Management’s Discussion and Analysis of Financial Condition and Results of Operations
Consolidated Results in Fiscal Year 2007 Compared to Fiscal Year 2006
Consolidated Results:
The following table presents net loss and diluted loss per share for fiscal 2007 and 2006 (amounts in thousands, except per share data):
| 2007 | 2006 | ||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Amount | % of Net Sales |
Amount | % of Net Sales |
Change | % Change | ||||||||||||||||||
| Net loss from continuing operations | $ | (87,650 | ) | (4.4 | )% | $ | (6,065 | ) | (.2 | )% | $ | (81,585 | ) | NM | |||||||||
| Net loss | (89,961 | ) | (4.5 | ) | (28,437 | ) | (1.2 | ) | (61,524 | ) | (216.4 | )% | |||||||||||
| Diluted loss per share | $ | (1.41 | ) | $ | (.48 | ) | |||||||||||||||||
NM—Not meaningful
The substantial increase to the net loss from continuing operations during fiscal 2007 stems from lower sales in all areas of our operations, partially offset by lower operating and other expenses (net). Losses from discontinued operations following the sale of our retail and financial services businesses in calendar 2005 were significantly lower in fiscal 2007 and consisted of ongoing general and administrative expenses.
Net Sales
The following table presents consolidated net sales by group for fiscal 2007 and 2006 (amounts in thousands):
| 2007 | 2006 | ||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Amount | % of Net Sales |
Amount | % of Net Sales |
Change | % Change | ||||||||||||||||||
| RV Group | $ | 1,441,810 | 71.8 | % | $ | 1,612,217 | 66.3 | % | $ | (170,407 | ) | (10.6 | )% | ||||||||||
| Housing Group | 518,258 | 25.8 | 795,596 | 32.7 | (277,338 | ) | (34.9 | ) | |||||||||||||||
| Supply Group | 47,854 | 2.4 | 50,214 | 2.1 | (2,360 | ) | (4.7 | ) | |||||||||||||||
| Intercompany sales | — | — | (25,627 | ) | (1.1 | ) | 25,627 | 100.0 | |||||||||||||||
| Net sales | $ | 2,007,922 | 100.0 | % | $ | 2,432,400 | 100.0 | % | $ | (424,478 | ) | (17.5 | ) | ||||||||||
The prior year period included 53 operating weeks rather than the typical 52 weeks for the current year. RV sales in fiscal 2007 were negatively impacted by the absence of travel trailer sales of emergency living units. In addition, a softer motor home market early in the fiscal year affected the rest of the RV market segments late in our fiscal year. Housing Group sales suffered from the loss of disaster relief sales, community/park developer business that did not recur in the current year, decreased sales to the formerly company-owned retail business, and general weakness in the housing market.
Consolidated Net Sales, Cost of Sales, and Gross Profit
The following table presents consolidated net sales, cost of sales, and gross profit for fiscal 2007 and 2006 (amounts in thousands):
| 2007 | 2006 | ||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Amount | % of Net Sales |
Amount | % of Net Sales |
Change | % Change | ||||||||||||||||||
| Net sales | $ | 2,007,922 | 100.0 | % | $ | 2,432,400 | 100.0 | % | $ | (424,478 | ) | (17.5 | )% | ||||||||||
| Cost of sales | 1,730,536 | 86.2 | 2,009,708 | 82.6 | (279,172 | ) | (13.9 | ) | |||||||||||||||
| Gross profit | $ | 277,386 | 13.8 | % | $ | 422,692 | 17.4 | % | $ | (145,306 | ) | (34.4 | ) | ||||||||||
Gross margin declined from a prior-year level that was elevated by higher production volumes and manufacturing efficiencies associated with the disaster relief sales. Additionally, competitive markets and a shift away from higher-margin products reduced consolidated gross margin.
Operating Expenses
The following table presents operating expenses for fiscal 2007 and 2006 (amounts in thousands):
| 2007 | 2006 | ||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Amount | % of Net Sales |
Amount | % of Net Sales |
Change | % Change | ||||||||||||||||||
| Selling | $ | 58,773 | 2.9 | % | $ | 62,092 | 2.5 | % | $ | (3,319 | ) | (5.3 | )% | ||||||||||
| Warranty and service | 103,299 | 5.1 | 120,593 | 5.0 | (17,294 | ) | (14.3 | ) | |||||||||||||||
| General and administrative | 169,828 | 8.5 | 204,448 | 8.4 | (34,620 | ) | (16.9 | ) | |||||||||||||||
| Operating expenses | $ | 331,900 | 16.5 | % | $ | 387,133 | 15.9 | % | $ | (55,233 | ) | (14.3 | ) | ||||||||||
Lower operating expenses, which include selling, warranty and service, and general and administrative expenses, were attributable to headcount and expense reductions from restructuring initiatives and lower incentive compensation costs. Also, lower warranty expense resulted from lower sales and a return to a more cost-effective factory-based service, rather than a centralized service operation.
