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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED December 31, 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 January 31, 2003:
136,110,524.
1
CLAYTON HOMES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited - in thousands except per share data)
Three Months Ended Six Months Ended
December 31, December 31,
2002 2001 2002 2001
--------- -------- --------- ---------
REVENUES
Net sales $214,924 $207,753 $436,145 $435,256
Financial services 66,721 70,631 134,400 121,957
Rental and other income 18,307 18,436 36,341 35,977
--------- -------- --------- ---------
Total revenues 299,952 296,820 606,886 593,190
--------- -------- --------- ---------
COSTS AND EXPENSES
Cost of sales 140,726 135,425 285,459 284,524
Selling, general and administrative 102,864 101,238 204,774 197,400
Financial services interest 32 109 90 236
Provision for credit losses 6,830 6,640 15,900 10,500
--------- -------- --------- ---------
Total expenses 250,452 243,412 506,223 492,660
--------- -------- --------- ---------
OPERATING INCOME 49,500 53,408 100,663 100,530
Interest income (expense), net and other (911) - (5,053) (5,002)
--------- -------- --------- ---------
Income before income taxes 48,589 53,408 95,610 95,528
Provision for income taxes 18,000 19,700 35,400 35,300
--------- -------- --------- ---------
Net income $ 30,589 $ 33,708 $ 60,210 $ 60,228
========= ======== ========= =========
NET INCOME PER COMMON SHARE
Basic $ 0.22 $ 0.25 $ 0.44 $ 0.44
Diluted 0.22 0.24 0.44 0.43
AVERAGE SHARES OUTSTANDING
Basic 135,994 137,391 136,308 137,711
Diluted 136,404 138,438 136,816 138,785
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
December 31, June 30,
2002 2002
------------- ----------
ASSETS
Cash and cash equivalents $ 90,708 $ 83,729
Trade receivables 6,333 9,308
Inventory finance receivables 136,448 43,859
Other receivables, net 564,004 744,074
Residual interests in installment contract receivables 191,159 181,344
Inventories 202,655 189,976
Property, plant and equipment, net 309,463 310,764
Other assets 287,419 265,349
------------- ----------
Total assets $1,788,189 $1,828,403
============= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued liabilities $ 93,607 $ 139,308
Debt obligations 91,359 92,912
Other liabilities 307,396 334,226
------------- ----------
Total liabilities 492,362 566,446
SHAREHOLDERS' EQUITY
Accumulated other comprehensive income 8,085 7,818
Other shareholders' equity 1,287,742 1,254,139
------------- ----------
Total shareholders' equity 1,295,827 1,261,957
------------- ----------
Total liabilities and shareholders' equity $1,788,189 $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)
Six Months Ended
December 31,
2002 2001
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 60,210 $ 60,228
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization 10,029 9,489
Amortization associated with sale of installment contract receivables 6,706 22,525
Gain on sale of installment contract receivables (12,835) (35,510)
Income accretion from residual interests in installment contract receivables (10,424) -
Provision for credit losses 15,900 10,500
Deferred income taxes (8,344) (3,027)
Increase in other receivables, net (44,341) (32,808)
Decrease (increase) in inventories (12,679) 5,222
Decrease in accounts payable, accrued liabilities, and increase in other assets (102,302) (26,308)
---------- ----------
Cash provided by (used in) operations (98,080) 10,311
Origination of installment contract receivables (459,040) (436,279)
Proceeds from sales of originated installment contract receivables 660,802 670,374
Principal collected on originated installment contract receivables 30,183 23,430
---------- ----------
Net cash provided by operating activities 133,865 267,836
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of installment contract receivables (296,170) (885,451)
Proceeds from sales of acquired installment contract receivables 179,502 643,902
Principal collected on acquired installment contract receivables 27,737 32,539
Proceeds from residual interests in installment contract receivables 3,096 -
Acquisition of property, plant and equipment (8,728) (9,552)
Decrease (increase) in restricted cash 21,154 (3,888)
---------- ----------
Net cash used in investing activities (73,409) (222,450)
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of debt obligations (1,553) (47,370)
Decrease in cash in excess of bank balances (25,317) (14,648)
Issuance of stock for incentive plans and other 4,257 3,516
Repurchase of common stock (30,864) (9,637)
---------- ----------
Net cash used in financing activities (53,477) (68,139)
---------- ----------
Net increase in cash and cash equivalents 6,979 (22,753)
Cash and cash equivalents at beginning of period 83,729 47,763
---------- ----------
Cash and cash equivalents at end of period $ 90,708 $ 25,010
========== ==========
(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 principles 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 December 31, 2002, and
the results of its operations and its cash flows for the three and six month
periods ended December 31, 2002 and 2001. All such adjustments are of a normal
recurring nature. The results of operations for the three and six months ended
December 31, 2002, are not necessarily indicative of the results to be expected
for the full year ending June 30, 2003.
