Business context and reporting period
Skyline Champion Corporation (formerly Skyline Corporation) filed this unaudited Form 10-Q for the quarter ended December 29, 2018, the third quarter of fiscal 2019. It manufactures factory-built housing in the U.S. and Canada and operates retail and transportation businesses.
Comparisons require care: the June 1, 2018 combination with Champion Holdings was accounted for as a reverse acquisition. Fiscal 2019 results include Champion Holdings before June 1 and the combined company afterward; prior periods reflect Champion Holdings alone. The filing also provides unaudited pro forma comparisons combining both businesses.
Financial performance and position
Dollar amounts below are in millions except per-share data. Quarter and nine-month figures are for the periods ended December 29, 2018, compared with the corresponding 2017 periods unless noted.
| Metric | Three months | Nine months |
|---|---|---|
| Net sales | $354.7; +20.5% | $1,032.4; +29.3% |
| Gross profit / margin | $64.7 / 18.3%, versus $56.3 / 19.1% | $178.9 / 17.3%, versus $133.6 / 16.7% |
| Operating income (loss) | $15.9, versus $23.4 | $(43.1), versus $46.2 |
| Net income (loss) | $10.5, versus $5.4; $0.19 per diluted share versus $0.11 | $(67.4), versus $18.1; $(1.28) per diluted share versus $0.38 |
| Adjusted EBITDA (non-GAAP) | $26.4, versus $25.6 reported; prior-year pro forma was $28.7 | $72.9, versus $51.6 reported; pro forma was $77.1 versus $60.1 |
Quarterly sales growth reflected higher U.S. home volume and average selling prices, as well as inclusion of Skyline operations. U.S. home units sold rose 17.0% and average selling price rose 9.0%; Canadian units rose 1.9% and average selling price rose 6.8%. Nine-month pro forma sales were $1,078.2 million versus $972.9 million, up 10.8%.
Quarterly gross margin declined 0.8 percentage point, partly reflecting the prior-year mix of high-efficiency FEMA disaster-relief homes and higher material and labor costs. Nine-month gross margin improved, which management attributed to pricing, operating improvements, product standardization and rationalization, and better fixed-cost absorption.
The nine-month GAAP loss was substantially affected by $97.6 million of equity-based compensation expense, including awards associated with the combination and follow-on offerings, as well as $6.9 million of Exchange-related legal, accounting and advisory costs, $5.5 million of integration costs and $1.2 million of restructuring charges. Other non-deductible transaction-related items contributed to the unusual reported tax rate. Management reported a 32.0% nine-month effective tax rate excluding specified non-deductible discrete items, compared with the reported negative 25.5% rate.
| Liquidity and debt | December 29, 2018 |
|---|---|
| Cash and cash equivalents | $129.0 million |
| Current assets / current liabilities | $298.7 million / $196.5 million |
| Long-term debt | $59.3 million, including $46.9 million drawn on a $100 million revolving facility |
| Floor plan payable | $39.0 million; $47.0 million available under floor-plan agreements |
| Unused revolving capacity | $32.1 million, net of the letter-of-credit subfacility |
Operating cash flow was $51.9 million for the nine months, versus cash used of $0.7 million a year earlier. Investing activities provided $2.4 million, including $9.7 million of cash assumed in the acquisition; capital expenditures were $7.6 million. Financing activities used $60.8 million, including $65.3 million of pre-combination distributions to Champion Holdings members. Cash and restricted cash declined $7.6 million from the start of the period.
The company had $21.0 million of letters of credit and $29.8 million of surety bonds. A 100-basis-point rise in interest rates was estimated to add approximately $1.0 million to annual interest expense, based on period-end borrowings.
Outlook, commentary and risks
- Management said cash, operating cash flow and available revolving capacity should meet liquidity and capital needs for the next year. The filing gives no quantified revenue or earnings guidance.
- Management described improving U.S. HUD-code housing demand: industry shipments rose 4.5% for the eight months ended November 30, 2018, and company HUD market share increased to 16.2% from 13.8%. The company noted that industry volumes remain below their long-term historical average.
- Capacity projects included a second production line at Corona, California, completed in the quarter; a Leesville, Louisiana plant expected to begin operating in June 2019; and an additional Leola, Pennsylvania plant expected to start in the first quarter of fiscal 2020.
- Key exposures include housing demand and seasonality, customer access to financing, material and labor costs, retailer floor-plan financing, integration of the combination, foreign exchange and variable interest rates. Transportation revenue was weaker amid reduced U.S. RV shipments.
- Gross contingent repurchase obligations for homes financed by retailers were estimated at $190.4 million before considering resale value; the related loss reserve was $0.8 million. The company said losses on repurchased homes were immaterial in the periods presented.
- Disclosure controls were deemed ineffective because an unremediated material weakness remained concerning the accuracy and valuation of raw-material inventory. Management described remediation efforts and stated the financial statements fairly present the company’s results in all material respects.
- The company expected the new lease accounting standard, scheduled for adoption in fiscal 2020, to have a significant balance-sheet impact; it was still assessing the effect.
Important facts for investors to verify
- Use the pro forma results to assess underlying year-over-year performance, and distinguish them from reported results affected by the June 2018 reverse acquisition.
- Check the nature, timing and potential recurrence of equity compensation, integration, restructuring and transaction costs; reconcile Adjusted EBITDA adjustments to GAAP results.
- Monitor whether pricing and operational improvements continue to offset rising material and labor costs and support margins.
- Assess liquidity against the revolving facility’s covenants, floor-plan obligations, letters of credit and the $190.4 million gross repurchase exposure.
- Track remediation and testing of the inventory-control material weakness, as well as the final purchase-price allocation and adoption of lease accounting.