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, 2002
-----------------------
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 (zip code)
executive offices)
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 October 31, 2002:
135,923,987.
1
CLAYTON HOMES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited - in thousands except per share data)
Three Months Ended
September 30,
2002 2001
-------- ---------
REVENUES
Net sales $221,221 $227,503
Financial services 67,679 51,326
Rental and other income 18,034 17,541
-------- ---------
Total revenues 306,934 296,370
-------- ---------
COSTS AND EXPENSES
Cost of sales 144,733 149,099
Selling, general and administrative 101,910 96,162
Financial services interest 58 127
Provision for credit losses 9,070 3,860
-------- ---------
Total expenses 255,771 249,248
-------- ---------
OPERATING INCOME 51,163 47,122
Interest income (expense), net/other (4,142) (5,002)
-------- ---------
Income before income taxes 47,021 42,120
Provision for income taxes 17,400 15,600
-------- ---------
Net income $ 29,621 $ 26,520
======== =========
NET INCOME PER COMMON SHARE
Basic $ 0.22 $ 0.19
Diluted 0.22 0.19
AVERAGE SHARES OUTSTANDING
Basic 136,623 138,030
Diluted 137,217 139,129
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
September 30, June 30,
2002 2002
------------ -----------
ASSETS
Cash and cash equivalents $ 167,838 $ 83,729
Trade receivables 7,597 9,308
Inventory finance receivables 45,709 43,859
Other receivables, net 646,230 744,074
Residual interests in installment contract receivables 178,810 181,344
Inventories 188,895 189,976
Property, plant and equipment, net 309,979 310,764
Other assets 269,928 265,349
------------ -----------
Total assets $ 1,814,986 $ 1,828,403
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued liabilities $ 142,226 $ 139,308
Debt obligations 92,136 92,912
Other liabilities 312,101 334,226
------------ -----------
Total liabilities 546,463 566,446
SHAREHOLDERS' EQUITY
Accumulated other comprehensive income 9,628 7,818
Other shareholders' equity 1,258,895 1,254,139
------------ -----------
Total shareholders' equity 1,268,523 1,261,957
------------ -----------
Total liabilities and shareholders' equity $ 1,814,986 $ 1,828,403
============ ===========
(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,
2002 2001
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 29,621 $ 26,520
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization 5,013 5,089
Amortization associated with sale of installment contract receivables 3,256 10,099
Gain on sale of installment contract receivables (305) (9,101)
Income accretion from residual interest in installment contract receivables (5,237) -
Provision for credit losses 9,070 3,860
Deferred income taxes (4,142) (3,190)
Increase in other receivables, net (6,148) (10,810)
Decrease in inventories 1,081 11,867
Decrease in accounts payable, accrued liabilities, and other (33,143) (10,865)
----------- ----------
Cash provided by (used in) operations (934) 23,469
Origination of installment contract receivables (227,175) (217,390)
Proceeds from sales of originated installment contract receivables 186,113 235,035
Principal collected on originated installment contract receivables 24,684 14,473
----------- ----------
Net cash provided by (used in) operating activities (17,312) 55,587
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of installment contract receivables (67,524) (59,759)
Proceeds from sales of acquired installment contract receivables 171,607 92,096
Principal collected on acquired installment contract receivables 13,066 7,083
Proceeds from residual interests in installment contract receivables 3,133 -
Acquisition of property, plant and equipment (4,228) (4,147)
Decrease in restricted cash 15,642 19,371
----------- ----------
Net cash provided by investing activities 131,696 54,644
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of debt obligations (776) (46,570)
Decrease in cash in excess of bank balances (4,632) (9,862)
Issuance of stock for incentive plans and other 2,237 1,364
Repurchase of common stock (27,104) (9,637)
----------- ----------
Net cash used in financing activities (30,275) (64,705)
----------- ----------
Net increase in cash and cash equivalents 84,109 45,526
Cash and cash equivalents at beginning of period 83,729 47,763
---------- ----------
Cash and cash equivalents at end of period $ 167,838 $ 93,289
========== ==========
(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 accounting principals generally accepted in the United States of America
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, 2002.
