CHB Champion Enterprises,

Deferred Tax Valuation Allowance and Weakness in U.S. Markets Drive Net Loss for the Quarter; Cash and Liquidity Remain Strong TROY, Mich., Nov. 5 /PRNewswire-FirstCall/ -- Champion Enterprises, Inc. (NYSE:CHB), a leader in factory-built construction, today announced results for its third quarter ended Sept. 27, 2008. Revenues for the quarter decreased 27.5 percent to $259.5 million compared to $357.7 million for the third quarter of 2007. The Company reported a loss before income taxes of $8.1 million for the third quarter compared to pretax income of $15.5 million in the same period of 2007. The loss before income taxes for the quarter included $6.0 million of expense to reduce the value of inventory at the Company's California-based retail operations to estimated market value. The Company reported a net loss for the quarter of $161.5 million, or $2.08 per diluted share, compared to net income of $12.9 million, or $0.17 per diluted share, for the same period of the prior year. During the quarter, the Company provided a valuation allowance for 100 percent of its U.S. deferred tax assets resulting in a non-cash charge of $150.8 million. "Conditions in our domestic housing markets further deteriorated during the quarter as the credit crisis deepened and economic concerns continued to escalate. Despite selling a similar number of homes as last quarter in the U.S., our Canadian units fell as retailers worked to reduce inventory levels in the face of increasing credit costs. This, coupled with increased raw material costs and greater competitive pressure resulted in reduced profits throughout North America," stated William Griffiths, chairman, president and chief executive officer of Champion Enterprises, Inc. "At the same time, our international segment reported less income than in recent quarters as prison spending in the U.K. returned to more normalized levels while investments in growth and diversification initiatives pressured margins. "We have reacted to these difficult market conditions by taking significant additional steps to reduce costs throughout the organization. Among these initiatives, we recently reduced our corporate staff by 35 percent and scaled back marketing, systems and certain business development programs which, together, are expected to reduce SG&A expenses by approximately $13 million through the end of 2009. Additionally, in an effort to maximize sales in weaker markets we are reviewing, and adjusting where needed, our U.S. product offerings to ensure they are appropriately positioned, in both price and features, for today's cautious homebuyers," Griffiths continued. "We will manage the business conservatively through the seasonally slower fourth and first quarters, strictly focused on cost containment and cash flow, particularly in today's uncertain markets. We believe that, with the increased flexibility provided by our recently amended senior credit facility, Champion will emerge a leaner organization well positioned for the future," Griffiths concluded. North American Manufacturing Segment -- Manufacturing segment net sales for the third quarter decreased 25.1 percent to $195.1 million compared to $260.4 million in the same period of the prior year. -- Manufacturing segment income for the third quarter totaled $8.8 million compared to $20.2 million in the third quarter of 2007, and the segment margin decreased to 4.5 percent for the quarter compared to 7.8 percent in the same period last year. The decrease in margin was in part driven by lower unit sales and backlog levels throughout the quarter, resulting in decreased factory utilization and efficiency despite previous capacity adjustments and workforce reductions. In addition, increased costs for raw materials and a challenging competitive environment contributed to weaker gross margins. -- Revenues from the sale of modular homes in the U.S. totaled $50 million for the quarter, down from $80 million in the third quarter of 2007. -- Segment backlogs totaled $40 million at Sept. 27, 2008, compared to $42 million at the end of last quarter and $64 million at the end of the third quarter of 2007. -- During the quarter, the Company strengthened its position in the Southeast by opening a leased manufacturing plant in Dresden, Tenn. as a temporary replacement for its facility in Henry, Tenn. that was destroyed by fire in February 2008, while the Company considers its options for a permanent solution. International