Management’s Discussion and Analysis of Financial Condition and Results of Operations
Liquidity and Capital Resources
We use external funding sources, including the issuance of debt and equity instruments, to supplement working capital, fund capital expenditures, and meet internal cash flow requirements on an as-needed basis. Cash totaling $37.1 million was used by operating activities during fiscal 2007 compared to cash generated of $31.5 million for fiscal 2006. In fiscal 2007, the loss from continuing operations, adjusted for non-cash items but excluding the effects of changes in assets and liabilities during the year, used $63.4 million of cash. Changes in remaining working capital balances provided $26.3 million in cash, primarily due to a reduction in receivables of $30.9 million related to lower travel trailer and housing volumes. In fiscal 2006, cash generated by operations resulted primarily from $55.8 million in lower inventories partially offset by a decrease in accruals.
Capital expenditures in fiscal 2007 totaled $8.3 million compared to $15.8 million in the prior year. Additionally, proceeds from the sale of idle facilities generated $10.2 million this year compared to $4.0 million last year.
Borrowings under our secured syndicated credit facility, led by Bank of America, N.A., as administrative agent, including the term loan, declined by $2.7 million in fiscal 2007. These borrowing arrangements are discussed in more detail below. We purchased and cancelled one million shares or 24.8% of our previously outstanding 6% convertible trust preferred securities in July 2006. The transaction price of $31 per share represented a discount of approximately 39% from the par value of $50 per share, taking into account accrued and unpaid interest. Long-term debt was reduced by $50 million and we recorded a pre-tax gain of approximately $18.5 million in other income.
Net cash used by discontinued operations was $2.3 million compared to cash provided of $41.8 million in the prior year. The cash used in fiscal 2007 related mostly to administrative costs incurred in connection with the wind-down of operations. Net cash generated by discontinued operations in the prior year generally related to the sale of company-owned retail housing stores, partially offset by the repayment of related debt and operating losses for that period.
As a result of the above-mentioned changes, cash and marketable investments decreased by $69.6 million from $145.9 million as of April 30, 2006, to $76.3 million as of April 29, 2007.
Credit Agreements:
In January 2007, the agreement governing our credit facility with a syndicate of lenders led by Bank of America was renewed and extended until July 31, 2010. We originally entered into the agreement in July 2001, and it was amended on several occasions prior to the most recent renewal. The new amended and restated agreement incorporates prior amendments and makes additional changes, but continues to provide for a revolving credit facility, a term loan, and a real estate sub-facility to the revolver.
In the January renewal, at our request, gross loan commitments for the three components of the facility were reduced to $182 million from May through November, with a seasonal uplift to $207 million from December through April. The reduced size of the commitments, in part, reflects our exit from the manufactured housing retail and financial services businesses, which were designated as discontinued operations and subsequently sold in the second quarter of fiscal 2006. The size of the new facility more closely matches the availability provided by the current borrowing base. The commitments to the term loan and real estate sub-facility, which had been reduced through quarterly amortization to net values of $17.3 million and $10.9 million, respectively, at the end of our fiscal year were subsequently increased by $3.9 million and $3.7 million, respectively, with the completion of updated real estate appraisals in June 2007. In addition, when appraisals were updated and the term loan was increased, the maturity date of the term loan was extended from July 31, 2007 to July 31, 2010. On the first day of each fiscal quarter beginning January 29, 2007, we are required to repay $786,000 in principal on the term loan and the ability to borrow under the real estate sub-facility is reduced by $375,000.
The amended facility continues to include restrictions regarding additional indebtedness, business operations, liens, guaranties, transfers and sales of assets, and transactions with subsidiaries or affiliates. The amended facility also contains customary events of default that would permit the lenders to accelerate repayment of borrowings under the amended facility if not cured within applicable grace periods, including the failure to make timely payments under the amended facility or other material indebtedness and the failure to meet certain covenants.
Under the prior facility, real estate with an approximate appraised value of $108 million was pledged as security, which included excess collateral of $50 million. Under the amended facility, total real estate collateral was reduced to approximately $77.5 million, and the excess collateral component reduced to $20 million. The reduction of over $30 million in collateral was driven by the lower loan commitments under the amended facility.
In May 2007, the credit facility was further amended to reset the financial performance covenant at levels that more closely approximate our expectations of future operating results. As part of the amendment, we agreed to restore $5 million in real estate collateral to the excess collateral pool for the benefit of the syndicate, increasing the total of such excess collateral to $25 million.
After giving effect to the extended maturity date of the term loan, the aggregate short-term balance outstanding on the revolver and term loan was $5.3 million as of April 29, 2007 and $5.7 million as of April 30, 2006. An additional $14.1 million of the term loan was included in long-term borrowings as of April 29, 2007, and an additional $16.5 million of the term loan was included in long-term borrowings as of April 30, 2006. The revolving credit line and term loan bear interest, at our option, at variable rates based on either Bank of Americas prime rate or one, two or three-month LIBOR.
As of April 29, 2007, the net loan commitments for the credit facility stood at $198.2 million, comprised of $180.9 million for the revolver and $17.3 million for the term loan. Our borrowing capacity, however, is governed by the amount of a borrowing base, consisting primarily of inventories and accounts receivable that fluctuate significantly. The borrowing base is revised weekly for changes in receivables and monthly for changes in inventory balances. At year-end, the borrowing base totaled $145.3 million. After consideration of outstanding borrowings and standby letters of credit of $69.1 million, unused borrowing capacity (availability) was approximately $56.7 million. Borrowings are secured by receivables, inventory and certain other assets, primarily real estate, and are used for working capital and general corporate purposes. Under the senior credit agreement, Fleetwood Enterprises, Inc. is a guarantor of the borrowings and letters of credit of its wholly owned subsidiary, Fleetwood Holdings, Inc. We are subject to a springing covenant that requires minimum levels of earnings before interest, taxes, depreciation, and amortization, but only if our average daily liquidity, defined as cash, cash equivalents, and unused borrowing capacity, falls below a prescribed minimum level. This minimum, which is measured monthly, was also reduced under the January 2007 renewal from $90 million to $50 million. In addition, the current agreement requires testing of the covenant if liquidity falls below $25 million on any single day or average daily availability is below $20 million in any particular month.
Dividends and Distributions:
On October 30, 2001, we announced that we would discontinue the payment of dividends. Any future resumption of dividends on our common stock would be at the discretion of our board of directors, and is not currently contemplated.
Other:
In the opinion of management, the combination of existing cash resources, expected future cash flows from operations, and available lines of credit will be sufficient to satisfy our foreseeable cash requirements for the next 12 months, including up to $20 million for capital expenditures in fiscal 2008, to be utilized primarily for enhancements to manufacturing facilities.