10-Q 1 d81611e10-q.txt FORM 10-Q FOR QUARTER ENDED SEPTEMBER 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 September 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 November 3, 2000 - 22,664,131. 2 PALM HARBOR HOMES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands)

SEPTEMBER 29, MARCH 31, 2000 2000 ------------- ---------- ASSETS (Unaudited) Cash and cash equivalents $ 61,472 $ 49,138 Investments 25,719 22,423 Receivables 93,514 91,494 Inventories 117,978 122,645 Other current assets 6,963 6,910 ---------- ---------- Total current assets 305,646 292,610 Other assets 72,087 77,572 Property, plant and equipment, net 89,621 86,992 ---------- ---------- TOTAL ASSETS $ 467,354 $ 457,174 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Accounts payable $ 38,747 $ 41,705 Floor plan payable 135,938 138,608 Accrued liabilities 56,013 52,602 Current portion of long-term debt 200 243 ---------- ---------- Total current liabilities 230,898 233,158 Long-term debt, less current portion 2,829 2,906 Deferred income taxes 3,281 3,934 Shareholders' equity: Common stock, $.01 par value 239 239 Additional paid-in capital 54,149 54,149 Retained earnings 196,301 181,082 Accumulated other comprehensive income 2,479 803 ---------- ---------- 253,168 236,273 Less treasury shares (19,041) (13,848) Unearned compensation (3,781) (5,249) ---------- ---------- Total shareholders' equity 230,346 217,176 ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 467,354 $ 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 SIX MONTHS ENDED SEPTEMBER 29, SEPTEMBER 24, SEPTEMBER 29, SEPTEMBER 24, 2000 1999 2000 1999 ------------- ------------- ------------- ------------- Net sales $ 175,813 $ 193,678 $ 365,884 $ 412,253 Cost of sales 118,761 130,168 249,644 281,233 Selling, general and administrative expenses 44,036 46,509 89,028 93,620 ------------ ------------ ------------ ------------ Income from operations 13,016 17,001 27,212 37,400 Interest expense (3,206) (2,436) (6,199) (4,818) Other income 2,919 2,741 4,301 4,078 ------------ ------------ ------------ ------------ Income before income taxes 12,729 17,306 25,314 36,660 Income tax expense 5,062 6,799 10,095 14,538 ------------ ------------ ------------ ------------ Net income $ 7,667 $ 10,507 $ 15,219 $ 22,122 ============ ============ ============ ============ Net income per common share - basic and diluted $ 0.34 $ 0.45 $ 0.67 $ 0.94 ============ ============ ============ ============ Weighted average common shares outstanding - basic 22,726 23,428 22,868 23,595 ============ ============ ============ ============ Weighted average common shares outstanding - diluted 22,736 23,459 22,881 23,631 ============ ============ ============ ============

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

SIX MONTHS ENDED SEPTEMBER 29, SEPTEMBER 24, 2000 1999 ------------- ------------- OPERATING ACTIVITIES Net income $ 15,219 $ 22,122 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 5,299 4,493 Amortization 2,039 2,021 Deferred income tax benefit (653) (495) Gain on sale of loans -- (6,087) Purchases of stock for long-term incentive plan -- (939) Provision for long-term incentive plan 1,053 550 Changes in operating assets and liabilities: Trade accounts receivable (135) 2,992 Inventories 4,667 (5,975) Other current assets (53) 745 Other assets 3,447 (816) Accounts payable and accrued liabilities 454 (4,228) ------------- ------------- Cash provided by operations 31,337 14,383 Loans originated (75,287) (80,093) Sales of loans 74,464 78,996 ------------- ------------- Net cash provided by operating activities 30,514 13,286 INVESTING ACTIVITIES Purchases of property, plant and equipment (7,928) (7,152) Purchases of investments (3,871) (5,058) Sales of investments 1,188 2,924 ------------- ------------- Net cash used in investing activities (10,611) (9,286) FINANCING ACTIVITIES Net proceeds from (payments on) floor plan payable (2,670) 8,648 Principal payments on notes payable and long-term debt (120) (115) Net purchases of treasury stock (4,779) (13,313) ------------- ------------- Net cash used in financing activities (7,569) (4,780) ------------- ------------- Net increase (decrease) in cash and cash equivalents 12,334 (780) Cash and cash equivalents at beginning of period 49,138 39,413 ------------- ------------- Cash and cash equivalents at end of period $ 61,472 $ 38,633 ============= ============= Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 5,965 $ 5,096 Income taxes 6,990 15,368

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):

SEPTEMBER 29, MARCH 31, 2000 2000 ------------- ------------- Raw materials $ 7,465 $ 7,376 Work in process 3,131 3,424 Finished goods - manufacturing 632 629 - retail 106,750 111,216 ------------- ------------- $ 117,978 $ 122,645 ============= =============

3. Other Assets Other assets include goodwill of $67.7 million at September 29, 2000 and $67.6 million at March 31, 2000, with accumulated amortization of $12.8 million and $10.8 million, respectively. 4. Floor Plan Payable As of September 11, 2000, the Company entered into a floor plan credit facility with a financial institution for $75.0 million and thus, as of September 29, 2000, has floor plan credit facilities totaling $250.0 million 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 (9.50% at September 29, 2000). The Company expects to reduce the credit facilities by approximately $110.0 million during the third quarter of fiscal 2001. The Company had $135.9 million and $138.6 million outstanding on these floor plan credit facilities at September 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 institutions, 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 earned on the amounts invested range from prime (9.50% at September 29, 2000) to prime minus 0.50%. The Company had $47.0 million invested at March 31, 2000 (none at September 29, 2000), and has 4 6 classified this amount as Cash and Cash Equivalents in the accompanying Condensed Consolidated Balance Sheets. 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 (6.81% at September 29, 2000) plus .625% or the prime rate (9.50% at September 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 September 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 periods ending September 29, 2000 and September 24, 1999 (in thousands):

THREE MONTHS ENDED SIX MONTHS ENDED SEPTEMBER 29, SEPTEMBER 24, SEPTEMBER 29, SEPTEMBER 24, 2000 1999 2000 1999 ------------- ------------- ------------- ------------- Net sales Retail $ 152,037 $ 168,282 $ 314,773 $ 346,319 Manufacturing 101,428 121,861 211,781 262,170 Financial services 6,018 6,220 12,190 12,791 ------------- ------------- ------------- ------------- 259,483 296,363 538,744 621,280 Intersegment sales (83,670) (102,685) (172,860) (209,027) ------------- ------------- ------------- ------------- $ 175,813 $ 193,678 $ 365,884 $ 412,253 ------------- ------------- ------------- ------------- Income from operations Retail $ 4,158 $ 7,271 $ 9,483 $ 15,673 Manufacturing 11,045 11,301 21,631 23,966 Financial services 3,043 3,344 5,831 7,049 General corporate expenses (4,954) (4,556) (8,978) (8,176) ------------- ------------- ------------- ------------- 13,292 17,360 27,967 38,512 Intersegment profits (276) (359) (755) (1,112) ------------- ------------- ------------- ------------- $ 13,016 $ 17,001 $ 27,212 $ 37,400 ------------- ------------- ------------- ------------- Interest expense $ (3,206) $ (2,436) $ (6,199) $ (4,818) Other income 2,919 2,741 4,301 4,078 ------------- ------------- ------------- ------------- Income before taxes $ 12,729 $ 17,306 $ 25,314 $ 36,660 ============= ============= ============= =============

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 The industry continues to be intensely competitive. Tightened credit standards, coupled with increased interest rates, have 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. Industry shipments through August were down 25% from a year ago, and it seems likely that further declines will be recorded at least through the end of this year. Sales have definitely been affected in this intensely competitive environment, and difficult year-to-year comparisons are likely to persist at least through the remainder of the fiscal year. The Company has cash and cash equivalents of $61.5 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 $790,000 per location, a decline of approximately $100,000, or 10%, compared to the year earlier period. Gross margin remains stable at 32.5%. 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 SIX MONTHS ENDED SEPTEMBER 29, SEPTEMBER 24, SEPTEMBER 29, SEPTEMBER 24, 2000 1999 2000 1999 ------------- ------------- ------------- ------------- Net sales 100.0% 100.0% 100.0% 100.0% Cost of sales 67.5 67.2 68.2 68.2 ------------- ------------- ------------- ------------- Gross profit 32.5 32.8 31.8 31.8 Selling, general and administrative expenses 25.0 24.0 24.3 22.7 ------------- ------------- ------------- ------------- Income from operations 7.5 8.8 7.5 9.1 Interest expense (1.8) (1.3) (1.7) (1.2) Other income 1.6 1.4 1.2 1.0 ------------- ------------- ------------- ------------- Income before income taxes 7.3 8.9 7.0 8.9 Income tax expense 2.9 3.5 2.8 3.5 ------------- ------------- ------------- ------------- Net income 4.4% 5.4% 4.2% 5.4% ============= ============= ============= =============

6 8 The following table summarizes certain key sales statistics as of and for the three and six months ended September 29, 2000 and September 24, 1999.

