Business context and reporting period
Skyline Champion Corporation (NYSE: SKY), a factory-built housing, retail and transportation company, filed this unaudited Form 10-Q for the quarter ended September 28, 2019, the second quarter of fiscal 2020. It operates U.S. and Canadian housing businesses and a transportation business. Unless noted, amounts below are U.S. dollars.
Comparability note: the six months ended September 29, 2018 included Champion Holdings’ results for only April and May before the June 1, 2018 combination, followed by the combined company’s results. The 2019 first half includes six months of combined operations.
Financial highlights
| Metric | Three months ended Sep. 28, 2019 | Prior-year quarter | Six months ended Sep. 28, 2019 | Prior-year first half |
|---|---|---|---|---|
| Net sales | $354.5 million | $355.4 million | $726.3 million | $677.7 million |
| Gross profit / margin | $74.1 million / 20.9% | $59.0 million / 16.6% | $150.1 million / 20.7% | $114.2 million / 16.8% |
| Operating income (loss) | $25.7 million | $(69.1) million | $50.0 million | $(59.0) million |
| Net income (loss) | $17.7 million | $(77.0) million | $35.1 million | $(77.9) million |
| Diluted EPS | $0.31 | $(1.42) | $0.62 | $(1.53) |
| Adjusted EBITDA (non-GAAP) | $32.5 million; 9.2% margin | $23.8 million; 6.7% margin | $64.6 million; 8.9% margin | $46.5 million; 6.9% margin |
Quarterly sales were down 0.3%; U.S. manufacturing and retail sales rose 2.0%, while transportation-related Corporate/Other sales fell 35.0%, primarily reflecting lower U.S. RV demand. In the first half, sales increased 7.2%, including the effect of six months of Skyline operations versus four months in the prior-year comparison. Adjusted EBITDA is a company-defined non-GAAP measure; the company cautions that it is not a substitute for GAAP results or cash flow.
For the quarter, gross margin improved to 20.9% from 16.6%, supported by material cost inputs, combination synergies, product rationalization and plant improvements. Management cited new-facility ramp costs as a partial offset. U.S. home units sold were nearly flat year over year, while average selling price increased 2.3%. First-half U.S. home units sold rose 9.3%; Canadian units fell 11.6% as western Canadian demand softened.
Cash from operations was $52.2 million for the first half, versus $29.0 million a year earlier. Investing used $9.4 million, principally for capital expenditures; financing used $14.8 million, including a $10.0 million revolving-credit repayment. Cash and cash equivalents were $154.7 million at September 28, 2019, up from $126.6 million at March 30, 2019.
Long-term debt was $44.3 million, down from $54.3 million, including $31.9 million outstanding on a $100 million revolving facility and $12.4 million of industrial revenue bonds. The company reported $39.4 million of available revolver capacity and $28.7 million of issued letters of credit. Floor-plan borrowings were $30.5 million, with $47.0 million of total line capacity. The company reported compliance with its credit covenants. Current assets were $340.1 million and current liabilities $200.6 million.
Material changes versus the prior comparable period
- Quarterly gross profit increased $15.1 million despite slightly lower sales; first-half gross profit increased $35.9 million.
- The prior-year periods included substantial Exchange- and secondary-offering-related equity compensation: $85.8 million in the prior-year quarter and $93.9 million in the prior-year first half. This materially affected prior-year SG&A, operating results and reported net losses. Prior-year transaction and offering costs also raised expenses.
- Quarterly U.S. housing results benefited from a 2.3% higher average selling price; transportation sales declined on reduced RV demand. Canadian quarterly sales increased on product mix and price, but first-half Canadian sales and unit volume declined.
- Backlog of unfilled U.S. and Canadian manufacturing orders was $172.0 million, down from $252.4 million a year earlier. Management attributed the decline to lower retailer order rates, shorter delivery times and continued softness in western Canada.
Outlook, commentary, risks and unusual items
The filing provides no quantified earnings or revenue guidance. Management said existing cash and expected operating cash flow should be adequate for capital expenditures over the next year, with projected cash availability in excess of operating needs. The company continued capacity expansion, including production at its Leesville, Louisiana facility, and reported production beginning at its expanded Leola, Pennsylvania campus in April 2019.
Management described U.S. HUD-code housing demand as improved from historical lows but still below long-term industry shipment averages. For the eight months ended August 31, 2019, industry HUD shipments were 62,471 versus 66,721 a year earlier; company share rose to 17.1% from 14.4%. U.S. modular shipments fell 9.9% in the first half of calendar 2019, while company share rose to 14.1% from 11.5%.
Key risks identified include housing demand and economic conditions, retailer inventory and order patterns, material prices and availability, labor costs and availability, interest and foreign-exchange rates, customer/dealer financing, regulation, weather and natural disasters, competition, and acquisition integration. The Canadian dollar weakened, reducing reported Canadian sales. Warranty obligations totaled $24.4 million, including $19.5 million current. Contingent repurchase obligations under retailer floor-plan arrangements were estimated at approximately $157.4 million before considering resale value of homes; the related reserve was $0.9 million. The company also disclosed $24.1 million of surety bonds and ongoing legal matters, which management did not expect to have a material adverse effect. A $1.0 million fair-value loss was recorded on acquired property held for sale.
The company adopted lease accounting (ASC 842) in fiscal 2020, recognizing $13.7 million of lease-related assets and liabilities at adoption; it reported no material effect on earnings or cash flows. Management stated disclosure controls were effective at quarter-end and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether margin gains and operating improvements persist after accounting for ramp-up costs, labor inflation and other SG&A increases.
- Whether the reduced backlog and retailer order rates signal further demand weakness, particularly in western Canada and transportation/RV markets.
- The comparability effects of the 2018 combination and unusually large prior-year equity compensation and transaction costs when assessing growth.
- Liquidity and borrowing availability after considering revolver borrowings, floor-plan financing, letters of credit, capital spending and contingent obligations.
- Potential cash and earnings exposure from retailer repurchase guarantees, warranty claims, held-for-sale property and legal contingencies.
- Whether management’s stated cash sufficiency over the next year is supported by subsequent operating cash flow and actual capital requirements.