e10vk
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 December 30, 2006 |
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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2701 Cambridge Court,
Suite 300,
Auburn Hills, Michigan
(Address of principal
executive offices)
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48326
(Zip
Code)
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Registrants telephone number, including area code:
(248) 340-9090
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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Chicago 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. Yes No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
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. Yes þ No o
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. þ
Indicate by check mark whether the Registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer (as defined in Exchange Act
Rule 12b-2
of the Act).
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Large
accelerated
filer þ
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Accelerated
filer o
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Non-accelerated
filer o
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Indicate by check mark whether the Registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes o No þ
The aggregate market value of the Common Stock held by
non-affiliates of the Registrant as of July 1, 2006, based
on the last sale price of $11.04 per share for the Common
Stock on the New York Stock Exchange on such date, was
approximately $836,904,345. As of February 22, 2007, the
Registrant had 76,596,261 shares of Common Stock
outstanding. For purposes of this computation, all officers and
directors of the Registrant as of February 22, 2007 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 2, 2007
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III
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Champion
Enterprises, Inc.
Form 10-K
Fiscal Year End December 30, 2006
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
Canada. We are also a leading producer in the United Kingdom of
steel-framed modular buildings for use as prisons, military
accommodations, hotels and residential units. As of
December 30, 2006, our North American manufacturing
operations (the manufacturing segment) consisted of
30 homebuilding facilities in 16 states and two provinces
in western Canada. As of December 30, 2006, our homes were
sold through more than 3,000 independent sales centers, builders
and developers across the U.S. and western Canada. As of
December 30, 2006, our homes were also sold through our
retail segment that operates 16 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 homes industry has been affected by limited
availability of consumer financing and floor plan inventory
financing, high levels of homes repossessed from consumers,
tightened consumer credit standards and other factors. Industry
shipments of
HUD-code
homes in 2006 and 2005 included an estimated 4,000 homes and
21,000 homes, respectively, that were sold to the Federal
Emergency Management Agency (FEMA) in connection
with its Hurricane Katrina relief efforts. Excluding homes sold
to FEMA, annual industry shipments of HUD-code homes have
averaged 126,000 homes during the last four years as compared to
373,000 homes in 1998. Industry shipments of HUD-code homes
totaled 117,500 in 2006, which was the lowest industry volume
since 1961. Champions sales of HUD-code homes in 2006 were
47% lower than in 2002. During 2006, the broader U.S. housing
market became more difficult, as evidenced by a 13% decline in
new housing starts and an over 8% decline in existing home
sales. In addition, inventories of unsold homes increased
significantly in many markets in the U.S. Industry
shipments of modular homes, which are more directly impacted by
conditions in the traditional housing market, totaled an
estimated 38,300 homes in 2006, an estimated decrease of 11%
versus 2005. Champions sales of modular homes in 2006,
including its acquisitions, were double its modular sales in
2002.
Since the beginning of 2002, we have closed, sold, or
consolidated 26 manufacturing facilities and all of our retail
operations except for our California-based retail segment, to
eliminate under-performing operations and rationalize 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. The 66 retail sales locations that were sold or closed
in 2005 and 2004, along with related administrative offices, are
reported as discontinued operations for all periods presented
herein.
On April 7, 2006, we acquired United Kingdom-based Calsafe
Group (Holdings) Limited and its operating subsidiary Caledonian
Building Systems Limited (Caledonian), a leading
modular manufacturer that constructs steel-framed modular
buildings for use as prisons, military accommodations, hotels
and residential units. Caledonians steel-framed modular
technology allows for multi-story construction, which is a key
advantage over wood-framed construction techniques. Our
international manufacturing segment (the international
segment) is comprised solely of Caledonian, which
currently operates four manufacturing facilities at one location
in the United Kingdom (UK).
On July 31, 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 that operates two homebuilding facilities in
Virginia. This acquisition expands our presence in the modular
construction industry, particularly in the mid-Atlantic region
of the U.S.
On March 31, 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.
1
On August 8, 2005, we acquired the assets and business of
New Era Building Systems, Inc. and its affiliates, Castle
Housing of Pennsylvania, Ltd. and Carolina Building Solutions,
LLC. These companies are primarily manufacturers of modular
housing and consist of two plants in Pennsylvania and one plant
in North Carolina.
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 two
homebuilding facilities in western Canada. Our international
segment is solely comprised of Caledonians operations in
the UK. For each of the last three years, the total sales and
total assets of our Canadian operations were no more than 6% of
both our consolidated and manufacturing segment totals.
Manufacturing
segment
Products
In 2006, our manufacturing segment sold 21,126 homes compared to
23,960 homes in 2005. Approximately 72.6% of the homes we
produced in 2006 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). The HUD Code regulates
manufactured home design and construction, strength and
durability, fire resistance and energy efficiency. Approximately
79.3% of the homes we produced in 2005 were HUD-code homes. The
remaining homes we produced were modular homes (22.0% in 2006
and 16.5% in 2005) or were manufactured and sold in Canada
(5.4% in 2006 and 4.2% in 2005). Modular homes are designed and
built to meet local building codes. Homes sold in Canada are
constructed in accordance with applicable Canadian building
standards.
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 multi-section,
ranch-style homes, we also build two-story homes, single-section
homes, cape cod style homes and multi-family units such as
townhouses, 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 or family room, a dining room, a kitchen
and two full bathrooms. In 2006 and 2005, we also produced
commercial modular structures including two-story buildings,
barracks for the U.S. military and other non-residential
buildings.
We regularly introduce homes with new floor plans, exterior
elevations, decors and features. Our corporate marketing and
engineering departments work with our manufacturing facilities
to design homes that appeal to local markets and consumers
changing tastes. We design and build homes with a traditional
residential or site-built appearance through the use of dormers
and higher pitched roofs. 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. In 2006, one of our homes won the National Modular
Housing Council 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 2006, the average net selling price for our factory-built
homes was $51,800, 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 2006, the average retail selling price for new
homes sold to consumers by our retail segment was $184,600,
including delivery, setup, accessories and lot improvements.
The chief 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. These components
include lumber, plywood, chipboard, drywall, steel, vinyl floor
coverings, insulation, exterior siding (wood, vinyl and metal),
windows, shingles, kitchen appliances, furnaces, plumbing and
electrical fixtures and hardware. These components are
2
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
is sometimes 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
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 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 approximately 150 to 250 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 during placement of the homes 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.
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 floor plan
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 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 2006, approximately 82% of our
manufacturing shipments were to approximately 2,700 independent
retail locations throughout the U.S. and western Canada. As of
December 30, 2006, approximately 900 of these independent
retail locations were part of our Champion Home Center
(CHC) retailer program. Sales to independent CHC
retailers accounted for approximately 58% 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.
3
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 2006, 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 2006
and for the five year period from 2002 through 2006, industry
shipments of HUD-code homes accounted for an estimated 8% and
9%, respectively, of all new single-family housing starts and
10% 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 in 2006 totaled
approximately 102,000 homes, down 9% from the comparable period
in 2005. Based on industry data published by the National
Modular Housing Council, wholesale shipments of modular homes in
2006 fell 11.1% from 2005 levels. Additionally, modular homes
sold in 2006 were approximately 25% of the factory-built housing
market in 2006 compared to 23% in 2005.
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 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 $40,000. This segment has a high
representation of young single persons and married couples,
first time house 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 homes and modular homes are
attractive to households with higher incomes as an alternative
to apartments and entry-level site-built homes and condominiums.
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 December 2006, there were 67 producers of
manufactured homes in the U.S. operating an estimated 205
production facilities. For the first nine months of 2006, the
top five companies had combined
4
market share of approximately 63% of HUD-code homes, according
to data published by MHI. According to information obtained from
MHI, there are approximately 7,000 industry retail locations
throughout the U.S.
Based on industry data reported by IBTS, in 2006 our
U.S. wholesale market share of HUD-code homes sold was
13.1%, compared to 12.9% in 2005, including homes sold to FEMA
in both years. Based on industry data published by MHI, we
estimate our share of the modular home market in 2006 to be
approximately 12% after our acquisitions of North American and
Highland.
Floor
Plan 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, several major
national floor plan lenders have exited the industry or
curtailed their floor plan operations, while a smaller number of
national lenders, and a large number of local and regional
banks, have entered the market or increased lending volumes.
Approximately 50% of independent retailer home purchases are
financed under floor plan agreements. In accordance with trade
practice, we generally enter into repurchase agreements with the
major lending institutions 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 five to fifteen days after a home is
sold and invoiced to an independent retailer.
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 a high number of repossessions of
manufactured homes from consumers during the early part of this
decade. The poor performance of portfolios of manufactured
housing home-only consumer loans in those years made it
difficult for industry consumer finance companies to obtain
long-term capital in the asset-backed securitization market,
which had previously been a significant source of long-term
capital for originators of such loans. As a result, consumer
finance companies curtailed their industry lending and some
exited the manufactured housing market. Since 2000, many
consumer lenders tightened credit underwriting standards and
loan terms and increased interest rates for home-only loans to
purchase manufactured homes, which reduced lending volumes and
resulted in lower industry sales volumes. Additionally, during
those years the industry saw a number of traditional real estate
mortgage lenders tighten terms or discontinue financing for
manufactured housing as a result, in part, of program changes by
the traditional buyers of conforming mortgage loans, primarily
Fannie Mae and Freddie Mac.
International
segment
Products
Our international manufacturing segment (the international
segment) is comprised of Caledonian, which was acquired in
April 2006 and currently operates four manufacturing facilities
at one location in the UK. Caledonian is a leading modular
manufacturer that constructs steel-framed modular buildings for
use as prisons, military accommodations, hotels and residential
units. 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 UK in terms of total annual revenues.
5
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, via a main
contractor, the UK Ministry of Defence (MoD), among
others.
Since 1996, Caledonian has constructed over 12,500 accommodation
rooms, of which 7,000 have been custodial (prison) units and
3,000 have been military units. The remaining balance of 2,500
rooms includes hotels and residential units. Caledonian produced
modular buildings have included a 420 unit complete prison;
a ten-story, 612 unit student accommodation; several three
and four-story, 100 bedroom military accommodations; and a
six-story, 108 unit hotel. In 2006, Caledonian completed a
1,000 unit student and key worker accommodation complex
that was comprised of six buildings including two 12-story
buildings and one 17-story building. The 17-story building is
believed to be the tallest modular building constructed in
Europe.
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 year to
100 year design life. The buildings are compliant with
necessary codes and regulations including UK 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.
Production
and construction
Caledonian operates four manufacturing facilities at one
location, including a new plant that commenced operations in
November 2006. Each plant employs approximately 70 production
workers. Subcontractors are used for various production
functions, including electrical and plumbing, 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.
Workers build the floors from wood, cement particleboards 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 can complete up to four modules per day. The
completed modules are wrapped in protective plastic sheeting and
set in the yard to await shipping.
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. 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 UK custom modular industry, which
competes with traditional commercial builders in the
construction of permanent, multi-story buildings. The custom
modular market in the UK has estimated total annual sales of
over $1 billion. There are several large competitors in the
UK custom modular market, but Caledonian is the only modular
builder that focuses solely on the bespoke market. Caledonian
competes
6
in four sectors of this market: prisons, military
accommodations, hotels and residential. Caledonian establishes
key relationships in these markets 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) project.
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
sectors. Funding for projects in the prison and military sectors
is dependent on government budgets. Hotel and residential
projects are dependent upon private sector funding that is
influenced by general economic and other factors.
Retail
segment
During 2005, we divested of our remaining traditional retail
sales centers. Our ongoing retail operations currently consist
of 16 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
spaces to be renovated in local communities, secure the space
and order a new home from a manufacturer, primarily Champion
plants. 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 2006, 85.9% were Champion-produced. Champion-produced homes
purchased by our retail segment in 2006 and 2005 accounted for
2.8% and 3.8%, respectively, of the total homes sold by our
manufacturing segment.
The 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.
Relationship
with our Employees
At December 30, 2006, we had approximately 7,000 employees.
We deem our relationship with our employees to be generally
good. Currently, our two manufacturing facilities in Canada
employ approximately 500 workers, of which 400 are subject to
collective bargaining agreements, one that expires in November
2007 and the other that expires in June 2008. Caledonian entered
into a voluntary recognition agreement with a labor union during
the second quarter of 2006 covering approximately 200 production
employees.
The workforce of approximately 150 employees at one of our
U.S. manufacturing plants voted to unionize in 2001 but
petitioned in April 2002 to withdraw from the union. On
January 17, 2003, an Administrative Law Judge
(ALJ) of the National Labor Relations Board
(NLRB) made findings that we had engaged in unfair
labor practices and therefore set aside the employees
April 2002 formal petition to end union representation. The ALJ
ordered the Company to immediately begin to bargain with the
union. This order was reinforced by a 10-J
bargaining injunction. We believe that the ALJs findings
were incorrect and have appealed those findings and orders to
the NLRB while we continue to bargain.
In addition, the workforce of approximately 180 employees at
another of our U.S. manufacturing plants voted to unionize
on September 1, 2004. Bargaining began in February 2005.
Certain employees filed a decertification petition with the NLRB
on November 17, 2005 to withdraw from the union. A
decertification vote was held on February 10, 2006 and a
majority of the employees voted in favor of decertification.
Therefore there is no union representation at this plant.
7
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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55
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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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44
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Executive Vice President,
Treasurer and Chief Financial Officer
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John J. Collins, Jr.
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55
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Senior Vice President, General
Counsel and Secretary
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Bobby J. Williams
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60
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Vice President, Operations
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Jeffrey L. Nugent
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60
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Vice President, Human Resources
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Richard P. Hevelhorst
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59
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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. Collins joined the Company in 1997 as Vice President,
General Counsel and Secretary and was promoted to Senior Vice
President, General Counsel and Secretary in April 2000.
Mr. Collins has resigned from his positions with the
Company effective March 30, 2007.
Mr. Williams joined Champion in 1997 as President, Eastern
Manufacturing Region, and was promoted to President, Champion
Homes in 2002. He was named Vice President, Operations in 2005.
Mr. Nugent joined Champion in September 2004 as Vice
President, Human Resources. Previously, since 2001
Mr. Nugent was employed by SPX Corporation where he was
Vice President-Fluid Systems Division and for the prior ten
years as Vice President, Human Resources for segments of its
predecessor, United Dominion Industries, Inc.
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.
8
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
maintenance of raw materials, expanding shipments and sales, our
status as a principal supplier to certain of our customers, our
relationship with our employees, the outcome of legal
proceedings or claims, our strategy to diversify, our ability to
generate U.S. pretax income, the impact of our contingent
repurchase obligations, 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 liabilities or
obligations on the results of our operations, the adequacy of
our cash flow from operations to fund capital expenditures, the
ability to secure an amendment to our credit facility and the
impact of our inability to do so, and the completion of our ERP
system implementation, 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.
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 6 of the Notes to Consolidated
Financial Statements in Item 8 of this Report, we
have a significant amount of debt outstanding, which consists
primarily of long-term debt due in 2009 and 2012. If our debt
due in 2009 is not repaid or refinanced prior to February 2009,
the maturity date of the debt due in 2012 will be accelerated to
2009. 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 factory-built housing industry;
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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.
9
Fluctuations in operating results The cyclical
and seasonal nature of the U.S. housing market has caused
our sales and operating results to fluctuate. These fluctuations
may continue in the future, which could result in operating
losses during downturns.
The U.S. housing industry 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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In addition, the factory-built housing industry is 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. Moreover, we may experience operating losses during
cyclical and seasonal downturns in the housing market.
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, governmental regulations
and economic and other conditions, all of which are beyond our
control. A consumer 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 purchase of land and the home.
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.
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
in the asset-backed securitization market. 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 retail and manufacturing
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.
Independent retailers of our manufactured homes generally
finance their inventory purchases with floor plan financing
provided by lending institutions. Reduced availability of floor
plan lending or tighter floor plan terms 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.
10
Contingent liabilities We have, and will
continue to have, significant contingent wholesale repurchase
obligations and other contingent obligations, some of which
could become actual obligations that we must satisfy. We may
incur losses under these wholesale 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 purchase from the lender the related
floor plan loan or the home 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 December 30, 2006 was
significant and includes 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 December 30, 2006, 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 2006, approximately 82% of our manufacturing shipments of
homes were made to independent retail locations throughout the
United States and western Canada. With the divestiture of our
traditional retail operations, the proportion of our
manufacturing sales to independent retailers has increased. As
is common in the industry, independent retailers may sell
manufactured homes produced by competing manufacturers. We may
not be able to establish relationships 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,
and drywall 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 the retailers and consumers in the form of
surcharges and base price increases. However, it is not certain
that future price increases can be passed on to the consumer
without affecting demand or that limited availability of
materials will not impact our production capabilities.
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 revolving credit facility 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 revolving credit facility
are insufficient to
11
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. 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 or to obtain alternative bonding or letter
of credit sources 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.
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 our subsidiaries 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 Senior Secured Credit
Agreement
and/or our
Senior Notes due 2009 contain financial and non-financial
covenants that place restrictions on us and our subsidiaries.
The terms of our
12
debt agreements include covenants that allow for a maximum
leverage limit and require a minimum level of interest coverage
that, to varying degrees, restrict our and our
subsidiaries ability to:
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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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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 December 30, 2006, we were in compliance with all
Term Loan covenants. However, as a result of scheduled decreases
in the leverage covenant coupled with lower forecasted results
due to U.S. housing market conditions, we will likely be
unable to remain in compliance with the current covenants during
2007. We have initiated discussions with the lenders to obtain
an amendment to the Restated Credit Agreement. The inability to
secure a satisfactory amendment to the Restated Credit Agreement
could result in a demand from the lenders to repay all or a
portion of the Term Loans and the termination of the letter of
credit and revolving line of credit facilities. In the event we
fail to obtain a satisfactory amendment, we would seek to
refinance the related indebtedness. However, there can be no
assurance that we will be able to refinance the debt on
favorable terms.
For additional detail and discussion concerning these financial
covenants see Liquidity and Capital Resources in
Item 7 of this Report.
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 increase our
diversification. 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 after the
consummation of the acquisitions.
Potential Dilution Potential capital, debt
reduction, or acquisition transactions effected with issuances
of our common stock could result in potential dilution and
impair the price of our common stock.
To the extent we decide to reduce debt obligations through the
issuance of common stock
and/or
convertible preferred stock, our then existing common
shareholders would 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 may result in additional
potential dilution.
13
Potential impairment charges We have a
significant amount of goodwill, amortizable intangible assets,
deferred tax assets and property, plant and equipment which are
subject to periodic review and testing for impairment.
A significant portion of our total assets at December 30,
2006 was comprised of goodwill, amortizable intangible assets,
deferred tax 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. The review and 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 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.
Operations in the UK We have a significant
investment in the UK. 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 UK or
unfavorable changes in exchange rates could adversely affect the
value of our investment in the UK and could significantly impact
our UK revenues and earnings.
We acquired Calsafe Group (Holdings) Limited and its operating
subsidiary Caledonian Building Systems Limited
(Caledonian) in April 2006. Caledonian, a leading
modular manufacturer, constructs steel-framed modular buildings,
including multi-story buildings, for use as prisons, military
accommodations, hotels and residential units. During 2006,
approximately 70% 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.
