<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED September 30, 1998
------------------
COMMISSION FILE NUMBER 1-8824
------
CLAYTON HOMES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 62-1671360
- ------------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
5000 Clayton Road
Maryville, Tennessee 37804
- --------------------------------------- ----------
(Address of principal executive offices) (zip code)
423-380-3000
- ----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Shares of common stock $.10 par value, outstanding on September 30, 1998
- -116,321,876.
1
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CLAYTON HOMES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited - in thousands except per share data)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
1998 1997
---- ----
<S> <C> <C>
REVENUES
Net sales $ 247,192 $208,946
Financial services 50,999 41,050
Rental and other income 16,495 12,699
--------- --------
Total revenues 314,686 262,695
--------- --------
COSTS AND EXPENSES
Cost of sales 171,662 143,554
Selling, general and administrative 84,325 70,794
Financial services interest 2,450 602
Provision for credit losses 2,559 1,000
--------- --------
Total expenses 260,996 215,950
--------- --------
OPERATING INCOME 53,690 46,745
Interest income (expense), net/other (993) 1,134
--------- --------
Income before income taxes 52,697 47,879
Provision for income taxes 19,500 18,200
--------- --------
Net income $ 33,197 $ 29,679
========= ========
EARNINGS PER SHARE
Basic $ 0.28 $ 0.25
Diluted $ 0.28 $ 0.25
DIVIDENDS PAID PER SHARE $ 0.02 $ 0.02
AVERAGE SHARES OUTSTANDING
Basic 117,569 118,574
Diluted 118,364 119,347
</TABLE>
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
(unaudited) (audited)
September 30, June 30,
1998 1998
---- ----
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 11,248 $ 1,731
Receivables, net 889,891 837,197
Inventories 149,392 167,113
Property, plant and equipment, net 271,237 261,549
Other assets 203,453 190,167
---------- ----------
Total assets $1,525,221 $1,457,757
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued liabilities $ 115,941 $ 138,557
Debt obligations 355,129 247,591
Other liabilities 184,701 190,590
Shareholders' equity 869,450 881,019
---------- ----------
Total liabilities and shareholders' equity $1,525,221 $1,457,757
========== ==========
</TABLE>
(See accompanying notes to the condensed consolidated financial statements)
2
<PAGE> 3
CLAYTON HOMES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited - in thousands)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 33,197 $ 29,679
Adjustments to reconcile net income to net cash
provided (required) by operating activities:
Depreciation and amortization 4,243 3,430
Gain on sale of installment contract receivables, net of amortization (1,591) (8,684)
Provision for credit losses 2,559 1,000
Deferred income taxes (1,500) (19,358)
Increase in other receivables, net (17,945) (12,649)
Decrease in inventories 17,721 5,638
Increase (decrease) in accounts payable, accrued liabilities, and other (34,828) 3,003
--------- ---------
Cash provided by operations 1,856 2,059
Origination of installment contract receivables (238,929) (173,274)
Proceeds from sales of originated installment contract receivables 197,489 174,629
Principal collected on originated installment contract receivables 5,500 3,365
--------- ---------
Net cash provided (required) by operating activities (34,084) 6,779
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of installment contract receivables (57,336) (75,096)
Proceeds from sales of acquired installment contract receivables 55,606 71,926
Principal collected on acquired installment contract receivables 1,953 1,730
Acquisition of property, plant and equipment, net (13,931) (7,135)
Increase in restricted cash and investments (5,463) (12,143)
--------- ---------
Net cash used in investing activities (19,171) (20,718)
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends (2,386) (2,400)
Net borrowings on credit facilities 103,377 --
Proceeds from (repayment of) long-term debt 4,161 (1,568)
Issuance of stock for incentive plans and other 848 1,534
Repurchase of common stock (43,228) (956)
--------- ---------
Net cash provided by (used in) financing activities 62,772 (3,390)
--------- ---------
Net increase (decrease) in cash and cash equivalents 9,517 (17,329)
Cash and cash equivalents at beginning of period 1,731 89,695
--------- ---------
Cash and cash equivalents at end of period $ 11,248 $ 72,366
========= =========
</TABLE>
(See accompanying notes to the condensed consolidated financial statements)
3
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CLAYTON HOMES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. The condensed consolidated financial statements of Clayton Homes, Inc.
and its subsidiaries (Company) have been prepared by the Company,
without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with
Generally Accepted Accounting Principles have been omitted. The
condensed consolidated financial statements should be read in
conjunction with the financial statements and notes thereto included in
the Company's Annual Report to Shareholders for the year ended June 30,
1998.
