Palm Harbor Homes, Inc. Reports Second Quarter Fiscal 2010 Results

Palm Harbor Homes, Inc. (NASDAQ: PHHM) today reported financial results for the second quarter and first six months of fiscal 2010 ended September 25, 2009.

Overview

Net sales for the second quarter of fiscal 2010 totaled $74.8 million compared with $110.7 million in the year-earlier period. Palm Harbor reported an operating loss of $6.6 million for the second quarter of fiscal 2010 compared with an operating loss of $4.4 million for the second quarter of fiscal 2009. Net loss for the second quarter of fiscal 2010 totaled $10.4 million, or ($0.45) per share, compared with a net loss of $7.8 million, or ($0.34) per share, a year ago. For the second quarter of fiscal 2009, losses associated with Hurricane Ike incurred by the Company’s insurance company, Standard Casualty, and from weather-related transportation and delivery delays in Texas and the east coast, reduced profitability by approximately $0.10 per share. Excluding these non-recurring items, net loss for the second quarter of fiscal 2009 was ($0.24) per share.

Net sales for the first six months of fiscal 2010 were $157.2 million compared with $240.7 million in the year-earlier period. Net loss for the first half of fiscal 2010 totaled $20.4 million, or ($0.89) per share, compared with a net loss of $8.3 million, or ($0.37) per share, in the first half of fiscal 2009. The results for the first half of fiscal 2009 included a pre-tax gain of $3.8 million, or $0.17 per share, on the repurchase of convertible senior notes. Excluding this gain and the non-recurring items noted above, net loss for the first half of fiscal 2009 was ($0.44) per share.

Improved Operating Efficiencies

Commenting on the results, Larry Keener, chairman and chief executive officer of Palm Harbor Homes, Inc., said, “Our results for the second quarter reflect the ongoing challenges facing the overall housing industry. Revenues have clearly been affected by constrained demand for factory-built housing products resulting from more restrictive financing environment and an over-supply of discounted site-built homes. While our year-over-year revenues declined 32 percent, this trend still compares favorably with the year-to-date overall industry decline of 43.2 percent for HUD-code manufactured housing and a 50.4 percent decline in modular sales.

“With the expected reduction in revenues, we have continued to streamline our operating costs. As a result of our improved manufacturing efficiencies, gross margin for the second fiscal quarter was a solid 24.1 percent, unchanged from the prior year. We have effectively lowered our quarterly selling, general and administrative costs by 21 percent, or an annualized reduction of $26 million, from the same period a year ago. We are now better positioned to sustain a continued downturn and, at the same time, benefit from any market improvement when it occurs. We are encouraged by some modest improvement in store traffic and sales as we begin our third fiscal quarter. However, we believe the primary catalyst for a meaningful improvement in demand for factory-built housing products will depend on a significant change in credit availability. We remain hopeful that congressional mandated expansion of government sponsored lending for factory-built housing will have a further positive impact on business in 2010.

“In light of the current sales environment, we are carefully managing our costs and are pleased, but not satisfied, with the progress we have made in improving our operating efficiencies,” added Keener. “At the same time, we are pursuing innovative ways to both expand our product offering and reach new distribution channels to further drive revenues. We believe the commercial and military markets for modular products represent a new growth opportunity at higher price points than the residential market. We will start production on a $13.5 million military project that will be completed in calendar year 2010 and we will continue to aggressively bid on additional future projects.

Profitable Insurance and Finance Businesses

“Our financial services operations have continued to support our business through this challenging environment. Standard Casualty, our insurance subsidiary, has remained a very consistent performer for the Company with steady growth in policies written and a profitable second quarter. Country Place Mortgage, Palm Harbor’s mortgage lending subsidiary, also remains profitable and its loan portfolio continues to perform significantly better than the national residential delinquency rates reported in the most recent Mortgage Bankers Association National Delinquency Survey. Country Place is focused on building its conforming mortgage business and is well positioned to meet current specialized loan demand as an approved Fannie Mae seller servicer and FHA lender,” added Keener.

Cash Flow Improvement

Kelly Tacke, executive vice president and chief financial officer of Palm Harbor Homes, Inc., commented, “Our top priority for fiscal 2010 is to manage our liquidity with a tight focus on cash generation and cash preservation in every area of our operations. For the first six months of fiscal 2010, we had positive cash flows from operating activities of approximately $13 million. Our balance sheet reflected $17.3 million in cash and cash equivalents at the end of the second fiscal quarter, compared with $12.4 million at the end of fiscal 2009. We remain committed to maintaining a strong balance sheet in light of today’s challenging economic conditions.”

A conference call regarding this release is scheduled for Wednesday, October 28, 2009, at 10:00 a.m. (Eastern Time). Interested parties can access a live simulcast on the Internet at www.PalmHarbor.com or www.earnings.com. A 30-day replay will be available on both websites.

Palm Harbor Homes is one of the nation's leading manufacturers and marketers of multi-section manufactured homes. The Company markets nationwide through vertically integrated operations, encompassing manufacturing, marketing, financing and insurance. For more information on the Company, please visit www.palmharbor.com.

