UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM10-Q

(Mark One)

For the quarterly period ended August 31, 2016September 3, 2017

or

For the transition period from                    to                    

Commission file number:1-4714

SKYLINE CORPORATION

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code:

(574)294-6521

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    ☒  Yes    ☐  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of RegulationS-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    ☒  Yes    ☐  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” andfiler,” “smaller reporting company,” and “emerging growth company” in RuleRule 12b-2 of the Exchange Act. (Check one):

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Act).     ☐  Yes    ☒  No

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

FORM 10-Q

INDEX

PART I— FINANCIAL INFORMATION

Item 1. Financial Statements.

Skyline Corporation and Subsidiary Companies

Consolidated Balance Sheets

(Dollars in thousands)thousands except share and per share amounts)

The accompanying notes are an integral part of the consolidated financial statements.

1

Item 1.

Financial Statements — (Continued).

Item 1. Financial Statements — (Continued).

Skyline Corporation and Subsidiary Companies

Consolidated Balance Sheets — (Continued)

(Dollars in thousands, except share and per share amounts)

The accompanying notes are an integral part of the consolidated financial statements.

Item 1.

Financial Statements — (Continued).

2

Item 1. Financial Statements — (Continued).

Skyline Corporation and Subsidiary Companies

Consolidated Income Statements of Operations

For the Three-Months Ended September 3, 2017 and August 31, 2016 and 2015

(Dollars in thousands, except share and per share amounts)

The accompanying notes are an integral part of the consolidated financial statements.

Item 1.

Financial Statements — (Continued).

3

Item 1. Financial Statements — (Continued).

Skyline Corporation and Subsidiary Companies

Consolidated Statements of Cash Flows

For the YearsThree-Months Ended September 3, 2017 and August 31, 2016 and 2015

(Dollars in thousands)

The accompanying notes are an integral part of the consolidated financial statements.

Item 1.

Financial Statements — (Continued).

4

Item 1. Financial Statements — (Continued).

Skyline Corporation and Subsidiary Companies

Notes to Consolidated Financial Statements (Unaudited)

NOTE 1 Basis of Presentation

The accompanying unaudited interim consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the consolidated financial position as of August 31, 2016,September 3, 2017, in addition to the consolidated results of operations and cash flows for the three-month periods ended September 3, 2017 and August 31, 2016 and 2015.2016. Due to the seasonal nature of the Corporation’s business, interim results are not necessarily indicative of results for the entire year. Effective June 1, 2017, the Corporation adopted a52-53 week fiscal year ending on the Sunday which is nearest to the last day of May in each year. Consequently, there were 95 days and 92 days in the three months ended September 3, 2017 and August 31, 2016, respectively.

The unaudited interim consolidated financial statements included herein have been prepared pursuant to the rules and regulations for reporting on Form10-Q. Accordingly, certain information and footnote disclosures normally accompanying the annual consolidated financial statements have been omitted. The audited consolidated balance sheet as of May 31, 20162017, and the unaudited interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Corporation’s latest annual report on Form10-K.

Recently issued accounting pronouncements— In May 2014, FASB issued ASUNo. 2014-09,Revenue from Contracts with Customers (Topic 66). The core principal of ASU2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. For a public entity, this guidance is effective for annual reporting periods after December 15, 2016, including interim periods within that reporting period. Early application is permitted. Subsequent to the issuance of ASUNo. 2014-09, FASB issued ASUNo. 2015-14, which deferred the effective date of ASU2014-09 by one year. In addition, FASB subsequently issued ASU2016-08,Principal versus Agent Considerations,ASU2016-10,Identifying Performance Obligations and Licensing, ASU2016-11,Rescission of SEC Guidance Because of Accounting Standards Updates2014-09 and2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting, and ASU2016-12,Narrow-Scope Improvements and Practical Expedients.The Corporation’s revenue comes substantially from the sale of manufactured housing, modular housing and park models, along with freight billed to customers, parts sold and aftermarket services. Revenue is essentially recognized when product is shipped or services rendered, and transfer of title has occurred. The Corporation is currently evaluating how the adoption of ASU2014-09 will impact its financial position and result of operations, but does not anticipate any material changes resulting from this adoption.

In NovemberJuly 2015, FASB issued ASUNo. 2015-17,2015-11,Balance Sheet ClassificationInventory, which requires an entity to measure inventory at the lower of Deferred Taxescost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. Public business entities should apply ASUNo. 2015-11 for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The Corporation implemented this pronouncement without a material effect on financial condition and results of operations.

5

Item 1. Financial Statements — (Continued).

