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 April 4, 1998
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 University Drive, 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.
47,644,565 shares of the registrant's $1.00 par value Common
Stock were outstanding as of May 1, 1998.
PART I. FINANCIAL INFORMATION
CHAMPION ENTERPRISES, INC.
__________________________
Consolidated Income Statements
(In thousands, except per share amounts)
Three Months Ended
______________________
April 4, March 29,
1998 1997
________ _________
Net sales $463,025 $362,957
Cost of sales 389,364 308,756
_________ _________
Gross margin 73,661 54,201
Selling, general and administrative expenses 43,288 31,617
_________ _________
Operating income 30,373 22,584
Other income (expense):
Interest income 376 416
Interest expense (1,332) (346)
_________ _________
Income from continuing operations
before income taxes 29,417 22,654
Income taxes 11,800 9,000
_________ _________
Income-continuing operations 17,617 13,654
Income-discontinued operations - 185
_________ _________
Net income $ 17,617 $ 13,839
========= =========
Basic earnings per share:
Income-continuing operations $0.37 $0.28
Income-discontinued operations - 0.01
_________ _________
Net income $0.37 $0.29
========= =========
Weighted shares for basic EPS 47,087 48,058
========= =========
Diluted earnings per share:
Income-continuing operations $0.36 $0.27
Income-discontinued operations - 0.01
_________ _________
Net income $0.36 $0.28
========= =========
Weighted shares for diluted EPS 48,645 49,673
========= =========
See accompanying Notes to Consolidated Financial Statements.
CHAMPION ENTERPRISES, INC.
__________________________
Consolidated Balance Sheets
(In thousands, except par value amounts)
April 4, January 3,
1998 1998
__________ __________
ASSETS
CURRENT ASSETS
Cash, cash equivalents and
short-term investments $ 25,884 $ 60,280
Accounts receivable, trade 108,168 49,574
Inventories 182,628 73,291
Deferred taxes and other current assets 46,449 46,373
__________ __________
Total current assets 363,129 229,518
__________ __________
PROPERTY AND EQUIPMENT
Cost 222,627 202,749
Less-accumulated depreciation 63,020 59,230
__________ __________
159,607 143,519
__________ __________
GOODWILL
Cost 316,190 134,865
Less-accumulated amortization 16,861 15,193
__________ __________
299,329 119,672
__________ __________
OTHER ASSETS 16,276 8,541
__________ __________
Total assets $ 838,341 $ 501,250
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable to bank $ 102,000 $ -
Floor plan payable 81,232 1,112
Accounts payable 77,696 24,646
Accrued dealer discounts 33,725 42,927
Accrued warranty obligations 41,546 40,819
Accrued compensation and payroll taxes 27,917 25,014
Other current liabilities 90,691 48,906
__________ __________
Total current liabilities 454,807 183,424
__________ __________
LONG-TERM LIABILITIES
Long-term debt 2,654 1,813
Deferred portion of purchase price 16,600 5,400
Other long-term liabilities 47,183 30,197
__________ __________
66,437 37,410
__________ __________
SHAREHOLDERS' EQUITY
Preferred stock, no par value, 5,000 shares
authorized, none issued - -
Common stock, $1 par value, 120,000 shares
authorized, 47,535 and 46,600 shares issued
and outstanding, respectively 47,535 46,600
Capital in excess of par value 32,443 14,338
Retained earnings 238,359 220,742
Foreign currency translation adjustments (1,240) (1,264)
__________ ___________
Total shareholders' equity 317,097 280,416
__________ ___________
Total liabilities and shareholders' equity $ 838,341 $ 501,250
========== ===========
See accompanying Notes to Consolidated Financial Statements.
CHAMPION ENTERPRISES, INC.