The commercial construction market in the UK is very
competitive. If we are unable to effectively compete in this
environment our revenues and earnings could suffer.
Additionally, unfavorable changes in foreign exchange rates
could adversely affect the value of our investment in this
business.
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Item 1B.
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Unresolved
Staff Comments
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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
four manufacturing plants in the UK range from 80,000 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.
14
The following table sets forth certain information with respect
to the 29 homebuilding facilities we were operating as of
December 30, 2006 (excluding one plant in Bartow, FL that
was closed in January 2007) in the United States and Canada
and the four manufacturing facilities in the United Kingdom
(UK). All of the North American facilities are
assembly-line operations.
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United States
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Alabama
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Guin
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Arizona
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Chandler*
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California
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Corona**
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Lindsay
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Woodland**
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Colorado
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Berthoud
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Florida
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Bartow*
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Lake City ***
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Idaho
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Weiser
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Indiana
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LaGrange (2 plants)
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Topeka (2 plants)
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Minnesota
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Worthington
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Nebraska
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York
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New York
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Sangerfield****
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North Carolina
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Lillington
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Salisbury
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Oregon
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Silverton
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Pennsylvania
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Claysburg
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Ephrata
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Knox
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Strattanville
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Tennessee
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Henry
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Texas
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Burleson
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Virginia
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Boones Mill
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Front Royal
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Canada
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Alberta
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Medicine Hat
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British Columbia
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Penticton
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United Kingdom
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Nottinghamshire
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Newark (4 plants, 2 owned and 2
leased**)
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* |
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Includes leased land. |
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** |
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Operating lease. |
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*** |
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Includes facility leased under a capital lease and leased land. |
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**** |
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Facility leased under a capital lease. |
Substantially all of the U.S. manufacturing facilities we
own are encumbered under first mortgages securing our
$200 million Senior Secured Credit Agreement. Two of the
facilities are encumbered under industrial revenue bond
financing agreements and one facility is encumbered under a
capital lease.
At December 30, 2006, we also owned 15 idle manufacturing
facilities in 6 states, including one plant closed in
January 2007. Eight of these idle facilities are permanently
closed and are generally for sale.
15
At December 30, 2006, our retail segment headquarters and
16 retail sales offices in California were leased. Sales office
lease terms generally range from monthly to five years. Our
executive offices, which are located in Auburn Hills, Michigan,
and other miscellaneous offices and properties are also leased.
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Item 3.
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Legal
Proceedings
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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.
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Item 4.
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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 2006.
16
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 and the Chicago Stock Exchange as ChampEnt and has a
ticker symbol of CHB. The high and low sale prices
per share of the common stock as reported by Yahoo! Finance for
each quarter of 2006 and 2005 were as follows:
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
2006
|
|
|
|
|
|
|
|
|
1st Quarter
|
|
$
|
16.02
|
|
|
$
|
13.00
|
|
2nd Quarter
|
|
|
16.32
|
|
|
|
9.24
|
|
3rd Quarter
|
|
|
10.56
|
|
|
|
5.15
|
|
4th Quarter
|
|
|
10.09
|
|
|
|
6.88
|
|
2005
|
|
|
|
|
|
|
|
|
1st Quarter
|
|
$
|
12.25
|
|
|
$
|
9.11
|
|
2nd Quarter
|
|
|
11.20
|
|
|
|
8.33
|
|
3rd Quarter
|
|
|
14.97
|
|
|
|
9.58
|
|
4th Quarter
|
|
|
15.55
|
|
|
|
12.30
|
|
As of February 27, 2007, the Company had approximately
3,927 shareholders of record and approximately 7,300
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. As discussed in Note 6 of Notes to
Consolidated Financial Statements in Item 8 of this
Report, our $200 million Senior Secured Credit Agreement
contains a covenant that limits our ability to pay dividends.
On March 2, 2004, the preferred shareholder exercised its
right to purchase $12 million of
Series B-2
Cumulative Convertible Preferred stock with a mandatory
redemption date of July 3, 2008 and a 5% annual dividend
that was payable quarterly, at the Companys option, in
cash or common stock. On April 18, 2005, the preferred
shareholder elected to immediately convert all of the
outstanding
Series B-2
and Series C preferred stock into 3.1 million shares
of common stock under the terms of the respective preferred
stock agreements.
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.
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company Name/Index
|
|
|
Dec 01
|
|
|
Dec 02
|
|
|
Dec 03
|
|
|
Dec 04
|
|
|
Dec 05
|
|
|
Dec 06
|
Champion Enterprises, Inc.
|
|
|
|
100
|
|
|
|
|
23.60
|
|
|
|
|
56.85
|
|
|
|
|
95.86
|
|
|
|
|
110.46
|
|
|
|
|
75.91
|
|
S&P 500 Index
|
|
|
|
100
|
|
|
|
|
75.40
|
|
|
|
|
95.47
|
|
|
|
|
104.38
|
|
|
|
|
107.52
|
|
|
|
|
122.16
|
|
Peer Group
|
|
|
|
100
|
|
|
|
|
84.55
|
|
|
|
|
99.87
|
|
|
|
|
118.01
|
|
|
|
|
111.84
|
|
|
|
|
93.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 December 30, 2006 (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
|
|
|
2,752
|
|
|
$
|
4.14
|
|
|
|
3,735
|
|
Equity Compensation Plans and
Agreements not Approved by Shareholders(1)
|
|
|
448
|
|
|
$
|
14.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
3,200
|
|
|
|
|
|
|
|
3,735
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 and
performance awards which were previously granted and remain
outstanding. Options representing 363,707 shares of common
stock remain outstanding under this plan. The weighted-average
exercise price of these options is $12.97.
Acquisitions We granted stock options to
certain employees of acquired businesses. Options representing
84,000 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 $20.22.
18
|
|
Item 6.
|
Selected
Financial Information
|
Five-Year
Highlights
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
(Dollars and weighted average shares in thousands,
|
|
|
|
except per share amounts)
|
|
|
Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing
|
|
$
|
1,195,834
|
|
|
$
|
1,190,819
|
|
|
$
|
1,002,164
|
|
|
$
|
981,254
|
|
|
$
|
1,150,638
|
|
International
|
|
|
90,717
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
|
117,397
|
|
|
|
135,371
|
|
|
|
110,024
|
|
|
|
130,366
|
|
|
|
250,277
|
|
Less: Intercompany
|
|
|
(39,300
|
)
|
|
|
(53,600
|
)
|
|
|
(97,900
|
)
|
|
|
(109,686
|
)
|
|
|
(156,704
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
|
1,364,648
|
|
|
|
1,272,590
|
|
|
|
1,014,288
|
|
|
|
1,001,934
|
|
|
|
1,244,211
|
|
Cost of sales
|
|
|
1,147,032
|
|
|
|
1,055,749
|
|
|
|
843,261
|
(b)
|
|
|
866,020
|
(b)
|
|
|
1,077,045
|
(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
217,616
|
|
|
|
216,841
|
|
|
|
171,027
|
|
|
|
135,914
|
|
|
|
167,166
|
|
Selling, general and administrative
expenses
|
|
|
154,518
|
|
|
|
151,810
|
|
|
|
129,096
|
|
|
|
146,513
|
|
|
|
197,317
|
|
Goodwill impairment charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34,183
|
|
|
|
97,000
|
|
Restructuring charges
|
|
|
1,200
|
|
|
|
|
|
|
|
3,300
|
|
|
|
21,100
|
|
|
|
40,000
|
|
Amortization of intangible assets
|
|
|
3,941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mark-to-market
(credit) charge for common stock warrant
|
|
|
|
|
|
|
(4,300
|
)
|
|
|
5,500
|
|
|
|
3,300
|
|
|
|
|
|
Loss (gain) on debt retirement
|
|
|
398
|
|
|
|
9,857
|
|
|
|
2,776
|
|
|
|
(10,639
|
)
|
|
|
(7,385
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
57,559
|
|
|
|
59,474
|
|
|
|
30,355
|
|
|
|
(58,543
|
)
|
|
|
(159,766
|
)
|
Net interest expense
|
|
|
(14,446
|
)
|
|
|
(13,986
|
)
|
|
|
(17,219
|
)
|
|
|
(26,399
|
)
|
|
|
(26,430
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations before income taxes
|
|
|
43,113
|
|
|
|
45,488
|
|
|
|
13,136
|
|
|
|
(84,942
|
)
|
|
|
(186,196
|
)
|
Income tax (benefit) expense
|
|
|
(95,211
|
)(f)
|
|
|
3,300
|
|
|
|
(10,000
|
)(c)
|
|
|
(5,500
|
)
|
|
|
53,500
|
(d)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations
|
|
|
138,324
|
|
|
|
42,188
|
|
|
|
23,136
|
|
|
|
(79,442
|
)
|
|
|
(239,696
|
)
|
Loss from discontinued operations
|
|
|
(16
|
)(a)
|
|
|
(4,383
|
)(a)
|
|
|
(6,125
|
)(a)
|
|
|
(23,642
|
)(a)
|
|
|
(15,859
|
)(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
138,308
|
|
|
$
|
37,805
|
|
|
$
|
17,011
|
|
|
$
|
(103,084
|
)
|
|
$
|
(255,555
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations
|
|
$
|
1.78
|
|
|
$
|
0.54
|
|
|
$
|
0.29
|
|
|
$
|
(1.45
|
)
|
|
$
|
(4.90
|
)
|
Loss from discontinued operations
|
|
|
|
|
|
|
(0.06
|
)(a)
|
|
|
(0.08
|
)(a)
|
|
|
(0.41
|
)(a)
|
|
|
(0.32
|
)(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income (loss) per share
|
|
$
|
1.78
|
|
|
$
|
0.48
|
|
|
$
|
0.21
|
|
|
$
|
(1.86
|
)
|
|
$
|
(5.22
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted shares for diluted EPS
|
|
|
77,578
|
|
|
|
76,034
|
|
|
|
71,982
|
|
|
|
57,688
|
|
|
|
49,341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows provided by (used for)
continuing operating activities
|
|
$
|
59,874
|
|
|
$
|
38,406
|
|
|
$
|
(7,319
|
)
|
|
$
|
71,215
|
(e)
|
|
$
|
10,544
|
(e)
|
Cash flows provided by (used for)
discontinued operations
|
|
|
1,201
|
|
|
|
15,438
|
|
|
|
(1,976
|
)
|
|
|
(12,030
|
)
|
|
|
(37,633
|
)
|
Depreciation and amortization
|
|
|
17,943
|
|
|
|
10,738
|
|
|
|
10,209
|
|
|
|
13,714
|
|
|
|
21,152
|
|
Capital expenditures
|
|
|
17,582
|
|
|
|
11,785
|
|
|
|
8,440
|
|
|
|
5,912
|
|
|
|
6,063
|
|
Net property, plant and equipment
|
|
|
112,527
|
|
|
|
91,173
|
|
|
|
80,957
|
|
|
|
87,365
|
|
|
|
127,129
|
|
Total assets
|
|
|
800,615
|
|
|
|
566,654
|
|
|
|
517,042
|
|
|
|
528,300
|
|
|
|
728,091
|
|
Long-term debt
|
|
|
252,449
|
|
|
|
201,727
|
|
|
|
200,758
|
|
|
|
244,669
|
|
|
|
341,612
|
|
Redeemable convertible preferred
stock
|
|
|
|
|
|
|
|
|
|
|
20,750
|
|
|
|
8,689
|
|
|
|
29,256
|
|
Shareholders equity
|
|
|
301,762
|
|
|
|
147,305
|
|
|
|
77,300
|
|
|
|
14,989
|
|
|
|
37,325
|
|
Per outstanding share (unaudited)
|
|
$
|
3.95
|
|
|
$
|
1.94
|
|
|
$
|
1.07
|
|
|
$
|
0.23
|
|
|
$
|
0.71
|
|
Other Statistical Information
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of employees at year end
|
|
|
7,000
|
|
|
|
7,400
|
|
|
|
6,800
|
|
|
|
6,800
|
|
|
|
8,000
|
|
Homes sold
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing
|
|
|
21,126
|
|
|
|
23,960
|
|
|
|
22,978
|
|
|
|
25,483
|
|
|
|
32,460
|
|
Retail new
|
|
|
629
|
|
|
|
748
|
|
|
|
687
|
|
|
|
3,432
|
|
|
|
6,006
|
|
Manufacturing multi-section mix
|
|
|
80
|
%
|
|
|
79
|
%
|
|
|
85
|
%
|
|
|
84
|
%
|
|
|
82
|
%
|
Certain amounts have been reclassified to conform to current
period presentation.
|
|
|
(a)
|
|
Discontinued operations consisted
of the consumer finance business, which was exited in 2003, and
66 retail lots that were closed or sold in 2004 and 2005.
|
|
(b)
|
|
Included restructuring (credits)
charges due to closing or consolidation of manufacturing
facilities and retail sales centers of ($1.3) million in
2004, $8.9 million in 2003, and $15.3 million in 2002
classified as cost of sales.
|
|
(c)
|
|
As a result of the finalization of
certain tax examinations, the allowance for tax adjustments was
reduced by $12 million.
|
|
(d)
|
|
Included recording a deferred tax
asset valuation allowance of $101.5 million.
|
|
(e)
|
|
Included income tax refunds of
$64 million in 2003 and $22 million in 2002.
|
|
(f)
|
|
Included a non-cash tax benefit of
$101.9 million from the reversal of the deferred tax asset
valuation allowance.
|
19
|
|
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. As of December 30, 2006, we operated 30
homebuilding facilities in 16 states in the U.S. and two
provinces in western Canada. As of December 30, 2006, our
homes were sold through more than 3,000 independent sales
centers, builders, and developers across the U.S. and western
Canada. Approximately 900 of the independent retailer locations
were members of our Champion Home Centers (CHC)
retail distribution network. As of December 30, 2006, our
homes were also sold through 16 Company-owned sales
locations in California. We are also a leading modular builder
in the United Kingdom.
On April 7, 2006, we acquired United Kingdom-based Calsafe
Group (Holdings) Limited and its operating subsidiary Caledonian
Building Systems Limited (Caledonian). Caledonian, a
leading modular manufacturer, constructs steel-framed modular
buildings for use as prisons, military accommodations, hotels
and residential units. Caledonians steel-framed modular
technology allows for multi-story construction, which is a key
advantage over wood-framed construction techniques. Our
international manufacturing segment (the international
segment) currently consists of four manufacturing
facilities that Caledonian operates in the United Kingdom. The
results of operations of Caledonian are included in our results
from continuing operations and in our international segment for
the year ended December 30, 2006.
On July 31, 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 that operates two homebuilding facilities in
Virginia. This acquisition expanded our presence in the modular
construction industry, particularly in the mid-Atlantic region
of the U.S. The results of operations of North American are
included in our results from continuing operations and in our
manufacturing segment for the year ended December 30, 2006.
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. 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. The results of operations of
Highland are included in our results from continuing operations
and in our manufacturing segment for the year ended
December 30, 2006.
On August 8, 2005, we acquired the assets of New Era
Building Systems, Inc., a leading modular homebuilder, and its
affiliates, Castle Housing of Pennsylvania Ltd. and Carolina
Building Solutions LLC (collectively, the New Era
group). The results of operations of the New Era group are
included in our results from continuing operations and in our
manufacturing segment for the years ended December 30, 2006
and December 31, 2005.
North American, Highland and Caledonian are referred to as
the 2006 acquisitions and their results are included
in our consolidated results from their respective acquisition
dates.
For the past five years the U.S. manufactured housing
(HUD-code) industry has been affected by limited availability of
consumer financing and floor plan inventory financing, high
levels of homes repossessed from consumers, tightened consumer
credit standards, and other factors. Excluding homes sold to
FEMA in 2006 and 2005, annual industry shipments of HUD-code
homes have averaged 126,000 homes during the last four years as
compared to 373,000 homes in 1998. Industry shipments of
HUD-code homes totaled 117,500 in 2006, which was the lowest
industry volume since 1961. The acquisitions in 2005 and 2006
were part of our strategy to diversify our operations with a
focus on increasing our modular homebuilding presence in the
U.S. and to seek modular opportunities outside of the U.S.
The HUD-code industry conditions have affected our U.S
operations during the past several years. Despite these
conditions, we started 2006 with $147 million in unfilled
orders for manufactured housing, a record level for Champion.
During 2006, the broader housing market became more difficult,
as evidenced by a 13% decline in new housing starts and an over
8% decline in existing home sales. In addition, inventories of
unsold homes increased significantly in many markets in the
U.S. As a result, our business in the U.S. softened
throughout the year and for much of the second half of 2006,
most of our U.S. plants operated on one week or less of
unfilled orders. Results of the 2006 acquisitions helped to
offset lower sales from existing operations. Meanwhile, our
Canadian operations enjoyed high sales volumes and high levels
of unfilled orders throughout 2006.
20
Our pretax income from continuing operations for the year ended
December 30, 2006 was $43.1 million versus
$45.5 million in 2005. Compared to 2005, our 2006
manufacturing segment income declined $8.7 million on flat
sales despite the acquisitions of Highland and North American
and a full year of results from the New Era group. The difficult
U.S. housing market during the second half of 2006 led to
lower sales volumes and production inefficiencies at most of our
plants. This decrease was partially offset by income of
$5.6 million from our new international segment.
Included in income from continuing operations for the year ended
December 30, 2006 were gains of $4.7 million,
primarily from the sale of an investment property in Florida and
five idle manufacturing plants, a fixed asset impairment charge
of $1.2 million for the closure of a manufacturing plant
and a $1.0 million reduction to our closed plant warranty
accrual. Included in income from continuing operations for the
year ended December 31, 2005 were a credit of
$4.3 million for the change in estimated fair value of a
common stock warrant, a loss on debt retirement of
$9.9 million, gains of $1.5 million from the sale of
three idle plants and an accrual of additional closed plant
warranty costs of $2.3 million.
Effective July 1, 2006, we reversed substantially all of
the previously recorded valuation allowance for 100% of deferred
tax assets after determining that realization of the deferred
tax assets was more likely than not. The reversal of the
valuation allowance resulted in recording a $101.9 million
non-cash income tax benefit in the second quarter of 2006.
Subsequent to this reversal, our earnings are fully taxed for
financial reporting purposes.
During the year ended December 31, 2005, we completed the
disposal of our traditional retail operations through the sale
of our remaining 42 traditional retail sales centers. In
accordance with Statement of Financial Accounting Standards
(SFAS) No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets and Emerging
Issues Task Force (EITF) Issue
No. 03-13,
Applying the Conditions in Paragraph 42 of
SFAS No. 144 in Determining Whether to Report
Discontinued Operations, the 66 traditional retail sales
centers closed or sold in 2005 and 2004 along with their related
administrative offices are reported as discontinued operations
for all periods presented. Retail restructuring charges in 2004
are also included with discontinued operations. Continuing
retail operations in 2006, 2005 and 2004 consist of our ongoing
non-traditional California retail operations.
During the first quarter of 2006 and the fourth quarter of 2005,
we sold 627 homes and 1,372 homes, respectively, to the Federal
Emergency Management Agency (FEMA) in connection
with its hurricane relief efforts, resulting in revenues of
$23.0 million and $47.4 million, respectively.
