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 OCTOBER 2, 1999
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.
47,675,114 shares of the registrant's $1.00 par value Common Stock were
outstanding as of October 29, 1999.
Page 1 of 18
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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)
Three Months Ended Nine Months Ended
------------------ -----------------
Oct. 2, Oct. 3, Oct. 2, Oct. 3,
1999 1998 1999 1998
----------- ----------- ----------- -----------
Net sales $ 631,148 $ 614,945 $ 1,920,411 $ 1,660,470
Cost of sales 529,208 500,236 1,583,737 1,367,142
----------- ----------- ----------- -----------
Gross margin 101,940 114,709 336,674 293,328
Selling, general and
administrative expenses 71,528 63,257 211,454 164,939
Loss from independent
retailer bankruptcy 33,600 - 33,600 -
----------- ----------- ----------- -----------
Operating income (loss) (3,188) 51,452 91,620 128,389
Other income (expense):
Interest income 782 653 1,867 1,540
Interest expense (7,315) (5,296) (20,629) (10,773)
----------- ----------- ----------- -----------
Income (loss) before
income taxes (9,721) 46,809 72,858 119,156
Income taxes (benefits) (3,800) 18,700 28,400 47,600
----------- ----------- ----------- -----------
Net income (loss) $ (5,921) $ 28,109 $ 44,458 $ 71,556
=========== =========== =========== ===========
Basic earnings (loss) per share $ (0.12) $ 0.59 $ 0.92 $ 1.50
=========== =========== =========== ===========
Weighted shares for basic EPS 48,200 48,040 48,422 47,649
=========== =========== =========== ===========
Diluted earnings (loss) per share $ (0.12) $ 0.57 $ 0.90 $ 1.45
=========== =========== =========== ===========
Weighted shares for diluted EPS 48,664 49,587 49,245 49,257
=========== =========== =========== ===========
See accompanying Notes to Consolidated Financial Statements.
Page 2 of 18
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CHAMPION ENTERPRISES, INC.
Consolidated Balance Sheets
(In thousands, except par value amount)
Oct. 2, Jan. 2,
1999 1999
----------- -----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 25,063 $ 23,828
Accounts receivable, trade 119,614 61,043
Inventories 340,911 244,142
Deferred taxes and other current assets 66,396 56,627
----------- -----------
Total current assets 551,984 385,640
----------- -----------
PROPERTY AND EQUIPMENT
Cost 311,651 265,844
Less-accumulated depreciation 89,031 74,881
----------- -----------
222,620 190,963
----------- -----------
GOODWILL
Cost 506,850 449,821
Less-accumulated amortization 34,302 24,071
----------- -----------
472,548 425,750
----------- -----------
OTHER ASSETS 38,273 19,319
----------- -----------
Total assets $ 1,285,425 $ 1,021,672
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable to bank $ 10,000 $ -
Floor plan payable 213,188 135,332
Accounts payable 83,369 47,762
Accrued dealer discounts 51,336 52,225
Accrued warranty obligations 52,556 46,032
Accrued compensation and payroll taxes 36,979 45,007
Other current liabilities 79,983 67,347
----------- -----------
Total current liabilities 527,411 393,705
----------- -----------
LONG-TERM LIABILITIES
Long-term debt 224,950 121,629
Deferred portion of purchase price 24,700 47,200
Other long-term liabilities 65,735 53,892
----------- -----------
315,385 222,721
----------- -----------
SHAREHOLDERS' EQUITY
Preferred stock, no par value, 5,000 shares
authorized, none issued - -
Common stock, $1 par value, 120,000 shares
authorized, 47,752 and 48,270 shares issued
and outstanding, respectively 47,752 48,270
Capital in excess of par value 37,002 43,649
Retained earnings 359,398 314,940
Foreign currency translation adjustments (1,523) (1,613)
----------- -----------
Total shareholders' equity 442,629 405,246
----------- -----------
Total liabilities and shareholders' equity $ 1,285,425 $ 1,021,672
=========== ===========
See accompanying Notes to Consolidated Financial Statements.
Page 3 of 18
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CHAMPION ENTERPRISES, INC.