The information furnished reflects all adjustments which are necessary
for a fair presentation of the Company's financial position as of
September 30, 1998, the results of its operations and its cash flows
for the three month periods ended September 30, 1998 and 1997. All such
adjustments are of a normal recurring nature.
2. The results of operations for the three months ended September 30, 1998
and 1997 are not necessarily indicative of the results to be expected
for the respective full years.
3. Certain reclassifications have been made to the 1997 financial
statements to conform to the 1998 presentation.
4. Debt obligations at September 30, 1998 and June 30, 1998 are summarized
as follows:
<TABLE>
<CAPTION>
September 30, June 30,
1998 1998
(in thousands) ---- ----
<S> <C> <C>
Lines of credit $331,250 $227,873
Other 23,879 19,718
-------- --------
Total debt obligations $355,129 $247,591
</TABLE>
5. Effective for the quarter ended December 31, 1997, the Company adopted
FASB Statement of Accounting Standards No. 128, Earnings per Share.
The Statement simplifies the standards for computing earnings per
share by replacing the presentation of primary earnings per share with
a presentation of basic earnings per share. Prior years have been
restated to reflect this change. The following reconciliation details
the numerators and denominators used to calculate basic and diluted
earnings per share for the respective periods:
<TABLE>
<CAPTION>
Three Months Ended
September 30,
1998 1997
---- ----
<S> <C> <C>
(in thousands except per share data)
Net income $ 33,197 $ 29,679
Average shares outstanding
Basic 117,569 118,574
Add: common stock equivalents 795 773
-------- --------
Diluted 118,364 119,347
Earnings per share
Basic and diluted $ .28 $ .25
</TABLE>
4
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PART I -- FINANCIAL INFORMATION
ITEM 1. Financial Statements.
See pages 2 through 4.
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
THREE MONTHS ENDED SEPTEMBER 30, 1998:
The following table reflects the percentage changes in retail sales for the
Company's retail and community sales centers and wholesale sales to independent
retailers. It also reflects percentage changes in the average number of
Company-owned retail centers, communities and independent retailers, the average
sales per location, and the average price per home sold in each category.
<TABLE>
<CAPTION>
First Three Months
Fiscal Year 1999 vs 1998
------------------------
<S> <C>
Retail
Dollar sales +26.3%
Number of retail centers +12.1%
Dollar sales per retail center +12.7%
Price of home + 7.9%
Wholesale
Dollar sales +10.4%
Number of independent retailers + 5.1%
Dollar sales per independent retailer + 5.1%
Price of home + 3.5%
Communities
Dollar sales -30.4%
Number of communities + 7.5%
Dollar sales per community -35.2%
Price of home - 4.9%
</TABLE>
Total revenues for the three months ended September 30, 1998, increased 20% to
$315 million, as manufactured housing sales rose 18% to $247 million, financial
services income grew 24% to $51 million and rental and other income increased
30% to $17 million.
Net sales of the Retail group rose 26% to $159 million on an 8% rise in the
average home price, a 12% increase in Company-owned sales centers, and a 4%
increase in the average number of homes sold per sales center.
Net sales of the Manufacturing group increased 10% to $82 million as the number
of homes sold increased 7% to 3,803. The average wholesale price to independent
retailers increased 3% as a result of a shift in product mix towards
multi-section homes.
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Net sales of the Communities group decreased 30% to $6 million as 27% less homes
were sold, while the average home selling price decreased 5%.
Financial services revenues increased 24%. Interest and loan servicing revenues
increased $15 million, and insurance related revenues rose $2 million. Rental
and other income increased 30% on a 29% rise in Communities rental income.
Loans sold through asset-backed securities totaled $244 million, compared to
$227 million during the same period last year.
