UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,Washington, D.C. 20549
FORM10-Q
(Mark One)
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 3, 2017October 2, 2021
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number:1-4714001-04714
SKYLINE CORPORATIONSkyline Champion Corporation
(Exact name of registrant as specified in its charter)
Indiana | 35-1038277 | |
(State
| (I.R.S. Employer Identification No.) | |
755 West Big Beaver Road, Suite 1000 | ||
Troy, Michigan | 48084 | |
(Address of Principal Executive Offices) | (Zip Code) |
| ||
(Registrant’s telephone number, including area code:code)
(574)294-6521
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Common Stock | SKY | New York Stock Exchange |
Indicate by check mark whether the registrantRegistrant (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 registrantRegistrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☑ Yes ☒ No ☐ 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 ☐ No
Indicate by check mark whether the registrantRegistrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,filers,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule12b-2 of the Exchange Act.Act:):
Large accelerated filer | ☒ | Accelerated filer | ☐ | Non-accelerated filer | ☐ | ||
Smaller reporting company | ☐ | ||||||
Emerging growth company | ☐ |
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 registrantRegistrant is a shell company (as defined in Rule12b-2 of the Exchange Act). Yes ☐ Yes ☑ No☒
Indicate the numberNumber of shares outstanding of each of the registrant’s classes of common stock outstanding as of the latest practicable date.October 21, 2021: 56,799,419
SKYLINE CHAMPION CORPORATION
FORM 10-Q
TABLE OF CONTENTS
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FORM10-Q
PART I— FINANCIAL INFORMATION
1 | ||||||
2 | ||||||
3 | ||||||
4 | ||||||
5 | ||||||
6 | ||||||
Management’s Discussion and Analysis of Financial Condition and Results of Operations | 15 | |||||
29 | ||||||
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29 | ||||||
PART I— FINANCIAL INFORMATION
30 | |
31 | |
32 |
i
PART I - FINANCIAL INFORMATION
Item 1.Financial Statements
Skyline Champion Corporation and Subsidiary Companies
Condensed Consolidated Balance Sheets
(Dollars and shares in thousands, except share and per share amounts)
December 3, 2017 | May 31, 2017 | |||||||
(Unaudited) | ||||||||
ASSETS | ||||||||
Current Assets: | ||||||||
Cash | $ | 12,287 | $ | 11,384 | ||||
Accounts receivable | 14,802 | 12,751 | ||||||
Inventories | 12,929 | 12,233 | ||||||
Workers’ compensation security deposit | 371 | 371 | ||||||
Other current assets | 995 | 563 | ||||||
|
|
|
| |||||
Total Current Assets | 41,384 | 37,302 | ||||||
|
|
|
| |||||
Property, Plant and Equipment, at Cost: | ||||||||
Land | 2,016 | 2,965 | ||||||
Buildings and improvements | 35,615 | 35,368 | ||||||
Machinery and equipment | 16,872 | 16,364 | ||||||
|
|
|
| |||||
54,503 | 54,697 | |||||||
Less accumulated depreciation | 44,092 | 43,721 | ||||||
|
|
|
| |||||
10,411 | 10,976 | |||||||
Other Assets | 7,242 | 7,366 | ||||||
|
|
|
| |||||
Total Assets | $ | 59,037 | $ | 55,644 | ||||
|
|
|
|
|
| October 2, |
|
| April 3, |
| ||
|
| (unaudited) |
|
|
|
| ||
ASSETS |
|
|
|
|
|
| ||
Current assets: |
|
|
|
|
|
| ||
Cash and cash equivalents |
| $ | 310,258 |
|
| $ | 262,581 |
|
Trade accounts receivable, net |
|
| 72,886 |
|
|
| 57,481 |
|
Inventories, net |
|
| 179,976 |
|
|
| 166,113 |
|
Other current assets |
|
| 20,315 |
|
|
| 13,592 |
|
Total current assets |
|
| 583,435 |
|
|
| 499,767 |
|
Long-term assets: |
|
|
|
|
|
| ||
Property, plant, and equipment, net |
|
| 122,905 |
|
|
| 115,140 |
|
Goodwill |
|
| 191,970 |
|
|
| 191,803 |
|
Amortizable intangible assets, net |
|
| 55,073 |
|
|
| 58,835 |
|
Deferred tax assets |
|
| 13,832 |
|
|
| 19,914 |
|
Other noncurrent assets |
|
| 43,115 |
|
|
| 32,443 |
|
Total assets |
| $ | 1,010,330 |
|
| $ | 917,902 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
| ||
Current liabilities: |
|
|
|
|
|
| ||
Floor plan payable |
| $ | 30,840 |
|
| $ | 25,733 |
|
Accounts payable |
|
| 57,694 |
|
|
| 57,214 |
|
Other current liabilities |
|
| 200,747 |
|
|
| 180,695 |
|
Total current liabilities |
|
| 289,281 |
|
|
| 263,642 |
|
Long-term liabilities: |
|
|
|
|
|
| ||
Long-term debt |
|
| 12,430 |
|
|
| 39,330 |
|
Deferred tax liabilities |
|
| 4,620 |
|
|
| 4,280 |
|
Other |
|
| 41,021 |
|
|
| 42,039 |
|
Total long-term liabilities |
|
| 58,071 |
|
|
| 85,649 |
|
|
|
|
|
|
|
| ||
Stockholders' Equity: |
|
|
|
|
|
| ||
Common stock, $0.0277 par value, 115,000 shares authorized, 56,796 and 56,640 shares issued as of October 2, 2021 and April 3, 2021, respectively |
|
| 1,572 |
|
|
| 1,569 |
|
Additional paid-in capital |
|
| 496,059 |
|
|
| 491,668 |
|
Retained earnings |
|
| 173,513 |
|
|
| 82,898 |
|
Accumulated other comprehensive loss |
|
| (8,166 | ) |
|
| (7,524 | ) |
Total stockholders’ equity |
|
| 662,978 |
|
|
| 568,611 |
|
Total liabilities and stockholders’ equity |
| $ | 1,010,330 |
|
| $ | 917,902 |
|
The
See accompanying notes are an integral part of the consolidated financial statements.
Skyline Champion Corporation and Subsidiary Companies
Condensed Consolidated Balance Sheets — (Continued)Income Statements
(DollarsUnaudited, dollars in thousands, except share and per share amounts)
December 3, 2017 | May 31, 2017 | |||||||
(Unaudited) | ||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY |
| |||||||
Current Liabilities: | ||||||||
Accounts payable, trade | $ | 4,056 | $ | 3,861 | ||||
Accrued salaries and wages | 2,942 | 3,530 | ||||||
Accrued volume rebates | 3,220 | 1,986 | ||||||
Accrued warranty | 3,916 | 4,757 | ||||||
Customer deposits | 1,977 | 1,880 | ||||||
Other accrued liabilities | 2,596 | 2,371 | ||||||
|
|
|
| |||||
Total Current Liabilities | 18,707 | 18,385 | ||||||
|
|
|
| |||||
Long-Term Liabilities: | ||||||||
Deferred compensation expense | 4,808 | 4,848 | ||||||
Accrued warranty | 2,800 | 2,800 | ||||||
Life insurance loans | 2,707 | 4,312 | ||||||
|
|
|
| |||||
Total Long-Term Liabilities | 10,315 | 11,960 | ||||||
|
|
|
| |||||
Commitments and Contingencies – See Note 7 | ||||||||
Shareholders’ Equity: | ||||||||
Common stock, $.0277 par value, 15,000,000 shares authorized; issued 11,217,144 shares | 312 | 312 | ||||||
Additionalpaid-in capital | 5,316 | 5,171 | ||||||
Retained earnings | 90,131 | 85,560 | ||||||
Treasury stock, at cost, 2,825,900 shares | (65,744 | ) | (65,744 | ) | ||||
|
|
|
| |||||
Total Shareholders’ Equity | 30,015 | 25,299 | ||||||
|
|
|
| |||||
Total Liabilities and Shareholders’ Equity | $ | 59,037 | $ | 55,644 | ||||
|
|
|
|
|
| Three months ended |
|
| Six months ended |
| ||||||||||
|
| October 2, |
|
| September 26, |
|
| October 2, |
|
| September 26, |
| ||||
Net sales |
| $ | 524,225 |
|
| $ | 322,366 |
|
| $ | 1,034,422 |
|
| $ | 595,651 |
|
Cost of sales |
|
| 394,898 |
|
|
| 259,573 |
|
|
| 793,565 |
|
|
| 478,855 |
|
Gross profit |
|
| 129,327 |
|
|
| 62,793 |
|
|
| 240,857 |
|
|
| 116,796 |
|
Selling, general, and administrative expenses |
|
| 61,340 |
|
|
| 41,373 |
|
|
| 115,363 |
|
|
| 82,180 |
|
Operating income |
|
| 67,987 |
|
|
| 21,420 |
|
|
| 125,494 |
|
|
| 34,616 |
|
Interest expense, net |
|
| 845 |
|
|
| 864 |
|
|
| 1,494 |
|
|
| 1,806 |
|
Other expense (income) |
|
| 11 |
|
|
| (2,599 | ) |
|
| (43 | ) |
|
| (6,813 | ) |
Income before income taxes |
|
| 67,131 |
|
|
| 23,155 |
|
|
| 124,043 |
|
|
| 39,623 |
|
Income tax expense |
|
| 16,408 |
|
|
| 5,644 |
|
|
| 30,419 |
|
|
| 10,209 |
|
Net income |
| $ | 50,723 |
|
| $ | 17,511 |
|
| $ | 93,624 |
|
| $ | 29,414 |
|
Net income per share: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Basic |
| $ | 0.89 |
|
| $ | 0.31 |
|
| $ | 1.65 |
|
| $ | 0.52 |
|
Diluted |
| $ | 0.89 |
|
| $ | 0.31 |
|
| $ | 1.64 |
|
| $ | 0.52 |
|
The
See accompanying notes are an integral partNotes to Condensed Consolidated Financial Statements.
2
Skyline Champion Corporation
Condensed Consolidated Statements of the consolidated financial statements.Comprehensive Income
|
| Three months ended |
|
| Six months ended |
| ||||||||||
|
| October 2, |
|
| September 26, |
|
| October 2, |
|
| September 26, |
| ||||
Net income |
| $ | 50,723 |
|
| $ | 17,511 |
|
| $ | 93,624 |
|
| $ | 29,414 |
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Foreign currency translation adjustments |
|
| (1,520 | ) |
|
| 861 |
|
|
| (642 | ) |
|
| 1,956 |
|
Total comprehensive income |
| $ | 49,203 |
|
| $ | 18,372 |
|
| $ | 92,982 |
|
| $ | 31,370 |
|
See accompanying Notes to Condensed Consolidated Financial Statements.
3
Skyline Champion Corporation and Subsidiary Companies
Consolidated Income Statements
For the Three-Months andSix-Months Ended December 3, 2017 and November 30, 2016
(Dollars in thousands, except share and per share amounts)
Three-Months Ended | Six-Months Ended | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
OPERATIONS | ||||||||||||||||
Net sales | $ | 57,765 | $ | 64,226 | $ | 116,227 | $ | 125,402 | ||||||||
Cost of sales | 49,394 | 58,996 | 99,930 | 113,592 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Gross profit | 8,371 | 5,230 | 16,297 | 11,810 | ||||||||||||
Selling and administrative expenses | 6,132 | 5,739 | 12,244 | 11,489 | ||||||||||||
Net gain on sale of property, plant and equipment | 762 | — | 702 | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Operating income (loss) | 3,001 | (509 | ) | 4,755 | 321 | |||||||||||
Interest expense | (37 | ) | (86 | ) | (184 | ) | (172 | ) | ||||||||
Income tax expense | — | — | — | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Net income (loss) | $ | 2,964 | $ | (595 | ) | $ | 4,571 | $ | 149 | |||||||
|
|
|
|
|
|
|
| |||||||||
Basic and diluted income (loss) per share | $ | .35 | $ | (.07 | ) | $ | .54 | $ | .02 | |||||||
|
|
|
|
|
|
|
| |||||||||
Weighted average number of common shares outstanding: | ||||||||||||||||
Basic | 8,391,244 | 8,391,244 | 8,391,244 | 8,391,244 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Diluted | 8,562,899 | 8,391,244 | 8,531,191 | 8,512,903 | ||||||||||||
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements.
Skyline Corporation and Subsidiary Companies
Condensed Consolidated Statements of Cash Flows
For theSix-Months Ended December 3, 2017 and November 30, 2016
(DollarsUnaudited, dollars in thousands)
2017 | 2016 | |||||||||
(Unaudited) | ||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||
Net income | $ | 4,571 | $ | 149 | ||||||
Adjustments to reconcile net income to net cash from operating activities: | ||||||||||
Depreciation | 417 | 511 | ||||||||
Amortization of debt financing costs | 93 | 51 | ||||||||
Share-based compensation | 145 | 62 | ||||||||
Net gain on sale of property, plant and equipment | (702 | ) | — | |||||||
Change in assets and liabilities: | ||||||||||
Accounts receivable | (2,051 | ) | (670 | ) | ||||||
Inventories | (696 | ) | (575 | ) | ||||||
Workers’ compensation security deposit | — | 604 | ||||||||
Other current assets | (432 | ) | (717 | ) | ||||||
Accounts payable, trade | 195 | 92 | ||||||||
Accrued liabilities | 127 | 2,502 | ||||||||
Other, net | 27 | 46 | ||||||||
|
|
|
| |||||||
Net cash from operating activities | 1,694 | 2,055 | ||||||||
|
|
|
| |||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||
Proceeds from sale of property, plant and equipment | 1,651 | — | ||||||||
Purchase of property, plant and equipment | (800 | ) | (787 | ) | ||||||
Other, net | (37 | ) | (25 | ) | ||||||
|
|
|
| |||||||
Net cash from investing activities | 814 | (812 | ) | |||||||
|
|
|
| |||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||
Repayment of life insurance loans | (1,605 | ) | — | |||||||
|
|
|
| |||||||
Net cash from financing activities | (1,605 | ) | — | |||||||
|
|
|
| |||||||
Net increase in cash | 903 | 1,243 | ||||||||
|
|
|
| |||||||
Cash at beginning of period | 11,384 | 7,659 | ||||||||
|
|
|
| |||||||
Cash at end of period | $ | 12,287 | $ | 8,902 | ||||||
|
|
|
|
|
| Six months ended |
| |||||
|
| October 2, |
|
| September 26, |
| ||
Cash flows from operating activities |
|
|
|
|
|
| ||
Net income |
| $ | 93,624 |
|
| $ | 29,414 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
| ||
Depreciation |
|
| 6,521 |
|
|
| 5,969 |
|
Amortization of intangible assets |
|
| 3,762 |
|
|
| 2,721 |
|
Amortization of deferred financing fees |
|
| 509 |
|
|
| 253 |
|
Equity-based compensation |
|
| 4,213 |
|
|
| 3,624 |
|
Deferred taxes |
|
| 6,421 |
|
|
| 2,655 |
|
Loss on disposal of property, plant, and equipment |
|
| 686 |
|
|
| 15 |
|
Foreign currency transaction loss (gain) |
|
| 35 |
|
|
| (219 | ) |
Change in assets and liabilities: |
|
|
|
|
|
| ||
Accounts receivable |
|
| (15,351 | ) |
|
| (984 | ) |
Inventories |
|
| (14,138 | ) |
|
| (990 | ) |
Prepaids and other assets |
|
| (17,934 | ) |
|
| (2,063 | ) |
Accounts payable |
|
| 407 |
|
|
| 5,406 |
|
Accrued expenses and other liabilities |
|
| 20,132 |
|
|
| 18,041 |
|
Net cash provided by operating activities |
|
| 88,887 |
|
|
| 63,842 |
|
Cash flows from investing activities |
|
|
|
|
|
| ||
Additions to property, plant, and equipment |
|
| (15,105 | ) |
|
| (2,552 | ) |
Cash paid for acquisition |
|
| (207 | ) |
|
| — |
|
Proceeds from maturity of Company owned life insurance policy |
|
| — |
|
|
| 1,186 |
|
Proceeds from disposal of property, plant, and equipment |
|
| 66 |
|
|
| 32 |
|
Net cash used in investing activities |
|
| (15,246 | ) |
|
| (1,334 | ) |
Cash flows from financing activities |
|
|
|
|
|
| ||
Changes in floor plan financing, net |
|
| 5,107 |
|
|
| (7,316 | ) |
Payments on deferred financing fees |
|
| (1,130 | ) |
|
| — |
|
Payments on revolving debt facility |
|
| (26,900 | ) |
|
| — |
|
Stock option exercises |
|
| 377 |
|
|
| 67 |
|
Tax payments for equity-based compensation |
|
| (3,007 | ) |
|
| (1,687 | ) |
Net cash used in financing activities |
|
| (25,553 | ) |
|
| (8,936 | ) |
Effect of exchange rate changes on cash and cash equivalents |
|
| (411 | ) |
|
| 1,259 |
|
Net increase in cash and cash equivalents |
|
| 47,677 |
|
|
| 54,831 |
|
Cash and cash equivalents at beginning of period |
|
| 262,581 |
|
|
| 209,455 |
|
Cash and cash equivalents at end of period |
| $ | 310,258 |
|
| $ | 264,286 |
|
The
See accompanying notes are an integral part of the consolidated financial statements.
Skyline Corporation and Subsidiary Companies
Notes to Condensed Consolidated Financial Statements.
