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 26, 1998 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 26, 1998 _________________________ ______________________________ Common stock, $1 par value 32,034,309 shares Preferred share purchase rights -- 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 26, 1998 and July 27, 1997, and the balances as of July 26, 1998 and April 26, 1998. 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 26, 1998, and the related condensed consolidated statements of income for the thirteen-week periods ended July 26, 1998 and July 27, 1997, respectively, the condensed consolidated statements of cash flows for the thirteen-week periods ended July 26, 1998 and July 27, 1997, and the condensed statement of changes in shareholders' equity for the thirteen- week period ended July 26, 1998 in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants. All information included in these financial statements is the representation of the management of Fleetwood Enterprises, Inc. and subsidiaries. A review of interim financial information consists principally of inquiries of Company personnel and analytical procedures applied to financial data. It is substantially less in scope than an audit 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 generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of Fleetwood Enterprises, Inc. and subsidiaries as of April 26, 1998, 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 June 22, 1998, 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 26, 1998, 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 25, 1998 FLEETWOOD ENTERPRISES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (CONDENSED) (Amounts in thousands except per share data) (UNAUDITED) 13 Weeks Ended 13 Weeks Ended July 26, 1998 July 27, 1997 Net sales: Manufacturing $839,761 $728,454 Retail 1,878 -- Less: intercompany (1,484) -- ------- -------- 840,155 728,454 Cost of products sold 666,365 594,785 ------- -------- Gross profit 173,790 133,669 Operating expenses 123,539 84,595 ------- -------- Operating income 50,251 49,074 Other income (expense): Investment income 5,095 2,293 Interest expense (868) (879) Distribution on preferred securities (4,380) -- Other (125) (144) ------ ------ (278) 1,270 ------- ------ Income before provision for income taxes 49,973 50,344 Provision for income taxes (19,748) (19,402) -------- -------- Net income $ 30,225 $ 30,942 ======== ======== Net income per Common share: Basic EPS $.96 $.86 Diluted EPS .86 .84 ======== ======== Dividends declared per share of Common stock outstanding $.18 $.17 ======== ======== Weighted average Common shares: Basic 31,621 35,843 Diluted 38,242 36,668 ======== ======== See accompanying notes to financial statements. FLEETWOOD ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME JULY 26,1998 (UNAUDITED) (Amounts in thousands) Net income $30,225 ------- Other comprehensive income, net of tax: Foreign currency translation adjustments, net of income taxes of $631 ( 756) Unrealized loss on securities, net of income taxes of $64 (110) ------- Other comprehensive income (866) ------- Comprehensive income $29,384 ======= See accompanying notes to financial statements. FLEETWOOD ENTERPRISES INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (CONDENSED) ASSETS (Amounts in thousands) July 26, 1998 April 26, 1998 Current assets: (Unaudited) Cash $ 30,306 $ 28,143 Marketable investments 303,764 255,919 Receivables 196,882 195,388 Inventories 178,668 153,746 Deferred tax benefits - current 32,441 30,212 Other current assets 26,544 19,443 -------- --------- Total current assets 768,605 682,851 Property, plant and equipment 277,255 277,211 Marketable investments maturing after one year 20,429 21,660 Deferred tax benefits 47,322 45,042 Cash value of Company-owned life insurance 63,827 63,355 Goodwill and intangible assets 63,156 13,745 Other assets 21,257 25,616 ------- --------- $1,261,851 $1,129,480 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 123,653 $ 118,481 Employee compensation and benefits 74,090 74,435 Federal and state taxes on income 31,952 8,800 Other liabilities 180,086 124,086 ---------- ---------- Total current liabilities 409,781 325,802 Deferred compensation and benefits 62,752 58,272 Insurance reserves 27,276 26,880 Long-term debt 55,000 55,000 Company-obligated mandatorily 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 32,034,000 at July 26, 1998 and 31,451,000 at April 26, 1998 32,034 31,451 Capital surplus 73,680 54,340 Retained earnings 316,155 291,696 Accumulated other comprehensive income (loss) (2,327) (1,461) -------- -------- 419,542 376,026 -------- -------- $1,261,851 $1,129,480 ========== ========== See accompanying notes to financial statements. [/TABLE] FLEETWOOD ENTERPRISES INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (CONDENSED) (UNAUDITED) (Amounts in thousands) 13 Weeks 13 Weeks Ended Ended July 26, July 27, 1998 1997 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $30,225 $30,942 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense 6,703 6,761 Amortization of intangibles and goodwill 65 65 Losses on sales of property, plant and equipment 125 144 Non-recurring insurance gain -- (16,180) Changes in assets and liabilities: (Increase) decrease in receivables 1,948 (3,552) (Increase) decrease in inventories 5,707 (15,439) (Increase) decrease in deferred tax benefits (4,509) 2,947 Increase