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 27, 2003
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 by check mark whether the registrant is an accelerated filer (as
defined in Rule12b-2 of the Exchange Act).
Yes X No _____
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date.
Class Outstanding at September 2, 2003
_______________________ _____________________________
Common stock, $1 par value 35,934,892 shares
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Independent Accountants' Review Report
To the Board of Directors and Shareholders
Fleetwood Enterprises, Inc.
We have reviewed the accompanying condensed consolidated balance sheet of
Fleetwood Enterprises, Inc. as of July 27, 2003 and the related condensed
consolidated statements of operations, changes in shareholders' equity, and
cash flows for the thirteen-week periods ended July 27, 2003 and July 28,
2002. These financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical
procedures to 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 auditing standards generally
accepted in the United States, which will be performed for the full year
with the objective of expressing 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 accompanying condensed consolidated financial
statements referred to above for them to be in conformity with accounting
principles generally accepted in the United States.
We have previously audited, in accordance with auditing standards generally
accepted in the United States, the consolidated balance sheet of Fleetwood
Enterprises, Inc. as of April 27, 2003, and the related consolidated
statements of operations, changes in shareholders' equity, and cash flows
for the year then ended (not presented herein), and in our report dated
July 14, 2003, except for Note 7, as to which the date was July 22, 2003,
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 27, 2003, is fairly
stated, in all material respects, in relation to the consolidated balance
sheet from which it has been derived.
/s/ Ernst & Young LLP
---------------------
Ernst & Young LLP
Orange County, California
August 29, 2003
FLEETWOOD ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands except per share data)
(Unaudited)
13 Weeks Ended
July 27, 2003 July 28, 2002
------------- -------------
Net sales:
Manufacturing $614,706 $571,739
Retail 57,604 72,516
Financial services 884 291
Less intercompany (27,063) (33,271)
-------- ---------
646,131 611,275
Cost of products sold 529,055 489,256
------- --------
Gross profit 117,076 122,019
Operating expenses 103,041 112,647
Financial services expenses 1,414 191
------- --------
Operating income 12,621 9,181
Other income (expense):
Investment income 517 752
Interest expense (2,650) (2,690)
Other 724 (343)
------ ------
(1,409) (2,281)
------ -----
Income before provision for income taxes,
and minority interest 11,212 6,900
Provision for income taxes (4,139) (3,374)
Minority interest in Fleetwood Capital
Trusts I, II and III,
net of income taxes (5,157) (5,046)
------ ------
Net income (loss) $1,916 $(1,520)
======== ========
Basic Diluted Basic Diluted
Net earnings (loss) per common
share: $.05 $.05 $(.04) $(.04)
===== ====== ===== =====
Weighted average common shares: 35,935 36,669 35,694 35,694
====== ====== ====== ======
See accompanying notes to condensed consolidated financial statements.
FLEETWOOD ENTERPRISES, INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands except share data)
ASSETS
July 27, April 27,
2003 2003
(Unaudited)
Cash $11,788 $31,515
Marketable investments available-
for-sale 37,021 38,261
Receivables 183,684 143,452
Inventories 216,900 240,521
Deferred tax benefits, net 58,488 58,488
Other current assets 16,796 18,998
-------- --------
Total current assets 524,677 531,235
Finance loans receivable, net 20,976 13,293
Property, plant and equipment, net 255,699 260,318
Deferred taxes, net 31,275 31,275
Cash value of Company-owned
life insurance, net 55,554 55,004
Goodwill 6,366 6,366
Other assets 30,766 27,075
-------- ---------
Total assets $925,313 $924,566
========= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $78,209 $78,890
Employee compensation and benefits 72,888 70,006
Product warranty reserve 60,888 62,137
Retail flooring liability 15,599 15,357
Other short-term borrowings 17,927 16,054
Accrued minority interest distribution 28,591 25,249
Other current liabilities 72,242 80,631
-------- --------
Total current liabilities 346,344 348,324
-------- -------
Deferred compensation and
retirement benefits 58,359 58,196
Insurance reserves 29,656 30,344
Long-term debt 2,354 2,357
------- ------
Total liabilities 436,713 439,221
------- ------
Commitments and contingencies
Company-obligated manditorily redeemable convertible
preferred securities of Fleetwood Capital Trusts I, II and III
holding solely convertible subordinated debentures
of the Company 374,685 374,377
------- ------
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 35,935,000
at July 27, 2003 and 35,935,000 at
April 27, 2003 35,935 35,935
Additional paid-in capital 250,235 250,175
Retained deficit (171,160) (173,076)
Accumulated other comprehensive loss (1,095) (2,066)
------- --------
113,915 110,968
-------- --------
$925,313 $924,566
======== ========
See accompanying notes to condensed consolidated financial statements.
FLEETWOOD ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Amounts in thousands)
13 Weeks Ended
July 27, 2003 July 28, 2002
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $1,916 $(1,520)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation expense 5,944 6,353
Amortization of financing costs 1,373 1,121
(Gain) loss on sales of property,
plant and equipment (724) 343
Issuance of stock in lieu of cash for
minority interest distribution -- 4,464
Changes in assets and liabilities:
(Increase) decrease in receivables (40,232) 1,128
(Increase) decrease in inventories 23,621 (228)
Decrease in income tax receivable 1,391 17,977
Decrease in deferred
tax benefits -- 12,268
(Increase) decrease in cash value of Company-owned
life insurance (550) 936
Increase in other assets (3,885) (3,785)
Increase (decrease) in accounts payable
and book overdraft (681) 6,057
Increase in employee compensation
and benefits 3,045 4,018
Decrease in product warranty reserve (1,249) (1,257)
Increase (decrease) in other
liabilities (5,735) 2,601
------- -------
Net cash provided by (used in)
operating activities (15,766) 50,476
------- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable investments
available-for-sale (152,277) (197,592)
Proceeds from sale of marketable
investments available-for-sale 153,543 148,660
Purchases of property, plant and
equipment, net (601) (4,400)
Increase in finance loans receivable (7,683) (490)
------- -------
Net cash used in
investing activities (7,018) (53,822)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Retail flooring 242 (12,763)
Short-term bank borrowings 1,873 (4,263)
Long-term debt (3) (6,177)
Proceeds from exercise of stock options -- 192
------- -------
Net cash provided by (used in)
financing activities 2,112 (23,011)
------ -------
Foreign currency translation adjustment 945 274
------ -------
Decrease in cash (19,727) (26,083)
Cash at beginning of period 31,515 26,083
------ -------
Cash at end of period $11,788 $ --
======== =======
See accompanying notes to condensed consolidated financial statements.
