##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
 For Quarterly period ended September 30, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
 For the transition period from  to
 Commission file number 1-9751
 CHAMPION ENTERPRISES, INC.
  Michigan
    
    38-2743168(State or other jurisdiction of incorporation or
    
    (I.R.S. Employerorganization)
    
    Identification No.)
 
 
    þ o
 
 þ o o
 o þ




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TABLE OF CONTENTS  PART I. FINANCIAL INFORMATIONItem 1. Financial StatementsItem 2. Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPART II. OTHER INFORMATIONItem 1A. Risk FactorsItem 6. Exhibits and Reports on Form 8-KSIGNATURESEXHIBIT INDEXEXHIBIT 10.1EXHIBIT 10.2Certification of Chief Executive Officer to Section 302Certification of Chief Financial Officer to Section 302Certification of CEO and CFO to Section 906    Table of Contents  
 PART I. FINANCIAL INFORMATION
 
  CHAMPION ENTERPRISES, INC.
 Unaudited
    
    
    UnauditedThree Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    October 1,
    
    
    September 30,
    
    
    October 1,2006
    
    
    2005
    
    
    2006
    
    
    2005Net sales
    
    $
    346,454
    
    
    $
    335,728
    
    
    $
    1,063,700
    
    
    $
    897,103Cost of sales
    
    
    289,563
    
    
    
    277,819
    
    
    
    895,677
    
    
    
    746,357Gross margin
    
    
    56,891
    
    
    
    57,909
    
    
    
    168,023
    
    
    
    150,746Selling, general and administrative expenses
    
    
    41,060
    
    
    
    36,995
    
    
    
    119,709
    
    
    
    105,397Mark-to-market credit for common stock warrant
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,300
    )Loss on debt retirement
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    901Operating income
    
    
    15,831
    
    
    
    20,914
    
    
    
    48,314
    
    
    
    48,748Interest income
    
    
    1,159
    
    
    
    980
    
    
    
    3,889
    
    
    
    2,682Interest expense
    
    
    (5,373
    )
    
    
    (4,340
    )
    
    
    (14,184
    )
    
    
    (13,549
    )Income from continuing operations
before income taxes
    
    
    11,617
    
    
    
    17,554
    
    
    
    38,019
    
    
    
    37,881Income tax (benefit) expense
    
    
    2,589
    
    
    
    950
    
    
    
    (104,514
    )
    
    
    1,850Income from continuing operations
    
    
    9,028
    
    
    
    16,604
    
    
    
    142,533
    
    
    
    36,031Income (loss) from discontinued operations, net
of taxes
    
    
    (13
    )
    
    
    (900
    )
    
    
    11
    
    
    
    (4,209
    )Net income
    
    $
    9,015
    
    
    $
    15,704
    
    
    $
    142,544
    
    
    $
    31,822Basic income (loss) per share:Income from continuing operations
    
    $
    0.12
    
    
    $
    0.22
    
    
    $
    1.87
    
    
    $
    0.47Loss from discontinued operations
    
    
    
    
    
    
    (0.01
    )
    
    
    
    
    
    
    (0.06
    )Basic income per share
    
    $
    0.12
    
    
    $
    0.21
    
    
    $
    1.87
    
    
    $
    0.41Weighted shares for basic EPS
    
    
    76,456
    
    
    
    75,837
    
    
    
    76,304
    
    
    
    74,520Diluted earnings (loss) per share:Income from continuing operations
    
    $
    0.12
    
    
    $
    0.21
    
    
    $
    1.84
    
    
    $
    0.46Loss from discontinued operations
    
    
    
    
    
    
    (0.01
    )
    
    
    
    
    
    
    (0.06
    )Diluted income per share
    
    $
    0.12
    
    
    $
    0.20
    
    
    $
    1.84
    
    
    $
    0.40Weighted shares for diluted EPS
    
    
    77,486
    
    
    
    76,886
    
    
    
    77,512
    
    
    
    75,559
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CHAMPION ENTERPRISES, INC.
 UnauditedSeptember 30, 2006
    
    
    December 31, 2005ASSETSCurrent assetsCash and cash equivalents
    
    $
    106,439
    
    
    $
    126,979Accounts receivable, trade
    
    
    61,455
    
    
    
