UNITED STATES
SECURITIES & EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 28, 2008
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _________________ to ________________ |
Commission File Number 1-9792
Cavalier Homes, Inc.
(Exact name of registrant as specified in its charter)
Delaware | 63-0949734 | |
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) |
32 Wilson Boulevard 100, Addison, Alabama 35540
(Address of principal executive offices) (Zip Code)
(256) 747-9800
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
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), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer ¨ | Accelerated Filer ¨ | Non-Accelerated Filer ¨ (Do not check if a smaller reporting company) | Smaller Reporting Company x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class | Outstanding at July 23, 2008 | |
Common Stock, $0.10 Par Value | 18,429,580 Shares |
CAVALIER HOMES, INC.
FORM 10-Q
Item 1. Financial Statements
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except per share amounts)
Quarter Ended | Year-to-Date Ended | |||||||||||||||
June 28, 2008 | June 30, 2007 | June 28, 2008 | June 30, 2007 | |||||||||||||
Revenue | $ | 51,090 | $ | 62,809 | $ | 100,606 | $ | 105,711 | ||||||||
Cost of sales | 41,447 | 54,172 | 82,663 | 91,094 | ||||||||||||
Gross profit | 9,643 | 8,637 | 17,943 | 14,617 | ||||||||||||
Selling, general and administrative expenses | 8,422 | 9,742 | 16,699 | 19,557 | ||||||||||||
Operating income (loss) | 1,221 | (1,105 | ) | 1,244 | (4,940 | ) | ||||||||||
Other income (expense): | ||||||||||||||||
Interest expense | (112 | ) | (146 | ) | (236 | ) | (310 | ) | ||||||||
Other, net | 135 | 174 | 320 | 146 | ||||||||||||
23 | 28 | 84 | (164 | ) | ||||||||||||
Income (loss) before income taxes and equity in earnings of equity-method investees | 1,244 | (1,077 | ) | 1,328 | (5,104 | ) | ||||||||||
Income tax provision | 84 | 34 | 95 | 56 | ||||||||||||
Equity in earnings of equity-method investees | 78 | 242 | 123 | 400 | ||||||||||||
Net income (loss) | $ | 1,238 | $ | (869 | ) | $ | 1,356 | $ | (4,760 | ) | ||||||
Net income (loss) per share: | ||||||||||||||||
Basic | $ | 0.07 | $ | (0.05 | ) | $ | 0.07 | $ | (0.26 | ) | ||||||
Diluted | $ | 0.07 | $ | (0.05 | ) | $ | 0.07 | $ | (0.26 | ) | ||||||
Weighted average shares outstanding: | ||||||||||||||||
Basic | 18,406 | 18,377 | 18,397 | 18,373 | ||||||||||||
Diluted | 18,409 | 18,377 | 18,407 | 18,373 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
June 28, 2008 (unaudited) | December 31, 2007 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 20,898 | $ | 22,043 | ||||
Accounts receivable, less allowance for losses of $118 (2008) and $106 (2007) | 13,366 | 6,208 | ||||||
Current portion of notes and installment contracts receivable, including held for resale of $6,395 (2008) and $5,688 (2007) | 6,505 | 5,761 | ||||||
Inventories | 18,677 | 20,537 | ||||||
Other current assets | 1,104 | 3,681 | ||||||
Total current assets | 60,550 | 58,230 | ||||||
Property, plant and equipment, net | 26,970 | 27,824 | ||||||
Installment contracts receivable, less allowance for credit losses of $705 (2008) and $725 (2007) | 1,206 | 3,264 | ||||||
Other assets | 1,924 | 2,059 | ||||||
Total assets | $ | 90,650 | $ | 91,377 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Current portion of long-term debt and capital lease obligation | $ | 890 | $ | 834 | ||||
Note payable under retail floor plan agreement | 792 | 510 | ||||||
Accounts payable | 6,141 | 4,720 | ||||||
Amounts payable under dealer incentives | 3,153 | 3,619 | ||||||
Estimated warranties | 11,690 | 11,720 | ||||||
Accrued insurance | 5,436 | 5,158 | ||||||
Accrued compensation and related withholdings | 3,094 | 2,846 | ||||||
Reserve for repurchase commitments | 1,167 | 1,131 | ||||||
Progress billings | -- | 3,546 | ||||||
Other accrued expenses | 3,686 | 3,384 | ||||||
Total current liabilities | 36,049 | 37,468 | ||||||
Long-term debt and capital lease obligation, less current portion | 2,920 | 3,678 | ||||||
Other long term liabilities | 251 | 247 | ||||||
Total liabilities | 39,220 | 41,393 | ||||||
Commitments and contingencies (Note 8) | ||||||||
Stockholders’ equity: | ||||||||
Series A Junior Participating Preferred stock, $0.01 par value; 200,000 shares authorized, none issued | -- | -- | ||||||
Preferred stock, $0.01 par value; 300,000 shares authorized, none issued | -- | -- | ||||||
Common stock, $0.10 par value; 50,000,000 shares authorized; 19,412,880 shares issued | 1,941 | 1,941 | ||||||
Additional paid-in capital | 59,140 | 59,126 | ||||||
Deferred compensation | (109 | ) | (185 | ) | ||||
Retained deficit | (5,760 | ) | (7,116 | ) | ||||
Treasury stock, at cost; 983,300 shares | (3,782 | ) | (3,782 | ) | ||||
Total stockholders’ equity | 51,430 | 49,984 | ||||||
Total liabilities and stockholders’ equity | $ | 90,650 | $ | 91,377 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
Year-to-Date Ended | ||||||||
June 28, 2008 | June 30, 2007 | |||||||
Operating activities: | ||||||||
Net income (loss) | $ | 1,356 | $ | (4,760 | ) | |||
Adjustments to reconcile net income (loss) to net cash used in operating activities: | ||||||||
Depreciation | 1,074 | 1,056 | ||||||
Stock-based compensation | 90 | 131 | ||||||
Provision for credit and accounts receivable losses | 245 | 75 | ||||||
(Gain) loss on sale of property, plant and equipment | (57 | ) | 50 | |||||
Other, net | (123 | ) | (400 | ) | ||||
Installment contracts purchased for resale | (17,882 | ) | (28,239 | ) | ||||
Sale of installment contracts purchased for resale | 16,221 | 25,507 | ||||||
Principal collected on installment contracts purchased for resale | 29 | 38 | ||||||
Changes in assets and liabilities: | ||||||||
Accounts receivable, net | (10,739 | ) | (12,795 | ) | ||||
Inventories | 1,860 | (4,269 | ) | |||||
Accounts payable | 1,421 | 2,799 | ||||||
Amounts payable under dealer incentives | (466 | ) | 136 | |||||
Accrued compensation and related withholdings | 248 | 533 | ||||||
Other assets and liabilities | 877 | 856 | ||||||
Net cash used in operating activities | (5,846 | ) | (19,282 | ) | ||||
Investing activities: | ||||||||
Proceeds from dispositions of property, plant and equipment | 89 | 60 | ||||||
Capital expenditures | (223 | ) | (1,515 | ) | ||||
Notes and installment contracts purchased for investment | (477 | ) | (163 | ) | ||||
Sale of installment contracts purchased for investment | 4,414 | -- | ||||||
Principal collected on notes and installment contracts purchased for investment | 1,116 | 1,221 | ||||||
Other investing activities | 231 | 332 | ||||||
Net cash provided by (used in) investing activities | 5,150 | (65 | ) | |||||
Financing activities: | ||||||||
Net borrowings on note payable under retail floor plan agreement | 282 | 1,056 | ||||||
Payments on long-term debt | (731 | ) | (880 | ) | ||||
Proceeds from exercise of stock options | -- | 50 | ||||||
Net cash provided by (used in) financing activities | (449 | ) | 226 | |||||
Net decrease in cash and cash equivalents | (1,145 | ) | (19,121 | ) | ||||
Cash and cash equivalents at beginning of period | 22,043 | 25,967 | ||||||
Cash and cash equivalents at end of period | $ | 20,898 | $ | 6,846 | ||||
Supplemental disclosures: | ||||||||
Cash paid for (received from): | ||||||||
Interest | $ | 208 | $ | 359 | ||||
Income taxes | $ | (10 | ) | $ | (531 | ) | ||
Non-cash investing and financing activities: | ||||||||
Property, plant and equipment acquired through capital lease transaction | $ | 29 | $ | -- | ||||
Retail assets sold for assumption of note payable, net of note receivable of $447 | $ | -- | $ | 1,793 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
Notes to Condensed Consolidated Financial Statements
(unaudited – dollars in thousands except per share amounts)
1. | BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES |
The condensed consolidated balance sheet as of December 31, 2007, which has been derived from audited financial statements, and the unaudited interim condensed consolidated financial statements have been prepared in compliance with standards for interim financial reporting and Form 10-Q instructions and thus do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, these statements contain all adjustments necessary to present fairly our financial position as of June 28, 2008, and the results of operations for the quarter and year-to-date periods ended June 28, 2008 and June 30, 2007, and the results of our cash flows for the year-to-date periods ended June 28, 2008 and June 30, 2007. All such adjustments are of a normal, recurring nature.
The results of operations for the quarter and year-to-date periods ended June 28, 2008 are not necessarily indicative of the results to be expected for the full year. The information included in this Form 10-Q should be read in conjunction with Management’s Discussion and Analysis and financial statements and notes thereto included in our 2007 Annual Report on Form 10-K.
For a description of our significant accounting policies used in the preparation of our consolidated financial statements, see Note 1 of Notes to Consolidated Financial Statements in our 2007 Annual Report on Form 10-K.
We report two net income (loss) per share numbers, basic and diluted, which are computed by dividing net income (loss) by the weighted average shares outstanding (basic) or weighted average shares outstanding assuming dilution (diluted), as detailed below:
Quarter Ended | Year-to-Date Ended | |||||||||||||||
June 28, 2008 | June 30, 2007 | June 28, 2008 | June 30, 2007 | |||||||||||||
Net income (loss) | $ | 1,238 | $ | (869 | ) | $ | 1,356 | $ | (4,760 | ) | ||||||
Weighted average shares outstanding: | ||||||||||||||||
Basic | 18,406 | 18,377 | 18,397 | 18,373 | ||||||||||||
Effect of potential common stock from the exercise of stock options | 3 | -- | 10 | -- | ||||||||||||
Diluted | 18,409 | 18,377 | 18,407 | 18,373 | ||||||||||||
Net income (loss) per share: | ||||||||||||||||
Basic | $ | 0.07 | $ | (0.05 | ) | $ | 0.07 | $ | (0.26 | ) | ||||||
Diluted | $ | 0.07 | $ | (0.05 | ) | $ | 0.07 | $ | (0.26 | ) | ||||||
Weighted average option shares excluded from computation of diluted loss per share because their effect is anti-dilutive | 525 | 884 | 569 | 945 |
Restricted common stock outstanding issued to employees as of June 28, 2008 totaling 23,332 shares has been excluded from the computation of basic earnings (loss) per share since the shares are not vested and remain subject to forfeiture.