The information furnished reflects all adjustments which are necessary for a
fair statement of the Company's financial position as of September 30, 2002, and
the results of its operations and its cash flows for the three month periods
ended September 30, 2002 and 2001. All such adjustments are of a normal
recurring nature. The results of operations for the three months ended September
30, 2002, are not necessarily indicative of the results to be expected for the
respective full year.
2. The overall change in inventories as of September 30, 2002, from June 30,
2002, was as follows:
($ in thousands) September 30, 2002 June 30, 2002 Increase (decrease)
--------------- -------------- --------------------
Manufacturing
- --------------
Finished goods $ 4,427 $ 1,027 $ 3,400
Raw materials 14,133 16,850 (2,717)
Retail
- ------
Inventory levels at Company-
owned retail centers 154,462 156,228 (1,766)
Communities
- -----------
Inventory levels at Company-
owned communities 15,873 15,871 2
-------- -------- --------
$188,895 $189,976 ($ 1,081)
-------- -------- --------
3. The Company follows the accounting requirements of Emerging Issues Task
Force (EITF) 99-20, Recognition of Interest Income and Impairment on Purchased
and Retained Beneficial Interests in Securitized Financial Assets. Under these
guidelines, the Company evaluated the expected future cash flows from its
available-for-sale interest-only securities on a disaggregate security by
security basis. There was a $2.7 million ($1.7 million after tax) increase in
the excess of the market value over the accreted book value of interest-only
securities. This favorable adjustment has been recorded as an element of
accumulated other comprehensive income. In addition, an other than temporary
charge of $.6 million was recorded in September 2002 as a reduction of financial
services revenues in relation to one of the Company's residual interests in
installment contract receivables.
4
CLAYTON HOMES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Changes in accumulated other comprehensive income, net of the related income tax
effects, are as follows:
Three Months Ended
September 30,
2002 2001
-------- --------
Accumulated other comprehensive income beginning balance $ 7,818 $ 8,949
Unrealized gains (losses) on securities
available-for-sale, net of tax (240) 2,299
Unrealized gains (losses) on residual interests, net of tax 1,680 (225)
Reclassification of realized losses on residual interests
included in net income, net of tax 370 -
-------- --------
Accumulated other comprehensive income ending balance $ 9,628 $ 11,023
======== ========
4. The Company follows the provisions of SFAS 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities. The key
economic assumptions used in the valuation of the residual interests for
securitizations completed during the three month period ending September 30,
2002 and 2001, were:
For the quarter ended
Sept. 30, 2002 Sept. 30, 2001
--------------- ----------------
Prepayment speed (multiple of the
manufactured housing prepayment model) 310% 300%
Constant prepayment rate (CPR) 17.64% 18.42%
Weighted average life in years 4.36 4.52
Expected credit losses 2.74% 1.98%
Residual cash flow discount rate 14.23% 15.75%
The following represents the key economic assumptions used in the valuation of
the existing portfolio at June 30, 2002 and have generally remained the same:
Constant prepayment rate (CPR) 10.7% - 24.10%
Weighted average life in years 4.27
Expected credit losses 2.43%
Residual cash flow discount rate 13.70%
5
CLAYTON HOMES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
5. 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,
(in thousands except per share data) 2002 2001
---------- ----------
Net income $ 29,621 $ 26,520
Average shares outstanding
Basic 136,623 138,030
Add: common stock equivalents (1) 594 1,099
---------- ----------
Diluted 137,217 139,129
Net income per common share
Basic $ 0.22 $ 0.19
Diluted $ 0.22 $ 0.19
(1) Common stock equivalents are principally stock options. Stock options to
purchase 1,836,586 and 213,728 shares of common stock for the three months ended
September 30, 2002, and 2001, respectively, were not included in the computation
of diluted earnings per share because their inclusion would have been
antidilutive.
6. In June 2001, the FASB issued Statement No. 143 (SFAS 143), Accounting
for Asset Retirement Obligations. SFAS 143 requires that obligations associated
with the retirement of a tangible long-lived asset be recorded as a liability
when those obligations are incurred, with the amount of the liability initially
measured at fair value. SFAS 143 was effective for financial statements for
fiscal years beginning after June 15, 2002. The Company has adopted SFAS 143 and
the adoption did not have a material impact on the Company's reported results of
operations, financial position or cash flows.
