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 October 25, 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 October 25, 1998
_______________________ _____________________________
Common stock, $1 par value 34,709,980 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 October 25, 1998 and October 26, 1997, and the
balances as of October 25, 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 October 25, 1998, and the related condensed consolidated statements of
income for the thirteen and twenty-six week periods ended October 25, 1998
and October 26, 1997, respectively, the condensed consolidated statements of
cash flows for the twenty-six week periods ended October 25, 1998 and
October 26, 1997, and the condensed consolidated statement of changes in
shareholders' equity for the twenty-six week period ended October 25, 1998.
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 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
November 23, 1998
FLEETWOOD ENTERPRISES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (CONDENSED)
(Amounts in thousands except per share data)
(UNAUDITED)
<TABLE>
13 Weeks 13 Weeks 26 Weeks 26 Weeks
Ended Ended Ended Ended
Oct. 25, Oct. 26, Oct. 25, Oct. 26,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net sales:
Manufacturing $853,481 $769,089 $1,693,242 $1,497,543
Retail 87,001 -- 88,879 --
Less: intercompany (42,642) -- (44,126) --
-------- -------- ---------- ----------
897,840 769,089 1,737,995 1,497,543
Cost of products sold 702,942 617,909 1,369,307 1,212,694
-------- ------- --------- ---------
Gross profit 194,898 151,180 368,688 284,849
Operating expenses 140,037 106,730 263,576 191,325
------- -------- -------- ---------
Operating income 54,861 44,450 105,112 93,524
Other income (expense):
Investment income 4,111 2,580 9,206 4,873
Interest on long-term
debt (924) (895) (1,792) (1,774)
Interest on inventory
floor plan financing (1,642) -- (1,642) --
Distribution on preferred
securities (4,380) -- (8,760) --
Other (77) (273) (202) (417)
------- ------- ------- -------
(2,912) 1,412 (3,190) 2,682
------- ------- ------- -------
Income before provision for
income taxes 51,949 45,862 101,922 96,206
Provision for income taxes (20,838) (17,738) (40,586) (37,140)
------- -------- -------- --------
Net income $31,111 $28,124 $61,336 $59,066
======= ======= ======= =======
Net income per Common share:
Basic EPS $.92 $.78 $1.87 $1.65
Diluted EPS .84 .77 1.70 1.61
======= ======= ======= =======
Weighted average Common shares:
Basic 33,896 35,948 32,759 35,896
Diluted 40,257 36,514 39,274 36,584
======= ======= ======= =======
Dividends declared per share of
Common stock outstanding $.18 $.17 $.36 $.34
======= ======= ======= =======
</TABLE>
See accompanying notes to financial statements.
FLEETWOOD ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(UNAUDITED)
(Amounts in thousands)
<TABLE>
13 Weeks 13 Weeks 26 Weeks 26 Weeks
Ended Ended Ended Ended
Oct. 25, Oct. 26, Oct. 25, Oct. 26,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net income $31,111 $28,124 $61,336 $59,066
------- ------- ------- -------
Other comprehensive income (loss):
Foreign currency translation adjustment-
Amount before income
taxes (1,020) (172) (2,357) 547
Income taxes 444 75 1,025 (238)
------- ------ ------ -------
Net of income taxes (576) (97) (1,332) 309
------- ------ ------ --------
Unrealized loss on securities-
Amount before income
taxes (1,316) (52) (1,498) 655
Income taxes 480 19 553 (239)
------- ------ ------ -------
Net of income taxes (836) (33) (945) 416
------- ------- ------ -------
(1,412) (130) (2,277) 725
------- ------- ------ -------
Comprehensive income $29,699 $27,994 $59,059 $59,791
======= ======= ======= =======
</TABLE>
See accompanying notes to financial statements.
