Palm Harbor Homes, Inc.

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Palm Harbor Homes, Inc.

15303 Dallas Parkway, Suite 800
Addison, Texas 75001
U.S.A.
Telephone: (972) 991-2422
Fax: (972) 991-5949
Web site: http://www.palmharbor.com

Public Company
Incorporated: 1977
Employees: 4,700
Sales: $777.47 million (2000)
Stock Exchanges: NASDAQ
Ticker Symbol: PHHM
NAIC: 321992 Prefabricated Wood Building Manufacturing

Palm Harbor Homes, Inc. is one of the largest producers of manufactured homes in the United States. The company manufactures single and multisection homes at 16 manufacturing facilities, marketing its products under the brand names Palm Harbor, Keystone, Masterpiece, River Bend, and Windsor Homes. Customers choose from more than 150 floor plans, and nearly all—90 percent—customize their homes either structurally or decoratively. Excluding land, the average retail price of a home manufactured by Palm Harbor is $58,000, with a typical home containing between two and five bedrooms, a living room, family room, dining room, kitchen, and two or three bathrooms. Palm Harbor sells its homes through independent retailers and through company-owned retail centers, which display furnished and landscaped homes. The company operates 133 superstores in 17 states. A vertically integrated company, Palm Harbor sells homeowners’ insurance to its customers through a subsidiary, Standard Casualty Company, and offers financing through another subsidiary, CountryPlace Mortgage, Ltd.

Origins

Palm Harbor was founded on the last day of 1977 by a veteran of the manufactured housing industry. Lee Posey had 21 years of experience in the industry when he started Palm Harbor, having spent the previous ten years as president of Redman Industries, Inc., based in Dallas, Texas, one of the country’s largest manufactured housing concerns. When Posey left Redman Industries in 1977, he enjoyed a short reprieve before entering the fray again, this time by starting his own business from scratch. Posey enlisted the help of four colleagues; they pooled their savings and obtained a small loan from a venture capital firm to start Palm Harbor.

With the capital, Posey and his supporters purchased two manufacturing facilities, thus entering the manufactured housing industry just as it was recovering from the recessionary and inflationary economic conditions of the 1970s. Industry-wide sales for the broadly defined mobile-home industry fell to $2.5 billion in 1974 after exceeding $4 billion in 1972. Companies such as Posey’s Redman Industries, which, along with three other manufacturers, controlled 30 percent of the market, were devastated by the downturn, as unit shipments plunged 42 percent. The industry began to recover in 1976, two years before Palm Harbor began operations, presenting manufacturers with market conditions that were, at least in one respect, better than they had been before the downturn. During the mid-1970s, the price of a conventional new home leaped 61 percent, making the far less expensive manufactured home an attractive alternative.

As he established Palm Harbor, Posey could take comfort in the improving conditions, but there were other, perhaps more important, developments underpinning his newest foray into the industry. The mobile-home industry, which first emerged during the 1920s to provide housing to migratory workers, had developed into a multibillion dollar business, spawning subsidiary industry segments such as the manufactured home segment that Palm Harbor occupied. The decisive point in the mobile-home industry’s evolution occurred during the mid-and late 1950s, when manufacturers realized that mobility was not the primary selling point of their products. Instead, affordability swayed consumers to purchase what was marketed as a “home on wheels.” Once they had realized that their business had less to do with the automotive industry and more to do with the construction industry, manufacturers tailored housing designs to match homebuyers’ needs. Manufactured homes such as those made by Palm Harbor were mobile in the sense that sections of the house were transported to the customers’ land, but once constructed on site, the homes were permanently fixed in place, like a conventional home.

During Palm Harbor’s formative years, the company grew by using its profits to fund capital expansion projects. As such, the company expanded through internal means, adding new manufacturing capacity only after the success of existing facilities warranted expansion. Toward this end, the company enjoyed a rousing start to its corporate life. Profits enabled Posey to establish two more manufacturing facilities in 1981, one in Austin, Texas, and another in Plant City, Florida. An additional plant was constructed alongside the Plant City facility in mid-1985, followed by the debut of another manufacturing plant in Boaz, Alabama, in December 1986.