In June 2006, the FASB issued FASB Interpretation No.
(FIN) 48, Accounting for Uncertainty in Income
Taxes an Interpretation of FASB statement
No. 109. FIN 48 clarifies the accounting for
uncertainty in income taxes recognized under
SFAS No. 109, Accounting for Income Taxes.
FIN 48 prescribes a recognition threshold and measurement
attribute for financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return and
also provides guidance on various related matters such as
derecognition, interest and penalties, and disclosure.
FIN 48 is effective with our fiscal year beginning
December 31, 2006. We expect that the financial impact, if
any, of applying the provisions of FIN 48 to all tax
positions will not be material upon the initial adoption of
FIN 48 in the first quarter of 2007.
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. Since June 2006, we have closed five homebuilding
plants in the U.S., including one that was closed in January
2007. We continually review our manufacturing capacity and will
make further adjustments as deemed necessary.
21
Results
of Operations
Consolidated
Results
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06 vs 05
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05 vs 04
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2006
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2005
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2004
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% Change
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% Change
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(Dollars in thousands)
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Net sales
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Manufacturing segment
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$
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1,195,834
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$
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1,190,819
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$
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1,002,164
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19
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%
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International segment
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90,717
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Retail segment
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117,397
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135,371
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110,024
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(13
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)%
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23
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%
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Less: intercompany
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(39,300
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)
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(53,600
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)
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(97,900
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)
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Total net sales
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$
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1,364,648
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$
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1,272,590
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$
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1,014,288
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7
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%
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25
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%
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Gross margin
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$
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217,616
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$
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216,841
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$
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171,027
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27
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%
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Selling, general and administrative
expenses
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154,518
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151,810
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129,096
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2
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%
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18
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%
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Amortization of intangible assets
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3,941
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Mark-to-market
(credit) charge for common stock warrant
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(4,300
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)
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5,500
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Restructuring charges
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1,200
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3,300
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Loss on debt retirement
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398
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9,857
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2,776
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Operating income
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57,559
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59,474
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30,355
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(3
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)%
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96
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%
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Interest expense, net
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14,446
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13,986
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17,219
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3
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%
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(19
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)%
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Income from continuing operations
before income taxes
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$
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43,113
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$
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45,488
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$
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13,136
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(5
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)%
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246
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%
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As a percent of net sales
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Gross margin
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15.9
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%
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17.0
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%
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16.9
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%
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SG&A
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11.3
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%
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11.9
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%
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12.7
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%
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Operating income
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4.2
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%
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4.7
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%
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3.0
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%
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Income from continuing operations
before income taxes
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3.2
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%
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3.6
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%
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1.3
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%
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Consolidated
results of operations 2006 versus 2005 analysis
Net sales in 2006 increased by 7% over 2005 sales due primarily
to the inclusion of the results of Caledonian (the international
segment) since acquisition. Manufacturing segment sales in 2006
were flat as compared with 2005 as sales from Highland and North
American since acquisition and full year results from the New
Era group offset a decline in sales from the other manufacturing
plants, including the $24.4 million decrease in sales to
FEMA. The decline in retail segment sales was substantially
offset by a lower elimination of intercompany sales resulting
from lower purchases by the retail segment from the
manufacturing segment.
Gross margin in 2006 was slightly higher than in 2005 on a 7%
increase in sales. A decline in gross margin in the
manufacturing and retail segments was offset by gross margin
from the international segment. Manufacturing segment gross
margin as a percent of sales declined 0.6% in 2006 as compared
to 2005, as low levels of unfilled orders at most of our plants
caused production inefficiencies resulting from under utilized
factory capacity. Manufacturing segment gross margin in 2006
included a $1.0 million reduction to closed plant warranty
reserves and in 2005 included a $2.3 million charge to
increase closed plant warranty reserves.
Selling, general and administrative expenses
(SG&A) in 2006 increased $2.7 million over
2005 as SG&A from the 2006 acquisitions and a full year of
SG&A from the New Era group exceeded decreases in SG&A
at the existing plants in the manufacturing segment, the retail
segment and the corporate office. These declines in SG&A
were caused in part by lower incentive compensation resulting
from lower profits and failure to achieve incentive compensation
targets. In addition, SG&A in 2006 was also reduced by gains
of $4.7 million, primarily from the sale of an investment
property and five idle manufacturing plants, while SG&A in
2005 was reduced by gains of $1.5 million from the sale of
three idle plants.
22
Results in 2006 included amortization expense of
$3.9 million related to intangible assets valued in the
2006 and 2005 acquisitions and a net loss of $0.4 million
from the write off of deferred financing costs related to the
voluntary repayment of $27.8 million of our Term Loan due
2012. Interest expense increased $0.5 million as a result
of increased debt incurred for the Caledonian acquisition,
partially offset by a lower average interest rate. During 2005,
a
mark-to-market
credit of $4.3 million was recorded for the decrease in
estimated fair value of an outstanding common stock warrant.
During 2005 we repurchased and subsequently cancelled the common
stock warrant in exchange for a cash payment of
$4.5 million. Also during 2005, operating results included
a loss on debt retirement of $9.9 million from the purchase
and retirement of $97.5 million of Senior Notes for cash
payments totaling $106.3 million.
The inclusion of the 2006 acquisitions and the New Era group in
consolidated results since their respective acquisition dates
contributed to an increase in net sales and operating income in
2006 as compared to 2005. On a pro forma basis, assuming we had
owned these acquisitions during the entire years ended
December 30, 2006 and December 31, 2005, consolidated
net sales and operating income in 2006 would have decreased by
8% and 16%, respectively, versus the prior year as compared to
7% increase and 3% decrease, respectively, reported in the table
above.
Consolidated
results of operations 2005 versus 2004 analysis
Net sales in 2005 increased by 25% from 2004 levels due to the
inclusion of the New Era group that was acquired on
August 8, 2005, increased selling prices in the
manufacturing and retail segments, the sale of 1,372 homes
to FEMA for approximately $47 million, and changes in
product mix in the manufacturing segment.
Gross margin in 2005 increased $45.8 million or 27% from
2004 primarily due to the 25% increase in net sales. Gross
margin in 2005 was also impacted by improved pricing, product
mix and purchasing, as well as from improved operating
efficiencies at our manufacturing facilities. The improvement in
gross margin was slightly offset by an accrual of
$2.3 million for additional closed plant warranty costs
that were included in cost of sales. Gross margin in the
manufacturing and retail segments in 2005 improved by
approximately 1.0% and 1.1% of sales, respectively, over 2004.
However, the effect of intercompany eliminations caused the
consolidated gross margin percent in 2005 to increase only 0.1%
over 2004.
Selling, general and administrative expenses
(SG&A) in 2005 increased $22.7 million from
2004 primarily due to increased sales and earnings in the
manufacturing segment, SG&A from the New Era group
subsequent to its acquisition, and increased corporate expenses
due to information technology projects and incentive
compensation programs. Also during 2005, retail SG&A
increased over 2004 due to operating a greater average number of
retail sales centers and increased retail sales. SG&A in
2005 included $1.5 million of gains from the sale of three
idle plants.
During 2005, a
mark-to-market
credit of $4.3 million was recorded for the decrease in
estimated fair value of an outstanding common stock warrant.
During 2005 we repurchased and subsequently cancelled the common
stock warrant in exchange for a cash payment of
$4.5 million. During 2004, a
mark-to-market
charge of $5.5 million was recorded for the change in
estimated fair value of the outstanding common stock warrant.
During 2005, operating results included a loss on debt
retirement of $9.9 million from the purchase and retirement
of $97.5 million of Senior Notes for cash payments totaling
$106.3 million. During 2004, operating results included a
net loss of $2.8 million on the extinguishment of debt
primarily from the purchase and retirement of $37.9 million
of Senior Notes in exchange for 3.9 million shares of
Company common stock and $10.4 million of cash.
The inclusion of the New Era group in consolidated results
contributed to an increase in net sales and operating income in
2005 as compared to 2004. On a pro forma basis, assuming we had
owned the New Era group during the entire years ended
December 31, 2005 and January 1, 2005, consolidated
net sales and operating income in 2005 would have increased by
19% and 75%, respectively versus the prior year as compared to
increases of 25% and 96%, respectively, reported in the table
above.
23
Income
from continuing operations before income taxes
The segment components of income from continuing operations
before income taxes are as follows:
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% of
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% of
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% of
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2006
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Related Sales
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2005
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Related Sales
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2004
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Related Sales
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(Dollars in thousands)
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Manufacturing segment income
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$
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81,600
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6.8%
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$
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90,286
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7.6%
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$
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59,731
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6.0%
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International segment income
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5,634
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6.2%
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Retail segment income
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7,636
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6.5%
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8,167
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6.0%
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5,506
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5.0%
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General corporate expenses
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(32,472
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)
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(35,522
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)
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(27,706
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)
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Amortization of intangible assets
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(3,941
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)
|
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Mark-to-market
credit (charge) for common stock warrant
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4,300
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|
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|
(5,500
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)
|
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|
Interest expense, net
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|
(14,446
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)
|
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|
|
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|
(13,986
|
)
|
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|
|
|
|
|
(17,219
|
)
|
|
|
|
|
Loss on debt retirement
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(398
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)
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|
|
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|
(9,857
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)
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|
(2,776
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)
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Intercompany profit elimination
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(500
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)
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2,100
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1,100
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Income from continuing operations
before income taxes
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$
|
43,113
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3.2%
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$
|
45,488
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3.6%
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$
|
13,136
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1.3%
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The manufacturing, international and retail segments and
interest expense, net, are discussed below. Amortization of
intangible assets,
mark-to-market
credit (charge) for the common stock warrant, and loss on debt
retirement are discussed above.
General corporate expenses in 2006 decreased by
$3.0 million from 2005 due primarily to lower incentive
compensation. General corporate expenses in 2005 increased by
$7.8 million over 2004 primarily due to information
technology projects and corporate compensation programs.
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. In
reconciling 2005 and 2004 results by segment, a credit (income)
resulted from the reduction in intercompany profit in inventory
due to declining inventories at the discontinued retail
operations.
Restructuring
Charges
During 2006, we closed four homebuilding plants and recorded a
$1.2 million impairment charge for one of the closures.
Also in 2006, the accrual for closed plant warranty costs was
reduced by $1.0 million due to favorable experience.
During 2005, a $2.3 million charge was recorded to increase
the accrual for closed plant warranty costs due to unfavorable
experience.
During 2004, we closed 15 retail sales centers and one
homebuilding facility and recorded $5.5 million of
restructuring charges. These restructuring charges consisted of
$2.8 million for the manufacturing segment and
$3.5 million in discontinued operations for the retail
closures, partially offset by $0.8 million of inter-company
profit (income). The manufacturing segment charges consisted of
a fixed asset impairment charge of $2.5 million,
24
severance costs of $0.8 million and an inventory write down
of $0.5 million for the closure of one plant. In addition,
closed plant warranty accruals were reduced by $1.0 million
due to favorable experience.
Inventory charges, warranty charges and credits and intercompany
profit adjustments are included in cost of sales. Fixed asset
impairment charges and severance costs are included in
restructuring charges. See additional discussion of
restructuring charges in Note 7 of Notes to
Consolidated Financial Statements in Item 8 of this
Report.
Impairment
Tests for Goodwill
For the years ended December 30, 2006, December 31,
2005 and January 1, 2005, 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.
Manufacturing
Segment
We evaluate the performance of our manufacturing segment based
on income before interest, income taxes, amortization of
intangible assets and general corporate expenses. A summary of
the manufacturing segment for the years ended December 30,
2006, December 31, 2005 and January 1, 2005 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
06 vs 05
|
|
|
05 vs 04
|
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
%
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Change
|
|
|
Change
|
|
|
Manufacturing segment net sales
(in thousands)
|
|
$
|
1,195,834
|
|
|
$
|
1,190,819
|
|
|
$
|
1,002,164
|
|
|
|
|
|
|
|
19
|
%
|
Manufacturing segment income
(in thousands)
|
|
$
|
81,600
|
|
|
$
|
90,286
|
|
|
$
|
59,731
|
|
|
|
(10
|
)%
|
|
|
51
|
%
|
Manufacturing segment margin %
|
|
|
6.8
|
%
|
|
|
7.6
|
%
|
|
|
6.0
|
%
|
|
|
|
|
|
|
|
|
HUD -code home shipments
|
|
|
15,341
|
|
|
|
18,989
|
|
|
|
18,782
|
|
|
|
(19
|
)%
|
|
|
1
|
%
|
U.S. modular home and unit
shipments
|
|
|
4,653
|
|
|
|
3,958
|
|
|
|
3,274
|
|
|
|
18
|
%
|
|
|
21
|
%
|
Canadian home shipments
|
|
|
1,132
|
|
|
|
1,013
|
|
|
|
922
|
|
|
|
12
|
%
|
|
|
10
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total homes and units sold
|
|
|
21,126
|
|
|
|
23,960
|
|
|
|
22,978
|
|
|
|
(12
|
)%
|
|
|
4
|
%
|
Floors sold
|
|
|
40,521
|
|
|
|
44,905
|
|
|
|
44,036
|
|
|
|
(10
|
)%
|
|
|
2
|
%
|
Multi-section mix
|
|
|
80
|
%
|
|
|
79
|
%
|
|
|
85
|
%
|
|
|
|
|
|
|
|
|
Average unit selling price,
excluding delivery
|
|
$
|
51,800
|
|
|
$
|
45,700
|
|
|
$
|
42,000
|
|
|
|
13
|
%
|
|
|
9
|
%
|
Manufacturing facilities at year
end
|
|
|
30
|
|
|
|
32
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
Manufacturing
segment 2006 versus 2005 analysis
Manufacturing segment sales in 2006 increased slightly from 2005
as sales from Highland and North American since acquisition
and full year results from the New Era group in 2006 offset a
decline in sales from the other manufacturing plants, including
the $24.4 million decrease in sales to FEMA. The
incremental net sales provided by the acquisitions totaled
$73.4 million. A difficult housing market during the second
half of 2006 led to low levels of unfilled production orders and
lower sales volumes at most of our U.S. plants. Higher
average selling prices in 2006 partially offset lower home and
unit sales at existing operations and resulted from price
increases, which, in part, offset rising material costs. Also
affecting average selling prices in 2006 was product mix,
including increased sales of higher priced modular homes and
larger modular housing units sold to the military. Increased
sales of modular homes in 2006 resulted primarily from
acquisitions. The multi-section mix increased due in part to
selling fewer single-section homes to FEMA.
Manufacturing segment income in 2006 decreased by
$8.7 million versus 2005 as a result of market conditions
in the second half of 2006 which resulted in low levels of
unfilled orders at most of our U.S. plants, an increased
number of days of production down-time, and related production
inefficiencies from under utilized factory capacity.
25
These unfavorable changes were partially offset by income from
the acquisitions. Additionally, 2006 sales and income at our
Canadian operations increased versus 2005 due to strong market
conditions. In response to the U.S. market conditions,
since June 2006 we have closed five manufacturing plants,
including one in January 2007. Results for 2006 include a fixed
asset impairment charge of $1.2 million for one of the
plant closures, gains of $4.7 million primarily from the
sale of an investment property in Florida and five idle
manufacturing plants, and a reduction of closed plant warranty
reserves of $1.0 million due to favorable experience.
Results in 2005 include gains of $1.5 million from the sale
of three idle plants and a charge of $2.3 million to
increase closed plant warranty reserves due to unfavorable
experience.
The inclusion of North American, Highland and the New Era group
in manufacturing results since their respective acquisition
dates contributed to an increase in net sales and operating
income in 2006 as compared to 2005. On a pro forma basis,
assuming we had owned these acquisitions during the entire years
ended December 30, 2006 and December 31, 2005,
manufacturing net sales and segment income in 2006 would have
decreased by 7% and 14%, respectively, versus the prior year as
compared to no change and a 10% decrease, 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
production orders for homes at December 30, 2006 totaled
approximately $36 million compared to $147 million at
December 31, 2005. Current unfilled orders are concentrated
at three manufacturing locations with the remainder of our
plants currently operating with one week or less of unfilled
orders.
Manufacturing
segment 2005 versus 2004 analysis
Manufacturing net sales for the year ended December 31,
2005 increased compared to 2004 primarily from the inclusion of
the New Era group net sales of approximately $48 million,
the inclusion of sales to FEMA totaling approximately
$47 million, higher average home selling prices and greater
delivery revenues. Average manufacturing selling prices
increased in 2005 as compared to 2004 as a result of price
increases which, in part, offset rising material costs.
Additionally, product mix, including increased sales of higher
priced modular homes, contributed to the increased selling
prices. Increased sales of modular homes in 2005 resulted, in
part, from the inclusion of the New Era group. The multi-section
mix decreased due to the sale of 1,372 single-section homes to
FEMA.
Manufacturing segment income for the year ended
December 31, 2005 increased over the prior year by
$30.6 million due to increased sales, including the New Era
group sales and sales to FEMA, as well as improved pricing,
material purchasing, and production efficiencies. Manufacturing
segment income in 2005 was reduced as a result of an accrual of
$2.3 million of additional closed plant warranty costs
based on unfavorable experience, partially offset by net gains
of $1.5 million from the sale of three idle plants.
The inclusion of the New Era group in manufacturing results
contributed to an increase in net sales and operating income in
2005 as compared to 2004. On a pro forma basis, assuming we had
owned the New Era group during the entire years ended
January 1, 2005 and December 31, 2005, manufacturing
net sales and segment income in 2005 would have increased by 13%
and 43%, respectively, versus the prior year as compared to
increases of 19% 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
production orders for homes at December 31, 2005 totaled
approximately $147 million compared to $90 million at
January 1, 2005.
International
Segment
Our international segment consists of United Kingdom-based
Caledonian, which was acquired on April 7, 2006.
Caledonian, a leading modular manufacturer, constructs
steel-framed modular buildings for use as prisons, military
accommodations, hotels and residential units. Caledonians
steel-framed modular technology allows for multi-story
construction. As of December 30, 2006, Caledonian operated
four manufacturing plants including a new plant that commenced
operations in November.
26
We evaluate the performance of our international segment based
on income before interest, income taxes, amortization of
intangible assets and general corporate expenses. A summary of
the international segment from date of acquisition through
December 30, 2006 is as follows:
|
|
|
|
|
|
|
2006
|
|
|
International segment net sales
(in thousands)
|
|
$
|
90,717
|
|
International segment income (in
thousands)
|
|
$
|
5,634
|
|
International segment margin %
|
|
|
6.2
|
%
|
In the period, approximately 70% of revenue was derived from
custodial (prison) and military accommodations projects with the
balance attributable to residential and hotel projects.
Contracts and orders pending contracts under framework
agreements totaled approximately $225 million at year end,
sufficient to secure production levels well into 2007 for most
of the plants. Approximately 70% of this business is custodial
and military accommodations projects.