in cash value of Company-owned life insurance (472) (143) Increase in goodwill and intangible assets (8,919) -- Decrease in other assets (2,180) (3,962) Increase in accounts payable 2,127 2,358 Increase in employee compensation and benefits 4,135 1,892 Increase in Federal and state income taxes 23,152 12,297 Increase in other liabilities 23,308 10,773 ------- ------- Net cash provided by operating activities 81,415 28,903 ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of investment securities: Held-to-maturity (1,600,835) (1,550,024) Available-for-sale (24,578) (3,839) Proceeds from maturity of investment securities: Held-to-maturity 1,554,921 1,507,950 Available-for-sale 12,990 -- Proceeds from sale of available-for-sale investment securities 10,778 2,716 Acquisition of retail companies, net of $1,262 cash acquired (22,218) -- Purchases of property, plant and equipment (3,831) (8,403) ------- ------ Net cash used in investing activities (72,773) (51,600) ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Dividends to shareholders (5,766) (6,101) Proceeds from exercise of stock options 43 6,534 ------- ------- Net cash provided by (used in) financing activities (5,723) 433 ------- ------- Foreign currency translation adjustment (756) 406 ------- ------- Increase (decrease) in cash 2,163 (21,858) Cash at beginning of period 28,143 37,890 ------ ------ Cash at end of period $30,306 $16,032 ======= ====== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for - Interest $5,349 $884 Income taxes 2,130 1,094 ======== ===== DETAILS OF ACQUISITIONS: Fair value of assets $79,493 -- Liabilities assumed 36,133 -- -------- ------ Acquisitions price 43,360 -- Less cash acquired (1,262) -- Less Common stock issued for acquisitions (19,880) -- ------- ------ Net cash paid for acquisitions $22,218 -- ======= ====== NON-CASH FINANCING ACTIVITIES: Common stock issued for acquisitions $19,880 -- ======= ======= 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 Common Stock Compre- Total Number Capital Retained hensive Shareholders' of Shares Amount Surplus Earnings Income Equity Balance April 26, 1998 31,451 $31,451 $54,340 $291,696 $(1,461) $376,026 Add (deduct) - Net income -- -- -- 30,225 -- 30,225 Other comprehensive income -- -- -- -- (866) (866) Cash dividends declared on Common stock -- -- -- (5,766) -- (5,766) Stock options exercised (including related tax benefits) 1 1 42 -- -- 43 Stock issued for acquisitions 582 582 19,298 -- -- 19,880 ---- ---- ------ ------ ----- ------ Balance July 26, 1998 32,034 $32,034 $73,680 $316,155 $(2,327) $419,542 ====== ======= ======= ======== ======= ======== See accompanying notes to financial statements FLEETWOOD ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JULY 26, 1998 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 26, 1998. 2) Industry Segment Information Information with respect to industry segments for the periods ending July 26, 1998 and July 27, 1997 is shown below (amounts in thousands): 13 Weeks Ended 13 Weeks Ended July 26, 1998 July 27, 1997 OPERATING REVENUES: Manufactured housing - Manufacturing $400,412 $366,649 Less: intercompany (1,484) -- -------- ------ 398,928 366,649 Retail 1,878 -- -------- ------- 400,806 366,649 Recreational vehicles 428,766 350,693 Supply operations 10,583 11,112 $840,155 $728,454 ======== ======== OPERATING INCOME: Manufactured housing $25,496 $ 15,830 Housing - retail (1,094) -- Recreational vehicles 26,637 16,113 Supply operations 3,583 3,392 Corporate and other* (4,371) 13,739** ------ -------- $50,251 $ 49,074 ======= ======== * Including adjustments and eliminations. ** Includes non-recurring insurance gain of $16.2 million. 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. Diluted earnings per share includes the effect of potential shares outstanding from dilutive stock options and dilutive preferred securities. After-tax distributions on preferred securities are added to net income to arrive at earnings used in the diluted earnings per share calculation. 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 26, 1998 July 27, 1997 Weighted Weighted Average Average Income Shares Income Shares Basic earnings per share	$30,225	 31,621 $30,942 35,843 Effect of dilutive securities: Stock options -- 720 -- 825 Preferred securities	 2,781	 5,90 --	-- Diluted earnings per share	$33,006 38,242 $30,942 36,668 ======= ====== ======= ====== 4) Accumulated Other Comprehensive Income Balances The Company has adopted SFAS 130 "Reporting Comprehensive Income" which establishes standards for reporting and displaying comprehensive income and its components in a full set of general purpose financial statements. The following reflects the activity in the accumulated other comprehensive income balance for the period (amounts in thousands): Foreign Unrealized Accumulated Other Currency Gains on Comprehensive Items Securities Income Beginning balance $(1,759) $298 $(1,461) Current period change (756) (110) (866) Ending balance $(2,515) $188 $(2,327) ======= ==== ======= FLEETWOOD ENTERPRISES INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Amounts in thousands) The following is an analysis of changes in key items included in the consolidated statements of income for the 13-week period ended July 26, 1998 compared to the 13-week period ended July 27, 1997. Thirteen Weeks Ended July 26, 1998 Increase % (Decrease) Change Sales $111,701 15.3% Cost of products sold 71,580 12.0 