Manufacturing Segment -- International segment net sales decreased 33.3 percent to $56.9 million for the quarter from $85.3 million in the same period of the prior year primarily as a result of reduced prison sector revenues. -- Segment income for the quarter was $2.7 million, down from $6.4 million in the third quarter of 2007, and the segment margin for the quarter was 4.7 percent, compared to 7.5 percent in the same period last year. The margin was negatively impacted by additional business development resources on staff and costs related to the additional capacity recently brought on line at the Company's new site in Driffield during a quarter with a reduced level of revenue. -- For the nine months ended Sept. 27, 2008, international segment revenues increased 26.0 percent to $237.8 million from $188.7 million for the same period of 2007. Segment income for the nine-month period grew to $15.0 million from $13.9 million last year, and the segment margin was 6.3 percent compared to 7.4 percent in the prior period. -- International segment order backlogs grew during the quarter, with firm contracts and orders pending contracts under framework agreements totaling approximately $235 million at Sept. 27, 2008 compared to approximately $205 million at the end of the second quarter. -- During the third quarter, the Company completed the leasehold improvements for three leased facilities near Driffield, East Yorkshire in the U.K., and ModularUK Building Systems Limited, acquired by Champion in February 2008, transferred its operations to the new facility. Retail Segment -- Retail segment third quarter 2008 revenues totaled $10.6 million, down 41.8 percent from $18.2 million for the same period last year. -- The retail segment reported a loss of $7.2 million for the quarter compared to $0.7 million of segment income in the third quarter of 2007. The segment loss for the third quarter of 2008 included $6.0 million of expense to reduce inventory values to reflect current housing market conditions in California. Other Items -- At the end of the third quarter, Champion provided a valuation allowance for 100 percent of its U.S. deferred tax assets resulting in a non-cash charge of $150.8 million. As a result, the Company's tax provisions in future periods will consist of income taxes on earnings of its foreign operations and certain state income taxes but generally will not include any federal income tax provision relating to its U.S. operations. Regardless of the valuation allowance, the Company may still utilize available U.S. federal tax loss carryforwards, which totaled approximately $233 million at the beginning of this fiscal year, to offset future taxable income generated in the U.S. until the carryforwards expire in 2023 through 2027. -- Cash provided by operating activities totaled $1.0 million for the quarter ended Sept. 27, 2008, compared to $4.7 million for the same period last year. During the quarter, the Company settled its obligation for $12.3 million of contingent consideration related to the fiscal 2007 performance of Caledonian Building Systems Limited, acquired by Champion in 2006, approximately $5.9 million of which was a reduction of operating cash flow. -- As previously announced, the Company borrowed $25.0 million under its revolving line of credit during the third quarter and, subsequent to quarter end, completed an amendment of its senior secured credit agreement. Pursuant to the amendment the Company repaid $10.0 million of the revolving loan and $23.5 million of its term debt. In the aggregate, these transactions resulted in a net debt reduction of $8.5 million. -- Cash, cash equivalents and short-term investments totaled $99.7 million as of Sept. 27, 2008 compared to $91.3 million at the end of last quarter and $111.3 million at the end of the third quarter of 2007. Third Quarter 2008 Conference Call Champion Enterprises will host a conference call on Wednesday, Nov. 5, 2008 at 11 a.m. EST to discuss these results and current business trends. To listen to the call, please call (800) 768-6570 for domestic callers or (785) 830-1942 for international callers. The passcode is 1979624. The call may also be heard live over the Internet at http://www.championhomes.com/ under the "Investors" link. A telephone replay of the call will be available approximately two hours after the call's conclusion through Friday, Nov. 14, 2008. To access the telephone replay, please call (888) 203-1112 