Fleetwood is the nation’s leader in producing recreational vehicles, including motor homes, travel trailers and folding trailers, as well as one of the nation’s largest producers of manufactured housing. We are also the third-largest retailer of manufactured homes in the United States and our subsidiary, Fleetwood Retail Corp., operated 129 retail sales locations at the end of fiscal 2004. Our vertically integrated housing operations also include our financial services subsidiary, HomeOne Credit Corp., which offers finance and insurance products to our retail customers. In addition, we operate four supply companies that provide components for the recreational vehicle and housing operations, while also generating outside sales.
Fleetwood’s business began in 1950 through the formation of a California corporation. The present Company was incorporated in Delaware in September 1977, and succeeded by merger to all the assets and liabilities of the predecessor company. Fleetwood conducts manufacturing activities in 16 states within the U.S., and to a much lesser extent in Canada, and operates retail locations in 21 states. Our principal executive offices are located in Riverside, California.
-- (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES --
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of Fleetwood Enterprises, Inc. and its wholly owned subsidiaries. The term “Company” or “Fleetwood” used herein means Fleetwood Enterprises, Inc. and its subsidiaries, unless otherwise indicated by the context. All material intercompany accounts and transactions have been eliminated.
ACCOUNTING PERIOD:
The Company’s fiscal year ends on the last Sunday in April. The year-end dates for the past three fiscal years were April 25, 2004; April 27, 2003; and April 28, 2002. The consolidated financial statements include the results of Fleetwood Retail Corp. (FRC) and HomeOne Credit Corp. (HomeOne) for the 12-month periods ended March 31, 2004; March 31, 2003; and March 31, 2002, in order to ensure timely preparation of the consolidated financial statements.
USE OF ESTIMATES:
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
RECLASSIFICATION:
Certain amounts previously reported have been reclassified to conform with the 2004 presentation.
REVENUE RECOGNITION:
Revenue for manufacturing operations is generally recorded when all of the following conditions have been met:
- an order for a product has been received from a dealer;
- written or verbal approval for payment has been received from the dealer’s flooring institution;
- a common carrier signs the delivery ticket accepting responsibility for the product as agent for the dealer; and
- the product is removed from Fleetwood’s property for delivery to the dealer.
Manufacturing sales are generally made for cash, with most dealers financing their purchases under flooring arrangements with banks or finance companies. Products are not sold on consignment; dealers do not have the right to return products; and dealers are typically responsible for interest charges from floorplan lenders. On average, we receive payments from floorplan lenders on products sold to independent dealers within about 15 days of the invoice date.
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; risk of ownership has been transferred; and funds have been received either from the finance company or the homebuyer.
Amounts billed to dealers for delivery of products are recognized as revenue with the corresponding delivery expense charged to cost of sales. Also, cash sales incentives are treated as a reduction of revenue.
DEALER VOLUME REBATES AND SALES INCENTIVES:
Estimated costs related to dealer volume rebates and sales incentives are accrued at the time products are sold.
PRODUCT WARRANTY COSTS:
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.
DEPRECIATION:
Depreciation is provided using the straight-line method based on the following estimated useful lives:
- Buildings and improvements — 10-40 years
- Machinery and equipment — 3-15 years
RESEARCH AND DEVELOPMENT COSTS AND ADVERTISING EXPENSE:
The Company follows the policy of charging research and development costs against income in the periods incurred. Expenditures for product research and development activities were $21.8 million in fiscal 2004, $19.6 million in fiscal
2003 and $19.3 million in fiscal 2002. Advertising expenditures, which were also charged against income in the periods incurred, totaled $1.1 million in fiscal 2004, $1.5 million in fiscal 2003 and $2.2 million in fiscal 2002.
INCOME TAXES:
Deferred income tax assets or liabilities are computed based on the difference between the financial statement and income tax basis of assets and liabilities using the statutory marginal tax rate. Deferred income tax expenses or benefits are based on the changes in the deferred asset or liability from period to period. A valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax asset will not be realized.