Other Operating Expenses, net
Other operating expense, net, in fiscal 2007 included approximately $14.0 million for one-time employee separation costs related to several plant closings and restructuring efforts, 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 operating expenses in fiscal 2006 consisted of $5.0 million of severance costs, $1.6 million of impairment charges on idle facilities, and a $0.5 million gain on sales of fixed assets.
Other Income (Expense)
Other income (expense) consisted of investment income, interest expense, and miscellaneous other income. Investment income increased to $5.9 million from $5.4 million in the prior year due to higher average interest rates earned on invested funds. Interest expense declined to $28.5 million from $29.7 million due to lower borrowings, the effect of the repayment of the deferred distributions on the 6% convertible trust preferred securities in February 2006, and the redemption of $50 million in face value of the same securities in June 2006, partially offset by interest expense of $2.9 million recorded on the Coleman judgment, pending the outcome of an appeals process. 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.
Provision for Income Taxes
The current-year tax provision was principally due to $14.7 million of non-cash adjustments to the carrying amount of the deferred tax asset as a result of changes in our tax planning strategies. Our decision to market for sale certain appreciated real estate properties reduced remaining unrealized gains that would be available to realize the carrying value of the deferred tax asset by $11.1 million. Earlier in fiscal 2007, the realization of gains from the repurchase of the 6% convertible trust preferred securities at a discount to book value resulted in a similar adjustment in the amount of $3.6 million. The income tax provision also included state tax liabilities in several states, with no offsetting tax benefits in others. The prior year tax provision resulted primarily from the effect of an increase in the partial valuation allowance attributed to our deferred tax assets of $5.7 million. This change resulted from a reduction in the estimated benefit of various available tax strategies, which, if executed, are intended to generate sufficient taxable income to realize the remaining net deferred tax asset.
Recreational Vehicles:
The following table presents RV Group net sales by division for fiscal 2007 and 2006 (amounts in thousands):
| 2007 | 2006 | ||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Amount | % of Net Sales |
Amount | % of Net Sales |
Change | % Change | ||||||||||||||||||
| Motor homes | $ | 961,925 | 66.7 | % | $ | 976,698 | 60.6 | % | $ | (14,773 | ) | (1.5 | )% | ||||||||||
| Travel trailers | 391,310 | 27.2 | 551,501 | 34.2 | (160,191 | ) | (29.0 | ) | |||||||||||||||
| Folding trailers | 88,575 | 6.1 | 84,018 | 5.2 | 4,557 | 5.4 | |||||||||||||||||
| Net sales | $ | 1,441,810 | 100.0 | % | $ | 1,612,217 | 100.0 | % | $ | (170,407 | ) | (10.6 | ) | ||||||||||
Recreational vehicle sales for the year fell, mainly due to the absence this year of $135.5 million of travel trailer emergency shelter unit sales to FEMA. 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 the market. The retail market for motor homes for calendar year 2006 was down 9.9% compared to a drop of 16.0% for our retail activity caused mainly by the lack of low-priced and fuel-efficient Class C units in our product line. We introduced two low-priced Class C models in the spring and expect to introduce a more fuel-efficient Class C product later in calendar 2007.
Travel trailer sales to independent dealers, which exclude $135.5 million of FEMA sales to the Gulf Coast region in the prior year, were off 5.9%, reflecting softer industry conditions that began in the latter part of the calendar year 2006. The retail market for travel trailers for calendar year 2006 was off 1.7% after being positive for most of the year. Our retail sales for the same period were down by 22.8%, mainly due to a lack of competitive products in several product segments in the early part of the year. Subsequently, we introduced new products and brands and, in the last six months through April 2007, industry shipments declined 19.7% versus our shipments declining only 2.8%, providing strong evidence that our new products are being positively received by our dealers.
Folding trailer revenues were up from the prior year despite a decrease of 7.7% in unit sales, which reflects a shift in product mix to higher-priced products. The folding trailer retail market was off about 6.0% for the calendar year, while sales of Fleetwood’s products were down only 2.2%, resulting in market share growth from 37.9% to 39.4% for the year.
Gross margin for the RV Group declined from 13.3% to 10.8% reflecting elevated margins in the prior year generated by efficiencies from the production of 10,561 disaster relief units. Current year inefficiencies and incremental costs related to the introduction of a significant number of new products also contributed to the negative comparison. Motor home and folding trailer gross margins were favorably influenced by lower labor costs stemming from improved efficiencies in the current year.
Operating expenses for the RV Group were $207.1 million, $6.6 million lower than the prior year but higher as a percentage of sales, rising from 13.3% in the prior year to 14.4% for the current period. The decrease in expenses was due to improved warranty costs and lower general and administrative expenses related to restructuring initiatives, partially offset by higher selling costs for the national dealer meeting and marketing materials for major new model introductions.