2. The overall change in inventories as of December 31, 2002, from June 30,
2002, was as follows:
($ in thousands) December 31, 2002 June 30, 2002 Increase (decrease)
------------------ -------------- --------------------
Manufacturing
- -------------
Finished goods $ 3,858 $ 1,027 $ 2,831
Raw materials 16,823 16,850 (27)
Retail
- ------
Inventory levels at Company-
owned retail centers 163,918 156,228 7,690
Communities
- ------------
Inventory levels at Company-
owned communities 18,056 15,871 2,185
------------------ -------------- --------------------
$202,655 $189,976 $ 12,679
------------------ -------------- --------------------
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. During the six months ended December 31, 2002, there was a $6.9
million ($4.3 million after tax) increase in the excess of the estimated 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.
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 Six Months Ended
December 31, December 31,
2002 2001 2002 2001
-------- -------- -------- --------
Beginning balance $ 9,628 $11,023 $ 7,818 $ 8,949
Unrealized gains (losses) on securities
available-for-sale, net of tax (4,183) (1,230) (4,423) (277)
Unrealized gains (losses) on residual interests, net of tax 2,640 978 4,320 2,099
Reclassification of realized losses on residual interests
included in net income, net of tax - - 370 -
-------- -------- -------- --------
Ending balance $ 8,085 $10,771 $ 8,085 $10,771
======== ======== ======== ========
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 six month period ending December 31, 2002
and 2001, were:
For the quarter ended For the quarter ended
Dec. 31, 2002 Dec. 31, 2001 Sept. 30, 2002 Sept. 30, 2001
-------------- -------------- --------------- ---------------
Prepayment speed (multiple of the manufactured
housing prepayment model) 300% 300% 310% 300%
Constant prepayment rate (CPR) 17.08% 17.93% 17.64% 18.42%
Weighted average life in years 4.61 4.48 4.36 4.52
Expected credit losses 2.19% 2.47% 2.74% 1.98%
Residual cash flow discount rate 15.75% 15.75% 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 for
the valuation at December 31, 2002:
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%
Note: The discount rate is reflective of a servicing liability which is
discounted at the risk-free rate.
5
CLAYTON HOMES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
5. The following tables reconcile the numerators and denominators used
to calculate basic and diluted earnings per share for the respective periods:
Three Months Ended Six Months Ended
December 31, December 31,
(in thousands except per share data) 2002 2001 2002 2001
-------- -------- -------- --------
Net income $ 30,589 $ 33,708 $ 60,210 $ 60,228
Average shares outstanding
Basic 135,994 137,391 136,308 137,711
Add: common stock equivalents (1) 410 1,047 508 1,074
--------- -------- -------- --------
Diluted 136,404 138,438 136,816 138,785
Net income per common share
Basic $ 0.22 $ 0.25 $ 0.44 $ 0.44
Diluted $ 0.22 $ 0.24 $ 0.44 $ 0.43
(1) Common stock equivalents are principally stock options. Stock options to purchase
3,035,889 and 219,000 shares of common stock for the three months ended December 31,
2002, and 2001, respectively, and stock options to purchase 2,226,659 and 218,212
shares of common stock for the six month periods ending December 31, 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 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. The Company does not presently anticipate any of the exit or disposal
activities so the provisions of this statement will not have a material impact
on the Company's reported results of operations, financial positions, or cash
flows.
In November 2002, the FASB issued Interpretation No. 45 (FIN 45), Guarantor's
Accounting and Disclosure requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others. FIN 45 elaborates on the disclosures to
be made by a guarantor in its interim and annual financial statements about its
obligations under certain guarantees that it has issued. It also requires the
guarantor to recognize, at the inception of the guarantee, a liability for the
fair value of obligations undertaken in issuing the guarantee. The disclosure
requirements are effective for quarters ending after December 15, 2002 and the
liability recognition is in effect for guarantees initiated after December 31,
2002. The Company has historically provided limited guarantees on certain
certificates offered in conjunction with installment contract securitizations
for which it is issuer. These securitizations have been accounted for in
accordance with SFAS 140, and accordingly, the fair value of the guarantee has
been considered when recording gain on sale. Consequently, 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.