    46,186Inventories
    
    
    73,868
    
    
    
    76,391Current assets of business held for sale
    
    
    40,986
    
    
    
    36,069Deferred tax assets
    
    
    37,258
    
    
    
    441Other current assets
    
    
    7,783
    
    
    
    12,090Total current assets
    
    
    327,789
    
    
    
    298,156Property, plant and equipment
    
    
    240,244
    
    
    
    213,832Less-accumulated depreciation
    
    
    127,091
    
    
    
    123,144113,153
    
    
    
    90,688Goodwill and amortizable intangible assets
    
    
    331,091
    
    
    
    158,101Non-current assets of business held for sale
    
    
    627
    
    
    
    875Non-current deferred tax assets
    
    
    95,600
    
    
    
    Other non-current assets
    
    
    18,521
    
    
    
    18,834$
    886,781
    
    
    $
    566,654LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilitiesAccounts payable
    
    $
    73,107
    
    
    $
    27,812Accrued warranty obligations
    
    
    32,266
    
    
    
    33,509Accrued volume rebates
    
    
    31,388
    
    
    
    33,056Accrued compensation and payroll taxes
    
    
    15,980
    
    
    
    23,022Accrued self-insurance
    
    
    34,123
    
    
    
    30,968Current liabilities of business held for sale
    
    
    3,461
    
    
    
    5,361Other current liabilities
    
    
    46,364
    
    
    
    32,363Total current liabilities
    
    
    236,689
    
    
    
    186,091Long-term liabilitiesLong-term debt
    
    
    283,665
    
    
    
    201,727Long-term deferred tax liabilities
    
    
    34,623
    
    
    
    124Other long-term liabilities
    
    
    33,013
    
    
    
    31,407351,301
    
    
    
    233,258Contingent liabilities (Note 9)Shareholders equityCommon stock, $1 par value, 120,000 shares authorized,
76,456 and 76,045 shares issued and outstanding,
respectively
    
    
    76,456
    
    
    
    76,045Capital in excess of par value
    
    
    197,775
    
    
    
    192,905Retained earnings (accumulated deficit)
    
    
    20,681
    
    
    
    (121,863
    )Accumulated other comprehensive income
    
    
    3,879
    
    
    
    218Total shareholders equity
    
    
    298,791
    
    
    
    147,305$
    886,781
    
    
    $
    566,654
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CHAMPION ENTERPRISES, INC.
 UnauditedNine Months EndedSeptember 30, 2006
    
    
    October 1, 2005*Cash flows from operating activitiesNet income
    
    $
    142,544
    
    
    $
    31,822(Income) loss from discontinued operations
    
    
    (11
    )
    
    
    4,209Adjustments to reconcile net income to net cash provided
by continuing operating activities:Depreciation and amortization
    
    
    12,932
    
    
    
    7,726Stock-based compensation
    
    
    3,717
    
    
    
    4,009Change in deferred taxes
    
    
    (107,400
    )
    
    
    Fixed asset impairment charges
    
    
    1,200
    
    
    
    Mark-to-market credit for common stock warrant
    
    
    
    
    
    
    (4,300
    )Loss on debt retirement
    
    
    
    
    
    
    901Gain on disposal of fixed assets
    
    
    (4,470
    )
    
    
    (1,625
    )Increase/decreaseAccounts receivable
    
    
    11,844
    
    
    
    (27,617
    )Inventories
    
    
    3,269
    
    
    
    (13,039
    )Accounts payable
    
    
    4,270
    
    
    
    20,840Accrued liabilities
    
    
    (11,814
    )
    
    
    12,848Other, net
    
    
    3,321
    
    
    
    3,916Net cash provided by continuing operating activities
    
    
    59,402
    
    
    
    39,690Cash flows from investing activitiesAdditions to property, plant and equipment
    
    
    (14,279
    )
    
    
    (7,976
    )Acquisitions
    
    
    (153,290
    )
    
    
    (41,427
    )Investments in and advances to unconsolidated subsidiaries
    
    
    
    
    
    
    (55
    )Proceeds on disposal of fixed assets
    
    
    5,730
    
    
    
    5,221Net cash used for investing activities
    
    
    (161,839
    )
    
    
    (44,237
    )Cash flows from financing activitiesPayments on short-term debt
    
    
    
    
    
    
    (8,195
    )Payments on long-term debt
    
    
    (1,376
    )
    
    
    (277
    )Proceeds from Term Loan
    
    
    78,561
    
    
    
    Purchase of Senior Notes
    
    
    
    
    
    
    (9,885
    )Increase in deferred financing costs
    
    
    (1,076
    )
    
    
    Decrease in restricted cash
    
    
    698
    
    
    
    1Purchase of common stock warrant
    
    
    
    
    
    
    (4,500
    )Common stock issued, net
    
    
    1,955
    
    
    
    1,582Dividends paid on preferred stock
    
    
    
    
    
    
    (293
    )Net cash provided by (used for) financing activities
    
    
    78,762
    
    
    
    (21,567
    )Cash flows from discontinued operationsNet cash
provided by (used for) operating activities of discontinued operations
    
    
    600
    
    
    
    (3,493
    )Net cash provided by investing activities of discontinued operations
    
    
    568
    
    
    
    30,649Net cash used for financing activities of discontinued operations
    
    
    
    
    
    
    (12,249
    )Net cash provided by discontinued operations
    
    
    1,168
    
    
    
    14,907Effect of exchange rate changes on cash and cash equivalents
    
    
    1,967
    
    
    
    Net decrease in cash and cash equivalents
    
    
    (20,540
    )
    
    
    (11,207
    )Cash and cash equivalents at beginning of period
    
    
    126,979
    
    
    
    142,266Cash and cash equivalents at end of period
    
    $
    106,439
    
    
    $
    131,059
 
 *
    
    The 2005 Statement of Cash Flows has been revised to separately disclose the operating,
investing, and financing portions of the cash flows attributable to discontinued operations. These
amounts were previously reported on a combined basis.  Page 3 of 26




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CHAMPION ENTERPRISES, INC.
 Retained
    
    AccumulatedCapital in
    
    earnings
    
    otherCommon stock
    
    excess of
    
    (accumulated
    
    comprehensiveShares
    
    Amount
    
    par value
    
    deficit)
    
    income
    
    TotalBalance at December 31, 2005
    
    
    76,045
    
    
    $
    76,045
    
    
    $
    192,905
    
    
    $
    (121,863
    )
    
    $
    218
    
    
    $
    147,305Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    142,544
    
    
    
    
    
    
    
    142,544Stock options and benefit plans
    
    
    411
    
    
    
    411
    
    
    
    4,870
    
    
    
    
    
    
    
    
    
    
    
    5,281Foreign currency
translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,661
    
    
    
    3,661Balance at September 30, 2006
    
    
    76,456
    
    
    $
    76,456
    
    
    $
    197,775
    
    
    $
    20,681
    
    
    $
    3,879
    
    
    $
    298,791
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CHAMPION ENTERPRISES, INC.  Notes to Consolidated Financial Statements
       Recent accounting pronouncement
 Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109
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September 30,
    
    
    December 31,2006
    
    
    2005(In thousands)Accounts receivable, trade
    
    $
    2,570
    
    
    $
    2,960Inventories
    
    
    37,825
    
    
    
    32,259Other current assets
    
    
    591
    
    
    
    850Total current assets of business held for sale
    
    
    40,986
    
    
    
    36,069Property, plant and equipment
    
    
    1,133
    
    
    
    1,314Less-accumulated depreciation
    
    
    (903
    )
    
    
    (829
    )Net property, plant and equipment
    
    
    230
    
    
    
    485Other non-current assets
    
    
    397
    
    
    
    390Total non-current assets of business held for sale
    
    
    627
    
    
    
    875Total assets of business held for sale
    
    $
    41,613
    
    
    $
    36,944Accounts payable
    
    $
    815
    
    
    $
    1,303Accrued compensation & taxes
    
    
    2,268
    
    
    
    3,735Other liabilities
    
    
    378
    
    
    