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. A summary of the retail segment for the years ended
December 30, 2006, December 31, 2005 and
January 1, 2005 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
06 vs 05
|
|
|
05 vs 04
|
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
%
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Change
|
|
|
Change
|
|
|
Retail segment net sales (in
thousands)
|
|
$
|
117,397
|
|
|
$
|
135,371
|
|
|
$
|
110,024
|
|
|
|
(13
|
)%
|
|
|
23
|
%
|
Retail segment income (in
thousands)
|
|
$
|
7,636
|
|
|
$
|
8,167
|
|
|
$
|
5,506
|
|
|
|
(7
|
)%
|
|
|
48
|
%
|
Retail segment margin %
|
|
|
6.5
|
%
|
|
|
6.0
|
%
|
|
|
5.0
|
%
|
|
|
|
|
|
|
|
|
New homes retail sold
|
|
|
629
|
|
|
|
748
|
|
|
|
687
|
|
|
|
(16
|
)%
|
|
|
9
|
%
|
% Champion-produced new homes sold
|
|
|
86
|
%
|
|
|
82
|
%
|
|
|
78
|
%
|
|
|
|
|
|
|
|
|
New home multi-section mix
|
|
|
97
|
%
|
|
|
97
|
%
|
|
|
97
|
%
|
|
|
|
|
|
|
|
|
Average new home retail selling
price
|
|
$
|
184,600
|
|
|
$
|
178,900
|
|
|
$
|
157,400
|
|
|
|
3
|
%
|
|
|
14
|
%
|
Sales centers at period end
|
|
|
16
|
|
|
|
20
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
Retail
segment 2006 versus 2005 analysis
Retail sales for 2006 decreased 13% versus 2005 due to selling
16% fewer homes, primarily as a result of housing market
conditions in California. The effect of lower unit sales was
partially offset by an increased average selling price per home
to offset higher prices from the manufacturers, in part due to
higher raw material costs. Average selling prices also increased
as a result of selling higher priced homes with more add-ons,
improvements and amenities.
Retail gross margin as a percent of sales in 2006 was comparable
to 2005. The increase in the retail segment margin percent was
attributable to lower SG&A costs in 2006, partially offset
by lower gross margin due to lower sales.
Retail
segment 2005 versus 2004 analysis
Retail net sales for the year ended December 31, 2005
increased versus 2004 due to an increased average selling price
per home and from selling more homes from a greater number of
sales offices in operation. The increased average home selling
price resulted from improved market conditions and the sale of
homes with more add-ons, improvements and amenities.
Additionally, retail prices increased to offset higher prices
from the manufacturers due to rising material costs. Retail
segment income for year ended December 31, 2005 improved by
$2.7 million compared to the same period in 2004 primarily
due to increased sales.
27
Discontinued
Operations
Losses from discontinued operations for the years ended
December 30, 2006, December 31, 2005 and
January 1, 2005 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Income (loss) from retail
operations
|
|
$
|
5
|
|
|
$
|
(4,334
|
)
|
|
$
|
(7,322
|
)
|
(Loss) income from consumer
finance business
|
|
|
(21
|
)
|
|
|
(49
|
)
|
|
|
1,197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loss from discontinued
operations
|
|
$
|
(16
|
)
|
|
$
|
(4,383
|
)
|
|
$
|
(6,125
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2005, we completed the disposal of our traditional retail
operations through the sale of our remaining 42 traditional
retail sales centers. As a result, the 66 retail sales locations
disposed of during 2005 and 2004 have been classified as
discontinued operations for the periods presented.
Loss from discontinued retail operations included operating
losses of $2.3 million and $5.2 million for 2005 and
2004, respectively, including restructuring charges totaling
$1.7 million in 2004 for closures of sales centers. Loss
from discontinued retail operations also included net losses of
$2.0 million and $2.1 million for 2005 and 2004,
respectively, for sales centers sold or to be sold, including
restructuring charges totaling $1.8 million in 2004. In
connection with the sales and closures of retail locations
during 2005 and 2004, intercompany manufacturing profit of
$2.4 million and $1.7 million, respectively, was
recognized in the consolidated statement of operations as a
result of the liquidation of retail inventory, which is not
classified as discontinued operations.
Income from the discontinued consumer finance business in 2004
resulted from the settlement of contractual obligations that
were accrued as part of the loss on discontinuance in 2003.
Interest
Income and Interest Expense
Interest
income and expense 2006 versus 2005 analysis
Interest income in 2006 was higher than in 2005 due to a higher
average interest rate, partially offset by lower average cash
balances. Interest expense in 2006 was higher than in 2005 due
to higher average debt balances in 2006 related to the Sterling
Term Loan that was entered into in April of 2006, in connection
with the Caledonian acquisition, partially offset by a lower
average interest rate due to the replacement in the fourth
quarter of 2005 of our 11.25% Senior Notes with the
$100 million Term Loan with a LIBOR-based interest rate.
Interest
income and expense 2005 versus 2004 analysis
Interest income in 2005 was higher than in 2004 due to higher
cash balances and increased interest rates. Interest expense in
2005 was lower than in 2004 due to debt reduction during 2005
and the first half of 2004 and the refinancing of the
11.25% Senior Notes due 2007 with the $100 million
Term Loan in the fourth quarter of 2005.
Income
Taxes
Income
taxes 2006 versus 2005 analysis
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. The reversal was originally reported as
$109.7 million but was subsequently reduced effective
July 1, 2006, by $7.8 million primarily to eliminate
the tax effect of net operating loss carryforwards related to
stock option tax deductions, the benefit of which, when
realized, will result in an increase to shareholders equity.
28
As of December 30, 2006, we had net operating loss
(NOL) carryforwards of approximately
$178 million for U.S. federal tax purposes available
to offset certain future U.S. taxable income that expire in
2023 through 2026. As of December 30, 2006, we had state
net NOL carryforwards of approximately $181 million
available to offset future state taxable income that expire
primarily in 2016 through 2026. For financial reporting
purposes, our U.S. pretax income for 2006 and 2005 totaled
approximately $71 million. We expect to generate sufficient
U.S. pretax income in the future to utilize available NOL
carryforwards.
During periods when these NOL carryforwards are available, our
cash tax expense is expected to be significantly lower than tax
expense for financial reporting purposes. Our cash tax expense
in these periods will be primarily related to foreign income
taxes.
Income
taxes 2005 versus 2004 analysis
During 2005 and 2004 we provided a 100% valuation allowance for
our deferred tax assets. The effective tax rates for the years
ended December 31, 2005 and January 1, 2005 differ
from the 35% federal statutory rate in part because of this 100%
valuation allowance. Income taxes in 2005 and 2004 consisted of
foreign (Canadian) and state taxes. Taxes in 2005 also included
U.S. federal tax of $0.8 million on dividends paid by
our Canadian subsidiary. Taxes in 2004 also included a
$12 million decrease in the allowance for tax adjustments
as a result of the finalization of certain U.S. tax
examinations.
As of December 31, 2005, we had net operating loss
carryforwards for tax purposes totaling approximately
$130 million that were available to offset certain future
taxable income. Additionally, as a result of the sale of our
remaining traditional retail operations during 2005,
approximately $49 million of additional net operating
losses became available in 2006, upon completion of certain
disposal activities.
Results
of Fourth Quarter 2006 Versus 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
|
(Dollars in thousands, except
|
|
|
|
average selling prices)
|
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing segment
|
|
$
|
250,823
|
|
|
$
|
350,247
|
|
|
|
(28
|
)%
|
International segment
|
|
|
32,640
|
|
|
|
|
|
|
|
|
|
Retail segment
|
|
|
23,685
|
|
|
|
34,640
|
|
|
|
(32
|
)%
|
Less: intercompany
|
|
|
(6,200
|
)
|
|
|
(9,400
|
)
|
|
|
(34
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
$
|
300,948
|
|
|
$
|
375,487
|
|
|
|
(20
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
$
|
49,593
|
|
|
$
|
66,095
|
|
|
|
(25
|
)%
|
Selling, general and
administrative expenses
|
|
|
38,522
|
|
|
|
46,413
|
|
|
|
(17
|
)%
|
Amortization of intangible assets
|
|
|
1,428
|
|
|
|
|
|
|
|
|
|
Loss on debt retirement
|
|
|
398
|
|
|
|
8,956
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
9,245
|
|
|
|
10,726
|
|
|
|
(14
|
)%
|
Interest expense, net
|
|
|
4,151
|
|
|
|
3,119
|
|
|
|
33
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
before income taxes
|
|
$
|
5,094
|
|
|
$
|
7,607
|
|
|
|
(33
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing segment income
|
|
$
|
15,042
|
|
|
$
|
26,971
|
|
|
|
(44
|
)%
|
International segment income
|
|
|
2,476
|
|
|
|
|
|
|
|
|
|
Retail segment income
|
|
|
1,319
|
|
|
|
2,115
|
|
|
|
(38
|
)%
|
General corporate expenses
|
|
|
(8,066
|
)
|
|
|
(9,704
|
)
|
|
|
(17
|
)%
|
Amortization of intangible assets
|
|
|
(1,428
|
)
|
|
|
|
|
|
|
|
|
Loss on debt retirement
|
|
|
(398
|
)
|
|
|
(8,956
|
)
|
|
|
|
|
Interest expense, net
|
|
|
(4,151
|
)
|
|
|
(3,119
|
)
|
|
|
33
|
%
|
Intercompany profit elimination
|
|
|
300
|
|
|
|
300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
before income taxes
|
|
$
|
5,094
|
|
|
$
|
7,607
|
|
|
|
(33
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
|
(Dollars in thousands, except
|
|
|
|
average selling prices)
|
|
|
As a percent of net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
16.5
|
%
|
|
|
17.6
|
%
|
|
|
|
|
SG&A
|
|
|
12.8
|
%
|
|
|
12.4
|
%
|
|
|
|
|
Income from continuing operations
before income taxes
|
|
|
1.7
|
%
|
|
|
2.0
|
%
|
|
|
|
|
Manufacturing segment margin %
|
|
|
6.0
|
%
|
|
|
7.7
|
%
|
|
|
|
|
International segment margin %
|
|
|
7.6
|
%
|
|
|
|
|
|
|
|
|
Retail segment margin %
|
|
|
5.6
|
%
|
|
|
6.1
|
%
|
|
|
|
|
Manufacturing segment
|
|
|
|
|
|
|
|
|
|
|
|
|
HUD-code home shipments
|
|
|
2,804
|
|
|
|
5,415
|
|
|
|
(48
|
)%
|
U.S. modular home and unit
shipments
|
|
|
1,140
|
|
|
|
1,222
|
|
|
|
(7
|
)%
|
Canadian home shipments
|
|
|
275
|
|
|
|
281
|
|
|
|
(2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total homes and units sold
|
|
|
4,219
|
|
|
|
6,918
|
|
|
|
(39
|
)%
|
Floors sold
|
|
|
8,242
|
|
|
|
12,091
|
|
|
|
(32
|
)%
|
Mutli-section mix
|
|
|
82
|
%
|
|
|
65
|
%
|
|
|
|
|
Average unit selling price,
|
|
$
|
54,600
|
|
|
$
|
45,600
|
|
|
|
20
|
%
|
excluding delivery
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail segment
|
|
|
|
|
|
|
|
|
|
|
|
|
New homes retail sold
|
|
|
134
|
|
|
|
188
|
|
|
|
(29
|
)%
|
% Champion-produced new homes sold
|
|
|
83
|
%
|
|
|
84
|
%
|
|
|
|
|
New home multi-section mix
|
|
|
96
|
%
|
|
|
97
|
%
|
|
|
|
|
Average new home retail selling
price
|
|
$
|
173,400
|
|
|
$
|
182,500
|
|
|
|
(5
|
)%
|
Net sales for the fourth quarter of 2006 decreased by 20% from
the fourth quarter of 2005 due primarily to a $99.4 million
decline in sales at the manufacturing segment, partially offset
by sales totaling $32.6 million from the international
segment, which was acquired in 2006. Manufacturing segment sales
in the fourth quarter of 2005 included sales of approximately
$47 million to FEMA in connection with its hurricane relief
efforts.
Gross margin for the fourth quarter of 2006 decreased
$16.5 million or 25% from the comparable period of 2005,
due primarily to the decline in manufacturing segment sales,
partially offset by gross margin from the international segment.
SG&A decreased $7.9 million primarily due to reduced
sales and earnings in the manufacturing segment, lower SG&A
at the retail segment and the corporate office, partially offset
by SG&A from the 2006 acquisitions. A significant portion of
the reduction in SG&A is related to lower costs for
incentive compensation programs as a result of lower
profitability and the failure to achieve incentive compensation
targets.
Interest expense increased $1.0 million as a result of
higher average debt balances in 2006 related to the Sterling
Term Loan that was entered into in April of 2006, partially
offset by a lower average interest rate.
Operating results in the fourth quarter of 2005 included a loss
on debt retirement of $9.0 million from the purchase and
retirement of $88.4 million of Senior Notes for cash
payments totaling $96.4 million.
The inclusion of the 2006 acquisitions in consolidated results
contributed to net sales and operating income during the fourth
quarter of 2006 as compared to 2005. On a pro forma basis,
assuming we had owned the acquisitions during the quarter ended
December 31, 2005, consolidated net sales and operating
income for the fourth quarter of 2006 would have decreased by
29% and 36%, respectively, versus the prior year period as
compared to decreases of 20% and 14%, respectively, as reported
in the table above.
Manufacturing
segment
Manufacturing segment net sales for the fourth quarter of 2006
decreased by $99.4 million compared to 2005, which included
sales of approximately $47 million to FEMA in connection
with its hurricane relief efforts. Sales in
30
2006 include sales from North American and Highland. Market
conditions throughout the U.S. have resulted in reduced
incoming order rates and sales.
Manufacturing segment income for the fourth quarter of 2006
decreased by $11.9 million versus the comparable quarter of
2005 due to decreased sales and production inefficiencies from
under utilized factory capacity. Market conditions during the
fourth quarter of 2006 resulted in low levels of unfilled orders
at most of our U.S. plants and a decreased number of
production days. In response to the market conditions, since
June 2006 we have closed five manufacturing plants, including
one during the fourth quarter and one in January 2007. These
unfavorable changes were partially offset by income from the
acquisitions. Additionally, 2006 sales and income at our
Canadian operations increased versus 2005 due to strong market
conditions. Results in 2006 include a $1.0 million
reduction to closed plant warranty reserves due to favorable
experience while 2005 results include an accrual of
$2.3 million of additional closed plant warranty costs due
to unfavorable experience.
The inclusion of North American and Highland in manufacturing
results contributed to an increase in net sales and operating
income during the fourth quarter of 2006 as compared to 2005. On
a pro forma basis, assuming we had owned these acquisitions
during the quarter ended December 31, 2005, manufacturing
net sales and segment income would have decreased by 31% and
49%, respectively, versus the fourth quarter of 2005, as
compared to decreases of 28% and 44%, respectively, as reported
in the table above.
International
segment
Approximately 70% of fourth quarter international segment
revenue was derived from custodial (prison) and military
accommodation projects with the balance attributable to hotel
and residential projects. During the quarter, operations
commenced in a fourth manufacturing facility, which is located
at the same site as existing operations in the UK. This new
facility is expected to reach full utilization by late 2007.
International segment margin percent improved to 7.6% as
compared to the prior two quarters. This improvement was a
result of sales mix and the completion and finalization of
certain contracts, partially offset by the start up of the new
plant. During the quarter approximately $80 million of
orders were obtained.
Retail
segment
Retail segment net sales for the fourth quarter of 2006
decreased 32% versus the comparable period of 2005 primarily due
to selling 29% fewer homes in a difficult California housing
market. During the quarter, four sales locations were closed or
consolidated, leaving 16 sales offices in operation. Retail
segment income for the fourth quarter of 2006 declined by
$0.8 million compared to the same period of 2005 primarily
due to lower gross margin from decreased sales, partially offset
by lower SG&A due in part to lower incentive compensation.
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 loan or the home for the unpaid balance of the
floor plan loan, subject to certain adjustments. In the event of
such repurchases, our loss is equal to the difference between
the repurchase price and the net price we realize upon 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 44% 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 December 30, 2006, our largest
independent retailer, a nationwide retailer,
31
had approximately $6.9 million of inventory subject to
repurchase for up to 18 months from date of invoice. As of
December 30, 2006 our next 24 largest independent retailers
had an aggregate of approximately $59.1 million of
inventory subject to repurchase for generally up to
18 months from date of invoice, with individual amounts
ranging from approximately $1.1 million to
$6.1 million per retailer.
A summary of actual repurchase activity for the last three years
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in millions)
|
|
|
Estimated repurchase obligation at
end of year
|
|
$
|
250
|
|
|
$
|
260
|
|
|
$
|
250
|
|
Number of retailers defaults
|
|
|
8
|
|
|
|
17
|
|
|
|
16
|
|
Number of homes repurchased
|
|
|
22
|
|
|
|
50
|
|
|
|
46
|
|
Total repurchase price
|
|
$
|
1.2
|
|
|
$
|
2.1
|
|
|
$
|
1.7
|
|
Losses incurred on homes
repurchased
|
|
$
|
0.1
|
|
|
$
|
0.3
|
|
|
$
|
0.3
|
|
We lowered repurchase reserves by $1.2 million in 2006 and
by $1.0 million in both 2005 and 2004 as a result of better
experience during those years and the improved financial
condition of our largest independent retailers.
Off
Balance Sheet Arrangements
Our off balance sheet arrangements at December 30, 2006,
consist of the contingent repurchase obligation totaling
approximately $250 million, surety bonds and letters of
credit totaling $76.1 million and guarantees of
$2.9 million of debt of unconsolidated affiliates.
Liquidity
and Capital Resources
Unrestricted cash balances totaled $70.2 million at
December 30, 2006. During 2006, continuing operating
activities provided net cash of $59.9 million. Excluding
the working capital acquired in the purchase of the 2006
acquisitions, inventories, accounts receivable and accounts
payable decreased by $13.1 million, $28.6 million and
$16.4 million, respectively, in part as a result of FEMA
related accounts receivable and inventory totaling
$17 million which were converted into cash during the first
quarter of 2006, and reduced sales in December 2006 versus
December 2005. Other cash provided during the period included
$78.6 million of proceeds from the Sterling Term Loan due
2012, which was used in the acquisition of Caledonian.
Additionally, $7.6 million of cash proceeds resulted from
the sale of property in Florida and five idle plants. Cash
totaling $153.8 million was used for the 2006 acquisitions.
In 2006, we used cash totaling $34.7 million to purchase
$7.0 million of our Senior Notes and for the voluntary
repayment of $27.8 million of our Term Loan due 2012 in
addition to the normally scheduled debt payments. Other cash
uses during the period included $17.6 million of capital
expenditures.
On October 31, 2005, we entered into a senior secured
credit agreement with various financial institutions. On
April 7, 2006, concurrent with the closing of the
acquisition of Caledonian, we entered into an Amended and
Restated Credit Agreement (the Restated Credit
Agreement) with various financial institutions. The
Restated Credit Agreement is a senior secured credit facility
comprised of a $100 million term loan (the Term
Loan), a £45 million (approximately
$80 million at April 7, 2006) term loan
denominated in Pounds Sterling (the Sterling Term
Loan), a revolving line of credit in the amount of
$40 million and a $60 million letter of credit
facility. As of December 30, 2006, letters of credit issued
under the facility totaled $56.9 million and there were no
borrowings under the revolving line of credit. The Restated
Credit Agreement also provides us with the right from time to
time to borrow incremental uncommitted term loans of up to an
additional $100 million, which may be denominated in
U.S. Dollars or Pounds Sterling, amended certain
restrictive covenants to permit the acquisition of Caledonian
and provided increased flexibility for foreign acquisitions
generally. The Restated Credit Agreement is secured by a first
security interest in substantially all of the assets of our
domestic operating subsidiaries.
