Business context and reporting period
The supplied filing is a Form 10-Q for Skyline Corporation, not Champion Homes, Inc. It covers the fiscal quarter and nine months ended February 28, 2017; comparative periods ended February 29, 2016. Skyline designs, manufactures, and markets manufactured housing, modular housing, and park models. Interim results are subject to seasonal variation.
Financial performance
Dollars in millions, except per-share amounts. Figures are unaudited.
| Metric | Three months ended Feb. 28, 2017 | Prior-year quarter | Nine months ended Feb. 28, 2017 | Prior-year period |
|---|---|---|---|---|
| Net sales | $51.640 | $47.697 | $177.042 | $155.123 |
| Gross profit / margin | $3.219 / 6.2% | $4.810 / 10.1% | $15.029 / 8.5% | $16.680 / 10.8% |
| Operating income (loss) | $(2.362) | $(0.436) | $(2.041) | $0.575 |
| Net income (loss) | $(2.447) | $(0.520) | $(2.298) | $0.352 |
| Basic and diluted EPS | $(0.29) | $(0.06) | $(0.27) | $0.04 |
- Quarterly sales rose 8.3%; manufactured housing sales increased 13.8% and park model sales 14.7%, while modular housing sales fell 38.7%. Total unit shipments rose 11.7% to 974.
- Nine-month sales rose 14.1%; manufactured housing increased 16.3%, park models 47.8%, and modular housing declined 13.7%. Shipments increased 18.4% to 3,353.
- Cost of sales increased to 93.8% of quarterly sales from 89.9%, and to 91.5% for nine months from 89.2%. Management cited higher labor and training costs, workers’ compensation costs, and, in the quarter, warranty costs. Selling and administrative expense was $5.581 million for the quarter and $17.070 million year to date.
- Operating cash flow was $(1.290) million for the nine months, versus $1.626 million generated in the prior-year period. Capital expenditures were $1.094 million versus $0.312 million; cash ended at $5.232 million, down from $7.659 million at May 31, 2016.
Balance sheet and liquidity
- At February 28, 2017, current assets were $35.174 million and current liabilities $19.689 million; working capital was $15.485 million, down from $17.787 million at May 31, 2016. Current ratio was approximately 1.8.
- Reported long-term liabilities were $11.733 million, including $4.312 million of life-insurance loans. Those loans have no fixed repayment schedule and carry a weighted-average rate of 5.2%. The filing does not report borrowings outstanding under the revolving facility.
- The secured revolving facility provides for up to $10 million in advances, subject to collateral ratios, at 3.75 percentage points above the one-year LIBOR rate, and is secured by substantially all borrower assets. Skyline reported a third-quarter covenant default; a waiver was obtained after quarter-end and a $50,000 accommodation fee was paid. Management said approximately $2.3 million could be borrowed against certain life-insurance policies if necessary.
Material changes, outlook, and risks
- Skyline suspended operations at its Mansfield, Texas facility under a restructuring plan, and announced the suspension of its Elkhart, Indiana facility after quarter-end. Production at Elkhart ended March 8, 2017; Mansfield production ended April 10. Management expected some customers to be served by facilities in Kansas and Ohio. It reported no material restructuring costs or liability accrued at quarter-end.
- The Mansfield property and substantially all equipment were sold on April 11, 2017 for net proceeds of approximately $2.212 million. Skyline estimated a gain of approximately $1.4 million for recognition in the fourth quarter; $1.1 million of proceeds was held as cash collateral under the credit arrangement.
- No quantitative earnings or sales guidance is provided. Management noted that new, inexperienced employees and production ramp-up raised costs. It also cited customer demand, financing availability, the housing market, seasonality and weather, interest rates, labor costs, regulation, competition, and insurance availability as risks.
- Dealer inventory-financing repurchase guarantees had a maximum potential liability of approximately $27 million, before resale value, with a $100,000 reserve. Management believed potential losses would not be material; no repurchased-unit obligations or net losses were reported for the periods presented. Management also said pending ordinary-course litigation was not expected to have a material adverse effect.
- The company had approximately $49.8 million of gross deferred tax assets, fully offset by a valuation allowance. Disclosure controls were concluded effective, and the filing reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Confirm the issuer identity: the supplied 10-Q identifies Skyline Corporation, despite the request metadata naming Champion Homes, Inc.
- Review the credit-facility waiver and subsequent amendments, covenant terms, borrowing availability, and collateral restrictions.
- Assess whether facility closures and customer transfers improve operating performance, and verify the realized Mansfield sale gain and use of proceeds.
- Track gross-margin recovery, labor and warranty costs, cash use, and working capital, including the expected fourth-quarter marketing-program payments.
- Monitor dealer repurchase guarantees, warranty accrual adequacy, and the realization assumptions behind deferred tax assets.