10-Q 1 d83807e10-q.txt FORM 10-Q FOR QUARTER ENDED DECEMBER 29, 2000 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 29, 2000 Commission file number 0-26188 PALM HARBOR HOMES, INC. -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Florida 59-1036634 --------------------------------------------- --------------------------------------- (State or other jurisdiction of incorporation (I.R.S. Employer Identification Number) or organization) 15303 Dallas Parkway, Suite 800, Addison, Texas 75001-4600 ------------------------------------------------------------------ (Address of principal executive offices) (Zip code) 972-991-2422 ---------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) Yes X No and (2) has been subject to such filing requirements for the past 90 days. Yes X No . Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Shares of common stock $.01 par value, outstanding on February 1, 2001 - 22,657,226. 2 PALM HARBOR HOMES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands)

DECEMBER 29, MARCH 31, 2000 2000 ------------ --------- (Unaudited) ASSETS Cash and cash equivalents $ 60,362 $ 49,138 Investments 27,214 22,423 Receivables 88,115 91,494 Inventories 114,097 122,645 Other current assets 6,783 6,910 ------------ --------- Total current assets 296,571 292,610 Other assets 70,820 77,572 Property, plant and equipment, net 90,213 86,992 ------------ --------- TOTAL ASSETS $ 457,604 $ 457,174 ============ ========= LIABILITIES AND SHAREHOLDERS' EQUITY Accounts payable $ 30,075 $ 41,705 Floor plan payable 138,324 138,608 Accrued liabilities 48,795 52,602 Current portion of long-term debt 177 243 ------------ --------- Total current liabilities 217,371 233,158 Long-term debt, less current portion 2,787 2,906 Deferred income taxes 2,993 3,934 Shareholders' equity: Common stock, $.01 par value 239 239 Additional paid-in capital 54,149 54,149 Retained earnings 199,468 181,082 Accumulated other comprehensive income 3,276 803 ------------ --------- 257,132 236,273 Less treasury shares (19,274) (13,848) Unearned compensation (3,405) (5,249) ------------ --------- Total shareholders' equity 234,453 217,176 ------------ --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 457,604 $ 457,174 ============ =========

See accompanying notes. 1 3 PALM HARBOR HOMES, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share data) (Unaudited)

THREE MONTHS ENDED NINE MONTHS ENDED DECEMBER 29, DECEMBER 31, DECEMBER 29, DECEMBER 31, 2000 1999 2000 1999 ------------ ------------ ------------ ------------ Net sales $ 145,934 $ 187,617 $ 511,818 $ 599,870 Cost of sales 100,403 127,041 350,047 408,274 Selling, general and administrative expenses 38,251 43,256 127,279 136,876 ------------ ------------ ------------ ------------ Income from operations 7,280 17,320 34,492 54,720 Interest expense (3,332) (2,700) (9,531) (7,518) Other income 1,323 1,179 5,624 5,257 ------------ ------------ ------------ ------------ Income before income taxes 5,271 15,799 30,585 52,459 Income tax expense 2,104 6,325 12,199 20,863 ------------ ------------ ------------ ------------ Net income $ 3,167 $ 9,474 $ 18,386 $ 31,596 ============ ============ ============ ============ Net income per common share - basic and diluted $ 0.14 $ 0.41 $ 0.81 $ 1.35 ============ ============ ============ ============ Weighted average common shares outstanding - basic 22,662 22,888 22,799 23,348 ============ ============ ============ ============ Weighted average common shares outstanding - diluted 22,671 22,913 22,810 23,380 ============ ============ ============ ============

See accompanying notes. 2 4 PALM HARBOR HOMES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (Unaudited)

