million non-cash charge related to
asset impairment on two closed manufactured housing plants and a parcel of
land, each held for sale.
Operating expenses, excluding the asset impairment charges, decreased $19.3
million or 14% to $120.1 million. As a percentage of sales, these costs
declined from 27.1% to 23.0% due to cost reduction actions over the past 12
months. Selling expenses rose 2% to $57.4 million, and remained at 11.0% of
sales. Decreases in advertising and marketing expenses were offset by
increases to service costs due in part to opening new service centers and
parts warehouses and in further part to reclassifying sales and service
salaries from general and administrative expense and selling expense.
General and administrative expenses fell $20.2 million or 24% to $62.7
million, and decreased as a percentage of sales from 16.1% to 12.0%. The
dollar reduction mainly reflects lower employee compensation and benefits,
mainly as the result of downsizing, and in part to reclassifying sales and
service salaries to selling expense.
Non-operating expenses increased $3.3 million to $4.2 million for the current
year. Net gains totaling $2.1 million on the disposition of fixed assets last
year and lower interest income this year were the main contributors to the
higher expense. Investment income was down 66% from the prior year as a
result of lower invested balances while interest expense on non-inventory
financing borrowings was higher because of increased amortization related to
the debt restructuring.
Manufactured Housing:
Gross manufacturing revenues of $202.1 million increased 6% from the prior
year, and included $39.1 million of intercompany sales to Company-owned retail
home centers. Manufacturing unit volume increased 4% to 7,075 homes, but the
number of sections was up a lesser 2% to 12,647. Multi-section homes
represented 77% of factory sales versus 78% last year, representing the first
quarter in more than five years where sales of multi-section homes declined as
a percentage of total factory sales.
The increased housing volume reflects a slight rise in what has been a weak
manufactured housing market. October was the first month in 30 months where
industry shipments exceeded the same month prior year shipments. The industry
has been adversely affected by excessive retail inventories and restrictive
retail financing conditions. During the past three years, lenders have
imposed more stringent credit standards and down payment requirements for
retail buyers. Additionally, several key lenders have exited the business,
including as of January 2002, the second largest lender, GreenPoint Financial
Corp. Further, an originator of floor plan financing for manufactured housing
dealers has also announced plans to exit that business. These actions,
combined with higher interest rates and other stringent loan terms, such as
shorter terms to maturity, relative to site-built housing have eliminated many
potential buyers of 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 largely on the availability and terms of
retail financing.
Housing operating income, excluding the adjustment for intercompany inventory
profit, declined 65% from $7.7 million to $2.7 million, and operating margin
fell from 4.1% to 1.3% of sales. Most of the decline related to the $3.5
million of asset impairment charges on the two closed plants. Gross profit
margin for the Housing Group improved from 22.9% to 25.4% of sales as a result
of selling price increases and lower manufacturing costs related to operating
fewer plants, which offset increased cost of raw materials. More efficient
material usage, improved product pricing and lower production costs all
contributed to the higher gross margin percentage. Housing Group operating
costs rose 26%, due mainly to increased warranty and service costs, which
resulted partly from the new regional service operations and partly also from
a reclassification of salaries from general and administrative expense to
selling expense. In addition, selling expense last year was $2 million lower
due to media advertising that was never produced or distributed due to the
soft market conditions.
Retail Housing Operations:
The retail housing division had third quarter revenues of $72.8 million, 40%
below last year's similar period. Unit sales from Fleetwood retail stores
fell 41% to 1,650 homes. The retail division incurred an operating loss of
$9.6 million for the current quarter compared to a loss of $35.8 million a
year ago. Last year, the significant operating loss included $10.6 million of
asset impairment charges related to downsizing actions and $9.8 million of
inventory write-downs for aged inventory. The operating loss this year was the
result of a decline in sales brought about by the restrictive financing
conditions and exacerbated by low gross margins stemming from competitive
pricing pressures. Retail housing margins increased from 10.2% to 19.6% for
the current quarter, although last year's gross margin was negatively affected
by the $9.8 million inventory write-down. Operating expenses declined 36% due
to lower volume, store closures and reduced staffing. Interest expense on
inventory financing decreased by 56% from $2.9 million to $1.3 million,
reflecting a $65.6 million or 38% drop in inventory and lower interest rates.
