1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark one)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
--- THE SECURITIES EXCHANGE ACT OF 1934.
FOR QUARTER ENDED MARCH 31, 2001
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
--- THE SECURITIES EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM TO
------------ ------------
Commission file number 1-9751
CHAMPION ENTERPRISES, INC.
-------------------------------------------------------
(Exact name of registrant as specified in its charter)
MICHIGAN 38-2743168
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2701 Cambridge Court, Suite 300, Auburn Hills, MI 48326
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (248) 340-9090
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.
47,767,136 shares of the registrant's $1.00 par value Common Stock were
outstanding as of April 27, 2001.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
CHAMPION ENTERPRISES, INC.
Consolidated Statements of Operations
(In thousands, except per share amounts)
Unaudited
Three Months Ended
-----------------------
March 31, April 1,
2001 2000
--------- ----------
Net sales $326,312 $535,309
Cost of sales 281,504 451,338
--------- ----------
Gross margin 44,808 83,971
Selling, general and administrative expenses 79,563 74,801
--------- ----------
Operating income (loss) (34,755) 9,170
Interest expense, net 6,428 6,969
--------- ----------
Income (loss) before income taxes (41,183) 2,201
Income taxes (benefits) (15,100) 900
--------- ----------
Net income (loss) $(26,083) $ 1,301
========= ==========
Basic earnings (loss) per share $(0.55) $0.03
========= ==========
Weighted shares for basic EPS 47,496 47,247
========= ==========
Diluted earnings (loss) per share $(0.55) $0.03
========= =========-
Weighted shares for diluted EPS 47,496 47,354
========= ==========
See accompanying Notes to Consolidated Financial Statements.
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CHAMPION ENTERPRISES, INC.
Consolidated Balance Sheets
(In thousands, except par value)
Unaudited
March 31, December 30,
2001 2000
----------- ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 19,029 $ 50,143
Accounts receivable, trade 50,579 31,132
Inventories 211,607 217,765
Deferred taxes and other current assets 89,900 77,493
----------- ------------
Total current assets 371,115 376,533
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PROPERTY AND EQUIPMENT
Cost 311,835 320,873
Less-accumulated depreciation 118,075 113,596
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193,760 207,277
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GOODWILL
Cost 320,570 320,656
Less-accumulated amortization 49,509 46,686
----------- ------------
271,061 273,970
----------- ------------
DEFERRED TAXES AND OTHER ASSETS 80,726 84,276
----------- ------------
Total assets $ 916,662 $ 942,056
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Floor plan payable $ 102,923 $ 114,198
Accounts payable 62,588 43,103
Accrued warranty obligations 47,931 49,304
Accrued volume rebates 42,385 45,552
Accrued compensation and payroll taxes 17,486 19,034
Other current liabilities 72,876 71,662
----------- ------------
Total current liabilities 346,189 342,853
----------- ------------
LONG-TERM LIABILITIES
Long-term debt 225,496 225,634
Notes payable to bank 5,000 -
Deferred portion of purchase price 34,557 39,157
Other long-term liabilities 34,099 37,603
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299,152 302,394
----------- ------------
CONTINGENT LIABILITIES (Note 6)
SHAREHOLDERS' EQUITY
Preferred stock, no par value, 5,000
authorized, none issued - -
Common stock, $1 par value, 120,000
authorized, 47,544 and 47,357 shares issued
and outstanding, respectively 47,544 47,357
Capital in excess of par value 33,700 33,116
Retained earnings 191,567 217,650
Accumulated other comprehensive income (1,490) (1,314)
----------- ------------
Total shareholders' equity 271,321 296,809
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Total liabilities and shareholders' equity $ 916,662 $ 942,056
=========== ============
See accompanying Notes to Consolidated Financial Statements.
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CHAMPION ENTERPRISES, INC.
