Skyline Champion Corporation — Q1 FY2020 Form 10-Q
Reporting period: Three months ended June 29, 2019. The filing’s registrant is Skyline Champion Corporation (NYSE: SKY). Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Business context and comparability
The company manufactures factory-built housing in the U.S. and Canada, operates retail sales centers, and provides transportation services. The prior-year quarter is not directly comparable: following the June 1, 2018 combination, it includes Champion Holdings’ results for April and May and combined-company results only from June. The current quarter includes the combined business for all three months.
Financial performance
| Metric | Q1 FY2020 | Prior-year quarter |
|---|---|---|
| Net sales | $371.9 | $322.3 |
| Gross profit / margin | $76.0 / 20.4% | $55.2 / 17.1% |
| Operating income / margin | $24.3 / 6.5% | $10.1 / 3.1% |
| Net income (loss) | $17.4 | $(0.9) |
| Diluted EPS | $0.31 | $(0.02) |
| Adjusted EBITDA / margin | $32.1 / 8.6% | $22.7 / 7.1% |
| Net cash from operating activities | $26.8 | $4.3 |
Sales grew 15.4%; U.S. manufacturing and retail sales rose 24.6% to $331.6 million, while Canadian sales declined 13.4% to $23.7 million and Corporate/Other sales fell 42.4% to $16.6 million, primarily reflecting reduced RV transportation demand. U.S. homes sold increased 20.1% to 5,448; average selling price rose 3.9% to $60.9 thousand. Canadian homes sold declined 21.3% to 285, partly offset by a 10.1% increase in average selling price.
Gross margin improvement reflected higher U.S. volume, product mix, favorable lumber and OSB pricing, plant improvements, and combination-related procurement and operating synergies; labor inflation was a partial offset. SG&A was $51.7 million, up 14.7%, but declined slightly as a share of sales to 13.9%. Prior-year results included $6.4 million of Exchange transaction expense and approximately $6.0 million of equity compensation for former Skyline employees. Adjusted EBITDA is a non-GAAP measure and includes specified adjustments; it should not be viewed as a substitute for GAAP results or cash available for discretionary spending.
Cash, debt, and liquidity
Cash and cash equivalents were $143.6 million at quarter-end, up from $126.6 million at March 30, 2019. Operating cash flow was $26.8 million; investing used $4.5 million, principally for capital expenditures, and financing used $5.7 million, including a $5.0 million revolver repayment. Long-term debt was $49.3 million, down from $54.3 million; floor-plan payable was $32.7 million. The $100 million revolving facility had $34.3 million of available borrowing capacity after borrowings and letters of credit. The company reported compliance with its debt covenants.
Management said expected cash balances and operating cash flow should fund capital expenditures and provide cash in excess of near-term operating needs for the next year. Capital spending included capacity and efficiency investments, including the new Leesville, Louisiana facility.
Outlook, risks, and notable items
- No specific earnings or revenue guidance was provided. Management noted softer U.S. HUD-code shipments and continued weakness in western Canadian housing. U.S. HUD market share was 17.0%, versus 13.0% in the prior comparable period, while industry HUD shipments fell 6.4%.
- Manufacturing backlog was $153.0 million, down from $221.8 million a year earlier. Management attributed the decline to softer demand and retailer inventory destocking in some U.S. markets, continued Canadian weakness, and unusually high prior-year backlog that included FEMA orders.
- The quarter included a $1.0 million fair-value loss on property held for sale. Operating lease adoption added $13.7 million of lease assets and obligations to the balance sheet, without a material impact on results or cash flows.
- Repurchase agreements with retailers’ floor-plan lenders carried an estimated contingent obligation of approximately $166.9 million before considering resale value; the recorded loss reserve was $0.9 million. The company also disclosed $28.8 million of letters of credit and $23.9 million of surety bonds. Management did not expect legal proceedings or contingencies to have a material adverse effect.
- Key risks include housing demand and retailer inventory changes, material prices and availability, labor costs, interest and foreign-exchange rates, customer financing conditions, competition, regulation, weather and natural disasters, and acquisition integration.
Investor verification points
- Assess year-over-year growth on a comparable basis, given the prior-year combination timing and the additional two months of Skyline operations in the current quarter.
- Track U.S. and Canadian home volumes, HUD and modular market share, backlog, and retailer inventory levels for evidence of demand trends.
- Review whether margin gains and Adjusted EBITDA growth persist after recognizing labor inflation, expansion costs, integration costs, and other adjustments.
- Monitor operating cash conversion, capital spending, revolver availability, debt and floor-plan financing, and compliance with credit covenants.
- Evaluate potential losses under retailer repurchase arrangements, warranties, letters of credit, surety bonds, and the held-for-sale property valuation.