__________________________
Consolidated Statements of Cash Flows
(In thousands)
Three Months Ended
___________________
April 4, March 29,
1998 1997
________ _________
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations $ 17,617 $ 13,654
_________ ________
Adjustments to reconcile income from continuing
operations to net cash provided by (used for)
operating activities:
Depreciation and amortization 5,647 4,076
Increase/decrease, net of acquisitions
Accounts receivable (46,563) (37,687)
Inventories (24,161) (8,886)
Accounts payable 44,484 14,480
Accrued liabilities 2,095 (8,902)
Merger reserve - (2,745)
Other, net 4,688 3,494
_________ _________
Total adjustments (13,810) (36,170)
_________ _________
Net cash provided by (used for) operating activities 3,807 (22,516)
_________ _________
CASH FLOWS FROM DISCONTINUED OPERATIONS:
Income from discontinued operations - 185
Proceeds on disposal, net 9,152 -
Decrease in net assets of discontinued operations - 3,308
_________ _________
Net cash provided by discontinued operations 9,152 3,493
_________ _________
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions (143,694) -
Additions to property and equipment (8,720) (8,008)
Proceeds on disposal of property and equipment - 1,795
_________ _________
Net cash used for investing activities (152,414) (6,213)
_________ _________
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in notes payable to bank 102,000 -
Increase in floor plan payable 1,489 -
Repayment of long-term debt (2,588) (135)
Common stock issued, net 2,958 4,014
Tax benefit of stock options 1,200 2,000
_________ _________
Net cash provided by financing activities 105,059 5,879
_________ _________
NET DECREASE IN CASH AND CASH EQUIVALENTS (34,396) (19,357)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 60,280 19,357
_________ _________
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 25,884 $ -
========= =========
ADDITIONAL CASH FLOW INFORMATION:
Cash paid for interest $ 991 $ 215
Cash paid for income taxes $ 270 $ 952
SCHEDULE OF CASH FLOWS FROM ACQUISITIONS:
Cash purchase price $184,450
Less: Deferred portion of purchase price (26,040)
Cash acquired (15,626)
Plus: Acquisition costs 910
_________
$143,694
=========
See accompanying Notes to Consolidated Financial Statements.
CHAMPION ENTERPRISES, INC.
__________________________
Notes to Consolidated Financial Statements
__________________________________________
1. For each of the dates indicated, inventories consisted of the
following (in thousands):
April 4, January 3,
1998 1998
__________ __________
Raw materials and work-in-process $ 53,136 $ 49,745
Manufactured homes 129,492 23,546
_________ __________
$182,628 $ 73,291
========= ==========
2. The difference between income taxes provided for financial reporting
purposes and expected charges at the U.S. federal statutory rate is
due primarily to state tax charges.
The components of the income tax provisions for the three months ended
April 4, 1998 and March 29, 1997 follows (in thousands):
April 4, March 29,
1998 1997
_________ _________
Statutory U.S. tax rate $ 10,300 $ 7,900
Increase in rate resulting from:
State taxes 1,100 900
Other 400 200
_________ _________
Total provision $ 11,800 $ 9,000
========= =========
Effective tax rate 40% 40%
========= =========
3. The per share amounts are calculated under Statement of Financial
Accounting Standards No. 128, "Earnings Per Share."
4. During the first quarter of 1998, Champion acquired six manufactured
housing retail organizations, which resulted in the recording of goodwill
totaling $181 million to be amortized over 25 years. The recorded purchase
price for these acquisitions consisted of cash totaling $158 million, deferred
payments of $26 million and 550,000 shares of Champion common stock valued at
$12.5 million. During the quarter, net cash of $144 million was paid. The
registrant is contingently obligated for additional purchase price payments up
to $95 million over the next five years depending upon the future performance
of the acquired businesses. Recognition of additional purchase price will
result in the recording of a comparable amount of goodwill.
5. Floor plan liabilities are borrowings from various financial
institutions secured principally by retail inventories of manufactured homes.
Interest on these liabilities generally ranges from the prime rate minus 0.5%
to the prime rate plus 1.5%.
6. The sale of the commercial vehicles business for approximately $10
million was completed in February 1998. Related amounts are classified as
discontinued operations.
