FORM 10-K
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT
OF 1934
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For the
fiscal year ended January 3, 2009 |
Commission File Number 1-9751 |
CHAMPION ENTERPRISES,
INC.
(Exact name of Registrant as
specified in its charter)
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Michigan
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38-2743168
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer Identification
No.)
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755 W. Big Beaver, Suite 1000,
Troy, Michigan
(Address of principal
executive offices)
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48084
(Zip
Code)
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Registrants telephone number, including area code:
(248) 614-8200
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock, $1 par value
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New York Stock Exchange
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Securities
registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the Registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. o Yes No
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. o Yes þ No
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 such shorter period that the Registrant has
been required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. þ Yes o No
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of Registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the
Exchange Act. (Check one):
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Large
accelerated
filer o Accelerated
filer þ
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Non-accelerated
filer o
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Smaller
reporting
company o
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(Do not check if a smaller reporting company)
Indicate by check mark whether the Registrant is a shell company
(as defined in Rule 12b-2 of the
Act). o Yes þ No
The aggregate market value of the Common Stock held by
non-affiliates of the Registrant as of June 27, 2008, based
on the last sale price of $6.13 per share for the Common Stock
on the New York Stock Exchange on such date, was approximately
$468,100,721. As of February 16, 2009, the Registrant had
77,633,804 shares of Common Stock outstanding. For purposes
of this computation, all officers and directors of the
Registrant as of February 16, 2009 are assumed to be
affiliates. Such determination should not be deemed an admission
that such officers and directors are, in fact, affiliates of the
Registrant.
DOCUMENTS
INCORPORATED BY REFERENCE
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Part of Form 10-K Report
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Document
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into which it is incorporated
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Proxy Statement for Annual Shareholders Meeting to be held
May 29, 2009
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III
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Champion
Enterprises, Inc.
Form 10-K
Fiscal Year End January 3, 2009
Table
of Contents
PART I
General
Established in 1953, Champion Enterprises, Inc. and its
subsidiaries (collectively, we,
Champion, or the Company) are a leading
producer of factory-built housing in the United States and
western Canada. We are also a leading producer of steel-framed
modular buildings in the United Kingdom (U.K.) for
uses such as prisons, military accommodations, hotels and
residential units, among other applications. As of
January 3, 2009, our North American manufacturing
operations (the manufacturing segment) consisted of
26 homebuilding facilities in 14 states and three provinces
in western Canada. As of January 3, 2009, our homes were
sold through approximately 1,600 independent sales centers,
builders and developers across the U.S. and western Canada
and also through our retail segment that operates 14 sales
offices in California.
Factory-built housing in the United States is generally
comprised of manufactured housing (also known as HUD-code
homes) and modular homes. During the past five years, the
HUD-code industry has been negatively affected by limited
availability of consumer financing, tight consumer credit
standards and other factors. The effects of the severe credit
crisis and deepening U.S. recession further curtailed the
industry and our business in 2008. Industry shipments of
HUD-code homes in 2006 and 2005 included an estimated 4,000
homes and 21,000 homes, respectively, which were sold to the
Federal Emergency Management Agency (FEMA) in
connection with hurricane relief efforts. Excluding homes sold
to FEMA, annual industry shipments of HUD-code homes have
averaged 109,500 homes during the last five years as compared to
373,000 homes in 1998. Industry shipments of HUD-code homes
totaled 81,900 in 2008 compared to 95,800 in 2007, representing
the lowest industry volume in nearly 50 years.
Champions sales of HUD-code homes in 2008 were 66% lower
than in 2004, while industry shipments were down 38% for the
same period. Industry HUD-code shipments in our core markets of
California, Florida and Arizona were down 70% during this four
year period and industry shipments in the Midwest states,
another of our core markets, were down 68% in the period.
During 2008 and 2007, the broader U.S. housing market
declined considerably, with 2008 registering a 41% decline in
new single-family housing starts and a 38% decline in new home
sales versus 2007 levels. In addition, average selling prices in
many U.S. markets saw significant declines, and inventories
of unsold homes continued to increase. Industry shipments of
modular homes, which are more directly impacted by conditions in
the traditional housing market, totaled an estimated 17,100
homes in the first nine months of 2008, a decrease of 31% versus
the same period in 2007. Champions sales of modular homes
in 2008 were 32% lower than its sales of modular homes in 2007
and 23% lower than its modular sales in 2004.
Since the beginning of 2004, we have closed, idled, sold, or
consolidated 14 manufacturing facilities and all of our retail
operations except for our California-based retail segment,
eliminating under-performing operations and rationalizing our
operations and capacity for industry conditions. During 2005, we
exited traditional manufactured housing retail operations by
completing the sale of our remaining 42 traditional retail sales
centers.
In July 2006 we acquired certain of the assets and the business
of North American Housing Corp. and an affiliate (North
American). North American is a modular homebuilder in
Virginia. This acquisition expanded our presence in the modular
construction industry, particularly in the mid-Atlantic region
of the U.S. In March 2006, we acquired Highland
Manufacturing Company, LLC (Highland), a
manufacturer of modular and HUD-code homes that operates one
plant in Minnesota. This acquisition further expanded our
presence in the modular construction industry and increased our
manufacturing and distribution in several states previously
under-served by us in the north central U.S.
On December 21, 2007, we acquired substantially all of the
assets and the business of western Canada-based SRI Homes Inc.
(SRI). SRI is a leading producer of homes in western
Canada that operates three manufacturing plants in the provinces
of Alberta, British Columbia and Saskatchewan. This acquisition
expanded our presence in one of the strongest housing markets in
North America and led to strong growth in our Canadian sales in
2008 despite a 27% decline in sales at our existing Canadian
operations.
1
During the last several years, the housing market in western
Canada experienced strong growth. While 2008 saw a modest
tempering of the market, conditions remained robust throughout
most of the year. Sales of homes produced by our Canadian plants
increased 61% in 2008 over 2007 after increasing 17% in 2007
over 2006. The increase in 2008 was the result of our
acquisition of SRI.
In April 2006, we acquired Calsafe Group (Holdings) Limited and
its operating subsidiary Caledonian Building Systems Limited
(Caledonian), a leading modular manufacturer in the
U.K. Caledonian operates four manufacturing facilities in
Newark, Nottinghamshire.
On February 29, 2008, we acquired 100% of the capital stock
of United Kingdom based ModularUK Building Systems Limited
(ModularUK), a producer of steel-framed modular
buildings serving the healthcare, education and commercial
sectors. ModularUK is located in Driffield, East Yorkshire,
where we have three leased buildings available to provide
production capacity to ModularUK and Caledonian.
Our international manufacturing segment (the international
segment) is currently comprised of the operations of
Caledonian and ModularUK.
In 2007 our international segment experienced significant growth
resulting from a high volume of orders from the custodial
(prison) and military segments of their market. In 2008 our
operations in the U.K. experienced modest growth over 2007,
before the effects of foreign exchange rates, as we experienced
significant growth in the first half of the year resulting from
a high volume of orders from the custodial (prison) and military
segments of the market. However, as 2008 progressed and economic
conditions in the U.K. worsened, driven in part by the credit
crisis, our second half sales declined. Despite a strong order
book, project delays and a lack of project financing negatively
impacted our business.
Segment
Information
Financial information about Champions manufacturing,
international and retail segments is included in Note 16 of
Notes to Consolidated Financial Statements in
Item 8 of this Report. All of our manufacturing segment
operations are located in the United States except for five
homebuilding facilities in western Canada. Our international
segment is solely comprised of the Caledonian and ModularUK
operations in the U.K.
Manufacturing
segment
Products
In 2008, our manufacturing segment sold 11,406 homes and units
compared to 15,346 in 2007. Approximately 56.1% of the homes we
produced in 2008 were constructed to building standards in
accordance with the National Manufactured Home Construction and
Safety Standards promulgated by the U.S. Department of
Housing and Urban Development (HUD-code homes or
manufactured homes) compared to 65.0% in 2007. The
HUD Code regulates manufactured home design and construction,
strength and durability, fire resistance and energy efficiency.
The remaining homes and units we produced consisted of modular
homes and units (22.0% in 2008 and 23.9% in 2007), homes sold
and primarily manufactured in Canada (20.4% in 2008 and 10.7% in
2007) or were park models (1.5% in 2008 and 0.4% in 2007).
Modular homes and units are designed and built to meet local
building codes. Homes sold in Canada are constructed in
accordance with applicable Canadian building standards. The
acquisition of SRI in December 2007 resulted in a significant
increase in sales in Canada in 2008.
Champion produces a broad range of homes under various trade
names and brand names and in a variety of floor plans and price
ranges. While most of the homes we build are single-family,
multi-section, ranch-style homes, we also build two-story,
single-section, and Cape Cod style homes as well as multi-family
units such as town homes, apartments, duplexes and triplexes.
The single-family homes that we manufacture generally range in
size from 400 to 4,000 square feet and typically include
two to four bedrooms, a living room
and/or
family room, a dining room, a kitchen and two full bathrooms.
During the past three years, we also produced commercial modular
structures including two- and three-story buildings, barracks
and other housing for U.S. military bases and other
non-residential buildings.
2
We regularly introduce homes with new floor plans, exterior
designs and elevations, decors and features. Our corporate
marketing and engineering departments work with our
manufacturing facilities to design homes that appeal to
consumers changing tastes at appropriate price points for
local markets. We design and build homes with a traditional
residential or site-built appearance through the use of dormers
and higher pitched roofs, among other features. We also design
and build energy efficient homes, and most of our
U.S. manufacturing facilities are qualified to produce
Energy
Star®
rated homes.
Champion homes have won numerous awards during the past five
years. One of our homes won the 2008 award for Excellence
in Systems Building for a Modular Home under 2,300 Square
Feet, awarded by the Building Systems Council of the
National Association of Home Builders. This home also won the
2008 award for Best New Modular Home Design Under 2,200
Square Feet, awarded by the National Modular Housing
Council (NMHC). In 2006, one of our homes won the
NMHC award for Best New Home Design for a Production
Modular Home Over 1,800 Square Feet. In 2005, one of our
HUD-code concept models won the Manufactured Housing Institute
(MHI) award for Best New Home Design for a
Concept Manufactured Home 1,800 Square Feet or Less.
Additionally, we were selected by Country Living magazine
to build its Home of the Year in both 2006 and 2005.
During 2008, the average net selling price for our factory-built
homes was $56,100, excluding delivery, and manufacturing sales
prices ranged from $20,000 to over $150,000. Retail sales prices
of the homes, without land, generally ranged from $25,000 to
over $200,000, depending upon size, floor plan, features and
options. During 2008, the average retail selling price for new
homes sold to consumers by our retail segment was $162,500,
including delivery, setup, accessories and site improvements.
The components and products used in factory-built housing are
generally of the same quality as those used by other housing
builders, including conventional site-builders. The primary
components include lumber, plywood, OSB, drywall, steel, floor
coverings, insulation, exterior siding (vinyl, composites, wood
and metal), doors, windows, shingles, kitchen appliances,
furnaces, plumbing and electrical fixtures and hardware. These
components are presently available from a variety of sources and
we are not dependent upon any single supplier. Prices of certain
materials such as lumber, insulation, steel and drywall can
fluctuate significantly due to changes in demand and supply.
Additionally, availability of certain materials such as drywall
and insulation has sometimes been limited, resulting in higher
prices
and/or the
need to find alternative suppliers. We generally have been able
to pass higher material costs on to the retailers and
builders/developers in the form of surcharges and price
increases.
Most completed factory-built homes have cabinets, wall coverings
and electrical, heating and plumbing systems. HUD-code homes
also generally contain factory installed floor coverings,
appliances and window treatments. Optional factory installed
features include fireplaces, dormers, entertainment centers and
skylights. Upon completion of the home at the factory, homes
sold to retailers are transported to a retail sales center
(stock orders) or directly to the home site (retail sold
orders). Homes sold to builders and developers are generally
transported directly to the home site. After the retail sale of
a stock home to the consumer, the home is transported to the
home site. At the home site, the home is placed on a foundation
and readied for occupancy typically by setup contractors. The
sections of a multi-section home are joined and the interior and
exterior seams are finished at the home site. The consumer
purchase of the home may also include retailer or contractor
supplied items such as additional appliances, air conditioning,
furniture, porches, decks and garages.
Production
We construct homes in indoor facilities using an assembly-line
process employing generally 100 to 200 production employees at
each facility. Manufactured homes are constructed in one or more
sections (also known as floors) on a permanently affixed steel
support frame that allows the section(s) to be moved through the
assembly line and transported upon sale. The sections of many of
the modular homes we produce are built on wooden floor systems
and transported on carriers that are removed upon placement of
the home at the home site. Each section or floor is assembled in
stages, beginning with the construction of the frame and the
floor, then adding the walls, ceiling and roof assembly, and
other constructed and purchased components, and ending with a
final quality control inspection. The efficiency of the
assembly-line process, protection from the weather, and
favorable pricing of materials resulting from our substantial
purchasing power enables us to produce homes more quickly and
often at a lower cost than a conventional site-built home of
similar quality.
3
The production schedules of our homebuilding facilities are
based upon customer (retailer and builder/ developer) orders,
which can fluctuate from week to week. Orders from retailers are
generally subject to cancellation at any time without penalty
and are not necessarily an indication of future business.
Retailers place orders for retail stocking (inventory) purposes
and for homebuyer orders. Before scheduling homes for
production, orders and availability of financing are confirmed
with our customer and, where applicable, their lender. Orders
are generally filled within 90 days of receipt, depending
upon the level of unfilled orders and requested delivery dates.
Although factory-built homes can be produced throughout the year
in indoor facilities, demand for homes is usually affected by
inclement weather and by the cold winter months in northern
areas of the U.S. and in Canada. We produce homes to fill
existing orders and, therefore, our manufacturing plants
generally do not carry finished goods inventories except for
homes awaiting delivery. Typically, a one to three-week supply
of raw materials is maintained. Charges to transport homes
increase with the distance from the factory to the retailer or
home site. As a result, most of the retailers and
builders/developers we sell to are located within a
500-mile
radius of our manufacturing plants.
Distribution
Our factory-built homes are distributed through independent
retailers, builders and developers, and our California-based
retail segment. During 2008, approximately 94% of our
manufacturing shipments were to approximately 1,200 independent
retail locations throughout the U.S. and western Canada. As
of January 3, 2009, approximately 725 of these independent
retail locations were part of our Champion Home Center
(CHC) retailer program. Sales to independent CHC
retailers accounted for approximately 56% of the homes we sold
to independent retailers. We continually seek to increase our
manufacturing shipments by expanding sales at our existing
independent retailers and by finding new independent retailers
to sell our homes.
As is common in the industry, our independent retailers may sell
homes produced by other manufacturers in addition to those
produced by the Company. Some independent retailers operate
multiple sales centers. In 2008, no single independent retailer
or distributor accounted for more than 2% of our manufacturing
sales.
We also sell our homes directly to approximately 500 builders
and developers through our Genesis Homes division and certain of
our other homebuilding plants. In this distribution channel the
builder/developer generally acquires the land, obtains the
appropriate zoning, develops the land and builds the foundation
for the home. We design, engineer and build the home. We, or the
builder/developer, contract a crew to set or place the home on
the foundation and to finish the home on site. The
builder/developer may construct the garage, patio, and porches
at the site and either sell the home directly to the consumer or
through a realtor. The homes sold through builders/developers
may be placed in planned communities or subdivisions in suburban
areas and rural markets. Certain of our builder/developer
projects involve multi-family housing units.
Market
Factory-built housing competes with other forms of new housing
such as site-built housing, panelized homes and condominiums and
with existing housing such as pre-owned homes, apartments and
condominiums. According to statistics published by the Institute
for Building Technology and Safety (IBTS) and the
U.S. Department of Commerce, Bureau of the Census, for 2008
and for the five year period from 2004 through 2008, industry
shipments of HUD-code homes accounted for an estimated 13% and
9%, respectively, of all new single-family housing starts and
15% and 11%, respectively, of all new single-family homes sold.
Based on data reported by Statistical Surveys, Inc., total
industry retail sales of new HUD-code homes through November
2008 totaled approximately 68,000 homes, down 15% from the
comparable period in 2007. Based on industry data published by
the NMHC, wholesale shipments of modular homes through September
2008 fell 30% compared to the same period in 2007. Additionally,
modular homes sold in 2007 and 2006 were approximately 25% of
the factory-built housing market.
The market for factory-built housing is affected by a number of
factors, including the availability, cost and credit
underwriting standards of consumer financing, consumer
confidence, employment levels, general housing market and other
economic conditions and the overall affordability of
factory-built housing versus other forms of housing. In
addition, demographic trends such as changes in population
growth and competition affect demand for
4
housing products. Interest rates and the availability of
financing also influence the affordability of factory-built
housing.
We believe the segment of the housing market in which
manufactured housing is most competitive includes consumers with
household incomes under $60,000. This segment has a high
representation of young single persons and married couples,
first time home buyers and elderly or retired persons. The
comparatively low cost of manufactured homes attracts these
consumers. People in rural areas, where fewer housing
alternatives exist, and those who presently live in
factory-built homes, also make up a significant portion of the
demand for new factory-built housing. We believe higher-priced,
multi-section manufactured and modular homes are attractive to
households with higher incomes as an alternative to rental
housing and condominiums, and are well suited to meet the needs
of the retiree buyer in many markets.
In the past, a number of factors have restricted demand for
factory-built housing, including, in some cases, less-favorable
financing terms compared to site-built housing, the effects of
restrictive zoning on the availability of certain locations for
home placement and, in some cases, an unfavorable public image.
Certain of these adverse factors have lessened considerably in
recent years with the improved quality and appearance of
factory-built housing.
Competition
The factory-built housing industry is highly competitive at both
the manufacturing and retail levels, with competition based upon
several factors including price, product features, reputation
for service and quality, and retail customer financing. Capital
requirements for entry into the industry are relatively low.
According to MHI, in November 2008, there were 65 producers of
manufactured homes in the U.S. operating an estimated 185
production facilities. For the first eleven months of 2008 and
for all of 2007 the top 5 companies had a combined market
share of HUD-code homes of approximately 63.5% and 64.5%,
respectively, according to data published by Statistical
Surveys, Inc. We estimate that there were approximately 4,000
industry retail locations throughout the U.S in 2008.
Based on industry data reported by IBTS, in 2008 our
U.S. wholesale market share of HUD-code homes sold was
7.8%, compared to 10.4% in 2007. Based on industry data
published by NMHC, we estimate our share of the modular home
market for the first nine months of 2008 and for the entire year
of 2007 to be approximately 11.7% and 11.4%, respectively.
Retailer
Inventory Financing
Independent retailers of factory-built homes generally finance
their inventory purchases from manufacturers with floor plan
financing provided by third party lending institutions and
secured by a lien on the homes. The availability and cost of
floor plan financing can affect the amount of retailer new home
inventory, the number of retail sales centers and related
wholesale demand. During the past five years, there has been
consolidation among the major national floor plan lenders, and a
number of local and regional banks have entered the market or
increased lending volumes.
During 2008, approximately 42% of our sales to independent
retailers were financed by retailers under floor plan agreements
with national lenders, while the remaining 58% were financed
under various arrangements with local or regional banks or paid
in cash. In accordance with trade practice, we have entered into
repurchase agreements with each of the national lenders and with
a small number of local and regional banks providing floor plan
financing, as is more fully described in Note 1 of
Notes to Consolidated Financial Statements in
Item 8 of this Report and in Contingent Repurchase
Obligations Manufacturing Segment in
Item 7 of this Report. We generally receive payment from
the lending institution three to fifteen days after a home is
sold and invoiced to an independent retailer.
As a result of the credit crisis, during the fourth quarter of
2008 each of the national floor plan lenders substantially
curtailed their lending activities, and one announced its
intention to exit the business in 2009. Many of our retailers
have arranged or are in the process of arranging to replace this
floor plan financing with working capital
5
lines of credit or floor plan financing through local banking
relationships. It is not yet clear what effect, if any, these
changes will have on our business.
Consumer
Financing
The number of factory-built homes that are sold to consumers and
related wholesale demand are significantly affected by the
availability, credit underwriting standards, loan terms and cost
of consumer financing. Two basic types of consumer financing are
available to purchasers of factory-built homes: home-only or
personal property loans for purchasers of only the home
(generally HUD-code homes), and real estate mortgages for
purchasers of the home and land on which the home is placed. The
majority of modular homes are financed with conventional real
estate mortgages. Loose credit standards for home-only loans in
the mid to late 1990s led to poor performance of portfolios of
manufactured housing home-only consumer loans in subsequent
years making it difficult for industry consumer finance
companies to obtain long-term capital. As a result, consumer
finance companies that didnt exit the business entirely
curtailed their industry lending by tightening credit
underwriting standards, restricting loan terms and increasing
interest rates. While the result of this tightening has vastly
improved portfolio performance for remaining lenders, for the
past several years it has driven industry demand sharply lower
because financing for manufactured home buyers was not
competitive with the easy credit available for traditional
mortgages.
During 2008, as the credit crisis deepened, credit terms and
pricing for traditional mortgages were tightened substantially
resulting in a more challenging lending environment for most
home buyers. While the credit crisis persists, credit
availability for major purchases of all kinds will likely be
limited.
International
segment
Products
Our international manufacturing segment (the international
segment) is comprised of Caledonian, which was acquired in
April 2006, and its subsidiary ModularUK, which was acquired in
February 2008. We currently operate five manufacturing
facilities at two locations in the U.K. Caledonian is a leading
modular manufacturer in the U.K. that constructs steel-framed
modular buildings for uses such as prisons, military
accommodations, hotels and residential units, among other
things. Caledonians steel-framed modular technology allows
for multi-story construction, which is a key advantage over
wood-framed construction techniques. We believe that Caledonian
is the largest off-site producer of permanent modular buildings
in the U.K. as measured by annual revenues.
Caledonian specializes in the design, manufacture and
construction of permanent, multi-story buildings using off-site
modular construction and may operate as the general contractor
for a project or as a
sub-contractor.
Most Caledonian projects involve total revenue from
$2 million to $50 million. Caledonian has key
framework agreements in place with its major customers, which
include Her Majestys Prison Service and, through a
third-party prime contractor, the U.K. Ministry of Defence
(MoD), among others.
During 2008, Caledonian supplied nearly 800 prison cells across
14 different locations in addition to a wide range of other
ancillary buildings for prison use. In addition, over 1,500
military bed spaces, 640 hotel rooms and 500 other residential
units were constructed in locations throughout the U.K. Product
development has focused on the sustainability and environmental
performance of the modular building process as well as the
design of ancillary and non residential structures
such as kitchens and health care facilities.
Projects are designed to maximize the amount of work that can be
performed at the factory thereby minimizing the amount of work
at the construction site. This allows for rapid construction of
the building with less manpower and material at the site and in
about one-half the time versus traditional construction. Reduced
site time and manpower is especially important to clients with
higher security requirements such as prisons and military bases.
The structures are engineered to provide a 60 to
100-year
design life. The buildings are compliant with required codes and
regulations including U.K. and Irish building regulations and
fire certification, Part E (sound insulation), and
Part L (thermal performance). Some structures also
comply with Counter Terrorist Measures and MoD Standards.
Caledonian has also obtained LANTAC (local authority type
approval), Zurich and NHBC (National House Builders
Confederation) accreditations.
6
Production
and construction
Caledonians four facilities on its main site employ
approximately 250 production workers, while the one facility
comprised of three plants on its second site, which commenced
operations in 2008, employ a total of approximately 65
production workers. Subcontractors are used for various
production functions, including electrical and plumbing work,
both in the factory and at construction sites.
The modules produced are created from welded steel frames using
hot rolled steel beams to create the basic frame (top, bottom
and vertical supports) and cold rolled steel elements for the
joists and wall studs. The frames are manufactured with lifting
points to facilitate craning the modules into place at the
construction site and fixing points, if required, to
facilitate the attachment of exterior cladding at the site.
After completion of the frame the unit is moved to a position in
the plant where it will be completed without further movement.
The steel floor is clad with either wood boards, cement particle
boards or concrete and the ceilings and interior walls are clad
with sheetrock. Insulation, plumbing, wiring, windows, doors,
bathroom components and cabinets are added as required. Each
module may contain up to four living units (bedrooms or cells).
Each factory at the main site can complete up to four modules
per day. The completed modules are wrapped in protective plastic
sheeting for shipment to the building site.
Site groundwork and foundation work are planned and coordinated
with the production schedule to minimize the total length of the
construction process. Completed modules are delivered to the
building site and erected with a mobile crane. Individual
modules are welded or bolted together to ensure correct
positioning and structural continuity. Modules can generally be
erected at a rate of eight per day. Central corridors are
created during this process. Once inter-connected, the modules
form the full structure of the building. Wiring and plumbing
between modules is connected on site and interiors are finished
by completing the flooring and decors. Traditional steel and
concrete construction techniques may be employed for non-modular
areas to meet design specifications. Exterior cladding or brick
work and the roof are added on site to complete the building
structure.
Market
and competition
Caledonian competes in the U.K. custom modular industry, which
also competes with traditional commercial builders in the
construction of permanent, multi-story buildings. The custom
modular market in the U.K. has estimated total annual sales of
over £1 billion (approximately $1.5 billion at
January 3, 2009). There are several large competitors in
the U.K. custom modular market, but Caledonian is the only
modular builder that focuses solely on the custom market.
Caledonian primarily competes in six segments of this market:
prisons, military accommodations, hotels, high-density
residential, health care and education. Caledonian establishes
key relationships in these segments and generally trades under
long-term framework agreements. Under these framework agreements
Caledonian is a principal supplier of modular prison units to
Her Majestys Prison Service and currently the sole
supplier of modular military accommodations to MoDs Single
Living Accommodation Modernization (SLAM) program.
Caledonian is one of five or more suppliers of modular
accommodation to MoD outside of SLAM. Caledonian has also
developed key relationships in the hotel and residential
segments. Funding for projects in the prison, military and
education segments is generally dependent on government programs
and budgets. Hotel, residential and health care projects are
generally dependent upon private sector funding that is
influenced by general economic and other factors. The current
credit crisis has caused certain delays both for government and
private sector funded projects.
Retail
segment
During 2005, we divested our remaining traditional retail sales
centers. Our ongoing retail operations currently consist of 14
sales offices in California that specialize in replacing older
homes within manufactured housing communities with new
manufactured homes. Our sales agents locate vacant spaces and
available spaces to be renovated in local communities, secure
the space and order a new home from a manufacturer, primarily
Champion plants. This can be done either on a speculative basis,
as a customer trade-in, or a custom order for an approved buyer.
The homes are placed on the leased sites and independent
contractors are engaged to set up the home and make site and
home improvements such as decks, porches, landscaping and air
conditioning. Of the total new homes sold by the retail segment
in 2008, 88.5% were Champion-produced, compared to 88.0% in
2007. Champion-
7
produced homes purchased by our retail segment in 2008 and 2007
accounted for 1.4% and 2.0%, respectively, of the total homes
sold by our manufacturing segment.
The retail segment sales offices are located in leased premises
from which the home acquisition, site preparation, set up,
improvements and sales processes are managed. Our sales agents
meet with and show potential buyers the homes. During the sale
process our sales offices may assist the homebuyer with finding
financing for the purchase and with insurance needs. The sales
offices may also arrange for any special improvements, add-ons
and amenities required by the homebuyer.
Sales in the retail segment have been slowed considerably by
current housing market conditions in California. Our business
model has traditionally targeted the retiree buyer with an
affordable home relative to owned real estate, but at a high
price point relative to manufactured housing in other markets.
The retiree market has been hard hit by the slow market and
declining prices for existing home re-sales. As a result, we
have shifted our business mix more toward family communities
with a lower price point home, but this market does not offer
the same revenue and gross margin opportunity that the retiree
market has offered in the past.
Buyers of our homes generally need to finance the purchase. For
the past several years consumer financing has been harder to
obtain and has been more expensive than traditional mortgage
lending. (See Consumer Financing above). During
2008, a lender that provided financing for a significant number
of buyers of our homes in California ceased operations. We are
currently seeking other local and national lenders to finance
our retail sales. However the current credit crisis has
restricted financing availability.
Relationship
with our Employees
As of January 3, 2009, we had approximately
4,100 employees. We deem our relationship with our
employees to be generally good. Currently, our five
manufacturing facilities in Canada employ approximately 820
workers, of which 600 are subject to collective bargaining
agreements, one that expired in November 2008 and the others
that expire in June 2009, June 2010, November 2010 and June
2011. Negotiations are progressing on replacing the agreement
that expired in November 2008. Caledonian entered into a
voluntary recognition agreement with a labor union during the
second quarter of 2006 covering approximately 200 production
employees.
Executive
Officers of the Company
Our executive officers, their ages, and the position or
office held by each, are as follows:
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Name
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Age
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Position or Office
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William C. Griffiths
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57
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Chairman of the Board of Directors, President and Chief
Executive Officer
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Phyllis A. Knight
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46
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Executive Vice President, Treasurer and Chief Financial Officer
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Roger K. Scholten
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54
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Senior Vice President, General Counsel and Secretary
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Richard P. Hevelhorst
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61
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Vice President and Controller
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The executive officers serve at the pleasure of our Board of
Directors.
Mr. Griffiths became President and Chief Executive Officer
of Champion Enterprises, Inc. on August 1, 2004 and was
elected Chairman of the Board of Directors in March 2006.
Previously, since 2001 Mr. Griffiths was employed by SPX
Corporation, a global multi-industry company, located in
Charlotte, North Carolina, where he was President-Fluid Systems
Division. From 1998 to 2001, Mr. Griffiths was
President-Fluid Systems Division at United Dominion Industries,
Inc., which was acquired by SPX Corporation in 2001.
Mrs. Knight joined Champion in 2002 after leaving Conseco
Finance Corp. where since 1994 she served in various executive
positions, including Senior Vice President and Treasurer and,
most recently, was President of its Mortgage Services Division.
Mr. Scholten joined the Company in October 2007.
Mr. Scholten was employed by Maytag Corporation since 1981,
where most recently he was General Counsel and Senior Vice
President.
