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 31, 1999
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 31, 1999
_______________________ _____________________________
Common stock, $1 par value 32,653,108 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 31, 1999 and October 25, 1998, and the
balances as of October 31, 1999 and April 25, 1999. 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 31, 1999, and the related condensed consolidated statements of
income for the fourteen and twenty-seven week periods ended October 31, 1999
and the thirteen and twenty-six week periods ended October 25, 1998, the
condensed consolidated statements of cash flows for the twenty-seven week
period ended October 31, 1999 and the twenty-six week period ended October
25, 1998, and the condensed consolidated statement of changes in
shareholders' equity for the twenty-seven week period ended October 31,
1999. 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 25, 1999 (not presented herein), and, in
our report dated June 21, 1999, we expressed an unqualified opinion on that
consolidated balance sheet. In our opinion, the information set forth in
the accompanying condensed consolidated balance sheet as of April 25, 1999,
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 30, 1999
FLEETWOOD ENTERPRISES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (CONDENSED)
(Amounts in thousands except per share data)
(UNAUDITED)
<TABLE>
14 Weeks 13 Weeks 27 Weeks 26 Weeks
Ended Ended Ended Ended
Oct. 31, Oct. 25, Oct. 31, Oct. 25,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net sales:
Manufacturing $922,686 $853,481 $1,803,282 $1,693,242
Retail 162,253 87,001 319,969 88,879
Less intercompany (74,836) (42,642) (156,434) (44,126)
-------- -------- ---------- ----------
1,010,103 897,840 1,966,817 1,737,995
Cost of products sold 782,410 702,942 1,525,854 1,369,307
-------- ------- --------- ---------
Gross profit 227,693 194,898 440,963 368,688
Operating expenses 172,951 140,037 336,265 263,576
------- -------- -------- ---------
Operating income 54,742 54,861 104,698 105,112
Other income (expense):
Investment income 3,125 4,111 6,577 9,206
Interest on long-term
debt (966) (924) (1,779) (1,792)
Interest on inventory
floor plan financing (2,851) (1,642) (5,688) (1,642)
Distribution on preferred
securities (4,381) (4,380) (8,762) (8,760)
Other 677 (77) 509 (202)
------- ------- ------- -------
(4,396) (2,912) (9,143) (3,190)
------- ------- ------- -------
Income before provision for
income taxes 50,346 51,949 95,555 101,922
Provision for income taxes (20,554) (20,838) (39,403) (40,586)
------- -------- -------- --------
Net income $29,792 $31,111 $56,152 $61,336
======= ======= ======= =======
Net income per Common share:
Basic $.91 $.92 $1.67 $1.87
Diluted .84 .84 1.56 1.70
======= ======= ======= =======
Weighted average Common shares:
Basic 32,917 33,896 33,628 32,759
Diluted 38,851 40,257 39,587 39,274
======= ======= ======= =======
Dividends declared per share of
Common stock outstanding $.19 $.18 $.38 $.36
======= ======= ======= =======
</TABLE>
See accompanying notes to financial statements
FLEETWOOD ENTERPRISES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONDENSED)
(Unaudited)
<TABLE>
ASSETS (Amounts in thousands)
October 31, April 25,
1999 1999
<S> <C> <C>
Current assets:
Cash $ 43,392 $ 25,602
Marketable investments 134,602 231,672
Receivables 257,157 245,847
Inventories 288,687 257,034
Deferred tax benefits - current 39,250 33,637
Other current assets 29,654 23,597
-------- ---------
Total current assets 792,742 817,389
Property, plant and equipment 317,137 303,934
Marketable investments maturing after
one year 8,449 9,859
Deferred tax benefits 51,997 47,932
Cash value of Company-owned life insurance 64,306 64,880
Goodwill and intangible assets 257,050 247,681
Other assets 37,227 39,509
------- ---------
$1,528,908 $1,531,184
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 139,621 $ 138,261
Employee compensation and benefits 85,972 90,266
Federal and state taxes on income 3,771 4,759
Retail flooring liability 97,936 125,275
Other current liabilities 194,459 156,159
---------- ----------
Total current liabilities 521,759 514,720
Deferred compensation and
retirement benefits 68,917 60,832
Insurance reserves 26,693 26,429
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 32,653,000 at
October 31, 1999 and 35,198,000 at
April 25, 1999 32,653 35,198
Capital surplus 191,811 202,244
Retained earnings 346,341 351,769
Accumulated other comprehensive
income (loss) (1,766) (2,508)
-------- --------
569,039 586,703
-------- --------
$1,528,908 $1,531,184
========== ==========
See accompanying notes to financial statements.