    323Total current liabilities of business held for sale
    
    $
    3,461
    
    
    $
    5,361
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North American
    
    
    Calsafe group
    
    
    HighlandJuly 31, 2006
    
    
    April 7, 2006
    
    
    March 31, 2006(In thousands)Current assets
    
    $
    1,983
    
    
    $
    36,652
    
    
    $
    4,005Property, plant and equipment
    
    
    3,553
    
    
    
    12,628
    
    
    
    4,065Goodwill & amortizable intangible assets
    
    
    28,193
    
    
    
    121,249
    
    
    
    17,744Other non-current assets
    
    
    75
    
    
    
    112
    
    
    
    Total assets
    
    
    33,804
    
    
    
    170,641
    
    
    
    25,814Current liabilities
    
    
    3,078
    
    
    
    47,443
    
    
    
    2,923Long-term liabilities
    
    
    
    
    
    
    11,738
    
    
    
    Net assets of acquired business
    
    $
    30,726
    
    
    $
    111,460
    
    
    $
    22,891
  Amortization
    
    
    Expected AnnualAmount
    
    
    Period
    
    
    Amortization(In thousands)
    
    
    (Years)
    
    
    (In thousands)HighlandTrade names
    
    $
    2,600
    
    
    
    15
    
    
    $
    173Customer relationships
    
    
    4,200
    
    
    
    15
    
    
    
    280Other amortizable intangible assets
    
    
    520
    
    
    
    7
    
    
    
    74Goodwill
    
    
    10,424
    
    
    
    
    
    
    
    Total goodwill and amortizable intangible assets
    
    $
    17,744
    
    
    
    
    
    
    $
    527Calsafe groupTrade names
    
    $
    7,833
    
    
    
    15
    
    
    $
    522Customer relationships
    
    
    15,213
    
    
    
    10
    
    
    
    1,521Technology
    
    
    3,649
    
    
    
    3-5
    
    
    
    793Employee agreements
    
    
    3,574
    
    
    
    5
    
    
    
    715Goodwill
    
    
    90,980
    
    
    
    
    
    
    
    Total goodwill and amortizable intangible assets
    
    $
    121,249
    
    
    
    
    
    
    $
    3,551
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Unaudited
    
    UnauditedThree Months Ended
    
    Nine Months EndedSeptember 30,
    
    October 1,
    
    September 30,
    
    October 1,2006
    
    2005
    
    2006
    
    2005(In thousands, except per share amounts)Net sales
    
    $
    348,769
    
    
    $
    399,651
    
    
    $
    1,128,607
    
    
    $
    1,125,170Net income
    
    
    9,296
    
    
    
    17,733
    
    
    
    148,121
    
    
    
    40,211Diluted income per share
    
    $
    0.12
    
    
    $
    0.23
    
    
    $
    1.91
    
    
    $
    0.53
   Nine Months EndedSeptember 30,
    
    
    October 1,2006
    
    
    2005(In thousands)Continuing operationsTax at federal statutory tax rates
    
    $
    13,400
    
    
    $
    13,300(Decrease) increase in rate resulting from:Permanent differences
    
    
    (1,800
    )
    
    
    (1,200
    )Adjustment of deferred tax valuation allowance
    
    
    (116,000
    )
    
    
    (10,400
    )State taxes and other
    
    
    (114
    )
    
    
    150Total income tax (benefit) expense
    
    $
    (104,514
    )
    
    $
    1,850
 Nine Months EndedSeptember 30,
    
    
    October 1,2006
    
    
    2005(In thousands)Discontinued operationsTax at federal statutory tax rates
    
    $
    
    
    
    $
    (1,500
    )Increase in rate resulting from:Adjustment of deferred tax valuation allowance
    
    
    
    
    
    
    1,500Total income tax
    
    $
    
    
    
    $
    
    September
30, 2006
    
    

December
31, 2005(In thousands)New manufactured homes
    
    $
    19,406
    
    
    $
    24,228Raw materials
    
    
    40,989
    
    
    
    41,525Work-in-process
    
    
    13,473
    
    
    
    10,638$
    73,868
    
    
    $
    76,391
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Nine Months EndedSeptember 30,
    
    
    October 1,2006
    
    
    2005(In thousands)Reserves at beginning of year
    
    $
    40,009
    
    
    $
    40,051Warranty expense provided
    
    
    38,094
    
    
    