7. In May 1998 the registrant entered into a five-year revolving credit
agreement which provides a $325 million unsecured line of credit, including
letters of credit. The credit agreement provides for annual reductions in the
line of credit for three years until the line is reduced to $175 million in
September 2001. At the registrant's option borrowings are subject to interest
either at the bank's prime rate or the bank's Eurodollar rate plus from 0.575%
to 1.0%. In addition, the registrant pays a facility fee ranging from 0.15%
to 0.25% of the entire line of credit and a letter of credit fee. The
agreement also contains convenants which, among other things, require
maintenance of certain financial ratios and minimum net worth and limit
additional indebtedness.
8. 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.
9. Certain amounts in the prior period's statements have been reclassified
to conform to the current period's presentation.
CHAMPION ENTERPRISES, INC.
__________________________
Management's Discussion and Analysis
____________________________________
of
Financial Condition and Results of Operations
_____________________________________________
Three months ended April 4, 1998 versus three months ended March 29, 1997
Overview
During the second half of 1997, Champion Enterprises, Inc. ("Champion" or
"registrant") announced its strategy to expand its operations by seeking
acquisitions of key manufactured housing retailers in growth areas around the
country. This strategy includes plans to acquire manufactured housing
retailers and rapidly expand their operations in order to have aggregate
annual retail sales of at least $1 billion by the year 2000. Related goals
are to improve the retail buying experience for the home buyer and to enhance
profits through better merchandising techniques, improved efficiencies,
control of costs and improved home installation to reduce service costs. In
1998 through April 30, Champion acquired seven retail operations with 122
sales centers and 1997 sales of approximately $385 million. As of early-May
1998, the registrant operates 150 retail sales centers in 21 states.
Consolidated
(Dollars in millions)
Three Months Ended
____________________
April 4, March 29, %
1998 1997 Change
_________ _________ ______
Net sales:
Manufacturing $424.4 $359.3 18%
Retail 66.6 7.8
Less: intercompany (28.0) (4.1)
Total net sales 463.0 363.0 28%
Gross margin 73.7 54.2 36%
SG&A 43.3 31.6 37%
Operating income $30.4 $22.6 34%
Operating margin 6.6% 6.2%
In the quarter ended April 4, 1998, Champion achieved record first quarter
sales and earnings. Consolidated revenues grew 28% due to higher wholesale
volume and the retail acquisitions, which resulted in selling, general and
administrative expenses ("SG&A") increasing. Total gross margin rose in 1998
due to higher wholesale volume, improved manufacturing margins, and expanded
retail operations. As a percent of sales, gross margin and SG&A increased due
primarily to retail acquisitions and expansions. Prior amounts have been
restated to classify as discontinued operations the commercial vehicles
business, the sale of which was completed in February 1998.
Income from continuing operations increased 29% to $17.6 million, compared to
$13.7 million in the prior year's first quarter. Net income for the quarter
rose 27% to $17.6 million, or $0.36 per diluted share, in 1998 compared to
$13.8 million, or $0.28 per diluted share, in 1997. Prior year includes $0.01
per diluted share of income from discontinued operations.
Manufacturing Operations
Three Months Ended
___________________
April 4, March 29, %
1998 1997 Change
________ _________ ______
Net sales (in millions) $ 424.4 $ 359.3 18%
Wholesale home shipments 16,175 14,247 14%
Wholesale multi-section mix 60% 55%
Wholesale floors sold 26,130 22,223 18%
Average wholesale sales price $26,240 $25,215 4%
Manufacturing revenues increased in the first quarter due to higher volume,
with wholesale home shipments and floors sold up 14% and 18%, respectively,
from a year ago. A floor is a section of a home. A single-section home is
comprised of one floor, while a multi-section home is comprised of two or more
floors. Of the total wholesale shipments, 94% were to independent retailers
and the remaining 6% were to company-operated sales centers. The wholesale
multi-section mix was 60%, compared to 55% in the first quarter of 1997.
