Skyline Champion Corporation — FY2019 Form 10-K
Reporting period: Fiscal year ended March 30, 2019. The filing is an annual report, not a standalone Q4 filing; quarterly figures below identify the fiscal fourth quarter. Although the request refers to Champion Homes, the registrant is Skyline Champion Corporation (NYSE: SKY).
Business context
The company manufactures manufactured and modular homes, park model RVs and commercial structures in the U.S. and western Canada, with complementary retail and transportation operations. On June 1, 2018, Skyline and Champion Holdings combined. The transaction was accounted for as a reverse acquisition, with Champion Holdings the accounting acquirer; therefore, FY2018 reported results include Champion Holdings alone and are not directly comparable with FY2019 combined results.
Financial performance
| Metric | FY2019 | FY2018 |
|---|---|---|
| Net sales | $1,360.0 million | $1,064.7 million |
| Gross profit / margin | $245.4 million / 18.0% | $177.1 million / 16.6% |
| Operating income (loss) | $(29.7) million / (2.2%) | $54.6 million / 5.1% |
| Net income (loss) | $(58.2) million | $15.8 million |
| Adjusted EBITDA | $97.1 million / 7.1% of sales | $64.6 million / 6.1% of sales |
| Cash from operating activities | $65.2 million | $31.6 million |
| Capital expenditures | $12.1 million | $9.4 million |
FY2019 sales rose 27.7%; U.S. manufacturing and retail home sales increased 36.9%, including $218.8 million of Skyline sales after the combination. U.S. homes sold increased 20.5% to 19,443, and average selling price rose 13.6% to $60,600. Gross margin improved, with management citing combination synergies, product standardization, pricing and operating improvements. Adjusted EBITDA is a non-GAAP measure and should not be treated as a substitute for GAAP earnings or cash flow.
The reported net loss was heavily affected by $102.0 million of equity-based compensation, largely associated with the combination and related offerings; SG&A also included integration, restructuring and other costs. In the fiscal fourth quarter, sales were $327.7 million versus $266.3 million a year earlier, gross profit was $66.5 million versus $43.5 million, and net income was $9.2 million versus a $2.3 million loss. Quarterly figures are unaudited.
Liquidity, debt and balance sheet
- At March 30, 2019, cash and cash equivalents were $126.6 million; current assets were $318.3 million and current liabilities $206.3 million.
- Long-term debt was $54.3 million, comprising $41.9 million drawn on a revolving facility and $12.4 million of industrial revenue bonds. Retail floor-plan borrowings were a further $33.3 million.
- The revolving facility provides up to $100 million, matures in June 2023 and had $37.1 million available to borrow at year-end. The company reported compliance with its covenants.
- Cash, cash equivalents and restricted cash declined by $10.0 million during the year, to $126.6 million. Financing cash outflows included a $65.3 million distribution to Champion Holdings members and a $5.0 million revolving-debt repayment.
- Total assets were $700.0 million, including $173.4 million of goodwill. Goodwill was 25% of total assets; management’s annual qualitative assessment indicated no reporting unit was at risk of impairment.
Changes, outlook and risks
On a pro forma basis, as if the combination had occurred at the start of FY2018, sales were $1,405.8 million versus $1,297.2 million and Adjusted EBITDA was $100.9 million versus $76.0 million. These unaudited figures include specified transaction adjustments and are not forecasts. Management described plans to grow through existing and idle plant capacity, operational improvements, product expansion and selective acquisitions. It did not provide quantified forward guidance.
Orders in backlog were $142.7 million at year-end, down from $154.8 million; orders may be cancellable before production begins. Management noted constrained labor availability as a challenge to increasing output. Principal risks include housing-market cyclicality and seasonality, consumer and retailer financing availability, material costs and supply, labor shortages, competition, integration execution, product quality and warranty exposure, regulation, weather and Canadian currency movements.
Contingencies include approximately $173.4 million of retailer floor-plan repurchase commitments, stated before resale value of homes, and $21.0 million of letters of credit and $23.6 million of surety bonds. The recorded reserve for estimated repurchase losses was $1.0 million; recent realized losses were described as immaterial. Management did not expect pending ordinary-course litigation to have a material adverse effect, while noting outcomes remain uncertain. The company said it did not expect to pay cash dividends for the foreseeable future. CEO Keith Anderson’s planned retirement and Mark Yost’s succession were announced in May 2019.
The company reported effective disclosure controls and internal control over financial reporting, and the auditor issued unqualified opinions. However, management’s and the auditor’s internal-control assessments excluded Champion Holdings and its subsidiaries, which represented 92% of consolidated assets and 84% of revenue. The filing also says a previously reported inventory-control material weakness was remediated.
Investor verification priorities
- Separate reported FY2019 results from pro forma results and account for the reverse-acquisition basis when comparing periods.
- Assess the recurring earnings impact of equity compensation, transaction and integration costs, and the company’s Adjusted EBITDA adjustments.
- Verify cash availability, debt and floor-plan obligations, facility covenants, and potential exposure under the $173.4 million repurchase commitments.
- Monitor backlog conversion, labor capacity, pricing versus input-cost inflation, and the pace and cost of integrating and expanding operations.
- Review internal-control coverage and remediation progress for the acquired operations, which were excluded from the reported control assessment.