</TABLE>
FLEETWOOD ENTERPRISES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONDENSED)
(UNAUDITED)
(Amounts in thousands)
<TABLE>
27 Weeks 26 Weeks
Ended Ended
October 31, October 25,
1999 1998
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $56,152 $61,336
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation expense 14,207 13,237
Amortization of intangibles and goodwill 3,151 998
(Gains) losses on sales of property, plant
and equipment (509) 202
Changes in assets and liabilities:
Increase in receivables (10,842) (8,459)
(Increase) decrease in inventories (25,983) 7,709
Increase in deferred tax benefits (9,678) (10,215)
(Increase) decrease in cash value of
Company-owned life insurance 574 (944)
Increase in other assets (3,744) (5,065)
Increase (decrease) in accounts payable 696 (2,752)
Increase in employee compensation
and benefits 3,791 15,977
Increase (decrease) in Federal and state
income taxes (988) 1,923
Increase (decrease) in retail flooring
liability (32,632) 3,629
Increase in other liabilities 39,572 39,995
------- --------
Net cash provided by operating activities 33,767 117,571
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment securities:
Held-to-maturity (2,440,219) (3,040,240)
Available-for-sale (13,473) (49,090)
Proceeds from maturity of investment securities:
Held-to-maturity 2,539,460 3,068,084
Available-for-sale 1,839 36,888
Proceeds from sale of available-for-sale
investment securities 10,803 20,639
Acquisition of retail companies (8,357) (116,826)
Purchases of property, plant and equipment, net (26,639) (9,727)
------- -------
Net cash provided by (used in) investing
activities 63,414 (90,272)
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends to shareholders (12,535) (12,027)
Proceeds from exercise of stock options -- 16,831
Repurchase of Common stock (67,668) (23,688)
------- --------
Net cash used in financing activities (80,203) (18,884)
------- -------
Foreign currency translation adjustment 812 (1,332)
------- --------
Increase in cash 17,790 7,083
Cash at beginning of period 25,602 28,143
------ -------
Cash at end of period $43,392 $35,226
======= ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for -
Interest $7,366 $7,998
Income taxes 44,921 46,952
======== =======
DETAILS OF ACQUISITIONS:
Fair value of assets acquired $19,767 $350,806
Liabilities assumed 6,194 106,491
-------- -------
Acquisitions price 13,573 244,315
Less cash acquired (816) (7,630)
Less Common stock issued for acquisitions (4,400) (119,859)
------- ------
Net cash paid for acquisitions $8,357 $116,826
======= ========
NON-CASH FINANCING ACTIVITIES:
Common stock issued for acquisitions $4,400 $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
Compre-
Common Stock hensive Total
Number Capital Retained Income Shareholders'
of Shares Amount Surplus Earnings (Loss) Equity
<S> <C> <C> <C> <C> <C> <C>
Balance April 25,
1999 35,198 $35,198 $202,244 $351,769 $(2,508) $586,703
Comprehensive income:
Net income -- -- -- 56,152 -- 56,152
Other comprehensive income:
Foreign currency translation,
net of taxes of
$519 -- -- -- -- 812 812
Investment securities,
net of taxes
of $45 -- -- -- -- (70) (70)
------
Comprehensive income 56,894
Cash dividends declared on
Common stock -- -- -- (12,535) -- (12,535)
Purchase of Common
stock (2,758) (2,758) (15,865) (49,045) -- (67,668)
Stock issued for
acquisitions 213 213 5,432 -- -- 5,645
---- ---- ------ ----- ----- ------
Balance October 31,
1999 32,653 $32,653 $191,811 $346,341 $(1,766) $569,039
====== ======= ======== ======== ====== ========
</TABLE>
See accompanying notes to financial statements.
