Management’s Discussion and Analysis of Financial Condition and Results of Operations
Consolidated Results in Fiscal Year 2006 Compared with Fiscal Year 2005
Consolidated Results:
The following table presents net loss and diluted loss per share for fiscal 2006 and 2005 (amounts in thousands, except per share data):
| 2006 | 2005 | ||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Amount | % of Net Sales |
Amount | % of Net Sales |
Change | % Change | ||||||||||||||||||
| Net loss from continuing operations | $ | (6,065 | ) | (.2 | )% | $ | (72,577 | ) | (3.1 | )% | $ | 66,512 | 91.6 | % | |||||||||
| Net loss | (28,437 | ) | (1.2 | ) | (161,459 | ) | (6.8 | ) | 133,022 | 82.4 | |||||||||||||
| Diluted loss per share | $ | (.48 | ) | $ | (2.92 | ) | |||||||||||||||||
The substantial decrease to the net loss from continuing operations during fiscal 2006 stems primarily from improved operating results further enhanced by lower net interest expense and partially offset by an increase in non-cash tax expenses. The decrease in our net loss for this fiscal year was even more pronounced due to the sizable reduction to losses from discontinued operations following the sale of our retail and financial services business in August 2005.
Net Sales
The following table presents consolidated net sales by group for fiscal 2006 and 2005 (amounts in thousands):
| 2006 | 2005 | ||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Amount | % of Net Sales |
Amount | % of Net Sales |
Change | % Change | ||||||||||||||||||
| RV Group | $ | 1,612,217 | 66.3 | % | $ | 1,659,882 | 69.9 | % | $ | (47,665 | ) | (2.9 | )% | ||||||||||
| Housing Group | 795,596 | 32.7 | 785,547 | 33.1 | 10,049 | 1.3 | |||||||||||||||||
| Supply Group | 50,214 | 2.1 | 57,020 | 2.4 | (6,806 | ) | (11.9 | ) | |||||||||||||||
| Intercompany sales | (25,627 | ) | (1.1 | ) | (127,737 | ) | (5.4 | ) | 102,110 | 79.9 | |||||||||||||
| Net sales | $ | 2,432,400 | 100.0 | % | $ | 2,374,712 | 100.0 | % | $ | 57,688 | 2.4 | ||||||||||||
Consolidated net sales increased by 2.4% or $57.7 million. RV sales were generally weak throughout the year, although sales of travel trailers for use as emergency shelter in the Gulf Coast region provided a boost to revenues and reduced the year-over-year decline to 2.9%. Manufactured housing revenues increased by 1.3%, also assisted by the sale of units intended for use as emergency shelter, partially offset by lower sales to former company-owned retail stores, a number of which were closed following their sale. Intercompany sales to the retail housing business, before its sale in August 2005, are excluded from consolidated revenues. Revenues from both the retail and financial services businesses are presented separately as part of discontinued operations.
Consolidated Net Sales, Cost of Sales, and Gross Profit
The following table presents consolidated net sales, cost of sales, and gross profit for fiscal 2006 and 2005 (amounts in thousands):
| 2006 | 2005 | ||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Amount | % of Net Sales |
Amount | % of Net Sales |
Change | % Change | ||||||||||||||||||
| Net sales | $ | 2,432,400 | 100.0 | % | $ | 2,374,712 | 100.0 | % | $ | 57,688 | 2.4 | % | |||||||||||
| Cost of sales | 2,009,708 | 82.6 | 1,979,482 | 83.4 | 30,226 | 1.5 | |||||||||||||||||
| Gross profit | $ | 422,692 | 17.4 | % | $ | 395,230 | 16.6 | % | $ | 27,462 | 6.9 | ||||||||||||
Gross profit margin increased to 17.4% of sales compared to 16.6% last year. A significant focus was placed on more effectively managing production schedules and improving plant efficiencies. The additional unit volume from the production of emergency shelter units also enabled plants to operate with higher capacity utilization, particularly those in the travel trailer business, where margins had previously been negatively impacted from producing lower volumes of a wide variety of unique products. Also, the prior-year margins were impacted by inefficiencies associated with vacillating RV production rates during the second half of fiscal 2005 to align inventories and supply with weakening demand. Certain areas of our business continued to experience rising raw material costs as prices for oil, aluminum, copper, and other commodities increased. Higher fuel prices also contributed to an increase in shipping costs.
Operating Expenses
The following table presents operating expenses for fiscal 2006 and 2005 (amounts in thousands):
| 2006 | 2005 | ||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Amount | % of Net Sales |
Amount | % of Net Sales |
Change | % Change | ||||||||||||||||||
| Selling | $ | 62,092 | 2.5 | % | $ | 76,642 | 3.2 | % | $ | (14,550 | ) | (19.0 | )% | ||||||||||
| Warranty and service | 120,593 | 5.0 | 131,290 | 5.5 | (10,697 | ) | (8.1 | ) | |||||||||||||||
| General and administrative | 204,448 | 8.4 | 212,255 | 9.0 | (7,807 | ) | (3.7 | ) | |||||||||||||||
| Operating expenses | $ | 387,133 | 15.9 | % | $ | 420,187 | 17.7 | % | $ | (33,054 | ) | (7.9 | ) | ||||||||||
A restructuring of the housing sales organization contributed to a reduction in selling costs combined with lower overall expenditures on strategic ventures and marketing initiatives. Warranty expenses for both groups declined due to lower incurred warranty costs combined with lower reserves. Responsibility for service and warranty work was transitioned back to the manufactured housing and travel trailer plants during the year and this, combined with initiatives to manage quality issues, had a positive impact on costs in this area. General and administrative expenses decreased due to lower workers’ compensation costs, consulting costs, and headcount reductions, partially offset by higher variable compensation costs.
Other Operating Expenses, net
Other operating expenses, net in fiscal 2006 consisted of impairment charges of $1.6 million and severance costs of $5.0 million, partially offset by net gains on sale of fixed assets of $0.5 million. Other operating expenses, net in fiscal 2005 consisted of litigation charges of $16.3 million, including charges related to a $14.6 million judgment in the dispute with Coleman, as well as impairment charges of $1.9 million and severance costs of $2.9 million, partially offset by net gains on sale of fixed assets of $2.5 million.
Other Income (Expense)
Other income (expense) improved by $3.5 million to $(24.2) million in fiscal 2006 when compared to the previous year. The change was attributable to costs of $2.7 million in the prior year related to transactions involving our trust preferred securities, as well as lower borrowings and higher invested balances at higher interest rates in the current year versus the prior year.
Recreational Vehicles:
The following table presents RV Group net sales by division for fiscal 2006 and 2005 (amounts in thousands):
| 2006 | 2005 | ||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Amount | % of Net Sales |
Amount | % of Net Sales |
Change | % Change | ||||||||||||||||||
| Motor homes | $ | 976,698 | 60.6 | % | $ | 1,097,091 | 66.1 | % | $ | (120,393 | ) | (11.0 | )% | ||||||||||
| Travel trailers | 551,501 | 34.2 | 477,610 | 28.8 | 73,891 | 15.5 | |||||||||||||||||
| Folding trailers | 84,018 | 5.2 | 85,181 | 5.1 | (1,163 | ) | (1.4 | ) | |||||||||||||||
| Net sales | $ | 1,612,217 | 100.0 | % | $ | 1,659,882 | 100.0 | % | $ | (47,665 | ) | (2.9 | ) | ||||||||||
In calendar 2005, our motor home market share declined slightly to 17.5% and retail unit sales decreased by 9.2% compared to calendar 2004. In fiscal 2006 compared to fiscal 2005, wholesale revenues were down by a greater 11.0%. This was largely in line with the experience of the industry, which was impacted by adverse trends in consumer confidence stemming mostly from volatile fuel prices. In calendar 2006, we experienced market share growth in the Class C and diesel segments with market erosion in the Class A gas segment, primarily in the entry-level and high-line gas products.