FLEETWOOD ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES
IN SHAREHOLDERS' EQUITY
(UNAUDITED)
(Amounts in thousands)
Accumulated
Other
Compre-
Common Stock Additional hensive Total
Number Paid-In Retained Income Shareholders'
of Shares Amount Capital Deficit (Loss) Equity
Balance April 27,
2003 35,935 $35,935 $250,175 $(173,076) $(2,066) $110,968
------ ------- ------- --------- ------- --------
Comprehensive income:
Net income -- -- -- 1,916 -- 1,916
Other comprehensive income:
Foreign currency translation,
net of taxes of
$266 -- -- -- -- 945 945
Investment securities,
net of taxes
of $15 -- -- -- -- 26 26
------
Comprehensive income 2,887
------
Amortization of restricted
stock -- -- 60 -- -- 60
---- ---- ------ ----- ----- ------
Balance July 27,
2003 35,935 $35,935 $250,235 $(171,160) $(1,095) $113,915
====== ======= ======== ======== ======= ========
See accompanying notes to condensed consolidated financial statements.
FLEETWOOD ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
July 27, 2003
(Unaudited)
1) Basis of Presentation
Fleetwood Enterprises, Inc. (the "Company") is the nation's leader in
recreational vehicle sales, which includes motor homes, travel trailers,
folding trailers and slide-in-truck campers, and one of the nation's
largest producers and retailers of manufactured housing. The Company
conducts manufacturing in 16 states within the U.S., and to a much
lesser extent in Canada. In addition, it operates five supply
companies, which provide components for the manufactured housing and
recreational vehicle operations, while also generating outside sales.
The accompanying condensed financial statements consolidate the accounts
of the Company and its wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated. Certain
amounts previously reported have been reclassified to conform to the
fiscal 2004 presentation.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management
to make estimates and assumptions that affect the amounts reported in
the accompanying financial statements. Actual results could differ from
those estimates. Significant estimates made in preparing these
financial statements include accrued warranty costs, workers'
compensation reserves, and accrued postretirement health care benefits.
In the opinion of the Company's management, the accompanying condensed
consolidated financial statements include all normal recurring
adjustments necessary for a fair presentation of the financial position
at July 27, 2003, and results of operations for the 13-week periods
ended July 27, 2003, and July 28, 2002. The condensed consolidated
financial statements do not include footnotes and certain financial
information normally presented annually under accounting principles
generally accepted in the United States and, therefore, should be read
in conjunction with the Company's Annual Report on Form 10-K for the
year ended April 27, 2003. Results of operations for the 13-week period
ended July 27, 2003, are not necessarily indicative of results to be
expected for the full year.
2) Industry Segment Information
Information with respect to industry segments for the periods ended
July 27, 2003, and July 28, 2002, is shown below (amounts in thousands):
13 Weeks Ended 13 Weeks Ended
July 27, 2003 July 28, 2002
-------------- --------------
OPERATING REVENUES:
Manufactured housing -
Manufacturing $169,767 $191,339
Less intercompany (27,063) (33,271)
-------- ---------
142,704 158,068
Retail 57,604 72,516
------- --------
Total housing 200,308 230,584
Recreational vehicles 436,533 370,950
Supply operations 8,406 9,450
Financial services 884 291
-------- -------
$646,131 $611,275
======== ========
OPERATING INCOME (LOSS):
Manufactured housing $ 1,859 $ 761
Housing - retail* (8,469) (9,764)
Recreational vehicles 14,925 17,663
Supply operations 740 1,013
Corporate and other 3,478 (2,827)
Financial services (530) 92
Intercompany profit 618 2,243
------- --------
$12,621 $9,181
======= ======
* Before deduction of interest expense on inventory floor plan
financing as follows:
$485 $644
==== ====
3) Earnings Per Share
Basic earnings per share are computed by dividing income available to
common shareholders by the weighted average number of common shares
outstanding. In the prior fiscal year, the effect of stock options and
preferred securities was anti-dilutive and was, therefore, not
considered in determining diluted loss per share. Although there are a
small number of dilutive stock options in the current fiscal year, there
is no effect on earnings per share, and the effect of preferred
securities remains anti-dilutive. The table below shows the components
of the calculations for both basic and diluted earnings per share
(amounts in thousands):
13 Weeks Ended 13 Weeks Ended
July 27, 2003 July 28, 2002
-------------- --------------
Weighted Weighted
Average Average
Income Shares Loss Shares
---- ------ ---- ------
Net income (loss) $1,916 35,935 $(1,520) 35,694
Effect of dilutive securities:
Stock options -- 734 -- --
------ ------ ------- ------
Diluted net income (loss) $1,916 36,669 $(1,520) 35,694
====== ====== ======= ======
Anti-dilutive options and
warrants available 3,997 4,258
===== =====
Anti-dilutive convertible trust
preferred securities 21,631 21,631
====== ======
4) Stock-Based Incentive Compensation
The Company accounts for stock-based incentive compensation plans using
the intrinsic method under which no compensation cost is recognized for
stock option grants as the options are granted at fair market value at
the date of grant. Had compensation costs for these plans been
determined using the fair value method, under which a compensation cost
is recognized over the vesting period of the stock option based on its
fair value at the date of grant, the Company's net income (loss) and
earnings (loss) per share would have been affected as indicated by the
following table (amounts in thousands except per share data):
13 Weeks Ended 13 Weeks Ended
July 27, 2003 July 28, 2002
------------- -------------
Net income (loss), as reported $1,916 $(1,520)
Deduct: Total stock-based employee
compensation expense determined
under fair value-based
method for all awards, net of
related tax effects (586) (525)
------- -------
Pro forma net income (loss) $1,330 $(2,045)
====== =======
Basic and diluted income (loss) per share,
as reported $.05 $(.04)
==== =====
Basic and diluted income (loss) per share,
pro forma $.04 $(.06)
==== =====
5) Inventory Valuation
Inventories are valued at the lower of cost (first-in, first-out) or
market. Manufacturing cost includes materials, labor and manufacturing
overhead. Retail finished goods are valued at cost less intercompany
manufacturing profit. Inventories consist of the following:
July 27, 2003 April 27, 2003
------------- ---------------
(Amounts in thousands)
Manufacturing inventory-
Raw materials $97,452 $105,971
Work in process 29,579 29,176
Finished goods 11,298 25,146
------- --------
138,329 160,293
------- -------
Retail inventory-
Finished goods 95,682 97,957
Less manufacturing profit (17,111) (17,729)
------- -------
78,571 80,228
------- -------
$216,900 $240,521
======== ========
6) Product Warranty Reserve
Fleetwood provides customers of our products with a warranty covering
defects in material or workmanship for periods ranging from one to two
years, with longer warranties on certain structural components. We
record a liability based on our best estimate of the amounts necessary
to settle future and existing claims on products sold as of the balance
sheet date. Factors we use in estimating the warranty liability include
a history of units sold to customers, the average cost incurred to
repair a unit and a profile of the distribution of warranty expenditures
over the warranty period. Changes in the Company's product warranty
liability during the period were as follows (amounts in thousands):
Balance at April 27, 2003 $62,137
Warranties issued and changes in
the estimated liability during the period 18,017
Settlements made during the period (19,266)
-------
Balance at July 27, 2003 $60,888
=======
7) Other Comprehensive Income (Loss)
The difference between net income (loss) and total comprehensive income
(loss) is shown below (amounts in thousands):
13 Weeks Ended
July 27, 2003 July 28, 2002
------------- -------------
Net income (loss) $1,916 $(1,520)
Foreign currency translation 945 274
Unrealized gain (loss) on investments 26 (11)
------ -------
Comprehensive income (loss) $2,887 $(1,257)
====== =======
8) New Accounting Pronouncements
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and
Equity." This statement establishes standards for how an issuer
classifies and measures certain financial instruments with
characteristics of both liabilities and equity. This statement
requires an issuer to classify a financial instrument issued in the
form of shares that are mandatorily redeemable-that embodies an
unconditional obligation requiring the issuer to redeem them by
transferring its assets at a specified or determinable date-as a
liability. We have three series of convertible trust preferred
securities totaling $374 million that are now treated as quasi-equity
securities that are mandatorily redeemable at specified dates.