Manufacturing margins rose due to improved material costs, production
efficiencies, and higher volume, which lowered fixed costs as a percent of
sales. Prior year's margins were reduced due to start-up costs at three
plants, low levels of unfilled orders, and the restructuring of the product
line at Redman's Indiana facilities.
The registrant's U.S. wholesale shipments of HUD code homes rose 13% from a
year earlier, which resulted in a U.S. market share improvement to 18.3% from
17.1% last year. According to data reported by the National Conference of
States on Building Codes and Standards ("NCSBCS"), industry wholesale
shipments of homes for the quarter increased 5.4% from the first quarter of
1997.
Although dealer orders can be cancelled at anytime without penalty, and
unfilled orders are not necessarily an indication of future business, the
registrant's unfilled orders for wholesale housing at April 4, 1998 totaled
approximately $75 million. This amount is 36% higher than a year ago due to
increased orders taken at industry trade shows and strong order activity
around the country.
Retail Operations
Three Months Ended
____________________
April 4, March 29,
1998 1997
________ _________
Net sales (in millions) $ 66.6 $ 7.8
New retail homes sold 1,484 123
Average retail sales price-new homes $43,520 $62,740
Retail sales substantially increased due to the six retail acquisitions
completed throughout the quarter. Because of the acquisition dates, only 118
stores contributed to first quarter results. Of the new retail homes sold in
the first quarter of 1998, 52% were multi-section and 620 homes, or 42%, were
Champion produced. A current non-Champion supplier of homes to certain
Champion sales centers has decided to discontinue supplying its homes to these
retailers. As a result, these particular company-operated stores are expected
to sell more Champion produced homes over time. The registrant plans to have
sufficient manufacturing capacity to provide homes to its sales centers.
Retail margins were strong as a result of volume and finance related income.
The registrant experienced solid retail traffic and sales nationwide. During
the first quarter of 1998, a non-cash accounting charge of approximately $3.3
million was recorded to eliminate the manufacturing profits in inventories of
Champion produced homes at company-operated sales centers. Similar charges
are expected to be recorded through the end of 1998 to the extent that
pre-acquisition retail inventory is replaced by Champion produced homes.
Other Matters
Interest expense increased in 1998 due to increased amounts outstanding on the
registrant's line of credit, floor plan payable and deferred portions of
retail acquisition purchase prices. Income tax expense in 1998 increased due
to higher pretax income, with a 40% effective tax rate in both quarters.
Manufactured Housing Industry Outlook
According to NCSBCS, first quarter 1998 industry wholesale shipments of HUD
code homes and floors increased 5.4% and 8.5%, respectively, compared to a
year ago. Current industry analysts' estimates for 1998 industry wholesale
home shipments range from 2% to 7% growth over 1997.
The registrant believes that retail demand continues to improve from a year
ago and excess inventories reported in 1997 are declining. Management believes
that moderate changes in interest rates will not have a significant direct
impact on demand for manufactured housing. Long-term industry growth and
short-term sales may be affected by many factors, which are discussed under
Forward Looking Statements in this Form 10-Q.
Liquidity and Capital Resources
Cash balances totaled $26 million at April 4, 1998, a reduction of $34 million
from year end. During the quarter, $4 million of cash was generated from
operations, $9 million was provided from discontinued operations, and $4
million from stock option exercises and related tax benefits. Bank borrowings
increased $102 million during the quarter. Net cash totaling $144 million was
used for retail acquisitions and $9 million for capital improvements. Earnings
before interest, taxes, depreciation and amortization totaled $36 million for
the quarter, up from $27 million a year ago.
Assets and liabilities substantially increased during the quarter due to the
retail acquisitions and higher wholesale revenues in March 1998 as compared to
December 1997. Accrued dealer discounts decreased during 1998 due to payments
made under annual programs. At quarter end debt was 40% of total capital.
The Company has a five-year $325 million unsecured bank line of credit, which
was completed in May 1998 and includes letters of credit. At quarter end the
registrant had $15 million of letters of credit outstanding, generally to
support insurance obligations and licensing and service bonding required by
various states.