This press release contains projections and other forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. These projections and statements reflect the Company's current views with respect to future events and financial performance. No assurance can be given, however, that these events will occur or that these projections will be achieved and actual results could differ materially from those projected as a result of certain factors. A discussion of these factors is included in the Company's periodic reports filed with the Securities and Exchange Commission.

PALM HARBOR HOMES, INC.
Statements of Operation
(Dollars in thousands, except per share data)
For the second quarter and six months ended September 25, 2009 and September 26, 2008
		Second Quarter Ended								Six Months Ended
		Sept. 25,				Sept. 26,				Sept. 25,				Sept. 26,
		2009				2008(1)				2009				2008(1)
		(Unaudited)								(Unaudited)
Net sales		$	74,797			$	110,716			$	157,218			$	240,737
Cost of sales			56,784				84,081				119,881				182,145
Gross profit			18,013				26,635				37,337				58,592
Selling, general and administrative expenses			24,657				31,084				49,035				62,263
Loss from operations			(6,644	)			(4,449	)			(11,698	)			(3,671	)
Interest expense			(4,054	)			(4,493	)			(9,018	)			(9,372	)
Gain on repurchase of convertible senior notes		-					738			-					3,775
Other income			211				583				439				1,164
Loss before income taxes			(10,487	)			(7,621	)			(20,277	)			(8,104	)
Income tax benefit (expense)			91				(184	)			(97	)			(242	)
Net loss		$	(10,396	)		$	(7,805	)		$	(20,374	)		$	(8,346	)
Loss per common share:
Basic and diluted		$	(0.45	)		$	(0.34	)		$	(0.89	)		$	(0.37	)
Weighted average common shares outstanding:
Basic and diluted			22,875				22,869				22,875				22,860

Condensed Balance Sheets
(Dollars in thousands)
September 25, 2009 and March 27, 2009
		September 25,			March 27,
		2009			2009 (1)
Assets		(Unaudited)
Cash and cash equivalents		$	17,324		$	12,374
Trade accounts receivables			20,543			23,458
Consumer loans receivable, net			184,227			191,597
Inventories			85,948			97,144
Property, plant and equipment, net			33,088			35,937
Other assets			44,403			51,172
Total Assets		$	385,533		$	411,682
Liabilities and Shareholders' Equity
Accounts payable and accrued liabilities		$	69,116		$	64,836
Floor plan payable			44,550			49,401
Convertible debt			49,117			47,939
Warehouse revolving debt			4,471			3,589
Securitized financings			130,969			140,283
Shareholders' equity			87,310			105,634
Total Liabilities and Shareholders' Equity		$	385,533		$	411,682
(1) Included in the Company’s second quarter results for fiscal 2010 and 2009 is the impact of approximately $589,000 and $676,000, respectively, of non-cash interest expense related to the retrospective adoption of the new accounting rules related to convertible debt instruments that may be settled in cash upon conversion. For the year-to-date period for fiscal 2010 and 2009, the impact is approximately $1,178,000 and $1,476,000, respectively. This additional non-cash interest expense represents the amortization of a debt discount recorded against the Company’s convertible debt as required under the new accounting rules, applied retrospectively.

PALM HARBOR HOMES, INC.
Quick Facts
		Second Quarter Ended								Six Months Ended
		Sept. 25,				Sept. 26,				Sept. 25,				Sept. 26,
		2009				2008				2009				2008
FACTORY-BUILT HOUSING:
Company-owned superstores and builder locations:
Beginning			81				87				86				87
Added			-				-				-				-
Closed			(3	)			-				(8	)			-
Ending			78				87				78				87
Factory-built homes sold through:
Company-owned superstores and builder locations			596				828				1,176				1,737
Independent dealers, builders and developers			170				312				319				596
Total factory-built homes sold			766				1,140				1,495				2,333
Factory-built homes sold as:
Single-section			171				189				305				386
Multi-section			431				673				853				1,388
Modular			164				278				337				559
Total factory-built homes sold			766				1,140				1,495				2,333
Commercial buildings sold:
Number of commercial buildings sold			11				5				40				31
Net sales from commercial buildings sold (in 000’s)		$	1,735			$	592			$	9,644			$	9,807
Average sales prices:
Manufactured housing – retail		$	67,000			$	74,000			$	68,000			$	75,000
Manufactured housing – wholesale		$	51,000			$	53,000			$	53,000			$	52,000
Modular housing – consumer		$	168,000			$	171,000			$	168,000			$	172,000
Modular housing – builder and developer		$	73,000			$	67,000			$	74,000			$	73,000
Homes produced			716				1,052				1,372				2,072
Internalization rate (residential manufactured and modular)			75	%			67	%			74	%			68	%
FINANCIAL SERVICES
Loan originations
CPM			81				54				143				171
Insurance penetration:
Warranty			85	%			93	%			88	%			93	%
Physical damage			68	%			69	%			68	%			69	%