FLEETWOOD ENTERPRISES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONDENSED)
(Unaudited)
<TABLE>
ASSETS (Amounts in thousands)
October 25, April 26,
1998 1998
<S> <C> <C>
Current assets:
Cash $ 35,226 $ 28,143
Marketable investments 219,298 255,919
Receivables 219,118 195,388
Inventories 232,985 153,746
Deferred tax benefits - current 33,281 30,212
Other current assets 29,712 19,443
-------- ---------
Total current assets 769,620 682,851
Property, plant and equipment 287,135 277,211
Marketable investments maturing after
one year 21,055 21,660
Deferred tax benefits 50,865 45,042
Cash value of Company-owned life insurance 64,299 63,355
Goodwill and intangible assets 225,227 13,745
Other assets 36,576 25,616
------- ---------
$1,454,777 $1,129,480
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 134,168 $ 118,481
Employee compensation and benefits 81,920 74,435
Federal and state taxes on income 10,723 8,800
Retail flooring liability 84,870 --
Other current liabilities 169,911 124,086
---------- ----------
Total current liabilities 481,592 325,802
Deferred compensation and
retirement benefits 66,764 58,272
Insurance reserves 27,861 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 34,710,000 at
October 25, 1998 and 31,451,000 at
April 26, 1998 34,710 31,451
Capital surplus 185,526 54,340
Retained earnings 319,562 291,696
Accumulated other comprehensive
income (loss) (3,738) (1,461)
-------- --------
536,060 376,026
-------- --------
$1,454,777 $1,129,480
========== ==========
See accompanying notes to financial statements.
</TABLE>
FLEETWOOD ENTERPRISES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONDENSED)
(UNAUDITED)
(Amounts in thousands)
<TABLE>
26 Weeks 26 Weeks
Ended Ended
October 25, October 26,
1998 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $61,336 $59,066
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation expense 13,237 13,581
Amortization of intangibles and goodwill 998 130
Losses on sales of property, plant and equipment 202 417
Non-recurring insurance gain -- (16,180)
Changes in assets and liabilities:
(Increase) decrease in receivables (8,459) 5,602
(Increase) decrease in inventories 7,709 (2,564)
(Increase) decrease in deferred tax benefits (10,215) 1,504
Increase in cash value of Company-owned
life insurance (944) (286)
Increase in goodwill and intangible assets (9,044) (479)
Increase in other assets (5,065) (4,183)
Increase (decrease) in accounts payable (2,752) 10,868
Increase in employee compensation
and benefits 15,977 10,068
Increase in Federal and state income taxes 1,923 614
Increase in other liabilities 43,624 13,744
------- --------
Net cash provided by operating activities 108,527 91,902
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment securities:
Held-to-maturity (3,040,240) (3,533,322)
Available-for-sale (49,090) (10,443)
Proceeds from maturity of investment securities:
Held-to-maturity 3,068,084 3,444,498
Available-for-sale 36,888 2,853
Proceeds from sale of available-for-sale
investment securities 20,639 7,492
Acquisition of retail companies, net of $7,630
cash acquired (107,782) --
Purchases of property, plant and equipment, net (9,727) (13,675)
------- -------
Net cash used in investing activities (81,228) (102,597)
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends to shareholders (12,027) (12,212)
Proceeds from exercise of stock options 16,831 7,431
Repurchase of Common stock (23,688) --
------- --------
Net cash used in financing activities (18,884) (4,781)
------- --------
Foreign currency translation adjustment (1,332) 309
------- --------
Increase (decrease) in cash 7,083 (15,167)
Cash at beginning of period 28,143 37,890
------ -------
Cash at end of period $35,226 $22,723
======= ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for -
Interest $7,998 $1,776
Income taxes 46,952 31,673
======== ======
DETAILS OF ACQUISITIONS:
Fair value of assets $341,762 --
Liabilities assumed 106,491 --
-------- ------
Acquisitions price 235,271 --
Less cash acquired (7,630) --
Less Common stock issued for acquisitions (119,859) --
------- ------
Net cash paid for acquisitions $107,782 --
======= ======
NON-CASH FINANCING ACTIVITIES:
Common stock issued for acquisitions $119,859 --
======= =======
See accompanying notes to financial statements.
