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 29, 2007 |
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
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(I.R.S. Employer Identification
No.)
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incorporation or
organization)
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755 W. Big Beaver, Suite 1000,
Troy, Michigan
(Address of principal
executive offices)
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48084
(Zip
Code)
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Registrants telephone number, including area code:
(248) 614-8200
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock, $1 par value
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New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the Registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. þ Yes No
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. o Yes þ No
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or such shorter period that the Registrant has
been required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. þ Yes o No
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of Registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer
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Accelerated filer
o
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Non-accelerated
filer o
(Do not check if a smaller reporting company)
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Smaller reporting
Company 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). o Yes þ No
The aggregate market value of the Common Stock held by
non-affiliates of the Registrant as of June 30, 2007, based
on the last sale price of $9.83 per share for the Common Stock
on the New York Stock Exchange on such date, was approximately
$746,524,713. As of February 22, 2008, the Registrant had
77,546,100 shares of Common Stock outstanding. For purposes
of this computation, all officers and directors of the
Registrant as of February 22, 2008 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 7, 2008
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III
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Champion
Enterprises, Inc.
Form 10-K
Fiscal Year End December 29, 2007
Table
of Contents
PART I
General
Established in 1953, Champion Enterprises, Inc. and its
subsidiaries (collectively, we,
Champion, or the Company) are a leading
producer of factory-built housing in the United States and
western Canada. We are also a leading producer of steel-framed
modular buildings in the United Kingdom for use as prisons,
military accommodations, hotels and residential units. As of
December 29, 2007, our North American manufacturing
operations (the manufacturing segment) consisted of
29 homebuilding facilities in 15 states and three provinces
in western Canada. As of December 29, 2007, our homes were
sold through more than 2,000 independent sales centers, builders
and developers across the U.S. and western Canada and also
through our retail segment that operates 17 sales offices in
California.
Factory-built housing in the United States is generally
comprised of manufactured housing (also known as HUD-code
homes) and modular homes. During the past five years, the
HUD-code industry has been affected by limited availability of
consumer financing, tight 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 119,000 homes
during the last five years as compared to 373,000 homes in 1998.
Industry shipments of HUD-code homes totaled 95,800 in 2007
compared to 117,500 in 2006, representing the lowest industry
volume since 1961. Champions sales of HUD-code homes in
2007 were 55% lower than in 2003. During 2007 and 2006, the
broader U.S. housing market became more difficult, as
evidenced by a 13% decline in 2006 new housing starts and an
over 8% decline in 2006 existing home sales versus 2005 levels.
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 31,200 homes in
2007, an estimated decrease of 19% versus 2006. Champions
sales of modular homes in 2007, were 20% lower than its sales of
modular homes in 2006 but were 40% higher than its modular sales
in 2003.
Since the beginning of 2002, we have closed, idled, sold, or
consolidated 30 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.
For the past two years the housing market in western Canada has
experienced strong growth. Sales of homes produced by our
Canadian plants increased 17% in 2007 over 2006 after increasing
12% in 2006 over 2005. On December 21, 2007, we acquired
substantially all the assets and the business of SRI Homes,
Inc., (SRI) a leading producer of homes in western
Canada. SRI operates three manufacturing plants with one each in
the provinces of Alberta, British Columbia and Saskatchewan.
This acquisition expanded our presence in one of the strongest
housing markets in North America.
On April 7, 2006, we acquired Calsafe Group (Holdings)
Limited and its operating subsidiary Caledonian Building Systems
Limited (Caledonian), a leading modular manufacturer
in the United Kingdom (UK). Our international
manufacturing segment (the international segment) is
comprised solely of Caledonian, which currently operates four
manufacturing facilities at one location in the UK. In 2007 our
operations in the UK experienced significant growth resulting
from a high volume of orders from the custodial (prison) and
military segments of their market.
1
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.
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.
Segment
Information
Financial information about Champions manufacturing,
international and retail segments is included in Note 16 of
Notes to Consolidated Financial Statements in
Item 8 of this Report. All of our manufacturing segment
operations are located in the United States except for five
homebuilding facilities in western Canada. Our international
segment is solely comprised of Caledonians operations in
the UK.
Manufacturing
segment
Products
In 2007, our manufacturing segment sold 15,346 homes and units
compared to 21,126 in 2006. Approximately 65.0% of the homes we
produced in 2007 were constructed to building standards in
accordance with the National Manufactured Home Construction and
Safety Standards promulgated by the U.S. Department of
Housing and Urban Development (HUD-code homes or
manufactured homes) compared to 72.6% in 2006. The
HUD Code regulates manufactured home design and construction,
strength and durability, fire resistance and energy efficiency.
The remaining homes and units we produced were modular homes and
units (23.9% in 2007 and 21.6% in 2006), were homes manufactured
and sold in Canada (10.7% in 2007 and 5.4% in 2006) or were
park models (0.4% in 2007 and 2006). Modular homes and units are
designed and built to meet local building codes. Homes sold in
Canada are constructed in accordance with applicable Canadian
building standards. With the acquisition of SRI Homes in
December 2007, we expect the volume of future annual sales in
Canada to increase significantly over the volume in 2007.
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 2007 and 2006, 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 2007, the average net selling price for our factory-built
homes was $55,100, excluding delivery, and manufacturing sales
prices ranged from $20,000 to over $150,000. Retail sales prices
of the homes, without land, generally ranged from $25,000 to
over $200,000, depending upon size, floor plan, features and
options. During
2
2007, the average retail selling price for new homes sold to
consumers by our retail segment was $191,700, 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, OSB, drywall, steel, vinyl floor
coverings, insulation, exterior siding (vinyl, composites, wood
and metal), windows, shingles, kitchen appliances, furnaces,
plumbing and electrical fixtures and hardware. These components
are presently available from a variety of sources and we are not
dependent upon any single supplier. Prices of certain materials
such as lumber, insulation, steel and drywall can fluctuate
significantly due to changes in demand and supply. Additionally,
availability of certain materials such as drywall and insulation
are 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/developers in the form of surcharges and price
increases.
Most completed factory-built homes have cabinets, wall coverings
and electrical, heating and plumbing systems. HUD-code homes
also generally contain factory installed floor coverings,
appliances and window treatments. Optional factory installed
features include fireplaces, dormers, entertainment centers and
skylights. Upon completion of the home at the factory, homes
sold to retailers are transported to a retail sales center
(stock orders) or directly to the home site (retail sold
orders). Homes sold to builders and developers are generally
transported directly to the home site. After the retail sale of
a stock home to the consumer, the home is transported to the
home site. At the home site, the home is placed on a foundation
and readied for occupancy by setup contractors. The sections of
a multi-section home are joined and the interior and exterior
seams are finished at the home site. The consumer purchase of
the home may also include retailer or contractor supplied items
such as additional appliances, air conditioning, furniture,
porches, decks and garages.
Production
We construct homes in indoor facilities using an assembly-line
process employing generally 100 to 200 production employees at
each facility. Manufactured homes are constructed in one or more
sections (also known as floors) on a permanently affixed steel
support frame that allows the section(s) to be moved through the
assembly line and transported upon sale. The sections of many of
the modular homes we produce are built on wooden floor systems
and transported on carriers that are removed 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/developers we sell to are located within a
500-mile
radius of our manufacturing plants.
3
Distribution
Our factory-built homes are distributed through independent
retailers, builders and developers, and our California-based
retail segment. During 2007, approximately 82% of our
manufacturing shipments were to approximately 1,800 independent
retail locations throughout the U.S. and western Canada. As
of December 29, 2007, approximately 850 of these
independent retail locations were part of our Champion Home
Center (CHC) retailer program. Sales to independent
CHC retailers accounted for approximately 65% of the homes we
sold to independent retailers. We continually seek to increase
our manufacturing shipments by expanding sales at our existing
independent retailers and by finding new independent retailers
to sell our homes.
As is common in the industry, our independent retailers may sell
homes produced by other manufacturers in addition to those
produced by the Company. Some independent retailers operate
multiple sales centers. In 2007, no single independent retailer
or distributor accounted for more than 2% of our manufacturing
sales.
We also sell our homes directly to approximately 400 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 2007 totaled
approximately 87,000 homes, down 15% from the comparable period
in 2006. 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 $60,000. 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, 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.
4
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 2007, there were 65 producers of
manufactured homes in the U.S. operating an estimated 196
production facilities. For the first six months of 2007 and for
12 months of 2006 the top 5 companies had a combined
market share of HUD-code homes of approximately 64% and 57%,
respectively, according to data published by MHI. According to
information obtained from MHI, there were approximately 7,000
industry retail locations throughout the U.S. in 2006.
Based on industry data reported by IBTS, in 2007 our
U.S. wholesale market share of HUD-code homes sold was
10.4%, compared to 13.1% in 2006, including homes sold to FEMA
in 2006. Based on industry data published by MHI, we estimate
our share of the modular home market in 2007 and 2006 to be
approximately 12%.
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, there has been
consolidation among the major national floor plan lenders, and a
number of local and regional banks have entered the market or
increased lending volumes.
Over 50% of our sales to independent retailers are financed by
the retailers 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.
5
Caledonian is a leading modular manufacturer in the UK 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.
Caledonian specializes in the design, manufacture and
construction of permanent, multi-story buildings using off-site
modular construction and may operate as the general contractor
for a project or as a
sub-contractor.
Most Caledonian projects involve total revenue from
$2 million to $50 million. Caledonian has key
framework agreements in place with its major customers, which
include Her Majestys Prison Service and, through a
third-party prime contractor, the UK Ministry of Defence
(MoD), among others.
Since 1996, Caledonian has constructed almost 17,000
accommodation rooms, of which 7,500 have been custodial (prison)
units and 6,000 have been military units. The remaining balance
of 3,500 rooms includes hotels and residential units.
Caledonian-produced modular buildings have included a
420 unit complete prison; a ten-story 612 unit student
accommodation building; many three and four-story, military
accommodation buildings of typically 50 to 150 bedrooms; 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 to
100-year
design life. The buildings are compliant with required 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
Each of Caledonians four plants employs approximately 70
production workers. Subcontractors are used for various
production functions, including electrical and plumbing work,
both in the factory and at construction sites.
The modules produced are created from welded steel frames using
hot rolled steel beams to create the basic frame (top, bottom
and vertical supports) and cold rolled steel elements for the
joists and wall studs. The frames are manufactured with lifting
points to facilitate craning the modules into place at the
construction site and fixing points, if required, to
facilitate the attachment of exterior cladding at the site.
After completion of the frame the unit is moved to a position in
the plant where it will be completed without further movement.
Workers clad the steel floors with either wood boards, cement
particle boards or concrete and the ceilings and interior walls
are clad with sheetrock. Insulation, plumbing, wiring, windows,
doors, bathroom components and cabinets are added as required.
Each module may contain up to four living units (bedrooms or
cells). Each factory 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 and interiors are finished
by completing the flooring and decors. Traditional steel and
concrete construction techniques may be employed for non-modular
areas to meet design specifications. Exterior cladding or brick
work and the roof are added on site to complete the building
structure.
6
Market
and competition
Caledonian competes in the UK custom modular industry, which
also 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 $2 billion. There are several large competitors in the
UK custom modular market, but Caledonian is the only modular
builder that focuses solely on the custom market. Caledonian
competes in four segments of this market: prisons, military
accommodations, hotels and residential. Caledonian establishes
key relationships in these segments and generally trades under
long-term framework agreements. Under these framework agreements
Caledonian is a principal supplier of modular prison units to
Her Majestys Prison Service and currently the sole
supplier of modular military accommodations to MoDs Single
Living Accommodation Modernization (SLAM) program.
Caledonian is one of five or more suppliers of modular
accommodation to MoD outside of SLAM. Caledonian has also
developed key relationships in the hotel and residential
segments. Funding for projects in the prison and military
segments 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 17 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 2007, 88.0% were Champion-produced, compared to 85.9% in
2006. Champion-produced homes purchased by our retail segment in
2007 and 2006 accounted for 2.0% and 2.7%, 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 29, 2007, we had approximately
6,500 employees. We deem our relationship with our
employees to be generally good. Currently, our five
manufacturing facilities in Canada employ approximately 1,200
workers, of which 900 are subject to collective bargaining
agreements, one that expired in November 2007 and the others
that expire in June 2008, November 2008, June 2009 and December
2010. Negotiations are progressing on replacing the agreement
that expired in November 2007. 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 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. In August 2007, a three-judge panel of the
NLRB issued a ruling that the Company had lawfully withdrawn
recognition in 2002. The Union did not appeal this decision and
the unit has been decertified.
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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56
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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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45
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Executive Vice President, Treasurer and Chief Financial Officer
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Roger K. Scholten
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53
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Senior Vice President, General Counsel and Secretary
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Jeffrey L. Nugent
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61
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Vice President, Human Resources
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Richard P. Hevelhorst
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60
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Vice President and Controller
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The executive officers serve at the pleasure of our Board of
Directors.
Mr. Griffiths became President and Chief Executive Officer
of Champion Enterprises, Inc. on August 1, 2004 and was
elected Chairman of the Board of Directors in March 2006.
Previously, since 2001 Mr. Griffiths was employed by SPX
Corporation, a global multi-industry company, located in
Charlotte, North Carolina, where he was President-Fluid Systems
Division. From 1998 to 2001, Mr. Griffiths was
President-Fluid Systems Division at United Dominion Industries,
Inc., which was acquired by SPX Corporation in 2001.
Mrs. Knight joined Champion in 2002 after leaving Conseco
Finance Corp. where since 1994 she served in various executive
positions, including Senior Vice President and Treasurer and,
most recently, was President of its Mortgage Services Division.
Mr. Scholten joined the Company in October 2007.
Mr. Scholten was employed by Maytag Corporation since 1981,
where most recently he was General Counsel and Senior Vice
President.
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
cost 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, compliance with the covenants
in our credit facilities and the impact of our inability to do
so, changes to our capital structure, our expected capital
expenditures, the impact of contingent repurchase obligations
and other contingent liabilities or obligations on the results
of our operations, the adequacy of our cash flow from operations
to fund capital expenditures, could be construed to be
forward-looking statements within the meaning of
U.S. federal securities laws. In addition, Champion or
persons acting on our behalf may from time to time publish or
communicate other items that could also be construed to be
forward-looking statements. Statements of this sort are, or will
be, based on the Companys then current estimates,
assumptions and projections and are subject to risks and
uncertainties, including those specifically listed below that
could cause actual results to differ materially from those
included in the forward-looking statements. The Company does not
undertake to update its forward-looking statements or risk
factors to reflect future events or circumstances. The following
risk factors could affect the Companys operating results.
Significant debt Our significant debt could
limit our ability to obtain additional financing, require us to
dedicate a substantial portion of our cash flows from operations
for debt service and prevent us from fulfilling our debt
obligations. If we are unable to pay our debt obligations when
due, we could be in default under our debt agreements and our
lenders could accelerate our debt or take other actions which
could restrict our operations.
As discussed in Note 5 of the Notes to Consolidated
Financial Statements in Item 8 of this Report, we
have a significant amount of debt outstanding, which consists
primarily of term loans due in 2012, a note payable due at the
end of 2008, and Convertible Senior Notes (the Convertible
Notes) due in 2037. Holders of the Convertible Notes may require
us to repurchase the Notes if we are involved in certain types
of corporate transactions or other events constituting a
fundamental change and have the right to require us to
repurchase all or a portion of their Notes on November 1 of
2012, 2017, 2022, 2027 and 2032. We have the right to redeem the
Convertible Notes, in whole or in part, for cash at any time
after October 31, 2012. We may incur additional debt to
finance acquisitions or for other purposes. This indebtedness
could, among other things:
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limit our ability to obtain future financing for working
capital, capital expenditures, acquisitions, debt service
requirements, surety bonds, or other requirements;
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require us to dedicate a substantial portion of our cash flows
from operations to the payment of principal and interest on our
indebtedness and reduce our ability to use our cash flows for
other purposes;
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limit our flexibility in planning for, or reacting to, changes
in our business and the markets in which we compete;
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place us at a competitive disadvantage to competitors with less
indebtedness; and
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make us more vulnerable in the event of a further downturn in
our business or in general economic conditions.
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Our business may not generate cash flows from operations in
amounts sufficient to pay our debt or to fund other liquidity
needs. The factors that affect our ability to generate cash can
also affect our ability to raise additional funds through the
sale of equity securities, the refinancing of debt or the sale
of assets.
We may need to refinance all or a portion of our debt on or
before maturity. We may not be able to refinance any of our debt
on commercially reasonable terms or at all. If we are unable to
refinance our debt obligations, we could be in default under our
debt agreements and our lenders could accelerate our debt or
take other actions that could restrict our operations.
9
Fluctuations in operating results The cyclical
and seasonal nature of the North American 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 North American housing market is highly cyclical and is
influenced by many national and regional economic and
demographic factors, including:
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terms and availability of financing for homebuyers and retailers;
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consumer confidence;
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interest rates;
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population and employment trends;
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income levels;
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housing demand; and
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general economic conditions, including inflation, and recessions.
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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.
As a result, consumer finance companies have curtailed their
industry lending and many have exited the manufactured housing
market. Additionally, the industry has seen certain traditional
real estate mortgage lenders tighten terms or discontinue
financing for manufactured housing.
If consumer financing for manufactured homes were to be further
curtailed, we would likely experience sales declines and our
operating results and cash flows would suffer.
Floor plan financing availability A reduction
in floor plan credit availability or tighter loan terms to our
independent retailers could cause our manufacturing sales to
decline. As a result, our operating results and cash flows could
suffer.
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 repurchase obligations
and other contingent obligations, some of which could become
actual obligations that we must satisfy. We may incur losses
under these contingent repurchase obligations or be required to
fund these or other contingent obligations that would reduce our
cash flows.
In connection with a floor plan arrangement for our
manufacturing shipments to independent retailers, the financial
institution that provides the retailer financing customarily
requires us to enter into a separate repurchase agreement with
the financial institution. Under this separate agreement,
generally for a period up to 18 months from the date of our
sale to the retailer, upon default by the retailer and
repossession of the home by the financial institution, we are
generally obligated to 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 29, 2007 was
significant and included significant contingent repurchase
obligations relating to our largest independent retail
customers. For additional discussion see Contingent
Repurchase Obligations Manufacturing Segment
in Item 7 and Note 13 of Notes to Consolidated
Financial Statements in Item 8 of this Report. We may
be required to honor some or all of our contingent repurchase
obligations in the future, which would result in operating
losses and reduced cash flows.
At December 29, 2007, 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 2007, approximately 82% of our manufacturing shipments of
homes were made to independent retail locations throughout the
United States and western Canada. As is common in the industry,
independent retailers may sell manufactured homes produced by
competing manufacturers. We may not be able to establish
relationships 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 our customers in the form of surcharges and
base price increases. However, it is not certain that future
price increases can be passed on to our customers without
affecting demand or that limited availability of materials will
not impact our production capabilities.
Effect on liquidity Industry conditions and
our operating results have limited our sources of capital in the
past. If we are unable to locate suitable sources of capital
when needed we may be unable to maintain or expand our
business.
We depend on our cash balances, our cash flows from operations
and our senior secured credit agreement, as amended, (the
Credit Agreement) to finance our operating
requirements, capital expenditures and other needs. The downturn
in the manufactured housing industry, combined with our
operating results and other changes, has limited our sources of
financing in the past. If our cash balances, cash flows from
operations, and availability under
11
our revolving credit facility are insufficient to finance our
operations and alternative capital is not available, we may not
be able to expand our business and make acquisitions, or we may
need to curtail or limit our existing operations.
We have a significant amount of surety bonds and letters of
credit representing collateral for our casualty insurance
programs and for general operating purposes which are backed by
our Credit Agreement . For additional detail and information
concerning the amounts of our surety bonds and letters of
credit, see Note 13 of Notes to Consolidated
Financial Statements in Item 8 of this Report. The
inability to retain our current letter of credit and surety bond
providers, to obtain alternative bonding or letter of credit
sources or to retain our current Credit Agreement to support
these programs could require us to post cash collateral, reduce
the amount of cash available for our operations or cause us to
curtail or limit existing operations.