In August 2001, the FASB issued Statement No. 144 (SFAS 144), Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS 144 supercedes SFAS 121 and
applies to all long-lived assets (including discontinued operations) and
consequently amends portions of Accounting Principles Board Opinion No. 30 (APB
30), Reporting Results of Operations Reporting the Effects of Disposal of a
Segment of a Business. SFAS 144 requires that long-lived assets to be sold be
measured at the lower of book value or fair value less cost to sell. SFAS 144
was effective for financial statements issued for fiscal years beginning after
December 15, 2001, and generally, its provisions are to be applied
prospectively. The Company has adopted SFAS 143 and the adoption did not have a
material impact on the Company's reported results of operations, financial
position or cash flows.
In April 2002, the FASB issued Statement No. 145, Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. This Statement rescinds FASB Statement No. 4, Reporting Gains and
Losses from Extinguishment of Debt, and an amendment of that Statement, FASB
Statement No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements. This Statement amends FASB Statement No. 13, Accounting for
Leases, to eliminate an inconsistency between the required accounting for
sale-leaseback
6
CLAYTON HOMES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
transactions and the required accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback transactions. This
Statement also amends other existing authoritative pronouncements to make
various technical corrections, clarify meanings, or describe their applicability
under changed conditions. The Company did not have any transactions applicable
to the provisions of this statement in the quarter; therefore, the adoption of
this statement did not have a material impact on the Company's reported results
of operations, financial position or cash flows.
In June 2002, the FASB issued Statement No. 146 (SFAS 146), Accounting for Costs
Associated with Exit or Disposal Activities. This Statement addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity. This Statement requires that a liability for a cost associated with an
exit or disposal activity be recognized and measured initially at fair value
only when the liability is incurred. SFAS 146 is effective for exit or disposal
activities that are initiated after December 31, 2002, and the Company does not
anticipate that the provisions of this statement will have a material impact on
the Company's reported results of operations, financial positions, or cash
flows.
7
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, 2002 and 2001:
Three Months Ended
September 30,
(in thousands) 2002 2001
----------- -----------
REVENUES
Retail $ 175,194 $ 175,397
Manufacturing 126,371 131,519
Financial Services 55,586 39,949
Communities 28,003 20,425
Intersegment sales (78,220) (70,920)
----------- -----------
Total revenues $ 306,934 $ 296,370
=========== ===========
INCOME FROM OPERATIONS
Retail $ 4,866 $ 8,135
Manufacturing 10,389 12,151
Financial Services 36,043 25,844
Communities 3,585 2,830
Eliminations/Other (3,720) (1,838)
----------- -----------
Total income from operations $ 51,163 $ 47,122
=========== ===========
CAPITAL EXPENDITURES
Retail $ 1,260 $ 1,283
Manufacturing 2,136 898
Financial Services 84 274
Communities 256 1,346
Eliminations/Other 492 346
----------- -----------
Total capital expenditures $ 4,228 $ 4,147
=========== ===========
As of Sept 30, As of June 30,
2002 2002
----------- -----------
IDENTIFIABLE ASSETS
Retail $ 265,707 $ 271,421
Manufacturing 78,732 79,102
Financial Services 1,098,804 1,210,460
Communities 188,621 191,147
Eliminations/Other 183,122 76,273
----------- -----------
Total identifiable assets $1,814,986 $1,828,403
=========== ===========
8
PART I - - FINANCIAL INFORMATION (Unaudited)
ITEM 1. Financial Statements.
----------------------
See pages 2 through 8.
ITEM 2. Management's Discussion and Analysis of Financial Condition and
-------------------------------------------------------------------
Results of Operations.
-------------------------
CRITICAL ACCOUNTING POLICIES:
The Company believes the following represents its critical accounting policies:
Revenue Recognition
- - Retail sales are recognized when:
1) Cash payment is received, or down payment is received for credit
sales and the home buyer enters into an installment sales
contract, and
2) The home buyer has inspected and accepted the completed home at
the home buyer's site, and
3) Title has passed to the retail home buyer.
