Skyline Champion Corporation — Q2 FY2022 Form 10-Q
Business and period: Skyline Champion manufactures factory-built housing in the U.S. and Canada and also operates retail and transportation businesses. This quarter ended October 2, 2021; comparisons are with the quarter ended September 26, 2020. Unless otherwise noted, amounts are U.S. dollars.
Financial results
| Metric | Q2 FY2022 | Q2 FY2021 | Six months FY2022 | Six months FY2021 |
|---|---|---|---|---|
| Net sales | $524.2 million | $322.4 million | $1,034.4 million | $595.7 million |
| Gross profit / margin | $129.3 million / 24.7% | $62.8 million / 19.5% | $240.9 million / 23.3% | $116.8 million / 19.6% |
| Operating income / margin | $68.0 million / 13.0% | $21.4 million / 6.6% | $125.5 million / 12.1% | $34.6 million / 5.8% |
| Net income | $50.7 million | $17.5 million | $93.6 million | $29.4 million |
| Diluted EPS | $0.89 | $0.31 | $1.64 | $0.52 |
| Adjusted EBITDA (non-GAAP) / margin | $73.1 million / 13.9% | $28.9 million / 9.0% | $135.8 million / 13.1% | $51.5 million / 8.6% |
Cash, debt and liquidity
- Six-month operating cash flow was $88.9 million, versus $63.8 million a year earlier. Investing used $15.2 million, chiefly for capital spending; financing used $25.6 million, including repayment of the prior revolver.
- Cash was $310.3 million at October 2, 2021, compared with $262.6 million at April 3, 2021. Current assets were $583.4 million and current liabilities $289.3 million (approximately 2.0x current ratio).
- Long-term debt was $12.4 million, consisting of industrial revenue bonds; the $26.9 million prior revolver borrowing was repaid. Floor-plan payable was $30.8 million. The new $200 million revolving facility had $169.6 million available after letters of credit.
- Management said cash and expected operating cash flows should cover next-year working capital, capital spending and debt obligations; no long-term debt maturities were scheduled within 12 months. The company reported covenant compliance.
Material changes and management commentary
- Quarterly sales increased 62.6%; U.S. manufacturing and retail sales rose 66.5%, while Canadian factory-built housing sales rose 56.8%. Higher home volumes, average selling prices and the ScotBilt acquisition contributed. For the six-month period, sales increased 73.7%.
- Quarterly U.S. homes sold rose 25.9% and average selling price rose 32.3%; Canadian homes sold rose 18.5% and average selling price rose 32.2%. Management attributed price increases to actions responding to higher input costs.
- Gross margin expanded as higher production improved operating efficiencies and fixed-cost absorption. Management said these gains were partly offset by higher material costs. SG&A rose 48.3% in the quarter, though it declined as a share of sales to 11.7% from 12.8%.
- Backlog was $1.369 billion at October 2, 2021, versus $390.1 million a year earlier. Management linked it to robust housing demand and orders exceeding production capacity; backlog orders are cancellable and are not necessarily an indicator of future sales.
- The company acquired two idle Texas facilities in June 2021 and intended to begin production at one by fiscal year-end. It also acquired ScotBilt in February 2021 and acquired two idle North Carolina facilities in January 2021.
Outlook, risks and contingencies
- Management described U.S. and Canadian demand as robust, supported by limited existing-home supply and demand for affordable single-family housing. No specific revenue, earnings or production guidance was provided.
- Supply disruptions, raw-material allocations and price volatility, higher freight costs, and difficulty recruiting and retaining qualified labor may constrain production and pressure costs. Management said it generally can pass increased costs to customers, but longer lead times and higher prices could increase cancellations.
- COVID-19, housing-market cyclicality, demand changes, labor availability, regulation, product quality, cybersecurity and systems disruptions, acquisition integration, foreign exchange, and availability of capital are among the disclosed risks.
- Contingent repurchase obligations tied to retailer floor-plan financing were estimated at $243.4 million before considering home resale value; the related loss reserve was $1.5 million. The company also had $30.4 million in letters of credit and $35.1 million in surety bonds. Management did not expect ordinary-course legal matters to have a material adverse effect.
- The company had deferred $11.8 million of payroll taxes under the CARES Act, with payments to begin in December 2021. Prior-year government wage subsidies were substantially lower in the current period, affecting other income comparisons.
Important facts for investors to verify
- Whether production capacity, labor availability and supplier allocations allow the company to convert the large, cancellable backlog into shipments and revenue.
- Whether selling-price increases continue to offset material, freight and labor inflation without weakening demand or increasing cancellations.
- How much of the sales and earnings growth reflects underlying volume and margins versus ScotBilt and the unusually weak COVID-affected prior-year comparison.
- Capital spending and ramp-up plans for the acquired idle facilities, and the resulting impact on cash generation and operating costs.
- The scale and potential loss severity of retailer repurchase guarantees, warranty obligations and other contingencies.
- Adjusted EBITDA is a non-GAAP measure; evaluate it alongside GAAP earnings and cash flow, not as a substitute for either.