<PAGE> 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 SEPTEMBER 30, 2000
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.
47,246,305 shares of the registrant's $1.00 par value Common Stock were
outstanding as of November 3, 2000.
Page 1 of 17
<PAGE> 2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CHAMPION ENTERPRISES, INC.
Consolidated Statements of Operations
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------ -----------------------
Sept. 30, Oct. 2, Sept. 30, Oct. 2,
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $ 452,731 $ 631,148 $1,489,424 $1,920,411
Cost of sales 377,022 529,208 1,239,324 1,583,737
---------- ---------- ---------- ----------
Gross margin 75,709 101,940 250,100 336,674
Selling, general and
administrative expenses 75,420 71,528 223,475 211,454
Loss from independent
retailer bankruptcy -- 33,600 5,000 33,600
---------- ---------- ---------- ----------
Operating income (loss) 289 (3,188) 21,625 91,620
Interest expense, net 6,762 6,533 20,575 18,762
---------- ---------- ---------- ----------
Income (loss) before
income taxes (6,473) (9,721) 1,050 72,858
Income taxes (benefits) (2,500) (3,800) 900 28,400
---------- ---------- ---------- ----------
Net income (loss) $ (3,973) $ (5,921) $ 150 $ 44,458
========== ========== ========== ==========
Basic earnings (loss) per share $ (0.08) $ (0.12) $ 0.00 $ 0.92
========== ========== ========== ==========
Weighted shares for basic EPS 47,248 48,200 47,250 48,422
========== ========== ========== ==========
Diluted earnings (loss) per share $ (0.08) $ (0.12) $ 0.00 $ 0.90
========== ========== ========== ==========
Weighted shares for diluted EPS 47,315 48,664 47,336 49,245
========== ========== ========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
Page 2 of 17
<PAGE> 3
CHAMPION ENTERPRISES, INC.
Consolidated Balance Sheets
(In thousands, except par value amount)
<TABLE>
<CAPTION>
Sept. 30, Jan. 1,
2000 2000
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 32,035 $ 12,847
Accounts receivable, trade 69,120 66,636
Inventories 251,968 301,885
Deferred taxes and other current assets 77,360 72,344
----------- -----------
Total current assets 430,483 453,712
----------- -----------
PROPERTY, PLANT AND EQUIPMENT
Cost 324,592 317,769
Less-accumulated depreciation 108,823 94,871
----------- -----------
215,769 222,898
----------- -----------
GOODWILL
Cost 514,580 511,588
Less-accumulated amortization 47,804 37,716
----------- -----------
466,776 473,872
----------- -----------
OTHER ASSETS 32,135 32,458
----------- -----------
Total assets $ 1,145,163 $ 1,182,940
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Floor plan payable $ 129,411 $ 170,553
Accounts payable 64,569 42,160
Accrued dealer discounts 48,445 54,237
Accrued warranty obligations 53,184 55,476
Accrued compensation and payroll taxes 25,926 26,848
Other current liabilities 74,289 79,902
----------- -----------
Total current liabilities 395,824 429,176
----------- -----------
LONG-TERM LIABILITIES
Long-term debt 226,539 224,357
Deferred portion of purchase price 39,157 45,200
Other long-term liabilities 38,827 39,945
----------- -----------
304,523 309,502
----------- -----------
CONTINGENT LIABILITIES (Note 7)
SHAREHOLDERS' EQUITY
Preferred stock, no par value, 5,000 shares
authorized, none issued -- --
Common stock, $1 par value, 120,000 shares
authorized, 47,246 and 47,304 shares issued
and outstanding, respectively 47,246 47,304
Capital in excess of par value 33,775 33,160
Retained earnings 365,132 364,982
Accumulated other comprehensive income (1,337) (1,184)
----------- -----------
Total shareholders' equity 444,816 444,262
----------- -----------
Total liabilities and shareholders' equity $ 1,145,163 $ 1,182,940
=========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
Page 3 of 17
<PAGE> 4
CHAMPION ENTERPRISES, INC.
Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
-----------------------
Sept. 30, Oct. 2,
2000 1999
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 150 $ 44,458
--------- ---------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 30,176 27,668
Increase/decrease, net of acquisitions
Accounts receivable (2,484) (54,010)
Inventories 48,225 (24,147)
Accounts payable 22,409 33,140
Accrued liabilities 921 (16,680)
Net cash charges to independent retailer
bankruptcy reserve (12,177) 32,489
Other, net (5,442) (2,866)
--------- ---------
Total adjustments 81,628 (4,406)
--------- ---------
Net cash provided by operating activities 81,778 40,052
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions (10,165) (83,930)
Additions to property, plant and equipment (12,692) (43,120)
Investments in and advances to
unconsolidated subsidiaries (2,837) (2,514)
Proceeds on disposal of property, plant and equipment 3,000 1,014
--------- ---------
Net cash used for investing activities (22,694) (128,550)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Senior Notes, net -- 197,300
Decrease in notes payable to bank, net -- (108,000)
Increase (decrease) in floor plan payable, net (41,142) 1,648
Increase in other long-term debt 2,081 12,957
Common stock issued, net 28 4,338
Common stock repurchased (863) (18,547)
Tax benefit of stock options exercised -- 1,000
Deferred financing costs -- (963)
--------- ---------
Net cash provided by (used for) financing activities (39,896) 89,733
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 19,188 1,235
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 12,847 23,828
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 32,035 $ 25,063
========= =========
ADDITIONAL CASH FLOW INFORMATION:
Cash paid for interest $ 18,959 $ 15,540
Cash paid for income taxes $ 4,148 $ 43,500
CASH FLOWS FROM ACQUISITIONS:
Guaranteed purchase price $ 165 $ 76,984
Less: Cash acquired -- (18,939)
Plus: Payments of deferred and contingent
portions of purchase price 10,000 25,350
Plus: Acquisition costs -- 535
--------- ---------
$ 10,165 $ 83,930
========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
Page 4 of 17
<PAGE> 5
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. Certain prior
period amounts have been reclassified to conform to current period
presentation. The balance sheet as of January 1, 2000 was derived from
audited financial statements. Accumulated other comprehensive income
consists of foreign currency translation adjustments.
2. For each of the dates indicated, inventories consisted of the following
(in thousands):
<TABLE>
<CAPTION>
Sept. 30, Jan. 1,
2000 2000
--------- ---------
<S> <C> <C>
Manufactured homes $ 170,648 $ 225,730
Raw materials and work-in-process 52,508 59,062
Other inventory 28,812 17,093
--------- ---------
$ 251,968 $ 301,885
========= =========
</TABLE>
3. The provisions for income taxes differ from the amount of income tax
determined by applying the applicable U.S. statutory federal income tax
rate to pretax income as a result of the following differences (in
thousands):
<TABLE>
<CAPTION>
Nine Months Ended
--------------------------
Sept. 30, Oct. 2,
2000 1999
-------- --------
<S> <C> <C>
Statutory U.S. tax rate $ 400 $ 25,500
Increase in rate resulting from:
State taxes 100 2,300
Nondeductible goodwill 750 750
Other (350) (150)
-------- --------
Total provision $ 900 $ 28,400
======== ========
Effective tax rate 86% 39%
======== ========
</TABLE>
4. Floor plan payable consists of borrowings from various financial
institutions secured by retail inventories of manufactured homes.
Interest on these liabilities generally ranges from the prime rate plus
or minus 1.0%.
5. Long-term debt consists primarily of $200 million of unsecured Senior
Notes due May 15, 2009 with interest payable semi-annually at an annual
rate of 7.625%.