- - Sales to independent retailers of homes produced by the Company are
recognized as revenue upon shipment.
- - Revenue from rental of homesites and homes is accrued and recognized based
on the terms of the resident's lease agreement with the Company.
- - Premiums from insurance policies represent short-duration contracts with
terms of one to 10 years and are deferred and recognized as revenue over
the terms of the policies.
- - Vanderbilt Mortgage and Finance, Inc. (VMF), the Company's financing
subsidiary, originates and sells installment contract and mortgage loan
receivables (receivables), retaining the servicing thereon. It also
provides servicing for investors in receivables on a contract basis.
Interest income on receivables held, either for sale or as an investment,
is recognized in accordance with the terms of the underlying installment
contracts. For receivables sold with servicing retained and receivables
serviced under servicing agreements, service fee income is recognized as
the service is performed. Interest income on interest-only residual
interests is recognized in accordance with the consensus of the Emerging
Issues Task Force in its Issue No. 99-20 (EITF 99-20), Recognition of
Interest Income and Impairment on Purchased and Retained Beneficial
Interests in Securitized Assets. Accordingly, interest income is recognized
through an effective yield method, with the yield computed prospectively
over the life of the residual interests after adjustments in the estimated
cash flows are made to reflect prepayments, defaults and other factors.
Valuation of Residual Interests
The Company engages in securitization activities in connection with certain of
its businesses. Gains and losses from securitizations are recognized in the
consolidated statements of income when the Company relinquishes control of the
transferred financial assets in accordance with SFAS No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.
The gain or loss on the sale of financial assets depends in part on the previous
carrying amount of the assets involved in the
9
transfer, allocated between the assets sold and the retained interests based
upon their respective fair values at the date of the sale.
Interest-only securities are periodically valued using a discounted cash flow
model. The future cash flows for the estimated life of each securitized pool
are projected as the excess interest received from borrowers over the interest
paid to the securityholders, less contractual servicing fees, after giving
effect to estimated prepayments and credit losses. Estimates for prepayments,
defaults, and losses are determined based on a model developed by the Company
that considers both Company-specific experience and current economic conditions.
The residual interests in the installment receivables sold are classified as
available-for-sale securities. Accordingly, changes in fair market value are
recorded as other comprehensive income (loss) unless an other than temporary
adverse change is determined. Such changes are reflected in net income. In
September 2002, an other than temporary charge of $.6 million was recorded as a
reduction of financial services revenues in relation to one of the Company's
residual interests. The valuation of residual interests involves various
assumptions and estimates. Any actual significant change in those original
assumptions and estimates could have a material impact on the Company's reported
financial position and cash flows.
Servicing assets are periodically evaluated on a transaction basis for
impairment based on the fair value of those assets. The estimate of fair value
assumes: 1) discount rates which, at the time the asset was created, approximate
current market rates; and 2) expected prepayment rates based on loan prepayment
experience for similar transactions. The servicing asset or liability is
amortized in proportion to and over the period of estimated net servicing income
or net servicing loss.
Reserves for Credit Losses and Contingent Liabilities
Reserves for credit losses and contingent liabilities are established for
receivables held for sale or investment and certain inventory. Actual credit
losses are charged to the reserves when incurred. The reserves established for
such losses are determined based on the Company's historical loss experience
after adjusting for current economic conditions. Management, in assessing the
loss experience and economic conditions, adjusts reserves through periodic
provisions. The Company also maintains a reserve for contingent liabilities
related to guarantees of installment contract receivables sold with recourse.
THREE MONTHS ENDED SEPTEMBER 30, 2002:
Total revenues for the three months ended September 30, 2002, increased 4% to
$307 million from the same period in 2001, which consisted of a 3% decrease in
manufactured housing sales to $221 million, a 32% increase in financial services
income to $68 million and a 3% increase in rental and other income to $18
million. Total units sold declined 9% to 6,092 from 6,684 in the prior year
period as total floors shipped decreased 9% to 9,205 from 10,065 in the prior
year period.