The retail housing segment was operating 145 stores at the end of January 2002
compared to 227 at the end of January a year ago.
Recreational Vehicles:
Recreational vehicle sales increased 11% to $278.3 million compared to $250.4
million for last year's third quarter. Motor home revenues increased 25% to
$183.6 million on a 13% increase in shipments to 1,987 units. The primary
drivers for the increased sales revenue were orders received during and
immediately after the industry trade show in late November and the strong
acceptance by dealers and customers of the recently renovated Pace Arrow and
Southwind products. In the towable RV categories, travel trailer sales
declined 12% to $68.4 million and folding trailer sales were unchanged at
$26.4 million. Third quarter unit shipments for travel trailers and folding
trailers were 5,268 and 4,225, respectively, representing decreases of 11% and
6%.
The RV Group incurred a $9.2 million operating loss in the third quarter,
mainly as a result of the decline in travel trailer sales and slimmer travel
trailer gross margins. On a positive note, the motor home plants earned $5.6
million compared to a loss from operations of $9.4 million in the prior year.
Gross profit margin in the RV Group rose from 10.1% a year ago to 13.0% of
sales, largely due to improved motor home margins due to efficiencies gained
from past downsizing efforts to align capacity with demand. In addition,
gross margins were negatively impacted by increased sales incentives offered
early in the third quarter. Last year's motor home and travel trailer gross
margins were negatively impacted by a sharp decline in volume resulting in
production shutdowns, material obsolescence and higher wage and benefit costs
resulting from production inefficiencies at lower volume levels. Operating
costs for our RV Group were 17% lower than the prior year due to successful
downsizing initiatives since last year. Selling expense was 16% lower due to
reduced sales and marketing costs. General and administrative expenses for
the RV Group were 18% below last year's third quarter, mainly due to staffing
reductions and lower levels of profit-based management incentive compensation.
Supply Operations:
The Supply Group contributed third quarter revenues of $8.1 million compared
to $7.3 million a year ago. Operating income more than doubled from $793,000
to $1.7 million for the current year, primarily due to increased sales volume
and lower material cost.
Current Year-to-Date Compared to Same Period Last Year
Consolidated Results:
For the first nine months of fiscal 2002, we incurred a net loss of $40.8
million or $0.34 per diluted share compared to a loss of $239.5 million or
$7.31 per diluted share for the similar period last year. The loss in the
current year stems from reduced sales volume in both manufactured housing and
recreational vehicles caused by restrictive financing in the housing industry
and a slowing economy, particularly in the first half of the fiscal year. The
significant loss in the prior year was due in a large part to other charges
related to goodwill impairment, restructuring and downsizing initiatives
resulting from declining markets in both our primary businesses, and which
contributed $5.40 to the loss per share. In addition, a change in accounting
treatment in the prior year for credit retail housing sales, which was adopted
in the first quarter, contributed $0.34 to the loss per share.
Consolidated revenues for the nine-month period fell 16% to $1.68 billion
compared to $1.98 billion for last year's similar period. Manufactured
housing sales declined 17% to $658.4 million and recreational vehicle sales
decreased 8% to $841.5 million. As mentioned earlier, restrictive financing
in the housing industry and a slowing economy were the primary reasons for
declining sales.
Gross profit margin increased to 20.2% of sales compared to 19.4% last year,
mainly due to improvements in housing's manufacturing and retail gross
margins. Overall manufacturing gross margin rose from 17.6% to 18.4% as the
gross margin from the housing business more than offset the decline in the RV
sector. Last year, retail margins were negatively impacted by the third
quarter inventory write-down described above.