Consolidated Statements of Cash Flows
(In thousands)
Unaudited
Three Months Ended
-----------------------
March 31, April 1,
2001 2000
--------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(26,083) $ 1,301
--------- ----------
Adjustments to reconcile net income (loss) to net
cash provided by (used for) operating activities:
Depreciation and amortization 9,336 9,728
Refundable income tax (15,100) -
Fixed asset impairment charges 5,500 -
Increase/decrease
Accounts receivable (19,447) (18,284)
Inventories 6,158 4,710
Accounts payable 19,485 46,794
Accrued liabilities 2,148 (10,094)
Net cash charges to independent retailer
bankruptcy reserve - (6,301)
Other, net 3,630 (25)
--------- ---------
Total adjustments 11,710 26,528
--------- ----------
Net cash provided by (used for) operating activities (14,373) 27,829
--------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Deferred and contingent purchase price payments (8,233) (10,165)
Additions to property and equipment (1,416) (4,918)
Investments in and advances to
unconsolidated subsidiaries (914) (3,971)
Proceeds on disposal of fixed assets - 497
--------- ----------
Net cash used for investing activities (10,563) (18,557)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in notes payable to bank, net 5,000 5,000
Decrease in floor plan payable, net (11,275) (422)
Repayment of long-term debt (131) (102)
Common stock issued, net 228 40
Common stock repurchased - (726)
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Net cash provided by (used for) financing activities (6,178) 3,790
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (31,114) 13,062
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 50,143 12,847
--------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 19,029 $ 25,909
========= ==========
ADDITIONAL CASH FLOW INFORMATION:
Cash paid for interest $ 3,701 $ 3,396
Cash paid for income taxes, net $ 319 $ 1,310
See accompanying Notes to Consolidated Financial Statements.
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CHAMPION ENTERPRISES, INC.
Notes to Consolidated Financial Statements
1. The Consolidated Financial Statements are unaudited, but in the opinion
of management include all adjustments necessary for a fair presentation
of the results of the interim period. Financial results of the interim
period are not necessarily indicative of results that may be expected
for any other interim period or for the fiscal year. The balance sheet
as of December 30, 2000 was derived from audited financial statements.
Accumulated other comprehensive income consists of foreign currency
translation adjustments.
Prior year manufacturing segment delivery revenue has been reclassified
to net sales from cost of sales in accordance with the Financial
Accounting Standards Board (FASB) Emerging Issues Task Force No. 00-10
"Accounting for Shipping and Handling Fees and Costs," which was
adopted by the Company in the fourth quarter of 2000.
2. For each of the dates indicated, inventories consisted of the following
(in thousands):
March 31, December 30,
2001 2000
---------- ------------
New and pre-owned manufactured homes $137,356 $143,892
Raw materials and work-in-process 44,870 44,980
Other inventory 29,381 28,893
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$211,607 $217,765
========== ============
3. The income tax provision (benefit) differs from the amount of income
tax determined by applying the applicable U.S. statutory federal income
tax rate to pretax income (loss) as a result of the following
differences (in thousands):
Three Months Ended
---------------------------
March 31, April 1,
2001 2000
--------- ----------
Statutory U.S. tax rate $(14,400) $ 800
Change in rate resulting from:
State taxes, net (1,200) 100
Other 500 -
--------- ----------
Total provision (benefit) $(15,100) $ 900
========= ==========
Effective tax rate 37% 41%
========= ==========
4. The Company has a revolving credit agreement, maturing in May 2003,
with a group of banks for a secured line of credit. The credit facility
was amended on February 13, 2001 to provide more flexible financial
performance covenants and automatically increased to $75 million on
March 1, 2001. The facility may be further increased to $90 million
upon a majority vote of the bank group. The agreement allows for
letters of credit up to $35 million. Availability under the credit
agreement is limited to a borrowing base calculated based on qualifying
assets. For the first quarter of 2001, the calculated borrowing base
averaged $65 million and the March 2001 calculated borrowing base was
$71 million. At the end of March 2001, there were $35 million of
letters of credit and $5 million of borrowings outstanding under the
credit facility.
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5. Reconciliations of segment sales to consolidated sales and segment
EBITA (earnings (loss) before interest, taxes, goodwill amortization
and general corporate expenses) to consolidated operating income (loss)
follow (in thousands):
Three Months Ended
-----------------------
March 31, April 1,
2001 2000
--------- ----------
Net sales
Manufacturing $260,510 $435,802
Retail 108,402 167,507
Less: intercompany (42,600) (68,000)
--------- ---------
Consolidated net sales $326,312 $535,309
========= =========
Operating income (loss)
Manufacturing EBITA (loss) $(10,456) $ 13,098
Retail EBITA (loss) (14,838) 5,255
General corporate expenses (6,582) (5,754)
Goodwill amortization (2,879) (3,429)
--------- ---------
Consolidated operating income (loss) $(34,755) $ 9,170
========= =========
For the quarter ended March 31, 2001, manufacturing EBITA (loss)
includes $2.3 million of non-cash fixed asset impairment charges
related to closed plants, and retail EBITA (loss) includes $3.2 million
of non-cash fixed asset impairment charges and $2.2 million of lease
termination and other costs associated with closures of retail sales
centers. Retail floor plan interest expense not charged to retail EBITA
totaled $2.7 million and $3.4 million for the three months ended March
31, 2001 and April 1, 2000, respectively.