</TABLE>
FLEETWOOD ENTERPRISES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES
IN SHAREHOLDERS' EQUITY (CONDENSED)
(UNAUDITED)
(Amounts in thousands)
<TABLE>
Accumulated
Other
Common Stock Compre- Total
Number Capital Retained hensive Shareholders'
of Shares Amount Surplus Earnings Income Equity
<S> <C> <C> <C> <C> <C> <C>
Balance April 26,
1998 31,451 $31,451 $54,340 $291,696 $(1,461) $376,026
Add (deduct) -
Net income -- -- -- 61,336 -- 61,336
Other comprehensive
income -- -- -- -- (2,277) (2,277)
Cash dividends
declared on
Common stock -- -- -- (12,027) -- (12,027)
Stock options exercised
(including related tax
benefits) 873 873 15,958 -- -- 16,831
Stock
repurchased (718) (718) (1,527) (21,443) -- (23,688)
Stock issued for
acquisitions 3,104 3,104 116,755 -- -- 119,859
------ ----- ------- ------ ----- -------
Balance October 25,
1998 34,710 $34,710 $185,526 $319,562 $(3,738) $536,060
====== ======= ======= ======== ======= ========
</TABLE>
See accompanying notes to financial statements
FLEETWOOD ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 25, 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
October 25, 1998 and October 26, 1997 is shown below:
<TABLE>
13 Weeks 13 Weeks 26 Weeks 26 Weeks
Ended Ended Ended Ended
Oct. 25, Oct. 26, Oct. 25, Oct. 26,
1998 1997 1998 1997
-------- --------- --------- --------
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Manufactured housing -
Manufacturing $409,608 $390,652 $ 810,020 $ 757,301
Retail 87,001 -- 88,879 --
Less: intercompany (42,642) -- (44,126) --
-------- -------- --------- --------
453,967 390,652 854,773 757,301
-------- -------- -------- --------
Recreational vehicles 432,709 366,654 861,475 717,347
Supply operations 11,164 11,783 21,747 22,895
-------- -------- -------- ---------
$897,840 $769,089 $1,737,995 $1,497,543
======== ======== ========== ==========
OPERATING INCOME:
Manufactured housing $20,834* $25,309 $46,330* $41,139
Housing - retail 2,960 -- 1,866 --
Recreational vehicles 30,253 17,944 56,890 34,057
Supply operations 4,113 3,860 7,696 7,252
Corporate and other (3,299) (2,663) (7,670) 11,076**
------- ------- ------- -------
$54,861 $44,450 $105,112 $93,524
======= ======= ======== =======
</TABLE>
* After $5,173 deduction for intercompany profit in inventory
elimination.
** 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):
<TABLE>
13 Weeks Ended 13 Weeks Ended
October 25, 1998 October 26, 1997
Weighted Weighted
Average Average
Income Shares Income Shares
<S> <C> <C> <C> <C>
Basic earnings per
share $31,111 33,896 $28,124 35,948
Effect of dilutive securities:
Stock options -- 460 -- 566
Preferred securities 2,780 5,901 -- --
------- ------ ------- ------
Diluted earnings per
share $33,891 40,257 $28,124 36,514
======= ====== ======= ======
</TABLE>
26 Weeks Ended 26 Weeks Ended
October 25, 1998 October 26, 1997
<TABLE>
Weighted Weighted
Average Average
Income Shares Income Shares
<S> <C> <C> <C> <C>
Basic earnings per
share $61,336 32,759 $59,066 35,896
Effect of dilutive securities:
Stock options -- 614 -- 688
Preferred securities 5,561 5,901 -- --
------- ------ ------- ------
Diluted earnings per
share $66,897 39,274 $59,066 36,584
======= ====== ======= ======
</TABLE>
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):
<TABLE>
Foreign Unrealized Accumulated Other
Currency Gains on Comprehensive
Items Securities Income (loss)
<S> <C> <C> <C>
Beginning balance $(1,759) $ 298 $(1,461)
Current period change (1,332) (945) (2,277)
------- ----- -------
Ending balance $(3,091) $(647) $(3,738)
======= ===== =======
</TABLE>
5) Accounting Period
The Company's fiscal quarters end in July, October, January and
April. Although the second fiscal quarter ended on October 25,
1998, the Company has included in its consolidated financial
statements the results of Fleetwood Retail Corp. (FRC), its wholly
owned housing retail subsidiary, through September 30, 1998. FCR
follows a calendar quarter accounting period.
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 and 26-week periods ended
October 25, 1998.
<TABLE>
13 Weeks Ended 26 Weeks Ended
October 25, 1998 October 25, 1998
Increase % Increase %
(Decrease) Change (Decrease) Change
<S> <C> <C> <C> <C>
Sales $128,751 16.7% $240,452 16.1%
Cost of products sold 85,033 13.8 156,613 12.9
-------- ---- -------- ----
Gross profit 43,718 28.9 83,839 29.4
Selling expenses 20,959 41.9 37,048 38.2
General and administrative
expenses 12,348 21.8 35,203 37.3
-------- ---- -------- ----
Operating expenses 33,307 31.2 75,251 37.8
-------- ---- -------- ----
Operating income 10,411 23.4 11,588 12.4
Other income (expense) (4,324) (306.2) (5,872) (218.9)
Income before taxes 6,087 13.3 5,716 5.9
Provision for income taxes 3,100 17.5 3,446 9.3
Net income $2,987 10.6% $2,270 3.8%
======== ==== ======= ===
</TABLE>
* Prior year's first quarter 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 17.2% for general and administrative expenses,
27.0% for operating expenses and 35.9% for operating income.
Current Quarter Compared to Same Quarter Last Year
Consolidated Results:
Net income for the second quarter increased 11% to $31.1 million compared to
$28.1 million last year, and diluted earnings per share rose 9% to 84 cents
from 77 cents a year ago. The earnings gain primarily reflects higher
recreational vehicle profits, mainly driven by improved motor home results.
Record second quarter revenues for both manufactured housing and
recreational vehicles, along with the addition of retail housing sales, led
to a 17% increase in revenues to $897.8 million from $769.1 million last
year.
Manufacturing operating margin was significantly higher because of a 69%
gain in RV group operating profit. A strong performance by the Company's
motor home division, which was struggling a year ago with a plant production
realignment initiative, led to the favorable results.
Operating expenses climbed 31 % to $140.0 million, and also increased as a
percentage of sales from 13.9 % to 15.6%. Selling expenses increased 42%
to $71.0 million, primarily as a result of higher costs for advertising,
sales compensation, product warranty and service, as well as the addition of
the retail housing operation. The retail business, which did not exist a
year ago, accounted for about one-third of the rise in selling costs. As a
percentage of sales, selling expenses increased from 6.5% to 7.9%. General
and administrative expenses increased 22% to $69.0 million, and also rose as
a percentage of sales from 7.4% to 7.7%. Higher costs were incurred for
incentive compensation, which is tied to profitability, and the addition of
the newly-formed housing retail division added approximately $9 million to
costs.
Non-operating items totaled a net expense of $2.9 million compared to income
of $1.4 million a year ago. The $4.3 million swing primarily resulted from
a $4.4 million distribution on convertible preferred securities and $1.6
million of interest expense on retail inventory floor plan financing,
neither of which existed a year ago. These items were partially offset by a
$1.5 million increase in investment income resulting from higher invested
balances.
The effective tax rate rose to 40.1% compared to 38.7% last year. The
increase primarily reflects the impact of goodwill amortization, which is
not deductible for tax purposes.
Manufactured Housing:
Factory sales of manufactured homes, including sales of $42.6 million to the
Company's retail housing division, rose 5% in the second quarter to nearly
$410 million. Factory shipments of 17,235 homes were virtually identical to
last year's volume.
The manufactured housing group generated operating income of $20.8 million,
net of a $5.2 million reduction for intercompany profit in homes sold to the
Company's retail operations that were still in inventory at the end of the
quarter. Excluding the impact of the intercompany profit elimination,
operating margin was 6.3% of sales versus 6.5% last year.
Recreational Vehicles:
Paced by the motor home division, recreational vehicle sales increased 18%
to $433 million. Motor home revenues jumped 23% to $266 million, an all-
time high for the second quarter, primarily on the strength of sales of
Fleetwood's large Class A products. Motor home unit volume rose 15% to
3,617 units, with Class A models outselling Class C's by a margin of five to
one. The Company also posted record second quarter sales of towable RV
products, with travel trailers rising 10% to $135 million and folding
trailers up 12% to $32 million. Unit volume increased 13% for travel
trailers and 8% for folding trailers to 9,428 and 5,899, respectively.
Operating income for the recreational vehicle group rose 69% to $30.3
million, reflecting the 18% sales increase and higher margins generated from
improved operating performance. Gross profit margins, which were impacted
by motor home inefficiencies a year ago, improved from 17.2% to 19.8%. RV
group operating margin was up from 4.9% to 7.0% of sales.
Supply Operations:
The Company's supply group generated second quarter revenues of just over
$11 million compared to nearly $12 million in last year's second quarter.
Operating income of $4.1 million was 7% ahead of the prior year.
Housing Retail Operations:
Fleetwood's new housing retail division, which was not in operation a year
ago, contributed $87.0 million in revenues on sales of 2,260 homes in the
second quarter. Sales of Fleetwood manufactured homes represented
approximately 80% of the retail dollar volume. Operating income, excluding
inventory floor plan interest expense, amounted to $3.0 million or 3.4% of
sales.
Current Year-To-Date Compared To Same Period Last Year
Consolidated Results:
Earnings for the first six months of fiscal 1999 increased 4% to $61.3
million compared to $59.1 million for the similar period last year.