Operating expenses, excluding other charges for asset impairment and
restructurings, declined $69.4 million or 15% and, as a percentage of sales,
decreased from 22.3% to 22.2%. The lower operating expenses were the result
of downsizing actions in all business segments. Selling expenses declined 12%
to $167.6 million, but as a percentage of sales rose slightly from 9.6% to
10.0%. Reductions in RV marketing programs and product warranty costs led to
the lower expense. General and administrative expenses fell 18% to $205.7
million, and decreased as a percentage of sales from 12.7% to 12.3% on the
lower sales. Included in the $205.7 million was $8.3 million as an estimate
of the cost to settle two class action suits. The reduction in cost was
mainly due to staff reductions resulting from manufacturing plant and retail
store closures.
In the prior year, other charges related to plant closings and downsizing
efforts totaled $28.3 million, which included $10.6 million for asset
impairment charges related to downsizing of the Company's retail housing
business and $9.4 million for the write-down of plant facilities. The balance
of these costs was largely related to employee severance payments and other
plant closing expenses. This year the cost was $5.8 million, which includes
asset impairment charges of $4.8 million, mostly for two closed housing plants
and $1.0 million related to closing two travel trailer manufacturing
facilities.
Non-operating expense was about $11.6 million compared with $8.1 million in
the prior year. The $3.5 million increase was due in part to lower investment
income this year resulting from lower interest rates and lower invested
balances and higher interest expense related to the debt restructuring.
Partially offsetting the above increases was lower interest expense on retail
housing inventory floor plan liability, resulting from a $65.6 million
decrease in inventories.
Manufactured Housing:
Gross manufacturing revenues in the first nine months were $658.4 million,
down 17% from the prior year, and included $115.9 million of intercompany
sales to Company-owned retail sales centers. Manufacturing unit volume
declined 20% to 23,547 homes, but the number of housing sections was off a
lesser 18% to 42,177 due to the continuing shift in sales mix toward multi-
section homes. Multi-section homes represented 77% of factory sales versus
73% last year.
The relative weakness in Company housing sales was attributable to the factors
described in the quarter-to-quarter comparison of results.
Operating income, excluding the adjustment for intercompany inventory profit,
increased 59% from $21.2 million to $33.8 million, and operating margin
improved from 2.7% to 5.1% of sales. Last year's operating income was
impacted by about $12 million of restructuring and impairment charges related
to plant closings and downsizing initiatives. This year's profit was
negatively affected by $3.5 million of asset impairment charges related to two
previously closed plants. Excluding these other charges, operating margin for
the Housing Group would have been 5.7% in the current year and 4.2% in the
prior year. Gross profit margin for the Housing Group improved from 22.6% to
25.6% of sales, mainly as a result of lower raw material costs. More
efficient material usage and improved product pricing, along with lower
manufacturing cost, contributed to the higher gross margin. Housing Group
operating costs, excluding the aforementioned other charges, fell 10%, mainly
as a result of reduced advertising expense and lower employee compensation.
Compensation costs reflect lower profit-based incentive compensation and
staffing reductions resulting from downsizing efforts.
Retail Housing Operations:
The retail housing division generated nine-month revenues of $269.0 million
compared to $458.7 million in last year's similar period. Unit sales for the
retail operation were down 38% to 6,508 homes. Last year, as a result of a
change in accounting for retail credit sales, we incurred a one-time
cumulative charge against earnings of $11.2 million after taxes. The retail
division incurred a nine-month operating loss of $30.6 million, before
interest expense on inventory financing, compared to an operating loss of
$47.3 million last year. The prior period loss included other asset
impairment charges totaling $10.6 million related to downsizing initiatives,
in addition to a $9.8 million inventory write-down. The operating loss for
the current year mainly resulted from the decline in sales brought about by
the restrictive financing environment and exacerbated by low gross margins
stemming from competitive pricing pressures. Partially offsetting the lower
gross profit was a 32% reduction in operating expense resulting from operating
fewer retail stores and staff reductions. Interest expense on inventory
financing dropped 61% from $9.4 million to $3.7 million, reflecting the
significant decrease in inventories and paying down the inventory floor plan
liability.