for domestic callers or (719) 457-0820 for international callers. The passcode is 1979624. A webcast replay will be available on the Company's Web site for at least 90 days under the "Investors" link. About Champion Troy, Michigan-based Champion Enterprises, Inc., a leader in factory-built construction, operates 32 manufacturing facilities in North America and the United Kingdom working with independent retailers, builders and developers. The Champion family of builders produces manufactured and modular homes, as well as modular buildings for government and commercial applications. For more information, please visit http://www.championhomes.com/. Forward-Looking Statements This news release contains certain statements, including statements regarding selling, general and administrative expense reductions, cost containment, cash flow, Champion's future position, backlogs and pending orders, future tax provisions and use of U.S. federal tax loss carryforwards, each of which could be construed to be forward-looking statements within the meaning of the Securities Exchange Act of 1934. These statements reflect the Company's views with respect to future plans, events and financial performance. The Company does not undertake any obligation to update the information contained herein, which speaks only as of the date of this press release. The Company has identified certain risk factors which could cause actual results and plans to differ substantially from those included in the forward-looking statements. These factors are discussed in the Company's most recently filed Form 10-K and other filings with the Securities and Exchange Commission, in each case under the section entitled "Forward-Looking Statements," and those discussions regarding risk factors are incorporated herein by reference. - Tables Follow - CHAMPION ENTERPRISES, INC. CONSOLIDATED FINANCIAL SUMMARY (UNAUDITED) (Dollars and weighted shares in thousands, except per share amounts) Three Months Ended -------------------- Sept. 27, Sept. 29, % 2008 2007 Change -------- -------- ------- Net sales: Manufacturing segment $195,062 $260,379 (25.1%) International segment 56,876 85,286 (33.3%) Retail segment 10,612 18,233 (41.8%) Less: intercompany (3,100) (6,200) -------- -------- Total net sales 259,450 357,698 (27.5%) Cost of sales 228,373 296,802 (23.1%) -------- -------- Gross margin 31,077 60,896 (49.0%) Selling, general and administrative expenses 32,635 40,082 (18.6%) Restructuring charges - - Foreign currency transaction losses 76 - Amortization of intangible assets 2,346 1,454 61.3% -------- -------- Operating (loss) income (3,980) 19,360 (120.6%) Interest expense, net 4,097 3,853 6.3% -------- -------- (Loss) income before income taxes (8,077) 15,507 (152.1%) Income tax expense 153,444 2,582 -------- -------- Net (loss) income $(161,521) $12,925 ======== ======== Basic (loss) income per share $(2.08) $0.17 ======== ======== Weighted shares for basic EPS 77,794 77,062 ======== ======== Diluted (loss) income per share $(2.08) $0.17 ======== ======== Weighted shares for diluted EPS 77,794 77,848 ======== ======== Nine Months Ended ---------------------- Sept. 27, Sept. 29, % 2008 2007 Change --------- --------- -------- Net sales: Manufacturing segment $587,820 $717,994 (18.1%) International segment 237,755 188,704 26.0% Retail segment 29,057 57,657 (49.6%) Less: intercompany (9,300) (16,500) -------- -------- Total net sales 845,332 947,855 (10.8%) Cost of sales 735,225 803,074 (8.4%) -------- -------- Gross margin 110,107 144,781 (23.9%) Selling, general and administrative expenses 104,953 112,608 (6.8%) Restructuring charges 9,471 1,121 Foreign currency transaction losses 1,851 - Amortization of intangible assets 7,197 4,273 68.4% -------- -------- Operating (loss) income (13,365) 26,779 (149.9%) Interest expense, net 12,059 11,616 3.8% -------- -------- (Loss) income before income taxes (25,424) 15,163 (267.7%) Income tax expense 153,231 2,019 -------- -------- Net (loss) income $(178,655) $13,144 ======== ======== Basic (loss) income per share $(2.30) $0.17 ======== ======== Weighted shares for basic EPS 77,668 76,804 ======== ======== Diluted (loss) income per share $(2.30) $0.17 ======== ======== Weighted shares for diluted EPS 77,668 77,616 ======== ======== See accompanying Notes to Consolidated Financial Information. CHAMPION ENTERPRISES, INC. CONSOLIDATED CONDENSED BALANCE SHEETS (In thousands) (UNAUDITED)(UNAUDITED) Sept. 27, June 