Competition The factory-built housing industry
is very competitive. If we are unable to effectively compete,
our growth could be limited, our sales could decline and our
operating results and cash flows could suffer.
The factory-built housing industry is highly competitive at both
the manufacturing and retail levels, with competition based,
among other things, on price, product features, reputation for
service and quality, merchandising, terms of retailer
promotional programs and the terms of consumer financing.
Numerous companies produce factory-built homes in our markets.
Some of our manufacturing competitors have captive retail
distribution systems and consumer finance operations. In
addition, there are independent factory-built housing retail
locations in most areas where independent retailers sell our
homes and in California where we have retail operations. Because
barriers to entry to the industry at both the manufacturing and
retail levels are low, we believe that it is relatively easy for
new competitors to enter our markets. In addition, our products
compete with other forms of low to moderate-cost housing,
including site-built homes, panelized homes, apartments,
townhouses and condominiums. If we are unable to effectively
compete in this environment, our manufacturing shipments and
retail sales could be reduced. As a result, our sales could
decline and our operating results and cash flows could suffer.
Zoning If the factory-built housing industry
is not able to secure favorable local zoning ordinances, our
sales could decline and our operating results and cash flows
could suffer.
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 Credit Agreement
contain financial and non-financial covenants that place
restrictions on us and our subsidiaries. The terms of this
agreement include covenants that allow for a
12
maximum leverage limit, require minimum levels of interest
coverage and fixed charge coverage that, to varying degrees,
restrict our and our subsidiaries ability to:
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make capital investments;
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engage in new lines of business;
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incur indebtedness, contingent liabilities, guarantees, and
liens;
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pay dividends or issue common stock;
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redeem or refinance existing indebtedness;
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redeem or repurchase common stock and redeem, repay or
repurchase subordinated debt;
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make investments in subsidiaries that are not subsidiary
guarantors;
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enter into joint ventures;
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sell certain assets or enter into sale and leaseback
transactions;
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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 29, 2007, we were in compliance with all Credit
Agreement covenants.
In addition, our Credit Agreement contains provisions that
require us, under certain circumstances, to use a significant
portion of our Excess Cash Flow (as defined) to repay
outstanding balances under the facility if our Excess Cash Flow
is not reinvested in the year it is generated, as required under
the agreement. As a result, our ability to execute our growth
and diversification strategies could be limited.
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 further diversify our
revenue base. The full benefits of these acquisitions, however,
require integration of manufacturing, administrative, financial,
sales, and marketing approaches and personnel. If we are unable
to successfully integrate these acquisitions, we may not realize
the benefits of the acquisitions, and our financial results may
be negatively affected. Completed acquisitions may also lead to
significant unexpected liabilities above and beyond the level of
available indemnities contained in the purchase agreements.
Potential Dilution Conversions by holders of
our convertible securities and potential capital, debt
reduction, or acquisition transactions effected with issuances
of our common stock could result in dilution and impair the
price of our common stock.
We currently have $180 million of 2.75% Convertible
Notes outstanding. The Convertible Notes are convertible into
approximately 8.6 million shares or more of our common
stock, depending on the market price of our common stock near
the conversion date. To the extent that holders convert their
Convertible Notes into shares of the Companys common
stock, other common shareholders would experience dilution in
their percentage ownership interests.
13
To the extent we decide to reduce debt obligations or finance
investments through the issuance of common stock or instruments
convertible into common stock, our then existing common
shareholders could experience dilution in their percentage
ownership interests. We may seek additional sources of capital
and financing in the future or issue securities in connection
with retiring our outstanding indebtedness or making
acquisitions, the terms of which could result in additional
dilution.
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 29,
2007 were 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. These tests require
projections of future cash flows and estimates of fair value of
the assets. Unfavorable trends in the industries in which we
operate or in our operations 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.
During 2007, approximately 82% 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 29, 2007 in the United States and Canada and the
four manufacturing facilities in the United Kingdom
(UK). On February 8, 2008, our Henry, TN plant
was destroyed by fire. All of the North American facilities are
assembly-line operations.
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United States
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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
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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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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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Lethbridge*
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British Columbia
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Penticton
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Winfield*
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Saskatchewan
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Estevan
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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. |
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***** |
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Destroyed by fire in February 2008 |
Substantially all of the U.S. manufacturing facilities we
own are encumbered under first mortgages securing our Credit
Agreement. Two of the facilities are encumbered under industrial
revenue bond financing agreements and one facility is encumbered
under a capital lease.
15
At December 29, 2007, we also owned 16 idle manufacturing
facilities in 6 states. Eight of these idle facilities are
permanently closed and are generally for sale.
At December 29, 2007, our retail segment headquarters and
17 retail sales offices in California were leased under
operating leases. Sales office lease terms generally range from
monthly to five years. Our executive offices, which are located
in Troy, Michigan, and other miscellaneous offices and
properties, are also leased under operating leases. The lease
term for our executive offices is ten years.
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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
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There were no matters submitted to a vote of Champions
security holders during the fourth quarter of 2007.
16
PART II
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Item 5.
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Market
for Registrants Common Equity, Related Shareholder
Matters, and Issuer Purchases of Equity Securities
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Champions common stock is listed on the New York 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 2007 and 2006
were as follows:
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
2007
|
|
|
|
|
|
|
|
|
1st Quarter
|
|
$
|
10.34
|
|
|
$
|
7.18
|
|
2nd Quarter
|
|
|
12.00
|
|
|
|
8.63
|
|
3rd Quarter
|
|
|
12.74
|
|
|
|
8.80
|
|
4th Quarter
|
|
|
14.59
|
|
|
|
7.84
|
|
2006
|
|
|
|
|
|
|
|
|
1st Quarter
|
|
$
|
16.15
|
|
|
$
|
12.90
|
|
2nd Quarter
|
|
|
16.50
|
|
|
|
9.12
|
|
3rd Quarter
|
|
|
10.73
|
|
|
|
5.04
|
|
4th Quarter
|
|
|
10.28
|
|
|
|
6.73
|
|
As of February 22, 2008, the Company had approximately
4,800 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 5 of Notes to
Consolidated Financial Statements in Item 8 of this
Report, our Credit Agreement contains a covenant that limits our
ability to pay dividends.
The graph below compares the cumulative five-year shareholder
returns on Company Common Stock to the cumulative five-year
shareholder returns for (i) the S&P 500 Stock Index
and (ii) an index of peer companies selected by the
Company. The peer group is composed of seven publicly traded
manufactured housing companies, which were selected based on
similarities in their products and their competitive position in
the industry. The companies comprising the peer group are
Cavalier Homes, Inc., Cavco Industries, Inc., Fleetwood
Enterprises, Inc., Nobility Homes, Inc., Palm Harbor Homes,
Inc., Skyline Corporation and Coachmen Industries, Inc.
17
INDEXED
RETURNS
Years Ending
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company Name/Index
|
|
|
Dec 02
|
|
|
Dec 03
|
|
|
Dec 04
|
|
|
Dec 05
|
|
|
Dec 06
|
|
|
Dec 07
|
Champion Enterprises, Inc.
|
|
|
|
100
|
|
|
|
|
240.89
|
|
|
|
|
406.19
|
|
|
|
|
468.04
|
|
|
|
|
321.65
|
|
|
|
|
321.31
|
|
S&P 500 Index
|
|
|
|
100
|
|
|
|
|
126.63
|
|
|
|
|
138.44
|
|
|
|
|
142.60
|
|
|
|
|
162.02
|
|
|
|
|
168.89
|
|
Peer Group
|
|
|
|
100
|
|
|
|
|
116.14
|
|
|
|
|
137.58
|
|
|
|
|
135.35
|
|
|
|
|
117.52
|
|
|
|
|
90.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 29, 2007 (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
|
|
|
2,031
|
|
|
$
|
2.86
|
|
|
|
3,291
|
|
Equity Compensation Plans and Agreements not Approved by
Shareholders(1)
|
|
|
85
|
|
|
$
|
16.68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,116
|
|
|
|
|
|
|
|
3,291
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 which
were previously granted and remain outstanding. Options
representing 72,802 shares of common stock remain
outstanding under this plan. The weighted-average exercise price
of these options is $16.03.
Acquisitions We granted stock options to
certain employees of acquired businesses. Options representing
12,000 shares of common stock remain outstanding under
these agreements and were granted at fair market value and
vested over time. The weighted-average exercise price of these
options is $20.63.
18
|
|
Item 6.
|
Selected
Financial Information
|
Five-Year
Highlights
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(Dollars and weighted average shares in thousands,
|
|
|
|
except per share amounts)
|
|
|
Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing
|
|
$
|
941,945
|
|
|
$
|
1,195,834
|
|
|
$
|
1,190,819
|
|
|
$
|
1,002,164
|
|
|
$
|
981,254
|
|
International
|
|
|
280,814
|
|
|
|
90,717
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
|
|
|
73,406
|
|
|
|
117,397
|
|
|
|
135,371
|
|
|
|
110,024
|
|
|
|
130,366
|
|
Less: Intercompany
|
|
|
(22,700
|
)
|
|
|
(39,300
|
)
|
|
|
(53,600
|
)
|
|
|
(97,900
|
)
|
|
|
(109,686
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
|
1,273,465
|
|
|
|
1,364,648
|
|
|
|
1,272,590
|
|
|
|
1,014,288
|
|
|
|
1,001,934
|
|
Cost of sales
|
|
|
1,083,601
|
|
|
|
1,147,032
|
|
|
|
1,055,749
|
|
|
|
843,261
|
(b)
|
|
|
866,020
|
(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
189,864
|
|
|
|
217,616
|
|
|
|
216,841
|
|
|
|
171,027
|
|
|
|
135,914
|
|
Selling, general and administrative expenses
|
|
|
157,134
|
|
|
|
154,518
|
|
|
|
151,810
|
|
|
|
129,096
|
|
|
|
146,513
|
|
Goodwill impairment charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34,183
|
|
Restructuring charges
|
|
|
3,780
|
|
|
|
1,200
|
|
|
|
|
|
|
|
3,300
|
|
|
|
21,100
|
|
Amortization of intangible assets
|
|
|
5,727
|
|
|
|
3,941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mark-to-market (credit) charge for common stock warrant
|
|
|
|
|
|
|
|
|
|
|
(4,300
|
)
|
|
|
5,500
|
|
|
|
3,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
23,223
|
|
|
|
57,957
|
|
|
|
69,331
|
|
|
|
33,131
|
|
|
|
(69,182
|
)
|
Loss (gain) on debt retirement
|
|
|
4,543
|
|
|
|
398
|
|
|
|
9,857
|
|
|
|
2,776
|
|
|
|
(10,639
|
)
|
Net interest expense
|
|
|
(14,731
|
)
|
|
|
(14,446
|
)
|
|
|
(13,986
|
)
|
|
|
(17,219
|
)
|
|
|
(26,399
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
|
|
|
3,949
|
|
|
|
43,113
|
|
|
|
45,488
|
|
|
|
13,136
|
|
|
|
(84,942
|
)
|
Income tax (benefit) expense
|
|
|
(3,243
|
)
|
|
|
(95,211
|
)(e)
|
|
|
3,300
|
|
|
|
(10,000
|
)(c)
|
|
|
(5,500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
7,192
|
|
|
|
138,324
|
|
|
|
42,188
|
|
|
|
23,136
|
|
|
|
(79,442
|
)
|
Loss from discontinued operations
|
|
|
|
(a)
|
|
|
(16
|
)(a)
|
|
|
(4,383
|
)(a)
|
|
|
(6,125
|
)(a)
|
|
|
(23,642
|
)(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
7,192
|
|
|
$
|
138,308
|
|
|
$
|
37,805
|
|
|
$
|
17,011
|
|
|
$
|
(103,084
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
0.09
|
|
|
$
|
1.78
|
|
|
$
|
0.54
|
|
|
$
|
0.29
|
|
|
$
|
(1.45
|
)
|
Loss from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
(0.06
|
)(a)
|
|
|
(0.08
|
)(a)
|
|
|
(0.41
|
)(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income (loss) per share
|
|
$
|
0.09
|
|
|
$
|
1.78
|
|
|
$
|
0.48
|
|
|
$
|
0.21
|
|
|
$
|
(1.86
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted shares for diluted EPS
|
|
|
77,719
|
|
|
|
77,578
|
|
|
|
76,034
|
|
|
|
71,982
|
|
|
|
57,688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows provided by (used for) continuing operating activities
|
|
$
|
80,305
|
|
|
$
|
59,874
|
|
|
$
|
38,406
|
|
|
$
|
(7,319
|
)
|
|
$
|
71,215
|
(d)
|
Cash flows provided by (used for) discontinued operations
|
|
|
62
|
|
|
|
1,201
|
|
|
|
15,438
|
|
|
|
(1,976
|
)
|
|
|
(12,030
|
)
|
Depreciation and amortization
|
|
|
20,063
|
|
|
|
17,943
|
|
|
|
10,738
|
|
|
|
10,209
|
|
|
|
13,714
|
|
Capital expenditures
|
|
|
10,201
|
|
|
|
17,582
|
|
|
|
11,785
|
|
|
|
8,440
|
|
|
|
5,912
|
|
Net property, plant and equipment
|
|
|
116,984
|
|
|
|
112,527
|
|
|
|
91,173
|
|
|
|
80,957
|
|
|
|
87,365
|
|
Total assets
|
|
|
1,022,223
|
|
|
|
800,615
|
|
|
|
566,654
|
|
|
|
517,042
|
|
|
|
528,300
|
|
Long-term debt
|
|
|
342,897
|
|
|
|
252,449
|
|
|
|
201,727
|
|
|
|
200,758
|
|
|
|
244,669
|
|
Redeemable convertible preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,750
|
|
|
|
8,689
|
|
Shareholders equity
|
|
|
319,846
|
|
|
|
301,762
|
|
|
|
147,305
|
|
|
|
77,300
|
|
|
|
14,989
|
|
Per outstanding share (unaudited)
|
|
$
|
4.14
|
|
|
$
|
3.95
|
|
|
$
|
1.94
|
|
|
$
|
1.07
|
|
|
$
|
0.23
|
|
Other Statistical Information (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of employees at year end
|
|
|
6,500
|
|
|
|
7,000
|
|
|
|
7,400
|
|
|
|
6,800
|
|
|
|
6,800
|
|
Homes sold
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing
|
|
|
15,346
|
|
|
|
21,126
|
|
|
|
23,960
|
|
|
|
22,978
|
|
|
|
25,483
|
|
Retail new
|
|
|
375
|
|
|
|
629
|
|
|
|
748
|
|
|
|
687
|
|
|
|
3,432
|
|
Manufacturing multi-section mix
|
|
|
77
|
%
|
|
|
80
|
%
|
|
|
79
|
%
|
|
|
85
|
%
|
|
|
84
|
%
|
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 and $8.9 million in 2003 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 income tax refunds of
$64 million in 2003.
|
|
(e)
|
|
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 and western Canada. As of December 29, 2007, we
operated 24 homebuilding facilities in 15 states in the
U.S. and five facilities in three provinces in western
Canada. As of December 29, 2007, our homes were sold
through more than 2,000 independent sales centers, builders, and
developers across the U.S. and western Canada.
Approximately 850 of our independent retailer locations were
members of our Champion Home Centers (CHC) retail
distribution network. As of December 29, 2007, our homes
were also sold through 17 Company-owned sales offices in
California. We are also a leading modular builder in the United
Kingdom, where we operate four manufacturing facilities and
construct steel-framed modular buildings for use as prisons,
military accommodations, hotels and residential units.
On December 21, 2007, we acquired substantially all the
assets and the business of SRI Homes, Inc., (SRI) a
leading producer of factory-built homes in western Canada, for
cash payments of approximately $96.2 million, a note
payable of $24.5 million and assumption of the operating
liabilities of the business. SRI operates three manufacturing
plants with one each in the provinces of Alberta, British
Columbia and Saskatchewan. This acquisition expanded our
presence in one of the strongest housing markets in North
America. SRI is included in our manufacturing segment, but due
to the timing of the acquisition, had no impact on our
consolidated 2007 results.
On April 7, 2006, we acquired 100% of the capital stock of
United Kingdom-based Calsafe Group (Holdings) Limited and its
operating subsidiary Caledonian Building Systems Limited
(Caledonian), for approximately $100 million in
cash, plus potential contingent purchase price up to
approximately $6.4 million and additional potential
contingent consideration to be paid over four years. Our
international manufacturing segment (the international
segment) currently consists of Caledonian and its four
manufacturing facilities in the United Kingdom.
On July 31, 2006, we acquired certain of the assets and the
business of North American Housing Corp. and an affiliate
(North American) for approximately $31 million
in cash plus assumption of certain operating liabilities. North
American is a modular homebuilder that operates two
manufacturing facilities in Virginia. On March 31, 2006, we
acquired 100% of the membership interests of Highland
Manufacturing Company, LLC (Highland), a
manufacturer of modular and HUD-code homes that operates one
plant in Minnesota, for cash consideration of approximately
$23 million. North American and Highland are included in
our manufacturing segment.
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.
Deteriorating HUD-code industry conditions have negatively
affected our U.S operations during the past several years as a
result of relatively tight availability of consumer financing
and lower levels of demand. During the past two years the market
for factory-built homes has also been affected by adverse
conditions in the overall U.S. housing market and the
U.S. economy. Excluding homes sold to FEMA in 2006 and
2005, annual industry shipments of HUD-code homes averaged
124,000 homes during the last five years as compared to 373,000
homes in 1998. Industry shipments of HUD-code homes totaled
approximately 95,800 in 2007, which was the lowest industry
volume since 1961. These conditions led to weak incoming order
rates for HUD-code and modular homes at our U.S. plants in
2007 and most of our U.S. plants operated on one week or
less of unfilled orders throughout the year resulting in
production inefficiencies and increased production downtime. As
a result of these conditions, in 2007 we closed three
manufacturing plants and temporarily idled another plant in the
U.S. and in 2006 we closed four plants in the U.S.
Our acquisitions in 2007 and 2006 were part of our strategy to
diversify our revenue base with a focus on increasing our
modular homebuilding presence in the U.S. and to seek
factory-built construction opportunities outside of the U.S.
Our pretax income from continuing operations for the year ended
December 29, 2007 was $3.9 million versus
$43.1 million in 2006. Compared to 2006, our 2007
manufacturing segment income declined $40.7 million or
nearly 50% on a 21% decline in sales despite significantly
better results from our Canadian operations and the
20
inclusion of full year results for Highland and North American.
Most of the decreased profitability in the manufacturing segment
occurred in the first and fourth quarters of 2007.
Meanwhile, during 2007 our manufacturing segments Canadian
operations enjoyed strong sales volumes, relatively high levels
of unfilled orders and increased pricing power resulting in
increased profitability. Homes sold in 2007 by our Canadian
operations increased 17% over the number sold in 2006. Total
homes we sold in Canada in 2007, including homes produced in the
U.S., increased 45% over the number we sold in 2006. Our
international segment in the UK also experienced growth in 2007
with strong backlogs, high utilization of manufacturing capacity
and a significant increase in site-work revenues. International
segment sales and income for the full year increased more than
200% over results in 2006, which consisted of only nine months.
Our retail segment, which operates exclusively in California,
suffered from poor housing market conditions in that state and
showed significant decreases in both sales and segment income in
2007.
Included in income from continuing operations for the year ended
December 29, 2007, were charges totaling $4.9 million
related to the closure of two plants in the manufacturing
segment, a loss on debt retirement of $4.5 million and a
compensation charge of $6.4 million in the international
segment as a result of a contingent purchase price or earn
out arrangement related to the acquisition of Caledonian.
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.
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. Continuing retail
operations in 2007, 2006 and 2005 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.
On February 8, 2008, our manufacturing facility in Henry,
TN was destroyed by fire. We immediately established a plan to
service the plants retail customers while we evaluate the
situation. The net book value of plant, equipment and inventory
of the Henry plant at February 2, 2008 was approximately
$3.3 million. We are fully insured through our property
insurance coverage, subject to a $250,000 deductible.
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 eight homebuilding
plants in the U.S. We continually review our manufacturing
capacity and will make further adjustments as deemed necessary.
21
Results
of Operations
Consolidated
Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
07 vs 06
|
|
|
06 vs 05
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
% Change
|
|
|
% Change
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
Net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing segment
|
|
$
|
941,945
|
|
|
$
|
1,195,834
|
|
|
$
|
1,190,819
|
|
|
|
(21
|
)%
|
|
|
|
|
International segment
|
|
|
280,814
|
|
|
|
90,717
|
|
|
|
|
|
|
|
210
|
%
|
|
|
|
|
Retail segment
|
|
|
73,406
|
|
|
|
117,397
|
|
|
|
135,371
|
|
|
|
(37
|
)%
|
|
|
(13
|
)%
|
Less: intercompany
|
|
|
(22,700
|
)
|
|
|
(39,300
|
)
|
|
|
(53,600
|
)
|
|
|
(42
|
)%
|
|
|
(27
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
$
|
1,273,465
|
|
|
$
|
1,364,648
|
|
|
$
|
1,272,590
|
|
|
|
(7
|
)%
|
|
|
7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
$
|
189,864
|
|
|
$
|
217,616
|
|
|
$
|
216,841
|
|
|
|
(13
|
)%
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
157,134
|
|
|
|
154,518
|
|
|
|
151,810
|
|
|
|
2
|
%
|
|
|
2
|
%
|
Amortization of intangible assets
|
|
|
5,727
|
|
|
|
3,941
|
|
|
|
|
|
|
|
45
|
%
|
|
|
|
|
Mark-to-market credit for common stock warrant
|
|
|
|
|
|
|
|
|
|
|
(4,300
|
)
|
|
|
|
|
|
|
|
|
Restructuring charges
|
|
|
3,780
|
|
|
|
1,200
|
|
|
|
|
|
|
|
215
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
23,223
|
|
|
|
57,957
|
|
|
|
69,331
|
|
|
|
(60
|
)%
|
|
|
(16
|
)%
|
Loss on debt retirement
|
|
|
4,543
|
|
|
|
398
|
|
|
|
9,857
|
|
|
|
1041
|
%
|
|
|
(96
|
)%
|
Interest expense, net
|
|
|
14,731
|
|
|
|
14,446
|
|
|
|
13,986
|
|
|
|
2
|
%
|
|
|
3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
$
|
3,949
|
|
|
$
|
43,113
|
|
|
$
|
45,488
|
|
|
|
(91
|
)%
|
|
|
(5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percent of net sales Gross margin
|
|
|
14.9
|
%
|
|
|
15.9
|
%
|
|
|
17.0
|
%
|
|
|
|
|
|
|
|
|
SG&A
|
|
|
12.3
|
%
|
|
|
11.3
|
%
|
|
|
11.9
|
%
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
1.8
|
%
|
|
|
4.2
|
%
|
|
|
5.4
|
%
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
|
0.3
|
%
|
|
|
3.2
|
%
|
|
|
3.6
|
%
|
|
|
|
|
|
|
|
|
Consolidated
results of operations 2007 versus 2006 analysis
Consolidated net sales for 2007 decreased $91.2 million
from 2006 primarily due to lower sales volumes from the
manufacturing and retail segments, partially offset by a
$190.1 million increase in sales at our international
segment. Consolidated net sales for 2007 included a full year of
sales from the 2006 acquisitions whereas sales in 2006 included
only five months of sales for North American and nine months of
sales for Caledonian and Highland. In 2006, manufacturing
segment results also included non-recurring sales of
approximately $23.0 million to FEMA.
Gross margin for 2007 decreased $27.8 million versus the
comparable period in 2006 primarily as a result of lower gross
margin in the manufacturing and retail segments due to lower
sales, which was partially offset by increased gross margin from
higher sales in the international segment. A large portion of
the decreased manufacturing segment gross margin occurred in the
first and fourth quarters of 2007. In the first quarter of 2007
the manufacturing segment saw a significant reduction in sales
and gross margin versus the first quarter of 2006 resulting from
low incoming order rates and levels of unfilled orders driven by
difficult housing market conditions in the U.S. and weather
conditions in many parts of the country and non-recurring FEMA
sales in 2006. Our U.S. plants operated at only 44% of
capacity in the first quarter and 50% of capacity in the fourth
quarter of 2007, resulting in manufacturing inefficiencies and
lower coverage of fixed costs.
Selling, general and administrative expenses
(SG&A) for 2007 increased slightly compared to
2006 primarily as a result of incremental SG&A from full
year results of the 2006 acquisitions and the effects of higher
sales in the international segment, partially offset by reduced
variable SG&A in the manufacturing and retail
22
segments due to lower sales. Additionally, the international
segment SG&A includes a compensation charge of
$6.4 million related to a contingent purchase price or
earn out arrangement for the acquisition of
Caledonian. In 2007, SG&A was reduced by net gains of
$1.2 million, primarily from the sale of two idle plants.
In 2006, SG&A was reduced by net gains of
$4.7 million, primarily from the sale of investment
property and five idle plants.
Results in 2007 included amortization expense of
$5.7 million compared to $3.9 million in 2006, as a
result of recording a full year of amortization of intangible
assets relating to the 2006 and 2005 acquisitions. The loss on
debt retirement in 2007 is primarily due to the early redemption
of $75.6 million of our Senior Notes due 2009, which
resulted from our fourth quarter tender offer.
In comparing 2007 consolidated results to 2006 results, net
sales and operating income for the 2006 acquisitions were
included in 2006 consolidated results based on their respective
acquisition dates and not for an entire year. On a proforma
basis, assuming we had owned these acquisitions during the
entire year ended December 30, 2006, consolidated net sales
and operating income in 2007 would have decreased by 11% and
65%, respectively, versus the prior year as compared to
decreases of 7% and 60%, respectively, reported in the table
above.
Consolidated
results of operations 2006 versus 2005 analysis
Net sales in 2006 increased by 7% over 2005, 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 underutilized
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.
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.
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 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 due 2007
for cash payments totaling $106.3 million.
The inclusion of the 2006 acquisitions and the New Era group,
which was acquired in August 2005, 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
proforma 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 16%
decrease, respectively, reported in the table above.
23
Restructuring
Charges
During 2007 we incurred charges totaling $4.9 million from
the closure of two U.S. homebuilding plants. Restructuring
charges totaling $3.8 million consisted of fixed asset
impairment charges of $2.0 million and severance costs
totaling $1.8 million. Other plant closing charges that are
included in cost of sales consisted of inventory write downs of
$0.6 million and additional warranty accruals of
$0.5 million. During 2006, we recorded restructuring
charges for the closure of one U.S. manufacturing plant
consisting of a $1.2 million fixed asset impairment charge.
Also in 2006, the accrual for closed plant warranty costs was
reduced by $1.0 million due to favorable experience for
plants previously closed. During 2005, a $2.3 million
charge was recorded to increase the accrual for closed plant
warranty costs due to unfavorable experience for previous
closures. See additional discussion of restructuring charges in
Note 6 of Notes to Consolidated Financial
Statements in Item 8 of this Report.
Impairment
Tests for Goodwill
For the years ended December 29, 2007, December 30,
2006 and December 31, 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.
Income
from continuing operations before income taxes
The segment components of income from continuing operations
before income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
2007
|
|
|
Related Sales
|
|
|
2006
|
|
|
Related Sales
|
|
|
2005
|
|
|
Related Sales
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
Manufacturing segment income
|
|
$
|
40,924
|
|
|
|
4.3%
|
|
|
$
|
81,600
|
|
|
|
6.8%
|
|
|
$
|
90,286
|
|
|
|
7.6%
|
|
International segment income
|
|
|
17,393
|
|
|
|
6.2%
|
|
|
|
5,634
|
|
|
|
6.2%
|
|
|
|
|
|
|
|
|
|
Retail segment income
|
|
|
1,911
|
|
|
|
2.6%
|
|
|
|
7,636
|
|
|
|
6.5%
|
|
|
|
8,167
|
|
|
|
6.0%
|
|
General corporate expenses
|
|
|
(31,609
|
)
|
|
|
|
|
|
|
(32,472
|
)
|
|
|
|
|
|
|
(35,522
|
)
|
|
|
|
|
Amortization of intangible assets
|
|
|
(5,727
|
)
|
|
|
|
|
|
|
(3,941
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Mark-to-market credit for common stock warrant
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,300
|
|
|
|
|
|
Loss on debt retirement
|
|
|
(4,543
|
)
|
|
|
|
|
|
|
(398
|
)
|
|
|
|
|
|
|
(9,857
|
)
|
|
|
|
|
Interest expense, net
|
|
|
(14,731
|
)
|
|
|
|
|
|
|
(14,446
|
)
|
|
|
|
|
|
|
(13,986
|
)
|
|
|
|
|
Intercompany profit elimination
|
|
|
331
|
|
|
|
|
|
|
|
(500
|
)
|
|
|
|
|
|
|
2,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
$
|
3,949
|
|
|
|
0.3%
|
|
|
$
|
43,113
|
|
|
|
3.2%
|
|
|
$
|
45,488
|
|
|
|
3.6%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment results, general corporate expenses and interest
expense, net, are discussed below. Amortization of intangible
assets, mark-to-market credit for the common stock warrant, and
loss on debt retirement are discussed above.
Manufacturing segment sales to the retail segment and related
manufacturing profits are included in the manufacturing segment.
Retail segment results include retail profits from the sale of
homes to consumers but do not include any manufacturing segment
profits associated with the homes sold. Intercompany
transactions between the operating segments are eliminated in
consolidation, including intercompany profit in inventory, which
represents the amount of manufacturing segment gross margin in
Champion-produced inventory at the retail segment. In
reconciling 2005 results by segment, a credit (income) resulted
from the reduction in intercompany profit in inventory due to
declining inventories at the discontinued retail operations.
24
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. Results of the
manufacturing segment for the years ended December 29,
2007, December 30, 2006 and December 31, 2005 are
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
07 vs 06
|
|
|
06 vs 05
|
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
%
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
Change
|
|
|
Manufacturing segment net sales (in thousands)
|
|
$
|
941,945
|
|
|
$
|
1,195,834
|
|
|
$
|
1,190,819
|
|
|
|
(21
|
)%
|
|
|
|
|
Manufacturing segment income (in thousands)
|
|
$
|
40,924
|
|
|
$
|
81,600
|
|
|
$
|
90,286
|
|
|
|
(50
|
)%
|
|
|
(10
|
)%
|
Manufacturing segment margin %
|
|
|
4.3
|
%
|
|
|
6.8
|
%
|
|
|
7.6
|
%
|
|
|
|
|
|
|
|
|
HUD-code home shipments
|
|
|
9,971
|
|
|
|
15,341
|
|
|
|
18,989
|
|
|
|
(35
|
)%
|
|
|
(19
|
)%
|
U.S. modular home and unit shipments
|
|
|
3,670
|
|
|
|
4,574
|
|
|
|
3,958
|
|
|
|
(20
|
)%
|
|
|
16
|
%
|
Canadian home shipments
|
|
|
1,637
|
|
|
|
1,132
|
|
|
|
1,013
|
|
|
|
45
|
%
|
|
|
12
|
%
|
Other shipments
|
|
|
68
|
|
|
|
79
|
|
|
|
|
|
|
|
(14
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total homes and units sold
|
|
|
15,346
|
|
|
|
21,126
|
|
|
|
23,960
|
|
|
|
(27
|
)%
|
|
|
(12
|
)%
|
Floors sold
|
|
|
29,233
|
|
|
|
40,521
|
|
|
|
44,905
|
|
|
|
(28
|
)%
|
|
|
(10
|
)%
|
Multi-section mix
|
|
|
77
|
%
|
|
|
80
|
%
|
|
|
79
|
%
|
|
|
|
|
|
|
|
|
Average unit selling price, excluding delivery
|
|
$
|
55,100
|
|
|
$
|
51,800
|
|
|
$
|
45,700
|
|
|
|
6
|
%
|
|
|
13
|
%
|
Manufacturing facilities at year end
|
|
|
29
|
|
|
|
30
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
Manufacturing
segment 2007 versus 2006 analysis
Manufacturing net sales for the year ended December 29,
2007 decreased 21% from net sales in the year ended
December 30, 2006 driven by a 31% reduction in the number
of homes we sold in the U.S. Partially offsetting these
decreases were higher average selling prices in 2007, increased
sales in Canada and the inclusion of incremental full year sales
from Highland and North American in 2007 results. Sales in 2006
included approximately $23.0 million of non-recurring
revenue from the sale of 627 homes to FEMA in the first quarter.
Difficult U.S. housing markets throughout 2007 contributed
to lower sales volumes at most of our U.S. plants. Average
manufacturing selling prices increased in 2007 as compared to
2006 as a result of product mix and the inclusion of sales to
FEMA at a lower average selling price in 2006. Product mix in
2007 included a greater proportion of sales of higher priced
modular homes and Canadian homes, partially offset by the sales
of fewer large, higher priced military housing units.
Manufacturing segment income for the year ended
December 29, 2007 decreased $40.7 million from the
year ended December 30, 2006 primarily driven by poor
results in the first and fourth quarters of 2007 when
manufacturing segment income declined $25.9 million and
$11.6 million, respectively, from the comparable quarters
of 2006. Our U.S. plants operated at only 44% of capacity
for the first quarter and 50% of capacity in the fourth quarter
of 2007, resulting in production inefficiencies and an increase
in production downtime. These conditions prompted the closure of
three manufacturing plants and the temporary idling of another
plant in the U.S. during 2007, resulting in plant closing
charges totaling $4.9 million for two of the closures. For
the year ended December 29, 2007, our Canadian plants
realized increased income from higher sales and price increases
in a strong market. Results for the year ended December 29,
2007 included a net gain of $0.6 million, primarily from
the sale of two idle plants. Results for the year ended
December 30, 2006 included net gains of $4.7 million,
primarily from the sale of investment property in Florida and
five idle plants and restructuring charges of $1.2 million
related to the closure of one plant.
The inclusion of the 2006 acquisitions in manufacturing segment
results since their respective acquisition dates contributed to
an increase in net sales and segment income during the year
ended December 29, 2007 over the
25
year ended December 30, 2006. On a proforma basis, assuming
we had owned these companies for all of 2006, manufacturing
segment net sales for the year ended December 29, 2007
would have decreased by 23% versus the year ended
December 30, 2006, compared to the decrease of 21% reported
in the table above. Manufacturing segment income for the year
ended December 29, 2007 would have decreased by 52% versus
the year ended December 30, 2006, compared to a decrease of
50% as reported in the table above.
Although orders from retailers can be cancelled at any time
without penalty and unfilled orders are not necessarily an
indication of future business, our unfilled manufacturing
segment orders for homes at December 29, 2007 totaled
approximately $56 million for the 29 plants in operation
(including the acquired SRI plants) compared to $36 million
at December 30, 2006 for the 30 plants in operation.
Unfilled orders are concentrated primarily at nine manufacturing
locations. The majority of our other plants are currently
operating with one week or less of unfilled orders.
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. 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, from
June through December 2006 we closed four manufacturing plants.
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 proforma 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. Unfilled orders were concentrated at
three manufacturing locations and the remainder of our plants
were operating with one week or less of unfilled orders.
26
International
Segment
We evaluate the performance of our international segment based
on income before interest, income taxes, amortization of
intangible assets and general corporate expenses. Results of the
international segment from date of acquisition through
December 29, 2007 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
07 vs 06
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
International segment net sales (in thousands)
|
|
$
|
280,814
|
|
|
$
|
90,717
|
|
|
|
210
|
%
|
International segment income (in thousands)
|
|
$
|
17,393
|
|
|
$
|
5,634
|
|
|
|
209
|
%
|
International segment margin %
|
|
|
6.2
|
%
|
|
|
6.2
|
%
|
|
|
|
|
International
segment 2007 versus 2006 analysis
Sales for 2007 increased over 2006 primarily due to increased
custodial (prison) projects, which generally include more
site-work (non-factory) revenue than other projects. Increased
military projects and the effects of the strengthening UK pound
sterling versus the U.S. dollar also contributed to the
sales increase in 2007. The international segment results for
2006 included only nine months due to the acquisition date of
April 7, 2006. Approximately $17 million of the
revenue increase resulted from changes in foreign exchange
rates. For 2007, approximately 82% of international segment
revenue was derived from custodial (prison) and military
projects. The balance of revenue was attributable to residential
and hotel projects. During the second half of 2007, revenues
from site-work exceeded revenues from factory production.
During the fourth quarter of 2007, upon the attainment of
certain levels of performance, the segment accrued a
$13.3 million obligation relating to contingent purchase
price or earn out provisions of the purchase
agreement. Under U.S. generally accepted accounting
principles, $6.9 million was recorded as additional
purchase price thereby increasing goodwill, and
$6.4 million was recorded as compensation expense.
A flood damaged a large number of completed and in-process
modules in June 2007, resulting in the loss of approximately
$4.0 million of revenue in the second quarter. During the
third quarter of 2007 most of the damaged modules were repaired
or replaced. The related insurance claim was settled and paid in
the fourth quarter resulting in income of $2.1 million
being recognized for the business interruption and property
damage claims.
Segment income in 2007, as a percent of sales, was equal to
2006. However, excluding the earn out compensation
charge the segment income percent for 2007 would have been 8.5%.
This improvement resulted from higher production levels,
favorable product line mix, the mix of factory production
revenue versus site-work revenue and the stage of completion of
the projects. Approximately $1.1 million of the increase in
segment income resulted from changes in foreign exchange rates.
Firm contracts and orders pending contracts under framework
agreements totaled approximately $250 million at
December 29, 2007, compared to approximately
$225 million at December 30, 2006.
27
Retail
Segment
The retail segment sells manufactured houses to consumers
throughout California. We evaluate the performance of our retail
segment based on income before interest, income taxes,
amortization of intangible assets and general corporate
expenses. Results of the retail segment for the years ended
December 29, 2007, December 30, 2006 and
December 31, 2005 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
07 vs 06
|
|
|
06 vs 05
|
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
%
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
Change
|
|
|
Retail segment net sales (in thousands)
|
|
$
|
73,406
|
|
|
$
|
117,397
|
|
|
$
|
135,371
|
|
|
|
(37
|
)%
|
|
|
(13
|
)%
|
Retail segment income (in thousands)
|
|
$
|
1,911
|
|
|
$
|
7,636
|
|
|
$
|
8,167
|
|
|
|
(75
|
)%
|
|
|
(7
|
)%
|
Retail segment margin %
|
|
|
2.6
|
%
|
|
|
6.5
|
%
|
|
|
6.0
|
%
|
|
|
|
|
|
|
|
|
New homes retail sold
|
|
|
375
|
|
|
|
629
|
|
|
|
748
|
|
|
|
(40
|
)%
|
|
|
(16
|
)%
|
% Champion-produced new homes sold
|
|
|
88
|
%
|
|
|
86
|
%
|
|
|
82
|
%
|
|
|
|
|
|
|
|
|
New home multi-section mix
|
|
|
98
|
%
|
|
|
97
|
%
|
|
|
97
|
%
|
|
|
|
|
|
|
|
|
Average new home retail selling price
|
|
$
|
191,700
|
|
|
$
|
184,600
|
|
|
$
|
178,900
|
|
|
|
4
|
%
|
|
|
3
|
%
|
Sales centers at period end
|
|
|
17
|
|
|
|
16
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
Retail
segment 2007 versus 2006 analysis
Retail segment sales for 2007 decreased 37% versus 2006
primarily due to selling 40% fewer homes as a result of the
difficult housing market conditions in California. Average
selling prices increased in 2007 as many high-end homes were
liquidated at reduced margins in an effort to reduce aged
inventory.
Retail segment income for 2007 decreased compared to 2006 as
gross margin was reduced due to lower sales volume and a lower
gross margin rate, partially offset by lower SG&A costs.
Gross margin as a percent of sales for 2007 was lower than the
gross margin percentage in 2006 due to liquidating high-end
homes and aged inventory at reduced margins combined with
pricing pressure from generally difficult market conditions.
SG&A costs declined in 2007 versus 2006 primarily resulting
from lower sales commissions and incentive compensation.
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.
Discontinued
Operations
Losses from discontinued operations for the years ended
December 29, 2007, December 30, 2006 and
December 31, 2005 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Income (loss) from retail operations
|
|
$
|
|
|
|
$
|
5
|
|
|
$
|
(4,334
|
)
|
(Loss) income from consumer finance business
|
|
|
|
|
|
|
(21
|
)
|
|
|
(49
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loss from discontinued operations
|
|
$
|
|
|
|
$
|
(16
|
)
|
|
$
|
(4,383
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28
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 in 2005 included
operating losses of $2.3 million and net losses of
$2.0 million for sales centers sold or to be sold. In
connection with the sales and closures of retail locations
during 2005, intercompany manufacturing profit of
$2.4 million was recognized in the consolidated statement
of operations as a result of the liquidation of retail
inventory, which was not classified as discontinued operations.
General
Corporate Expenses
General corporate expenses for 2007 declined $0.9 million,
or 3%, from the amount in 2006, primarily as a result of lower
information technology costs, partially offset by higher
financing related costs and professional fees. General corporate
expenses in 2006 decreased by $3.1 million, or 9%, from the
amount in 2005 primarily due to lower incentive compensation.
Interest
Income and Interest Expense
Interest expense in 2007 was higher than in 2006 primarily due
to higher interest rates and slightly higher average debt in
2007. Interest income for 2007 was slightly higher than the
comparable period of 2006 due to lower cash investment balances
offset by higher interest rates.
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.
Income
Taxes
Income
taxes 2007 versus 2006 analysis
The effective tax rate for 2007 was (82%) and was impacted by
the mix of our pretax earnings among jurisdictions and the
respective tax rates in those jurisdictions. As a result, the
tax benefit from our U.S. loss exceeded the tax expense on
foreign income. Also impacting the effective tax rate is the
effect of permanent differences and state tax benefits. Due to
the low level of consolidated pretax income, these factors had a
significant impact on the effective tax rate.
Effective July 1, 2006, we reversed substantially all of
the previously recorded valuation allowance for deferred tax
assets after determining that realization of the deferred tax
assets was more likely than not. This determination was based
upon our achieving historical profitability and our outlook for
ongoing profitability, among other factors. Subsequent to this
reversal our earnings are fully taxed for financial reporting
purposes. During the periods prior to this reversal of the
valuation allowance, no tax expense or benefit was recorded for
our U.S. taxable income or loss for financial reporting
purposes except for unusual items.
The 2006 income tax provision includes a $101.9 million
non-cash tax benefit from the reversal of the valuation
allowance. 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.
As of December 29, 2007, we had net operating loss
(NOL) carryforwards of approximately
$233 million for U.S. federal tax purposes available
to offset certain future U.S. taxable income that expire in
2023 through 2027. As of December 29, 2007, we had state
net NOL carryforwards of approximately $211 million
available to offset future state taxable income that expire
primarily in 2016 through 2027. For financial reporting
purposes, our U.S. pretax income for 2005 through 2007
totaled approximately $41 million. Although we expect to
generate sufficient U.S. pretax income in the future to
utilize available NOL carryforwards, there can be no assurance
that we will be able to do so. Additionally, the current
U.S. economy and housing market present significant
challenges to returning
29
the Companys U.S. operations to profitability. In the
event that we incur additional U.S. operating losses in
2008, we will likely be required to provide a valuation
allowance for all or a portion of the U.S. net deferred tax
assets which totaled approximately $117 million at
December 29, 2007.
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 2006 versus 2005 analysis
The 2006 income tax provision includes a $101.9 million
non-cash tax benefit from the reversal of the valuation
allowance. During 2005 we had a 100% valuation allowance for our
deferred tax assets. The effective tax rates for 2005 differs
from the 35% federal statutory rate in part because of this 100%
valuation allowance. Income taxes in 2005 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.
Results
of Fourth Quarter 2007 Versus 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
|
(Dollars in thousands,
|
|
|
|
except average selling prices)
|
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing segment
|
|
$
|
223,951
|
|
|
$
|
250,823
|
|
|
|
(11
|
)%
|
International segment
|
|
|
92,110
|
|
|
|
32,640
|
|
|
|
182
|
%
|
Retail segment
|
|
|
15,749
|
|
|
|
23,685
|
|
|
|
(34
|
)%
|
Less: intercompany
|
|
|
(6,200
|
)
|
|
|
(6,200
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
$
|
325,610
|
|
|
$
|
300,948
|
|
|
|
8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
$
|
45,083
|
|
|
$
|
49,593
|
|
|
|
(9
|
)%
|
Selling, general and administrative expenses
|
|
|
44,526
|
|
|
|
38,522
|
|
|
|
16
|
%
|
Amortization of intangible assets
|
|
|
1,454
|
|
|
|
1,428
|
|
|
|
2
|
%
|
Restructuring charges
|
|
|
2,659
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
(3,556
|
)
|
|
|
9,643
|
|
|
|
(137
|
)%
|
Loss on debt retirement
|
|
|
4,543
|
|
|
|
398
|
|
|
|
1041
|
%
|
Interest expense, net
|
|
|
3,115
|
|
|
|
4,151
|
|
|
|
(25
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations before income taxes
|
|
$
|
(11,214
|
)
|
|
$
|
5,094
|
|
|
|
(320
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing segment income
|
|
$
|
3,383
|
|
|
$
|
15,042
|
|
|
|
(78
|
)%
|
International segment income
|
|
|
3,449
|
|
|
|
2,476
|
|
|
|
39
|
%
|
Retail segment (loss) income
|
|
|
(316
|
)
|
|
|
1,319
|
|
|
|
(124
|
)%
|
General corporate expenses
|
|
|
(8,249
|
)
|
|
|
(8,066
|
)
|
|
|
2
|
%
|
Amortization of intangible assets
|
|
|
(1,454
|
)
|
|
|
(1,428
|
)
|
|
|
2
|
%
|
Loss on debt retirement
|
|
|
(4,543
|
)
|
|
|
(398
|
)
|
|
|
1041
|
%
|
Interest expense, net
|
|
|
(3,115
|
)
|
|
|
(4,151
|
)
|
|
|
(25
|
)%
|
Intercompany profit elimination
|
|
|
(369
|
)
|
|
|
300
|
|
|
|
(223
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations before income taxes
|
|
$
|
(11,214
|
)
|
|
$
|
5,094
|
|
|
|
(320
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
|
(Dollars in thousands,
|
|
|
|
except average selling prices)
|
|
|
As a percent of net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
13.8
|
%
|
|
|
16.5
|
%
|
|
|
|
|
SG&A
|
|
|
13.7
|
%
|
|
|
12.8
|
%
|
|
|
|
|
(Loss) income from continuing operations before income taxes
|
|
|
(3.4
|
)%
|
|
|
1.7
|
%
|
|
|
|
|
Manufacturing segment margin %
|
|
|
1.5
|
%
|
|
|
6.0
|
%
|
|
|
|
|
International segment margin %
|
|
|
3.7
|
%
|
|
|
7.6
|
%
|
|
|
|
|
Retail segment margin %
|
|
|
(2.0
|
)%
|
|
|
5.6
|
%
|
|
|
|
|
Manufacturing segment
|
|
|
|
|
|
|
|
|
|
|
|
|
HUD-code home shipments
|
|
|
2,251
|
|
|
|
2,804
|
|
|
|
(20
|
)%
|
U.S. modular home and unit shipments
|
|
|
921
|
|
|
|
1,119
|
|
|
|
(18
|
)%
|
Canadian home shipments
|
|
|
422
|
|
|
|
275
|
|
|
|
53
|
%
|
Other shipments
|
|
|
17
|
|
|
|
21
|
|
|
|
(19
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total homes and units sold
|
|
|
3,611
|
|
|
|
4,219
|
|
|
|
(14
|
)%
|
Floors sold
|
|
|
6,697
|
|
|
|
8,242
|
|
|
|
(19
|
)%
|
Mutli-section mix
|
|
|
75
|
%
|
|
|
82
|
%
|
|
|
(9
|
)%
|
Average unit selling price, excluding delivery
|
|
$
|
55,700
|
|
|
$
|
54,600
|
|
|
|
2
|
%
|
Retail segment
|
|
|
|
|
|
|
|
|
|
|
|
|
New homes retail sold
|
|
|
80
|
|
|
|
134
|
|
|
|
(40
|
)%
|
% Champion-produced new homes sold
|
|
|
93
|
%
|
|
|
83
|
%
|
|
|
|
|
New home multi-section mix
|
|
|
98
|
%
|
|
|
96
|
%
|
|
|
|
|
Average new home retail selling price
|
|
$
|
194,600
|
|
|
$
|
173,400
|
|
|
|
12
|
%
|
Net sales for the fourth quarter of 2007 increased by 8% from
the fourth quarter of 2006 due primarily to a $59.5 million
increase in sales at the international segment that offset sales
declines at the manufacturing and retail segments
Gross margin for the fourth quarter of 2007 decreased
$4.5 million from the comparable period of 2006, due
primarily to the decline in manufacturing and retail segment
sales, partially offset by increased gross margin from the
international segment. In the fourth quarter of 2007,
U.S. manufacturing plants operated at only 50% of capacity
resulting in production inefficiencies, an increase in
production downtime and lower coverage of fixed costs which
negatively impacted the manufacturing segments gross
margin.
SG&A increased $6.0 million primarily due to inclusion
in the international segment of a $6.4 million compensation
charge resulting from a contingent purchase price or earn
out arrangement for the acquisition of Caledonian.
The loss on debt retirement in 2007 is primarily due to the
early redemption of $75.6 million of our Senior Notes due
2009, which resulted from our fourth quarter tender offer.
Net interest expense for the fourth quarter of 2007 decreased
$1.0 million from the fourth quarter of 2006 as a result of
using approximately $94 million of the net proceeds from
the $180 million 2.75% Convertible Note offering to
pay down approximately $90 million of higher interest rate
debt and earnings from investing the remaining proceeds,
partially offset by an increase in total debt.
Charges totaling $3.6 million were incurred in the fourth
quarter of 2007 from the closure of one manufacturing plant.
Restructuring charges totaling $2.7 million consisted of a
fixed asset impairment charge of $1.8 million and severance
costs of $0.9 million. Other plant closing charges that are
included in cost of sales consisted of inventory write downs of
$0.4 million and an additional warranty accrual of
$0.5 million.
31
Manufacturing
segment
Manufacturing segment net sales for the fourth quarter of 2007
decreased by $26.9 million compared to 2006 substantially
driven by the weak housing market in the U.S. partially
offset by higher average selling prices in the U.S. and
higher volumes and higher average selling prices in Canada.
Manufacturing segment income for the fourth quarter of 2007
decreased by $11.7 million versus the comparable quarter of
2006 due to decreased sales and production inefficiencies from
underutilized factory capacity. Market conditions during the
fourth quarter of 2007 resulted in low levels of unfilled orders
at most of our U.S. plants and a decreased number of
production days. Sales and income in the fourth quarter of 2007
at our Canadian operations increased versus the same quarter in
2006 due to strong market conditions. In response to market
conditions in the U.S, during the fourth quarter of 2007 we
closed one manufacturing plant and idled another, which resulted
in plant closing charges of $3.6 million for the one
closure. Additional casualty self-insurance charges of
$2.8 million were recorded in the fourth quarter of 2007 as
a result of increases in several large claims and the results of
our annual actuarial valuation. Results in 2006 included a
$1.0 million reduction to closed plant warranty reserves
due to favorable experience.
International
segment
Approximately 83% 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, site work revenue
exceeded factory production revenue, primarily due to custodial
projects. During the fourth quarter of 2007, upon attainment of
certain levels of performance, the segment accrued a
$13.3 million obligation relating to contingent purchase
price or earn out provisions of the purchase
agreement. Under U.S. generally accepted accounting
principles, $6.9 million was recorded as additional
purchase price thereby increasing goodwill, and
$6.4 million was recorded as compensation expense.
A flood damaged a large number of completed and in-process
modules in June 2007, resulting in the loss of approximately
$4.0 million of revenue in the second quarter. During the
third quarter of 2007 most of the damaged modules were repaired
or replaced. The related insurance claim was settled and paid in
the fourth quarter, resulting in income of $2.1 million
being recognized for the business interruption and property
damage claims.
Segment income in the quarter, as a percent of sales, was 3.7%
compared to 7.6% in the fourth quarter of 2006. However,
excluding the earn out compensation charge and income from the
insurance settlement which recovered losses from previous
quarters, the segment income percent for 2007 would have been
8.4%. This improvement resulted from higher production levels,
favorable product line mix, the mix of factory production
revenue versus site-work revenue and the stage of completion of
the projects.
Retail
segment
Retail segment net sales for the fourth quarter of 2007
decreased 34% versus the comparable period of 2006 primarily due
to selling 40% fewer homes in a difficult California housing
market. The effect on sales from the decrease in homes sold was
partially offset by higher selling prices. Retail segment income
for the fourth quarter of 2007 declined by $1.6 million
compared to the same period of 2006 primarily due to lower gross
margin from decreased sales and from a lower margin rate from
selling aged inventory.
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 represents the difference between the
repurchase price and the estimated net proceeds we realize from
the resale of the home, less any related reserves or accrued
volume rebates that will not be paid.
Each quarter we review our contingent wholesale repurchase
obligations to assess the adequacy of our reserves for
repurchase losses. This analysis is based on a review of current
and historical experience, reports received from
32
the primary national floor plan lenders that provide floor plan
financing for approximately 43% 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 29, 2007, our largest
independent retailer, a nationwide retailer, had approximately
$6.8 million of inventory subject to repurchase for up to
18 months from date of invoice. As of December 29,
2007 our next 24 largest independent retailers had an aggregate
of approximately $42.4 million of inventory subject to
repurchase for generally up to 18 months from date of
invoice, with individual amounts ranging from approximately
$0.4 million to $3.4 million per retailer.
A summary of actual repurchase activity for the last three years
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in millions)
|
|
|
Estimated repurchase obligation at end of year
|
|
$
|
200
|
|
|
$
|
250
|
|
|
$
|
260
|
|
Number of retailer defaults
|
|
|
12
|
|
|
|
8
|
|
|
|
17
|
|
Number of homes repurchased
|
|
|
23
|
|
|
|
22
|
|
|
|
50
|
|
Total repurchase price
|
|
$
|
1.2
|
|
|
$
|
1.2
|
|
|
$
|
2.1
|
|
Losses incurred on homes repurchased
|
|
$
|
0.1
|
|
|
$
|
0.1
|
|
|
$
|
0.3
|
|
We lowered repurchase reserves by $1.2 million in 2006 and
by $1.0 million in 2005 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 29, 2007
consist of the contingent repurchase obligation totaling
approximately $200 million, surety bonds and letters of
credit totaling $75.1 million and guarantees of
$2.5 million of debt of unconsolidated affiliates.
Liquidity
and Capital Resources
Unrestricted cash balances totaled $135.4 million at
December 29, 2007. During 2007, continuing operating
activities provided net cash of $80.3 million. Excluding
working capital acquired in the purchase of SRI, during 2007
inventories decreased by $24.0 million, accounts receivable
increased by $28.4 million and accounts payable increased
by $61.2 million. Cash of $96.2 million was used to
acquire SRI and $10.2 million was used for capital
expenditures. Other cash provided during the period included
cash proceeds of $4.5 million from the sale of two idle
plants and cash totaling $3.8 million from stock option
exercises.
In the fourth quarter of 2007, we improved our capital structure
by completing a $180 million 2.75% Convertible Note
offering that provided $174.1 million of net proceeds. In
connection therewith, we completed a tender offer for our Senior
Notes due 2009 and used cash of $79.7 million to redeem
$75.6 million of the Senior Notes. In addition, we prepaid
$14.5 million of our Term Loan due 2012. These transactions
extended the average maturity of our indebtedness and also
reduced the average interest rate on our indebtedness.
The Convertible Notes are convertible into approximately
47.7 shares of our common stock per $1,000 of principal.
The conversion rate can exceed 47.7 shares per $1,000 of
principal when the closing price of our common stock exceeds
approximately $20.97 per share for one or more days in the 20
consecutive trading day period beginning on the second trading
day after the conversion date. Holders of the Convertible Notes
may require us to repurchase the Notes if we are involved in
certain types of corporate transactions or other events
constituting a fundamental change. Holders of the Convertible
Notes have the right to require us to repurchase all or a
portion of their Notes on November 1 of 2012, 2017, 2022, 2027
and 2032. We have the right to redeem the Convertible Notes, in
whole or in part, for cash at any time after October 31,
2012.
33
On October 31, 2005, we entered into a senior secured
credit agreement with various financial institutions, which has
been amended from time to time (the Credit
Agreement). The Credit Agreement is comprised of a
$100 million term loan (the Term Loan), a
£45 million 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 29, 2007, letters of
credit issued under the facility totaled $55.7 million and
there were no borrowings under the revolving line of credit. The
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. The Credit Agreement is
secured by a first security interest in substantially all of the
assets of our domestic operating subsidiaries.
The Credit Agreement requires principal payments for the Term
Loan and the Sterling Term Loan totaling approximately
$1.1 million for 2008 and approximately $1.8 million
annually thereafter. The interest rate for borrowings under the
Term Loan is currently a LIBOR based rate plus 3.25% and the
interest rate for borrowings under the Sterling Term Loan is
currently a UK LIBOR based rate plus 3.25%. Letter of credit
fees are 3.35% annually and revolver borrowings bear interest at
either the prime interest rate plus 2.25% or LIBOR plus 3.25%.
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. The Credit Agreement contains affirmative
and negative covenants. Under the Credit Agreement, we are
required to maintain a maximum Leverage Ratio of Total Debt (as
defined) on the last day of a fiscal quarter to consolidated
EBITDA (as defined) for the four-quarter period then ended. We
are also required to maintain a minimum Interest Coverage Ratio
of consolidated EBITDA to Cash Interest Expense (as defined)
over the four-quarter period then ended and a minimum Fixed
Charge Ratio of consolidated EBITDA to Fixed Charges (as
defined) over the four-quarter period then ended. Annual
prepayments are required should we generate Excess Cash Flow (as
defined). As of December 29, 2007, we were in compliance
with all covenants. We expect to remain in compliance with all
covenants throughout 2008.
The Senior Notes due 2009 are secured equally and ratably with
our obligations under the Credit Agreement. Interest is payable
semi-annually at an annual rate of 7.625%. In November 2007, the
Indenture governing the Senior Notes was modified via a
Supplemental Indenture, which eliminated substantially all
restrictive covenants.
We continuously evaluate our capital structure in light of
existing and expected market conditions. 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. The amounts involved in any
such transactions, individually or in the aggregate, may be
material.
We expect to spend less than $20 million in 2008 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 29, 2007, including surety bonds and letters of
credit totaling $75.1 million and guarantees of
$2.5 million of debt of unconsolidated affiliates.
Additionally, we are contingently obligated under repurchase
agreements with certain lending institutions that provide floor
plan financing to our independent retailers. We estimate our
contingent repurchase obligation as of December 29, 2007
was approximately $200 million, without reduction for the
resale value of the homes. See Contingent Repurchase
Obligations-Manufacturing Segment discussed above in
Item 7 of this Report.
34
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 29, 2007, our unrestricted cash balances
totaled $135.4 million and we had unused availability of
$40.0 million under our revolving credit facility.
Therefore, total cash available from these sources was
approximately $175.4 million. We expect that our cash flow
from operations and our cash balances will be adequate to fund
capital expenditures as well as the approximate
$47.9 million of scheduled debt payments due in 2008 and
2009, including the $24.5 million note payable for the SRI
acquisition, the $13.3 million Caledonian earn out
obligation and the remaining $6.7 million of Senior Notes
due 2009. 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.
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 29, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period: After December 29, 2007
|
|
|
|
Total
|
|
|
< 1 Year
|
|
|
1 to 3 Years
|
|
|
3 to 5 Years
|
|
|
> 5 Years
|
|
|
|
(In thousands)
|
|
|
Long-term debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible Notes due 2037
|
|
$
|
180,000
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
180,000
|
|
|
$
|
|
|
Senior Notes due 2009
|
|
|
6,716
|
|
|
|
|
|
|
|
6,716
|
|
|
|
|
|
|
|
|
|
Term Loans due 2012
|
|
|
144,136
|
|
|
|
1,124
|
|
|
|
3,598
|
|
|
|
139,414
|
|
|
|
|
|
Obligations under industrial revenue bonds
|
|
|
12,430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,430
|
|
Note payable, SRI acquisition
|
|
|
24,528
|
|
|
|
24,528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Caledonian earnout obligation
|
|
|
13,252
|
|
|
|
13,252
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital leases and other debt
|
|
|
971
|
|
|
|
232
|
|
|
|
513
|
|
|
|
226
|
|
|
|
|
|
Operating leases
|
|
|
33,461
|
|
|
|
5,592
|
|
|
|
9,617
|
|
|
|
7,247
|
|
|
|
11,005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
415,494
|
|
|
$
|
44,728
|
|
|
$
|
20,444
|
|
|
$
|
326,887
|
|
|
$
|
23,435
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Based on the repurchase and redemption features, which first
become available in 2012, the Convertible Notes are listed as
being due in 2012 in the table above.
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
35
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
liability claims, up to $0.5 million, $1.5 million or
$1.75 million per claim for product liability and general
liability claims, depending on the policy year under which the
claim is made, and up to $250,000 per claim for property
insurance claims including business interruption losses. We
maintain excess liability and property insurance with
independent insurance carriers to minimize our risks related to
catastrophic claims. Under our current self-insurance program we
are responsible for up to $150,000 of health insurance claims
per contract per year. Estimated casualty and health insurance
costs are accrued for incurred claims and estimated claims
incurred but not yet reported. Factors 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.
36
Although we expect to generate sufficient U.S. pretax
income in the future to utilize available NOL carryforwards
there can be no assurance that we will be able to do so.
Additionally, the current U.S. economy and housing market
present significant challenges to returning our
U.S. operations to profitability. In the event that we
incur additional U.S. operating losses in 2008, we will
likely be required to provide a valuation allowance for all or a
portion of the U.S. net deferred tax assets which totaled
$117 million at December 29, 2007.
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 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 September 2006, the Financial Accounting Standards Board
issued Financial Accounting Standard Number 157
(SFAS 157), Fair Value Measurements.
SFAS 157 clarifies the principle that fair value should be
based on the assumptions market participants would use when
pricing an asset or liability and establishes a fair value
hierarchy that prioritizes the information used to develop those
assumptions. Under the standard, fair value measurements would
be separately disclosed by level within the fair value
hierarchy. SFAS 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007
and interim periods within those fiscal years, with early
37
adoption permitted. In February 2008, the FASB issued FSP
FAS 157-2
that delayed, by one year, the effective date of SFAS 157
for the majority of non-financial assets and non-financial
liabilities. However, we would still be required to adopt
SFAS 157 as of January 1, 2008 for certain assets and
liabilities which were not included in FSP
FAS 157-2.
We have not yet determined the effect, if any, that the
implementation of SFAS 157 will have on our results of
operations or financial condition.
Effective January 1, 2007, the Company adopted Financial
Accounting Standards Board Interpretation Number 48
(FIN 48) Accounting for Uncertainty in
Income Taxes an interpretation of FASB Statement
No. 109. FIN 48 clarifies accounting for uncertain
tax positions using a more likely than not
recognition threshold for tax positions. Under FIN 48, 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
our best estimate of the ultimate tax benefit to be sustained if
audited by the taxing authority. The adoption of FIN 48
required no adjustment to opening balance sheet accounts as of
December 30, 2006.
In February 2007, the Financial Accounting Standards Board
issued Financial Accounting Standard Number 159
(SFAS 159), The Fair Value Option for
Financial Assets and Financial Liabilities including
an amendment of FASB Statement No. 115, which permits
an entity to choose to measure many financial instruments and
certain other items at fair value that are not currently
required to be measured at fair value. The objective is to
provide entities with an opportunity to mitigate volatility in
reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge
accounting provisions. Entities that choose to measure eligible
items at fair value will report unrealized gains and losses in
earnings at each subsequent reporting date. The fair value
option may be elected at specified election dates on an
instrument-by-instrument
basis, with few exceptions. The Statement also establishes
presentation and disclosure requirements designed to facilitate
comparisons between entities that choose different measurement
attributes for similar types of assets and liabilities.
SFAS 159 is effective at the beginning of the first fiscal
year beginning after November 15, 2007. We are currently
evaluating the impact of adopting SFAS 159.
In December 2007, the Financial Accounting Standards Board
(FASB) issued Financial Accounting Standard Number
141(R) (SFAS 141R), Business Combinations
and Financial Accounting Standard Number 160
(SFAS 160), Accounting and Reporting of
Non-controlling Interests in Consolidated Financial Statements,
an amendment of ARB No. 51. SFAS 141R and
SFAS 160 expand the scope of acquisition accounting to all
transactions and circumstances under which control of a business
is obtained. SFAS 141R and SFAS 160 are effective for
financial statements issued for fiscal years beginning after
December 15, 2008 and interim periods within those fiscal
years, with early adoption prohibited and these standards must
be adopted concurrently. These standards will impact us for any
acquisitions subsequent to the adoption date; however, we have
not yet determined the effect that the implementation of
SFAS 141R and SFAS 160 will have on our results of
operations or financial condition.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
Our debt obligations under the Credit Agreement are currently
subject to variable rates of interest based on 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 $1.4 million, assuming
average related debt of $144.1 million, which was the
amount of related outstanding borrowings at December 29,
2007.
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 29, 2007.
Our approach to interest rate risk is to balance our borrowings
between fixed rate and variable rate debt. At December 29,
2007, we had $180 million of Convertible Notes and
$6.7 million of Senior Notes at fixed rates and
$156.5 million of Term Notes and industrial revenue bonds
at variable rates. At December 30, 2006, we had
38
$82.3 million of Senior Notes at a fixed rate and
$171.1 million of Term Notes and industrial revenue bonds
at variable rates.
We are exposed to foreign exchange risk with our factory-built
housing operations in Canada and our international segment in
the UK. Our Canadian operations had 2007 proforma net sales
totaling $220 million (CAD), including SRIs net
sales. Assuming future annual Canadian sales equal to 2007
proforma sales, a change of 1.0% in exchange rates between the
U.S. and Canadian dollars would change consolidated sales
by $2.2 million. Our international segment had 2007 sales
of £140 million (pounds Sterling). Assuming future
annual UK sales equal to 2007 sales, a change of 1.0% in
exchange rates between the U.S. dollar and the British
pound Sterling would change consolidated sales by
$2.8 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 hedge 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 29, 2007, 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 29, 2007, 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. During 2007, we
completed the implementation of a new enterprise resource
planning (ERP) system for its manufacturing
operations, excluding one 2006 acquisition. The ERP system
implementation for the remaining 2006 acquisition is targeted
for the first half of 2008. The time frame for the ERP system
implementation for the December 2007 acquisition of SRI has not
yet been established. Management does not currently believe that
this will adversely affect the Companys internal control
over financial reporting.
|
|
Item 9B.
|
Other
Information
|
None.
39
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 7, 2008
(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.
40
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
|
|
|
1
|
.1
|
|
Underwriting agreement, dated October 27, 2007, between
Champion Enterprises, Inc. and Credit Suisse Securities (USA),
filed as Exhibit 1.1 to the Companys Current Report
on Form 8-K filed November 2, 2007 and incorporated
herein by reference.
|
|
2
|
.1
|
|
Asset Purchase Agreement, dated February 24, 2006, by and among
CBS Monaco Limited, Champion Enterprises, Inc. and the
shareholders of Calsafe Group (Holdings) Limited, filed as
Exhibit 2.1 to the Companys Current Report on Form 8-K
filed March 1, 2006 and incorporated herein by reference.
|
|
2
|
.2
|
|
Asset Purchase Agreement, dated December 17, 2007, by
Champion Enterprises, Inc. and 1367606 Alberta ULC
(Buyer) with SRI Homes Inc., NGI Investment
Corporation, Robert Adria and Brian Holterhus, filed as
Exhibit 2.1 to the Companys Current Report on
Form 8-K filed December 21, 2007 and incorporated
herein by reference.
|
|
3
|
.1
|
|
Restated Articles of Incorporation of Champion Enterprises,
Inc., as amended, filed as Exhibit 3.1 to the Companys
Current Report on Form 8-K filed April 19, 2006 and incorporated
herein by reference.
|
|
3
|
.2
|
|
Bylaws of the Company as amended through December 2, 2003, filed
as Exhibit 3.5 to the Companys Annual Report on Form 10-K
for the fiscal year ended January 3, 2004 and incorporated
herein by reference.
|
|
4
|
.1
|
|
Indenture dated as of May 3, 1999 between the Company, the
Subsidiary Guarantors and Bank One Trust Company, NA, as
Trustee, filed as Exhibit 4.1 to the Companys Form S-4
Registration Statement No. 333-84227 dated July 30, 1999 and
incorporated herein by reference.
|
|
4
|
.2
|
|
Supplemental Indenture dated as of July 30, 1999 between the
Company, the Subsidiary Guarantors and Wells Fargo Bank
Minnesota, NA, as Trustee, filed as Exhibit 4.2 to the
Companys Form S-4 Registration Statement No. 333-84227
dated July 30, 1999 and incorporated herein by reference.
|
|
4
|
.3
|
|
Supplemental Indenture dated as of October 4, 1999 between the
Company, the Subsidiary Guarantors and Wells Fargo Bank
Minnesota, NA, filed as Exhibit 4.3 to the Companys Annual
Report on Form 10-K for the fiscal year ended January 1, 2000
and incorporated herein by reference.
|
|
4
|
.4
|
|
Supplemental Indenture dated as of February 10, 2000 between the
Company, the Subsidiary Guarantors and Wells Fargo Bank
Minnesota, NA, filed as Exhibit 4.4 to the Companys Annual
Report on Form 10-K for the fiscal year ended January 1, 2000
and incorporated herein by reference.
|
|
4
|
.5
|
|
Supplemental Indenture dated as of September 5, 2000, among the
Company, the Subsidiary Guarantors and Wells Fargo Bank
Minnesota, NA, filed as Exhibit 4.5 to the Companys Annual
Report on Form 10-K for the fiscal year ended December 29, 2001
and incorporated herein by reference.
|
|
4
|
.6
|
|
Supplemental Indenture dated as of March 15, 2002 between the
Company, A-1 Champion GP, Inc., the Subsidiary Guarantors and
Wells Fargo Bank Minnesota, NA, as Trustee, filed as Exhibit 4.6
to the Companys Annual Report on Form 10-K for the fiscal
year ended December 28, 2002 and incorporated herein by
reference.
|
|
4
|
.7
|
|
Supplemental Indenture dated as of August 7, 2002 among the
Company, the Subordinated Subsidiary Guarantors and Wells Fargo
Bank Minnesota, NA, as Trustee, filed as Exhibit 4.7 to the
Companys Annual Report on Form 10-K for the fiscal year
ended December 28, 2002 and incorporated herein by reference.
|
41
|
|
|
|
|
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
|
|
Supplemental Indenture for Senior Debt Securities dated
November 2, 2007, filed as Exhibit 4.1 to the
Companys Current Report on Form 8-K dated
November 2, 2007 and incorporated herein by reference.
|
|
4
|
.12
|
|
Supplemental Indenture dated November 13, 2007, filed as
Exhibit 4.1 to the Companys Current Report on
Form 8-K dated November 16, 2007 and incorporated
herein by reference.
|
|
10
|
.1
|
|
*1993 Management Stock Option Plan, as amended and restated as
of December 3, 2002, filed as Exhibit 10.11 to the
Companys Annual Report on Form 10-K for the fiscal year
end December 28, 2002 and incorporated herein by reference.
|
|
10
|
.2
|
|
*1995 Stock Option and Incentive Plan, filed as Exhibit 10.1 to
the Companys Registration Statement on Form S-8 dated May
1, 1995 and incorporated herein by reference.
|
|
10
|
.3
|
|
*First Amendment to the 1995 Stock Option and Incentive Plan,
filed as Exhibit 10.12 to the Companys Annual Report on
Form 10-K for the fiscal year ended December 30, 1995 and
incorporated herein by reference.
|
|
10
|
.4
|
|
*Second Amendment dated April 28, 1998 to the 1995 Stock Option
and Incentive Plan, filed as Exhibit 10.9 to the Companys
Annual Report on Form 10-K for the fiscal year ended January 2,
1999 and incorporated herein by reference.
|
|
10
|
.5
|
|
*Third Amendment dated October 27, 1998 to the 1995 Stock Option
and Incentive Plan, filed as Exhibit 10.10 to the Companys
Annual Report on Form 10-K for the fiscal year ended January 2,
1999 and incorporated herein by reference.
|
|
10
|
.6
|
|
*Fourth Amendment dated April 27, 1999 to the 1995 Stock Option
and Incentive Plan, filed as Exhibit 10.2 to the Companys
Report on Form 10-Q for the quarter ended April 3, 1999 and
incorporated herein by reference.
|
|
10
|
.7
|
|
*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.
|
42
|
|
|
|
|
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 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
|
.27
|
|
Cash Compensation Plan for Non-Employee Directors (the
Plan), filed as Exhibit 10.1 to the Companys
Current Report on Form 8-K filed March 20, 2006 and incorporated
herein by reference.
|
|
10
|
.28
|
|
First Amendment to Amended and Restated Credit Agreement, dated
March 22, 2007, by Champion Home Builders Co., a
wholly-owned subsidiary of Champion Enterprises, Inc., and
certain additional subsidiaries of Champion Enterprises, Inc.
with certain financial institutions and other parties thereto as
lenders, filed as Exhibit 10.1 to the Companys
Current Report on Form 8-K filed March 28, 2007 and
incorporated herein by reference.
|
|
10
|
.29
|
|
Second Amendment to Amended and Restated Credit Agreement, dated
June 20, 2007, by Champion Home Builders Co., a
wholly-owned subsidiary of Champion Enterprises, Inc., and
certain additional subsidiaries of the Company with certain
financial institutions and other parties thereto as lenders,
filed as Exhibit 10.1 to the Companys Current Report
on Form 8-K filed June 22, 2007 and incorporated
herein by reference.
|
43
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
10
|
.30
|
|
Third Amendment to Amended and Restated Credit Agreement, dated
October 25, 2007, by Champion Home Builders Co., a
wholly-owned subsidiary of Champion Enterprises, Inc., and
certain additional subsidiaries of Champion Enterprises, Inc.
with certain financial institutions and other parties thereto as
lenders, filed as Exhibit 10.1 to the Companys
Current Report on Form 8-K filed October 31, 2007 and
incorporated herein by reference.
|
|
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,
2008, relating to the Registrants Annual Report on Form
10-K for the year ended December 29, 2007.
|
|
31
|
.2
|
|
Certification of Chief Financial Officer dated February 27,
2008, relating to the Registrants Annual Report on Form
10-K for the year ended December 29, 2007.
|
|
32
|
.1
|
|
Certification of Chief Executive Officer and Chief Financial
Officer of Registrant, dated February 27, 2008, 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 29, 2007.
|
|
99
|
.1
|
|
Proxy Statement for the Companys 2008 Annual Meeting of
Shareholders, filed by the Company pursuant to Regulation 14A
and incorporated herein by reference.
|
44
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, 2008
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, 2008
|
|
|
|
|
|
/s/ Phyllis
A. Knight
Phyllis
A. Knight
|
|
Executive Vice President, Treasurer and Chief Financial Officer
(Principal Financial Officer)
|
|
February 27, 2008
|
|
|
|
|
|
/s/ Richard
Hevelhorst
Richard
Hevelhorst
|
|
Vice President and Controller (Principal Accounting Officer)
|
|
February 27, 2008
|
|
|
|
|
|
/s/ Robert
W. Anestis
Robert
W. Anestis
|
|
Director
|
|
February 27, 2008
|
|
|
|
|
|
/s/ Eric
S. Belsky
Eric
S. Belsky
|
|
Director
|
|
February 27, 2008
|
|
|
|
|
|
/s/ Selwyn
Isakow
Selwyn
Isakow
|
|
Director and Lead Independent Director
|
|
February 27, 2008
|
|
|
|
|
|
/s/ Brian
D. Jellison
Brian
D. Jellison
|
|
Director
|
|
February 27, 2008
|
|
|
|
|
|
/s/ G.
Michael Lynch
G.
Michael Lynch
|
|
Director
|
|
February 27, 2008
|
|
|
|
|
|
/s/ Thomas
Madden
Thomas
Madden
|
|
Director
|
|
February 27, 2008
|
|
|
|
|
|
/s/ Shirley
D. Peterson
Shirley
D. Peterson
|
|
Director
|
|
February 27, 2008
|
|
|
|
|
|
/s/ David
Weiss
David
Weiss
|
|
Director
|
|
February 27, 2008
|
45
MANAGEMENTS
RESPONSIBILITY FOR FINANCIAL STATEMENTS
Management is responsible for the preparation of the
Companys consolidated financial statements and related
notes. Management believes that the consolidated financial
statements present the Companys financial position and
results of operations in conformity with accounting principles
that are generally accepted in the United States, using our best
estimates and judgments as required.
The independent registered public accounting firm audits the
Companys consolidated financial statements in accordance
with the standards of the Public Company Accounting Oversight
Board (United States) and provides an objective, independent
review of the fairness of reported operating results and
financial position.
The Audit Committee of the Board of Directors of the Company is
composed of four non-management directors. The Committee meets
regularly with management, internal auditors, and the
independent registered public accounting firm to review
accounting, internal control, auditing, and financial reporting
matters.
Formal policies and procedures, including an active Ethics and
Business Conduct program, support the internal controls, and are
designed to ensure employees adhere to the highest standards of
personal and professional integrity. We have an internal audit
program that independently evaluates the adequacy and
effectiveness of these internal controls.
MANAGEMENTS
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term
is defined in Exchange Act
Rule 13a-15(f).
Under the supervision and with the participation of management,
including our Chief Executive Officer and Chief Financial
Officer, we conducted an evaluation of the effectiveness of our
internal control over financial reporting based on the framework
in Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to risk that controls may become inadequate
because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
Based on our evaluation under the framework in Internal
Control Integrated Framework, management
concluded that our internal control over financial reporting was
effective as of December 29, 2007. The effectiveness of our
internal control over financial reporting as of
December 29, 2007 has been audited by Ernst &
Young LLP, an independent registered public accounting firm, as
stated in their report, which is included herein.
On December 21, 2007, we acquired substantially all the
assets and the business of SRI Homes Ltd. We have excluded this
acquisition from our assessment of internal control over
financial reporting as of December 29, 2007 because it was
acquired during 2007. The total assets of this acquisition
represented 13 percent of our consolidated assets at
December 29, 2007. Due to the date of the acquisition, no
sales or operating results of SRI are included in our
consolidated sales for 2007.
|
|
|
/s/ WILLIAM
C. GRIFFITHS
William
C. Griffiths
Chairman, President and Chief Executive Officer
February 27, 2008
|
|
/s/ PHYLLIS
A. KNIGHT
Phyllis
A. Knight
Executive Vice President, Treasurer and
Chief Financial Officer
February 27, 2008
|
46
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of
Champion Enterprises, Inc.
We have audited the accompanying consolidated balance sheets of
Champion Enterprises, Inc. (the Company) as of
December 29, 2007 and December 30, 2006, and the
related consolidated statements of operations,
shareholders equity and comprehensive income, and cash
flows for each of the two years in the period ended
December 29, 2007. Our audits also included the financial
statement schedule listed in the Index for the two years ended
December 29, 2007. These financial statements and schedule
are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Champion Enterprises, Inc. at
December 29, 2007 and December 30, 2006, and the
consolidated results of its operations and its cash flows for
each of the two years in the period ended December 29,
2007, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all
material respects the information set forth for the two years
ended December 29, 2007.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
Champion Enterprises, Inc.s internal control over
financial reporting as of December 29, 2007, 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 22, 2008
expressed an unqualified opinion thereon.
Detroit, Michigan
February 22, 2008
F-2
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of
Champion Enterprises, Inc.
We have audited Champion Enterprises Inc.s internal
control over financial reporting as of December 29, 2007,
based on criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria).
Champion Enterprises Inc.s management is responsible for
maintaining effective internal control over financial reporting,
and for its assessment of the effectiveness of internal control
over financial reporting included in the accompanying
Managements Annual Report on Internal Control Over
Financial Reporting. Our responsibility is to express an opinion
on the companys internal control over financial reporting
based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
As indicated in the accompanying Managements 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 2007 acquisition of SRI
Homes, Inc., which are included in the consolidated statements
of the Company and constituted 13 percent of consolidated
assets at December 29, 2007 and zero percent of
consolidated net sales for the year then ended. Management did
not include an assessment of the internal control over financial
reporting for SRI Homes, Inc. as it was acquired in a business
combination in 2007.
F-3
In our opinion, Champion Enterprises, Inc. maintained, in all
material respects, effective internal control over financial
reporting as of December 29, 2007, 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 29, 2007 and December 30, 2006, and the
related consolidated statements of operations,
shareholders equity and comprehensive income, and cash
flows for each of the two years in the period ended
December 29, 2007 and our report dated February 22,
2008 expressed an unqualified opinion thereon.
Detroit, Michigan
February 22, 2008
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 statements of income,
shareholders equity and cash flows for the year ended
December 31, 2005 present fairly, in all material respects,
the results of operations and cash flows of Champion
Enterprises, Inc. and its subsidiaries for the year 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 the year
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 audit.
We conducted our audit 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 audit
provides a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers
LLP
Detroit, MI
March 10, 2006
F-5
CHAMPION
ENTERPRISES, INC.
CONSOLIDATED
INCOME STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 29, 2007
|
|
|
December 30, 2006
|
|
|
December 31, 2005
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Net sales
|
|
$
|
1,273,465
|
|
|
$
|
1,364,648
|
|
|
$
|
1,272,590
|
|
Cost of sales
|
|
|
1,083,601
|
|
|
|
1,147,032
|
|
|
|
1,055,749
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
189,864
|
|
|
|
217,616
|
|
|
|
216,841
|
|
Selling, general and administrative expenses
|
|
|
157,134
|
|
|
|
154,518
|
|
|
|
151,810
|
|
Restructuring charges
|
|
|
3,780
|
|
|
|
1,200
|
|
|
|
|
|
Amortization of intangible assets
|
|
|
5,727
|
|
|
|
3,941
|
|
|
|
|
|
Mark-to-market credit for common stock warrant
|
|
|
|
|
|
|
|
|
|
|
(4,300
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
23,223
|
|
|
|
57,957
|
|
|
|
69,331
|
|
Loss on debt retirement
|
|
|
(4,543
|
)
|
|
|
(398
|
)
|
|
|
(9,857
|
)
|
Interest income
|
|
|
5,649
|
|
|
|
5,050
|
|
|
|
3,712
|
|
Interest expense
|
|
|
(20,380
|
)
|
|
|
(19,496
|
)
|
|
|
(17,698
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
|
3,949
|
|
|
|
43,113
|
|
|
|
45,488
|
|
Income tax (benefit) expense
|
|
|
(3,243
|
)
|
|
|
(95,211
|
)
|
|
|
3,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
7,192
|
|
|
|
138,324
|
|
|
|
42,188
|
|
Loss from discontinued operations, net of taxes
|
|
|
|
|
|
|
(16
|
)
|
|
|
(4,383
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
7,192
|
|
|
$
|
138,308
|
|
|
$
|
37,805
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
0.09
|
|
|
$
|
1.81
|
|
|
$
|
0.55
|
|
Loss from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
(0.06
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income per share
|
|
$
|
0.09
|
|
|
$
|
1.81
|
|
|
$
|
0.49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted shares for basic EPS
|
|
|
76,916
|
|
|
|
76,334
|
|
|
|
74,891
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
0.09
|
|
|
$
|
1.78
|
|
|
$
|
0.54
|
|
Loss from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
(0.06
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income per share
|
|
$
|
0.09
|
|
|
$
|
1.78
|
|
|
$
|
0.48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted shares for diluted EPS
|
|
|
77,719
|
|
|
|
77,578
|
|
|
|
76,034
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
F-6
CHAMPION
ENTERPRISES, INC.
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 29,
|
|
|
December 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands, except par value)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
135,408
|
|
|
$
|
70,208
|
|
Accounts receivable, trade
|
|
|
89,646
|
|
|
|
47,645
|
|
Inventories
|
|
|
90,782
|
|
|
|
102,350
|
|
Deferred tax assets
|
|
|
29,746
|
|
|
|
32,303
|
|
Other current assets
|
|
|
14,827
|
|
|
|
10,677
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
360,409
|
|
|
|
263,183
|
|
Property, plant and equipment
|
|
|
|
|
|
|
|
|
Land and improvements
|
|
|
30,970
|
|
|
|
25,805
|
|
Buildings and improvements
|
|
|
129,002
|
|
|
|
123,483
|
|
Machinery and equipment
|
|
|
89,742
|
|
|
|
89,037
|
|
|
|
|
|
|
|
|
|
|
|
|
|
249,714
|
|
|
|
238,325
|
|
Less-accumulated depreciation
|
|
|
132,730
|
|
|
|
125,798
|
|
|
|
|
|
|
|
|
|
|
|
|
|
116,984
|
|
|
|
112,527
|
|
Goodwill
|
|
|
360,610
|
|
|
|
287,789
|
|
Amortizable intangible assets, net of accumulated
amortization
|
|
|
72,541
|
|
|
|
47,675
|
|
Deferred tax assets
|
|
|
87,983
|
|
|
|
71,600
|
|
Other non-current assets
|
|
|
23,696
|
|
|
|
17,841
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,022,223
|
|
|
$
|
800,615
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Short-term portion of debt
|
|
$
|
25,884
|
|
|
$
|
2,168
|
|
Accounts payable
|
|
|
119,390
|
|
|
|
54,607
|
|
Accrued volume rebates
|
|
|
29,404
|
|
|
|
30,891
|
|
Accrued warranty obligations
|
|
|
29,246
|
|
|
|
30,423
|
|
Accrued compensation and payroll taxes
|
|
|
25,168
|
|
|
|
13,933
|
|
Accrued self-insurance
|
|
|
27,539
|
|
|
|
29,219
|
|
Other current liabilities
|
|
|
61,695
|
|
|
|
41,962
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
318,326
|
|
|
|
203,203
|
|
Long-term liabilities
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
342,897
|
|
|
|
252,449
|
|
Deferred tax liabilities
|
|
|
7,065
|
|
|
|
10,600
|
|
Other long-term liabilities
|
|
|
34,089
|
|
|
|
32,601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
384,051
|
|
|
|
295,650
|
|
Contingent liabilities (Note 13)
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
|
|
|
|
|
|
Common stock, $1 par value, 120,000 shares authorized,
77,346 and 76,450 shares issued and outstanding,
respectively
|
|
|
77,346
|
|
|
|
76,450
|
|
Capital in excess of par value
|
|
|
203,708
|
|
|
|
199,597
|
|
Retained earnings
|
|
|
23,637
|
|
|
|
16,445
|
|
Accumulated other comprehensive income
|
|
|
15,155
|
|
|
|
9,270
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
319,846
|
|
|
|
301,762
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,022,223
|
|
|
$
|
800,615
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
F-7
CHAMPION
ENTERPRISES, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 29,
|
|
|
December 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
$
|
7,192
|
|
|
$
|
138,308
|
|
|
$
|
37,805
|
|
Loss from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
16
|
|
|
|
4,383
|
|
Adjustments to reconcile net income to net cash provided by
(used for) continuing operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
|
|
|
20,063
|
|
|
|
17,943
|
|
|
|
10,738
|
|
Stock-based compensation
|
|
|
|
|
|
|
2,975
|
|
|
|
4,563
|
|
|
|
5,674
|
|
Change in deferred taxes
|
|
|
|
|
|
|
(17,637
|
)
|
|
|
(100,125
|
)
|
|
|
|
|
Fixed asset impairment charges
|
|
|
|
|
|
|
2,000
|
|
|
|
1,200
|
|
|
|
|
|
Gain on disposal of fixed assets
|
|
|
|
|
|
|
(1,199
|
)
|
|
|
(4,708
|
)
|
|
|
(1,691
|
)
|
Loss on debt retirement
|
|
|
|
|
|
|
4,543
|
|
|
|
398
|
|
|
|
9,857
|
|
Mark-to-market credit for common stock warrant
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,300
|
)
|
Increase/decrease
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
|
|
|
|
(28,412
|
)
|
|
|
28,626
|
|
|
|
(24,364
|
)
|
Inventories
|
|
|
|
|
|
|
24,024
|
|
|
|
13,129
|
|
|
|
(22,984
|
)
|
Cash collateral deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,500
|
|
Accounts payable
|
|
|
|
|
|
|
61,230
|
|
|
|
(16,405
|
)
|
|
|
9,326
|
|
Accrued liabilities
|
|
|
|
|
|
|
5,733
|
|
|
|
(24,753
|
)
|
|
|
7,040
|
|
Foreign currency transaction gain
|
|
|
|
|
|
|
(942
|
)
|
|
|
|
|
|
|
|
|
Other, net
|
|
|
|
|
|
|
735
|
|
|
|
1,682
|
|
|
|
422
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by continuing operating activities
|
|
|
|
|
|
|
80,305
|
|
|
|
59,874
|
|
|
|
38,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to property, plant and equipment
|
|
|
|
|
|
|
(10,201
|
)
|
|
|
(17,582
|
)
|
|
|
(11,785
|
)
|
Acquisitions
|
|
|
|
|
|
|
(96,208
|
)
|
|
|
(153,845
|
)
|
|
|
(41,416
|
)
|
Proceeds on disposal of fixed assets
|
|
|
|
|
|
|
4,487
|
|
|
|
7,566
|
|
|
|
5,472
|
|
Distributions from unconsolidated affiliates
|
|
|
|
|
|
|
884
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used for investing activities
|
|
|
|
|
|
|
(101,038
|
)
|
|
|
(163,861
|
)
|
|
|
(47,729
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments on short-term debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,195
|
)
|
Proceeds from Convertible Notes
|
|
|
|
|
|
|
180,000
|
|
|
|
|
|
|
|
|
|
Proceeds from Term Loan
|
|
|
|
|
|
|
|
|
|
|
78,561
|
|
|
|
100,000
|
|
Redemption of Senior Notes
|
|
|
|
|
|
|
(79,728
|
)
|
|
|
(6,901
|
)
|
|
|
(106,316
|
)
|
Payment of U.S. Term Loan
|
|
|
|
|
|
|
(14,500
|
)
|
|
|
(27,750
|
)
|
|
|
|
|
Payments on other long-term debt
|
|
|
|
|
|
|
(1,829
|
)
|
|
|
(1,862
|
)
|
|
|
(687
|
)
|
Purchase of common stock warrant
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,500
|
)
|
Increase in deferred financing costs
|
|
|
|
|
|
|
(5,939
|
)
|
|
|
(1,076
|
)
|
|
|
(3,567
|
)
|
Decrease (increase) in restricted cash
|
|
|
|
|
|
|
15
|
|
|
|
698
|
|
|
|
(184
|
)
|
Common stock issued, net
|
|
|
|
|
|
|
3,801
|
|
|
|
1,974
|
|
|
|
2,340
|
|
Dividends paid on preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(293
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used for) financing activities
|
|
|
|
|
|
|
81,820
|
|
|
|
43,644
|
|
|
|
(21,402
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used for) operating activities of
discontinued operations
|
|
|
|
|
|
|
62
|
|
|
|
633
|
|
|
|
(3,247
|
)
|
Net cash provided by investing activities of discontinued
operations
|
|
|
|
|
|
|
|
|
|
|
568
|
|
|
|
30,952
|
|
Net cash used for financing activities of discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,267
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by discontinued operations
|
|
|
|
|
|
|
62
|
|
|
|
1,201
|
|
|
|
15,438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
|
|
|
|
4,051
|
|
|
|
2,371
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
|
|
|
|
65,200
|
|
|
|
(56,771
|
)
|
|
|
(15,287
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
|
|
|
|
70,208
|
|
|
|
126,979
|
|
|
|
142,266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
|
|
|
|
$
|
135,408
|
|
|
$
|
70,208
|
|
|
$
|
126,979
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
|
|
|
|
$
|
19,888
|
|
|
$
|
19,394
|
|
|
$
|
20,084
|
|
Cash paid for income taxes
|
|
|
|
|
|
|
8,296
|
|
|
|
5,156
|
|
|
|
2,661
|
|
See accompanying Notes to Consolidated Financial Statements.
F-8
CHAMPION
ENTERPRISES, INC.
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital in
|
|
|
earnings
|
|
|
other
|
|
|
|
|
|
|
Common stock
|
|
|
excess of
|
|
|
(accumulated
|
|
|
comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
par value
|
|
|
deficit)
|
|
|
income (loss)
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Balance at January 1, 2005
|
|
|
72,358
|
|
|
$
|
72,358
|
|
|
$
|
164,377
|
|
|
$
|
(159,375
|
)
|
|
$
|
(60
|
)
|
|
$
|
77,300
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
76,045
|
|
|
$
|
76,045
|
|
|
$
|
192,905
|
|
|
$
|
(121,863
|
)
|
|
$
|
218
|
|
|
$
|
147,305
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
138,308
|
|
|
|
|
|
|
|
138,308
|
|
Stock options and benefit plans
|
|
|
405
|
|
|
|
405
|
|
|
|
6,692
|
|
|
|
|
|
|
|
|
|
|
|
7,097
|
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,552
|
|
|
|
14,552
|
|
Net investment hedge, net of income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,500
|
)
|
|
|
(5,500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 30, 2006
|
|
|
76,450
|
|
|
|
76,450
|
|
|
|
199,597
|
|
|
|
16,445
|
|
|
|
9,270
|
|
|
|
301,762
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,192
|
|
|
|
|
|
|
|
7,192
|
|
Stock options and benefit plans
|
|
|
896
|
|
|
|
896
|
|
|
|
4,111
|
|
|
|
|
|
|
|
|
|
|
|
5,007
|
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,185
|
|
|
|
7,185
|
|
Net investment hedge, net of income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,300
|
)
|
|
|
(1,300
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 29, 2007
|
|
|
77,346
|
|
|
$
|
77,346
|
|
|
$
|
203,708
|
|
|
$
|
23,637
|
|
|
$
|
15,155
|
|
|
$
|
319,846
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 operates in three segments. The North American
manufacturing segment (the manufacturing segment)
consists of 29 manufacturing facilities that primarily construct
factory-built manufactured and modular houses throughout the
U.S. and in western Canada. The international manufacturing
segment (the international segment) consists of
Caledonian Building Systems Limited (Caledonian), a
manufacturer of steel-framed modular buildings for prisons,
military accommodations, hotels and residential units.
Caledonian operates four manufacturing facilities in the United
Kingdom. The retail segment currently operates 17 retail sales
centers that sell manufactured houses to consumers throughout
California.
Revenue
Recognition
For manufacturing shipments to independent retailers and
builders/developers, sales revenue is generally recognized when
wholesale floor plan financing or retailer credit approval has
been received, the home is shipped and invoiced and title is
transferred. As is customary in the factory-built housing
industry, 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).
F-10
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Companys international segment recognizes revenue for
long-term construction contracts under the percentage of
completion method using the
cost-to-cost
basis.
Restructuring
Charges
Restructuring charges are accounted for in accordance with
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 $4.0 million, $4.2 million and
$3.5 million in 2007, 2006 and 2005, 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 $14.3 million, $14.0 million and
$10.6 million in 2007, 2006 and 2005, 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 29, 2007, the Company had 16 idle manufacturing
facilities with net book value of $10.9 million of which
nine with net book value of approximately $3.4 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 29, 2007 was net of
impairment reserves totaling $8.7 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 29, 2007 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.
F-11
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Amortizable
Intangible Assets
Amortizable intangible assets consist primarily of fair values
assigned to customer relationships, trade names, employee
agreements and technology for acquired businesses. Trade names
and technologies were valued based upon the royalty-saving
method, customer relationships were valued based upon the excess
earnings method and employment agreements were valued based upon
the income method. Amortization is provided over the useful
lives of the intangible assets, generally five to fifteen years,
using the straight-line method. Amortization expense totaled
$5.7 million and $3.9 million in 2007 and 2006,
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 $2.2 million and
$2.9 million at December 29, 2007 and
December 30, 2006, respectively. Equity method pretax
income or loss from these affiliates totaled income of
$0.2 million in 2007, loss of $0.3 million in 2006 and
loss of $0.4 million in 2005, which 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 is amortized using the
interest method. Upon retirement of any of the related debt, a
proportional share of debt issuance costs and original issue
discount is written off.
Warranty
Obligations
The Companys manufacturing segment generally provides the
retail homebuyer or the builder/developer with a twelve-month
warranty from the date of respective purchase. Estimated
warranty costs are accrued as cost of sales at the time of sale.
Warranty provisions and reserves are based on estimates of the
amounts necessary to settle existing and future claims on homes
sold by the manufacturing segment as of the balance sheet date.
Factors used to calculate the warranty obligation are the
estimated number of homes still under warranty, including homes
in retailer inventories, homes purchased by consumers still
within the twelve-month warranty period and the historical
average costs incurred to service a home.
Dealer
Volume Rebates
The Companys manufacturing segment sponsors volume rebate
programs under which sales to retailers and builder/developers
can qualify for cash rebates generally based on the level of
sales attained during a twelve-month period. Volume rebates are
accrued at the time of sale and are recorded as a reduction of
net sales.
Accrued
Self-Insurance
The Company is self-insured for a significant portion of its
workers compensation, general and products liability, auto
liability, health and property insurance. Insurance coverage is
maintained for catastrophic exposures and those risks required
to be insured by law. Estimated self-insurance costs are accrued
for incurred claims and estimated claims incurred but not yet
reported.
Income
Taxes
Deferred tax assets and liabilities are determined based on
temporary differences between the financial statement amounts
and the tax bases of assets and liabilities using enacted tax
rates in effect in the years in which the differences are
expected to reverse. A valuation allowance is provided when the
Company determines that it is more likely than not that some or
all of the deferred tax asset will not be realized. In 2002, the
Company provided a 100% valuation allowance for its deferred tax
assets. In 2006, the Company reversed the valuation allowance
after
F-12
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
Effective January 1, 2007, the Company adopted Financial
Accounting Standards Board Interpretation Number 48
(FIN 48) Accounting for Uncertainty in
Income Taxes an interpretation of FASB Statement
No. 109. FIN 48 clarifies accounting for uncertain
tax positions using a more likely than not
recognition threshold for tax positions. Under FIN 48, the
Company will initially recognize the financial statement effects
of a tax position when it is more likely than not, based on the
technical merits of the tax position, that such a position will
be sustained upon examination by the relevant tax authorities.
If the tax benefit meets the more likely than not
threshold, the measurement of the tax benefit will be based on
the Companys estimate of the ultimate tax benefit to be
sustained if audited by the taxing authority. The adoption of
FIN 48 required no adjustment to opening balance sheet
accounts as of December 30, 2006.
Stock-Based
Compensation Programs
The Company accounts for stock-based compensation in accordance
with SFAS No. 123(R), Share-Based Payment.
Under SFAS No. 123(R), a public entity is required to
measure the cost of employee services received in exchange for
an award of equity instruments based on the grant-date fair
value of the award. That cost is recognized on a straight-line
basis over the period during which an employee is required to
provide service in exchange for the award. No stock options were
granted by the Company in 2007, 2006 or 2005, but grants were
made of restricted stock, including performance-based shares.
Reclassification
The Company previously reported the loss (gain) on debt
retirement as a part of operating income. Commencing in 2007,
the Company reported the loss (gain) on debt retirement outside
of operating income and has reclassified prior results
accordingly.
Year
End
The Companys fiscal year is a 52 or 53 week period
that ends on the Saturday nearest December 31. Fiscal years
2007, 2006 and 2005 were each comprised of 52 weeks.
Recent
Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board
issued Financial Accounting Standard Number 157
(SFAS 157), Fair Value Measurements.
SFAS 157 clarifies the principle that fair value should be
based on the assumptions market participants would use when
pricing an asset or liability and establishes a fair value
hierarchy that prioritizes the information used to develop those
assumptions. Under the standard, fair value measurements would
be separately disclosed by level within the fair value
hierarchy. SFAS 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007
and interim periods within those fiscal years, with early
adoption permitted. In February 2008, the FASB issued FSP
FAS 157-2
that delayed, by one year, the effective date of SFAS 157
for the majority of non-financial assets and non-financial
liabilities. However, the Company would still be required to
adopt SFAS 157 as of January 1, 2008 for certain
assets and liabilities which were not included in FSP
FAS 157-2.
The Company has not yet determined the effect, if any, that the
implementation of SFAS 157 will have on the Companys
results of operations or financial condition.
In February 2007, the Financial Accounting Standards Board
issued Financial Accounting Standard Number 159
(SFAS 159), The Fair Value Option for
Financial Assets and Financial Liabilities including
an amendment of FASB Statement No. 115, which permits
an entity to choose to measure many financial instruments and
certain other items at fair value that are not currently
required to be measured at fair value. The objective is to
provide entities with an opportunity to mitigate volatility in
reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge
accounting provisions. Entities that choose to measure eligible
items at fair value will report unrealized gains and losses in
earnings at each subsequent reporting
F-13
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
date. The fair value option may be elected at specified election
dates on an
instrument-by-instrument
basis, with few exceptions. The Statement also establishes
presentation and disclosure requirements designed to facilitate
comparisons between entities that choose different measurement
attributes for similar types of assets and liabilities.
SFAS 159 is effective at the beginning of the first fiscal
year beginning after November 15, 2007. The Company is
currently evaluating the impact of adopting SFAS 159.
In December 2007, the Financial Accounting Standards Board
(FASB) issued Financial Accounting Standard Number
141(R) (SFAS 141R), Business Combinations
and Financial Accounting Standard Number 160
(SFAS 160), Accounting and Reporting of
Non-controlling Interests in Consolidated Financial Statements,
an amendment of ARB No. 51. SFAS 141R and
SFAS 160 expand the scope of acquisition accounting to all
transactions and circumstances under which control of a business
is obtained. SFAS 141R and SFAS 160 are effective for
financial statements issued for fiscal years beginning after
December 15, 2008 and interim periods within those fiscal
years, with early adoption prohibited and these standards must
be adopted concurrently. These standards will impact the Company
for any acquisitions subsequent to the adoption date; however,
the Company has not yet determined the effect that the
implementation of SFAS 141R and SFAS 160 will have on
the results of the Companys operations or financial
condition.
On December 21, 2007, the Company acquired substantially
all of the assets and the business of western Canada-based SRI
Homes Inc. (SRI) for cash payments of approximately
$96.2 million, a note payable of $24.5 million and
assumption of the operating liabilities of the business. SRI
produces factory-built homes in three plants that are located in
the provinces of Alberta, British Columbia and Saskatchewan. The
acquisition of SRI expanded the Companys presence in one
of the strongest housing markets in North America. SRIs
balance sheet as of December 29, 2007 is included in the
Companys consolidated balance sheet at that date. SRI is
included in the Companys manufacturing segment. Due to its
holiday closure, SRI had no significant operating activity from
the acquisition date to December 29, 2007.
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 are included in the
Companys 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 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 are included in the Companys
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 are included in
the Companys manufacturing segment.
F-14
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table presents the preliminary purchase price
allocation for SRI at its acquisition date:
|
|
|
|
|
|
|
SRI
|
|
|
|
December 21,
|
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Accounts receivable, trade
|
|
|
12,725
|
|
Inventory
|
|
|
11,735
|
|
Notes receivable
|
|
|
5,214
|
|
Other current assets
|
|
|
264
|
|
Property, plant and equipment
|
|
|
12,935
|
|
Amortizable intangible assets:
|
|
|
29,621
|
|
Goodwill
|
|
|
63,076
|
|
|
|
|
|
|
Total assets
|
|
|
135,570
|
|
Short-term debt
|
|
|
24,168
|
|
Accounts payable
|
|
|
2,661
|
|
Accrued volume rebates
|
|
|
3,572
|
|
Accrued compensation and payroll taxes
|
|
|
3,247
|
|
Accrued warranty obligations
|
|
|
1,905
|
|
Other current liabilities
|
|
|
3,809
|
|
|
|
|
|
|
Current liabilities
|
|
|
39,362
|
|
|
|
|
|
|
Net assets of acquired business
|
|
$
|
96,208
|
|
|
|
|
|
|
Goodwill and amortizable intangible assets from the SRI
acquisition are attributed to the manufacturing segment. The
valuation of intangible assets other than goodwill has not yet
been completed. The estimate of amortizable intangible assets
acquired is based on valuations of such assets in the
Companys 2006 acquisitions. The useful life of the
amortizable intangible assets is assumed to average
7.5 years based on valuations of such intangible assets in
the Companys 2006 acquisitions resulting in estimated
annual amortization expense of approximately $4.0 million.
The valuation of amortizable intangible assets acquired is
expected to be completed during the first quarter of 2008.
The following table presents the Companys 2007 results
compared to unaudited proforma combined results for 2006,
assuming that Highland, Caledonian and North American (the
2006 acquisitions) were acquired on the first day of
2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proforma
|
|
|
|
Actual
|
|
|
Unaudited
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 29,
|
|
|
December 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands, except
|
|
|
|
per share amounts)
|
|
|
Net sales
|
|
$
|
1,273,465
|
|
|
|
1,429,555
|
|
Net income
|
|
|
7,192
|
|
|
|
143,773
|
|
Diluted income per share
|
|
$
|
0.09
|
|
|
$
|
1.85
|
|
F-15
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table presents unaudited proforma combined results
for 2007 and 2006, assuming that SRI and the 2006 acquisitions
were acquired on the first day of 2006:
|
|
|
|
|
|
|
|
|
|
|
Proforma
|
|
|
Proforma
|
|
|
|
Unaudited
|
|
|
Unaudited
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 29,
|
|
|
December 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands, except
|
|
|
|
per share amounts)
|
|
|
Net sales
|
|
$
|
1,375,196
|
|
|
|
1,513,663
|
|
Net income
|
|
|
15,516
|
|
|
|
148,321
|
|
Diluted income per share
|
|
$
|
0.20
|
|
|
$
|
1.91
|
|
The proforma results include amortization of amortizable
intangible assets acquired and valued in the transactions. The
proforma results are not necessarily indicative of what actually
would have occurred if the transactions had been completed as of
the beginning of each of the fiscal periods presented nor are
they necessarily indicative of future consolidated results.
Pretax income from continuing operations for the fiscal years
ended December 29, 2007, December 30, 2006 and
December 31, 2005 was taxed under the following
jurisdictions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Domestic
|
|
$
|
(29,736
|
)
|
|
$
|
32,902
|
|
|
$
|
38,336
|
|
Foreign
|
|
|
33,685
|
|
|
|
10,211
|
|
|
|
7,152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total pretax income from continuing operations
|
|
$
|
3,949
|
|
|
$
|
43,113
|
|
|
$
|
45,488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The income tax provision (benefit) for continuing operations is
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Federal
|
|
$
|
|
|
|
$
|
(800
|
)
|
|
$
|
800
|
|
Foreign
|
|
|
14,394
|
|
|
|
5,364
|
|
|
|
2,200
|
|
State
|
|
|
|
|
|
|
350
|
|
|
|
300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current
|
|
|
14,394
|
|
|
|
4,914
|
|
|
|
3,300
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Federal
|
|
|
(12,800
|
)
|
|
|
(84,700
|
)
|
|
|
|
|
Foreign
|
|
|
(3,937
|
)
|
|
|
(1,275
|
)
|
|
|
|
|
State
|
|
|
(900
|
)
|
|
|
(14,150
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred
|
|
|
(17,637
|
)
|
|
|
(100,125
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total tax (benefit) provision
|
|
$
|
(3,243
|
)
|
|
$
|
(95,211
|
)
|
|
$
|
3,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-16
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The income tax provisions (benefits) differ from the amount of
income tax determined by applying the applicable
U.S. statutory federal income tax rate to income from
continuing operations before income taxes and discontinued
operations as a result of the following differences:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax at U.S. Federal statutory tax rate
|
|
$
|
1,400
|
|
|
$
|
15,100
|
|
|
$
|
15,900
|
|
(Decrease) increase in rate resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
Permanent differences
|
|
|
(2,000
|
)
|
|
|
(1,100
|
)
|
|
|
(1,500
|
)
|
Adjustment of deferred tax valuation allowance
|
|
|
100
|
|
|
|
(109,500
|
)
|
|
|
(14,200
|
)
|
Change in allowance for tax adjustments
|
|
|
|
|
|
|
(500
|
)
|
|
|
|
|
State taxes
|
|
|
(1,000
|
)
|
|
|
1,000
|
|
|
|
2,000
|
|
Foreign tax rate differences
|
|
|
(900
|
)
|
|
|
|
|
|
|
|
|
Other
|
|
|
(843
|
)
|
|
|
(211
|
)
|
|
|
1,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax (benefit) expense
|
|
$
|
(3,243
|
)
|
|
$
|
(95,211
|
)
|
|
$
|
3,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax at U.S. Federal statutory tax rate
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(1,500
|
)
|
Increase in rate resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment of deferred tax valuation allowance
|
|
|
|
|
|
|
|
|
|
|
1,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in income tax benefits in 2007 is a $0.5 million
benefit from the effects of a reduction in the UK income tax
rate on deferred tax assets and liabilities and a
$0.4 million benefit from the settlement of tax uncertainty
for which no benefit had been provided in the prior year.
The income tax provision in 2006 includes a $101.9 million
non-cash tax benefit from the reversal of substantially all of
the valuation allowance for deferred tax assets that was
established in 2002. This reversal was made as of July 1,
2006, after determining that realization of the deferred tax
assets was more likely than not. The 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 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 Company has available federal net operating loss
carryforwards of approximately $233 million for tax
purposes to offset certain future federal taxable income. These
loss carryforwards expire in 2023 through 2027. Approximately
$23.5 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 $211 million for tax purposes to offset
future state taxable income and which expire primarily 2016
through 2027. At December 29, 2007, a deferred tax asset
valuation allowance of $1.0 million has been provided for
state NOL carryforwards expected to expire unutilized.
Discontinued operations were taxed domestically. There was no
significant income tax expense or benefit related to
discontinued operations for 2007 and 2006. No net tax benefits
were recorded for discontinued operations
F-17
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
for 2005 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 29, 2007 and December 30,
2006:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
ASSETS
|
Federal net operating loss carryforwards
|
|
$
|
74,250
|
|
|
$
|
55,300
|
|
Goodwill
|
|
|
6,100
|
|
|
|
6,500
|
|
Warranty reserves
|
|
|
13,150
|
|
|
|
14,300
|
|
Insurance reserves
|
|
|
16,300
|
|
|
|
16,800
|
|
Fixed asset impairments
|
|
|
4,700
|
|
|
|
4,500
|
|
State net operating loss carryfowards
|
|
|
13,600
|
|
|
|
12,000
|
|
Employee compensation
|
|
|
6,500
|
|
|
|
7,600
|
|
Volume rebates
|
|
|
2,700
|
|
|
|
3,400
|
|
Foreign currency translation adjustments
|
|
|
3,800
|
|
|
|
3,500
|
|
Inventory reserves
|
|
|
1,200
|
|
|
|
1,300
|
|
Other
|
|
|
5,751
|
|
|
|
4,803
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax assets
|
|
|
148,051
|
|
|
|
130,003
|
|
|
LIABILITIES
|
Goodwill
|
|
|
33,820
|
|
|
|
32,200
|
|
Depreciation
|
|
|
1,567
|
|
|
|
2,400
|
|
Prepaid expenses
|
|
|
1,000
|
|
|
|
1,200
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax liabilities
|
|
|
36,387
|
|
|
|
35,800
|
|
Valuation allowance
|
|
|
(1,000
|
)
|
|
|
(900
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
110,664
|
|
|
$
|
93,303
|
|
|
|
|
|
|
|
|
|
|
The Company does not provide U.S. income taxes on the
undistributed earnings of its foreign subsidiaries, which
totaled approximately $35 million at December 29,
2007. The Company intends to indefinitely reinvest these
earnings outside the U.S. It is not practical to determine
the amount of U.S. income tax that could be payable in the
event of distribution of these earnings since such amount is
dependent on foreign tax credits that may be available to reduce
U.S. taxes based on tax laws and circumstances at the time
of distribution.
The Company and its subsidiaries are subject to income taxes in
the U.S. federal jurisdiction and various state and foreign
jurisdictions. With few exceptions, the Company is no longer
subject to U.S. federal, state and foreign tax examinations
by tax authorities for years prior to 2003.
Included in the balance sheets at December 29, 2007 and
December 30, 2006 are tax accruals of approximately
$0.6 million and $1.4 million, respectively, for
uncertain tax positions, including $0.3 million of accrued
interest and penalties. The decrease in these accruals during
the year ended December 29, 2007 was primarily related to
the settlement of a tax uncertainty. Recognition of any of the
related unrecognized tax benefits would affect the
Companys effective tax rate. The Company classifies
interest and penalties on income tax uncertainties as a
component of income tax expense.
F-18
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 4
|
Inventories,
Long-term Construction Contracts and Other Current
Liabilities
|
A summary of inventories by component at December 29, 2007
and December 30, 2006 is as follows:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
New manufactured homes
|
|
$
|
20,235
|
|
|
$
|
27,579
|
|
Raw materials
|
|
|
38,725
|
|
|
|
35,737
|
|
Work-in-process
|
|
|
8,617
|
|
|
|
14,284
|
|
Other inventory
|
|
|
23,205
|
|
|
|
24,750
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
90,782
|
|
|
$
|
102,350
|
|
|
|
|
|
|
|
|
|
|
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 29, 2007
and December 30, 2006 are uncollected billings of
$22.4 million and $5.7 million, respectively, and
unbilled revenue of $37.2 million and $18.9 million,
respectively, under long-term construction contracts of the
Companys international segment and includes retention
amounts totaling $2.8 million and $1.7 million,
respectively. Other current liabilities at December 29,
2007 and December 30, 2006 include cash receipts in excess
of revenue recognized under these construction contacts of
$9.2 million and $5.1 million, respectively.
Also included in other current liabilities at December 29,
2007 and December 30, 2006 are customer deposits of
$9.7 million and $15.4 million, respectively.
Long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Convertible Senior Notes due 2037
|
|
$
|
180,000
|
|
|
$
|
|
|
7.625% Senior Notes due 2009
|
|
|
6,716
|
|
|
|
82,298
|
|
Term Loan due 2012
|
|
|
55,750
|
|
|
|
71,000
|
|
Sterling Term Loan due 2012
|
|
|
88,386
|
|
|
|
87,623
|
|
Obligations under industrial revenue bonds
|
|
|
12,430
|
|
|
|
12,430
|
|
Other debt
|
|
|
971
|
|
|
|
1,266
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
|
344,253
|
|
|
|
254,617
|
|
Less: current portion of long-term debt
|
|
|
(1,356
|
)
|
|
|
(2,168
|
)
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
342,897
|
|
|
$
|
252,449
|
|
|
|
|
|
|
|
|
|
|
On November 2, 2007 the Company issued $180 million of
2.75% Convertible Senior Notes due 2037 (the
Convertible Notes). Interest on the Convertible
Notes is payable semi-annually on May 1 and November 1 of each
year, beginning on May 1, 2008. The Convertible Notes are
convertible into approximately 47.7 shares of the
Companys common stock per $1,000 of principal. The
conversion rate can exceed 47.7 shares per $1,000 of
principal when the closing price of the Companys common
stock exceeds approximately $20.97 per share for one or more
days in the 20 consecutive trading day period beginning on the
second trading day after the conversion date. Holders of the
Convertible Notes may require the Company to repurchase the
Notes if the Company is involved in certain types of corporate
transactions or other events constituting a fundamental change.
Holders of the Convertible Notes have the right to require the
Company to repurchase all or a portion of their Notes on
November 1 of 2012, 2017, 2022, 2027 and 2032. The Company has
the right to redeem the Convertible Notes, in whole or in part,
for cash at any time after October 31, 2012.
F-19
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
On December 21, 2007, in connection with the acquisition of
SRI Homes, the Company issued a $24.5 million pre-payable
note due January 2, 2009 bearing interest at a rate of
8.33% percent per annum. The note is secured by a purchase money
security interest in certain SRI assets including purchased
inventory, intangibles, intellectual property and real estate
and is guaranteed by the Company. This note plus the current
portion of long-term debt is included on the balance sheet in
short-term portion of debt.
On October 31, 2005, the Company entered into a senior
secured credit agreement with various financial institutions. On
April 7, 2006, the credit agreement was amended and
restated to provide a portion of the funding for the Caledonian
acquisition. The credit agreement has been amended from time to
time, thereafter (the Credit Agreement). The Credit
Agreement is a senior secured credit facility originally
comprised of a $100 million term loan (the Term
Loan), a £45 million 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. The Credit Agreement
also provides the Company 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. The Credit Agreement is secured by a first
security interest in substantially all of the assets of the
domestic operating subsidiaries of the Company. As of
December 29, 2007, letters of credit issued under the
facility totaled $55.7 million and there were no borrowings
under the revolving line of credit.
The Credit Agreement requires principal payments for the Term
Loan and the Sterling Term Loan totaling approximately
$1.1 million for 2008 and approximately $1.8 million
annually thereafter. The interest rate for borrowings under the
Term Loan is currently a LIBOR based rate (4.81% at
December 29, 2007) plus 3.25%. The interest rate for
borrowings under the Sterling Term Loan is currently a UK LIBOR
based rate (6.05% at December 29, 2007) plus 3.25%.
Letter of credit fees are 3.35% annually and revolver borrowings
bear interest at either the prime interest rate plus 2.25% or
LIBOR plus 3.25%. 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.
The Credit Agreement contains affirmative and negative
covenants. During 2007, the Credit Agreement was amended to
modify certain financial covenants and increase interest rates
and letter of credit fees for the second, third and fourth
fiscal quarters of 2007. Subsequently in 2007, the Credit
Agreement was further amended to modify certain financial
covenants, add a Fixed Charge Ratio test and a requirement to
prepay certain Term Debt and Senior Notes with proceeds from the
Convertible Notes, and increase interest rates and letter of
credit fees.
The following table represents the maximum Senior Leverage Ratio
and minimum Interest Coverage Ratio and Fixed Charge Ratio that
the Company is required to maintain under the Restated Credit
Agreement:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum
|
|
|
Minimum
|
|
|
Minimum
|
|
|
|
Senior
|
|
|
Interest
|
|
|
Fixed
|
|
|
|
Leverage
|
|
|
Coverage
|
|
|
Charge
|
|
Fiscal Quarter
|
|
Ratio
|
|
|
Ratio
|
|
|
Ratio
|
|
|
Fourth quarter of 2007
|
|
|
3.50:1
|
|
|
|
|
|
|
|
|
|
First quarter of 2008
|
|
|
3.25:1
|
|
|
|
|
|
|
|
|
|
Fourth quarter of 2007 Third quarter of 2009
|
|
|
|
|
|
|
2.25:1
|
|
|
|
1.25:1
|
|
Second quarter of 2008 Third quarter of 2009
|
|
|
3.00:1
|
|
|
|
|
|
|
|
|
|
Fourth quarter of 2009 Third quarter of 2010
|
|
|
2.75:1
|
|
|
|
2.50:1
|
|
|
|
1.25:1
|
|
Fourth quarter of 2010 Third quarter of 2011
|
|
|
2.50:1
|
|
|
|
2.75:1
|
|
|
|
1.25:1
|
|
Fourth quarter of 2011 Second quarter of 2012
|
|
|
2.25:1
|
|
|
|
3.00:1
|
|
|
|
1.25:1
|
|
Each fiscal quarter thereafter
|
|
|
2.00:1
|
|
|
|
3.00:1
|
|
|
|
1.25:1
|
|
The Senior Leverage Ratio is the ratio of Total Senior Debt (as
defined) of the Company on the last day of a fiscal quarter to
its consolidated EBITDA (as defined) for the four-quarter period
then ended. The Interest Coverage
F-20
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Ratio is the ratio of the Companys consolidated EBITDA to
its Cash Interest Expense (as defined) for the four-quarter
period then ended. The Fixed Charge Ratio is the ratio of the
Companys consolidated EBITDA to its Fixed Charges (as
defined) for the four-quarter period then ended. Annual
prepayments are required should the Company generate Excess Cash
Flow (as defined). Violations of any of the covenants in the
Credit Agreement, if not cured or waived by the lenders, 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. As of December 29,
2007, the Company was in compliance with all covenants.
During the fourth quarter of 2007 the Company prepaid
$14.5 million of its Term Loan, resulting in a pre-tax loss
of $0.4 million from the write-off of related deferred
issuance costs.
On November 27, 2007, the Company completed its previously
announced tender offer and consent solicitation for its
$82.3 million principal amount of outstanding Senior Notes
due 2009 (the Senior Notes), pursuant to which
$75.6 million principal amount of Senior Notes were
tendered, representing approximately 91.8% of the outstanding
Senior Notes. Funding for the tender offer and consent
solicitation was provided by proceeds from the new
$180 million Convertible Senior Notes due 2037. The fourth
quarter retirement of the $75.6 million of Senior Notes for
cash payments totaling $79.7 million resulted in a pretax
loss on debt retirement of $4.1 million. The remaining
Senior Notes continue to be secured equally and ratably with
obligations under the Credit Agreement. Interest is payable
semi-annually at an annual rate of 7.625%.
On November 13, 2007, the Company entered into a
supplemental indenture (the Supplemental Indenture)
to the indenture dated May 3, 1999 (as amended and
supplemented at various times (the Indenture)),
between the Company and Wells Fargo Bank, N.A. as trustee. The
Indenture governs the terms of the Senior Notes. The
Supplemental Indenture amended the Indenture by eliminating
substantially all of the restrictive covenants contained in the
Indenture, as described below (the Amendments).
Prior to the execution of the Supplemental Indenture, the
Company solicited and received the required consents to the
Amendments in connection with its offer to purchase and consent
solicitation for the Senior Notes. The Amendments eliminated
sections pertaining to SEC Reports, limitations on liens,
limitations on sale/leaseback transactions, exempted
indebtedness, future subsidiary guarantors and when the company
may merge or transfer assets.
During the fourth quarter of 2006, the Company purchased
$7.0 million of its outstanding Senior Notes for cash
consideration of $6.9 million and made a voluntary
repayment of $27.8 million on its Term Loan, 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 a 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 redemption of the 2007 Notes was
provided by the proceeds of the $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.
F-21
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Future maturities of long-term debt as of December 29, 2007
are as follows (in thousands):
|
|
|
|
|
2008
|
|
$
|
1,356
|
|
2009
|
|
|
8,761
|
|
2010
|
|
|
2,066
|
|
2011
|
|
|
2,014
|
|
2012
|
|
|
317,626
|
|
Thereafter
|
|
|
12,430
|
|
|
|
|
|
|
|
|
$
|
344,253
|
|
|
|
|
|
|
|
|
NOTE 6
|
Restructuring
Charges
|
Charges totaling $4.9 million were recorded in 2007 in
connection with the closure of two manufacturing plants, one in
Pennsylvania in the first quarter and one in Alabama in the
fourth quarter. Restructuring charges totaling $3.8 million
consisted of severance costs totaling $1.8 million and
fixed asset impairment charges of $2.0 million. Other plant
closing charges that are included in cost of sales consisted of
inventory write-downs of $0.6 million and an additional
warranty accrual of $0.5 million. Severance costs are
related to the termination of substantially all
160 employees at the Pennsylvania plant and substantially
all 170 employees at the Alabama plant and included
payments required under the Worker Adjustment and Retraining
Notification Act.
During 2006, the Company closed four homebuilding facilities and
recorded restructuring charges consisting of 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 for
plants closed in previous years.
During 2005, the Company accrued additional warranty costs of
$2.3 million for plants closed in prior years 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.
F-22
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table provides information regarding activity for
other restructuring reserves during 2007, 2006 and 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
Prior
|
|
|
Prior
|
|
|
Prior
|
|
|
|
Closures
|
|
|
Closures
|
|
|
Closures
|
|
|
|
(In thousands)
|
|
|
Balance at beginning of year
|
|
$
|
1,018
|
|
|
$
|
4,330
|
|
|
$
|
4,421
|
|
Additions charged (reversals credited) to earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance costs
|
|
|
1,745
|
|
|
|
|
|
|
|
(190
|
)
|
Warranty costs
|
|
|
500
|
|
|
|
(1,000
|
)
|
|
|
2,300
|
|
Other closing costs
|
|
|
(86
|
)
|
|
|
|
|
|
|
(16
|
)
|
Cash payments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance costs
|
|
|
(1,303
|
)
|
|
|
|
|
|
|
(604
|
)
|
Warranty costs
|
|
|
(932
|
)
|
|
|
(1,900
|
)
|
|
|
(1,060
|
)
|
Other closing costs
|
|
|
|
|
|
|
(412
|
)
|
|
|
(521
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
942
|
|
|
$
|
1,018
|
|
|
$
|
4,330
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year end balance comprised of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Warranty costs
|
|
$
|
500
|
|
|
$
|
932
|
|
|
$
|
3,832
|
|
Severance costs
|
|
|
442
|
|
|
|
|
|
|
|
|
|
Other closing costs
|
|
|
|
|
|
|
86
|
|
|
|
498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
942
|
|
|
$
|
1,018
|
|
|
$
|
4,330
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance costs and other closing costs are generally paid
within one year of the related 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 7
|
Goodwill
and other intangible assets
|
The Company tests for impairment of goodwill and other
intangible assets in accordance with SFAS No. 142,
Goodwill and Other Intangible Assets. The Company
evaluates the manufacturing and international segments
fair value versus their carrying value annually as of the end of
each fiscal year or more frequently if events or changes in
circumstances indicate that the carrying value may exceed the
fair value. The provisions of SFAS No. 142 require
that a two-step evaluation be performed to assess goodwill and
for impairment. First, the fair value of the reporting unit is
compared to its carrying value. If the fair value exceeds the
carrying value, goodwill and other intangible assets are not
impaired and no further steps are required. If the carrying
value of the reporting unit exceeds its fair value, then the
implied fair value of the reporting units goodwill must be
determined and compared to the carrying value of its goodwill.
If the carrying value of the reporting units goodwill
exceeds its implied fair value, then an impairment charge equal
to the difference is recorded.
When estimating fair value, the Company calculates the present
value of future cash flows based on forecasted sales volumes,
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. During the fourth quarter of
2007, the Company performed its annual impairment test for
goodwill and other intangible assets and concluded no impairment
existed at December 29, 2007.
F-23
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The change in the carrying amount of goodwill for the fiscal
years ended December 29, 2007 and December 30, 2006 is
as follows:
|
|
|
|
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Balance at December 31, 2005
|
|
$
|
154,174
|
|
New Era acquisition
|
|
|
(950
|
)
|
North American acquisition
|
|
|
21,785
|
|
Calsafe acquisition
|
|
|
91,264
|
|
Highland acquisition
|
|
|
10,222
|
|
Foreign currency translation changes
|
|
|
11,294
|
|
|
|
|
|
|
Balance at December 30, 2006
|
|
|
287,789
|
|
SRI acquisition
|
|
|
63,076
|
|
Calsafe acquisition
|
|
|
6,900
|
|
Foreign currency translation changes
|
|
|
2,845
|
|
|
|
|
|
|
Balance at December 29, 2007
|
|
$
|
360,610
|
|
|
|
|
|
|
Amortizable intangible assets as of December 29, 2007
consisted of the following, and includes an estimated
$30.0 million for SRI, pending completion of a formal
valuation:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Customer relationships
|
|
$
|
26,832
|
|
|
$
|
26,508
|
|
Trade names
|
|
|
16,736
|
|
|
|
16,568
|
|
Employee agreements
|
|
|
4,858
|
|
|
|
4,782
|
|
Technology
|
|
|
4,118
|
|
|
|
4,042
|
|
Estimated SRI intangibles
|
|
|
30,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
82,544
|
|
|
|
51,900
|
|
Less accumulated amortization
|
|
|
(10,003
|
)
|
|
|
(4,225
|
)
|
|
|
|
|
|
|
|
|
|
Total amortizable intangible assets, net
|
|
$
|
72,541
|
|
|
$
|
47,675
|
|
|
|
|
|
|
|
|
|
|
Future annual amortization of intangible assets as of
December 29, 2007 is as follows and includes an estimated
$4.0 million annually for SRI, pending completion of a
formal valuation:
|
|
|
|
|
|
|
(In thousands)
|
|
2008
|
|
$
|
9,152
|
|
2009
|
|
|
9,012
|
|
2010
|
|
|
8,966
|
|
2011
|
|
|
7,797
|
|
2012
|
|
|
7,313
|
|
|
|
|
|
|
|
|
$
|
42,240
|
|
|
|
|
|
|
F-24
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 8
|
Discontinued
Operations
|
Discontinued operations consist of the retail operations closed
or sold during 2005 and 2004 that were reclassified in 2005 as
discontinued operations and the Companys former consumer
finance business which was exited in 2003. The loss from
discontinued operations for the year ended December 31,
2005 was comprised primarily of an operating loss from
discontinued retail operations of $2.3 million and a net
loss of $2.0 for sales centers sold or to be sold. Retail assets
sold in 2005 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 2005 the discontinued retail operations had
net sales of approximately $26 million. In connection with
the disposals of retail businesses during 2005, intercompany
manufacturing profit of $2.4 million was recognized in the
consolidated statement of operations as a result of the
liquidation of retail inventory, which is not classified as
discontinued operations.
The assets and liabilities of discontinued operations are
included in the consolidated balance sheet in other current
assets totaling $0.4 million in 2007 and $0.5 million
in 2006, other non-current assets totaling $0.3 million in
2007 and $1.1 million in 2006, and other current
liabilities totaling $1.3 million in 2007 and
$2.6 million in 2006.
|
|
NOTE 9
|
Redeemable
Convertible Preferred Stock
|
At January 1, 2005, redeemable convertible preferred stock
consisted of $8.75 million of Series C and
$12 million of
Series B-2
with mandatory redemption dates of April 2, 2009 and
July 3, 2008, respectively. Both Series had a 5% annual
dividend that was payable quarterly, at the Companys
option, in cash or common stock. Also at January 1, 2005,
the preferred shareholder held a warrant that was issued by the
Company, which was exercisable based on approximately
2.2 million shares at the strike price at April 2,
2005 of $12.27 per share. The warrant had an expiration date of
April 2, 2009 and was exercisable only on a non-cash, net
basis, whereby the warrant holder would receive shares of common
stock as payment for any net gain upon exercise.
On April 18, 2005, the Company repurchased and subsequently
cancelled the common stock warrant in exchange for a cash
payment of $4.5 million and 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 Company recorded mark-to-market
adjustments for the change in estimated fair value of the
warrant of a credit of $4.3 million in 2005.
F-25
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
NOTE 10
|
Earnings
per Share
|
The Companys potentially dilutive securities consist of
convertible debt, outstanding stock options and awards,
convertible preferred stock and common stock warrants.
Convertible preferred stock, convertible debt or common stock
warrants were not considered in determining the denominator for
diluted earnings per share (EPS) in any period
presented because the effect would have been antidilutive. A
reconciliation of the numerators and denominators used in the
Companys basic and diluted EPS calculations is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
7,192
|
|
|
$
|
138,308
|
|
|
$
|
37,805
|
|
Plus loss from discontinued operations
|
|
|
|
|
|
|
16
|
|
|
|
4,383
|
|
Less preferred stock dividends
|
|
|
|
|
|
|
|
|
|
|
(293
|
)
|
Less amount allocated to participating securities holders
|
|
|
|
|
|
|
|
|
|
|
(1,025
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations available to common
shareholders for basic and diluted EPS
|
|
|
7,192
|
|
|
|
138,324
|
|
|
|
40,870
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
|
|
|
|
|
(16
|
)
|
|
|
(4,383
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations available to common
shareholders for basic and diluted EPS
|
|
|
|
|
|
|
(16
|
)
|
|
|
(4,383
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available to common shareholders for basic and diluted EPS
|
|
$
|
7,192
|
|
|
$
|
138,308
|
|
|
$
|
36,487
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares for basic EPS weighted average shares
outstanding
|
|
|
76,916
|
|
|
|
76,334
|
|
|
|
74,891
|
|
Plus effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and awards
|
|
|
803
|
|
|
|
1,244
|
|
|
|
1,143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares for diluted EPS
|
|
|
77,719
|
|
|
|
77,578
|
|
|
|
76,034
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The earnings per share calculation for 2005 included an
allocation of income to participating securities pursuant to the
provisions of
EITF 03-6,
Participating Securities and the Two-Class Method
under FASB Statement No. 128. The Companys
participating securities during 2005 consisted of its
convertible preferred stock and its common stock warrant. As a
result of the repurchase and cancellation of the warrant and the
conversion of all convertible preferred stock in April 2005, the
Companys participating securities have been eliminated for
future periods.
|
|
NOTE 11
|
Shareholders
Equity
|
The Company has 120 million shares of common stock
authorized. In addition, there are 5 million authorized
shares of preferred stock, without par value, the issuance of
which is subject to approval by the Board of Directors. The
Board has the authority to fix the number, rights, preferences
and limitations of the shares of each series, subject to
applicable laws and the provisions of the Articles of
Incorporation.
|
|
NOTE 12
|
Fair
Value of Financial Instruments
|
The Company estimates the fair value of its financial
instruments in accordance with SFAS No. 107,
Disclosure About Fair Value of Financial
Instruments. Fair value estimates are made at a specific
point in time, based on relevant market data and information
about the financial instrument. The estimated fair values of all
financial instruments approximate book values due to the
instruments short term maturities, except for the
Companys Convertible Notes, Senior Notes and Term Loans,
which were valued based upon trading activity and
managements estimates.
F-26
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The book value and estimated fair value of the Companys
financial instruments are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 29, 2007
|
|
|
December 30, 2006
|
|
|
|
Book
|
|
|
Estimated
|
|
|
Book
|
|
|
Estimated
|
|
|
|
Value
|
|
|
Fair Value
|
|
|
Value
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
|
Cash and cash equivalents
|
|
$
|
135,408
|
|
|
$
|
135,408
|
|
|
$
|
70,208
|
|
|
$
|
70,208
|
|
Convertible Notes due 2037
|
|
|
180,000
|
|
|
|
160,200
|
|
|
|
|
|
|
|
|
|
Term Loan due 2012
|
|
|
55,750
|
|
|
|
54,078
|
|
|
|
71,000
|
|
|
|
70,290
|
|
SRI Note Payable
|
|
|
24,528
|
|
|
|
24,528
|
|
|
|
|
|
|
|
|
|
Sterling Term Loan due 2012
|
|
|
88,386
|
|
|
|
85,734
|
|
|
|
87,623
|
|
|
|
86,390
|
|
Senior Notes due 2009
|
|
|
6,716
|
|
|
|
6,850
|
|
|
|
82,298
|
|
|
|
81,064
|
|
Other long-term debt
|
|
|
13,402
|
|
|
|
13,402
|
|
|
|
13,696
|
|
|
|
13,696
|
|
Earnout obligations
|
|
|
13,252
|
|
|
|
13,252
|
|
|
|
|
|
|
|
|
|
The Company borrowed £45 million in the U.S. to
finance a portion of the Caledonian purchase price totaling
approximately £62 million. This Sterling denominated
borrowing was designated as an economic hedge of the
Companys net investment in the UK. Therefore a significant
portion of foreign exchange risk related to the Caledonian
investment in the UK is eliminated. During 2007 and 2006, the
Company recorded an accumulated translation loss of
$2.2 million ($1.3 million, net of tax) and
$9.0 million ($5.5 million, net of tax), respectively,
in other comprehensive income for this hedging arrangement
|
|
NOTE 13
|
Contingent
Liabilities
|
As is customary in the manufactured housing industry, a
significant portion of the manufacturing segments sales to
independent retailers are made pursuant to repurchase agreements
with lending institutions that provide wholesale floor plan
financing to the retailers. Pursuant to these agreements,
generally for a period of up to 18 months from invoice date
of the sale of the homes and upon default by the retailers and
repossession by the financial institution, the Company is
obligated to purchase the related floor plan loans or repurchase
the homes from the lender. The contingent repurchase obligation
at December 29, 2007 was estimated to be approximately
$200 million, without reduction for the resale value of the
homes. Losses under repurchase obligations represent the
difference between the repurchase price and the estimated net
proceeds from the resale of the homes, less accrued rebates,
which will not be paid. Annual losses incurred on homes
repurchased totaled $0.1 million in 2007 and 2006 and
$0.3 million in 2005.
The Company lowered its wholesale repurchase reserves by
$1.2 million in 2006 and $1.0 million in 2005 as a
result of reduced repurchases during the years and improved
financial condition of its largest retailers.
At December 29, 2007 the Company was contingently obligated
for approximately $55.7 million under letters of credit,
primarily comprised of $41.5 million to support insurance
reserves and $12.6 million to support long-term debt.
Champion was also contingently obligated for $19.4 million
under surety bonds, generally to support license and service
bonding requirements. Approximately $54.2 million of the
letters of credit support insurance reserves and debt that are
reflected as liabilities in the consolidated balance sheet.
At December 29, 2007 certain of the Companys
subsidiaries were contingently obligated under reimbursement
agreements for approximately $2.5 million of debt of
unconsolidated affiliates, none of which was reflected in the
consolidated balance sheet. These obligations are related to
indebtedness of certain manufactured housing community
developments, which are collateralized by the properties.
The Company has provided various representations, warranties and
other standard indemnifications in the ordinary course of its
business, in agreements to acquire and sell business assets and
in financing arrangements. The Company is subject to various
legal proceedings and claims that arise in the ordinary course
of its business.
F-27