Recreational Vehicles:
Recreational vehicle revenues declined 8% to $841.5 million, primarily as a
result of lower travel trailer sales. Motor home revenues increased 1% to
$489.3 million on a 7% decrease in unit volume. This mainly reflects the
increased shipments of the new high-line gas products and fewer lower-priced
Class C products. Sales were also weaker for towable products. Travel
trailer revenues declined 23% to $268.1 million and folding trailer sales fell
4% to $84.1 million. Unit shipments for travel trailers and folding trailers
were 19,342 and 12,981, respectively, representing decreases of 23% and 11%.
The RV Group incurred a nine-month operating loss of $37.0 million versus an
operating loss of $43.1 million in the prior period. Last year the RV Group
incurred a charge of $3.4 million for plant closings and other downsizing
related actions. This year's loss was mainly the result of lower travel
trailer sales and reduced gross margins. RV gross margin declined to 12.4% of
sales from 13.1% a year ago due to competitive conditions. Both divisions
were negatively impacted by higher sales program costs this year that reduced
sales and gross profit along with production inefficiencies associated with
lower volume levels, both resulting from weak market conditions. RV operating
expenses decreased $22.0 million and declined as a percentage of sales from
17.8% to 16.8% primarily due to reduced marketing expenses and lower employee
compensation and benefits resulting from downsizing.
Supply Operations:
The Supply Group's nine-month revenues were about $24 million for both years.
Operating income increased 16% to $5.9 million mainly due to reduced material
cost resulting from a more favorable product mix.
Liquidity and Capital Resources
Operations
We have historically relied upon internally generated cash flows to satisfy
working capital needs and to fund capital expenditures. In recent periods,
however, we have used external funding sources to supplement internal cash
flows (see footnotes 6 and 8). Cash provided by operating activities totaled
$52.5 million in the first nine months of fiscal 2002 compared to $13,000 used
by operations for the similar period last year. The increased cash flow from
operations resulted largely from a $50.8 million reduction in inventories,
primarily in the retail housing segment. Also contributing to the positive
cash flow were a $50.3 million refund of Federal taxes paid in prior periods,
a $13.8 million increase in other liabilities, mainly due to the $8.3 million
accrual for legal settlements, and an increase of $10.6 million in accounts
payable. In addition, the elimination of the cash dividend and deferral of
the convertible trust preferred security distribution effective with the third
quarter preserved $5.6 million of cash. Cash and cash equivalents increased
from $73.1 million as of April 29, 2001, to $140.3 million at the end of
January 2002. The higher level of cash and cash equivalents was largely the
result of net proceeds of $141.8 million from the sale of new convertible
trust preferred securities, $19.9 million net proceeds from the sale of Common
stock to a private investment fund and $15.8 million of borrowings on the
secured credit facility, as well as higher cash flow from operations as
discussed above. The increase in cash and cash equivalents was mitigated by
the payoff of $80.0 million of unsecured notes due to the Prudential Insurance
Company of America, a reduction in retail inventory financing of $52.0
million, and the retirement of the $11.1 million balance due on motor home
chassis financing. Additional cash outlays in the current year included $14.0
million for capital expenditures, $8.6 million for distribution on the
convertible trust preferred security, and $2.6 million in dividends to
shareholders. Last year distributions on the convertible trust preferred
securities totaled $12.9 million, dividends were $13.8 million and net capital
expenditures totaled $26.5 million.
