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ELDEN L. SMITH
President and CEO
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FOCUS. It's a word that I repeat often in meetings
with our associates, our dealers, and the
investment community, and that I find myself using in
connection with our numerous downsizing,
realignment, and forward-looking initiatives. I intend
for Fleetwood to focus on its core competency as a
manufacturer; focus on our products as the
foundation for progress and success; focus on
market segments and niches that have meaningful,
profitable volumes; focus our design, manufacturing,
and sales associates on a narrower array of product
lines; and encourage every associate in the
Company to focus on reaching consistent profitability.
We are focused on these things because our financial
situation mandates it, and our future success depends
upon it. This year's loss from continuing operations of
$72.6 million was a giant step backward and we must
regain momentum toward profitability.
REFOCUSING ON OUR CORE PRINCIPLES.
Tom mentioned the growth Fleetwood experienced in
RVs from 1968 to 1997. At the same time, the manufactured housing
business experienced similar
expansion. That dual success was enabled by a
Company-wide focus on a handful of principles.
While many aspects of both industries have
changed, the importance of these principles—
including value-oriented and customer-influenced
products, performance-based incentives and
accountability, efficient regionally located
manufacturing centers, respect for the
entrepreneurial character of our independent
dealers, and broad-based, collaborative decision
making—endures. I believe we must balance the
potential of the technological advances and
sophisticated initiatives of recent years with the proven benefits of the
flatter, more responsive
organization of Fleetwood's
earlier years.
Most of all, I strongly
believe that our products are
of paramount importance, and that the way they are
developed, designed, manufactured, and serviced
must be the foundation of our success.
I have been pleased to find that many people in the
Company believe in these simple but important
principles—some because they saw them work
before, and others because they simply make sense.
Following my appointment by the Board, one of my
first moves was to hire another long-time
Fleetwood management associate, Charley Lott, to
head up the Housing Group. Charley has long
experienced and espoused the basics of the
corporate culture that enabled us to lead the
manufactured housing industry in the '80s and
'90s, and he has an extensive history of
successfully managing manufactured housing
operations. With the leadership of Charley in the
Housing Group and Chris Braun in the RV Group, I
believe that Fleetwood is positioned to recapture
momentum and challenge the most successful and
profitable companies in both industries. Some of
the specific moves made in each Group—for
instance, a flatter organizational structure and
product changes—are laid out later in this report.
The overriding charge is to make Fleetwood more
responsive to our customers, whether they are our
dealers or the end user. We want everyone who
has a Fleetwood product to feel that they have
received good value for their investment.
AGGRESSIVELY IMPLEMENTING COST-EFFECTIVE PRACTICES.
At the corporate level, we too are focused on
receiving value for what we spend. Every expense is
being scrutinized for the value of its contribution to
our success. This focus resulted in significant cost
reductions within the last few months, particularly in
the areas of compensation and consulting fees. We
have also changed the Company's management
incentive compensation structure to more effectively
focus our managers on the importance of controlling
costs and generating profits.
By definition, distraction is not compatible with the
concept of focus. As previously announced, we have
begun the exit from our manufactured housing retail
and finance businesses, known as Fleetwood Retail
Corp. (FRC) and HomeOne Credit Corp., respectively.
Fleetwood was never able to reach the critical mass in
revenues necessary to achieve profitability in retail.
Our core competency has always been in
manufacturing, and the decision to focus on that
segment during this still-challenging time in the
manufactured housing market cycle will be crucial to
our recovery. As we go to press, it appears that we will
successfully close a transaction selling the majority of
the assets of both the retail and finance businesses
to divisions of Clayton Homes. FRC has been our
largest customer, and we are pleased that the buyer,
Clayton, has a strong, well-established presence in
retail and also as an important Fleetwood customer.
This should provide for the continued sale of
Fleetwood homes through most of these retail sites.
Other distractions have been eliminated as well. We
have discontinued a project to develop and build our
own proprietary RV chassis, initiated a search for
investment partners for our RV time-share venture
Fleetwood Vacation Club (which would leave us with a minority ownership interest), redirected a project to
develop a wholesale RV parts business, and halted
the production of conventional trailers in our folding
trailer plant. Some of these projects might be worthy
of a greater investment when Fleetwood is healthier
but, for now, they are more of a distraction than an
advantage to our recovery efforts. The benefit of these
moves, in addition to the potential monetary gains, will
be the refocusing of some of our best people on
developing and manufacturing very competitive,
innovative RVs and manufactured homes.
REORGANIZING FOR EFFICIENCY AND PROFITABILITY.
The basic reorganization of the Company is almost
complete. We now have several distinct business
units—motor homes, travel trailers, folding trailers,
three regions in manufactured housing, and the
Supply Group. We have consolidated several
facilities. Our employment level has been reduced
by approximately 9 percent, or 1,200 associates,
since the end of the fiscal 2005 third quarter. This
reduction included production associates, as well as
staff and management at all levels. You may note
that the number of corporate executive officers has
been reduced from 24 in our 2004 annual report to
10 in this report. Our efforts at all levels are more
streamlined and focused for quicker, more effective
decision making.
Liquidity will be critical to our efforts going forward.
As announced in early March of this year, the banks
in our secured credit facility provided us with a $25
million increase in availability from December 1 to
April 30, the period during which we typically build
inventory levels. More recently, the year-round
addition of a $15 million real estate sub-facility and
a $22 million term loan, also collateralized by real
estate, boosted the base credit line to $212 million.
We anticipate that these additional resources and
the continued support of our banks will contribute
significantly to our efforts in future periods.
As our renewed focus begins to take effect and we
move closer to sustained profitability, a silver lining
in the cloud of our losses from recent periods
emerges. Income, as we begin to generate it, will be
essentially free from Federal income taxes for quite
some time. As of the beginning of fiscal 2006, we
had a net operating loss carryforward of
approximately $188 million. In addition, we have a
valuation allowance against our deferred tax asset
of more than $115 million, which will begin to
reverse into income after we demonstrate consistent
profitability. These items, combined with the
operating leverage that exists in both businesses,
will allow us to recover financially much more quickly
than would otherwise be the case.
MOVING STRATEGICALLY AND POSITIVELY AHEAD.
We have a number of significant strengths that are
playing key roles as we move to a more positive
future, including a core of outstanding, experienced
associates; excellent, committed suppliers; products
that are represented by the best dealers; and
thousands of loyal, satisfied product owners.
We are privileged to be a leader in two businesses
that provide individuals and families with products
that have tangible value, within industries that have
an inherent promise of growth. The RV lifestyle
allows people to connect with family and friends,
travel freely, and pursue their passions. More people
are entering the traditional age range for the
purchase of an RV at the same time that the range
is expanding—younger families are buying RVs and
people are remaining healthy and using RVs longer.
And there will always be a need for affordable
housing, so we're proud to be in the business of
building quality homes that cost 10 to 35 percent
less per square foot than site-built houses.
I believe in Fleetwood's future as a market leader,
and I believe in Fleetwood as a solid investment.
We will focus on our products, as well as on gaining
market share, increasing sales, and improving
operating margins. We have done it before, and
throughout this difficult time in the Company's
history, our associates, our dealers, our product
owners, our suppliers, our banks, and our
shareholders have continued to believe that we will
do it again. I thank all of you for your support, and I
pledge to do what it takes to fulfill your expectations
and the inherent promise of value in your Company.
ELDEN L. SMITH
President and CEO
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