Consolidated Statements of Cash Flows
(In thousands)
Nine Months Ended
Oct. 2, Oct. 3,
1999 1998
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 44,458 $ 71,556
--------- ---------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 27,668 19,427
Increase/decrease, net of acquisitions
Accounts receivable (54,010) (38,185)
Inventories (24,147) (40,399)
Accounts payable 33,140 50,680
Accrued liabilities (1,553) 29,239
Other, net 14,496 (8,256)
--------- ---------
Total adjustments (4,406) 12,506
--------- ---------
Net cash provided by operating activities 40,052 84,062
--------- ---------
CASH FLOWS FROM DISCONTINUED OPERATIONS:
Proceeds on disposal, net - 9,450
--------- ---------
Net cash provided by discontinued operations - 9,450
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions (83,930) (254,688)
Additions to property and equipment (43,120) (36,227)
Advances to unconsolidated subsidiaries (2,514) -
Proceeds on disposal of property and equipment 1,014 -
--------- ---------
Net cash used for investing activities (128,550) (290,915)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from senior notes, net 197,300 -
Increase (decrease) in notes payable to bank (108,000) 152,000
Increase in floor plan payable 1,648 520
Net increase (decrease) in long-term debt 12,957 (698)
Common stock issued, net 4,338 6,500
Common stock repurchased (18,547) -
Tax benefit of stock options exercised 1,000 4,000
Deferred financing costs (963) -
--------- ---------
Net cash provided by financing activities 89,733 162,322
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,235 (35,081)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 23,828 60,280
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 25,063 $ 25,199
========= =========
ADDITIONAL CASH FLOW INFORMATION:
Cash paid for interest $ 15,540 $ 9,327
Cash paid for income taxes $ 43,500 $ 39,390
SCHEDULE OF CASH FLOWS FROM ACQUISITIONS:
Guaranteed purchase price $ 76,984 $ 278,719
Less: Unpaid portion of guaranteed purchase price - (16,300)
Cash acquired (18,939) (14,476)
Plus: Payment of deferred portion of purchase price 25,350 4,850
Acquisition costs 535 1,895
--------- ---------
$ 83,930 $ 254,688
========= =========
See accompanying Notes to Consolidated Financial Statements.
Page 4 of 18
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CHAMPION ENTERPRISES, INC.
Notes to Consolidated Financial Statements
1. In the quarter ended October 2, 1999, the registrant's former largest
independent retail customer, Ted Parker Home Sales, Inc. ("Ted
Parker"), filed a Chapter 11 bankruptcy petition. Champion was
contingently obligated under repurchase agreements with Ted Parker's
inventory floor plan lenders. Pursuant to these agreements the
registrant repurchased approximately $70 million of inventory, which
was financed through floor plan borrowings. In the quarter a pretax
charge of $33.6 million ($20.5 million after tax or $0.42 per diluted
share) was recorded for the discounting and other costs expected to be
incurred in connection with the liquidation of the repurchased homes.
In the bankruptcy proceedings, Champion acquired 37 sales center leases
previously operated by Ted Parker. These stores, primarily in North and
South Carolina, were acquired in September 1999 for approximately $2.8
million. The registrant plans to operate 18 to 20 of these acquired
locations on a permanent basis and to sell seven of the leases to other
independent retailers. The remaining locations will be operated
temporarily until the inventory is liquidated, then they will be closed
or sold. Further, the registrant has consolidated its manufacturing
operations in North Carolina and temporarily idled two facilities in
that state.
2. For each of the dates indicated, inventories consisted of the following
(in thousands):
Oct. 2, Jan. 2,
1999 1999
-------- --------
Raw materials and work-in-process $ 66,336 $ 60,259
Manufactured homes 274,575 183,883
-------- --------
$340,911 $244,142
======== ========
3. The difference between income taxes provided for financial reporting
purposes and expected charges or benefits at the U.S. federal statutory
rate is due primarily to state tax charges.
The components of the income tax provisions for the nine months ended
October 2, 1999 and October 3, 1998 follow (in thousands):
Oct. 2, Oct. 3,
1999 1998
-------- --------
Statutory U.S. tax rate $ 25,500 $ 41,700
Increase in rate resulting from:
State taxes 2,300 4,300
Other 600 1,600
-------- --------
Total provision $ 28,400 $ 47,600
======== ========
Effective tax rate 39% 40%
======== ========
4. Earnings per share amounts, including pro forma amounts, are calculated
in accordance with Statement of Financial Accounting Standards No. 128,
"Earnings Per Share."
