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 SEPTEMBER 29, 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
-------------------------------------------------- -----------
(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.
48,210,196 shares of the registrant's $1.00 par value Common Stock were
outstanding as of October 26, 2001.
Page 1 of 18
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
CHAMPION ENTERPRISES, INC.
Consolidated Statements of Operations
(In thousands, except per share amounts)
Unaudited Unaudited
Three Months Ended Nine Months Ended
--------------------- ----------------------
Sept. 29, Sept. 30, Sept. 29, Sept. 30,
2001 2000 2001 2000
--------- --------- --------- -----------
Net sales $427,642 $466,068 $1,182,156 $1,534,588
Cost of sales 350,175 390,359 983,470 1,289,488
--------- --------- ---------- ----------
Gross margin 77,467 75,709 198,686 245,100
Selling, general and
administrative expenses 67,461 75,420 215,863 223,475
--------- --------- ---------- ----------
Operating income (loss) 10,006 289 (17,177) 21,625
Interest expense, net 5,190 6,762 17,400 20,575
--------- --------- ---------- ----------
Income (loss) before income taxes 4,816 (6,473) (34,577) 1,050
Income taxes (benefits) 2,300 (2,500) (11,500) 900
--------- --------- ---------- ----------
Net income (loss) $ 2,516 $ (3,973) $ (23,077) $ 150
========= ========= ========== ==========
Basic earnings (loss) per share $0.05 $(0.08) $(0.49) $0.00
========= ========= ========== ==========
Weighted shares for basic EPS 47,957 47,248 47,767 47,250
========= ========= ========== ==========
Diluted earnings (loss) per share $0.05 $(0.08) $(0.48) $0.00
========= ========= ========== ==========
Weighted shares for diluted EPS 50,942 47,248 47,767 47,336
========= ========= ========== ==========
See accompanying Notes to Consolidated Financial Statements.
Page 2 of 18
CHAMPION ENTERPRISES, INC.
Consolidated Balance Sheets
(In thousands, except par value)
Unaudited
Sept. 29, Dec. 30,
2001 2000
----------- -------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 65,907 $ 50,143
Accounts receivable, trade 68,021 31,132
Inventories 175,267 217,765
Deferred taxes and other current assets 74,963 77,493
----------- -----------
Total current assets 384,158 376,533
----------- -----------
PROPERTY AND EQUIPMENT
Cost 309,059 320,873
Less-accumulated depreciation 126,273 113,596
----------- -----------
182,786 207,277
----------- -----------
GOODWILL
Cost 320,518 320,656
Less-accumulated amortization 55,305 46,686
----------- -----------
265,213 273,970
----------- -----------
DEFERRED TAXES AND OTHER ASSETS 79,597 84,276
----------- -----------
Total assets $ 911,754 $ 942,056
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Floor plan payable $ 68,084 $ 114,198
Accounts payable 76,087 43,103
Accrued warranty obligations 45,411 49,304
Accrued volume rebates 44,409 45,552
Accrued compensation and payroll taxes 27,408 19,034
Other current liabilities 76,818 71,662
----------- -----------
Total current liabilities 338,217 342,853
----------- -----------
LONG-TERM LIABILITIES
Long-term debt 224,592 225,634
Deferred portion of purchase price 20,000 39,157
Other long-term liabilities 35,285 37,603
----------- -----------
279,877 302,394
----------- -----------
CONTINGENT LIABILITIES (Note 6)
REDEEMABLE PREFERRED STOCK, no par value,
5,000 shares authorized, 20 issued 20,000 -
SHAREHOLDERS' EQUITY
Common stock, $1 par value, 120,000 shares
authorized, 47,990 and 47,357 shares issued
and outstanding, respectively 47,990 47,357
Capital in excess of par value 32,856 33,116
Retained earnings 194,323 217,650
Accumulated other comprehensive income (1,509) (1,314)
----------- ----------
Total shareholders' equity 273,660 296,809
----------- -----------
Total liabilities and shareholders' equity $ 911,754 $ 942,056
=========== ===========
See accompanying Notes to Consolidated Financial Statements.
