UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED September 30, 1999
--------------------
COMMISSION FILE NUMBER 1-8824
------
CLAYTON HOMES, INC.
---------------------
(Exact name of registrant as specified in its charter)
Delaware 62-1671360
- -------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
5000 Clayton Road
Maryville, Tennessee 37804
- --------------------- -----
(Address of principal executive offices) (zip code)
865-380-3000
------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No.
--
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Shares of common stock $.10 par value, outstanding on September 30, 1999
- -139,938,297.
1
CLAYTON HOMES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited - in thousands except per share data)
Three Months Ended
September 30,
1999 1998
---- ----
REVENUES
Net sales $265,740 $247,192
Financial services 54,348 50,999
Rental and other income 17,209 16,495
-------- ---------
Total revenues 337,297 314,686
-------- ---------
COSTS AND EXPENSES
Cost of sales 178,483 171,662
Selling, general and administrative 98,248 84,325
Financial services interest 289 2,450
Provision for credit losses 4,000 2,559
-------- ---------
Total expenses 281,020 260,996
-------- ---------
OPERATING INCOME 56,277 53,690
Interest income (expense), net/other 147 (993)
--------- ---------
Income before income taxes 56,424 52,697
Provision for income taxes 20,900 19,500
-------- --------
Net income $ 35,524 $ 33,197
========= =========
NET INCOME PER COMMON SHARE (1)
Basic $ 0.25 $ 0.23
Diluted 0.25 0.22
DIVIDENDS PAID PER SHARE (1) $ 0.016 $ 0.016
AVERAGE SHARES OUTSTANDING (1)
Basic 141,040 146,961
Diluted 141,413 147,955
(1) Adjusted for the December 9, 1998 5-for-4 stock split.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited) (audited)
September 30, June 30,
1999 1999
---- ----
ASSETS
Cash and cash equivalents $ 4,913 $ 2,680
Receivables, net 685,283 707,888
Inventories 180,447 184,444
Property, plant and equipment, net 295,939 291,503
Other assets 244,980 230,730
---------- -----------
Total assets $1,411,562 $1,417,245
========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued liabilities $ 129,038 $ 130,579
Debt obligations 95,655 96,477
Other liabilities 233,100 242,421
---------- -----------
Total Liabilities 457,793 469,477
SHAREHOLDERS' EQUITY
Accumulated other comprehensive income (2,318) (821)
Other shareholders' equity 956,087 948,589
---------- -----------
Total shareholders' equity 953,769 947,768
---------- -----------
Total liabilities and shareholders' equity $1,411,562 $1,417,245
========== ===========
(See accompanying notes to the condensed consolidated financial statements)
2
CLAYTON HOMES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited - in thousands)
Three Months Ended
September 30,
1999 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 35,524 $ 33,197
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 4,990 4,243
Gain on sale of installment contract receivables, net of amortization (311) (1,591)
Provision for credit losses 4,000 2,559
Deferred income taxes (4,710) (1,500)
Decrease (increase) in other receivables, net 23,301 (17,945)
Decrease in inventories 3,997 17,721
Decrease in accounts payable, accrued liabilities, and other (32,353) (34,828)
---------- ----------
Cash provided by operations 34,438 1,856
Origination of installment contract receivables (264,435) (238,929)
Proceeds from sales of originated installment contract receivables 197,925 197,489
Principal collected on originated installment contract receivables 11,161 5,500
---------- ----------
Net cash used in operating activities (20,911) (34,084)
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of installment contract receivables (32,388) (57,336)
Proceeds from sales of acquired installment contract receivables 77,191 55,606
Principal collected on acquired installment contract receivables 6,161 1,953
Acquisition of property, plant and equipment (9,426) (13,931)
Decrease (increase) in restricted cash 10,454 (5,463)
---------- ----------
Net cash provided by (used in) investing activities 51,992 (19,171)
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends (2,351) (2,386)
Net borrowings on credit facilities -- 103,377
Proceeds from (repayment of) long-term debt (822) 4,161
Issuance of stock for incentive plans and other 947 848
Repurchase of common stock (26,622) (43,228)
---------- ----------
Net cash provided by (used in) financing activities (28,848) 62,772
---------- ----------
Net increase in cash and cash equivalents 2,233 9,517
Cash and cash equivalents at beginning of period 2,680 1,731
---------- ----------
Cash and cash equivalents at end of period $ 4,913 $ 11,248
========== ==========
(See accompanying notes to the condensed consolidated financial statements)
3
CLAYTON HOMES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. The condensed consolidated financial statements of Clayton Homes, Inc.
and its wholly and majority owned subsidiaries (the Company) have
been prepared by the Company, without audit, pursuant to the rules
and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been omitted. The condensed consolidated financial
statements should be read in conjunction with the financial statements
and notes thereto included in the Company's Annual Report to Shareholders
for the year ended June 30, 1999.