The Restated Credit Agreement requires annual principal payments
for the Term Loan and the Sterling Term Loan totaling
approximately $1.9 million due in equal quarterly
installments. The interest rate for borrowings under the Term
Loan is currently a LIBOR based rate (5.35% at December 30,
2006) plus 2.5%. The interest rate for borrowings under the
Sterling Term Loan is currently a UK LIBOR based rate (5.25% at
December 30, 2006) plus 2.5%. Letter of credit fees
are 2.60% annually and revolver borrowings bear interest at
either the prime interest rate
32
plus up to 1.5% or LIBOR plus up to 2.5%. In addition, there is
a fee on the unused portion of the facility ranging from 0.50%
to 0.75% annually.
The maturity date for each of the Term Loan, the Sterling Term
Loan and the letter of credit facility is October 31, 2012,
and the maturity date for the revolving line of credit is
October 31, 2010 unless, as of February 3, 2009, more
than $25 million in aggregate principal amount of our
Senior Notes due 2009 are outstanding, then the maturity date
for the four facilities will be February 3, 2009.
The Restated Credit Agreement contains affirmative and negative
covenants. Under the Restated Credit Agreement, we are required
to maintain a maximum Leverage Ratio (as defined) of no more
than 3.5 to 1 for the fourth fiscal quarter of 2006, 3.25 to 1
for the first, second and third fiscal quarters of 2007, 3.0 to
1 for the fourth fiscal quarter of 2007 and 2.75 to 1
thereafter. The Leverage Ratio is the ratio of our Total Debt
(as defined) on the last day of a fiscal quarter to our
consolidated EBITDA (as defined) for the four-quarter period
then ended. We are also required to maintain a minimum Interest
Coverage Ratio (as defined) of not less than 3.0 to 1. The
Interest Coverage Ratio is the ratio of our consolidated EBITDA
for the four-quarter period then ended to our Cash Interest
Expense (as defined) over the same four-quarter period. In
addition, annual mandatory prepayments are required should we
generate Excess Cash Flow (as defined). As of December 30,
2006, we were in compliance with all covenants. However,
scheduled decreases in the leverage covenant coupled with lower
expected levels of EBITDA (as defined), particularly in the
first quarter of 2007, make it unlikely that we will remain in
compliance. As a result, we have initiated discussions with our
lenders for purposes of amending the Credit Agreement.
The Senior Notes due 2009 are secured equally and ratably with
our obligations under the Restated Credit Agreement. Interest is
payable semi-annually at an annual rate of 7.625%. The indenture
governing the Senior Notes due 2009 contains covenants that,
among other things, limit our ability to incur additional
indebtedness and incur liens on assets.
We continuously evaluate our capital structure. Strategies
considered to improve our capital structure include without
limitation, purchasing, refinancing, exchanging, or otherwise
retiring our outstanding indebtedness, restructuring of
obligations, new financings, and issuances of securities,
whether in the open market or by other means and to the extent
permitted by our existing financing arrangements. We evaluate
all potential transactions in light of existing and expected
market conditions. The amounts involved in any such
transactions, individually or in the aggregate, may be material.
We expect to spend less than $15 million in 2007 on capital
expenditures. 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
and/or incur
additional indebtedness to finance acquisitions of businesses.
Contingent
Liabilities and Obligations
We had significant contingent liabilities and obligations at
December 30, 2006, including surety bonds and letters of
credit totaling $76.1 million and guarantees of
$2.9 million of debt of unconsolidated affiliates.
Additionally, we are contingently obligated under repurchase
agreements with certain lending institutions that provide floor
plan financing to our independent retailers. We estimate our
contingent repurchase obligation as of December 30, 2006
was approximately $250 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 December 30, 2006, our unrestricted cash balances
totaled $70.2 million and we had unused availability of
$27.3 million under our revolving credit facility.
Therefore, total cash available from these sources was
33
approximately $97.5 million. We expect that our cash flow
from operations for the next two years will be adequate to fund
capital expenditures during that period as well as the
approximately $4.3 million of scheduled debt payments due
in 2007 and 2008. Therefore, the level of cash availability is
projected to be in excess of cash needed to operate our
businesses for the next two years. We may use a portion of our
cash balances
and/or incur
additional indebtedness to finance acquisitions of businesses.
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.
As of December 30, 2006, we were in compliance with all
Term Loan covenants. However, as a result of scheduled decreases
in the leverage covenant coupled with lower forecasted results
due to U.S. housing market conditions, we will likely be
unable to remain in compliance with the current covenants during
2007. We have initiated discussions with the lenders to obtain
an amendment to the Restated Credit Agreement. The inability to
secure a satisfactory amendment to the Restated Credit Agreement
could result in a demand from the lenders to repay all or a
portion of the Term Loans and the termination of the letter of
credit and revolving line of credit facilities. In the event we
fail to obtain a satisfactory amendment, we would seek to
refinance the related indebtedness.
Contractual
Obligations
The following table presents a summary of payments due by period
for our contractual obligations for long-term debt, capital
leases, operating leases, and certain other long-term
liabilities as of December 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period: After December 30, 2006
|
|
|
|
Total
|
|
|
< 1 Year
|
|
|
1 to 3 Years
|
|
|
3 to 5 Years
|
|
|
> 5 Years
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Long-term debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Notes due 2009
|
|
$
|
82,298
|
|
|
$
|
|
|
|
$
|
82,298
|
|
|
$
|
|
|
|
$
|
|
|
Term Loans due 2012
|
|
|
158,623
|
|
|
|
1,883
|
|
|
|
3,766
|
|
|
|
3,766
|
|
|
|
149,208
|
*
|
Obligations under industrial
revenue bonds
|
|
|
12,430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,430
|
|
Capital leases and other debt
|
|
|
1,266
|
|
|
|
285
|
|
|
|
489
|
|
|
|
492
|
|
|
|
|
|
Operating leases
|
|
|
20,813
|
|
|
|
4,792
|
|
|
|
4,980
|
|
|
|
3,819
|
|
|
|
7,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
275,430
|
|
|
$
|
6,960
|
|
|
$
|
91,533
|
|
|
$
|
8,077
|
|
|
$
|
168,860
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
The maturity date for each of the Term Loans is October 31,
2012, unless as of February 3, 2009, more than
$25 million in aggregate principal amount of our
7.625% Senior Notes due 2009 are outstanding, then the
maturity date will be February 3, 2009. |
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
($0.75 million per claim in California) and automobile
34
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 $0.5 million 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 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.
Property,
Plant and Equipment
The recoverability of property, plant and equipment 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 prices, appraised values or projected
undiscounted cash flows. 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 and retail sales centers. 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. 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
achieving historical profitability and our outlook for ongoing
profitability, among other factors. Projections of future
profitability and levels of taxable income are required in
assessing deferred tax assets and involve significant estimates
and assumptions. Significant changes in these estimates and
assumptions could result in the need to establish a valuation
allowance for all or part of our deferred tax assets again in
the future.
Goodwill
and Amortizable Intangible Assets
Goodwill and amortizable intangible assets are 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 test for impairment of amortizable intangible
assets in accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived
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 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
35
of manufacturing facilities in operation, current industry and
economic conditions, historical results and inflation. We also
use available market value information to evaluate fair value.
Significant changes in the estimates and assumptions used in
calculating the fair value of the segments and the
recoverability of goodwill and amortizable intangible assets, or
differences between estimates and actual results could result in
impairment charges in the future.
Wholesale
Repurchase Reserves
Approximately 50% of our manufacturing sales to independent
retailers are made pursuant to repurchase agreements with the
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.
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.
Impact of
Recently Issued Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board issued
Interpretation Number 48 (FIN 48)
Accounting for Uncertainty in Income Taxes
an interpretation of FASB Statement No. 109.
FIN 48 is effective beginning with our 2007 fiscal year.
FIN 48 clarifies accounting for uncertain tax positions
utilizing a more likely than not recognition
threshold for tax positions. We 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 best estimate of the ultimate tax benefit that
will be sustained if audited by the taxing authority. The
adoption by the Company of FIN 48 in the first quarter of
2007 is not expected to have a material effect on our financial
position or results of operations, but will result in additional
disclosures in the financial statements.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
Our debt obligations under the Restated Credit Agreement are
currently subject to variable rates of interest based on both
U.S. and UK LIBOR. A 100 basis point increase in the underlying
interest rate would result in an additional annual interest cost
of approximately $1.6 million, assuming average related
debt of $158.6 million, which was the amount of outstanding
borrowings at December 30, 2006.
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 $124,000, assuming average related debt of
$12.4 million, which was the amount of outstanding
borrowings at December 30, 2006.
36
Our approach to interest rate risk is to balance our borrowings
between fixed rate and variable rate debt. At December 30,
2006, we had $82.3 million of Senior Notes at a fixed rate
and $158.6 million of Term Notes at a variable rate. At
December 31, 2005, we had $92.3 million of Senior
Notes at a fixed rate and $99.8 million of Term Notes at a
variable rate.
We are exposed to foreign exchange risk with our factory-built
housing operations in Canada and our international segment in
the UK. Our Canadian operations had 2006 net sales totaling
$Can 82 million. Assuming future annual Canadian sales
equal to 2006 sales, a change of 1.0% in exchange rates between
the U.S. and Canadian dollars would change consolidated sales by
$0.8 million. Our international segment had annualized 2006
sales of £64 million (pounds Sterling). Assuming
future annual UK sales equal to 2006 annualized sales, a change
of 1.0% in exchange rates between the U.S. dollar and the
British pound Sterling would change consolidated sales by
$0.6 million. Net income of the Canadian and UK operations
would also be affected by changes in exchange rates.
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 UK. Therefore a significant portion of foreign
exchange risk related to our Caledonian investment in the UK is
offset. We do not attempt to manage foreign exchange risk that
relates to our investment in the Canadian operations.
|
|
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 December 30, 2006, 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 December 30, 2006, 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. The Company is in the
process of implementing a new enterprise resource planning
(ERP) system for its manufacturing operations. The
completion of the ERP system implementation is targeted for the
first quarter of 2007, except for the 2006 acquisitions, for
which implementation is scheduled later in 2007. Management does
not currently believe that this will adversely affect the
Companys internal control over financial reporting.
|
|
Item 9B.
|
Other
Information
|
None.
37
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 2, 2007
(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.
38
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
July 18, 2005, by and among NEBS Acquisition Corp.,
Champion Enterprises, Inc., and New Era Building Systems, Inc.,
filed as Exhibit 2.1 to the Companys Current Report
on
Form 8-K
filed July 22, 2005 and incorporated herein by reference.
|
|
2
|
.2
|
|
Asset Purchase Agreement, dated
July 18, 2005, by and among NEBS Acquisition Corp.,
Champion Enterprises, Inc., and Castle Housing of Pennsylvania,
Ltd., filed as Exhibit 2.2 to the Companys Current
Report on
Form 8-K
filed July 22, 2005 and incorporated herein by reference.
|
|
2
|
.3
|
|
Asset Purchase Agreement, dated
July 18, 2005, by and among NEBS Acquisition Corp.,
Champion Enterprises, Inc., and Carolina Building Solutions,
L.L.C., filed as Exhibit 2.3 to the Companys Current
Report on
Form 8-K
filed July 22, 2005 and incorporated herein by reference.
|
|
2
|
.4
|
|
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.
|
|
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.
|
39
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
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.
|
|
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
|
|
Agreement, dated as of
June 29, 2001, between the Company, and Fletcher
International, Ltd., filed as Exhibit 4.2 to the
Companys Current Report on
Form 8-K
dated July 9, 2001 and incorporated herein by reference.
|
|
4
|
.12
|
|
Agreement, dated as of
March 29, 2002, between the Company and Fletcher
International, Ltd., filed as Exhibit 4.4 to the
Companys Current Report on
Form 8-K
dated April 5, 2002 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
|
|
*Management Stock Purchase Plan,
filed as Exhibit 4.1 to the Companys
Form S-8
dated September 17, 1998 and incorporated herein by
reference.
|
|
10
|
.8
|
|
*Amendment to the Management Stock
Purchase Plan, filed as Exhibit 10.8 to the Companys
Annual Report on
Form 10-K
for the fiscal year ended January 3, 2004 and incorporated
herein by reference.
|
|
10
|
.9
|
|
*Deferred Compensation Plan, filed
as Exhibit 4.2 to the Companys
Form S-8
dated September 17, 1998 and incorporated herein by
reference.
|
|
10
|
.10
|
|
*Amendment to the Deferred
Compensation Plan, dated as of March 26, 2004, filed as
Exhibit 10.10 to the Companys Annual Report on
Form 10-K
for the fiscal year ended January 1, 2005 and incorporated
herein by reference.
|
|
10
|
.11
|
|
*Corporate Officer Stock Purchase
Plan, filed as Exhibit 4.1 to the Companys
Form S-8
dated February 26, 1999 and incorporated herein by
reference.
|
|
10
|
.12
|
|
*Amendment to the Corporate
Officer Stock Purchase Plan, filed as Exhibit 10.11 to the
Companys Annual Report on
Form 10-K
for the fiscal year ended January 3, 2004 and incorporated
herein by reference.
|
|
10
|
.13
|
|
*Consent in Lieu of a Special
Meeting of the Deferred Compensation Committee dated
January 1, 1999 to amend the Corporate Officer Stock
Purchase Plan, filed as Exhibit 10.33 to the Companys
Annual Report on
Form 10-K
for the fiscal year ended January 2, 1999 and incorporated
herein by reference.
|
40
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
10
|
.14
|
|
*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
|
.15
|
|
*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
|
.16
|
|
*Salesperson Retention Plan, filed
as Exhibit 99(a) to the Companys Registration
Statement on
Form S-3
dated January 19, 2001 and incorporated herein by reference.
|
|
10
|
.17
|
|
*2005 Equity Compensation and
Incentive Plan, filed as Exhibit 10.1 to the Companys
Current Report on
Form 8-K
dated May 4, 2005 and incorporated herein by reference.
|
|
10
|
.18
|
|
*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
|
.19
|
|
*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
|
.20
|
|
*Executive Employment Agreement
dated as of July 12, 2004 between the Company and William
C. Griffiths, as amended and restated, filed as
Exhibit 99.2 to the Companys Current Report on
Form 8-K
dated July 13, 2004 and incorporated herein by reference.
|
|
10
|
.21
|
|
*Form of Change in Control
Agreement dated November 22, 2004 between the Company and
certain executive officers, filed as Exhibit 10.1 to the
Companys Current Report on
Form 8-K
dated November 22, 2004 and incorporated herein by
reference.
|
|
10
|
.22
|
|
*Change in Control Agreement dated
November 22, 2004 between the Company and William C.
Griffiths, filed as Exhibit 10.2 to the Companys
Current Report on
Form 8-K
dated November 22, 2004 and incorporated herein by
reference.
|
|
10
|
.23
|
|
*Executive Officer Severance Pay
Plan effective December 1, 2004, filed as Exhibit 10.3
to the Companys Current Report on
Form 8-K
dated November 22, 2004 and incorporated herein by
reference.
|
|
10
|
.24
|
|
*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
|
.25
|
|
*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
|
.26
|
|
*Letter Agreement dated
February 12, 1997 between the Company and John J.
Collins, Jr., filed as Exhibit 10.25 to the
Companys Annual Report on
Form 10-K
for the fiscal year ended December 28, 1996 and
incorporated herein by reference.
|
|
10
|
.27
|
|
*Letter Agreement dated
April 7, 2000 between the Company and John J.
Collins, Jr., filed as Exhibit 10.32 to the
Companys Annual Report on
Form 10-K
for the fiscal year ended December 30, 2000 and
incorporated herein by reference.
|
|
10
|
.28
|
|
*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
|
.29
|
|
Lease Agreement dated
November 21, 1991 between the Company and University
Development Company relating to the premises located at 2701
Cambridge Court, Auburn Hills, Michigan, filed as
Exhibit 10.12 to the Companys Annual Report on
Form 10-K
for the fiscal year ended February 28, 1992 and
incorporated herein by reference.
|
|
10
|
.30
|
|
First Amendment dated
December 29, 1997 to the Lease Agreement dated
November 21, 1991 between the Company and University
Development Company relating to the premises located at 2701
Cambridge Court, Auburn Hills, Michigan, filed as
Exhibit 10.2 to the Companys Annual Report on
Form 10-K
for the fiscal year ended January 3, 1998 and incorporated
herein by reference.
|
41
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
10
|
.31
|
|
Amended and Restated Credit
Agreement, dated as of April 7, 2006, by and among Champion
Home Builders Co., as the Borrower, Champion Enterprises, Inc.,
as the Parent, various financial institutions and other persons
from time to time parties thereto, as Lenders, and Credit
Suisse, as Administrative Agent, filed as Exhibit 10.1 to
the Companys Current Report on
Form 8-K
filed April 11, 2006 and incorporated herein by reference.
|
|
10
|
.32
|
|
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.
|
|
16
|
.1
|
|
Letter of PricewaterhouseCoopers
LLP dated June 21, 2006, regarding change in certifying
accountant of Champion Enterprises, Inc., filed as
exhibit 16 to the Companys Current Report on
Form 8-K
filed June 21, 2006 and incorporated herein by reference.
|
|
21
|
.1
|
|
Subsidiaries of the Company.
|
|
23
|
.1
|
|
Consent of Ernst & Young
LLP.
|
|
23
|
.2
|
|
Consent of PricewaterhouseCoopers
LLP.
|
|
31
|
.1
|
|
Certification of Chief Executive
Officer dated February 27, 2007, relating to the
Registrants Annual Report on
Form 10-K
for the year ended December 30, 2006.
|
|
31
|
.2
|
|
Certification of Chief Financial
Officer dated February 27, 2007, relating to the
Registrants Annual Report on
Form 10-K
for the year ended December 30, 2006.
|
|
32
|
.1
|
|
Certification of Chief Executive
Officer and Chief Financial Officer of Registrant, dated
February 27, 2007, 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 December 30, 2006.
|
|
99
|
.1
|
|
Proxy Statement for the
Companys 2007 Annual Meeting of Shareholders, filed by the
Company pursuant to Regulation 14A and incorporated herein
by reference.
|
42
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 27, 2007
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 27, 2007
|
|
|
|
|
|
/s/ Phyllis
A. Knight
Phyllis
A. Knight
|
|
Executive Vice President,
Treasurer and Chief Financial Officer
(Principal Financial Officer)
|
|
February 27, 2007
|
|
|
|
|
|
/s/ Richard
Hevelhorst
Richard
Hevelhorst
|
|
Vice President and Controller
(Principal Accounting Officer)
|
|
February 27, 2007
|
|
|
|
|
|
/s/ Robert
W. Anestis
Robert
W. Anestis
|
|
Director
|
|
February 27, 2007
|
|
|
|
|
|
/s/ Eric
S. Belsky
Eric
S. Belsky
|
|
Director
|
|
February 27, 2007
|
|
|
|
|
|
/s/ Selwyn
Isakow
Selwyn
Isakow
|
|
Director, Lead Independent Director
|
|
February 27, 2007
|
|
|
|
|
|
/s/ Brian
D. Jellison
Brian
D. Jellison
|
|
Director
|
|
February 27, 2007
|
|
|
|
|
|
/s/ G.
