Skyline Champion Corporation — Form 10-Q Summary
Reporting period: Second quarter and six months ended September 29, 2018. The filing identifies the registrant as Skyline Champion Corporation (formerly Skyline Corporation). The June 1, 2018 combination with Champion Holdings was accounted for as a reverse acquisition: pre-combination periods reflect Champion Holdings alone, while the six-month 2018 reported results include Skyline only from June 1. Accordingly, reported year-over-year comparisons are not fully comparable. Unless stated otherwise, amounts below are in millions of dollars.
Business context and results
The company produces factory-built housing in the U.S. and Canada and also operates retail sales centers and a transportation business. At period end it operated 31 U.S. and five Canadian manufacturing facilities and 21 U.S. retail centers.
| Metric | Three months ended Sep. 29, 2018 | Prior-year quarter | Six months ended Sep. 29, 2018 | Prior-year six months |
|---|---|---|---|---|
| Net sales | $355.4 | $260.0 | $677.7 | $504.1 |
| Gross profit / margin | $59.0 / 16.6% | $41.3 / 15.9% | $114.2 / 16.8% | $77.4 / 15.3% |
| Operating income (loss) | $(69.1) | $13.6 | $(59.0) | $22.8 |
| Net income (loss) | $(77.0) | $7.4 | $(77.9) | $12.7 |
| Diluted EPS | $(1.42) | $0.16 | $(1.53) | $0.27 |
| Adjusted EBITDA (non-GAAP) | $23.8 | $15.1 | $46.5 | $26.0 |
Quarterly sales rose 36.7%; U.S. manufacturing and retail sales increased 48.9%, reflecting acquired Skyline sales, more units sold, higher average selling prices, added retail locations and improved plant output. U.S. homes sold increased 28.8% and average selling price rose 15.6%. Canadian quarterly sales declined 4.7%, while Corporate/Other sales fell 14.4%, primarily with lower U.S. RV demand affecting transportation.
Gross margin improved, which management attributed to pricing actions, operational improvements, product rationalization and better fixed-cost absorption, despite higher material and labor costs. The reported loss primarily reflects $85.8 million of non-cash equity-based compensation in quarterly SG&A, triggered largely by restricted-share vesting in connection with secondary offerings. Six-month equity-based compensation was $93.9 million. Other notable six-month expenses included $6.9 million of Exchange-related services, $3.5 million of integration costs and $1.1 million of restructuring charges. Adjusted EBITDA is a non-GAAP measure and excludes selected costs; it is not a substitute for GAAP results or cash flow.
Cash flow, debt and liquidity
- Six-month operating cash flow was $29.0 million, versus $3.7 million a year earlier. Investing activities provided $5.2 million, including $9.7 million of cash assumed in the combination; capital expenditures were $4.7 million.
- Financing used $67.9 million, including a $65.3 million pre-combination distribution to Champion Holdings members. Cash, cash equivalents and restricted cash ended at $102.9 million, down $33.7 million from the start of the period.
- Period-end cash was $102.9 million; the company reported $32.1 million of unused revolving capacity, net of the letter-of-credit sub-facility. Management said cash on hand, operating cash generation, revolver availability and capital-market access should meet liquidity and capital needs for the next year.
- Debt was $59.3 million, including $46.9 million drawn on a new $100 million revolver maturing in 2023 and $12.4 million of industrial revenue bonds. Retail floor-plan borrowings were an additional $29.9 million, with $47.0 million available under those arrangements. The company was in compliance with credit-agreement covenants.
- Borrowings are variable-rate. The filing estimates a 100-basis-point rate increase would add about $0.9 million in annual interest expense, based on period-end borrowings.
Combination, outlook and risks
The exchange issued 47.8 million shares to Champion Holdings members; they held 84.5% of the company immediately afterward on a fully diluted basis. The preliminary purchase-price allocation recorded $174.3 million of goodwill and $43.3 million of acquired intangible assets; management cautioned that the allocation remained preliminary and could change materially. Pro forma six-month results, intended as supplemental information rather than a forecast, showed sales of $723.5 million versus $622.0 million and Adjusted EBITDA of $50.7 million versus $31.4 million.
Management cited improving U.S. demand: HUD-code industry shipments increased 9.4% over the comparable six-month period, and company HUD market share was 14.8%, up from 13.4%. Unfilled U.S. and Canadian manufacturing orders were $252 million versus $217 million a year earlier, but orders may be cancelled and are not necessarily indicative of future business. No specific financial guidance was provided. The company described plans to expand capacity and improve operations, while noting risks from housing cyclicality, financing availability and rates, material costs and supply, labor, competition, weather, integration execution and foreign exchange.
Contingencies include approximately $190.5 million of retailer-home repurchase exposure before considering resale value, against a $0.8 million estimated-loss reserve; $21.0 million of letters of credit; and $29.3 million of surety bonds. Management did not expect ordinary-course legal proceedings to have a material adverse effect. The company’s disclosure controls were deemed ineffective because an unresolved material weakness concerned inventory accuracy and valuation. The acquired Champion Holdings controls, representing about 53.3% of consolidated assets, were excluded from the period-end control evaluation.
Important facts for investors to verify
- Separate underlying operating performance from acquisition timing, integration costs and the unusually large, non-cash equity-compensation charge; review the reconciliation and limitations of Adjusted EBITDA.
- Track remediation and testing of the inventory-control material weakness, and the planned assessment of controls over the combined business.
- Monitor the final purchase-price allocation, acquired-asset valuations and resulting future amortization and depreciation.
- Assess cash conversion and working-capital needs alongside revolver availability, variable-rate exposure, covenant compliance and floor-plan financing.
- Evaluate potential cash demands from retailer repurchase agreements, warranties, letters of credit and surety bonds; compare exposure with reserves and recoverable resale values.
- Check whether backlog, market-share gains and margin improvements persist, particularly if financing conditions tighten or material and labor inflation accelerates.