FLEETWOOD ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1999
(Unaudited)
1) Reference to Annual Report
Reference is made to the Notes to Consolidated Financial Statements
included in the Company's Form 10-K annual report for the year ended
April 25, 1999.
2) Industry Segment Information
Information with respect to industry segments for the periods ending
October 31, 1999 and October 25, 1998 is shown below:
<TABLE>
14 Weeks 13 Weeks 27 Weeks 26 Weeks
Ended Ended Ended Ended
Oct. 31, Oct. 25, Oct. 31, Oct. 25,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Manufactured housing -
Manufacturing $409,264 $409,608 $795,067 $810,020
Retail 162,253 87,001 319,969 88,879
Less intercompany (74,836) (42,642) (156,434) (44,126)
-------- -------- --------- --------
496,881 453,967 958,602 854,773
-------- -------- -------- --------
Recreational vehicles 497,965 432,709 981,699 861,475
Supply operations 15,457 11,164 26,516 21,747
-------- -------- -------- ---------
$1,010,103 $897,840 $1,966,817 $1,737,995
========== ======== ========== ==========
OPERATING INCOME:
Manufactured housing* $24,266 $20,834 $41,382 $46,330
Housing - retail** 3,021 3,828 9,723 2,734
Recreational vehicles 29,061 30,315 60,028 57,014
Supply operations 6,506 4,113 11,369 7,696
Corporate and other*** (8,112) (4,229) (17,804) (8,662)
------- ------- ------- -------
$54,742 $54,861 $104,698 $105,112
======= ======= ======== =======
* After deduction for elimination of intercompany profit in inventory as
follows:
$2,463 $5,173 $6,018 $5,173
====== ====== ====== ======
** Before deduction of interest expense on inventory floor plan financing
as follows:
$2,851 $1,642 $5,688 $1,642
====== ====== ====== ======
*** Including adjustments and eliminations. The operating income
information for the periods ended October 25, 1998 has been restated to
reflect all amortization of goodwill in "Corporate and other" rather than in
the industry segments.
</TABLE>
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>
14 Weeks Ended 13 Weeks Ended
October 31, 1999 October 25, 1998
Weighted Weighted
Average Average
Income Shares Income Shares
<S> <C> <C> <C> <C>
Basic earnings per share $29,792 32,917 $31,111 33,896
Effect of dilutive securities:
Stock options -- 33 -- 460
Preferred securities 2,781 5,901 2,780 5,901
------ ------- ------ -------
Diluted earnings per share $32,573 38,851 $33,891 40,257
======= ======= ======= =======
</TABLE>
<TABLE>
27 Weeks Ended 26 Weeks Ended
October 31, 1999 October 25, 1998
Weighted Weighted
Average Average
Income Shares Income Shares
<S> <C> <C> <C> <C>
Basic earnings per share $56,152 33,628 $61,336 32,759
Effect of dilutive securities:
Stock options -- 58 -- 614
Preferred securities 5,568 5,901 5,561 5,901
------- ------- ------ -------
Diluted earnings per share $61,720 39,587 $66,897 39,274
======= ======= ======= ======
</TABLE>
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:
<TABLE>
October 31, 1999 April 25, 1999
(Amounts in thousands)
<S> <C> <C>
Manufacturing inventory-
Raw materials $125,006 $108,813
Work in process 28,374 28,015
Finished goods 8,942 9,973
-------- --------
162,322 146,801
-------- --------
Retail inventory-
Finished goods 148,389 126,239
Less manufacturing profit (22,024) (16,006)
------- -------
126,365 110,233
------- -------
$288,687 $257,034
======== ========
</TABLE>
5) 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 25, 1999. During fiscal 1998, Fleetwood
Capital Trust (the Trust), 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 proceeds from the
issuance were invested by the Trust in 6% convertible subordinated
debentures (the Debentures) issued by the Company in the aggregate
principal amount of $296.4 million, maturing on February 15, 2028. The
Debentures are the sole assets of the Trust and eliminate in
consolidation.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following is an analysis of changes in key items included in the
consolidated statements of income for the 14-week and 27-week periods ended
October 31, 1999, compared to the 13-week and 26-week periods ended October
25, 1998.
<TABLE>
14 Weeks Ended 27 Weeks Ended
October 31, 1999 October 31, 1999
(Unaudited) (Unaudited)
Increase % Increase %
(Amounts in thousands) (Decrease) Change (Decrease) Change
<S> <C> <C> <C> <C>
Sales $112,263 12.5% $228,822 13.2%
Cost of products sold 79,468 11.3 156,547 11.4
-------- ---- -------- ----
Gross profit 32,795 16.8 72,275 19.6
Selling expenses 11,100 15.6 26,685 19.9
General and administrative
expenses 21,814 31.6 46,004 35.5
-------- ---- -------- ----
Operating expenses 32,914 23.5 72,689 27.6
-------- ---- -------- ----
Operating income (119) (.2) (414) (.4)
Other income (expense) (1,484) (51.0) (5,953) (186.6)
-------- ---- -------- -----
Income before taxes (1,603) (3.1) (6,367) (6.2)
Provision for income taxes (284) (1.4) (1,183) (2.9)
-------- ---- ------- ---
Net income $(1,319) (4.2)% $(5,184) (8.5)%
======== ==== ======= ===
</TABLE>
Current Quarter Compared to Same Quarter Last Year
Consolidated Results:
Net income for the second quarter of fiscal 2000 declined 4% from $31.1
million to $29.8 million, but diluted earnings per share of 84 cents was
identical to the prior year due to fewer outstanding shares. The current
quarterly period included an extra week, consisting of 14 weeks compared to 13
weeks in last year's second quarter. This boosted sales volume and improved
profitability in the current period. Higher manufacturing profits from the
Company's housing and supply businesses were more than offset by other
factors, including increases in goodwill amortization and interest expense on
retail inventory financing. A 24% decline in investment earnings and a higher
effective tax rate also contributed to the earnings decline.
Higher recreational vehicle sales and the additional volume from the Company's
new retail business led to record second quarter revenues of $1.01 billion, a
13% increase over last year's $898 million.
Gross profit margin rose from 21.7% to 22.5% of sales due to improved housing
manufacturing margins and the impact of the retail business. Retail gross
margins are typically higher than manufacturing gross margins. Also, the
combination of the added retail profit and the elimination of intercompany
sales has the effect of boosting consolidated gross margin percentages. The
combined gross margin for all of the Company's core manufacturing businesses
declined slightly from 21.2% to 21.1% of sales.
Operating expenses rose 24% to $173 million, and also increased as a
percentage of sales from 15.6% to 17.1%. Approximately 52% of the dollar
increase was related to the expansion of retail housing operations. Selling
expenses rose 16% to $82 million, with the retail operation accounting for
about 29% of the increase. Within the manufacturing sector, higher costs were
incurred for product warranty and service, sales promotion and advertising.
Product warranty costs were partially influenced by RV product recall
expenses. As a percentage of sales, selling costs rose from 7.9% to 8.1%.
General and administrative expenses were up 32% to $91 million, primarily due
to the addition of $14 million in retail costs. Manufacturing costs were up
12%, largely due to increases in insurance, compensation and benefit costs.
Goodwill amortization rose from $933,000 to $1.6 million, which also
contributed to the rise in G & A costs. General and administrative expenses
as a percentage of sales were 9.0% compared to 7.7% in last year's second
quarter.
.
Non-operating items amounted to a net expense of $4.4 million compared to net
expense of $2.9 million a year ago, largely as a result of lower investment
income and a $1.2 million rise in interest on retail inventory financing. The
combination of reduced rates of return and lower invested balances led to the
decline in investment income.
The Company's effective income tax rate moved from 40.1% last year to 40.8% in
the current quarter, mostly due to the effect of goodwill amortization, which
is not deductible for tax purposes. The higher tax rate reduced earnings by
about one cent per share.
Manufactured Housing:
Factory sales of manufactured homes, including intercompany sales to
affiliates of $75 million, totaled $409 million compared to $410 million for
the similar period last year. Unit volume declined 3% to 16,752 homes, but
the number of sections shipped rose 1% to 27,760 due to the increasing
importance of multi-section homes. Multi-section models represented 63% of
sales versus 56% in the prior year. As a result of a higher gross profit
margin, operating income before intercompany profit elimination increased 3%
to $26.7 million. Gross margin as a percentage of sales rose from 22.2% to
22.8%, mainly due to improved pricing and relatively stable raw material
costs. Operating margin improved to 6.5% of sales, up from 6.3% of sales in
last year's second quarter.
Recent softness in the Company's factory sales of manufactured housing is
mainly attributable to market factors, which have been negatively impacted by
excess inventory at the retail level. In general, the Company believes that
inventories carried by its own retail stores and by its independent retailers
are reasonable relative to retail consumer demand. However, the overall
industry inventory excess has had, and will continue to have, an unfavorable
effect on wholesale shipments and pricing. The Company believes that it will
take at least several months for the excess inventory to be absorbed at
retail.
Recreational Vehicles:
Healthy consumer demand for recreational vehicles drove Fleetwood's RV sales
to an all-time high for the second quarter. The Company attributes the strong
consumer demand to the healthy economy, high levels of consumer confidence and
favorable demographic trends. Company RV revenues rose 15% to $498 million
with all three RV divisions posting record second quarter sales. Motor home
revenues were up 17% to $311 million on a 9% increase in unit volume to 3,954
units. Motor home revenues rose at a faster rate than unit volume due to a
shift in product mix toward larger and more fully-featured Class A models.
Sales of Class A diesel models, which rank among the highest-priced products
produced by the Company, represented 29% of Class A sales compared to 23% last
year. Travel trailer sales rose 12% to $150 million on an 11% rise in
shipments to 10,466 units. Folding trailer revenues of $37 million were up
14% primarily due to a 10% rise in unit volume to 6,507.
Despite the increase in sales, operating income for the RV group declined 4%
to $29.1 million in the second quarter, and operating margin eased from 7.0%
to 5.8% of sales. This mainly resulted from a decrease in gross profit margin
from 19.8% to 19.1% of sales and unusual costs related to product recalls.
Gross margins for motor homes and travel trailers were adversely affected by
increased sales of competitively-priced entry level products, which have
relatively low profit margins. In addition, two separate recall initiatives,
one for motor homes and one for travel trailers, resulted in estimated costs
of approximately $3.4 million. Exact costs of the recall actions will not be
known for at least several months.
Supply Operations:
The Company's supply group generated second quarter revenues of $15 million
compared to $11 million in last year's similar period. Operating income,
which rose 58% to $6.5 million, primarily reflected higher profits from
fiberglass manufacturing operations stemming from higher volume.
Retail Housing Operations:
Fleetwood's retail housing division, which commenced operations a little over
a year ago, contributed second quarter revenues of $162 million versus $87
million for the similar period last year. There were 202 sales centers in
operation at the end of the current quarter compared to 126 locations a year
ago. Operating income of $3.0 million was off 21% from the prior year,
despite the rise in sales volume. This was the result of operating costs
rising at a faster rate than sales, which in turn was mainly caused by
overhead costs associated with new sales locations and the building of
infrastructure and support systems. A significant portion of the incremental
general and administrative costs was related to new sales locations, many of
which did not contribute materially to sales and profits because they were in
a start-up phase. Interest expense on inventory financing rose from $1.6
million to $2.9 million. This mainly reflects the increase in inventories
associated with new store openings.
The retail housing business is seasonal in nature, and sales are slowest
during the winter months. This seasonal factor, combined with the current
difficult market environment, will most likely result in operating losses for
the retail division over the next two quarters. The continuing addition of
new retail locations, which is consistent with the Company's longer-term
growth strategy, will further add to operating costs in the near term.