Page 3 of 18
CHAMPION ENTERPRISES, INC.
Consolidated Statements of Cash Flows
(In thousands)
Unaudited
Nine Months Ended
---------------------
Sept. 29, Sept. 30,
2001 2000
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(23,077) $ 150
--------- ----------
Adjustments to reconcile net income (loss) to net
cash provided by operating
activities:
Depreciation and amortization 27,206 30,176
Fixed asset impairment charges 6,500 4,000
Increase/decrease
Accounts receivable (36,889) (2,484)
Inventories 42,498 48,225
Accounts payable 32,984 22,409
Accrued liabilities 10,036 921
Net cash charges to independent retailer
bankruptcy reserve - (12,177)
Other, net 5,969 (9,442)
--------- ----------
Total adjustments 88,304 81,628
--------- ----------
Net cash provided by operating activities 65,227 81,778
--------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Deferred and contingent purchase price payments (16,633) (10,165)
Additions to property and equipment (4,994) (12,692)
Investments in and advances to
unconsolidated subsidiaries (2,584) (2,837)
Proceeds on disposal of fixed assets 2,215 3,000
--------- ----------
Net cash used for investing activities (21,996) (22,694)
--------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in floor plan payable, net (46,114) (41,142)
Increase (decrease) long-term debt (526) 2,081
Preferred stock issued, net 18,464 -
Common stock issued, net 709 28
Common stock repurchased - (863)
--------- ----------
Net cash used for financing activities (27,467) (39,896)
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 15,764 19,188
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 50,143 12,847
--------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 65,907 $ 32,035
========= ==========
See accompanying Notes to Consolidated Financial Statements.
Page 4 of 18
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):
Sept. 29, Dec. 30,
2001 2000
--------- --------
New and pre-owned manufactured homes $ 107,884 $143,892
Raw materials and work-in-process 43,407 44,980
Other inventory 23,976 28,893
--------- --------
$ 175,267 $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):
Nine Months Ended
--------------------------
Sept. 29, Sept. 30,
2001 2000
--------- ---------
Statutory U.S. tax rate $(12,100) $ 400
Change in rate resulting from:
State taxes, net (900) 100
Goodwill and other 1,500 400
--------- ---------
Total provision (benefit) $(11,500) $ 900
========= =========
Effective tax rate 33% 86%
========= =========
4. The Company has a revolving credit agreement, maturing in May 2003,
with a group of banks for a $75 million secured line of credit. 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. As of September 29, 2001, the calculated
borrowing base was $70 million and the Company had no cash borrowings
and $35 million of letters of credit outstanding under the facility. In
September 2001 and October 2001 the bank agreement was amended to allow
for more flexible financial performance covenants.
Page 5 of 18
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
-------------------------
Sept. 29, Sept. 30,
2001 2000
----------- -----------
Net sales
Manufacturing $ 362,005 $ 378,449
Retail 119,637 148,619
Less: intercompany (54,000) (61,000)
----------- -----------
Consolidated net sales $ 427,642 $ 466,068
=========== ===========
Operating income
Manufacturing EBITA $ 25,896 $ 14,731
Retail EBITA (loss) (6,082) (3,413)
General corporate expenses (6,891) (8,107)
Intercompany profit elimination - 500
Goodwill amortization (2,917) (3,422)
----------- -----------
Consolidated operating income $ 10,006 $ 289
=========== ===========
Nine Months Ended
-------------------------
Sept. 29, Sept. 30,
2001 2000
----------- -----------
Net sales
Manufacturing $ 973,714 $1,253,528
Retail 357,442 483,060
Less: intercompany (149,000) (202,000)
----------- -----------
Consolidated net sales $1,182,156 $1,534,588
=========== ===========
Operating income (loss)
Manufacturing EBITA $ 34,812 $ 47,746
Retail EBITA (loss) (22,737) 6,067
General corporate expenses (20,574) (20,860)
Intercompany profit elimination - 4,000
Loss from independent retailer bankruptcy - (5,000)
Goodwill amortization (8,678) (10,328)
----------- -----------
Consolidated operating income (loss) $ (17,177) $ 21,625
=========== ===========
For the quarter ended September 29, 2001, retail EBITA (loss) includes
charges of $3.7 million for estimated losses on retail finance loans
and costs to transition existing loans to alternative financing
sources. The loan origination subsidiary has stopped originating new
loans. For the nine months then ended, retail EBITA (loss) also
includes $3.2 million of non-cash fixed asset impairment charges and
$2.2 million of lease termination and other costs associated with
retail sales center closings. Retail EBITA for the prior year's three
and nine-month periods included $1.5 million for non-cash fixed asset
impairment charges and $0.7 million for lease termination and other
costs related to closed operations. Retail floor plan interest expense
excluded from retail EBITA totaled $1.9 million and $6.8 million for
the three and nine months ended September 29, 2001, respectively, and
$3.6 million and $10.2 million for the three and nine months ended
September 30, 2000, respectively.