28, December 29, 2008 2008 2007 -------- -------- -------- Assets: Cash and cash equivalents $92,760 $84,370 $135,408 Short-term investments 6,950 6,950 - Accounts receivable 71,537 95,365 89,646 Inventories 71,059 82,703 90,782 Deferred tax assets 654 28,369 29,746 Other current assets 7,166 9,334 14,827 -------- -------- -------- Total current assets 250,126 307,091 360,409 -------- -------- -------- Property, plant and equipment, net 105,785 105,353 116,984 Goodwill and other intangible assets, net 418,722 433,667 433,151 Deferred tax assets - 97,298 87,983 Other non-current assets 21,118 22,313 23,696 -------- -------- -------- Total assets $795,751 $965,722 $1,022,223 ======== ======== ======== Liabilities and Shareholders' Equity: Short-term debt $43,716 $8,406 $25,884 Accounts payable 111,707 125,482 119,390 Other accrued liabilities 117,382 149,256 173,052 -------- -------- -------- Total current liabilities 272,805 283,144 318,326 -------- -------- -------- Long-term debt 319,364 336,804 342,897 Deferred tax liabilities 37,852 10,272 7,065 Other long-term liabilities 33,868 34,611 34,089 Shareholders' equity 131,862 300,891 319,846 -------- -------- -------- Total liabilities and shareholders' equity $795,751 $965,722 $1,022,223 ======== ======== ======== See accompanying Notes to Consolidated Financial Information. CHAMPION ENTERPRISES, INC. CONSOLIDATED CONDENSED CASH FLOW STATEMENTS (UNAUDITED) (In thousands) Three Months Ended Nine Months Ended ------------------- ------------------- Sept. 27, Sept. 29, Sept. 27, Sept. 29, 2008 2007 2008 2007 ------------------- ------------------- Net (loss) income $(161,521) $12,925 $(178,655) $13,144 Adjustments: Depreciation and amortization 5,728 5,004 17,540 15,036 Stock-based compensation (511) 679 346 2,235 Change in deferred taxes 153,134 72 144,526 (4,420) Fixed asset impairment charges - - 7,000 245 Compensation portion of UK earnout payment (5,884) - (5,884) - Insurance proceeds 3,291 - 5,791 - Gain on disposal of fixed assets (96) (40) (235) (633) Foreign currency transaction losses 76 - 1,851 - Increase/decrease: Accounts receivable 17,240 (27,948) 14,587 (53,107) Inventories 11,150 1,274 19,861 20,979 Accounts payable (7,025) 20,829 (2,649) 53,114 Accrued liabilities (15,841) (6,695) (37,428) (9,047) Other, net 1,220 (1,419) 768 (2,407) ------------------- ------------------- Cash provided by (used for) operating activities 961 4,681 (12,581) 35,139 ------------------- ------------------- Additions to property, plant and equipment (5,705) (1,847) (11,421) (5,494) Acquisition related payments (6,392) - (8,892) - Proceeds on disposal of fixed assets 322 236 2,850 3,640 Purchase of short-term investments, net - - (6,950) - Distributions from unconsolidated affiliates - - - 884 ------------------- ------------------- Cash used for investing activities (11,775) (1,611) (24,413) (970) ------------------- ------------------- Payments on debt (1,450) (541) (27,107) (1,577) Borrowings from revolving line of credit 25,000 - 25,000 - Decrease in restricted cash - - - 15 Common stock issued, net - 873 437 2,294 ------------------- ------------------- Cash provided by (used for) financing activities 23,550 332 (1,670) 732 ------------------- ------------------- Cash provided by discontinued operations 180 193 93 285 Effect of exchange rate changes on cash and cash equivalents (4,526) 2,932 (4,077) 5,888 ------------------- ------------------- Increase (decrease) in cash and cash equivalents 8,390 6,527 (42,648) 41,074 Cash and cash equivalents at beginning of period 84,370 104,755 135,408 70,208 ------------------- ------------------- Cash and cash equivalents at end of period $92,760 $111,282 $92,760 $111,282 =================== =================== See accompanying Notes to Consolidated Financial Information. CHAMPION ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED) (1) On December 21, 2007, the Company acquired substantially all of the assets and the business of SRI Homes Inc. ("SRI"), a producer of factory-built homes in western Canada. The results of operations for SRI are included in the Company's results and its manufacturing segment beginning in the first quarter of 2008. (2) The Company evaluates the performance of its manufacturing, international and retail segments based on income before amortization of intangible assets, interest, income taxes, foreign currency transaction gains and losses on intercompany indebtedness and general corporate