Certain amounts from the prior year periods have been reclassified to conform to the 2008 presentation.
2. | RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS |
In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, Fair Value Measurements, which defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. SFAS No. 157 does not require any new fair value measurements but rather eliminates inconsistencies in guidance found in various prior accounting pronouncements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued FASB Staff Position No. FAS 157-2, Effective Date of FASB Statement No. 157. This FSP permits the delayed application of SFAS No. 157 for all non-recurring fair value measurements of non-financial assets and non-financial liabilities until fiscal years beginning after November 15, 2008. We adopted SFAS
No. 157 in the first quarter of 2008 for all financial assets and financial liabilities with no material impact on our consolidated statements of operations or financial condition. For disclosure purposes, we estimated the fair value of our installment contracts receivable at $7,733 using Level 3 inputs as defined in SFAS No. 157. In general, these inputs were based on the actual sales prices we received from the sale of comparable installment contracts and the underlying collateral value on certain loans based on appraisals, when available, or industry price guides for used manufactured housing.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS No. 159 allows companies to elect to follow fair value accounting for certain financial assets and liabilities in an effort to mitigate volatility in earnings without having to apply complex hedge accounting provisions. SFAS No. 159 is applicable only to certain financial instruments and is effective for fiscal years beginning after November 15, 2007. We elected to not adopt the provisions of SFAS No. 159.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (“SFAS No. 141R”) and SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements (“SFAS No. 160”). SFAS 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. SFAS No. 141R also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. SFAS No. 160 amends ARB No. 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It also amends certain of ARB No. 51’s consolidation procedures for consistency with the requirements of SFAS No. 141R. SFAS No. 141R and SFAS No. 160 are effective for fiscal years beginning on or after December 15, 2008. We have not yet completed our assessment of the impact, if any, SFAS No. 141R and SFAS No. 160 will have on our financial condition, results of operations or cash flows.
In May 2008, the FASB issued SFAS No. 162, Hierarchy of Generally Accepted Accounting Principles (“SFAS 162”). This statement is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements of nongovernmental entities that are presented in conformity with GAAP. This statement will be effective 60 days following the U.S. Securities and Exchange Commission’s approval of the Public Company Accounting Oversight Board amendment to AU Section 411, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles. We believe that FAS 162 will have no effect on our financial statements.
3. | INVENTORIES |
Inventories are stated at the lower of cost (first-in, first-out method) or market. Work-in-process and finished goods inventories include an allocation for labor and overhead costs. Inventories at June 28, 2008 and December 31, 2007 were as follows:
June 28, 2008 | December 31, 2007 | |||||||
Raw materials | $ | 11,543 | $ | 11,967 | ||||
Work-in-process | 1,004 | 1,263 | ||||||
Finished goods | 6,130 | 7,307 | ||||||
Total inventories | $ | 18,677 | $ | 20,537 |
4. | LONG-LIVED ASSETS |
SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, provides that a long-lived asset or asset group that is to be sold shall be classified as “held for sale” if certain criteria are met, including the expectation supported by evidence that the sale will be completed within one year. We had idle assets of $6,462 and $6,873 at June 28, 2008 and December 31, 2007, respectively, recorded at the lower of carrying value or fair value. Idle assets are comprised primarily of closed home manufacturing facilities, which we are attempting to sell. Management does not have evidence at the balance sheet date that it is probable that the sale of these assets will occur within one year, and thus, in accordance with the requirements of SFAS No. 144, such assets are classified as “held and used” and depreciation has continued on these assets.
5. | INCOME TAXES |
We did not record a regular federal income tax provision in the quarter and year-to-date period ended June 28, 2008 due to the availability of net operating loss carryforwards. The income tax provision of $84 in the quarter ended June 28, 2008
includes $7 for alternative minimum federal income taxes payable, $2 of interest related to uncertain tax positions, and $75 for state income taxes payable for certain subsidiaries, including $58 related to a state income tax audit conducted this year. The income tax provision of $95 in the year-to-date period ended June 28, 2008 includes $7 for alternative minimum federal income taxes payable, $4 of interest related to uncertain tax positions, and $84 for state income taxes payable for certain subsidiaries. The income tax provision of $34 in the quarter ended June 30, 2007 includes $25 for state income taxes payable for certain subsidiaries and $9 of interest related to uncertain tax positions. The income tax provision of $56 in the year-to-date period ended June 30, 2007 includes $44 for state income taxes payable for certain subsidiaries and $12 of interest related to uncertain tax positions.
Since December 31, 2006, we have maintained a valuation allowance to fully reserve our deferred tax assets due to a number of factors, including among others, operating losses and uncertainty of future operating results. We did not record a federal income tax benefit in the year-to-date period ended June 30, 2007 because management believes it is not appropriate to record income tax benefits in excess of anticipated refunds and certain carryforward items under the provisions of SFAS No. 109, Accounting for Income Taxes. As of June 28, 2008, our valuation allowance against deferred tax assets totaled approximately $17,100. The valuation allowance may be reversed to income in future periods to the extent that the related deferred income tax assets are realized or the valuation allowance is otherwise no longer needed.
We recognize potential accrued interest and penalties related to uncertain tax positions in income tax expense. To the extent interest and penalties are not assessed in the future with respect to uncertain tax positions, amounts accrued will be reduced and reflected as a reduction of the overall income tax provision.
We file consolidated and separate income tax returns in the U.S. federal jurisdiction and in various state jurisdictions. With few exceptions, we are no longer subject to U.S. federal, state or local income tax examinations by tax authorities in our major tax jurisdictions for years before 2003.
6. | ESTIMATED WARRANTIES |
We provide retail home buyers a one-year limited warranty covering defects in material or workmanship in home structure, plumbing and electrical systems. A two-year limited warranty was provided for homes we shipped under the contract with the Mississippi Emergency Management Agency. We have provided a liability of $11,690 and $11,720 at June 28, 2008 and December 31, 2007, respectively, for estimated future warranty costs relating to homes sold, based upon management’s assessment of historical experience factors and current industry trends. Activity in the liability for estimated warranties was as follows:
Quarter Ended | Year-to-Date Ended | |||||||||||||||
June 28, 2008 | June 30, 2007 | June 28, 2008 | June 30, 2007 | |||||||||||||
Balance, beginning of period | $ | 11,784 | $ | 11,650 | $ | 11,720 | $ | 11,900 | ||||||||
Provision for warranties issued in the current period | 3,242 | 3,840 | 6,370 | 6,352 | ||||||||||||
Adjustments for warranties issued in prior periods | (46 | ) | (540 | ) | 23 | 88 | ||||||||||
Payments | (3,290 | ) | (3,150 | ) | (6,423 | ) | (6,540 | ) | ||||||||
Balance, end of period | $ | 11,690 | $ | 11,800 | $ | 11,690 | $ | 11,800 |
We evaluate actual warranty costs on a quarterly basis in conjunction with the review of our liability for estimated warranties. Based on these evaluations, we recorded changes in the accounting estimates in the quarters ended June 28, 2008 and June 30, 2007 totaling $46 and $540, respectively, which reduced the warranty provision.
7. | CREDIT ARRANGEMENTS |
We have a credit agreement with our primary lender (the “Credit Facility”), which has been amended from time to time with a current maturity date of April 2009. The Credit Facility is comprised of (i) a revolving line of credit that provides for borrowings (including letters of credit) up to $17,500 and (ii) a real estate term loan with an initial term of 14 years, which are cross-secured and cross-defaulted. No amounts were outstanding under the revolving line of credit as of June 28, 2008 or December 31, 2007.
The amount available under the revolving line of credit is equal to the lesser of (i) $17,500 or (ii) an amount based on defined percentages of accounts and notes receivable and inventories reduced by the sum of $2,500 and any outstanding letters of credits. At June 28, 2008, $11,926 was available under the revolving line of credit after deducting letters of credit of $4,353.
The applicable interest rates under the revolving line of credit are based on certain levels of tangible net worth as noted in the following table. Tangible net worth at June 28, 2008 was $51,430.
Tangible Net Worth | Interest Rate | |
above $62,000 | Prime less 0.50% | |
$62,000 – $56,500 | Prime | |
$56,500 – $38,000 | Prime plus 0.75% | |
below $38,000 | Prime plus 1.25% |
The bank’s prime rate was 5.00% and 7.25% at June 28, 2008 and December 31, 2007, respectively.
The real estate term loan agreement contained in the Credit Facility provided for initial borrowings of $10,000, of which $2,631 and $2,737 was outstanding on June 28, 2008 and December 31, 2007, respectively. Interest on the term note is fixed for a period of five years from issuance (September 2003) at 6.5% and may be adjusted at 5 and 10 years. Amounts outstanding under the real estate term loan are collateralized by certain plant facilities and equipment.
The Credit Facility contains certain restrictive and financial covenants which, among other things, limit our ability without the lender’s consent to (i) make dividend payments and purchases of treasury stock in an aggregate amount which exceeds 50% of consolidated net income for the two most recent years, (ii) mortgage or pledge assets which exceed in the aggregate $1,000, (iii) incur additional indebtedness, including lease obligations, which exceed in the aggregate $1,000, excluding floor plan notes payable which cannot exceed $3,000 and (iv) make annual capital expenditures in excess of $5,000. In addition, the Credit Facility contains certain financial covenants requiring us (i) to maintain on a consolidated basis certain defined levels of liabilities to tangible net worth ratio (not to exceed 1.5 to 1), (ii) to maintain a current ratio, as defined, of at least 1.1 to 1, (iii) maintain minimum cash and cash equivalents of $5,000, (iv) achieve an annual cash flow to debt service ratio of not less than 1.35 to 1 for the year ending December 31, 2008, and (v) achieve an annual minimum profitability of $100. The Credit Facility also requires CIS to comply with certain specified restrictions and financial covenants. At June 28, 2008, we were in compliance with our debt covenants.
We have amounts outstanding under Industrial Development Revenue Bond issues (“Bonds”) which totaled $1,155 and $1,775 at June 28, 2008 and December 31, 2007, respectively. One bond issue bearing interest at 5.25% will mature in April 2009; and a second bond issue is payable in annual installments through 2013 with interest payable monthly at a variable rate currently at 1.75% as determined by a remarketing agent. The real estate term loan and the Bonds are collateralized by substantially all of our plant facilities and equipment.
