Business context and reporting period
This is Skyline Champion Corporation’s unaudited Form 10-Q for the quarter ended December 26, 2020, the third quarter of fiscal 2021; comparable periods ended December 28, 2019. The filing describes a North American factory-built housing manufacturer with U.S. and Canadian manufacturing, U.S. retail centers, and transportation operations. The filing registrant is Skyline Champion Corporation (NYSE: SKY), notwithstanding the request metadata naming Champion Homes, Inc.
Financial performance and position
Unless otherwise noted, amounts below are in millions of U.S. dollars.
| Metric | Quarter ended Dec. 26, 2020 | Prior-year quarter | Nine months ended Dec. 26, 2020 | Prior-year nine months |
|---|---|---|---|---|
| Net sales | $377.6 | $342.2 | $973.2 | $1,068.6 |
| Gross profit / margin | $71.8 / 19.0% | $68.9 / 20.1% | $188.6 / 19.4% | $219.0 / 20.5% |
| Operating income / margin | $27.5 / 7.3% | $23.7 / 6.9% | $62.1 / 6.4% | $73.6 / 6.9% |
| Net income / diluted EPS | $21.6 / $0.38 | $17.0 / $0.30 | $51.0 / $0.90 | $52.2 / $0.92 |
| Adjusted EBITDA / margin | $32.1 / 8.5% | $29.7 / 8.7% | $83.5 / 8.6% | $94.3 / 8.8% |
Quarterly sales increased 10.3%, led by higher U.S. and Canadian home volumes and selling prices. For the nine-month period, sales declined 8.9%; lower home volumes and transportation sales reflected pandemic-related disruptions earlier in the fiscal year. Nine-month net income fell 2.2%, while Adjusted EBITDA declined 11.4%. Quarterly gross margin contracted primarily due to higher material costs, especially forest products; pricing, higher volumes, and labor efficiencies partly offset the pressure.
Operating cash flow was $103.8 million for the first nine months, versus $73.1 million a year earlier. Investing activities used $1.2 million and financing activities used $47.9 million; cash increased $57.6 million to $267.1 million. Management attributed stronger operating cash flow partly to customer deposits, CARES Act payroll-tax deferrals, and Canadian wage subsidies.
At December 26, 2020, cash was $267.1 million, total assets $825.9 million, and stockholders’ equity $532.2 million. Long-term debt was $39.3 million, down from $77.3 million at March 28, 2020; this excludes $25.6 million of floor-plan payables. The $100 million revolving facility had $39.2 million of available borrowings after $33.9 million of letters of credit. The company reported compliance with its debt covenants.
Material changes, outlook, risks, and unusual items
- Quarterly U.S. manufacturing and retail sales rose 10.3%, with homes sold up 6.2% and average selling price up 4.0%. Nine-month U.S. homes sold fell 9.3%. Canadian quarterly sales rose 15.5%; nine-month sales declined 9.3%.
- Unfilled U.S. and Canadian manufacturing orders were $488.5 million at quarter-end, versus $133.1 million a year earlier. Orders may be canceled without penalty. Management said demand significantly exceeded production, with output constrained by capacity, hiring and training, attendance, materials, and potential COVID-19 interruptions.
- Management cited continued opportunity from affordability, demographic trends, alternative dwelling units, and migration from urban to rural areas. It expects cash and operating cash flow to cover near-term working capital, capital spending, and debt obligations, and anticipates covenant compliance and adequate liquidity. No specific revenue, earnings, or margin guidance was provided.
- COVID-19 effects remained uncertain. As of quarter-end, one manufacturing facility was temporarily idled due to labor availability; intermittent facility closures and elevated absenteeism had occurred. Material prices were volatile and manufacturing costs had trended higher. Three retail centers were closed during the second quarter, leaving 18 open.
- The company recognized $6.2 million of Canadian wage subsidies and $0.8 million of U.S. wage subsidies during the nine months; no Canadian subsidy was recognized in the quarter. It also recognized a $1.7 million R&D tax-credit benefit in the quarter. A further $11.6 million of payroll taxes had been deferred, with payments beginning in December 2021.
- Contingent repurchase obligations to retailer floor-plan lenders were estimated at $148.8 million, excluding resale value of homes; the related loss reserve was $0.9 million. The company also had $34.3 million of surety-bond obligations and $33.9 million of letters of credit. Management did not expect legal proceedings or these contingencies to have a material adverse effect.
- Other principal risks include housing-market cyclicality and demand, labor and supply constraints, raw-material costs, COVID-19, competition, product quality and liability, regulation, interest and foreign-exchange rates, cybersecurity, and potential goodwill impairment.
Important facts for investors to verify
- Whether production can catch up with the unusually large, cancellable backlog without further labor, capacity, materials, or COVID-19 disruption.
- Whether rising material costs can be passed through to customers, and whether the recent gross-margin decline persists.
- How much reported operating cash flow depended on customer deposits, subsidies, and deferred payroll taxes, and the timing of the deferred tax payments.
- Revolver availability, covenant headroom, and potential cash exposure from repurchase agreements, letters of credit, surety bonds, and legacy guarantees.
- The durability of quarterly volume recovery and the gap between quarterly improvement and weaker nine-month sales and Adjusted EBITDA.