6
CLAYTON HOMES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
In December 2002, the FASB issued Statement No. 148 (SFAS 148), Accounting for
Stock-Based Compensation-Transition and Disclosure-an amendment of FASB
Statement No. 123. This Statement amends FASB Statement No. 123, Accounting for
Stock-Based Compensation, to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, this Statement amends the disclosure
requirements of Statement 123 to require prominent disclosures in both annual
and interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results. The
Company will continue to follow the intrinsic value-based method in accounting
for its stock option plans. Accordingly, the Company does not anticipate that
the provisions of this statement will have a material impact on the 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 and six-month periods ended December 31, 2002 and 2001:
Three Months Ended Six Months Ended
December 31, December 31,
(in thousands) 2002 2001 2002 2001
------------ ------------ ------------ ------------
REVENUES
Retail $ 177,564 $ 162,028 $ 352,758 $ 337,425
Manufacturing 127,160 134,370 253,531 265,889
Financial Services 54,120 59,023 109,706 98,972
Communities 23,657 20,768 51,660 41,193
Intersegment sales (82,549) (79,369) (160,769) (150,289)
------------ ------------ ------------ ------------
Total revenues $ 299,952 $ 296,820 $ 606,886 $ 593,190
============ ============ ============ ============
INCOME FROM OPERATIONS
Retail $ 4,895 $ 5,681 $ 9,761 $ 13,816
Manufacturing 10,409 12,104 20,798 24,255
Financial Services 35,457 37,650 71,500 63,494
Communities 3,145 2,163 6,730 4,993
Eliminations/Other (4,406) (4,190) (8,126) (6,028)
------------ ------------ ------------ ------------
Total income from operations $ 49,500 $ 53,408 $ 100,663 $ 100,530
============ ============ ============ ============
CAPITAL EXPENDITURES
Retail $ 453 $ 958 $ 1,713 $ 2,241
Manufacturing 1,804 1,723 3,940 2,621
Financial Services 133 - 217 80
Communities 774 2,590 1,030 3,936
Eliminations/Other 1,336 134 1,828 674
------------ ------------ ------------ ------------
Total capital expenditures $ 4,500 $ 5,405 $ 8,728 $ 9,552
============ ============ ============ ============
As of December 31, As of June 30,
2002 2002
------------ ------------
IDENTIFIABLE ASSETS
Retail $ 281,162 $ 271,421
Manufacturing 80,592 79,102
Financial Services 1,130,192 1,210,460
Communities 190,257 191,147
Eliminations/Other 105,986 76,273
------------ ------------
Total identifiable assets $1,788,189 $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 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.
SIX MONTHS ENDED DECEMBER 31, 2002:
Total revenues for the six months ended December 31, 2002, increased 2% to $607
million from the same period in 2001, which consisted of a slight increase in
manufactured housing sales to $436 million, a 10% increase in financial services
revenue to $134 million and a 1% increase in rental and other income to $36
million. Total units sold declined 8% to 11,722 from 12,804 in the prior year
period as total floors shipped decreased 8% to 17,769 from 19,229 in the prior
year period.
Gross profit margins on net sales decreased slightly to 34.5% from 34.6%, while
selling, general and administrative expenses, as a percent of total revenues,
increased to 33.7% from 33.3% 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
decreased to 16.6% of total revenues in the six month period from 16.9% in 2001.
Interest expense (net of interest income) increased slightly to $5.1 million for
the six month period ending December 31, 2002, as compared to $5.0 million net
expense in the same period last year. The net expense
10
was primarily attributable to overall declining interest rates during the six
month period which had a negative impact on the value of the Company's interest
rate swaps. During the six month period ended December 31, 2002, there was an
unfavorable mark-to-market adjustment of $3.9 million relating to the swaps. In
the comparable period last year, there was a $3.2 million mark-to-market
unfavorable swap adjustment.