8
Mr. Hevelhorst joined Champion in 1995 as Controller and
was promoted to the position of Vice President and Controller in
1999.
Available
Information
Champions main website is www.championhomes.com.
Champions annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
proxy statements and amendments to all such reports and
statements are made available via its website free of charge as
soon as reasonably practicable after such reports are filed
with, or furnished to, the Securities and Exchange Commission
(SEC).
Champions Code of Ethics, Corporate Governance Guidelines,
Lead Independent Director Charter, Audit and Financial Resources
Committee Charter, Compensation and Human Resources Committee
Charter and Nominating and Corporate Governance Committee
Charter are also posted on its website. The information on the
Companys website is not part of this or any other report
that Champion files with, or furnishes to, the SEC.
Additionally, the public may read and copy any materials the
Company files with the SEC at the SECs Public Reference
Room at 100 F Street, NE, Room 1580, Washington
D.C. 20549. The public may obtain information on the operation
of the Public Reference Room by calling the SEC at
1-800-SEC-0330.
The SEC also maintains an Internet site that contains reports,
proxy and information statements, and other information
regarding issuers that file electronically with the SEC at
www.sec.gov.
Forward-Looking
Statements
Certain statements contained in this Report, including our
ability to introduce new homes and new floor plans, our ability
to pass various costs on to our customers, the availability and
cost of raw materials, expanding shipments and sales, our
relationship with our employees, the outcome of legal
proceedings or claims, our strategy to diversify, compliance
with the covenants in our credit facilities and the impact of
our inability to do so, changes to our capital structure, our
expected capital expenditures, the impact of contingent
repurchase obligations and other contingent liabilities or
obligations on the results of our operations and the adequacy of
our cash flow from operations to fund capital expenditures,
could be construed to be forward-looking statements within the
meaning of U.S. federal securities laws. In addition,
Champion or persons acting on our behalf may from time to time
publish or communicate other items that could also be construed
to be forward-looking statements. Statements of this sort are,
or will be, based on the Companys then current estimates,
assumptions and projections and are subject to risks and
uncertainties, including those specifically listed below that
could cause actual results to differ materially from those
included in the forward-looking statements. The Company does not
undertake to update its forward-looking statements or risk
factors to reflect future events or circumstances. The following
risk factors could affect the Companys operating results.
The credit crisis The credit crisis has
significantly affected the financial markets and the economies
in the U.S., Canada and the U.K., the countries in which we
operate.
The current global credit crisis has significantly affected the
financial markets and the economies in the U.S., Canada and the
U.K., the countries in which we operate. The housing markets in
the U.S. have also been significantly impacted by the
credit crisis. Conditions in the U.S. are likely to affect
the availability and cost of financing for the retailers and
builder-developers who buy our homes and for individual home
buyers. Additionally, the selling prices of homes that we market
in the U.S. may be pressured due to competition from excess
inventories of new and pre-owned homes and from foreclosures.
The credit crisis and its impact on the world economies could
also affect the availability and cost of financing and selling
prices in our markets in western Canada.
A substantial portion of our revenue in the U.K is from two
large public sector customers who rely on public (government)
and private funding. The credit crisis and its impact on the
British economy could affect the availability and cost of
financing in the U.K. and could result in loss of funding or
delays for projects that we have been awarded. In addition, it
could negatively affect our ability to gain new contracts for
future projects. Therefore, the current credit crisis could
negatively affect our operations and result in lower sales,
income and cash flows.
9
Further, our significant negative working capital position in
the U.K. is highly correlated with our revenues and, as such, a
further decline in revenues could result in a significant
reduction in our operating cash flow.
We have a significant amount of debt outstanding that contains
financial covenants with which we must comply. Without
improvements in the current housing and credit markets, it is
possible that we will not be in compliance with covenants which
take effect in the first quarter of our 2010 fiscal year, absent
a significant reduction in our senior debt. Further, if our
markets deteriorate further in 2009 there can be no assurance
that we will maintain compliance with our 2009 financial
covenants, which were modified in October 2008. These covenants
are measured at each quarter end and require that we attain
minimum levels of EBITDA and liquidity as defined by our Credit
Agreement.
As a result, we may need to refinance all or a portion of our
debt before maturity. If conditions in the credit market were to
persist throughout 2009, there can be no assurance that we will
be able to refinance any or all of this indebtedness.
New York Stock Exchange We have received
notice from the New York Stock Exchange (NYSE) that we are not
in compliance with the exchanges continued listing
standards because the average closing share price of
Champions common stock for a consecutive
30-day
trading period fell below $1.00.
The listing of our common stock on the NYSE is at risk as a
result of our average stock price falling below $1.00 per share
over a consecutive
30-day
trading period. While the Company has a period of six months
from the date it received notice to cure this non-compliance,
and we have a number of options to cure under consideration,
there can be no assurance that we will be able to cure this
deficiency in the time permitted. In addition, there can be no
guarantee that the Company will remain in compliance with other
continued listing requirements related to market capitalization
and stockholders equity.
We also maintain a listing for our common stock on the Chicago
Stock Exchange (CHX), and are currently in
compliance with all of its applicable listing maintenance
requirements.
In the current environment there can be no assurance that we
will not be in violation of other NYSE listing standards or CHX
maintenance requirements, some of which may not be curable.
Our convertible debt requires that our common stock be listed on
a U.S. national or regional securities exchange. Our
failure to be so listed may constitute a fundamental change
whereby the holders of our convertible notes could require us to
purchase with cash their notes at face value. In the event the
Companys common stock is delisted from the stock exchanges
there are additional risks such as the impact on the market
liquidity of our common stock, the impact on our ability to
raise capital or issue certain types of debt, and general issues
regarding our perception in the marketplace.
Significant debt Our significant debt could
limit our ability to obtain additional financing, require us to
dedicate a substantial portion of our cash flows from operations
for debt service and prevent us from fulfilling our debt
obligations. If we are unable to pay our debt obligations when
due, we could be in default under our debt agreements and our
lenders could accelerate our debt or take other actions which
could restrict our operations.
As discussed in Note 5 of the Notes to Consolidated
Financial Statements in Item 8 of this Report, we
have a significant amount of debt outstanding, consisting
primarily of Term Loans due in 2012 and Convertible Senior Notes
(the Convertible Notes) due in 2037. Holders of the
Convertible Notes may require us to repurchase the Notes in the
event we are involved in certain types of corporate transactions
or other events constituting a fundamental change and, in
addition, holders have the right to require us to repurchase all
or a portion of their Notes on November 1 of 2012, 2017, 2022,
2027 and 2032. We have the right to redeem the Convertible
Notes, in whole or in part, for cash at any time after
October 31, 2012. We may incur additional debt to finance
acquisitions or for other purposes. This indebtedness could,
among other things:
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limit our ability to obtain future financing for working
capital, capital expenditures, acquisitions, debt service
requirements, surety bonds, or other requirements;
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require us to dedicate a substantial portion of our cash flows
from operations to the payment of principal and interest on our
indebtedness and reduce our ability to use our cash flows for
other purposes;
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limit our flexibility in planning for, or reacting to, changes
in our business and the markets in which we compete;
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place us at a competitive disadvantage to competitors with less
indebtedness; and
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make us more vulnerable in the event of a further downturn in
our business or in general economic conditions.
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Our business may not generate cash flows from operations in
amounts sufficient to pay our debt or to fund other liquidity
needs. The factors that affect our ability to generate cash can
also affect our ability to raise additional funds through the
sale of equity securities, the refinancing of debt or the sale
of assets.
We may need to refinance all or a portion of our debt on or
before maturity. We may not be able to refinance any of our debt
on commercially reasonable terms or at all. If we are unable to
refinance our debt obligations, we could be in default under our
debt agreements and our lenders could accelerate our debt or
take other actions that could restrict our operations.
Fluctuations in operating results The cyclical
and seasonal nature of our construction businesses has caused
our sales and operating results to fluctuate. These
fluctuations, which have caused operating losses in the past,
may continue to occur in the future, which could result in
additional operating losses during future downturns.
The North American housing market is highly cyclical and is
influenced by many national and regional economic and
demographic factors, including:
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terms and availability of financing for homebuyers and retailers;
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consumer confidence;
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interest rates;
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population and employment trends;
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income levels;
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housing demand; and
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general economic conditions, including inflation, and recessions.
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The factory-built housing industry is also affected by
seasonality. Sales during the period from March to November are
traditionally higher than in other months. As a result of the
foregoing factors, our sales and operating results fluctuate,
and we expect that they will continue to fluctuate in the future.
In addition, our U.K. commercial modular construction business
is highly cyclical and it, too, is influenced by numerous
national and regional economic factors, including:
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availability of project financing;
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availability of government funding for prison, military and
education construction projects;
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population and employment trends; and
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general economic conditions, including inflation and recessions.
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Moreover, we may experience operating losses during future
cyclical and seasonal downturns in our markets as we are now and
have in the past.
Consumer financing availability Tight credit
standards and loan terms, curtailed lending activity, and
increased interest rates among consumer lenders could reduce our
sales. If consumer financing were to become further curtailed,
our sales could decline and our operating results and cash flows
could suffer.
The consumers who buy our homes have historically secured
consumer financing from third party lenders. The availability,
terms and costs of consumer financing depend on the lending
practices of financial institutions, government regulations and
economic and other conditions, all of which are beyond our
control. A consumer
11
seeking to finance the purchase of a manufactured home without
land will generally pay a higher interest rate and have a
shorter loan term than a consumer seeking to finance the home
along with the real estate on which it will be placed.
Manufactured home consumer financing is at times more difficult
to obtain than financing for site-built and modular homes.
Between 1999 and 2003, consumer lenders tightened the credit
underwriting standards and loan terms and increased interest
rates for loans to purchase manufactured homes, which reduced
lending volumes and caused our sales to decline. During 2008 one
of the national lenders exited the market. In addition, the
current credit crisis has caused certain lenders to further
tighten underwriting guidelines and increase pricing and may
result in further curtailment of lending or additional lenders
exiting the market.
The poor performance of portfolios of manufactured housing
consumer loans in past years has made it more difficult for
industry consumer finance companies to obtain long-term capital.
As a result, consumer finance companies have curtailed their
industry lending and many have exited the manufactured housing
market. Additionally, the industry has seen certain traditional
real estate mortgage lenders tighten terms or discontinue
financing for manufactured housing.
If consumer financing for manufactured homes were to be further
curtailed, we would likely experience sales declines and our
operating results and cash flows would suffer.
Floor plan financing availability A reduction
in floor plan credit availability or tighter loan terms to our
independent retailers could cause our manufacturing sales to
decline. As a result, our operating results and cash flows could
suffer.
Many independent retailers of our manufactured homes finance
their inventory purchases with floor plan financing provided by
lending institutions. Reduced availability of floor plan lending
or tighter floor plan terms, both of which occurred in late
2008, may affect our independent retailers inventory
levels of new homes, the number of retail sales centers and
related wholesale demand. As a result, we could experience
manufacturing sales declines or a higher level of retailer
defaults and our operating results and cash flows could suffer.
Contingent liabilities We have, and will
continue to have, significant contingent repurchase obligations
and other contingent obligations, some of which could become
actual obligations that we must satisfy. We may incur losses
under these contingent repurchase obligations or be required to
fund these or other contingent obligations that would reduce our
cash flows.
In connection with a floor plan arrangement for our
manufacturing shipments to independent retailers, the financial
institution that provides the retailer financing customarily
requires us to enter into a separate repurchase agreement with
the financial institution. Under this separate agreement,
generally for a period up to 18 months from the date of our
sale to the retailer, upon default by the retailer and
repossession of the home by the financial institution, we are
generally obligated to repurchase the home from the lender at a
price equal to the unpaid principal amount of the loan, plus
certain administrative and handling expenses, reduced by the
cost of any damage to the home and any missing parts or
accessories. Our estimated aggregate contingent repurchase
obligation at January 3, 2009 was significant and included
significant contingent repurchase obligations relating to our
largest independent retail customers. For additional discussion
see Contingent Repurchase Obligations
Manufacturing Segment in Item 7 and Note 13 of
Notes to Consolidated Financial Statements in
Item 8 of this Report. We may be required to honor some or
all of our contingent repurchase obligations in the future,
which would result in operating losses and reduced cash flows.
At January 3, 2009, we also had contingent obligations
related to surety bonds and letters of credit. For additional
detail and discussion, see Liquidity and Capital
Resources in Item 7 of this Report. If we were
required to fund a material amount of these contingent
obligations, we would have reduced cash flows and could incur
losses.
Dependence upon independent retailers If we
are unable to establish or maintain relationships with
independent retailers who sell our homes, our sales could
decline and our operating results and cash flows could
suffer.
During 2008, approximately 94% of our manufacturing shipments of
homes were made to independent retail locations throughout the
United States and western Canada. As is common in the industry,
independent retailers may sell manufactured homes produced by
competing manufacturers. We may not be able to establish
relationships
12
with new independent retailers or maintain good relationships
with independent retailers that sell our homes. Even if we do
establish and maintain relationships with independent retailers,
these retailers are not obligated to sell our manufactured homes
exclusively, and may choose to sell our competitors homes
instead. The independent retailers with whom we have
relationships can cancel these relationships on short notice. In
addition, these retailers may not remain financially solvent, as
they are subject to the same industry, economic, demographic and
seasonal trends that we face. If we do not establish and
maintain relationships with solvent independent retailers in the
markets we serve, sales in those markets could decline and our
operating results and cash flows could suffer.
Cost and availability of raw materials Prices
of certain materials can fluctuate significantly and
availability of certain materials may be limited at
times.
Prices of certain materials such as lumber, insulation, steel,
drywall, oil based products and fuel can fluctuate significantly
due to changes in demand and supply. Additionally, availability
of certain materials such as drywall and insulation may be
limited at times resulting in higher prices
and/or the
need to find alternative suppliers. We generally have been able
to maintain adequate supplies of materials and to pass higher
material costs on to our customers in the form of surcharges and
base price increases. However, it is not certain that future
price increases can be passed on to our customers without
affecting demand or that limited availability of materials will
not impact our production capabilities. The current credit
crisis and its impact on the financial and housing markets may
also impact our suppliers and affect the availability or pricing
of materials.
Effect on liquidity Industry conditions and
our operating results have limited our sources of capital in the
past. If we are unable to locate suitable sources of capital
when needed we may be unable to maintain or expand our
business.
We depend on our cash balances, our cash flows from operations
and our senior secured credit agreement, as amended, (the
Credit Agreement) to finance our operating
requirements, capital expenditures and other needs. The downturn
in the manufactured housing industry, combined with our
operating results and other changes, has limited our sources of
financing in the past. If our cash balances, cash flows from
operations, and availability under our Credit Agreement are
insufficient to finance our operations and alternative capital
is not available, we may not be able to expand our business and
make acquisitions, or we may need to curtail or limit our
existing operations.
We have a significant amount of surety bonds and letters of
credit representing collateral for our casualty insurance
programs and for general operating purposes. The letters of
credit are issued under our Credit Agreement. For additional
detail and information concerning the amounts of our surety
bonds and letters of credit, see Note 13 of Notes to
Consolidated Financial Statements in Item 8 of this
Report. The inability to retain our current letter of credit and
surety bond providers, to obtain alternative bonding or letter
of credit sources or to retain our current Credit Agreement to
support these programs could require us to post cash collateral,
reduce the amount of cash available for our operations or cause
us to curtail or limit existing operations.
Competition The factory-built housing industry
is very competitive. If we are unable to effectively compete,
our growth could be limited, our sales could decline and our
operating results and cash flows could suffer.
The factory-built housing industry is highly competitive at both
the manufacturing and retail levels, with competition based,
among other things, on price, product features, reputation for
service and quality, merchandising, terms of retailer
promotional programs and the terms of consumer financing.
Numerous companies produce factory-built homes in our markets.
Some of our manufacturing competitors have captive retail
distribution systems and consumer finance operations. In
addition, there are independent factory-built housing retail
locations in most areas where independent retailers sell our
homes and in California where we have retail operations. Because
barriers to entry to the industry at both the manufacturing and
retail levels are low, we believe that it is relatively easy for
new competitors to enter our markets. In addition, our products
compete with other forms of low to moderate-cost housing,
including site-built homes, panelized homes, apartments,
townhouses and condominiums. If we are unable to effectively
compete in this environment, our manufacturing shipments and
retail sales could be reduced. As a result, our sales could
decline and our operating results and cash flows could suffer.
Zoning If the factory-built housing industry
is not able to secure favorable local zoning ordinances, our
sales could decline and our operating results and cash flows
could suffer.
13
Limitations on the number of sites available for placement of
manufactured homes or on the operation of manufactured housing
communities could reduce the demand for manufactured homes and
our sales. 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, some property owners have resisted the
adoption of zoning ordinances permitting the use of manufactured
homes in residential areas, which we believe has restricted the
growth of the industry. Manufactured homes may not receive
widespread acceptance and localities may not adopt zoning
ordinances permitting the development of manufactured home
communities. If the manufactured housing industry is unable to
secure favorable local zoning ordinances, our sales could
decline and our operating results and cash flows could suffer.
Dependence upon executive officers and other key
personnel The loss of any of our executive officers
or other key personnel could reduce our ability to manage our
businesses and achieve our business plan, which could cause our
sales to decline and our operating results and cash flows to
suffer.
We depend on the continued services and performance of our
executive officers and other key personnel. If we lose the
service of any of our executive officers or other key personnel,
it could reduce our ability to manage our businesses and achieve
our business plan, which could cause our sales to decline and
our operating results and cash flows to suffer.
Restrictive covenants The terms of our debt
place operating restrictions on us and contain various financial
performance and other covenants with which we must remain in
compliance. If we do not remain in compliance with these
covenants, certain of our debt facilities could be terminated
and the amounts outstanding thereunder could become immediately
due and payable.
The documents governing the terms of our Credit Agreement
contain financial and non-financial covenants that place
restrictions on us. The terms of this agreement include
covenants that, for the four quarters in 2009, require that we
attain minimum levels of EBITDA and liquidity, and beginning in
the first quarter of our 2010 fiscal year, allow for a maximum
leverage limit and require minimum levels of interest coverage
and fixed charge coverage. These and other non-financial
covenants, to varying degrees, restrict our ability to:
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make capital investments;
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engage in new lines of business;
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incur indebtedness, contingent liabilities, guarantees, and
liens;
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pay dividends or issue common stock;
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redeem or refinance existing indebtedness;
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redeem or repurchase common stock and redeem, repay or
repurchase subordinated debt;
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make investments in subsidiaries that are not subsidiary
guarantors;
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enter into joint ventures;
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sell certain assets or enter into sale and leaseback
transactions;
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transfer cash between U.S. and foreign affiliates;
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acquire, consolidate with, or merge with or into other
companies; and
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enter into transactions with affiliates.
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If we fail to comply with any of these covenants, the lenders
could cause our debt to become due and payable prior to
maturity, or result in refinancing the related indebtedness
under unfavorable terms. If our debt were accelerated, our
assets might not be sufficient to repay our debt in full. As of
January 3, 2009, we were in compliance with all Credit
Agreement covenants.
For additional detail and discussion concerning these financial
covenants see Liquidity and Capital Resources in
Item 7 of this Report.
14
Our potential inability to integrate acquired operations
could have a negative effect on our expenses and results of
operations.
In the past, we have grown through strategic acquisitions and we
may engage in strategic acquisitions in the future to strengthen
and expand our operating capabilities and further diversify our
revenue base. The full benefits of these acquisitions, however,
require integration of manufacturing, administrative, financial,
sales, and marketing approaches and personnel. If we are unable
to successfully integrate these acquisitions, we may not realize
the benefits of the acquisitions, and our financial results may
be negatively affected. Completed acquisitions may also lead to
significant unexpected liabilities above and beyond the level of
available indemnities contained in the purchase agreements.
Potential Dilution Conversions by holders of
our convertible securities and potential capital, debt
reduction, or acquisition transactions effected with issuances
of our common stock could result in dilution and impair the
price of our common stock.
We currently have $180 million of 2.75% Convertible
Notes outstanding. The Convertible Notes are convertible into
approximately 8.6 million shares or more of our common
stock, depending on the market price of our common stock near
the conversion date. To the extent that holders convert their
Convertible Notes into shares of the Companys common
stock, other common shareholders would experience dilution in
their percentage ownership interests.
To the extent we decide to reduce debt obligations or finance
investments through the issuance of common stock or instruments
convertible into common stock, our then existing common
shareholders could experience dilution in their percentage
ownership interests. We may seek additional sources of capital
and financing in the future or issue securities in connection
with retiring our outstanding indebtedness or making
acquisitions, the terms of which could result in additional
dilution. In addition, to remain in compliance with the
continued listing standards of the NYSE, the Company may elect a
reverse stock split. In the event of such action, there can be
no guarantee the price of our stock will remain constant or
proportional to the split and additional risks may exist related
to market liquidity and market capitalization, among others.
Potential impairment charges We have a
significant amount of goodwill, amortizable intangible assets
and property, plant and equipment which are subject to periodic
review and testing for impairment.
A significant portion of our total assets at January 3,
2009 were comprised of goodwill, amortizable intangible assets,
and property, plant and equipment. Under generally accepted
accounting principles each of these assets is subject to
periodic review and testing to determine whether the asset is
recoverable or realizable. These tests require projections of
future cash flows and estimates of fair value of the assets.
Unfavorable trends in the industries in which we operate or in
our operations, not unlike those we are currently experiencing,
can affect these projections and estimates. Significant
impairment charges, although not affecting cash flow, could have
a material effect on our operating results and financial
position. In addition, because our stock price has declined
significantly, our current equity market capitalization has
fallen below our book value. This situation, were it to
continue, could result in impairment charges.
Operations in the U.K. We have a significant
investment in the U.K. We depend upon a few individually
significant customers in our international segment. If we are
unable to maintain relationships with our significant customers,
our sales could decline and our operating results and cash flows
could suffer. A reduction in government funding to our major
customers, our inability to effectively compete in the U.K. or
unfavorable changes in exchange rates could adversely affect the
value of our investment in the U.K. and could significantly
impact our U.K. revenues and earnings.
During 2008, approximately 64% of our international segment
sales were, either directly or indirectly, to two large public
sector (government) customers. If we are unable to maintain
relationships with these customers or establish suitable
replacement customer relationships, our operating results and
cash flows could suffer. Caledonians two major customers
rely on government funding for construction projects. Reduction
in government funding to either of these two customers or
unfavorable changes in the markets for hotels and residential
structures could significantly impact Caledonians revenues
and earnings.
15
The commercial construction market in the U.K. is very
competitive. If we are unable to effectively compete in this
environment our revenues and earnings could suffer.
Foreign exchange rates Changes in foreign
exchange rates could adversely affect the value of our
investments in Canada and the U.K. and cause foreign exchange
losses related to intercompany loans.
We have substantial investments in businesses in Canada and the
U.K. Unfavorable changes in foreign exchange rates could
adversely affect the value of our investment in these businesses.
We use intercompany loans between our U.S. and foreign
subsidiaries to provide funds for acquisitions and other
purposes. Fluctuations in the relative exchange rates between
the U.S. dollar, Canadian dollar and British pound could
result in foreign exchange transaction losses that will be
reported in our statement of operations until such loans are
repaid.
|
|
Item 1B.
|
Unresolved
Staff Comments
|
None
All of our North American manufacturing facilities are one story
with concrete floors and wood and steel superstructures and
generally range from 80,000 to 150,000 square feet. Our
five manufacturing facilities in the U.K. are comprised of seven
plants that range from 48,000 to 100,000 square feet. We
own all of our manufacturing facilities except as noted in the
table below. We also own substantially all of the machinery and
equipment used in our manufacturing facilities. We believe our
plant facilities are generally well maintained and provide ample
capacity to meet expected demand.
16
The following table sets forth certain information with respect
to the 26 homebuilding facilities we were operating as of
January 3, 2009 in the United States and Canada and the
five manufacturing facilities in the U.K. All of the North
American facilities are assembly-line operations.
|
|
|
United States
|
|
|
|
Arizona
|
|
Chandler*
|
California
|
|
Corona**
Lindsay
Woodland**
|
Colorado
|
|
Berthoud
|
Florida
|
|
Bartow*
Lake City ***
|
Idaho
|
|
Weiser
|
Indiana
|
|
Topeka (2 plants)
|
Minnesota
|
|
Worthington
|
Nebraska
|
|
York
|
New York
|
|
Sangerfield****
|
North Carolina
|
|
Lillington
Salisbury
|
Pennsylvania
|
|
Claysburg
Ephrata
Strattanville
|
Tennessee
|
|
Dresden**
|
Texas
|
|
Burleson
|
Virginia
|
|
Front Royal
|
Canada
|
|
|
Alberta
|
|
Medicine Hat
Lethbridge*
|
British Columbia
|
|
Penticton
Winfield*
|
Saskatchewan
|
|
Estevan
|
United Kingdom
|
|
|
Nottinghamshire
|
|
Newark (4 plants, 2 owned and 2 leased**)
|
East Yorkshire
|
|
Driffield**
|
|
|
|
* |
|
Includes leased land. |
|
** |
|
Operating lease. |
|
*** |
|
Includes facility leased under a capital lease and leased land. |
|
**** |
|
Facility leased under a capital lease. |
Substantially all of the U.S. manufacturing facilities we
own are encumbered under first mortgages securing our Credit
Agreement. Two of the facilities are encumbered under industrial
revenue bond financing agreements and one facility is encumbered
under a capital lease.
At January 3, 2009, we also owned 17 idle manufacturing
facilities in 8 states. Eight of these idle facilities are
permanently closed and are generally for sale.
17
At January 3, 2009, our retail segment headquarters and 14
retail sales offices in California were leased under operating
leases. Sales office lease terms generally range from monthly to
five years. Our corporate offices, which are located in Troy,
Michigan, and other miscellaneous offices and properties, are
also leased under operating leases. The lease term for our
corporate offices is ten years ending in 2017.
|
|
Item 3.
|
Legal
Proceedings
|
In the ordinary course of business, we are involved in routine
litigation incidental to our business. This litigation arises
principally from the sale of our products and in various
governmental agency proceedings arising from occupational safety
and health, wage and hour, and similar employment and workplace
regulations. In the opinion of management, none of these matters
presently pending are expected to have a material adverse effect
on our overall financial position or results of operations.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
There were no matters submitted to a vote of Champions
security holders during the fourth quarter of 2008.
18
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Shareholder
Matters, and Issuer Purchases of Equity Securities
|
Champions common stock is listed on the New York Stock
Exchange as ChampEnt and the Chicago Stock Exchange as Champ
Enterprises and has a ticker symbol of CHB for both
Exchanges. The high and low sale prices per share of the common
stock as reported by Yahoo! Finance for each quarter of 2008 and
2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
2008
|
|
|
|
|
|
|
|
|
1st Quarter
|
|
$
|
10.96
|
|
|
$
|
7.15
|
|
2nd Quarter
|
|
|
11.42
|
|
|
|
5.68
|
|
3rd Quarter
|
|
|
7.88
|
|
|
|
2.84
|
|
4th Quarter
|
|
|
6.12
|
|
|
|
0.40
|
|
2007
|
|
|
|
|
|
|
|
|
1st Quarter
|
|
$
|
10.34
|
|
|
$
|
7.18
|
|
2nd Quarter
|
|
|
12.00
|
|
|
|
8.63
|
|
3rd Quarter
|
|
|
12.74
|
|
|
|
8.80
|
|
4th Quarter
|
|
|
14.59
|
|
|
|
7.84
|
|
As of February 16, 2009, the Company had approximately
3,600 shareholders of record and approximately 8,100
beneficial holders.
We have not paid cash dividends on our common stock since 1974
and do not plan to pay cash dividends on our common stock in the
near term. Our Credit Agreement contains a covenant that limits
our ability to pay dividends.
The graph below compares the cumulative five-year shareholder
returns on Company Common Stock to the cumulative five-year
shareholder returns for (i) the S&P 500 Stock Index
and (ii) an index of peer companies selected by the
Company. The peer group is composed of seven publicly traded
manufactured housing companies, which were selected based on
similarities in their products and their competitive position in
the industry. The companies comprising the peer group are
Cavalier Homes, Inc., Cavco Industries, Inc., Fleetwood
Enterprises, Inc., Nobility Homes, Inc., Palm Harbor Homes,
Inc., Skyline Corporation and Coachmen Industries, Inc.
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company Name / Index
|
|
|
Dec. 03
|
|
|
|
Dec. 04
|
|
|
|
Dec. 05
|
|
|
|
Dec. 06
|
|
|
|
Dec. 07
|
|
|
|
Dec. 08
|
|
Champion Enterprises, Inc
|
|
|
$
|
100.00
|
|
|
|
$
|
168.62
|
|
|
|
$
|
194.29
|
|
|
|
$
|
133.52
|
|
|
|
$
|
133.38
|
|
|
|
$
|
8.99
|
|
S&P 500 Index
|
|
|
$
|
100.00
|
|
|
|
$
|
109.33
|
|
|
|
$
|
112.61
|
|
|
|
$
|
127.95
|
|
|
|
$
|
133.18
|
|
|
|
$
|
84.06
|
|
Peer Group
|
|
|
$
|
100.00
|
|
|
|
$
|
121.44
|
|
|
|
$
|
117.71
|
|
|
|
$
|
96.73
|
|
|
|
$
|
70.40
|
|
|
|
$
|
30.56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
Compensation Plan Information
The following table contains information about our common stock
that may be issued upon the exercise of options, warrants, and
rights under all of our equity compensation plans and agreements
as of January 3, 2009 (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
|
|
|
|
|
|
|
|
Remaining Available
|
|
|
|
|
|
|
|
|
|
for Future Issuance
|
|
|
|
Number of Shares to
|
|
|
|
|
|
Under Equity
|
|
|
|
be Issued upon
|
|
|
Weighted-Average
|
|
|
Compensation Plans
|
|
|
|
Exercise of
|
|
|
Exercise Price of
|
|
|
(Excluding
|
|
|
|
Outstanding Options,
|
|
|
Outstanding Options,
|
|
|
Outstanding Options,
|
|
Plan Category
|
|
Warrants, and Rights
|
|
|
Warrants, and Rights
|
|
|
Warrants, and Rights)
|
|
|
Equity Compensation Plans Approved by Shareholders
|
|
|
2,011
|
|
|
$
|
2.06
|
|
|
|
2,683
|
|
Equity Compensation Plans and Agreements not Approved by
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders(1)
|
|
|
39
|
|
|
$
|
21.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,050
|
|
|
|
|
|
|
|
2,683
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Included in this Plan Category are the following: |
1993 Management Stock Option Plan This
plan is no longer in effect other than for stock options that
were previously granted and remain outstanding. Options
representing 34,432 shares of common stock remain
outstanding under this plan. The weighted-average exercise price
of these options is $21.04.
