Business context and reporting period
Skyline Champion Corporation (NYSE: SKY), a factory-built housing manufacturer and retailer with transportation operations, filed this Form 10-Q for the quarter ended December 28, 2019, the third quarter of fiscal 2020. It operates in the U.S. and Canada. The filing compares the quarter and nine months with periods ended December 29, 2018.
Key financial metrics
Amounts below are in millions of dollars except per-share data, percentages, units, and where otherwise noted.
| Metric | Q3 FY2020 | Q3 FY2019 | Nine months FY2020 | Nine months FY2019 |
|---|---|---|---|---|
| Net sales | $342.2 | $354.7 | $1,068.6 | $1,032.4 |
| Gross profit / margin | $68.9 / 20.1% | $64.7 / 18.3% | $219.0 / 20.5% | $178.9 / 17.3% |
| Operating income (loss) / margin | $23.7 / 6.9% | $15.9 / 4.5% | $73.6 / 6.9% | $(43.1) / (4.2%) |
| Net income (loss) / diluted EPS | $17.0 / $0.30 | $10.5 / $0.19 | $52.2 / $0.92 | $(67.4) / $(1.28) |
| Adjusted EBITDA / margin | $29.7 / 8.7% | $26.4 / 7.4% | $94.3 / 8.8% | $72.9 / 7.1% |
Adjusted EBITDA is a company-defined non-GAAP measure; the filing cautions that it is not a substitute for GAAP results or a measure of discretionary cash available.
- Quarterly revenue mix and volume: U.S. manufacturing and retail sales were $304.8 million, down 1.5%, with 5,033 homes sold, up 0.3%; average selling price declined 1.8% to $60,600, attributed mainly to product mix. Canadian sales declined 15.9% to $22.8 million as units sold fell 16.1%. Transportation and other sales declined 18.9%, principally with reduced U.S. RV-related shipments.
- Nine-month revenue: Sales increased 3.5%. U.S. manufacturing and retail sales rose 7.6%, including $50.4 million from having Skyline operations for all nine months versus seven months in the prior comparable period. Canadian sales fell 8.7%; Corporate/Other sales fell 33.9%.
- Cash flow: Nine-month operating cash flow was $73.1 million, versus $51.9 million. Capital expenditures were $12.1 million; investing cash outflow was $11.0 million. Financing cash outflow was $18.0 million, including $15.0 million of revolver repayments. Cash increased $44.7 million to $171.3 million.
- Balance sheet and liquidity: At December 28, 2019, cash was $171.3 million, current assets $334.8 million, and current liabilities $178.3 million. Long-term debt was $39.3 million, down from $54.3 million at March 30, 2019; floor-plan payable was $32.4 million. The $100 million revolving facility had $44.4 million of available borrowing capacity after outstanding borrowings and letters of credit. The company reported compliance with credit covenants.
Material changes versus the prior comparable period
- Q3 sales fell 3.5%, but gross profit rose 6.4% and net income increased to $17.0 million. Gross margin improved to 20.1%, with U.S. housing margin gains attributed to procurement and operational synergies, product refinement, and plant improvements; labor inflation partly offset those gains.
- For the nine months, gross profit rose 22.4% and the company returned to GAAP operating and net income from prior-period losses. Comparisons are affected by the June 2018 reverse acquisition: the prior nine-month period included Champion Holdings for two months and the combined company for seven months, versus nine months of current-period operations. Prior-period SG&A also included substantial Exchange-related equity compensation and transaction costs.
- Quarterly SG&A declined 7.4%; nine-month SG&A declined 34.5%, largely reflecting the prior period’s $93.9 million of Exchange-related equity compensation. Interest expense, net, declined in both periods, helped by higher interest income and lower debt balances/rates.
- Manufacturing backlog was $133.1 million at December 28, 2019, versus $181.3 million a year earlier. Management attributed the decline to lower customer order rates, shorter delivery times, and continued softness in western Canada.
Outlook, commentary, risks and contingencies
- No formal earnings or revenue guidance is provided. Management said cash balances and expected operating cash flow should be adequate to fund capital expenditures and business needs for the next year, with projected cash availability above operating requirements.
- Management described a strategy of expanding manufacturing capacity and retail presence, improving plant operations, and growing in U.S. HUD-code and modular markets. HUD market share was 17.1% for the eleven months ended November 30, 2019, versus 15.4% a year earlier; modular market share was 14.0% for the first nine months of calendar 2019, versus 12.1%.
- Industry and company risks include housing demand and customer preferences, material prices and availability, labor costs and shortages, interest and currency rates, weather and natural disasters, retailer financing and inventory, regulation, competitive pricing, and acquisition integration. The filing reported no material changes to the risk factors in the prior annual report.
- Contingencies included estimated retailer floor-plan repurchase obligations of approximately $147.9 million before considering resale value of homes, with a $0.9 million reserve; $0.6 million of retailer loan guarantees; $28.7 million of letters of credit; and $24.2 million of surety bonds. Management did not expect legal proceedings to have a material adverse effect.
- The company recorded a $1.0 million fair-value loss on acquired property held for sale and sold it for $1.1 million during the quarter. Adoption of lease accounting recognized $13.7 million of lease-related assets and liabilities; management said the standard did not materially affect results or cash flows.
Most important facts for investors to verify
- Whether the backlog decline and lower Canadian and transportation sales persist, and how orders, shipments, and market demand develop.
- Whether improved U.S. housing gross margins can be sustained amid labor inflation and capacity-expansion costs.
- How much of nine-month earnings improvement reflects underlying operations versus prior-period Exchange-related compensation, transaction costs, and differing consolidation periods.
- Whether operating cash flow and liquidity remain sufficient as capital spending and expansion continue, and whether debt and covenant headroom change.
- Potential exposure from retailer repurchase guarantees, letters of credit, surety bonds, warranty obligations, and other contingencies.