Gross profit margins on net sales increased slightly to 34.6% from 34.5%, while
selling, general and administrative expenses, as a percent of total revenues,
increased to 33.2% from 32.4% in the prior year period. The increase in the
provision for credit losses was primarily due to the additional number of
contracts in foreclosure from the same period last year. Operating income
increased to 16.7% of total revenues in the quarter from 15.9% in 2001.
Interest expense (net of interest income) decreased to $4.1 million for the
quarter ending September 30, 2002, as compared to $5.0 million net expense in
the same period last year. The net expense was primarily
10
attributable to overall declining interest rates during the three month period
which had a negative impact on the value of the Company's interest rate swaps.
During the quarter ended September 30, 2002, there was an unfavorable
mark-to-market adjustment of $4.0 million relating to the swaps. In the
comparable period last year, there was a $3.9 million mark-to-market unfavorable
swap adjustment.
RETAIL. Within the Retail segment revenues, the group experienced a slight
decrease in net sales to $158 million, as the average home price increased 9%,
the average number of homes sold per sales center decreased 6%, and the total
number of homes sold declined 9% to 3,740. Same store dollar sales declined 1%
for the quarter. The average number of Company-owned sales centers decreased 3%
due to the Company's continuous evaluation of retail centers' strategic fit into
the Company's operating model and distribution channels.
Three Months Ended
September 30, %
2002 2001 Change
-------- -------- -------
Dollar sales (in thousands) $158,146 $158,836 -0.4%
Average number of retail centers 289 297 -2.7%
Dollar sales per retail center (in thousands) $ 548 $ 536 2.3%
Average price of home $ 42,285 $ 38,637 9.4%
New homes sold 3,149 3,317 -5.1%
Previously-owned homes sold 591 794 -25.6%
Percentage single-section/multi-section mix (new only) 44/56 47/53
MANUFACTURING. Within the Manufacturing segment revenues, the group experienced
a 20% decline to $49 million in net sales to independent retailers and a 17%
decrease in the number of homes sold to 1,934. In addition, the average number
of independent retailers decreased 4% to 615. Manufacturing segment operating
income decreased $2 million to $10 million as compared to the same quarter last
year. Capacity utilization decreased to 60% versus 63% for the comparable
quarter last year.
Three Months Ended
September 30, %
2002 2001 Change
-------- -------- -------
Wholesale dollar sales (in thousands) $ 48,635 $ 60,912 -20.2%
Number of plants operating 20 20 0.0%
Number of independent retailers (average) 615 639 -3.7%
Dollar sales per independent retailer (in thousands) 79 95 -17.1%
Average price of home $ 25,148 $ 26,031 - 3.4%
Homes sold to independent retailers 1,934 2,340 -17.4%
Percentage single-section/multi-section mix 39/61 39/61
FINANCIAL SERVICES. Revenues for the Financial Services segment increased $16
million, primarily due to a larger servicing portfolio and improved spreads over
last year. Insurance related revenues rose $1 million. Originations of $227
million and acquisitions of $68 million were completed during the quarter,
bringing the total serviced portfolio to $5.0 billion. Loans sold through
asset-backed securities totaled $500 million (including pre-funding of $143
million), compared to $400 million (including pre-funding of $73 million) during
the same period last year, and delinquency on the originated portfolio declined
59 basis points to 3.12% for the quarter versus the comparable period last year.
Overall delinquency, including the serviced portfolio and the recent portfolio
purchases, increased from 2.84% in June 2002 to 3.73% in September, but
11
declined 41 basis points from September last year. Total Financial Services
operating income increased 39% to $36 million.
The following table sets forth information related to loan loss experience for
all installment contract receivables which the Company either owns or for which
it is contingently liable.