Travel trailer sales were up 15.5% in fiscal 2006 compared to fiscal 2005. Wholesale shipments benefited from the sale of emergency living units, which generated $121.6 million of additional revenue in fiscal 2006 compared to fiscal 2005. Sales to our traditional dealer network, in terms of units, decreased by approximately 13% and underlying retail unit sales were down by 3.3% in calendar 2005 compared to the previous year. This continued a trend of eroding market share particularly in the higher-priced fifth-wheel travel trailer class to 4.5% and conventional travel trailers to 10.6%, that can be attributed to a mismatch of value and features in our products relative to the competition.
Folding trailer sales were down 1.4%, but market share increased slightly to 38% as the industry was down nearly 17% for calendar 2005. A prolonged industry decline slowed considerably as this market showed some signs of recovery by the end of the fiscal year. We continue to maintain a dominant market share in this segment.
The RV Group generated $216,000 of operating income in fiscal 2006 compared to an operating loss of $39.2 million in the prior fiscal year. Despite sales that were lower by 2.9%, higher margins and lower operating expenses contributed to the improvement in operating results. Prior-year operating results also included a charge related to a $14.6 million judgment in the Coleman litigation.
The following table presents division operating income (loss) for fiscal 2006 and 2005 (amounts in thousands):
| 2006 | 2005 | ||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Amount | % of Net Sales |
Amount | % of Net Sales |
Change | % Change | ||||||||||||||||||
| Motor homes | $ | 5,364 | 0.5 | % | $ | 27,702 | 2.5 | % | $ | (22,338 | ) | (80.6 | )% | ||||||||||
| Travel trailers | 1,067 | 0.2 | (40,897 | ) | (8.6 | ) | 41,964 | 102.6 | |||||||||||||||
| Folding trailers | (6,215 | ) | (7.4 | ) | (25,974 | ) | (30.5 | ) | 19,759 | 76.1 | |||||||||||||
| RV Group | $ | 216 | 0.0 | $ | (39,169 | ) | (2.4 | ) | $ | 39,385 | 100.6 | ||||||||||||
Manufactured Housing:
The following table presents Housing Group net sales for fiscal 2006 and 2005 (amounts in thousands):
| 2006 | 2005 | ||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Amount | % of Net Sales |
Amount | % of Net Sales |
Change | % Change | ||||||||||||||||||
| Wholesale sales | $ | 795,596 | 100.0 | % | $ | 785,547 | 100.0 | % | $ | 10,049 | 1.3 | % | |||||||||||
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.
Revenues in fiscal 2006 were up 1.3% from the prior year, and included $25.6 million of intercompany sales to company-owned retail sales centers. Manufacturing unit volume decreased 5.3% to 22,681 homes, and the total number of housing sections was down 7.8% to 37,695 due to a shift in sales mix toward single-section homes. Multi-section homes represented 64% of factory shipments for the fiscal year versus 68% last year.
Sales volume was improved over the prior year because of significant sales of emergency shelter product in response to hurricane damage in the Gulf Coast region. This was partially offset by lower sales to manufactured housing community developers and to divested company-owned stores.
Gross profit margin of 24.3% of sales was a 2.1% increase over the prior year. Operating costs decreased $13.2 million or 8% as a result of lower selling and product warranty expenses following a reorganization of these functions. Other operating expenses also decreased by $1.2 million, primarily due to charges in the prior year, including $1.9 million of impairment, $0.8 million for severance and $1.7 million in litigation costs. Overall results improved from an operating profit of $6.4 million to $38.8 million.
Supply Operations:
Including intercompany sales, our Supply Group contributed revenues of $209.7 million in fiscal 2006 compared to $232.8 million in fiscal 2005, of which $50.2 million and $57.0 million, respectively, were sales to third-party customers. Operating income from sales to third party customers declined from $3.8 million to $2.2 million primarily as a result of lower margins and a gain on the sale of the drapery operation in the prior year.
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 in 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.