The conclusion of Palm Harbor’s first decade of physical expansion also marked the company’s entry into the retail side of the business. In 1986, Palm Harbor co-founded Newco Homes, Inc., a retail operation in Texas that sold manufactured homes. The move into retail represented the company’s first attempt at developing a synergistic presence in manufactured housing. Ultimately, Posey wanted to control every aspect of the relationship between Palm Harbor and its customers, a goal that he would vigorously pursue during the 1990s. In the interim, Newco served as the testing ground for Palm Harbor’s future in retail, while Posey concentrated on the manufacturing side of his business. Once the manufacturing operations were in order, he began to delve into complementary business areas, creating a highly efficient, vertically integrated manufactured housing concern.

Quality Control Measures Adopted in 1988

As Palm Harbor entered its second decade of business, manufacturers of a different ilk were experimenting with a new management practice and enjoying great success. Total Quality Management (TQM), a program that embraced statistical quality control methods, was credited for significant performance improvements at some of the country’s largest manufacturing operations. Companies such as Ford, Motorola, and General Electric had adopted TQM standards and recorded marked improvements, piquing the interest of all types of manufacturers.

The excitement swirling around TQM carried over into the housing industry, but in that industry in general, it proved difficult to use the system to eliminate the variables that compromised quality. Much of the production work was subcontracted, performed by workers who were beyond the direct control of a single managerial team or one presiding company. Not so at Palm Harbor, where the actual production work took place in a controlled environment. Accordingly, the company began implementing TQM measures in 1988, starting at the two adjacent manufacturing facilities in Plant City, Florida. Through TQM, Posey and his second-in-command, Larry Keener, soon discovered a problem with quality control that was eroding customer satisfaction. In the October 2000 issue of Professional Builder, Keener explained: “We learned that most of the set-up contractors employed by our retailers do a pretty good job on the ‘rough set,’ which is putting the sections together on-site, getting them level, and making sure they are structurally anchored and ‘weathered in.’ But they were doing a very poor job on interior finishing. And that’s the stuff our customers sit and look at every day.”

Posey and Keener focused their efforts on altering the quality control methods covering the final detailing work, a stage in the construction process referred to as “field completions.” It took nearly four years to revamp field completions in Florida and another four years before the entire company had adopted the new quality control methods. Eventually, the company developed a network of factory-trained technicians who performed field completions, but by the time the operations in Florida had conformed to the new standards, Posey was ready to branch out into new areas. In 1992, the company began to vertically integrate its operations, beginning with the decision to develop a full-fledged retail arm to its operations. Based on the experience with Newco, which operated roughly a dozen stores, Posey decided to complement the company’s reliance on independent retailers with a network of wholly owned superstores.

1995 Public Offering Spurs Diversification and Expansion

To help finance Palm Harbor’s diversification into retail, Posey turned to Wall Street, filing with the Securities and Exchange Commission in 1994 for the company’s initial public offering (IPO). At the time of the filing, Palm Harbor ranked as the fourth-largest builder of manufactured homes in the country, supported by 12 manufacturing facilities and 20 company-owned superstores in more than two dozen states. With the proceeds from the IPO, Posey intended to add manufacturing plants in Arizona, Oregon, and Idaho, and to open between 12 and 24 retail centers. The IPO was completed in July 1995, followed by a secondary offering three months later in October, which gave the company more than $20 million for the expansion of its retail and manufacturing operations.

Company Perspectives:

Under the direction of Lee Posey, who has been in the industry since 1956, management’s thrust has been dedicated to assuring that the customer is satisfied with a quality product and that the associates at Palm Harbor Homes feel this is the best job they have ever had. This commitment has worked —as the demand for manufactured housing in the United States soared, Palm Harbor has stayed on the leading edge of innovative design, construction, and marketing while empowering its employees with the tools and responsibility they need to achieve even beyond their own expectations.

The mid-1990s also saw Palm Harbor gain control over additional aspects of the manufactured housing business. In July 1995, concurrent with the company’s debut on the NASDAQ exchange, Palm Harbor began offering installment financing to its customers, providing the service through a subsidiary named CountryPlace Mortgage, Ltd. Less than a year later, in May 1996, the company acquired Standard Casualty Company, an underwriter of property and casualty insurance for owners of manufactured homes. The addition of these two subsidiaries turned Palm Harbor into a full-service operator and added new streams of revenue to a company that was growing at the fastest pace in its history. The manufacturing side of its business was bolstered by the acquisition of a production plant in Georgia in April 1996 that became the company’s 15th manufacturing facility. On the retail front, Palm Harbor opted to purchase all of Newco, making the company a wholly owned subsidiary. In August 1996, the company purchased the 58 percent of Newco it did not already own, giving Palm Harbor full control over Newco’s 19 retail centers.

As Palm Harbor entered the latter half of the 1990s, the manufactured housing market was growing at a record pace. Posey had kept up with the expanding market by greatly increasing the size and scope of Palm Harbor’s capabilities, and the company’s stature had swelled exponentially. In 1992, when management embraced the idea of developing its own retail arm, Palm Harbor sold 4,848 homes. In 1996, after more than doubling its manufacturing capacity, the company sold 12,175 homes, which, increasingly, were sold at company-owned retail centers. Although the company continued to add independent retailers to its distribution network, Posey’s emphasis during the late 1990s was on increasing the number of company-owned superstores.

The last years of the 1990s brought unprecedented growth to Palm Harbor, substantiating the diversification into financing, insurance, and marketing. Palm Harbor’s 16th manufacturing facility, located in Arizona, began shipping houses in August 1997, enabling the company to post record totals for sales, net income, and earnings per share for its 1998 fiscal year. By March 1998, after opening 40 superstores during the previous twelve months, Palm Harbor operated 94 retail centers, which accounted for the majority of the homes the company sold during the year. In 1999, Palm Harbor again achieved record totals in sales, net income, and earnings per share, selling 15,628 homes during the year. The number of the company’s superstores rose to 120, accounting for 10,766 of the homes sold during the year.

The consecutive years of record financial totals ended in 2000, as demand within the manufactured housing market began to slacken. Palm Harbor’s shipments declined for the first time in years, dropping to 14,301. Despite the downturn, the company increased its store count to 133 by the end of its fiscal year, while the number of independent retailers selling Palm Harbor homes dropped from 300 to 200. Looking ahead, Posey and Keener, who was promoted to chief executive officer in 1997, planned to continue opening new stores and further solidify the company’s retail operations. Short-term plans called for the opening of between 15 and 20 new stores in 2001.

Principal Subsidiaries

CountryPlace Mortgage, Ltd.; Standard Casualty Corporation; Palm Harbor Finance Corporation; Palm Harbor G.P., Inc.; Better Homes Systems, Inc.; Palm Harbor Investments, Inc.; Palm Harbor Holding, Inc.; Standard Insurance Agency, Inc.; Palm Harbor Homes I.L.P.; First Home Mortgage Corporation; Palm Harbor Insurance Agency, Inc.; Magic Living, Inc.

Principal Competitors

Champion Enterprises, Inc.; Fleetwood Enterprises, Inc.; Oak-wood Homes Corporation; Schuler Homes, Inc.; M/I Schottenstein Homes, Inc.; Crossmann Communities, Inc.

Key Dates:

1977:: Posey and four associates found Palm Harbor.
1986:: By co-founding Newco Homes, Inc., the company enters the retail segment of the manufactured housing industry.
1988:: Total Quality Management is applied to manufacturing plants in Florida.
1995:: Palm Harbor converts to public ownership.
1996:: Palm Harbor begins offering homeowners’ insurance.
2000:: The number of company-owned retail centers reaches 133.