NINE MONTHS ENDED DECEMBER 29, DECEMBER 31, 2000 1999 ------------ ------------ OPERATING ACTIVITIES Net income $ 18,386 $ 31,596 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 7,984 6,967 Amortization 3,053 3,033 Deferred income tax benefit (941) (838) Gain on sale of loans -- (2,253) Purchases of stock for long-term incentive plan -- (986) Provision for long-term incentive plan 1,342 826 Changes in operating assets and liabilities: Trade accounts receivable 6,296 8,934 Inventories 8,548 710 Other current assets 125 251 Other assets 3,699 180 Accounts payable and accrued liabilities (15,450) (7,500) ------------ ------------ Cash provided by operations 33,042 40,920 Loans originated (110,028) (118,920) Sales of loans 108,941 117,456 ------------ ------------ Net cash provided by operating activities 31,955 39,456 INVESTING ACTIVITIES Purchases of property, plant and equipment (11,202) (12,852) Purchases of investments (5,427) (5,562) Sales of investments 1,278 2,924 ------------ ------------ Net cash used in investing activities (15,351) (15,490) FINANCING ACTIVITIES Net proceeds from (payments on) floor plan payable (284) 1,443 Principal payments on notes payable and long-term debt (185) (173) Net purchases of treasury stock (4,911) (15,535) ------------ ------------ Net cash used in financing activities (5,380) (14,265) Net increase in cash and cash equivalents 11,224 9,701 Cash and cash equivalents at beginning of period 49,138 39,413 ------------ ------------ Cash and cash equivalents at end of period $ 60,362 $ 49,114 ============ ============ Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 9,011 $ 7,752 Income taxes 12,536 20,882

See accompanying notes. 3 5 PALM HARBOR HOMES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Basis of Presentation The condensed consolidated financial statements reflect all adjustments, which include only normal recurring adjustments, which are, in the opinion of management, necessary for a fair and accurate presentation. Certain footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted. The condensed consolidated financial statements should be read in conjunction with the audited financial statements for the year ended March 31, 2000. Results of operations for any interim period are not necessarily indicative of results to be expected for a full year. 2. Inventories Inventories consist of the following (in thousands):

DECEMBER 29, MARCH 31, 2000 2000 ------------ --------- Raw materials $ 7,495 $ 7,376 Work in process 2,971 3,424 Finished goods - manufacturing 369 629 - retail 103,262 111,216 ------------ --------- $ 114,097 $ 122,645 ============ =========

3. Other Assets Other assets include goodwill of $67.7 million at December 29, 2000, and $67.6 million at March 31, 2000, with accumulated amortization of $13.8 million and $10.8 million, respectively. 4. Floor Plan Payable The Company has floor plan facilities totaling $250.0 million plus a temporary overline facility of $15.0 million available through April 2, 2001 from financial institutions to finance a major portion of its home inventory at the Company's retail superstores. These facilities are secured by a portion of the Company's home inventory and receivables from financial institutions. The interest rates on the facilities are prime (9.5% at December 29, 2000). The Company had $138.3 million and $138.6 million outstanding on these floor plan credit facilities at December 29, 2000 and March 31, 2000, respectively. The Company's floor plan financing agreements permit the Company to earn interest on investments made with the financial institution, which can be withdrawn without any imposed restrictions. One agreement allows the Company to invest up to fifty percent of the floor plan balance provided that the net of the floor plan balance and investment balance does not fall below $60.0 million. The other agreement allows the Company to invest up to 25% of the outstanding amount owed to the financial institution. Interest rates on the amounts invested range from prime (9.5% at December 29, 2000) to prime minus 0.5%. The Company had $16.6 million and $47.0 million invested at December 29, 2000 and March 31, 2000, respectively, and has classified these amounts as Cash and Cash Equivalents in the accompanying Condensed Consolidated Balance Sheets. 4 6 5. Line of Credit The Company has a $25.0 million unsecured revolving line of credit from a financial institution for general corporate purposes. The line of credit bears interest, at the option of the Company (under certain conditions), at either the LIBOR rate (6.4% at December 29, 2000) plus 1.2% or the prime rate (9.5% at December 29, 2000) minus 1.0%. The line of credit contains provisions regarding minimum net worth requirements and certain indebtedness limitations, which would limit the amount available for future borrowings. The line is available through June 27, 2001, and requires an annual commitment fee of up to $12,500. The Company had no amounts outstanding on the line of credit at December 29, 2000 and March 31, 2000. 6. Business Segment Information The Company operates primarily in three business segments, retail sales, manufacturing and financial services. The following table summarizes information with respect to the Company's business segments for the indicated periods ending December 29, 2000 and December 31, 1999 (in thousands):

THREE MONTHS ENDED NINE MONTHS ENDED DECEMBER 29, DECEMBER 31, DECEMBER 29, DECEMBER 31, 2000 1999 2000 1999 ------------ ------------ ------------ ------------ Net sales Retail $ 124,035 $ 164,398 $ 438,808 $ 510,717 Manufacturing 82,746 112,323 294,527 374,493 Financial services 5,489 5,926 17,679 18,717 ------------ ------------ ------------ ------------ 212,270 282,647 751,014 903,927 Intersegment sales (66,336) (95,030) (239,196) (304,057) ------------ ------------ ------------ ------------ $ 145,934 $ 187,617 $ 511,818 $ 599,870 ------------ ------------ ------------ ------------ Income from operations Retail $ 1,785 $ 8,354 $ 11,268 $ 24,027 Manufacturing 7,373 9,002 29,004 32,968 Financial services 2,757 3,271 8,588 10,320 General corporate expenses (4,644) (3,971) (13,622) (12,147) ------------ ------------ ------------ ------------ 7,271 16,656 35,238 55,168 Intersegment profits 9 664 (746) (448) ------------ ------------ ------------ ------------ $ 7,280 $ 17,320 $ 34,492 $ 54,720 ------------ ------------ ------------ ------------ Interest expense $ (3,332) $ (2,700) $ (9,531) $ (7,518) Other income 1,323 1,179 5,624 5,257 ------------ ------------ ------------ ------------ Income before taxes $ 5,271 $ 15,799 $ 30,585 $ 52,459 ============ ============ ============ ============

5 7 PART I. FINANCIAL INFORMATION Item 1. Financial Statements See pages 1 through 5. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This continues to be a challenging period for the manufactured housing industry. Elevated credit standards resulted in reduced retail sales levels and declining margins for most industry participants. Additionally, business conditions have resulted in a considerable contraction of industry-wide manufacturing capacity. Calendar 2000 industry shipments through November were down 27% from a year ago and it seems likely that the present industry lending environment will continue to dampen industry sales and shipments for the next several months. Despite the difficult conditions, the Company maintained gross margins, profitably increased market share, decreased fixed expenses, and reduced inventories, while continuing its controlled growth strategy of opening new retail superstores. The Company has cash and cash equivalents of $60.4 million after investing over $20 million in the Company's stock buyback program and virtually no long-term debt. In addition, the Company continues to control inventory levels with the average new home inventory per retail superstore averaging $740,000 per location, a decline of approximately $90,000, or 11%, compared to the year earlier period. Gross margin remained stable at 31.2%. The following table sets forth certain items of the Company's statement of income as a percentage of net sales for the period indicated.

THREE MONTHS ENDED NINE MONTHS ENDED DECEMBER 29, DECEMBER 31, DECEMBER 29, DECEMBER 31, 2000 1999 2000 1999 ------------ ------------ ------------ ------------ Net sales 100.0% 100.0% 100.0% 100.0% Cost of sales 68.8 67.7 68.4 68.1 ------------ ------------ ------------ ------------ Gross profit 31.2 32.3 31.6 31.9 Selling, general and administrative expenses 26.2 23.1 24.9 22.8 ------------ ------------ ------------ ------------ Income from operations 5.0 9.2 6.7 9.1 Interest expense (2.3) (1.4) (1.8) (1.3) Other income 0.9 0.6 1.1 0.9 ------------ ------------ ------------ ------------ Income before income taxes 3.6 8.4 6.0 8.7 Income tax expense 1.4 3.4 2.4 3.5 ------------ ------------ ------------ ------------ Net income 2.2% 5.0% 3.6% 5.2% ============ ============ ============ ============

6 8 The following table summarizes certain key sales statistics as of and for the three and nine months ended December 29, 2000 and December 31, 1999.