Gross profit 40,121 30.0 Selling expenses 16,089 34.3 General and administrative expenses 22,855* 60.7 Operating expenses 38,944* 46.0 Operating income 1,177* 2.4 Other income (expense) (1,548) (121.9) Income before taxes (371) (.7) Provision for income taxes 346 1.8 Net income $ (717) (2.3)% ========= ===== [/TABLE] * Prior year included $16.2 million non-recurring insurance gain which reduced operating costs and increased operating income. Excluding the insurance gain from prior year results, percentage increases would have been 12.4% for general and administrative expenses 22.6% for operating expenses and 52.8% for operating income. Current Quarter Compared to Same Quarter Last Year Consolidated Results: Net income for the first quarter of fiscal 1999 was $30.2 million or 86 cents per share on a diluted basis compared to $30.9 million or 84 cents per diluted share a year ago. Prior year earnings included a non-recurring gain of $10.4 million or 28 cents per share from certain insurance transactions. Excluding the insurance gain from prior year results, earnings per share improved 54% as a result of operating gains from both manufactured housing and recreational vehicles. In last year's first quarter, the Company recorded a change in estimate of products liability insurance reserves and concurrently lowered its self- insured retention (i.e. deductible) by placing a portion of its insurance risk in the commercial insurance market. The net effect of these actions was an increase in operating income of $16.2 million and an improvement to net earnings of $10.4 million or 28 cents per share. Higher sales of both manufactured housing and recreational vehicles led to a 15% increase in consolidated revenues to a record $840.2 million from $728.5 million in last year's first quarter. Both of the Company's core manufacturing businesses posted strong earnings gains for the quarter primarily as a result of record sales and improved operating efficiencies. Gross profit margin for fiscal 1999 rose to 20.7% from 18.4% last year as both housing and recreational vehicles experienced margin improvements. Operating expenses rose 46.0% to $123.5 million, and also increased as a percentage of sales from 11.6% to 14.7%. Excluding the effect of the non- recurring $16.2 million insurance gain from prior year results, operating expenses were up 23% from an adjusted $100.8 million and 13.8% of sales last year. As a percentage of sales, selling expenses were up from 6.4% a year ago to 7.5%, while general and administrative expenses, adjusted to exclude the insurance gain, declined from 7.4% to 7.2% this year. Selling expenses increased 34% to $63.0 million, primarily reflecting higher costs for advertising, sales compensation and product warranty and service. General and administrative expenses, as adjusted, were up 12% to $60.5 million, reflecting higher management incentive compensation stemming from improved profits. Non-operating items totaled a loss of $278,000 in the July quarter compared to income of $1.3 million a year ago. The loss resulted from the $4.4 million distribution on convertible preferred securities, which included amortization of related underwriting costs. Income from investments of $5.1 million was more than double last year's $2.3 million, largely due to the significantly higher cash balances that were available for investment this year. The large balance of invested funds this year mainly resulted from a combination of cash flow from operations, proceeds from the convertible preferred securities offering and the exercise of stock options. The effective income tax rate rose to 39.5% in the first quarter compared to 38.5% a year ago due to an increase in state tax accruals. Last year, the reinsurance gain was taxed at a lower rate for state tax purposes versus a typically higher rate for manufacturing income. Manufactured Housing: Manufactured housing revenues rose nine percent to a record $398.9 million on a five percent gain in unit sales to 17,158 homes. A higher mix of multi-section homes, which rose from 55% to 56% of sales, resulted in a six percent increase in sections and a higher realization per home sold. First quarter operating income increased 61% from $15.8 million to $25.5 million, and also rose as a percentage of sales from 4.3% to 6.4%. The higher profits resulted from higher sales volume, along with improved gross profit margins due to selling price increases and lower material costs. Recreational Vehicles: Recreational Vehicle sales in the first quarter surged 22% to a record $428.8 million compared to $350.7 million in last year's first period. A rising RV market and Fleetwood market share gains led to the strong sales performance. Motor home sales increased 25% to $259.4 million, which represented the highest first quarter revenues ever recorded by the motor home division. This reflects a 14% increase in motor home shipments to 3,780 units. Both towable divisions produced record first quarter sales with travel trailer sales rising 17% to $139.9 million and folding trailer revenues increasing 23% to $29.5 million. Healthy unit volume gains were posted by both towable divisions, with travel trailers rising 19% to 10,153 and folding trailers up 13% to 5,324. RV operating income climbed 65% to $26.6 million as a result of the increase in sales and higher gross margins. As a percentage of sales, operating income rose to 6.2% from 4.6% a year