Business context and reporting period
The supplied 10-Q is for Skyline Corporation, not Champion Homes, Inc.; verify the issuer identity. It covers the quarter and six months ended November 30, 2015, the second quarter of Skyline’s fiscal 2016. Skyline manufactures manufactured and modular housing and park models. Results are unaudited and may be affected by seasonality.
Unless stated otherwise, financial amounts below are in millions of dollars. Continuing-operations results exclude the recreational vehicle business, which Skyline sold in October 2014.
Financial performance and liquidity
| Metric | Three months ended Nov. 30, 2015 | Prior-year quarter | Six months ended Nov. 30, 2015 | Prior-year six months |
|---|---|---|---|---|
| Net sales | $58.684 | $49.667 | $107.426 | $99.271 |
| Gross profit | $7.227 | $5.158 | $11.870 | $9.199 |
| Gross margin | 12.3% | 10.4% | 11.0% | 9.3% |
| Operating income (loss) | $1.827 | $0.150 | $1.011 | $(0.989) |
| Income (loss) from continuing operations | $1.748 | $0.081 | $0.853 | $(1.128) |
| Net income (loss), including discontinued operations | $1.706 | $(3.444) | $0.872 | $(7.217) |
| Basic earnings (loss) per share | $0.20 | $(0.41) | $0.10 | $(0.86) |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $2.079 | $(3.556) |
- Quarterly continuing-operations sales rose 18.2%; manufactured housing drove the increase, while modular housing and park model sales declined. Shipments totaled 1,071 units, up from 911.
- For the six months, sales increased 8.2%; manufactured housing sales rose 11.7%, while modular housing fell 2.1% and park models fell 16.1%.
- Management attributed improved gross margin partly to better material-cost control. Selling and administrative expenses rose, but declined as a share of sales. A $250,000 final payment on a previously fully reserved account also benefited results.
- Cash was $6.804 million at November 30, versus $4.995 million at May 31. Working capital was $17.477 million, up from $16.464 million. Current assets were $34.034 million and current liabilities $16.557 million.
- Long-term liabilities totaled $11.812 million, including $4.312 million of life-insurance loans, $5.100 million of deferred compensation, and $2.400 million of long-term warranty accruals. The filing does not clearly state any outstanding balance under the revolving facility.
- Six-month capital expenditures were $245,000. Cash used in investing activities was $270,000.
Material changes, outlook, and risks
- Quarterly net income improved substantially from the prior-year loss, mainly as the prior period included significant losses from discontinued RV operations. Current-quarter discontinued operations recorded a $42,000 loss; the prior-year quarter recorded a $3.525 million loss.
- Skyline reported recurring losses in certain periods and historical negative operating cash flows, which management said raise substantial doubt about the company’s ability to continue as a going concern. Management plans to grow sales through new markets, marketing, product development, and wider distribution of Shore Park park models, while controlling material costs. These plans are not quantified guidance.
- The company had a secured revolving credit facility with a maximum borrowing amount of $10 million, subject to collateral ratios. During fiscal 2016’s first quarter it twice failed a monthly-loss covenant; the lender waived the defaults and amended covenant limits. Skyline reported covenant compliance at November 30, 2015. The facility is secured by substantially all assets, and its interest rate is 3.75% above the stated one-year LIBOR reference rate.
- Dealer inventory repurchase commitments had a maximum potential exposure of approximately $52 million at November 30, without offset for resale value; $11 million related to discontinued operations. Skyline maintained a $100,000 reserve and said potential losses were not expected to be material. The filing also reports ordinary-course litigation and says management does not expect a material adverse effect.
- Key risks include housing-market and consumer conditions, financing availability, industry cyclicality, weather, regulation, interest rates, input costs, competition, and insurance availability. Management said risk factors had not materially changed from the May 2015 Form 10-K.
Important facts for investors to verify
- Confirm the issuer: the filing identifies Skyline Corporation, despite the request naming Champion Homes, Inc.
- Assess the going-concern warning against operating cash-flow trends, cash needs, and management’s ability to deliver its sales and cost initiatives.
- Check the revolving facility’s actual outstanding borrowings, collateral availability, covenant performance, and subsequent compliance; the filing gives the facility limit but not a clear borrowing balance.
- Track whether manufactured-housing growth offsets continued weakness in modular housing and park model shipments.
- Review the potential realization of approximately $50 million in deferred tax assets, which are fully valuation-allowanced, and the possible effect of any future allowance change.
- Evaluate the repurchase exposure in light of the stated maximum commitment, dealer conditions, and the much smaller recorded reserve.