Champion Homes - 10-Q quarterly report FY

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).o Yes o No

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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). o Yes þ No

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

The accompanying unaudited interim consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the consolidated financial position as of November 30, 2010, in addition to the consolidated results of operations and consolidated cash flows for the three-month and six-month periods ended November 30, 2010 and 2009. Due to the seasonal nature of the Corporation’s business, interim results are not necessarily indicative of results for the entire year.

The unaudited interim consolidated financial statements included herein have been prepared pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly, certain information and footnote disclosures normally accompanying the annual consolidated financial statements have been omitted. The audited consolidated balance sheet as of May 31, 2010 and the unaudited interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Corporation’s latest annual report on Form 10-K.

Certain prior period amounts have been reclassified to conform to the current year presentation.

In July 2010, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) 2010-20, “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” ASU 2010-20 requires entities to provide new financial statement disclosures regarding financing receivables, including credit risk exposures and the allowance for credit losses. For public entities, this ASU is effective for reporting periods ending on or after December 15, 2010 for disclosures of financing receivables as of the end of a reporting period. Financing receivables disclosures relating to activity occurring during a reporting period are required to be adopted for periods beginning on or after December 15, 2010. The Corporation does not expect the adoption of ASU 2010-20 to have a material effect on its future financial condition or results of operations.

The Corporation invests in United States Government securities, which are typically held until maturity and are therefore classified as held-to-maturity and carried at amortized cost. The following is a summary of the securities (dollars in thousands):

The fair value is determined by a secondary market for U.S. Government Securities. At November 30 and May 31, 2010, the U.S. Treasury Bills matured within three and four months, respectively.

Trade receivables are based on the amounts billed to dealers and communities. The Corporation does not accrue interest on any of its trade receivables.

Inventories are stated at the lower of cost or market. Cost is determined under the first-in, first-out method. Physical inventory counts are taken at the end of each reporting quarter.

Total inventories consist of the following:

Property, plant and equipment are stated at cost. Depreciation is computed over the estimated useful lives of the assets using the straight-line method for financial statement reporting and accelerated methods for income tax reporting purposes. Estimated useful lives for significant classes of property, plant and equipment, including idle property, are as follows: Building and improvements 10 to 30 years; machinery and equipment 5 to 8 years. Idle property, net of depreciation represents the net book value of idle manufacturing facilities in the following locations: Hemet, California; Ocala, Florida; Halstead, Kansas; Mocksville, North Carolina and Ephrata, Pennsylvania.

The Corporation provides the retail purchaser of its manufactured homes with a full fifteen-month warranty against defects in design, materials and workmanship. Recreational vehicles are covered by a one-year warranty. The warranties are backed by service departments located at the Corporation’s manufacturing facilities and an extensive field service system.

Estimated warranty costs are accrued at the time of sale based upon current sales, historical experience and management’s judgment regarding anticipated rates of warranty claims. The adequacy of the recorded warranty liability is periodically assessed and the amount is adjusted as necessary.

A reconciliation of accrued warranty and related expenses is as follows:

The Corporation recognizes deferred tax assets based on differences between the carrying values of assets for financial and tax reporting purposes. The realization of the deferred tax assets is dependent upon the generation of sufficient future taxable income. Generally accepted accounting principles require that an entity consider both negative and positive evidence in determining whether a valuation allowance is warranted. In comparing negative and positive evidence, continual losses in recent years is considered significant, negative, objective evidence that deferred tax assets may not be realized in the future, and generally is assigned more weight than subjective positive evidence of the realizability of deferred tax assets. As a result of its extensive evaluation of both positive and negative evidence, management recorded a full valuation allowance against its deferred tax assets during the fourth quarter of fiscal 2010.

The Corporation’s gross deferred tax assets of approximately $23 million consist of approximately $12 million in federal net operating loss and tax credit carryforwards, $5 million in state net operating loss carryforwards, and $6 million resulting from temporary differences between financial and tax reporting. The federal net operating loss and tax credit carryforwards have a life expectancy of twenty years.

The state net operating loss carryforwards have a life expectancy, depending on the state where a loss was incurred, between five and twenty years. If the Corporation, after considering future negative and positive evidence regarding the realization of deferred tax assets, determines that a lesser valuation allowance is warranted, it would record a reduction to income tax expense and the valuation allowance in the period of determination.

