Champion Homes - 10-Q quarterly report FY

 

 

or

For the transition period from ___________________________________________ to ____________________________________________

Commission File Number:1-4714

SKYLINE CORPORATION

(574) 294-6521

(Registrant’s telephone number, including area code)

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

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). ý Yes o No

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes ý No

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

 

Form 10-Q Quarterly Report

INDEX

The accompanying notes are a part of the consolidated financial statements.

The accompanying notes are a part of the consolidated financial statements.

Consolidated Statements of Earnings and Retained Earnings
For the three-month periods ended August 31, 2005 and 2004

(Unaudited)
(Dollars in thousands, except per share data)

The accompanying notes are a part of the consolidated financial statements.

Consolidated Statements of Cash Flows
For the three-month periods ended August 31, 2005 and 2004

Increase (Decrease) in Cash
(Unaudited)
(Dollars in thousands)

The accompanying notes are a part of the consolidated financial statements.

Consolidated Statements of Cash Flows (continued)
For the three-month periods ended August 31, 2005 and 2004
Increase (Decrease) in Cash
(Unaudited)
(Dollars in thousands)

The accompanying notes are a part of the consolidated financial statements.

Notes to the Consolidated Financial Statements
(Unaudited)

The accompanying unaudited interim consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the consolidated financial position as of August 31, 2005, in addition to the consolidated results of operations and consolidated cash flows for the three-month periods ended August 31, 2005 and 2004. Due to the seasonal nature of the Corporation’s business, interim results are not necessarily indicative of results for the entire year.

The unaudited interim consolidated financial statements included herein have been prepared pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly, certain information and footnote disclosures normally accompanying the annual consolidated financial statements have been omitted. The interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Corporation’s latest annual report on Form 10-K.

Inventories are stated at cost, determined under the first-in, first-out method, which is not in excess of market. Physical inventory counts are taken at the end of each reporting quarter. Total inventories for the periods presented consisted of (dollars in thousands):

The Corporation provides the retail purchaser of its manufactured homes with a fifteen-month warranty against defects in design, materials and workmanship. Recreational vehicles are covered by either a two-year warranty or a one-year warranty.

The warranties are backed by a corporate service department and an extensive field service system. Estimated warranty costs are accrued at the time of sale based upon current sales, historical experience and management’s judgment regarding anticipated rates of warranty claims. The adequacy of the recorded warranty liability is periodically assessed and the amount is adjusted as necessary. A reconciliation of accrued warranty and related expenses is as follows (dollars in thousands):

The Corporation was contingently liable at August 31, 2005 under repurchase agreements with certain financial institutions providing inventory financing for retailers of its products. Under these arrangements, which are customary in the manufactured housing and recreational vehicle industries, the Corporation agrees to repurchase homes in the event of default by the retailer at declining prices over the term of the agreement, generally 12 months. The maximum repurchase liability is the total amount that would be paid upon the default of all the Corporation’s independent dealers. The maximum potential repurchase liability, without reduction for the resale value of the repurchased units, was approximately $102 million at August 31, 2005 and $106 million at May 31, 2005. The risk of loss under these agreements is spread over many retailers 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 allowance for doubtful accounts includes a reserve for potential net losses on repurchased units. There were no repurchases in the three-month periods ending August 31, 2005 and 2004.

Notes to the Consolidated Financial Statements
(Unaudited)

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

The Corporation designs, produces and distributes manufactured housing (single section homes, multi-section homes and modular homes) and towable recreational vehicles (travel trailers, including park models and fifth wheels). In the first quarter of fiscal year 2006, manufactured housing represented 78 percent of total sales, while recreational vehicles accounted for the remaining 22 percent. In the first three months of fiscal year 2005, manufactured housing represented 72 percent of total sales, while recreational vehicles accounted for the remaining 28 percent.

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

The Corporation sells manufactured housing and towable recreational vehicle products to independent dealers and manufactured housing communities located throughout the United States. To better serve the needs of its dealers, the Corporation has twenty-two manufacturing facilities in eleven states. Manufactured housing and recreational vehicles are sold to dealers either through floor plan financing with various financial institutions or on a cash basis. While the Corporation maintains production of manufactured homes and recreational vehicles throughout the year, seasonal fluctuations in sales do occur. Sales and production of manufactured homes are affected by winter weather conditions at the Corporation’s northern plants. Recreational vehicle sales are generally higher in the spring and summer months than in the fall and winter months.

Sales in both business segments are affected by the strength of the U.S. economy, interest rate levels, consumer confidence and the availability of wholesale and retail financing. The manufactured housing segment is currently affected by an industry recession. This recession, caused primarily by restrictive retail financing and economic uncertainty has resulted in industry sales to be the lowest in decades. In the recreational vehicle segment, the Corporation sells travel trailers, fifth wheels and park models. Industry sales of travel trailers and fifth wheels have seen steady growth in recent years. However, there has been a softening of demand over the past few months.

Despite the recession in the manufactured housing industry, demand for multi-section homes is increasing. This product is often sold as part of a land-home package and is financed with a conventional mortgage. Multi-section homes have an appearance similar to site-built homes and are notably less expensive. The Corporation is capitalizing on this increased demand by expanding manufacturing capabilities. Eight manufactured housing facilities have obtained approval from applicable state and local governmental entities to produce modular homes, which will extend existing product offerings.

The recreational vehicle segment in which the Corporation operates is a very competitive ever-changing market. This segment is witnessing an ongoing shift in consumer demand for both metal-sided products and products with bonded wall construction. The Corporation is positioning itself to take advantage of the available opportunities in the towable recreational vehicle segment in which it competes.

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

Manufactured housing unit sales continue to be affected by difficult market conditions, restrictive retail financing and economic uncertainty impacting the entire manufactured housing industry. Despite these challenges, increased demand occurred for both single section and multi-section homes. In addition, sales rose due to an increase in the average selling price of multi-section homes.

Recreational vehicle sales decreased as a result of a continued shift in consumer demand toward products with bonded wall construction. The Corporation currently offers a limited number of models with fiberglass exteriors. In addition, the industry experienced a slowdown in the demand for towable recreational vehicles during this period.

*The percentages for manufactured housing and recreational vehicles are based on segment sales. The percentage for consolidated cost of sales is based on total sales.

Manufactured housing cost of sales increased due to increased sales. As a percentage of manufactured housing sales, however, cost of sales decreased as a result of the timing of the impact of increased selling prices.

Recreational vehicle cost of sales decreased due to fewer units sold in the first quarter of fiscal 2006 versus 2005.

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

Selling and administrative expenses rose primarily due to increases in performance based compensation.

*The percentages for manufactured housing and recreational vehicles are based on segment sales. The percentage for general corporate expenses and total operating earnings are based on total sales.

Operating earnings for the manufactured housing segment increased due to improved sales, and improved margins on those sales. The operating loss for the recreational vehicle segment increased slightly in spite of a significant reduction in sales. General corporate expenses increased primarily due to an increase in an accrual for performance based compensation.

Interest income is directly related to the amount available for investment and the prevailing yields of U.S. Government Securities.

In the first quarter of fiscal 2006, the Corporation sold vacant land for a pre-tax gain of $464,000.

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

Liquidity and Capital Resources
(Dollars in thousands)

The Corporation’s policy is to invest its excess cash, which exceeds its operating needs, in U.S. Government Securities. Current assets, exclusive of cash and U.S. Treasury Bills and Notes, increased due to a rise in accounts receivables, $1,437,000, inventories, $1,001,000 and other current assets, $3,376,000. Accounts receivable and inventories increased as a result of higher amount of sales in August 2005 versus May 2005. Other current assets increased due to funding of workers’ compensation claims with the Corporation’s workers’ compensation insurance carrier.

Current liabilities declined primarily due to a $1,784,000 decrease in accrued profit sharing. The decrease resulted from the timing of a yearly contribution to the Corporation’s profit sharing plan.

Capital expenditures totaled $741,000 for the three months ended August 31, 2005 versus $1,312,000 in the comparable period of the previous year. Capital expenditures during this period were made primarily to replace or refurbish machinery, equipment and facilities in addition to improving manufacturing efficiencies. In addition, the Corporation received proceeds totaling $1,493,000 from the sale of vacant land.

The cash provided by operating activities, along with current cash and other short-term investments, is expected to be adequate to fund any capital expenditures and treasury stock purchases during the year. Historically, the Corporation’s financing needs have been met through funds generated internally.

The provisions for federal income taxes in each year approximates the statutory rate and for state income taxes reflects current state rates effective for the period based upon activities within the taxable entities.

The consolidated financial statements included in this report reflect transactions in the dollar values in which they were incurred and, therefore, do not attempt to measure the impact of inflation. The Corporation, however, experienced in fiscal 2005 significant increases in the cost of lumber, lumber-related materials and steel. Although the Corporation was unable to recover all of the increases in the first half of fiscal 2005, on a long-term basis it has demonstrated an ability to adjust selling prices in reaction to changing costs due to inflation. The Corporation believes that inflation has not had a material effect on its operations during the first quarter of fiscal 2006.

Certain statements in this report are considered forward looking as indicated by the Private Securities Litigation Reform Act of 1995. These statements involve uncertainties that may cause actual results to materially differ from expectations as of the report date. These uncertainties include but are not limited to:

As of August 31, 2005, the Corporation conducted an evaluation, under the supervision and participation of management including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Corporation’s disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Corporation’s disclosure controls and procedures are effective as of August 31, 2005.

No change in the Corporation’s internal control over financial reporting (as such term is defined in Exchange Act Rule 13a-15(f)) occurred during the fiscal quarter ended August 31, 2005 that materially affected, or is reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

Information with respect to this Item for the period covered by this Form 10-Q has been reported in Item 3, entitled “Legal Proceedings” of the Form 10-K for the fiscal year ended May 31, 2005 filed by the registrant with the Commission.

On September 26, 2005, Skyline Corporation held its Annual Meeting of Shareholders at which the following matters were submitted to a vote of the security holders:

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

INDEX TO EXHIBITS