Skyline Champion Corporation (NYSE: SKY) — FY2020 Form 10-K
Reporting period: Fiscal year ended March 28, 2020 (52 weeks). Although the request identifies Champion Homes and “2019 Q4,” this filing is for Skyline Champion Corporation and reports FY2020; it also includes unaudited fiscal fourth-quarter results. Amounts below are in U.S. dollars.
Business context
Skyline Champion manufactures factory-built homes and modular buildings in the U.S. and western Canada, and also operates company-owned retail centers and a transportation business. At year-end it had 38 manufacturing facilities and 21 U.S. retail centers. The June 2018 combination with Champion Holdings was accounted for as a reverse acquisition; FY2019 included only ten months of Skyline operations, limiting comparability with FY2020.
Financial performance and liquidity
| Metric | FY2020 | FY2019 |
|---|---|---|
| Net sales | $1,369.7 million | $1,360.0 million |
| Gross profit / margin | $279.0 million / 20.4% | $245.4 million / 18.0% |
| Operating income (loss) | $86.5 million / 6.3% of sales | ($29.7) million / (2.2%) |
| Net income (loss) | $58.2 million; $1.03 basic EPS | ($58.2) million; ($1.09) basic EPS |
| Adjusted EBITDA (non-GAAP) | $114.4 million / 8.3% of sales | $97.1 million / 7.1% |
| Cash from operating activities | $76.7 million | $65.2 million |
| Capital expenditures | $15.4 million | $12.1 million |
At March 28, 2020, cash and cash equivalents were $209.5 million, versus $126.6 million a year earlier. Long-term debt was $77.3 million, including $64.9 million drawn on the revolving facility and $12.4 million in industrial revenue bonds; retail floor-plan borrowings were $33.9 million. The $100 million revolving facility had $6.4 million of additional borrowing availability after letters of credit. Current assets were $398.8 million and current liabilities $186.6 million. Management said expected cash and operating cash flows were adequate for the next 12 months and anticipated compliance with its leverage covenant.
Material changes and quarterly results
- FY2020 sales increased 0.7%. U.S. factory-built housing sales rose 4.1%, supported by 3.4% more homes sold and a 0.7% increase in average selling price; Canadian sales declined 14.6% on lower unit volume, while Corporate/Other sales fell 29.4%, chiefly reflecting weaker RV-related transportation activity.
- Gross margin increased 2.4 percentage points, reflecting U.S. volume growth, lower manufacturing costs, favorable material pricing, procurement and combination synergies, and plant improvements; labor inflation partly offset gains.
- SG&A declined to $192.5 million from $275.1 million, largely because FY2019 included approximately $101 million of equity-based compensation, including a substantial Exchange-related charge, plus higher transaction, integration, and restructuring costs. FY2020 included $8.3 million of equity-based compensation.
- FY2020 interest expense, net, fell to $1.4 million, primarily due to higher interest income and lower borrowing rates and average debt balances. FY2019 included $8.3 million of other expense related mainly to the Exchange and equity offerings; none was recorded in FY2020.
- Fiscal fourth-quarter FY2020 sales were $301.1 million, gross profit $60.0 million, and net income $6.0 million (basic and diluted EPS $0.11). In fourth-quarter FY2019, the corresponding figures were $327.7 million, $66.5 million, and $9.2 million (EPS $0.16). The filing gives no clear fourth-quarter gross-margin percentage.
- Unfilled home-order backlog was $127.5 million, down from $142.7 million. Management attributed the decline partly to weakness in western Canada and partly to increased U.S. capacity and production.
Outlook, risks, and unusual items
- COVID-19 had caused temporary shutdowns of several facilities beginning in March 2020, reduced utilization and demand, supplier disruption, and closure of some independent retailers. Many facilities reopened in late April at lower production levels. In April, the company reduced its workforce by 5% and furloughed additional employees while continuing health benefits for furloughed staff.
- Management said COVID-19 could slow strategic growth and margin initiatives during FY2021 and possibly FY2022; the duration and financial effects were uncertain. Longer term, it cited affordable-housing demand, demographic trends, ADUs, and modular construction as opportunities.
- Key risks include housing cyclicality and consumer financing availability, supply and labor constraints, retailer solvency, competition, product quality and warranty exposure, local zoning, regulation, cybersecurity, and foreign-exchange movements. The company’s $152.7 million contingent retailer repurchase exposure is stated before potential resale proceeds; its related reserve was $1.0 million.
- All borrowings were variable-rate. Management disclosed that a 100-basis-point rate increase would add approximately $0.6 million annual interest on revolver debt, $0.1 million on industrial revenue bonds, and $0.3 million on floor-plan borrowings. The credit facility referenced LIBOR, which was expected to be phased out by the end of 2021.
- Goodwill was $173.5 million, approximately 22% of total assets. COVID-related impairment assessments found reporting-unit fair values above carrying values, but future deterioration could change that assessment. FY2020 also included a $1.0 million write-down of a property later sold for $1.1 million and a $0.6 million impairment charge on idle manufacturing facilities.
- The company paid no cash dividends and said it expected to retain earnings. The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting; workers’ compensation reserves of $20.5 million were identified as a critical audit matter.
Investor verification points
- Review the full financial statements and notes for debt availability, covenant headroom, variable-rate exposure, and the effect of pandemic-related borrowing.
- Assess FY2020 versus FY2019 on a comparable basis, accounting for the reverse acquisition, the partial-year inclusion of Skyline in FY2019, and unusually high prior-year equity compensation and transaction costs.
- Monitor post-year-end COVID-19 effects on orders, production utilization, backlog, margins, workforce, and supply-chain costs; this filing does not provide quantified FY2021 guidance.
- Track the $152.7 million repurchase commitment, retailer credit conditions, warranty and self-insurance reserves, and any claims under legacy U.K. guarantees.
- Verify the durability of U.S. margin improvement and the recovery or further weakness of Canadian housing and transportation operations.