Filing summary
Registrant discrepancy: The supplied filing is for Skyline Corporation and its subsidiaries, not Champion Homes, Inc. Verify the company identity before relying on this summary.
Business context and reporting period
Skyline designs, manufactures and sells manufactured housing, modular housing and park models through nine facilities in eight states. This unaudited Form 10-Q covers the fiscal third quarter and nine months ended February 29, 2016; comparisons are with the periods ended February 28, 2015. The company had exited the recreational vehicle business in October 2014, and presents that business as discontinued operations. Management cautions that results are seasonal and interim results may not indicate full-year performance.
Financial performance and liquidity
Amounts below are in millions of dollars except per-share figures and percentages.
| Metric | Three months ended Feb. 29, 2016 | Three months ended Feb. 28, 2015 | Nine months ended Feb. 29, 2016 | Nine months ended Feb. 28, 2015 |
|---|---|---|---|---|
| Net sales, continuing operations | $47.697 | $38.109 | $155.123 | $137.380 |
| Gross profit | $4.810 | $2.338 | $16.680 | $11.537 |
| Gross margin | 10.1% | 6.1% | 10.8% | 8.4% |
| Operating income (loss) | $(0.436) | $(2.821) | $0.575 | $(3.810) |
| Net income (loss) | $(0.520) | $(2.997) | $0.352 | $(10.214) |
| Basic earnings (loss) per share | $(0.06) | $(0.36) | $0.04 | $(1.22) |
- Sales and margins: Third-quarter sales increased 25.2%; nine-month sales rose 12.9%. Cost of sales declined as a share of sales, which management attributed partly to improved material-cost control and fixed manufacturing costs being spread over higher sales.
- Cash flow: Nine-month operating cash flow was $1.626 million, versus an outflow of $5.014 million a year earlier. Investing cash outflow was $0.361 million, including $0.312 million of capital expenditures. Cash increased $1.265 million to $6.260 million.
- Liquidity: At February 29, 2016, current assets were $32.094 million, current liabilities $14.956 million and working capital $17.138 million. The filing attributes the increase in cash partly to operating cash flow; receivables fell $2.550 million and inventories rose $1.804 million from May 31, 2015.
- Debt and credit: Long-term liabilities included $4.312 million of life-insurance loans. The company had a secured revolving credit facility with a maximum borrowing amount of $10 million, subject to collateral ratios; the filing does not clearly state the outstanding revolver balance. The facility is secured by substantially all assets.
Material changes versus the prior comparable period
- Third-quarter shipments increased to 872 from 663; nine-month shipments increased to 2,832 from 2,523. Manufactured housing drove most of the sales growth. Nine-month park-model sales fell 6.5%, and shipments fell 6.9%.
- Average third-quarter selling prices for manufactured and modular homes declined 6.1% and 7.8%, respectively, which management attributed to sales of smaller homes with fewer amenities. Nine-month modular-home average price declined 1.2%; manufactured-home and park-model averages were relatively unchanged.
- Nine-month net income improved by $10.566 million year over year, substantially reflecting the absence of the prior-year discontinued-operations loss of $6.175 million, alongside improved continuing-operations results.
- Accrued warranty was $7.155 million at period end, up from $5.722 million a year earlier; warranty accruals for the nine months were $5.087 million and settlements were $4.843 million.
Outlook, risks and unusual items
- Going concern: Management disclosed that recurring losses and historical negative operating cash flows raise substantial doubt about the company’s ability to continue as a going concern. Its plans include sales growth, broader marketing and product development, expansion of Shore Park production across more divisions, and cost control. Management said it believed it could execute these strategies; no quantified earnings or revenue guidance was provided.
- Credit covenant: The company breached its monthly-loss covenant twice in the first fiscal quarter and obtained a waiver in the second quarter. The covenant limits were temporarily relaxed for December 2015 through February 2016; stricter thresholds resumed thereafter. The company reported covenant compliance as of February 29, 2016.
- Contingencies: Maximum potential dealer-inventory repurchase obligations were approximately $48 million, before considering resale value, versus $60 million at May 31, 2015. The company maintained a $100,000 loss reserve and stated that potential losses under current agreements were not expected to be material. Pending ordinary-course legal proceedings were also described as not expected to have a material adverse effect.
- Other risks: Results are exposed to economic and housing-market conditions, consumer and dealer financing availability, seasonality and weather, interest rates, regulation, competition, inflation, fuel and labor costs, insurance availability, and retailer inventory adjustments.
- Taxes: The company reported approximately $49.8 million of gross deferred tax assets, fully offset by a valuation allowance. No income tax expense was reported for the periods shown.
Important facts for investors to verify
- Confirm that Skyline Corporation—not Champion Homes, Inc.—is the intended registrant and that the February 29, 2016 period is the intended filing.
- Review the going-concern disclosure, cash-flow trend and management’s ability to execute its sales and cost initiatives.
- Confirm revolver borrowings, remaining availability, collateral requirements and covenant compliance after the temporary covenant modifications.
- Assess warranty costs and the potential exposure from dealer repurchase agreements, including the resale value of units.
- Evaluate whether sales growth is sustainable given lower average selling prices in some product categories, seasonal effects and softness in park-model demand.