For The Quarter Ended
September 30,
2002 2001
------ ------
Net losses as a percentage of average
loans outstanding (annualized)
All contracts 2.3% 2.0%
Contracts originated by VMF 2.1% 2.1%
Contracts acquired from other institutions 3.1% 1.6%
Loans Serviced (in thousands)
Originated and purchased loans serviced $4,869 $4,178
Master servicing contracts 152 181
------ ------
Total $5,021 $4,359
Number of contracts in repossession
All contracts 3,100 2,899
Contracts originated by VMF 2,366 2,443
Contracts acquired from other institutions 734 456
Total number of contracts in repossession
as a percentage of total contracts 2.02% 2.09%
COMMUNITIES. Within the Communities segment revenues, net sales increased 86%
to $14 million, the average home selling price increased 4%, and 79% more homes
were sold. Communities rental income rose 5% as segment operating income
increased 27% to $4 million.
Three Months Ended
September 30, %
2002 2001 Change
-------- -------- -------
Dollar sales (in thousands) $14,440 $ 7,755 86.2%
Number of communities (average) 83 81 1.9%
Dollar sales per community (in thousands) $ 175 $ 96 82.8%
Average price of home $34,545 $33,283 3.8%
New homes sold 225 152 48.0%
Previously-owned homes sold 193 81 138.3%
LIQUIDITY AND CAPITAL RESOURCES:
Cash and cash equivalents at September 30, 2002, were $168 million as compared
to $84 million at June 30, 2002. The Company anticipates meeting cash
requirements with cash flow from operations, revolving credit lines, a
commercial paper sales facility, a participation facility, senior notes, and
sales of installment contract and mortgage loan receivables and GNMA
certificates.
Cash used in operating activities was $17 million for the three months ending
September 30, 2002, as compared to $56 million being provided from operations
for the same period last year. The Company
12
provided $132 million from investing activities, primarily from the sales of
acquired contract installment receivables, as compared to $55 million provided
by investing activities last year. In addition, $30 million in cash was used
for financing activities, mostly for repurchase of common stock, as compared to
$65 million being used in the same period last year.
The Company's debt to capital ratio was 7% at September 30, 2002. Short-term
debt available consists of $165 million committed and $71 million uncommitted
lines of credit. These lines of credit do not require collateral and are priced
in relation to LIBOR. The committed credit lines are guaranteed by all
significant subsidiaries of the Company and are governed by various financial
covenants that require maintenance of certain financial ratios. The Company had
debt outstanding of $92 million and $93 million at September 30, 2002 and June
30, 2002, respectively.
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 that require
maintenance of certain financial ratios. At September 30, 2002, the Company was
in compliance with those financial covenants, as required.
A $300 million one-year sales facility is available of which $150 million is
committed. This facility was not utilized at September 30, 2002. In addition,
a committed one-year $150 million participation facility is also available to
facilitate the future sale of manufactured housing contracts. This
participation facility was not utilized at September 30, 2002. In accordance
with the agreements of the sales facility, utilization of any unfunded
commitment is permitted as long as criteria, that include credit rating,
financial covenants, and performance triggers, are met. The Company owns its
inventory; therefore, no floorplanning arrangements are necessary.
The following table summarizes the Company's significant contractual obligations
and other contingencies as of September 30, 2002:
($ - in thousands)
Contractual Obligations (1) Payments due by period
- ------------------------------------------------------------------------------------------------------------
Total FY03 FY04 FY05 FY06 FY07 Thereafter
---------------------------------------------------------------------------------
Debt obligations $ 92,136 $ 1,321 $ 75,325 $ 134 $ 35 $ - $ 15,321
Capital leases $ 434 $ 219 $ 215 $ - $ - $ - $ -
Operating leases $ 9,935 $ 2,970 $ 2,591 $ 1,741 $ 1,152 $ 662 $ 819
Other Contingencies (2) Amount of contingency expiration per period
- ------------------------------------------------------------------------------------------------------------
Total FY03 FY04 FY05 FY06 FY07 Thereafter
---------------------------------------------------------------------------------
Letters of credit $127,697 $127,697 $ - $ - $ - $ - $ -
Guarantees $493,829 $ 660 $ 3,405 $ 11,439 $ 19,155 $ 39,525 $419,645
Repurchase agreements $ 58,993 $ 50,144 $ 8,849 $ - $ - $ - $ -
(1) Debt obligations consist primarily of $75 million Senior Notes due December 2003, and $15 million tax-exempt bonds
due through 2030. Capital leases represent amounts due on computer-related equipment. Operating leases represent
minimum rental commitments primarily for retail centers in effect on September 30, 2002.
