Champion Homes, Inc. quarterly report, Q1 FY2021

Skyline Champion Corporation (NYSE: SKY) — Form 10-Q Summary

Reporting period: First quarter of fiscal 2021, the 13 weeks ended June 27, 2020; comparative period ended June 29, 2019. The filing identifies the registrant as Skyline Champion Corporation.

Business context and key financial metrics

The company manufactures factory-built housing in the U.S. and Canada, operates U.S. retail sales centers, and provides transportation services. Results were affected by COVID-19-related shutdowns, reduced production, and lower demand.

MetricQuarter ended June 27, 2020Prior-year quarterChange
Net sales$273.3 million$371.9 millionDown 26.5%
Gross profit / margin$54.0 million / 19.8%$76.0 million / 20.4%Down $22.0 million; margin down 0.6 points
Operating income / margin$13.2 million / 4.8%$24.3 million / 6.5%Down 45.7%
Net income / diluted EPS$11.9 million / $0.21$17.4 million / $0.31Net income down 31.5%
Adjusted EBITDA (non-GAAP) / margin$22.5 million / 8.2%$32.1 million / 8.6%Down 29.7%
Operating cash flow$32.2 million$26.8 millionUp $5.4 million

Liquidity and debt: Cash was $236.5 million at quarter-end, up from $209.5 million at March 28, 2020. Long-term debt was $77.3 million, unchanged; floor-plan borrowings were $29.4 million, down from $33.9 million. The $100 million revolving facility had $6.4 million available at quarter-end, declining to $1.1 million after additional letters of credit were issued on July 15. The company reported compliance with credit covenants. Capital expenditures were $1.3 million.

Material changes versus the prior comparable period

  • U.S. manufacturing and retail sales fell 25.0%, reflecting 26.1% fewer homes sold; average selling price rose 1.5% to $61.8 thousand.
  • Canadian sales fell 35.9%, with homes sold down 32.6% and average selling price down 4.9% to $79.1 thousand.
  • Transportation revenue declined 44.3%. Lower volumes across business lines reflected COVID-19 disruption; manufacturing volumes were also affected by reduced fixed-cost absorption.
  • Gross margin declined amid lower production leverage and $1.9 million of supplemental COVID-related employee benefits. SG&A decreased 21.1%, but rose as a share of sales from 13.9% to 14.9%.
  • Operating cash flow improved partly due to increased customer deposits, payroll-tax deferrals, and Canadian wage subsidies; operating income was lower.

Outlook, risks, and unusual items

  • Management said cash balances and expected operating cash flow should cover working capital, capital expenditures, and floor-plan obligations for the next year, and anticipated covenant compliance. No specific earnings or revenue guidance was provided.
  • Unfilled U.S. and Canadian manufacturing orders were $192.1 million, versus $153.0 million a year earlier. Orders may be cancelled without penalty. By late June, production averaged about 90% of the prior-year rate; hiring constraints, absenteeism, and distancing measures remained obstacles, and two U.S. facilities were temporarily idled.
  • The company recognized $3.6 million of Canadian wage subsidies and $0.6 million under the U.S. CARES Act as other income. It deferred $3.6 million of payroll taxes, with repayment beginning in December 2021.
  • Repurchase agreements with retailers’ lenders carried an estimated contingent obligation of $145.2 million before resale proceeds, with a $1.0 million loss reserve. Letters of credit totaled $28.7 million and surety bonds $23.5 million. Management said ordinary-course legal matters were not expected to have a material adverse effect.
  • Key risks cited include continued COVID-19 effects, housing-market cyclicality and demand, labor and supply constraints, availability of capital, materials costs, regulation, product quality, cybersecurity, and foreign-exchange and interest-rate changes.

Important facts for investors to verify

  • Whether production, staffing, and sales recover sufficiently to convert the larger backlog into revenue; orders are cancellable.
  • Available revolving-credit capacity after letters of credit, and ongoing compliance with leverage covenants.
  • The persistence and eligibility of government subsidies, and the timing of deferred payroll-tax payments.
  • Potential losses on retailer repurchase guarantees and the adequacy of related reserves.
  • Adjusted EBITDA is non-GAAP; assess it alongside reported operating income, net income, and cash flow.