    36,160Warranty reserves from acquisitions
    
    
    513
    
    
    
    1,783Cash warranty payments
    
    
    (39,850
    )
    
    
    (39,129
    )Reserves at end of quarter
    
    $
    38,766
    
    
    $
    38,865
  September 30,
    
    
    December 31,2006
    
    
    2005(In thousands)7.625% Senior Notes due 2009
    
    $
    89,273
    
    
    $
    89,273Term Loan due 2012
    
    
    99,000
    
    
    
    99,750Sterling Term Loan due 2012
    
    
    83,730
    
    
    
    Obligations under industrial revenue bonds
    
    
    12,430
    
    
    
    12,430Other debt
    
    
    1,305
    
    
    
    1,539Total debt
    
    
    285,738
    
    
    
    202,992Less: current portion of long-term debt
    
    
    (2,073
    )
    
    
    (1,265
    )Long-term debt
    
    $
    283,665
    
    
    $
    201,727
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Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    October 1,
    
    
    September 30,
    
    
    October 1,2006
    
    
    2005
    
    
    2006
    
    
    2005(In thousands)NumeratorNet income
    
    $
    9,015
    
    
    $
    15,704
    
    
    $
    142,544
    
    
    $
    31,822Less income/plus loss from discontinued operations
    
    
    13
    
    
    
    900
    
    
    
    (11
    )
    
    
    4,209Less preferred stock dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (293
    )Less amount allocated to participating securities holders
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (988
    )Income from continuing operations available to common
shareholders for basic and diluted EPS
    
    
    9,028
    
    
    
    16,604
    
    
    
    142,533
    
    
    
    34,750Income (loss) from discontinued operations
    
    
    (13
    )
    
    
    (900
    )
    
    
    11
    
    
    
    (4,209
    )Income (loss) from discontinued operations available to
common shareholders for basic and diluted EPS
    
    
    (13
    )
    
    
    (900
    )
    
    
    11
    
    
    
    (4,209
    )Income available to common shareholders for basic and
diluted EPS
    
    $
    9,015
    
    
    $
    15,704
    
    
    $
    142,544
    
    
    $
    30,541DenominatorShares for basic EPSweighted average shares outstanding
    
    
    76,456
    
    
    
    75,837
    
    
    
    76,304
    
    
    
    74,520Stock options and awards
    
    
    1,030
    
    
    
    1,049
    
    
    
    1,208
    
    
    
    1,039Shares for diluted EPS
    
    
    77,486
    
    
    
    76,886
    
    
    
    77,512
    
    
    
    75,559
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Three Months EndedSeptember 30,
    
    
    October 1,2006
    
    
    2005(In thousands)Net salesManufacturing segment
    
    $
    293,417
    
    
    $
    310,239International segment
    
    
    30,946
    
    
    
    Retail segment
    
    
    31,391
    
    
    
    36,789Less: intercompany
    
    
    (9,300
    )
    
    
    (11,300
    )Consolidated net sales
    
    $
    346,454
    
    
    $
    335,728Income from continuing operations before income taxes:Manufacturing segment income
    
    $
    19,553
    
    
    $
    27,318International segment income
    
    
    1,959
    
    
    
    Retail segment income
    
    
    2,425
    
    
    
    2,184General corporate expenses
    
    
    (7,184
    )
    
    
    (8,788
    )Amortization of intangibles
    
    
    (1,122
    )
    
    
    Interest expense, net
    
    
    (4,214
    )
    
    
    (3,360
    )Intercompany eliminations
    
    
    200
    
    
    
    200Income from continuing operations before income taxes
    
    $
    11,617
    
    
    $
    17,554
 Nine Months EndedSeptember 30,
    
    
    October 1,2006
    
    
    2005(In thousands)Net salesManufacturing segment
    
    $
    945,011
    
    
    $
    840,572International segment
    
    
    58,077
    
    
    
    Retail segment
    
    
    93,712
    
    
    
    100,731Less: intercompany
    
    
    (33,100
    )
    
    
    (44,200
    )Consolidated net sales
    
    $
    1,063,700
    
    
    $
    897,103Income from continuing operations before income taxes:Manufacturing segment income
    