Diluted earnings per share rose 6% to $1.70 versus $1.61 last year. Last
year's first half included a non-recurring insurance gain of $10.4 million
or 28 cents per share attributable to a change in estimate of products
liability insurance reserves. Without this gain, earnings last year would
have been $48.7 million or $1.33 per share for the first half.
Sales for the six months rose 16% to an all-time high of $1.74 billion
compared to $1.50 billion in last year's first half. This resulted from a
20% rise in RV sales, a 7% gain in housing volume and the added sales
volume from the newly-formed retail division.
All of Fleetwood's manufacturing segments generated higher profits in the
first half which, excluding last year's insurance gain, led to a 26%
improvement in comparable earnings per share. Despite the strong profit
performance, the ramping up of the housing retail operations restrained
overall operating margin and earnings per share in both the second quarter
and first half. In addition, first half operating income for the
manufactured housing group was reduced $5.2 million due to the elimination
of intercompany profit on homes sold to Fleetwood retail stores that were
in retail inventory at the end of the reporting period.
Operating expenses of $263.6 million were up 38% from the same period a
year ago, and also increased as a percentage of sales from 12.8% to 15.2%.
Selling expenses rose 38% to $134.0 million for the reasons discussed
previously, which included the addition of the retail business and higher
costs for advertising, sales compensation and product warranty and service.
As a percentage of sales, selling expenses increased from 6.5% to 7.7%.
General and administrative expenses increased 37% to $129.6 million, and
rose from 6.3% to 7.5% of sales. The increase was primarily caused by
higher incentive compensation, related to the increase in profits, and
costs from the new retail operations as mentioned earlier.
Non-operating items totaled a net expense of $3.2 million compared to
income of $2.7 million a year ago. The change is due to expenses which did
not exist a year ago, specifically an $8.8 million distribution on
convertible preferred securities and $1.6 million of interest expense on
retail inventory floor plan financing. These items were partially offset
by a $4.3 million increase in investment income generated from higher
invested balances.
The effective tax rate rose to 39.8% compared to 38.6% last year. The
increase primarily reflects higher state income tax accruals and the impact
of goodwill amortization, which is not deductible for tax purposes.
Manufactured Housing:
For the first six months of fiscal 1999, factory sales of manufactured
housing, including sales of $44.1 million to the Company's retail housing
division, rose 7% to $810 million. Unit shipments were up 2% to 34,433
homes.
Housing group operating income of $46.3 million excludes $5.2 million for
intercompany profit in ending inventory as discussed previously. Excluding
the impact of the intercompany profit elimination, housing group operating
profit rose 26% for the first half, and operating margin increased from
5.4% to 6.4% of sales. This improvement mainly resulted from higher sales
volume, along with higher gross margins due to selling price increases and
lower raw material costs.
Recreational Vehicles:
RV revenues for the first six months of fiscal 1999 were up 20% to $862
million with all three RV divisions posting record first half sales. Motor
home sales increased 24% to $525 million on a 14% rise in unit volume to
7,397 units. Travel trailer sales rose 13% to $275 million and folding
trailer sales of $62 million were 17% ahead of the prior year. Travel
trailer shipments rose 16% to 19,581 units and folding trailer shipments
increased 10% to 11,223 units.
On the significantly higher volume, operating income for the RV group was up
a strong 67% over the prior year to $56.9 million, and operating margin
improved from 4.7% to 6.6% of sales. 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:
The Company's supply group generated first half revenues of nearly $22
million compared to $23 million for the similar period last year. Operating
income rose 6% to $7.7 million, despite the decline in outside sales.
Housing Retail Operations:
The Company's newly-formed housing retail division posted first half sales
of $89 million and operating income of $1.9 million (excluding interest
expense of $1.6 million on inventory floor plan financing). Housing retail
shipments totaled 2,300 units. 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 did not have a full three
months impact on second quarter results. This acquisition, combined with
eight smaller acquisitions completed since June 1998, resulted in the
Company having a total of 134 retail sales centers nationwide as of October
25, 1998 and an estimated full-year sales volume approaching $500 million.
A portion of manufactured housing revenues is 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. For financial reporting purposes, the retail division
is on a calendar quarter basis. Accordingly, consolidated results include
the effect of retail operations through September 30, 1998.
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 $108.5 million compared to $91.9 million last year.