We had $792 and $510 of notes payable under a retail floor plan agreement at June 28, 2008 and December 31, 2007, respectively. The notes are collateralized by certain retail new home inventories and bear interest rates ranging from prime to prime plus 2.5% but not less than 6% based on the age of the home.
We entered into a capital lease transaction during the first quarter of 2008 related to machinery and equipment we acquired with an initial cost of $29. At June 28, 2008, $24 was outstanding under the capital lease obligation.
At June 28, 2008 and December 31, 2007, the estimated fair value of outstanding borrowings other than notes payable under a retail floor plan agreement was $3,897 and $4,551, respectively. These estimates were determined using rates we believe we could have obtained on similar borrowings at such times.
8. | COMMITMENTS AND CONTINGENCIES |
We are contingently liable under terms of repurchase agreements with financial institutions providing inventory financing for retailers of our products. These arrangements, which are customary in the industry, provide for the repurchase of products sold to retailers in the event of default by the retailer. The risk of loss under these agreements is spread over numerous retailers. The price we are obligated to pay generally declines over the period of the agreement (generally 9 - 24 months) and the risk of loss is further reduced by the sales value of repurchased homes. We applied FASB Interpretation (“FIN”) No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others, an interpretation of FASB Statements No. 5, 57, and 107 and a rescission of FASB Interpretation No. 34 and SFAS
No. 5, Accounting for Contingencies to account for our liability for repurchase commitments. Under the provisions of FIN 45, during the period in which a home is sold (inception of a repurchase commitment), we record the greater of the estimated fair value of the non-contingent obligation or a contingent liability under the provisions of SFAS No. 5, based on historical information available at the time, as a reduction to revenue. Additionally, subsequent to the inception of the repurchase commitment, we evaluate the likelihood that we will be called on to perform under the inventory repurchase commitments. If it becomes probable that a dealer will default and a SFAS No. 5 loss reserve should be recorded, then such contingent liability is recorded equal to the estimated loss on repurchase. Based on identified changes in dealers’ financial conditions, we evaluate the probability of default for the group of dealers who are identified at an elevated risk of default and apply a probability of default to the group based on historical default rates. Changes in the reserve are recorded as an adjustment to revenue. Following the inception of the commitment, the recorded reserve is reduced over the repurchase period and is eliminated once the dealer sells the home. Under the repurchase agreements, we were contingently liable at June 28, 2008, to financial institutions providing inventory financing for retailers of our products up to a maximum of approximately $60,000 in the event we must perform under the repurchase commitments. We recorded an estimated liability of $1,167 at June 28, 2008 and $1,131 at December 31, 2007 related to these commitments. Activity in the reserve for repurchase commitments was as follows:
Quarter Ended | Year-to-Date Ended | |||||||||||||||
June 28, 2008 | June 30, 2007 | June 28, 2008 | June 30, 2007 | |||||||||||||
Balance, beginning of period | $ | 1,159 | $ | 1,199 | $ | 1,131 | $ | 1,513 | ||||||||
Reduction for payments made on inventory purchases | (91 | ) | (23 | ) | (91 | ) | (109 | ) | ||||||||
Recoveries for inventory repurchase | -- | 26 | 4 | 44 | ||||||||||||
Accrual for guarantees issued during the period | 367 | 456 | 675 | 753 | ||||||||||||
Reduction to pre-existing guarantees due to declining obligations or expired guarantees | (336 | ) | (402 | ) | (653 | ) | (879 | ) | ||||||||
Changes to the accrual for pre-existing guarantees for those dealers deemed to be probable of default | 68 | 45 | 101 | (21 | ) | |||||||||||
Balance, end of period | $ | 1,167 | $ | 1,301 | $ | 1,167 | $ | 1,301 |
In conjunction with the quarterly review of our critical accounting estimates, we evaluate our historical loss factors applied to the reserve for repurchase commitments, including changes in dealers’ circumstances and industry conditions, for those dealers deemed to be probable of default.
Our workers’ compensation, product liability and general liability insurance are provided by fully-insured, large deductible policies. The current deductibles under these programs are $250 for workers’ compensation and $100 for product liability and general liability. Under these plans, we incur insurance expense based upon various rates applied to current payroll costs and sales. Refunds or additional premiums are estimated and recorded when sufficiently reliable data is available. We recorded an estimated liability of $3,910 at June 28, 2008 and $4,274 at December 31, 2007 related to these contingent claims.
Litigation is subject to uncertainties and we cannot predict the probable outcome or the amount of liability of individual litigation matters with any level of assurance. We are engaged in various legal proceedings that are incidental to and arise in the course of our business. Certain of the cases filed against us and other companies engaged in businesses similar to ours allege, among other things, breach of contract and warranty, product liability, personal injury and fraudulent, deceptive or collusive practices in connection with their businesses. These kinds of suits are typical of suits that have been filed in recent years, and they sometimes seek certification as class actions, the imposition of large amounts of compensatory and punitive damages and trials by jury. Our liability under some of this litigation is covered in whole or in part by insurance. Anticipated legal fees and other losses, in excess of insurance coverage, associated with these lawsuits are accrued at the time such cases are identified or when additional information is available such that losses are probable and reasonably estimable. In the opinion of management, the ultimate liability, if any, with respect to the proceedings in which we are currently involved is not presently expected to have a material adverse effect on our results of operations, financial position or liquidity.
We provided letters of credit totaling $4,353 as of June 28, 2008. These letters of credit are to providers of surety bonds ($2,307) and insurance policies ($2,046). While the current letters of credit have a finite life, they are subject to renewal at different amounts based on the requirements of the insurance carriers. We recorded insurance expense based on anticipated losses related to these policies.
9. | SEGMENT INFORMATION |
Our reportable segments are organized around products and services. The home manufacturing segment is comprised of our four manufacturing divisions (five plants), which are aggregated for reporting purposes, our supply companies that sell their products primarily to the manufacturing divisions, and retail activities that provide revenue from home sales to individuals. Through our home manufacturing segment, we design and manufacture homes, which are sold in the United States to a network of dealers. Through our financial services segment, we primarily offer retail installment sale financing and related insurance products for manufactured homes. The accounting policies of the segments are the same as those described in the summary of significant accounting policies except that intercompany transactions and balances have not been eliminated. Our determination of segment operating profit does not include other income (expense), equity in earnings of equity-method investees, or income tax provision (benefit).
Quarter Ended | Year-to-Date Ended | |||||||||||||||
June 28, 2008 | June 30, 2007 | June 28, 2008 | June 30, 2007 | |||||||||||||
Revenue from external customers: | ||||||||||||||||
Home manufacturing | $ | 50,353 | $ | 61,765 | $ | 99,034 | $ | 103,810 | ||||||||
Financial services | 737 | 1,044 | 1,572 | 1,901 | ||||||||||||
Revenue from external customers | $ | 51,090 | $ | 62,809 | $ | 100,606 | $ | 105,711 | ||||||||
Operating income (loss): | ||||||||||||||||
Home manufacturing | $ | 2,204 | $ | (538 | ) | $ | 3,108 | $ | (3,521 | ) | ||||||
Financial services | 66 | 304 | 173 | 521 | ||||||||||||
Segment operating income (loss) | 2,270 | (234 | ) | 3,281 | (3,000 | ) | ||||||||||
General corporate | (1,049 | ) | (871 | ) | (2,037 | ) | (1,940 | ) | ||||||||
Operating income (loss) | $ | 1,221 | $ | (1,105 | ) | $ | 1,244 | $ | (4,940 | ) | ||||||
June 28, 2008 | December 31, 2007 | |||||||||||||||
Identifiable assets: | ||||||||||||||||
Home manufacturing | $ | 66,319 | $ | 62,809 | ||||||||||||
Financial services | 14,647 | 14,587 | ||||||||||||||
Segment assets | 80,966 | 77,396 | ||||||||||||||
General corporate | 9,684 | 13,981 | ||||||||||||||
Total assets | $ | 90,650 | $ | 91,377 |
10. | EQUITY-METHOD INVESTEES |
We recorded equity in earnings of equity-method investees of $78 and $242 for the quarters ended June 28, 2008 and June 30, 2007, respectively, and $123 and $400 for the year-to-date periods then ended. As we disclosed in our 2007 consolidated financial statements, we sold our ownership interest in one partnership to a joint venture partner and we acquired that partner’s interest in another of our joint ventures, which resulted in only one remaining active equity-method investee. In 2007, none of our equity-method investees were defined as significant. Summarized information related to the equity-method investees is shown below.
Quarter Ended | Year-to-Date Ended | |||||||||||||||
June 28, 2008 | June 30, 2007 | June 28, 2008 | June 30, 2007 | |||||||||||||
Net sales | $ | 5,038 | $ | 16,825 | $ | 9,707 | $ | 30,569 | ||||||||
Gross profit | 1,323 | 3,244 | 2,470 | 5,856 | ||||||||||||
Income from continuing operations | 263 | 1,073 | 459 | 1,751 | ||||||||||||
Net income | 263 | 1,073 | 459 | 1,751 |
11. | STOCK-BASED COMPENSATION |
Stock Incentive Plans
At June 28, 2008, our stock incentive plans included the following:
a. | The 2005 Incentive Compensation Plan (the “2005 Plan”) provides for both incentive stock options and non-qualified stock options to key employees. The 2005 Plan also provides for stock appreciation rights and awards of both restricted stock and performance shares. Awards are granted at prices and terms determined by the compensation committee of the Board of Directors. The term for awards granted under the 2005 Plan cannot exceed ten years from the date of grant. Upon adoption of the 2005 Plan, our 1996 Key Employee Stock Incentive Plan (the “1996 Plan”) was terminated. However, the termination of the 1996 Plan did not affect any options which were outstanding and unexercised under that Plan. A total of 1,500,000 shares of common stock are authorized for issuance under the 2005 Plan. As of June 28, 2008, shares authorized for grant and available to be granted under the 2005 Plan totaled 1,430,000 shares. |
b. | The 2005 Non-Employee Directors Stock Option Plan (the “2005 Directors Plan”) provides for the issuance of up to 500,000 shares of our common stock, which is reserved for grant to non-employee directors. Options are granted upon the director’s initial election and automatically on an annual basis thereafter at fair market value on the date of such grant. Stock option grants become exercisable at a rate of 1/12th of the shares subject to the stock option on each monthly anniversary of the date of grant. Except in the case of death, disability, or retirement, options granted under the 2005 Directors Plan expire ten years from the date of grant. We had a 1993 Non-employee Director Plan, (the “1993 Plan”), that was terminated upon adoption of the 2005 Directors Plan. However, the termination of the 1993 Plan did not affect any options which were outstanding and unexercised under that Plan. As of June 28, 2008, shares available to be granted under the 2005 Directors Plan totaled 410,000 shares. |
The following table sets forth the summary of activity under our stock incentive plans for the year-to-date period ended June 28, 2008:
Options Outstanding | ||||||||||||
Shares Available for Grant | Number of Shares | Weighted Average Exercise Price | ||||||||||
Balance at December 31, 2007 | 1,870,000 | 830,598 | $ | 6.81 | ||||||||
Granted | (30,000 | ) | 30,000 | 1.93 | ||||||||
Expired | -- | (323,509 | ) | 9.96 | ||||||||
Balance at June 28, 2008 | 1,840,000 | 537,089 | $ | 4.64 | ||||||||
Options exercisable at June 28, 2008 | 522,504 | $ | 4.72 |
The weighted average fair value of options granted during the year-to-date periods ended June 28, 2008 and June 30, 2007 was $0.94 and $2.29, respectively. The total intrinsic value of options exercised during the year-to-date periods ended June 29, 2008 and June 30, 2007 was $0 and $21, respectively. The aggregate intrinsic value of options outstanding and options exercisable as of June 28, 2008 was $6 and $5, respectively.