Page 5 of 18
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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 January 1999 the registrant acquired Homes of Merit, Inc. and
Heartland Homes Group. Homes of Merit is the largest producer of
manufactured housing in Florida and Heartland Homes is a Texas retailer
of manufactured homes. In June 1999 the registrant acquired Care Free
Homes, Inc., a manufactured housing retailer based in Utah. During the
first nine months of 1999, net cash of $49.5 million was paid for these
acquisitions, financed from additional borrowings. Guaranteed purchase
price for these companies totaled $68 million, with additional purchase
price payments of up to $66.5 million over the next four years if
certain performance goals of the acquired businesses are achieved. The
acquisitions were accounted for using the purchase method and resulted
in the recording of $49 million of goodwill.
Throughout 1998 the registrant acquired 14 manufactured housing retail
organizations and one manufactured home building facility. The
aggregate purchase price for these 1998 acquisitions consisted of
guaranteed purchase price of $295 million and contingent purchase price
of up to $160 million, potentially payable over the next five years if
certain performance goals of the acquired businesses are achieved.
Goodwill associated with acquisitions is generally amortized using the
straight-line method over 40 years. Recognition of additional purchase
price related to contingent amounts will result in the recording of a
corresponding amount of goodwill. At October 2, 1999 the registrant was
contingently obligated for additional purchase price of up to $190
million, $30 million of which has been recorded on the balance sheet.
The results of operations of acquisitions are included with those of
the registrant from the respective acquisition dates.
Following are pro forma results of operations for the three and nine
month periods ended October 3, 1998 assuming that 1998 and 1999
acquisitions of significant subsidiaries had taken place at the
beginning of 1998. The pro forma results are not necessarily indicative
of future earnings or earnings that would have been reported had the
acquisitions been completed when assumed. The pro forma results should
not be taken as indicative of results for a full year.
(In thousands, except Three Months Ended Nine Months Ended
per share amounts) Oct. 3, 1998 Oct. 3, 1998
------------------ -----------------
Net sales $669,095 $1,926,720
======== ==========
Income before income taxes $ 50,000 $ 129,200
Income taxes 20,000 51,700
-------- ----------
Net income $ 30,000 $ 77,500
======== ==========
Income per diluted share $ 0.60 $ 1.57
======== ==========
Page 6 of 18
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8. On May 3, 1999 the registrant completed an offering for $200 million of
unsecured Senior Notes due May 15, 2009 with interest payable
semi-annually at an annual rate of 7.625%. The net proceeds from the
offering totaling $197.3 million were primarily used to reduce bank
debt.
9. The registrant has a five-year revolving credit agreement that provides
a $275 million unsecured line of credit, including letters of credit.
In September 1999 the line of credit was reduced from $325 million
pursuant to the agreement, which provides for annual reductions 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.
10. Reconciliations of segment sales to consolidated net sales and segment
EBITA (earnings before interest, taxes, goodwill amortization and
corporate office costs) to consolidated operating income (loss) follow
(in thousands):
Three Months Ended
-----------------------
Oct. 2, Oct. 3,
1999 1998
---------- ----------
Net sales
Manufacturing $ 492,632 $ 495,285
Retail 211,516 172,660
Less: intercompany (73,000) (53,000)
---------- ----------
Consolidated net sales $ 631,148 $ 614,945
========== ==========
Operating income (loss)
Manufacturing EBITA $ 26,253 $ 46,834
Retail EBITA 14,015 13,628
General corporate expenses (6,393) (5,463)
Intercompany profit elimination - (1,400)
Goodwill amortization (3,463) (2,147)
Loss from independent retailer bankruptcy (33,600) -
---------- ----------
Consolidated operating income (loss) $ (3,188) $ 51,452
========== ==========
Nine Months Ended
-----------------------
Oct. 2, Oct. 3,
1999 1998
---------- ----------
Net sales
Manufacturing $1,526,746 $1,414,103
Retail 611,665 383,367
Less: intercompany (218,000) (137,000)
---------- ----------
Consolidated net sales $1,920,411 $1,660,470
========== ==========
Operating income
Manufacturing EBITA $ 111,626 $ 126,339
Retail EBITA 46,610 34,532
General corporate expenses (18,385) (16,844)
Intercompany profit elimination (4,400) (8,700)
Goodwill amortization (10,231) (6,938)
Loss from independent retailer bankruptcy (33,600) -
----------- ----------
Consolidated operating income $ 91,620 $ 128,389
========== ==========
Page 7 of 18
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11. As is customary in the manufactured housing industry, Champion has
entered into repurchase agreements with lending institutions that
provide wholesale floor plan financing to its independent retailers.
Pursuant to these agreements Champion is obligated to repurchase its
homes during a period of 12 or 15 months after wholesale shipment upon
default by the retailer and repossession by the financial institution.
The maximum potential repurchase obligation at October 2, 1999 was $700
million, exclusive of any resale value of the homes.
12. 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.
13. Substantially all the registrant'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
aggregate total assets and pretax income of, and the Company's net
investment in, the nonguarantor subsidiaries is not material to the
consolidated totals of the company.
Page 8 of 18
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Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
CHAMPION ENTERPRISES, INC.
THREE AND NINE MONTHS ENDED OCTOBER 2, 1999
VERSUS THREE AND NINE MONTHS ENDED OCTOBER 3, 1998
CONSOLIDATED
(Dollars in millions)
Three Months Ended
--------------------
Oct. 2, Oct. 3, %
1999 1998 Change
-------- -------- ------
Net sales
Manufacturing $ 492.6 $ 495.3 -1%
Retail 211.5 172.7 23%
Less: intercompany (73.0) (53.0)
-------- --------
Total net sales $ 631.1 $ 615.0 3%
======== ========
Gross margin $ 101.9 $ 114.7 -11%
SG&A 71.5 63.2 13%
Loss from independent
retailer bankruptcy 33.6 -
-------- --------
Operating income (loss) $ (3.2) $ 51.5
======== ========
As a percent of sales
Gross margin 16.2% 18.7%
SG&A 11.3% 10.3%
Operating income before loss from
independent retailer bankruptcy 4.8% 8.4%
Loss from independent
retailer bankruptcy 5.3% -
Operating income (loss) -0.5% 8.4%
Nine Months Ended
--------------------
Oct. 2, Oct. 3, %
1999 1998 Change
-------- -------- ------
Net sales
Manufacturing $1,526.7 $1,414.1 8%
Retail 611.7 383.4 60%
Less: intercompany (218.0) (137.0)
-------- --------
Total net sales $1,920.4 $1,660.5 16%
======== ========
Gross margin $ 336.7 $ 293.3 15%
SG&A 211.5 164.9 28%
Loss from independent
retailer bankruptcy 33.6 -
-------- --------
Operating income $ 91.6 $ 128.4 -29%
======== ========
As a percent of sales
Gross margin 17.5% 17.7%
SG&A 11.0% 9.9%
Operating income before loss from
independent retailer bankruptcy 6.5% 7.7%
Loss from independent
retailer bankruptcy 1.7% -
Operating income 4.8% 7.7%
Page 9 of 18
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OVERVIEW
In the three and nine months ended October 2, 1999, Champion's consolidated
revenues rose 3% for the quarter and 16% for the year-to-date period. These
increases are primarily due to internal expansions and acquisitions completed in
1998 and 1999. Throughout 1998 the registrant acquired 14 manufactured housing
retail organizations and a home building facility. In January 1999 the
registrant completed the acquisitions of Homes of Merit, Florida's largest
producer of manufactured homes, and Heartland Homes, a Texas housing retailer.
In June 1999 the registrant acquired Care Free Homes, Inc., a housing retailer
headquartered in Utah.
In the quarter ended October 2, 1999, the registrant's former largest
independent retail customer, Ted Parker Home Sales, Inc. ("Ted Parker"), filed a
Chapter 11 bankruptcy petition. Champion was contingently obligated under
repurchase agreements with Ted Parker's inventory floor plan lenders. Pursuant
to these agreements the registrant repurchased approximately $70 million of
inventory, which was financed through floor plan borrowings. In the quarter a
pretax charge of $33.6 million ($20.5 million after tax or $0.42 per diluted
share) was recorded for the discounting and other costs expected to be incurred
in connection with the liquidation of the repurchased homes. Sales to this
customer represented 3.5% of Champion's wholesale home shipments in 1998 and
2.7% for the six months ended July 3, 1999.
In the bankruptcy proceedings, Champion acquired 37 sales center leases
previously operated by Ted Parker. These stores, primarily in North and South
Carolina, were acquired in September 1999 for approximately $2.8 million. The
registrant plans to operate 18 to 20 of these acquired locations on a permanent
basis and to sell seven of the leases to other independent retailers. The
remaining locations will be operated temporarily until the inventory is
liquidated, then they will be closed or sold. Further, the registrant has
consolidated its manufacturing operations in North Carolina and temporarily
idled two facilities in that state.
Operating margins, before the loss from the Ted Parker bankruptcy, were 4.8% of
sales for the quarter and 6.5% for the nine months. Selling, general and
administrative expenses ("SG&A") rose in 1999 due to acquisitions and expanded
retail operations. Quarterly net income, before the loss from the Ted Parker
bankruptcy, decreased 48% to $14.6 million, compared to $28.1 million in the
prior year's third quarter. Income per diluted share, before the loss from the
Ted Parker bankruptcy, declined 47% to $0.30, compared to $0.57 per diluted
share in the third quarter 1998. For the year-to-date period, net income was
$44.5 million, or $0.90 per diluted share, compared to $71.6 million, or $1.45
per diluted share, a year ago. These income declines are also due to reduced
manufacturing and retail margins as discussed below.
MANUFACTURING OPERATIONS
Three Months Ended
-------------------
Oct. 2, Oct. 3, %
1999 1998 Change
-------- -------- ------
Net sales (in millions) $ 492.6 $ 495.3 -1%
Segment income before loss
from independent retailer
bankruptcy (in millions) $ 26.3 $ 46.8 -44%
Segment margin 5.3% 9.5%
Homes sold 17,560 18,010 -2%
Floors sold 29,662 29,889 -1%
Multi-section mix 67% 64%
Average home price $28,100 $27,500 2%
Page 10 of 18
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Nine Months Ended
-------------------
Oct. 2, Oct. 3, %
1999 1998 Change
-------- -------- ------
Net sales (in millions) $1,526.7 $1,414.1 8%
Segment income before loss
from independent retailer
bankruptcy (in millions) $ 111.6 $ 126.3 -12%
Segment margin 7.3% 8.9%
Homes sold 55,550 52,641 6%
Floors sold 93,040 86,233 8%
Multi-section mix 66% 62%
Average home price $27,500 $26,900 2%
Manufacturing facilities-end of period 62 59 5%
Compared to a year ago, manufacturing revenues decreased 1% for the quarter,
with homes and floors sold down 2.5% and 0.8%, respectively. The industry's
excess number of retailers and retail inventory levels affected the registrant's
sales. For the year-to-date period, revenues reached $1.5 billion, up 8% from a
year earlier, with company-operated retailers accounting for 14% of year-to-date
homes sold. The remaining 86% were sold to independent retailers. The
registrant's year-to-date wholesale shipments of homes and floors sold rose 5.5%
and 7.9%, respectively, from 1998 levels. Excluding Homes of Merit from both
periods, the registrant's year-to-date wholesale shipments of homes sold
decreased 0.5% and floors sold rose 0.7%. According to data reported by the
National Conference of States on Building Codes and Standards ("NCSBCS"), U.S.
industry wholesale shipments for the first eight months of 1999 decreased 1.4%
in homes and rose 1.1% in floors from the comparable 1998 period.
Manufacturing segment income for the quarter, before the loss from the Ted
Parker bankruptcy, was $26 million, compared to $47 million, in 1998. Nine-month
segment income, before the loss from the Ted Parker bankruptcy, was $112
million, or 7.3% of wholesale revenues, compared to $126 million, or 8.9% of
revenues, a year ago. Margins in 1999 were affected by rising material costs,
market conditions, and operating inefficiencies resulting from low levels of
unfilled orders. Start-up expenses at three new facilities, one each in Arizona,
New York and Kentucky, and $3.7 million of costs to consolidate five plants into
other operations also affected the third quarter's profitability.
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 October 2, 1999 totaled approximately
$80 million, compared to $150 million a year ago, excluding Homes of Merit from
both periods. Excluding five idled facilities which were consolidated into other
operations in July and August, and including six Homes of Merit plants, the
registrant had 62 home building facilities at quarter end, compared to 59 one
year earlier. During the third quarter of 1999, the registrant opened new
facilities in Arizona and Kentucky, and its replacement plant in New York for
the one destroyed by fire in the first quarter. In October 1999 Champion
consolidated its Idaho operations into one facility upon the temporary idling of
a plant located there. In November 1999 the company further consolidated
operations and temporarily idled a facility in Alabama.