(2) Letters of credit primarily relate to insurance reserves. Guarantees are for subordinate corporate guarantee bonds
relating to asset-backed securitizations and GNMA certificates. The Company believes the probability of having to make
guarantee payments under the terms of the guarantees is remote. The repurchase agreements represent the maximum
potential repurchase obligations in the event of a default by an independent retailer to the institution providing its
floorplan lending. These agreements are customary in the manufactured housing industry, and the Company's losses in the
past have not been significant.
13
Forward Looking Statements
- ----------------------------
This report contains "forward looking statements" within the meaning of the
federal securities laws regarding the business and industry of Clayton Homes,
Inc. (the "Company"). Such forward-looking statements can be identified by the
use of the words "believes," "estimates," "expects," "projects" and words of
similar import and include, without limitation, statements regarding the growth
and financing strategies of the Company, projections of revenues, income,
earnings per share or other financial items, the effective implementation of the
Company's business or regarding trends relating to the manufactured home
industry and various other items. Forward-looking statements involve known and
unknown risks, uncertainties and other factors which may cause the actual
financial condition, results of operations, performance and achievements of the
Company to be materially different from any of the results, performance or
achievements expressed or implied by such forward-looking statements. Such
factors include general economic and business conditions; industry trends;
demographic changes; competition; raw material and labor costs and availability;
import protection and regulation; relationships with customers, distributors or
dealers; changes in the business strategy or development plans of the Company;
the availability, terms and development plans of capital; the availability of
other forms of housing; the availability of consumer credit; general
inflationary pressures; the growing number of dealers and manufacturers
operating in the Company's markets; and government regulation.
Such forward looking statements are based on current expectations, estimates and
projections about the industry and markets in which the Company operates, as
well as management's beliefs and assumptions. Although the Company believes its
current expectations to be based upon reasonable assumptions, there can be no
assurance that such expectations will be attained or that actual results will
not differ materially. The Company undertakes no obligation to publicly update
or revise any forward-looking statement, whether as a result of new information,
future events or otherwise.
CONTROLS AND PROCEDURES
Within the 90 days prior to the filing date of this report, the Company carried
out an evaluation, under the supervision and with the participation of the
Company's management, including the Company's Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant to Exchange Act Rule
13a-14. Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded the Company's disclosure controls and procedures are
effective. There were no significant changes in the company's internal controls
or in other factors that could significantly affect these controls subsequent to
the date of their evaluation.
14
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) Reports on Form 8-K.
Clayton Homes, Inc./Vanderbilt Mortgage & Finance, Inc. Senior Subordinate
Pass-Through Certificates Series 2002B. Filed August 14, 2002.
Clayton Homes, Inc./Vanderbilt Mortgage & Finance, Inc. incorporation of
financial statements of Clayton Homes, Inc. into registration statement file no.
333-57532 pertaining to Senior Subordinate Pass-Through Certificates Series
2002B. Filed August 23, 2002.
Clayton Homes, Inc./Vanderbilt Mortgage & Finance, Inc. Pooling and Servicing
Agreement. Filed September 6, 2002.
Clayton Homes, Inc. Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Filed September 25,
2002.
15
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 13, 2002 /s/ Kevin T. Clayton
------------------- -----------------------
Kevin T. Clayton
Chief Executive Officer and President
(Principal Executive Officer)
Date: November 13, 2002 /s/ John J. Kalec
------------------- -----------------------
John J. Kalec
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
16
(a) CEO Certification
I, Kevin T. Clayton, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Clayton Homes,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 45 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or person performing equivalent functions):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: November 13, 2002
/s/ Kevin T. Clayton
-----------------------
Kevin T. Clayton
Chief Executive Officer, President, and President,
Financial Services
17
(b) CFO Certification
I, John J. Kalec, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Clayton Homes,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 45 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or person performing equivalent functions):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: November 13, 2002
/s/ John J. Kalec
--------------------
John J. Kalec
Executive Vice President and Chief
Financial Officer
18