Page 5 of 17
<PAGE> 6
6. Reconciliations of segment sales to consolidated sales and segment
EBITA (earnings before interest, taxes, goodwill amortization and
general corporate expenses) to consolidated operating income (loss)
follow (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
-------------------------
Sept. 30, Oct. 2,
2000 1999
--------- ----------
<S> <C> <C>
Net sales
Manufacturing $ 362,112 $ 492,632
Retail 148,619 211,516
Less: intercompany (58,000) (73,000)
--------- ----------
Consolidated net sales $ 452,731 $ 631,148
========= ==========
Operating income
Manufacturing EBITA $ 14,731 $ 26,253
Retail EBITA (3,413) 14,015
General corporate expenses (8,107) (6,393)
Intercompany profit adjustment 500 --
Goodwill amortization (3,422) (3,463)
Loss from independent retailer
bankruptcy -- (33,600)
--------- ----------
Consolidated operating income (loss) $ 289 $ (3,188)
========= ==========
<CAPTION>
Nine Months Ended
-------------------------
Sept. 30, Oct. 2,
2000 1999
----------- ----------
<S> <C> <C>
Net sales
Manufacturing $ 1,199,364 $1,526,746
Retail 483,060 611,665
Less: intercompany (193,000) (218,000)
----------- ----------
Consolidated net sales $ 1,489,424 $1,920,411
=========== ==========
Operating income
Manufacturing EBITA $ 47,746 $ 111,626
Retail EBITA 6,067 46,610
General corporate expenses (20,860) (18,385)
Intercompany profit adjustment 4,000 (4,400)
Goodwill amortization (10,328) (10,231)
Loss from independent retailer
bankruptcy (5,000) (33,600)
----------- ----------
Consolidated operating income $ 21,625 $ 91,620
=========== ==========
</TABLE>
Segment data includes intersegment revenues and corporate office costs
that are directly and exclusively incurred for each segment, including
the cost of marketing programs that are charged to the manufacturing
segment. General corporate expenses include the results of manufactured
housing developments.
Page 6 of 17
<PAGE> 7
7. 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 limited period after wholesale shipment (generally 12 or
15 months) upon default by the retailer and repossession by the
financial institution. The maximum contingent repurchase obligation at
September 30, 2000 was $480 million, before any resale value of the
homes. This amount compares to $630 million at the beginning of the
year and $700 million a year ago. The potential losses on these
contingent obligations consist of remarketing costs and unrecoverable
discounts on the repurchased homes.
At September 30, 2000 the Company was contingently obligated for
additional purchase price of up to $133 million related to its 1999 and
1998 acquisitions. Management currently believes that payment of $1
million of this contingent purchase price is reasonably possible.
The Company is contingently obligated for approximately $33 million
under letters of credit and $33 million under surety bonds as of
September 30, 2000.
8. As of the end of the third quarter, the Company received a waiver of
certain of the financial performance covenants for the period from
October 1, 2000 through November 15, 2000 under its bank revolving
credit agreement. The Company is currently working with its banks to
amend the credit facility. In the meantime, the Company expects to
receive an extension of the waiver of the financial performance
covenants under the bank revolving credit agreement.
9. During the quarter ended September 30, 2000, Champion closed two
homebuilding facilities and 29 retail sales centers and recorded $3.2
million of charges for asset impairments and lease termination costs.
Also included in the quarter was a $1.5 million charge for asset
impairments related to consolidating development operations and a $2.5
million gain from a property insurance settlement. The impairment
charges, lease termination costs, and insurance gain are included in
selling, general and administrative expenses ("SG&A").
Page 7 of 17
<PAGE> 8
Year-to-date 2000 includes $4.7 million of asset impairment charges and
lease termination costs related to the closing and consolidating of
operations. Employee termination benefits totaling $1.7 million were
recorded and paid in the quarter ended July 1, 2000 upon the closing of
three manufacturing facilities and the termination of substantially all
of the approximately 350 employees at these locations. Also included
for the nine-month period is $6.9 million of gains from property
insurance settlements and a $4.0 million reduction in the reserve for
intercompany profit in retail inventory as a result of lower
manufacturing profits due to market conditions. The intercompany profit
adjustment and employee termination benefits were recorded in cost of
sales and the impairment charges, lease termination costs, and
insurance gains were recorded in SG&A.