Page 6 of 18
Year-to-date 2001 manufacturing EBITA includes $3.3 million of non-cash
fixed asset impairment charges related to closed plants. For the three
months ended September 30, 2000, manufacturing EBITA included $2.5
million for property insurance gains and $1.0 million of non-cash fixed
asset impairment charges related to closed operations. Manufacturing
EBITA for the nine months then ended includes $6.9 million of property
insurance gains, $1.7 million of employee termination benefits paid
upon the closure of three homebuilding facilities and the $1.0 million
impairment charge for fixed assets.
General corporate expenses include $1.5 million of fixed asset
impairment charges for the three and nine-month periods ended September
30, 2000. The charge for potential losses on loans, impairment charges,
lease termination costs and insurance gains are included in selling,
general and administrative expenses. Employee termination benefits and
the loss from independent retailer bankruptcy are included in cost of
sales.
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 September 29,
2001 was $310 million, without reduction for the resale value of the
homes. This amount compares to $430 million at the beginning of the
year and $480 million a year ago. Losses incurred upon the repurchase
of homes totaled $0.2 million and $3.5 million for the three and nine
months ended September 29, 2001, respectively, and $1.7 million and
$3.7 million for the three and nine months ended September 30, 2000,
respectively.
At September 29, 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 $47 million under surety bonds as of September
29, 2001.
7. 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.
Page 7 of 18
8. During June 2001, Champion restructured the payment terms of a deferred
purchase price liability totaling $32 million that was originally
scheduled for payment in cash in June 2002. In July 2001 $6 million of
the obligation was paid in cash. The remaining $26 million is due
quarterly, commencing October 2001, in installments of $2 million
without interest, and is payable, at Champion's option, in cash or
common stock. In October 2001, Champion paid the first quarterly
installment by issuing 220,000 shares of Champion common stock. The
terms do not require a payment in April 2002.
9. In July 2001 Champion issued $20 million of a newly designated class of
convertible preferred stock. The preferred stock has a seven-year term
with a 5% annual dividend, which is payable quarterly in either cash or
common stock, at Champion's option, and is convertible into common
stock at a conversion price of $15.93 per share during the first six
months. Six months after issuance the conversion price will be adjusted
to 120% of the common stock's market value, subject a minimum of $7.50
and a maximum of $15.93 per share. Following 24 months of issuance, the
preferred stock is redeemable by the investor in either cash or common
stock at the Company's option. At the investor's option, an additional
$12 million of preferred stock can be purchased through March 2003 on
similar terms. On September 28, 2001 Champion paid a dividend on the
preferred stock by issuing 27,000 shares of Champion common stock.