ago. RV results were particularly driven by improved profitability from the Company's motor home division which made a significant recovery from operational difficulties encountered last year in connection with a plant production realignment initiative. All three RV divisions, however, produced better margins than were experienced last year, primarily as a result of productivity gains and raw material cost reductions. Supply Operations: The Company's supply group recorded sales of $10.6 million in the July quarter compared to $11.1 million in last year's similar period. Operating income increased six percent to $3.6 million, despite the decline in outside sales. Retail Housing Operations: The Company's retail housing division posted first quarter sales of $1.9 million generated from three sales centers owned and operated during the quarter. Fleetwood's previously announced acquisition of HomeUSA, Inc., the nation's largest independent retailer of manufactured homes, was completed on August 10, 1998, and thus, didn't have an impact on first quarter results. This acquisition, combined with five smaller acquisitions completed since June 1998, resulted in the Company having a total of 116 retail sales centers nationwide as of August 31, 1998 and an estimated full-year sales volume of more than $380 million. Some portion of future manufactured housing revenues will be eliminated in consolidation because homes sold by Fleetwood manufacturing centers to Company-owned retailers cannot be recognized as sales on a consolidated basis until homes are sold at retail. Based on the fact that the majority of retail sales are expected to be Fleetwood product, the Company estimates that approximately 50% of incremental retail volume will be eliminated in consolidation against future manufacturing revenues. For financial reporting purposes, the retail division is on a calendar quarter basis. Accordingly, none of the five smaller acquisitions had any income statement impact in the Company's first quarter, despite the fact that the investment was included in the July 1998 balance sheet. Liquidity and Capital Resources The Company generally relies upon internally generated cash flows to satisfy working capital needs and to fund capital expenditures. Cash generated from operations improved to $81.4 million compared to $28.9 million last year as a result of profitable operations and a reduction in working capital investment. Cash totaling $22.2 million was used for the acquisition of five retail housing companies during the first quarter. This was in addition to $19.9 million in Common stock issued as part of the consideration. The retail acquisitions resulted in some significant changes in assets and liabilities as of July 26, 1998, which included $30.6 million for inventories, $40.5 million for goodwill and $28.7 million for floor plan financing liability. Cash outlays in the current year included $5.8 million in dividends to shareholders and $3.8 million for capital expenditures. This compares with $6.1 million and $8.4 million, respectively, last year. Year 2000 Compliance The Company is dependent on a cluster of centralized computers to provide data in support of vital company-wide operational and accounting functions. Many of the computer routines used to generate this data were programmed in-house, following the common practice of using only two digits to designate a year. As a consequence, as we approach the year 2000, programs with date-related logic would not be able to distinguish between the years 1900 and 2000, potentially causing software and hardware to fail, generate erroneous calculations or present information in an unusable form. In recognition of this potential, the Company launched a "Year 2000" conversion project in February 1996 to correct and fully test all offending computer code by mid-1998. At this date, the project is substantially complete and in a testing phase. It is expected that all systems will be Year 2000 compliant and operational by the early part of calendar 1999. Given these efforts, management does not anticipate any appreciable impact on company operations consequent to the use of the Company's computer systems in the new millennium. The estimated amount the Company plans to spend on the year 2000 project will not have a material effect on results of operations, liquidity and capital resources. Other The Financial Accounting Standards Board ("FASB") Statement No. 130, "Reporting Comprehensive Income," was adopted by the Company in the first quarter. This statement establishes standards for the reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general-purpose financial statements. FASB Statement No. 131, "Disclosures About Segments of an Enterprise and Related Information," was also adopted this quarter. This statement establishes standards for the way that companies report information about operating segments in annual financial statements, and requires that companies report selected information about operating segments in interim financial reports issued to shareholders. PART II OTHER INFORMATION There are no other items to be reported or exhibits to be filed. 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. ____________________________ Paul M. Bingham Senior Vice President - Finance and Chief Financial Officer August 31, 1998 FLEETWOOD ENTERPRISES, INC. CONSOLIDATED FINANCIAL INFORMATION FINANCIAL DATA SCHEDULE [SROS] NYSE [SROS] PCX