Skyline Corporation and Subsidiary Companies

Notes to Consolidated Financial Statements (Unaudited) —(Continued)

NOTE 1 Basis of Presentation—(Continued)

In March 2016, FASB issued ASUNo. 2016-09,Improvements to Employee Share-Based Payment Accounting. ASU 2015-17 requires deferred2016-09 simplifies the accounting for share-based payment transactions related to: the income tax liabilitiesconsequences related to exercised or vested share-based payment awards; the classification of awards as either assets or liabilities; and assets be classifiedthe classification in the consolidated statements of cash flows. In addition, ASU2016-09 provides an accounting policy election to account for forfeitures as noncurrent in a classified statement of financial position.they occur. For public entities, this update is effective for annual periods beginning after December 15, 2016, and for annual and interim periods thereafter. Early application is permitted as of the beginning of an interim or annual period.permitted. The Corporation has elected to continue its current policy of estimating forfeitures rather than recognizing forfeitures when they occur, and implemented this pronouncement in the first quarter of fiscal 2017 without a material effect on financial condition and results of operations.operations upon adoption on June 1, 2017.

During September 2014, the Corporation made a strategic decision to exit the recreational vehicle industry in order to focus on its core housing business. As a result, on October 7, 2014, the Corporation completed the sale of certain assets associated with its recreational vehicle segment to Evergreen Recreational Vehicles, LLC.

Item 1.

Financial Statements — (Continued).

Skyline Corporation and Subsidiary Companies

Notes to Consolidated Financial Statements (Unaudited)—(Continued)

NOTE 3    Discontinued Operations—(Continued)2 Inventories

The following table summarizes the results of discontinued operations:

Total inventories consist of the following:

NOTE 3 Other Assets

Other assets consist primarily of the cash surrender value of life insurance policies which totaled $6,894,000$7,103,000 and $6,885,000$7,093,000 at August 31, 2016September 3, 2017 and May 31, 2016,2017, respectively.

Item 1.

Financial Statements — (Continued).

NOTE 4 Warranty

A reconciliation of accrued warranty is as follows:

6

Item 1. Financial Statements — (Continued).

Skyline Corporation and Subsidiary Companies

Notes to Consolidated Financial Statements (Unaudited)—(Continued)

A reconciliation of accrued warranty is as follows:

At August 31, 2016, the total current obligation for warranty and related expenses associated with discontinued operations is estimated to be $126,000 as compared to $150,000 at May 31, 2016.

NOTE 5 Life Insurance Loans

Life insurance loans have no fixed repayment schedule, and have interest rates ranging from 4.2 percent to 7.4 percent. The weighted average interest rate is 5.2 percent. Subsequent to September 3, 2017, $1,604,000 in life insurance loans with a weighted average interest rate of 6.3 percent were repaid in order to reduce debt and corresponding interest expense.

NOTE 6 Income Taxes

At August 31, 2016,September 3, 2017, the Corporation’s gross deferred tax assets of approximately $48.7$48.0 million consist of approximately $32.0$33.5 million in federal net operating loss and tax credit carryforwards, $7.7$7.4 million in state net operating loss carryforwards and $9.0$7.1 million resulting from temporary differences between financial and tax reporting. The federal net operating loss and tax credit carryforwards have a life expectancy of between eleven and twentyeighteen years. The state net operating loss carryforwards have a life expectancy, depending on the state where a loss was incurred, between one and twenty years. The Corporation has recorded a full valuation allowance against this asset. If the Corporation, after considering future negative and positive evidence regarding the realization of deferred tax assets, determines that a lesser valuation allowance is warranted, it would record a reduction to income tax expense and the valuation allowance in the period of determination.

The Corporation had no federal and state income tax benefit or expense for the quarters ended September 3, 2017 and August 31, 2016. For the three months ended August 31, 2016,first quarter of fiscal 2017, the Corporation utilizedreported the utilization of previously fully-reserved federal net operating loss carryforwards of $345,000$546,000 and state operating loss carryforwards of $63,000$113,000 and released corresponding amounts of the valuation allowance to offset federal and state income tax expense.

Item 1.

Financial Statements — (Continued).

Skyline Corporation and Subsidiary Companies

Notes to Consolidated Financial Statements—(Continued)

NOTE 7 Commitments and Contingencies

The Corporation was contingently liable at August 31, 2016September 3, 2017 and May 31, 2016,2017, under repurchase agreements with certain financial institutions providing inventory financing for dealers of its products. Under these arrangements, which are customary in the manufactured housing and park model industries, the Corporation agrees to repurchase units in the event of default by the dealer at declining prices over the term of the agreement. The period to potentially repurchase units is between 12 to 24 months. The maximum repurchase liability is the total amount that would be paid upon the default of the Corporation’s independent dealers.

The maximum potential repurchase liability, without reduction for the resale value of the repurchased units, was approximately $28$29 million at August 31, 2016September 3, 2017 and approximately $25$30 million at May 31, 2016.2017. As a result of the Corporation’s favorable experience regarding repurchased units, which is largely due to the strength of dealers selling the Corporation’s products, the Corporation maintained at August 31, 2016September 3, 2017 and May 31, 2016,2017, a $100,000 loss reserve that is a component of other accrued liabilities. The risk of loss under these agreements is spread over many dealers and financial institutions. The loss, if any, under these agreements is the difference between the repurchase cost and the resale value of the units.