Acquisitions We granted stock options to
certain employees of acquired businesses. Options representing
4,000 shares of common stock remain outstanding under these
agreements and were granted at fair market value and vested over
time. The weighted-average exercise price of these options is
$20.63.
20
|
|
Item 6.
|
Selected
Financial Information
|
Five-Year
Highlights
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars and weighted average shares in thousands,
|
|
|
|
except per share amounts)
|
|
|
Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing
|
|
$
|
727,331
|
|
|
$
|
941,945
|
|
|
$
|
1,195,834
|
|
|
$
|
1,190,819
|
|
|
$
|
1,002,164
|
|
International
|
|
|
279,641
|
|
|
|
280,814
|
|
|
|
90,717
|
|
|
|
|
|
|
|
|
|
Retail
|
|
|
36,521
|
|
|
|
73,406
|
|
|
|
117,397
|
|
|
|
135,371
|
|
|
|
110,024
|
|
Less: Intercompany
|
|
|
(10,300
|
)
|
|
|
(22,700
|
)
|
|
|
(39,300
|
)
|
|
|
(53,600
|
)
|
|
|
(97,900
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
|
1,033,193
|
|
|
|
1,273,465
|
|
|
|
1,364,648
|
|
|
|
1,272,590
|
|
|
|
1,014,288
|
|
Cost of sales
|
|
|
906,685
|
|
|
|
1,083,601
|
|
|
|
1,147,032
|
|
|
|
1,055,749
|
|
|
|
843,261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
126,508
|
|
|
|
189,864
|
|
|
|
217,616
|
|
|
|
216,841
|
|
|
|
171,027
|
|
Selling, general and administrative expenses
|
|
|
130,756
|
|
|
|
158,142
|
|
|
|
154,534
|
|
|
|
151,810
|
|
|
|
129,096
|
|
Restructuring charges
|
|
|
10,683
|
|
|
|
3,780
|
|
|
|
1,200
|
|
|
|
|
|
|
|
3,300
|
|
Foreign currency transaction losses (gains)
|
|
|
10,536
|
|
|
|
(1,008
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangible assets
|
|
|
9,251
|
|
|
|
5,727
|
|
|
|
3,941
|
|
|
|
|
|
|
|
|
|
Mark-to-market
(credit) charge for common stock warrant
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,300
|
)
|
|
|
5,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
(34,718
|
)
|
|
|
23,223
|
|
|
|
57,941
|
|
|
|
69,331
|
|
|
|
33,131
|
|
Loss on debt retirement
|
|
|
(608
|
)
|
|
|
(4,543
|
)
|
|
|
(398
|
)
|
|
|
(9,857
|
)
|
|
|
(2,776
|
)
|
Net interest expense
|
|
|
(16,692
|
)
|
|
|
(14,731
|
)
|
|
|
(14,446
|
)
|
|
|
(13,986
|
)
|
|
|
(17,219
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations before income taxes
|
|
|
(52,018
|
)
|
|
|
3,949
|
|
|
|
43,097
|
|
|
|
45,488
|
|
|
|
13,136
|
|
Income tax expense (benefit)
|
|
|
147,442
|
(a)
|
|
|
(3,243
|
)
|
|
|
(95,211
|
)(b)
|
|
|
3,300
|
|
|
|
(10,000
|
)(c)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations
|
|
|
(199,460
|
)
|
|
|
7,192
|
|
|
|
138,308
|
|
|
|
42,188
|
|
|
|
23,136
|
|
Loss from discontinued operations(d)
|
|
|
|
|
|
|
|
|
|
|
(16
|
)
|
|
|
(4,383
|
)
|
|
|
(6,125
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(199,460
|
)
|
|
$
|
7,192
|
|
|
$
|
138,292
|
|
|
$
|
37,805
|
|
|
$
|
17,011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations
|
|
$
|
(2.57
|
)
|
|
$
|
0.09
|
|
|
$
|
1.78
|
|
|
$
|
0.54
|
|
|
$
|
0.29
|
|
Loss from discontinued operations(d)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.06
|
)
|
|
|
(0.08
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss) income per share
|
|
$
|
(2.57
|
)
|
|
$
|
0.09
|
|
|
$
|
1.78
|
|
|
$
|
0.48
|
|
|
$
|
0.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted shares for diluted EPS
|
|
|
77,700
|
|
|
|
77,719
|
|
|
|
77,578
|
|
|
|
76,034
|
|
|
|
71,982
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows (used for) provided by continuing operating activities
|
|
$
|
(16,030
|
)
|
|
$
|
80,305
|
|
|
$
|
59,874
|
|
|
$
|
38,406
|
|
|
$
|
(7,319
|
)
|
Cash flows provided by (used for) discontinued operations
|
|
|
124
|
|
|
|
62
|
|
|
|
1,201
|
|
|
|
15,438
|
|
|
|
(1,976
|
)
|
Depreciation and amortization
|
|
|
22,478
|
|
|
|
20,063
|
|
|
|
17,943
|
|
|
|
10,738
|
|
|
|
10,209
|
|
Capital expenditures
|
|
|
12,179
|
|
|
|
10,201
|
|
|
|
17,582
|
|
|
|
11,785
|
|
|
|
8,440
|
|
Net property, plant and equipment
|
|
|
96,863
|
|
|
|
116,984
|
|
|
|
112,527
|
|
|
|
91,173
|
|
|
|
80,957
|
|
Total assets
|
|
|
645,009
|
|
|
|
1,022,223
|
|
|
|
800,615
|
|
|
|
566,654
|
|
|
|
517,042
|
|
Long-term debt
|
|
|
300,851
|
|
|
|
342,897
|
|
|
|
252,449
|
|
|
|
201,727
|
|
|
|
200,758
|
|
Redeemable convertible preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,750
|
|
Shareholders equity
|
|
|
86,823
|
|
|
|
319,846
|
|
|
|
301,762
|
|
|
|
147,305
|
|
|
|
77,300
|
|
Per outstanding share (unaudited)
|
|
$
|
1.12
|
|
|
$
|
4.14
|
|
|
$
|
3.95
|
|
|
$
|
1.94
|
|
|
$
|
1.07
|
|
Other Statistical Information (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of employees at year end
|
|
|
4,100
|
|
|
|
6,500
|
|
|
|
7,000
|
|
|
|
7,400
|
|
|
|
6,800
|
|
Homes sold
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing
|
|
|
11,406
|
|
|
|
15,346
|
|
|
|
21,126
|
|
|
|
23,960
|
|
|
|
22,978
|
|
Retail new
|
|
|
218
|
|
|
|
375
|
|
|
|
629
|
|
|
|
748
|
|
|
|
687
|
|
Manufacturing multi-section mix
|
|
|
68
|
%
|
|
|
77
|
%
|
|
|
80
|
%
|
|
|
79
|
%
|
|
|
85
|
%
|
Certain amounts have been reclassified to conform to current
period presentation.
|
|
|
(a)
|
|
Included a non-cash tax charge of
$164.5 million to provide a valuation allowance for 100% of
our U.S. deferred tax assets.
|
|
(b)
|
|
Included a non-cash tax benefit of
$101.9 million from the reversal of the deferred tax asset
valuation allowance.
|
|
(c)
|
|
As a result of the finalization of
certain tax examinations, the allowance for tax adjustments was
reduced by $12 million.
|
|
(d)
|
|
Discontinued operations consisted
of 66 retail lots that were closed or sold in 2004 and 2005.
|
21
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
Overview
We are a leading producer of factory-built housing in the United
States and western Canada. As of January 3, 2009, we
operated 21 homebuilding facilities in 14 states in the
U.S. and five facilities in three provinces in western
Canada. As of January 3, 2009, our homes were sold through
more than 1,600 independent sales centers, builders, and
developers across the U.S. and western Canada.
Approximately 725 of our independent retailer locations were
members of our Champion Home Centers (CHC) retail
distribution network. As of January 3, 2009, our homes were
also sold through 14 Company-owned sales offices in California.
We are also a leading modular builder in the United Kingdom,
where we operate five manufacturing facilities and construct
steel-framed modular buildings for use as prisons, military
accommodations, hotels and residential units, among other
applications.
We made one acquisition during both 2008 and 2007 and three
acquisitions during 2006. These acquisitions were part of our
strategy to grow and diversify our revenue base with a focus on
increasing our modular homebuilding presence in the
U.S. and to seek factory-built construction opportunities
outside of the U.S. Results of operations for these
acquisitions are included in our consolidated results for
periods subsequent to their respective acquisition dates.
On February 29, 2008, we acquired 100% of the capital stock
of U.K. based ModularUK Building Systems Limited
(ModularUK) for a nominal initial cash payment and
the assumption of approximately $4.2 million of debt.
ModularUK is located in East Yorkshire, U.K. and is a producer
of steel-framed modular buildings serving the healthcare,
education and commercial sectors. The results of operations of
ModularUK are included in our results from operations and in our
international segment for periods subsequent to its acquisition
date.
On December 21, 2007, we acquired substantially all of the
assets and the business of SRI Homes Inc., (SRI) for
cash payments of approximately $96.2 million, a note
payable of $24.5 million (CAD) (approximately
$24.5 million USD at acquisition date) and assumption of
the operating liabilities of the business. SRI is a leading
producer of homes in western Canada that operates three
manufacturing plants in the provinces of Alberta, British
Columbia and Saskatchewan. The results of operations of SRI are
included in our results from operations and in our manufacturing
segment for periods subsequent to its acquisition date.
On April 7, 2006, we acquired 100% of the capital stock of
U.K. based Calsafe Group (Holdings) Limited and its operating
subsidiary Caledonian Building Systems Limited
(Caledonian), for approximately $100 million in
cash, plus potential contingent purchase price up to
approximately $6.4 million and additional potential
contingent consideration to be paid over four years. Caledonian
and ModularUK together with their five manufacturing facilities
in the U.K. comprise our international manufacturing segment
(the international segment).
On July 31, 2006, we acquired certain of the assets and the
business of North American Housing Corp. and an affiliate
(North American) for approximately $31 million
in cash plus assumption of certain operating liabilities. North
American is a modular homebuilder that operates manufacturing
facilities in Virginia. On March 31, 2006, we acquired 100%
of the membership interests of Highland Manufacturing Company,
LLC (Highland), a manufacturer of modular and
HUD-code homes that operates one plant in Minnesota, for cash
consideration of approximately $23 million. North American
and Highland are included in our manufacturing segment.
Adverse conditions have existed in the manufactured housing
industry and the broader housing market in the U.S. for
several years, including limited availability of consumer
financing, excess inventories of new and pre-owned homes,
increasing foreclosure rates and pressure on selling prices. Our
manufacturing and retail segments continue to be affected by
these challenging conditions in the U.S. Since the
beginning of 2006 we have closed twelve U.S. manufacturing
plants, including three plants in 2008, and reduced headcount at
most of our operating plants. Since the beginning of 2007 our
retail operations in California have reduced the number of sales
centers operated by three and reduced inventories by
approximately 17%, excluding the effects of inventory write
downs. During the third and fourth quarters of 2008, as the
credit crisis deepened, conditions in the housing and financial
markets worsened and negatively impacted the overall economy in
the U.S. and elsewhere. These conditions led to lower sales
throughout our U.S. operations for the year ended
January 3, 2009. As a result of falling home prices and
competitive conditions in the California housing market, in 2008
we wrote down our retail inventories of park spaces and homes by
$14.1 million, including $6.3 million in the fourth
quarter of 2008. In addition, since October 2008 we have reduced
our corporate office headcount by 53 positions, or over 40%, and
curtailed or eliminated
22
various marketing and information technology projects and other
expenditures, resulting in projected annualized cost savings of
approximately $13 million.
Excluding homes sold to FEMA in 2006 and 2005, annual industry
shipments of HUD-code homes averaged 109,500 homes during the
last five years as compared to 373,000 homes in 1998. Industry
shipments of HUD-code homes totaled 81,900 homes in 2008, a
decline of 14.5% from 95,800 homes in 2007, and the lowest
annual volume in 50 years. Industry shipments of modular
homes in the U.S. for the first 9 months of 2008
totaled 17,100 homes, a 30.8% reduction from shipments in the
comparable period of 2007. Our total shipments of homes in the
U.S. in 2008 were down 33.8% from shipments in 2007.
Meanwhile, our manufacturing segments Canadian operations,
with the acquisition of SRI, enjoyed strong sales volumes and
relatively high levels of unfilled orders during the first half
of 2008. However, incoming order rates and sales volume weakened
in Canada during the second half of the year. Total homes sold
in Canada in 2008, including those produced in the U.S.,
increased 42.5% over the number sold in 2007, while homes sold
by our Canadian operations increased 61.4% over the number sold
in 2007.
Our international segment experienced a strong first half in
2008 with revenues totaling $181 million driven by prison
projects with a significant amount of site-work. Second half
sales volume declined to $99 million, following substantial
completion of many of the prison projects and a weakening
economy in the U.K. that was impacted by the global credit
crisis. International segment income in 2008 of
$16.3 million was 6% lower than in 2007. Segment income in
2007 was reduced by $6.4 million of expense in connection
with the earn out provisions of the 2006 Caledonian acquisition
while 2008 included no such earn out expense. This decline in
segment income before earn out expense was driven primarily by
higher general and administrative expenses.
Our loss before income taxes for the year ended January 3,
2009 was $52.0 million versus income of $3.9 million
in 2007. Compared to 2007, our 2008 manufacturing segment income
declined $27.1 million or nearly 67% on a 23% decline in
sales despite the inclusion of SRI. Results in 2008 also
included $10.7 million of restructuring charges, primarily
in the manufacturing segment, retail inventory write downs
totaling $14.1 million and foreign currency transaction
losses of $10.5 million related to intercompany loans.
Results in 2007 included manufacturing segment restructuring
charges totaling $3.8 million, a loss on debt retirement of
$4.5 million and a compensation charge of $6.4 million
in the international segment as a result of a contingent
purchase price or earn out arrangement related to
the acquisition of Caledonian.
Effective September 27, 2008, we provided a valuation
allowance for 100% of our U.S. deferred tax assets,
resulting in a non-cash tax charge of approximately
$150.8 million in the third quarter and $164.5 million
for the full year.
In February 2008, our manufacturing facility in Henry, TN was
destroyed by fire. The net book value of plant, equipment and
inventory of the Henry plant at February 2, 2008 was
approximately $3.3 million. We are fully insured through
our property insurance coverage, subject to a $250,000
deductible. In August 2008, we commenced operations in a leased
facility in Dresden, TN, as a temporary replacement of the
destroyed plant.
We continue to focus on matching our factory-built housing
manufacturing capacity to industry and local market conditions
and improving or eliminating under-performing manufacturing
facilities. We continually review our manufacturing capacity and
will make further adjustments as deemed necessary.
23
Results
of Operations
Consolidated
Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
08 vs 07
|
|
|
07 vs 06
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
% Change
|
|
|
% Change
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
Net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing segment
|
|
$
|
727,331
|
|
|
$
|
941,945
|
|
|
$
|
1,195,834
|
|
|
|
(23
|
)%
|
|
|
(21
|
)%
|
International segment
|
|
|
279,641
|
|
|
|
280,814
|
|
|
|
90,717
|
|
|
|
|
|
|
|
210
|
%
|
Retail segment
|
|
|
36,521
|
|
|
|
73,406
|
|
|
|
117,397
|
|
|
|
(50
|
)%
|
|
|
(37
|
)%
|
Less: intercompany
|
|
|
(10,300
|
)
|
|
|
(22,700
|
)
|
|
|
(39,300
|
)
|
|
|
(55
|
)%
|
|
|
(42
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
$
|
1,033,193
|
|
|
$
|
1,273,465
|
|
|
$
|
1,364,648
|
|
|
|
(19
|
)%
|
|
|
(7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
$
|
126,508
|
|
|
$
|
189,864
|
|
|
$
|
217,616
|
|
|
|
(33
|
)%
|
|
|
(13
|
)%
|
Selling, general and administrative expenses
|
|
|
130,756
|
|
|
|
158,142
|
|
|
|
154,534
|
|
|
|
(17
|
)%
|
|
|
2
|
%
|
Restructuring charges
|
|
|
10,683
|
|
|
|
3,780
|
|
|
|
1,200
|
|
|
|
183
|
%
|
|
|
215
|
%
|
Foreign currency transaction losses (gains)
|
|
|
10,536
|
|
|
|
(1,008
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangible assets
|
|
|
9,251
|
|
|
|
5,727
|
|
|
|
3,941
|
|
|
|
62
|
%
|
|
|
45
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
(34,718
|
)
|
|
|
23,223
|
|
|
|
57,941
|
|
|
|
(249
|
)%
|
|
|
(60
|
)%
|
Loss on debt retirement
|
|
|
608
|
|
|
|
4,543
|
|
|
|
398
|
|
|
|
(87
|
)%
|
|
|
1041
|
%
|
Interest expense, net
|
|
|
16,692
|
|
|
|
14,731
|
|
|
|
14,446
|
|
|
|
13
|
%
|
|
|
2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes
|
|
$
|
(52,018
|
)
|
|
$
|
3,949
|
|
|
$
|
43,097
|
|
|
|
|
|
|
|
(91
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percent of net sales
Gross margin
|
|
|
12.2
|
%
|
|
|
14.9
|
%
|
|
|
15.9
|
%
|
|
|
|
|
|
|
|
|
SG&A
|
|
|
12.7
|
%
|
|
|
12.4
|
%
|
|
|
11.3
|
%
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
(3.4
|
%)
|
|
|
1.8
|
%
|
|
|
4.2
|
%
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes
|
|
|
(5.0
|
%)
|
|
|
0.3
|
%
|
|
|
3.2
|
%
|
|
|
|
|
|
|
|
|
Consolidated
results of operations 2008 versus 2007 analysis
Consolidated net sales for the year ended January 3, 2009
decreased $240.3 million from the comparable period of 2007
due to lower manufacturing and retail segment sales, despite the
inclusion of SRI in 2008. International segment sales in 2008,
measured in British pounds, increased 6.6% over sales in 2007,
but due to changes in exchange rates, sales are down slightly as
expressed in U.S. dollars in 2008.
Gross margin for the year ended January 3, 2009 decreased
$63.4 million from 2007 primarily as a result of lower
sales in the manufacturing segment, excluding SRI, lower retail
segment sales and the $14.1 million write-down of inventory
in the retail segment. These decreases were partially offset by
gross margin from SRI in 2008. Selling, general and
administrative expenses (SG&A) for the year
ended January 3, 2009 decreased $27.4 million from
2007, due to lower SG&A at the manufacturing segment,
excluding SRI, resulting from decreased sales and fewer plants
in operation and lower SG&A at the retail segment and in
general corporate expenses. These SG&A reductions were
partially offset by the SG&A at SRI.
Restructuring charges are discussed below in the section titled
Restructuring Charges. Interest expense, net is
discussed below in the section titled Interest Income and
Interest Expense.
Foreign currency transaction gains and losses are related to
intercompany loans between certain of our U.S. and foreign
subsidiaries that are expected to be repaid and result from the
effects of changes in exchange rates on loans that are
denominated in Canadian dollars and British pounds.
Amortization expense for the year ended January 3, 2009
increased $3.5 million from the comparable period of 2007
due to amortization expense related to intangible assets from
the SRI acquisition, partially offset by the effects
24
of foreign exchange rate changes on amortizable intangible
assets in the U.K. The loss on debt retirement in 2008 is
primarily due to the prepayment of $13.1 million and
$10.4 million of borrowings under the Sterling Term Loan
and the Term Loan, respectively. The loss on debt retirement in
2007 was primarily due to the early redemption of
$75.6 million of our Senior Notes due 2009 (the
Senior Notes).
The inclusion of SRIs results for the year ended
January 3, 2009 contributed sales and operating income to
our consolidated results for the period. On a proforma basis,
assuming we had owned SRI as of the beginning of 2007,
consolidated net sales and operating income for the year ended
December 29, 2007, would have been $1,375.2 million
and $41.8 million, respectively.
Consolidated
results of operations 2007 versus 2006 analysis
Consolidated net sales for 2007 decreased $91.2 million
from 2006 primarily due to lower sales volumes from the
manufacturing and retail segments, partially offset by a
$190.1 million increase in sales at our international
segment. Consolidated net sales for 2007 included a full year of
sales from the 2006 acquisitions whereas sales in 2006 included
only five months of sales for North American and nine months of
sales for Caledonian and Highland. In 2006, manufacturing
segment results also included non-recurring sales of
approximately $23.0 million to FEMA.
Gross margin for 2007 decreased $27.8 million versus the
comparable period in 2006 primarily as a result of lower gross
margin in the manufacturing and retail segments due to lower
sales, which was partially offset by increased gross margin from
higher sales in the international segment. A large portion of
the decreased manufacturing segment gross margin occurred in the
first and fourth quarters of 2007. In the first quarter of 2007
the manufacturing segment saw a significant reduction in sales
and gross margin versus the first quarter of 2006 resulting from
low incoming order rates and levels of unfilled orders driven by
difficult housing market conditions in the U.S. and weather
conditions in many parts of the country and non-recurring FEMA
sales in 2006. Our U.S. plants operated at only 44% of
capacity in the first quarter and 50% of capacity in the fourth
quarter of 2007, resulting in manufacturing inefficiencies and
lower coverage of fixed costs.
SG&A for 2007 increased slightly compared to 2006 primarily
as a result of incremental SG&A from full year results of
the 2006 acquisitions and the effects of higher sales in the
international segment, partially offset by reduced variable
SG&A in the manufacturing and retail segments due to lower
sales. Additionally, in 2007 the international segment SG&A
included a compensation charge of $6.4 million related to a
contingent purchase price or earn out arrangement
for the acquisition of Caledonian. In 2007, SG&A was
reduced by net gains of $1.2 million, primarily from the
sale of two idle plants. In 2006, SG&A was reduced by net
gains of $4.7 million, primarily from the sale of
investment property and five idle plants.
Results in 2007 included amortization expense of
$5.7 million compared to $3.9 million in 2006, as a
result of recording a full year of amortization of intangible
assets relating to the 2006 and 2005 acquisitions. The loss on
debt retirement in 2007 was primarily due to the early
redemption of $75.6 million of our Senior Notes due 2009.
In comparing 2007 consolidated results to 2006 results, net
sales and operating income for the 2006 acquisitions were
included in 2006 consolidated results based on their respective
acquisition dates and not for an entire year. On a proforma
basis, assuming we had owned these acquisitions during the
entire year ended December 30, 2006, consolidated net sales
and operating income in 2007 would have decreased by 11% and
65%, respectively, versus the prior year proforma amounts, as
compared to decreases of 7% and 60%, respectively, reported in
the table above.
Restructuring
Charges
During 2008, we incurred charges totaling $11.0 million
from the closure of two U.S. manufacturing plants, the
restructuring of the manufacturing segment, which included the
elimination of two regional offices, and the reduction of our
corporate headcount by 45 positions. Restructuring charges in
2008 totaling $10.7 million consisted of fixed asset
impairment charges of $7.0 million and severance costs of
$3.7 million. Other plant closing charges in the period,
which are included in cost of sales, consisted of
$0.3 million for the write down of closed plant
inventories. Of the total charges, $1.1 million of the
severance costs are included in general corporate expenses and
$9.9 million of the costs and charges are included in the
results of the manufacturing segment.
25
During 2008, we paid $3.1 million of accrued restructuring
costs. As of January 3, 2009, accrued but unpaid
restructuring costs totaled $1.0 million and consisted of
severance costs totaling $0.9 million and warranty costs
totaling $0.1 million.
During 2007, we incurred charges totaling $4.9 million from
the closure of two U.S. homebuilding plants. Restructuring
charges totaling $3.8 million consisted of fixed asset
impairment charges of $2.0 million and severance costs
totaling $1.8 million. Other plant closing charges that are
included in cost of sales consisted of inventory write downs of
$0.6 million and additional warranty accruals of
$0.5 million. During 2006, we recorded restructuring
charges for the closure of one U.S. manufacturing plant
consisting of a $1.2 million fixed asset impairment charge.
Also in 2006, the accrual for closed plant warranty costs was
reduced by $1.0 million due to favorable experience for
plants previously closed. See additional discussion of
restructuring charges in Note 6 of Notes to
Consolidated Financial Statements in Item 8 of this
Report.
Impairment
Tests for Goodwill
For the years ended January 3, 2009, December 29, 2007
and December 30, 2006, we performed our annual impairment
tests for goodwill in the fourth quarter of each year and
concluded no impairment existed for the carrying value of
goodwill.
(Loss)
income before income taxes
The segment components of (loss) income before income taxes are
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
2008
|
|
|
Related Sales
|
|
|
2007
|
|
|
Related Sales
|
|
|
2006
|
|
|
Related Sales
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
Manufacturing segment income
|
|
$
|
13,054
|
|
|
|
1.8%
|
|
|
$
|
40,106
|
|
|
|
4.3%
|
|
|
$
|
81,600
|
|
|
|
6.8%
|
|
International segment income
|
|
|
16,266
|
|
|
|
5.8%
|
|
|
|
17,393
|
|
|
|
6.2%
|
|
|
|
5,634
|
|
|
|
6.2%
|
|
Retail segment (loss) income
|
|
|
(18,163
|
)
|
|
|
(49.7
|
)%
|
|
|
1,911
|
|
|
|
2.6%
|
|
|
|
7,636
|
|
|
|
6.5%
|
|
General corporate expenses
|
|
|
(26,788
|
)
|
|
|
|
|
|
|
(31,799
|
)
|
|
|
|
|
|
|
(32,488
|
)
|
|
|
|
|
Amortization of intangible assets
|
|
|
(9,251
|
)
|
|
|
|
|
|
|
(5,727
|
)
|
|
|
|
|
|
|
(3,941
|
)
|
|
|
|
|
Foreign currency translation (losses) gains
|
|
|
(10,536
|
)
|
|
|
|
|
|
|
1,008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on debt retirement
|
|
|
(608
|
)
|
|
|
|
|
|
|
(4,543
|
)
|
|
|
|
|
|
|
(398
|
)
|
|
|
|
|
Interest expense, net
|
|
|
(16,692
|
)
|
|
|
|
|
|
|
(14,731
|
)
|
|
|
|
|
|
|
(14,446
|
)
|
|
|
|
|
Intercompany profit elimination
|
|
|
700
|
|
|
|
|
|
|
|
331
|
|
|
|
|
|
|
|
(500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes
|
|
$
|
(52,018
|
)
|
|
|
(5.0
|
)%
|
|
$
|
3,949
|
|
|
|
0.3%
|
|
|
$
|
43,097
|
|
|
|
3.2%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment results, general corporate expenses, interest expense,
net, and income taxes are discussed below. Amortization of
intangible assets, foreign currency transaction losses, loss on
debt retirement and restructuring are discussed above.
Manufacturing segment sales to the retail segment and related
manufacturing profits are included in the manufacturing segment.
Retail segment results include retail profits from the sale of
homes to consumers but do not include any manufacturing segment
profits associated with the homes sold. Intercompany
transactions between the operating segments are eliminated in
consolidation, including intercompany profit in inventory, which
represents the amount of manufacturing segment gross margin in
Champion-produced inventory at the retail segment.
26
Manufacturing
Segment
We evaluate the performance of our manufacturing segment based
on income before interest, income taxes, amortization of
intangible assets, foreign currency transaction gains and losses
on intercompany indebtedness and general corporate expenses.
Results of the manufacturing segment for the years ended
January 3, 2009, December 29, 2007 and
December 30, 2006 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
08 vs 07
|
|
|
07 vs 06
|
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
%
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
Change
|
|
|
Manufacturing segment net sales (in thousands)
|
|
$
|
727,331
|
|
|
$
|
941,945
|
|
|
$
|
1,195,834
|
|
|
|
(23
|
)%
|
|
|
(21
|
)%
|
Manufacturing segment income (in thousands)
|
|
$
|
13,054
|
|
|
$
|
40,106
|
|
|
$
|
81,600
|
|
|
|
(67
|
)%
|
|
|
(51
|
)%
|
Manufacturing segment margin%
|
|
|
1.8
|
%
|
|
|
4.3
|
%
|
|
|
6.8
|
%
|
|
|
|
|
|
|
|
|
HUD-code home shipments
|
|
|
6,399
|
|
|
|
9,971
|
|
|
|
15,341
|
|
|
|
(36
|
)%
|
|
|
(35
|
)%
|
U.S. modular home and unit shipments
|
|
|
2,507
|
|
|
|
3,670
|
|
|
|
4,574
|
|
|
|
(32
|
)%
|
|
|
(20
|
)%
|
Canadian home shipments
|
|
|
2,332
|
|
|
|
1,637
|
|
|
|
1,132
|
|
|
|
42
|
%
|
|
|
45
|
%
|
Other shipments
|
|
|
168
|
|
|
|
68
|
|
|
|
79
|
|
|
|
147
|
%
|
|
|
(14
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total homes and units sold
|
|
|
11,406
|
|
|
|
15,346
|
|
|
|
21,126
|
|
|
|
(26
|
)%
|
|
|
(27
|
)%
|
Floors sold
|
|
|
20,177
|
|
|
|
29,233
|
|
|
|
40,521
|
|
|
|
(31
|
)%
|
|
|
(28
|
)%
|
Multi-section mix
|
|
|
68
|
%
|
|
|
77
|
%
|
|
|
80
|
%
|
|
|
|
|
|
|
|
|
Average unit selling price, excluding delivery
|
|
$
|
56,100
|
|
|
$
|
55,100
|
|
|
$
|
51,800
|
|
|
|
2
|
%
|
|
|
6
|
%
|
Manufacturing facilities at year end
|
|
|
26
|
|
|
|
29
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
Manufacturing
segment 2008 versus 2007 analysis
Manufacturing net sales for the year ended January 3, 2009
decreased 23% from net sales in the year ended December 29,
2007 primarily driven by a reduction in the number of homes we
sold due to seven plant closures in the U.S. since the
beginning of 2007, the loss of our Henry, TN plant from a fire
in February 2008 and lower sales at the same plants operated a
year ago. Partially offsetting these decreases was the inclusion
in 2008 of sales from SRI. Average manufacturing selling prices
increased in 2008 as compared to 2007 as a result of product
mix, including the impact of higher priced SRI homes. In July
2008 a plant was temporarily reopened in Topeka, IN to fill the
large seasonal backlog in the Midwest. This plant was idled
again at the end of October 2008. In August 2008 we commenced
operations in a leased facility in Dresden, TN as a temporary
replacement for the Henry, TN plant that was lost to a fire in
February 2008. In December 2008, we temporarily idled a plant in
Boones Mill, VA. Overall, difficult U.S. housing market
conditions continued throughout 2008 and resulted in lower sales
volumes at most of our plants.