In the third quarter of 1999, a charge of $33.6 million ($20.5 million
after-tax or $0.42 per diluted share) was recorded for the expected
losses in connection with the liquidation of repurchased homes upon the
bankruptcy of the Company's former largest independent retailer. During
the first nine months of 2000, cash charges to this reserve totaled
$17.2 million and an additional $5.0 million reserve to liquidate the
repurchased inventory was recorded. As of September 30, 2000
substantially all of the 1,850 homes repurchased in 1999 had been
liquidated.
10. 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 17
<PAGE> 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
CHAMPION ENTERPRISES, INC.
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 VERSUS THREE AND
NINE MONTHS ENDED OCTOBER 2, 1999
CONSOLIDATED
(Dollars in millions)
<TABLE>
<CAPTION>
Three Months Ended
---------------------
Sept.30, Oct. 2, %
2000 1999 Change
--------- --------- ------
<S> <C> <C> <C>
Net sales
Manufacturing $ 362.1 $ 492.6 (26%)
Retail 148.6 211.5 (30%)
Less: intercompany (58.0) (73.0)
--------- ---------
Total net sales $ 452.7 $ 631.1 (28%)
========= =========
Gross margin $ 75.7 $ 101.9 (26%)
SG&A 75.4 71.5 5%
Loss from independent
retailer bankruptcy - (33.6) 100%
--------- ---------
Operating income (loss) $ 0.3 $ (3.2) 109%
========= =========
As a percent of sales
Gross margin 16.7% 16.2%
SG&A 16.7% 11.3%
Operating income before loss from
independent retailer bankruptcy 0.0% 4.8%
Operating income (loss) 0.0% (0.5%)
<CAPTION>
Nine Months Ended
---------------------
Sept. 30, Oct. 2, %
2000 1999 Change
--------- --------- ------
<S> <C> <C> <C>
Net sales
Manufacturing $1,199.4 $1,526.7 (21%)
Retail 483.0 611.7 (21%)
Less: intercompany (193.0) (218.0)
--------- ---------
Total net sales $1,489.4 $1,920.4 (22%)
========= =========
Gross margin $ 250.1 $ 336.7 (26%)
SG&A 223.5 211.5 6%
Loss from independent
retailer bankruptcy (5.0) (33.6) 85%
--------- ---------
Operating income $ 21.6 $ 91.6 (76%)
========= =========
</TABLE>
Page 9 of 17
<PAGE> 10
<TABLE>
<S> <C> <C>
As a percent of sales
Gross margin 16.8% 17.5%
SG&A 15.0% 11.0%
Operating income before loss from
independent retailer bankruptcy 1.8% 6.5%
Operating income 1.5% 4.8%
</TABLE>
OVERVIEW
Consolidated revenues decreased 28% for the quarter and 22% year-to-date due to
reduced wholesale demand as a result of the following industry conditions:
tightened consumer credit standards, increased repossessions, higher interest
rates, excess number of retailers and excess retail inventory. The tightened
consumer credit standards, increased repossessions and higher interest rates
have negatively affected retail sales at company-owned stores.
As a percent of sales in the third quarter of 2000, gross margins increased from
the year earlier period due to higher material costs in 1999. Gross margins in
2000 were also impacted by the effects of lower volume on manufacturing fixed
costs, plant closings, manufacturing incentives to retailers to sell older
homes, and costs to reduce inventory and sell older homes at company-owned
stores. Selling, general and administrative expenses ("SG&A") rose in 2000 due
primarily to marketing programs and Internet initiatives to stimulate retail and
wholesale demand. Costs for these programs increased SG&A in 2000 by $6.7
million in the quarter and $18.8 million in the year-to-date period. Third
quarter SG&A in 2000 also included $4.0 million of noncash asset impairment
charges related to the closing and consolidating of homebuilding facilities,
sales centers and development operations. Gains from property insurance
settlements totaling $2.5 million and $6.9 million were included in SG&A for the
three and nine-month periods, respectively.
Year-to-date 2000 included an additional $5.0 million charge to liquidate
inventory repurchased in 1999 upon the bankruptcy of the Company's former
largest independent retailer. Third quarter 1999 included a charge of $33.6
million ($20.5 million after-tax or $0.42 per diluted share) related to this
bankruptcy.