Current Year-To-Date Compared To Same Period Last Year
Consolidated Results:
Net income for the first six months of fiscal 2000 declined 8% to $56.2
million or $1.56 per diluted share compared to $61.3 million and $1.70 per
share for last year's similar period. The current period consisted of 27
weeks compared to 26 weeks in last year's first half. The earnings decline
mainly resulted from non-operating items and the effects of entering the
retail housing business. The latter factor includes the impact of Fleetwood
Retail Corp. (FRC) start-up costs, goodwill amortization related to retail
acquisitions, the elimination of intercompany profits (related to factory
sales to FRC for homes that had not yet been sold to retail buyers) and a $4.0
million rise in interest expense on retail inventory financing due to the
opening of new stores. Unfavorable variances related to non-operating factors
included lower investment income and a higher income tax rate.
Higher recreational vehicle sales and the additional volume from the Company's
new retail business led to record first half revenues of $1.97 billion, a 13%
increase over last year's $1.74 billion.
Gross profit margin rose from 21.2% to 22.4% of sales, mainly due to the
impact of the retail business. Retail gross margins are typically higher than
manufacturing margins, and the combination of the added retail profit and the
elimination of intercompany sales has the effect of boosting the consolidated
gross margin percentages. Manufacturing gross margins were 20.8% of sales
compared to 20.9% for the similar period last year.
Operating expenses rose 28% to $336 million, and also increased as a
percentage of sales from 15.2% to 17.1%. Approximately 62% of the dollar
increase was related to the addition of retail housing operations. Selling
expenses rose 20% to $161 million, with the retail operation accounting for
about 50% of the increase. Within the manufacturing sector, higher costs were
incurred for product warranty and service and sales promotion and advertising.
As a percentage of sales, selling costs rose from 7.7% to 8.2%. General and
administrative expenses were up 36% to $175 million, principally due to the
addition of $31 million in retail costs. Manufacturing costs were up 10%,
reflecting increases in insurance, compensation and benefit costs. Goodwill
amortization rose from $998,000 to $3.2 million, which also contributed to the
increase in G & A costs. General and administrative expenses as a percentage
of sales were 8.9% compared to 7.5% in last year's first half.
.
Non-operating items amounted to a net expense of $9.1 million compared to net
expense of $3.2 million a year ago, largely as a result of higher interest
expense on retail inventory financing and a decrease in investment income.
The combination of lower invested balances and reduced rates of return led to
the decline in investment income.
The Company's effective income tax rate moved from 39.8% last year to 41.2% in
the current period, primarily due to the effect of goodwill amortization,
which is not deductible for tax purposes. The higher tax rate reduced
earnings by about three cents per share in the first half.
Manufactured Housing:
Factory sales of manufactured homes, including intercompany sales to
affiliates of $156 million, declined 2% from $810 million to $795 million on a
5% decline in unit volume to 32,567 homes. The lower volume and the
elimination of intercompany profit on certain sales to Company-owned retail
stores led to an 11% decrease in operating income to $41.4 million. The
latter factor, which amounted to $6.0 million for the first six months, is
related to intercompany sales of homes which remain in retail inventories at
the end of the reporting period. Profit recognition is delayed until such
homes are sold to retail customers. Gross profit margin as a percentage of
sales was slightly improved compared to the prior year, but higher product
warranty costs and the effect of lower volume pushed the operating margin
below last year's percentage. Operating income for the housing group, before
intercompany profit elimination, fell 8% to $47.4 million or 6.0% of sales,
down from $51.5 million and 6.4% of sales in last year's first half.
Recreational Vehicles:
Fleetwood's RV sales climbed to an all-time high for the first half, rising
14% to $982 million, mainly on the strength of higher motor home sales. All
of the Company's RV divisions posted record sales for the first six months.
Robust sales of both Class A and Class C products pushed motor home revenues
up 17% to $617 million on a 14% increase in unit volume to 8,426 units.
Travel trailer sales rose 9% to $299 million on a 10% rise in shipments to
21,485 units. Folding trailer revenues of $66 million were up 7% on a 3% rise
in unit volume to 11,526.
Operating income for the RV group increased 5% to $60.0 million in the first
half, but operating margin declined from 6.6% to 6.1% of sales. The reduced
operating margin mainly stems from product recall costs, mentioned previously,
and the effect of increased sales of more competitively-priced products with
lower profit margins.
Supply Operations:
The Company's supply group generated first half revenues of $26 million
compared to $22 million in last year's similar period. Operating income rose
48% to $11.4 million, reflecting higher profits from fiberglass manufacturing
as well as improved results from import and lumber brokerage operations. Most
of this improvement was due to higher volume.
Retail Housing Operations:
Fleetwood's retail housing division, which commenced operations a little over
a year ago, contributed first half revenues of $320 million versus $89 million
for the similar period last year. Operating income increased to $9.7 million
compared to $2.7 million last year, largely due to higher sales volume.
Operating margin declined slightly from 3.1% to 3.0% of sales for the reasons
cited previously in the discussion on quarterly results. Pre-tax profits,
after deducting interest expense of $5.7 million for inventory financing, rose
to $4.0 million compared to $1.1 million last year.
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 in the first half of fiscal 2000 amounted to $33.8 million compared
to $117.6 million for the similar period last year. The reduced cash flow from
operations in the first six months compared to the prior year primarily
reflects the expansion of the retail housing business and the related
inventory requirements, as well as a significant reduction in the retail
flooring liability. Cash and cash equivalents declined from $267.1 million as
of April 25, 1999 to $186.4 million at the end of October. The lower level of
cash and cash equivalents compared to the balance at April 25, 1999 was mainly
due to the aforementioned reduction in flooring liability and significant
share repurchases during the first half of fiscal 2000. The Company expects
to continue its share repurchase program.
Cash outlays in the current period included $12.5 million in dividends to
shareholders, $26.6 million for net capital expenditures and $67.7 million for
repurchases of the Company's Common stock. Dividends last year totaled $12.0
million and net capital expenditures were $9.7 million. In the prior year,
$116.8 million in cash was used for the acquisition of retail housing
businesses and $23.7 million for share repurchases.
On November 5, 1999, the Company completed a $25 million financing arrangement
with a large insurance company. The proceeds of this fixed rate, four-year
loan will be used to pay down existing variable-rate debt.
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 the Company's foreseeable cash requirements.
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 complete.
The Company's dependence on non-information technology which utilizes embedded
chip controllers is minimal. Nevertheless, as part of the year 2000 project,
an inventory of all such equipment was conducted, disclosing that most is not
calendar-date sensitive. In isolated cases where remediation was required,
repair or replacement was completed.
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 vendors, suppliers and financial institutions.
As part of its determination of year 2000 readiness, the Company has
identified material relationships with third party vendors and suppliers and
has completed a survey intended to assess the status of their year 2000
compliance. Responses from the survey indicate that key suppliers to the
Company, including financial institutions, plan to be compliant by year end.
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 Company believes that the worst case scenario relative to year 2000 issues
would be a significant disruption of production due to wide-spread failures of
vendors and suppliers to provide critical materials and services, including
utilities. Because of the broad geographical disbursement of the Company's
manufacturing facilities and the diversification of vendors for most materials
and components, the Company believes that such a disruption is unlikely.
Where the Company is dependent on a few or sole source suppliers to provide a
crucial product or component, measures have been taken, where possible, to
identify alternate vendors who can supply the required material and provide
assurance of year 2000 readiness. The Company's most significant exposure in
this area is with a few manufacturers which supply most of the chassis used in
the production of motor homes. All such suppliers have provided the Company
with specific assurances of year 2000 compliance.
It is anticipated that the Company's year 2000 project will substantially
reduce the risk of significant business interruptions, but there is no
assurance that all material risks can be eliminated. 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. The Company
assessed the potential for year 2000 failures and has formulated contingency
plans to mitigate the effect of such occurrences.
The total cost of the Company's year 2000 efforts, including hardware,
software, related consulting costs and assessment of third party compliance
was approximately $1.2 million.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to market risks related to fluctuations in interest
rates on its marketable investments, investments underlying a Company-owned
life insurance program (COLI) and variable rate debt, which consists of notes
payable to an insurance company and the liability for flooring of manufactured
retail housing inventories. With respect to the COLI program, the underlying
investments are subject to both interest rate risk and equity market risk.
The Company does not use interest rate swaps, futures contracts or options on
futures, or other types of derivative financial instruments.