    $
    66,558
    
    
    $
    63,315International segment income
    
    
    3,158
    
    
    
    Retail segment income
    
    
    6,317
    
    
    
    6,052General corporate expenses
    
    
    (24,406
    )
    
    
    (25,818
    )Amortization of intangibles
    
    
    (2,513
    )
    
    
    Mark-to-market credit for common stock warrant
    
    
    
    
    
    
    4,300Loss on debt retirement
    
    
    
    
    
    
    (901
    )Interest expense, net
    
    
    (10,295
    )
    
    
    (10,867
    )Intercompany eliminations
    
    
    (800
    )
    
    
    1,800Income from continuing operations before income taxes
    
    $
    38,019
    
    
    $
    37,881
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    October 1,
    
    
    September 30,
    
    
    October 1,2006
    
    
    2005
    
    
    2006
    
    
    2005(In thousands)Income (loss) from retail operations
    
    $
    (9
    )
    
    $
    (872
    )
    
    $
    30
    
    
    $
    (4,159
    )Loss from consumer finance business
    
    
    (4
    )
    
    
    (28
    )
    
    
    (19
    )
    
    
    (50
    )Total income (loss) from discontinued operations
    
    $
    (13
    )
    
    $
    (900
    )
    
    $
    11
    
    
    $
    (4,209
    )
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Nine Months EndedSeptember 30,2006(In thousands)Balance at beginning of year
    
    $
    4,330Cash payments:Warranty costs
    
    
    (1,541
    )Other costs
    
    
    (343
    )Balance September 30, 2006
    
    $
    2,446Period end balance comprised of:Warranty costs
    
    $
    2,291Other costs
    
    
    155$
    2,446
   Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    October 1,
    
    
    September 30,
    
    
    October 1,2006
    
    
    2005
    
    
    2006
    
    
    2005(In thousands)Net income
    
    $
    9,015
    
    
    $
    15,704
    
    
    $
    142,544
    
    
    $
    31,822Other comprehensive incomeForeign currency translation adjustments
    
    
    1,160
    
    
    
    155
    
    
    
    3,661
    
    
    
    291Total comprehensive income
    
    $
    10,175
    
    
    $
    15,859
    
    
    $
    146,205
    
    
    $
    32,113
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CHAMPION ENTERPRISES, INC.
 Results of Operations
Three and Nine Months Ended September 30, 2006
versus the Three and Nine Months Ended October 1, 2005
 Overview
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Page 15 of 26




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Consolidated Results
 Three Months EndedSeptember 30,
    
    
    October 1,
    
    
    %2006
    
    
    2005
    
    
    Change(Dollars in thousands)Net salesManufacturing segment
    
    $
    293,417
    
    
    $
    310,239
    
    
    
    (5
    %)International segment
    
    
    30,946
    
    
    
    Retail segment
    
    
    31,391
    
    
    
    36,789
    
    
    
    (15
    %)Less: intercompany
    
    
    (9,300
    )
    
    
    (11,300
    )Total net sales
    
    $
    346,454
    
    
    $
    335,728
    
    
    
    3
    %Gross margin
    
    $
    56,891
    
    
    $
    57,909
    
    
    
    (2
    %)Selling, general and administrative
expenses (SG&A)
    
    
    39,938
    
    
    
    36,995
    
    
    
    8
    %Amortization of intangible assets
    
    
    1,122
    
    
    
    Operating income
    
    $
    15,831
    
    
    $
    20,914
    
    
    
    (24
    %)As a percent of net salesGross margin
    
    
    16.4
    %
    
    
    17.2
    %SG&A
    
    
    11.5
    %
    
    
    11.0
    %Operating income
    
    
    4.6
    %
    
    
    6.2
    %
 Nine Months EndedSeptember 30,
    
    
    October 1,
    
    
    %2006
    
    
    2005
    
    
    Change(Dollars in thousands)Net salesManufacturing segment
    
    $
    945,011
    
    
    $
    840,572
    
    
    
    12
    %International segment
    
    
    58,077
    
    
    
    Retail segment
    
    
    93,712
    
    
    
    100,731
    
    
    
    (7
    %)Less: intercompany
    
    
    (33,100
    )
    
    
    (44,200
    )Total net sales
    
    $
    1,063,700
    
    
    $
    897,103
    
    
    
    19
    %Gross margin
    
    $
    168,023
    
    
    $
    150,746
    
    
    
    11
    %Selling, general and administrative expenses
    
    
    117,196
    
    
    
    105,397
    
    
    
    11
    %Amortization of intangible assets
    
    
    2,513
    
    
    
    Mark-to-market credit for common stock warrant
    
    
    
    
    
    
    (4,300
    )Loss on debt retirement
    
    
    
    
    
    
    901Operating income
    
    $
    48,314
    
    
    $
    48,748
    
    
    
    (1
    %)As a percent of net salesGross margin
    
    
    15.8
    %
    
    
    16.8
    %SG&A
    
    
    11.0
    %
    
    
    11.7
    %Operating income
    
    
    4.5
    %
    
    
    5.4
    %
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Manufacturing Segment
  Three Months EndedSeptember 30,
    
    
    October 1,
    
    
    %2006
    
    
    2005
    
    
    ChangeManufacturing segment net sales (in thousands)
    
    $
    293,417
    
    
    $
    310,239
    
    
    
    (5
    %)Manufacturing segment income (in thousands)
    
    $
    19,553
    
    
    $
    27,318
    
    
    
    (28
    %)Manufacturing segment margin %
    
    
    6.7
    %
    
    
    8.8
    %HUD-code home shipments
    
    
    3,587
    
    
    
    4,717
    
    
    
    (24
    %)U.S. modular home and unit shipments
    
    
    1,230
    
    
    
    1,088
    
    
    
    13
    %Canadian home shipments
    
    
    319
    
    
    
    272
    
    
    
    17
    %Total homes and units sold
    
    
    5,136
    
    
    
    6,077
    
    
    
    (15
    %)Floors sold
    
    
    9,917
    
    
    
    11,799
    
    
    
    (16
    %)Multi-section mix
    
    
    82
    %
    
    
    85
    %Average unit selling price, excluding delivery
    
    $
    52,400
    
    
    $
    47,300
    
    
    
    11
    %
 Nine Months EndedSeptember 30,
    
    
    October 1,
    
    
    %2006
    
    
    2005
    
    
    ChangeManufacturing segment net sales (in thousands)
    
    $
    945,011
    
    
    $
    840,572
    
    
    
    12
    %Manufacturing segment income (in thousands)
    
    $
    66,558
    
    
    $
    63,315
    
    
    
    5
    %Manufacturing segment margin %
    
    
    7.0
    %
    
    
    7.5
    %HUD-code home shipments
    
    
    12,537
    
    
    
    13,574
    
    
    
    (8
    %)U.S. modular home and unit shipments
    
    
    3,513
    
    
    
    2,736
    
    
    
    28
    %Canadian home shipments
    
    
    857
    
    
    
    732
    
    
    
    17
    %Total homes and units sold
    
    
    16,907
    
    
    
    17,042
    
    
    
    (1
    %)Floors sold
    
    
    22,362
    
    
    
    32,814
    
    
    
    (32
    %)Multi-section mix
    
    
    79
    %
    
    
    85
    %Average unit selling price, excluding delivery
    
    $
    51,100
    
    
    $
    45,700
    
    
    
    12
    %
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International Segment
   Three Months
    
    Nine MonthsEnded
    
    EndedSeptember 30,
    
    September 30,2006
    
    2006International segment net sales (in thousands)
    
    $
    30,946
    
    
    $
    58,077International segment income (in thousands)
    
    $
    1,959
    
    
    $
    3,158International segment margin %
    
    
    6.3
    %
    
    
    5.4
    %
  Retail Segment
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Three Months EndedSeptember 30,
    
    October 1,
    
    %2006
    
    2005
    
    ChangeRetail segment net sales (in thousands)
    
    $
    31,391
    
    
    $
    36,789
    
    
    
    (15
    %)Retail segment income (in thousands)
    
    $
    2,425
    
    
    $
    2,184
    
    
    
    11
    %Retail segment margin %
    
    
    7.7
    %
    
    
    5.9
    %New homes retail sold
    
    
    167
    
    
    
    193
    
    
    
    (13
    %)% Champion-produced new homes sold
    
    
    87
    %
    
    
    85
    %New home multi-section mix
    
    
    99
    %
    
    
    96
    %Average new home retail price
    
    $
    186,900
    
    
    $
    188,100
    
    
    
    (1
    %)
 Nine Months EndedSeptember 30,
    
    October 1,
    
    %2006
    
    2005
    
    ChangeRetail segment net sales (in thousands)
    
    $
    93,712
    
    
    $
    100,731
    
    
    
    (7
    %)Retail segment income (in thousands)
    
    $
    6,317
    
    
    $
    6,052
    
    
    
    4
    %Retail segment margin %
    
    
    6.7
    %
    
    
    6.0
    %New homes retail sold
    
    
    499
    
    
    
    560
    
    
    
    (11
    %)% Champion-produced new homes sold
    
    
    87
    %
    
    
    81
    %New home multi-section mix
    
    
    97
    %
    
    
    96
    %Average new home retail price
    
    $
    187,000
    
    
    $
    177,700
    
    
    
    5
    %
   Discontinued Operations
  Restructuring Charges
  Interest Income and Interest Expense
  Income Taxes
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Liquidity and Capital Resources
       Page 20 of 26




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Contingent liabilities and obligations
     Summary of liquidity and capital resources
  Critical Accounting Policies
  Impact of Recently Issued Accounting Pronouncements
 Page 21 of 26




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Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109
 Forward Looking Statements
  Page 22 of 26




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Page 23 of 26




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PART II. OTHER INFORMATION
 
   Operations in the United Kingdom
  Page 24 of 26




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Exhibit No.
    
    Description10.1
    
    Stock Purchase Agreement, by and
among, Champion Retail, Inc. and Bayshore Advantage, LLC, dated
September 8, 2006, for the sale of San Jose Advantage Homes, Inc.10.2
    
    First Amendment to the Stock
Purchase Agreement, by and among, Champion Retail, Inc. and Bayshore
Advantage, LLC, dated September 21, 2006, for the sale of San
Jose Advantage Homes, Inc.

31.1
    
    Certification of Chief Executive Officer dated November 1, 2006,
relating to the Registrants Quarterly Report on Form 10-Q for the
quarter ended September 30, 2006.31.2
    
    Certification of Chief Financial Officer dated November 1, 2006,
relating to the Registrants Quarterly Report on Form 10-Q for the
quarter ended September 30, 2006.32.1
    
    Certification of Chief Executive Officer and Chief Financial Officer
of the Registrant, dated November 1, 2006, pursuant to 18 U.S.C.
Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, relating to the Registrants Quarterly Report on Form
10-Q for the quarter ended September 30, 2006.
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SIGNATURES
  CHAMPION ENTERPRISES, INC.By:
    
    /s/ PHYLLIS A. KNIGHTPhyllis A. KnightExecutive Vice President andChief Financial Officer(Principal Financial Officer)And:
    
    /s/ RICHARD HEVELHORSTRichard HevelhorstVice President and Controller(Principal Accounting Officer)Dated: November 1, 2006
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Exhibit No.
    
    Description of Exhibits10.1
    
    Stock Purchase Agreement, by and
among, Champion Retail, Inc. and Bayshore Advantage, LLC, dated
September 8, 2006, for the sale of San Jose Advantage Homes, Inc.10.2
    
    First Amendment to the Stock
Purchase Agreement, by and among, Champion Retail, Inc. and Bayshore
Advantage, LLC, dated September 21, 2006, for the sale of San
Jose Advantage Homes, Inc.31.1
    
    Certification of Chief Executive Officer dated November 1, 2006,
relating to the Registrants Quarterly Report on
Form10-Q for the
quarter ended September 30, 2006.31.2
    
    Certification of Chief Financial Officer dated November 1, 2006,
relating to the Registrants Quarterly Report on Form 10-Q for the
quarter ended September 30, 2006.32.1
    
    Certification of Chief Executive Officer and Chief Financial Officer
of the Registrant, dated November 1, 2006, pursuant to 18 U.S.C.
Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, relating to the Registrants Quarterly Report on Form
10-Q for the quarter ended September 30, 2006.