10. Basic earnings (loss) per share includes the effect of the dividend on
preferred stock as calculated below (in thousands, except per share
amounts):
Three Months Ended Nine Months Ended
------------------- ---------------------
Sept. 29, Sept. 30, Sept. 29, Sept. 30,
2001 2000 2001 2000
-------- --------- --------- ---------
Net income (loss) $ 2,516 $ (3,973) $(23,077) $ 150
Less: Preferred stock dividend 250 - 250 -
-------- --------- --------- ---------
Income (loss) available
to common shareholders $ 2,266 $ (3,973) $(23,327) $ 150
======== ========= ========= =========
Basic earnings (loss) per share $ 0.05 $ (0.08) $ (0.49) $ 0.00
======== ========= ========= =========
Diluted earnings (loss) per share is based on net income (loss) without
deducting the dividend on preferred stock.
11. In July 2001 the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill
and Other Intangible Assets," which requires that goodwill not be
amortized but instead be tested for impairment based on a reporting
unit's fair value versus its carrying value. The Company is currently
performing the transitional impairment tests required in order to
determine each reporting unit's fair value. Champion will adopt SFAS
142 in January 2002 and the impact to the Company's financial
statements has not yet been determined. The adoption of this
pronouncement will eliminate goodwill amortization expense, which
currently approximates $11.5 million pretax and $8.7 million after tax
annually.
Page 8 of 18
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS 143 requires the recognition of the fair
value of an asset retirement obligation in the period in which the
obligation is incurred. SFAS 143 is effective for fiscal years
beginning after June 15, 2002. The adoption of SFAS 143 will not have a
material effect on the Company's financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS 144 broadens the
presentation of discontinued operations to include any component of an
entity which comprises operations and cash flows that can be clearly
distinguished from the rest of the entity. SFAS 144 is effective for
fiscal years beginning after December 15, 2001. The adoption of SFAS
144 will not have a material effect on the Company's financial
statements.
Page 9 of 18
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
CHAMPION ENTERPRISES, INC.
THREE AND NINE MONTHS ENDED SEPTEMBER 29, 2001
VERSUS THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000
CONSOLIDATED
(Dollars in millions)
Three Months Ended
---------------------
Sept. 29, Sept. 30, %
2001 2000 Change
--------- --------- ------
Net sales
Manufacturing $ 362.0 $ 378.5 (4%)
Retail 119.6 148.6 (20%)
Less: intercompany (54.0) (61.0)
--------- ---------
Total net sales $ 427.6 $ 466.1 (8%)
========= =========
Gross margin $ 77.5 $ 75.7 2%
SG&A 67.5 75.4 (11%)
--------- ---------
Operating income $ 10.0 $ 0.3
========= =========
As a percent of sales
Gross margin 18.1% 16.2%
SG&A 15.8% 16.2%
Operating income 2.3% 0.1%
Nine Months Ended
---------------------
Sept. 29, Sept. 30, %
2001 2000 Change
--------- --------- ------
Net sales
Manufacturing $ 973.7 $1,253.5 (22%)
Retail 357.5 483.1 (26%)
Less: intercompany (149.0) (202.0)
--------- ---------
Total net sales $1,182.2 $1,534.6 (23%)
========= =========
Gross margin $ 198.7 $ 245.1 (19%)
SG&A 215.9 223.5 (3%)
--------- ---------
Operating income (loss) $ (17.2) $ 21.6
========= =========
As a percent of sales
Gross margin 16.8% 16.0%
SG&A 18.3% 14.6%
Operating income (loss) (1.5%) 1.4%
Consolidated revenues decreased for the quarter and year-to-date periods from
the effects of challenging industry conditions, including tightened consumer
credit standards and high consumer repossession levels. As a result of these
conditions we are operating fewer manufacturing facilities and retail sales
centers than a year ago. Since June 2000 we have closed and consolidated eight
manufacturing facilities and 84 sales centers.