Financial services interest expense increased to $2 million due to higher
average borrowings. Average debt collateralized by installment contract
receivables dropped 31% to $15 million, while the weighted average interest rate
dropped to 10.39% from 11.15%. The terms of the debt preclude prepayment by the
Company.
Gross profit margins decreased to 30.6% from 31.3% which is attributable to a
shift in mix to multi-section units for manufactured housing.
Selling, general and administrative expenses, as a percent of revenues,
decreased to 26.8% from 26.9% in the prior year period. The provision for credit
losses increased to 1.0% from 0.5% of sales.
The following table represents delinquent installment sales contracts as a
percentage of the total number of installment sales contracts which the Company
services and either owns or for which it is contingently liable. A contract is
considered delinquent if any payment is more than one month past due.
<TABLE>
<CAPTION>
September 30,
1998 1997
---- ----
Total delinquencies as a percentage *Includes Excludes
of contracts outstanding: Access Access
------ -------
<S> <C> <C> <C>
All contracts 3.67% 2.86% 2.23%
Contracts originated by VMF N/A 2.85% 2.15%
Contracts acquired from other institutions 7.13% 2.99% 2.77%
</TABLE>
*In the month of May 1998 the Company purchased $245 million in loans from
Access Financial Lending Corporation (Access) and contracted to service an
additional $267 million - for a total of $512 million in servicing.
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<PAGE> 7
The following table sets forth information related to loan loss/repossession
experience for all installment contract receivables which the Company either
owns or for which it is contingently liable.
<TABLE>
<CAPTION>
Three months Ended
September 30,
1998 1997
---- ----
Net losses as a percentage of average *Includes Excludes
loans outstanding (annualized): Access Access
------ ------
<S> <C> <C> <C>
All contracts 1.2% 1.0% 0.6%
Contracts originated by VMF N/A 0.9% 0.6%
Contracts acquired from other institutions 2.9% 2.3% 0.7%
Number of contracts in repossession:
All contracts 1,848 1,429 1,160
Contracts originated by VMF N/A 1,309 1,060
Contracts acquired from other institutions 539 120 100
Total number of contracts in repossession
as a percentage of total contracts 1.7% 1.4% 1.3%
</TABLE>
*In the month of May 1998 the Company purchased $245 million in loans from
Access Financial Lending Corporation (Access) and contracted to service an
additional $267 million - for a total of $512 million in servicing.
The decrease in inventories as of September 30, 1998, from June 30, 1998, is
explained as follows:
<TABLE>
<CAPTION>
Manufacturing Increase (decrease)
------------- -------------------
<S> <C>
Finished goods $ 2.5
Raw materials (10.9)
Retail
------
Decrease in inventory levels at 273
Company-owned retail centers at
June 30, 1998 (13.1)
Inventory to stock nine
new Company-owned retail centers 2.9
Communities
-----------
Total of all communities .9
-------
$ (17.7)
=======
</TABLE>
On September 30, 1998, the order backlog for the Manufacturing group (consisting
of Company-owned and independent retailer orders) increased to $54 million, as
compared to $44 million for the same period last year.
7
<PAGE> 8
Liquidity and Capital Resources
Cash at September 30, 1998, was $11.2 million as compared to $1.7 million at
June 30, 1998. The Company anticipates meeting cash requirements with cash flow
from operations, revolving credit lines, and sales of installment contract and
mortgage loan receivables and GNMA certificates.
The Company has committed and uncommitted lines of credit totaling $350 million
and $32.5 million for working capital needs of which $320 million and $11.3
million, respectively, were outstanding at September 30, 1998. These lines of
credit do not require collateral and are priced on LIBOR plus rates ranging from
0.10% to 0.45%. The committed credit lines are guaranteed by all material
subsidiaries of the Company and are governed by various financial covenants
which require maintenance of certain financial ratios.
Subsequent to September 30, 1998 the Company entered into short-term, committed
lines of credit for $205 million, primarily to facilitate the stock repurchase
program and the purchase, origination and warehousing of manufactured housing
loan portfolios. These lines of credit do not require collateral, are not
guaranteed and have no financial covenants.