4
Skyline Champion Corporation
Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited, dollars and shares in thousands)
|
| Three months ended October 2, 2021 |
| |||||||||||||||||||||
|
| Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
|
| Shares |
|
| Amount |
|
| Additional |
|
| Retained |
|
| Accumulated |
|
| Total |
| ||||||
Balance at July 3, 2021 |
|
| 56,699 |
|
| $ | 1,571 |
|
| $ | 493,191 |
|
| $ | 124,467 |
|
| $ | (6,646 | ) |
| $ | 612,583 |
|
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 50,723 |
|
|
| — |
|
|
| 50,723 |
|
Equity-based compensation |
|
| — |
|
|
| — |
|
|
| 2,772 |
|
|
| — |
|
|
| — |
|
|
| 2,772 |
|
Net common stock issued under equity-based compensation plans |
|
| 97 |
|
|
| 1 |
|
|
| 96 |
|
|
| (1,677 | ) |
|
| — |
|
|
| (1,580 | ) |
Foreign currency translation adjustments |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,520 | ) |
|
| (1,520 | ) |
Balance at October 2, 2021 |
|
| 56,796 |
|
| $ | 1,572 |
|
| $ | 496,059 |
|
| $ | 173,513 |
|
| $ | (8,166 | ) |
| $ | 662,978 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
| Six months ended October 2, 2021 |
| |||||||||||||||||||||
|
| Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
|
| Shares |
|
| Amount |
|
| Additional |
|
| Retained |
|
| Accumulated |
|
| Total |
| ||||||
Balance at April 3, 2021 |
|
| 56,640 |
|
| $ | 1,569 |
|
| $ | 491,668 |
|
| $ | 82,898 |
|
| $ | (7,524 | ) |
| $ | 568,611 |
|
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 93,624 |
|
|
| — |
|
|
| 93,624 |
|
Equity-based compensation |
|
| — |
|
|
| — |
|
|
| 4,213 |
|
|
| — |
|
|
| — |
|
|
| 4,213 |
|
Net common stock issued under equity-based compensation plans |
|
| 156 |
|
|
| 3 |
|
|
| 178 |
|
|
| (3,009 | ) |
|
| — |
|
|
| (2,828 | ) |
Foreign currency translation adjustments |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (642 | ) |
|
| (642 | ) |
Balance at October 2, 2021 |
|
| 56,796 |
|
| $ | 1,572 |
|
| $ | 496,059 |
|
| $ | 173,513 |
|
| $ | (8,166 | ) |
| $ | 662,978 |
|
|
| Three months ended September 26, 2020 |
| |||||||||||||||||||||
|
| Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
|
| Shares |
|
| Amount |
|
| Additional |
|
| Retained |
|
| Accumulated |
|
| Total |
| ||||||
Balance at June 27, 2020 |
|
| 56,665 |
|
| $ | 1,570 |
|
| $ | 487,781 |
|
| $ | 11,610 |
|
| $ | (11,664 | ) |
| $ | 489,297 |
|
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 17,511 |
|
|
| — |
|
|
| 17,511 |
|
Equity-based compensation |
|
| — |
|
|
| — |
|
|
| 1,398 |
|
|
| — |
|
|
| — |
|
|
| 1,398 |
|
Net common stock issued under equity-based compensation plans |
|
| (27 | ) |
|
| (1 | ) |
|
| (1,622 | ) |
|
| — |
|
|
| — |
|
|
| (1,623 | ) |
Foreign currency translation adjustments |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 861 |
|
|
| 861 |
|
Balance at September 26, 2020 |
|
| 56,638 |
|
| $ | 1,569 |
|
| $ | 487,557 |
|
| $ | 29,121 |
|
| $ | (10,803 | ) |
| $ | 507,444 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
| Six months ended September 26, 2020 |
| |||||||||||||||||||||
|
| Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
|
| Shares |
|
| Amount |
|
| Additional |
|
| Retained |
|
| Accumulated |
|
| Total |
| ||||||
Balance at March 28, 2020 |
|
| 56,665 |
|
| $ | 1,570 |
|
| $ | 485,552 |
|
| $ | (48 | ) |
| $ | (12,759 | ) |
| $ | 474,315 |
|
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 29,414 |
|
|
| — |
|
|
| 29,414 |
|
Equity-based compensation |
|
| — |
|
|
| — |
|
|
| 3,624 |
|
|
| — |
|
|
| — |
|
|
| 3,624 |
|
Cumulative adjustment for adoption of ASU 2016-13 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (245 | ) |
|
| — |
|
|
| (245 | ) |
Net common stock issued under equity-based compensation plans |
|
| (27 | ) |
|
| (1 | ) |
|
| (1,619 | ) |
|
| — |
|
|
| — |
|
|
| (1,620 | ) |
Foreign currency translation adjustments |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,956 |
|
|
| 1,956 |
|
Balance at September 26, 2020 |
|
| 56,638 |
|
| $ | 1,569 |
|
| $ | 487,557 |
|
| $ | 29,121 |
|
| $ | (10,803 | ) |
| $ | 507,444 |
|
Components of accumulated other comprehensive income (loss) consisted solely of foreign currency translation adjustments.
See accompanying Notes to Condensed Consolidated Financial Statements.
5
Skyline Champion Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE 1
1.Basis of Presentation and Business
Nature of Operations: Skyline Champion Corporation (the “Company”) is a leading producer of factory-built housing in the United States (“U.S.”) and Canada. The Company’s operations consist of manufacturing, retail, and transportation activities. The Company operates 35 manufacturing facilities throughout the U.S. and 5 manufacturing facilities in western Canada. These facilities primarily construct factory-built, timber-framed manufactured, and modular houses that are sold primarily to independent retailers, builders/developers, and manufactured home community operators. The Company’s retail operations consist of 18 sales centers that sell manufactured houses to consumers primarily in the Southern U.S. The Company’s transportation business engages independent owners/drivers to transport manufactured homes, recreational vehicles and other products throughout the U.S. and Canada.
COVID-19 Government Financial Assistance: The outbreak of a novel strain of coronavirus ("COVID-19") was declared a global pandemic by the World Health Organization in March 2020. Various government programs were announced to provide financial relief for affected businesses, including the Employee Retention Credit under the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") and state level programs in the United States and the Canada Emergency Wage Subsidy ("CEWS") under the COVID-19 Economic Response Plan in Canada. The Company recognized $0.6 million for wage subsidies under the CARES Act and other state level programs in the United States during the first quarter of fiscal 2021. The Company recognized $2.6 million and $6.2 million of payroll subsidies under CEWS during the three and six months ended September 26, 2020, respectively. The Company’s policy is to account for these subsidies as Other Income in the period in which the related costs are incurred and the Company is reasonably assured to receive payment. In addition, the CARES Act allows for deferring payment of certain payroll taxes. Through October 2, 2021, the Company has deferred $11.8 million of payroll taxes that will be paid beginning in December 2021.
Basis of Presentation: The accompanying unaudited interimcondensed consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the consolidated financial position as of December 3, 2017, in addition to the consolidated results of operations and cash flows for the three-month andsix-month periods ended December 3, 2017 and November 30, 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 91 days in the three-month periods ended December 3, 2017 and November 30, 2016, respectively. In addition, there were 186 and 183 days in thesix-month periods ended December 3, 2017 and November 30, 2016, respectively.
The unaudited interim consolidated financial statements included hereinCompany have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for reportingQuarterly Reports on Form10-Q. 10-Q and Article 10 of SEC Regulation S-X. Accordingly, certain information and footnote disclosures normally accompanying the annualincluded in financial statements prepared in accordance with United States Generally Accepted Accounting Principles (“U.S. GAAP”) have been condensed or omitted pursuant to such rules and regulations.
The condensed consolidated financial statements have been omitted.include the accounts of the Company and its majority-owned subsidiaries after elimination of intercompany balances and transactions. In the opinion of management, these statements include all normal recurring adjustments necessary to fairly state the Company’s consolidated results of operations, cash flows, and financial position. The audited consolidatedCompany has evaluated subsequent events after the balance sheet asdate through the date of May 31, 2017, and the unaudited interimfiling of this report with the SEC. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes theretoto the audited consolidated financial statements included in the Corporation’s latest annual reportCompany’s Annual Report on Form10-K. 10-K, which was filed with the SEC on May 26, 2021 (the “Fiscal 2021 Annual Report”).
Recently issued accounting pronouncements— In May 2014,The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU)No. 2014-09,Revenueamounts reported in the condensed consolidated financial statements and the accompanying notes thereto. Actual results could differ from Contracts with Customers (Topic 606). Subsequentthose estimates. The condensed consolidated income statements, condensed consolidated statements of comprehensive income, and condensed consolidated statements of cash flows for the interim periods are not necessarily indicative of the results of operations or cash flows for the full year.
The Company’s allowance for credit losses on financial assets measured at amortized cost reflects management’s estimate of credit losses over the remaining expected life of such assets, measured primarily using historical experience, as well as current economic conditions and forecasts that affect the collectability of the reported amount. Expected credit losses for newly recognized financial assets, as well as changes to expected credit losses during the period, are recognized in earnings. Accounts receivable are reflected net of reserves of $0.5 million and $0.4 million at October 2, 2021 and April 3, 2021, respectively. At both October 2, 2021 and April 3, 2021, other notes receivable are reflected net of reserves of $0.4 million.
The Company’s fiscal year is a 52- or 53-week period that ends on the Saturday nearest to March 31. The Company’s current fiscal year, “fiscal 2022,” will end on April 2, 2022 and will include 52 weeks. References to “fiscal 2021” refer to the issuance of ASUNo. 2014-09, FASBCompany’s fiscal year ended April 3, 2021. The three and six months ended October 2, 2021 and September 26, 2020 each included 13 and 26 weeks, respectively.
There were no accounting standards recently issued ASUNo. 2015-14, which deferred the effective date of ASU2014-09 by one year. In addition, FASB subsequently issued several ASU’s that update or clarify the new rules. For a public entity, this guidance is effective for annual reporting periods after December 15, 2017, including interim periods within that reporting period. Early application is permitted.
The core principal of ASU2014-09 is that an entity should recognize revenueare expected 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. Using this principle, a comprehensive framework was established for determining how much revenue to recognize and when it should be recognized. To be consistent with this core principle, an entity is required to apply the following five-step approach:
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.
Skyline Corporation and Subsidiary Companies
Notes to Consolidated Financial Statements (Unaudited) —(Continued)
NOTE 1 Basis of Presentation—(Continued).
Recently issued accounting pronouncements—(continued) The Corporation is currently evaluating how the adoption of ASU2014-09 will impact its financial position and result of operations by applying the five-step approach to each revenue stream. At this time, material changes resulting from this adoption are not anticipated with the modified retrospective method being utilized.
The Corporation, however, does expect to greatly increase the amount of required disclosures, including but not limited to:
NOTE 2 Inventories
Total inventories consist of the following:
December 3, 2017 | May 31, 2017 | |||||||
(Unaudited) | ||||||||
(Dollars in thousands) | ||||||||
Raw materials | $ | 8,206 | $ | 7,734 | ||||
Work in process | 3,807 | 4,030 | ||||||
Finished goods | 916 | 469 | ||||||
|
|
|
| |||||
$ | 12,929 | $ | 12,233 | |||||
|
|
|
|
NOTE 3 Other Assets
Other assets consist primarily of the cash surrender value of life insurance policies which totaled $7,129,000 and $7,093,000 at December 3, 2017 and May 31, 2017, respectively. Subsequent to December 3, 2017, life insurance policies with cash surrender value of approximately $2,546,000 were cancelled. Proceeds from the cash surrender value were used to repay all outstanding life insurance loans.
Skyline Corporation and Subsidiary Companies
Notes to Consolidated Financial Statements (Unaudited) —(Continued)
NOTE 4 Warranty
A reconciliation of accrued warranty is as follows:
Six-Months Ended | ||||||||
December 3, 2017 | November 30, 2016 | |||||||
(Unaudited) | ||||||||
(Dollars in thousands) | ||||||||
Balance at the beginning of the period | $ | 7,557 | $ | 7,317 | ||||
Accruals for warranties | 3,030 | 3,842 | ||||||
Settlements made during the period | (3,871 | ) | (3,280 | ) | ||||
|
|
|
| |||||
Balance at the end of the period | 6,716 | 7,879 | ||||||
Non-current balance | 2,800 | 2,500 | ||||||
|
|
|
| |||||
Accrued warranty | $ | 3,916 | $ | 5,379 | ||||
|
|
|
|
NOTE 5 Life Insurance Loans
Life insurance loans have no fixed repayment schedule, and have interest rates ranging from 4.2 percent to 4.8 percent. The weighted average interest rate is 4.5 percent. In the second quarter of fiscal 2018, $1,605,000 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. Subsequent to December 3, 2017, all remaining loan balances were repaid as referenced in Note 3.
NOTE 6 Income Taxes
At December 3, 2017, the Corporation’s gross deferred tax assets of approximately $46.7 million consist of approximately $32.4 million in federal net operating loss and tax credit carryforwards, $7.2 million in state net operating loss carryforwards and $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 eighteen years. The state net operating loss carryforwards have a life expectancy, dependingmaterial impact 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 is currently evaluating the new tax law that was enacted on December 22, 2017 and its impact on future estimates of the valuation of the Corporation’s deferred income taxes.
The Corporation had no federal and state income tax benefit or expense for the quarters ended December 3, 2017 and November 30, 2016. For the first half of fiscal 2018, the Corporation reported the utilization of previously fully-reserved federal net operating loss carryforwards of $1,582,000 and state operating loss carryforwards of $326,000 and released corresponding amounts of the valuation allowance to offset federal and state income tax expense.
Skyline Corporation and Subsidiary Companies
Notes to Consolidated Financial Statements (Unaudited) —(Continued)
NOTE 7 Commitments and Contingencies
The Corporation was contingently liable at December 3, 2017 and May 31, 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 $26 million at December 3, 2017 and $30 million at May 31, 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 December 3, 2017 and May 31, 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. 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 December 3, 2017 will not be material to itsCompany’s financial position or results of operations. There were no obligations or incurred net losses from repurchased units for thesix-month periods ended December 3, 2017 and November 30, 2016.
The6
Skyline Champion 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 provided 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 was 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.
Skyline Corporation and Subsidiary Companies
Notes to Condensed Consolidated Financial Statements (Unaudited) —(Continued)
2.Business Acquisition
NOTE 8 Secured Revolving Credit Facility—(Continued)
ScotBilt Acquisition
As
On February 28, 2021, the Company acquired 100% of the datemembership interests of termination,ScotBilt Homes, LLC and related companies (“ScotBilt”), a builder of manufactured homes with annual revenues of approximately $79.0 million, for a purchase price of $53.0 million. Under 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 terminationterms of the Loan Agreement.
As previously referenced,purchase agreement, 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”). Loan advances bear interest at either 50 basis points above Chase’s floating prime rate (“CBFR”) or 150 basis points in excess of the LIBOR ratepreliminary purchase price was adjusted for the applicable period (the “Adjusted LIBO Rate”). Loans are securedcash held by the Loan Parties’ assets, now owned or hereafter acquired, except for real property and any life insurance policies owned by any Borrower on the effective date of the Agreement. Interest is payable in arrears on a monthly basis in the case of the CBFR orScotBilt at the endclosing date and working capital adjustments resulting in an initial total purchase consideration 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 at the maturity of the New 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 Agreement, Chase agreed to issue letters of credit for the account of the Borrowers not to exceed $500,000. No advances have yet been made in connection with such letters of credit.
As 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.
Skyline Corporation and Subsidiary Companies
Notes to Consolidated Financial Statements (Unaudited) —(Continued)
NOTE 8 Secured Revolving Credit Facility—(Continued)
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 December 3, 2017 with covenants associated with the Agreement.
NOTE 9 Stock-Based Compensation
In 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. 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 contractualten-year life at which time the options 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 and restricted stock awards immediately vest upon the closing of change in control events (See Note 12).
Stock Options – The following unaudited tables summarize option activity for thesix-months ended December 3, 2017.
Number of Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (years) | Aggregate Intrinsic Value (in thousands) | |||||||||||||
Options outstanding at May 31, 2017 | 274,000 | $ | 4.79 | 8.40 | $ | 128 | ||||||||||
|
|
|
| |||||||||||||
Granted | 57,000 | 6.15 | ||||||||||||||
|
|
|
| |||||||||||||
Options outstanding at December 3, 2017 | 331,000 | $ | 5.03 | 8.19 | $ | 2,470 | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Vested and exercisable options at December 3, 2017 | 90,000 | $ | 3.54 | 7.66 | $ | 805 | ||||||||||
|
|
|
|
|
|
|
|
Skyline Corporation and Subsidiary Companies
Notes to Consolidated Financial Statements (Unaudited) —(Continued)
NOTE 9 Stock-Based Compensation — (Continued).
Number of Shares | Weighted Average Grant-Date Fair Value | |||||||
Non-vested options at May 31, 2017 | 229,000 | $ | 3.34 | |||||
Granted | 57,000 | 3.86 | ||||||
Vested | (45,000 | ) | 2.55 | |||||
|
|
|
| |||||
Non-vested options at December 3, 2017 | 241,000 | $ | 3.61 | |||||
|
|
|
|
Stock-based compensation expense for the second quarter of fiscal 2018 and 2017 was approximately $55,000 and $31,000, respectively. Stock-based compensation for the first half of fiscal 2018 and 2017 was approximately $105,000 and $62,000, respectively. Total unrecognized compensation expense related to stock options outstanding at December 3, 2017 was approximately $753,000 and is to be recorded over a weighted-average life of 3.15 years.
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 half of fiscal 2018 and 2017 were estimated at the date of grant using the following weighted average assumptions:
2018 | 2017 | |||||||
Volatility | 65.9 | % | 66.0 | % | ||||
Risk-free interest rate | 2.13 | % | 1.47 | % | ||||
Expected option life in years | 7.50 | 7.50 | ||||||
Dividend yield | 0 | % | 0 | % |
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 –$54.5 million. In the first quarter of fiscal 20182022, the Company adjusted the preliminary purchase price allocation by $0.2 million as a result of the final working capital settlement. The Company accounted for the acquisition as a business combination under the acquisition method of accounting provided by FASB ASC 805, Business Combinations (“ASC 805”). As such, the purchase price was allocated to the net assets acquired, inclusive of intangible assets, with the excess fair value recorded to goodwill. The purchase price allocation for this acquisition is preliminary and third quartercould change.