The information furnished reflects all adjustments which are necessary
for a fair presentation of the Company's financial position as of
September 30, 1999, the results of its operations and its cash flows
for the three month periods ended September 30, 1999 and 1998. All such
adjustments are of a normal recurring nature.
2. The results of operations for the three months ended September 30, 1999
and 1998 are not necessarily indicative of the results to be expected
for the respective full years.
3. Certain reclassifications have been made to the 1998 financial statements
to conform to the 1999 presentation.
4. The Company has $75 million of 6.25% Senior Notes due December 30, 2003,
which are primarily to facilitate the purchase, origination and
warehousing of loan portfolios. The Senior Notes are guaranteed by all
significant subsidiaries of the Company and are governed by various
financial covenants which require maintenance of certain financial
ratios.
A committed one year $300 million commercial paper conduit facility is
utilized to facilitate interim sale of manufactured housing contracts.
5. Reconciling items in excess of bank balances have been reclassified to
Accounts payable and accrued liabilities.
6. The following reconciliation details the numerators and denominators
used to calculate basic and diluted earnings per share for the
respective periods:
Three Months Ended
September 30,
1999 1998
---- ----
(in thousands except per share data)
Net income $ 35,524 $ 33,197
Average shares outstanding
Basic 141,040 146,961
Add: common stock equivalents 373 994
-------- --------
Diluted 141,413 147,955
Earnings per share
Basic $ .25 $ .23
Diluted $ .25 $ .22
4
CLAYTON HOMES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
7. The Company operates primarily in four business segments: Retail,
Manufacturing, Financial Services and Communities. The following table
summarizes information with respect to the Company's business segments
for the three month periods ended September 30, 1999 and 1998:
Three Months Ended
September 30,
(in thousands) 1999 1998
----- ----
REVENUES
Retail $ 192,994 $ 174,214
Manufacturing 159,250 151,543
Financial Services 44,943 44,962
Communities 21,511 16,526
Intersegment sales (81,401) (72,559)
--------------- -----------
Total Revenues $ 337,297 $ 314,686
INCOME FROM OPERATIONS
Retail $ 15,409 $ 15,200
Manufacturing 15,371 17,728
Financial Services 25,194 25,490
Communities 3,268 2,660
Eliminations/Other (2,965) (7,388)
--------------- -----------
Total Income from operations $ 56,277 $ 53,690
CAPITAL EXPENDITURES
Retail $ 3,009 $ 2,734
Manufacturing 3,318 4,100
Financial Services 105 294
Communities 2,943 6,464
Eliminations/Other 51 339
--------------- -----------
Total Capital expenditures $ 9,426 $ 13,931
As of September 30,
1999 1998
----- ----
IDENTIFIABLE ASSETS
Retail $ 245,974 $ 206,267
Manufacturing 87,425 75,757
Financial Services 873,933 1,016,667
Communities 178,756 173,066
Eliminations/Other 25,474 53,464
--------------- -----------
Total Identifiable assets $ 1,411,562 $1,525,221
5
PART I - - FINANCIAL INFORMATION
ITEM 1. Financial Statements.
----------------------
See pages 2 through 5.
ITEM 2. Management's Discussion and Analysis of Financial Condition and
-------------------------------------------------------------------
Results of Operations.
-----------------------
THREE MONTHS ENDED SEPTEMBER 30, 1999:
The following table reflects the percentage changes in retail sales for the
Company's retail and community sales centers and wholesale sales to independent
retailers. It also reflects percentage changes in the average number of
Company-owned retail centers, communities and independent retailers, the average
sales per location, and the average price per home sold in each category.
First Three Months
Fiscal Year 2000 vs 1999
----------------------------
Retail
Dollar sales +11.6%
Number of retail centers +11.0%
Dollar sales per retail center + 0.6%
Price of home +11.4%
Wholesale
Dollar sales - 4.9%
Number of independent retailers - 3.6%
Dollar sales per independent retailer - 1.4%
Price of home + 5.8%
Communities
Dollar sales +68.5%
Number of communities + 4.9%
Dollar sales per community +60.6%
Price of home + 8.0%
Total revenues for the three months ended September 30, 1999, increased 7% to
$337 million, as manufactured housing sales rose 8% to $266 million, financial
services income grew 7% to $54 million and rental and other income increased 4%
to $17 million.
Net sales of the Retail group rose 12% to $178 million on an 11% rise in the
average home price and an 11% increase in Company-owned sales centers. A 10%
decrease in the average number of homes sold per sales center was partially
attributable to a change in mix toward multi-section units.
Net sales of the Manufacturing group decreased 5% to $78 million as the number
of homes sold decreased 10% to 3,419. The average wholesale price to independent
retailers increased 6% as a result of a shift in product mix towards
multi-section homes.
6
Net sales of the Communities group increased 68% to $10 million as 56% more
homes were sold, while the average home selling price increased 8%.
Within financial services revenues, interest and loan servicing revenues
decreased $.5 million, and insurance related revenues rose $1 million. Rental
and other income increased 4% on an 8% rise in Communities rental income.
Loans sold through asset-backed securities totaled $356 million, compared to
$244 million during the same period last year.
Financial services interest expense decreased to $.3 million. Average debt
collateralized by installment contract receivables dropped 17% to $12 million,
while the weighted average interest rate dropped to 9.4% from 10.4%. The
terms of the debt preclude prepayment by the Company.
Gross profit margins increased to 32.8% from 30.6% which is attributable to a
shift in mix to multi-section units.
Selling, general and administrative expenses, as a percent of revenues,
increased to 29.1% from 26.8% in the prior year period, primarily due to
increased set up costs associated with the shift in mix to multi-section units
as well as sales of larger homes. The provision for credit losses increased to
1.5% from 1.0% of sales.
The following table represents delinquent installment sales contracts as a
percentage of the total number of installment sales contracts which the Company
services and either owns or for which it is contingently liable. A contract is
considered delinquent if any payment is more than one month past due.
September 30,
1999 1998
---- ----
Total delinquency as a percentage
of contracts outstanding:
All contracts 2.53% 3.67%
Contracts originated by VMF 2.13% 2.85%
Contracts acquired from other institutions 4.01% 7.13%
7
The following table sets forth information related to loan loss/repossession
experience for all installment contract receivables which the Company either
owns or for which it is contingently liable.
Three Months Ended
September 30,
1999 1998
---- ----
Net losses as a percentage of average
loans outstanding (annualized):
All contracts 1.4% 1.2%
Contracts originated by VMF 1.2% 0.9%
Contracts acquired from other institutions 3.2% 2.9%
Number of contracts in repossession:
All contracts 1,977 1,848
Contracts originated by VMF 1,567 1,309
Contracts acquired from other institutions 410 539
Total number of contracts in repossession
as a percentage of total contracts 1.6% 1.7%
The overall decrease in inventories as of September 30, 1999, from June 30,
1999, is explained as follows:
(in millions)
Manufacturing Increase (decrease)
- ------------- --------------------
Finished goods $ 6.8
Raw materials (9.6)
Retail
- ------
Decrease in inventory levels at 306
Company-owned retail centers at
June 30, 1999 (2.8)
Inventory to stock four
new Company-owned retail centers 2.3
Communities
- -----------
Decrease in inventory levels at 75
Communities at June 30, 1999 (0.8)
Inventory to stock one new
Community .1
-------
$ (4.0)
=======
On September 30, 1999, the order backlog for the Manufacturing group (consisting
of Company-owned and independent retailer orders) decreased to $33 million, as
compared to $54 million for the same period last year.
8
Liquidity and Capital Resources
- ----------------------------------
Cash at September 30, 1999, was $4.9 million as compared to $2.7 million at
June 30, 1999. The Company anticipates meeting cash requirements with cash flow
from operations, revolving credit lines, a commercial paper conduit facility,
senior notes, and sales of installment contract and mortgage loan receivables
and GNMA certificates.
At September 30, 1999 and June 30, 1999, the Company had short-and long-
term debt outstanding of $0 and $95.7 million and $0 and $96.4 million,
respectively. Short-term debt available consists of $150 million committed and
$62.5 million uncommitted lines of credit. These lines of credit do not require
collateral and are priced on LIBOR plus rates ranging from 0.10% to 0.40%. The
committed credit lines are guaranteed by all significant subsidiaries of
the Company and are governed by various financial covenants which require
maintenance of certain financial ratios.
The Company has $75 million of 6.25% Senior Notes due December 30, 2003, which
are primarily to facilitate the purchase, origination and warehousing of loan
portfolios. The Senior Notes are guaranteed by all significant subsidiaries of
the Company and are governed by various financial covenants which require
maintenance of certain financial ratios.
A committed one year $300 million commercial paper conduit facility is utilized
to facilitate interim sale of manufactured housing contracts.
Year 2000
- ----------
Management believes the majority of the Company's mission critical systems and
related software are Year 2000 compliant. The Company has executed a plan to
address potential disruptions to normal business activities related to the Year
2000. Areas addressed by the plan include information systems (hardware and
software), non-information systems, embedded chips, and supply chain
continuance. Currently, the Company has completed its mission critical Year
2000 projects and based on the test results of these systems, management
believes the operation of the Company will not be materially impacted by the new
millennium. At this point, the Company believes that any problems relating to
the Year 2000 will be manifested as minor inconveniences and reasonable
precautions have been taken to prevent major disruptions to normal business
activities.
Information systems, consisting of hardware and software, have been modified or
replaced to ensure Year 2000 compliance. The Company's hardware consists of a
mainframe, networks and personal computers. All desktop computers utilized in
mission critical functions have been tested and are in compliance. The
mainframe computers are compliant with respect to the hardware and operating
systems. Many of the Company's critical software systems, such as the general
ledger, accounts payable, payroll, human resources, and credit application
tracking systems have been replaced by Year 2000 compliant packages. The
Company tested each of these software systems using a standardized testing
methodology which includes millennium testing, millennium leap year testing and
cross over year testing.
Non-information systems at corporate such as HVAC, elevator, phone, security,
vaults, and computer rooms are Year 2000 compliant as a direct result of
building a new Corporate office. Similar equipment at field locations is not
dependent on embedded chip technologies and is not considered an area of
material exposure.
9
The Company has completed its survey of major suppliers and vendors of
raw materials for Year 2000 compliance. The Company is not directly dependent
on electronic data interchange (EDI) for the purchase of raw materials,
though some of the Company's suppliers may be. Moreover, the bulk of raw
materials (mostly lumber) is readily available from other suppliers. Possible
interruptions in the supply chain can be circumvented by purchasing raw
materials from an alternate local supplier. Responses from the Company's
surveys provide assurance that our critical suppliers, including Financial
Services providers, will be compliant.
Through September 30, 1999, the Company has incurred approximately $250,000 in
costs associated with Year 2000 compliance. The total costs are not expected
to exceed $500,000 or to have a material impact on the Company's financial
position, results of operations, or cash flows in future periods. Most of the
hardware, software, and non-information system replacements have been due to
growth of the Company and Year 2000 compliance is a by-product of the
replacement systems. The custom written software is addressed by the in-house
programming staff and contract programming services. Most costs directly
associated with Year 2000 compliance were incurred during fiscal 1999.
Contingency plans, both short- and long-term, for critical processes for each
business unit have been developed. To mitigate any unexpected problems with the
Year 2000, plans could include but are not limited to: (1) rapid transitions
to alternative suppliers of services and materials, (2) replacement of errant
equipment or software, (3) manual ledgers, (4) increased work hours by Company
personnel, (5) temporary personnel, (6) outsourcing and (7) routine backup of
critical data to different platforms. While contingency plans have been
developed, opportunities for refinement and improvements will be incorporated
into each business unit's contingency plan throughout 1999. Should the Company
be required to execute a long-term contingency plan, an adverse material
effect to operations could result.
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could adversely affect the Company's results of
operations, liquidity and financial condition. Due to the general uncertainty
inherent in the Year 2000 problem, resulting in part from the uncertainty of the
Year 2000 readiness of third-party suppliers and customers, the Company is
unable to determine at this time whether the consequences of Year 2000 failures
could have a material impact on the Company's results of operations, liquidity
or financial condition. The Year 2000 project is expected to significantly
reduce the Company's level of uncertainty about the Year 2000 problem and, in
particular, about the Year 2000 compliance and readiness of its critical
suppliers and financial services providers. The Company believes that, with the
implementation of new business systems and completion of the project as
scheduled, the exposure to significant interruptions of normal operations should
be reduced.
New Accounting Pronouncements
- -------------------------------
In March 1998, the AICPA issued Statement of Position 98-1 (SOP 98-1),
Accounting for the Cost of Computer Software Developed or Obtained for Internal
Use. SOP 98-1 is effective for financial statements for fiscal years beginning
after December 15, 1998. SOP 98-1 provides guidance on accounting for computer
software developed or obtained for internal use including the requirement to
capitalize specified costs and amortization of such costs. The Company will
adopt the provisions of SOP 98-1 in its fiscal year ending June 30, 2000, and
does not expect such adoption to have a material effect on the Company's
reported results of operations, financial position, or cash flows.
In April 1998, the AICPA issued SOP 98-5, Reporting on the Costs of Start-Up
Activities, which is effective for fiscal years beginning after December 15,
1998. SOP 98-5 provides guidance on the
10
financial reporting of start-up and organization costs. It requires start-up
activities and organization costs to be expensed as incurred. The adoption of
this standard is not expected to have a material impact on the Company's
reported results of operations, financial position or cash flows.
In June 1998, the FASB issued SFAS No. 133,
Accounting for Derivatives and Financial Instruments and Hedging Activities.
SFAS 133 establishes accounting and reporting standards of derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. In July 1999, the FASB issued SFAS No.
137, Deferral of the Effective Date of SFAS 133, which amends SFAS 133 by
deferring the effective date to fiscal years beginning after June 15, 2000.
The adoption of SFAS 133 is not expected to have a material impact on the
Company's reported results of operations, financial position or cash flows.
Forward Looking Statements
- ----------------------------
Certain statements in this quarterly report are forward looking as defined in
the Private Securities Litigation Reform Law. These statements involve certain
risks and uncertainties that may cause actual results to differ materially from
expectations as of the date of this report. These risks fall generally within
three broad categories consisting of industry factors, management expertise, and
government policy and economic conditions. Industry factors include such
matters as potential periodic inventory adjustments by both captive and
independent retailers, general or seasonal weather conditions affecting sales
and revenues, catastrophic events impacting insurance reserves, cost of labor
and/or raw materials and industry consolidation trends creating fewer but
stronger competitors capable of sustaining competitive pricing pressures.
Management expertise is affected by management's overall ability to anticipate
and meet consumer preferences, maintain successful marketing programs, continue
quality manufacturing output, keep a strong cost management oversight, meet the
Year 2000 compliance plan, and project stable gain on sale accounting
assumptions. Lastly, management has the least control over government policy
and economic conditions such as prevailing interest rates, capital market
liquidity, government monetary policy, stable regulation of manufacturing
standards, consumer confidence, favorable trade policies, and general prevailing
economic and employment conditions.
11
PART II - - OTHER INFORMATION
ITEM 1 - There were no reportable events for Item 1 through Item 5.
ITEM 6 - Exhibits and Reports for Form 8-K.
---------------------------------------
(a) 27. Financial Data Schedule (SEC use only)
(b) Reports on Form 8-K.
Clayton Homes, Inc./Vanderbilt Mortgage & Finance, Inc. Senior
Subordinate Pass-Through Certificates Series 1999C. Filed
August 18, 1999.
12
CLAYTON HOMES, INC.
-------------------
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CLAYTON HOMES, INC.
---------------------
(Registrant)
Date: November 12, 1999 /s/ Kevin T. Clayton
------------------- -----------------------------------------
Kevin T. Clayton
Chief Executive Officer and President
Date: November 12, 1999 /s/ Amber W. Krupacs
------------------- ----------------------------------------
Amber W. Krupacs
Vice President Finance
Date: November 12, 1999 /s/ Greg A. Hamilton
------------------- -----------------------------------------
Greg A. Hamilton
Vice President and Controller
13