THREE MONTHS ENDED SIX MONTHS ENDED SEPTEMBER 29, SEPTEMBER 24, SEPTEMBER 29, SEPTEMBER 24, 2000 1999 2000 1999 ------------- ------------- ------------- ------------- Company homes sold through Company-owned retail superstores 2,434 2,798 5,096 5,791 Total new homes sold 2,881 3,604 6,107 7,808 Internalization rate (1) 84% 78% 83% 74% Average new home price - retail $ 60,000 $ 58,000 $ 59,000 $ 57,000 Number of retail superstores at end of period 137 129 137 129 Homes sold to independent retailers 427 751 977 1,868

(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 SEPTEMBER 29, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER 24, 1999 NET SALES. Net sales decreased 9.2% to $175.8 million in the three months ended September 29, 2000 from $193.7 million in the three months ended September 24,1999. The decrease in net sales was primarily due to competitive conditions in the manufactured housing industry as indicated by a decrease of 14% in the volume of homes sold through Company-owned superstores while overall unit volume, which includes sales to independent retailers, declined 20% in the current quarter. This decline in volume is somewhat 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, 82% of the homes manufactured by the Company are multi-section. The number of superstores increased from 129 at the end of the second quarter of fiscal 2000 to 137 at the end of the second quarter of fiscal 2001. GROSS PROFIT. For the quarter ended September 29, 2000, gross profit decreased 10.2% to $57.1 million, which is consistent with the 9.2% decrease in net sales. For the quarter ended September 29, 2000, gross profit margin as a percentage of net sales remained stable at 32.5% compared to 32.8% for the quarter ended September 24, 1999. The Company sold 84% of its homes through Company-owned retail superstores in the second quarter of fiscal 2001 versus 78% in the second quarter of fiscal 2000. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses decreased 5.3% to $44.0 million in the quarter ended September 29, 2000 from $46.5 million in the quarter ended September 24, 1999, primarily due to the Company's continued focus on reducing fixed expenses company-wide somewhat offset by a commitment to building brand awareness via advertising and expenses associated with the opening of 8 additional retail superstores. As a percentage of net sales, selling, general and administrative expenses increased, as planned, to 25.0% in the second quarter of fiscal 2001 from 24.0% in the second 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 31.6% to $3.2 million for the second quarter of fiscal 2001 from $2.4 million in the second quarter of fiscal 2000 primarily due to an increase in the prime interest rate from 8.25% in the second quarter of fiscal 2000 to 9.50% in the second quarter of fiscal 2001. SIX MONTHS ENDED SEPTEMBER 29, 2000 COMPARED TO SIX MONTHS ENDED SEPTEMBER 24, 1999 NET SALES. Net sales decreased 11.2% to $365.9 million in the six months ended September 29, 2000 from $412.3 million in the six months ended September 24,1999. The decrease in net sales was primarily due to competitive conditions in the manufactured housing industry as indicated by a decrease of 14% in the volume of homes sold through Company-owned superstores while overall unit volume, which includes sales to independent retailers, declined 22% in the first two quarters of fiscal 2001 compared to the first two quarters of fiscal 2000. This decline in volume is somewhat 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, 82% of the homes manufactured by the Company are multi-section. The number of Company-owned retail superstores increased from 129 at the end of the second quarter of fiscal 2000 to 137 at the end of the second quarter of fiscal 2001. GROSS PROFIT. Gross profit decreased 11.3% to $116.2 million, which is consistent with the 11.2% decrease in net sales. During the same period, gross profit margin as a percentage of net sales remained constant at 31.8%. The Company sold 83% of its homes through Company-owned retail superstores in the six months ended September 29, 2000 versus 74% in the six months ended September 24, 1999. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses decreased 4.9% to $89.0 million in the six months ended September 29, 2000 from $93.6 million in the six months ended September 24, 1999, primarily due to the Company's continued focus on reducing fixed expenses company-wide somewhat offset by a commitment to building brand awareness via advertising and expenses associated with the 8 additional retail superstores. As a percentage of net sales, selling, general and administrative expenses increased, as planned, to 24.3% in the six months ended September 29, 2000 from 22.7% in the six months ended September 24, 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 28.9% to $6.2 million in the six months ended September 29, 2000 primarily due to an increase in the prime interest rate from an average of 8% in the first two quarters of fiscal 2000 to 9.5% in the first two quarters of fiscal 2001. 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 (9.50% at September 29, 2000). The agreement is effective until June 30, 2001. As of September 11, 2000, the Company entered into a floor plan credit facility with Deutsche for $75.0 million. This agreement has substantially the same terms as the agreement with Conseco. The Company expects to reduce the Conseco facility by approximately $110.0 million during the third quarter of fiscal 2001. The Company's floor plan financing agreements permit the Company to earn interest on investments made 8 10 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 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 (6.64% at September 29, 2000) plus 1.20% or the prime rate (9.50% at September 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 September 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 $20.4 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) Exhibit 27 - Financial Data Schedule (EDGAR filing only). (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: November 9, 2000 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 12 INDEX TO EXHIBITS

EXHIBIT NUMBER DESCRIPTION ------- ----------- 27 Financial Data Schedule