Convertible Trust Preferred Securities
On December 11, 2001, we commenced an offer of up to an aggregate of $37.95
million in liquidation amount of new 9.5% Convertible Trust II Preferred
Securities due February 15, 2013, in exchange for up to an aggregate of $86.25
million of the $287.5 million in liquidation amount of outstanding 6%
Convertible Trust Preferred Securities due February 15, 2028. The exchange
offer expired on January 4, 2002, and was completed on January 10, 2002. The
new securities are convertible, at the option of the holder, at any time into
1.752 shares of Fleetwood Common stock per share of new trust preferred issued
in the exchange offer (i.e., a conversion price of $12.56 per Common share).
With 1.725 million shares of new trust preferred issued in the exchange offer,
the potential dilution to Common shareholders upon conversion of the new
exchange offer trust preferred is 3.0 million Common shares. As a result of
the exchange, debentures supporting the exchanged convertible preferred
securities were cancelled, resulting in a taxable gain of $46.2 million.
After deducting taxes of $16.8 million, the remainder of $29.4 million was
reported as an increase to capital surplus and treated as income attributable
to Common shareholders in the calculation of earnings per share.
In conjunction with the exchange offer, we offered to sell for cash $150
million of 9.5% Convertible Trust III Preferred Securities due February 15,
2013. The registration statement was declared effective by the Securities and
Exchange Commission on December 11, 2001, and the cash offer closed on
December 14, 2001. The Trust III Preferred Securities are convertible, at the
option of the holder, at any time into 4.826 shares of Fleetwood Common stock
per share of new trust preferred issued in the cash offer (i.e., a conversion
price of $10.36 per Common share). With 3.0 million shares of new trust
preferred issued in the cash offer, the potential dilution to Common
shareholders upon conversion of the new cash offer trust preferred is 14.5
million Common shares. Upon closing, of the $141.8 million net proceeds
received, $24.0 million was used to pay down the bank term loan to a balance
of $6.0 million and another approximately $4.0 million was used to pay off the
balance then outstanding on the revolving loan. The remaining balance is
available for general corporate purposes, providing a significant enhancement
to liquidity.
Dividends and Distributions
As previously announced on October 30, 2001, the board of directors
discontinued the payment of dividends on our Common stock for the foreseeable
future and elected to defer the distribution on our existing 6% convertible
trust preferred securities due to be made on November 15, 2001. The
distribution on the existing 6% trust preferred securities due to be paid on
February 15, 2002, was also deferred. We have the right to elect to defer
distributions for up to 20 consecutive quarters on our existing preferred
securities under the trust indenture governing the existing 6% trust preferred
securities. When we defer a distribution on the existing 6% trust preferred
securities, we are prevented from declaring or paying dividends on our Common
stock during the period of the deferral. In light of our business environment
and recent operating results, we currently anticipate that we will find it
necessary to defer distributions on the existing 6% trust preferred securities
through at least August 15, 2002. Distributions on the new 9.5% trust
preferred securities can be paid in cash or, at our election, prior to
February 15, 2004, in our Common stock, at a rate of 9.5% per year of the
liquidation amount of $22 per exchange preferred security and $50 per cash
offer preferred security. After February 15, 2004, we can defer interest
payments on the new securities for up to 20 consecutive quarterly periods. As
previously announced, we elected to pay the distribution on the new trust
preferred securities due to be made on February 15, 2002, in shares of our
Common stock. In light of our business environment and recent operating
results we currently anticipate that we will find it necessary to do so at
least through August 2002.
We are in the process of exploring other possible sources of junior capital to
replace some of the existing debt. If we are successful, we believe that
these financing sources are likely to be in place sometime during the first
fiscal quarter of 2003.
In the opinion of management, the combination of existing cash resources,
expected future cash flows from operations, and available lines of credit will
be sufficient to satisfy our foreseeable cash requirements for the next 12
months, including up to $30 million for capital expenditures.
