Filing summary
Issuer and period: The supplied filing is Skyline Corporation’s Form 10-Q for the quarter ended November 30, 2016 (fiscal 2017 second quarter), not a filing identified as Champion Homes, Inc. Investors should verify the issuer before relying on this summary. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions unless stated otherwise.
Business context and results
Skyline designs, manufactures, and sells manufactured housing, modular housing, and park models through ten facilities. The company had exited the recreational vehicle business in 2014. Management notes that results are seasonal and can be affected by winter weather.
| Metric | Three months ended Nov. 30, 2016 | Prior-year quarter | Six months ended Nov. 30, 2016 | Prior-year half-year |
|---|---|---|---|---|
| Net sales | $64.2 million | $58.7 million | $125.4 million | $107.4 million |
| Gross profit | $5.2 million | $7.2 million | $11.8 million | $11.9 million |
| Gross margin | 8.1% | 12.3% | 9.4% | 11.1% |
| Operating income (loss) | $(0.5) million | $1.8 million | $0.3 million | $1.0 million |
| Net income (loss) | $(0.6) million | $1.7 million | $0.1 million | $0.9 million |
| Basic and diluted EPS | $(0.07) | $0.20 | $0.02 | $0.10 |
Financial position, cash flow, and liquidity
- At November 30, 2016, cash was $8.9 million, current assets $38.4 million, current liabilities $20.6 million, and working capital $17.8 million. Working capital was nearly unchanged from May 31, 2016.
- Six-month operating cash flow was $2.1 million, compared with $2.1 million in the prior-year period. Capital expenditures were $0.8 million versus $0.2 million; cash increased by $1.2 million to $8.9 million.
- Reported liabilities included $4.3 million of life-insurance loans, with rates of 4.2%–7.4% and a weighted-average rate of 5.2%. A secured revolving facility provides for up to $10 million of advances, subject to collateral ratios; its stated rate is one-year LIBOR plus 3.75%. The filing does not clearly state the amount outstanding under the facility.
- The company said it could borrow approximately $2.3 million against the cash surrender value of certain life insurance policies. Other assets included $6.9 million of life insurance cash surrender value.
Changes, explanations, outlook, and risks
- Quarterly sales grew 9.4%; first-half sales grew 16.7%. First-half unit shipments rose 21.4%, led by manufactured housing and park models. Modular housing sales declined 5.0% in the first half.
- Profitability fell despite higher sales: quarterly gross margin declined to 8.1% from 12.3%, and the company posted a quarterly operating loss. Management attributed higher cost of sales as a percentage of revenue mainly to labor costs from hiring and training as production increased, and higher workers’ compensation costs linked to employee inexperience.
- The new Elkhart, Indiana facility began operating in June 2016. It contributed approximately $6.3 million of first-half manufactured-housing sales and $7.2 million of first-half cost of sales; management also cited startup, ongoing operating, and selling and administrative expenses associated with the facility.
- Management provided no numerical earnings or sales guidance. It cited risks including economic uncertainty, financing availability, housing-market conditions, weather and seasonality, regulation, interest rates, labor costs, pricing competition, insurance availability, and inventory changes at independent retailers.
- In November 2016, Skyline breached a revolving-credit covenant limiting monthly losses to $250,000. After quarter-end, the lender waived the default and amended the agreement to eliminate that covenant effective with the fiscal month ended December 31, 2016. The filing warned that an uncured, unwaived default could affect access to financing and liquidity.
- Accrued warranty was $7.9 million, including $5.4 million current; first-half warranty accruals were $3.8 million and settlements $3.3 million. Dealer inventory repurchase commitments had a stated maximum potential liability of approximately $25 million before resale value, against a $0.1 million reserve; management said potential losses were not expected to be material.
- The company reported approximately $48.8 million of gross deferred tax assets with a full valuation allowance. It reported no material changes to previously disclosed risk factors; pending legal proceedings were described as ordinary-course matters not expected to have a material adverse effect.
Important facts to verify
- Confirm the filing’s issuer: the source identifies Skyline Corporation, whereas the request identifies Champion Homes, Inc.
- Review the lender waiver and January 10, 2017 credit-agreement amendment, including current availability, outstanding borrowings, and any remaining covenants.
- Assess whether Elkhart’s ramp-up costs and labor inefficiencies are continuing, and whether sales growth can translate into recovered gross margins.
- Monitor warranty accruals and dealer repurchase exposure, including the assumptions behind the reserve and estimated resale values.
- Consider the full valuation allowance on deferred tax assets and the seasonal nature of interim results when assessing earnings sustainability.