STOCK-BASED INCENTIVE COMPENSATION:
The Company accounts for stock-based incentive compensation plans, which are described more fully in Note 18, using the intrinsic method under which no compensation cost is recognized for stock option grants because 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 loss and loss per share would have been affected as indicated by the following table:
| YEARS ENDED APRIL |
 |
 |
 |
| (AMOUNTS IN THOUSANDS, EXCEPT PER-SHARE DATA) |
|
|
2004 |
|
|
|
2003 |
|
|
2002 |
|
 |
|
|
| Net loss, as reported |
|
$ |
(22,261 |
) |
|
$ |
(70,739 |
) |
$ |
(161,928 |
) |
| Deduct: Total stock-based employee compensation |
|
|
|
|
|
|
|
|
|
|
|
| expense determined under fair value-based |
|
|
|
|
|
|
|
|
|
|
|
| method for all awards, net of related tax effects |
|
|
(4,071 |
) |
|
|
(2,439 |
) |
|
(3,383 |
) |
|
| Pro forma net loss |
|
$ |
(26,332 |
) |
|
$ |
(73,178 |
) |
$ |
(165,311 |
) |
|
| Basic and diluted loss per share, as reported |
|
$ |
(.58 |
) |
|
$ |
(1.97 |
) |
$ |
(3.90 |
) |
| Basic and diluted loss per share, pro forma |
|
$ |
(.69 |
) |
|
$ |
(2.04 |
) |
$ |
(4.00 |
) |
|
 |
|
 |
During fiscal 2002, $401,000 of compensation cost, net of taxes, was included in the net loss as reported, as a result of a modification in terms of 200,000 options granted to an employee whose status changed from employee to non-employee. There was no stock-based employee compensation in fiscal 2004 or 2003.
CASH FLOW STATEMENTS:
For purposes of these statements, cash includes cash on hand and cash in banks in demand deposit accounts.
MARKETABLE INVESTMENTS:
All of the marketable investments of the Company are classified as available-for-sale securities. The Company does not hold investments classified as trading securities. Marketable investments classified as available-for-sale are reported on the consolidated balance sheet at their market value. The net unrealized gains or losses for these securities are reported, net of related taxes, as separate components of other comprehensive income (loss). Interest income from the securities portfolio is accrued as earned including the accretion of discounts and the amortization of premiums based on the original cost of each security. Realized gains or losses are recognized using the specific identification method.
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.
LONG-LIVED ASSETS:
The Company assesses the recoverability of its long-lived assets by determining whether the net book value can be recovered through projected cash flows over the remaining life. If projections indicate that the value of long-lived assets will not be recovered, an adjustment is made to reduce the asset to fair value based upon estimated recoverability upon sale, where appropriate, or other estimates of fair value such as discounting future cash flows. Cash flow projections, although subject to a degree of uncertainty, are based on trends of historical performance and management’s estimate of future performance, giving consideration to existing and anticipated competitive, market and economic conditions. The Company recorded asset impairment charges of $1.2 million and $12.5 million for fiscal years 2003 and 2002, respectively (see Note 4).
GOODWILL:
Goodwill is not amortized but is tested at least annually for impairment and expensed against earnings when the implied fair value of a reporting unit, including goodwill, is less than its carrying amount (see Note 8).
INSURANCE RESERVES:
Insurance reserves primarily represent estimated liabilities for products liability and workers’ compensation claims. Workers’ compensation reserves mainly consist of estimated case reserves on known claims, as well as a factor for incurred but not reported claims. Products liability reserves include both case reserves on known claims as well as estimated liabilities for claims that have not been reported. Products liability reserves include estimated amounts for unpaid claims and claim adjustment expenses, which are based on historical experience and independent actuarial calculations.
FOREIGN CURRENCY TRANSLATION:
Exchange adjustments resulting from foreign currency transactions are recognized currently in income, whereas adjustments resulting from the translation of non-U.S. functional currency financial statements are reflected in other comprehensive income (loss) as a separate component of shareholders’ equity. The assets and liabilities of the Canadian operation (which are not material) are translated to U.S. dollars at current exchange rates. Revenues and expenses are translated at the average exchange rates for the year. Gains or losses on foreign currency transactions in fiscal years 2004, 2003 and 2002 were not material.
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