Fleetwood Enterprises Inc, Year 2000 Annual Report Management's Discussion and Analysis

Management's Discussion and Analysis of
Results of Operations and Financial Condition

 

1999 Compared to 1998
Consolidated Results: Net income for fiscal year 1999 was $107.1 million or $2.94 per diluted share compared to $108.5 million and $3.01 per share for the prior year. Fiscal 1998 earnings included a non-recurring after-tax insurance gain of $10.4 million or 28 cents per share attributable to a change in estimate of products liability insurance reserves. Without this gain, earnings for fiscal 1998 would have been $98.1 million or $2.73 per share.
   Higher profits from the Company’s core manufacturing businesses led to an eight percent improvement in comparable earnings per share, after excluding last year’s insurance gain. The strong manufacturing performance, however, was largely offset by several factors: 1) a $1.5 million pre-tax operating loss from the Company’s new and rapidly expanding manufactured housing retail business; 2) the elimination of $16.0 million of intercompany profit on homes sold to Fleetwood-owned retail stores that were in retail inventory at the end of the year; 3) $3.7 million of goodwill amortization on retail acquisitions; and, 4) a higher effective income tax rate which reduced net earnings approximately $3.9 million or 10 cents per share. Additionally, earnings per share in fiscal 1999 were reduced by a higher number of shares outstanding as a result of retailer acquisitions made during the year.
     Sales for fiscal 1999 rose 14 percent to an all-time high of $3.49 billion compared to $3.05 billion for the prior year. This revenue increase resulted from higher manufacturing sales for both housing and recreational vehicles, as well as the addition of $332 million of retail sales.
    Gross profit margin for fiscal 1999 rose to 21.6 percent from 19.5 percent last year, reflecting more efficient recreational vehicle operations and, with respect to manufactured housing, more favorable pricing and lower material costs.
    Operating expenses rose 33 percent to $563.5 million, and also increased as a percentage of sales from 13.9 percent to 16.1 percent. Fiscal 1998 operating costs were reduced by the non-recurring insurance gain of $16.2 million before taxes. Excluding this unusual item from the comparison, operating costs in 1999 actually increased $123.2 million or 28 percent. The new housing retail business accounted for about $68 million of the increase in operating costs in fiscal 1999. Selling expenses rose 32 percent to $278.0 million, with the housing retail operation accounting for 40 percent of the increase. Higher selling costs were incurred in manufacturing operations for advertising, sales compensation and product warranty and service. General and administrative expenses of $285.5 million, including the effect of the aforementioned insurance gain, were up 33 percent, primarily due to the addition of $43 million in retail costs, which represented over half of the increase. The increase attributable to manufacturing was primarily due to higher management incentive compensation as a result of higher manufacturing profits. The change in the “Corporate and other” operating loss in fiscal 1999, as shown in the business segment information, mainly reflects the absence of the unusual insurance gain recorded in fiscal 1998 and goodwill amorti-zation on retail housing acquisitions. As a percentage of sales, selling expenses increased from 6.9 percent to 8.0 percent and general and administrative expenses rose from 7.0 percent to 8.2 percent.
    Non-operating items totaled a net expense of $11.4 million compared to income of $4.8 million a year ago. This $16.2 million change was mainly caused by a $17.5 million distribution on convertible preferred securities and $6.3 million of interest expense on retail inventory floor plan financing. The convertible preferred securities were issued during the fourth quarter of the prior fiscal year, and since the retail business is new, there was no retail inventory financing expense last year. These items were partially offset by a $4.0 million increase in investment income that originated from higher invested balances.
    The effective tax rate rose to 40.1 percent compared to 38.0 percent last year. The increase primarily reflects the impact of the amortization of goodwill recorded in conjunction with retail acquisitions, which is not deductible for tax purposes.


Manufactured Housing: Factory sales of manufactured housing increased five percent to a record $1.56 billion in fiscal 1999. This included intercompany sales of $179 million to the Company’s retail housing division. Shipments for the year were up less than one percent to 65,877 homes.
    Operating income for the housing group rose 11 percent in fiscal 1999 to $83.9 million due to higher gross margins and the rise in sales volume. The margin improvement mainly resulted from raw material cost reductions and increases in product selling prices. Operating income in the current year is net of $16.0 million of intercompany profit eliminated in consolidation, as discussed previously. As a percentage of sales, operating income in fiscal 1999 was 5.4 percent compared to 5.1 percent in the prior year.


Recreational Vehicles:
RV revenues for fiscal 1999 were up 14 percent to $1.73 billion, with all three RV divisions posting record sales. Motor home sales surpassed the billion dollar mark for the first time, climbing 18 percent to a new high of $1.06 billion, as shipments rose 10 percent to 14,923 units. Both towable segments reached record levels in fiscal 1999, with travel trailer sales rising nine percent to $549 million and folding trailer sales increasing five percent to nearly $116 million. Travel trailer shipments were up 10 percent to 38,628 units, while folding trailer unit volume increased one percent to 21,171.
    Fiscal 1999 operating income for the RV group surged 43 percent over the prior year to $109.9 million as a result of higher sales volume and improved gross margins. The margin improvement primarily stems from a turnaround in motor home operations which were not producing at efficient levels last year. RV operating margin in fiscal 1999 rose to
6.4 percent of sales from 5.1 percent in the prior year.


Supply Operations:
Revenue for the Company’s supply group was $44 million in fiscal 1999, down from $45 million in fiscal 1998, mostly due to a slightly reduced emphasis on outside lumber sales. Operating income of $16.3 million in fiscal 1999 was up five percent from the prior year as a result of higher sales of imported parts and components.
Retail Housing Operations: Fleetwood’s retail housing division recorded revenues of $332 million in fiscal 1999 on the sale of 8,255 homes. Operating income, before $6.3 million of interest expense on inventory floor plan financing, was $4.9 million or about 1.5 percent of sales.