Additional borrowings may be necessary during 1998 to fund retail acquisitions
and the opening of 25 new sales centers. Also, total expenditures of up to
$38 million are planned for new construction and expansions of manufacturing
facilities. Production began at a new North Carolina facility in March 1998
and another new plant in that state should be operational during second
quarter. Construction of a new facility in Texas should begin early this
summer, bringing the total number of manufacturing plants to 58.
The Company believes that existing cash balances, cash flow from operations
and additional availability under its line of credit are adequate to meet its
anticipated financing needs, operating requirements, capital expenditures and
acquisitions in the foreseeable future. However, management may explore other
opportunities to raise capital to finance growth. The registrant's long-term
goal is to increase earnings per share at a minimum compound annual growth
rate of 15%. Consistent with its plan to improve shareholder value through
investments in sound operating businesses, the registrant does not plan to pay
cash dividends in the near term.
Forward Looking Statements
Certain statements contained in this report, including industry analysts'
estimates of wholesale industry shipments for 1998, the registrant's plans for
retail expansion, capital expenditures and planned facilities, and its
earnings growth goal, 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 registrant's estimates,
assumptions and projections, and are subject to risks and uncertainties,
including those specifically listed below and those contained in Champion's
reports previously filed with the SEC, that could cause actual results to
differ materially from those included in the forward looking statements.
Long term growth in the manufactured housing industry may be affected by: (1)
the relative cost of manufactured housing versus other forms of housing; (2)
general economic trends, including inflation and unemployment rates, consumer
confidence, job growth and interest rates; (3) changes in demographics,
including new household formations and the number of Americans on fixed
income; (4) the availability and cost of financing for manufactured homes; (5)
changes in government regulations and policies, including HUD regulations,
local building codes and zoning regulations; and (6) changes in regional
markets and the U.S. economy as a whole. Short-term sales could be affected
by inclement weather and inventory levels of manufactured housing retailers.
Fluctuations in interest rates may affect the demand for manufactured housing
to the extent that those changes reduce job growth, slow the U.S. economy, or
cause a loss in consumer confidence. The profitability of the registrant may
also be affected by: (1) its ability to efficiently expand operations and to
utilize production capacity; (2) its ability to pass increased raw material
costs, particularly lumber costs, on to its customers; (3) market share
position; (4) growth in the manufactured housing industry as a whole; (5) the
results of its acquisitions; and (6) strength of retail distribution.
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
__________ ___________
10 Credit Agreement dated May 5, 1998 by and among Champion
Enterprises, Inc.; the guarantors party; the banks party; PNC Bank, National
Association, as Administrative Agent; Comerica Bank, as Documentation Agent;
National City Bank, Harris Trust and Savings Bank, Keybank National
Association, Nationsbank, N.A., and Wachovia Bank and Trust Company, N.A., as
co-Agents.
11 Computation of EPS.
27.1 Financial Data Schedule.
27.2 Restated Financial Data Schedule.
(b) No reports on Form 8-K were filed by the registrant during the
quarter ended April 4, 1998.
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.
CHAMPION ENTERPRISES, INC.
By: JOSEPH H. STEGMAYER
__________________________
Joseph H. Stegmayer
President, Retail Operations
and Chief Financial Officer
(Principal Financial Officer)
And: /S/ RICHARD HEVELHORST
_________________________
Richard Hevelhorst
Controller (Principal
Accounting Officer)
Dated: May 14, 1998
INDEX TO EXHIBITS
Exhibit No. Description
__________ ___________
10 Credit Agreement dated May 5, 1998 by and among Champion
Enterprises, Inc.; the guarantors party; the banks party; PNC
Bank, National Association, as Administrative Agent; Comerica
Bank, as Documentation Agent; National City Bank, Harris Trust and
Savings Bank, Keybank National Association, Nationsbank, N.A., and
Wachovia Bank and Trust Company, N.A., as co-Agents.
11 Computation of EPS.
27.1 Financial Data Schedule.
27.2 Restated Financial Data Schedule.