6. As is customary in the manufactured housing industry, the majority of
Champion's manufacturing sales to independent retailers are made in
connection with repurchase agreements with lending institutions that
provide wholesale floor plan financing to the retailers. Pursuant to
these agreements, for a period of either 12 or 15 months from invoice
date of the sale of the homes and upon default by the retailer and
repossession by the financial institution, the Company is obligated to
purchase the related floor plan loans or repurchase the homes from the
lender. The maximum potential repurchase obligation at March 31, 2001
was $360 million, without reduction for the resale value of the homes.
This amount compares to $430 million at the beginning of the year and
$640 million a year ago. Repurchase losses incurred totaled $2.0
million for the quarter ended March 31, 2001 and $0.7 million for the
quarter ended April 1, 2000.
At March 31, 2001 the Company was contingently obligated for additional
purchase price of up to $80 million related to its 1999 and 1998
acquisitions. Management currently believes that payment of none of
this contingent purchase price is reasonably possible.
Champion is contingently obligated for approximately $35 million under
letters of credit and $48 million under surety bonds as of March 31,
2001.
7. During the quarter ended March 31, 2001, Champion closed two
homebuilding facilities and 30 retail sales centers. As a result of
these closings, charges totaling $7.7 million were recorded in selling,
general and administrative expenses for fixed asset impairment charges
and lease termination and other costs. In May 2001, the Company
announced the closing of two additional manufacturing facilities.
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8. Substantially all of the Company's subsidiaries are guarantors of
indebtedness under the $200 million Senior Notes. Separate financial
statements for each guarantor subsidiary are not included in this
filing because each guarantor subsidiary is fully, unconditionally,
jointly and severally liable for the Senior Notes. In addition, the
parent company issuer has no independent assets or operations and the
non-guarantor subsidiaries of the Company, individually or in the
aggregate, are minor in relation to consolidated totals of the Company.
There are no significant restrictions on the ability of the parent
company or any guarantor subsidiary to obtain funds from its
subsidiaries by dividend or loan.
9. In June 1998, the FASB issued Statement of Financial Accounting
Standards (SFAS) No. 133, "Accounting for Derivative Instruments and
Hedging Activities" which was subsequently amended by SFAS Nos. 137 and
138. SFAS 133, as amended, did not have a material impact on the
Company's results of operations, financial position or cash flows, and
did not require the recording of a transition adjustment upon adoption
in January 2001.
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Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
CHAMPION ENTERPRISES, INC.
THREE MONTHS ENDED MARCH 31, 2001 VERSUS THREE MONTHS ENDED APRIL 1, 2000
CONSOLIDATED
(Dollars in millions)
Three Months Ended
------------------
March 31, April 1, %
2001 2000 Change
-------- -------- --------
Net sales
Manufacturing $ 260.5 $ 435.8 (40%)
Retail 108.4 167.5 (35%)
Less: intercompany (42.6) (68.0)
-------- --------
Total net sales $ 326.3 $ 535.3 (39%)
======== ========
Gross margin $ 44.8 $ 84.0 (47%)
SG&A 79.6 74.8 6%
-------- --------
Operating income (loss) $ (34.8) $ 9.2
======== ========
As a percent of sales
Gross margin 13.7% 15.7%
SG&A 24.4% 14.0%
Operating income (loss) (10.7%) 1.7%
Consolidated revenues for the quarter ended March 31, 2001 decreased 39% from
the prior year due to challenging industry conditions, including tightened
consumer credit standards, high consumer repossession levels and higher interest
rates.
Gross margin dollars for the first quarter of 2001 were $39 million less than in
2000, primarily due to the $209 million reduction in consolidated net sales.
Gross margin as a percent of sales in 2001 was impacted by the effects of lower
manufacturing sales volume on manufacturing fixed costs and production
inefficiencies from low volume, partially offset by lower material costs.
Selling, general and administrative expenses ("SG&A") rose in 2001 due to $5.5
million of fixed asset impairment charges and $2.2 million of lease termination
and other costs related to the closing of two homebuilding facilities and 30
retail sales centers. In the first quarter of 2001, lower SG&A from operating
fewer manufacturing facilities and retail sales centers was offset by an
increase in the provision for wholesale repurchase losses of $1.6 million and an
increase of $0.8 million in general corporate expenses.