RETAIL. Within the Retail segment revenues, the group experienced a 5% increase
in net sales to $318 million, as the average home price increased 11%, the
average number of homes sold per sales center decreased 3%, and the total number
of homes sold declined 5% to 7,452. Same store dollar sales increased 5% for
the six month period.
Six Months Ended
December 31, %
2002 2001 Change
-------- -------- -------
Dollar sales (in thousands) $318,226 $303,361 4.9%
Average number of retail centers 289 295 -2.0%
Dollar sales per retail center (in thousands) $ 1,103 $ 1,030 7.1%
Average price of home $ 42,703 $ 38,532 10.8%
New homes sold 6,377 6,328 0.8%
Previously-owned homes sold 1,075 1,545 -30.4%
Percentage single-section/multi-section mix (new only) 45/55 46/54
MANUFACTURING. Within the Manufacturing segment revenues, the group experienced
a 20% decline to $93 million in net sales to independent retailers and a 20%
decrease in the number of homes sold to 3,569. This decline is primarily due to
more restrictive credit underwriting applied to home-only transactions.
However, the average number of independent retailers increased slightly to 612.
Manufacturing segment operating income decreased $3 million to $21 million as
compared to the prior year, as capacity utilization decreased to 58% versus 62%
for the same period last year.
Six Months Ended
December 31, %
2002 2001 Change
------- -------- -------
Wholesale dollar sales (in thousands) $93,139 $116,044 -19.7%
Number of plants operating 20 20 -
Number of independent retailers (average) 612 606 0.9%
Dollar sales per independent retailer (in thousands) 152 191 -20.5%
Average price of home $26,097 $ 26,060 0.1%
Homes sold to independent retailers 3,569 4,453 -19.9%
Percentage single-section/multi-section mix 39/61 40/60
FINANCIAL SERVICES. Revenues for the Financial Services segment decreased $11
million. Insurance related revenues rose $3 million. Originations of $439
million and acquisitions of $284 million were completed during the quarter,
bringing the total serviced portfolio to $5.1 billion. Inventory finance
receivables increased $93 million to $136 million. Loans sold through
asset-backed securities totaled $849 million, compared to $815 million during
the same period last year, and delinquency on the originated portfolio increased
6 basis points to 3.43%. Overall delinquency, including the serviced portfolio
and the recent portfolio purchases, increased from 2.84% in June 2002 to 3.89%
in December 2002, but declined 34 basis points from December last year. Total
Financial Services operating income increased 13% to $72 million.
11
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.
Six months ended
December 31,
2002 2001
------- -------
Net losses as a percentage of average loans outstanding (annualized)
All contracts 2.4% 2.0%
Contracts originated by VMF 2.2% 2.0%
Contracts acquired from other institutions 3.4% 1.9%
Loans Serviced (in thousands)
Originated and purchased loans serviced $4,995 $4,682
Master servicing contracts 146 173
------- -------
Total $5,141 $4,855
======= =======
Number of contracts in repossession
Contracts originated by VMF 2,676 2,420
Contracts acquired from other institutions 739 510
All contracts 3,415 2,930
Total number of contracts in repossession as a percentage of total contracts 2.1% 1.9%
COMMUNITIES. Within the Communities segment revenues, net sales increased 56%
to $25 million, the average home selling price increased 7%, and 47% more homes
were sold. Communities rental income rose 5% as segment operating income
increased 35% to $7 million.
Six Months Ended
December 31, %
2002 2001 Change
------- ------- -------
Dollar sales (in thousands) $24,780 $15,851 56.3%
Number of communities (average) 83 81 1.9%
Dollar sales per community (in thousands) 300 196 53.5%
Average price of home $35,350 $33,161 6.6%
New homes sold 391 308 26.9%
Previously-owned homes sold 310 170 82.4%
THREE MONTHS ENDED DECEMBER 31, 2002:
Total revenues for the three months ended December 31, 2002, increased 1% to
$300 million from the same period in 2001, which consisted of a 3% increase in
manufactured housing sales to $215 million, a 6% decrease in financial services
revenues to $67 million and a 1% decrease in rental and other income to $18
million. Total units sold declined 8% to 5,630 from 6,120 in the prior year
period as total floors shipped decreased 7% to 8,564 from 9,164 in the prior
year period.
Gross profit margins on net sales decreased slightly to 34.5% from 34.8%, while
selling, general and administrative expenses, as a percent of total revenues,
increased to 34.3% from 34.1% 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
decreased to 16.5% of total revenues in the three month period from 18.0% in
2001.