The preliminary allocation of fiscal 2017, the Corporation issued 36,000 sharespurchase price was as follows:
(Dollars in thousands) |
|
|
| |
Cash |
| $ | 1,521 |
|
Trade accounts receivable |
|
| 2,256 |
|
Inventory |
|
| 6,752 |
|
Property, plant, and equipment |
|
| 10,466 |
|
Other assets |
|
| 1,164 |
|
Accounts payable and accrued liabilities |
|
| (7,432 | ) |
Intangibles |
|
| 21,100 |
|
Goodwill |
|
| 18,449 |
|
Total purchase price allocation |
| $ | 54,276 |
|
Goodwill is primarily attributable to expected synergies from the combination of the companies, including, but not limited to, expected cost synergies through procurement activities and 15,000 sharesoperational improvements through sharing of restricted stock valuedbest practices. Goodwill, which is deductible for income tax purposes, was allocated to the U.S. Factory-built Housing reporting unit.
Cash, trade accounts receivable, inventory, other assets, accounts payable, and accrued liabilities were generally stated at approximately $221,000historical carrying values given the short-term nature of these assets and $216,000, respectively. No restricted stock was vested at December 3, 2017,liabilities. Intangible assets include $13.0 million in customer relationships and $8.1 million associated with thenon-vested shares had a weighted average grant date ScotBilt trade name and were based on an independent appraisal. The fair value of $8.58 per share. The valuethe customer relationships was determined using the market pricemulti-period excess earnings method and the fair value of the Corporation’s common stocktrade name was determined using the relief-from-royalty method. The Company estimates that each intangible asset has a weighted average useful life of ten years from the acquisition date. Fair value estimates of property, plant, and equipment were based on independent appraisals, giving consideration to the highest and best use of the assets. Key assumptions used in the appraisals were based on a combination of market, cost, and sales comparison approaches, as appropriate. Level 3 fair value estimates of $10.5 million related to property, plant, and equipment and $21.1 million related to intangible assets were recorded in the accompanying consolidated balance sheet as of April 3, 2021.
The acquisition of ScotBilt was a taxable business combination. Therefore, the Company’s tax basis in the assets acquired and the liabilities assumed approximate the respective fair values at the dateacquisition date.
3.Inventories, net
The components of grant.inventory, net of reserves for obsolete inventory, were as follows:
(Dollars in thousands) |
| October 2, |
|
| April 3, |
| ||
Raw materials |
| $ | 104,179 |
|
| $ | 91,916 |
|
Work in process |
|
| 24,036 |
|
|
| 21,642 |
|
Finished goods and other |
|
| 51,761 |
|
|
| 52,555 |
|
Total inventories, net |
| $ | 179,976 |
|
| $ | 166,113 |
|
At October 2, 2021 and April 3, 2021, reserves for obsolete inventory were $4.5 million and $4.6 million, respectively.
7
Skyline Champion Corporation and Subsidiary Companies
Notes to Condensed Consolidated Financial Statements (Unaudited) —(Continued)
4.Property, Plant, and Equipment
NOTE 9 Stock-Based Compensation—(Continued)
The restricted stock’s valueProperty, plant, and equipment are stated at cost. Depreciation is to be expensed over a five-year vesting period usingcalculated primarily on a straight-line method. Compensationbasis, generally over the following estimated useful lives: land improvements – 3 to 10 years; buildings and improvements – 8 to 25 years; and vehicles and machinery and equipment – 3 to 8 years. Depreciation expense for the second quarterthree months ended October 2, 2021 and first halfSeptember 26, 2020 was $3.3 million and $3.1 million, respectively. Depreciation expense for the six months ended October 2, 2021 and September 26, 2020 was $6.5 million and $6.0 million, respectively.
The components of fiscal 2018property, plant, and equipment were as follows:
(Dollars in thousands) |
| October 2, |
|
| April 3, |
| ||
Land and improvements |
| $ | 38,966 |
|
| $ | 36,470 |
|
Buildings and improvements |
|
| 96,324 |
|
|
| 97,005 |
|
Machinery and equipment |
|
| 61,384 |
|
|
| 57,790 |
|
Construction in progress |
|
| 10,591 |
|
|
| 1,889 |
|
Property, plant, and equipment, at cost |
|
| 207,265 |
|
|
| 193,154 |
|
Less: accumulated depreciation |
|
| (84,360 | ) |
|
| (78,014 | ) |
Property, plant, and equipment, net |
| $ | 122,905 |
|
| $ | 115,140 |
|
5.Goodwill, Intangible Assets, and Cloud Computing Arrangements
Goodwill
Goodwill represents the excess of the cost of an acquired business over the fair value of the identifiable tangible and intangible assets acquired and liabilities assumed in a business combination. At October 2, 2021 and April 3, 2021, the Company had goodwill of $192.0 million and $191.8 million, respectively.
Intangible Assets
The components of amortizable intangible assets were as follows:
(Dollars in thousands) |
| October 2, 2021 |
|
| April 3, 2021 |
| ||||||||||||||||||
|
| Customer |
|
| Trade |
|
| Total |
|
| Customer |
|
| Trade |
|
| Total |
| ||||||
Gross carrying amount |
| $ | 61,923 |
|
| $ | 21,393 |
|
| $ | 83,316 |
|
| $ | 61,963 |
|
| $ | 21,409 |
|
| $ | 83,372 |
|
Accumulated amortization |
|
| (20,934 | ) |
|
| (7,309 | ) |
|
| (28,243 | ) |
|
| (18,158 | ) |
|
| (6,379 | ) |
| $ | (24,537 | ) |
Amortizable intangibles, net |
| $ | 40,989 |
|
| $ | 14,084 |
|
| $ | 55,073 |
|
| $ | 43,805 |
|
| $ | 15,030 |
|
| $ | 58,835 |
|
During the three months ended October 2, 2021 and September 26, 2020, amortization of intangible assets was approximately $22,000$1.9 million and $40,000,$1.3 million, respectively. Unrecognized compensationDuring the six months ended October 2, 2021 and September 26, 2020, amortization of intangible assets was $3.8 million and $2.7 million, respectively.
Cloud Computing Arrangements
The Company capitalizes costs associated with the development of cloud computing arrangements in a manner consistent with internally developed technology. At October 2, 2021 and April 3, 2021, the Company had capitalized cloud computing costs of $10.6 million and $0.3 million within other noncurrent assets, respectively. There was 0 amortization of capitalized cloud computing costs during the three and six months ended October 2, 2021 and September 26, 2020, respectively, as the related cloud computing technology has not yet been placed in service.
8
Skyline Champion Corporation
Notes to Condensed Consolidated Financial Statements - Continued
6.Other Current Liabilities
The components of other current liabilities were as follows:
(Dollars in thousands) |
| October 2, |
|
| April 3, |
| ||
Customer deposits |
| $ | 59,807 |
|
| $ | 58,888 |
|
Accrued volume rebates |
|
| 23,048 |
|
|
| 18,207 |
|
Accrued warranty obligations |
|
| 25,419 |
|
|
| 24,033 |
|
Accrued compensation and payroll taxes |
|
| 45,484 |
|
|
| 42,560 |
|
Accrued insurance |
|
| 15,716 |
|
|
| 12,421 |
|
Other |
|
| 31,273 |
|
|
| 24,586 |
|
Total other current liabilities |
| $ | 200,747 |
|
| $ | 180,695 |
|
7.Accrued Warranty Obligations
Changes in the accrued warranty obligations were as follows:
|
| Three months ended |
|
| Six months ended |
| ||||||||||
(Dollars in thousands) |
| October 2, |
|
| September 26, |
|
| October 2, |
|
| September 26, |
| ||||
Balance at beginning of period |
| $ | 31,079 |
|
| $ | 24,695 |
|
| $ | 30,469 |
|
| $ | 24,969 |
|
Warranty expense |
|
| 10,880 |
|
|
| 8,394 |
|
|
| 21,184 |
|
|
| 14,753 |
|
Cash warranty payments |
|
| (10,104 | ) |
|
| (8,629 | ) |
|
| (19,798 | ) |
|
| (15,262 | ) |
Balance at end of period |
|
| 31,855 |
|
|
| 24,460 |
|
|
| 31,855 |
|
|
| 24,460 |
|
Less: noncurrent portion in other long-term liabilities |
|
| (6,436 | ) |
|
| (5,790 | ) |
|
| (6,436 | ) |
|
| (5,790 | ) |
Total current portion |
| $ | 25,419 |
|
| $ | 18,670 |
|
| $ | 25,419 |
|
| $ | 18,670 |
|
8.Debt and Floor Plan Payable
Long-term debt consisted of the following:
(Dollars in thousands) |
| October 2, |
|
| April 3, |
| ||
Revolving credit facility maturing in 2026 |
| $ | — |
|
| $ | 26,900 |
|
Obligations under industrial revenue bonds due 2029 |
|
| 12,430 |
|
|
| 12,430 |
|
Total debt |
|
| 12,430 |
|
|
| 39,330 |
|
Less: current portion |
|
| — |
|
|
| — |
|
Total long-term debt |
| $ | 12,430 |
|
| $ | 39,330 |
|
On July 7, 2021, the Company entered into an Amended and Restated Credit Agreement with a syndicate of banks that provides for a revolving credit facility of up to $200.0 million, including a $45.0 million letter of credit sub-facility (“Amended Credit Agreement”). The Amended Credit Agreement replaced the Company’s previously existing $100.0 million revolving credit facility. Outstanding borrowings of $26.9 million on the Company’s previous revolving credit facility were repaid in July 2021. The Amended Credit Agreement allows the Company to draw down, repay and re-draw loans on the available funds during the term, subject to certain terms and conditions, matures in July 2026 and has no scheduled amortization. The Company capitalized $1.1 million of deferred financing fees associated with the Amended Credit Agreement, which is included in other noncurrent assets on the consolidated balance sheet. The Company wrote off $0.3 million of deferred financing fees associated with the previously existing credit facility, which is included in interest expense, at December 3, 2017 was approximately $380,000.net for the three and six months ended October 2, 2021.
NOTE 10 Earnings Per Share
Basic earnings per common share is computedThe interest rate on borrowings under the Amended Credit Agreement adjusts based on the consolidated total net leverage of the Company from a high of LIBOR plus 1.875% and ABR plus 0.875%, at the election of the Company, when the consolidated total net leverage ratio is equal to or greater than 2.25:1.00, to a low of LIBOR plus 1.125% and ABR plus 0.125% when the consolidated total net leverage is below 0.50:1.00. In addition, the Company is obligated to pay an unused line fee ranging between 0.15% and 0.3% (depending on the consolidated total net leverage ratio) in respect of unused commitments under the Amended Credit Agreement. At October 2, 2021the interest rate under the Amended Credit Agreement was 1.2%. At October 2, 2021, letters of credit issued under the Amended Credit Agreement totaled $30.4 million and total available borrowings were $169.6 million.
9
Skyline Champion Corporation
Notes to Condensed Consolidated Financial Statements - Continued
Obligations under industrial revenue bonds are supported by letters of credit and bear interest based on a municipal bond index rate. The weighted-average interest rate at October 2, 2021, including related costs and fees, was 1.74%. The industrial revenue bonds require lump-sum payments of principal upon maturity in 2029.
The Amended Credit Agreement contains covenants that restrict the amount of additional debt, liens and certain payments, including equity buybacks, investments, dispositions, mergers and consolidations, among other restrictions as defined. The Company was in compliance with all covenants of the Amended Credit Agreement as of October 2, 2021.
Floor Plan Payable
The Company’s retail operations utilize floor plan financing to fund the purchase of manufactured homes for display or resale. At October 2, 2021 and April 3, 2021, the Company had outstanding borrowings on floor plan financing agreements of $30.8 million and $25.7 million, respectively. Total credit line capacity provided under the agreements was $57.0 million as of October 2, 2021. Borrowings are secured by the homes and are required to be repaid when the Company sells the home to a customer.
10
Skyline Champion Corporation
Notes to Condensed Consolidated Financial Statements - Continued
9.Revenue Recognition
The following tables disaggregate the Company’s revenue by sales category for the three and six months ended October 2, 2021 and September 26, 2020:
|
| Three months ended October 2, 2021 |
| |||||||||||||
(Dollars in thousands) |
| U.S. |
|
| Canadian |
|
| Corporate/ |
|
| Total |
| ||||
|
|
|
| |||||||||||||
Manufacturing and retail |
| $ | 469,127 |
|
| $ | 38,501 |
|
| $ | — |
|
| $ | 507,628 |
|
Commercial |
|
| 2,572 |
|
|
| — |
|
|
| — |
|
|
| 2,572 |
|
Transportation |
|
| — |
|
|
| — |
|
|
| 14,025 |
|
|
| 14,025 |
|
Total |
| $ | 471,699 |
|
| $ | 38,501 |
|
| $ | 14,025 |
|
| $ | 524,225 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
| Six months ended October 2, 2021 |
| |||||||||||||
(Dollars in thousands) |
| U.S. |
|
| Canadian |
|
| Corporate/ |
|
| Total |
| ||||
|
|
|
| |||||||||||||
Manufacturing and retail |
| $ | 925,018 |
|
| $ | 76,332 |
|
| $ | — |
|
| $ | 1,001,350 |
|
Commercial |
|
| 4,001 |
|
|
| — |
|
|
| — |
|
|
| 4,001 |
|
Transportation |
|
| — |
|
|
| — |
|
|
| 29,071 |
|
|
| 29,071 |
|
Total |
| $ | 929,019 |
|
| $ | 76,332 |
|
| $ | 29,071 |
|
| $ | 1,034,422 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
| Three months ended September 26, 2020 |
| |||||||||||||
(Dollars in thousands) |
| U.S. |
|
| Canadian |
|
| Corporate/ |
|
| Total |
| ||||
|
|
|
| |||||||||||||
Manufacturing and retail |
| $ | 275,969 |
|
| $ | 24,558 |
|
| $ | — |
|
| $ | 300,527 |
|
Commercial |
|
| 7,391 |
|
|
| — |
|
|
| — |
|
|
| 7,391 |
|
Transportation |
|
| — |
|
|
| — |
|
|
| 14,448 |
|
|
| 14,448 |
|
Total |
| $ | 283,360 |
|
| $ | 24,558 |
|
| $ | 14,448 |
|
| $ | 322,366 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
| Six months ended September 26, 2020 |
| |||||||||||||
(Dollars in thousands) |
| U.S. |
|
| Canadian |
|
| Corporate/ |
|
| Total |
| ||||
|
|
|
| |||||||||||||
Manufacturing and retail |
| $ | 524,828 |
|
| $ | 39,753 |
|
| $ | — |
|
| $ | 564,581 |
|
Commercial |
|
| 7,391 |
|
|
| — |
|
|
| — |
|
|
| 7,391 |
|
Transportation |
|
| — |
|
|
| — |
|
|
| 23,679 |
|
|
| 23,679 |
|
Total |
| $ | 532,219 |
|
| $ | 39,753 |
|
| $ | 23,679 |
|
| $ | 595,651 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
Skyline Champion Corporation
Notes to Condensed Consolidated Financial Statements - Continued
10.Income Taxes
For the three months ended October 2, 2021 and September 26, 2020, the Company recorded $16.4 million and $5.6 million of income tax expense and had an effective tax rate during each period of 24.4%. For the six months ended October 2, 2021 and September 26, 2020, the Company recorded $30.4 million and $10.2 million of income tax expense and had an effective tax rate of 24.5% and 25.8%, respectively.
The Company’s effective tax rate for the three months and six months ended October 2, 2021 differs from the federal statutory rate of 21.0% due primarily to the effect of state and local income taxes, non-deductible expenses, tax credits, results in foreign jurisdictions, and tax benefits from vested equity compensation. The Company’s effective tax rate for the three months and six months ended September 26, 2020 differs from the federal statutory rate of 21.0% due primarily to the effect of state and local income taxes, non-deductible expenses, tax credits, and results in foreign jurisdictions.
At October 2, 2021, the Company had 0 unrecognized tax benefits. The Company does not anticipate any material changes to uncertain tax benefits in the next twelve months. The Company records interest and penalties related to unrecognized tax benefits as a component of income tax expense.
11.Earnings Per Share
Basic net income per share (“EPS”) attributable to the Company was computed by dividing net income attributable to the Company by the average number of common shares outstanding during the reporting period. Certain of the Company’s time-based restricted share awards were considered participating securities prior to the completion of the vesting period. The vesting for these time-based shares occurred in the second quarter of fiscal 2021. Diluted earnings per common share is computed based on the combinationmore dilutive of: (i) the two class method, assuming the participating securities are not exercised or converted; or (ii) the summation of dilutive common share equivalents, comprised of shares issuable under the Corporation’s Stock Incentive Plan and the weighted-average number ofaverage common shares outstanding during the reporting period. Dilutiveand additional common share equivalents includeshares that would have been outstanding if the dilutive effect ofin-the-money options to purchasepotential common shares which is calculated based onhad been issued. During the average share price for each period usingthree and six months ended September 26, 2020, the treasury stock method.two-class method was more dilutive.
The following table sets forth the computation of basic and diluted earnings per share (dollars in thousands, except per share amounts):common share:
Three-Months Ended | Six-Months Ended | |||||||||||||||
December 3, 2017 | November 30, 2016 | December 3, 2017 | November 30, 2016 | |||||||||||||
(Unaudited) | ||||||||||||||||
Net income (loss) | $ | 2,964 | $ | (595 | ) | $ | 4,571 | $ | 149 | |||||||
|
|
|
|
|
|
|
| |||||||||
Weighted average share outstanding: | ||||||||||||||||
Basic | 8,391,244 | 8,391,244 | 8,391,244 | 8,391,244 | ||||||||||||
Common stock equivalents— treasury stock method | 171,655 | — | 139,947 | 121,659 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Diluted | 8,562,899 | 8,391,244 | 8,531,191 | 8,512,903 | ||||||||||||
Net income (loss) per share: | ||||||||||||||||
Basic | $ | .35 | $ | (.07 | ) | $ | .54 | $ | .02 | |||||||
|
|
|
|
|
|
|
| |||||||||
Diluted | $ | .35 | $ | (.07 | ) | $ | .54 | $ | .02 | |||||||
|
|
|
|
|
|
|
|
|
| Three months ended |
| Six months ended |
| |||||||||||
(Dollars and shares in thousands, except per share data) |
| October 2, |
|
| September 26, |
|
| October 2, |
|
| September 26, |
| ||||
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net income |
| $ | 50,723 |
|
| $ | 17,511 |
|
| $ | 93,624 |
|
| $ | 29,414 |
|
Undistributed earnings allocated to participating securities |
|
| — |
|
|
| (19 | ) |
|
| — |
|
|
| (53 | ) |
Net income attributable to the Company's common shareholders |
| $ | 50,723 |
|
| $ | 17,492 |
|
| $ | 93,624 |
|
| $ | 29,361 |
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Basic weighted-average shares outstanding |
|
| 56,808 |
|
|
| 56,654 |
|
|
| 56,757 |
|
|
| 56,593 |
|
Dilutive securities |
|
| 400 |
|
|
| 255 |
|
|
| 455 |
|
|
| 238 |
|
Diluted weighted-average shares outstanding |
|
| 57,208 |
|
|
| 56,909 |
|
|
| 57,212 |
|
|
| 56,831 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Basic net income per share |
| $ | 0.89 |
|
| $ | 0.31 |
|
| $ | 1.65 |
|
| $ | 0.52 |
|
Diluted net income per share |
| $ | 0.89 |
|
| $ | 0.31 |
|
| $ | 1.64 |
|
| $ | 0.52 |
|
There were 23,417 and 139,532 anti-dilutive common stock equivalents excluded from the computation of diluted earnings per share for the three-months ended December 3, 2017 and November 30, 2016, respectively. There were 46,168 and 8,727 anti-dilutive common stock equivalents excluded from the computation of diluted earnings per share for thesix-months ended December 3, 2017 and November 30, 2016.
