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

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

 

Liquidity and Capital Resources
The Company generally relies upon internally generated cash flows to satisfy working capital needs and to fund capital expenditures. Positive cash flow of $146.4 million was generated from operations in fiscal year 1999, which was sufficient to support manufacturing and retail operations, and to fund capital expenditures and shareholder dividends. In fiscal 2000, however, cash flow from operations declined to a negative $22.1 million, and operating cash flows were supplemented by $25 million of long-term borrowing. The decline in operating cash flows in fiscal 2000 primarily resulted from a significantly higher investment in inventories, particularly within the expanding retail housing business, and the use of cash to reduce the Company’s retail inventory financing liability. Also, the decline in earnings from $107 million to $83 million contributed to the cash flow reduction. Despite the preceding operational factors and significant share repurchase activity early in fiscal 2000, the Company was able to maintain a relatively strong cash position. Cash and investments totaled $135.1 million at the end of fiscal 2000 compared to $267.1 million in fiscal 1999.
    Cash outflows in fiscal 2000 included $67.7 million for share repurchases, capital expenditures of $55.1 million and $25.0 million for dividends to Common shareholders.Cash outflows in fiscal 1999 included $118.0 million disbursed for the acquisition of retail housing companies, the largest of which was HomeUSA. This was in addition to $131.4 million in Common stock issued as part of the consideration for the acquisitions. Cash outflows in 1999 also included capital expenditures of $49.8 million, Common stock repurchases of $24.9 million and dividends to Common shareholders of $24.7 million.
    Capital expenditures in fiscal 2000 and 1999 included additions to manufacturing capacity and investments in retail sales centers, along with the normal replacement of machinery and equipment. The Company added one new manufactured housing plant in fiscal 1999 that became operational in the second fiscal quarter. With respect to retail operations, the Company built 49 new sales centers and acquired 44 locations during fiscal 2000. This compares with 30 and 137, respectively, in fiscal 1999.
    Capital expenditures for manufacturing capacity in fiscal 2001 are expected to be on a par with the relatively modest levels of the past two years, reflecting the Company’s belief that, with few exceptions, current capacity is ample to satisfy expected near-term levels of consumer demand for its products. The Company’s retail housing strategy during fiscal 2001 will primarily involve the development of Company-owned sales centers, but at a significantly slower pace than was experienced in fiscal years 1999 and 2000. Including retail store development, total capital expenditures for the year are expected to range from $30 million to $40 million. This includes the normal replacement of existing machinery and equipment, but excludes any expenditures for potential acquisitions. Management anticipates that capital expenditures will be funded with a combination of existing resources and expected cash flows.
    During the seasonally slow winter months (typically November through February), the Company has historically built inventories of RV’s in order to meet peak demand for these products in the spring. This is usually accomplished without the use of debt financing; however, there have been occasions when the Company has required the short-term use of uncommitted bank credit lines. No such borrowings were necessary in fiscal 1999 or 2000. The Company has uncommitted credit lines with its principal bank and another bank which have been used primarily to support standby letters of credit. In addition, the Company has a $50 million shelf facility with an insurance company. With respect to the Company’s retail operation, the Company currently has an arrangement with a financial institution to provide retail inventory floor plan financing, which totaled $113.3 million at the end of fiscal 2000. It is expected that as new retail stores are added in fiscal 2001, additional borrowings will be necessary to fund higher levels of retail inventories.
    The Company anticipates that a combination of cash flow from operating activities and existing financial resources, along with available lines of credit, will be adequate to satisfy its currently foreseeable liquidity needs, including capital expenditure requirements.

Year 2000 Compliance
The Company experienced no disruption to its operations as a result of Year 2000 issues related to information systems and software applications. There have been no indications that any third party upon which the Company relies, including vendors, suppliers, and financial institutions, has experienced any Year 2000 problems which would have a material impact on the future operations or financial results of the Company. The total cost of the Company’s Year 2000 project was reported previously at $1.2 million, and no additional costs have been incurred. The Company does not expect any future disruptions related to Year 2000 issues either internally or from third parties.

New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” SFAS No. 133 is effective for fiscal years beginning after June 15, 2000. SFAS No. 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. The Company does not believe SFAS No. 133 will have a material impact on the Company’s financial position, results of operations, or liquidity at the current time.
    In fiscal 2001, in order to adopt provisions of Staff Accounting Bulletin 101, the Company will change its revenue recognition policy on credit retail housing sales from what is currently industry practice to a method based on loan funding, which generally occurs with customer acceptance. This change will slow revenue recognition on retail housing sales, although the Company has not yet determined the exact impact. The change will be reflected as the cumulative effect of a change in accounting.

Market Risk
The Company is exposed to market risks related to fluctuations in interest rates on its marketable investments, cash value of Company-owned life insurance, and variable rate debt. Variable rate debt consists of notes payable to an insurance company and the liability for flooring of manufactured housing retail inventories. The Company does not use interest rate swaps, futures contracts or options on futures, or other types of derivative financial instruments.
    The vast majority of the Company’s marketable investments are in fixed rate securities with relatively short maturities, minimizing the effect of interest rate fluctuations on their fair value. The assets underlying the Company-owned life insurance are recorded at fair market value.
    For fixed rate debt and convertible trust preferred securities, changes in interest rates generally affect the fair market value, but not earnings or cash flows. Conversely, for variable rate debt, changes in interest rates generally do not influence fair market value, but do affect future earnings and cash flows. The Company does not have an obligation to prepay fixed rate debt prior to maturity, and as a result, interest rate risk and changes in fair market value should not have a significant impact on such debt until the Company would be required to refinance it. Holding the variable rate debt balance constant, each one percentage point increase in interest rates occurring on the first day of the year would result in an increase in interest expense for the coming year of approximately $1.7 million.
    The Company does not believe that future market interest rate risks related to its marketable investments or debt obligations will have a material impact on the Company or the results of its future operations.