MANUFACTURING OPERATIONS
Three Months Ended
------------------
March 31, April 1, %
2001 2000 Change
--------- -------- ------
Net sales (in millions) $ 260.5 $ 435.8 (40%)
EBITA (loss) (in millions) $ (10.5) $ 13.1
EBITA margin % (4.0%) 3.0%
Homes sold 8,210 15,351 (47%)
Floors sold 14,696 25,701 (43%)
Multi-section mix 76% 66%
Average home price $30,500 $27,200 12%
Manufacturing facilities at period end 51 59 (14%)
Manufacturing sales volume in the quarter ended March 31, 2001 was affected by
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challenging market conditions. According to data reported by the National
Conference of States on Building Codes and Standards, U.S. industry wholesale
shipments for the first three months of 2001 decreased 40.8% in homes and 37.9%
in floors from the comparable 2000 period. Of the Company's total wholesale
shipments for the quarter, 85% were to independent retailers and 15% were to
company-operated sales centers. Due to market conditions, during the first
quarter of 2001 two manufacturing facilities were closed. In May 2001, we
announced the closing of two additional facilities and may consider other
adjustments to manufacturing capacity in response to industry conditions.
Manufacturing EBITA in the first quarter of 2001 declined $24 million from the
prior year, most of which was due to lower gross margin dollars from the $175
million reduction in manufacturing sales and $2.3 million of fixed asset
impairment charges for closed plants. Also affecting 2001 EBITA were the effects
of low volume on fixed costs, production inefficiencies resulting from low
volume, and an increased provision for wholesale repurchase losses, partially
offset by lower material costs and lower SG&A from operating fewer manufacturing
facilities.
Although dealer orders can be cancelled at anytime without penalty, and unfilled
orders are not necessarily an indication of future business, the Company's
unfilled orders for wholesale housing at March 31, 2001 totaled approximately
$19 million, compared to $15 million at December 30, 2000 and $36 million a year
ago.
RETAIL OPERATIONS
Three Months Ended
------------------
March 31, April 1, %
2001 2000 Change
--------- -------- ------
Net sales (in millions) $ 108.4 $ 167.5 (35%)
EBITA (loss) (in millions) $ (14.8) $ 5.3
EBITA margin % (13.7%) 3.1%
New homes sold 1,824 3,315 (45%)
Pre-owned homes sold 513 906 (43%)
Total homes sold 2,337 4,221 (45%)
% Champion-produced new homes sold 84% 68%
New multi-section mix 69% 58%
Average new home price $55,500 $47,300 17%
Average number of new homes sold
per sales center per month 2.5 3.9 (36%)
Average number of new homes in
inventory per sales center
at period end 18 19 (5%)
Sales centers at period end 230 285 (19%)
Retail sales decreased in 2001 primarily due to challenging industry conditions.
As a result, we closed 30 under performing sales centers during the first
quarter of 2001. Based on data reported by Statistical Surveys, Inc., we believe
that industry retail sales of new homes in the first quarter of 2001 dropped
approximately 30% from prior year levels.
Retail EBITA for the quarter ended March 31, 2001 declined $20 million compared
to the first quarter of 2000. Approximately $12 million of this decline was due
to reduced gross margin from the $59 million reduction in retail sales and $5.4
million was due to sales center closing costs, including $3.2 million of fixed
asset impairment charges. Reduced income from loan origination fees, insurance
and other commissions as a result of lower sales volume was partially offset by
lower SG&A from operating fewer retail sales centers.
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REPURCHASE OBLIGATIONS
The Company enters into repurchase agreements with lending institutions that
provide wholesale floor plan financing to independent retailers. At March 31,
2001 the maximum contingent repurchase obligation was approximately $360
million, without reduction for the resale value of the homes. In the first
quarter of 2001, Champion paid $8.4 million and incurred losses of $2.0 million
for the repurchase of 265 homes resulting from defaults by 21 independent retail
companies. In the first quarter of 2000, the Company incurred losses of $0.7
million for the repurchase of 66 homes from 20 independent retail companies.
LIQUIDITY AND CAPITAL RESOURCES
Cash balances totaled $19 million at March 31, 2001. During the quarter, cash of
$14 million was used for operations, $1 million for capital improvements, $8
million for payments related to 1998 acquisitions, and $1 million for
investments in and advances to unconsolidated subsidiaries. For the three-month
period, $5 million was borrowed on the Company's bank credit facility and $11
million was used to reduce floor plan payable.
Accounts receivable and accounts payable increased during the quarter due to
seasonality and year end levels generally being low due to the holidays and
vacations. Inventories and floor plan payable decreased during the quarter due
to continued efforts to reduce inventories throughout our retail organization in
response to industry conditions. Other current assets increased due to the tax
benefit related to the Company's net operating loss during the quarter.
The Company has a revolving credit agreement, maturing in May 2003, with a group
of banks. On February 13, 2001, the credit facility was amended to provide more
flexible financial performance covenants. The facility automatically increased
to $75 million on March 1, 2001 and may be further increased to $90 million upon
a majority vote of the bank group. The agreement allows for letters of credit up
to $35 million. Availability under the credit agreement is limited to a
borrowing base calculated based on qualifying assets. For the first quarter of
2001, the calculated borrowing base averaged $65 million and the March 2001
calculated borrowing base was $71 million. At the end of March 2001, there were
$35 million of letters of credit and $5 million of borrowings outstanding under
the credit facility. Through March 2001, we were in compliance with the
agreement's financial performance covenants and believe that we will be in
compliance throughout 2001.
Champion plans to spend less than $15 million in 2001 on capital expenditures.
Borrowings may be required during 2001 for capital improvements and to meet
seasonal working capital needs. The Company does not plan to pay cash dividends
in the near term.
During 2000 some of the manufactured housing industry floor plan lenders elected
to exit or reduce their participation in the market. Currently, there are five
primary national floor plan lenders, which finance a substantial portion of
floor plan borrowings of Company-owned and independent retailers. We finance
most of the new home inventory at our Company-owned stores through borrowings
from floor plan lenders, of which Conseco Finance (Conseco) is the primary
lender, with $66 million of borrowings currently outstanding. In March 2001, we
reached an agreement with Conseco to reduce our floor plan borrowings with them
to $60 million by June 30, 2001 and $40 million by September 30, 2001.
Additional reductions of our retail inventories and borrowings from Conseco will
occur upon the liquidation of inventory at the 30 retail sales centers that we
closed during the first quarter of 2001 and through additional planned inventory
reductions.
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We continue to review the most effective means to finance our retail inventories
from a variety of sources. As a result of efforts to diversify our floor plan
borrowings, since November 2000 we obtained floor plan lines of credit totaling
$25 million with two other financial institutions.
The Company believes that its cash balances, cash flows from operations and
availability under its bank line of credit facility and floor plan arrangements
will be adequate to meet its anticipated financing needs, operating requirements
and capital expenditures for the next twelve months. We are seeking alternative
finance sources in order to further reduce our floor plan borrowings with
Conseco. We may also seek additional sources of capital. However, there can be
no assurance that we will be able to secure additional floor plan borrowings or
additional capital. In the event the Company is required to further reduce its
total floor plan borrowings or the availability under its credit facility is
insufficient to finance its operations and alternative financing or capital is
unavailable, there could be an adverse impact on our liquidity.
FORWARD LOOKING STATEMENTS
Certain statements contained in this report, including the Company's plans,
anticipated capital expenditures, new market initiatives, and the adequacy of
cash to meet financing needs, could be construed as forward looking statements
within the meaning of the Securities Exchange Act of 1934. In addition, Champion
or persons acting on its behalf may from time to time publish or communicate
other items which could also be construed to be forward looking statements.
Statements of this sort are or will be based on the Company's estimates,
assumptions and projections, and are subject to risks and uncertainties,
including those contained in Champion's most recently filed Annual Report on
Form 10-K, that could cause actual results to differ materially from those
included in the forward looking statements.
If one or more of these risks or uncertainties materialize, or if underlying
assumptions prove incorrect, actual results may vary materially from those
expected, estimated or projected. The Company does not undertake to update its
forward looking statements or risk factors to reflect future events or
circumstances.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company's floor plan borrowings at March 31, 2001 were $103 million and
are subject to interest primarily based on the U.S. prime interest rate. A 100
basis point increase in the prime rate would result in additional annual
interest cost of $1 million, assuming average floor plan borrowings of $103
million.
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PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) The following exhibits are filed as part of this report:
Exhibit No. Description
----------- -----------
11 Statement Regarding Computation of Per Share Earnings.
(b) On March 20, 2001 and April 18, 2001 Champion filed current reports on
Form 8-K.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CHAMPION ENTERPRISES, INC.
By: ANTHONY S. CLEBERG
------------------------
Anthony S. Cleberg
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
And: RICHARD HEVELHORST
-------------------------
Richard Hevelhorst
Vice President and Controller
(Principal Accounting Officer)
Dated: May 14, 2001
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Exhibit Index
-------------
Exhibit No. Description
----------- -----------
11 Statement Regarding Computation of Per Share Earnings.