Other operating expenses of $10.6 million were up $9.6 million from the prior year related mostly to restructuring costs from the closure of five travel trailer plants.
The following table presents division operating income (loss) for fiscal 2007 and 2006 (amounts in thousands):
| 2007 | 2006 | ||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Amount | % of Net Sales |
Amount | % of Net Sales |
Change | % Change | ||||||||||||||||||
| Motor homes | $ | 12,122 | 1.3 | % | $ | 5,364 | 0.5 | % | $ | 6,758 | 126.0 | % | |||||||||||
| Travel trailers | (65,301 | ) | (16.7 | ) | 1,067 | 0.2 | (66,368 | ) | NM | ||||||||||||||
| Folding trailers | (9,237 | ) | (10.4 | ) | (6,215 | ) | (7.4 | ) | (3,022 | ) | (48.6 | ) | |||||||||||
| RV Group | $ | (62,416 | ) | (4.3 | ) | $ | 216 | 0.0 | $ | (62,632 | ) | NM | |||||||||||
Manufactured Housing:
The following table presents Housing Group net sales for fiscal 2007 and 2006 (amounts in thousands):
| 2007 | 2006 | ||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Amount | % of Net Sales |
Amount | % of Net Sales |
Change | % Change | ||||||||||||||||||
| Wholesale sales | $ | 518,258 | 100.0 | % | $ | 795,596 | 100.0 | % | $ | (277,338 | ) | (34.9 | )% | ||||||||||
Results for the Housing Group consist of factory wholesale revenues. In the prior year, results also included sales to our retail business prior to its divestiture in August 2005. Transactions with our retail business prior to the sale were eliminated in consolidation. In the current presentation, revenues for the retail business are included in the results of discontinued operations.
In addition to the continued effects of difficult industry conditions, the negative sales comparison reflects prior-year sales of $86.8 million in sales for hurricane disaster relief, $136 million in sales to community/park operators and $25.6 million of intercompany sales to the sold retail business. In the current year, those sales were substantially less or in the case of disaster relief, non-existent. Manufactured homes are sold as single-section or multi-section units. Multi-section units typically are built in two, three or four sections. The average selling price per home increased 11.4% over the prior year from $35,078 to $39,093. Most of this change was attributable to abnormally low prices in the prior year related to a large number of shipments of special single-section homes to assist in hurricane disaster relief. Excluding these special units, the average price per home increased 7.6%, which more closely approximates material cost increases.
Year over year, manufactured housing industry shipments for calendar 2006 were down 19.7% to 117,371, a 45-year low. Our unit volume for the similar period declined 36.3% with single-section sales off by 55.7% and multi-section homes down 26.2%. Our overall market share, based on wholesale shipments for the 2006 calendar year, fell to 12.9% from 16.3% in calendar year 2005. The Group’s market share for multi-section homes also fell from 16.5% to 13.7%, while its share of the single-section market declined from 15.8% to 10.9%. This loss of market share was principally attributed to the sale of company-owned stores in August 2005. Of the 125 stores that were sold, approximately half were subsequently closed or are no longer buying Fleetwood products. Additionally, sales to community and park operators were lower in the current period.
Despite substantial sales related to the impact of hurricanes in 2004 and 2005, the underlying manufactured housing market continued to be adversely affected by the 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 parts of the Southeast, particularly Florida, developed weakness in calendar 2006.
Gross profit margins decreased from 24.3% to 21.4%, reflecting higher margins in the prior year associated with efficiencies from the production of 3,174 disaster relief units, aggressive pricing necessary to compete in a tightening market, higher labor costs from operating for partial weeks, and fixed manufacturing overheads being spread over fewer units.
Operating expenses declined $36.8 million or 24.4% to $113.8 million. The decrease was attributable to lower general and administrative expenses and a significant reduction in selling and warranty expenses as a result of decentralizing operations.
Other operating expenses decreased $4.1 million from the prior year. Current-year expenses include $2.8 million of impairment charges and $1.5 million of severance and restructuring costs, offset by $4.3 million in gains from the sale of idle facilities. Prior-year expenses included $1.6 million of impairment charges and $3.0 million of severance and restructuring costs, partially offset by $0.8 million of gains from sales of fixed assets.
Supply Operations:
The Supply Group contributed revenues of $161.2 million for fiscal year 2007 compared to $209.7 million in the prior year, of which $47.9 million and $50.2 million, respectively, were sales to third party customers. Operating income decreased from $2.2 million in the prior year to $1.7 million in fiscal 2007 mainly due to the lower sales.
Discontinued Operations:
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 discontinued operations were $2.3 million in the current year compared to a loss of $22.4 million in the prior year. The current-year loss consists of general and administrative costs associated with wind-down and closure activities.