Year 2000
The Company has developed a plan to address potential disruptions to normal
business activities related to the next millennium. Areas addressed by the plan
include information systems (hardware and software), non-information systems,
embedded chips, and supply chain continuance. Currently, the Company has
completed the awareness and assessment stages of the project and all business
units are in various stages of renovation, validation, and implementation of
solutions. Contingency planning for critical processes for each business unit is
scheduled to begin third quarter of fiscal 1999 and be completed by end of
fiscal year 1999. A Year 2000 Steering Committee has been established and a
project leader has been assigned to oversee the process and report on a weekly
basis. The steering committee is chaired by the President of the Company.
Information systems, consisting of hardware and software, are being modified or
replaced to ensure Year 2000 compliance. The Company's hardware consists of a
mainframe, networks, and personal computers. Most hardware is currently
compliant or will be by the end of calendar year 1998. Many of the Company's
critical software systems, such as the General Ledger, Accounts Payable,
Payroll, Human Resources, and Credit Application Tracking systems have been
replaced by Year 2000 compliant packages. The remediation process for Financial
Services and other in-house, custom written software is expected to be completed
by the end of fiscal 1999. The Company plans to test each of these software
systems using a standardized testing methodology which will include millennium
testing, millennium leap year testing, and cross over year testing.
Non-information systems at corporate such as HVAC, elevator, phone system,
security systems, vaults, and computer rooms are Year 2000 compliant as a direct
result of building a new Corporate office. Similar equipment at field locations
are not dependent on embedded chip technologies and are not considered an area
of material exposure.
The Company has completed its surveying of major suppliers and vendors of raw
materials for Year 2000 compliance. The Company is not directly dependent on
electronic data interchange (EDI) for the purchase of raw materials, though some
of the Company's suppliers may be. Moreover, the bulk of raw materials (mostly
lumber) are readily available from other suppliers. Possible interruptions in
the supply
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<PAGE> 9
chain can be circumvented by purchasing raw materials from an alternate local
supplier. Responses from the Company's surveys provide assurance that our
critical suppliers, including Financial Services providers, plan to be compliant
by the middle of 1999.
The costs associated with Year 2000 compliance are not expected to exceed
$500,000 or to have a material impact on the Company's financial position,
results of operations, or cash flows in future periods. Most of the hardware,
software, and non-information system replacements have been due to growth of the
Company and Year 2000 compliance is a byproduct of the replacement systems. The
custom written software is addressed by the in-house programming staff and
contract programming services. Most costs directly associated with Year 2000
compliance will be incurred during fiscal 1999.
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could adversely affect the Company's results of
operations, liquidity and financial condition. The Company believes that the
risk of failure to the Housing and Communities business units are not material
due to the low-technology nature of those businesses and manual processes are in
use for backup procedures now. Due to the general uncertainty inherent in the
Year 2000 problem, resulting in part from the uncertainty of the Year 2000
readiness of third-party suppliers and customers, the Company is unable to
determine at this time whether the consequences of Year 2000 failures could have
a material impact on the Company's results of operations, liquidity or financial
condition. The Year 2000 Project is expected to significantly reduce the
Company's level of uncertainty about the Year 2000 problem and, in particular,
about the Year 2000 compliance and readiness of its critical suppliers and
financial services providers. The Company believes that, with the implementation
of new business systems and completion of the Project as scheduled, the exposure
to significant interruptions of normal operations should be reduced.
New Accounting Pronouncements
During fiscal 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 131 (SFAS No. 131), Disclosures
About Segments of an Enterprise and Related Information. SFAS 131 requires new
disclosures of segment information in a company's financial statements and is
effective for fiscal years beginning after December 15, 1997. These statements
will be effective for the Company in fiscal 1999. Adoption of these statements
will not impact the Company's consolidated financial position, results of
operations, or cash flows.
On June 15, 1998, the FASB issued SFAS No. 133, Accounting for Derivative and
Financial Instruments and Hedging Activities. SFAS 133 establishes a new model
for accounting for derivatives and hedging activities based on these fundamental
principles: i) derivatives represent assets and liabilities that should be
recognized at fair value on the balance sheet; ii) derivative gains and losses
do not represent liabilities or assets and therefore, should not be reported on
the balance sheet as deferred credits or deferred debits; and iii) special hedge
accounting should be provided only for transactions that meet certain specified
criteria, which include a requirement that the change in fair value of the
derivative be highly effective in offsetting the change in the fair value or
cash flows of the hedged item. This statement is effective for fiscal years
beginning after June 15, 1999 and is not expected to have a material effect on
the Company's financial position or results of operations.