Business Outlook
We do not expect to operate profitably during the final quarter of fiscal
2002. Results for the quarter, which will end on April 28, 2002, are expected
to be adversely affected by continuing softness in the manufactured housing
market. For almost three years, excess capacity, high retail inventories and
a slowing of retail sales caused by restrictive financing conditions have
impacted the manufactured housing industry. Encouraging progress has occurred
with respect to reducing industry inventory levels and production capacity,
but significant improvements in market conditions are unlikely until financing
for our retail customers for the purchase of a manufactured home becomes more
readily available at more affordable interest rates. In addition, Conseco
Inc., a large originator of floor plan financing, has recently indicated that
it intends to discontinue providing floor plan financing to the manufactured
housing industry. Even without Conseco, Fleetwood Retail Corp. will have
ample alternative sources of inventory financing. We believe that
approximately one-third of the inventory at our independent retailers is
financed through Conseco, with the remaining two-thirds financed either
through one of the four other major national and regional sources of floor
plan financing, or through local banks or other local lending sources. We
believe that most of our independent retailers who currently finance inventory
through Conseco will obtain floor plan financing from one or more of the
several existing alternative sources.
If certain retailers are unable to obtain alternative sources of financing in
order to purchase inventory, the loss of these retailers would likely have a
negative effect on our distribution channel in the geographic areas in which
these retailers operated, which could have an adverse effect on sales of our
housing products. In addition, since we are required under the terms of our
agreements with Conseco to repurchase inventory from retailers who default in
their obligations to Conseco, we may incur a loss under these agreements if a
retailer is unable to find an alternative source of financing and subsequently
defaults in its repayment obligation to Conseco. However, any loss we incur
would be offset by a subsequent or concurrent resale of the repurchased
inventory. Thus, while the effect of Conseco's exit from the flooring
business cannot be determined at this time, we nonetheless presently believe
that both the manufacturing and retail segments of our housing operations will
perform at approximately the same sales and profit levels in the fourth
quarter as they experienced in the third quarter.
Within the recreational vehicle sector, retail demand for motor homes began to
soften late in fiscal year 2000 and dealers began to reduce their relatively
high inventories to more appropriate levels for the existing market
conditions. This led to a slowdown in factory shipments, which persisted
through the first half of fiscal year 2002. Retail and wholesale demand also
slowed for towable RV products about 15 months ago. Prior to September 11,
2001, consumer confidence was softening. Subsequent to the terrorist attacks,
a further decline in the economy affected our businesses, especially the
recreational vehicle market. During and immediately following the industry
trade show in late November, we experienced increased travel trailer and motor
home orders. Due to the resulting improvement in RV backlogs and positive
retail shows, we increased travel trailer and motor home production rates late
in the third quarter. The motor home segment has posted profits for the last
two quarters, and is expected to be profitable in the fourth quarter. The
travel trailer segment is expected to fall short of breakeven, and as a result
the RV Group on a combined basis is not expected to be profitable.
As described in footnote 9 to the financial statements included in Item 1 of
Part 1 of this Form 10-Q, we adopted SFAS No. 142, "Goodwill and Other
Intangible Assets" effective with the beginning of this fiscal year. This
statement addresses financial accounting and reporting for acquired goodwill
and other intangible assets. It 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. Based on preliminary findings, it is likely
that the estimated fair value of one of the reporting units, retail housing,
is less than its carrying amount. Although the second phase of our review is
not complete, we believe that the impairment is likely to be substantial, thus
resulting in a non-cash write-down. In accordance with SFAS No. 142, the
impairment charge will be recognized as a cumulative effect of an accounting
change, net of tax, effective with the first quarter. In the fiscal year 2002
annual report to shareholders, the quarterly information will be restated to
reflect the impairment in the first quarter of fiscal year 2002.
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 our marketable investments are in institutional money
market funds and other short-term notes, with a relatively small balance,
(less than $0.5 million at the end of the third quarter), invested in longer-
term notes, which are subject to periodic fluctuations in interest rates and
greater market risk.
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. At the end of the third quarter
we held $15.6 million of fixed rate debt. Based upon the amount of variable
rate debt outstanding at the end of the quarter, and holding the variable rate
debt balance constant, each one percentage point increase in interest rates
occurring on the first day of an annual period would result in an increase in
interest expense of approximately $497,000.
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 alleged violations of
the federal Fair Labor Standards Act, and similar state laws, and requested
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. On February 22, 2002, we announced
that we have reached a settlement with representatives of the class. The
settlement was given preliminary approval by the Magistrate Judge on January
30, 2002. We will pay a total of $7.35 million in settlement of the case and
we have agreed to certain injunctive relief, including implementing a policy
explicitly prohibiting off-the-clock work and modifying rounding practices
under our timekeeping system.
In Part I, Item 3 of our Annual Report on Form 10-K for the fiscal year ended
April 29, 2001, we reported 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 were attempting to establish a national class action
and are requesting compensatory and punitive damages, litigation expenses and
attorneys' fees. In February 2002, we reached a settlement with
representatives of the putative class, and we expect preliminary approval of
the settlement to be given by the court. We will pay a total of $925,000 in
settlement of the case and we have agreed to certain injunctive relief,
including benchmarking certain jobs to achieve diversity and formalizing a
sexual harassment awareness training program at Company facilities.
In Part l, Item 3 of our Annual Report on Form 10K for the fiscal year ended
April 29, 2001, we reported that we are a defendant in a class action in the
case of McManus v. Fleetwood Enterprises, Inc., which was filed on April 9,
1999, and is pending in the U. S. District Court for the Western District of
Texas, San Antonio Division. The complaint attempts to establish a class of
purchasers of our Class A motor homes for the model years 1994-1999 and makes
claims with respect to the alleged breach of express and implied warranties,
negligent misrepresentation, fraudulent concealment, and violation of various
state statutes in connection with the ability of such motor homes to tow an
automobile or other vehicle or cargo. On September 24, 2001, the Court
certified a subclass of Texas residents who purchased a subject motor home
from a Texas dealer and who still own the motor home. We appealed this
certification to the Fifth Circuit Court of Appeals on October 4, 2001, and we
expect that a hearing on this matter will be scheduled later this calendar
year. We continue to deny the material allegations in the complaint while
asserting a vigorous defense to that end. It is not possible at this time to
properly assess the risk of an adverse verdict or the magnitude of possible
exposure.
On January 29, 2002, a purported class action was filed by sixteen individual
plaintiffs against us and thirteen of our subsidiaries, along with 253 other
companies in the manufactured housing industry. The matter, designated Matte
v. Sunshine Homes, Inc., was filed in the 27th Judicial District Court, St.
Landry Parish, Lafayette, Louisiana, and purports to be a class action
consisting of all individuals in the United States who purchased a
manufactured home built to the federal department of Housing and Urban
Development (HUD) construction and safety standards. HUD regulates all
manufactured housing in the United States. The complaint alleges breach of
warranty claims and various personal injuries and property damages resulting
from water infiltration, mold and mildew. We deny the material allegations in
the complaint and plan to assert a vigorous defense to that end. It is not
possible at this time to properly assess the risk of an adverse verdict or the
magnitude of possible exposure.
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 currently be determined, in the opinion of our management such
liability is not expected to have a material adverse effect on our financial
condition or results of operations.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. None
(b) Reports on Form 8-K
On December 5, 2001, the Company filed a current report on Form 8-K disclosing
three amendments to the senior secured facility dated July 27, 2001, had been
executed.
On December 14, 2001, the Company filed a current report on Form 8-K
disclosing the closing of its offer of new convertible trust preferred
securities for $150 million in cash.
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
Executive Vice President and
Chief Financial Officer
March 7, 2002