Gross margin dollars for the three months ended September 29, 2001 increased
slightly despite the 8% decline in sales while gross margin as a percentage of
Page 10 of 18
sales increased to 18.1% from 16.2% versus the same quarter last year. The
quarter's gross margin increased primarily due to reduced material costs both as
a percentage of sales and in dollars. Gross margin dollars for the nine months
then ended are $46 million less than in 2000. The decrease in gross margin
dollars for the year-to-date period is due to the $352 million decline in
consolidated net sales, partially offset by reduced material cost of sales and
the net effect of the following items that occurred last year. Gross margin
dollars for the nine months ended September 30, 2000 included a $5 million
charge for additional write down of the repurchased homes from the 1999
independent retailer bankruptcy and $1.7 million of employee termination
benefits paid related to closed homebuilding facilities, partially offset by a
$4 million reduction in the intercompany profit in inventory as a result of
lower manufacturing margins and declining inventories at the retail segment.
Third quarter 2001 selling, general and administrative expenses ("SG&A") include
a $3.7 million charge for estimated losses on retail finance loans and costs to
transition existing loans to alternative financing sources. The loan origination
subsidiary has stopped originating new loans. SG&A for the three months ended
September 30, 2000 included $4 million for fixed asset impairment charges and
$0.7 million for lease termination and other costs. These charges are partially
offset by a $2.5 million gain from a property insurance settlement. The decrease
in quarterly SG&A as a percentage of sales despite the items mentioned above is
due to efficiencies obtained through operating fewer sales centers and the
company's efforts to reduce fixed costs.
SG&A for the nine-month period ended September 29, 2001 decreased 3% versus the
prior year. Lower SG&A in the current year from the reduction in sales and
operating fewer manufacturing facilities and sales centers was partially offset
by the $3.7 million reserve for estimated loan losses and transition costs, $6.5
million of fixed asset impairment charges and $2.2 million of lease termination
and other costs related to closing four homebuilding facilities and 30 retail
sales centers. Prior year's SG&A included property insurance gain of $6.9
million, partially offset by the $4 million of fixed asset impairment charges
and $0.7 million of lease termination and other costs.
MANUFACTURING OPERATIONS
Three Months Ended
---------------------
Sept. 29, Sept. 30, %
2001 2000 Change
--------- ---------- ------
Net sales (in millions) $ 362.0 $ 378.5 (4%)
EBITA (in millions) $ 25.9 $ 14.7 76%
EBITA margin % 7.2% 3.9%
Homes sold 10,941 12,393 (12%)
Floors sold 19,804 21,682 (9%)
Multi-section mix 77% 73%
Average home price $31,700 $ 29,200 9%
Nine Months Ended
---------------------
Sept. 29, Sept 30, %
2001 2000 Change
--------- ---------- ------
Net sales (in millions) $ 973.7 $1,253.5 (22%)
EBITA (in millions) $ 34.8 $ 47.7 (27%)
EBITA margin % 3.6% 3.8%
Homes sold 30,069 42,705 (30%)
Page 11 of 18
Floors sold 54,016 72,992 (26%)
Multi-section mix 76% 69%
Average home price $31,100 $ 28,100 11%
Manufacturing facilities at period end 49 55 (11%)
Manufacturing sales declined for the three and nine-month periods ended
September 29, 2001, due to 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 nine months of 2001 decreased
29% in homes and 27% in floors from a year earlier. Our average home wholesale
price increased 9% versus the same quarter last year, primarily due to the
increase in multi-section mix. Of our total wholesale shipments for the quarter,
85% were shipped to independent retailers and 15% were shipped to
company-operated sales centers. Due to market conditions, we closed four
manufacturing facilities this year.
Third quarter manufacturing EBITA increased 76% despite a 4% decline in sales
versus the same period last year. Manufacturing EBITA for the third quarter 2001
was favorably affected by lower material costs and marketing expenses. Segment
EBITA for the three months ended September 30, 2000 includes $1.0 million of
impairment charges for a closed homebuilding facility and a $2.5 million gain
from a property insurance settlement.