12
Interest expense (net of interest income) increased to $.9 million for the
period ending December 31, 2002, as compared to the same period last year.
During the three month period ended December 31, 2002, there was a favorable
mark-to-market adjustment of $.2 million relating to the swaps. In the
comparable period last year, there was a $.7 million mark-to-market favorable
swap adjustment.
RETAIL. Within the Retail segment revenues, the group experienced an 11%
increase in net sales to $160 million, as the average home price increased 12%,
the average number of homes sold per sales center remained constant, and the
total number of homes sold declined 1% to 3,712. Same store dollar sales
increased 10% for the quarter.
Three Months Ended
December 31, %
2002 2001 Change
-------- -------- -------
Dollar sales (in thousands) $160,080 $144,525 10.8%
Average number of retail centers 290 294 -1.4%
Dollar sales per retail center (in thousands) $ 552 $ 492 12.3%
Average price of home $ 43,125 $ 38,417 12.3%
New homes sold 3,228 3,011 7.2%
Previously-owned homes sold 484 751 -35.6%
Percentage single-section/multi-section mix (new only) 45/55 46/54
MANUFACTURING. Within the Manufacturing segment revenues, the group experienced
a 19% decline to $45 million in net sales to independent retailers and a 23%
decrease in the number of homes sold to 1,635 as the average number of
independent retailers increased 2% to 626. This decline is primarily due to
more restrictive credit underwriting applied to home-only transactions.
Manufacturing segment operating income decreased $2 million to $10 million as
compared to the same quarter last year. Capacity utilization decreased to 57%
versus 62% for the comparable quarter last year.
Three Months Ended
December 31, %
2002 2001 Change
------- ------- -------
Wholesale dollar sales (in thousands) $44,504 $55,132 -19.3%
Number of plants operating 20 20 -
Number of independent retailers (average) 626 611 2.5%
Dollar sales per independent retailer (in thousands) 71 90 -21.2%
Average price of home $27,220 $26,092 4.3%
Homes sold to independent retailers 1,635 2,113 -22.6%
Percentage single-section/multi-section mix 39/61 41/59
FINANCIAL SERVICES. Revenues for the Financial Services segment decreased $5
million, as insurance related revenues rose $2 million. Originations of $228
million and acquisitions of $222 million were completed during the quarter,
bringing the total serviced portfolio to $5.1 billion. Inventory finance
receivables increased $91 million during the quarter bringing the balance to
$136 million. Loans sold through asset-backed securities totaled $392 million,
compared to $415 million during the same period last year, and delinquency on
the originated portfolio increased 6 basis points to 3.43% at the end of 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 3.89% in December, but declined 34 basis points from December
last year. Total Financial Services operating income decreased 6% to $35
million.
13
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
December 31,
2002 2001
----- -----
Net losses as a percentage of average loans outstanding (annualized)
All contracts 2.5% 2.0%
Contracts originated by VMF 2.2% 1.9%
Contracts acquired from other institutions 3.9% 2.4%
COMMUNITIES. Within the Communities segment revenues, net sales increased 28%
to $10 million, the average home selling price increased 11%, and 16% more homes
were sold. Communities rental income rose 5% as segment operating income
increased 45% to $3 million.
Three Months Ended
December 31, %
2002 2001 Change
------- ------- -------
Dollar sales (in thousands) $10,340 $ 8,096 27.7%
Number of communities (average) 83 81 2.5%
Dollar sales per community (in thousands) 125 100 24.6%
Average price of home $36,537 $33,045 10.6%
New homes sold 166 156 6.4%
Previously-owned homes sold 117 89 31.5%
LIQUIDITY AND CAPITAL RESOURCES:
Cash and cash equivalents at December 31, 2002, were $91 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 provided by operating activities was $134 million for the six months ending
December 31, 2002, as compared to $268 million being provided from operations
for the same period last year. The decline was due primarily to the increased
retention associated with securitizations completed in the year, along with
lower spreads and a decrease in accrued liabilities. The Company used $73
million in investing activities, primarily for the acquisition of installment
contract receivables, as compared to $222 million used in investing activities
last year. In addition, $53 million in cash was used in financing activities,
mostly for repurchase of common stock and a reduction of cash in excess of bank
balances, as compared to $68 million being used in the same period last year,
principally to repay debt obligations.