7

Item 1. Financial Statements — (Continued).

Skyline Corporation and Subsidiary Companies

Notes to Consolidated Financial Statements (Unaudited) —(Continued)

NOTE 7 Commitments and Contingencies —(Continued)

The Corporation estimates the fair value of this commitment considering both the contingent losses and the value of the guarantee. This amount has historically been insignificant. The Corporation believes that any potential loss under the agreements in effect at August 31, 2016September 3, 2017 will not be material to its financial position or results of operations.

The amounts of There were no obligations or incurred net losses from repurchased units and incurred net losses for the three-month periods presented are as follows:

Item 1.

Financial Statements — (Continued).

Skyline Corporationended September 3, 2017 and Subsidiary Companies

Notes to Consolidated Financial Statements—(Continued)

August 31, 2016.

The Corporation is a party to various pending legal proceedings in the normal course of business. Management believes that any losses resulting from such proceedings would not have a material adverse effect on the Corporation’s results of operations or financial position.

The Corporation utilizes a combination of insurance coverage and self-insurance for certain items, including workers’ compensation and group health benefits. Liabilities for workers’ compensation are recognized for estimated future medical costs and indemnity costs. Liabilities for group health benefits are recognized for claims incurred but not paid. Insurance reserves are estimated based upon a combination of historical data and actuarial information. Actual results could differ from these estimates.

NOTE 8 Secured Revolving Credit Facility

On March 20, 2015, the Corporation (“Borrower(s)”) entered into a Loan and Security Agreement (the “Loan Agreement”) with First Business Capital Corp. (“First Business Capital”). Under the Loan Agreement, First Business Capital will provideprovided a secured revolving credit facility to the Borrowers for a term of three years, renewable on an annual basis thereafter with each renewal for a successiveone-year term. The Corporation maywas able to obtain loan advances up to a maximum of $10,000,000 subject to certain collateral-obligation ratios. On July 21, 2017, the Corporation terminated the Loan Agreement in connection with its entry into a new Credit Agreement with JPMorgan Chase Bank, N.A. (“Chase”) having terms more favorable to the Corporation. As of the date of termination, the Corporation did not have any borrowings outstanding under the Loan Agreement. In addition, the Corporation did not incur any early termination penalties in connection with the termination of the Loan Agreement.

As previously referenced, the Corporation (the “Loan Parties,” and Skyline Corporation and Skyline Homes, Inc., the “Borrowers” and each a “Borrower”) entered into a Credit Agreement (the “Agreement”) with Chase and other ancillary agreements and documents, including a Security Agreement and Patent and Trademark Security Agreement (collectively referred to along with the Agreement as the “Loan Documents”). Under the Agreement, Chase will provide a three-year revolving credit facility with loan advances to the Borrowers of up to a maximum of $10,000,000, subject to a borrowing base set forth in the Agreement (the “New Facility”).

8

Item 1. Financial Statements — (Continued).

Skyline Corporation and Subsidiary Companies

Notes to Consolidated Financial Statements (Unaudited) —(Continued)

NOTE 8 Secured Revolving Credit Facility —(Continued)

Loan advances bear interest at 3.75%either 50 basis points above Chase’s floating prime rate (“CBFR”) or 150 basis points in excess ofThe Wall Street Journal’s published one year the LIBOR rate andfor the applicable period (the “Adjusted LIBO Rate”). Loans are secured by substantially all of the Borrowers’Loan Parties’ assets, now owned or hereafter acquired.acquired, except for real property and any life insurance policies owned by any Borrower on the effective date of the Agreement. Interest is payable monthly, in arrears on a monthly basis in the case of the CBFR or at the end of the applicable interest rate in the case of the Adjusted LIBO Rate, and all principal and accrued but unpaid interest is due and payable upon terminationat the maturity of the Loan Agreement. First Business Capital also agreedNew Facility. Borrowers may at any time prepay in whole or in part any loan amounts, subject to minimum amounts and breakage costs.

Also under the Loan Agreement, Chase agreed to issue or cause to be issued by a bank affiliate or other bank, letters of credit for the account of the Corporation. However, noBorrowers not to exceed $500,000. No advances have yet been made in connection with such letters of credit.

DuringAs part of the first quarterclosing of fiscal 2017,the financing, the Company paid Chase a closing fee of $25,000 plus legal and due diligence costs. The Loan Parties also agreed to pay the following additional amendments were madefees to Chase during the term of the New Facility: (i) a commitment fee payable in arrears at a rate of .25% per annum on the average daily amount of the available revolving commitment under the New Facility during the prior calendar month; and (ii) monthly letter of credit fees payable in arrears at the applicable Adjusted LIBO Rate on the outstanding amount of letters of credit issued and outstanding during the prior month.