Segment EBITA declined $13 million or 27% for the nine months ended September
29, 2001 versus the same period in 2000 primarily due to lower gross margin
dollars from the 22% reduction in manufacturing sales, $3.3 million of fixed
asset impairment charges for the plant closings and the prior year $6.9 million
insurance settlement gain. These items are partially offset by reduced material
costs in the current period. EBITA margins as a percentage of sales have
declined for the same reasons mentioned above.
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 September 29, 2001 totaled
approximately $54 million, compared to $15 million at December 30, 2000 and $27
million a year ago.
RETAIL OPERATIONS
Three Months Ended
---------------------
Sept. 29, Sept. 30, %
2001 2000 Change
--------- --------- ------
Net sales (in millions) $ 119.6 $ 148.6 (20%)
EBITA (loss) (in millions) $ (6.1) $ (3.4) (78%)
EBITA margin % (5.1%) (2.3%)
New homes sold 1,990 2,776 (28%)
Pre-owned homes sold 461 650 (29%)
Total homes sold 2,451 3,426 (28%)
% Champion-produced new homes sold 91% 77%
New multi-section mix 73% 62%
Average new home price $56,600 $50,200 13%
Average number of new homes sold
per sales center per month 2.9 3.3 (12%)
Page 12 of 18
Nine Months Ended
---------------------
Sept. 29, Sept. 30, %
2001 2000 Change
--------- --------- ------
Net sales (in millions) $ 357.5 $ 483.1 (26%)
EBITA (loss) (in millions) $ (22.7) $ 6.1 (475%)
EBITA margin % (6.4%) 1.3%
New homes sold 5,997 9,267 (35%)
Pre-owned homes sold 1,503 2,269 (34%)
Total homes sold 7,500 11,536 (35%)
% Champion-produced new homes sold 87% 71%
New multi-section mix 71% 60%
Average new home price $56,000 $49,000 14%
Average number of new homes sold
per sales center per month 2.8 3.6 (22%)
Average number of new homes in
inventory per sales center
at period end 13 18 (28%)
Sales centers at period end 229 270 (15%)
Retail sales decreased for the three and nine-month periods ended September 29,
2001, primarily due to challenging industry conditions and a decline in the
number of our company-owned sales centers. We operated 229 sales centers at
quarter end compared to 270 one year ago. Based on data reported by Statistical
Surveys, Inc., we believe that industry retail sales of new homes in the first
eight months of 2001 dropped approximately 32% from prior year levels. Our
average new home selling price increased by 13% versus the same quarter last
year, primarily due to the sale of a greater proportion of higher-priced,
multi-section homes.
Retail EBITA for the quarter ended September 29, 2001 declined $2.7 million
compared to the same quarter last year due to reduced gross margin from the $29
million reduction in retail sales and the $3.7 million charge for estimated
losses on retail finance loans, partially offset by lower SG&A from lower sales
and operating fewer sales centers. Segment EBITA for the quarter ended September
30, 2000 includes charges of $2.2 million for closing and consolidating sales
centers. Our company-owned stores have reduced the average number of new homes
in inventory per sales center to 13 new homes at September 29, 2001 compared to
15 new homes last quarter and 18 new homes one year ago.
Year-to-date retail EBITA decreased by $29 million compared to the same period a
year ago. The decline in the segment margin is primarily due to the $126 million
reduction in sales, the $3.7 million charge for estimated losses on retail
finance loans and $5.4 million of costs to close 30 sales centers. Additionally,
reduced income from loan origination fees, insurance and other commissions as a
result of lower sales volume impacted margins. EBITA results a year ago included
charges of $2.2 million for closing and consolidating sales centers.
REPURCHASE OBLIGATIONS
The Company enters into repurchase agreements with lending institutions that
provide wholesale floor plan financing to independent retailers. At September
29, 2001 the maximum contingent repurchase obligation was approximately $310
million, without reduction for the resale value of the homes. For the nine
Page 13 of 18
months ended September 29, 2001, Champion paid $18.5 million and incurred losses
of $3.5 million for the repurchase of 616 homes resulting from defaults by
independent retail companies. In the same period last year, the Company paid
$13.1 million and incurred losses of $3.7 million for the repurchase of 449
homes.