Due primarily to the factors noted above, for the quarter the registrant
recorded a net loss of $4.0 million, or $0.08 per diluted share, compared to a
net loss of $5.9 million, or $0.12 per diluted share, in the prior year's third
quarter. Year-to-date net income was $150,000, or $0.00 per diluted share,
compared to $44.5 million, or $0.90 per diluted share, one year earlier.
Page 10 of 17
<PAGE> 11
MANUFACTURING OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
--------------------
Sept. 30, Oct. 2, %
2000 1999 Change
--------- --------- ------
<S> <C> <C> <C>
Net sales (in millions) $ 362.1 $ 492.6 (26%)
Segment EBITA before loss
from independent retailer
bankruptcy (in millions) $ 14.7 $ 26.3 (44%)
Segment EBITA margin 4.1% 5.3%
Homes sold 12,393 17,560 (29%)
Floors sold 21,682 29,662 (27%)
Multi-section mix 73% 67%
Average home price $29,200 $28,100 4%
<CAPTION>
Nine Months Ended
--------------------
Sept. 30, Oct. 2, %
2000 1999 Change
--------- --------- ------
<S> <C> <C> <C>
Net sales (in millions) $1,199.4 $1,526.7 (21%)
Segment EBITA before loss
from independent retailer
bankruptcy (in millions) $ 47.7 $ 111.6 (57%)
Segment EBITA margin 4.0% 7.3%
Homes sold 42,705 55,550 (23%)
Floors sold 72,992 93,040 (22%)
Multi-section mix 69% 66%
Average home price $ 28,100 $ 27,500 2%
Manufacturing facilities at period end 55 62 (11%)
</TABLE>
Lower sales volume, increased marketing expenses, plant closings, asset
impairment charges and gains from property insurance settlements affected
manufacturing margins in the three and nine-month periods in 2000. Due to market
conditions, the registrant closed two homebuilding facilities and recorded a
$1.0 million asset impairment charge during this year's third quarter.
Year-to-date margins include property insurance gains totaling $6.9 million.
The registrant's year-to-date wholesale home shipments and floors sold were down
23.1% and 21.5%, 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 registrant's total wholesale shipments
in 2000, 84% were to independent retailers and 16% were to company-operated
sales centers.
According to data reported by the National Conference of States on Building
Codes and Standards ("NCSBCS"), U.S. industry wholesale shipments through
September 2000 decreased 25.4% in homes and 23.4% in floors from the comparable
1999 period. The registrant's year-to-date third quarter U.S. wholesale
shipments of HUD code homes and floors sold decreased 23.3% and 21.8%,
respectively, from a year earlier. Based on industry data from NCSBCS, the
registrant's U.S. wholesale market share increased to 20.2% for the first nine
months of 2000 from 19.7% for the same period one year earlier.
Page 11 of 17
<PAGE> 12
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 September 30, 2000 totaled
approximately $27 million, compared to $80 million a year ago.
At September 30, 2000 the registrant was operating 55 homebuilding facilities,
compared to 62 a year earlier. During 1999 and through the first nine months of
2000, the registrant closed and consolidated 12 manufacturing facilities
primarily as a result of market conditions. The registrant may consider other
adjustments to manufacturing capacity in response to changes in market
conditions and since September 30, 2000 two additional facilities have been
consolidated.