Effective with the second quarter of fiscal year 2004, these financial
instruments will be classified as long-term liabilities on the balance
sheet and valued at fair market value using the present value of the
redemption amount, at the rate implicit in the contract at inception.
Distributions to the minority interest, now classified below the tax
provision net of taxes, will be reclassified on the consolidated
statement of operations to a separate line item included in
"Other income (expense)" as an interest expense. As these types of
securities will now be treated as a liability, the number of shares
related to the conversion into common stock will not be included in the
calculation of diluted earnings per share.
In January 2003, the FASB issued Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities," which expands upon and
strengthens existing accounting guidance concerning when a company
should include in its financial statements the assets, liabilities and
activities of another entity. Prior to the issuance of FIN 46, a
company generally included another entity in its consolidated financial
statements only if it controlled the entity through voting interests.
FIN 46 now requires a variable interest entity, as defined in FIN 46, to
be consolidated by a company if that company is subject to a majority of
the risk of loss from the variable interest entity's activities or
entitled to receive a majority of the entity's residual returns or both.
FIN 46 also requires disclosures about variable interest entities that
the company is not required to consolidate but in which it has a
significant variable interest. The consolidation requirements of FIN 46
apply immediately to variable interest entities created after January
31, 2003, and to older entities in the first fiscal year or interim
period beginning after June 15, 2003. Certain of the disclosure
requirements apply to all financial statements issued after January 31,
2003, regardless of when the variable interest entity was established.
The Company does not believe the adoption of FIN 46 will have a material
impact on the Company's financial position, results of operations or
cash flows.
9) Repurchase Commitments
Producers of recreational vehicles and manufactured housing customarily
enter into repurchase agreements with lending institutions that provide
wholesale floorplan financing to independent dealers. These agreements
generally provide that, in the event of a default by a dealer in its
obligation to these credit sources, we will repurchase product. With
most repurchase agreements our obligation ceases when the amount for
which we are contingently liable to the lending institution has been
outstanding for more than 12, 18 or 24 months, depending on the terms of
the agreement. The contingent liability under these agreements
approximates the outstanding principal balance owed by the dealer for
units subject to the repurchase agreement less any scheduled principal
payments waived by the lender. Although the maximum potential
contingent repurchase liability approximated $153 million for inventory
at manufactured housing dealers and $505 million for inventory at RV
dealers as of July 27, 2003, the risk of loss is reduced by the
potential resale value of any products that are subject to repurchase,
and is spread over numerous dealers and financial institutions. The
gross repurchase obligation will vary depending on the season and the
level of dealer inventories. Typically, the fiscal third quarter
repurchase obligation will be greater than other periods due to high
dealer inventories. The RV repurchase obligation is significantly more
than the manufactured housing obligation due to a higher average cost
per motor home and more units in dealer inventories. Past losses under
these agreements have not been significant and lender repurchase demands
have been funded out of working capital. Through the first three months
of fiscal year 2004, we have repurchased $1.3 million of product
compared to $0.6 million for the same period in the prior year, with a
loss of $220,000 incurred this year compared to a repurchase loss of
$358,000 in the prior year.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Preliminary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains statements which may constitute
"forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934 (Exchange Act). Forward-looking statements regarding future events and
the future performance of the Company involve risks and uncertainties that
could cause actual results to differ materially. These risks and
uncertainties include, without limitation, the following items:
1. the cyclical nature of both the manufactured housing and recreational
vehicle industries;
2. ongoing weakness in the manufactured housing market;
3. the potential impact on demand for our products as a result of
declining consumer confidence;
4. the effect of global tensions on consumer confidence;
5. continued acceptance of the Company's products;
6. expenses and uncertainties associated with the introduction and
manufacturing of new products;
7. the future availability of manufactured housing retail financing as
well as housing and RV wholesale financing;
8. changes in retail inventory levels in the manufactured housing and
recreational vehicle industries;
9. competitive pricing pressures;
10. the ability to attract and retain quality dealers, executive officers
and other personnel; and
11. the ability to obtain the financing we need in order to execute our
business strategies.
Although management believes that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee future
results, levels of activity, performance or achievements. You should not
place undue reliance on these forward-looking statements, which speak only
as of the date of this report. Fleetwood undertakes no obligation to
publicly release the results of any revisions to these forward-looking
statements that may arise from changing circumstances or unanticipated
events. Additionally, other risks and uncertainties are described in our
Annual Report on Form 10-K for the fiscal year ended April 27, 2003, filed
with the Securities and Exchange Commission, under "Item 1. Business,"
including the section therein entitled "Risks Relating to Our Business,"
and "Item 7. Management's Discussion and Analysis of Results of Operations
and Financial Condition," including the section therein entitled "Business
Outlook."
Overview
We are the nation's leader in recreational vehicle sales, including motor
homes, travel trailers, folding trailers and slide-in truck campers, and
one of the nation's largest producers and retailers of manufactured
housing. In fiscal 2002 and for fiscal 2003, we sold 53,575 and 57,069
recreational vehicles, respectively. In calendar 2002, we had an 18.2
percent share of the overall recreational vehicle retail market, consisting
of a 17.7 percent share of the motor home market, a 13.4 percent share of
the travel trailer market and a 42.7 percent share of the folding trailer
market.
In fiscal 2002 and for fiscal 2003, we shipped 30,056 and 22,176
manufactured homes, respectively, and were the second largest producer of
HUD-Code homes in the United States in terms of units sold. In calendar
2002, we had a 16.9 percent share of the manufactured housing retail
market.
Our manufacturing activities are conducted in 16 states within the U.S.,
and to a much lesser extent in Canada. In addition, we operate five supply
companies that provide components for our manufactured housing and
recreational vehicle operations, while also generating outside sales. Our
business began in 1950 producing travel trailers and quickly evolved to the
exclusive production of manufactured homes. We re-entered the recreational
vehicle business in 1964. We distribute our manufactured products
primarily through a network of independent dealers throughout the United
States and Canada. However, in fiscal 1999, we entered the manufactured
housing retail business through a combination of key acquisitions and
internal development of new retail sales centers. At July 27, 2003, we
operated 133 retail sales locations in 21 states, and were one of the four
largest retailers of manufactured homes in the United States.
Critical Accounting Policies
Our financial statements are prepared in accordance with accounting
principles generally accepted in the United States. This requires us to
make estimates and assumptions that affect the amounts reported in the
financial statements and notes. We evaluate these estimates and
assumptions on an ongoing basis and use historical experience factors and
various other assumptions that we believe are reasonable under the
circumstances. The results of these estimates form the basis for making
judgments about the carrying values of assets and liabilities. Actual
results could differ from these estimates under different assumptions or
conditions.
The following is a list of the accounting policies that we believe reflect
our more significant judgments and estimates, and that could potentially
result in materially different results under different assumptions and
conditions.
Revenue Recognition
We recognize revenue in accordance with SEC Staff Accounting Bulletin No.
101, "Revenue Recognition in Financial Statements" (SAB 101), as amended
by SAB 101A and 101B.
Revenue for manufacturing operations is generally recorded when all of the
following conditions have been met:
1. an order for a product has been received from a dealer;
2. written or verbal approval for payment has been received from the
dealer's flooring institution;
3. a common carrier signs the delivery ticket accepting responsibility
for the product as agent for the dealer; and
4. product is removed from Fleetwood's property for delivery to the
dealer who placed the order.
Most manufacturing sales are made on cash terms, with most dealers financing
their purchases under flooring arrangements with banks or finance companies.
Products are not ordinarily sold on consignment; dealers do not ordinarily
have the right to return products; and dealers are typically responsible for
interest costs to floorplan lenders. On average, we receive payments from
floorplan lenders on products sold to independent dealers within 15 days of
the invoice date, i.e. the date product is shipped.
For retail sales from Company-owned retail stores, sales revenue is
recognized when the home has been delivered, set up and accepted by the
consumer, title has been transferred and funds have been received either from
the finance company or the homebuyer.
Warranty
Fleetwood provides customers of our products with a warranty covering
defects in material or workmanship for periods ranging from one to two
years, with longer warranties on certain structural components. We record a
liability based on our best estimate of the amounts necessary to settle
future and existing claims on products sold as of the balance sheet date.
Factors we use in estimating the warranty liability include a history of
units sold to customers, the average cost incurred to repair a unit and a
profile of the distribution of warranty expenditures over the warranty
period. A significant increase in dealer shop rates, the cost of parts or
the frequency of claims could have a material adverse impact on our
operating results for the period or periods in which such claims or
additional costs materialize.
Insurance Reserves
Generally, we are self-insured for health benefit, workers' compensation,
products liability and personal injury insurance. Under these plans,
liabilities are recognized for claims incurred (including those incurred but
not reported), changes in the reserves related to prior claims and an
administration fee. At the time a claim is filed, a liability is estimated
to settle the claim. The liability for workers' compensation claims is
guided by state statute. Factors considered in establishing the estimated
liability for products liability and personal injury claims are the nature
of the claim, the geographical region in which the claim originated, loss
history, severity of the claim, the professional judgment of our legal
counsel, and inflation. Any material change in the aforementioned factors
could have an adverse impact on our operating results. We maintain excess
liability insurance with outside insurance carriers to minimize our risks
related to catastrophic claims.
Deferred Taxes
Deferred tax assets and liabilities are determined based on temporary
differences between income and expenses reported for financial reporting and
tax reporting. We are required to record a valuation allowance to reduce
our deferred tax assets to the amount that we believe is more likely than
not to be realized. In assessing the need for a valuation allowance, we
previously have considered all positive and negative evidence, including
scheduled reversals of deferred tax liabilities, projected future taxable
income, tax planning strategies and recent financial performance. The
accounting guidance states that forming a conclusion that a valuation
allowance is not needed is difficult when there is negative evidence such as
cumulative losses in recent years. As a result of this guidance, our recent
cumulative losses and the full utilization of our loss carryback potential,
we concluded that a partial valuation allowance against our net deferred tax
assets was appropriate. Accordingly, as of fiscal year 2003, after
considering only the effects of prudent and feasible tax strategies, we
recognized a valuation allowance of $28.4 million. We continue to believe
that the combination of all positive and negative factors will enable us to
realize the full value of the deferred tax assets. If, after future
assessments of the realizability of our deferred tax assets, we determine a
lesser allowance is required, we would record a reduction to income tax
expense and the valuation allowance in the period of such determination.
Legal Proceedings
We are regularly involved in legal proceedings in the ordinary course of our
business. Because of the uncertainties related to the outcome of the
litigation and range of loss on cases other than breach of warranty, we are
generally unable to make a reasonable estimate of the liability that could
result from an unfavorable outcome. In other cases, including products
liability (discussed above) and personal injury cases, we prepare estimates
based on historical experience, the professional judgment of our legal
counsel, and other assumptions that we believe are reasonable. As
additional information becomes available, we reassess the potential
liability related to pending litigation and revise our estimates. Such
revisions and any actual liability that greatly exceeds our estimates could
materially impact our results of operations and financial position.
Repurchase Commitments
Producers of recreational vehicles and manufactured housing customarily
enter into repurchase agreements with lending institutions that provide
wholesale floorplan financing to independent dealers. These agreements
generally provide that, in the event of a default by a dealer in its
obligation to these credit sources, we will repurchase product. With most
repurchase agreements our obligation ceases when the amount for which we are
contingently liable to the lending institution has been outstanding for more
than 12, 18 or 24 months, depending on the terms of the agreement. The
contingent liability under these agreements approximates the outstanding
principal balance owed by the dealer for units subject to the repurchase
agreement less any scheduled principal payments waived by the lender.
Although the maximum potential contingent repurchase liability approximated
$153 million for inventory at manufactured housing dealers and $505 million
for inventory at RV dealers as of July 27, 2003, the risk of loss is reduced
by the potential resale value of any products that are subject to
repurchase, and is spread over numerous dealers and financial institutions.
The gross repurchase obligation will vary depending on the season and the
level of dealer inventories. Typically, the fiscal third quarter repurchase
obligation will be greater than other periods due to high dealer
inventories. The RV repurchase obligation is significantly more than the
manufactured housing obligation due to a higher average cost per motor home
and more units in dealer inventories. Past losses under these agreements
have not been significant and lender repurchase demands have been funded out
of working capital. Through the first three months of fiscal year 2004, we
have repurchased $1.3 million of product compared to $0.6 million for the
same period in the prior year, with a loss of $220,000 incurred this year
compared to a repurchase loss of $358,000 in the prior year. In the past
three fiscal years we have had the following repurchase activity:
Fiscal Years
(Amounts in millions)
2003 2002 2001
Units 182 417 641
Repurchase amount $4.4 $10.5 $15.0
Loss recognized (1) $ -- $ 2.1 $ 3.3
(1) An accrual for a potential repurchase loss was reversed in the fourth
quarter of fiscal 2003 that offset losses incurred during that year.
Results of Operations
The following is an analysis of changes in key items included in the
condensed consolidated statements of operations for the 13-week periods
ended July 27, 2003, and July 28, 2002.
13 Weeks Ended
July 27, 2003
--------------
(Unaudited)
(Amounts in thousands) Increase %
(Decrease) Change
--------- ------
Net sales $34,856 5.7%
Cost of products sold 39,799 8.1
------ ----
Gross profit (4,943) (4.1)
----- ----
Selling expenses (7,169) (13.5)
General and administrative expenses (1,214) (2.0)
------ ----
Operating income 3,440 37.5
Other expense (872) (38.2)
---- ----
Income before taxes and minority interest 4,312 62.5
Provision for income taxes 765 22.7
Minority interest in Fleetwood Capital
Trusts, net of income taxes 111 2.2
---- ----
Net income $3,436 -%
====== ===
Current Quarter Compared to Same Quarter Last Year
Consolidated Results:
We earned net income of $1.9 million or $.05 per diluted share in the July
quarter compared to a net loss of $1.5 million or $.04 per diluted share a
year ago. The primary reasons for the improved results were a 6 percent
increase in sales and a 7 percent decline in operating expenses, resulting
mostly from lower selling expenses, along with reductions in insurance
related costs.
Income from operations was $12.6 million compared to $9.2 million in the
prior year. The manufacturing segment earned $17.5 million, excluding
intercompany profit, and housing retail lost $8.5 million. The RV Group
earned $14.9 million of income from operations, $2.8 million less than the
$17.7 million earned in the prior year mainly due to lower gross margin in
all three segments. The Motor Home Division's operating income increased 11
percent to $12.0 million compared to $10.8 million in the prior year mainly
due to an 18 percent increase in sales. The Travel Trailer Division
earned $3.9 million of income in the first quarter compared to $5.7 million
in the prior year. The $1.8 million decline in income was mainly
attributed to gross margin erosion from incremental costs associated with
production inefficiencies related to 2004 model year products. Even though
travel trailers continued to experience production inefficiencies,
incremental production costs were significantly improved over the January
and April quarters. Folding trailers incurred a loss of $976,000 from
operations in the current quarter compared to earning $1.1 million in the
prior year primarily due to a 30 percent decline in shipments. This was a
result of soft market conditions experienced in the folding trailer
industry. The Housing Group earned $1.9 million from manufacturing
operations, before intercompany profit elimination, compared to $761,000 in
the prior year. The improvement in profitability, despite an 11 percent
decline in sales, was the result of an increase in gross margin and a 31
percent decline in product warranty expenses.
Gross margin declined from 20.0 percent to 18.1 percent of sales mainly due
to incremental RV manufacturing costs associated with the introduction of
new products. Gross margin in the RV segment decreased from 16.4 percent
to 14.1 percent of sales in the current year, mostly due to higher labor
costs resulting from inefficiencies and complexities in the changeover to
new products, partially offset by higher average selling prices. Gross
margin for the manufactured housing segment improved from 21.5 percent to
22.8 percent as a result of selling price increases that more than offset
increases to raw material costs and direct labor wage rates. Retail
housing gross profit as a percentage of sales improved to 20.6 percent for
the first quarter compared to 19.4 percent in the prior year due to a
concerted effort to maintain margins in a very competitive market.
Operating expenses, which include selling, general and administrative
expenses, decreased $8.4 million or 7 percent in the first quarter, and
fell as a percentage of sales from 18.5 percent to 16.2 percent. The
operating expense decline from the prior year was primarily due to lower
selling expenses, which decreased $7.2 million or 13 percent and fell as a
percentage of sales from 8.7 percent in the prior year to 7.1 percent for
the current quarter mostly due to lower warranty, sales commissions,
advertising and promotional expenses. Product warranty expenses declined
$3.6 million or 12 percent due to a $5.2 million reduction in Housing Group
direct and indirect warranty expenses resulting from lower volume and cost-
cutting actions, partially offset by a $2.1 million increase in RV warranty
expense. General and administrative expenses declined $1.2 million, and
decreased as a percentage of sales from 9.8 percent to 9.1 percent. The
most significant decreases were mainly due to a $1.9 million decrease in
the cost of the Company-owned life insurance (COLI) and split-dollar
insurance expenses, along with reductions in products liability and health
benefit insurance costs. The values of the securities supporting the COLI
and split-dollar life insurance are affected each quarter by changes in the
stock and bond markets. Last year, with a declining stock market compared
to the prior quarter, the securities supporting the COLI and split-dollar
life insurance policies declined in value resulting in a charge in that
quarter, whereas this past quarter the value of the securities increased
resulting in a credit, or a reduction, to those accounts. Also
contributing to the decrease this past quarter was a $1.2 million reduction
to the group insurance reserve due to the cost of benefits being lower than
anticipated and a $1.2 million decrease in expenses resulting from an
adjustment to the products liability loss reserves. Partially offsetting
the decreases was a $1.2 million increase in HomeOne Credit Corp. expenses,
which were related to the ramp up of the finance subsidiary's operations
over the past year.
Other expense for the first quarter was $1.4 million compared to $2.3
million in the prior year. The current quarter included a $724,000 gain
from the sale of two properties contrasted with a $343,000 loss on the
disposal of assets in the prior year.
The effective tax rate was 36.9 percent in the first quarter compared to
48.9 percent one year ago. The current year's rate does not include a
federal provision because we have a net operating loss (NOL) carryforward
and a partial valuation allowance of the net deferred tax asset. The
relatively high rates for the two periods (considering there is not a
federal provision for the current year) were the result of the low level of
pre-tax income and the fact that we don't receive a tax benefit in some
states, such as Texas, where losses were the highest.
Recreational Vehicles:
Recreational vehicle sales rose 18 percent to $436.6 million compared to
$370.9 million for last year's July quarter. Travel trailer sales led the
group with a 29 percent increase to $156.8 million, compared to $121.8
million in the prior year, primarily due to customer acceptance of 2004
model year products. Motor home sales improved by 18 percent to $257.3
million versus $218.3 million in the prior year, driven by a 16 percent
increase in the deliveries of Class A diesel products that have a higher
average selling price. Folding trailer sales declined by 27 percent from
the prior year to $22.4 million as a result of a declining market for that
segment.
The RV Group earned $14.9 million, which was mainly attributable to the
Motor Home Division. Motor home operating income increased 11 percent to
$12.0 million in the first quarter as a result of an increase in diesel
product sales. The Travel Trailer Division generated operating income of
$3.9 million in the current July quarter, which was $1.8 million lower than
the prior year's income of $5.7 million, primarily due to incremental costs
incurred in the production of new products. The Travel Trailer Division
introduced new products that represented about 60 percent of its product
offering at the national trade show in December. Due to the significant
increase in variety, larger sizes and additional features in the new
models, the manufacturing facilities incurred labor inefficiencies and
overtime in their production, resulting in higher costs. Travel trailer
operations also struggled in the prior two quarters with similar
inefficiencies; however, by the end of the first quarter, such
inefficiencies had been all but eliminated. Folding trailers incurred a
loss from operations of $976,000 compared to earning $1.1 million in the
prior year. The current year's loss was attributed to a 30 percent
reduction in volume due to soft market conditions. Operating expenses for
the RV Group rose $3.5 million but fell from 11.6 percent of sales to 10.7
percent in the current year mainly due to a 19 percent reduction in selling
expenses and a rise in product warranty costs that was less than the rate
of revenue growth.
Manufactured Housing:
Gross manufacturing revenues of $169.8 million fell 11 percent from the
prior year and included $27.1 million of intercompany sales to Company-
owned retail home centers. Manufacturing unit volume declined 17 percent
to 5,372 homes, while the number of sections was off the same percent to
9,859. Multi-section homes represented 82 percent of factory sales versus
81 percent last year. Sales volume was below the prior year due to
continued weakness in the manufactured housing market, which has been
adversely affected by limited availability of retail financing and
competition from repossessed units.
Operating income, before the addition of intercompany profit of $618,000
this year and $2.2 million in the prior year, improved from $761,000 to
$1.9 million, mainly due to improved gross margin and lower product
warranty expense. Gross profit margin for the Housing Group rose from 21.5
percent to 22.8 percent of sales, mainly as a result of increased selling
prices that more than offset higher raw material costs and direct labor
wage rate increases. Housing Group operating costs declined by $3.4
million or 8 percent as a result of a 31 percent drop in product warranty
costs. Partially offsetting the warranty reduction was an increase in
general and administrative expenses due to a larger allocation of corporate
expenses this year.
Retail Housing Operations:
Retail housing revenues from Fleetwood Retail Corp. (FRC) decreased 21
percent to $57.6 million in the first quarter on a 24 percent decline in
unit sales due to difficult market conditions caused by restrictive
financing. The retail division incurred an operating loss of $8.5 million
for the current quarter compared to a loss of $9.8 million a year ago. The
operating loss was lower despite the drop in revenues due to an improvement
in gross margin from 19.4 percent to 20.6 percent of sales and a 15 percent
reduction in operating expenses resulting from lower volume, store closures
and reduced staffing. Interest expense on inventory financing decreased by
25 percent from $644,000 to $485,000, reflecting a 7 percent drop in
inventories and lower interest rates. The retail housing segment was
operating 133 stores at the end of July this year versus 136 stores last
year.
Fleetwood Retail Corp.
Key Operational Information
Quarter Ended*
June 2003 June 2002
--------- ---------
Number of retail stores
Beginning 136 138
New 3 1
Closed (6) (3)
Transferred 0 0
--- ---
Ending 133 136
Average number of retail stores 135 137
Unit volume
Retail - new
Single-section 165 254
Multi-section 836 1,056
----- ------
Subtotal 1,001 1,310
Retail - pre-owned 147 195
----- -----
Total 1,148 1,505
===== =====
Average number of homes sold per store 8 11
Average sales price
New
Single-section $30,388 $27,180
Multi-section $58,987 $53,262
Pre-owned $17,499 $10,541
Average unit inventory per store at quarter end
New 19 19
Pre-owned 3 3
* The above statistics are as of FRC's first fiscal quarter end, which
is the last day in June. Unless noted otherwise, all other statistics
in this report related to FRC are as of Fleetwood Enterprises, Inc.'s
first fiscal quarter ended July 27, 2003.
Supply Operations:
The Supply Group contributed first quarter revenues of $8.4 million
compared to $9.5 million a year ago. Operating income decreased from $1.0
million in the prior year to $740,000 in the current quarter due to the
lower sales.
Business Outlook
The combination of an improved RV market and positive acceptance of our new
motor home products has been reflected in increased market share and higher
production rates, resulting in significantly improved motor home earnings
compared with the past two years. The Travel Trailer Division introduced
new products covering 60 percent of its model line-up at the national trade
show in December 2002. The impact of the new products on production
efficiencies negatively affected the operating results in the second half
of fiscal year 2003. However, we have now begun to experience improved
operating efficiencies and expect the travel trailer business to sustain
profitability in fiscal year 2004.
With the current low interest rates and the introduction of new products,
we expect that our RV Group will continue to achieve improved operating
results in fiscal 2004 over fiscal 2003. However, the anticipated
improvement could be at risk if consumer confidence, which is a key factor
affecting the recreational vehicle industry, deteriorates due to concerns
regarding the economy, gasoline prices or global tensions.
Conditions in the manufactured housing market have been in decline since
1999, and further deteriorated in the last half of fiscal year 2003.
Competition from repossessed homes, more stringent lending standards,
relatively high retail interest rates for manufactured housing and the
shortage of retail financing have adversely affected the industry. These
conditions were aggravated by several developments during calendar 2002. As
a result of the exit of several consumer lenders, there has been a reduction
in the volume of loans being written, particularly in the chattel, or home
only, portion of the business, related mostly to single-section homes.
Further, legislation in Texas, the largest manufactured home state in the
country, which was effective at the beginning of calendar year 2002,
required more restrictive procedures and legal processes to be applied to
sales of manufactured homes. The Texas legislature has passed a new law as
of June 2003 that substantially moderates the effect of the earlier, more
restrictive statute. In March 2002, Conseco Finance Servicing Corp.
(Conseco), the largest floorplan lender in the country, announced its
withdrawal from that business. In October, Deutsche Financial Services
(Deutsche), another large housing wholesale floorplan lender, announced it
would be exiting the business. Since the announcements by Conseco and
Deutsche, dealer transition to other floorplan sources has been orderly and
most dealers have found alternative sources of inventory financing,
including our Company-owned stores.
In October 2002, Conseco, also formerly the largest provider of retail
financing to the manufactured housing industry, announced it would no longer
provide retail financing in any form and that it would more aggressively
liquidate its existing inventory of repossessed homes. Further, Oakwood
Homes, the fourth largest manufacturer, as well as a major industry retailer
and lender, announced in November 2002 that it was filing for Chapter 11
bankruptcy protection. Subsequently, Conseco and Oakwood have been
aggressively liquidating their inventories of repossessed homes, which has
depressed demand and pricing for new homes even further. We expect the
industry will benefit in the longer term from these accelerated efforts to
liquidate inventories of repossessed homes, thereby eventually reducing the
competition for new homes. In fact, there are some indications the
inventory of foreclosed homes appears to be headed towards equilibrium.
However, we expect we will continue to be challenged by the overhang of
repossessions in the near term. In the meantime, industry shipments in the
first half of calendar 2003 were lower than in any other six months in the
past 40 years. As a result of these conditions, over the past three years
there have been significant industry manufacturing and retail capacity
reductions and more are expected until retail finance and inventory
conditions improve.
We expect that the operating environment for manufactured housing will
continue to be challenging, at least through fiscal year 2004. Recently,
Fannie Mae, the nation's largest source of financing for home mortgages,
promulgated new regulations related to purchasing mortgages on manufactured
homes that will further restrict the availability of financing. However, a
national lender has recently announced its intention to provide manufactured
housing retail financing. Depending on the extent of the financing actually
provided by this lender, in combination with retail financing that may be
provided by other new entrants or that Fleetwood may make available through
our own HomeOne Credit Corp. finance subsidiary, it is possible that new
sources of financing could begin to moderate the effect of restrictive
retail financing that has challenged the manufactured housing industry in
recent years. For fiscal 2004, we expect to achieve profitability in the RV
Group and the manufacturing segment of housing, although we expect we will
incur an operating loss at our retail housing business. Overall, we believe
that we have an excellent opportunity to have a profitable year in fiscal
2004. Toward that end, we currently expect to generate a net profit in the
second quarter.
Liquidity and Capital Resources
We have historically relied upon internally generated cash flows to satisfy
working capital needs and to fund capital expenditures. In recent periods,
however, primarily due to operating losses, we have used external funding
sources to supplement internal cash flows. Cash totaling $15.8 million was
used in operating activities during the first quarter compared to cash
generated of $50.5 million for the similar period one year ago. The use of
cash from operations resulted primarily from a $40.2 million increase in
receivables as a result of improved sales particularly in the month of July
this year compared to the prior year. The increase in receivables was
partially offset by a $23.6 million drop in inventories. Last year, the
$50.5 million of cash generated from operations was mainly attributable to a
$30 million refund of Federal taxes, arising from a carryback of losses to
prior periods. As a result of the above-mentioned changes, cash and
marketable investments decreased $21.0 million from $69.8 million as of
April 27, 2003, to $48.8 million as of July 27, 2003.
Additional cash outlays in the first quarter included $7.7 million in
finance loans receivable at our HomeOne subsidiary and $601,000 in capital
expenditures. In the same period of the prior year, the Company had capital
expenditures of $4.4 million. Distributions of $3.0 million on the 6%
convertible trust preferred securities were deferred, whereas $4.5 million
in distributions on the 9.5% issues were paid in cash this year and in
common stock in the first quarter of fiscal year 2003.
At the end of the current July quarter, short-term borrowings under our
secured syndicated credit facility, led by Bank of America, N.A., as
administrative agent, were $17.9 million. Currently, lender commitments to
the facility total $130 million. Our borrowing capacity, however, is
governed by the amount of a borrowing base, consisting of inventories and
accounts receivable, that fluctuates significantly from week to week. The
borrowing base is revised weekly for changes in receivables and monthly for
changes in inventory balances. Under the borrowing agreement, $30 million
must be maintained as minimum unused availability, with the remainder
available to support standby letters of credit and fund borrowings. At the
end of the July quarter, the borrowing base totaled $138.2 million. After
consideration of the unused minimum requirement, collateral reserves of $2.3
million, $45.0 million in standby letters of credit and the outstanding
borrowings, unused borrowing capacity was approximately $33.5 million.
We believe the combination of our current holdings of cash and short-term
marketable investments, estimated future cash flows from operations and
existing credit facilities will be sufficient to satisfy our foreseeable
cash requirements for the next 12 months, including up to $30 million for
capital expenditures.
Contracts and Commitments
Below is a table showing payment obligations for long-term debt, capital
leases, operating leases and purchase obligations for the next five years
and beyond:
Payments Due by Period
------------------------------------------
(Amounts in thousands)
More
1-3 3-5 than 5
Contractual Obligations Total years years years
- ----------------------- ----- ----- ----- -----
Long-term debt $2,354 $681 $311 $1,362
Capital lease obligations 1,440 1,440 - -
Operating leases (1) 38,304 26,531 6,699 5,074
Purchase obligations (2) 10,491 10,491 - -
Other long-term liabilities:
Deferred compensation
and non-qualified
retirement plans 58,359 22,895 17,839 17,625
Insurance reserves 29,656 29,656
Company-obligated
mandatorily redeemable
convertible preferred
securities (3) 374,685 -- -- 374,685
-------- ------ ------- --------
Total $515,289 $91,694 $24,849 $398,746
======== ======= ======= ========
* Includes payments due from July 28, 2003, through fiscal year ending
April 30, 2006.
** Includes payments due from April 30, 2006, through fiscal year ending
April 27, 2008.
(1) Most of the Company's retail sales locations and certain of its other
facilities are leased under terms that range from monthly to 15 years.
Also included in the above amounts are equipment leases. Management
expects that in the normal course of business, leases will be renewed or
replaced by other leases for the continuing operations.
(2) We have an operating agreement with a large dealer who manages 41 retail
store locations for FRC. Either party may terminate the agreement by
giving written notice 120 days in advance of the date of the
termination. If termination notice is provided, Fleetwood Enterprises,
Inc. is obligated to repurchase the outstanding inventory at that time
for the amount of the dealer's obligation to its flooring institution.
Similarly, an equivalent amount is included in the aggregate repurchase
obligation described in footnote 9 to the Company's financial statements
contained elsewhere in this Report. That repurchase obligation would
become due and payable to the flooring institution only in the event the
dealer defaults prior to its agreement with Fleetwood being terminated.
(3) The mandatorily redeemable convertible preferred securities were issued
in three separate transactions, and are reflected on the balance sheet
as a quasi-equity interest. In fiscal 1998, Fleetwood, through a wholly
owned Delaware business trust, issued $287.5 million aggregate
liquidation amount of 6% convertible trust preferred securities due
2028. In fiscal 2002, Fleetwood, through another Delaware business
trust, exchanged $86.25 million in liquidation amount of the existing 6%
convertible preferred securities for $37.95 million in liquidation
amount of new 9.5% convertible preferred securities due 2013. Also in
fiscal 2002, Fleetwood, again through a Delaware business trust, issued
$150 million in aggregate liquidation amount of new 9.5% convertible
preferred securities due 2013. The obligations of the business trusts
to holders of the trust preferred securities are supported by debentures
issued by Fleetwood to the respective business trusts. The interest is
payable quarterly. Currently, as permitted by the trust documents,
payment of interest is being deferred on the outstanding 6% convertible
trust preferred securities.
Off-Balance Sheet
In March 2002, Fleetwood entered into a sale and leaseback agreement
involving 22 manufactured housing retail stores. The minimum rental
payments required under this agreement are included in the Contractual
Obligation schedule above, under operating leases. The agreement includes a
contingent rental reset provision which provides that, in the event that the
Company's credit rating falls below a certain level anytime prior to March
2005, the Company could be required, at the option of the lessor, to make an
accelerated rent payment equal to the unamortized principal of the lessor's
underlying debt. Since entering into the agreement, the Company's credit
rating has fallen below the specified level, raising the possibility that
the provision could be exercised in March 2005. The accelerated payment
would be approximately $20 million.
We describe our aggregate contingent repurchase obligation at footnote 9 to
the Company's consolidated condensed financial statements and under Critical
Accounting Policies at Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations contained elsewhere in this
Report.
Under the senior credit agreement, Fleetwood Enterprises, Inc. is a
guarantor of the borrowings of Fleetwood Holdings, Inc. (FHI) and Fleetwood
Retail Corp. (FRC). FHI includes most of the manufacturing wholly owned
subsidiaries and FRC includes all the retail housing subsidiaries. Only the
FRC parent company, however, and seven of the retail subsidiaries are
borrowers under the loan and covered under the guarantee. In addition,
Fleetwood Enterprises, Inc. guarantees FRC's floorplan obligation to Textron
pursuant to FRC's wholesale financing agreement with Textron.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risks related to fluctuations in interest rates on
marketable investments, investments underlying a Company-owned life
insurance program (COLI), variable rate debt under the secured credit
facility and the liability for flooring of manufactured housing retail
inventories. With respect to the COLI program, the underlying investments
are subject to both interest rate risk and equity market risk. We do not
currently use interest rate swaps, futures contracts or options on futures,
or other types of derivative financial instruments.
The vast majority of our marketable investments are in 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. Based upon the amount
of variable rate debt outstanding at the end of the first quarter, and
holding the variable rate debt balance constant, each one percentage point
increase in interest rates occurring on the first day of an annual period
would result in an increase in interest expense of approximately $335,000.
We do not believe that future market equity or interest rate risks related
to our marketable investments or debt obligations will have a material
impact on our results.
Item 4. Controls and Procedures
The Company's management evaluated, with the participation of its Chief
Executive Officer and Chief Financial Officer, the effectiveness of the
Company's disclosure controls and procedures (as defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the
"Exchange Act")), as of the end of the period covered by this Report. Based
on their evaluation, the Company's Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures were effective as of July 27, 2003.
There have been no changes in the Company's internal control over financial
reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange
Act) that occurred during the Company's fiscal quarter ended July 27, 2003,
that have materially affected, or are reasonably likely to materially
affect, the Company's internal control over financial reporting.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
As previously reported, we filed a complaint in state court in Kansas, in
the 18th Judicial District, District Court, Sedgewick County, Civil
Department, against The Coleman Company, Inc. in connection with a dispute
over the use of the "Coleman" brand name. Our Folding Trailer Division has
licensed the name since 1989, when we bought Coleman Recreation Vehicles,
Inc. Coleman recently notified us that it now has a different
interpretation of the manner in which royalties were intended to be
calculated under the license agreement. We had entered into discussions
with Coleman to address these concerns in good faith, but on May 12, 2003,
Coleman notified us that it had terminated the agreement and ordered us to
cease using the name. Our lawsuit seeks declaratory and injunctive relief.
On June 6, 2003, Coleman filed an answer and counterclaimed against us
alleging various counts, including breach of contract and trademark
infringement. A hearing on the matters was held on June 17, 18 and 19. On
July 11, 2003, the Court issued an order stating that the rights and
obligations of the parties should be resolved at a trial and not by
injunctive relief. On July 16, 2003, Coleman filed a motion for
reconsideration. The Court heard arguments on Coleman's motion on August
15, 2003, and on August 18, 2003, the Court issued an order granting a
temporary injunction to Coleman enjoining Fleetwood from certain conduct,
including using Coleman's name, trademark or logos. The Company will comply
with the Court's order. Trial in this matter is currently scheduled for
December 2, 2003. We intend to aggressively pursue this litigation and
provide a vigorous defense to Coleman's counterclaim. It is not possible at
this time to properly assess the risk of an adverse verdict or the magnitude
of the possible exposure.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
15.1 Letter of Acknowledgment of Use of Report on Unaudited Interim
Financial Information
31.1 Certification of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
On May 2, 2003, we filed a Current Report on Form 8-K disclosing that
we had issued a news release reporting the sales results for our
fourth fiscal quarter and fiscal year ended April 27, 2003.
On July 23, 2003, we filed a Current Report on Form 8-K disclosing
that we had issued a news release reporting our financial
results for the fourth fiscal quarter and fiscal year ended April 27,
2003, and we attached a transcript of our conference call script.
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.
/s/ Boyd R. Plowman
--------------------
Boyd R. Plowman
Executive Vice President and
Chief Financial Officer
September 3, 2003
Exhibit 15.1
August 29, 2003
Board of Directors and Shareholders
Fleetwood Enterprises, Inc.
We are aware of the incorporation by reference in the Registration Statement
(Form S-8 No. 33-55824) of Fleetwood Enterprises, Inc., Registration
Statement (Form S-8 No. 333-15167) of Fleetwood Enterprises, Inc.,
Registration Statement (Form S-8 No. 333-37544) of Fleetwood Enterprises,
Inc., Registration Statement (Form S-8 No. 333-101543) of Fleetwood
Enterprises, Inc. for the registration of 3,552,698 shares of its common
stock, Registration Statement (Form S-3 No. 333-73678) of Fleetwood
Enterprises, Inc. for the registration of 2,359,945 shares of its common
stock, and the Registration Statement (Form S-3 No. 333-102585) of Fleetwood
Enterprises, Inc. of our report dated August 29, 2003 relating to the
unaudited condensed consolidated interim financial statements of Fleetwood
Enterprises, Inc. that are included in its Form 10-Q for the quarter ended
July 27, 2003.
/s/ ERNST & YOUNG LLP
---------------------
Exhibit 31.1
Certification
I, Edward B. Caudill, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Fleetwood
Enterprises, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such
evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant's ability
to record, process, summarize and report financial information;
and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: September 3, 2003
/s/ Edward B. Caudill
- --------------------------
Edward B. Caudill
Chief Executive Officer
Exhibit 31.2
Certification
I, Boyd R. Plowman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Fleetwood
Enterprises, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such
evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant's ability
to record, process, summarize and report financial information;
and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: September 3, 2003
/s/ Boyd R. Plowman
- --------------------------
Boyd R. Plowman
Chief Financial Officer
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Each of the undersigned hereby certifies, in his capacity as an officer
of Fleetwood Enterprises, Inc. (the "Company"), for purposes of 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
1. the Quarterly Report of the Company on Form 10-Q for the period
ended July 27, 2003, fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934;
and
2. the information contained in such report fairly presents, in all
material respects, the financial condition and results of
operations of the Company.
Dated: September 3, 2003
/s/ EDWARD B. CAUDILL
- ----------------------
Edward B. Caudill
President and Chief Executive Officer
/s/ BOYD R. PLOWMAN
- --------------------
Boyd R. Plowman
Executive Vice President and Chief Financial Officer