expenses. A reconciliation of (loss) income before income taxes for the three and nine months ended is as follows (dollars in thousands): As a As a % of % of Three months ended: Sept. 27, Related Sept. 29, Related ------------------- 2008 Sales 2007 Sales ------------------------------------- Manufacturing segment income $8,753 4.5% $20,228 7.8% International segment income 2,673 4.7% 6,362 7.5% Retail segment (loss) income (7,184) (67.7)% 689 3.8% General corporate expenses (6,100) (6,665) Amortization of intangible assets (2,346) (1,454) Intercompany eliminations 300 200 Foreign currency transaction losses (76) - Interest expense, net (4,097) (3,853) -------- -------- (Loss) income before income taxes $(8,077) (3.1%) $15,507 4.3% ======== ======== As a As a % of % of Nine months ended: Sept. 27, Related Sept. 29, Related ------------------- 2008 Sales 2007 Sales ------------------------------------- Manufacturing segment income $13,325 2.3% $37,541 5.2% International segment income 14,951 6.3% 13,944 7.4% Retail segment (loss) income (10,991) (37.8)% 2,227 3.9% General corporate expenses (21,802) (23,360) Amortization of intangible assets (7,197) (4,273) Intercompany eliminations 200 700 Foreign currency transaction losses (1,851) - Interest expense, net (12,059) (11,616) -------- -------- (Loss) income before income taxes $(25,424) (3.0%) $15,163 1.6% ======== ======== (3) The Company provided a valuation allowance for 100% of its U.S. deferred tax assets resulting in a non-cash charge of $150.8 million during the three months ended September 27, 2008. (4) For the year-to-date period ended September 27, 2008, charges totaling $9.8 million were incurred in connection with the Company's decision to close a manufacturing facility in Oregon, close the last of four plants at an Indiana complex where the other three plants had been previously idled, and reduce the number of North American regional offices from four to two. Charges totaling $9.3 million were recorded in the manufacturing segment with the remaining $0.5 million included in general corporate expenses. During the same period in 2007, the Company recorded charges totaling $1.3 million related to the closure of a plant in Pennsylvania. A portion of these charges, totaling $0.3 million and $0.2 million in 2008 and 2007, respectively, was recorded in cost of sales, with the balance reported as restructuring charges. (5) For the three and nine month periods ended September 27, 2008, the Company's retail segment recorded charges of $6.0 million and $7.8 million, respectively, to reduce inventory values to reflect current housing market conditions in California. These charges are included in cost of sales. (6) During the nine months ended September 27, 2008, the Company repaid the $24.0 million (CAD) note issued in connection with its acquisition of SRI. (7) Gains on disposal of fixed assets resulted primarily from the sale of one idle plant for the year-to-date period ended September 27, 2008 and from the sale of two idle plants during the same period in 2007. CHAMPION ENTERPRISES, INC. OTHER STATISTICAL INFORMATION (UNAUDITED) Three months ended Nine Months Ended ------------------ ------------------ Sept. 27, Sept. 29, % Sept. 27, Sept. 29, % 2008 2007 Change 2008 2007 Change -------------------------- ------------------------- MANUFACTURING SEGMENT Units sold: HUD-Code 1,730 2,808 (38.4%) 4,988 7,720 (35.4%) Modular 684 980 (30.2%) 2,005 2,749 (27.1%) Canadian 621 441 40.8% 1,918 1,215 57.9% Other 31 29 6.9% 130 51 154.9% -------------------------- ------------------------- Total units sold 3,066 4,258 (28.0%) 9,041 11,735 (23.0%) Less: intercompany (33) (70) (52.9%) (131) (220) (40.5%) -------------------------- ------------------------- Units sold to independent retailers/ builders 3,033 4,188 (27.6%) 8,910 11,515 (22.6%) Floors sold 5,414 8,073 (32.9%) 16,051 22,536 (28.8%) Multi-section mix 69% 77% 68% 78% Average unit prices, excluding delivery Total $55,500 $54,800 1.3% $56,600 $55,000 2.9% HUD-Code $44,500 $44,300 0.5% $45,100 $45,000 0.2% Modular $68,400 $77,000 (11.2%) $69,400 $76,400 (9.2%) DATASOURCE: Champion Enterprises, Inc. CONTACT: Laurie Van Raemdonck, Vice President, Investor Relations, +1-248-614-8267, ; Phyllis Knight, Executive Vice President and CFO, +1-248-614-8200 Web site: http://www.championhomes.com/ Company News On-Call: http://www.prnewswire.com/comp/110861.html

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