RETAIL OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
--------------------
Sept. 30, Oct. 2, %
2000 1999 Change
-------- -------- ------
<S> <C> <C> <C>
Net sales (in millions) $ 148.6 $ 211.5 (30%)
Segment EBITA (in millions) $ (3.4) $ 14.0 (124%)
Segment EBITA margin (2.3%) 6.6%
New homes sold 2,776 4,299 (35%)
Pre-owned homes sold 650 1,037 (37%)
Total homes sold 3,426 5,336 (36%)
% Champion-produced new homes sold 77% 64%
New multi-section mix 62% 56%
Average new home price $50,200 $46,100 9%
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended
--------------------
Sept. 30, Oct. 2, %
2000 1999 Change
--------- --------- ------
<S> <C> <C> <C>
Net sales (in millions) $ 483.0 $ 611.7 (21%)
Segment EBITA (in millions) $ 6.1 $ 46.6 (87%)
Segment EBITA margin 1.3% 7.6%
New homes sold 9,267 12,475 (26%)
Pre-owned homes sold 2,269 3,123 (27%)
Total homes sold 11,536 15,598 (26%)
% Champion-produced new homes sold 71% 62%
New multi-section mix 60% 55%
Average new home price $49,000 $45,700 7%
Average number of new homes in inventory
per sales center at period end 18 20 (10%)
Sales centers at period end 270 291 (7%)
</TABLE>
Retail sales decreased in 2000 due to the industry's tightened consumer credit
standards, increased repossessions and higher interest rates. Based on data
reported by Statistical Surveys, Inc., the Company estimates that U.S. industry
retail sales for the first eight months of 2000 decreased 16.7% from the
comparable 1999 period. At September 30, 2000 Champion's retail sales centers
totaled 270 locations in 28 states, compared to 291 locations a year ago and 280
at December 1999. During the fourth quarter of 2000, the registrant expects to
close additional sales locations.
Page 12 of 17
<PAGE> 13
Fixed costs on lower sales volume per store and costs to reduce inventories and
close under performing locations affected retail margins in 2000. Asset
impairment charges and lease termination costs totaling $2.2 million were
recorded in this year's third quarter as a result of closing 29 sales locations.
Due to market conditions the registrant has been reducing inventories and
related carrying costs at company-owned stores.
OTHER MATTERS
Year-to-date 2000 results include a $4.0 million reduction in the reserve for
intercompany profit in retail inventory as a result of lower manufacturing
profits due to market conditions. Interest expense was higher in 2000 due to
amounts outstanding on the registrant's Senior Notes and floor plan payable.
Income tax expense in 2000 decreased due to lower pretax income. The effective
tax rate was 86% in 2000, compared to 39% in 1999, rising primarily due to the
effect of nondeductible goodwill on lower pretax income.
LIQUIDITY AND CAPITAL RESOURCES
Cash balances totaled $32 million at September 30, 2000. For the nine months
ended September 30, 2000, cash provided by operations was $82 million and
earnings before interest, taxes, depreciation and amortization totaled $52
million. Expenditures during 2000 included $13 million for capital improvements
and $10 million for contingent purchase price payments. Approximately $41
million of cash was used to reduce the floor plan payable and $0.9 million was
used to repurchase 117,000 shares of common stock during the year. These
buybacks were pursuant to a Board of Directors authorization for up to 3.0
million shares, of which 1.9 million shares have been repurchased. The stock
buyback program was suspended in June 2000.
During 2000, accounts payable increased due to seasonality and year end levels
generally being low due to the holidays and vacations. Inventories and floor
plan payable declined primarily due to the liquidation of homes repurchased in
1999 upon the bankruptcy of the registrant's former largest independent retailer
and to the Company's efforts to reduce inventories throughout its retail
organization in response to industry conditions. Accrued dealer discounts
decreased due to payments made under annual programs in early 2000 and lower
sales volumes, partially offset by a change of many dealer discount programs
from quarterly payments to payments upon retail sale.
At quarter end the Company had a $100 million unsecured bank line of credit,
which expires in May 2003 and includes letters of credit. There were no bank
borrowings outstanding at quarter end and $33 million of letters of credit were
outstanding to support insurance obligations and industrial revenue bond
financing.
Page 13 of 17
<PAGE> 14
As of the end of the third quarter, the Company received a waiver of certain of
the financial performance covenants for the period from October 1, 2000 through
November 15, 2000 under its bank line of credit agreement. The Company is
currently working with its banks to amend the credit facility. In the meantime,
the Company expects to receive an extension of the waiver of the financial
performance covenants under the bank revolving credit agreement.