12
Skyline Champion Corporation and Subsidiary Companies
Notes to Condensed Consolidated Financial Statements (Unaudited) —(Continued)
NOTE 11 Net Gain
12.Segment Information
Financial results for the Company's reportable segments have been prepared using a management approach, which is consistent with the basis and manner in which financial information is evaluated by the Company's chief operating decision maker in allocating resources and in assessing performance. The Company’s chief operating decision maker, the Chief Executive Officer, evaluates the performance of the Company’s segments primarily based on Sale of Property, Plantnet sales, earnings before interest, taxes, depreciation, and Equipmentamortization (“EBITDA”) and operating assets.
On November 22, 2017,The Company operates in 2 reportable segments: (i) U.S. Factory-built Housing, which includes manufacturing and retail housing operations and (ii) Canadian Factory-built Housing. Corporate/Other includes the Corporation sold anon-income producing parcel of land located in McMinnville, Oregon. Proceeds of $1,231,000 were received,Company’s transportation operations, corporate costs incurred for all segments and a gain of $762,000intersegment eliminations. Segments are generally determined by geography. Segment data includes intersegment revenues and corporate office costs that are directly and exclusively incurred for each segment. Total assets for Corporate/Other primarily includes cash and certain deferred tax items not specifically allocated to another segment.
Selected financial information by reportable segment was recognizedas follows:
|
| Three months ended |
|
| Six months ended |
| ||||||||||
(Dollars in thousands) |
| October 2, |
|
| September 26, |
|
| October 2, |
|
| September 26, |
| ||||
|
|
|
|
|
|
| ||||||||||
Net sales: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
U.S. Factory-built Housing |
| $ | 471,699 |
|
| $ | 283,360 |
|
| $ | 929,019 |
|
| $ | 532,219 |
|
Canadian Factory-built Housing |
|
| 38,501 |
|
|
| 24,558 |
|
|
| 76,332 |
|
|
| 39,753 |
|
Corporate/Other |
|
| 14,025 |
|
|
| 14,448 |
|
|
| 29,071 |
|
|
| 23,679 |
|
Consolidated net sales |
| $ | 524,225 |
|
| $ | 322,366 |
|
| $ | 1,034,422 |
|
| $ | 595,651 |
|
Operating income: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
U.S. Factory-built Housing EBITDA |
| $ | 78,075 |
|
| $ | 28,697 |
|
| $ | 141,092 |
|
| $ | 53,090 |
|
Canadian Factory-built Housing EBITDA |
|
| 6,390 |
|
|
| 5,951 |
|
|
| 12,056 |
|
|
| 10,857 |
|
Corporate/Other EBITDA |
|
| (11,351 | ) |
|
| (6,221 | ) |
|
| (17,328 | ) |
|
| (13,828 | ) |
Other income |
|
| 11 |
|
|
| (2,599 | ) |
|
| (43 | ) |
|
| (6,813 | ) |
Depreciation |
|
| (3,264 | ) |
|
| (3,048 | ) |
|
| (6,521 | ) |
|
| (5,969 | ) |
Amortization |
|
| (1,874 | ) |
|
| (1,360 | ) |
|
| (3,762 | ) |
|
| (2,721 | ) |
Consolidated operating income |
| $ | 67,987 |
|
| $ | 21,420 |
|
| $ | 125,494 |
|
| $ | 34,616 |
|
Depreciation: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
U.S. Factory-built Housing |
| $ | 2,619 |
|
| $ | 2,391 |
|
| $ | 5,229 |
|
| $ | 4,789 |
|
Canadian Factory-built Housing |
|
| 273 |
|
|
| 248 |
|
|
| 558 |
|
|
| 363 |
|
Corporate/Other |
|
| 372 |
|
|
| 409 |
|
|
| 734 |
|
|
| 817 |
|
Consolidated depreciation |
| $ | 3,264 |
|
| $ | 3,048 |
|
| $ | 6,521 |
|
| $ | 5,969 |
|
Amortization of U.S. Factory-built Housing intangible assets: |
| $ | 1,874 |
|
| $ | 1,360 |
|
| $ | 3,762 |
|
| $ | 2,721 |
|
Capital expenditures: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
U.S. Factory-built Housing |
| $ | 5,269 |
|
| $ | 1,054 |
|
| $ | 12,527 |
|
| $ | 1,939 |
|
Canadian Factory-built Housing |
|
| 236 |
|
|
| 85 |
|
|
| 341 |
|
|
| 242 |
|
Corporate/Other |
|
| 379 |
|
|
| 102 |
|
|
| 2,237 |
|
|
| 371 |
|
Consolidated capital expenditures |
| $ | 5,884 |
|
| $ | 1,241 |
|
| $ | 15,105 |
|
| $ | 2,552 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
(Dollars in thousands) |
|
|
|
|
|
|
| October 2, |
|
| April 3, |
| ||||
Total Assets: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
U.S. Factory-built Housing (1) |
|
|
|
|
|
|
| $ | 605,669 |
|
| $ | 578,897 |
| ||
Canadian Factory-built Housing (1) |
|
|
|
|
|
|
|
| 93,773 |
|
|
| 87,224 |
| ||
Corporate/Other (1) |
|
|
|
|
|
|
|
| 310,888 |
|
|
| 251,781 |
| ||
Consolidated total assets |
|
|
|
|
|
|
| $ | 1,010,330 |
|
| $ | 917,902 |
|
13
Skyline Champion Corporation
Notes to Condensed Consolidated Financial Statements - Continued
Likewise,
13.Commitments, Contingencies and Legal Proceedings
Repurchase Contingencies and Guarantees
The Company is contingently liable under terms of repurchase agreements with lending institutions that provide wholesale floor plan financing to retailers. These arrangements, which are customary in the manufactured housing industry, provide for the repurchase of products sold to retailers in the event of default by the retailer on August 31, 2017,its agreement to pay the Corporation soldfinancial institution. The risk of loss from these agreements is spread over numerous retailers. The repurchase price is generally determined by the original sales price of the product less contractually defined curtailment payments. Excluding the resale value of the homes, the contingent repurchase obligation as of October 2, 2021 was estimated to be $243.4 million. The Company accounts for the guarantees under its repurchase agreements with the retailers’ financing institutions by estimating and deferring anon-income producing parcel portion of land located in Elkhart, Indiana. Proceedsthe related product sale that represents the estimated fair value of $420,000 were received,the repurchase obligation. In addition, the Company has estimated the expected contingent net loss the Company will incur upon resale of any repurchases. These estimates are based on recent historical experience supplemented by management’s assessment of current economic and other conditions affecting retailers for which the Company has a contingent repurchase obligation. Based on these repurchase agreements and historical loss experience, as well as current economic conditions and forecasts that affect the potential loss exposure, a loss reserve of $60,000$1.5 million and $1.4 million was recognizedrecorded as of October 2, 2021 and April 3, 2021, respectively. Losses incurred on homes repurchased were not significant during the three or six months ended October 2, 2021 or September 26, 2020.
At October 2, 2021, the Company was contingently obligated for $30.4 million under letters of credit, primarily consisting of $12.6 million to support long-term debt, $17.5 million to support the casualty insurance program, and $0.3 million to support bonding agreements. The letters of credit are issued from a sub-facility of the Amended Credit Agreement. The Company was also contingently obligated for $35.1 million under surety bonds, generally to support performance on long-term construction contracts and license and service bonding requirements.
In the normal course of business, the Company’s former subsidiaries that operated in the first quarter.
NOTE United Kingdom historically provided certain guarantees to two customers. Those guarantees provide contractual liability for proven construction defects up to 12 Subsequent Event
years from the date of delivery of certain products. The Exchange
On January 5, 2018, the Corporation (“Skyline” or the “Company”) and Champion Enterprises Holdings, LLC (“Champion Holdings”) entered intoguarantees remain a Share Contribution & Exchange Agreement (the “Exchange Agreement”) pursuant to which the two companies will combine their operations. Under the Exchange Agreement, (i) Champion Holdings will contribute to Skyline allcontingent liability of the issued and outstanding shares of common stock of Champion Holdings’ wholly-owned operating subsidiariesCompany which declines over time through the contribution of allOctober 2027. As of the issueddate of this report, the Company expects few, if any, claims to be reported under the terms of the guarantees.
Legal Proceedings
The Company has agreed to indemnify counterparties in the ordinary course of its business in agreements to acquire and outstanding equity interestssell business assets and in financing arrangements. The Company is subject to various legal proceedings and claims that arise in the ordinary course of eachits business. As of the date of this filing, the Company believes the ultimate liability with respect to these contingent obligations will not have, either individually or in the aggregate, a material adverse effect on the Company’s financial condition, results of operations, or cash flows.
14
Item 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following should be read in conjunction with Skyline Champion Corporation’s condensed consolidated financial statements and the related notes that appear in Item 1 of this Report.
Overview
Skyline Champion Corporation (the “Company”) is a leading producer of factory-built housing in the U.S. and Canada. The Company serves as a complete solutions provider across complementary and vertically integrated businesses including manufactured offsite construction, company-owned retail locations, and transportation logistics services. The Company is the largest independent publicly traded factory-built solutions provider in North America (based on revenue) and markets its homes under several nationally recognized brand names including Skyline Homes, Champion Home Builders, Inc., a Delaware corporation (“CHB”)Genesis Homes, Athens Park Models, Dutch Housing, Excel Homes, Homes of Merit, New Era, Redman Homes, ScotBilt Homes, Shore Park, Silvercrest, and Titan Homes in the U.S., and CHB International B.V.,Moduline and SRI Homes in western Canada. The Company operates 35 manufacturing facilities throughout the U.S. and five manufacturing facilities in western Canada that primarily construct factory-built, timber-framed, manufactured and modular houses that are sold mainly to independent retailers, builders/developers, and manufactured home community operators. The Company’s retail operations consist of 18 sales centers that sell manufactured homes to consumers primarily in the southern U.S. The Company’s transportation business engages independent owners/drivers to transport manufactured homes, recreational vehicles, and other products throughout the U.S. and Canada.
Industry and Company Outlook
Since July 2020, U.S. and Canadian housing industry demand has been robust. The limited availability of existing homes for sale and the broader need for newly built affordable, single-family housing has continued to drive demand for new homes in these markets. In recent years, manufactured home construction experienced revenue growth due to a Dutch private limited liability company (“CIBV”) (the sharesnumber of stockfavorable demographic trends and demand drivers in the United States, including underlying growth trends in key homebuyer groups, such as the population over 55 years of CHBage, the population of first-time home buyers, and CIBVthe population of households earning less than $60,000 per year. We have also seen a number of market trends pointing to increased sales of accessory dwelling units and urban-to-rural migration as customers accommodate working-from-home patterns, as well as people seeking rent-to-own single-family options.
The robust demand environment has resulted in backlog of $1,369 million as of October 2, 2021 compared to $390.1 million as of September 26, 2020. Generally higher backlog at our manufacturing facilities creates an opportunity to increase production efficiencies. Although the higher demand brings opportunities, it also has resulted in significant increases in certain material input costs, most significantly forest products for much of fiscal 2022. In addition, we are also experiencing supply disruption, higher freight costs and fluctuating prices for many of our other material inputs. Finding and retaining qualified labor continues to be contributeda challenge for our plants which requires us to Skyline,review our compensation programs and adjust accordingly. We manage our business to anticipate or quickly react to these supply challenges and cost increases and generally are able to pass along increased costs to our customers. Historically, order cancellation rates have been very low, but the “Contributed Shares”longer lead-time caused by larger backlogs and changing prices could result in cancellations in future periods.
For the six months ended October 2, 2021, approximately 77% of the Company’s U.S. manufacturing sales were generated from the manufacture of homes that comply with the U.S. Department of Housing and Urban Development ("HUD") code construction standard in the U.S. Industry shipments of HUD-code homes are reported on a one-month lag. According to data reported by the Manufactured Housing Institute ("MHI"), HUD-code industry home shipments were 43,949 and (ii) in exchange36,312 units during the five months ended August 31, 2021 and 2020, respectively. Based on industry data, the Company’s U.S. wholesale market share of HUD code homes sold was 19.5% and 15.6%, for the Contributed Shares, Skyline will issuefive months ended August 31, 2021 and 2020, respectively. Annual shipments have generally increased each year since calendar year 2009 when only 50,000 HUD-coded manufactured homes were shipped, the lowest level since the industry began recording statistics in 1959. While shipments of HUD-coded manufactured homes have improved modestly in recent years, manufactured housing’s most recent annual shipment levels still operate at lower levels than the long-term historical average of over 200,000 units.
Acquisitions and Expansions
Over the last several years, demand for the Company’s products, primarily affordable housing in the U.S., has continued to Champion Holdings that numberimprove. As a result, the Company has focused on operational improvements to make existing manufacturing facilities more profitable as well as executing measured expansion of sharesits manufacturing and retail footprints.
The Company has increased capacity through strategic acquisitions and expansions of Skyline common stock, $0.0277 par value per share, such that atits manufacturing operations. The Company is focused on growing in strong housing markets across the closing, Champion Holdings (orU.S.
On June 21, 2021, the Company acquired two idle facilities in Navasota, Texas in order to strengthen its members) will hold 84.5%,production capabilities in the Texas market. The Company intends to initiate production in one of these facilities by the end of fiscal 2022. On February 28, 2021, the Company acquired ScotBilt. In calendar 2020, ScotBilt shipped over 1,600 homes from its two manufacturing facilities in Georgia providing affordable housing throughout Alabama, Florida, Georgia and Skyline’s shareholders will hold 15.5%,the Carolinas. ScotBilt has approximately 400 employees in its two
15
manufacturing facilities. The Company believes ScotBilt is an excellent fit because of the common stockcompatible company cultures and because of the combined company on a fully-diluted basis (the “Shares Issuance”). The contribution of the Contributed Shares by Champion Holdings to Skyline, and the Shares Issuance by Skyline to Champion Holdings, are collectively referred to herein as the “Exchange.” In connection with the closing of the Exchange, Skyline will file the Company Charter Amendment (described below) and will change its name to “Skyline Champion Corporation.”
Immediately prior to the closing of the Exchange, Skyline will amend and restate its articles of incorporation to provide for, among other things, (i) the changeScotBilt’s strong presence in the nameattractive Mid-South region, which helps to balance national distribution and complements the Company’s existing manufacturing footprint. The operations of ScotBilt are included in the financial results of the Company since the date of the acquisition. On January 14, 2021, the Company acquired two idled facilities in Pembroke, North Carolina, which provides an opportunity to further expand its manufacturing footprint in the South and Southeast markets. The Company is currently assessing prospects for initiating production in one or both of these facilities.
The Company's acquisitions and investments are part of a strategy to grow and diversify revenue with a focus on increasing the Company’s HUD and modular homebuilding presence in the U.S. as described above; (ii)well as improving the results of operations. These acquisitions and investments are included in the Company's consolidated results for periods subsequent to their respective acquisition dates.
COVID-19 Pandemic
The outbreak of a novel strain of coronavirus ("COVID-19") was declared a global pandemic by the World Health Organization in March 2020. There remains continued uncertainty regarding the extent and duration of the impact that the COVID-19 pandemic will have on the economy, the housing market, and the Company, as well as the Company’s employees, customers, and suppliers.
The Company has prioritized the safety and well-being of its employees and customers and has implemented standards to operate in accordance with social-distancing protocols and public health authority guidelines. Beginning in March 2020, the Company took actions to temporarily idle certain facilities in response to government shutdown orders or reduced demand. By late April 2020, most of the temporarily idled manufacturing facilities had reopened, but at reduced production levels due to employee absenteeism, difficulty hiring new team members, and social distancing protocols. During fiscal 2021, the Company experienced intermittent closures due to COVID-19 outbreaks at the facilities or surrounding communities causing higher than normal absenteeism. In the second half of fiscal 2021, the Company was able to increase daily production rates over the levels achieved in the prior fiscal year period as direct labor staffing levels increased and production efficiencies improved. As of October 2, 2021, availability of labor and certain materials remain subject to disruption and uncertainty. Prices for key raw materials have experienced increased volatility and, overall, manufacturing costs have trended higher than prior periods.
As part of the initial response to the pandemic, the Company offered extended benefits to employees, including increased sick pay and waived premium payments on healthcare benefits for furloughed employees during the first quarter of fiscal 2021. The Company’s U.S. operations incurred $1.9 million of expense related to the extended benefits. Various government programs have been announced to provide financial relief for affected businesses, including the Employee Retention Credit under the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") in the United States and the Canada Emergency Wage Subsidy ("CEWS") under the COVID-19 Economic Response Plan in Canada. CEWS provided a cash subsidy of up to 75% of eligible employees’ remuneration, subject to certain criteria. The Company recognized $2.6 million and $6.2 million, respectively, for payroll subsidies under CEWS during the three and six months ended September 26, 2020. The Company also recognized $0.6 million for payroll subsidies under the CARES Act during the first quarter of fiscal 2021. In addition, the CARES Act allowed for deferring payment of certain payroll taxes. Through October 2, 2021, the Company has deferred $11.8 million of payroll taxes that will be paid beginning in December 2021.
16
UNAUDITED INCOME STATEMENTS FOR THE SECOND QUARTER OF FISCAL 2022 VS. 2021
|
| Three months ended |
| |||||
(Dollars in thousands) |
| October 2, |
|
| September 26, |
| ||
|
|
|
| |||||
Results of Operations Data: |
|
|
|
|
|
| ||
Net sales |
| $ | 524,225 |
|
| $ | 322,366 |
|
Cost of sales |
|
| 394,898 |
|
|
| 259,573 |
|
Gross profit |
|
| 129,327 |
|
|
| 62,793 |
|
Selling, general, and administrative expenses |
|
| 61,340 |
|
|
| 41,373 |
|
Operating income |
|
| 67,987 |
|
|
| 21,420 |
|
Interest expense, net |
|
| 845 |
|
|
| 864 |
|
Other income (expense) |
|
| 11 |
|
|
| (2,599 | ) |
Income before income taxes |
|
| 67,131 |
|
|
| 23,155 |
|
Income tax expense |
|
| 16,408 |
|
|
| 5,644 |
|
Net income |
| $ | 50,723 |
|
| $ | 17,511 |
|
|
|
|
|
|
|
| ||
Reconciliation of Adjusted EBITDA: |
|
|
|
|
|
| ||
Net income |
| $ | 50,723 |
|
| $ | 17,511 |
|
Income tax expense |
|
| 16,408 |
|
|
| 5,644 |
|
Interest expense, net |
|
| 845 |
|
|
| 864 |
|
Depreciation and amortization |
|
| 5,138 |
|
|
| 4,408 |
|
Equity-based compensation (for awards granted prior to December 31, 2018) |
|
| — |
|
|
| 388 |
|
Other |
|
| — |
|
|
| 122 |
|
Adjusted EBITDA |
| $ | 73,114 |
|
| $ | 28,937 |
|
As a percent of net sales: |
|
|
|
|
|
| ||
Gross profit |
|
| 24.7 | % |
|
| 19.5 | % |
Selling, general, and administrative expenses |
|
| 11.7 | % |
|
| 12.8 | % |
Operating income |
|
| 13.0 | % |
|
| 6.6 | % |
Net income |
|
| 9.7 | % |
|
| 5.4 | % |
Adjusted EBITDA |
|
| 13.9 | % |
|
| 9.0 | % |
NET SALES
The following table summarizes net sales for the three months ended October 2, 2021 and September 26, 2020:
|
| Three months ended |
|
|
|
|
|
|
| |||||||
(Dollars in thousands) |
| October 2, |
|
| September 26, |
|
| $ |
|
| % |
| ||||
Net sales |
| $ | 524,225 |
|
| $ | 322,366 |
|
| $ | 201,859 |
|
|
| 62.6 | % |
U.S. manufacturing and retail net sales |
| $ | 471,699 |
|
| $ | 283,360 |
|
| $ | 188,339 |
|
|
| 66.5 | % |
U.S. homes sold |
|
| 5,902 |
|
|
| 4,689 |
|
|
| 1,213 |
|
|
| 25.9 | % |
U.S. manufacturing and retail average home selling price |
| $ | 79.9 |
|
| $ | 60.4 |
|
| $ | 19.5 |
|
|
| 32.3 | % |
Canadian manufacturing net sales |
| $ | 38,501 |
|
| $ | 24,558 |
|
| $ | 13,943 |
|
|
| 56.8 | % |
Canadian homes sold |
|
| 358 |
|
|
| 302 |
|
|
| 56 |
|
|
| 18.5 | % |
Canadian manufacturing average home selling price |
| $ | 107.5 |
|
| $ | 81.3 |
|
| $ | 26.2 |
|
|
| 32.2 | % |
Corporate/Other net sales |
| $ | 14,025 |
|
| $ | 14,448 |
|
| $ | (423 | ) |
|
| (2.9 | %) |
U.S. manufacturing facilities in operation at end of period |
|
| 35 |
|
|
| 33 |
|
|
|
|
|
|
| ||
U.S. retail sales centers in operation at end of period |
|
| 18 |
|
|
| 18 |
|
|
|
|
|
|
| ||
Canadian manufacturing facilities in operation at end of period |
|
| 5 |
|
|
| 5 |
|
|
|
|
|
|
|
Net sales for the three months ended October 2, 2021 were $524.2 million, an increase of $201.9 million, or 62.6%, over the three months ended September 26, 2020. The following is a summary of the change by operating segment.
17
U.S. Factory-built Housing:
Net sales for the Company’s U.S. manufacturing and retail operations increased by $188.3 million, or 66.5%, for the three months ended October 2, 2021 compared to the three months ended September 26, 2020. The change was primarily due to an increase in the number of authorized shareshomes sold during the period of common stock25.9%, an increase in the average home selling price of 32.3%, and the impact of the Company from 15,000,000acquisition of ScotBilt. Demand for our products has increased significantly in recent periods and we have been able to 115,000,000 shares; (iii) a provision statingincrease production in response to that demand. The average selling price increased during the period due to pricing actions enacted in response to rising material, freight, and labor costs. Generally, we are able to pass the increase in input costs along to our customers.
Canadian Factory-built Housing:
The Canadian Factory-built Housing segment net sales increased by $13.9 million, or 56.8% for the three months ended October 2, 2021 compared to the same period in the prior fiscal year, primarily due to an 18.5% increase in the number of directors shall be as specifiedhomes sold and a 32.2% increase in average home selling price. The increase in volume was due to an increase in demand and production rates. The increase in average selling price was due to pricing actions enacted in response to rising material and labor costs. On a constant currency basis, net sales for the Canadian segment were unfavorably impacted by approximately $0.6 million due to fluctuations in the Company’s bylaws; and (iv) certain other ministerial revisions to update and modernizetranslation of the articles of incorporation and remove various extraneous provisions (collectively, the “Company Charter Amendment”).
The Exchange is expected to close as soon as practicable after the satisfaction or waiver of all the conditionsCanadian dollar to the closingU.S. dollar during the three months ended October 2, 2021 as compared to the same period of the prior fiscal year.
Corporate/Other:
Net sales for Corporate/Other includes the Company’s transportation business and the elimination of intersegment sales. For the three months ended October 2, 2021, net sales decreased $0.4 million, or 2.9%, primarily attributable to lower revenue from the shipment of recreational vehicles.
GROSS PROFIT
The following table summarizes gross profit for the three months ended October 2, 2021 and September 26, 2020:
|
| Three months ended |
|
|
|
|
|
|
| |||||||
(Dollars in thousands) |
| October 2, |
|
| September 26, |
|
| $ |
|
| % |
| ||||
Gross profit: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
U.S. Factory-built Housing |
| $ | 116,604 |
|
| $ | 54,546 |
|
| $ | 62,058 |
|
|
| 113.8 | % |
Canadian Factory-built Housing |
|
| 8,868 |
|
|
| 4,787 |
|
|
| 4,081 |
|
|
| 85.3 | % |
Corporate/Other |
|
| 3,855 |
|
|
| 3,460 |
|
|
| 395 |
|
|
| 11.4 | % |
Total gross profit |
| $ | 129,327 |
|
| $ | 62,793 |
|
| $ | 66,534 |
|
|
| 106.0 | % |
Gross profit as a percent of net sales |
|
| 24.7 | % |
|
| 19.5 | % |
|
|
|
|
|
|
Gross profit as a percent of sales during the three months ended October 2, 2021 was 24.7% compared to 19.5% during the three months ended September 26, 2020. The following is a summary of the change by operating segment.
U.S. Factory-built Housing:
Gross profit for the U.S. Factory-built Housing segment increased by $62.1 million, or 113.8%, during the three months ended October 2, 2021 compared to the same period in the Exchange Agreement, which is currently expectedprior fiscal year. Gross profit was 24.7% as a percent of segment net sales for the three months ended October 2, 2021, compared to be19.2% in the first halfsame period of 2018.the prior fiscal year. The increase in gross profit is due to the increase in homes sold and operational efficiencies and increased leverage of manufacturing fixed costs resulting from higher production volumes.
Skyline Corporation and Subsidiary CompaniesCanadian Factory-built Housing:
NotesGross profit for the Canadian Factory-built Housing segment increased by $4.1 million, or 85.3%, during the three months ended October 2, 2021, compared to Consolidated Financial Statements (Unaudited) —(Continued)
NOTE 12 Subsequent Event—(Continued)
Representations and Warranties; Covenants
Each of Skyline and Champion Holdings makes customary representations and warrantiesthe same period in the Exchange Agreement. Skyline also has agreedprior fiscal year, primarily due to various covenantsincreased sales volume. Gross profit as a percent of net sales was 23.0% for the three months ended October 2, 2021, compared to 19.5% in the Exchange Agreement, including, without limitation,same period of the prior fiscal year. The improvement is due to cause a special meeting of Skyline’s shareholders to be held as promptly as practicable to considerdirect labor and approvemanufacturing efficiencies from the Company Charter Amendment andincrease in home sales, partially offset by higher material costs.
18
Corporate/Other:
Gross profit for the Shares Issuance (the “Company Shareholder Approval Matters”)Corporate/Other segment increased $0.4 million, or 11.4%, and to file a proxy statement withduring the Securities and Exchange Commission (“SEC”) relating to such special meeting.
The Exchange Agreement contains customary covenants governing the conduct of Skyline’s and Champion Holdings’ respective businesses, access to information pertainingthree months ended October 2, 2021, compared to the parties’ businesses, and notification of certain events, among other things, between the datesame period of the Exchange Agreement and the closing. Pursuant to the Exchange Agreement, Skyline is subject tocustomary “no-shop” restrictions which restrict its ability to solicit alternative acquisition proposals from third parties and to provide information to and engage in discussions with third parties regarding alternative acquisition proposals. However, prior to receiving approval of the Company Shareholder Approval Matters by Skyline’s shareholders, Skyline may, under certain circumstances, provide information to and participate in discussions with third parties with respect to certain unsolicited alternative acquisition proposals as provided in the Exchange Agreement.
The Exchange Agreement provides that, prior to the closing of the Exchange, Skyline may declare and pay a special cash dividend to its shareholders in the aggregate amount of Skyline’s “net cash” (generally defined in the Exchange Agreement as Skyline’s aggregate cash and cash equivalents, less the aggregate amount of Skyline’s indebtedness and debt-like items, and less Skyline’s aggregate transaction expenses incurred in connection with the Exchange, each as determined as of the close of business on the last business day immediately prior to the date Skyline gives notice of the special dividend to the NYSE American), if any. If declared, Skyline must pay the special dividend at least one business day prior to the closing date.
Closing Conditions
Consummation of the Exchange is subject to various conditions, including, without limitation, (i) approval by Skyline’s shareholders of the Company Shareholder Approval Matters; (ii) the receipt of all required regulatory approvals (without the imposition of any burdensome divestiture condition on the parties, as described in the Exchange Agreement); (iii) the absence of any law, order, or legal injunction which prohibits the consummation of the Exchange and the absence of certain other litigation matters; (iv) the NYSE American listing application for the Company’s shares to be issued in the Shares Issuance shall have been conditionally approved; (v) the accuracy of the parties’ respective representations and warranties and the performance of their respective obligations; (vi) the absence of the occurrence of a material adverse effect with respect to each of Skyline and Champion Holdings, and their subsidiaries, each taken as a whole, between the date of the Exchange Agreement and closing; and (vii) certain other customary conditions.
Skyline Corporation and Subsidiary Companies
Notes to Consolidated Financial Statements (Unaudited) —(Continued)
NOTE 12 Subsequent Event—(Continued)
Termination and Termination Fees
The Exchange Agreement contains certain termination rights in favor of Skyline and Champion Holdings, as set forth therein. Upon the termination of the Exchange Agreement under specified circumstances, and upon Skyline entering into or closing another acquisition transaction within 12 months after termination of the Exchange Agreement, Skyline may be required to pay Champion Holdings a termination fee of $10 million. Any termination fee triggered under the Exchange Agreement will accrue upon Skyline entering into or closing another acquisition transaction within 12 months after termination, but the fee is not payable by Skyline to Champion Holdings until two business days after the date that the other acquisition closes or is terminated unless the board of directors of Skyline adversely changes its favorable recommendation of the Exchange to its shareholders and Champion Holdings terminates the Exchange Agreementfiscal year, as a result of such changechanges in recommendation, in which case, a termination feerevenue mix.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
Selling, general, and administrative expenses include foreign currency transaction gains and losses, equity compensation, and intangible amortization expense. The following table summarizes selling, general, and administrative expenses for the three months ended October 2, 2021 and September 26, 2020:
|
| Three months ended |
|
|
|
|
|
|
| |||||||
(Dollars in thousands) |
| October 2, |
|
| September 26, |
|
| $ |
|
| % |
| ||||
Selling, general, and administrative expenses: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
U.S. Factory-built Housing |
| $ | 43,014 |
|
| $ | 29,601 |
|
| $ | 13,413 |
|
|
| 45.3 | % |
Canadian Factory-built Housing |
|
| 2,751 |
|
|
| 1,683 |
|
|
| 1,068 |
|
|
| 63.5 | % |
Corporate/Other |
|
| 15,575 |
|
|
| 10,089 |
|
|
| 5,486 |
|
|
| 54.4 | % |
Total selling, general, and administrative expenses |
| $ | 61,340 |
|
| $ | 41,373 |
|
| $ | 19,967 |
|
|
| 48.3 | % |
Selling, general, and administrative expense as a percent of net sales |
|
| 11.7 | % |
|
| 12.8 | % |
|
|
|
|
|
|
Selling, general, and administrative expenses were $61.3 million for the three months ended October 2, 2021, an increase of $3$20.0 million, in cash is immediately due and payable by Skyline to Champion Holdings upon such termination, and if Skyline subsequently enters into or closes another acquisition transaction within 12 months after termination, an additional $7 million cash termination fee would accrue and would become payable two business days after the date that the other acquisition closes or is terminated.
In addition48.3%, compared to the termination fee, ifsame period in the Exchange Agreementprior fiscal year. The following is terminateda summary of the change by either Skylineoperating segment.
U.S. Factory-built Housing:
Selling, general, and administrative expenses for the U.S. Factory-built Housing segment increased $13.4 million, or Champion Holdings because45.3%, during the three months ended October 2, 2021, as compared to the same period in the prior fiscal year. Selling, general, and administrative expenses as a percent of Skyline’s shareholders do not approvesegment net sales decreased to 9.1% for the Company Shareholder Approval Matters, then Skyline must pay Champion Holdings $2three months ended October 2, 2021, compared to 10.4% during the comparable period of the prior fiscal year, primarily due to increased leverage of fixed costs resulting from the increase in sales. The increase in expenses resulted from the following factors: (i) higher sales commissions and incentive compensation, which is generally based on sales volume or a measure of profitability; (ii) higher wage expense from headcount increases due to the growth in housing demand; and (iii) the impact of the acquisition of the ScotBilt operations.
Canadian Factory-built Housing:
Selling, general, and administrative expenses for the Canadian Factory-built Housing segment increased $1.1 million, or 63.5%, for the three months ended October 2, 2021 when compared to the same period of the prior fiscal year. Selling, general, and administrative expenses as reimbursementa percent of segment net sales increased to 7.1% for feesthe three months ended October 2, 2021, compared to 6.9% during the comparable period of the prior fiscal year. The increase in expenses resulted from an increase in commissions and incentive compensation as well as wage expense from headcount increases due to the growth in housing demand.
Corporate/Other:
Selling, general, and administrative expenses for Corporate/Other includes the Company’s transportation operations, corporate costs incurred by Champion Holdingsfor all segments, and intersegment eliminations. Selling, general, and administrative expenses for Corporate/Other increased $5.5 million, or 54.4%, during the three months ended October 2, 2021, compared to the same period of the prior fiscal year, due to an increase in connectionemployee compensation, primarily equity and incentive compensation as well as $2.1 million of costs related to investments made to enhance our customer buying experience and supporting systems.
19
INTEREST EXPENSE, NET
The following table summarizes the components of interest expense, net for the three months ended October 2, 2021 and September 26, 2020:
|
| Three months ended |
|
|
|
|
|
|
| |||||||
(Dollars in thousands) |
| October 2, |
|
| September 26, |
|
| $ |
|
| % |
| ||||
Interest expense |
| $ | 993 |
|
| $ | 974 |
|
| $ | 19 |
|
|
| 2.0 | % |
Less: Interest income |
|
| (148 | ) |
|
| (110 | ) |
|
| (38 | ) |
|
| 34.5 | % |
Interest expense, net |
| $ | 845 |
|
| $ | 864 |
|
| $ | (19 | ) |
|
| (2.2 | %) |
Average outstanding floor plan payable |
| $ | 29,300 |
|
| $ | 27,309 |
|
|
|
|
|
|
| ||
Average outstanding long-term debt |
| $ | 12,430 |
|
| $ | 77,330 |
|
|
|
|
|
|
|
Interest expense, net was $0.8 million for the three months ended October 2, 2021, remaining consistent with the Exchange Agreement. Any expense reimbursement paid by Skyline will be credited against, and thereby reduce, any termination fee that may become due and payable.
The foregoing descriptionssame period of the Exchange Agreement, the Exchange, and the Shares Issuance are summaries, do not purport to be complete, and are qualified in their entirety by reference to the full text of the Exchange Agreement, and the exhibits attached thereto, copies of which are attached as Exhibits 2.1 to the Current Report onForm 8-K filed with Securities and Exchange Commission on January 5, 2018.
Overview
Established in 1951 and headquartered in Elkhart, Indiana, the Corporation designs, produces and markets manufactured housing, modular housing and park models.prior fiscal year. The Company sells its products to independent dealers, developers, campgrounds and manufactured housing communities located throughout the United States and Canada.