Michael
Lynch
G.
Michael Lynch
|
|
Director
|
|
February 27, 2007
|
|
|
|
|
|
/s/ Thomas
Madden
Thomas
Madden
|
|
Director
|
|
February 27, 2007
|
|
|
|
|
|
/s/ Shirley
D. Peterson
Shirley
D. Peterson
|
|
Director
|
|
February 27, 2007
|
|
|
|
|
|
/s/ David
Weiss
David
Weiss
|
|
Director
|
|
February 27, 2007
|
43
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
Our 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 December 30, 2006. Our managements
assessment of the effectiveness of our internal control over
financial reporting as of December 30, 2006 has been
audited by Ernst & Young LLP, an independent registered
public accounting firm, as stated in their report which is
included herein.
During 2006, we acquired United Kingdom-based Calsafe Group
(Holdings) Limited and its operating subsidiary Caledonian
Building Systems Limited, Highland Manufacturing Company, LLC
and North American Housing Corp. and an affiliate. We have
excluded these acquisitions from our assessment of internal
control over financial reporting as of December 30, 2006
because they were acquired during 2006. The total assets and
total sales of these acquisitions represented 32 percent of
our consolidated assets at December 30, 2006, and
9 percent of consolidated sales for the year then ended.
|
|
|
/s/ WILLIAM
C. GRIFFITHS
William
C. Griffiths
Chairman, President and Chief Executive Officer
|
|
/s/ PHYLLIS
A. KNIGHT
Phyllis
A. Knight
Executive Vice President, Treasurer and
Chief Financial Officer
|
44
CHAMPION
ENTERPRISES, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
AND
FINANCIAL STATEMENT SCHEDULES
|
|
|
|
|
Description
|
|
Page
|
|
|
|
|
F-2
|
|
|
|
|
F-6
|
|
|
|
|
F-7
|
|
|
|
|
F-8
|
|
|
|
|
F-9
|
|
|
|
|
F-10
|
|
Financial Statement
Schedule II, Valuation and Qualifying Accounts, for the
Years Ended December 30, 2006, December 31, 2005 and
January 1, 2005
|
|
|
F-36
|
|
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 sheet of
Champion Enterprises, Inc. (and subsidiaries) as of
December 30, 2006 and the related consolidated statements
of income, shareholders equity, and cash flows for the
year then ended. Our audit also includes the financial statement
schedule listed in the Index. These financial statements and
schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on the
financial statements and schedule 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 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 audit provides a
reasonable basis for our opinion.
In our opinion, the 2006 financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Champion Enterprises, Inc. (and
subsidiaries) at December 30, 2006, and the consolidated
results of its operations and its cash flows for the year then
ended, in conformity with U.S. generally accepted
accounting principles. Also, in our opinion, the related 2006
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 therein.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of Champion Enterprises, Inc. internal control
over financial reporting as of December 30, 2006, 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 23, 2007
expressed an unqualified opinion thereon.
Detroit, MI
February 23, 2007
F-2
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of
Champion Enterprises, Inc.
We have audited managements assessment, included in the
accompanying Management Report on Internal Control Over
Financial Reporting, that Champion Enterprises, Inc. maintained
effective internal control over financial reporting as of
December 30, 2006, 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, Incs management
is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness
of internal control over financial reporting. Our responsibility
is to express an opinion on managements assessment and an
opinion on the effectiveness of 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, evaluating
managements assessment, testing and evaluating the design
and operating effectiveness of internal control, 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.
As indicated in the accompanying Managements Annual
Report on Internal Control over Financial Reporting,
managements assessment of and conclusion on the
effectiveness of internal control over financial reporting did
not include the internal controls of the 2006 acquisitions of
Calsafe Group (Holdings) Limited and its operating subsidiary
Caledonian Building Systems Limited (Caledonian),
Highland Manufacturing Company, LLC (Highland) and
North American Housing Corp. and an affiliate (North
American), which are included in the consolidated
statements of the Company and constituted 32 percent of
consolidated assets as of December 30, 2006 and
9 percent of consolidated net sales for the year then
ended. Management did not include an assessment of the internal
control over financial reporting for Caledonian, Highland and
North American because they were acquired in business
combinations during 2006.
F-3
In our opinion, managements assessment that Champion
Enterprises, Inc. maintained effective internal control over
financial reporting as of December 30, 2006, is fairly
stated, in all material respects, based on the COSO criteria.
Also, in our opinion, Champion Enterprises, Inc. maintained, in
all material respects, effective internal control over financial
reporting as of December 30, 2006, 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
December 30, 2006 and the related consolidated statements
of income, shareholders equity, and cash flows for the
year then ended of Champion Enterprises, Inc. and our report
dated February 23, 2007 expressed an unqualified opinion
thereon.
Detroit, MI
February 23, 2007
F-4
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Champion Enterprises, Inc.:
In our opinion, the consolidated balance sheet as of
December 31, 2005 and the related consolidated statements
of income, of shareholders equity and of cash flows for
each of the two years in the period ended December 31, 2005
present fairly, in all material respects, the financial position
of Champion Enterprises, Inc. and its subsidiaries at
December 31, 2005, and the results of their operations and
their cash flows for each of the two years in the period ended
December 31, 2005, in conformity with accounting principles
generally accepted in the United States of America. In addition,
in our opinion, the financial statement schedule for each of the
two years in the period ended December 31, 2005 presents
fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated
financial statements. These financial statements and financial
statement schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on
our audits. We conducted our audits of these statements 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers
LLP
Detroit, MI
March 10, 2006
F-5
CHAMPION
ENTERPRISES, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 30, 2006
|
|
|
December 31, 2005
|
|
|
January 1, 2005
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Net
sales
|
|
$
|
1,364,648
|
|
|
$
|
1,272,590
|
|
|
$
|
1,014,288
|
|
Cost of sales
|
|
|
1,147,032
|
|
|
|
1,055,749
|
|
|
|
843,261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
217,616
|
|
|
|
216,841
|
|
|
|
171,027
|
|
Selling, general and
administrative expenses
|
|
|
154,518
|
|
|
|
151,810
|
|
|
|
129,096
|
|
Restructuring charges
|
|
|
1,200
|
|
|
|
|
|
|
|
3,300
|
|
Amortization of intangible assets
|
|
|
3,941
|
|
|
|
|
|
|
|
|
|
Mark-to-market
(credit) charge for common stock warrant
|
|
|
|
|
|
|
(4,300
|
)
|
|
|
5,500
|
|
Loss on debt retirement
|
|
|
398
|
|
|
|
9,857
|
|
|
|
2,776
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
57,559
|
|
|
|
59,474
|
|
|
|
30,355
|
|
Interest income
|
|
|
5,050
|
|
|
|
3,712
|
|
|
|
1,625
|
|
Interest expense
|
|
|
(19,496
|
)
|
|
|
(17,698
|
)
|
|
|
(18,844
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing
operations before income taxes
|
|
|
43,113
|
|
|
|
45,488
|
|
|
|
13,136
|
|
Income tax (benefit) expense
|
|
|
(95,211
|
)
|
|
|
3,300
|
|
|
|
(10,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing
operations
|
|
|
138,324
|
|
|
|
42,188
|
|
|
|
23,136
|
|
Loss from discontinued operations,
net of taxes
|
|
|
(16
|
)
|
|
|
(4,383
|
)
|
|
|
(6,125
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
138,308
|
|
|
$
|
37,805
|
|
|
$
|
17,011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
1.81
|
|
|
$
|
0.55
|
|
|
$
|
0.29
|
|
Loss from discontinued operations
|
|
|
|
|
|
|
(0.06
|
)
|
|
|
(0.08
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income per share
|
|
$
|
1.81
|
|
|
$
|
0.49
|
|
|
$
|
0.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted shares for basic EPS
|
|
|
76,334
|
|
|
|
74,891
|
|
|
|
70,494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
1.78
|
|
|
$
|
0.54
|
|
|
$
|
0.29
|
|
Loss from discontinued operations
|
|
|
|
|
|
|
(0.06
|
)
|
|
|
(0.08
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income per share
|
|
$
|
1.78
|
|
|
$
|
0.48
|
|
|
$
|
0.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted shares for diluted EPS
|
|
|
77,578
|
|
|
|
76,034
|
|
|
|
71,982
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
F-6
CHAMPION
ENTERPRISES, INC.
|
|
|
|
|
|
|
|
|
|
|
December 30,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands,
|
|
|
|
except par value)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
70,208
|
|
|
$
|
126,979
|
|
Accounts receivable, trade
|
|
|
47,645
|
|
|
|
49,146
|
|
Inventories
|
|
|
102,350
|
|
|
|
108,650
|
|
Deferred tax asset
|
|
|
32,303
|
|
|
|
|
|
Other current assets
|
|
|
10,677
|
|
|
|
13,381
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
263,183
|
|
|
|
298,156
|
|
Property, plant and
equipment
|
|
|
|
|
|
|
|
|
Land and improvements
|
|
|
25,805
|
|
|
|
26,467
|
|
Buildings and improvements
|
|
|
123,483
|
|
|
|
104,329
|
|
Machinery and equipment
|
|
|
89,037
|
|
|
|
84,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
238,325
|
|
|
|
215,146
|
|
Less-accumulated depreciation
|
|
|
125,798
|
|
|
|
123,973
|
|
|
|
|
|
|
|
|
|
|
|
|
|
112,527
|
|
|
|
91,173
|
|
Goodwill
|
|
|
287,789
|
|
|
|
154,174
|
|
Amortizable intangible assets,
net of accumulated amortization
|
|
|
47,675
|
|
|
|
3,927
|
|
Deferred tax asset
|
|
|
71,600
|
|
|
|
|
|
Other non-current
assets
|
|
|
17,841
|
|
|
|
19,224
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
800,615
|
|
|
$
|
566,654
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and
Shareholders Equity
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
54,607
|
|
|
$
|
29,115
|
|
Accrued warranty obligations
|
|
|
30,423
|
|
|
|
33,509
|
|
Accrued volume rebates
|
|
|
30,891
|
|
|
|
33,056
|
|
Accrued compensation and payroll
taxes
|
|
|
13,933
|
|
|
|
26,757
|
|
Accrued self-insurance
|
|
|
29,219
|
|
|
|
30,968
|
|
Other current liabilities
|
|
|
44,130
|
|
|
|
32,686
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
203,203
|
|
|
|
186,091
|
|
Long-term liabilities
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
252,449
|
|
|
|
201,727
|
|
Deferred tax liability
|
|
|
10,600
|
|
|
|
124
|
|
Other long-term liabilities
|
|
|
32,601
|
|
|
|
31,407
|
|
|
|
|
|
|
|
|
|
|
|
|
|
295,650
|
|
|
|
233,258
|
|
Contingent liabilities
(Note 13)
|
|
|
|
|
|
|
|
|
Shareholders
equity
|
|
|
|
|
|
|
|
|
Common stock, $1 par value,
120,000 shares authorized, 76,450 and 76,045 shares
issued and outstanding, respectively
|
|
|
76,450
|
|
|
|
76,045
|
|
Capital in excess of par value
|
|
|
199,597
|
|
|
|
192,905
|
|
Retained earnings (accumulated
deficit)
|
|
|
16,445
|
|
|
|
(121,863
|
)
|
Accumulated other comprehensive
income
|
|
|
9,270
|
|
|
|
218
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
301,762
|
|
|
|
147,305
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
800,615
|
|
|
$
|
566,654
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
F-7
CHAMPION
ENTERPRISES, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 30,
|
|
|
December 31,
|
|
|
January 1,
|
|
|
|
2006
|
|
|
2005
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
138,308
|
|
|
$
|
37,805
|
|
|
$
|
17,011
|
|
Loss from discontinued operations
|
|
|
16
|
|
|
|
4,383
|
|
|
|
6,125
|
|
Adjustments to reconcile net income
to net cash provided by (used for) continuing operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
17,943
|
|
|
|
10,738
|
|
|
|
10,209
|
|
Stock-based compensation
|
|
|
4,563
|
|
|
|
5,674
|
|
|
|
2,349
|
|
Loss on debt retirement
|
|
|
398
|
|
|
|
9,857
|
|
|
|
2,776
|
|
Change in deferred taxes
|
|
|
(100,125
|
)
|
|
|
|
|
|
|
|
|
Mark-to-market
(credit) charge for common stock warrant
|
|
|
|
|
|
|
(4,300
|
)
|
|
|
5,500
|
|
Fixed asset impairment charges
|
|
|
1,200
|
|
|
|
|
|
|
|
2,500
|
|
Gain on disposal of fixed assets
|
|
|
(4,708
|
)
|
|
|
(1,691
|
)
|
|
|
(555
|
)
|
Decrease in allowance for tax
adjustments
|
|
|
|
|
|
|
|
|
|
|
(12,000
|
)
|
Increase/decrease
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
28,626
|
|
|
|
(24,364
|
)
|
|
|
(8,636
|
)
|
Refundable income taxes
|
|
|
|
|
|
|
|
|
|
|
3,123
|
|
Inventories
|
|
|
13,129
|
|
|
|
(22,984
|
)
|
|
|
(23,016
|
)
|
Cash collateral deposits
|
|
|
|
|
|
|
6,500
|
|
|
|
|
|
Accounts payable
|
|
|
(16,405
|
)
|
|
|
9,326
|
|
|
|
(10,483
|
)
|
Accrued liabilities
|
|
|
(24,753
|
)
|
|
|
7,040
|
|
|
|
684
|
|
Other, net
|
|
|
1,682
|
|
|
|
422
|
|
|
|
(2,906
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used for)
continuing operating activities
|
|
|
59,874
|
|
|
|
38,406
|
|
|
|
(7,319
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to property, plant and
equipment
|
|
|
(17,582
|
)
|
|
|
(11,785
|
)
|
|
|
(8,440
|
)
|
Acquisitions
|
|
|
(153,845
|
)
|
|
|
(41,416
|
)
|
|
|
|
|
Investments in and advances to
unconsolidated affiliates
|
|
|
2
|
|
|
|
(104
|
)
|
|
|
(208
|
)
|
Proceeds on disposal of fixed assets
|
|
|
7,564
|
|
|
|
5,576
|
|
|
|
3,718
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used for investing
activities
|
|
|
(163,861
|
)
|
|
|
(47,729
|
)
|
|
|
(4,930
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments on short-term debt
|
|
|
|
|
|
|
(8,195
|
)
|
|
|
(29
|
)
|
Proceeds from Term Loan
|
|
|
78,561
|
|
|
|
100,000
|
|
|
|
|
|
Purchase of Senior Notes
|
|
|
(6,901
|
)
|
|
|
(106,316
|
)
|
|
|
(10,395
|
)
|
Payments on long-term debt
|
|
|
(29,612
|
)
|
|
|
(687
|
)
|
|
|
(5,940
|
)
|
Purchase of common stock warrant
|
|
|
|
|
|
|
(4,500
|
)
|
|
|
|
|
Increase in deferred financing costs
|
|
|
(1,076
|
)
|
|
|
(3,567
|
)
|
|
|
|
|
Decrease (increase) in restricted
cash
|
|
|
698
|
|
|
|
(184
|
)
|
|
|
7,888
|
|
Preferred stock issued, net
|
|
|
|
|
|
|
|
|
|
|
12,000
|
|
Common stock issued, net
|
|
|
1,974
|
|
|
|
2,340
|
|
|
|
7,777
|
|
Dividends paid on preferred stock
|
|
|
|
|
|
|
(293
|
)
|
|
|
(678
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used for)
financing activities
|
|
|
43,644
|
|
|
|
(21,402
|
)
|
|
|
10,623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from discontinued
operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used for)
operating activities of discontinued operations
|
|
|
633
|
|
|
|
(3,247
|
)
|
|
|
(6,072
|
)
|
Net cash provided by investing
activities of discontinued operations
|
|
|
568
|
|
|
|
30,952
|
|
|
|
6,722
|
|
Net cash used for financing
activities of discontinued operations
|
|
|
|
|
|
|
(12,267
|
)
|
|
|
(2,626
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used for)
discontinued operations
|
|
|
1,201
|
|
|
|
15,438
|
|
|
|
(1,976
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on
cash and cash equivalents
|
|
|
2,371
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash
equivalents
|
|
|
(56,771
|
)
|
|
|
(15,287
|
)
|
|
|
(3,602
|
)
|
Cash and cash equivalents at
beginning of period
|
|
|
126,979
|
|
|
|
142,266
|
|
|
|
145,868
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of
period
|
|
$
|
70,208
|
|
|
$
|
126,979
|
|
|
$
|
142,266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional cash flow
information
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
19,394
|
|
|
$
|
20,084
|
|
|
$
|
20,801
|
|
Cash paid for income taxes
|
|
|
5,156
|
|
|
|
2,661
|
|
|
|
2,356
|
|
See accompanying Notes to Consolidated Financial Statements.