Manufacturing segment income for the year ended January 3,
2009 decreased 67% from the year ended December 29, 2007
primarily from lower sales at our same plants operating a year
ago and charges totaling $9.3 million in the first quarter
of 2008 resulting from the announced closure of two
manufacturing facilities and two regional offices. Partially
offsetting these decreases were the inclusion of income from SRI
and plant cost reduction initiatives including headcount
reductions. Market conditions during the period resulted in low
levels of unfilled orders at most of our plants and production
inefficiencies caused by under utilized factory capacity. Our
plants operated at 43% of capacity for the year ended
January 3, 2009 compared to 54% for the year ended
December 29, 2007. Results for year ended December 29,
2007 included charges totaling $4.7 million for the closure
of two plants and a net gain of $0.6 million, primarily
from the sale of one idle plant.
The plant closures announced in the first quarter of 2008
included one in Oregon and one in Indiana. Operations at the
closed Indiana plant were consolidated at our other Indiana
homebuilding complex. The Indiana closure was the final of four
plants at a complex where the other three plants had been
previously idled. Charges for the plant closures in the first
quarter of 2008 totaling $9.3 million consisted of fixed
asset impairment charges of $7.0 million, severance costs
totaling $2.0 million and an inventory write-down of
$0.3 million. Severance costs
27
included certain payments required under the Worker Adjustment
and Retraining Notification Act and were related to the
termination of approximately 330 employees consisting of
substantially all employees at the Oregon plant and those
terminated as a result of the Indiana plant closure and
consolidation of operations. During the year ended
December 29, 2007 we closed one plant in Pennsylvania and
our one remaining plant in Alabama. The plant closings in 2007
resulted in severance costs totaling $1.8 million, fixed
asset impairment charges of $1.8 million, inventory
write-downs of $0.4 million and additional warranty charges
of $0.5 million. Severance costs were related to the
termination of substantially all 356 employees at the two
closed plants and included payments required under the Worker
Adjustment and Retraining Notification Act.
Although orders from retailers can be cancelled at any time
without penalty and unfilled orders are not necessarily an
indication of future business, our unfilled manufacturing orders
for homes at January 3, 2009 totaled approximately
$7 million for the 26 plants in operation compared to
$40 million at September 27, 2008 for the 26 plants in
operation and $56 million at December 29, 2007 for the
29 plants in operation. Other than one location, our plants are
currently operating with one week or less of unfilled orders.
The inclusion of SRIs results for the year ended
January 3, 2009 contributed sales and segment income to our
manufacturing segment results. On a proforma basis, assuming we
had owned SRI as of the beginning of 2007, manufacturing net
sales and segment income for the year ended December 29,
2007, would have been $1,043.7 million and
$63.2 million, respectively.
Manufacturing
segment 2007 versus 2006 analysis
Manufacturing net sales for the year ended December 29,
2007 decreased 21% from net sales in the year ended
December 30, 2006 driven by a reduction in the number of
homes we sold. Partially offsetting these decreases were higher
average selling prices in 2007 and the inclusion of incremental
full year sales from Highland and North American in 2007
results. Sales in 2006 included approximately $23.0 million
of non-recurring revenue from the sale of 627 homes to FEMA in
the first quarter. Difficult U.S. housing markets
throughout 2007 contributed to lower sales volumes at most of
our U.S. plants. Average manufacturing selling prices
increased in 2007 as compared to 2006 as a result of product mix
and the inclusion of sales to FEMA at a lower average selling
price in 2006. Product mix in 2007 included a greater proportion
of sales of higher priced modular homes and Canadian homes,
partially offset by the sales of fewer large, higher priced
military housing units.
Manufacturing segment income for the year ended
December 29, 2007 decreased $41.5 million from the
year ended December 30, 2006 primarily driven by poor
results in the first and fourth quarters of 2007 when
manufacturing segment income declined $25.9 million and
$11.6 million, respectively, from the comparable quarters
of 2006. Our plants operated at only 46% of capacity for the
first quarter and 52% of capacity in the fourth quarter of 2007,
resulting in production inefficiencies and an increase in
production downtime. These conditions prompted the closure of
four manufacturing plants in the U.S. during 2007,
resulting in plant closing charges totaling $4.9 million
for two of the closures. Results for the year ended
December 29, 2007 included a net gain of $0.6 million,
primarily from the sale of two idle plants. Results for the year
ended December 30, 2006 included net gains of
$4.7 million, primarily from the sale of investment
property in Florida and five idle plants and restructuring
charges of $1.2 million related to the closure of one plant.
The inclusion of the 2006 acquisitions in manufacturing segment
results since their respective acquisition dates contributed to
an increase in net sales and segment income during the year
ended December 29, 2007 over the year ended
December 30, 2006. On a proforma basis, assuming we had
owned these companies for all of 2006, manufacturing segment net
sales and segment income for the year ended December 29,
2007 would have decreased by 23% and 52%, respectively, versus
proforma amounts for the year ended December 30, 2006,
compared to decreases of 21% and 51%, respectively, reported in
the table above.
Although orders from retailers can be cancelled at any time
without penalty and unfilled orders are not necessarily an
indication of future business, our unfilled manufacturing
segment orders for homes at December 29, 2007 totaled
approximately $56 million for the 29 plants in operation
(including the acquired SRI plants) compared to $36 million
at December 30, 2006 for the 30 plants in operation.
Unfilled orders were concentrated primarily at nine
manufacturing locations. The majority of our other plants were
operating with one week or less of unfilled orders.
28
International
Segment
We evaluate the performance of our international segment based
on income before interest, income taxes, amortization of
intangible assets, foreign currency transaction gains and losses
on intercompany indebtedness and general corporate expenses.
Results of the international segment for the years ended
January 3, 2009 and December 29, 2007 and the period
from April 7, 2006 (date of acquisition) to
December 30, 2006 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
08 vs 07
|
|
|
07 vs 06
|
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
%
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
Change
|
|
|
International segment net sales (in thousands)
|
|
$
|
279,641
|
|
|
$
|
280,814
|
|
|
$
|
90,717
|
|
|
|
|
|
|
|
210
|
%
|
International segment income (in thousands)
|
|
$
|
16,266
|
|
|
$
|
17,393
|
|
|
$
|
5,634
|
|
|
|
(6
|
)%
|
|
|
209
|
%
|
International segment margin
|
|
|
5.8
|
%
|
|
|
6.2
|
%
|
|
|
6.2
|
%
|
|
|
|
|
|
|
|
|
International
segment 2008 versus 2007 analysis
International segment net sales for the year ended
January 3, 2009 decreased by $1.2 million from the
comparable period of 2007. The weakening of the British pound
versus the U.S. dollar during the last five months of 2008
resulted in a reduction in sales and segment income totaling
$17.7 million and $1.0, respectively, as compared to 2007.
Results in 2008 included ten months of operations from
ModularUK, which was acquired on February 29, 2008. In
2008, approximately 64% of revenue was derived from prison and
military accommodations projects. Segment gross margin as a
percent of sales in 2008 was slightly higher than in 2007 on
similar revenue. SG&A in 2008 increased over 2007. During
2008, investments in SG&A to support and grow the business
impacted segment income, in addition to $0.6 million of
compensation expense for contingent consideration related to the
ModularUK acquisition. During 2007, compensation expense of
$6.4 million was recorded related to contingent earn
out provisions of the Caledonian purchase agreement. Also
in 2007, income of $2.1 million was recognized in SG&A
for the settlement of business interruption and property damage
claims related to a flood that occurred in June 2007. These
changes, in addition to the foreign exchange rate effect,
resulted in a decrease in segment income in 2008 of
$1.1 million versus 2007.
In connection with the acquisition of ModularUK, we entered into
a lease agreement for three additional buildings near Driffield,
East Yorkshire, which is approximately 60 miles from
Caledonians existing operations. ModularUK relocated its
operations to Driffield during the third quarter and is
operating in two of the buildings. The Driffield facility will
also provide additional manufacturing capacity for Caledonian.
Firm contracts and orders pending contracts under framework
agreements totaled approximately $150 million at
January 3, 2009, compared to $235 million at
September 27, 2008. Approximately half of the reduction was
due to the change in foreign exchange rates, while the other
half was the result of project completions in the fourth quarter
and minimal incoming orders. Approximately 42% of these orders
are scheduled to be built after 2009. It is not currently known
the extent to which current financial and economic conditions in
the U.K. will affect the availability of public and private
funding, the lack of which could result in the delay or
cancellation of current or pending contracts.
International
segment 2007 versus 2006 analysis
Sales for 2007 increased over 2006 primarily due to increased
prison projects, which generally include a higher proportion of
revenues from non-factory site-work than other projects.
Increased military projects and the effects of the strengthening
British pound versus the U.S. dollar also contributed to
the sales increase in 2007. The international segment results
for 2006 included only nine months due to the acquisition date
of April 7, 2006. Approximately $17 million of the
revenue increase resulted from changes in foreign exchange
rates. For 2007, approximately 82% of international segment
revenue was derived from prison and military projects. The
balance of revenue was attributable to residential and hotel
projects. During the second half of 2007, revenues from
site-work exceeded revenues from factory production.
During the fourth quarter of 2007, upon the attainment of
certain levels of performance, the segment accrued a
$13.3 million obligation relating to contingent purchase
price or earn out provisions of the Caledonian
purchase
29
agreement. Under U.S. generally accepted accounting
principles, $6.9 million was recorded as additional
purchase price thereby increasing goodwill, and
$6.4 million was recorded as compensation expense.
A flood damaged a large number of completed and in-process
modules in June 2007, resulting in the loss of approximately
$4.0 million of revenue in the second quarter. During the
third quarter of 2007 most of the damaged modules were repaired
or replaced. The related insurance claim was settled and paid in
the fourth quarter resulting in income of $2.1 million
being recognized for the business interruption and property
damage claims.
Segment income in 2007, as a percent of sales, was equal to
2006. However, excluding the earn out compensation
charge the segment income percent for 2007 would have been 8.5%.
This improvement resulted from higher production levels,
favorable product mix, the mix of factory production revenue
versus site-work revenue and the stage of completion of the
projects. Approximately $1.1 million of the increase in
segment income resulted from changes in foreign exchange rates.
Firm contracts and orders pending contracts under framework
agreements totaled approximately $250 million at
December 29, 2007, compared to approximately
$225 million at December 30, 2006.
Retail
Segment
The retail segment sells manufactured houses to consumers
throughout California. We evaluate the performance of our retail
segment based on income before interest, income taxes,
amortization of intangible assets and general corporate
expenses. Results of the retail segment for the years ended
January 3, 2009, December 29, 2007 and
December 30, 2006 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
08 vs 07
|
|
|
07 vs 06
|
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
%
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
Change
|
|
|
Retail segment net sales (in thousands)
|
|
$
|
36,521
|
|
|
$
|
73,406
|
|
|
$
|
117,397
|
|
|
|
(50
|
)%
|
|
|
(37
|
)%
|
Retail segment (loss) income (in thousands)
|
|
$
|
(18,163
|
)
|
|
$
|
1,911
|
|
|
$
|
7,636
|
|
|
|
(1050
|
)%
|
|
|
(75
|
)%
|
Retail segment margin %
|
|
|
(49.7
|
%)
|
|
|
2.6
|
%
|
|
|
6.5
|
%
|
|
|
|
|
|
|
|
|
New homes retail sold
|
|
|
218
|
|
|
|
375
|
|
|
|
629
|
|
|
|
(42
|
)%
|
|
|
(40
|
)%
|
% Champion-produced new homes sold
|
|
|
89
|
%
|
|
|
88
|
%
|
|
|
86
|
%
|
|
|
|
|
|
|
|
|
New home multi-section mix
|
|
|
98
|
%
|
|
|
98
|
%
|
|
|
97
|
%
|
|
|
|
|
|
|
|
|
Average new home retail selling price
|
|
$
|
162,500
|
|
|
$
|
191,700
|
|
|
$
|
184,600
|
|
|
|
(15
|
)%
|
|
|
4
|
%
|
Sales centers at period end
|
|
|
14
|
|
|
|
17
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
Retail
segment 2008 versus 2007 analysis
The current global credit crisis has significantly affected the
financial markets, which in turn has exacerbated weak conditions
in the California housing market in which we operate. Retail
segment sales for the year ended January 3, 2009 decreased
50% versus the comparable period of 2007 primarily due to these
conditions. Additionally, a company that provided financing to a
significant number of buyers of our homes in California ceased
operations at the beginning of the second quarter. As a result,
our retail operations and its customers were unable to find
suitable financing for many potential transactions. We are
currently seeking other local and national lenders to finance
our retail sales. However the current credit crisis has
restricted financing availability. Market conditions have
resulted in a shift away from sales of higher priced homes to
the retiree market and toward sales of more moderately priced
homes in family communities. These factors have resulted in
selling fewer homes and in sales at a lower average selling
price per home. Additionally, during 2008, we have been
liquidating aged inventory at lower prices.
The retail segment loss for the year ended January 3, 2009
was caused by lower gross profit from lower sales and from
inventory write downs totaling $14.1 million. These write
downs were driven by declining housing prices and park space
values and competitive conditions in California. In addition we
have lowered selling prices in an effort to reduce inventories
and inventory carrying costs.
SG&A costs in 2008 have declined proportionally less than
the significant decrease in sales because of the fixed nature of
certain SG&A costs. During the year ended January 3,
2009, we closed three sales offices to reduce costs and are
servicing the related inventory from other sales locations.
30
Retail
segment 2007 versus 2006 analysis
Retail segment sales for 2007 decreased 37% versus 2006
primarily due to selling 40% fewer homes as a result of the
difficult housing market conditions in California. Average
selling prices increased in 2007 as many high-end homes were
liquidated at reduced margins in an effort to reduce aged
inventory.
Retail segment income for 2007 decreased compared to 2006 as
gross margin was reduced due to lower sales volume and a lower
gross margin rate, partially offset by lower SG&A costs.
Gross margin as a percent of sales for 2007 was lower than the
gross margin percentage in 2006 due to liquidating high-end
homes and aged inventory at reduced margins combined with
pricing pressure from generally difficult market conditions.
SG&A costs declined in 2007 versus 2006 primarily resulting
from lower sales commissions and incentive compensation.
General
Corporate Expenses
General corporate expenses for 2008 declined approximately
$5.0 million as compared to 2007 primarily as a result of
lower incentive and stock based compensation costs, and to a
lesser degree, as a result of headcount reductions and other
cost cuts implemented in October 2008.
General corporate expenses for 2007 declined $0.9 million,
or 3%, from the amount in 2006, primarily as a result of lower
information technology costs, partially offset by higher
financing related costs and professional fees.
Interest
Income and Interest Expense
Interest expense in 2008 was comparable to 2007 as a result of
higher average debt balances but lower average interest rates
resulting from the issuance of $180 million of 2.75%
convertible debt in November 2007 and a net reduction of
$90 million of debt in the fourth quarter of 2007 with
interest rates that averaged 7.7%. Interest expense for 2008
also included interest at 8.33% on the $24.0 million (CAD)
note issued in connection with our SRI acquisition that was paid
in full in June 2008. Interest income for 2008 was lower than in
2007 due to lower average invested cash balances and lower
interest rates.
Interest expense in 2007 was higher than in 2006 primarily due
to higher interest rates and slightly higher average debt in
2007. Interest income for 2007 was slightly higher than the
comparable period of 2006 due to lower cash investment balances
offset by higher interest rates.
Income
Taxes
Income
taxes 2008 versus 2007 analysis
During the third quarter of 2008, we provided a valuation
allowance for 100% of our U.S. deferred tax assets.
SFAS No. 109 Accounting for Income Taxes,
requires the recording of a valuation allowance when it is
more likely than not that some portion or all of the
deferred tax assets will not be realized.
SFAS No. 109 further states forming a conclusion
that a valuation allowance is not needed is difficult when there
is negative evidence such as cumulative losses in recent
years, and places considerably more weight on historical
results and less weight on future projections. Although we had
U.S. pretax income in 2005 and 2006 totaling approximately
$71 million, we have cumulative U.S. pretax losses
totaling approximately $78 million for the years 2006
through 2008. Current conditions in the housing and credit
markets and the general economy in the U.S. continue to
present significant challenges to returning our
U.S. operations to profitability. In the absence of
specific favorable factors, application of
SFAS No. 109 requires a valuation allowance for
deferred tax assets in a tax jurisdiction when a company has
cumulative financial accounting losses over several years.
Accordingly, after consideration of these factors, effective
September 27, 2008, we provided a valuation allowance for
100% of our U.S. deferred tax assets resulting in a
non-cash tax charge of approximately $150.8 million in the
third quarter and $164.5 million for the full year.
In addition to the $164.5 million tax charge related to the
valuation allowance, the tax provision for the year ended
January 3, 2009, also included the tax benefit of the
U.S. loss and foreign income tax expense of
$9.6 million related to the our operations in Canada and
the United Kingdom.
During periods when we have a valuation allowance for 100% of
our U.S. deferred tax assets, our income tax provisions
will be comprised of income taxes on results of our foreign
operations and no tax expense or benefit for our
U.S. results except for state income taxes payable in cash
and a deferred tax expense related to amortization of certain
goodwill for tax purposes.
31
As of January 3, 2009, we had available U.S. federal
net operating loss (NOL) carryforwards of
approximately $346 million for tax purposes to offset
certain future federal taxable income that expire in 2023
through 2028. As of January 3, 2009, we had state NOL
carryforwards of approximately $270 million available to
offset future state taxable income that expire primarily in 2016
through 2028.
Income
taxes 2007 versus 2006 analysis
The effective tax rate for 2007 was (82%) and was impacted by
the mix of our pretax earnings among jurisdictions and the
respective tax rates in those jurisdictions. As a result, the
tax benefit from our U.S. loss exceeded the tax expense on
foreign income. Also impacting the effective tax rate is the
effect of permanent differences and state tax benefits. Due to
the low level of consolidated pretax income, these factors had a
significant impact on the effective tax rate.
Effective July 1, 2006, we reversed substantially all of
the previously recorded valuation allowance for deferred tax
assets after determining that realization of the deferred tax
assets was more likely than not. This determination was based
upon our achieving historical profitability and our outlook for
ongoing profitability, among other factors. Subsequent to this
reversal our earnings are fully taxed for financial reporting
purposes. During the periods prior to this reversal of the
valuation allowance, no tax expense or benefit was recorded for
our U.S. taxable income or loss for financial reporting
purposes except for unusual items. The 2006 income tax provision
includes a $101.9 million non-cash tax benefit from the
reversal of the valuation allowance.
As of December 29, 2007, we had NOL carryforwards of
approximately $233 million for U.S. federal tax
purposes available to offset certain future U.S. taxable
income that expire in 2023 through 2027. As of December 29,
2007, we had state net NOL carryforwards of approximately
$211 million available to offset future state taxable
income that expire primarily in 2016 through 2027.
Results
of Fourth Quarter 2008 Versus 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
|
(Dollars in thousands,
|
|
|
|
except average selling prices)
|
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing segment
|
|
$
|
139,511
|
|
|
$
|
223,951
|
|
|
|
(37.7
|
)%
|
International segment
|
|
|
41,886
|
|
|
|
92,110
|
|
|
|
(54.5
|
)%
|
Retail segment
|
|
|
7,464
|
|
|
|
15,749
|
|
|
|
(52.6
|
)%
|
Less: intercompany
|
|
|
(1,000
|
)
|
|
|
(6,200
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
$
|
187,861
|
|
|
$
|
325,610
|
|
|
|
(42.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
$
|
16,401
|
|
|
$
|
45,083
|
|
|
|
(63.6
|
)%
|
Selling, general and administrative expenses
|
|
|
25,803
|
|
|
|
45,534
|
|
|
|
(43.3
|
)%
|
Foreign currency transaction losses (gains)
|
|
|
8,685
|
|
|
|
(1,008
|
)
|
|
|
|
|
Amortization of intangible assets
|
|
|
2,054
|
|
|
|
1,454
|
|
|
|
41.3
|
%
|
Restructuring charges
|
|
|
1,212
|
|
|
|
2,659
|
|
|
|
(54.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(21,353
|
)
|
|
|
(3,556
|
)
|
|
|
500.5
|
%
|
Loss on debt retirement
|
|
|
608
|
|
|
|
4,543
|
|
|
|
(86.6
|
)%
|
Interest expense, net
|
|
|
4,633
|
|
|
|
3,115
|
|
|
|
48.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
$
|
(26,594
|
)
|
|
$
|
(11,214
|
)
|
|
|
137.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing segment (loss) income
|
|
$
|
(271
|
)
|
|
$
|
2,565
|
|
|
|
(110.6
|
)%
|
International segment income
|
|
|
1,315
|
|
|
|
3,449
|
|
|
|
(61.9
|
)%
|
Retail segment loss
|
|
|
(7,172
|
)
|
|
|
(316
|
)
|
|
|
|
|
General corporate expenses
|
|
|
(4,986
|
)
|
|
|
(8,439
|
)
|
|
|
(40.9
|
)%
|
Amortization of intangible assets
|
|
|
(2,054
|
)
|
|
|
(1,454
|
)
|
|
|
41.3
|
%
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
|
(Dollars in thousands,
|
|
|
|
except average selling prices)
|
|
|
Loss on debt retirement
|
|
|
(608
|
)
|
|
|
(4,543
|
)
|
|
|
(86.6
|
)%
|
Interest expense, net
|
|
|
(4,633
|
)
|
|
|
(3,115
|
)
|
|
|
48.7
|
%
|
Foreign currency transaction (losses) gains
|
|
|
(8,685
|
)
|
|
|
1,008
|
|
|
|
|
|
Intercompany profit elimination
|
|
|
500
|
|
|
|
(369
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
$
|
(26,594
|
)
|
|
$
|
(11,214
|
)
|
|
|
137.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percent of net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
8.7
|
%
|
|
|
13.8
|
%
|
|
|
|
|
SG&A
|
|
|
13.7
|
%
|
|
|
14.0
|
%
|
|
|
|
|
Loss before income taxes
|
|
|
(14.2
|
%)
|
|
|
(3.4
|
)%
|
|
|
|
|
Manufacturing segment margin%
|
|
|
(0.2
|
%)
|
|
|
1.1
|
%
|
|
|
|
|
International segment margin%
|
|
|
3.1
|
%
|
|
|
3.7
|
%
|
|
|
|
|
Retail segment margin%
|
|
|
(96.1
|
%)
|
|
|
(2.0
|
)%
|
|
|
|
|
Manufacturing segment
|
|
|
|
|
|
|
|
|
|
|
|
|
HUD-code home shipments
|
|
|
1,411
|
|
|
|
2,251
|
|
|
|
(37.3
|
)%
|
U.S. modular home and unit shipments
|
|
|
502
|
|
|
|
921
|
|
|
|
(45.5
|
)%
|
Canadian home shipments
|
|
|
414
|
|
|
|
422
|
|
|
|
(1.9
|
)%
|
Other shipments
|
|
|
38
|
|
|
|
17
|
|
|
|
123.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total homes and units sold
|
|
|
2,365
|
|
|
|
3,611
|
|
|
|
(34.5
|
)%
|
Floors sold
|
|
|
4,126
|
|
|
|
6,697
|
|
|
|
(38.4
|
)%
|
Mutli-section mix
|
|
|
67
|
%
|
|
|
75
|
%
|
|
|
(10.7
|
)%
|
Average unit selling price, excluding delivery
|
|
$
|
53,900
|
|
|
$
|
55,700
|
|
|
|
(3.2
|
)%
|
Retail segment
|
|
|
|
|
|
|
|
|
|
|
|
|
New homes retail sold
|
|
|
50
|
|
|
|
80
|
|
|
|
(37.5
|
)%
|
% Champion-produced new homes sold
|
|
|
84
|
%
|
|
|
93
|
%
|
|
|
|
|
New home multi-section mix
|
|
|
94
|
%
|
|
|
98
|
%
|
|
|
|
|
Average new home retail selling price
|
|
$
|
147,800
|
|
|
$
|
194,600
|
|
|
|
(24.0
|
%)
|
Net sales for the fourth quarter of 2008 decreased by 42% from
the fourth quarter of 2007 due to sales reductions in each of
the segments, despite the inclusion of SRI and ModularUK that
were not in 2007s fourth quarter results because of their
acquisition dates. The manufacturing and retail segments were
impacted significantly by the financial and economic crises and
the effects on the housing and credit markets. In the fourth
quarter of 2007, the international segment was building for a
large number of prison projects that were subsequently completed
in 2008. In addition, changes in foreign exchange rates caused a
reduction in international sales of approximately
$12 million for the quarter.
Gross margin for the fourth quarter of 2008 decreased
$28.7 million or 64% from the comparable period of 2007,
due primarily to the decline in sales and to an inventory write
down of $6.3 million at the retail segment due to falling
home prices and park space values and challenging housing market
conditions in California. In the fourth quarter of 2008, our
manufacturing segment plants operated at only 36% of capacity
resulting in production inefficiencies, an increase in
production downtime and lower coverage of fixed costs which
negatively impacted the manufacturing segments gross
margin. For the same period in 2007, our manufacturing segment
plants operated at 52%.
SG&A for the fourth quarter of 2008 decreased
$19.7 million or 43% from the fourth quarter of 2007.
Manufacturing segment SG&A in the 2008 quarter was
significantly lower due to operating fewer plants and reduced
headcounts. The international segment SG&A was
significantly lower in the fourth quarter of 2008 because
33
the fourth quarter of 2007 included a $6.4 million
compensation charge resulting from a contingent purchase price
or earn out arrangement, partially offset by income
of $2.1 million that was recognized for the settlement of
business interruption and property damage claims related to a
flood the occurred in June 2007. Retail SG&A for the fourth
quarter of 2008 was lower than the prior year due to lower sales
and fewer sales offices. General corporate expenses, which are
also included in SG&A, were lower in the fourth quarter of
2008 primarily due to lower incentive and stock compensation
expenses, including reversals of amounts previously expensed,
and also lower professional fees. Partially offsetting these
decreases was SG&A from SRI.
Foreign currency transaction gains and losses are related to
intercompany loans between certain of our U.S. and foreign
subsidiaries that are expected to be repaid and result from the
effects of changes in exchange rates on loans that are
denominated in Canadian dollars and British pounds.
Amortization of intangible assets in the fourth quarter of 2008
increased over the similar period of 2007 as a result of the SRI
acquisition, partially offset by the effect of changes in
exchange rates.
Restructuring charges totaling $1.2 million were incurred
in the fourth quarter of 2008, consisting of severance charges
from reducing corporate office headcount by 45 positions.
Charges totaling $3.6 million were incurred in the fourth
quarter of 2007 from the closure of one manufacturing plant.
Restructuring charges totaling $2.7 million consisted of a
fixed asset impairment charge of $1.8 million and severance
costs of $0.9 million. Other plant closing charges that are
included in cost of sales consisted of inventory write downs of
$0.4 million and an additional warranty accrual of
$0.5 million.
The loss on debt retirement in 2008 is primarily due to the
prepayment of $13.1 million and $10.4 million of
borrowings under the Sterling Term Loan and the Term Loan,
respectively, in October 2008. The loss on debt retirement in
2007 resulted primarily from the early redemption of
$75.6 million of Senior Notes due 2009. Net interest
expense for the fourth quarter of 2008 increased
$1.5 million from the fourth quarter of 2007 primarily due
to reduced interest income from lower invested cash balances and
lower interest rates.
Manufacturing
segment
Manufacturing segment net sales for the fourth quarter of 2008
decreased by $84.4 million or 38% compared to 2007, on the
sale of 35% fewer homes, substantially driven by the weak
housing market in the U.S. and a weakening market in
Canada. Partially offsetting these decreases was the inclusion
in 2008 of sales from SRI.
Manufacturing segment income for the fourth quarter of 2008
decreased by $2.8 million versus the comparable quarter of
2007, despite the inclusion of SRI in 2008, due to decreased
sales and production inefficiencies from under utilized factory
capacity. Market conditions during the fourth quarter of 2008
resulted in low levels of unfilled orders at most of our plants
and a decreased number of production days. In response to market
conditions during the fourth quarter of 2008 we idled one
manufacturing plant. In the fourth quarter of 2007, we closed a
plant in Alabama resulting in severance costs totaling
$0.9 million, a fixed asset impairment charge of
$1.8 million, an inventory write-down of $0.2 million,
and additional warranty charges of $0.5 million. Severance
costs were related to the termination of substantially all
196 employees at the closed plant and included payments
required under the Worker Adjustment and Retraining Notification
Act. Also in the fourth quarter of 2007, additional casualty
self-insurance charges of $2.8 million were recorded as a
result of increases in several large claims and the results of
our annual actuarial valuation.