Overview—(Continued)
Manufactured housing products are built according to standards established by the U.S. Departmentwrote off $0.3 million 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, Pennsylvania, Sugarcreek, Ohio, Ocala, Florida, Lancaster, Wisconsin, Arkansas City, Kansas, San Jacinto, California, Woodland, California and McMinnville, Oregon. 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 plandeferred 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. Government Sponsored Enterprises’ Federal National Mortgage Association and Federal Home Loan Mortgage Corporation 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:
Manufactured Housing | 2012 | 2013 | 2014 | 2015 | 2016 | |||||||||||||||
Industry | 54,891 | 60,210 | 64,344 | 70,519 | 81,169 | |||||||||||||||
Percentage Increase | 9.7 | % | 6.9 | % | 9.6 | % | 15.1 | % | ||||||||||||
Corporation | 1,848 | 2,205 | 2,678 | 2,872 | 3,606 | |||||||||||||||
Percentage Increase | 19.3 | % | 21.5 | % | 7.2 | % | 25.6 | % |
Manufactured Housing, Modular Housing and Park Model Industry Conditions — (Continued)
Modular Housing | 2012 | 2013 | 2014 | 2015 | 2016 | |||||||||||||||
*Industry | 13,290 | 14,020 | 13,844 | 13,974 | 13,881 | |||||||||||||||
Percentage Increase (Decrease) | 5.5 | % | (1.3 | %) | 0.9 | % | (0.7 | %) | ||||||||||||
**Corporation | 382 | 350 | 477 | 341 | 334 | |||||||||||||||
Percentage Increase (Decrease) | (8.4 | %) | 36.3 | % | (28.5 | %) | (2.1 | %) | ||||||||||||
* Domestic shipment only. Canadian industry shipments not available. ** Includes domestic and Canadian unit shipments
|
| |||||||||||||||||||
Park Models | ||||||||||||||||||||
Industry | 2,780 | 3,598 | 3,781 | 3,649 | 3,669 | |||||||||||||||
Percentage Increase (Decrease) | 29.4 | % | 5.1 | % | (3.5 | %) | 0.5 | % | ||||||||||||
Corporation | 138 | 171 | 307 | 380 | 419 | |||||||||||||||
Percentage Increase | 23.9 | % | 79.5 | % | 23.8 | % | 10.3 | % |
Fiscal 2018 Second Quarter and First Half Results
The Corporation experienced the following resultsfees during the second quarter ofended October 2, 2021, which offset the reduction in interest expense from lower average outstanding borrowing balance on the Company's revolving credit facility during the second quarter ended October 2, 2021 versus the same quarter in fiscal 2018:2021.
OTHER EXPENSE (INCOME)
The following table summarizes other income for the $64,226,000 reported inthree months ended October 2, 2021 and September 26, 2020:
|
| Three months ended |
|
|
|
|
|
|
| |||||||
(Dollars in thousands) |
| October 2, |
|
| September 26, |
|
| $ |
|
| % |
| ||||
Other expense (income) |
| $ | 11 |
|
| $ | (2,599 | ) |
| $ | 2,610 |
|
|
| (100.4 | %) |
Other income decreased $2.6 million, or 100.4%, during the three months ended October 2, 2021, as compared to the same period of the prior fiscal year. The decrease is due to a year ago.
INCOME TAX EXPENSE
The following table summarizes income tax expense for fiscal 2018the three months ended October 2, 2021 and September 26, 2020:
|
| Three months ended |
|
|
|
|
|
|
| |||||||
(Dollars in thousands) |
| October 2, |
|
| September 26, |
|
| $ |
|
| % |
| ||||
|
|
|
|
|
|
|
|
|
| |||||||
Income tax expense |
| $ | 16,408 |
|
| $ | 5,644 |
|
| $ | 10,764 |
|
|
| 190.7 | % |
Effective tax rate |
|
| 24.4 | % |
|
| 24.4 | % |
|
|
|
|
|
|
Income tax expense for the three months ended October 2, 2021 was $3,001,000 as$16.4 million, representing an effective tax rate of 24.4%, compared to income tax expense of $5.6 million, representing an operating losseffective tax rate of $509,00024.4% for fiscal 2017. Current year operatingthe three months ended September 26, 2020.
20
The Company’s effective tax rate for the three months ended October 2, 2021 differs from the federal statutory income includes a $762,000 net gain ontax rate of 21.0% due primarily to the saleeffect of property, plantstate and equipment. Prior year’s operating loss included a $1,362,000 loss, excluding corporate overhead allocation, attributablelocal income taxes, non-deductible expenses, tax credits, results in foreign jurisdictions, and tax benefits from vested equity compensation. The Company’s effective tax rate for the three months ended September 26, 2020 differs from the federal statutory income tax rate of 21.0% due primarily to facilitiesthe effect of non-deductible expenses, state and local income taxes, tax credits, and results in Elkhart, Indiana and Mansfield, Texas that closed in the fourth quarter of fiscal 2017.
The Corporation experienced
|
| Three months ended |
|
|
|
|
|
|
| |||||||
(Dollars in thousands) |
| October 2, |
|
| September 26, |
|
| $ |
|
| % |
| ||||
Net income |
| $ | 50,723 |
|
| $ | 17,511 |
|
| $ | 33,212 |
|
| * |
| |
Income tax expense |
|
| 16,408 |
|
|
| 5,644 |
|
|
| 10,764 |
|
| * |
| |
Interest expense, net |
|
| 845 |
|
|
| 864 |
|
|
| (19 | ) |
|
| (2.2 | %) |
Depreciation and amortization |
|
| 5,138 |
|
|
| 4,408 |
|
|
| 730 |
|
|
| 16.6 | % |
Equity-based compensation (for awards granted prior to December 31, 2018) |
|
| — |
|
|
| 388 |
|
|
| (388 | ) |
| * |
| |
Other |
|
| — |
|
|
| 122 |
|
|
| (122 | ) |
| * |
| |
Adjusted EBITDA |
| $ | 73,114 |
|
| $ | 28,937 |
|
| $ | 44,177 |
|
| * |
|
* indicates that the following results duringcalculated percentage is not meaningful
Adjusted EBITDA for the first halfthree months ended October 2, 2021 was $73.1 million, an increase of fiscal 2018:
UNAUDITED INCOME STATEMENTS FOR THE FIRST HALF OF FISCAL 2022 VS. 2021
|
| Six months ended |
| |||||
(Dollars in thousands) |
| October 2, |
|
| September 26, |
| ||
|
|
|
| |||||
Results of Operations Data: |
|
|
|
|
|
| ||
Net sales |
| $ | 1,034,422 |
|
| $ | 595,651 |
|
Cost of sales |
|
| 793,565 |
|
|
| 478,855 |
|
Gross profit |
|
| 240,857 |
|
|
| 116,796 |
|
Selling, general, and administrative expenses |
|
| 115,363 |
|
|
| 82,180 |
|
Operating income |
|
| 125,494 |
|
|
| 34,616 |
|
Interest expense, net |
|
| 1,494 |
|
|
| 1,806 |
|
Other income |
|
| (43 | ) |
|
| (6,813 | ) |
Income before income taxes |
|
| 124,043 |
|
|
| 39,623 |
|
Income tax expense |
|
| 30,419 |
|
|
| 10,209 |
|
Net income |
| $ | 93,624 |
|
| $ | 29,414 |
|
|
|
|
|
|
|
| ||
Reconciliation of Adjusted EBITDA: |
|
|
|
|
|
| ||
Net income |
| $ | 93,624 |
|
| $ | 29,414 |
|
Income tax expense |
|
| 30,419 |
|
|
| 10,209 |
|
Interest expense, net |
|
| 1,494 |
|
|
| 1,806 |
|
Depreciation and amortization |
|
| 10,283 |
|
|
| 8,690 |
|
Equity-based compensation (for awards granted prior to December 31, 2018) |
|
| — |
|
|
| 1,358 |
|
Adjusted EBITDA |
| $ | 135,820 |
|
| $ | 51,477 |
|
As a percent of net sales: |
|
|
|
|
|
| ||
Gross profit |
|
| 23.3 | % |
|
| 19.6 | % |
Selling, general, and administrative expenses |
|
| 11.2 | % |
|
| 13.8 | % |
Operating income |
|
| 12.1 | % |
|
| 5.8 | % |
Net income |
|
| 9.1 | % |
|
| 4.9 | % |
Adjusted EBITDA |
|
| 13.1 | % |
|
| 8.6 | % |
21
NET SALES
The following table summarizes net sales for fiscal 2018 was $4,755,000 asthe six months ended October 2, 2021 and September 26, 2020:
|
| Six months ended |
|
|
|
|
|
|
| |||||||
(Dollars in thousands) |
| October 2, |
|
| September 26, |
|
| $ |
|
| % |
| ||||
|
|
|
|
|
|
|
|
|
| |||||||
Net sales |
| $ | 1,034,422 |
|
| $ | 595,651 |
|
| $ | 438,771 |
|
|
| 73.7 | % |
U.S. manufacturing and retail net sales |
| $ | 929,019 |
|
| $ | 532,219 |
|
| $ | 396,800 |
|
|
| 74.6 | % |
U.S. homes sold |
|
| 12,274 |
|
|
| 8,717 |
|
|
| 3,557 |
|
|
| 40.8 | % |
U.S. manufacturing and retail average home selling price |
| $ | 75.7 |
|
| $ | 61.1 |
|
| $ | 14.6 |
|
|
| 23.9 | % |
Canadian manufacturing net sales |
| $ | 76,332 |
|
| $ | 39,753 |
|
| $ | 36,579 |
|
|
| 92.0 | % |
Canadian homes sold |
|
| 743 |
|
|
| 494 |
|
|
| 249 |
|
|
| 50.4 | % |
Canadian manufacturing average home selling price |
| $ | 102.7 |
|
| $ | 80.5 |
|
| $ | 22.2 |
|
|
| 27.6 | % |
Corporate/Other net sales |
| $ | 29,071 |
|
| $ | 23,679 |
|
| $ | 5,392 |
|
|
| 22.8 | % |
U.S. manufacturing facilities in operation at end of period |
|
| 35 |
|
|
| 33 |
|
|
|
|
|
|
| ||
U.S. retail sales centers in operation at end of period |
|
| 18 |
|
|
| 18 |
|
|
|
|
|
|
| ||
Canadian manufacturing facilities in operation at end of period |
|
| 5 |
|
|
| 5 |
|
|
|
|
|
|
|
Net sales for the six months ended October 2, 2021 were $1,034.4 million, an increase of $438.8 million, or 73.7%, over the six months ended September 26, 2020. The following is a summary of the change by operating segment.
U.S. Factory-built Housing:
Net sales for the Company’s U.S. manufacturing and retail operations increased by $396.8 million, or 74.6%, for the six months ended October 2, 2021 compared to operating income of $321,000 for fiscal 2017. Current year operating income includes a $702,000 net gain on the sale of property, plant and equipment. Prior year’s operating income included a $2,517,000 loss, excluding corporate overhead allocation, attributablesix months ended September 26, 2020. The increase was primarily due to the Elkhart and Mansfield facilities.
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 provided 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 was 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”).
Loan advances bear interest at either 50 basis points above Chase’s floating prime rate (“CBFR”) or 150 basis points in excess of the LIBOR rate for the applicable period (the “Adjusted LIBO Rate”). Loans are secured by the Loan Parties’ assets, now owned or hereafter acquired, except for real property and any life insurance policies owned by any Borrower on the effective date of the Agreement. Interest is payable 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 at the maturity of the New 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 Agreement, Chase agreed to issue letters of credit for the account of the Borrowers not to exceed $500,000. No advances have yet been made in connection with such letters of credit.
As 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.
Secured Revolving Credit Facility— (Continued)
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 December 3, 2017 with covenants associated with the Agreement.
Subsequent Event
The Exchange
On January 5, 2018, the Corporation (“Skyline” or the “Company”) and Champion Enterprises Holdings, LLC (“Champion Holdings”) entered into a Share Contribution & Exchange Agreement (the “Exchange Agreement”) pursuant to which the two companies will combine their operations. Under the Exchange Agreement, (i) Champion Holdings will contribute to Skyline all of the issued and outstanding shares of common stock of Champion Holdings’ wholly-owned operating subsidiaries through the contribution of all of the issued and outstanding equity interests of each of Champion Home Builders, Inc., a Delaware corporation (“CHB”), and CHB International B.V., a Dutch private limited liability company (“CIBV”) (the shares of stock of CHB and CIBV to be contributed to Skyline, the “Contributed Shares”), and (ii) in exchange for the Contributed Shares, Skyline will issue to Champion Holdings that number of shares of Skyline common stock, $0.0277 par value per share, such that at the closing, Champion Holdings (or its members) will hold 84.5%, and Skyline’s shareholders will hold 15.5%, of the common stock of the combined company on a fully-diluted basis (the “Shares Issuance”). The contribution of the Contributed Shares by Champion Holdings to Skyline, and the Shares Issuance by Skyline to Champion Holdings, are collectively referred to herein as the “Exchange.” In connection with the closing of the Exchange, Skyline will file the Company Charter Amendment (described below) and will change its name to “Skyline Champion Corporation.”
Subsequent Event — (Continued)
The Exchange — (Continued)
Immediately prior to the closing of the Exchange, Skyline will amend and restate its articles of incorporation to provide for, among other things, (i) the change in the name of the Company as described above; (ii) an increase in the number of authorized shareshomes sold during the period of common stock3,557, an increase in the average selling price of 23.9%, and the impact of the Company from 15,000,000 to 115,000,000 shares; (iii) a provision stating thatacquisition of ScotBilt. The increase in the number of directors shall be as specified in the Company’s bylaws; and (iv) certain other ministerial revisions to update and modernize the articles of incorporation and remove various extraneous provisions (collectively, the “Company Charter Amendment”). The Exchange is expected to close as soon as practicable after the satisfaction or waiver of all the conditions to the closing in the Exchange Agreement, which is currently expected to be in the first half of 2018.
Representations and Warranties; Covenants
Each of Skyline and Champion Holdings makes customary representations and warranties in the Exchange Agreement. Skyline also has agreed to various covenants in the Exchange Agreement, including, without limitation, to cause a special meeting of Skyline’s shareholders to be held as promptly as practicable to consider and approve the Company Charter Amendment and the Shares Issuance (the “Company Shareholder Approval Matters”), and to file a proxy statement with the Securities and Exchange Commission (“SEC”) relating to such special meeting.
The Exchange Agreement contains customary covenants governing the conduct of Skyline’s and Champion Holdings’ respective businesses, access to information pertaining to the parties’ businesses, and notification of certain events, among other things, between the date of the Exchange Agreement and the closing. Pursuant to the Exchange Agreement, Skyline is subject tocustomary “no-shop” restrictions which restrict its ability to solicit alternative acquisition proposals from third parties and to provide information to and engage in discussions with third parties regarding alternative acquisition proposals. However, prior to receiving approval of the Company Shareholder Approval Matters by Skyline’s shareholders, Skyline may, under certain circumstances, provide information to and participate in discussions with third parties with respect to certain unsolicited alternative acquisition proposals as provided in the Exchange Agreement.
The Exchange Agreement provides that, prior to the closing of the Exchange, Skyline may declare and pay a special cash dividend to its shareholders in the aggregate amount of Skyline’s “net cash” (generally defined in the Exchange Agreement as Skyline’s aggregate cash and cash equivalents, less the aggregate amount of Skyline’s indebtedness and debt-like items, and less Skyline’s aggregate transaction expenses incurred in connection with the Exchange, each as determined as of the close of business on the last business day immediately prior to the date Skyline gives notice of the special dividend to the NYSE American), if any. If declared, Skyline must pay the special dividend at least one business day prior to the closing date.
Subsequent Event — (Continued)
Closing Conditions
Consummation of the Exchange is subject to various conditions, including, without limitation, (i) approval by Skyline’s shareholders of the Company Shareholder Approval Matters; (ii) the receipt of all required regulatory approvals (without the imposition of any burdensome divestiture condition on the parties, as described in the Exchange Agreement); (iii) the absence of any law, order, or legal injunction which prohibits the consummation of the Exchange and the absence of certain other litigation matters; (iv) the NYSE American listing application for the Company’s shares to be issued in the Shares Issuance shall have been conditionally approved; (v) the accuracy of the parties’ respective representations and warranties and the performance of their respective obligations; (vi) the absence of the occurrence of a material adverse effect with respect to each of Skyline and Champion Holdings, and their subsidiaries, each taken as a whole, between the date of the Exchange Agreement and closing; and (vii) certain other customary conditions.
Termination and Termination Fees
The Exchange Agreement contains certain termination rights in favor of Skyline and Champion Holdings, as set forth therein. Upon the termination of the Exchange Agreement under specified circumstances, and upon Skyline entering into or closing another acquisition transaction within 12 months after termination of the Exchange Agreement, Skyline may be required to pay Champion Holdings a termination fee of $10 million. Any termination fee triggered under the Exchange Agreement will accrue upon Skyline entering into or closing another acquisition transaction within 12 months after termination, but the fee is not payable by Skyline to Champion Holdings until two business days after the date that the other acquisition closes or is terminated unless the board of directors of Skyline adversely changes its favorable recommendation of the Exchange to its shareholders and Champion Holdings terminates the Exchange Agreement ashomes sold was a result of such changeincreased production levels at many of the Company’s manufacturing locations in recommendation,reaction to strong demand. The average selling price increased due to pricing actions enacted in which case, a termination fee of $3response to rising material and labor costs. Generally, we are able to pass the increase in input costs along to our customers. Net sales in the six months ended September 26, 2020 were more negatively impacted by COVID-19 related plant shutdowns and higher than normal absenteeism.
Canadian Factory-built Housing:
The Canadian Factory-built Housing segment net sales increased by $36.6 million, in cash is immediately due and payable by Skyline to Champion Holdings upon such termination, and if Skyline subsequently enters into or closes another acquisition transaction within 1292.0%, for the six months after termination, an additional $7 million cash termination fee would accrue and would become payable two business days after the date that the other acquisition closes or is terminated.
In additionended October 2, 2021 compared to the termination fee, if the Exchange Agreement is terminated by either Skyline or Champion Holdings because of Skyline’s shareholders do not approve the Company Shareholder Approval Matters, then Skyline must pay Champion Holdings $2 million as reimbursement for fees and expenses incurred by Champion Holdings in connection with the Exchange Agreement. Any expense reimbursement paid by Skyline will be credited against, and thereby reduce, any termination fee that may become due and payable.
The foregoing descriptions of the Exchange Agreement, the Exchange, and the Shares Issuance, are summaries, do not purport to be complete, and are qualified in their entirety by reference to the full text of the Exchange Agreement, and the exhibits attached thereto, copies of which are attached as Exhibits 2.1 to the Current Report onForm 8-K filed with Securities and Exchange Commission on January 5, 2018.
Results of Operations – Three-Month Period Ended December 3, 2017 Compared to Three-Month Period Ended November 30, 2016
Net Sales and Unit Shipments
December 3, 2017 | Percent | November 30, 2016 | Percent | Increase (Decrease) | ||||||||||||||||
(Unaudited) (Dollars in thousands) | ||||||||||||||||||||
Net Sales | ||||||||||||||||||||
Manufactured Housing | $ | 45,975 | 79.6 | $ | 54,207 | 84.4 | $ | (8,232 | ) | |||||||||||
Modular Housing | 8,227 | 14.2 | 6,718 | 10.5 | 1,509 | |||||||||||||||
Park Models | 3,563 | 6.2 | 3,301 | 5.1 | 262 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total Net Sales | $ | 57,765 | 100.0 | $ | 64,226 | 100.0 | $ | (6,461 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Unit Shipments | ||||||||||||||||||||
Manufactured Housing | 778 | 80.1 | 1,037 | 84.8 | (259 | ) | ||||||||||||||
Modular Housing | 114 | 11.7 | 100 | 8.2 | 14 | |||||||||||||||
Park Models | 79 | 8.2 | 85 | 7.0 | (6 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total Unit Shipments | 971 | 100.0 | 1,222 | 100.0 | (251 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
Net sales decreased approximately 10.1 percent mainly due to priorsame period net manufactured housing sales including $8,092,000 attributable to the Elkhart, Indiana and Mansfield, Texas facilities which closed in the fourth quarter ofprior fiscal 2017. Modular housing net sales partially offset the decrease as a result of multiple facilities experiencing increased customer demand for this product.
For the following three-month periods, the percentage increase or decrease in unit shipments from the comparable period last year, are as follows:
December 3, 2017 Skyline | October 31, 2017 Industry | |||||||
Manufactured Housing | (25.0 | %) | 13.0 | % | ||||
Modular Housing | 14.0 | % | Not Available | |||||
Park Models | (7.1 | %) | 10.1 | % | ||||
Total | (20.5 | %) | Not Available |
Compared to the prior year, the average net sales price for manufactured housing, modular housing and park models increased 13.0, 7.4 and 16.1 percent, respectively, primarily as a result of price increases and product sold with greater square footage and additional amenities.
Results of Operations – Three-Month Period Ended December 3, 2017 Compared to Three-Month Period Ended November 30, 2016 — (Continued)
Cost of Sales
December 3, 2017 | Percent of Net Sales | November 30, 2016 | Percent of Net Sales | Decrease | ||||||||||||||||
(Unaudited) (Dollars in Thousands) | ||||||||||||||||||||
Cost of Sales | $ | 49,394 | 85.5 | $ | 58,996 | 91.9 | $ | 9,602 |
Cost of sales, in dollars, decreased primarily as a result of prior year costs including $8,966,000 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
December 3, 2017 | Percent of Net Sales | November 30, 2016 | Percent of Net Sales | Increase | ||||||||||||||||
(Unaudited) (Dollars in thousands) | ||||||||||||||||||||
Selling and administrative expenses | $ | 6,132 | 10.6 | $ | 5,739 | 8.9 | $ | 393 |
The increase in selling and administrative expenses is primarily due to an increase in administrative salaries and wages, profit based compensation, and approximately $190,000homes sold of 249, coupled with a 27.6% increase innon-recurring costs associated with the merger with Champion Holdings. Administrative salaries and wages rose due to headcount additions and competitive market conditions. Profit based compensation increased due to improved financial results. Prior period expenses included $488,000 attributable to the Elkhart, Indiana and Mansfield, Texas facilities that closed in the fourth quarter of fiscal 2017. As a percentage of net sales, average home selling and administrative expenses rose due to certain costs increasing amid declining sales.
Net gain on sale of property, plant and equipment
On November 22, 2017, the Corporation sold anon-income producing parcel of land located in McMinnville, Oregon. Proceeds of $1,231,000 were received, and a gain of $762,000 was recognized in the second quarter.
Results of Operations – Three-Month Period Ended December 3, 2017 Compared to Three-Month Period Ended November 30, 2016 — (Continued)
Interest Expense
December 3, 2017 | November 30, 2016 | Decrease | ||||||||||
(Unaudited) (Dollars in thousands) | ||||||||||||
Interest on life insurance policies loans | $ | 32 | $ | 55 | $ | 23 | ||||||
Amortization on debt financing costs | 5 | 26 | 21 | |||||||||
Interest on secured revolving credit facility | — | 5 | 5 | |||||||||
|
|
|
|
|
| |||||||
$ | 37 | $ | 86 | $ | 49 | |||||||
|
|
|
|
|
|
Interest expense decreased as a result of the repayment of life insurance loans, and the refinancing of a Credit Agreement with Chase.
Results of Operations –Six-Month Period Ended December 3, 2017 Compared toSix-Month Period Ended November 30, 2016
December 3, 2017 | Percent | November 30, 2016 | Percent | Increase (Decrease) | ||||||||||||||||
(Unaudited) (Dollars in thousands) | ||||||||||||||||||||
Net Sales | ||||||||||||||||||||
Manufactured Housing | $ | 91,500 | 78.7 | $ | 103,964 | 82.9 | $ | (12,464 | ) | |||||||||||
Modular Housing | 15,378 | 13.3 | 13,863 | 11.1 | 1,515 | |||||||||||||||
Park Models | 9,349 | 8.0 | 7,575 | 6.0 | 1,774 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total Net Sales | $ | 116,227 | 100.0 | $ | 125,402 | 100.0 | $ | (9,175 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Unit Shipments | ||||||||||||||||||||
Manufactured Housing | 1,572 | 78.8 | 1,985 | 83.4 | (413 | ) | ||||||||||||||
Modular Housing | 208 | 10.4 | 197 | 8.3 | 11 | |||||||||||||||
Park Models | 214 | 10.8 | 197 | 8.3 | 17 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total Unit Shipments | 1,994 | 100.0 | 2,379 | 100.0 | (385 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
Net sales decreased approximately 7.3 percent mainly due to prior period net manufactured housing sales including $13,293,000 attributable to the Elkhart, Indiana and Mansfield, Texas facilities which closed in the fourth quarter of fiscal 2017. Modular housing net sales partially offset the decrease as a result of multiple facilities experiencing increased customer demand for this product. In addition, 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.
Results of Operations –Six-Month Period Ended December 3, 2017 Compared toSix-Month Period Ended November 30, 2016
Net Sales and Unit Shipments — (Continued)
For the followingsix-month periods, the percentage increase or decrease in unit shipments from the comparable period last year are as follows:
December 3, 2017 Skyline | October 31, 2017 Industry | |||||||
Manufactured Housing | (20.8 | %) | 12.7 | % | ||||
Modular Housing | 5.6 | % | Not Available | |||||
Park Models | 8.6 | % | 11.8 | % | ||||
Total | (16.2 | %) | Not Available |
Compared to the prior year, the average net sales price for manufactured housing, modular housing and park models increased 11.1, 5.1 and 13.6 percent, respectively, primarily as a result of price increases and product sold with greater square footage and additional amenities.
Cost of Sales
December 3, 2017 | Percent of Net Sales | November 30, 2016 | Percent of Net Sales | Decrease | ||||||||||||||||
Cost of Sales | $ | 99,930 | 86.0 | $ | 113,592 | 90.6 | $ | 13,662 |
Cost of sales, in dollars, decreased primarily as a result of prior year costs including $14,847,000 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
December 3, 2017 | Percent of Net Sales | November 30, 2016 | Percent of Net Sales | Increase | ||||||||||||||||
(Unaudited) (Dollars in thousands) | ||||||||||||||||||||
Selling and administrative expenses | $ | 12,244 | 10.5 | $ | 11,489 | 9.2 | $ | 755 |
price. The increase in selling and administrative expenses is primarilyvolume was due to an increase in administrative salariesdemand and wages, health insurance costs, profit based compensation, and approximately $190,000production rates. The increase innon-recurring costs associated with the merger with Champion Holdings. Administrative salaries and wages rose average selling price was due to headcount additionspricing actions enacted in response to rising material and competitive market conditions. Health insurance costslabor costs. On a constant currency basis, net sales for the Canadian segment were favorably impacted by approximately $6.8 million due to fluctuations in the translation of the Canadian dollar to the U.S. dollar during the first six months of fiscal 2022 as compared to the same period of the prior fiscal year. Net sales in the six months ended September 26, 2020 were more negatively impacted by COVID-19 related plant shutdowns and higher than normal absenteeism.
Corporate/Other:
Net sales for Corporate/Other includes the Company’s transportation business and the elimination of intersegment sales. For the six months ended October 2, 2021, net sales increased $5.4 million, or 22.8%, primarily attributable to an increase in shipments of manufactured homes and recreational vehicles.
22
GROSS PROFIT
The following table summarizes gross profit for the six months ended October 2, 2021 and September 26, 2020:
|
| Six months ended |
|
|
|
|
|
|
| |||||||
(Dollars in thousands) |
| October 2, |
|
| September 26, |
|
| $ |
|
| % |
| ||||
|
|
|
|
|
|
|
|
|
| |||||||
Gross profit: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
U.S. Factory-built Housing |
| $ | 215,815 |
|
| $ | 102,956 |
|
| $ | 112,859 |
|
|
| 109.6 | % |
Canadian Factory-built Housing |
|
| 17,193 |
|
|
| 7,569 |
|
|
| 9,624 |
|
|
| 127.2 | % |
Corporate/Other |
|
| 7,849 |
|
|
| 6,271 |
|
|
| 1,578 |
|
|
| 25.2 | % |
Total gross profit |
| $ | 240,857 |
|
| $ | 116,796 |
|
| $ | 124,061 |
|
|
| 106.2 | % |
Gross profit as a percent of net sales |
|
| 23.3 | % |
|
| 19.6 | % |
|
|
|
|
|
|
Gross profit as a resultpercent of adverse claim experience and fewer employees contributingsales during the six months ended October 2, 2021 was 23.3% compared to 19.6% during the six months ended September 26, 2020. The following is a summary of the change by operating segment.
U.S. Factory-built Housing:
Gross profit for the U.S. Factory-built Housing segment increased by $112.9 million, or 109.6%, during the six months ended October 2, 2021 compared to the Corporation’s health insurance plan. Profit based compensation increasedsame period in the prior fiscal year. Gross profit was 23.2% as a percent of segment net sales for the six months ended October 2, 2021 compared to 19.3% in the same period of the prior fiscal year. The increase in gross profit is due to improved financial results.operational efficiencies and increased leverage of manufacturing fixed costs resulting from higher production volumes and a reduction of COVID-19 related sick-pay and health benefits provided in the prior fiscal year, all partially offset by higher material costs.
Results of Operations – Six Month Period Ended December 3, 2017 Compared toSix-Month Period Ended November 30, 2016 — (Continued)Canadian Factory-built Housing:
Selling and Administrative Expenses — (Continued)
Prior period expenses included $963,000 attributableGross profit for the Canadian Factory-built Housing segment increased by $9.6 million, or 127.2% during the six months ended October 2, 2021 compared to the Elkhart, Indiana and Mansfield, Texas facilities that closedsame period in the fourth quarter ofprior fiscal 2017. As a percentage of net sales, selling and administrative expenses rose due to certain costs increasing amid declining sales.
Net Gain on Sale of Property, Plant and Equipment
On November 22, 2017, the Corporation sold anon-income producing parcel of land located in McMinnville, Oregon. Proceeds of $1,231,000 were received, and a gain of $762,000 was recognized in the second quarter. Likewise, 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.
Interest Expense
December 3, 2017 | November 30, 2016 | Increase (Decrease) | ||||||||||
(Unaudited) | ||||||||||||
(Dollars in thousands) | ||||||||||||
Interest on life insurance policies loans | $ | 87 | $ | 112 | $ | (25 | ) | |||||
Amortization on debt financing costs | 93 | 51 | 42 | |||||||||
Interest on secured revolving credit facility | 4 | 9 | (5 | ) | ||||||||
|
|
|
|
|
| |||||||
$ | 184 | $ | 172 | $ | 12 | |||||||
|
|
|
|
|
|
Interest expenseyear primarily increased as the result ofwrite-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
December 3, 2017 | May 31, 2017 | Increase | ||||||||||
(Unaudited) | ||||||||||||
(Dollars in thousands) | ||||||||||||
Cash | $ | 12,287 | $ | 11,384 | $ | 903 | ||||||
Current assets, exclusive of cash | 29,097 | 25,918 | 3,179 | |||||||||
Current liabilities | 18,707 | 18,385 | 322 | |||||||||
|
|
|
|
|
| |||||||
Working capital | $ | 22,677 | $ | 18,917 | $ | 3,760 | ||||||
|
|
|
|
|
|
As noted in the Consolidated Statements of Cash Flows for thesix-month period ended December 3, 2017, cash increased due to cash provided from operating activities of $1,694,000, cash provided from investing activities of $814,000, and cash used in financing activities of $1,605,000. Current assets, exclusive of cash, increased primarily due to a $2,051,000 increase in Accounts receivable, $432,000 increase in Other current assets, and a $696,000 increase in Inventories. Accounts receivable rose due to increased sales volume. Gross profit as a percent of net sales was 22.5% for the six months ended October 2, 2021, compared to 19.0% in November 2017the same period of the prior fiscal year primarily due to operational efficiencies from the increase in home sales, partially offset by higher material and labor costs.
Corporate/Other:
Gross profit for the Corporate/Other segment increased $1.6 million, or 25.2%, during the six months ended October 2, 2021 compared to the same period of the prior fiscal year, primarily due to increased net sales in the Company’s transportation operations.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
Selling, general, and administrative expenses include foreign currency transaction gains and losses, equity compensation, and intangible amortization expense. The following table summarizes selling, general, and administrative expenses for the six months ended October 2, 2021 and September 26, 2020:
|
| Six months ended |
|
|
|
|
|
|
| |||||||
(Dollars in thousands) |
| October 2, |
|
| September 26, |
|
| $ |
|
| % |
| ||||
|
|
|
|
|
|
|
|
|
| |||||||
Selling, general, and administrative expenses: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
U.S. Factory-built Housing |
| $ | 83,769 |
|
| $ | 57,977 |
|
| $ | 25,792 |
|
|
| 44.5 | % |
Canadian Factory-built Housing |
|
| 5,696 |
|
|
| 3,289 |
|
|
| 2,407 |
|
|
| 73.2 | % |
Corporate/Other |
|
| 25,898 |
|
|
| 20,914 |
|
|
| 4,984 |
|
|
| 23.8 | % |
Total selling, general, and administrative expenses |
| $ | 115,363 |
|
| $ | 82,180 |
|
| $ | 33,183 |
|
|
| 40.4 | % |
Selling, general, and administrative expense as a percent of net sales |
|
| 11.2 | % |
|
| 13.8 | % |
|
|
|
|
|
|
Selling, general, and administrative expenses were $115.4 million for the six months ended October 2, 2021, an increase of $33.2 million, or 40.4%, compared to the same period in the prior fiscal year. The following is a summary of the change by operating segment.
23
U.S. Factory-built Housing:
Selling, general, and administrative expenses for the U.S. Factory-built Housing segment increased $25.8 million, or 44.5%, during the six months ended October 2, 2021 as compared to May 2017. Other current assets increasedthe same period in the prior fiscal year. Selling, general, and administrative expenses, as a resultpercent of annual insurance premiums paidsegment net sales decreased to 9.0% for the six months ended October 2, 2021 compared to 10.9% during the first quartercomparable period of the prior fiscal 2018. Inventoriesyear. The increase in expenses resulted from the following factors: (i) higher sales commissions and incentive compensation, which is generally based on sales volume or a measure of profitability; (ii) higher wage expense from headcount increases to support increased production; (iii) an increase in travel expenses compared to the same period in the prior fiscal year; and (iv) the impact of the acquisition of the ScotBilt operations.
Canadian Factory-built Housing:
Selling, general, and administrative expenses for the Canadian Factory-built Housing segment increased $2.4 million, or 73.2%, for the six months ended October 2, 2021 when compared to the same period of the prior fiscal year. Selling, general, and administrative expenses as a percent of segment net sales decreased to 7.5% for the six months ended October 2, 2021 compared to 8.3% during the comparable period of the prior fiscal year. The increase in selling, general, and administrative expenses resulted from an increase in commissions and incentive compensation as well as wage expense from additional headcount to support the increase in production.
Corporate/Other:
Selling, general, and administrative expenses for Corporate/Other includes the Company’s transportation operations, corporate costs incurred for all segments, and intersegment eliminations. Selling, general, and administrative expenses for Corporate/Other increased $5.0 million, or 23.8%, during the six months ended October 2, 2021 as compared to the same period of the prior fiscal year due to an increase in homes waitingwages, incentive and equity compensation costs as well as $1.9 million for the investment made to enhance our customer buying experience and supporting systems.
INTEREST EXPENSE, NET
The following table summarizes the components of interest expense, net for the six months ended October 2, 2021 and September 26, 2020:
|
| Six months ended |
|
|
|
|
|
|
| |||||||
(Dollars in thousands) |
| October 2, |
|
| September 26, |
|
| $ |
|
| % |
| ||||
|
|
|
|
|
|
|
|
|
| |||||||
Interest expense |
| $ | 1,801 |
|
| $ | 2,061 |
|
| $ | (260 | ) |
|
| (12.6 | %) |
Less: Interest income |
|
| (307 | ) |
|
| (255 | ) |
|
| (52 | ) |
|
| 20.4 | % |
Interest expense, net |
| $ | 1,494 |
|
| $ | 1,806 |
|
| $ | (312 | ) |
|
| (17.3 | %) |
Average outstanding floor plan payable |
| $ | 28,946 |
|
| $ | 29,188 |
|
|
|
|
|
|
| ||
Average outstanding long-term debt |
| $ | 25,882 |
|
| $ | 77,330 |
|
|
|
|
|
|
|
Interest expense, net was $1.5 million for the six months ended October 2, 2021, a decrease of $0.3 million, or 17.3%, compared to the same period of the prior fiscal year. The net decrease in expense was primarily due to a lower average outstanding balance on the Company’s revolving credit facility, partially offset by the write-off of deferred financing fees of $0.3 million in association with the previously existing revolving credit facility.