F-8
CHAMPION
ENTERPRISES, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital in
|
|
|
earnings
|
|
|
other
|
|
|
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
excess of
|
|
|
(accumulated
|
|
|
comprehensive
|
|
|
|
|
|
comprehensive
|
|
|
|
Shares
|
|
|
Amount
|
|
|
par value
|
|
|
deficit)
|
|
|
income
|
|
|
Total
|
|
|
income (loss)
|
|
|
|
(In thousands)
|
|
|
Balance at January 3,
2004
|
|
|
65,470
|
|
|
$
|
65,470
|
|
|
$
|
125,386
|
|
|
$
|
(175,450
|
)
|
|
$
|
(417
|
)
|
|
$
|
14,989
|
|
|
$
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,011
|
|
|
|
|
|
|
|
17,011
|
|
|
|
17,011
|
|
Preferred stock dividends declared
|
|
|
29
|
|
|
|
29
|
|
|
|
230
|
|
|
|
(936
|
)
|
|
|
|
|
|
|
(677
|
)
|
|
|
|
|
Stock options and benefit plans
|
|
|
2,127
|
|
|
|
2,127
|
|
|
|
5,758
|
|
|
|
|
|
|
|
|
|
|
|
7,885
|
|
|
|
|
|
Amortization of preferred stock
issuance costs
|
|
|
|
|
|
|
|
|
|
|
(61
|
)
|
|
|
|
|
|
|
|
|
|
|
(61
|
)
|
|
|
|
|
Issuance for acquisition deferred
purchase price payments
|
|
|
880
|
|
|
|
880
|
|
|
|
7,120
|
|
|
|
|
|
|
|
|
|
|
|
8,000
|
|
|
|
|
|
Issuance for purchase and
retirement of debt
|
|
|
3,852
|
|
|
|
3,852
|
|
|
|
25,944
|
|
|
|
|
|
|
|
|
|
|
|
29,796
|
|
|
|
|
|
Foreign currency translation
adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
357
|
|
|
|
357
|
|
|
|
357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1,
2005
|
|
|
72,358
|
|
|
$
|
72,358
|
|
|
$
|
164,377
|
|
|
$
|
(159,375
|
)
|
|
$
|
(60
|
)
|
|
$
|
77,300
|
|
|
$
|
17,368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,805
|
|
|
|
|
|
|
|
37,805
|
|
|
$
|
37,805
|
|
Preferred stock dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(293
|
)
|
|
|
|
|
|
|
(293
|
)
|
|
|
|
|
Stock options and benefit plans
|
|
|
456
|
|
|
|
456
|
|
|
|
9,009
|
|
|
|
|
|
|
|
|
|
|
|
9,465
|
|
|
|
|
|
Issuance for acquisition deferred
purchase price payments
|
|
|
171
|
|
|
|
171
|
|
|
|
1,829
|
|
|
|
|
|
|
|
|
|
|
|
2,000
|
|
|
|
|
|
Preferred stock conversion
|
|
|
3,060
|
|
|
|
3,060
|
|
|
|
17,690
|
|
|
|
|
|
|
|
|
|
|
|
20,750
|
|
|
|
|
|
Foreign currency translation
adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
278
|
|
|
|
278
|
|
|
|
278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31,
2005
|
|
|
76,045
|
|
|
$
|
76,045
|
|
|
$
|
192,905
|
|
|
$
|
(121,863
|
)
|
|
$
|
218
|
|
|
$
|
147,305
|
|
|
$
|
38,083
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
138,308
|
|
|
|
|
|
|
|
138,308
|
|
|
$
|
138,308
|
|
Stock options and benefit plans
|
|
|
405
|
|
|
|
405
|
|
|
|
6,692
|
|
|
|
|
|
|
|
|
|
|
|
7,097
|
|
|
|
|
|
Foreign currency translation
adjustments, including tax effects
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,052
|
|
|
|
9,052
|
|
|
|
9,052
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 30,
2006
|
|
|
76,450
|
|
|
$
|
76,450
|
|
|
$
|
199,597
|
|
|
$
|
16,445
|
|
|
$
|
9,270
|
|
|
$
|
301,762
|
|
|
$
|
147,360
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
F-9
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.
During 2005, the Company completed the disposal of its
traditional retail operations through the sale of its remaining
traditional retail sales centers. In accordance with Statement
of Financial Accounting Standards (SFAS)
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets and Emerging Issues Task Force
(EITF) Issue
No. 03-13,
Applying the Conditions in Paragraph 42 of
FAS 144 in Determining Whether to Report Discontinued
Operations, the traditional retail sales centers closed or
sold in 2005 and 2004, along with their related administrative
offices, are reported as discontinued operations for all periods
presented. Continuing retail operations consist of the
Companys ongoing non-traditional California retail
operations.
Business
The Company is a leading producer of factory-built housing with
operations and markets located throughout the U.S. and in
western Canada. The Company is also a leading producer of
steel-framed modular buildings in the United Kingdom for use as
prisons, military accommodations, hotels and residential units.
Additionally, the Company has retail operations that sell
factory-built housing in California.
Revenue
Recognition
For manufacturing shipments to independent retailers, 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, the majority 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 purchase the related floor plan loans or
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.
F-10
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Restructuring
Charges
Restructuring charges are accounted for in accordance with
SFAS No. 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 $4.2 million, $3.5 million, and
$6.0 million in 2006, 2005 and 2004, respectively. Delivery
costs are included in cost of sales and delivery revenue is
included in net sales.
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 $14.0 million, $10.6 million, and
$10.2 million in 2006, 2005 and 2004, 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 December 30, 2006, the Company had 14 idle manufacturing
facilities with net book value of $10.7 million of which
eight with net book value of approximately $3.3 million
were permanent closures. 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 December 30, 2006 was net of
impairment reserves totaling $8.1 million.
Goodwill
The Company tests for goodwill impairment in accordance with
SFAS No. 142, Goodwill and Other Intangible
Assets. The Companys remaining goodwill at
December 30, 2006 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
F-11
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
the useful lives of the intangible assets, generally five to
fifteen years, using the straight-line method. Amortization
expense totaled $3.9 million and $0.2 million in 2006
and 2005, respectively.
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 $2.9 million and
$3.0 million at December 30, 2006 and
December 31, 2005, respectively. Equity method pretax
losses from these companies totaled $0.3 million in 2006,
$0.4 million in 2005, and $0.4 million in 2004 and
were recorded in SG&A.
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 related to the
Companys Senior Notes 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.
The warranty provision 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. In 2002, the
Company provided a 100% valuation allowance for its deferred tax
assets. In 2006, the Company reversed the valuation allowance
after determining that realization of the deferred tax assets
was more likely than not. This determination was based upon
achieving historical profitability and an outlook for ongoing
profitability, among other factors.
In June 2006, the FASB issued FASB Interpretation No.
(FIN) 48, Accounting for Uncertainty in Income
Taxes an Interpretation of FASB statement
No. 109. FIN 48 clarifies the accounting for
uncertainty in income
F-12
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
taxes recognized under SFAS No. 109, Accounting
for Income Taxes. FIN 48 prescribes a recognition
threshold and measurement attribute for financial statement
recognition and measurement of a tax position taken or expected
to be taken in a tax return and also provides guidance on
various related matters such as derecognition, interest,
penalties and disclosure. FIN 48 is effective with the
Companys fiscal year beginning December 31, 2006. The
Company expects that the financial impact, if any, of applying
the provisions of FIN 48 to all tax positions will not be
material upon the initial adoption of FIN 48 in the first
quarter of 2007.
Derivative
Instruments
The Company generally does not utilize derivative instruments.
However, the Company accounted for a common stock warrant for
2.2 million shares as a derivative instrument. The
obligation under this warrant was valued at its estimated fair
market value. During 2005, the Company purchased and
subsequently cancelled the warrant for $4.5 million cash.
Stock-Based
Compensation Programs
In December 2004, SFAS No. 123(R), Share-Based
Payment was issued. Under previous practice stock-based
employee compensation programs could be accounted for under the
provisions of Accounting Principles Board (APB)
Opinion No. 25 and disclosures made for share-based
compensation as if accounted for under the provisions of
SFAS No. 123. Under the provisions of
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 award. The Company early
adopted SFAS No. 123(R) in the fourth quarter of 2005,
effective January 2, 2005 using the modified prospective
method of transition. The cumulative effect of the accounting
change at January 2, 2005 of $0.2 million (income) was
included in selling, general and administrative expenses and was
insignificant to income from continuing operations, income
before income taxes, net income, cash flow from operations and
diluted earnings per share for 2005.
Under APB Opinion No. 25, no expense was recorded for stock
options with an option price of grant date market value. The
effect of expensing stock options under
SFAS No. 123(R) in 2005 was less than $0.01 per
diluted share. Under APB Opinion No. 25, awards of
performance shares and restricted stock were accounted for by
valuing unvested shares expected to be earned at current fair
market value through the vesting date. Under
SFAS No. 123(R) awards of performance shares and
restricted stock are accounted for by valuing unvested shares
expected to be earned at grant date market value.
F-13
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In previous years, the Company accounted for its stock-based
employee compensation programs under APB Opinion No. 25.
Additional disclosures and pro forma information required by
SFAS No. 123(R) follow. If compensation costs for the
Companys stock-based compensation plans had been
determined based on the fair value at the grant dates consistent
with the requirements of
SFAS No. 123®,
pro forma net income per share and stock-based compensation
expense would have been as indicated below for the year ended
January 1, 2005:
|
|
|
|
|
|
|
2004
|
|
|
|
(In millions, except
|
|
|
|
per share amounts)
|
|
|
Net income as reported
|
|
$
|
17.0
|
|
Net income pro forma
|
|
|
16.5
|
|
Basic income per share
as reported
|
|
|
0.21
|
|
Diluted income per
share as reported
|
|
|
0.21
|
|
Basic income per share
pro forma
|
|
|
0.21
|
|
Diluted income per
share pro forma
|
|
|
0.20
|
|
Stock-based employee compensation
expense, net of related tax effects as reported
|
|
|
2.1
|
|
Stock-based employee compensation
expense, net of related tax effects pro forma
|
|
$
|
2.6
|
|
SFAS No. 123(R) pro forma stock-based compensation
costs for 2004 was reduced by the reversal of prior year pro
forma stock-based compensation costs totaling $0.3 million
for forfeitures of unvested options and awards during the year.
In determining the pro forma amounts in accordance with
SFAS No. 123(R), the fair value of each stock option
grant or award is estimated as of the grant date using the
Black-Scholes option pricing model with the following weighted
average assumptions used for grants in 2004:
|
|
|
|
|
|
|
2004
|
|
|
Risk free interest rate
|
|
|
5.1
|
%
|
Expected life (years)
|
|
|
4.0
|
|
Expected volatility
|
|
|
50
|
%
|
Expected dividend
|
|
|
|
|
The weighted average per share fair value of stock options
granted during 2004 was $4.90 for options granted at market
value. No stock options were granted in 2006 or 2005.
Year
End
The Companys fiscal year is a 52 or 53 week period
that ends on the Saturday nearest December 31. Fiscal years
2006, 2005 and 2004 were each comprised of 52 weeks.
NOTE 2
Acquisitions
On July 31, 2006, the Company acquired certain of the
assets and the business of North American Housing Corp. and an
affiliate (North American) for $30.8 million of
cash plus assumption of certain operating liabilities. North
American is a modular homebuilder that operates two homebuilding
facilities in Virginia. This acquisition expanded the
Companys presence in the modular construction industry,
particularly in the mid-Atlantic region of the U.S. The
results of operations of North American from the acquisition
date to December 30, 2006 are included in the
Companys results from continuing operations and in its
manufacturing segment.
On April 7, 2006, the Company acquired 100% of the capital
stock of United Kingdom-based Calsafe Group (Holdings) Limited
and its operating subsidiary Caledonian Building Systems Limited
(Caledonian) for $100.3 million in cash plus
potential contingent purchase price of up to approximately
$6.4 million and additional potential contingent
consideration to be paid over four years. The final purchase
price will ultimately be determined
F-14
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
based upon the achievement of certain financial benchmarks over
the three years and three quarters ending December 2009. The
transaction was financed through a combination of debt, via a
$78.6 million Sterling-denominated increase in
Champions credit facility and cash.
Caledonian, a leading modular manufacturer, constructs
steel-framed modular buildings for use as prisons, residences
and hotels, as well as military accommodations for the UK
Ministry of Defence. Caledonians steel-framed modular
technology allows for multi-story construction, which is a key
advantage over wood-framed construction techniques. The results
of operations of Caledonian from the acquisition date to
December 30, 2006 are included in the Companys
results from continuing operations and in its international
segment.
On March 31, 2006, the Company acquired 100% of the
membership interests of Highland Manufacturing Company, LLC
(Highland), a manufacturer of modular and HUD-code
homes, for cash consideration of approximately
$22.7 million. This acquisition further expanded the
Companys presence in the modular construction industry and
increased its manufacturing and distribution in several states
previously under-served by Champion in the north central United
States. The results of operations of Highland from the
acquisition date to December 30, 2006 are included in the
Companys results from continuing operations and in its
manufacturing segment.
On August 8, 2005, pursuant to three separate asset
purchase agreements, the Company acquired the assets and
business of New Era Building Systems, Inc. and its affiliates,
Castle Housing of Pennsylvania, Ltd. and Carolina Building
Solutions, LLC (collectively, the New Era group),
modular homebuilders, for aggregate cash consideration of
$41.4 million plus the assumption of certain current
liabilities.
F-15
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table presents the current purchase price
allocations for North American, Caledonian and Highland at their
acquisition dates and the initial annual amortization expense
and respective amortization periods for amortizable intangible
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North
|
|
|
|
|
|
|
|
|
|
American
|
|
|
Caledonian
|
|
|
Highland
|
|
|
|
July 31,
|
|
|
April 7,
|
|
|
March 31,
|
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Accounts receivable, trade
|
|
$
|
|
|
|
$
|
22,728
|
|
|
$
|
1,620
|
|
Inventory
|
|
|
1,938
|
|
|
|
1,830
|
|
|
|
2,284
|
|
Other current assets
|
|
|
45
|
|
|
|
967
|
|
|
|
353
|
|
Property, plant and equipment
|
|
|
3,553
|
|
|
|
12,628
|
|
|
|
4,065
|
|
Amortizable intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
|
4,000
|
|
|
|
15,188
|
|
|
|
4,200
|
|
Trade names
|
|
|
2,300
|
|
|
|
7,586
|
|
|
|
2,600
|
|
Employee agreements
|
|
|
240
|
|
|
|
3,579
|
|
|
|
520
|
|
Technology
|
|
|
|
|
|
|
3,596
|
|
|
|
|
|
Goodwill
|
|
|
21,785
|
|
|
|
91,264
|
|
|
|
10,222
|
|
Other non-current assets
|
|
|
75
|
|
|
|
112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
33,936
|
|
|
|
159,478
|
|
|
|
25,864
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term debt
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
869
|
|
|
|
35,199
|
|
|
|
1,907
|
|
Accrued volume rebates
|
|
|
|
|
|
|
|
|
|
|
47
|
|
Customer deposits
|
|
|
1,954
|
|
|
|
|
|
|
|
|
|
Accrued compensation and payroll
taxes
|
|
|
141
|
|
|
|
2,248
|
|
|
|
356
|
|
Accrued warranty obligations
|
|
|
130
|
|
|
|
|
|
|
|
483
|
|
Other current liabilities
|
|
|
40
|
|
|
|
9,996
|
|
|
|
337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
3,134
|
|
|
|
47,443
|
|
|
|
3,130
|
|
Long-term liabilities
|
|
|
|
|
|
|
11,726
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets of acquired business
|
|
$
|
30,802
|
|
|
$
|
100,309
|
|
|
$
|
22,734
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial annual amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
571
|
|
|
$
|
1,707
|
|
|
$
|
280
|
|
Trade names
|
|
|
154
|
|
|
|
589
|
|
|
|
174
|
|
Employee agreements
|
|
|
48
|
|
|
|
804
|
|
|
|
74
|
|
Technology
|
|
|
|
|
|
|
881
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
773
|
|
|
$
|
3,981
|
|
|
$
|
528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected useful life (in years):
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
|
7
|
|
|
|
10
|
|
|
|
15
|
|
Trade names
|
|
|
15
|
|
|
|
15
|
|
|
|
15
|
|
Employee agreements
|
|
|
5
|
|
|
|
5
|
|
|
|
7
|
|
Technology
|
|
|
|
|
|
|
3-5
|
|
|
|
|
|
Goodwill and amortizable intangible assets from the North
American, Highland and New Era group acquisitions are attributed
to the manufacturing segment. Goodwill and amortizable
intangible assets from the Caledonian acquisition are attributed
to the international segment.
F-16
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Amortizable intangible assets as of December 30, 2006
consisted of the following:
|
|
|
|
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Customer relationships
|
|
$
|
26,508
|
|
Trade names
|
|
|
16,568
|
|
Employee agreements
|
|
|
4,782
|
|
Technology
|
|
|
4,042
|
|
|
|
|
|
|
|
|
|
51,900
|
|
Less accumulated amortization
|
|
|
(4,225
|
)
|
|
|
|
|
|
Total amortizable intangible
assets, net
|
|
$
|
47,675
|
|
|
|
|
|
|
Future annual amortization of intangible assets as of
December 30, 2006, which takes into consideration the
companies acquired in 2006 and 2005, is as follows (in
thousands):
|
|
|
|
|
2007
|
|
$
|
5,648
|
|
2008
|
|
|
5,648
|
|
2009
|
|
|
5,511
|
|
2010
|
|
|
5,465
|
|
2011
|
|
|
4,318
|
|
|
|
|
|
|
|
|
$
|
26,590
|
|
|
|
|
|
|
The following table presents unaudited pro forma combined
results for 2006 and 2005 as if Champion had acquired the New
Era group, Highland, Caledonian and North American at the
beginning of the periods presented, instead of their respective
acquisition dates of August 8, 2005, March 31, 2006,
April 7, 2006 and July 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 30,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Net sales
|
|
$
|
1,429,555
|
|
|
$
|
1,547,514
|
|
Net income
|
|
|
143,773
|
|
|
|
48,102
|
|
Diluted income per share
|
|
$
|
1.85
|
|
|
$
|
0.63
|
|
The pro forma results include amortization of amortizable
intangible assets acquired and valued in the transactions. The
pro forma 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.
NOTE 3
Discontinued Operations
Discontinued operations consist of the retail operations closed
or sold during 2005 and 2004 that were reclassified in 2005 as
discontinued operations for the periods presented and the
Companys former consumer finance business which was exited
in 2003.
F-17
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The loss from discontinued operations for the years ended
December 30, 2006, December 31, 2005 and
January 1, 2005 is summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Income (loss) from retail
operations
|
|
$
|
5
|
|
|
$
|
(4,334
|
)
|
|
$
|
(7,322
|
)
|
(Loss) income from consumer
finance business
|
|
|
(21
|
)
|
|
|
(49
|
)
|
|
|
1,197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loss from discontinued
operations
|
|
$
|
(16
|
)
|
|
$
|
(4,383
|
)
|
|
$
|
(6,125
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The assets and liabilities of discontinued operations are
included in the consolidated balance sheet in other current
assets, other non-current assets and other current liabilities
and consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 30,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Accounts receivable, trade
|
|
$
|
|
|
|
$
|
36
|
|
Inventories
|
|
|
157
|
|
|
|
1,279
|
|
Other current assets
|
|
|
352
|
|
|
|
521
|
|
|
|
|
|
|
|
|
|
|
Current assets of discontinued
operations
|
|
$
|
509
|
|
|
$
|
1,836
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
|
|
|
$
|
430
|
|
Other non-current assets
|
|
|
1,081
|
|
|
|
1,796
|
|
|
|
|
|
|
|
|
|
|
Non-current assets of discontinued
operations
|
|
$
|
1,081
|
|
|
$
|
2,226
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
20
|
|
|
$
|
359
|
|
Other current liabilities
|
|
|
2,604
|
|
|
|
2,920
|
|
|
|
|
|
|
|
|
|
|
Current liabilities of
discontinued operations
|
|
$
|
2,624
|
|
|
$
|
3,279
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued retail operations included operating
losses of $2.3 million and $5.2 million in 2005 and
2004, respectively, including restructuring charges totaling
$1.7 million in 2004 for closures of sales centers. Loss
from discontinued retail operations also included net losses of
$2.0 million and $2.1 million for 2005 and 2004,
respectively, for sales centers sold or to be sold, including
restructuring charges totaling $1.8 million in 2004. In
connection with the disposals of retail businesses during 2005
and 2004, intercompany manufacturing profit of $2.4 million
and $1.7 million, respectively, was recognized in the
consolidated statement of operations as a result of the
liquidation of retail inventory, which is not classified as
discontinued operations. Retail assets sold in 2005 and 2004
consisted primarily of new home inventory, other inventory and
property and equipment. During 2005, the aggregate sale price
for the sale of the 42 sales centers and other retail assets was
cash of approximately $31.0 million and the buyers
assumption of certain liabilities totaling approximately
$3.5 million. In connection with these sales, the Company
paid down $10.9 million of floor plan borrowings. During
2004, nine traditional sales centers and four other sales
locations were sold for net cash proceeds of $6.8 million
and the buyers assumption of liabilities of
$0.6 million. During 2005 and 2004, the discontinued retail
operations had net sales of approximately $26 million and
$136 million, respectively.