The Loan Documents contain covenants that limit the ability of the Loan Agreement:Parties to, among other things: (i) incur other indebtedness; (ii) create or incur liens on their assets; (iii) consummate asset sales, acquisitions, or mergers; (iv) pay dividends; (v) make certain investments; (vi) enter into certain transactions with affiliates; and (vii) amend a Loan Party’s articles of incorporation or bylaws.

The Corporation was in compliance as of September 3, 2017 with covenants associated with the Agreement.

Item 1.

Financial Statements — (Continued).

9

Item 1. Financial Statements — (Continued).

Skyline Corporation and Subsidiary Companies

Notes to Consolidated Financial Statements (Unaudited)—(Continued)

Except as provided herein, the Loan Agreement and all other loan documentation related thereto shall remain in full force and effect in accordance with their terms. The Corporation was in compliance with Loan Agreement covenants as of August 31, 2016.

On June 25, 2015,

NOTE 9 Stock-Based Compensation

In the fiscal 2016, the Corporation’s Board of Directors and shareholders approved the 2015 Stock Incentive Plan (“Plan”), which allows the granting of stock options and other equity awards to directors, officers, employees, and eligible independent contractors of the Corporation and is intended to retain and reward key employees’ performance and efforts as they relate to the Corporation’s long-term objectives and strategic plan. The Plan was subsequently approved by shareholders at the Corporation’s annual shareholder meeting on September 21, 2015. A total of 700,000 shares of Common Stock have been reserved for issuance under the Plan. Stock option awards are granted with an exercise price equal to, or greater than, the market price of the Corporation’s stock at the date of grant and vest over a period of time as determined by the Corporation at the date of grant up to the contractual ten yearten-year life at which time the options expires.expire. Restricted stock awards are priced no less than 100 percent of market price of the Corporation’s stock at the date of grant, and the awards made to date fully vest after five years.

Stock Options – The following table summarizesunaudited tables summarize option activity for the three months ended August 31, 2016:September 3, 2017.

Stock-based compensation expense for the fair value of the stock options vested during the first quarter of fiscal 2018 and 2017 was approximately $31,000. At August 31, 2016, the intrinsic value of all options outstanding approximated $2,029,000$50,000 and had a weighted-average remaining contractual life of approximately nine years. In addition, the intrinsic value of all vested and exercisable options outstanding approximated $355,000 and had a remaining contractual life of approximately nine years.$31,000, respectively. Total unrecognized compensation expense related to stock-based awardsstock options outstanding at August 31, 2016September 3, 2017 was $530,000approximately $807,000 and is to be recorded over a weighted-average life of approximately four3.4 years.

Item 1.

Financial Statements — (Continued).

10

Item 1. Financial Statements — (Continued).

Skyline Corporation and Subsidiary Companies

Notes to Consolidated Financial Statements (Unaudited)—(Continued)

The Corporation records all stock-based payments, including grants of stock options, in the consolidated statements of operations based on their fair values at the date of grant. The Corporation currently uses the Black-Scholes option pricing model to determine the fair value of stock options. The determination of the fair value of stock options on the date of grant using an option-pricing model is affected by stock price as well as assumptions that include expected stock price volatility over the term of the awards, expected life of the awards, risk-free interest rate, and expected dividends.

The fair value of the options granted during the first quarter of fiscal 2018 and 2017 were estimated at the date of grant using the following weighted average assumptions:

Volatility is estimated based on historical volatility measured monthly for a time period equal to the expected life of the option ending on the date of grant. The risk-free interest rate is determined based on observed U.S. Treasury yields in effect at the time of the grant for maturities equivalent to the expected life of the options. The expected option life (estimated average period of time the options will be outstanding) is estimated based on the expected exercise date of the options. The expected dividend yield of zero is estimated based on the dividend yield at the time of grant as adjusted for any expected changes during the life of the options.

Restricted Stock – In the first quarter of fiscal 2018 and third quarter of fiscal 2017, the Corporation issued 36,000 shares and 15,000 shares of restricted stock valued at approximately $221,000 and $216,000, respectively. No restricted stock was vested at September 3, 2017, and thenon-vested shares had a weighted average grant date fair value of $8.58 per share. The value was determined using the market price of the Corporation’s common stock at the date of grant. The restricted stock’s value is to be expensed over a five-year vesting period using a straight-line method. Compensation expense for the first quarter was approximately $18,000, and unrecognized compensation expense at September 3, 2017 was approximately $402,000.

NOTE 10 Earnings Per Share

Basic earnings per common share is computed based on the weighted-average number of common shares outstanding during the reporting period. Diluted earnings per common share is computed based on the combination of dilutive common share equivalents, comprised of shares issuable under the Corporation’s Stock Incentive Plan and the weighted-average number of common shares outstanding during the reporting period. Dilutive common share equivalents include the dilutive effect ofin-the-money options to purchase shares, which is calculated based on the average share price for each period using the treasury stock method. The following table sets forth the computation of basic and diluted earnings per share (dollars in thousands, except per share amounts):

Item 1.

Financial Statements — (Continued).

11

Item 1. Financial Statements — (Continued).

Skyline Corporation and Subsidiary Companies

Notes to Consolidated Financial Statements (Unaudited) —(Continued)

NOTE 10 Earnings Per Share—(Continued)

There were 13,71695,754 and 129,13913,716 anti-dilutive common stock equivalents excluded from the computation of diluted earnings per share for the three months ended September 3, 2017 and August 31, 2016, and 2015, respectively.

NOTE 11 Loss on Sale of Property, Plant and Equipment

On August 31, 2017, the Corporation sold anon-income producing parcel of land located in Elkhart, Indiana. Proceeds of $420,000 were received, and a loss of $60,000 was recognized in the first quarter.

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Overview

TheEstablished in 1951 and headquartered in Elkhart, IN, the Corporation designs, produces and markets manufactured housing, modular housing and park modelsmodels. The Company sells its products to independent dealers, developers, campgrounds and manufactured housing communities located throughout the United States and Canada. To better serve the needs of its dealers, developers, campgrounds and communities, the Corporation has ten manufacturing facilities in nine states; including a facility in Elkhart, Indiana that commenced operations in June 2016. Manufactured housing, modular housing and park models are sold to customers either through floor plan financing with various financial institutions, credit terms, or on a cash basis. While the Corporation maintains production of manufactured housing, modular homes and park models throughout the year, seasonal fluctuations in sales do occur.

Manufactured Housing, Modular Housing and Park Model Industry Conditions

Sales and production of manufactured housing, modular housing and park models are affected by winter weather conditions at the Corporation’s northern plants. Manufactured and modular housing are marketed under a number of trademarks, and are available in a variety of dimensions. Park models are marketed under the “Shore Park” trademark.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations — (Continued).

Manufactured Housing, Modular Housing and Park Model Industry Conditions—(Continued)

Manufactured housing products are built according to standards established by the U.S. Department of Housing and Urban Development. Modular homes are built according to state, provincial or local building codes. Park models are built according to specifications established by the American National Standards Institute, and are intended to provide temporary living accommodations for individuals seeking leisure travel and outdoor recreation.

To better serve the needs of its dealers, developers, campgrounds and communities, the Corporation has eight manufacturing facilities located in Leola, PA, Sugar Creek, OH, Ocala, FL, Lancaster, WI, Ark City, KS, San Jacinto, CA, Woodland, CA and McMinnville, OR.

12

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations — (Continued).

Overview — (Continued)

Manufactured and modular housing are marketed under a number of trademarks, and are available in a variety of dimensions. Park models are marketed under the “Shore Park” trademark. Manufactured housing, modular housing and park models are sold to customers either through floor plan financing with various financial institutions, credit terms, or on a cash basis.

Manufactured Housing, Modular Housing and Park Model Industry Conditions

New home sales and the overall housing market is subject to seasonal swings. Typically, the demand for our primary product, single family housing, is highest in the spring and summer months and like the general housing market is lower in the winter months. Likewise, the production and sale of manufactured housing, modular housing and park models can be affected by winter weather conditions at the Corporation’s northern plants. Demand for park models, used primarily for vacation and retirement living often offsets slower single-family homes sales during the winter months.

Although the overall demand for new homes is rising, our industry’s products still do not enjoy the favorable financing options afforded conventional site built homes. Industry trade associations at the state and national level are working to improve legislation to make available more favorable financing options for affordable home buyers. GSE’s FNMA (Fannie) and FHLMC (Freddie) recently released their “Underserved Markets Plan” that describes specifically their three-year plan to meet the “Duty to Serve” obligations as outlined in the Federal Housing Enterprises Financial Safety and Soundness Act of 1992, as further amended by the Housing and Economic Recovery Act of 2008. The creation and expansion of a secondary chattel loan market could have a positive effect on the demand for affordable manufactured housing as more favorable finance options are made available.

Sales of manufactured housing, modular housing and park models are affected by the strength of the U.S. economy, interest rate and employment levels, consumer confidence and the availability of wholesale and retail financing. Recent trends regarding calendar year unit shipments of the Corporation’s products and their respective industries are as follows:

13

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations — (Continued).

Manufactured Housing, Modular Housing and Park Model Industry Conditions — (Continued)

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations — (Continued)

First Quarter Fiscal 20172018 Results

The Corporation experienced the following results during the first quarter of fiscal 2017:2018:

Discontinued Operations

During September 2014, the Corporation made a strategic decision to exit the recreational vehicle industry in order to focus on its core housing business. As a result, on October 7, 2014, the Corporation completed the sale of certain assets associated with its recreational vehicle segment to Evergreen Recreational Vehicles, LLC.

The following table summarizes the results of discontinued operations:

Secured Revolving Credit Facility

On March 20, 2015, the Corporation (“Borrower(s)”) entered into a Loan and Security Agreement (the “Loan Agreement”) with First Business Capital Corp. (“First Business Capital”). Under the Loan Agreement, First Business Capital will provideprovided a secured revolving credit facility to the Borrowers for a term of three years, renewable on an annual basis thereafter with each renewal for a successive one-year term. The Corporation maywas able to obtain loan advances up to a maximum of $10,000,000 subject to certain collateral-obligation ratios. On July 21, 2017, the Corporation terminated the Loan Agreement in connection with its entry into a new Credit Agreement with JPMorgan Chase Bank, N.A. (“Chase”) having terms more favorable to the Corporation. As of the date of termination, the Corporation did not have any borrowings outstanding under the Loan Agreement. In addition, the Corporation did not incur any early termination penalties in connection with the termination of the Loan Agreement.

As previously referenced, the Corporation (the “Loan Parties,” and Skyline Corporation and Skyline Homes, Inc., the “Borrowers” and each a “Borrower”) entered into a Credit Agreement (the “Agreement”) with Chase and other ancillary agreements and documents, including a Security Agreement and Patent and Trademark Security Agreement (collectively referred to along with the Agreement as the “Loan Documents”). Under the Agreement, Chase will provide a three-year revolving credit facility with loan advances to the Borrowers of up to a maximum of $10,000,000, subject to a borrowing base set forth in the Agreement (the “New Facility”).

14

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations — (Continued).

Secured Revolving Credit Facility — (Continued)

Loan advances bear interest at 3.75%either 50 basis points above Chase’s floating prime rate (“CBFR”) or 150 basis points in excess ofThe Wall Street Journal’s published one year the LIBOR rate andfor the applicable period (the “Adjusted LIBO Rate”). Loans are secured by substantially all of the Borrowers’Loan Parties’ assets, now owned or hereafter acquired.acquired, except for real property and any life insurance policies owned by any Borrower on the effective date of the Agreement. Interest is payable monthly, in arrears on a monthly basis in the case of the CBFR or at the end of the applicable interest rate in the case of the Adjusted LIBO Rate, and all principal and accrued but unpaid interest is due and payable upon

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations — (Continued).

Secured Revolving Credit Facility — (Continued)

terminationat the maturity of the Loan Agreement. First Business Capital also agreedNew Facility. Borrowers may at any time prepay in whole or in part any loan amounts, subject to minimum amounts and breakage costs.

Also under the Loan Agreement, Chase agreed to issue or cause to be issued by a bank affiliate or other bank, letters of credit for the account of the Corporation. However, noBorrowers not to exceed $500,000. No advances have yet been made in connection with such letters of credit.

DuringAs part of the closing of the financing, the Company paid Chase a closing fee of $25,000 plus legal and due diligence costs. The Loan Parties also agreed to pay the following fees to Chase during the term of the New Facility: (i) a commitment fee payable in arrears at a rate of .25% per annum on the average daily amount of the available revolving commitment under the New Facility during the prior calendar month; and (ii) monthly letter of credit fees payable in arrears at the applicable Adjusted LIBO Rate on the outstanding amount of letters of credit issued and outstanding during the prior month.

The Loan Documents contain covenants that limit the ability of the Loan Parties to, among other things: (i) incur other indebtedness; (ii) create or incur liens on their assets; (iii) consummate asset sales, acquisitions, or mergers; (iv) pay dividends; (v) make certain investments; (vi) enter into certain transactions with affiliates; and (vii) amend a Loan Party’s articles of incorporation or bylaws.

The Agreement also requires compliance with a financial covenant involving a fixed charge coverage ratio as set forth in the Agreement, which becomes effective when borrowing on the revolving credit facility is outstanding.

If the Borrowers default in their obligations under the Agreement, then the unpaid balances will bear interest at 2.0% per annum in excess of the rate that would apply in the absence of a default. Other remedies available to Chase upon an event of default include the right to accelerate the maturity of all obligations, the right to foreclose on and otherwise repossess the collateral securing the obligations, and all other rights set forth in the Loan Documents.

The events of default under the Agreement include, but are not limited to, the following: (i) certain events of bankruptcy and insolvency; (ii) failure to make required payments; (iii) misrepresentations to Chase; (iv) failure to comply with certain covenants and agreements; (v) changes in control; and (vi) a material adverse change occurs.

The Corporation was in compliance as of September 3, 2017 with covenants associated with the Agreement.

15

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations — (Continued).

Results of Operations — Three-Month Period Ended September 3, 2017 Compared to Three-Month Period Ended August 31, 2016

Net Sales and Unit Shipments

Net sales decreased approximately 4.4 percent. The decrease was comprised of an 8.5 percent decrease in manufactured housing net sales, a 0.1 percent increase in modular housing net sales, and a 35.4 percent increase in park model net sales. Prior period net manufactured housing sales included $5,201,000 attributable to the Elkhart, Indiana and Mansfield, Texas facilities which closed in the fourth quarter of fiscal 2017. Park model net sales rose as a result of management’s continuing initiative to increase this product’s exposure at substantially all of the Corporation’s facilities.

For the following three-month periods, the percentage increase or decrease in unit shipments from the comparable period last year are as follows:

Compared to the prior year, the average net sales price for manufactured housing, modular housing and park models increased 9.2, 3.3 and 12.3 percent, respectively, primarily as a result of price increases and product sold with greater square footage and additional amenities.

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Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations — (Continued).

Results of Operations — Three-Month Period Ended September 3, 2017 Compared to Three-Month Period Ended August 31, 2016 — (Continued)

Cost of Sales

Cost of sales, in dollars, decreased primarily as a result of prior year costs including $5,881,000 attributable to the Elkhart, Indiana and Mansfield, Texas facilities that closed in the fourth quarter of fiscal 2017. As a percentage of net sales, cost of sales decreased primarily due to the adverse effect in prior year of the Elkhart and Mansfield facilities. Margins were also positively impacted by the company’s focus on higher margin, multi-section homes, and single section manufactured housing models being a smaller proportion of current year total net sales.

Selling and Administrative Expenses

The increase in selling and administrative expenses is primarily due to an increase in administrative salaries and wages, health insurance costs and profit based compensation. Administrative salaries and wages rose due to headcount additions, including OP-EX (Operational Excellence) managers at multiple facilities, and competitive market conditions. Health insurance costs increased as a result of adverse claim experience and fewer employees contributing to the Corporation’s health insurance plan. Profit based compensation increased due to improved financial results. Prior period expenses included $475,000 attributable to the Elkhart, Indiana and Mansfield, Texas facilities that closed in the fourth quarter of fiscal 2017. As a percentage of net sales, selling and administrative expenses rose due to certain costs increasing amid declining sales.

Loss on sale of property, plant and equipment

On August 31, 2017, the Corporation sold a non-income producing parcel of land located in Elkhart, Indiana. Proceeds of $420,000 were received, and a loss of $60,000 was recognized in the first quarter.

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Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations — (Continued).

Results of Operations — Three-Month Period Ended September 3, 2017 Compared to Three-Month Period Ended August 31, 2016 — (Continued)

Interest Expense

Interest expense primarily increased as the result of write-off of $69,000 in debt financing costs associated with the termination of the First Business Capital Loan Agreement in July 2017.

Liquidity and Capital Resources

As noted in the Consolidated Statements of Cash Flows for the three-month period ended September 3, 2017, cash increased due to cash provided in operating activities of $1,337,000 and cash used in investing activities of $86,000. Current assets, exclusive of cash, increased primarily due to an $811,000 increase in Accounts receivable and a $593,000 increase in Other current assets; offset by a $834,000 decrease in Inventories. Accounts receivable rose due to increased sales in August 2017 as compared to May 2017. Other current assets increased as a result of annual insurance premiums paid during the first quarter of fiscal 2018. Inventories decreased due to decline in work in process units at September 3, 2017 as compared to May 31, 2017.

Current liabilities decreased primarily as a result of a $669,000 decrease in Accrued warranty and a $528,000 decrease in accrued salaries and wages; offset by a $657,000 increase in Accrued volume rebates. Accrued warranty declined as a result of fewer unit sales. Accrued salaries and wages decreased due to timing of payments to employees at September 3, 2017 as compared to May 31, 2017. Accrued volume rebates rose as a result of accruals for an ongoing marketing program for manufactured housing customers that approximately begins on March 1 and approximately ends on February 28 the following additional amendments wereyear. Accruals are made tomonthly, and the Loan Agreement:majority of payments are made during the Corporation’s fourth fiscal quarter.

Except as provided herein, the Loan Agreement

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Item 2.Management’s Discussion and all other loan documentation related thereto shall remain in full forceAnalysis of Financial Condition and effect in accordance with their terms. Results of Operations — (Continued).

Liquidity and Capital Resources — (Continued)

The Corporation was in compliance with Loan Agreement covenants as of August 31, 2016.September 3, 2017 with credit agreement covenants associated with the Secured Revolving Credit Facility with Chase.

At September 3, 2017, the Corporation had the ability to borrow approximately $2,300,000 under the cash surrender value of certain life insurance policies. Subsequent to September 3, 2017, $1,604,000 in life insurance loans with a weighted average interest of 6.3 percent were repaid. Management believes sufficient liquidity exists to meet financial obligations that will occur for at least one year after the date of the filing of this periodic report.

Recently Issued Accounting Pronouncements

In NovemberMay 2014, FASB issued ASU No. 2014-09,Revenue from Contracts with Customers (Topic 66). The core principal of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. For a public entity, this guidance is effective for annual reporting periods after December 15, 2016, including interim periods within that reporting period. Early application is permitted. Subsequent to the issuance of ASU No. 2014-09, FASB issued ASU No. 2015-14, which deferred the effective date of ASU 2014-09 by one year. In addition, FASB subsequently issued ASU 2016-08,Principal versus Agent Considerations, ASU 2016-10,Identifying Performance Obligations and Licensing, ASU 2016-11,Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting, and ASU 2016-12,Narrow-Scope Improvements and Practical Expedients. The Corporation’s revenue comes substantially from the sale of manufactured housing, modular housing and park models, along with freight billed to customers, parts sold and aftermarket services. Revenue is essentially recognized when product is shipped or services rendered, and transfer of title has occurred. The Corporation is currently evaluating how the adoption of ASU 2014-09 will impact its financial position and result of operations, but does not anticipate any material changes resulting from this adoption.

In July 2015, FASB issued ASU No. 2015-17,2015-11,Balance Sheet ClassificationInventory, which requires an entity to measure inventory at the lower of Deferred Taxescost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. Public business entities should apply ASU No. 2015-11 for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The Corporation implemented this pronouncement without a material effect on financial condition and results of operations.

In March 2016, FASB issued ASU No. 2016-09,Improvements to Employee Share-Based Payment Accounting. ASU 2015-17 requires deferred2016-09 simplifies the accounting for share-based payment transactions related to: the income tax liabilitiesconsequences related to exercised or vested share-based payment awards; the classification of awards as either assets or liabilities; and assets be classifiedthe classification in the consolidated statements of cash flows. In addition, ASU 2016-09 provides an accounting policy election to account for forfeitures as noncurrent in a classified statement of financial position.they occur. For public entities, this update is effective for annual periods beginning after December 15, 2016, and for annual and interim periods thereafter.

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Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations — (Continued).

Recently Issued Accounting Pronouncements — (Continued)

Early application is permitted as of the beginning of an interim or annual period.permitted. The Corporation has elected to continue its current policy of estimating forfeitures rather than recognizing forfeitures when they occur, and implemented this pronouncement in the first quarter of fiscal 2017 without a material effect on financial condition and results of operations.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations — (Continued).

Results of Operations — Three-Month Period Ended August 31, 2016 Compared to Three-Month Period Ended August 31, 2015

Net Sales and Unit Shipments

Net sales increased approximately 25.5 percent. The increase was comprised of a 24.6 percent increase in manufactured housing net sales, a 6.9 percent increase in modular housing net sales, and a 100.8 percent increase in park model net sales. Current year net sales includes approximately $2,086,000 attributable to the Elkhart, Indiana facility which commenced operations inupon adoption on June 2016.

For the first quarter of fiscal 2017, the percentage increase or decrease in unit shipments from the comparable period last year are as follows:

Compared to the prior year, the average net sales price for manufactured housing and park models decreased 4.0 and 1.4 percent, respectively, primarily as a result of homes sold with less square footage and fewer amenities and was partially offset by a price increase. The average net sales price for modular housing increased 14.6 percent as a result of a price increase and product sold with greater square footage and additional amenities.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations — (Continued).

Cost of Sales

Cost of sales, in dollars, increased primarily as a result of increased net sales. In addition, current year cost of sales includes approximately $2,645,000 attributable to the Elkhart, Indiana facility; a portion of which were costs associated with startup inefficiencies. As a percentage of net sales, cost of sales decreased due to more effectively controlling material costs during the procurement and manufacturing process, and certain manufacturing expenses being fixed amid rising sales.

Selling and Administrative Expenses

Selling and administrative expenses increased as a result of increased sales-based compensation and performance-based compensation. In addition, current year selling and administrative expenses includes approximately $172,000 attributable to the Elkhart, Indiana facility. As a percentage of net sales, selling and administrative expenses declined due to certain costs remaining relatively constant amid rising sales.

Interest Expense

Interest expense increased as the result of debt financing costs incurred in the fourth quarter of fiscal 2016 that are being amortized over the remaining term of the Secured Revolving Credit Facility.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations — (Continued).

Liquidity and Capital Resources

As noted in the Consolidated Statements of Cash Flows, cash increased due to cash flow from operating activities increasing $1,366,000 and cash flow from investing activities decreasing $575,000. The increase in Other Current assets, exclusive of cash, resulted primarily from $634,000 of annual insurance premiums paid during the first quarter or fiscal1, 2017.

Current liabilities increased primarily as a result of an $899,000 increase in accrued marketing programs. Accrued marketing programs rose as a result of accruals for an ongoing marketing program for manufactured housing customers. Accruals are made monthly, and the majority of payments are made during the Corporation’s fourth fiscal quarter.