THREE MONTHS ENDED NINE MONTHS ENDED DECEMBER 29, DECEMBER 31, DECEMBER 29, DECEMBER 31, 2000 1999 2000 1999 ------------ ------------ ------------ ------------ Company homes sold through Company-owned retail superstores 1,982 2,694 7,078 8,485 Total new homes sold 2,410 3,421 8,517 11,229 Internalization rate (1) 82% 79% 83% 76% Average new home price - retail $60,000 $ 59,000 $ 59,000 $ 57,000 Number of retail superstores at end of period 138 132 138 132 Homes sold to independent retailers 418 713 1,395 2,581

(1) The internalization rate is the percentage of new homes that are manufactured by the Company and sold through Company-owned retail superstores. THREE MONTHS ENDED DECEMBER 29, 2000 COMPARED TO THREE MONTHS ENDED DECEMBER 31, 1999 NET SALES. Net sales decreased 22.2% to $145.9 million in the three months ended December 29, 2000 from $187.6 million in the three months ended December 31, 1999. The decrease in net sales was primarily due to competitive conditions in the manufactured housing industry as indicated by a decrease of 26% in the volume of homes sold through Company-owned superstores while overall unit volume, which includes sales to independent retailers, declined 30% in the current quarter. This decline in volume is partially offset by an increase in the average selling price of a new home, which resulted from a continued shift in product mix towards multi-section homes. Currently, 81% of the homes manufactured by the Company are multi-section. The number of superstores increased from 132 at the end of the third quarter of fiscal 2000 to 138 at the end of the third quarter of fiscal 2001. GROSS PROFIT. Gross profit decreased 24.8% to $45.6 million in the quarter ended December 29, 2000 compared to $60.6 million in the quarter ended December 31, 1999. During the same period, gross profit margin as a percentage of net sales decreased slightly to 31.2% compared to 32.3%. The Company sold 82% of its homes through Company-owned retail superstores in the third quarter of fiscal 2001 versus 79% in the third quarter of fiscal 2000. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses decreased 11.6% to $38.3 million in the quarter ended December 29, 2000 from $43.3 million in the quarter ended December 31, 1999, primarily due to the Company's continued focus on reducing fixed expenses company-wide partially offset by a commitment to building brand awareness via advertising and expenses associated with the opening of six additional retail superstores. As a percentage of net sales, selling, general and administrative expenses increased, as planned, to 26.2% in the third quarter of fiscal 2001 from 23.1% in the third quarter of fiscal 2000. This increase is due to the growth in the Company's retail operations which, generally, have higher selling, general and administrative expenses as a percentage of net sales as compared to wholesale operations. 7 9 INTEREST EXPENSE. Interest expense increased 23.4% to $3.3 million in the third quarter of fiscal 2001 from $2.7 million in the third quarter of fiscal 2000 due to increases in both the average floor plan balance and the prime interest rate from the third quarter of fiscal 2000 to the third quarter of fiscal 2001. NINE MONTHS ENDED DECEMBER 29, 2000 COMPARED TO NINE MONTHS ENDED DECEMBER 31, 1999 NET SALES. Net sales decreased 14.7% to $511.8 million in the nine months ended December 29, 2000 from $599.9 million in the nine months ended December 31,1999. The decrease in net sales was primarily due to competitive conditions in the manufactured housing industry as indicated by a decrease of 18% in the volume of homes sold through Company-owned superstores while overall unit volume, which includes sales to independent retailers, declined 24% in the first three quarters of fiscal 2001 compared to the first three quarters of fiscal 2000. This decline in volume is partially offset by an increase in the average selling price of a new home, which resulted from a continued shift in product mix towards multi-section homes. Currently, 81% of the homes manufactured by the Company are multi-section. The number of Company-owned retail superstores increased from 132 at the end of the third quarter of fiscal 2000 to 138 at the end of the third quarter of fiscal 2001. GROSS PROFIT. Gross profit decreased 15.6% to $161.8 million in the nine months ended December 29, 2000 compared to $191.6 million in the nine months ended December 31, 1999. During the same period, gross profit margin as a percentage of net sales remained stable at 31.6% compared to 31.9%. The Company sold 83% of the its homes through Company-owned retail superstores in the nine months ended December 29, 2000 versus 76% in the nine months ended December 31, 1999. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses decreased 7.0% to $127.3 million in the nine months ended December 29, 2000 from $136.9 million in the nine months ended December 31, 1999, primarily due to the Company's continued focus on reducing fixed expenses company-wide partially offset by a commitment to building brand awareness via advertising and expenses associated with the six additional retail superstores. As a percentage of net sales, selling, general and administrative expenses increased, as planned, to 24.9% in the nine months ended December 29, 2000 from 22.8% in the nine months ended December 31, 1999. This increase is due to the growth in the Company's retail operations which, generally, have higher selling, general and administrative expenses as a percentage of net sales as compared to wholesale operations. INTEREST EXPENSE. Interest expense increased 26.8% to $9.5 million in the nine months ended December 29, 2000 from $7.5 million in the nine months ended December 31, 1999 due to increases in both the average floor plan balance and the prime interest rate from the nine months ended December 31, 1999 to the nine months ended December 29, 2000. LIQUIDITY AND CAPITAL RESOURCES. The Company has a floor plan credit facility totaling $175.0 million with Conseco Finance, a subsidiary of Conseco, Inc., to finance a major portion of its home inventory at the Company's retail superstores. This facility is secured by a portion of the Company's home inventory and receivables from financial institutions. The interest rate on the facility is prime (9.5% at December 29, 2000). The agreement is effective until June 30, 2001. The Company also has a floor plan credit facility with Deutsche Financial Services for $75.0 million (with an overline of $15.0 million through April 2, 2001). This agreement has substantially the same terms as the agreement with Conseco and is effective until September 11, 2001. The Company's floor plan financing agreements permit the Company to earn interest on investments made with the financial institutions, which can be withdrawn without any imposed restrictions. The agreement with Conseco allows the Company to invest up to fifty percent of the floor plan balance provided that the net of the floor plan balance and investment 8 10 balance does not fall below $60.0 million. The agreement with Deutsche allows the Company to invest up to 25% of the outstanding amount owed to them. The Company has a $25.0 million unsecured revolving line of credit from a financial institution for general corporate purposes. The line of credit bears interest, at the option of the Company (under certain conditions), at either the LIBOR rate (6.4% at December 29, 2000) plus 1.2% or the prime rate (9.5% at December 29, 2000) minus 1.0%. The line of credit contains provisions regarding minimum net worth requirements and certain indebtedness limitations which would limit the amount available for future borrowings. The line is available through June 27, 2001 and requires an annual commitment fee of up to $12,500. The Company had no amounts outstanding on the line of credit at December 29, 2000 and March 31, 2000. Through CountryPlace Mortgage, the Company's finance subsidiary, the Company assigns approved loan contracts to one of three national finance companies. In January 2000, one of these companies, Associates Housing Finance, announced that they would be discontinuing retail and floor plan financing for the manufactured housing industry. The Company does, however, have a contract through March 31, 2002 with the Associates and they have committed to providing consumer financing to the Company throughout the duration of the contract. In July 1999, the Company's Board of Directors authorized, subject to certain business and market conditions, the use of up to $20.0 million to repurchase the Company's common stock. In July 2000, the Board of Directors authorized another $20.0 million for common stock repurchases. As of the date of this filing, the Company had invested $20.5 million in the common stock buyback program. The Company believes that cash flow from operations, together with floor plan financing and the revolving line of credit, will be adequate to support its working capital, currently planned capital expenditure needs and future share repurchases in the foreseeable future. The Company may, from time to time, obtain additional floor plan financing for its retail inventories. Such practice is customary in the industry. However, because future cash flows and the availability of financing will depend on a number of factors, including prevailing economic and financial conditions, business and other factors beyond the Company's control, no assurances can be given in this regard. FORWARD-LOOKING INFORMATION. Certain statements contained in this report are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. Investors should be aware of factors, which could have a negative impact on prospects and the consistency of progress. These include political, economic or other factors such as inflation rates, recessionary or expansive trends, taxes and regulations and laws affecting the business in each of the Company's markets; competitive product, advertising, promotional and pricing activity; dependence on the rate of development and degree of acceptance of new product introductions in the marketplace; and the difficulty of forecasting sales at certain times in certain markets. 9 11 PART II. OTHER INFORMATION Item 1. Legal Proceedings - Not applicable Item 2. Changes in Securities - Not applicable Item 3. Defaults upon Senior Securities - Not applicable Item 4. Submission of Matters to a Vote by Security Holders - Not applicable Item 5. Other Information - Not applicable Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits - None (b) Reports on Form 8-K - Not applicable SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized. Date: February 1, 2001 Palm Harbor Homes, Inc. ----------------------- (Registrant) By: /s/ Kelly Tacke -------------------------------- Kelly Tacke Chief Financial and Accounting Officer By: /s/ Lee Posey -------------------------------- Lee Posey Chairman of the Board 10