LIQUIDITY AND CAPITAL RESOURCES
Cash balances totaled $66 million at September 29, 2001. For the nine months
ended September 29, 2001, $65 million was provided by operations and $18 million
from the net proceeds of the preferred stock issuance as discussed below.
Expenditures during 2001 included $5 million for capital improvements, $17
million for payments related to 1998 acquisitions, and $3 million for
investments in and advances to unconsolidated subsidiaries. Approximately $46
million was used to reduce the Company's floor plan payable.
During 2001, accounts receivable and accounts payable increased due to
seasonality and year end levels generally being low due to the holidays and
vacations. Inventories and floor plan payable decreased during the nine month
period ended September 29, 2001 due to continued efforts to reduce inventories
throughout our retail organization in response to industry conditions.
The Company has a $75 million revolving credit agreement, maturing in May 2003,
with a group of banks. 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. As of September 29, 2001, the calculated
borrowing base was $70 million. At the end of September 2001, there were $35
million of letters of credit and no cash borrowings outstanding under the credit
facility, resulting in loan availability of $35 million. In September 2001 and
October 2001 we amended our bank agreement to allow for more flexible financial
performance covenants. We believe that we will be in compliance with these
covenants through the next twelve months.
In June 2001 we restructured the payment terms of a deferred purchase price
liability totaling $32 million that was originally scheduled for payment in cash
in June 2002. In July 2001, $6 million of the obligation was paid in cash. The
remaining $26 million is due quarterly, commencing October 2001, in installments
of $2 million without interest, and is payable, at our option, in cash or common
stock. In October 2001, we paid the first quarterly installment by issuing
220,000 shares of Champion common stock. The terms do not require a payment in
April 2002.
In July 2001 Champion issued a newly designated class of convertible preferred
stock with a seven-year term and a 5% annual dividend, which is payable
quarterly in either cash or common stock, at Champion's option. The preferred
stock is convertible into common stock at a conversion price of $15.93 per share
during the first six months. Six months after issuance the conversion price will
be adjusted to 120% of the common stock's market value, subject to a minimum of
$7.50 and a maximum of $15.93 per share. Following 24 months of issuance, the
preferred stock is redeemable by the investor in either cash or common stock at
the Company's option. At the investor's option, an additional $12 million of
preferred stock can be purchased through March 2003 on similar terms. On
September 28, 2001 Champion paid a dividend on the preferred stock by issuing
27,000 shares of Champion common stock.
Page 14 of 18
Champion plans to spend less than $7 million in 2001 on capital expenditures.
Borrowings under the bank credit facility may be necessary in the future for
capital improvements and to meet seasonal working capital needs. The Company
does not plan to pay cash dividends on its common stock in the near term.
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.
Conseco Finance (Conseco) is our primary floor plan lender, with $49 million of
borrowings outstanding at the end of the quarter. In March 2001, we reached an
agreement with Conseco to reduce our floor plan borrowings with them to targeted
amounts of $60 million by June 30, 2001 and $40 million by September 30, 2001.
In August 2001, the targeted amounts were modified to $48 million by September
30, 2001 and $40 million by December 24, 2001. Since June 2000 we have reduced
our floor plan borrowings with Conseco by over $70 million through inventory
reductions and proceeds from new floor plan lines of credit with other financial
institutions. We plan to reduce our floor plan borrowings with Conseco by
obtaining additional financing from other lenders or using cash flows from
operations.
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 or
operating cash flow 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, covenant compliance
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.
Page 15 of 18
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company's floor plan borrowings at September 29, 2001 were $68 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 $0.7 million, assuming average floor plan borrowings of $68
million.
Page 16 of 18
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 July 9, 2001; July 19, 2001; August 21, 2001; September 18,
2001 and October 17, 2001 Champion filed current reports on Form
8-K.
Page 17 of 18
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: November 9, 2001
Page 18 of 18
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
11 Statement Regarding Computation of Per Share Earnings.