The income from the consumer finance business recorded in 2004
primarily resulted from the settlement of contractual
obligations that were accrued as part of the loss on
discontinuance in 2003.
NOTE 4
Income Taxes
Pretax income from continuing operations for the fiscal years
ended December 30, 2006, December 31, 2005 and
January 1, 2005 was taxed under the following jurisdictions:
F-18
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Domestic
|
|
$
|
32,902
|
|
|
$
|
38,336
|
|
|
$
|
8,982
|
|
Foreign
|
|
|
10,211
|
|
|
|
7,152
|
|
|
|
4,154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total pretax income from
continuing operations
|
|
$
|
43,113
|
|
|
$
|
45,488
|
|
|
$
|
13,136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The income tax provision (benefit) for continuing operations is
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Federal
|
|
$
|
(800
|
)
|
|
$
|
800
|
|
|
$
|
(12,000
|
)
|
Foreign
|
|
|
5,364
|
|
|
|
2,200
|
|
|
|
2,000
|
|
State
|
|
|
350
|
|
|
|
300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current
|
|
|
4,914
|
|
|
|
3,300
|
|
|
|
(10,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Federal
|
|
|
(84,700
|
)
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
(1,275
|
)
|
|
|
|
|
|
|
|
|
State
|
|
|
(14,150
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred
|
|
|
(100,125
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total (benefit) provision
|
|
$
|
(95,211
|
)
|
|
$
|
3,300
|
|
|
$
|
(10,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 from
continuing operations before income taxes and discontinued
operations as a result of the following differences:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax at U.S. Federal statutory
tax rate
|
|
$
|
15,100
|
|
|
$
|
15,900
|
|
|
$
|
4,600
|
|
(Decrease) increase in rate
resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
Permanent differences
|
|
|
(1,100
|
)
|
|
|
(1,500
|
)
|
|
|
2,000
|
|
Adjustment of deferred tax
valuation allowance
|
|
|
(109,500
|
)
|
|
|
(14,200
|
)
|
|
|
(17,600
|
)
|
Change in allowance for tax
adjustments
|
|
|
(500
|
)
|
|
|
|
|
|
|
(12,000
|
)
|
State tax net operating loss
|
|
|
1,000
|
|
|
|
2,000
|
|
|
|
4,500
|
|
Nondeductible goodwill impairment
|
|
|
|
|
|
|
|
|
|
|
7,500
|
|
Other
|
|
|
(211
|
)
|
|
|
1,100
|
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax (benefit) expense
|
|
$
|
(95,211
|
)
|
|
$
|
3,300
|
|
|
$
|
(10,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax at U.S. Federal statutory
tax rate
|
|
$
|
|
|
|
$
|
(1,500
|
)
|
|
$
|
(2,100
|
)
|
Increase in rate resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment of deferred tax
valuation allowance
|
|
|
|
|
|
|
1,500
|
|
|
|
2,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-19
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 reversal was originally
reported as $109.7 million but was subsequently reduced
effective July 1, 2006, by $7.8 million primarily to
eliminate the tax effect of federal net operating loss
(NOL) carryforwards related to stock option tax
deductions. The balance of the 2006 adjustment and all of the
2005 and 2004 adjustments of deferred tax valuation allowance
represent the tax effect of changes in NOL carryforwards
resulting from U.S. taxable income in the periods presented
through July 1, 2006. The 2004 tax benefit included a
$12.0 million current federal tax benefit from a reduction
in the allowance for tax adjustments as a result of the
finalization of certain tax examinations.
The Company has available federal net operating loss
carryforwards of approximately $178 million for tax
purposes to offset certain future federal taxable income. These
loss carryforwards expire in 2023 through 2026. Approximately
$20.0 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 $181 million for tax purposes to offset
future state taxable income and which expire primarily 2016
through 2026. At December 30, 2006, a deferred tax asset
valuation allowance of $0.9 million has been provided for
state NOL carryforwards expected to expire unutilized.
Discontinued operations were taxed domestically. No net tax
benefits were recorded for discontinued operations for 2005 and
2004 because the tax benefits of the pretax losses were entirely
offset by the deferred tax asset valuation allowance.
Deferred tax assets and liabilities are comprised of the
following as of December 30, 2006 and December 31,
2005:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
ASSETS
|
Federal net operating loss
carryforwards
|
|
$
|
55,300
|
|
|
$
|
46,800
|
|
Goodwill
|
|
|
6,500
|
|
|
|
6,400
|
|
Warranty reserves
|
|
|
14,300
|
|
|
|
15,500
|
|
Insurance reserves
|
|
|
16,800
|
|
|
|
17,600
|
|
Fixed asset impairments
|
|
|
4,500
|
|
|
|
7,800
|
|
State net operating loss
carryfowards
|
|
|
12,000
|
|
|
|
11,200
|
|
Employee compensation
|
|
|
7,600
|
|
|
|
5,300
|
|
Volume rebates
|
|
|
3,400
|
|
|
|
3,800
|
|
Foreign currency translation
adjustments
|
|
|
3,500
|
|
|
|
|
|
Inventory reserves
|
|
|
1,300
|
|
|
|
700
|
|
Other
|
|
|
4,803
|
|
|
|
4,700
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax assets
|
|
|
130,003
|
|
|
|
119,800
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
Goodwill
|
|
|
32,200
|
|
|
|
|
|
Depreciation
|
|
|
2,400
|
|
|
|
2,400
|
|
Prepaid expenses
|
|
|
1,200
|
|
|
|
1,000
|
|
Other
|
|
|
|
|
|
|
400
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax liabilities
|
|
|
35,800
|
|
|
|
3,800
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
(900
|
)
|
|
|
(116,000
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
93,303
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
F-20
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company does not provide U.S. income taxes on the
undistributed earnings of its foreign subsidiaries, which
totaled approximately $16 million at December 30,
2006. The Company intends to indefinitely reinvest these
earnings outside the U.S. It is not practicable 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.
NOTE 5
Inventories, Long-term Construction Contracts and Other Current
Liabilities
A summary of inventories by component at December 30, 2006
and December 31, 2005 is as follows:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
New manufactured homes
|
|
$
|
27,579
|
|
|
$
|
36,843
|
|
Raw materials
|
|
|
35,737
|
|
|
|
41,525
|
|
Work-in-process
|
|
|
14,284
|
|
|
|
10,621
|
|
Other inventory
|
|
|
24,750
|
|
|
|
19,661
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
102,350
|
|
|
$
|
108,650
|
|
|
|
|
|
|
|
|
|
|
Other inventory consists of payments made by the retail segment
for park spaces in manufactured housing communities and related
improvements.
Included in accounts receivable-trade at December 30, 2006
are uncollected billings of $5.7 million and unbilled
revenue of $18.9 million under long-term construction
contracts of the Companys international segment and
includes retention amounts totaling $1.7 million. Included
in other current liabilities at December 30, 2006 are cash
receipts in excess of revenue recognized under these
construction contracts of $5.1 million.
Included in other current liabilities at December 30, 2006
and December 31, 2005 are customer deposits of
$15.4 million and $9.0 million, respectively.
NOTE 6
Debt
Long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
7.625% Senior Notes due 2009
|
|
$
|
82,298
|
|
|
$
|
89,273
|
|
Term Loan due 2012
|
|
|
71,000
|
|
|
|
99,750
|
|
Sterling Term Loan due 2012
|
|
|
87,623
|
|
|
|
|
|
Obligations under industrial
revenue bonds
|
|
|
12,430
|
|
|
|
12,430
|
|
Other debt
|
|
|
1,266
|
|
|
|
1,539
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
254,617
|
|
|
|
202,992
|
|
Less: current portion of long-term
debt
|
|
|
(2,168
|
)
|
|
|
(1,265
|
)
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
252,449
|
|
|
$
|
201,727
|
|
|
|
|
|
|
|
|
|
|
On October 31, 2005, the Company entered into a senior
secured credit agreement with various financial institutions. On
April 7, 2006, concurrent with the closing of the
acquisition of Caledonian, the Company entered into an Amended
and Restated Credit Agreement (the Restated Credit
Agreement) with various financial institutions. The
Restated Credit Agreement is a senior secured credit facility
comprised of a $100 million term loan (the Term
Loan), a £45 million (approximately
$80 million at April 7, 2006) term loan
denominated in Pounds Sterling (the Sterling Term
Loan), a revolving line of credit in the amount of
$40 million and a $60 million letter of credit
facility. As of December 30, 2006, letters of credit issued
under the facility totaled $56.9 million and there were no
borrowings under the revolving line of credit. The Restated
Credit Agreement also provides the Company
F-21
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
the right from time to time to borrow incremental uncommitted
term loans of up to an additional $100 million, which may
be denominated in U.S. Dollars or Pounds Sterling, amended
certain restrictive covenants to permit the acquisition of
Caledonian and provided increased flexibility for foreign
acquisitions generally. The Restated Credit Agreement is secured
by a first security interest in substantially all of the assets
of the domestic operating subsidiaries of the Company.
The Restated Credit Agreement requires annual principal payments
for the Term Loan and the Sterling Term Loan totaling
approximately $1.9 million due in equal quarterly
installments. The interest rate for borrowings under the Term
Loan is currently a LIBOR based rate (5.35% at December 30,
2006) plus 2.5%. The interest rate for borrowings under the
Sterling Term Loan is currently a UK LIBOR based rate (5.25% at
December 30, 2006) plus 2.5%. Letter of credit fees
are 2.60% annually and revolver borrowings bear interest at
either the prime interest rate plus up to 1.5% or LIBOR plus up
to 2.5%. In addition, there is a fee on the unused portion of
the facility ranging from 0.50% to 0.75% annually.
The maturity date for each of the Term Loan, the Sterling Term
Loan and the letter of credit facility is October 31, 2012
and the maturity date for the revolving line of credit is
October 31, 2010 unless, as of February 3, 2009, more
than $25 million in aggregate principal amount of the
Companys Senior Notes due 2009 are outstanding, then the
maturity date for the four facilities will be February 3,
2009.
The Restated Credit Agreement contains affirmative and negative
covenants. Under the Restated Credit Agreement, the Company is
required to maintain a maximum Leverage Ratio (as defined) of no
more than 3.5 to 1 for the third and fourth fiscal quarters of
2006, 3.25 to 1 for the first, second and third fiscal quarters
of 2007, 3.0 to 1 for the fourth fiscal quarter of 2007, and
2.75 to 1 thereafter. The Leverage Ratio is the ratio of Total
Debt (as defined) of the Company on the last day of a fiscal
quarter to its consolidated EBITDA (as defined) for the
four-quarter period then ended. The Company is also required to
maintain a minimum Interest Coverage Ratio (as defined) of not
less than 3.0 to 1. The Interest Coverage Ratio is the ratio of
the Companys consolidated EBITDA for the four-quarter
period then ended to its Cash Interest Expense (as defined) over
the same four-quarter period. In addition, annual mandatory
prepayments are required should the Company generate Excess Cash
Flow (as defined). As of December 30, 2006, the Company was
in compliance with all covenants. However, as a result of
scheduled decreases in the leverage covenant coupled with lower
forecasted results due to U.S. housing market conditions,
the Company will likely be unable to remain in compliance with
the current covenants during 2007. The Company has initiated
discussions with the lenders to obtain an amendment to the
Restated Credit Agreement. The inability to secure a
satisfactory amendment to the Restated Credit Agreement could
result in a demand from the lenders to repay all or a portion of
the Term Loans and the termination of the letter of credit and
revolving line of credit facilities. In the event the Company
fails to obtain a satisfactory amendment, the Company would seek
to refinance the related indebtedness.
During the fourth quarter of 2006, the Company purchased
$7.0 million of its outstanding Senior Notes due 2009 for
cash consideration of $6.9 million and made a voluntary
repayment of $27.8 million on its Term Loan due 2012,
resulting in a pretax loss of $0.4 million from the
write-off of related deferred issuance costs.
On October 31, 2005, the Company completed its previously
announced tender offer and consent solicitation for its
outstanding Senior Notes due 2007, pursuant to which
$82.4 million principal amount of 2007 Senior Notes were
tendered. The remaining $6.0 million of Senior Notes due
2007 were redeemed in the quarter ended December 31, 2005,
via provisions in the 2007 Senior Note indenture. Funding for
the tender offer and consent solicitation, as well as the
redemption of the remaining 2007 Notes, was provided by the
proceeds of the new $100 million term loan. The fourth
quarter retirement of the $88.4 million of Senior Notes due
2007 for cash payments totaling $96.4 million resulted in a
pretax loss on debt retirement of $9.0 million.
During the quarter ended July 2, 2005, the Company
purchased and retired $9.1 million of its Senior Notes due
2007 in exchange for cash payments of $9.9 million,
resulting in a pretax loss of $0.9 million. During 2004,
the Company purchased and retired $13.5 million of its
Senior Notes due 2007 in exchange for 2.2 million shares of
the Companys common stock, resulting in a pretax loss of
$2.7 million. Also during the first quarter of 2004, the
Company repaid a $5.7 million obligation under an
industrial revenue bond, resulting in a pretax loss of
$0.1 million.
F-22
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Senior Notes due 2009 are secured equally and ratably with
obligations under the Restated Credit Agreement. Interest is
payable semi-annually at an annual rate of 7.625%. The indenture
governing the Senior Notes due 2009 contains covenants, which,
among other things, limit the Companys ability to incur
additional indebtedness and incur liens on assets. During 2004,
the Company purchased and retired $24.4 million of its
Senior Notes due 2009 in exchange for cash payments of
$10.4 million and 1.7 million shares of the
Companys common stock, resulting in no net gain or loss.
Future maturities of long-term debt as of December 30, 2006
are as follows (in thousands):
|
|
|
|
|
2007
|
|
$
|
2,168
|
|
2008
|
|
|
2,125
|
|
2009
|
|
|
84,428
|
|
2010
|
|
|
2,150
|
|
2011
|
|
|
2,108
|
|
Thereafter
|
|
|
161,638
|
|
|
|
|
|
|
|
|
$
|
254,617
|
|
|
|
|
|
|
NOTE 7
Restructuring Charges
During 2006, the Company closed four homebuilding facilities and
recorded a $1.2 million fixed asset impairment charge for
one of the closures. Also in 2006 the Company reduced its
accrual for closed plant warranty costs by $1.0 million due
to favorable experience.
During 2005, the Company accrued additional warranty costs of
$2.3 million for plants closed in prior periods due to
unfavorable experience. In addition, in 2005 the Company sold
its remaining 42 traditional sales centers. The net proceeds for
these sales approximated book value of the assets sold, net of
related reserves for intercompany profit in inventory.
During 2004, the Company closed 15 retail sales centers and one
manufacturing facility and recorded $5.5 million of
restructuring charges. These restructuring charges consisted of
$2.8 million for the manufacturing segment,
$3.5 million in discontinued operations for the retail
closures, and $0.8 million of inter-company profit (income)
resulting from the disposal of retail inventory that was
produced by Champion manufacturing plants. These restructuring
actions were substantially completed during the first quarter of
2005.
Manufacturing restructuring charges in 2004 consisted of fixed
asset impairment charges totaling $2.5 million, an
inventory write down of $0.5 million and severance costs of
$0.8 million. Manufacturing severance costs are related to
the termination of substantially all the 200 employees at the
manufacturing facility closed and include payments required
under the Worker Adjustment and Retraining Notification Act made
to hourly employees and severance payments to qualifying
salaried employees. Manufacturing restructuring charges in 2004
also included a $1.0 million reduction of accrued warranty
costs related to prior year closures due to better than expected
loss experience.
Retail restructuring charges in 2004 consisted of fixed asset
impairment charges totaling $1.4 million, inventory write
downs of $1.9 million and severance and lease termination
costs totaling $0.2 million. In addition, in 2004 the
Company sold nine traditional sales centers and four other sales
centers. The net proceeds for these sales approximated book
value of the assets sold, net of related reserves for
intercompany profit in inventory.
Inventory charges in 2004, net of intercompany profit
elimination, and warranty costs were included in cost of sales
while asset impairment charges, severance costs, lease
termination costs and other closing costs were included in
restructuring charges in the consolidated statements of
operations. All retail restructuring charges recorded during
2004 are included in net loss from discontinued operations in
the consolidated statements of operations.
F-23
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table provides information regarding activity for
other restructuring reserves during 2006, 2005 and 2004.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
Prior
|
|
|
Prior
|
|
|
2004
|
|
|
Prior
|
|
|
|
Closures
|
|
|
Closures
|
|
|
Closures
|
|
|
Closures
|
|
|
|
(In thousands)
|
|
|
Balance at beginning of year
|
|
$
|
4,330
|
|
|
$
|
4,421
|
|
|
$
|
|
|
|
$
|
8,073
|
|
Additions charged (reversals
credited) to earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance costs
|
|
|
|
|
|
|
(190
|
)
|
|
|
900
|
|
|
|
(64
|
)
|
Warranty costs
|
|
|
(1,000
|
)
|
|
|
2,300
|
|
|
|
|
|
|
|
(1,000
|
)
|
Lease termination costs
|
|
|
|
|
|
|
|
|
|
|
100
|
|
|
|
(114
|
)
|
Other closing costs
|
|
|
|
|
|
|
(16
|
)
|
|
|
|
|
|
|
|
|
Cash payments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance costs
|
|
|
|
|
|
|
(604
|
)
|
|
|
(106
|
)
|
|
|
(438
|
)
|
Warranty costs
|
|
|
(1,900
|
)
|
|
|
(1,060
|
)
|
|
|
|
|
|
|
(2,234
|
)
|
Lease termination costs
|
|
|
(412
|
)
|
|
|
(16
|
)
|
|
|
(84
|
)
|
|
|
(448
|
)
|
Other closing costs
|
|
|
|
|
|
|
(505
|
)
|
|
|
|
|
|
|
(164
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
1,018
|
|
|
$
|
4,330
|
|
|
$
|
810
|
|
|
$
|
3,611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year end balance comprised of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warranty costs
|
|
$
|
932
|
|
|
$
|
3,832
|
|
|
$
|
|
|
|
$
|
2,592
|
|
Other closing costs
|
|
|
86
|
|
|
|
498
|
|
|
|
810
|
|
|
|
1,019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,018
|
|
|
$
|
4,330
|
|
|
$
|
810
|
|
|
$
|
3,611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance costs and other closing costs are generally paid
within one year of the related closures. Most lease termination
costs are paid within one year of the closures but some are paid
up to three years after the closures. Warranty costs are
expected to be paid over a three-year period after the closures,
with the majority occurring in the first year.
NOTE 8
Goodwill
The Company tests for impairment of goodwill 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,
number of homebuilding 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. Past evaluations of goodwill
F-24
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
have resulted in significant retail impairment charges. The
change in the carrying amount of goodwill for the fiscal years
ended December 30, 2006 and December 31, 2005 is as
follows: