Filing summary
Reporting-period clarification: The supplied filing is Skyline Corporation’s Form 10-K for the fiscal year ended May 31, 2012, not a Champion Homes, Inc. filing. It includes unaudited fourth-quarter results for the three months ended May 31, 2012.
Business context and financial performance
Skyline designs, manufactures and sells manufactured and modular homes and recreational vehicles (RVs) through independent dealers in the United States and Canada. Fiscal 2012 sales were 60% housing and 40% RVs.
- Full-year revenue: $182.846 million, up 13% from $162.327 million. Housing sales rose 11% to $109.157 million; RV sales rose 14% to $73.689 million.
- Units shipped: 7,332 total, up 6% year over year; 2,328 housing units and 5,004 RVs.
- Profitability: Gross profit was $4.884 million, a 2.7% gross margin, versus $1.802 million and 1.1% in fiscal 2011. Operating loss was $19.382 million (10.6% of sales), compared with $26.688 million (16.4%). Net loss was $19.365 million, or $2.31 per share, versus $26.627 million, or $3.17 per share. The company reported losses in each of fiscal 2008–2012.
- Cash flow: Operating cash use was $18.597 million, versus $25.575 million in fiscal 2011. Investing activities provided $22.391 million, including $5.054 million from asset sales; capital expenditures were $614,000. Financing cash use was $1.510 million in dividends.
- Liquidity and balance sheet: Cash and U.S. Treasury bills totaled $29.009 million, down from $44.721 million. Working capital was $36.789 million, versus $53.665 million; current assets were $51.470 million and current liabilities $14.681 million. Total assets were $78.856 million and shareholders’ equity $56.164 million. The balance sheet lists no interest-bearing borrowings; current and deferred liabilities include accrued obligations and deferred compensation.
- Margins and expenses: Cost of sales was 97% of revenue versus 99% the prior year. Selling and administrative expense declined to $27.450 million from $28.490 million. Operating results include $3.184 million of gains on asset sales.
- Fiscal fourth quarter: Revenue was $50.461 million, gross profit $3.267 million and net loss $1.711 million, compared with revenue of $48.103 million, gross profit of $2.396 million and net loss of $4.064 million in fiscal 2011 Q4.
Material changes and unusual items
- Housing and RV sales increased, while net losses narrowed. Domestic manufactured-home shipments grew 3%, lagging the industry’s reported 19% fiscal-year shipment increase. RV shipments increased 6%.
- Skyline closed its Fair Haven, Vermont housing facility in October 2011 and Hemet, California RV facility in April 2012, citing weak demand. It sold idle facilities in Ocala, Florida and Ephrata, Pennsylvania, and its aircraft; reported gains were $1.114 million, $1.386 million and $684,000, respectively.
- The company recognized approximately $400,000 of expense for a FEMA formaldehyde litigation settlement and paid the full $737,000 settlement in the fourth quarter.
- The board suspended common-stock dividends in the third quarter to preserve cash. Fiscal 2012 dividends were $0.18 per share, down from $0.72 in fiscal 2011.
- A full valuation allowance was maintained against $37.453 million of gross deferred tax assets; consequently, no income tax benefit was recorded despite the pretax loss.
- Maximum potential dealer-inventory repurchase obligations were approximately $64 million, before considering resale value, versus $52 million a year earlier. No units were repurchased and no related losses were recorded in fiscal 2012.
Outlook, risks and management commentary
Management said the increase in housing sales might not be sustainable given ongoing adverse economic conditions. It cited industry forecasts for higher calendar 2012 and 2013 travel-trailer and fifth-wheel shipments, but gave no specific company revenue or earnings guidance. Management’s plans include growing modular-home and park-model sales, improving product development and marketing, reducing costs, streamlining operations and selling nonstrategic assets. It expected available cash and short-term investments to fund operating needs and planned capital expenditures for the upcoming fiscal year.
Key risks include restricted retail and dealer floor-plan financing, weak housing demand, economic and industry cyclicality, dealer inventory levels and solvency, competition and pricing pressure, material costs and supply, seasonality, fuel prices, regulation, and contingent repurchase commitments. Liquidity declined amid continuing losses and operating cash outflows. The independent auditor issued an unqualified opinion on the financial statements; management concluded disclosure controls and internal control over financial reporting were effective as of May 31, 2012.
Important facts for investors to verify
- Confirm issuer identity and period: this filing is for Skyline Corporation, fiscal year ended May 31, 2012—not Champion Homes or a standalone Q4 filing.
- Assess the pace of cash use and liquidity, including the decline in cash and Treasury bills and the suspension of dividends.
- Review whether improved segment margins and sales can continue without further asset-sale gains.
- Evaluate exposure under the approximately $64 million maximum dealer repurchase commitments and the company’s assumptions about recoveries and resale values.
- Check the status and realizability of deferred tax assets subject to the full valuation allowance, and monitor facility closures, the FEMA settlement and other contingencies.