Page 11 of 18
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RETAIL OPERATIONS
Three Months Ended
-------------------
Oct. 2, Oct. 3, %
1999 1998 Change
------- ------- ------
Net sales (in millions) $ 211.5 $ 172.7 23%
Segment income (in millions) $ 14.0 $ 13.6 3%
Segment margin 6.6% 7.9%
New homes sold 4,299 3,576 20%
Pre-owned homes sold 1,037 847 22%
Total homes sold 5,336 4,423 21%
% Champion produced-new homes sold 64% 50%
New multi-section mix 56% 53%
Average new home price $46,100 $45,700 1%
Nine Months Ended
-------------------
Oct. 2, Oct. 3, %
1999 1998 Change
------- ------- ------
Net sales (in millions) $ 611.7 $ 383.4 60%
Segment income (in millions) $ 46.6 $ 34.5 35%
Segment margin 7.6% 9.0%
New homes sold 12,475 8,121 54%
Pre-owned homes sold 3,123 1,852 69%
Total homes sold 15,598 9,973 56%
% Champion produced-new homes sold 62% 47%
New multi-section mix 55% 53%
Average new home price $45,700 $44,900 2%
Sales centers-end of period 291 233 25%
In the third quarter of 1999, retail sales reached $212 million, an increase of
23% from a year ago. Year-to-date, retail sales rose 60% to $612 million, with
new and pre-owned homes sold up 54% and 69%, respectively, from the comparable
1998 period. These increases are due to expanded retail operations from
acquisitions and internal expansions. At quarter end the registrant was
operating 291 retail stores, excluding locations acquired from Ted Parker,
compared to 233 locations a year ago. Of the total new homes sold in the
nine-month period, 62% were produced by Champion facilities, compared to 47% a
year ago.
Quarterly segment income, before inventory financing charges, rose 3% from a
year ago to reach $14 million, or 6.6% of retail revenues. Nine-month segment
income, before inventory financing costs, increased 35% to $47 million and
represented 7.6% of related revenues. Competitive pricing in key markets and
start-up and expansion costs affected margins in 1999. Lower margins at some of
the minor acquisitions also affected margins in the year-to-date period.
OTHER MATTERS
During the nine-month period, a non-cash accounting charge of approximately $4.4
million was recorded to eliminate the manufacturing profits in inventories of
Champion produced homes at company-operated sales centers. This amount compares
to $8.7 million a year ago. Interest expense was higher in 1999 due to increased
amounts outstanding on the registrant's line of credit, Senior Notes payable and
floor plan payable. Income tax expense in 1999 decreased due to lower pretax
income. The effective tax rate was 39% in 1999, compared to 40% in 1998,
decreasing as a result of lower state tax rates due to certain acquisitions.
Page 12 of 18
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The industry's U.S. wholesale shipments in the remainder of 1999 and into 2000
could suffer from the excess number of industry retailers and retail inventory
levels. Increased competitive pressures are expected to reduce Champion's
wholesale and retail margins until industry retail inventories are reduced to
acceptable levels and wholesale shipments increase. Due to the industry's excess
retail inventories and the Ted Parker bankruptcy situation, the company will not
reach its earnings growth goal in 1999. Because of the uncertainty in the
marketplace, the registrant will not be setting an earnings growth goal for the
year 2000.
On August 26, 1999, a putative shareholder class action suit entitled Joel
Miller v. Champion Enterprises, Inc. was filed against the company and Walter R.
Young in the U.S. District Court for the Eastern District of Michigan. The
complaint seeks unspecified damages and costs for alleged violations of federal
securities laws. The plaintiff generally alleges, among other things, that the
company made false and misleading statements and omitted other information
regarding the financial condition of Ted Parker and the potential impact on the
company of Ted Parker becoming insolvent. Champion believes that it is possible
that additional similar actions have been or may be filed. The company intends
to vigorously defend against this litigation.
YEAR 2000 ISSUE
The company began assessments in prior years to identify the work required to
assure that its computer systems successfully operate after January 1, 2000.
This review included analyzing software internally developed, software licensed
from third parties and related issues of significant suppliers, including
wholesale and retail financing companies. It has been determined that a small
portion of the registrant's computer systems could be affected by the Year 2000
Issue. The process of replacing or modifying such software and hardware was
started in 1997 and remaining changes were substantially completed by the end of
the third quarter of 1999. Costs incurred to date by the company related to the
Year 2000 Issue have been immaterial and were charged to expense as incurred.
Remaining costs to make the registrant's computer systems year 2000 compliant
are not expected to have a material effect on results of operations, liquidity
or capital resources.
The registrant is dependent upon licensed software for a significant portion of
its computer applications. It has been represented by these suppliers that such
third-party software is year 2000 compliant. The registrant's operations are
also dependent on an adequate supply of raw materials, energy and utilities,
delivery services, and wholesale and retail financing. The company uses a
variety of vendors for these products and services, and is reviewing its major
vendors to determine the potential impact of the Year 2000 Issue. Management is
not aware of any significant problems with these vendors relating to this issue.
In the event that certain suppliers are not year 2000 compliant, the company
could be adversely affected.
LIQUIDITY AND CAPITAL RESOURCES
Cash balances totaled $25 million at October 2, 1999, compared to $24 million at
January 2, 1999. During the year-to-date period, $40 million of cash was
generated from operating activities and $5 million from stock option exercises
and related tax benefits. Long-term debt increased $102 million during the
nine-month period, with net cash totaling $84 million used for acquisitions and
for other acquisition related payments. Expenditures in 1999 included $43
million for capital improvements and $18.5 million for common stock repurchases.
These buybacks, totaling 1.3 million shares during the nine months, were
pursuant to a Board of Directors authorization for up to 3.0 million shares.
Through October 29, 1999 1.4 million shares had been repurchased at a cost of
$19.2 million.
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Assets and liabilities increased during the year due to acquisitions and higher
wholesale revenues in September 1999 as compared to December 1998. Inventories
and floor plan payable rose during the quarter due to homes that were
repurchased from Ted Parker and financed by flooring lenders. At quarter end
debt was 50% of total capital. For the year-to-date period, earnings before the
loss from the Ted Parker bankruptcy, interest, taxes, depreciation and
amortization totaled $153 million, up from $148 million a year ago.
The company has a five-year $275 million unsecured bank line of credit, which
was completed in May 1998 and includes letters of credit. At quarter end the
registrant had $33 million of letters of credit outstanding and bank borrowings
totaling $10 million.
On May 3, 1999 the registrant completed an offering for $200 million of
unsecured Senior Notes due May 15, 2009 with interest payable semi-annually at
an annual rate of 7.625%. The net proceeds from the offering of approximately
$197.3 million were primarily used to reduce bank debt.
Additional borrowings may be necessary during 1999 to fund development projects,
common stock repurchases, and capital expenditures. The company estimates that
its total capital expenditures for 1999 should be approximately $50 million for
new construction and expansions of manufacturing facilities and internal retail
expansions.
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, development project
funding, common stock repurchases, capital expenditures, and acquisition related
payments, including contingent purchase price, in the foreseeable future.
However, management may explore other opportunities to raise capital to finance
growth. Consistent with its plan to improve shareholder value through
investments in sound operating businesses and common stock repurchases, the
registrant does not plan to pay cash dividends in the near term. The company has
a goal to reach $1 billion in retail revenues by the year 2000.
FORWARD LOOKING STATEMENTS
Certain statements contained in this report, including the registrant's plans
for retail expansion, capital expenditures and planned facilities, contingent
liabilities related to repurchase agreements, and its retail sales 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 (wholesale and retail) 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.
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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, insulation
and drywall 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.
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 registrant does not undertake to update
its forward looking statements or risk factors to reflect future events or
circumstances.
THE CYCLICAL AND SEASONAL NATURE OF THE HOUSING MARKET MAY CAUSE FLUCTUATIONS IN
OPERATING RESULTS.
The housing market historically has been highly cyclical and seasonal and
subject to volatility in quarterly operating results. The housing market is
influenced by many national and regional economic and demographic factors,
including consumer confidence, interest rates, availability of financing,
regional population and employment trends and general economic conditions,
including recessions. The housing industry generally experiences lower sales in
the first and fourth calendar quarters of the year primarily as a result of the
effect of adverse weather on construction, manufacturing, distribution and sales
efforts, as well as retail sales and setups. The registrant may, in certain
periods, be affected by these economic and seasonal trends and cannot be assured
that the housing market will not experience future declines or that such
declines will not have a material adverse effect on business.
FUTURE RESULTS OF OPERATIONS ARE DEPENDENT UPON THE ABILITY TO ASSIMILATE THE
OPERATIONS OF ACQUISITIONS.
During the past five years the registrant has significantly expanded its
manufactured housing production operations through acquisitions, with nine
acquisitions of manufactured housing companies since 1994. Champion also has
significantly expanded its retail operations with 291 retail sales locations in
28 states, excluding stores acquired from Ted Parker, as of October 2, 1999,
compared to 22 sales locations at January 3, 1998. Future results of operations
are dependent, in part, upon the ability of management to assimilate the
operations of recent acquisitions, as well as any future acquisitions and to
oversee these expanded operations. The ability to manage these and any future
acquisitions will depend upon a number of factors, including capital resources,
ability to retain key employees and ability to control operating and production
costs. The registrant cannot be assured that it will be successful in these
efforts or that these efforts may not in certain circumstances adversely affect
operating results.
CHAMPION DEPENDS ON INDEPENDENT RETAILERS.
During 1999, 86% of the registrant's wholesale shipments of homes were made to
approximately 3,500 independent retail locations throughout the U.S. and western
Canada. Some independent retailers operate multiple sales centers. As is common
in the industry, Champion's independent retailers may sell manufactured homes
produced by other manufacturers in addition to those produced by the registrant.
While the company believes that its relations with its independent retailers are
generally good, relationships with retailers are cancellable on short notice by
either party. The registrant cannot be assured that it will be able to maintain
these relations, that these retailers will continue to sell Champion homes or
that it will be able to attract and retain quality independent retailers.
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SALES DEPEND ON THE AVAILABILITY OF RETAILER AND CONSUMER FINANCING.
Champion's retailers and the retail purchasers of homes normally secure
financing from third-party lenders. The availability, interest rate and other
costs of such financing are dependent on the lending practices of financial
institutions, governmental policies and economic and other conditions, all of
which are beyond the registrant's control. Interest rates for manufactured home
loans are generally higher, and the terms of these loans shorter, than loans for
site-built homes. Additionally, manufactured home financing is at times more
difficult to obtain than conventional home mortgages. There can be no assurance
that affordable wholesale or retail financing for manufactured homes will
continue to be available on a widespread basis. If such financing were to become
unavailable, such unavailability could have a material adverse effect on results
of operations.
THE REGISTRANT COULD BE ADVERSELY IMPACTED BY CONTINGENT LIABILITIES.
As is customary in the manufactured housing industry, most retailers finance
their purchases through floor plan arrangements under which a financial
institution provides the retailer with a loan for the purchase price of the home
and maintains a security interest in the home as collateral. In connection with
a floor plan arrangement, the financial institution that provides the
independent retailer financing customarily requires the registrant to enter into
a separate repurchase agreement with the financial institution. Under these
agreements Champion is obligated, upon default by the retailer and repossession
by the financial institution, to repurchase its home during a period of 12 or 15
months after wholesale shipment in an amount equal to the unpaid loan balance
for the home, plus certain administrative and handling expenses, reduced by the
amount of any damage to the home.
The maximum potential repurchase obligation at October 2, 1999 was $700 million,
exclusive of any resale value of the homes. Losses incurred in connection with
these agreements in 1994 through 1998 were immaterial and estimated losses are
provided for currently. Excluding losses incurred in connection with the Ted
Parker bankruptcy, year-to-date through third quarter Champion repurchased 413
homes and recorded a loss on resale of approximately $720,000 in connection with
these repurchases from 52 bankrupt retailers. Champion cannot be assured that it
will not suffer additional losses with respect to, and as a consequence of,
these financing arrangements.
GROWTH MAY BE LIMITED BY THE AVAILABILITY OF MANUFACTURED HOUSING SITES.
Any limitation on the growth of the number of sites for placement of
manufactured homes or on the operation of manufactured housing communities could
adversely affect the manufactured housing business. Manufactured housing
communities and individual home placements are subject to local zoning
ordinances and other local regulations relating to utility service and
construction of roadways. In the past, property owners often have resisted the
adoption of zoning ordinances permitting the location of manufactured homes in
residential areas, which the registrant believes has adversely affected the
growth of the industry. Champion cannot be assured that manufactured homes will
receive widespread acceptance or that localities will adopt zoning ordinances
permitting the location of manufactured home areas. The inability of the
manufactured home industry to gain such acceptance and zoning ordinances could
have a material adverse effect on results of operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
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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 Computation of EPS.
27 Financial Data Schedule.
(b) On July 12, 1999; July 30, 1999; August 26, 1999; and September 2, 1999
the registrant filed current reports on Form 8-K.
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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
Executive Vice President, Chief
Strategic and Financial Officer
(Principal Financial Officer)
And: RICHARD HEVELHORST
--------------------------------
Richard Hevelhorst
Vice President and Controller
(Principal Accounting Officer)
Dated: November 10, 1999
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Exhibit Index
-------------
Exhibit No. Description
- ----------- -----------
11 Computation of EPS
27 Financial Data Schedule