OTHER EXPENSE (INCOME)
The following table summarizes other income for the six months ended October 2, 2021 and September 26, 2020:
|
| Six months ended |
|
|
|
|
|
|
| |||||||
(Dollars in thousands) |
| October 2, |
|
| September 26, |
|
| $ |
|
| % |
| ||||
|
|
|
|
|
|
|
|
|
| |||||||
Other expense (income) |
| $ | (43 | ) |
| $ | (6,813 | ) |
| $ | 6,770 |
|
|
| (99.4 | %) |
Other income decreased $6.8 million, or 99.4%, during the six months ended October 2, 2021, compared to the same period of the prior fiscal year. The decrease is due to a reduction in the wage subsidies provided by government sponsored financial assistance programs that were
24
enacted in response to the COVID-19 pandemic. The programs included a Canadian wage subsidy benefit of $6.2 million and U.S. federal and state wage subsidy benefit of $0.6 million during the six months ended September 26, 2020.
INCOME TAX EXPENSE
The following table summarizes income tax expense for the six months ended October 2, 2021 and September 26, 2020:
|
| Six months ended |
|
|
|
|
|
|
| |||||||
(Dollars in thousands) |
| October 2, |
|
| September 26, |
|
| $ |
|
| % |
| ||||
|
|
|
|
|
|
|
|
|
| |||||||
Income tax expense |
| $ | 30,419 |
|
| $ | 10,209 |
|
| $ | 20,210 |
|
|
| 198.0 | % |
Effective tax rate |
|
| 24.5 | % |
|
| 25.8 | % |
|
|
|
|
|
|
Income tax expense for the six months ended October 2, 2021 was $30.4 million, representing an effective tax rate of 24.5%, compared to income tax expense of $10.2 million, representing an effective tax rate of 25.8% for the six months ended September 26, 2020.
The Company’s effective tax rate for the six months ended October 2, 2021 differs from the federal statutory income tax rate of 21.0% due primarily to the effect of state and local income taxes, non-deductible expenses, tax credits, results in foreign jurisdictions, and tax benefits from vested equity compensation. The Company’s effective tax rate for the six months ended September 26, 2020 differs from the federal statutory income tax rate of 21.0% due primarily to the effect of non-deductible expenses, state and local income taxes, tax credits, and results in foreign jurisdictions.
25
ADJUSTED EBITDA
The following table reconciles net income, the most directly comparable U.S. GAAP measure, to Adjusted EBITDA, a non-GAAP financial measure, for the six months ended October 2, 2021 and September 26, 2020:
|
| Six months ended |
|
|
|
|
|
|
| |||||||
(Dollars in thousands) |
| October 2, |
|
| September 26, |
|
| $ |
|
| % |
| ||||
|
|
|
|
|
|
|
|
|
| |||||||
Net income |
| $ | 93,624 |
|
| $ | 29,414 |
|
| $ | 64,210 |
|
| * |
| |
Income tax expense |
|
| 30,419 |
|
|
| 10,209 |
|
|
| 20,210 |
|
| * |
| |
Interest expense, net |
|
| 1,494 |
|
|
| 1,806 |
|
|
| (312 | ) |
|
| (17.3 | %) |
Depreciation and amortization |
|
| 10,283 |
|
|
| 8,690 |
|
|
| 1,593 |
|
|
| 18.3 | % |
Equity-based compensation (for awards granted prior to December 31, 2018) |
|
| — |
|
|
| 1,358 |
|
|
| (1,358 | ) |
| * |
| |
Adjusted EBITDA |
| $ | 135,820 |
|
| $ | 51,477 |
|
| $ | 84,343 |
|
| * |
|
* Indicates that the calculated percentage is not meaningful
Adjusted EBITDA for the six months ended October 2, 2021 was $135.8 million, an increase of $84.3 million, from the same period of the prior fiscal year. The increase is primarily a result of higher operating income due to increases in sales volume and gross margin, partially offset by higher SG&A expenses.
The Company defines Adjusted EBITDA as net income or loss plus; (a) the provision for income taxes; (b) interest expense, net; (c) depreciation and amortization; (d) gain or loss from discontinued operations; (e) equity based compensation for awards granted prior to December 31, 2018; (f) non-cash restructuring charges and impairment of assets; and (g) other non-operating costs including those for the acquisition and integration or disposition of businesses and idle facilities. Adjusted EBITDA is not a measure of earnings calculated in accordance with U.S. GAAP and should not be considered an alternative to, or more meaningful than, net income or loss prepared on a U.S. GAAP basis. Adjusted EBITDA does not purport to represent cash flow provided by, or used in, operating activities as defined by U.S. GAAP, which is presented in the Statement of Cash Flows. In addition, Adjusted EBITDA is not necessarily comparable to similarly titled measures reported by other companies.
In evaluating Adjusted EBITDA, investors should be aware that, in the future, the Company may incur expenses similar to those adjusted for in this presentation. This presentation of Adjusted EBITDA should not be construed as an implication that the Company’s future results will be unaffected by unusual or nonrecurring items.
Adjusted EBITDA has important limitations as an analytical tool and you should not consider it in isolation or as a substitute for analysis of our results as reported under U.S. GAAP. Some of these limitations are:
Adjusted EBITDA:
Also about Adjusted EBITDA:
Given these limitations, Adjusted EBITDA should not be considered as a measure of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our U.S. GAAP results and using non-GAAP financial measures only on a supplemental basis.
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BACKLOG
Although orders from customers can be cancelled at December 3, 2017 asany time without penalty, and unfilled orders are not necessarily an indication of future business, the Company’s unfilled U.S. and Canadian manufacturing orders at October 2, 2021 totaled $1,369 million compared to May 31, 2017.
Liquidity$390.1 million at September 26, 2020. The increase in backlog was driven by increased demand for single-family homes, which resulted in order levels that significantly outpaced production in both the U.S. and Capital Resources — (Continued)
Current liabilities increased primarilyCanada. Our ability to increase production rates to keep pace with orders is limited by individual plant capacity, the availability of and time needed to train new employees, employee attendance and availability of materials, including (most recently) raw material allocations by certain of our suppliers. We may experience greater order cancellations in the future as a result of higher prices and the longer time required to manufacture and deliver our products.
Liquidity and Capital Resources
Sources and Uses of Cash
The following table presents summary cash flow information for the six months ended October 2, 2021 and September 26, 2020:
|
| Six months ended |
| |||||
(Dollars in thousands) |
| October 2, |
|
| September 26, |
| ||
Net cash provided by (used in): |
|
|
|
|
|
| ||
Operating activities |
| $ | 88,887 |
|
| $ | 63,842 |
|
Investing activities |
|
| (15,246 | ) |
|
| (1,334 | ) |
Financing activities |
|
| (25,553 | ) |
|
| (8,936 | ) |
Effect of exchange rate changes on cash, cash equivalents |
|
| (411 | ) |
|
| 1,259 |
|
Net increase in cash and cash equivalents |
|
| 47,677 |
|
|
| 54,831 |
|
Cash and cash equivalents at beginning of period |
|
| 262,581 |
|
|
| 209,455 |
|
Cash and cash equivalents at end of period |
| $ | 310,258 |
|
| $ | 264,286 |
|
The Company’s primary sources of liquidity are cash flows from operations and existing cash balances. Cash balances and cash flows from operations for the next year are expected to be adequate to cover working capital requirements, capital expenditures, and debt payment obligations. The Company does not have any scheduled long-term debt maturities in the next twelve months. On July 7, 2021, the Company entered into an Amended and Restated Credit Agreement which provides for a $841,000 decrease$200.0 million revolving credit facility, including a $45.0 million letter of credit sub-facility. At October 2, 2021 $169.6 million was available for borrowing under the Amended Credit Agreement. The Company’s revolving credit facility includes (i) a maximum consolidated total net leverage ratio of 3.25 to 1.00, subject to an upward adjustment upon the consummation of a material acquisition, and (ii) a minimum interest coverage ratio of 3.00 to 1.00. The Company anticipates compliance with its debt covenants and projects its level of cash availability to be in Accrued warrantyexcess of cash needed to operate the business for the next year. In the event operating cash flow and a $588,000 decrease in Accrued salariesexisting cash balances were deemed inadequate to support the Company’s liquidity needs, and wages;one or more capital resources were to become unavailable, the Company would revise operating strategies accordingly.
Cash provided by operating activities was $88.9 million for the six months ended October 2, 2021 compared to $63.8 million for the six months ended September 26, 2020. Cash provided by operating activities increased due to higher net income, partially offset by a $1,234,000an increase in Accrued volume rebates. Accrued warranty declined as a resultinventory from higher material costs and higher stocking levels to mitigate supply chain challenges, an increase in accounts receivable from higher sales volumes, and an increase in prepaid and other assets primarily from the capitalization of fewer unit sales. Accrued salariescloud computing costs in fiscal 2022.
Cash used in investing activities was $15.2 million for the six months ended October 2, 2021 compared to $1.3 million for the six months ended September 26, 2020. The increase in cash used for investing activities was primarily related to an increase in capital expenditures in the current period which was related to the acquisition of two idle manufacturing facilities in Texas and wages decreasedinvestments in plant operations which were deferred in the prior-year due to timing of payments to employees at December 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 year. Accruals are made monthly, and the majority of payments are made during the Corporation’s fourth fiscal quarter.
Capital expenditures totaled $800,000 forpandemic. The Company suspended all but critical capital projects in the first half of fiscal 2018 as compared2021 due to $787,000 forCOVID-19 concerns. Capital spending in the first half of fiscal 2017.2022 reflects our reversion to normal, planned spending.
Cash used in financing activities was $25.6 million for the six months ended October 2, 2021 compared to $8.9 million for the six months ended September 26, 2020. The expenditures areincrease in cash used for building improvements,financing was primarily related to the repayment of the Company's previously existing revolving credit facility and replacing equipmentpayments of deferred financing fees related to the Amended Credit Agreement.
Critical Accounting Policies
For a discussion of our critical accounting policies that had reachedmanagement believes affect its full economic useful life.
The Corporation wasmore significant judgments and estimates used in compliance asthe preparation of December 3, 2017 with credit agreement covenants associated withour Consolidated Financial Statements, see Part II, Item 7 of the Secured Revolving Credit Facility with Chase.
At December 3, 2017, the Corporation had the ability to borrow approximately $3,973,000Fiscal 2021 Annual Report, under the cash surrender value of certain life insurance policies. Management believes sufficient liquidity exists to meet financial obligations that will occur for at least one year afterheading “Critical Accounting Policies.” There have been no significant changes in our significant accounting policies or critical accounting estimates discussed in the date of the filing of this periodic report.Fiscal 2021 Annual Report.
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Recently Issued Accounting Pronouncements
In May 2014,For information on the Financial Accounting Standards Board (FASB)impact of recently issued Accounting Standards Update (ASU)No. 2014-09,Revenue from Contracts with Customers (Topic 606). Subsequent to the issuanceaccounting pronouncements, see Note 1, “Basis 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 several ASU’s that update or clarify the new rules. For a public entity, this guidance is effective for annual reporting periods after December 15, 2017, including interim periods within that reporting period. Early application is permitted.
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. Using this principle, a comprehensive framework was established for determining how much revenue to recognize and when it should be recognized. To be consistent with this core principle, an entity is required to apply the following five-step approach:
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.
Presentation – Recently Issued Accounting Pronouncements, — (Continued)
The Corporation is currently evaluating how” to the adoption of ASU2014-09 will impact its financial position and result of operations by applying the five-step approach to each revenue stream. At this time, material changes resulting from this adoption are not anticipated with the modified retrospective method being utilized.
The Corporation, however, does expect to greatly increase the amount of required disclosures, including but not limited to:
Impact of Inflation
Thecondensed consolidated financial statements included in this report reflect transactionsReport.
Forward-Looking Statements
Some of the statements in the dollar valuesthis Report are not historical in which they were incurrednature and therefore, do not attempt to measure the impact of inflation. On a long-term basis, the Corporation has adjusted selling prices in reaction to changing costs due to inflation.
Forward Looking Information
The preceding Management’s Discussion and Analysis containsare forward-looking statements within the meaning of Thethe Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements about our expectations regarding our future liquidity, earnings, expenditures, and financial condition. These statements are also made elsewhere in this report. The Corporation publishes other forward-looking statements from time to time.
Statements that are not historical in nature, including those containingoften identified by the words such as“will,” “could”, “should,” “anticipate,” “believe,” “expect,” “intend,” “estimate,” “should,“hope,” “expect,” “believe,” “intend,” andor similar expressions, are intended to identify forward-looking statements. We caution to be aware of the speculative nature of “forward-looking statements.” Although theseexpressions. These statements reflect the Corporation’s good faith belief based onmanagement’s current expectations, estimates,views with respect to future events and projections about (among other things) the industry and the markets in which the Corporation operates, they are not guarantees of future performance.
Whether actual results will conform to management’s expectations and predictions is subject to a number of knownrisks and unknownuncertainties. There are risks and uncertainties, many of which are beyond our control, that could cause our actual results to differ materially from those in our forward-looking statements, including regional, national and international economic, financial, public health and labor conditions, and the following:
Forward Looking Information — (Continued)
Consequently, allIf any of the Corporation’srisks or uncertainties referred to above materializes or if any of the assumptions underlying our forward-looking statements are qualified by these cautionary statements. The Corporationproves to be incorrect, then differences may not realize thearise between our forward-looking statements and our actual results, anticipated by management or, even if the Corporation substantially realizes the results management anticipates, the results may not have the consequences to, or effects on, the Corporation or its business or operations that management expects. Suchand such differences may be material. ExceptInvestors should not place undue reliance on our forward-looking statements, which speak only as of the date of this report. We assume no obligation to update, amend or clarify them to reflect events, new information or circumstances occurring after the date hereof, except as required by applicable laws,law.
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Item 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For a discussion of the Corporation does not intend to publish updates or revisionsCompany’s interest rate and foreign exchange risks, see Part II, Item 7A of any forward-looking statements management makes to reflect new information, future events or otherwise.
Not applicable.
Management’s Conclusions Regarding Effectiveness of Disclosure Controls and Procedures
As of December 3, 2017, the Corporation conducted an evaluation,Fiscal 2021 Annual Report, under the supervisionheading "Quantitative and with the participationQualitative Disclosures about Market Risk." There have been no significant changes in such risks since April 3, 2021.
Item 4.CONTROLS AND PROCEDURES
Evaluation of management including the Chief Executive Officerdisclosure controls and Chief Financial Officer, of the effectiveness of the design and operation of the Corporation’sprocedures
The Company maintains disclosure controls and procedures (as defineddesigned to provide reasonable assurance that information required to be disclosed in Rule13a-15(e) ofreports filed under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based upon that evaluation, is recorded, processed, summarized, and reported within the Chief Executive Officerspecified time periods and Chief Financial Officer concluded thataccumulated and communicated to management, including the Corporation’sprincipal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
The Company’s management, with the participation of the CEO and CFO, evaluated the effectiveness of the Company’s disclosure controls and procedures are notpursuant to Rule 13a-15(e) of the Exchange Act at October 2, 2021. Based upon this evaluation, the CEO and CFO concluded that the Company’s disclosure controls and procedures were effective for the period ended December 3, 2017 as a result of a material weakness identified in the fourth quarter of fiscal 2017 related to the accuracy and valuation of raw materials and inventories. The Corporation is currently evaluating the effectiveness of improvementsOctober 2, 2021.
Changes in internal controlscontrol over the accuracy and valuation of raw materials inventory.financial reporting
ChangesThere have been no changes in Internal Control Over Financial Reporting
No change in the Corporation’sour internal control over financial reporting (as such term is defined in Exchange Act Rule13a-15(f)) occurred during the second fiscal quarter ended December 3, 2017to which this report relates that have materially affected, or isare reasonably likely to materially affect, the Corporation’sCompany’s internal control over financial reporting except as noted above with respect
29
PART II – OTHER INFORMATION
Item 1.LEGAL PROCEEDINGS
We are involved from time to time in various legal proceedings and claims, including, without limitation, commercial or contractual disputes, product liability claims and other matters. For additional information on legal proceedings, see Note 13 “Commitments, Contingencies and Legal Proceedings – Legal Proceedings,” to the accuracy and valuation of raw materials inventory.condensed consolidated financial statements included in this Report.
PART II—OTHER INFORMATION
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.
There were no material changes in the risk factors disclosed in 30
Item 1A of the Corporation’s Form10-K for the year ended May 31, 2017.6.EXHIBITS
PART II—OTHER INFORMATION — (Continued)
Exhibits (Numbered according to Item 601 of RegulationS-K, Exhibit Table)
Exhibit Number | Description | |
31.1 | ||
31.2 | ||
32 | ||
101 (INS) | Inline XBRL Instance Document - the | |
101(SCH) | Inline XBRL Taxonomy Extension Schema Document. | |
101(CAL) | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | |
101(DEF) | Inline XBRL Taxonomy Extension Definition Linkbase Document. | |
101(LAB) | Inline XBRL Taxonomy Extension Label Linkbase Document. | |
101(PRE) | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | |
104 | Cover Page Interactive Data File (formatted as Inline XBRL and | |
† Filed herewith.
31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrantRegistrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Skyline Champion Corporation
Registrant
Signature | Title | Date | ||||||
/s/ Mark Yost | President and Chief Executive Officer | November 3, 2021 | ||||||
Mark Yost | (Principal Executive Officer) | |||||||
/s/ Laurie Hough | Executive Vice President, Chief Financial Officer and Treasurer | November 3, 2021 | ||||||
Laurie Hough | (Principal Financial Officer) |
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