Business context and reporting period
Skyline Champion Corporation (the filing issuer; identified in the request as Champion Homes, Inc.) filed this unaudited Form 10-Q for the 13 weeks ended July 3, 2021, the first quarter of fiscal 2022. The comparable quarter ended June 27, 2020. The company manufactures and sells factory-built housing in the U.S. and Canada and operates retail and transportation businesses.
Key financial results
Amounts are U.S. dollars; financial statement amounts are in millions unless noted.
- Revenue: $510.2 million, up 86.7% year over year. U.S. factory-built housing revenue was $457.3 million (+83.8%); Canadian factory-built housing was $37.8 million (+149.0%); Corporate/Other was $15.0 million (+63.0%). U.S. homes sold rose 58.2% to 6,372 and average selling price rose 16.2% to $71,800. Canadian homes sold rose 100.5% to 385 and average selling price rose 24.3% to $98,300.
- Profit and margins: Gross profit was $111.5 million, up 106.5%, with gross margin of 21.9% versus 19.8%. Operating income was $57.5 million versus $13.2 million; operating margin was 11.3% versus 4.8%. Net income was $42.9 million versus $11.9 million; net margin was 8.4% versus 4.4%. Diluted EPS was $0.75 versus $0.21. Adjusted EBITDA, a non-GAAP measure, was $62.7 million (12.3% of sales) versus $22.5 million (8.2%).
- Cash flow: Operating cash flow was $31.9 million versus $32.2 million. Investing cash use was $9.2 million, primarily reflecting higher capital expenditures; financing provided $1.8 million. Cash increased $25.2 million to $287.7 million.
- Liquidity and debt: Current assets were $562.4 million and current liabilities $288.4 million at July 3, 2021. Long-term debt was $39.3 million, unchanged from April 3; floor-plan payable was $28.8 million. The company reported $42.7 million available under its then-existing revolver after letters of credit. It was in compliance with credit covenants.
Material changes and management commentary
- Management attributed revenue growth to strong housing demand, higher production and sales volumes, higher selling prices in response to material costs, and the ScotBilt acquisition, completed February 28, 2021. First-quarter U.S. HUD-code market share was 20.8% versus 13.8% a year earlier, based on industry data.
- Higher production volumes and improved manufacturing efficiencies lifted margins, partly offset by higher material and labor costs. SG&A rose 32.4% to $54.0 million, but declined to 10.6% of sales from 14.9% as revenue growth provided fixed-cost leverage.
- The prior-year quarter included $4.2 million of government wage subsidies in other income and $1.9 million of COVID-related employee benefit expense. The current quarter included no comparable wage subsidies reported in other income.
- Unfilled manufacturing orders were $1.2 billion at July 3, 2021, compared with $192.1 million a year earlier. Management said demand had outpaced production; capacity, hiring and training, attendance, and material availability constrained the ability to increase output. Orders may be cancelled without penalty, and management cautioned that longer lead times and price changes could increase cancellations.
- On July 7, 2021, after quarter-end, the company replaced its $100 million revolver with a $200 million revolving facility, including a $45 million letter-of-credit subfacility, maturing July 7, 2026. The existing $26.9 million revolver borrowing was repaid at closing. Management expected cash and operating cash flows to cover near-term needs and anticipated covenant compliance; it did not provide earnings guidance.
- Expansion activity included the acquisition of two idle Texas facilities in June 2021, with production intended to begin in one or both by fiscal year-end, and two idle North Carolina facilities acquired in January 2021, for which production plans remained under evaluation.
Risks, contingencies and unusual items
- Management cited continued uncertainty from COVID-19, material cost inflation and supply constraints, labor availability and absenteeism, demand and housing-industry cyclicality, and the potential for order cancellations. Raw-material allocations by suppliers were also limiting production.
- Repurchase agreements with retailers’ lenders created an estimated contingent obligation of $231.0 million before considering resale value of homes; the related loss reserve was $1.5 million. The company also had $30.4 million in letters of credit and $35.0 million in surety bonds.
- The company had deferred $11.8 million of payroll taxes under the CARES Act, with payments scheduled to begin in December 2021. Management stated that ordinary-course legal matters were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether the exceptionally high backlog converts to shipments and revenue, considering cancellation rights, production capacity, labor constraints, and material availability.
- Whether price increases continue to offset rising material and labor costs without weakening demand or margins.
- The utilization, covenants, pricing and availability of the new $200 million credit facility, and the company’s cash needs for capital investment and expansion.
- The realized performance and integration of ScotBilt and the timing and cost of bringing acquired idle facilities into production.
- The exposure and reserve adequacy for retailer repurchase guarantees, warranty obligations and other contingencies.