Skyline Corporation (later proposed to become Skyline Champion Corporation) — Form 10-Q summary
Reporting period: Fiscal second quarter and first half ended December 3, 2017; comparisons are to the periods ended November 30, 2016. The company designs and manufactures manufactured homes, modular homes, and park models. Interim results are seasonal and not necessarily indicative of full-year performance. The filing is Skyline Corporation’s, not a filing under Champion Homes, Inc.
Financial performance and condition
| Metric | Three months ended Dec. 3, 2017 | Three months ended Nov. 30, 2016 | Six months ended Dec. 3, 2017 | Six months ended Nov. 30, 2016 |
|---|---|---|---|---|
| Net sales | $57.765 million | $64.226 million | $116.227 million | $125.402 million |
| Gross profit | $8.371 million | $5.230 million | $16.297 million | $11.810 million |
| Gross margin | 14.5% | 8.1% | 14.0% | 9.4% |
| Operating income (loss) | $3.001 million | $(0.509) million | $4.755 million | $0.321 million |
| Net income (loss) | $2.964 million | $(0.595) million | $4.571 million | $0.149 million |
| Basic and diluted EPS | $0.35 | $(0.07) | $0.54 | $0.02 |
- Sales and mix: Quarterly sales fell 10.1% and first-half sales fell 7.3%. Manufactured-housing sales declined, partly offset by higher modular-housing and park-model sales. First-half unit shipments decreased 16.2%; average selling prices increased across all three product categories.
- Margins and expenses: Cost of sales was 85.5% of quarterly sales versus 91.9% a year earlier, and 86.0% for the half versus 90.6%. Management cited the prior-year effects of facilities subsequently closed and a greater focus on higher-margin multi-section homes. Selling and administrative expense rose to 10.6% of quarterly sales and 10.5% of first-half sales; increases included compensation, health costs, and approximately $190,000 of merger-related costs.
- Cash flow: First-half operating cash flow was $1.694 million, investing cash flow was $0.814 million, and financing cash outflow was $1.605 million. Cash increased $0.903 million to $12.287 million. Capital expenditures were $0.800 million.
- Liquidity and obligations: Working capital was $22.677 million at December 3, compared with $18.917 million at May 31, 2017; current assets were $41.384 million and current liabilities $18.707 million. Life-insurance loans were $2.707 million at quarter-end and were fully repaid after quarter-end. No revolving-credit borrowings were outstanding under the prior facility when it was terminated; the replacement Chase facility has a maximum commitment of $10 million, subject to a borrowing base. The company reported approximately $3.973 million of borrowing ability under certain life-insurance policies at quarter-end.
- Other balance-sheet items: Total assets were $59.037 million and shareholders’ equity $30.015 million at December 3. Accrued warranty was $6.716 million, including $2.800 million noncurrent. The company had a full valuation allowance against approximately $46.7 million of gross deferred tax assets and reported no income-tax expense or benefit for the periods presented.
Material developments, outlook, and risks
- Results include a $0.762 million second-quarter gain on sale of non-income-producing Oregon land; first-half results also include a $0.060 million loss on an Indiana land sale. The prior-year comparison was affected by losses and costs at the Elkhart and Mansfield facilities, which closed in fiscal 2017.
- In January 2018, Skyline agreed to combine with Champion Enterprises Holdings, LLC through an exchange of Champion operating-company shares for Skyline shares. At closing, Champion Holdings or its members would own 84.5% and existing Skyline shareholders 15.5% of the combined company on a fully diluted basis. Closing was expected in the first half of 2018, subject to shareholder, regulatory, listing, and other conditions. Skyline could pay a special dividend of net cash before closing. Specified termination circumstances could trigger a $10 million fee; failure to obtain shareholder approval could require up to $2 million of expense reimbursement.
- Management gave no quantified earnings or revenue guidance. It cited housing-market conditions, consumer confidence, financing availability, interest rates, seasonality and weather, regulation, labor and material costs, competition, insurance, and other factors as risks. Management said liquidity should be sufficient for obligations for at least one year after filing.
- Dealer inventory-financing repurchase guarantees had a maximum potential liability of approximately $26 million, without deducting resale value; the recorded reserve was $100,000. Management considered potential losses not material, and no repurchase obligations or net losses were incurred in the reported first halves. Pending ordinary-course litigation was not expected by management to have a material adverse effect.
- Disclosure controls were concluded to be ineffective because of a material weakness identified in fiscal 2017 concerning accuracy and valuation of raw-material inventory; management was evaluating remediation. The company was evaluating the new tax law’s effect on deferred-tax estimates. It expected no material financial-statement change from adopting revenue standard ASU 2014-09, but anticipated substantially expanded disclosures.
Most important facts to verify
- Whether the Champion transaction closed, its final ownership and share issuance, and any special dividend or transaction costs.
- Whether inventory-control remediation was effective and whether the material weakness affected subsequent reporting.
- How much of the improvement in operating results reflects sustainable margins versus closed facilities and land-sale gains.
- Subsequent repayment of life-insurance loans, actual availability and use of the Chase facility, and covenant compliance.
- Developments in dealer repurchase exposure, warranty claims, and deferred-tax valuation after the reporting date.