Business context and reporting period
Skyline Champion Corporation (NYSE: SKY) manufactures factory-built housing in the U.S. and Canada and operates retail and transportation businesses. This Form 10-Q covers the 13 weeks ended July 2, 2022, the first quarter of fiscal 2023; comparisons are with the 13 weeks ended July 3, 2021. The filing is unaudited. The company operated 37 U.S. and five Canadian manufacturing facilities and 19 retail sales centers at quarter-end.
Financial results and liquidity
| Metric | Quarter ended July 2, 2022 | Prior-year quarter |
|---|---|---|
| Net sales | $725.9 million | $510.2 million |
| Gross profit / margin | $229.3 million / 31.6% | $111.5 million / 21.9% |
| Operating income / margin | $157.1 million / 21.6% | $57.5 million / 11.3% |
| Net income | $117.2 million | $42.9 million |
| Diluted EPS | $2.04 | $0.75 |
| Adjusted EBITDA (non-GAAP) / margin | $162.7 million / 22.4% | $62.7 million / 12.3% |
| Operating cash flow | $47.4 million | $31.9 million |
Cash and cash equivalents were $463.8 million at July 2, 2022, up from $435.4 million at fiscal year-end. Investing activities used $19.0 million, including $9.6 million to acquire Manis Custom Builders; capital expenditures were $9.4 million. Cash flow from operations was affected by higher receivables and inventory, partly related to FEMA production.
Long-term debt was $12.4 million, consisting of industrial revenue bonds; there were no revolving-credit borrowings. Floor plan payable was $37.9 million. The $200 million revolving facility had $167.9 million available after letters of credit, and the company reported compliance with its covenants. Management said cash and expected operating cash flows should cover requirements, capital expenditures, and strategic investments for at least the next year.
Material changes versus the prior comparable period
- Sales rose 42.3%; U.S. manufacturing and retail sales increased 44.6%, with homes sold up 6.9% and average selling price up 35.1%. Canadian sales increased 19.1%, despite an 8.6% decline in homes sold, as average selling price rose 30.2%.
- Management attributed U.S. growth to expanded capacity, increased production, pricing actions, and $82.5 million of FEMA disaster-relief housing sales. FEMA products generally have higher specifications and selling prices.
- Gross margin increased to 31.6%, reflecting pricing and FEMA sales, while SG&A rose 33.8% to $72.3 million but declined as a share of sales to 10.0% from 10.6%.
- Adjusted EBITDA increased 159.4%. Net income increased 173.1%. Net interest expense fell, mainly because higher interest income on invested cash offset interest expense.
- Unfilled manufacturing orders were $1.4 billion, versus $1.2 billion a year earlier; management said the increase was primarily driven by higher average selling prices in backlog.
Outlook, risks, contingencies, and unusual items
Management described housing demand as robust, supported by limited existing-home supply and demand for affordable housing. It cited opportunities in manufactured housing, accessory dwelling units, and rural migration, but gave no specific earnings or revenue guidance. The company reported that it generally passes higher input costs to customers, while acknowledging intermittent supply disruptions, higher freight and material costs, and difficulty hiring and retaining qualified labor. Higher interest rates, longer lead times, and changing prices could increase cancellations; some retailers cancelled a limited number of orders during the quarter.
Other identified risks include housing-market cyclicality, inflation, labor and supplier constraints, borrowing-rate changes, foreign-exchange movements, competition, quality and warranty claims, cybersecurity and IT disruptions, regulation, natural disasters, and acquisition integration. Manis was acquired in May 2022 for $9.6 million; its acquired net assets were not material. Other income included insurance proceeds relating to pre-bankruptcy workers’ compensation claims, partly offset by Manis transaction costs.
Contingencies include estimated potential retailer-floor-plan repurchases of $373.6 million before considering home resale value, with a $2.4 million loss reserve; losses on repurchased homes were not significant in the quarter. The company also had $32.1 million of letters of credit and $35.5 million of surety bonds. Management did not expect legal proceedings or other contingent obligations to have a material adverse effect.
Important facts for investors to verify
- How much of the quarter’s U.S. sales and margin improvement is repeatable without FEMA business, which contributed $82.5 million in sales.
- Whether backlog converts to shipments given capacity, labor, material availability, higher interest rates, and cancellation risk.
- Whether pricing continues to offset input-cost inflation and freight expense, and whether improved margins are sustainable.
- How working-capital needs—particularly inventory and receivables—affect operating cash flow as production and sales change.
- The potential exposure under floor-plan repurchase agreements, including the effect of collateral resale values, and the status of credit-facility covenant compliance.
- Adjusted EBITDA is a non-GAAP measure; assess it alongside GAAP earnings and cash flow, not as a substitute for either.