The Corporation was contingently liable at November 30, 2010 under repurchase agreements with certain financial institutions providing inventory financing for dealers of its products. Under these arrangements, which are customary in the manufactured housing and recreational vehicle industries, the Corporation agrees to repurchase units in the event of default by the dealer at declining prices over the term of the agreement. The period to potentially repurchase units is between 12 to 24 months.

The maximum repurchase liability is the total amount that would be paid upon the default of the Corporation’s independent dealers. The maximum potential repurchase liability, without reduction for the resale value of the repurchased units, was approximately $46 million at November 30, 2010 and approximately $49 million at May 31, 2010.

The risk of loss under these agreements is spread over many dealers and financial institutions. The loss, if any, under these agreements is the difference between the repurchase cost and the resale value of the units. The Corporation estimates the fair value of this commitment considering both the contingent losses and the value of the guarantee. This amount has historically been insignificant. The Corporation believes that any potential loss under the agreements in effect at November 30, 2010 will not be material to its financial position or results of operations.

The amounts of obligations from repurchased units and incurred net losses for the periods presented are as follows:

The Corporation is a party to various pending legal proceedings in the normal course of business. Management believes that any losses resulting from such proceedings would not have a material adverse effect on the Corporation’s results of operations or financial position.

The Corporation designs, produces and distributes manufactured housing, modular housing and recreational vehicles (travel trailers, fifth wheels and park models). Manufactured housing represents homes built according to a national building code; modular housing represents homes built to a local building code. The percentage allocation of manufactured housing and recreational vehicle sales is:

Total operating loss represents operating losses before interest income and benefit from income taxes with non-traceable operating expenses being allocated to industry segments based on percentages of sales. General corporate expenses are not allocated to the industry segments.

The Corporation designs, produces and distributes manufactured housing, modular housing and recreational vehicles (travel trailers, fifth wheels and park models) to independent dealers and manufactured housing communities located throughout the United States and Canada. Manufactured housing represents homes built according to a national building code; modular housing represents homes built to a local building code. To better serve the needs of its dealers and communities, the Corporation has thirteen active manufacturing facilities in ten states. Manufactured housing, modular housing and recreational vehicles are sold to dealers and communities either through floor plan financing with various financial institutions or on a cash basis. While the Corporation maintains production of manufactured housing, modular homes and recreational vehicles throughout the year, seasonal fluctuations in sales do occur. Sales and production of manufactured housing and modular housing are affected by winter weather conditions at the Corporation’s northern plants. Recreational vehicle sales are generally higher in the spring and summer months than in the fall and winter months.

Sales of manufactured housing, modular housing and recreational vehicles are affected by the strength of the U.S. economy, interest rate levels, consumer confidence and the availability of wholesale and retail financing. The manufactured housing industry has until recently been affected by a continuing decline in sales. This decline, caused primarily by adverse economic conditions, tightening retail and wholesale credit markets and a depressed site-built housing market, is resulting in historically low industry shipments. From January to November of 2010, however, total shipments were approximately 47,000 units, a 2 percent increase from the same period a year ago.

Tight credit markets for retail and wholesale financing have become a significant challenge for the manufactured housing industry. According to the Manufactured Housing Institute, a lack of retail financing options and restrictive credit standards has negatively affected manufactured home buyers. In addition, a significant decline has occurred in wholesale financing, especially as national floor plan lenders have decreased lending to industry dealers.

Sales of recreational vehicles are influenced by changes in consumer confidence, the availability of retail and wholesale financing and gasoline prices. Industry unit sales of travel trailers and fifth wheels have varied in recent years. From calendar 2007 to the first half of 2009 unit sales decreased as a result of recessionary conditions, decreased household wealth, tightening credit markets for retail and wholesale financing, and excess inventory of new recreational vehicles. Unit sales, however, started increasing in the last half of calendar 2009 and continues to date. The Recreational Vehicle Industry Association (RVIA), notes that economic uncertainty, continuing credit constraints, depressed home values, higher unemployment and lackluster income growth could slow the pace of the recovery.

The Corporation’s manufacturing and modular housing segment encountered increased sales in the first half of fiscal 2011, and management cannot determine with certainty if the increase is sustainable. This uncertainty is based on continuing negative economic conditions previously referenced.

The recreational vehicle segment experienced increased sales in the first half of fiscal 2011. Regarding the business environment for the last half of fiscal 2011, the RVIA forecasts calendar 2011 travel trailer and fifth wheel sales of approximately 203,000 units; a 4 percent increase from calendar 2010’s estimated total of approximately 195,000 units. Despite this favorable trend, business conditions for calendar 2011 could be negatively impacted by adverse factors previously referenced by the RVIA.

With a healthy position in cash and U.S. Treasury Bills, no bank debt, and experienced employees, the Corporation is prepared to meet the challenges ahead.

Manufactured and modular housing sales revenue decreased approximately 1 percent. The decrease was the result of:

In addition, total manufactured and modular housing unit shipments increased approximately 5 percent. The increase was the result of:

Total manufactured housing unit shipments increased approximately 13 percent. Industry unit shipments for these products decreased approximately 9 percent from September to November of 2010 as compared to the same period a year ago. Current industry unit shipment data for modular housing is not available.

The average sales per unit for domestic manufactured housing, Canadian manufactured housing and domestic modular housing products in the second quarter as compared to prior year decreased approximately 5, 19 and 8 percent, respectively. The decrease is primarily due to a shift in consumer preference toward homes with lower price points. The average sales per unit for Canadian modular housing products is unchanged from prior year.

Recreational vehicle sales revenue increased approximately 29 percent. The increase was the result of:

In addition, total recreational vehicle unit shipments increased approximately 49 percent. The increase was the result of:

During the second quarter, unit shipments for travel trailers and fifth wheels increased approximately 49 percent as compared to prior year while industry shipments for these products decreased approximately 6 percent. Current industry unit shipment data for park models is not available.

The average sales per unit for recreational vehicle products in the second quarter as compared to prior year decreased approximately 13 percent. The decrease is primarily due to a shift in consumer preference toward recreational vehicles with lower price points, and discounting to meet competitive market conditions.

Pricing of all the Corporation’s products increased slightly in the second quarter of fiscal 2011 as compared to the second quarter of fiscal 2010. The increase was in response to higher material costs.

Manufactured and modular housing cost of sales, as well as recreational vehicle cost of sales, increased due to increased material costs and an improvement in unit shipments. In addition, prior year’s cost of sales included an $800,000 reduction in manufacturing costs related to a warranty accrual reduction based on lower sales.

As a percentage of sales, cost of sales increased due to a product mix shift toward product that has a higher material cost percentage relative to product sold in the prior year. In addition, cost of sales as a percentage of sales increased as a result of higher material costs and the warranty cost reduction that occurred in prior year.

Selling and administrative expenses, in dollars and as a percentage of sales, decreased slightly from prior year. Prior year’s expenses included a $600,000 increase in the Corporation’s liability for retirement and death benefits offered to certain employees. This increase was offset primarily by decreases in salaries and performance based compensation.

The operating loss for manufactured and modular housing, as well as recreational vehicles, increased primarily due to:

General corporate expenses decreased due to a $600,000 charge in the prior year for the Corporation’s liability for retirement and death benefits offered to certain employees.

Interest income is directly related to the amount available for investment and the prevailing yields of U.S. Government Securities. In the second quarter of fiscal 2011, the average amount available for investment was approximately $62 million with a weighted average yield of 0.08 percent. In the second quarter of fiscal 2010, the average amount available for investment was approximately $79 million with a weighted average yield of 0.03 percent.

The benefit from federal income taxes approximates the statutory rate and for state income taxes reflects current state rates effective for the period based upon activities within the taxable entities. The benefit for federal and state income tax is the result of pretax losses that occurred in the second quarter of fiscal 2010. The Corporation recorded a full valuation allowance against its deferred tax assets at May 31, 2010 and, as a result, reflects no income tax benefit during the current period, as any benefit is directly offset by a change in the valuation allowance. Additional information regarding income taxes is located in Note 7 in Notes to Consolidated Financial Statements included in this document under Item 1.

Manufactured housing and modular housing sales revenue increased approximately 9 percent. The increase was the result of:

Total manufactured and modular housing unit shipments increased approximately 14 percent. The increase was the result of: