Consolidated Results in Fiscal Year 2008 Compared to Fiscal Year 2007
Consolidated Results:
The following table presents net income (loss) and diluted earnings (loss) per share for fiscal 2008 and 2007 (amounts in thousands, except per share data):
| 2008 | 2007 | ||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Amount | % of Net Sales |
Amount | % of Net Sales |
Change | % Change | ||||||||||||||||||
| Net income (loss) from continuing operations |
$ | 2,919 | 0.2 | % | $ | (78,013 | ) | (4.1 | )% | $ | 80,932 | NM | |||||||||||
| Net loss | (1,013 | ) | (0.1 | ) | (89,961 | ) | (4.7 | ) | 88,948 | (98.9 | )% | ||||||||||||
| Diluted loss per share | $ | (.02 | ) | $ | (1.41 | ) | $ | 1.39 | 98.6 | ||||||||||||||
The increase in income from continuing operations during fiscal 2008 resulted from improved gross margins and lower operating expenses that more than offset a 13.5% decline in revenues. The improvement was further supplemented by gains from the sales of excess or idle properties and the absence of substantial restructuring costs incurred in the prior year. Losses from discontinued operations related to the folding trailer business, which was sold shortly after the end of the fiscal year.
Net Sales
The following table presents consolidated net sales by group for fiscal 2008 and 2007 (amounts in thousands):
| 2008 | 2007 | ||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Amount | % of Net Sales |
Amount | % of Net Sales |
Change | % Change | ||||||||||||||||||
| RV Group | $ | 1,163,041 | 70.1 | % | $ | 1,400,886 | 73.0 | % | $ | (237,845 | ) | (17.0 | )% | ||||||||||
| Housing Group | 496,939 | 29.9 | 518,461 | 27.0 | (21,522 | ) | (4.2 | ) | |||||||||||||||
| Net sales | $ | 1,659,980 | 100.0 | % | $ | 1,919,347 | 100.0 | % | $ | (259,367 | ) | (13.5 | ) | ||||||||||
Consolidated net sales decreased 13.5% to $1.66 billion in the current year from $1.92 billion in the prior year, as all businesses suffered in relation to declining economic conditions, deteriorating financial markets, and falling consumer confidence resulting in soft market conditions.
Consolidated Net Sales, Cost of Products Sold, and Gross Profit
The following table presents consolidated net sales, cost of products sold, and gross profit for fiscal 2008 and 2007 (amounts in thousands):
| 2008 | 2007 | ||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Amount | % of Net Sales |
Amount | % of Net Sales |
Change | % Change | ||||||||||||||||||
| Net sales | $ | 1,659,980 | 100.0 | % | $ | 1,919,347 | 100.0 | % | $ | (259,367 | ) | (13.5 | )% | ||||||||||
| Cost of products sold | 1,410,133 | 84.9 | 1,654,370 | 86.2 | (244,237 | ) | (14.8 | ) | |||||||||||||||
| Gross profit | $ | 249,847 | 15.1 | % | $ | 264,977 | 13.8 | % | $ | (15,130 | ) | (5.7 | ) | ||||||||||
Gross margin improved from the prior year mainly due to lower labor cost as a percentage of sales from improved travel trailer labor efficiencies and reduced fringe benefit costs.
Operating Expenses
The following table presents operating expenses for fiscal 2008 and 2007 (amounts in thousands):
| 2008 | 2007 | ||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Amount | % of Net Sales |
Amount | % of Net Sales |
Change | % Change | ||||||||||||||||||
| Selling | $ | 46,769 | 2.8 | % | $ | 55,181 | 2.9 | % | $ | (8,412 | ) | (15.2 | )% | ||||||||||
| Warranty and service | 70,577 | 4.3 | 94,278 | 4.9 | (23,701 | ) | (25.1 | ) | |||||||||||||||
| General and administrative | 145,128 | 8.7 | 160,810 | 8.4 | (15,682 | ) | (9.8 | ) | |||||||||||||||
| Operating expenses | $ | 262,474 | 15.8 | % | $ | 310,269 | 16.2 | % | $ | (47,795 | ) | (15.4 | ) | ||||||||||
Operating expenses, which include selling, warranty and service, and general and administrative expenses, were lower due to the closure of five travel trailer plants, reduced staffing levels, and favorable products liability costs. Also, warranty expense dropped as a result of lower sales and a return to a more cost-effective factory-based service, rather than a centralized service operation.
Other Operating Income (Expense), net
Other operating income (expense), net, of $30.4 million in fiscal 2008 consisted of gains on the sale of excess or idle properties, partially offset by $4.4 million of impairment charges on idle facilities and $1.7 million of restructuring costs. In fiscal 2007, other operating expense, net, included approximately $14.0 million of restructuring costs related to several plant closures and $2.8 million of impairment charges on idle facilities, partially offset by $4.3 million of gains from the sale of idle facilities.
Other Income (Expense)
Other income (expense) consisted of investment income, interest expense, and miscellaneous other income. Investment income decreased to $4.5 million from $5.9 million in the prior year due to lower invested funds. Interest expense declined to $23.0 million from $25.6 million mainly due to lower borrowings and the redemption of $50 million in face value of the 6% convertible trust preferred securities in June 2006. The redemption also generated other income of $18.5 million representing a pre-tax gain on the purchase and resulted in the cancellation of one million shares or 24.8% of the previously outstanding 6% convertible trust preferred securities at a discount to par value.
Benefit (Provision) for Income Taxes
The fiscal 2008 tax benefit from continuing operations was principally due to $4.9 million of non-cash adjustments to the carrying amount of the deferred tax asset as a result of changes in our tax planning strategies. The prior year tax provision resulted primarily from the effect of a $17.2 million increase in the partial valuation allowance attributed to our deferred tax assets.
Recreational Vehicles:
The following table presents RV Group net sales by division for fiscal 2008 and 2007 (amounts in thousands):
| 2008 | 2007 | ||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Amount | % of Net Sales |
Amount | % of Net Sales |
Change | % Change | ||||||||||||||||||
| Motor homes | $ | 919,578 | 79.1 | % | $ | 961,925 | 68.7 | % | $ | (42,347 | ) | (4.4 | )% | ||||||||||
| Travel trailers | 219,014 | 18.8 | 391,310 | 27.9 | (172,296 | ) | (44.0 | ) | |||||||||||||||
| RV supply | 24,449 | 2.1 | 47,651 | 3.4 | (23,202 | ) | (48.7 | ) | |||||||||||||||
| Net sales | $ | 1,163,041 | 100.0 | % | $ | 1,400,886 | 100.0 | % | $ | (237,845 | ) | (17.0 | ) | ||||||||||
Recreational vehicle sales for the year decreased 17.0%, mainly due to challenging economic and market conditions affecting all RV segments and restructuring actions taken in the travel trailer segment to reduce capacity in the fourth quarter of fiscal 2007 and into the first fiscal quarter of 2008. The decline in motor home revenues was mainly due to a weak market as consumer concerns regarding volatile fuel prices and rising interest rates negatively affected demand. The retail market for motor homes for calendar year 2007 was down 6.0% compared to a drop of 5.4% in our retail activity resulting in an increase in market share to 16.4%. The increase resulted from the introduction of low-priced Class A and Class C gas units and a more fuel-efficient Class C product later in calendar 2007.
Travel trailer sales fell 44% mainly due to the impact of plant closures in specific regions where we no longer produce certain entry-level products, as well as dealers' reluctance to replace sold units in light of a weaker economic outlook. The retail market for travel trailers for calendar year 2007 was up 2.1% on the strength of conventional travel trailers, which were up 5.4% compared to fifth-wheel trailers, which fell 4.6%. Fleetwood's retail sales for the same period were down by 11.8%, mainly due to a lack of competitive products in several product segments in the early part of the year.
Gross margin for the RV Group rose from 11.3% to 11.8% primarily due to lower material and labor costs as a percentage of travel trailer sales. Material costs were reduced through plant-based initiatives related to negotiations and freight management while labor costs were lowered through productivity gains and reduced fringe benefits. Motor home gross margin was 13.2% this year compared to 13.3% in the prior fiscal year; the slight decrease was mainly due to increased sales incentives in the last half of the fiscal year.
Operating expenses, including selling, warranty, and general and administrative expenses, for the RV Group were $152.3 million, $47.2 million lower than the prior year and lower as a percentage of sales, declining from 14.2% in the prior year to 13.1% for the current period. The decrease in expenses was mostly due to improved warranty experience and lower general and administrative expenses related to travel trailer restructuring initiatives.
Other operating income, net, was $18.1 million related to gains from the sales of idle properties contrasted to $10.8 million of restructuring costs in the prior year related mostly to the closure of five travel trailer plants.
The following table presents division operating income (loss) for fiscal 2008 and 2007 (amounts in thousands):
| 2008 | 2007 | ||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Amount | % of Net Sales |
Amount | % of Net Sales |
Change | % Change | ||||||||||||||||||
| Motor homes | $ | 14,767 | 1.6 | % | $ | 12,122 | 1.3 | % | $ | 2,645 | 21.8 | % | |||||||||||
| Travel trailers | (16,765 | ) | (7.7 | ) | (65,301 | ) | (16.7 | ) | 48,536 | 74.3 | |||||||||||||
| RV supply | 4,998 | 20.4 | 1,598 | 3.4 | 3,400 | 212.8 | |||||||||||||||||
| RV Group | $ | 3,000 | 0.3 | $ | (51,581 | ) | (3.8 | ) | $ | 54,581 | NM | ||||||||||||
Manufactured Housing:
The following table presents Housing Group net sales for fiscal 2008 and 2007 (amounts in thousands):
| 2008 | 2007 | ||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Amount | % of Net Sales |
Amount | % of Net Sales |
Change | % Change | ||||||||||||||||||
| Net sales | $ | 496,939 | 100.0 | % | $ | 518,461 | 100.0 | % | $ | (21,522 | ) | (4.2 | )% | ||||||||||
Results for the Housing Group consist of factory wholesale revenues, which include units built to the HUD construction code and distributed through an independent dealer network, and modular homes, built to local codes and sold to developers or sold to the military as base housing. Our participation in military housing to date has been as a subcontractor, building units to specifications based on a contract. Housing Group results now include the lumber brokerage operation, formerly included with the Supply Group segment.
Housing Group revenues for the fiscal year 2008 declined 4.2% to $497.0 million, as the HUD housing market continued to weaken. HUD revenues fell $50.4 million, or 9.7%; however, the decline was partially offset by $28.0 million in modular sales, primarily to the military for base housing.
Manufactured homes are sold as single-section or multi-section units. Multi-section units are typically built in two, three, or four sections. The average selling price per home decreased 3.3% over the prior year from $39,093 to $37,797. Most of this reduction was attributable to a change in product mix due to a higher percent of single-section homes sold in fiscal 2008, which carry a lower unit sales price. This evidences the weakness of the multi-section market, primarily in California, Arizona, and Florida, compared to the relatively stronger single-section market in Texas and the Southeast. Also contributing to the lower average selling price were the modular sales to the military, where housing units averaged $34,828 for the year.
Year over year, manufactured housing industry shipments for calendar 2007 were down 18.4% to 95,752, a 46-year low. Our unit volume for the similar period declined 15.1%, with single-section sales down by 9.7% and multi-section homes down 16.9%. Our overall market share, based on wholesale shipments for the 2007 calendar year, improved from 12.9% to 13.4%. The improvement was the result of an increase in new points of distribution, a key objective for this past year. The Group's market share for multi-section homes grew from 13.7% to 14.7%, while its share of the single-section market declined to 10.6% from 10.9%.
The underlying manufactured housing market has been declining over the past nine years due to limited availability of retail financing, as well as competition from conventional builders benefiting from low mortgage rates and more liberal financing. In addition, traditionally strong manufactured housing markets, such as California, Arizona, and Florida, were down by more than 40% in calendar year 2007.
Gross profit margins rose from 21.6% to 22.6% as a result of lower labor fringe benefit costs as well as reduced fixed manufacturing costs stemming from plant consolidations. Material cost as a percentage of sales increased slightly due to selling price increases that only partially offset rising raw material costs.
Operating expenses, including selling, warranty, and general and administrative expenses, declined $14.0 million or 12.2% to $100.6 million. The decrease was attributable to lower selling expense due to declining volume, reduced warranty expenses as a result of decentralizing operations, and lower general and administrative expenses related to plant consolidations in the prior year.
Other operating income, net, of $3.1 million related primarily to gains from the sale of idle properties.
Supply Operations:
The Supply Group was reorganized in the fourth quarter of fiscal 2008 upon the sale of the West Coast fiberglass operations. The remaining fiberglass operation in Indiana and the import business are now included in the RV Group. The lumber operation is included with the Housing Group.
Discontinued Operations:
In April 2008, the folding trailer division was designated as "held for sale" and the business was subsequently sold in May. The results and financial position of the business have been classified as discontinued operations for all periods presented. The division had sales for fiscal 2008 of $76.6 million with an operating loss of $3.3 million. The operating loss included a $7.2 million impairment charge, a $9.2 million partial reversal of reserves related to a settlement of litigation with Coleman, and a $2.5 million deferred tax charge related to the sale of the business. The prior-year loss from operations was $9.6 million.
In March 2005, we announced our intention to exit the manufactured housing retail and financial services businesses and most of these operations were sold by August 2005. The businesses are presented as discontinued operations in our financial statements. Losses from these operations were $0.6 million in the current year compared to a loss of $2.3 million in the prior year. The current-year loss consists of general and administrative costs associated with wind-down and closure activities.