Business context and reporting period
This is Skyline Champion Corporation’s unaudited Form 10-Q for the quarter ended September 26, 2020, the second quarter of fiscal 2021; comparisons are with the quarter ended September 28, 2019. The company manufactures factory-built housing in the U.S. and Canada, operates retail sales centers, and provides transportation services. The filing identifies the registrant as Skyline Champion Corporation (NYSE: SKY), notwithstanding the request metadata’s “Champion Homes” label.
Financial performance
Dollar figures below are in millions, except per-share amounts and percentages.
| Metric | Three months ended Sep. 26, 2020 | Prior-year quarter | Six months ended Sep. 26, 2020 | Prior-year six months |
|---|---|---|---|---|
| Net sales | $322.4 | $354.5 | $595.7 | $726.3 |
| Gross profit / margin | $62.8 / 19.5% | $74.1 / 20.9% | $116.8 / 19.6% | $150.1 / 20.7% |
| Operating income / margin | $21.4 / 6.6% | $25.7 / 7.2% | $34.6 / 5.8% | $50.0 / 6.9% |
| Net income / diluted EPS | $17.5 / $0.31 | $17.7 / $0.31 | $29.4 / $0.52 | $35.1 / $0.62 |
| Adjusted EBITDA / margin | $28.9 / 9.0% | $32.5 / 9.2% | $51.5 / 8.6% | $64.6 / 8.9% |
Adjusted EBITDA is a non-GAAP measure; the company cautions it is not a substitute for GAAP results or a measure of cash available for discretionary use.
Cash flow, balance sheet, and debt
- First-half operating cash flow was $63.8 million, versus $52.2 million a year earlier. Investing used $1.3 million (prior year: $9.4 million); financing used $8.9 million (prior year: $14.8 million). Cash increased by $54.8 million to $264.3 million.
- At September 26, cash was $264.3 million; total assets were $829.5 million and stockholders’ equity was $507.4 million. Current assets of $457.3 million exceeded current liabilities of $195.1 million.
- Long-term debt was $77.3 million, unchanged from fiscal year-end, comprising $64.9 million drawn on a $100 million revolver and $12.4 million of industrial revenue bonds. The revolver matures in 2023; bonds mature in 2029. The company reported covenant compliance. Letters of credit of $33.9 million left $1.2 million of available revolver borrowings.
- Retail floor-plan borrowings were $26.6 million, down from $33.9 million at March 28, 2020; total floor-plan capacity was $49.0 million.
Material changes versus prior comparable periods
- Quarterly sales fell 9.1%; first-half sales fell 18.0%. U.S. manufacturing and retail home volumes declined 6.7% in the quarter and 16.8% year to date. First-half U.S. average selling price was down 0.7%; Canadian volume and average price also declined.
- Quarterly net income slipped 1.3%, while first-half net income declined 16.3%. First-half Adjusted EBITDA fell 20.3%. Lower sales volume, material-cost inflation and COVID-related production constraints weighed on performance.
- Quarterly SG&A fell 14.5% and was 12.8% of sales, versus 13.7%. The reduction reflected lower commissions, incentive compensation, travel and marketing costs. These savings only partly offset lower gross profit.
- First-half cash generation benefited from increased customer deposits, payroll-tax deferrals and Canadian wage subsidies, despite lower net income. Capital expenditures were $2.6 million, down from $9.4 million, partly reflecting deferred non-essential spending.
Outlook, management commentary, and risks
- Management gave no numerical earnings or revenue guidance. It said cash balances and expected operating cash flow should cover next-year working capital, capital expenditures and debt obligations, and anticipated covenant compliance.
- Unfilled U.S. and Canadian manufacturing orders were $390.1 million at quarter-end, versus $172.0 million a year earlier. Management attributed the increase to stronger single-family-home demand, but orders may be canceled without penalty and are not assured future revenue.
- Production had recovered close to prior-year levels by quarter-end, but one facility remained temporarily idled. Labor availability, training, absenteeism, facility capacity and material access constrained the ability to increase output. Raw-material prices, including forest products, were volatile and manufacturing costs were higher.
- COVID-19 disruptions affected production, demand and shipments earlier in the fiscal year. Retail locations generally remained open with greater online activity; the company closed three company-owned sales centers in the quarter. Management cited longer-term opportunities from affordability, demographic trends, alternative dwelling units and urban-to-rural migration, but these are not quantified forecasts.
- Government assistance recognized as other income totaled $6.8 million for the first half ($6.2 million Canadian wage subsidies and $0.6 million U.S. subsidies); $2.6 million was recognized in the quarter. The company had deferred $7.4 million of payroll taxes, with payments to begin in December 2021.
- Contingencies include an estimated $142.6 million gross repurchase obligation under retailer floor-plan arrangements, before resale value of homes; the recorded loss reserve was $0.9 million. The company also had $14.3 million of surety bonds and contingent U.K. product guarantees that decline through October 2027. Management did not expect legal matters to have a material adverse effect.
- Key risks include pandemic-related disruption, labor and supply constraints, commodity costs, housing-market cyclicality and demand, competition, product quality, regulation, interest and foreign-exchange rates, and potential goodwill impairment. Disclosure controls were reported effective, with no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the substantial backlog converts to shipments and revenue, given cancellation rights and production constraints.
- Whether labor and material availability improve enough to meet orders, and whether higher input costs continue to pressure gross margins.
- How much sales and cash flow reflect underlying operations versus government subsidies, customer deposits and payroll-tax deferrals.
- Available borrowing capacity and covenant headroom, given only $1.2 million of revolver availability after letters of credit, despite the sizable cash balance.
- Potential losses under retailer repurchase agreements and the adequacy of the $0.9 million reserve relative to the stated gross contingent exposure.