The Company's debt to capital ratio was 7% at December 31, 2002. Short-term debt
available consists of $190 million committed and $36 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 $91 million and $93 million at December 31, 2002 and June 30,
2002, respectively.
14
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 December 31, 2002, the Company was
in compliance with all financial covenants.
A $300 million one-year sales facility is available of which $150 million is
committed. This facility was not utilized at December 31, 2002. In addition, a
committed one-year $150 million participation facility is also available to
facilitate the future sale of manufactured housing contracts. This
participation facility was not utilized at December 31, 2002. In accordance with
the agreements of the sales facility, utilization of any unfunded commitment is
permitted as long as criteria, that include credit rating, financial covenants,
and performance triggers, are met. The Company owns its inventory; therefore,
no floorplanning arrangements are necessary.
The following table summarizes the Company's significant contractual obligations
and other contingencies as of December 31, 2002:
($ in thousands)
Contractual Obligations (1) Payments due by period
-------------------------------------------------------------------------------
Total FY03 FY04 FY05 FY06 FY07 Thereafter
-------------------------------------------------------------------------------
Debt obligations $91,359 $ 545 $75,325 $ 134 $ 35 $ - $ 15,320
Capital leases $ 386 $ 171 $ 215 $ - $ - $ - $ -
Operating leases $ 9,330 $ 1,959 $ 2,697 $ 1,833 $ 1,242 $ 740 $ 859
Other Contingencies (2) Amount of contingency expiration per period
-------------------------------------------------------------------------------
Total FY03 FY04 FY05 FY06 FY07 Thereafter
-------------------------------------------------------------------------------
Letters of credit $139,287 $ 50,952 $88,335 $ - $ - $ - $ -
Guarantees $494,470 $ 6,984 $14,199 $19,125 $22,219 $48,220 $383,723
Repurchase agreements $ 57,914 $ 28,957 $21,718 $ 7,239 $ - $ - $ -
(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 December 31, 2002.
(2) Letters of credit primarily relate to insurance reserves. Guarantees are for subordinate corporate guarantee bonds
relating to asset-backed securitizations and for 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 Companys losses in the past
have not been significant.
15
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 of other forms of housing; the availability of consumer credit;
general inflationary pressures; the availability and terms of capital and
general interest rate risk; 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.
ITEM 3 - Quantitative and Qualitative Disclosures about Market Risk.
----------------------------------------------------------------
There were no material changes during the quarter.
ITEM 4 - Controls and Procedures.
--------------------------
Within the 45 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.
16
PART II - - OTHER INFORMATION
ITEM 1 - There were no reportable events for Item 1 through Item 3.
ITEM 4 - Submission of Matters to a Vote by Security Holders
-----------------------------------------------------------
(a) The Annual Meeting of Stockholders of Clayton Homes, Inc. was held on
October 30, 2002.
(b) The following nominees were elected Directors until the next Annual
Meeting of Stockholders and until their respective successors shall have been
elected and qualified.
James L. Clayton
B. Joe Clayton
Kevin T. Clayton
Dan W. Evins
Wilma H. Jordan
Thomas N. McAdams
C. Warren Neel
(c) The tabulation of votes for each Director was as follows:
Election of Directors For
---------------------- ---------------------
James L. Clayton 112,922,212
B. Joe Clayton 123,050,076
Kevin T. Clayton 113,988,518
Dan W. Evins 123,063,502
Wilma H. Jordan 123,068,573
Thomas N. McAdams 121,643,643
C. Warren Neel 123,055,115
(d) The shareholder proposal to expense options was defeated.
For Against
--- ----------
30,926,824 77,926,517
ITEM 5 - There was no reportable event for 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 2002C. Filed November 21, 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 November 13,
2002.
17
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: February 12, 2003 /s/ Kevin T. Clayton
------------------- -----------------------
Kevin T. Clayton
Chief Executive Officer and President
(Principal Executive Officer)
Date: February 12, 2003 /s/ John J. Kalec
------------------- -----------------------
John J. Kalec
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
18
CERTIFICATIONS
(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: February 12, 2003
/s/ Kevin T. Clayton
-----------------------
Kevin T. Clayton
Chief Executive Officer, President, and President,
Financial Services
19
(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: February 12, 2003
/s/ John J. Kalec
--------------------
John J. Kalec
Executive Vice President and Chief
Financial Officer
20