The registrant has $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 were used to reduce bank debt that resulted from acquisitions.
At quarter end total debt was 44% of total capital.
During the past year some of the manufactured housing industry floor plan
lenders have elected to exit or reduce their participation in the market.
Currently, there are four primary national floor plan lenders, which finance a
substantial portion of floor plan borrowings of the registrant's owned and
independent retailers. The Company finances most of the new home inventory at
its company-owned stores through borrowings from floor plan lenders, of which
Conseco Finance ("Conseco") is the primary lender. Conseco has made a verbal
request of the registrant to reduce its floor plan borrowings with Conseco in
order to meet certain of their concentration requirements. As a result of its
efforts to diversify its floor plan borrowings, in November 2000, the Company
obtained a $20 million floor plan line of credit from Deutsche Bank and
continues to review the most effective means to finance inventories from a
variety of sources.
The Company enters into repurchase agreements with floor plan lenders that
finance Champion-produced homes at independent retailers. At September 30, 2000
the maximum contingent repurchase obligation was approximately $480 million,
before any resale value of the homes. This amount compares to $630 million at
the beginning of the year and $700 million a year ago. For the first nine months
of 2000, Champion repurchased 449 homes from 65 independent retail companies and
provided for losses of $3.7 million. For the 12 months ended December 1999, the
registrant repurchased 480 homes from 63 independent retail companies and
recorded losses of $2.9 million, excluding the loss from the bankruptcy of its
former largest independent retailer. Management monitors its contingent
repurchase obligation for potential losses, which includes remarketing expenses
and unrecoverable discounts. The Company is focusing on encouraging higher
retailer inventory turnover by deferring volume rebate payments to retailers
until the retail sale of homes and promoting sound retailer business practices
to reduce its loss potential.
Total capital expenditures of less than $20 million are expected in 2000,
compared to $50 million in 1999. The registrant does not plan to pay cash
dividends.
The Company believes that its cash balances, cash flows from operations,
anticipated additional availability under its line of credit, and floor plan
lending, as currently provided, would be adequate to meet its anticipated
financing needs,
Page 14 of 17
<PAGE> 15
operating requirements, and capital expenditures in the foreseeable future. The
Company is seeking alternative finance sources in order to reduce its floor plan
borrowings with Conseco. However, there can be no assurance that the Company
will be able to secure additional floor plan borrowings or that credit line
borrowings will be available.
IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements." SAB 101
draws on existing accounting rules and provides specific guidance on how those
accounting rules should be applied to revenue recognition. The registrant
believes that its accounting practices already comply with the provisions of SAB
101.
FORWARD LOOKING STATEMENTS
Certain statements contained in this report, including the registrant's plans
for manufacturing and retail capacity management, anticipated capital
expenditures, new market initiatives, and the adequacy of cash and financing to
meet liquidity 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 registrant's estimates, assumptions and
projections, and are subject to risks and uncertainties, including those
contained in the registrant'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 registrant does not undertake to update
its forward looking statements or risk factors to reflect future events or
circumstances.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The registrant's floor plan borrowings at September 30, 2000 were $129 million
and are subject to interest primarily based on the U.S. prime rate. A 100 basis
point increase in the prime rate would result in additional annual interest cost
of $1.3 million, assuming average floor plan borrowings of $129 million.
Page 15 of 17
<PAGE> 16
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 Per Share Earnings.
27 Financial Data Schedule.
(b) On September 18, 2000 the registrant filed a current report on Form 8-K.
Page 16 of 17
<PAGE> 17
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: ANTHONY S. CLEBERG
-------------------------
Anthony S. Cleberg
Executive Vice President
and Chief Financial Officer
(Principal Financial Officer)
By: RICHARD HEVELHORST
-------------------------
Richard Hevelhorst
Vice President and Controller
(Principal Accounting Officer)
Dated: November 14, 2000
Page 17 of 17
<PAGE> 18
Exhibit Index
-------------
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
11 Computation of Per Share Earnings.
27 Financial Data Schedule.
</TABLE>