International
segment
International segment sales in the fourth quarter of 2008
decreased by $50.2 million or 55% from sales in the
comparable quarter of 2007. Sales volume in the fourth quarter
of 2008 were lower than in the fourth quarter of 2007 due to a
large number of prison projects that were in process in the 2007
quarter that were substantially completed during the first half
of 2008. Approximately $12.4 million of the sales reduction
in the quarter was due to changes in foreign exchange rates.
International segment income in the 2008 quarter was
$2.1 million lower than in the 2007 quarter. Gross margin
was significantly lower in the 2008 quarter due to the large
reduction in sales, partially offset by reduced SG&A.
Results in the fourth quarter of 2008 included $0.6 million
of compensation expense for contingent consideration related to
the ModularUK acquisition. Additionally, exchange rates caused
$0.6 million of the decline in segment income. During the
fourth quarter of 2007, upon attainment of certain levels of
performance, the
34
segment accrued a $13.3 million obligation relating to
contingent purchase price or earn out provisions of
the purchase agreement. Under U.S. generally accepted
accounting principles, $6.9 million was recorded as
additional purchase price thereby increasing goodwill, and
$6.4 million was recorded as compensation expense in
SG&A. Fourth quarter 2007 results also included income of
$2.1 million that was recognized for the settlement of
business interruption and property damage claims related to a
flood the occurred in June 2007.
Retail
segment
Retail segment net sales for the fourth quarter of 2008
decreased 53% versus the comparable period of 2007 primarily due
to selling 38% fewer homes in a difficult California housing
market that has been significantly impacted by the financial and
economic crises. The lower average selling prices in the 2008
quarter were caused by selling aged inventory and by a shift in
the market to more moderately priced homes from higher priced
homes previously targeted at the retiree market. Retail segment
gross profit for the fourth quarter of 2008 declined and the
segment loss increased due to lower gross margin from decreased
sales and from a charge of $6.3 million to write down
inventory to lower of cost or market, partially offset by lower
SG&A.
Contingent
Repurchase Obligations Manufacturing
Segment
We are contingently obligated under repurchase agreements with
certain lending institutions that provide floor plan financing
to our independent retailers. Upon default by a retailer under a
floor plan financing agreement subject to an associated
repurchase agreement, the manufacturer is generally required to
repurchase the home for the unpaid balance of the floor plan
loan, subject to certain adjustments. In the event of such
repurchases, our loss represents the difference between the
repurchase price and the estimated net proceeds we realize from
the resale of the home, less any related reserves or accrued
volume rebates that will not be paid.
Each quarter we review our contingent wholesale repurchase
obligations to assess the adequacy of our reserves for
repurchase losses. This analysis is based on a review of current
and historical experience, reports received from the primary
national floor plan lenders that provide floor plan financing
for approximately 42% of our manufacturing sales, and
information regarding the performance of our retailers obtained
from our manufacturing facilities. We do not retain repurchase
risk for cash sales and we do not always enter into repurchase
agreements with floor plan lenders that provide financing for
the balance of our manufacturing sales to independent retailers.
The estimated repurchase obligation is calculated as the total
amount that would be paid upon the default of all of our
independent retailers whose inventories are subject to
repurchase agreements, without reduction for the resale value of
the repurchased homes. As of January 3, 2009, our largest
independent retailer had approximately $4.4 million of
inventory subject to repurchase for up to 18 months from
date of invoice. As of January 3, 2009 our next 24 largest
independent retailers had an aggregate of approximately
$31.9 million of inventory subject to repurchase for
generally up to 18 months from date of invoice, with
individual amounts ranging from approximately $0.2 million
to $4.3 million per retailer.
A summary of actual repurchase activity for the last three years
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in millions)
|
|
|
Estimated repurchase obligation at end of year
|
|
$
|
134
|
|
|
$
|
200
|
|
|
$
|
250
|
|
Number of retailer defaults
|
|
|
19
|
|
|
|
12
|
|
|
|
8
|
|
Number of homes repurchased
|
|
|
49
|
|
|
|
23
|
|
|
|
22
|
|
Total repurchase price
|
|
$
|
2.6
|
|
|
$
|
1.2
|
|
|
$
|
1.2
|
|
Losses incurred on homes repurchased
|
|
$
|
0.5
|
|
|
$
|
0.1
|
|
|
$
|
0.1
|
|
Off
Balance Sheet Arrangements
Our off balance sheet arrangements at January 3, 2009
consist of the contingent repurchase obligation totaling
approximately $134 million, surety bonds and letters of
credit totaling $63.5 million and guarantees of
$2.5 million of debt of unconsolidated affiliates.
35
Liquidity
and Capital Resources
At January 3, 2009, unrestricted cash balances totaled
$52.8 million. During 2008, operating activities used
$16.0 million of net cash. During the year ended
January 3, 2009, accounts receivable and accounts payable
decreased $42.7 million and $28.3 million,
respectively, primarily due to decreased fourth quarter volume
in the international and manufacturing segments. In 2008,
inventories decreased by $21.6 million, excluding
$14.1 million of retail segment write-downs. Other current
liabilities and accruals decreased during the year primarily due
to reductions in accrued rebates, warranty and compensation due
to lower manufacturing segment sales and lower accruals for
income taxes and valued added taxes due to the timing of
payments. Other cash provided during the period included
$3.6 million of property sales proceeds that included
proceeds from the sale of two idle plants and $7.5 million
of insurance receipts related to the Henry, TN plant fire.
During the year, we borrowed $25.0 million under our
Revolving Credit Facility (Revolver) and
$61.2 million of cash was used to retire debt, primarily
the $24 million note payable issued in the SRI acquisition,
$10.0 million on the Revolver and $23.5 million on the
Sterling Term Loan and the Term Loan. Other cash used during the
period included $12.2 million for capital expenditures, and
$14.8 million of acquisition related payments. Acquisition
related payments included $12.3 million of contingent
consideration that was earned and accrued for in 2007 related to
Caledonians 2007 performance.
We have a senior secured credit agreement, as amended, (the
Credit Agreement) with various financial
institutions under which the Sterling Term Loan and the Term
Loan were issued. Under the Credit Agreement, at January 3,
2009, we also have a revolving line of credit
(Revolver) in the amount of $40 million and a
$43.5 million letter of credit facility. The Credit
Agreement is secured by a first security interest in
substantially all of the assets of our domestic operating
subsidiaries. As of January 3, 2009, letters of credit
issued under the facility totaled $55.7 million, including
$12.2 million under the Revolver. The maturity date for the
Revolver is October 31, 2010. The maturity date for each of
the Term Loan, the Sterling Term Loan and the letter of credit
facility is October 31, 2012.
As a result of deteriorating operating results throughout 2008,
we would not have been in compliance with certain of our debt
covenants as of September 27, 2008. During October 2008, an
amendment to the Credit Agreement (the Amendment)
was completed. The Amendment covers the period from
September 27, 2008 through January 2, 2010 (our 2009
fiscal year end) and provides for, among other things, changes
to certain covenants in exchange for certain repayments and
prepayments, as well as revised pricing.
During the period covered by the Amendment, the maximum senior
leverage ratio, minimum interest coverage ratio and minimum
fixed charge ratio covenants have been eliminated in exchange
for new covenants requiring minimum liquidity and minimum
twelve-month EBITDA measured quarterly and as defined by the
Credit Agreement, as amended. The minimum liquidity requirement
is measured each quarter end and is based upon the level of cash
and unused Revolver availability and required levels range from
$35 million to $45 million per quarter. The minimum
twelve-month EBITDA requirement is measured at the end of each
quarter and ranges from approximately $6 million to
$15 million for the twelve month periods. The minimum
EBITDA requirement is subject to certain adjustments during
2009, including the impact of disposals of any operating assets.
Management believes these required minimum levels of liquidity
and EBITDA, as defined, are achievable based upon the
Companys current operating plan. Management has also
identified other actions within their control that could be
implemented, if necessary, to help the Company meet these
quarterly requirements. However, there can be no assurance that
these actions will be successful.
Pursuant to the Amendment, in October 2008 we repaid
$10.0 million of the Revolver and prepaid
$23.5 million of borrowings under the Sterling Term Loan
and the Term Loan. During the Amendment period, the interest
rates for borrowings under the Credit Agreement were increased
to LIBOR plus 6.5%, with a LIBOR floor of 3.25% for the Term
Loans and prime plus 5.5%, with a prime rate floor of 4.25% for
the Revolver. Interest of LIBOR plus 5.0% is payable in cash and
the remaining interest of 1.5% may be paid in kind (deferred and
added to the respective loan balances). In addition, the
Amendment revised the letter of credit facility annual fee to
6.6%.
The Amendment provides for interest rate reductions on all
remaining borrowings under the Credit Agreement and the fees for
the letter of credit facility if we make additional term loan
prepayments during the effected period. For cumulative
prepayments between $10 and $20 million the interest rate
will be reduced to LIBOR plus 5.5% (of which 0.5% percent may be
paid in kind); for cumulative prepayments between $20 and
$30 million the interest rate
36
will be reduced to LIBOR plus 5.0%; and for cumulative
prepayments of $30 million or more the interest rate will
be reset to LIBOR plus 4.5%. Those respective aggregate
prepayments will result in reducing the letter of credit annual
fee to 5.6%, 5.1% and 4.6%, respectively.
The Amendment also reduced the letter of credit facility to
$43.5 million from $60 million previously, by
canceling approximately $4.3 million of unused capacity and
moving approximately $12.2 million of outstanding undrawn
letters of credit to the Revolver. As a result, while the total
size of the Revolver remains at $40 million, its unused
capacity at January 3, 2009 was approximately
$12.8 million.
The Amendment requires quarterly principal payments for the Term
Loan and the Sterling Term Loan totaling $5.0 million for
2009. Thereafter the Credit Agreement requires quarterly
principal payments for the Term Loan and the Sterling Term Loan
totaling approximately $0.9 million annually.
The interest rate at January 3, 2009 for borrowings under
the Term Loan and the Sterling Term was a base rate of 3.25%
plus 6.5%. The interest rate at January 3, 2009 for
borrowings under the Revolver was a base rate of 4.25% plus
5.5%. The letter of credit facility was subject to a 6.6% annual
fee and the unused portion of the letter of credit facility and
Revolver was subject to an annual fee of 0.75%.
The following table represents the maximum Senior Leverage
Ratio, minimum Interest Coverage Ratio and minimum Fixed Charge
Ratio that we are required to maintain under the Credit
Agreement for periods after January 2, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum
|
|
|
Minimum
|
|
|
Minimum
|
|
|
|
Senior
|
|
|
Interest
|
|
|
Fixed
|
|
|
|
Leverage
|
|
|
Coverage
|
|
|
Charge
|
|
Fiscal Quarter
|
|
Ratio
|
|
|
Ratio
|
|
|
Ratio
|
|
|
First quarter of 2010 Third quarter of 2010
|
|
|
2.75:1
|
|
|
|
2.50:1
|
|
|
|
1.25:1
|
|
Fourth quarter of 2010 Third quarter of 2011
|
|
|
2.50:1
|
|
|
|
2.75:1
|
|
|
|
1.25:1
|
|
Fourth quarter of 2011 Second quarter of 2012
|
|
|
2.25:1
|
|
|
|
3.00:1
|
|
|
|
1.25:1
|
|
Third quarter of 2012
|
|
|
2.00:1
|
|
|
|
3.00:1
|
|
|
|
1.25:1
|
|
In the fourth quarter of 2007, we issued $180 million of
2.75% Convertible Notes (the Convertible Notes)
that provided $174.1 million of net proceeds. In connection
therewith, we completed a tender offer for our Senior Notes and
used cash of $79.7 million to redeem $75.6 million of
the Senior Notes. In addition, we prepaid $14.5 million of
our Term Loan due 2012. These transactions extended the average
maturity of our indebtedness and also reduced the average
interest rate on our indebtedness.
The Convertible Notes are convertible into approximately
47.7 shares of our common stock per $1,000 of principal.
The conversion rate can exceed 47.7 shares per $1,000 of
principal when the closing price of our common stock exceeds
approximately $20.97 per share for one or more days in the 20
consecutive trading day period beginning on the second trading
day after the conversion date. Holders of the Convertible Notes
may require us to repurchase the Notes if we are involved in
certain types of corporate transactions or other events
constituting a fundamental change. Holders of the Convertible
Notes have the right to require us to repurchase all or a
portion of their Notes on November 1 of 2012, 2017, 2022, 2027
and 2032. We have the right to redeem the Convertible Notes, in
whole or in part, for cash at any time after October 31,
2012.
Each of our primary debt instruments contain cross default
provisions whereby a default under one instrument, if not cured
or waived by the lenders, could cause a default under the other
debt instruments.
We expect to spend less than $5 million on capital
expenditures in 2009. We do not plan to pay cash dividends on
our common stock in the near term. We may use a portion of our
cash balances to repay indebtedness. We have debt pay down
requirements through 2010 totaling approximately
$28.7 million, consisting primarily of $6.7 million of
Senior Notes due May 2009, $15.0 million of Revolver debt
due and scheduled installment payments on the Term Loans
totaling $6.0 million.
Contingent
Liabilities and Obligations
We had significant contingent liabilities and obligations at
January 3, 2009, including surety bonds and letters of
credit totaling $63.5 million and guarantees of
$2.5 million of debt of unconsolidated affiliates.
Additionally, we are contingently obligated under repurchase
agreements with certain lending institutions that provide floor
plan
37
financing to our independent retailers. We estimate our
contingent repurchase obligation as of January 3, 2009 was
approximately $134 million, without reduction for the
resale value of the homes. See Contingent Repurchase
Obligations-Manufacturing Segment discussed above in
Item 7 of this Report.
We have provided various representations, warranties and other
standard indemnifications in the ordinary course of our
business, in agreements to acquire and sell business assets and
in financing arrangements. We are also subject to various legal
proceedings and claims that arise in the ordinary course of our
business.
Management believes the ultimate liability with respect to these
contingent liabilities and obligations will not have a material
effect on our financial position, results of operations or cash
flows.
Summary
of Liquidity and Capital Resources
At January 3, 2009, our total liquidity was
$65.6 million, consisting of unrestricted cash balances
totaling $52.8 million and availability under our Revolver
of $12.8 million. We expect that our cash balances and cash
flow from operations for the next two years will be adequate to
fund capital expenditures as well as the approximately
$28.7 million of scheduled debt payments due during that
period. Except as described below, the level of cash
availability is projected to be in excess of cash needed to
operate our businesses for the next two years. In the event that
our operating cash flow is inadequate and one or more of our
capital resources were to become unavailable, we would revise
our operating strategies accordingly.
The Amendment eliminated financial covenants for the quarter
ended September 27, 2008 and provided revised financial
covenants for the five quarter period ending January 2,
2010. Management believes the minimum liquidity and minimum
twelve-month EBITDA requirements, as defined, are achievable
based upon the Companys current operating plan. Management
has also identified other actions within their control that
could be implemented, if necessary, to help the Company meet
these quarterly requirements. However, there can be no assurance
that these actions will be successful. Additionally, in light of
current market conditions and absent further unscheduled
reductions of our indebtedness under the Credit Agreement, it is
possible that we will not be in compliance with the
pre-Amendment
financial covenants which take effect as of the end of the first
quarter of our 2010 fiscal year. Further, if current credit
market conditions were to persist throughout 2009, there can be
no assurance that we will be able to refinance all or a
sufficient portion of this indebtedness.
While we will explore asset sales, divestitures and other types
of capital raising alternatives in order to reduce indebtedness
under the Credit Agreement prior to expiration of the Amendment,
there can be no assurance that such activities will be
successful or generate cash resources adequate to retire or
sufficiently reduce this indebtedness. In this event, there can
be no assurance that a majority of the lenders that are party to
our Credit Agreement will consent to a further amendment of the
Credit Agreement.
38
Contractual
Obligations
The following table presents a summary of payments due by period
for our contractual obligations for long-term debt, capital
leases and operating leases as of January 3, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period: After January 3, 2009
|
|
|
|
Total
|
|
|
< 1 Year
|
|
|
1 to 3 Years
|
|
|
3 to 5 Years
|
|
|
> 5 Years
|
|
|
|
(In thousands)
|
|
|
Long-term debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible Senior Notes due 2037
|
|
$
|
180,000
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
180,000
|
|
|
$
|
|
|
Revolving line of credit
|
|
|
15,040
|
|
|
|
|
|
|
|
15,040
|
|
|
|
|
|
|
|
|
|
7.625% Senior Notes due May 2009
|
|
|
6,716
|
|
|
|
6,716
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term Loans due 2012
|
|
|
97,063
|
|
|
|
5,000
|
|
|
|
1,841
|
|
|
|
90,222
|
|
|
|
|
|
Obligations under industrial revenue bonds due 2029
|
|
|
12,430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,430
|
|
ModUK debt
|
|
|
1,101
|
|
|
|
266
|
|
|
|
513
|
|
|
|
322
|
|
|
|
|
|
Capital leases and other debt
|
|
|
730
|
|
|
|
247
|
|
|
|
483
|
|
|
|
|
|
|
|
|
|
Interest payments
|
|
|
59,365
|
|
|
|
15,515
|
|
|
|
28,119
|
|
|
|
11,440
|
|
|
|
4,291
|
|
Operating leases
|
|
|
34,983
|
|
|
|
5,784
|
|
|
|
9,690
|
|
|
|
6,537
|
|
|
|
12,972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
407,428
|
|
|
$
|
33,528
|
|
|
$
|
55,686
|
|
|
$
|
288,521
|
|
|
$
|
29,693
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Convertible Notes are listed as being due in 2012 in the
table above based on the repurchase and redemption features,
which first become available in 2012. Interest payments are
calculated through the respective maturity dates of the debt
assuming that only required installment payments are made.
Required interest payments for the Term Loans and the Revolver
are based on the 9.75% interest rate in effect as of
January 3, 2009. Interest payments for the Convertible
Notes and Senior Notes due 2009 are based on the fixed rates of
2.75% and 7.625%, respectively. Interest payments for
obligations under industrial revenue bonds are based on 2.25%,
which is the average rate paid during 2008.
Critical
Accounting Policies
The preparation of financial statements in conformity with
generally accepted accounting principles (GAAP)
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could
differ from those estimates. Assumptions and estimates of future
earnings and cash flow are used in the periodic analyses of the
recoverability of goodwill, intangible assets, deferred tax
assets and property, plant and equipment. Historical experience
and trends are used to estimate reserves, including reserves for
self-insured risks, warranty costs and wholesale repurchase
losses. Following is a description of each accounting policy
requiring significant judgments and estimates:
Reserves
for Self-Insured Risks
We are self-insured for a significant portion of our
workers compensation, general and products liability, auto
liability, health and property insurance. Under our current
self-insurance programs, we are generally responsible for up to
$0.5 million per claim for workers compensation
claims ($0.5 million or $0.75 million per claim in
California, depending on the policy year under which the claim
is made), up to $0.5 million for automobile liability
claims, up to $0.5 million, $1.5 million or
$1.75 million per claim for product liability and general
liability claims, depending on the policy year under which the
claim is made, and up to $250,000 per claim for property
insurance claims including business interruption losses. We
maintain excess liability and property insurance with
independent insurance carriers to minimize our risks related to
catastrophic claims. Under our current self-insurance program we
are responsible for up to $150,000 of health insurance claims
per contract per year. Estimated casualty and health insurance
costs are accrued for incurred claims and estimated claims
incurred but not yet reported. Factors
39
considered in estimating our insurance reserves are the nature
of outstanding claims including the severity of the claims,
estimated costs to settle existing claims, loss history and
inflation, as well as estimates provided by our third party
actuaries. Significant changes in the factors described above
could have a material adverse impact on future operating results.
Warranty
Reserves
Our manufacturing operations generally provide the retail
homebuyer or the builder/developer with a twelve-month warranty.
Estimated warranty costs are accrued as cost of sales at the
time of sale. Our warranty reserve is based on estimates of the
amounts necessary to settle existing and future claims on homes
sold by the manufacturing operations as of the balance sheet
date. Factors used to calculate the warranty obligation are the
estimated number of homes still under warranty, including homes
in retailer inventories and homes purchased by consumers still
within the twelve-month warranty period and the historical
average costs incurred to service a home. Significant changes in
these factors could have a material adverse impact on future
operating results.
Amortizable
Intangible Assets and Property, Plant and
Equipment
Amortizable intangible assets are related to both our
manufacturing and international segments. We test for impairment
of amortizable intangible assets and property, plant and
equipment (PP&E) in accordance with
SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. The recoverability of
amortizable intangible assets and PP&E is evaluated
whenever events or changes in circumstances indicate that the
carrying amount of the assets may not be recoverable, primarily
based on projected undiscounted cash flows and for PP&E,
appraised values or estimated selling prices. Our cash flow
estimates are based on historical results adjusted for estimated
current industry trends, the economy and operating conditions.
Additionally, we use estimates of fair market values to
establish impairment reserves for permanently closed facilities
that are held for sale. Past evaluations of property, plant and
equipment have resulted in significant impairment charges
primarily for closed manufacturing facilities. Significant
changes in these estimates and assumptions could result in
additional impairment charges in the future.
Income
Taxes and Deferred Tax Assets
Deferred tax assets and liabilities are determined based on
temporary differences between the financial statement balances
and the tax bases of assets and liabilities using enacted tax
rates in effect in the years in which the differences are
expected to reverse. We periodically evaluate the realizability
of our deferred tax assets based on the requirements established
in SFAS No. 109, Accounting for Income
Taxes, which requires the recording of a valuation
allowance when it is more likely than not that some portion or
all of the deferred tax assets will not be realized.
SFAS No. 109 further states forming a conclusion
that a valuation allowance is not needed is difficult when there
is negative evidence such as cumulative losses in recent
years, and places considerably more weight on historical
results and less weight on future projections. Although the
Company had U.S. pretax income in 2005 and 2006 totaling
approximately $71 million, it has cumulative
U.S. pretax losses totaling approximately $78 million
for the years 2006 through 2008. Current conditions in the
housing and credit markets and the general economy in the
U.S. continue to present significant challenges to
returning the Companys U.S. operations to
profitability. In the absence of specific favorable factors,
application of SFAS No. 109 requires a valuation
allowance for deferred tax assets in a tax jurisdiction when a
company has cumulative financial accounting losses over several
years. Accordingly, after consideration of these factors,
effective September 27, 2008, the Company provided a
valuation allowance for 100% of its U.S. deferred tax
assets resulting in a non-cash tax charge of approximately
$150.8 million in the third quarter and $164.5 million
for the full year. Deferred tax assets will continue to require
a 100% valuation allowance until we have demonstrated their
realizability through sustained profitability
and/or from
other factors. The valuation allowance will be reversed to
income in future periods to the extent that the related deferred
tax assets are realized as a reduction of taxes otherwise
payable on any future earnings or a portion or all of the
valuation allowance is otherwise no longer required.
Goodwill
Goodwill is related to both our manufacturing and international
segments. We test for impairment of goodwill in accordance with
SFAS No. 142, Goodwill and Other Intangible
Assets. We evaluate the fair value of our manufacturing
and international segments versus their carrying value as of
each fiscal year end or more frequently if
40
events or changes in circumstances indicate that the carrying
value may exceed the fair value. When estimating the
segments fair value, we calculate the present value of
future cash flows based on forecasted sales volumes and profit
margins, the number of manufacturing facilities in operation,
current industry and economic conditions, historical results and
inflation. The discount factors used in present value
calculations are updated annually. We also use available market
value information to evaluate fair value. The total fair values
of the segments less net debt was reconciled to end of year
total market capitalization.
The discount factors used in the 2008 goodwill impairment tests
were 16.0% and 17.0% compared to 8.5% used in the 2007 tests.
The current credit crisis has significantly affected the
financial markets and economies in the countries in which we
operate. Our current fair value calculations for the
manufacturing segment assumes modest revenue growth beginning in
2010 through 2013 after industry HUD-code shipments reached a
50-year low
in 2008. The assumed long-term annual growth rate after 2013 is
2%. This assumed growth rate results in forecasted sales,
including sales from SRI that was acquired in December 2007,
being approximately 11% less in 2013 than our manufacturing
segment sales were in 2006. Our current fair value calculations
for the international segment assumes slight revenue growth in
2010 and modest growth beginning in 2011 through 2013. The
assumed long-term annual growth rate after 2013 is 2%. This
assumed growth rate results in forecasted sales, including sales
from ModularUK that was acquired in February 2008, being
approximately 20% greater in 2013 than our international segment
sales were in 2007, its first full year of operations subsequent
to our acquisition.
Significant changes in the estimates and assumptions used in
calculating the fair value of the segments and the
recoverability of goodwill or differences between estimates and
actual results could result in impairment charges in the future.
Wholesale
Repurchase Reserves
In 2008, approximately 42% of our manufacturing sales to
independent retailers were made pursuant to repurchase
agreements with the national providers of floor plan financing.
We determine our repurchase reserves based on the greater of
(1) the fair value of the guaranty made under
the repurchase agreements and (2) an estimate of losses for
homes expected to be repurchased based on historical repurchase
experience. An additional reserve is established for estimated
losses related to specific retailer defaults that are deemed to
be probable. Losses under repurchase obligations are determined
by calculating the difference between the repurchase price and
the estimated net resale value of the homes, less accrued
rebates which will not be paid. Estimated losses under
repurchase agreements are based on the historical number of
homes repurchased, the cost of such repurchases and the
historical losses incurred, as well as the current inventory
levels held at our independent retailers. In addition, we
monitor the risks associated with our independent retailers and
consider these risks in identifying probable retailer defaults.
Significant changes in these factors could have a material
adverse impact on future operating results.
Revenue
Recognition
The percentage of completion method of revenue recognition is
used for certain construction contracts. This method of
accounting requires estimates and assumptions as to total costs
and profitability for each contract. Actual results could vary
significantly from these estimates resulting in significant
adjustments to reported income.
Foreign
currency transaction losses (gains)
Commencing in 2007, the Company used intercompany loans between
its U.S. and foreign subsidiaries to provide funds for
acquisitions and other purposes. Until these loans are repaid,
the foreign exchange impact on these transactions will be
reported in the statement of operations under foreign currency
transaction losses (gains) and will be based on fluctuations in
the relative exchange rates between the U.S. dollar,
Canadian dollar and British pound.
Impact of
Inflation
Inflation has not had a material effect on our operations during
the last three years. Commodity prices, including lumber,
fluctuate; however, during periods of rising commodity prices we
have generally been able to pass the increased costs to our
customers in the form of surcharges and price increases.
41
Impact of
Recently Issued Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board
(FASB) issued Financial Accounting Standard Number
157 (SFAS 157), Fair Value Measurements.
SFAS 157 clarifies the principle that fair value should be
based on the assumptions market participants would use when
pricing an asset or liability and establishes a fair value
hierarchy that prioritizes the information used to develop those
assumptions. Under the standard, fair value measurements would
be separately disclosed by level within the fair value
hierarchy. SFAS 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007.
In February 2008, the FASB issued FSP
FAS 157-2
that delayed, by one year, the effective date of SFAS 157
for the majority of non-financial assets and non-financial
liabilities. Effective December 30, 2007, we adopted
SFAS 157 for certain assets and liabilities, which were not
included in FSP
FAS 157-2.
The adoption of SFAS 157 had no significant impact on our
financial position or results of operations for the year ended
January 3, 2009.
In February 2007, the FASB issued Financial Accounting Standard
Number 159 (SFAS 159), The Fair Value Option
for Financial Assets and Financial Liabilities
including an amendment of FASB Statement No. 115, which
permits an entity to choose to measure many financial
instruments and certain other items at fair value that are not
currently required to be measured at fair value. The objective
is to provide entities with an opportunity to mitigate
volatility in reported earnings caused by measuring related
assets and liabilities differently without having to apply
complex hedge accounting provisions. Entities that choose to
measure eligible items at fair value will report unrealized
gains and losses in earnings at each subsequent reporting date.
The fair value option may be elected at specified election dates
on an
instrument-by-instrument
basis, with few exceptions. The Statement also establishes
presentation and disclosure requirements designed to facilitate
comparisons between entities that choose different measurement
attributes for similar types of assets and liabilities.
SFAS 159 is effective at the beginning of the first fiscal
year beginning after November 15, 2007. We have decided not
to adopt SFAS 159 for any existing financial instruments.
In December 2007, the FASB issued Financial Accounting Standard
Number 141(R) (SFAS 141R), Business
Combinations and Financial Accounting Standard Number 160
(SFAS 160), Accounting and Reporting of
Non-controlling Interests in Consolidated Financial Statements,
an amendment of ARB No. 51. SFAS 141R and
SFAS 160 expand the scope of acquisition accounting to all
transactions and circumstances under which control of a business
is obtained. SFAS 141R and SFAS 160 are effective for
financial statements issued for fiscal years beginning after
December 15, 2008 and interim periods within those fiscal
years, with early adoption prohibited and these standards must
be adopted concurrently. These standards will impact us for any
acquisitions subsequent to the adoption date. The most
significant effect of adoption of SFAS 141R on our results
of operations is that success fees and due diligence, legal,
accounting, valuation and similar costs incurred in connection
with acquisitions (acquisition-related costs) are required to be
expensed as incurred. Current practice is that such costs are
capitalized as part of the cost of the acquisition.
In December 2007, the FASB issued Financial Accounting Standard
Number 160 (SFAS 160), Non-controlling
Interest in Consolidated Financial Statements an
amendment of Accounting Research Bulletin No. 51,
Consolidated Financial Statements. SFAS 160 requires
all entities to report non-controlling (minority) interests in
subsidiaries as equity in the consolidated financial statements.
Its intention is to eliminate the diversity in practice
regarding the accounting for transactions between an entity and
non-controlling interests. SFAS 160 is effective for fiscal
years beginning after December 15, 2008. The adoption of
SFAS 160 is not expected to have a material effect on our
financial position or results of operations.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
Our debt obligations under the Credit Agreement are currently
subject to variable rates of interest based on U.S. and
U.K. LIBOR and the U.S. prime rate. A 100 basis point
increase in the underlying interest rate would result in an
additional annual interest cost of approximately
$1.1 million, assuming average related debt of
$112.1 million, which was the amount of outstanding
borrowings at January 3, 2009.
Our obligations under industrial revenue bonds are subject to
variable rates of interest based on short-term tax-exempt rate
indices. A 100 basis point increase in the underlying
interest rates would result in additional annual interest cost
of approximately $0.1 million, assuming average related
debt of $12.4 million, which was the amount of outstanding
borrowings at January 3, 2009.
42
Our approach to interest rate risk is to balance our borrowings
between fixed rate and variable rate debt. At January 3,
2009, we had $180 million of Convertible Notes and
$6.7 million of Senior Notes at fixed rates and
$124.5 million of Term Loans, Revolver and industrial
revenue bonds at variable rates.
We are exposed to foreign exchange risk with our factory-built
housing operations in Canada and our international segment in
the U.K. Our Canadian operations had 2008 net sales
totaling $170 million (CAD). Assuming future annual
Canadian sales equal to 2008 sales, a change of 1.0% in exchange
rates between the U.S. and Canadian dollars would change
consolidated sales by $1.4 million. Our international
segment had 2008 sales of £148 million (pounds
Sterling). Assuming future annual U.K. sales equal to 2008
sales, a change of 1.0% in exchange rates between the
U.S. dollar and the British pound Sterling would change
consolidated sales by $2.2 million. Net income of the
Canadian and U.K. operations would also be affected by changes
in exchange rates. We also have foreign exchange risk for cash
balances we maintain in U.S. dollars, Canadian dollars and
U.K. pounds that are subject to fluctuating values when
exchanged into another currency.
We borrowed £45 million in the U.S. to finance a
portion of the Caledonian purchase price, which totaled
approximately £62 million. This Sterling denominated
borrowing was designated as an economic hedge of our net
investment in the U.K. Therefore a significant portion of
foreign exchange risk related to our Caledonian investment in
the U.K. is offset. Repayment of any portion of this loan will
result in realized foreign exchange transaction gains and losses
based on the exchange rate at the time of repayment. We do not
hedge our investment in the Canadian operations.
We use intercompany loans between our U.S. and foreign
subsidiaries to provide funds for acquisitions and other
purposes. At January 3, 2009 the total of such intercompany
loans was $52.8 million. Until these loans are repaid,
foreign exchange transaction gains and losses will be reported
in our statement of operations based on fluctuations in the
relative exchange rates between the U.S. dollar, Canadian
dollar and British pound.
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
The financial statements and schedules filed herewith are set
forth on the Index to Financial Statements and Financial
Statement Schedules on
page F-1
of the separate financial section of this Report and are
incorporated herein by reference.
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
None.
|
|
Item 9A.
|
Controls
and Procedures
|
As of the date of this Report, we carried out an evaluation,
under the supervision and with the participation of our Chief
Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure
controls and procedures pursuant to
Rule 13a-15
of the Securities Exchange Act of 1934. Based upon that
evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures
are effective to cause material information required to be
disclosed by the Company in the reports that we file or submit
under the Securities Exchange Act of 1934 to be recorded,
processed, summarized, and reported within the time periods
specified in the SECs rules and forms. During the quarter
ended January 3, 2009, there were no changes in our
internal control over financial reporting that materially
affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
|
|
Item 9B.
|
Other
Information
|
None.
43
PART III
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance
|
The information set forth in the sections entitled
Election of Directors and Corporate
Governance in the Companys Proxy Statement for the
Annual Shareholders Meeting to be held May 29, 2009
(the Proxy Statement) and the information set forth
in the section entitled Executive Officers of the
Company in Part 1, Item 1 of this Report is
incorporated herein by reference.
The information set forth under the caption
Section 16(a) Beneficial Ownership Reporting
Compliance in the section entitled Other
Information in the Companys Proxy Statement is
incorporated herein by reference.
|
|
Item 11.
|
Executive
Compensation
|
The information set forth under the sections entitled
Compensation of Directors, Compensation
Discussion and Analysis and Executive
Compensation and the information set forth under the
caption Compensation Committee Report in the section
entitled Corporate Governance Compensation and
Human Resources Committee in the Companys Proxy
Statement is incorporated herein by reference.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
The information set forth under Part II, Item 5 of
this Report is incorporated herein by reference. The information
set forth under the section entitled Share Ownership
in the Companys Proxy Statement is incorporated herein by
reference.
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
The information set forth under the caption Related Party
Transaction Policy in the section entitled Other
Information and the information set forth under the
caption Director Independence in the section
entitled Corporate Governance in the Companys
Proxy Statement is incorporated herein by reference.
|
|
Item 14.
|
Principal
Accountant Fees and Services
|
The information set forth under the caption Independent
Auditors in the section entitled Other
Information in the Companys Proxy Statement is
incorporated herein by reference.
44
PART IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules
|
(a) The financial statements, supplementary financial
information and financial statement schedules filed herewith are
set forth on the Index to Financial Statements and Financial
Statement Schedules on
page F-1
of the separate financial section of this Report, which is
incorporated herein by reference.
The following exhibits are filed as part of this Report. Those
exhibits with an asterisk (*) designate the Companys
management contracts or compensation plans or arrangements for
its executive officers.
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
2
|
.1.
|
|
Asset Purchase Agreement, dated February 24, 2006, by and
among CBS Monaco Limited, Champion Enterprises, Inc. and the
shareholders of Calsafe Group (Holdings) Limited, filed as
Exhibit 2.1 to the Companys Current Report on
Form 8-K
filed March 1, 2006 and incorporated herein by reference.
|
|
2
|
.2.
|
|
Asset Purchase Agreement, dated December 17, 2007, by
Champion Enterprises, Inc. and 1367606 Alberta ULC
(Buyer) with SRI Homes Inc., NGI Investment
Corporation, Robert Adria and Brian Holterhus, filed as
Exhibit 2.1 to the Companys Current Report on
Form 8-K
filed December 21, 2007 and incorporated herein by
reference.
|
|
3
|
.1.
|
|
Restated Articles of Incorporation of Champion Enterprises,
Inc., as amended, filed as Exhibit 3.1 to the
Companys Current Report on
Form 8-K
filed April 19, 2006 and incorporated herein by reference.
|
|
3
|
.2.
|
|
Bylaws of the Company as amended through December 2, 2003,
filed as Exhibit 3.5 to the Companys Annual Report on
Form 10-K
for the fiscal year ended January 3, 2004 and incorporated
herein by reference.
|
|
4
|
.1.
|
|
Indenture dated as of May 3, 1999 between the Company, the
Subsidiary Guarantors and Bank One Trust Company, NA, as
Trustee, filed as Exhibit 4.1 to the Companys
Form S-4
Registration Statement
No. 333-84227
dated July 30, 1999 and incorporated herein by reference.
|
|
4
|
.2.
|
|
Supplemental Indenture dated as of July 30, 1999 between
the Company, the Subsidiary Guarantors and Wells Fargo Bank
Minnesota, NA, as Trustee, filed as Exhibit 4.2 to the
Companys
Form S-4
Registration Statement
No. 333-84227
dated July 30, 1999 and incorporated herein by reference.
|
|
4
|
.3.
|
|
Supplemental Indenture dated as of October 4, 1999 between
the Company, the Subsidiary Guarantors and Wells Fargo Bank
Minnesota, NA, filed as Exhibit 4.3 to the Companys
Annual Report on
Form 10-K
for the fiscal year ended January 1, 2000 and incorporated
herein by reference.
|
|
4
|
.4.
|
|
Supplemental Indenture dated as of February 10, 2000
between the Company, the Subsidiary Guarantors and Wells Fargo
Bank Minnesota, NA, filed as Exhibit 4.4 to the
Companys Annual Report on
Form 10-K
for the fiscal year ended January 1, 2000 and incorporated
herein by reference.
|
|
4
|
.5.
|
|
Supplemental Indenture dated as of September 5, 2000, among
the Company, the Subsidiary Guarantors and Wells Fargo Bank
Minnesota, NA, filed as Exhibit 4.5 to the Companys
Annual Report on
Form 10-K
for the fiscal year ended December 29, 2001 and
incorporated herein by reference.
|
|
4
|
.6.
|
|
Supplemental Indenture dated as of March 15, 2002 between
the Company,
A-1 Champion
GP, Inc., the Subsidiary Guarantors and Wells Fargo Bank
Minnesota, NA, as Trustee, filed as Exhibit 4.6 to the
Companys Annual Report on
Form 10-K
for the fiscal year ended December 28, 2002 and
incorporated herein by reference.
|
|
4
|
.7.
|
|
Supplemental Indenture dated as of August 7, 2002 among the
Company, the Subordinated Subsidiary Guarantors and Wells Fargo
Bank Minnesota, NA, as Trustee, filed as Exhibit 4.7 to the
Companys Annual Report on
Form 10-K
for the fiscal year ended December 28, 2002 and
incorporated herein by reference.
|
|
4
|
.8.
|
|
Supplemental Indenture dated as of January 13, 2003 among
HomePride Insurance Agency, Inc., HP National Mortgage Holdings,
Inc., Champion Enterprises Management Co., the Company, the
Subordinated Subsidiary Guarantors, and Wells Fargo Bank
Minnesota, NA, as Trustee, filed as Exhibit 4.8 to the
Companys Annual Report on
Form 10-K
for the fiscal year ended December 28, 2002 and
incorporated herein by reference.
|
45
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
4
|
.9.
|
|
Supplemental Indenture dated as of January 31, 2003, among
Moduline Industries (Canada) Ltd., the Company, the Subordinated
Subsidiary Guarantors and Wells Fargo Bank Minnesota, NA, as
Trustee, filed as Exhibit 4.9 to the Companys Annual
Report on
Form 10-K
for the fiscal year ended December 28, 2002 and
incorporated herein by reference.
|
|
4
|
.10.
|
|
Supplemental Indenture dated as of October 14, 2005, filed
as Exhibit 4.1 to the Companys Current Report on
Form 8-K
dated October 14, 2005 and incorporated herein by reference.
|
|
4
|
.11.
|
|
Supplemental Indenture for Senior Debt Securities dated
November 2, 2007, filed as Exhibit 4.1 to the
Companys Current Report on
Form 8-K
dated November 2, 2007 and incorporated herein by reference.
|
|
4
|
.12.
|
|
Supplemental Indenture dated November 13, 2007, filed as
Exhibit 4.1 to the Companys Current Report on
Form 8-K
dated November 16, 2007 and incorporated herein by
reference.
|
|
10
|
.1.
|
|
*1993 Management Stock Option Plan, as amended and restated as
of December 3, 2002, filed as Exhibit 10.11 to the
Companys Annual Report on
Form 10-K
for the fiscal year end December 28, 2002 and incorporated
herein by reference.
|
|
10
|
.2.
|
|
*1995 Stock Option and Incentive Plan, filed as
Exhibit 10.1 to the Companys Registration Statement
on
Form S-8
dated May 1, 1995 and incorporated herein by reference.
|
|
10
|
.3.
|
|
*First Amendment to the 1995 Stock Option and Incentive Plan,
filed as Exhibit 10.12 to the Companys Annual Report
on
Form 10-K
for the fiscal year ended December 30, 1995 and
incorporated herein by reference.
|
|
10
|
.4.
|
|
*Second Amendment dated April 28, 1998 to the 1995 Stock
Option and Incentive Plan, filed as Exhibit 10.9 to the
Companys Annual Report on
Form 10-K
for the fiscal year ended January 2, 1999 and incorporated
herein by reference.
|
|
10
|
.5.
|
|
*Third Amendment dated October 27, 1998 to the 1995 Stock
Option and Incentive Plan, filed as Exhibit 10.10 to the
Companys Annual Report on
Form 10-K
for the fiscal year ended January 2, 1999 and incorporated
herein by reference.
|
|
10
|
.6.
|
|
*Fourth Amendment dated April 27, 1999 to the 1995 Stock
Option and Incentive Plan, filed as Exhibit 10.2 to the
Companys Report on
Form 10-Q
for the quarter ended April 3, 1999 and incorporated herein
by reference.
|
|
10
|
.7.
|
|
*Nonqualified Deferred Compensation Plan, as amended and
restated December 31, 2008 to comply with Section 409A
of the Internal Revenue Code.
|
|
10
|
.8.
|
|
*2000 Stock Compensation Plan for Nonemployee Directors, as
amended and restated effective December 18, 2002, filed as
Exhibit 10.21 to the Companys Annual Report on
Form 10-K
for the fiscal year end December 28, 2002 and incorporated
herein by reference.
|
|
10
|
.9.
|
|
*Fourth Amendment to the 2000 Stock Compensation Plan for
Nonemployee Directors, filed as Exhibit 10.14 to the
Companys Annual Report on
Form 10-K
for the fiscal year ended January 3, 2004 and incorporated
herein by reference.
|
|
10
|
.10.
|
|
*2005 Equity Compensation and Incentive Plan, as amended and
restated December 31, 2008 to comply with Section 409A
of the Internal Revenue Code.
|
|
10
|
.11.
|
|
*Form of Performance Share Award under the 2005 Equity
Compensation and Incentive Plan, filed as Exhibit 10.1 to
the Companys Current Report on
Form 8-K
dated January 12, 2006 and incorporated herein by reference.
|
|
10
|
.12.
|
|
*Form of Annual Incentive Award under the 2005 Equity
Compensation and Incentive Plan, filed as Exhibit 10.2 to
the Companys Current Report on
Form 8-K
dated January 12, 2006 and incorporated herein by reference.
|
|
10
|
.13.
|
|
* Amended and Restated Executive Employment Agreement with
William C. Griffiths, dated as of December 17, 2008, filed
as Exhibit 99.4 to the Companys Current Report on
Form 8-K
dated December 18, 2008 and incorporated herein by
reference.
|
|
10
|
.14.
|
|
*Form of Amended and Restated Change in Control Agreement dated
December 17, 2008 between the Company and certain executive
officers, filed as Exhibit 99.1 to the Companys
Current Report on
Form 8-K
dated December 18, 2008 and incorporated herein by
reference.
|
|
10
|
.15.
|
|
*Form of Amended and Restated Change in Control Agreement dated
December 17, 2008 between the Company and William C.
Griffiths, filed as Exhibit 99.2 to the Companys
Current Report on
Form 8-K
dated December 18, 2008 and incorporated herein by
reference.
|
46
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
10
|
.16.
|
|
*Executive Officer Severance Pay Plan, as amended and restated
December 31, 2008 to comply with Section 409A of the
Internal Revenue Code.
|
|
10
|
.17.
|
|
*Letter Agreement dated October 17, 2002 between the
Company and Phyllis A. Knight, filed as Exhibit 10.25 to
the Companys Annual Report on
Form 10-K
for the fiscal year ended December 28, 2002 and
incorporated herein by reference.
|
|
10
|
.18.
|
|
*Amendment dated December 17, 2008 to Letter Agreement
dated October 17, 2002 between the Company and Phyllis A.
Knight.
|
|
10
|
.19.
|
|
*Nonqualified Inducement Stock Option Agreement dated
October 17, 2002 between the Company and Phyllis A. Knight,
filed as Exhibit 10.26 to the Companys Annual Report
on
Form 10-K
for the fiscal year ended December 28, 2002 and
incorporated herein by reference.
|
|
10
|
.20.
|
|
*Letter Agreement dated September 21, 2004 between the
Company and Jeffrey L. Nugent, filed as Exhibit 10.28 to
the Companys Annual Report on
Form 10-K
for the fiscal year ended December 31, 2005 and
incorporated herein by reference.
|
|
10
|
.21.
|
|
Termination Agreement and General Release with Jeffrey P.
Nugent, Vice-President, effective December 17, 2008 and
filed as Exhibit 99.3 on
Form 8-K
on December 18, 2008 and incorporated herein by reference.
|
|
10
|
.22.
|
|
Cash Compensation Plan for Non-Employee Directors (the
Plan), filed as Exhibit 10.1 to the
Companys Current Report on
Form 8-K
filed March 20, 2006 and incorporated herein by reference.
|
|
10
|
.23.
|
|
First Amendment to Amended and Restated Credit Agreement, dated
March 22, 2007, by Champion Home Builders Co., a
wholly-owned subsidiary of Champion Enterprises, Inc., and
certain additional subsidiaries of Champion Enterprises, Inc.
with certain financial institutions and other parties thereto as
lenders, filed as Exhibit 10.1 to the Companys
Current Report on
Form 8-K
filed March 28, 2007 and incorporated herein by reference.
|
|
10
|
.24.
|
|
Second Amendment to Amended and Restated Credit Agreement, dated
June 20, 2007, by Champion Home Builders Co., a
wholly-owned subsidiary of Champion Enterprises, Inc., and
certain additional subsidiaries of the Company with certain
financial institutions and other parties thereto as lenders,
filed as Exhibit 10.1 to the Companys Current Report
on
Form 8-K
filed June 22, 2007 and incorporated herein by reference.
|
|
10
|
.25.
|
|
Third Amendment to Amended and Restated Credit Agreement, dated
October 25, 2007, by Champion Home Builders Co., a
wholly-owned subsidiary of Champion Enterprises, Inc., and
certain additional subsidiaries of Champion Enterprises, Inc.
with certain financial institutions and other parties thereto as
lenders, filed as Exhibit 10.1 to the Companys
Current Report on
Form 8-K
filed October 31, 2007 and incorporated herein by reference.
|
|
10
|
.26.
|
|
Fourth Amendment to Amended and Restated Credit Agreement, dated
October 24, 2008, by Champion Home Builders Co., a
wholly-owned subsidiary of Champion Enterprises, Inc., and
certain additional subsidiaries of Champion Enterprises, Inc.
with certain financial institutions and other parties thereto as
lenders, filed as Exhibit 10.1 to the Companys
Current Report on
Form 8-K
filed October 27, 2008 and incorporated herein by reference.
|
|
10
|
.27.
|
|
Letter Agreement dated October 9, 2007 between the Company
and Roger Scholten.
|
|
21
|
.1.
|
|
Subsidiaries of the Company.
|
|
23
|
.1.
|
|
Consent of Ernst & Young LLP.
|
|
31
|
.1.
|
|
Certification of Chief Executive Officer dated February 18,
2009, relating to the Registrants Annual Report on
Form 10-K
for the year ended January 3, 2009.
|
|
31
|
.2.
|
|
Certification of Chief Financial Officer dated February 18,
2009, relating to the Registrants Annual Report on
Form 10-K
for the year ended January 3, 2009.
|
|
32
|
.1.
|
|
Certification of Chief Executive Officer and Chief Financial
Officer of Registrant, dated February 18, 2009, pursuant to
18 U.S.C. Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, relating to
the Registrants Annual Report on
Form 10-K
for the year ended January 3, 2009.
|
|
99
|
.1.
|
|
Proxy Statement for the Companys 2008 Annual Meeting of
Shareholders, filed by the Company pursuant to
Regulation 14A and incorporated herein by reference.
|
47
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Company has duly caused
this Report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Champion Enterprises, Inc.
|
|
|
|
By:
|
/s/ Phyllis
A. Knight
|
Phyllis A. Knight
Executive Vice President, Treasurer and
Chief Financial Officer
Dated: February 18, 2009
Pursuant to the requirements of the Securities Exchange Act of
1934, this Report has been signed below by the following persons
on behalf of the Company and in the capacities and on the dates
indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ William
C. Griffiths
William
C. Griffiths
|
|
Chairman of the Board of Directors, President and Chief
Executive Officer (Principal Executive Officer)
|
|
February 18, 2009
|
|
|
|
|
|
/s/ Phyllis
A. Knight
Phyllis
A. Knight
|
|
Executive Vice President, Treasurer and Chief Financial Officer
(Principal Financial Officer)
|
|
February 18, 2009
|
|
|
|
|
|
/s/ Richard
Hevelhorst
Richard
Hevelhorst
|
|
Vice President and Controller (Principal Accounting Officer)
|
|
February 18, 2009
|
|
|
|
|
|
/s/ Robert
W. Anestis
Robert
W. Anestis
|
|
Director
|
|
February 18, 2009
|
|
|
|
|
|
/s/ Eric
S. Belsky
Eric
S. Belsky
|
|
Director
|
|
February 18, 2009
|
|
|
|
|
|
/s/ Selwyn
Isakow
Selwyn
Isakow
|
|
Director and Lead Independent Director
|
|
February 18, 2009
|
|
|
|
|
|
/s/ Brian
D. Jellison
Brian
D. Jellison
|
|
Director
|
|
February 18, 2009
|
|
|
|
|
|
/s/ G.
Michael Lynch
G.
Michael Lynch
|
|
Director
|
|
February 18, 2009
|
|
|
|
|
|
/s/ Thomas
Madden
Thomas
Madden
|
|
Director
|
|
February 18, 2009
|
|
|
|
|
|
/s/ Shirley
D. Peterson
Shirley
D. Peterson
|
|
Director
|
|
February 18, 2009
|
48
MANAGEMENTS
RESPONSIBILITY FOR FINANCIAL STATEMENTS
Management is responsible for the preparation of the
Companys consolidated financial statements and related
notes. Management believes that the consolidated financial
statements present the Companys financial position and
results of operations in conformity with accounting principles
that are generally accepted in the United States, using our best
estimates and judgments as required.
The independent registered public accounting firm audits the
Companys consolidated financial statements in accordance
with the standards of the Public Company Accounting Oversight
Board (United States) and provides an objective, independent
review of the fairness of reported operating results and
financial position.
The Audit Committee of the Board of Directors of the Company is
composed of four non-management directors. The Committee meets
regularly with management, internal auditors, and the
independent registered public accounting firm to review
accounting, internal control, auditing, and financial reporting
matters.
Formal policies and procedures, including an active Ethics and
Business Conduct program, support the internal controls, and are
designed to ensure employees adhere to the highest standards of
personal and professional integrity. We have an internal audit
program that independently evaluates the adequacy and
effectiveness of these internal controls.
MANAGEMENTS
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term
is defined in Exchange Act
Rule 13a-15(f).
Under the supervision and with the participation of management,
including our Chief Executive Officer and Chief Financial
Officer, we conducted an evaluation of the effectiveness of our
internal control over financial reporting based on the framework
in Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to risk that controls may become inadequate
because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
Based on our evaluation under the framework in Internal
Control Integrated Framework, management
concluded that our internal control over financial reporting was
effective as of January 3, 2009. The effectiveness of our
internal control over financial reporting as of January 3,
2009 has been audited by Ernst & Young LLP, an
independent registered public accounting firm, as stated in
their report, which is included herein.
|
|
|
/s/ WILLIAM
C. GRIFFITHS
William
C. Griffiths
Chairman, President and Chief Executive Officer
February 18, 2009
|
|
/s/ PHYLLIS
A. KNIGHT
Phyllis
A. Knight
Executive Vice President, Treasurer and
Chief Financial Officer
February 18, 2009
|
49
CHAMPION
ENTERPRISES, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
AND
FINANCIAL STATEMENT SCHEDULES
|
|
|
|
|
Description
|
|
Page
|
|
|
|
|
F-2
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
|
|
|
F-7
|
|
|
|
|
F-8
|
|
|
|
|
F-33
|
|
All other financial statement schedules are omitted either
because they are not applicable or the required information is
immaterial or is shown in the Notes to Consolidated Financial
Statements.
F-1
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of
Champion Enterprises, Inc.
We have audited the accompanying consolidated balance sheets of
Champion Enterprises, Inc. (the Company) as of
January 3, 2009 and December 29, 2007, and the related
consolidated statements of operations, shareholders
equity, and cash flows for each of the three years in the period
ended January 3, 2009. Our audits also included the
financial statement schedule listed in the Index for the three
years ended January 3, 2009. These financial statements and
schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Champion Enterprises, Inc. at
January 3, 2009 and December 29, 2007, and the
consolidated results of its operations and its cash flows for
each of the three years in the period ended January 3,
2009, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all
material respects the information set forth for the three years
ended January 3, 2009.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
Champion Enterprises, Inc.s internal control over
financial reporting as of January 3, 2009, based on
criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated February 17, 2009
expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Detroit, Michigan
February 17, 2009
F-2
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of
Champion Enterprises, Inc.
We have audited Champion Enterprises, Inc.s internal
control over financial reporting as of January 3, 2009,
based on criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria).
Champion Enterprises Inc.s management is responsible for
maintaining effective internal control over financial reporting,
and for its assessment of the effectiveness of internal control
over financial reporting included in the accompanying
Managements Annual Report on Internal Control Over
Financial Reporting. Our responsibility is to express an opinion
on the Companys internal control over financial reporting
based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, Champion Enterprises, Inc. maintained, in all
material respects, effective internal control over financial
reporting as of January 3, 2009, based on the COSO criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Champion Enterprises, Inc. as of
January 3, 2009 and December 29, 2007, and the related
consolidated statements of operations, shareholders
equity, and cash flows for each of the three years in the period
ended January 3, 2009 of Champion Enterprises, Inc. and our
report dated February 17, 2009 expressed an unqualified
opinion thereon.
/s/ Ernst & Young LLP
Detroit, Michigan
February 17, 2009
F-3
CHAMPION
ENTERPRISES, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
January 3, 2009
|
|
|
December 29, 2007
|
|
|
December 30, 2006
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Net sales
|
|
$
|
1,033,193
|
|
|
$
|
1,273,465
|
|
|
$
|
1,364,648
|
|
Cost of sales
|
|
|
906,685
|
|
|
|
1,083,601
|
|
|
|
1,147,032
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
126,508
|
|
|
|
189,864
|
|
|
|
217,616
|
|
Selling, general and administrative expenses
|
|
|
130,756
|
|
|
|
158,142
|
|
|
|
154,534
|
|
Restructuring charges
|
|
|
10,683
|
|
|
|
3,780
|
|
|
|
1,200
|
|
Foreign currency transaction losses (gains)
|
|
|
10,536
|
|
|
|
(1,008
|
)
|
|
|
|
|
Amortization of intangible assets
|
|
|
9,251
|
|
|
|
5,727
|
|
|
|
3,941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
(34,718
|
)
|
|
|
23,223
|
|
|
|
57,941
|
|
Loss on debt retirement
|
|
|
(608
|
)
|
|
|
(4,543
|
)
|
|
|
(398
|
)
|
Interest income
|
|
|
3,709
|
|
|
|
5,649
|
|
|
|
5,050
|
|
Interest expense
|
|
|
(20,401
|
)
|
|
|
(20,380
|
)
|
|
|
(19,496
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes
|
|
|
(52,018
|
)
|
|
|
3,949
|
|
|
|
43,097
|
|
Income tax expense (benefit)
|
|
|
147,442
|
|
|
|
(3,243
|
)
|
|
|
(95,211
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
|
(199,460
|
)
|
|
|
7,192
|
|
|
|
138,308
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) income per share
|
|
$
|
(2.57
|
)
|
|
$
|
0.09
|
|
|
$
|
1.81
|
|
Weighted shares for basic EPS
|
|
|
77,700
|
|
|
|
76,916
|
|
|
|
76,334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss) income per share
|
|
$
|
(2.57
|
)
|
|
$
|
0.09
|
|
|
$
|
1.78
|
|
Weighted shares for diluted EPS
|
|
|
77,700
|
|
|
|
77,719
|
|
|
|
77,578
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
F-4
CHAMPION
ENTERPRISES, INC.
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
January 3,
|
|
|
December 29,
|
|
|
|
2009
|
|
|
2007
|
|
|
|
(In thousands, except par value)
|
|
|
Assets
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
52,787
|
|
|
$
|
135,408
|
|
Accounts receivable, trade
|
|
|
33,935
|
|
|
|
89,646
|
|
Inventories
|
|
|
52,960
|
|
|
|
90,782
|
|
Deferred tax assets
|
|
|
673
|
|
|
|
29,746
|
|
Other current assets
|
|
|
9,839
|
|
|
|
14,827
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
150,194
|
|
|
|
360,409
|
|
Property, plant and equipment
|
|
|
|
|
|
|
|
|
Land and improvements
|
|
|
29,039
|
|
|
|
30,970
|
|
Buildings and improvements
|
|
|
115,447
|
|
|
|
129,002
|
|
Machinery and equipment
|
|
|
81,497
|
|
|
|
89,742
|
|
|
|
|
|
|
|
|
|
|
|
|
|
225,983
|
|
|
|
249,714
|
|
Less-accumulated depreciation
|
|
|
129,120
|
|
|
|
132,730
|
|
|
|
|
|
|
|
|
|
|
|
|
|
96,863
|
|
|
|
116,984
|
|
Goodwill
|
|
|
307,760
|
|
|
|
360,610
|
|
Amortizable intangible assets, net of accumulated
amortization
|
|
|
67,932
|
|
|
|
72,541
|
|
Deferred tax assets
|
|
|
|
|
|
|
87,983
|
|
Other non-current assets
|
|
|
22,260
|
|
|
|
23,696
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
645,009
|
|
|
$
|
1,022,223
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity
|
Current liabilities
|
|
|
|
|
|
|
|
|
Short-term portion of debt
|
|
$
|
12,229
|
|
|
$
|
25,884
|
|
Accounts payable
|
|
|
70,050
|
|
|
|
119,390
|
|
Accrued volume rebates
|
|
|
19,120
|
|
|
|
29,404
|
|
Accrued warranty obligations
|
|
|
20,925
|
|
|
|
29,246
|
|
Accrued compensation and payroll taxes
|
|
|
15,372
|
|
|
|
25,168
|
|
Accrued self-insurance
|
|
|
22,537
|
|
|
|
27,539
|
|
Other current liabilities
|
|
|
27,399
|
|
|
|
61,695
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
187,632
|
|
|
|
318,326
|
|
Long-term liabilities
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
300,851
|
|
|
|
342,897
|
|
Deferred tax liabilities
|
|
|
36,592
|
|
|
|
7,065
|
|
Other long-term liabilities
|
|
|
33,111
|
|
|
|
34,089
|
|
|
|
|
|
|
|
|
|
|
|
|
|
370,554
|
|
|
|
384,051
|
|
Contingent liabilities (Note 13)
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
|
|
|
|
|
|
Common stock, $1 par value, 120,000 shares authorized,
77,780 and 77,346 shares issued and outstanding,
respectively
|
|
|
77,780
|
|
|
|
77,346
|
|
Capital in excess of par value
|
|
|
201,919
|
|
|
|
203,708
|
|
(Accumulated deficit) retained earnings
|
|
|
(175,823
|
)
|
|
|
23,637
|
|
Accumulated other comprehensive (loss) income
|
|
|
(17,053
|
)
|
|
|
15,155
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
86,823
|
|
|
|
319,846
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
645,009
|
|
|
$
|
1,022,223
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
F-5
CHAMPION
ENTERPRISES, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
January 3,
|
|
|
December 29,
|
|
|
December 30,
|
|
|
|
2009
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(199,460
|
)
|
|
$
|
7,192
|
|
|
$
|
138,308
|
|
Adjustments to reconcile net (loss) income to net cash (used
for) provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
22,478
|
|
|
|
20,063
|
|
|
|
17,943
|
|
Stock-based compensation
|
|
|
(476
|
)
|
|
|
2,975
|
|
|
|
4,563
|
|
Change in deferred taxes
|
|
|
136,186
|
|
|
|
(17,637
|
)
|
|
|
(100,125
|
)
|
Fixed asset impairment charges
|
|
|
7,000
|
|
|
|
2,000
|
|
|
|
1,200
|
|
Compensation portion of UK earnout payment
|
|
|
(5,884
|
)
|
|
|
|
|
|
|
|
|
Insurance proceeds
|
|
|
7,478
|
|
|
|
|
|
|
|
|
|
LCM inventory reserve
|
|
|
14,100
|
|
|
|
|
|
|
|
|
|
Gain on disposal of fixed assets
|
|
|
(505
|
)
|
|
|
(1,199
|
)
|
|
|
(4,708
|
)
|
Loss on debt retirement
|
|
|
608
|
|
|
|
4,543
|
|
|
|
398
|
|
Foreign currency transaction losses (gains)
|
|
|
10,536
|
|
|
|
(1,008
|
)
|
|
|
|
|
Increase/decrease:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
42,678
|
|
|
|
(28,412
|
)
|
|
|
28,626
|
|
Inventories
|
|
|
21,648
|
|
|
|
24,024
|
|
|
|
13,129
|
|
Accounts payable
|
|
|
(28,295
|
)
|
|
|
61,230
|
|
|
|
(16,405
|
)
|
Accrued liabilities
|
|
|
(44,370
|
)
|
|
|
5,733
|
|
|
|
(24,753
|
)
|
Other, net
|
|
|
248
|
|
|
|
801
|
|
|
|
1,698
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used for) provided by operating activities
|
|
|
(16,030
|
)
|
|
|
80,305
|
|
|
|
59,874
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to property, plant and equipment
|
|
|
(12,179
|
)
|
|
|
(10,201
|
)
|
|
|
(17,582
|
)
|
Acquisitions and related payments
|
|
|
(8,892
|
)
|
|
|
(96,208
|
)
|
|
|
(153,845
|
)
|
Purchase of short-term investments
|
|
|
(10,000
|
)
|
|
|
|
|
|
|
|
|
Redemption of short-term investments
|
|
|
10,000
|
|
|
|
|
|
|
|
|
|
Proceeds on disposal of fixed assets
|
|
|
3,557
|
|
|
|
4,487
|
|
|
|
7,566
|
|
Distributions from unconsolidated affiliates
|
|
|
9
|
|
|
|
884
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used for investing activities
|
|
|
(17,505
|
)
|
|
|
(101,038
|
)
|
|
|
(163,861
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from Convertible Notes
|
|
|
|
|
|
|
180,000
|
|
|
|
|
|
Proceeds from Revolver debt
|
|
|
25,000
|
|
|
|
|
|
|
|
|
|
Proceeds from Term Loan
|
|
|
|
|
|
|
|
|
|
|
78,561
|
|
Redemption of Senior Notes
|
|
|
|
|
|
|
(79,728
|
)
|
|
|
(6,901
|
)
|
Payments on debt
|
|
|
(61,174
|
)
|
|
|
(16,329
|
)
|
|
|
(29,612
|
)
|
Increase in deferred financing costs
|
|
|
(2,744
|
)
|
|
|
(5,939
|
)
|
|
|
(1,076
|
)
|
Decrease in restricted cash
|
|
|
|
|
|
|
15
|
|
|
|
698
|
|
Common stock issued, net
|
|
|
437
|
|
|
|
3,801
|
|
|
|
1,974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used for) provided by financing activities
|
|
|
(38,481
|
)
|
|
|
81,820
|
|
|
|
43,644
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from discontinued operations
|
|
|
124
|
|
|
|
62
|
|
|
|
1,201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
(10,729
|
)
|
|
|
4,051
|
|
|
|
2,371
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(82,621
|
)
|
|
|
65,200
|
|
|
|
(56,771
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
135,408
|
|
|
|
70,208
|
|
|
|
126,979
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
52,787
|
|
|
$
|
135,408
|
|
|
$
|
70,208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
19,807
|
|
|
$
|
19,888
|
|
|
$
|
19,394
|
|
Cash paid for income taxes
|
|
|
12,764
|
|
|
|
8,296
|
|
|
|
5,156
|
|
See accompanying Notes to Consolidated Financial Statements.
F-6
CHAMPION
ENTERPRISES, INC.
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital in
|
|
|
earnings
|
|
|
other
|
|
|
|
|
|
|
Common stock
|
|
|
excess of
|
|
|
(accumulated
|
|
|
comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
par value
|
|
|
deficit)
|
|
|
income (loss)
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Balance at December 31, 2005
|
|
|
76,045
|
|
|
$
|
76,045
|
|
|
$
|
192,905
|
|
|
$
|
(121,863
|
)
|
|
$
|
218
|
|
|
$
|
147,305
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
138,308
|
|
|
|
|
|
|
|
138,308
|
|
Stock options and benefit plans
|
|
|
405
|
|
|
|
405
|
|
|
|
6,692
|
|
|
|
|
|
|
|
|
|
|
|
7,097
|
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,552
|
|
|
|
14,552
|
|
Net investment hedge, net of income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,500
|
)
|
|
|
(5,500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 30, 2006
|
|
|
76,450
|
|
|
|
76,450
|
|
|
|
199,597
|
|
|
|
16,445
|
|
|
|
9,270
|
|
|
|
301,762
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,192
|
|
|
|
|
|
|
|
7,192
|
|
Stock options and benefit plans
|
|
|
896
|
|
|
|
896
|
|
|
|
4,111
|
|
|
|
|
|
|
|
|
|
|
|
5,007
|
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,185
|
|
|
|
7,185
|
|
Net investment hedge, net of income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,300
|
)
|
|
|
(1,300
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 29, 2007
|
|
|
77,346
|
|
|
|
77,346
|
|
|
|
203,708
|
|
|
|
23,637
|
|
|
|
15,155
|
|
|
|
319,846
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(199,460
|
)
|
|
|
|
|
|
|
(199,460
|
)
|
Stock options and benefit plans
|
|
|
434
|
|
|
|
434
|
|
|
|
(1,789
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,355
|
)
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(46,637
|
)
|
|
|
(46,637
|
)
|
Pension actuarial gain, net of income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
441
|
|
|
|
441
|
|
Investment hedge, net of income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,988
|
|
|
|
13,988
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 3, 2009
|
|
|
77,780
|
|
|
$
|
77,780
|
|
|
$
|
201,919
|
|
|
$
|
(175,823
|
)
|
|
$
|
(17,053
|
)
|
|
$
|
86,823
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
F-7
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
NOTE 1
|
Summary
of Significant Accounting Policies
|
Principles
of Consolidation
The Consolidated Financial Statements include the accounts of
Champion Enterprises, Inc. and its wholly owned subsidiaries
(Champion or the Company). All
significant intercompany transactions have been eliminated. The
preparation of financial statements in conformity with generally
accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Business
The Company operates in three segments. At January 3, 2009,
the North American manufacturing segment (the
manufacturing segment) consisted of 26 manufacturing
facilities that primarily construct factory-built manufactured
and modular houses throughout the U.S. and in western
Canada. The international manufacturing segment (the
international segment) consists of Caledonian
Building Systems Limited (Caledonian) and ModularUK
Building Systems Limited (ModularUK), manufacturers
of steel-framed modular buildings for prisons, military
accommodations, hotels and residential units, among other
applications. At January 3, 2009, Caledonian and ModularUK
operated five manufacturing facilities in the United Kingdom. At
January 3, 2009, the retail segment operated 14 retail
sales centers that sell manufactured houses to consumers
throughout California.
Revenue
Recognition
For manufacturing shipments to independent retailers and
builders/developers, sales revenue is generally recognized when
wholesale floor plan financing or retailer credit approval has
been received, the home is shipped and invoiced and title is
transferred. As is customary in the factory-built housing
industry, a significant portion of the Companys
manufacturing sales to independent retailers are financed by the
retailers under floor plan agreements with financing companies
(lenders). In connection with these floor plan agreements, the
Company generally has separate agreements with the lenders that
require the Company, for a period of generally up to
18 months from invoice date of the sale of the homes, upon
default by the retailer and repossession of the homes by the
lender, to repurchase the homes from the lender. The repurchase
price is equal to the lesser of (1) the unpaid balance of
the floor plan loans or (2) the original loan amount less
any curtailments due, plus certain administrative costs incurred
by the lender to repossess the homes, less the cost of any
damage to the homes or any missing parts or accessories.
Estimated losses for repurchase obligations are accrued for
currently. See Note 13.
Manufacturing sales to independent retailers are not made on a
consignment basis; the Company does not provide financing for
sales to independent retailers; retailers do not have the right
to return homes purchased from the Company; and retailers are
responsible to the floor plan lenders for interest costs.
Payment for floor-planned sales is generally received five to
fifteen business days from the date of invoice.
For retail sales to consumers from Company-owned retail sales
centers, sales revenue is recognized when the home has been
delivered,
set-up and
accepted by the consumer, title has been transferred and either
funds have been released by the finance company (financed sales
transactions) or cash has been received from the homebuyer (cash
sales transactions).
The Companys international segment recognizes revenue for
long-term construction contracts under the percentage of
completion method using the cost-to-cost basis.
Restructuring
Charges
Restructuring charges are accounted for in accordance with
Financial Accounting Standard Number 146, Accounting
for Costs Associated with Exit or Disposal Activities.
Advertising
Costs and Delivery Costs and Revenue
Advertising costs are expensed as incurred and are included in
selling, general and administrative expenses
(SG&A). Total advertising expense was
approximately $2.9 million, $4.0 million and
$4.2 million in 2008, 2007 and 2006, respectively. Delivery
costs are included in cost of sales and delivery revenue is
included in net sales.
F-8
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Cash
and Cash Equivalents
Cash and cash equivalents include investments that have original
maturities less than 90 days at the time of their purchase.
These investments are carried at cost, which approximates market
value because of their short maturities.
Inventories
Inventories are stated at the lower of cost or market, with cost
determined under the
first-in,
first-out method for raw materials and the specific
identification method for finished goods and other inventory.
Manufacturing cost includes cost of materials, labor and
manufacturing overhead. Retail inventories of new manufactured
homes are valued at manufacturing cost or net purchase price if
acquired from unaffiliated third parties.
Property,
Plant, and Equipment
Property, plant and equipment (PP&E) are stated
at cost. Depreciation is provided principally on the
straight-line method over the following estimated useful lives:
land improvements 3 to 15 years; buildings and
improvements 8 to 33 years; and machinery and
equipment 3 to 15 years. Depreciation expense
was $13.2 million, $14.3 million and
$14.0 million in 2008, 2007 and 2006, respectively. The
recoverability of PP&E is evaluated whenever events or
changes in circumstances indicate that the carrying amount of
the assets may not be recoverable, primarily based on estimated
selling price, appraised value or projected future cash flows.
At January 3, 2009, the Company had 17 idle manufacturing
facilities with net book value of $9.6 million of which
eight of these facilities are permanently closed and generally
available for sale and have a net book value of approximately
$2.7 million. The Companys idle manufacturing
facilities are accounted for as long-lived assets to be held and
used due to uncertainty of completing disposals of the
facilities within one year. The net book value of idle
manufacturing facilities at January 3, 2009 was net of
impairment reserves totaling $12.5 million.
Goodwill
The Company tests for goodwill impairment in accordance with
SFAS No. 142, Goodwill and Other Intangible
Assets. The Companys remaining goodwill at
January 3, 2009 is related to its manufacturing and
international segments. As of the end of each fiscal year, the
Company evaluates each segments fair value versus its
carrying value, or more frequently if events or changes in
circumstances indicate that the carrying value may exceed the
fair value. When estimating the segments fair value, the
Company calculates the present value of future cash flows based
on forecasted sales volumes, current industry and economic
conditions, historical results and inflation. The Company also
uses available market value information to evaluate fair value.
Amortizable
Intangible Assets
Amortizable intangible assets consist primarily of fair values
assigned to customer relationships, trade names, employee
agreements and technology for acquired businesses. Trade names
and technologies were valued based upon the royalty-saving
method, customer relationships were valued based upon the excess
earnings method and employment agreements were valued based upon
the income method. Amortization is provided over the useful
lives of the intangible assets, generally five to fifteen years,
using the straight-line method. Amortization expense totaled
$9.3 million, $5.7 million, and $3.9 million in
2008, 2007, and 2006 respectively.
The recoverability of amortizable intangible assets is evaluated
whenever events or changes in circumstances indicate that the
carrying amount of the assets may not be recoverable, primarily
based on projected future cash flows.
Unconsolidated
Affiliates
The Company uses the equity method to account for its minority
interests in certain manufactured housing community development
companies. The Companys net investment in its
unconsolidated affiliates totaled $2.1 million and
$2.2 million at January 3, 2009 and December 29,
2007, respectively. Equity method pretax income or loss from
these affiliates totaled a loss of $0.1 million in 2008,
income of $0.2 million in 2007 and a loss of
$0.3 million in 2006, which were recorded in SG&A.
F-9
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Deferred
Expenses
Debt issuance costs and deferred financing costs are classified
as non-current assets on the balance sheet and amortized over
the life of the related debt or credit facility using the
straight-line method since minimal or no installment payments
are required. Original issue discount is amortized using the
interest method. Upon retirement of any of the related debt, a
proportional share of debt issuance costs and original issue
discount is written off.
Warranty
Obligations
The Companys manufacturing segment generally provides the
retail homebuyer or the builder/developer with a twelve-month
warranty from the date of respective purchase. Estimated
warranty costs are accrued as cost of sales at the time of sale.
Warranty provisions and reserves are based on estimates of the
amounts necessary to settle existing and future claims on homes
sold by the manufacturing segment as of the balance sheet date.
Factors used to calculate the warranty obligation are the
estimated number of homes still under warranty, including homes
in retailer inventories, homes purchased by consumers still
within the twelve-month warranty period and the historical
average costs incurred to service a home.
Dealer
Volume Rebates
The Companys manufacturing segment sponsors volume rebate
programs under which sales to retailers and builder/developers
can qualify for cash rebates generally based on the level of
sales attained during a twelve-month period. Volume rebates are
accrued at the time of sale and are recorded as a reduction of
net sales.
Accrued
Self-Insurance
The Company is self-insured for a significant portion of its
workers compensation, general and products liability, auto
liability, health and property insurance. Insurance coverage is
maintained for catastrophic exposures and those risks required
to be insured by law. Estimated self-insurance costs are accrued
for incurred claims and estimated claims incurred but not yet
reported.
Income
Taxes
Deferred tax assets and liabilities are determined based on
temporary differences between the financial statement amounts
and the tax bases of assets and liabilities using enacted tax
rates in effect in the years in which the differences are
expected to reverse. A valuation allowance is provided when the
Company determines that it is more likely than not that some or
all of the deferred tax asset will not be realized. Effective
September 27, 2008, the Company provided a valuation
allowance for 100% of its U.S. deferred tax assets.
U.S. deferred tax assets will continue to require a
valuation allowance until the Company can demonstrate their
realizability through sustained profitability
and/or from
other factors.
Effective January 1, 2007, the Company adopted Financial
Accounting Standards Board Interpretation Number 48
(FIN 48) Accounting for Uncertainty in
Income Taxes an interpretation of FASB Statement
No. 109. FIN 48 clarifies accounting for uncertain
tax positions using a more likely than not
recognition threshold for tax positions. Under FIN 48, the
Company will initially recognize the financial statement effects
of a tax position when it is more likely than not, based on the
technical merits of the tax position, that such a position will
be sustained upon examination by the relevant tax authorities.
If the tax benefit meets the more likely than not
threshold, the measurement of the tax benefit will be based on
the Companys estimate of the ultimate tax benefit to be
sustained if audited by the taxing authority. The adoption of
FIN 48 required no adjustment to opening balance sheet
accounts as of December 30, 2006.
Stock-Based
Compensation Programs
The Company accounts for stock-based compensation in accordance
with SFAS No. 123(R), Share-Based Payment.
Under SFAS No. 123(R), a public entity is required to
measure the cost of employee services received in exchange for
an award of equity instruments based on the grant-date fair
value of the award. That cost is recognized on a straight-line
basis over the period during which an employee is required to
provide service in exchange for the
F-10
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
award. The Company granted no stock options from 2004 through
2008, but grants were made of restricted stock, including
performance-based shares.
Foreign
currency transaction gains and losses
Commencing in 2007, the Company used intercompany loans between
its U.S. and foreign subsidiaries to provide funds for
acquisitions and other purposes. Until these loans are repaid,
the foreign exchange impact on these transactions will be
reported in the statement of operations under foreign currency
transaction gains and losses and will be based on fluctuations
in the relative exchange rates between the U.S. dollar,
Canadian dollar and British pound.
Reclassification
Prior to 2007, the Company reported the loss (gain) on debt
retirement as a part of operating income. Commencing in 2007,
the Company reported the loss (gain) on debt retirement outside
of operating income and has reclassified prior results
accordingly.
In 2007, the Company reported the loss (gain) on foreign
currency transactions related to intercompany loans in SG&A
and for segment reporting in the manufacturing segment and
general corporate expenses. Beginning in 2008, the Company
reported such gains and losses on intercompany loans in a
separate category in the Statement of Operations and excluded
such amounts from SG&A, the manufacturing segment and
general corporate expenses. The Company has reclassified prior
results accordingly.
Year
End
The Companys fiscal year is a 52 or 53 week period
that ends on the Saturday nearest December 31. Fiscal year
2008 was comprised of 53 weeks while years 2007 and 2006
were each comprised of 52 weeks.
Recent
Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board
(FASB) issued Financial Accounting Standard Number
157 (SFAS 157), Fair Value Measurements.
SFAS 157 clarifies the principle that fair value should be
based on the assumptions market participants would use when
pricing an asset or liability and establishes a fair value
hierarchy that prioritizes the information used to develop those
assumptions. Under the standard, fair value measurements would
be separately disclosed by level within the fair value
hierarchy. SFAS 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007.
In February 2008, the FASB issued FSP
FAS 157-2
that delayed, by one year, the effective date of SFAS 157
for the majority of non-financial assets and non-financial
liabilities. Effective December 30, 2007, we adopted
SFAS 157 for certain assets and liabilities, which were not
included in FSP
FAS 157-2.
The adoption of SFAS 157 had no significant impact on the
Companys financial position or results of operations for
the year ended January 3, 2009.
In February 2007, the FASB issued Financial Accounting Standard
Number 159 (SFAS 159), The Fair Value Option
for Financial Assets and Financial Liabilities
including an amendment of FASB Statement No. 115, which
permits an entity to choose to measure many financial
instruments and certain other items at fair value that are not
currently required to be measured at fair value. The objective
is to provide entities with an opportunity to mitigate
volatility in reported earnings caused by measuring related
assets and liabilities differently without having to apply
complex hedge accounting provisions. Entities that choose to
measure eligible items at fair value will report unrealized
gains and losses in earnings at each subsequent reporting date.
The fair value option may be elected at specified election dates
on an
instrument-by-instrument
basis, with few exceptions. The Statement also establishes
presentation and disclosure requirements designed to facilitate
comparisons between entities that choose different measurement
attributes for similar types of assets and liabilities.
SFAS 159 is effective at the beginning of the first fiscal
year beginning after November 15, 2007. The Company has
decided not to adopt SFAS 159 for any existing financial
instruments.
In December 2007, the FASB issued Financial Accounting Standard
Number 141(R) (SFAS 141R), Business
Combinations and Financial Accounting Standard Number 160
(SFAS 160), Accounting and Reporting of
Non-controlling Interests in Consolidated Financial Statements,
an amendment of ARB No. 51. SFAS 141R and
F-11
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
SFAS 160 expand the scope of acquisition accounting to all
transactions and circumstances under which control of a business
is obtained. SFAS 141R and SFAS 160 are effective for
financial statements issued for fiscal years beginning after
December 15, 2008 and interim periods within those fiscal
years, with early adoption prohibited and these standards must
be adopted concurrently. These standards will impact the Company
for any acquisitions subsequent to the adoption date. The most
significant effect of adoption of SFAS 141R on the
Companys results of operations is that success fees and
due diligence, legal, accounting, valuation and similar costs
incurred in connection with acquisitions (acquisition-related
costs) are required to be expensed as incurred. Current practice
is that such costs are capitalized as part of the cost of the
acquisition.
In December 2007, the FASB issued Financial Accounting Standard
Number 160 (SFAS 160), Non-controlling
Interest in Consolidated Financial Statements an
amendment of Accounting Research Bulletin No. 51,
Consolidated Financial Statements. SFAS 160 requires
all entities to report non-controlling (minority) interests in
subsidiaries as equity in the consolidated financial statements.
Its intention is to eliminate the diversity in practice
regarding the accounting for transactions between an entity and
non-controlling interests. SFAS 160 is effective for fiscal
years beginning after December 15, 2008. The adoption of
SFAS 160 is not expected to have a material effect on the
Companys financial position or results of operations.
On February 29, 2008, the Company acquired 100% of the
capital stock of United Kingdom based ModularUK Building Systems
Limited (ModularUK) for a nominal initial cash
payment and the assumption of approximately $4.2 million of
debt, resulting in intangible assets totaling approximately
$3.9 million. The results of operations of ModularUK are
included in the Companys results from operations and in
its international segment for periods subsequent to its
acquisition date.
On December 21, 2007, the Company acquired substantially
all of the assets and the business of western Canada-based
SRI Homes Inc. (SRI) for cash payments of
approximately $96.2 million, a note payable of
$24.0 million (CAD) ($24.5 million USD at acquisition
date) and assumption of the operating liabilities of the
business. SRI produces factory-built homes in three plants that
are located in the provinces of Alberta, British Columbia
and Saskatchewan. The acquisition of SRI expanded the
Companys presence in one of the strongest housing markets
in North America. The results of operations of SRI are included
in the Companys results from operations and in its
manufacturing segment for periods subsequent to its acquisition
date. The following is a summary of amortizable intangible
assets and goodwill arising from the SRI acquisition, together
with amortization periods and initial amortization expense,
translated at the exchange rate on the acquisition date.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial
|
|
|
|
|
|
|
Expected
|
|
|
annual
|
|
|
|
Cost
|
|
|
useful life
|
|
|
amortization
|
|
|
|
(In thousands)
|
|
|
(In years)
|
|
|
(In thousands)
|
|
|
Goodwill
|
|
$
|
47,607
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortizable intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
42,330
|
|
|
|
14
|
|
|
$
|
3,024
|
|
Trade names
|
|
|
6,955
|
|
|
|
15
|
|
|
|
464
|
|
Employee agreements
|
|
|
302
|
|
|
|
3
|
|
|
|
101
|
|
Favorable leases
|
|
|
493
|
|
|
|
1
|
|
|
|
493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
50,080
|
|
|
|
|
|
|
$
|
4,082
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-12
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
ModularUK is not material to the Company. The following table
presents the Companys 2008 results compared to unaudited
proforma combined results as if the Company had acquired SRI on
January 1, 2007, instead of the actual acquisition date of
December 21, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proforma
|
|
|
|
Actual
|
|
|
Unaudited
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
January 3,
|
|
|
December 29,
|
|
|
|
2009
|
|
|
2007
|
|
|
|
(In thousands, except
|
|
|
|
per share data)
|
|
|
Net sales
|
|
$
|
1,033,193
|
|
|
$
|
1,375,196
|
|
Net (loss) income
|
|
|
(199,460
|
)
|
|
|
15,516
|
|
Diluted (loss) income per share
|
|
$
|
(2.57
|
)
|
|
$
|
0.20
|
|
The proforma results include amortization of amortizable
intangible assets acquired and valued in the transactions. The
proforma results are not necessarily indicative of what actually
would have occurred if the transactions had been completed as of
the beginning of each of the fiscal periods presented nor are
they necessarily indicative of future consolidated results.
Pretax (loss) income for the fiscal years ended January 3,
2009, December 29, 2007 and December 30, 2006 was
taxed under the following jurisdictions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Domestic
|
|
$
|
(80,924
|
)
|
|
$
|
(29,736
|
)
|
|
$
|
32,886
|
|
Foreign
|
|
|
28,906
|
|
|
|
33,685
|
|
|
|
10,211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total pretax (loss) income
|
|
$
|
(52,018
|
)
|
|
$
|
3,949
|
|
|
$
|
43,097
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The income tax provisions (benefits) by jurisdictions were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Federal
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(800
|
)
|
Foreign
|
|
|
10,656
|
|
|
|
14,394
|
|
|
|
5,364
|
|
State
|
|
|
600
|
|
|
|
|
|
|
|
350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current
|
|
|
11,256
|
|
|
|
14,394
|
|
|
|
4,914
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Federal
|
|
|
125,220
|
|
|
|
(12,800
|
)
|
|
|
(84,700
|
)
|
Foreign
|
|
|
(1,019
|
)
|
|
|
(3,937
|
)
|
|
|
(1,275
|
)
|
State
|
|
|
11,985
|
|
|
|
(900
|
)
|
|
|
(14,150
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred
|
|
|
136,186
|
|
|
|
(17,637
|
)
|
|
|
(100,125
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total tax (benefit) provision
|
|
$
|
147,442
|
|
|
$
|
(3,243
|
)
|
|
$
|
(95,211
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-13
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The income tax provisions (benefits) differ from the amount of
income tax determined by applying the applicable
U.S. statutory federal income tax rate to income before
income taxes as a result of the following differences:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Tax at U.S. Federal statutory tax rate
|
|
$
|
(18,200
|
)
|
|
$
|
1,400
|
|
|
$
|
15,100
|
|
(Decrease) increase in rate resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
Permanent differences
|
|
|
(1,800
|
)
|
|
|
(2,000
|
)
|
|
|
(1,100
|
)
|
Adjustment of deferred tax valuation allowance
|
|
|
164,500
|
|
|
|
100
|
|
|
|
(109,500
|
)
|
State taxes, net of U.S. federal benefit
|
|
|
|
|
|
|
(1,000
|
)
|
|
|
1,000
|
|
Foreign tax rate differences
|
|
|
(1,300
|
)
|
|
|
(900
|
)
|
|
|
|
|
Change in U.S. deferred tax liability
|
|
|
3,100
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
1,142
|
|
|
|
(843
|
)
|
|
|
(711
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense (benefit)
|
|
$
|
147,442
|
|
|
$
|
(3,243
|
)
|
|
$
|
(95,211
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the third quarter of 2008, the Company provided a
valuation allowance for 100% of its U.S. deferred tax
assets. SFAS No. 109 Accounting for Income
Taxes, requires the recording of a valuation allowance
when it is more likely than not that some portion or all
of the deferred tax assets will not be realized.
SFAS No. 109 further states forming a conclusion
that a valuation allowance is not needed is difficult when there
is negative evidence such as cumulative losses in recent
years, and places considerably more weight on historical
results and less weight on future projections. Although the
Company had U.S. pretax income in 2005 and 2006 totaling
approximately $71 million, its cumulative U.S. pretax
losses total approximately $78 million for the years 2006
through 2008. Current conditions in the housing and credit
markets and the general economy in the U.S. continue to
present significant challenges to returning the Companys
U.S. operations to profitability. In the absence of
specific favorable factors, application of
SFAS No. 109 requires a valuation allowance for
deferred tax assets in a tax jurisdiction when a company has
cumulative financial accounting losses over several years.
Accordingly, after consideration of these factors, effective
September 27, 2008, the Company provided a valuation
allowance for 100% of its U.S. deferred tax assets
resulting in a non-cash tax charge of approximately
$150.8 million in the third quarter and $164.5 million
for the full year.
During the fourth quarter of 2008, the Company recognized in
other comprehensive income a tax charge that resulted in a
decrease in U.S. net deferred tax assets of
$6.2 million. As a result, the Companys valuation
allowance for U.S. deferred tax assets and income tax
expense were reduced by $6.2 million.
Included in income tax benefits in 2007 is a $0.5 million
benefit from the effects of a reduction in the U.K. income tax
rate on deferred tax assets and liabilities and a
$0.4 million benefit from the settlement of a tax
uncertainty for which no benefit had been provided in the prior
year.
The income tax provision in 2006 includes a $101.9 million
non-cash tax benefit from the reversal of substantially all of
the valuation allowance for deferred tax assets that was
established in 2002. This reversal was made as of July 1,
2006, after determining that realization of the deferred tax
assets was more likely than not. The balance of the 2006
adjustment of the deferred tax valuation allowance represents
the tax effect of U.S. taxable income in the six-month
period through July 1, 2006.
The Company has available federal net operating loss
(NOL) carryforwards of approximately
$346 million for tax purposes to offset certain future
federal taxable income. These loss carryforwards expire in 2023
through 2028. Approximately $24.7 million of the
U.S. federal NOL carryforward is due to tax deductions
related to stock option exercises, the benefit of which, when
realized, will result in an increase to shareholders
equity capital in excess of par value. The Company
has available state NOL carryforwards of approximately
$270 million for tax purposes to offset future state
taxable income and which expire primarily 2016 through 2028. At
December 29,
F-14
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
2007, a deferred tax asset valuation allowance of
$1.0 million had been provided for state NOL carryforwards
expected to expire unutilized.
Deferred tax assets and liabilities are comprised of the
following as of January 3, 2009 and December 29, 2007:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
ASSETS
|
Federal net operating loss carryforwards
|
|
$
|
108,200
|
|
|
$
|
74,250
|
|
Goodwill
|
|
|
5,500
|
|
|
|
6,100
|
|
Warranty reserves
|
|
|
10,400
|
|
|
|
13,150
|
|
Insurance reserves
|
|
|
14,500
|
|
|
|
16,300
|
|
Fixed asset impairments
|
|
|
6,200
|
|
|
|
4,700
|
|
State net operating loss carryfowards
|
|
|
11,200
|
|
|
|
13,600
|
|
Employee compensation
|
|
|
5,500
|
|
|
|
6,500
|
|
Volume rebates
|
|
|
1,500
|
|
|
|
2,700
|
|
Foreign currency translation adjustments
|
|
|
1,500
|
|
|
|
3,800
|
|
Inventory reserves
|
|
|
5,900
|
|
|
|
1,200
|
|
Other
|
|
|
3,419
|
|
|
|
5,751
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax assets
|
|
|
173,819
|
|
|
|
148,051
|
|
|
LIABILITIES
|
Goodwill
|
|
|
37,200
|
|
|
|
33,800
|
|
Foreign currency translation adjustments
|
|
|
5,400
|
|
|
|
|
|
Depreciation
|
|
|
800
|
|
|
|
1,600
|
|
Prepaid expenses and other
|
|
|
838
|
|
|
|
987
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax liabilities
|
|
|
44,238
|
|
|
|
36,387
|
|
Valuation allowance
|
|
|
(165,500
|
)
|
|
|
(1,000
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets (liabilities)
|
|
$
|
(35,919
|
)
|
|
$
|
110,664
|
|
|
|
|
|
|
|
|
|
|
The Company does not provide U.S. income taxes on the
undistributed earnings of its foreign subsidiaries, which
totaled approximately $58 million at January 3, 2009.
The Company intends to indefinitely reinvest these earnings
outside the U.S. It is not practical to determine the
amount of U.S. income tax that could be payable in the
event of distribution of these earnings since such amount is
dependent on foreign tax credits that may be available to reduce
U.S. taxes based on tax laws and circumstances at the time
of distribution.
The Company and its subsidiaries are subject to income taxes in
the U.S. federal jurisdiction and various state and foreign
jurisdictions. With few exceptions, the Company is no longer
subject to U.S. federal, state and foreign tax examinations
by tax authorities for years prior to 2004.
Included in the balance sheets at January 3, 2009 and
December 29, 2007 are tax accruals of approximately
$0.5 million and $0.6 million, respectively, for
uncertain tax positions, including $0.3 million of accrued
interest and penalties. Recognition of any of the related
unrecognized tax benefits would affect the Companys
effective tax rate. The Company classifies interest and
penalties on income tax uncertainties as a component of income
tax expense.
F-15
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 4
|
Inventories,
Long-term Construction Contracts and Other Current
Liabilities
|
A summary of inventories by component at January 3, 2009
and December 29, 2007 is as follows:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Raw materials
|
|
$
|
27,994
|
|
|
$
|
38,725
|
|
Work-in-process
|
|
|
4,875
|
|
|
|
8,617
|
|
New manufactured homes
|
|
|
14,352
|
|
|
|
20,235
|
|
Other inventory
|
|
|
18,403
|
|
|
|
23,205
|
|
Inventory reserves
|
|
|
(12,664
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
52,960
|
|
|
$
|
90,782
|
|
|
|
|
|
|
|
|
|
|
Other inventory consists of payments made by the retail segment
for park spaces in manufactured housing communities and related
improvements. Inventory lower of cost or market reserves are
related to retail segment homes and park spaces.
Included in accounts receivable-trade at January 3, 2009
and December 29, 2007 are uncollected billings of
$2.4 million and $22.4 million, respectively, and
unbilled revenue of $12.5 million and $37.2 million,
respectively, under long-term construction contracts of the
Companys international segment and includes retention
amounts totaling $5.3 million and $2.8 million,
respectively. Other current liabilities at January 3, 2009
and December 29, 2007 include cash receipts in excess of
revenue recognized under these construction contacts of
$3.6 million and $9.2 million, respectively.
Also included in other current liabilities at January 3,
2009 and December 29, 2007 are customer deposits of
$5.7 million and $9.7 million, respectively.
Long-term debt at January 3, 2009 and December 29,
2007 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Convertible Senior Notes due 2037
|
|
$
|
180,000
|
|
|
$
|
180,000
|
|
7.625% Senior Notes due May 2009
|
|
|
6,716
|
|
|
|
6,716
|
|
Revolving Line of Credit
|
|
|
15,040
|
|
|
|
|
|
Term Loan due 2012
|
|
|
45,273
|
|
|
|
55,750
|
|
Sterling Term Loan due 2012
|
|
|
51,790
|
|
|
|
88,386
|
|
Obligations under industrial revenue bonds due 2029
|
|
|
12,430
|
|
|
|
12,430
|
|
Other debt
|
|
|
1,831
|
|
|
|
971
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
|
313,080
|
|
|
|
344,253
|
|
Less: current portion of long-term debt
|
|
|
(12,229
|
)
|
|
|
(1,356
|
)
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
300,851
|
|
|
$
|
342,897
|
|
|
|
|
|
|
|
|
|
|
The Company has a senior secured credit agreement, as amended,
(the Credit Agreement) with various financial
institutions under which the Sterling Term Loan and the Term
Loan were issued. The Sterling Term Loan is denominated in
British pounds. Under the Credit Agreement, at January 3,
2009, the Company also has a revolving line of credit
(Revolver) in the amount of $40 million and a
$43.5 million letter of credit facility. The Credit
Agreement is secured by a first security interest in
substantially all of the assets of the domestic operating
subsidiaries of the Company. As of January 3, 2009, letters
of credit issued under the facility totaled $55.7 million,
including $12.2 million under the Revolver. The maturity
date for the revolving line of credit is October 31, 2010.
The maturity date for the Term Loan, the Sterling Term Loan and
the letter of credit facility is October 31, 2012. The
F-16
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Credit Agreement also contains affirmative and negative
covenants requiring certain maximum senior leverage ratio,
minimum interest coverage ratio and minimum fixed charge ratio,
all as defined in the Credit Agreement.
As of June 28, 2008, the Company was in compliance with all
Credit Agreement covenants. However, as a result of
deteriorating operating results throughout 2008, the Company
would not have been in compliance with certain of its debt
covenants as of September 27, 2008. During October 2008, an
amendment to the Credit Agreement (the Amendment)
was completed. The Amendment covers the period from
September 27, 2008 through January 2, 2010 (the
Companys 2009 fiscal year end) and provides for, among
other things, changes to certain covenants in exchange for
upfront fees, prepayments, and revised pricing.
During the period covered by the Amendment, the maximum senior
leverage ratio, minimum interest coverage ratio and minimum
fixed charge ratio covenants have been eliminated in exchange
for new covenants requiring minimum liquidity and minimum
twelve-month EBITDA measured quarterly. Levels for the new
covenants were established based on the Companys then
current forecast for the next five quarters less a fixed dollar
amount of downward adjustment. Pursuant to the Amendment, in
October 2008 the Company repaid $10.0 million of the
Revolver and prepaid $13.1 million and $10.4 million
of borrowings under the Sterling Term Loan and the Term Loan,
respectively. During the Amendment period, the interest rates
for borrowings under the Credit Agreement were increased to
LIBOR plus 6.5% with a LIBOR floor of 3.25% for the Term Loans
and the prime rate plus 5.5% with a prime rate floor of 4.25%
for the Revolver. Interest of LIBOR plus 5.0% is payable in cash
and payment of the remaining interest of 1.5% may be paid in
kind (deferred and added to the respective loan balances). In
addition, the Amendment revised the letter of credit facility
annual fee to 6.6%.
The Amendment provides for interest rate reductions on all
remaining borrowings under the Credit Agreement and a reduction
of fees for the letter of credit facility if the Company makes
additional term loan prepayments during the Amendment period.
For aggregate prepayments between $10 and $20 million the
interest rate will be reduced to LIBOR plus 5.5% (of which 0.5%
percent may be paid in kind); for aggregate prepayments between
$20 and $30 million the interest rate will be reduced to
LIBOR plus 5.0%; and for aggregate prepayments of
$30 million or more the interest rate will be reduced to
LIBOR plus 4.5%. Those respective aggregate prepayments will
result in reducing the letter of credit annual fee to 5.6%, 5.1%
and 4.6%, respectively.
The interest rate at January 3, 2009 for borrowings under
the Term and Sterling Term Loan was a base rate of 3.25% plus
6.5%. The interest rate at January 3, 2009 for borrowings
under the Revolver was a base rate of 4.25% plus 5.5%. As of
January 3, 2009, the letter of credit facility was subject
to a 6.6% annual fee and the unused portion of the letter of
credit facility and Revolver was subject to an annual fee of
0.75%.
The Amendment also reduced the letter of credit facility to
$43.5 million from $60 million previously, by
canceling approximately $4.3 million of unused capacity and
moving approximately $12.2 million of outstanding undrawn
letters of credit to the Revolver. As a result, while the total
size of the Companys Revolver remains at $40 million,
its unused capacity at January 3, 2009 was approximately
$12.8 million.
The Amendment requires quarterly principal payments for the Term
Loan and the Sterling Term Loan totaling $5.0 million for
2009. Thereafter the Credit Agreement requires quarterly
principal payments for the Term Loan and the Sterling Term Loan
totaling approximately $0.9 million annually.
The following table summarizes the maximum Senior Leverage
Ratio, minimum Interest Coverage Ratio and minimum Fixed Charge
Ratio that the Company is required to maintain under the Credit
Agreement for periods after January 2, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum
|
|
|
Minimum
|
|
|
Minimum
|
|
|
|
Senior
|
|
|
Interest
|
|
|
Fixed
|
|
|
|
Leverage
|
|
|
Coverage
|
|
|
Charge
|
|
Fiscal Quarter
|
|
Ratio
|
|
|
Ratio
|
|
|
Ratio
|
|
|
First quarter of 2010 Third quarter of 2010
|
|
|
2.75:1
|
|
|
|
2.50:1
|
|
|
|
1.25:1
|
|
Fourth quarter of 2010 Third quarter of 2011
|
|
|
2.50:1
|
|
|
|
2.75:1
|
|
|
|
1.25:1
|
|
Fourth quarter of 2011 Second quarter of 2012
|
|
|
2.25:1
|
|
|
|
3.00:1
|
|
|
|
1.25:1
|
|
Third quarter of 2012
|
|
|
2.00:1
|
|
|
|
3.00:1
|
|
|
|
1.25:1
|
|
F-17
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following provides brief definitions of the Credit Agreement
covenants: Liquidity is the Companys total cash and cash
equivalents plus availability under the Revolver. EBITDA is the
Companys consolidated earnings before net interest
expense, income taxes, and depreciation and amortization
expense, adjusted for various items pursuant to the provisions
of the Credit Agreement and amendments. The Senior Leverage
Ratio is the ratio of Total Senior Debt (as defined) of the
Company on the last day of a fiscal quarter to its consolidated
EBITDA for the four-quarter period then ended. The Interest
Coverage Ratio is the ratio of the Companys consolidated
EBITDA to its Cash Interest Expense (as defined) for the
four-quarter period then ended. The Fixed Charge Ratio is the
ratio of the Companys consolidated EBITDA to its Fixed
Charges (as defined) for the four-quarter period then ended.
The Amendment eliminated financial covenants for the quarter
ended September 27, 2008 and provided revised financial
covenants for the five quarter period ending January 2,
2010. Management believes the minimum liquidity and minimum
twelve-month EBITDA requirements, as defined, are achievable
based upon the Companys current operating plan. Management
has also identified other actions within their control that
could be implemented, if necessary, to help the Company meet
these quarterly requirements. However, there can be no assurance
that these actions will be successful. Additionally, in light of
current market conditions and absent further unscheduled
reductions of indebtedness under the Credit Agreement, it is
possible that the Company will not be in compliance with the
pre-Amendment
financial covenants which take effect as of the end of the first
quarter of our 2010 fiscal year. Further, if current credit
market conditions were to persist throughout 2009, there can be
no assurance that the Company will be able to refinance all or a
sufficient portion of this indebtedness.
While the Company will explore asset sales, divestitures and
other types of capital raising alternatives in order to reduce
indebtedness under the Credit Agreement prior to expiration of
the Amendment, there can be no assurance that such activities
will be successful or generate cash resources adequate to retire
or sufficiently reduce this indebtedness. In this event, there
can be no assurance that a majority of the lenders that are
party to the Credit Agreement will consent to a further
amendment of the Credit Agreement.
On November 2, 2007, the Company issued $180 million
of 2.75% Convertible Senior Notes due 2037 (the
Convertible Notes). Interest on the Convertible
Notes is payable semi-annually on May 1 and November 1 of each
year. The Convertible Notes are convertible into approximately
47.7 shares of the Companys common stock per $1,000
of principal. The conversion rate can exceed 47.7 shares
per $1,000 of principal when the closing price of the
Companys common stock exceeds approximately $20.97 per
share for one or more days in the 20 consecutive trading day
period beginning on the second trading day after the conversion
date. Holders of the Convertible Notes may require the Company
to repurchase the Notes if the Company is involved in certain
types of corporate transactions or other events constituting a
fundamental change and have the right to require the Company to
repurchase all or a portion of their Notes on November 1 of
2012, 2017, 2022, 2027 and 2032. The Company has the right to
redeem the Convertible Notes, in whole or in part, for cash at
any time after October 31, 2012.
The Senior Notes due 2009 are secured equally and ratably with
obligations under the Credit Agreement, but contain no
significant restrictive covenants. Interest is payable
semi-annually at an annual rate of 7.625%. In June 2008, the
Company elected to repay the $24.0 million (CAD) note
issued in connection with the December 2007 acquisition of SRI
ahead of the scheduled maturity date of January 5, 2009.
At January 3, 2009, short-term portion of debt consisted of
the Senior Notes due May 2009 totaling $6.7 million;
quarterly installment payments totaling $5.0 million due
within one year on the Term Loans; and payments totaling
$0.5 million due within one year on other debt.
Each of the Companys primary debt instruments contain
cross default provisions whereby a default under one instrument,
if not cured or waived by the lenders, could cause a default
under its other debt instruments.
F-18
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Future maturities of long-term debt as of January 3, 2009
are as follows:
|
|
|
|
|
|
|
(In thousands)
|
|
|
2009
|
|
$
|
12,229
|
|
2010
|
|
|
16,459
|
|
2011
|
|
|
1,418
|
|
2012
|
|
|
270,483
|
|
2013
|
|
|
61
|
|
Thereafter
|
|
|
12,430
|
|
|
|
|
|
|
|
|
$
|
313,080
|
|
|
|
|
|
|
|
|
NOTE 6
|
Restructuring
Charges
|
During the year ended January 3, 2009, charges totaling
$11.0 million were incurred primarily in connection with
the Companys decision to close a manufacturing facility in
Oregon, close the final of four plants at an Indiana complex
where the other three plants had been previously idled, reduce
the number of North American regional offices from four to two
and reduce corporate headcount by 45 people. The operations
at the closed Indiana plant were consolidated at the
Companys other Indiana homebuilding complex. Total 2008
restructuring charges consisted of severance costs of
$3.7 million and fixed asset impairment charges of
$7.0 million. An inventory write-down of $0.3 million
was included in cost of sales.
Charges totaling $4.9 million were recorded in 2007 in
connection with the closure of two manufacturing plants, one in
Pennsylvania in the first quarter and one in Alabama in the
fourth quarter. Restructuring charges totaling $3.8 million
consisted of severance costs totaling $1.8 million and
fixed asset impairment charges of $2.0 million. Other plant
closing charges that are included in cost of sales consisted of
inventory write-downs of $0.6 million and an additional
warranty accrual of $0.5 million.
Severance costs for the year ended January 3, 2009 included
certain payments required under the Worker Adjustment and
Retraining Notification Act and were related to the termination
of approximately 330 employees, consisting of substantially
all employees at the Oregon plant and those terminated as a
result of the Indiana plant closure and consolidation of
operations. Severance costs for the year ended December 29,
2007 were related to the termination of substantially all
160 employees at the closed plant in Pennsylvania and
included payments required under the Worker Adjustment and
Retraining Notification Act.
F-19
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table provides information regarding activity for
restructuring reserves during 2008, 2007 and 2006 and relates
primarily to closures of manufacturing plants.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Balance at beginning of year
|
|
$
|
942
|
|
|
$
|
1,018
|
|
|
$
|
4,330
|
|
Additions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
|
|
|
3,683
|
|
|
|
1,745
|
|
|
|
|
|
Warranty
|
|
|
|
|
|
|
500
|
|
|
|
|
|
Reversals:
|
|
|
|
|
|
|
|
|
|
|
|
|
Warranty
|
|
|
|
|
|
|
|
|
|
|
(1,000
|
)
|
Severance
|
|
|
(512
|
)
|
|
|
|
|
|
|
|
|
Other closing costs
|
|
|
|
|
|
|
(86
|
)
|
|
|
|
|
Cash payments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Warranty
|
|
|
(416
|
)
|
|
|
(932
|
)
|
|
|
(1,900
|
)
|
Severance
|
|
|
(2,716
|
)
|
|
|
(1,303
|
)
|
|
|
(412
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance January 3, 2009
|
|
$
|
981
|
|
|
$
|
942
|
|
|
$
|
1,018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period end balance comprised of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Warranty costs
|
|
$
|
84
|
|
|
$
|
500
|
|
|
$
|
932
|
|
Severance
|
|
|
897
|
|
|
|
442
|
|
|
|
|
|
Other closing costs
|
|
|
|
|
|
|
|
|
|
|
86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
981
|
|
|
$
|
942
|
|
|
$
|
1,018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The majority of warranty costs are expected to be paid over a
three-year period after the related closures. Severance costs
are generally paid within one year of the related closures or
termination of employment.
|
|
NOTE 7
|
Goodwill
and other intangible assets
|
The Company tests for impairment of goodwill and other
intangible assets in accordance with SFAS No. 142,
Goodwill and Other Intangible Assets. The Company
evaluates the manufacturing and international segments
fair value versus their carrying value annually as of the end of
each fiscal year or more frequently if events or changes in
circumstances indicate that the carrying value may exceed the
fair value. The provisions of SFAS No. 142 require
that a two-step evaluation be performed to assess goodwill and
for impairment. First, the fair value of the reporting unit is
compared to its carrying value. If the fair value exceeds the
carrying value, goodwill and other intangible assets are not
impaired and no further steps are required. If the carrying
value of the reporting unit exceeds its fair value, then the
implied fair value of the reporting units goodwill must be
determined and compared to the carrying value of its goodwill.
If the carrying value of the reporting units goodwill
exceeds its implied fair value, then an impairment charge equal
to the difference is recorded.
When estimating fair value, the Company calculates the present
value of future cash flows based on forecasted sales volumes,
the number of manufacturing facilities in operation, current
industry and economic conditions, historical results and
inflation. The Company also uses available market value
information to evaluate fair value. Significant changes in the
estimates and assumptions used in calculating the fair value of
goodwill or differences between estimates and actual results
could result in additional impairment charges in the future.
During the fourth quarter of 2008, the Company performed its
annual impairment test for goodwill and other intangible assets
and concluded no impairment existed at January 3, 2009.
At December 29, 2007, the purchase accounting for the SRI
acquisition was not finalized and, therefore, values assigned to
goodwill and amortizable intangible assets were estimates.
During 2008, the valuation of amortizable intangible assets was
completed and the SRI purchase accounting was finalized. As a
result, the values assigned to amortizable intangibles were
increased and goodwill was decreased.
F-20
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The change in the carrying amount of goodwill for the fiscal
years ended January 3, 2009 and December 29, 2007 is
as follows:
|
|
|
|
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Balance at December 30, 2006
|
|
$
|
287,789
|
|
SRI acquisition, estimated goodwill
|
|
|
63,076
|
|
Caledonian contingent purchase price earned
|
|
|
6,900
|
|
Foreign currency translation changes
|
|
|
2,845
|
|
|
|
|
|
|
Balance at December 29, 2007
|
|
$
|
360,610
|
|
ModUK acquisition
|
|
|
3,944
|
|
SRI purchase price adjustments
|
|
|
(15,471
|
)
|
Foreign currency translation changes
|
|
|
(41,323
|
)
|
|
|
|
|
|
Balance at January 3, 2009
|
|
$
|
307,760
|
|
|
|
|
|
|
Amortizable intangible assets as of January 3, 2009 and
December 29, 2007 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Customer relationships
|
|
$
|
56,613
|
|
|
$
|
26,832
|
|
Trade names
|
|
|
19,945
|
|
|
|
16,736
|
|
Employee agreements
|
|
|
3,981
|
|
|
|
4,858
|
|
Technology
|
|
|
3,393
|
|
|
|
4,118
|
|
Estimated SRI intangibles
|
|
|
|
|
|
|
30,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83,932
|
|
|
|
82,544
|
|
Less accumulated amortization
|
|
|
(16,000
|
)
|
|
|
(10,003
|
)
|
|
|
|
|
|
|
|
|
|
Total amortizable intangible assets, net
|
|
$
|
67,932
|
|
|
$
|
72,541
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangible assets for the next five years is as
follows:
|
|
|
|
|
|
|
(In thousands)
|
|
|
2009
|
|
$
|
6,867
|
|
2010
|
|
|
6,833
|
|
2011
|
|
|
5,897
|
|
2012
|
|
|
5,517
|
|
2013
|
|
|
5,358
|
|
|
|
|
|
|
|
|
$
|
30,472
|
|
|
|
|
|
|
|
|
NOTE 8
|
Discontinued
Operations
|
Included in the consolidated balance sheet at January 3,
2009 and December 29, 2007 were the assets and liabilities
of discontinued operations that consisted of other current
assets totaling $0.1 million in 2008 and $0.4 million
in 2007, other non-current assets totaling $0.3 million in
2008 and 2007, and other current liabilities totaling
$1.2 million in 2008 and $1.3 million in 2007.
F-21
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 9
|
Total
Comprehensive (Loss) Income
|
Total comprehensive (loss) income for the years ended
January 3, 2009, December 29, 2007 and
December 30, 2006 consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 29,
|
|
|
December 30,
|
|
|
|
January 3, 2009
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(199,460
|
)
|
|
$
|
7,192
|
|
|
$
|
138,308
|
|
Other comprehensive (loss) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
(46,637
|
)
|
|
|
7,185
|
|
|
|
14,552
|
|
Pension actuarial gain, net of income taxes
|
|
|
441
|
|
|
|
|
|
|
|
|
|
Net investment hedge, net of income taxes
|
|
|
13,988
|
|
|
|
(1,300
|
)
|
|
|
(5,500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive (loss) income
|
|
$
|
(231,668
|
)
|
|
$
|
13,077
|
|
|
$
|
147,360
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 10
|
Earnings
per Share
|
For the years ended January 3, 2009 and December 29,
2007, the Companys potentially dilutive securities
consisted of convertible debt, stock options and performance
share awards. For the year ended December 30, 2006, the
Companys potentially dilutive securities consisted of
stock options and performance share awards. For the year ended
January 3, 2009, potentially dilutive securities were not
considered in determining the denominator for diluted earnings
per share (EPS) because the effect would have been
anti-dilutive. For the year ended December 27, 2007,
convertible debt was not considered in determining the
denominator for diluted EPS because the effect would have been
anti-dilutive. A reconciliation of the numerators and
denominators used in the Companys basic and diluted EPS
calculations is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income available to common shareholders for for basic
and diluted shares
|
|
$
|
(199,460
|
)
|
|
$
|
7,192
|
|
|
$
|
138,324
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares for basic EPS weighted average shares
outstanding
|
|
|
77,700
|
|
|
|
76,916
|
|
|
|
76,334
|
|
Plus effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible debt
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and performance awards
|
|
|
|
|
|
|
803
|
|
|
|
1,244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares for diluted EPS
|
|
|
77,700
|
|
|
|
77,719
|
|
|
|
77,578
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 11
|
Shareholders
Equity
|
The Company has 120 million shares of common stock
authorized. In addition, there are 5 million authorized
shares of preferred stock, without par value, the issuance of
which is subject to approval by the Board of Directors. The
Board has the authority to fix the number, rights, preferences
and limitations of the shares of each series, subject to
applicable laws and the provisions of the Articles of
Incorporation.
|
|
NOTE 12
|
Fair
Value of Financial Instruments
|
The Company estimates the fair value of its financial
instruments in accordance with Financial Accounting Standard
Number 107, Disclosure About Fair Value of Financial
Instruments. Fair value estimates are made at a
specific point in time, based on relevant market data and
information about the financial instrument. The estimated fair
values of the Convertible Notes, Senior Notes and Term Loans
were valued based upon trading activity. The estimated fair
values of the Revolving Line of Credit and other financial
instruments are based upon market information and
managements estimates.
F-22
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The book value and estimated fair value of the Companys
financial instruments are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Book
|
|
|
Estimated
|
|
|
Book
|
|
|
Estimated
|
|
|
|
Value
|
|
|
Fair Value
|
|
|
Value
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
|
Cash and cash equivalents
|
|
$
|
52,787
|
|
|
$
|
52,787
|
|
|
$
|
135,408
|
|
|
$
|
135,408
|
|
Convertible Notes due 2037
|
|
|
180,000
|
|
|
|
27,000
|
|
|
|
180,000
|
|
|
|
160,200
|
|
Revolving Line of Credit
|
|
|
15,040
|
|
|
|
6,768
|
|
|
|
|
|
|
|
|
|
Term Loan due 2012
|
|
|
45,273
|
|
|
|
20,373
|
|
|
|
55,750
|
|
|
|
54,078
|
|
SRI Note Payable
|
|
|
|
|
|
|
|
|
|
|
24,528
|
|
|
|
24,528
|
|
Sterling Term Loan due 2012
|
|
|
51,790
|
|
|
|
23,306
|
|
|
|
88,386
|
|
|
|
85,734
|
|
Senior Notes due 2009
|
|
|
6,716
|
|
|
|
6,716
|
|
|
|
6,716
|
|
|
|
6,850
|
|
Other long-term debt
|
|
|
14,261
|
|
|
|
14,261
|
|
|
|
13,402
|
|
|
|
13,402
|
|
Earnout obligations
|
|
|
|
|
|
|
|
|
|
|
13,252
|
|
|
|
13,252
|
|
In 2006 the Company borrowed £45 million in the
U.S. to finance a portion of the Caledonian purchase price
totaling approximately £62 million. This Sterling
denominated borrowing was designated as an economic hedge of the
Companys net investment in the U.K. Therefore a
significant portion of foreign exchange risk related to the
Caledonian investment in the U.K. is eliminated. During 2008 and
2007, the Company recorded an accumulated translation gain of
$23.0 million ($14.0 million, net of tax) and a loss
of $2.2 million ($1.3 million, net of tax),
respectively, in other comprehensive income for this hedging
arrangement.
|
|
NOTE 13
|
Contingent
Liabilities
|
As is customary in the manufactured housing industry, a
significant portion of the manufacturing segments sales to
independent retailers are made pursuant to repurchase agreements
with lending institutions that provide wholesale floor plan
financing to the retailers. Pursuant to these agreements,
generally for a period of up to 18 months from invoice date
of the sale of the homes and upon default by the retailers and
repossession by the financial institution, the Company is
obligated to repurchase the homes from the lender. The
contingent repurchase obligation at January 3, 2009 was
estimated to be approximately $134 million, without
reduction for the resale value of the homes. Losses under
repurchase obligations represent the difference between the
repurchase price and the estimated net proceeds from the resale
of the homes, less accrued rebates, which will not be paid.
Annual losses incurred on homes repurchased totaled
$0.5 million in 2008 and $0.1 million in 2007 and 2006.
The Company lowered its wholesale repurchase reserves by
$1.2 million in 2006 as a result of reduced repurchases and
improved financial condition of its largest retailers.
At January 3, 2009 the Company was contingently obligated
for approximately $55.7 million under letters of credit,
primarily comprised of $41.5 million to support insurance
reserves and $12.6 million to support long-term debt.
Champion was also contingently obligated for $7.8 million
under surety bonds, generally to support license and service
bonding requirements. Approximately $54.2 million of the
letters of credit support insurance reserves and debt that are
reflected as liabilities in the consolidated balance sheet.
At January 3, 2009 certain of the Companys
subsidiaries were contingently obligated under reimbursement
agreements for approximately $2.5 million of debt of
unconsolidated affiliates, none of which was reflected in the
consolidated balance sheet. These obligations are related to
indebtedness of certain manufactured housing community
developments, which are collateralized by the properties.
The Company has provided various representations, warranties and
other standard indemnifications in the ordinary course of its
business, in agreements to acquire and sell business assets and
in financing arrangements. The Company is subject to various
legal proceedings and claims that arise in the ordinary course
of its business.
Management believes the ultimate liability with respect to these
contingent obligations will not have a material effect on the
Companys financial position, results of operations or cash
flows.
F-23
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
On February 8, 2008, the Companys manufacturing
facility in Henry, TN was destroyed by fire. The net book value
of plant, equipment and inventory at the Henry plant at
February 2, 2008, was approximately $3.3 million. The
plant was fully insured through our property insurance coverage,
subject to a $250,000 deductible.
|
|
NOTE 14
|
Retirement
Plans
|
The Company and certain of its domestic subsidiaries sponsor
defined contribution retirement and savings plans covering most
U.S. employees. Full-time employees of participating
companies are eligible to participate in a plan after completing
three months of service. Participating employees may contribute
from 1% to 17% of their compensation to the plans. The Company
generally makes matching contributions of 50% of the first 6% of
employees contributions. Company contributions vest when
made for employees with at least one full year of service.
Company contributions made on behalf of employees with less than
one full year of service vest on the employees first
anniversary. In February 2009, the Company temporarily suspended
its matching contributions to the U.S. plans.