Additionally in October 1998, the FASB issued SFAS 134, Accounting for
Mortgaged-Backed Securities Retained after the Securitization of Loans Held for
Sale by a Mortgage Banking Enterprise. SFAS 134 requires that after an entity
that is engaged in mortgage banking activities has securitized mortgage loans
that are held for sale, it must classify the resulting retained mortgage-backed
securities
9
<PAGE> 10
or other retained interests based on its ability and intent to sell or hold
those investments. The Company is currently assessing the effect, if any, on its
financial statements of implementing SFAS 134. SFAS 134 is effective for the
first fiscal quarter beginning after December 15, 1998.
Forward Looking Statements
Certain statements in this quarterly report are forward looking as defined in
the Private Securities Litigation Reform Law. These statements involve certain
risks and uncertainties that may cause actual results to differ materially from
expectations as of the date of this report. These risks fall generally within
three broad categories consisting of industry factors, management expertise, and
government policy and economic conditions. Industry factors include such matters
as potential periodic inventory adjustments by both captive and independent
retailers, general or seasonal weather conditions affecting sales and revenues,
catastrophic events impacting insurance reserves, cost of labor and/or raw
materials and industry consolidation trends creating fewer, but stronger
competitors capable of sustaining competitive pricing pressures.
Management expertise is affected by management's overall ability to anticipate
and meet consumer preferences, maintain successful marketing programs, continue
quality manufacturing output, keep a strong cost management oversight, meet the
Year 2000 compliance plan, and project stable gain on sale accounting
assumptions. Lastly, management has the least control over government policy and
economic conditions such as prevailing interest rates, government monetary
policy, stable regulation of manufacturing standards, consumer confidence,
favorable trade policies, and general prevailing economic and employment
conditions.
10
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PART II -- OTHER INFORMATION
ITEM 1 - There were no reportable events for Item 1 through Item 5.
ITEM 6 - Exhibits and Reports for Form 8-K.
(a) 27. Financial Data Schedule (SEC use only)
(b) Reports on Form 8-K.
Clayton Homes, Inc./Vanderbilt Mortgage & Finance, Inc. Senior
Subordinate Pass-Through Certificates Series 1998C.
Filed August 14, 1998.
11
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CLAYTON HOMES, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CLAYTON HOMES, INC.
(Registrant)
Date: November 12, 1998 /s/ Kevin T. Clayton
----------------- ----------------------------------------
Kevin T. Clayton
President and Chief Operating Officer
Date: November 12, 1998 /s/ Amber W. Krupacs
----------------- ----------------------------------------
Amber W. Krupacs
Vice President, Finance and Secretary
Date: November 12, 1998 /s/ Greg A. Hamilton
----------------- ----------------------------------------
Greg A. Hamilton
Vice President and Controller
12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF CLAYTON HOMES, INC. FOR THE THREE MONTHS ENDED SEPTEMBER
30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 11,248
<SECURITIES> 0
<RECEIVABLES> 918,573
<ALLOWANCES> 28,682
<INVENTORY> 149,392
<CURRENT-ASSETS> 0
<PP&E> 341,571
<DEPRECIATION> 70,334
<TOTAL-ASSETS> 1,525,221
<CURRENT-LIABILITIES> 115,941
<BONDS> 355,129
0
0
<COMMON> 11,632
<OTHER-SE> 857,818
<TOTAL-LIABILITY-AND-EQUITY> 1,525,221
<SALES> 247,192
<TOTAL-REVENUES> 314,686
<CGS> 171,662
<TOTAL-COSTS> 255,987
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 2,559
<INTEREST-EXPENSE> 3,443
<INCOME-PRETAX> 52,697
<INCOME-TAX> 19,500
<INCOME-CONTINUING> 33,197
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 33,197
<EPS-PRIMARY> .28
<EPS-DILUTED> .28
</TABLE>