Stock-based Compensation
We use the Black-Scholes option pricing model to determine the fair value of stock option shares granted. The determination of the fair value of stock-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as other assumptions, including our expected stock price volatility over the term of the awards, actual and projected employee stock option exercise behaviors, risk-free interest rate and expected dividends. We estimate the expected term of options granted by calculating the average term from our historical stock option exercise experience. We estimate the volatility of our common stock by using the historical volatility in our common stock over a period similar to the expected term on the options. We base the risk-free interest rate that we use in the option valuation model on U.S. Treasury zero-coupon issues with remaining terms similar to the expected term on the options. We do not anticipate paying any cash dividends in the foreseeable future and therefore use an expected dividend yield of zero in the option valuation model. We are required to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. Based on historical data, we assumed zero forfeitures in our 2008 calculation of stock-based
compensation expense. All stock-based payment awards are amortized on a straight-line basis over the requisite service periods of the awards, which are generally the vesting periods.
The assumptions used to value stock option grants are as follows:
June 28, 2008 | June 30, 2007 | |||||||
Expected dividend yield | 0.00 | % | 0.00 | % | ||||
Expected stock price volatility | 52.10 | % | 59.23 | % | ||||
Risk free interest rate | 3.28 | % | 4.68 | % | ||||
Expected life (years) | 5.07 | 5.00 |
No restricted stock awards were granted in the year-to-date periods ended June 28, 2008 and June 30, 2007. We recognize the estimated compensation cost of restricted stock awards, defined as the fair value of our common stock on the date of grant, on a straight line basis over the three year vesting period. During the year-to-date periods ended June 28, 2008 and June 30, 2007, 23,334 restricted stock awards vested in each year. Restricted stock awards that were unvested as of June 28, 2008 totaled 23,332 shares. Deferred compensation of $109 as of June 28, 2008 represents the unamortized cost of these unvested restricted stock awards.
Stock-based compensation in the quarters ended June 28, 2008 and June 30, 2007 totaled $45 and $55, respectively, and totaled $90 and $131 in the year-to-date periods ended June 28, 2008 and June 30, 2007, respectively. We charge stock-based compensation to selling, general and administrative expense in our condensed consolidated statement of operations. Future compensation cost on unvested stock-based awards as of June 28, 2008 is estimated to be approximately $123, which will be charged to expense through March 2009.
Overview
Cavalier Homes, Inc. and its subsidiaries produce, sell, and finance manufactured housing. Unless otherwise indicated by the context, references in this report to the terms “we,” “us,” “our,” “Company,” or “Cavalier” include Cavalier Homes, Inc., its subsidiaries, divisions of these subsidiaries and their respective predecessors, if any. The manufactured housing industry is cyclical and seasonal and is influenced by many of the same economic and demographic factors that affect the housing market as a whole. As a result of the growth in the industry during much of the 1990s, the number of retail dealerships, manufacturing capacity and wholesale shipments expanded significantly, which ultimately created slower retail turnover, higher retail inventory levels and increased price competition. Since the beginning of 2000, the industry has been impacted by an increase in dealer failures, a severe reduction in available consumer credit and wholesale (dealer) financing for manufactured housing, more restrictive credit standards and increased home repossessions which re-enter home distribution channels, each of which contributed to a reduction in wholesale industry shipments to a 45 year low in 2007.
For the first five months of 2008, the latest data available from the Manufactured Housing Institute (“MHI”), floor shipments are 9.0% lower than the same period in 2007 due to the continuation of challenging manufactured housing market conditions and the overall decline in the economy. Continuing turmoil in the credit markets in 2008 could further reduce the number of floor shipments. As a result of the weak home shipments for May 2008, industry analysts have reduced their full year 2008 forecast for unit shipments to a 4 to 7% decline as compared to home shipments in 2007.
In 2008, we received additional orders to build and deliver 150 homes under the initial contract for 500 homes we entered into in June 2007 with the Mississippi Emergency Management Agency (“MEMA”) under the Alternative Housing Pilot Program as part of that state's ongoing efforts to provide permanent and semi-permanent housing for residents displaced by Hurricane Katrina. We shipped 121 and 291 homes to MEMA in the three and six months ended June 28, 2008, respectively. With the shipment of one unit in early July, we have now shipped all the units ordered by MEMA.
Industry/Company Shipments and Market Share
Based on information provided by MHI, wholesale floor shipments of HUD-Code homes were down 72% cumulatively from the year ended December 31, 1999 through December 31, 2007 as shown by the data in the following table:
Floor Shipments | ||||||||||||||||||||||||||||||||||||||||
Nationwide | Cavalier’s Core 11 States | |||||||||||||||||||||||||||||||||||||||
Year | Industry | Increase (decrease) from prior year | Cavalier | Increase (decrease) from prior year | Market Share | Industry | Increase (decrease) from prior year | Cavalier | Increase (decrease) from prior year | Market Share | ||||||||||||||||||||||||||||||
1999 | 582,498 | 34,294 | 5.9 | % | 284,705 | 30,070 | 10.6 | % | ||||||||||||||||||||||||||||||||
2000 | 431,787 | (25.9 | )% | 18,590 | (45.8 | )% | 4.3 | % | 199,276 | (30.0 | )% | 15,941 | (47.0 | )% | 8.0 | % | ||||||||||||||||||||||||
2001 | 342,321 | (20.7 | )% | 21,324 | 14.7 | % | 6.2 | % | 149,162 | (25.1 | )% | 17,884 | 12.2 | % | 12.0 | % | ||||||||||||||||||||||||
2002 | 304,370 | (11.1 | )% | 21,703 | 1.8 | % | 7.1 | % | 124,127 | (16.8 | )% | 18,039 | 0.9 | % | 14.5 | % | ||||||||||||||||||||||||
2003 | 240,180 | (21.1 | )% | 12,411 | (42.8 | )% | 5.2 | % | 87,265 | (29.7 | )% | 10,584 | (41.3 | )% | 12.1 | % | ||||||||||||||||||||||||
2004 | 232,824 | (3.1 | )% | 10,772 | (13.2 | )% | 4.6 | % | 88,958 | 1.9 | % | 8,912 | (15.8 | )% | 10.0 | % | ||||||||||||||||||||||||
2005 | 246,750 | 6.0 | % | 10,648 | (1.2 | )% | 4.3 | % | 105,508 | 18.6 | % | 9,905 | 11.1 | % | 9.4 | % | ||||||||||||||||||||||||
2006 | 206,822 | (16.2 | )% | 8,261 | (22.4 | )% | 4.0 | % | 86,748 | (17.8 | )% | 7,774 | (21.5 | )% | 9.0 | % | ||||||||||||||||||||||||
2007 | 163,761 | (20.8 | )% | 7,378 | (10.7 | )% | 4.5 | % | 69,115 | (20.3 | )% | 6,568 | (15.5 | )% | 9.5 | % | ||||||||||||||||||||||||
Q1 2008 | 34,289 | 1,745 | 5.1 | % | 16,484 | 1,619 | 9.8 | % | ||||||||||||||||||||||||||||||||
Two months ended 05/31/08 | 26,355 | 1,217 | 4.6 | % | 12,385 | 1,139 | 9.2 | % |
During 2007, our floor shipments decreased 10.7% as compared to 2006, while industry wide shipments decreased 20.8%, with our market share in 2007 increasing to 4.5%. In our core states, our market share in 2007 increased to 9.5% from 9.0% in 2006 due to new products we introduced in early 2007 and our participation in the MEMA Alternative Housing Pilot Program. For the five months ended May 31, 2008, our total market share increased to 4.9% and our market share in our core 11 states increased slightly to 9.6% due primarily to the impact of our contract with MEMA.
Modular Housing
We primarily produce HUD-Code homes. We also produce modular homes, which are constructed to local, regional or state building codes. Modular homes generally have a different and more complex roof system than HUD-Code homes, are typically two or more sections, and, when combined with land, usually qualify for traditional mortgage financing, which generally has better terms than financing for a HUD-Code home. The national market for modular housing was 32,300 homes in 2007 according to data available from the National Modular Housing Council (“NMHC”), a decrease of 16.1% from 2006. Modular homes shipped industry wide in the first quarter of 2008 (the latest data available from NMHC) totaled 5,400 homes, a decrease of 27% from the first quarter of 2007. In the first quarters of 2008 and 2007, we shipped 38 and 85 modular homes, respectively, for a year over year decrease of 55.3%. We believe the decline in modular home shipments industry-wide is primarily attributable to economic conditions, including the downturn in the general housing market and the turmoil in the credit markets. We have experienced a greater than market decline in modular housing in certain states where we have less modular housing experience than our competitors.
Industry Finance Environment
A major factor that impacts the manufactured housing industry is the availability of credit and the tightening/relaxation of credit standards. The industry continues to be impacted significantly by reduced financing available at both the wholesale and retail levels. In 2007, the mortgage credit markets experienced a significant upheaval related to sub-prime mortgages, which has continued to impact the overall credit and financial markets in the first half of 2008. More restrictive credit standards will impact the ability of home buyers to obtain financing and the downturn in the real estate markets has increased home repossessions. We believe these factors have impacted the manufactured housing industry, particularly modular housing products. We believe a meaningful expansion for our industry will be delayed until there is substantial entry of finance resources to the manufactured housing market.
Capacity and Overhead Cost
Our plants operated at capacities ranging from 38% to 54% in 2007. We closed one of two manufacturing lines in Millen, Georgia in September 2007 and consolidated our Winfield, Alabama production line with our operations in Hamilton, Alabama. During the first half of 2008, our plants operated at 54% of total capacity with individual plants operating from 36% to 78% of capacity. We will continue to monitor the relationship between demand and capacity and may take additional steps to adjust our capacity or enhance our operations based on our views of the industry and its general direction.
Outlook
In 2008, we will continue to focus on programs to improve manufacturing efficiencies, increase gross margins, reduce costs overall, and improve liquidity. We believe this internal focus was instrumental in the positive results we achieved in the first six months of this year. Also, we believe economic issues related to the high price of oil and escalating commodity prices, as well as the current credit crisis, all point to continuing weakness in the manufactured housing market, producing limited visibility with regard to near-term outlook. Further changes in general economic conditions that affect consumer purchases, availability of adequate financing sources, increases in repossessions or dealer failures and further commodity price increases could affect our results of operations.
Results of Operations
Quarters Ended June 28, 2008 and June 30, 2007
The following table summarizes certain financial and operating data, including, as applicable, the percentage of total revenue:
Quarter Ended | ||||||||||||||||||||||||
Statement of Operations Data: | June 28, 2008 | June 30, 2007 | Differences | |||||||||||||||||||||
Revenue: | ||||||||||||||||||||||||
Home manufacturing net sales | $ | 50,353 | $ | 61,765 | $ | (11,412 | ) | (18.5 | )% | |||||||||||||||
Financial services | 737 | 1,044 | (307 | ) | (29.4 | ) | ||||||||||||||||||
Total revenue | 51,090 | 100.0 | % | 62,809 | 100.0 | % | (11,719 | ) | (18.7 | ) | ||||||||||||||
Cost of sales | 41,447 | 81.1 | 54,172 | 86.2 | (12,725 | ) | (23.5 | ) | ||||||||||||||||
Gross profit | 9,643 | 18.9 | 8,637 | 13.8 | 1,006 | 11.6 | ||||||||||||||||||
Selling, general and administrative | 8,422 | 16.5 | 9,742 | 15.5 | (1,320 | ) | (13.5 | ) | ||||||||||||||||
Operating income (loss) | 1,221 | 2.4 | (1,105 | ) | (1.7 | ) | 2,326 | n/m | ||||||||||||||||
Other income (expense): | ||||||||||||||||||||||||
Interest expense | (112 | ) | (0.2 | ) | (146 | ) | (0.2 | ) | 34 | 23.3 | ||||||||||||||
Other, net | 135 | 0.2 | 174 | 0.2 | (39 | ) | (22.4 | ) | ||||||||||||||||
23 | 0.0 | 28 | 0.0 | (5 | ) | (17.9 | ) | |||||||||||||||||
Income (loss) before income taxes and equity in earnings of equity-method investees | 1,244 | 2.4 | (1,077 | ) | (1.7 | ) | 2,321 | n/m | ||||||||||||||||
Income tax provision | 84 | 0.1 | 34 | 0.1 | 50 | 147.1 | ||||||||||||||||||
Equity in earnings of equity-method investees | 78 | 0.1 | 242 | 0.4 | (164 | ) | (67.8 | ) | ||||||||||||||||
Net income (loss) | $ | 1,238 | 2.4 | % | $ | (869 | ) | (1.4 | )% | $ | 2,107 | n/m |
Quarter Ended | ||||||||||||||||
Operating Data: | June 28, 2008 | June 30, 2007 | ||||||||||||||
Home manufacturing: | ||||||||||||||||
Floor shipments: | ||||||||||||||||
HUD-Code | 1,817 | 95.8 | % | 2,382 | 93.0 | % | ||||||||||
Modular | 80 | 4.2 | 178 | 7.0 | ||||||||||||
Total floor shipments | 1,897 | 100.0 | % | 2,560 | 100.0 | % | ||||||||||
Home shipments: | ||||||||||||||||
Single-section | 490 | 41.1 | % | 382 | 26.0 | % | ||||||||||
Multi-section | 701 | 58.9 | 1,085 | 74.0 | ||||||||||||
Wholesale home shipments | 1,191 | 100.0 | 1,467 | 100.0 | ||||||||||||
Shipments to company-owned retail locations | (6 | ) | (0.5 | ) | (8 | ) | (0.5 | ) | ||||||||
MEMA shipments | (121 | ) | (10.2 | ) | -- | -- | ||||||||||
Shipments to independent retailers | 1,064 | 89.3 | 1,459 | 99.5 | ||||||||||||
Retail home sales | 6 | 0.5 | 4 | 0.2 | ||||||||||||
Shipments other than to MEMA | 1,070 | 89.8 | % | 1,463 | 99.7 | % | ||||||||||
Other operating data: | ||||||||||||||||
Installment loan purchases | $ | 9,512 | $ | 16,610 | ||||||||||||
Capital expenditures | $ | 182 | $ | 909 | ||||||||||||
Home manufacturing facilities (operating) | 5 | 7 | ||||||||||||||
Independent exclusive dealer locations | 56 | 64 |
Revenue
Revenue for the second quarter of 2008 totaled $51,090, decreasing $11,719 or 18.7%, from 2007’s second quarter revenue of $62,809. Home manufacturing net sales decreased $11,412 to $50,353 from $61,765 in the second quarter of 2007. Home shipments decreased 18.6%, with floor shipments decreasing by 25.9%. The decrease in manufactured home revenue and shipments are due in part to the overall decline in the manufactured housing industry, which experienced a 15.3% decline in year over year home shipments in the month of May 2008 compared to the same month in 2007 and an 18.3% decline in floor shipments. Multi-section home shipments, as a percentage of total shipments, were 58.9% in the second quarter of 2008 as compared to 74.0% in 2007. Single-section homes, as a percentage of total shipments, increased to 41.1% in the second quarter of 2008 from 26.0% in the same quarter of 2007. The primary cause of the bulge in single-section shipments in the second quarter of 2008 was the single-section units shipped to MEMA. Shipments other than MEMA units to exclusive dealers were 51% and 49% of revenue in the second quarters of 2008 and 2007, respectively. The number of independent dealers participating in our exclusive dealer program declined from 64 at June 30, 2007 to 56 at June 28, 2008. Total home shipments (wholesale and retail) for the second quarter of 2008 were 1,188 versus 1,463 in 2007. Inventory of our product at all retail locations decreased to approximately $83,900 at June 28, 2008 from $97,800 at June 30, 2007.
Revenue from the financial services segment decreased 29.4% to $737 for the second quarter of 2008 compared to $1,044 in 2007. The revenue decrease is primarily due to a lower level of loan purchases and reduced interest income on a lower portfolio balance throughout the quarter compared to the same period in 2007. During the second quarter of 2008, CIS Financial Services, Inc. (“CIS”), our wholly owned finance subsidiary, purchased contracts totaling $9,512 and sold installment contracts totaling $9,560. In the same period of 2007, CIS purchased contracts of $16,610 and sold installment contracts totaling $14,671. CIS does not generally retain the servicing function and does not earn interest income on these re-sold loans.
Gross Profit
Gross profit was $9,643, or 18.9% of total revenue, for the second quarter of 2008, up from $8,637, or 13.8%, in 2007. The increase in gross profit and gross margin is primarily the result of (i) increases in unit sales prices in the current year and the impact of product sales mix, (ii) improvements in manufacturing efficiencies and capacity utilization, and (iii) the full benefit of the closure of two plants/manufacturing lines in the last half of 2007. Our average wholesale sales price per unit (including MEMA) in the second quarter of 2008 increased to approximately $41,700 from $41,600 in the second quarter of 2007. We experienced cost increases in the second quarter of 2008 compared to the second quarter 2007 in certain raw materials and commodity components due primarily to higher oil prices. We were able to minimize the impact of the increase in raw material costs in the second quarter of 2008 through increases in our sales prices. However, if raw material prices continue to increase, we may not be able to further increase our sales prices and could experience a decline in our gross profit and gross margin percentage.
Selling, General and Administrative
Selling, general and administrative (“SG&A”) expenses during the second quarter of 2008 were $8,422 or 16.5 % of total revenue, compared to $9,742 or 15.5 % in 2007, a decrease of $1,320. Lower selling, general and administrative costs reflect our efforts this year to reduce fixed costs across the company. In terms of major spending categories, (i) advertising and promotion costs decreased $932,000, (ii) salaries, wages and payroll benefits decreased $228,000, and (iii) other SG&A expenses decreased in general as a result of cost-control measures.
Operating Income (Loss)
Operating income for the quarter was $1,221 compared to a loss of $1,105 in the second quarter of 2007. Segment operating results were as follows: (1) Home manufacturing operating income was $2,204 in the second quarter of 2008 as compared to a loss of $538 in 2007. The improvement in home manufacturing operating results was due to improved margins and reduced costs, both as discussed above. (2) Financial services operating income was $66 in the second quarter of 2008 as compared to $304 in 2007 due to lower number of loan purchases and reduced interest income. (3) General corporate operating expense, which is not identifiable to a specific segment, increased from $871 in the second quarter of 2007 to $1,049 in 2008 primarily due to incentive compensation based on profitable results in the current year.
Other Income (Expense)
Interest expense for the quarter was $112 compared to $146 in the second quarter of 2007 due primarily to lower outstanding debt balances between the two periods.
Other, net is comprised primarily of interest income (unrelated to financial services). Other, net decreased $39 to $135 for the second quarter of 2008 compared to $174 for the same period in 2007. A decrease in interest income due to lower interest rates on higher average balances of invested funds contributed to the overall decrease in other, net.
Income Tax Provision
We did not record a regular federal income tax provision in the current year period due to the availability of net operating loss carryforwards. The income tax provision of $84 in the quarter ended June 28, 2008 includes $7 for alternative minimum federal income taxes payable, $2 of interest related to uncertain tax positions, and $75 for state income taxes payable for certain subsidiaries, including $58 related to a state income tax audit completed in the current year. The income tax provision of $34 in the quarter ended June 30, 2007 includes $25 for state income taxes payable for certain subsidiaries and $9 of interest related to uncertain tax positions.
Since December 31, 2006, we have maintained a valuation allowance to fully reserve our deferred tax assets due to a number of factors, including among others, operating losses and uncertainty of future operating results. We did not record a federal income tax benefit in the quarter ended June 30, 2007 because management believes it is not appropriate to record income tax benefits in excess of anticipated refunds and certain carryforward items under the provisions of SFAS No. 109, Accounting for Income Taxes. As of June 28, 2008, our valuation allowance against deferred tax assets totaled approximately $17,100. The valuation allowance may be reversed to income in future periods to the extent that the related deferred income tax assets are realized or the valuation allowance is otherwise no longer needed.
Net Income (Loss)
Net income for the second quarter of 2008 was $1,238 or $0.07 per diluted share compared to a net loss of $869 or $0.05 per diluted share in the same period last year. The changes between these two periods are due to the items discussed above.
Year-to-Date Periods Ended June 28, 2008 and June 30, 2007
The following table summarizes certain financial and operating data, including, as applicable, the percentage of total revenue:
Year-to-Date Ended | ||||||||||||||||||||||||
Statement of Operations Data: | June 28, 2008 | June 30, 2007 | Differences | |||||||||||||||||||||
Revenue: | ||||||||||||||||||||||||
Home manufacturing net sales | $ | 99,034 | $ | 103,810 | $ | (4,776 | ) | (4.6 | )% | |||||||||||||||
Financial services | 1,572 | 1,901 | (329 | ) | (17.3 | ) | ||||||||||||||||||
Total revenue | 100,606 | 100.0 | % | 105,711 | 100.0 | % | (5,105 | ) | (4.8 | ) | ||||||||||||||
Cost of sales | 82,663 | 82.2 | 91,094 | 86.2 | (8,431 | ) | (9.3 | ) | ||||||||||||||||
Gross profit | 17,943 | 17.8 | 14,617 | 13.8 | 3,326 | 22.8 | ||||||||||||||||||
Selling, general and administrative | 16,699 | 16.6 | 19,557 | 18.5 | (2,858 | ) | (14.6 | ) | ||||||||||||||||
Operating income (loss) | 1,244 | 1.2 | (4,940 | ) | (4.7 | ) | 6,184 | n/m | ||||||||||||||||
Other income (expense): | ||||||||||||||||||||||||
Interest expense | (236 | ) | (0.2 | ) | (310 | ) | (0.3 | ) | 74 | 23.9 | ||||||||||||||
Other, net | 320 | 0.3 | 146 | 0.2 | 174 | (119.2 | ) | |||||||||||||||||
84 | 0.1 | (164 | ) | (0.1 | ) | 248 | 151.2 | |||||||||||||||||
Income (loss) before income taxes and equity in earnings of equity-method investees | 1,328 | 1.3 | (5,104 | ) | (4.8 | ) | 6,432 | n/m | ||||||||||||||||
Income tax provision | 95 | 0.1 | 56 | 0.1 | 39 | 69.6 | ||||||||||||||||||
Equity in earnings of equity-method investees | 123 | 0.1 | 400 | 0.4 | (277 | ) | (69.3 | ) | ||||||||||||||||
Net income (loss) | $ | 1,356 | 1.3 | % | $ | (4,760 | ) | (4.5 | )% | $ | 6,116 | n/m |
Year-to-Date Ended | ||||||||||||||||
Operating Data: | June 28, 2008 | June 30, 2007 | ||||||||||||||
Home manufacturing: | ||||||||||||||||
Floor shipments: | ||||||||||||||||
HUD-Code | 3,562 | 95.8 | % | 3,862 | 91.6 | % | ||||||||||
Modular | 157 | 4.2 | 356 | 8.4 | ||||||||||||
Total floor shipments | 3,719 | 100.0 | % | 4,218 | 100.0 | % | ||||||||||
Home shipments: | ||||||||||||||||
Single-section | 985 | 42.0 | % | 657 | 27.1 | % | ||||||||||
Multi-section | 1,363 | 58.0 | 1,770 | 72.9 | ||||||||||||
Wholesale home shipments | 2,348 | 100.0 | 2,427 | 100.0 | ||||||||||||
Shipments to company-owned retail locations | (9 | ) | (0.4 | ) | (29 | ) | (1.2 | ) | ||||||||
MEMA shipments | (291 | ) | (12.4 | ) | -- | -- | ||||||||||
Shipments to independent retailers | 2,048 | 87.2 | 2,398 | 98.8 | ||||||||||||
Retail home sales | 11 | 0.5 | 32 | 1.3 | ||||||||||||
Shipments other than to MEMA | 2,059 | 87.7 | % | 2,430 | 100.1 | % | ||||||||||
Other operating data: | ||||||||||||||||
Installment loan purchases | $ | 18,279 | $ | 28,367 | ||||||||||||
Capital expenditures | $ | 252 | $ | 1,515 | ||||||||||||
Home manufacturing facilities (operating) | 5 | 7 | ||||||||||||||
Independent exclusive dealer locations | 56 | 64 |
Revenue
Revenue for the first half of 2008 totaled $100,606, decreasing $5,105, or 4.8%, from 2007’s first half revenue of $105,711. Home manufacturing net sales accounted for a significant part of the change, decreasing $4,776 to $99,034 from net sales for the first half of 2007 of $103,810 due generally to the overall decline in the manufactured housing market. Home shipments (wholesale and retail) for the first half of 2008 were 2,350 versus 2,430 in 2007, a decrease of 3.3%, and floor shipments decreased 11.8%. Multi-section home shipments, as a percentage of total shipments, were 58.0% in the first half of 2008 as compared to 72.9% in 2007. Single-section homes, as a percentage of total shipments, increased to 42.0% in the first half of 2008 from 27.1% in the same period of 2007, primarily due to the single-section homes built for MEMA. Shipments other than MEMA units to exclusive dealers were 53% and 49% in the first half of 2008 and 2007, respectively.
Revenue from the financial services segment decreased 17.3% to $1,572 for the first half of 2008 compared to $1,901 in 2007. The revenue decrease is primarily due to a lower level of loan purchases and reduced interest income on a lower portfolio balance throughout the quarter compared to the same period in 2007. During the first half of 2008, CIS purchased contracts of $18,279 and sold installment contracts totaling $18,315. In the same period of 2007, CIS purchased contracts of $28,367 and sold installment contracts totaling $25,507.
Gross Profit
Gross profit was $17,943, or 17.8% of total revenue, for the first half of 2008, versus $14,617, or 13.8%, in 2007. The $3,326 increase in gross profit is primarily the result of (i) increases in our sales prices in the current year and the impact of product sales mix, (ii) improvements in manufacturing efficiencies and capacity utilization, and (iii) the full benefit of the closure of two plants/manufacturing lines in the last half of 2007, which reduced overall fixed manufacturing costs. Additionally, our average wholesale sales price per unit (including MEMA) in the first half of 2008 increased slightly to approximately $41,400 from $41,000 in the first half of 2007. As noted above, we experienced price increases in 2008 compared to the same period in 2007 in certain raw materials and commodity components due primarily to higher oil prices, which were offset by increases in our selling prices.
Selling, General and Administrative
SG&A expenses during the first half of 2008 were $16,699, or 16.6% of total revenue, compared to $19,557 or 18.5% in 2007, a decrease of $2,858. Selling, general and administrative costs decreased between these periods as a result of (i) lower advertising and promotion costs, including show related expenses, totaling $1,521,000, (ii) a decrease in salaries, wages and payroll benefits of $900,000, and (iii) a net decrease in other SG&A expenses totaling $437,000 primarily as a result of cost-control measures.
Operating Income (Loss)
Operating income for the first half of 2008 was $1,244 compared to an operating loss of $4,940 in the first half of 2007. Segment operating results were as follows: (1) Home manufacturing operating income was $3,108 in the first half of 2008 as compared to an operating loss of $3,521 in 2007. The increased home manufacturing operating profit is primarily due to higher gross profits and lower costs as discussed above. (2) Financial services operating income was $173 in the first half of 2008 as compared to $521 in 2007 due to lower number of loan purchases and reduced interest income. (3) General corporate operating expense, which is not identifiable to a specific segment, increased slightly from $1,940 in the first half of 2007 to $2,037 in 2007 primarily due to incentive compensation accrued on profitable results in the current year offset in part by reduced spending in other expenses.
Other Income (Expense)
Interest expense for the first half of 2008 was $236 compared to $310 in 2007. The decrease of $74 is primarily due to lower levels of outstanding debt in the first half of 2008 compared to the same period in 2007.
Other, net is comprised primarily of interest income (unrelated to financial services) and gains related to cost-method investees. Other, net increased $174 primarily due a $250 loss recorded on the sale of the two retail locations on March 30, 2007, which did not occur in 2008, and a decrease in interest income.
Income Tax Provision
We did not record a regular federal income tax provision in the current year period due to the availability of net operating loss carryforwards. The income tax provision of $95 in the year-to-date period ended June 28, 2008 includes $7 for alternative minimum federal income taxes payable, $4 of interest related to uncertain tax positions, and $84 for state income taxes payable for certain subsidiaries. The income tax provision of $56 in the year-to-date period ended June 30, 2007 includes $44 for state income taxes payable for certain subsidiaries and $12 of interest related to uncertain tax positions.
Net Income (Loss)
Net income for the first half of 2008 was $1,356 or $0.07 per diluted share compared to a net loss of $4,760 or $0.26 per diluted share.
Liquidity and Capital Resources
Balances as of | ||||||||
June 28, 2008 | December 31, 2007 | |||||||
Cash, cash equivalents, and certificates of deposit | $ | 20,898 | $ | 22,043 | ||||
Working capital | $ | 24,501 | $ | 20,906 | ||||
Current ratio | 1.7 to 1 | 1.6 to 1 | ||||||
Long-term debt and capital lease obligation | $ | 2,920 | $ | 3,678 | ||||
Ratio of long-term debt to equity | 0.1 to 1 | 0.1 to 1 | ||||||
Installment loan portfolio | $ | 8,399 | $ | 9,844 |
Year-to-Date Period Ended June 28, 2008
Cash decreased $1,145 from $22,043 at December 31, 2007 to $20,898 at June 28, 2008. Historically, our cash and cash equivalents in the first half of each year generally decrease significantly from the beginning of the year balances due to a number of factors: (i) the closing of our facilities at the end of December for plant-wide vacations and holidays, which results in lower average levels of inventories and accounts receivable and higher levels of cash at December 31st, and (ii) a return to normal operating levels of inventory and accounts receivable at the beginning of each year. The decrease in cash at June 28, 2008 was consistent with this trend, but declined much less this year than in prior years due to our focus on increasing gross margins, reducing costs, and improving manufacturing efficiencies, including a reduction in inventory levels.
Operating activities used net cash of $5,846 primarily as a result of the following:
(a) | an increase in accounts receivable of $10,739 due to the seasonal increase from the traditional December low point, |
(b) | the net purchase of installment contracts of $1,661, offset by |
(c) | income excluding non-cash expenses, such as depreciation, provision for credit and accounts receivable losses, stock-based compensation and gain on disposal of property, plant and equipment, totaling $2,708, |
(d) | a reduction in inventories of $1,860, and |
(e) | an increase of $1,421 in accounts payable, again reflecting normal production levels this quarter compared to the low production levels in December. |
Investing activities provided cash in the first half of 2008 of $5,150, primarily from the cash received on the sale of a portion of our installment contracts held for investment totaling $4,414. Capital expenditures during the first half of 2008 totaled $223 for normal property, plant and equipment additions and replacements. We believe calendar 2008 capital expenditures will be significantly below the 2007 levels, but expect additions in the last half of 2008 to be higher than in the first half. Principal collected on notes and installment contracts purchased for investment totaled $1,116 during the first half of 2008.
The decrease in long-term debt for the first half of 2008 was due to scheduled principal payments of $731, and net borrowings under our retail floor plan agreement provided cash of $282.
The installment loan portfolio totaling $8,399 at June 28, 2008 decreased $1,445 from the balance at December 31, 2007 due to our decision to reduce the balance in this portfolio. Further reduction in the held for investment portfolio is not planned at this time. We expect to utilize cash on hand to fund future installment contracts purchased for resale.
Year-to-Date Period Ended June 30, 2007
Cash decreased $19,121 from $25,967 at December 31, 2006 to $6,846 at June 30, 2007. As noted above, our cash and cash equivalents in the first half of each year generally decrease from the beginning of the year balances. On average, (i) cash decreased approximately $13,000 in the first quarter of each year from 2002 through 2007, excluding 2006, which reflected an increase in cash due to the impact of FEMA home shipments and timing of cash collections; and (ii) cash decreased approximately $1,900 in the second quarter of each year from 2003 through 2007. The decrease in cash at June 30, 2007 and March 31, 2007 was consistent with this trend.
Operating activities used net cash of $19,282 primarily as a result of the following:
(a) | an increase in accounts receivable of $12,795 due to the seasonal increase from the traditional December low point, |
(b) | an increase in inventories of $4,269, |
(c) | the net purchase of installment contracts of $2,732, |
(d) | the net loss for the quarter of $4,760, offset by |
(e) | an increase of $2,799 in accounts payable, again reflecting normal production levels this quarter compared to the low production levels in December. |
Our capital expenditures were $1,515 during the first half of 2007 primarily for normal property, plant and equipment additions and replacements. The additions also include amounts under programs at one of our plants to provide improved manufacturing techniques for modular products and to increase overall productivity.
The decrease in long-term debt for the first half of 2007 was due to scheduled principal payments of $880. Borrowings under our retail floor plan agreement were $1,056 in the first half of 2007. A total of $1,793 outstanding under the retail floor plan agreement as of March 30, 2007 was assumed by the purchaser of the two Alabama retail sales centers.
The installment loan portfolio totaling $14,120 at June 30, 2007 increased $1,855 from the balance at December 31, 2006. Included in the installment loan portfolio at June 30, 2007 was $6,151 of land/home loans. At December 31, 2006, we had $5,475 land/home loans in our portfolio.
General Liquidity and Debt Agreements
Historically, we have funded our operating activities with cash flows from operations supplemented by available cash on hand and, when necessary, funds from our Credit Facility. During the industry downturn, we benefited from the proceeds
from sales of idle facilities as a replacement source of funds due to net operating losses. Currently, we have two previously idled facilities that are being marketed for sale; however, we cannot predict when or at what amounts the facilities will ultimately be sold.
We have a credit agreement with our primary lender (the “Credit Facility”), which has been amended from time to time with a current maturity date of April 2009. The Credit Facility is comprised of (i) a revolving line of credit that provides for borrowings (including letters of credit) up to $17,500 and (ii) a real estate term loan, which are cross-secured and cross-defaulted. No amounts were outstanding under the revolving line of credit as of June 28, 2008 or December 31, 2007.
The amount available under the revolving line of credit is equal to the lesser of (i) $17,500 or (ii) an amount based on defined percentages of accounts and notes receivable and inventories reduced by the sum of $2,500 and any outstanding letters of credits. At June 28, 2008, $11,926 was available under the revolving line of credit after deducting letters of credit of $4,353.
The applicable interest rates under the revolving line of credit are based on certain levels of tangible net worth as noted in the following table. Tangible net worth at June 28, 2008 was $51,430.
Tangible Net Worth | Interest Rate | |
above $62,000 | Prime less 0.50% | |
$62,000 – $56,500 | Prime | |
$56,500 – $38,000 | Prime plus 0.75% | |
below $38,000 | Prime plus 1.25% |
The bank’s prime rate was 5.00% and 7.25% at June 28, 2008 and December 31, 2007, respectively.
The real estate term loan agreement contained in the Credit Facility provided for initial borrowings of $10,000, of which $2,631 and $2,737 was outstanding on June 28, 2008 and December 31, 2007, respectively. Interest on the term note is fixed for a period of five years from issuance (September 2003) at 6.5% and may be adjusted at 5 and 10 years. Amounts outstanding under the real estate term loan are collateralized by certain plant facilities and equipment.
The Credit Facility contains certain restrictive and financial covenants which, among other things, limit our ability without the lender’s consent to (i) make dividend payments and purchases of treasury stock in an aggregate amount which exceeds 50% of consolidated net income for the two most recent years, (ii) mortgage or pledge assets which exceed in the aggregate $1,000, (iii) incur additional indebtedness, including lease obligations, which exceed in the aggregate $1,000, excluding floor plan notes payable which cannot exceed $3,000 and (iv) make annual capital expenditures in excess of $5,000. In addition, the Credit Facility contains certain financial covenants requiring us (i) to maintain on a consolidated basis certain defined levels of liabilities to tangible net worth ratio (not to exceed 1.5 to 1), (ii) to maintain a current ratio, as defined, of at least 1.1 to 1, (iii) maintain minimum cash and cash equivalents of $5,000, (iv) achieve an annual cash flow to debt service ratio of not less than 1.35 to 1 for the year ending December 31, 2008, and (v) achieve an annual minimum profitability of $100. The Credit Facility also requires CIS to comply with certain specified restrictions and financial covenants. At June 28, 2008, we were in compliance with our debt covenants.
We have amounts outstanding under Industrial Development Revenue Bond issues (“Bonds”) which totaled $1,155 and $1,775 at June 28, 2008 and December 31, 2007, respectively. One bond issue bearing interest at 5.25% will mature in April 2009; and a second bond issue is payable in annual installments through 2013 with interest payable monthly at a variable rate currently at 1.75% as determined by a remarketing agent. The real estate term loan and the Bonds are collateralized by substantially all of our plant facilities and equipment.
We had $792 and $510 of notes payable under a retail floor plan agreement at June 28, 2008 and December 31, 2007, respectively. The notes are collateralized by certain retail new home inventories and bear interest rates ranging from prime to prime plus 2.5% but not less than 6% based on the age of the home.
We entered into a capital lease transaction during the first quarter of 2008 related to machinery and equipment we acquired with an initial cost of $29. At June 28, 2008, $24 was outstanding under the capital lease obligation.
Since its inception, CIS has been restricted in the amount of loans it could purchase based on underwriting standards, as well as the availability of working capital and funds borrowed under its credit line with its primary lender. From time to time, we evaluate the potential to sell all or a portion of our remaining installment loan portfolio, in addition to the periodic sale of installment contracts purchased by CIS in the future. CIS re-sells loans to other lenders under various retail finance contracts.
We believe the periodic sale of installment contracts under these retail finance agreements will reduce requirements for both working capital and borrowings, increase our liquidity, reduce our exposure to interest rate fluctuations, and enhance our ability to increase our volume of loan purchases. There can be no assurance, however, that additional sales will be made under these agreements, or that we will be able to realize the expected benefits from such agreements. At December 31, 2007, we sold a portion of our portfolio held for investment totaling $2,320 with cash settlement in early January 2008. At March 29, 2008, we sold additional installment contracts held for investment totaling $2,094 with cash settlement in early April 2008.
We believe existing cash and funds available under the Credit Facility, together with cash provided by operations, will be adequate to fund our operations and plans for the next twelve months. If it is not, or if we are unable to remain in compliance with our covenants under our Credit Facility, we would seek to maintain or enhance our liquidity position and capital resources through modifications to or waivers under the Credit Facility, incurrence of additional short or long-term indebtedness or other forms of financing, asset sales, restructuring of debt, and/or the sale of equity or debt securities in public or private transactions, the availability and terms of which will depend on various factors and market and other conditions, some of which are beyond our control.
Cash to be provided by operations in the coming year is largely dependent on sales volume. Our manufactured homes are sold mainly through independent dealers who generally rely on third-party lenders to provide floor plan financing for homes purchased. In addition, third-party lenders generally provide consumer financing for manufactured home purchases. Our sales depend in large part on the availability and cost of financing for manufactured home purchasers and dealers as well as our own retail locations. The availability and cost of such financing is further dependent on the number of financial institutions participating in the industry, the departure of financial institutions from the industry, the financial institutions’ lending practices, the strength of the credit markets in general, governmental policies, and other conditions, all of which are beyond our control. Throughout the past nine years the industry has been impacted significantly by reduced financing available at both the wholesale and retail levels, with several lenders exiting the marketplace or limiting their participation in the industry, coupled with more restrictive credit standards and increased home repossessions which re-enter home distribution channels and limit wholesale shipments of new homes. Unfavorable changes in these factors and terms of financing in the industry may have a material adverse effect on our results of operations or financial condition.
Recently Issued Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, Fair Value Measurements, which defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. SFAS No. 157 does not require any new fair value measurements but rather eliminates inconsistencies in guidance found in various prior accounting pronouncements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued FASB Staff Position No. FAS 157-2, Effective Date of FASB Statement No. 157. This FSP permits the delayed application of SFAS No. 157 for all non-recurring fair value measurements of non-financial assets and non-financial liabilities until fiscal years beginning after November 15, 2008. We adopted SFAS No. 157 in the first quarter of 2008 for all financial assets and financial liabilities with no material impact on our consolidated statements of operations or financial condition. For disclosure purposes, we estimated the fair value of our installment contracts receivable at $7,733 using Level 3 inputs as defined in SFAS No. 157. In general, these inputs were based on the actual sales prices we received from the sale of comparable installment contracts and the underlying collateral value on certain loans based on appraisals, when available, or industry price guides for used manufactured housing.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS No. 159 allows companies to elect to follow fair value accounting for certain financial assets and liabilities in an effort to mitigate volatility in earnings without having to apply complex hedge accounting provisions. SFAS No. 159 is applicable only to certain financial instruments and is effective for fiscal years beginning after November 15, 2007. We elected to not adopt the provisions of SFAS No. 159.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (“SFAS No. 141R”) and SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements (“SFAS No. 160”). SFAS 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. SFAS No. 141R also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. SFAS No. 160 amends ARB No. 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It also amends certain of ARB No. 51’s consolidation procedures for
consistency with the requirements of SFAS No. 141R. SFAS No. 141R and SFAS No. 160 are effective for fiscal years beginning on or after December 15, 2008. We have not yet completed our assessment of the impact, if any, SFAS No. 141R and SFAS No. 160 will have on our financial condition, results of operations or cash flows.
In May 2008, the FASB issued SFAS No. 162, Hierarchy of Generally Accepted Accounting Principles (“SFAS 162”). This statement is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements of nongovernmental entities that are presented in conformity with GAAP. This statement will be effective 60 days following the U.S. Securities and Exchange Commission’s approval of the Public Company Accounting Oversight Board amendment to AU Section 411, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles. We believe that FAS 162 will have no effect on our financial statements.
Off-Balance Sheet Arrangements
Our material off-balance sheet arrangements consist of repurchase obligations, guarantees, and letters of credit.
We are contingently liable under terms of repurchase agreements with financial institutions providing inventory financing for retailers of our products. Under the repurchase agreements, we were contingently liable at June 28, 2008, for a maximum of approximately $60,000 in the event we must perform under the repurchase commitments.
We have provided letters of credit totaling $4,353 as of June 28, 2008 to providers of certain of our surety bonds and insurance policies. While the current letters of credit have a finite life, they are subject to renewal at different amounts based on the requirements of the insurance carriers. We have recorded insurance expense based on anticipated losses related to these policies.
Market risk is the risk of loss arising from adverse changes in market prices and interest rates. We are exposed to interest rate risk inherent in our financial instruments, but are not currently subject to foreign currency or commodity price risk. We manage our exposure to these market risks through our regular operating and financing activities.
We purchase retail installment contracts from our dealers, at fixed interest rates, in the ordinary course of business, and periodically resell a majority of these loans to financial institutions under the terms of retail finance agreements. The periodic resale of installment contracts reduces our exposure to interest rate fluctuations, as the majority of contracts are held for a short period of time. Our portfolio consisted of fixed rate contracts with interest rates generally ranging from 6.5% to 14.0% and an average original term of 252 months at June 28, 2008. We estimated the fair value of our installment contracts receivable at $7,733 as of June 28, 2008 using Level 3 inputs as defined in SFAS 157. In general, these inputs were based on the actual sales prices we received from the sale of comparable installment contracts and the underlying collateral value on certain loans based on appraisals, when available, or industry price guides for used manufactured housing.
We have one industrial development revenue bond issue that is exposed to interest rate changes. Since this borrowing is floating rate debt, an increase in short-term interest rates could adversely affect interest expense. Additionally, we have one other industrial development revenue bond issue at a fixed interest rate. We estimated the fair value of our debt instruments at $3,897 using rates we believe we could have obtained on similar borrowings at June 28, 2008.
Additionally, we have a revolving line of credit (of which no amounts were outstanding at June 28, 2008) and a retail floor plan agreement that are exposed to interest rate changes, as they are floating rate debt based on the prime interest rate. The bank’s prime rate was 5.00% at June 28, 2008. We have $792 and $510 of notes payable under a retail floor plan agreement at June 28, 2008 and December 31, 2007, respectively. The notes bear interest rates ranging from prime to prime plus 2.5%, but not less than 6%, based on the age of the home.
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our chief executive officer and chief financial officer, management has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-
15(e) and 15d-15(e) of the Securities Exchange Act of 1934) as of June 28, 2008. Based on that evaluation, our chief executive officer and our chief financial officer have concluded that our disclosure controls and procedures were effective as of June 28, 2008.
Changes in Internal Controls Over Financial Reporting
There have been no internal control changes during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995:
Our disclosure and analysis in this Quarterly Report on Form 10-Q contain some forward-looking statements. Forward looking statements give our current expectations or forecasts of future events, including statements regarding trends in the industry and the business, financing and other strategies of Cavalier. You can identify these statements by the fact that they do not relate strictly to historical or current facts. They generally use words such as “estimates,” “projects,” “intends,” “believes,” “anticipates,” “expects,” “plans,” and other words and terms of similar meaning in connection with any discussion of future operating or financial performance. From time to time, we also may provide oral or written forward-looking statements in other materials released to the public. These forward-looking statements include statements involving known and unknown assumptions, risks, uncertainties and other factors which may cause the actual results, performance or achievements to differ from any future results, performance, or achievements expressed or implied by such forward-looking statements or words. In particular, such assumptions, risks, uncertainties, and factors include those associated with the following:
· | the cyclical and seasonal nature of the manufactured housing industry and the economy generally; |
· | the severe and continuing downturn in the manufactured housing industry; |
· | limitations in our ability to pursue our business strategy; |
· | changes in demographic trends, consumer preferences and our business strategy; |
· | changes and volatility in interest rates and the availability of capital; |
· | changes in the availability of retail (consumer) financing; |
· | changes in the availability of wholesale (dealer) financing; |
· | changes in level of industry retail inventories; |
· | the ability to attract and retain quality independent dealers in a competitive environment, including any impact from the consolidation of independent dealers; |
· | the ability to attract and retain executive officers and other key personnel; |
· | the ability to produce modular and HUD-code products within the same manufacturing plants; |
· | the ability to substantially grow our modular business; |
· | competition; |
· | contingent repurchase and guaranty obligations; |
· | uncertainties regarding our retail financing activities; |
· | the potential unavailability of and price increases for raw materials; |
· | the potential unavailability of manufactured housing sites; |
· | regulatory constraints; |
· | the potential for additional warranty claims; |
· | litigation, including formaldehyde-related regulation and litigation; and |
· | the potential for deficiencies in internal controls over financial reporting or in disclosure controls and procedures. |
Any or all of the forward-looking statements in this report, in the 2007 Annual Report to Stockholders, in the Annual Report on Form 10-K for the year ended December 31, 2007 and in any other public statements we make may turn out to be wrong. These statements may be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties. Many factors listed above will be important in determining future results. Consequently, no forward-looking statement can be guaranteed. Actual future results may vary materially.
We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosures we make on related subjects in future filings with the Securities and Exchange Commission or in any of our press releases. Also note that, in the Annual Report on Form 10-K for the period ended December 31, 2007, under the heading “Risk Factors,” we have provided a discussion of factors that we think could cause the actual results to differ materially from expected and historical results. Other factors besides those listed could also adversely affect us. This discussion is provided as permitted by the Private Securities Litigation Reform Act of 1995.
Reference is made to the legal proceedings previously reported in our Annual Report on Form 10-K for the year ended December 31, 2007 under the heading “Item 3 – Legal Proceedings”.
In the first quarter of 2008, Cavalier Home Builders, LLC, a wholly owed subsidiary, was named as a defendant in an action entitled “In Re: FEMA Trailer Formaldehyde Product Liability Litigation”, Docket Number MDL 1873 in the United States District Court for the Eastern District of Louisiana, New Orleans Division. In the second quarter of 2008, Cavalier Homes, Inc. and Cavalier Home Builders, LLC were named as defendants in another formaldehyde-related action styled “Stephanie G. Pujol, Individually and as Representative of Similarly Situated Persons vs. The United States of America (See Page 1-A)”, Docket No. 08-3217 in the United States District Court for the Eastern District of Louisiana, New Orleans Division. Also in the second quarter, Cavalier Homes, Inc. was named as a defendant in a third formaldehyde-related action styled “Keith Johnson, ET AL vs. United States of America, ET AL”, Case Number 08-3602 “N” (4) in the United States District Court for the Eastern District of Louisiana, New Orleans Division. Each of these Class Action Complaints are brought on behalf of those persons residing or living in manufactured homes, mobile homes or travel trailers along the Gulf Coast of the United States. The Plaintiffs allege that they are being subjected to harmful levels of formaldehyde while residing in these housing units. Cavalier Home Builders, LLC disputes the allegations in these Complaints and intends to vigorously defend itself in these actions.
Litigation is subject to uncertainties and we cannot predict the probable outcome or the amount of liability of individual litigation matters with any level of assurance. We are engaged in various legal proceedings that are incidental to and arise in the course of our business. Certain of the cases filed against us and other companies engaged in businesses similar to ours allege, among other things, breach of contract and warranty, product liability, personal injury and fraudulent, deceptive, or collusive practices in connection with their businesses. These kinds of suits are typical of suits that have been filed in recent years, and they sometimes seek certification as class actions, the imposition of large amounts of compensatory and punitive damages and trials by jury. Our liability under some of this litigation is covered in whole or in part by insurance. Anticipated legal fees and other losses, in excess of insurance coverage, associated with these lawsuits are accrued at the time such cases are identified or when additional information is available such that losses are probable and reasonably estimable. In the opinion of management, the ultimate liability, if any, with respect to the proceedings in which we are currently involved is not presently expected to have a material adverse effect on our results of operations, financial position, or liquidity.
There have been no material changes in our risk factors since December 31, 2007. See risk factors at December 31, 2007 within our Form 10-K.
Our Annual Meeting of Stockholders was held May 20, 2008, and the stockholders elected six directors. The following is a tabulation of voting on this matter:
Shares Voting | ||||||||||||
For | Withheld | Total | ||||||||||
Thomas A. Broughton III | 16,053,952 | 1,161,134 | 17,215,086 | |||||||||
Barry B. Donnell | 16,445,189 | 769,897 | 17,215,086 | |||||||||
Lee Roy Jordan | 15,975,403 | 1,239,683 | 17,215,086 | |||||||||
David A. Roberson | 16,052,852 | 1,162,234 | 17,215,086 | |||||||||
Bobby Tesney | 16,027,552 | 1,187,534 | 17,215,086 | |||||||||
J. Don Williams | 16,028,852 | 1,186,234 | 17,215,086 |
The stockholders also ratified the Board of Director’s appointment of Carr, Riggs & Ingram, LLC as our Independent Registered Public Accountants for 2008. The appointment was ratified by a vote of 17,085,768 for, 68,790 against, and 60,255 abstained.
The exhibits required to be filed with this report are listed below.
31.1 | Certification of principal executive officer pursuant to Exchange Act Rule 13a-15(e) or 15d-15(e). |
31.2 | Certification of principal financial officer pursuant to Exchange Act Rule 13a-15(e) or 15d-15(e). |
32 | Certification of CEO and CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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 thereunto duly authorized.
CAVALIER HOMES, INC. | |
(Registrant) | |
Date: July 24, 2008 | /s/ David A. Roberson |
David A. Roberson | |
President and Chief Executive Officer | |
Date: July 24, 2008 | /s/ Michael R. Murphy |
Michael R. Murphy | |
Chief Financial Officer | |
(Principal Financial and Accounting Officer) |