Cash totaling $107.8 million was used for the acquisition of retail housing
companies, the largest of which was HomeUSA. This was in addition to $119.9
million in Common stock issued as part of the consideration for the
acquisitions. The acquisitions resulted in several significant changes in
assets and liabilities as of October 25, 1998, including $85.2 million for
inventories, $223.2 million for goodwill and $84.9 million for inventory
floor plan financing liability.
Cash outlays in the current year included $12.0 million in dividends to
shareholders, $9.7 million for capital expenditures and $23.7 million for
repurchases of the Company's Common stock. Dividends last year totaled
$12.2 million and capital expenditures were $13.7 million. There were no
repurchases of Common stock in last year's similar period.
Year 2000 Compliance
Fleetwood 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 processes used to generate this data were programmed in-house
following the common practice of using only two digits to designate a year.
Other software purchased by the Company was written using the same convention.
As the year 2000 approaches, programs with such date-related logic will 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 project in February 1996 to identify and correct
all offending computer code that was written internally and to upgrade or
replace any purchased software that was non-compliant. At this date, the
project, including thorough testing and certification, is substantially
complete. The tasks remaining relate to the implementation of vendor upgrades
and replacements of purchased software and are expected to be completed by
mid-1999.
The Company has relationships with various third parties on whom it relies to
provide goods and services necessary for the manufacture and distribution of
its products. These include suppliers, vendors and financial institutions.
As part of its determination of year 2000 readiness, the Company has
identified material relationships with third party vendors and is in the
process of assessing the status of their compliance through the use of
questionnaires. We expect this process will be complete by the first quarter
of 1999.
The Company sells its products mostly through numerous independent retailers,
none of which account for a material part of the Company's total sales. Due
to the broad diversification of these retailers, the risk associated with
potential business interruptions as a result of year 2000 non-compliance is
not considered significant.
The total cost of the Company's year 2000 efforts, including hardware,
software, related consulting costs and assessment of third party compliance is
estimated to be about $1.2 million, and is not material to the Company's
financial statements.
Senior management has been active in the oversight of the year 2000 project,
with the objective of minimizing the potential impact on the Company's
operations. As part of this effort the Company has begun the process of
assessing potential year 2000 failures and designing contingency plans to
mitigate the effect of such occurrences. This effort is expected to be
complete by mid-1999.
It is anticipated that the Company's year 2000 project will reduce the risk of
significant business interruptions, but there is no assurance that this
outcome will be achieved. Failure to detect and correct all internal
instances of non-compliance or the inability of third parties to achieve
timely compliance could result in the interruption of normal business
operations which could, depending on its duration, have a material adverse
effect on the Company's financial statements.
Other
The Financial Accounting Standards Board ("FASB") Statement No. 130,
"Reporting Comprehensive Income," was adopted by the Company in fiscal 1999.
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 during the first half of fiscal 1999. 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
Item 4. Submission of Matters to a Vote of Security Holders
At Fleetwood's Annual Meeting of Shareholders held on September 15, 1998, the
following directors were elected to three-year terms to Fleetwood's Board of
Directors: Nelson W. Potter and Thomas B. Pitcher. The following directors
continued in office after the meeting, but were not elected at the meeting:
Glenn F. Kummer, Dr. Douglas M. Lawson, Walter F. Beran Thomas A. Fuentes, Dr.
James L. Doti and Andrew Crean.
The shareholder votes on the elections were as follows:
For Withheld Vote
Nelson W. Potter 27,606,458 512,460
Thomas B. Pitcher 27,313,709 805,209
In addition, the shareholders approved amendments to the Company's 1992 Non-
Employee Director Stock Option Plan, adopted by the Board of Directors on June
9, 1998, to (i) increase the number of authorized shares and (ii) increase the
annual automatic award to each non-employee director. The vote on this
proposal was as follows:
For: 25,787,845
Against: 2,143,953
Withheld Vote: 187,120
Item 6(b). Reports on Form 8-K
During the second fiscal quarter, the Company filed the following Form 8-K
reports:
Date Subject
August 4, 1998 Class action lawsuits and acquisition
of manufactured housing retailers.
August 11, 1998 Completion of HomeUSA acquisition.
September 24, 1998 Adoption of Stockholder Rights Plan,
share repurchase authorization and
declaration of regular dividend.
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
December 1, 1998
FLEETWOOD ENTERPRISES, INC.
CONSOLIDATED FINANCIAL INFORMATION
FINANCIAL DATA SCHEDULE
[SROS] NYSE
[SROS] PSE
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