The vast majority of the Company's marketable investments are in fixed rate
securities with average original maturity dates of approximately two weeks,
minimizing the effect of interest rate fluctuations on their fair value.
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. The Company does not have an
obligation to prepay fixed rate debt prior to maturity, and as a result,
interest rate risk and changes in fair market value should not have a
significant impact on such debt until the Company would be required to
refinance it. Based upon the amount of variable rate debt outstanding at the
end of the second quarter, and holding the variable rate debt balance
constant, each one percentage point increase in interest rates occurring on
the first day of an annual period would result in an increase in interest
expense of approximately $1.5 million.
The Company does not believe that future market interest rate risks related to
its marketable investments or debt obligations will have a material impact on
the Company or the results of its future operations.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
In its Annual Report on Form 10-K for the fiscal year ended on April 25, 1999,
the Company reported concerning McManus v. Fleetwood Enterprises, Inc. et al,
a purported class action filed against the Company and General Motors
Corporation, which alleged that the Company misrepresented the ability of
certain of its motor homes to tow an automobile or other vehicle or cargo
without an auxiliary braking system. Since the date of that report, the
related case discussed in the report, Legnon v. Fleetwood Motor Homes of
Pennsylvania, Inc. et al, was resolved for an amount within the previously
established insurance reserve. In addition, an amendment to the McManus
complaint was filed dismissing General Motors from the case and expanding the
proposed class to include additional motor homes produced by the Company. No
class has been certified nor any discovery completed. At this time, it
remains difficult to properly assess the risk of an adverse verdict. While a
negative verdict could have a material adverse impact on the Company's
financial results, management believes that this is unlikely.
Item 4. Submission of Matters to a Vote of Security Holders
At Fleetwood's Annual Meeting of Shareholders held on September 14, 1999, the
following four directors were elected to three-year terms to Fleetwood's Board
of Directors: Walter A. Beran, Loren K. Carroll, Dr. Douglas M. Lawson and
John T. Montford. The following directors continued in office after the
meeting, but were not elected at the meeting: Glenn F. Kummer, Nelson W.
Potter, Thomas B. Pitcher, Paul D. Borghesani, David S. Engelman, Dr. James L.
Doti and Thomas A. Fuentes.
The shareholder votes on the elections were as follows:
For Withheld Vote
Walter A. Beran 27,853,137 524,955
Loren K. Carroll 27,450,367 927,725
Dr. Douglas M. Lawson 27,856,157 521,935
John T. Montford 27,449,512 928,580
In addition, the shareholders approved the adoption of an amendment to the
Company's Amended and Restated 1992 Stock-Based Incentive Compensation Plan,
which increased from 4.9 million to 6.9 million the total number of shares
that may be utilized for the issuance of awards. The shareholder vote on the
proposal was as follows:
For: 17,473,349
Against: 6,278,298
Abstain: 4,626,445
The shareholders also approved the adoption of an amendment to the Company's
1992 Non-Employee Director Stock Option Plan, which eliminated the deferred
vesting schedule for options granted under the plan. The shareholder vote on
the proposal was as follows:
For: 23,886,203
Against: 4,302,623
Abstain: 189,266
The total number of shares of Fleetwood Common stock outstanding as of July
20, 1999, the record date for the Annual Meeting, was 33,339,075.
Item 5. Other Information
On October 1, 1999, the Company began a recall under the National Highway
Traffic Safety Act with respect to approximately 3,400 of its luxury American
Coach Class A motor homes. Under the recall, the Company is providing two new
larger capacity front tires to owners of the subject motor homes, adjusting
the weight distribution on the front axle of certain of the motor homes to
correct a weight imbalance and again providing reinforcement of consumer
education about the importance of proper tire maintenance, especially with
respect to proper tire pressure. Owners of some of the subject motor homes
have experienced front tire blowouts, several of which have resulted in
accidents and serious injuries, including five deaths. No lawsuits have been
filed with respect to any of these accidents as yet and the causes remain
under investigation.
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, 1999
FLEETWOOD ENTERPRISES, INC.
CONSOLIDATED FINANCIAL INFORMATION
FINANCIAL DATA SCHEDULE
[SROS] NYSE
[SROS] PSE
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