UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-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 28, 2019
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: 001-04714
Skyline Champion Corporation
(Exact name of registrant as specified in its charter)
Indiana
35-1038277
(State of Incorporation)
(I.R.S. Employer Identification No.)
755 West Big Beaver Road, Suite 1000
Troy, Michigan
48084
(Address of Principal Executive Offices)
(Zip Code)
(248) 614-8211
(Registrant’s telephone number, including area code)
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 Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filers,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange 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 Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Number of shares of common stock outstanding as of January 26, 2020: 56,665,681
SKYLINE CHAMPION CORPORATION
TABLE OF CONTENTS
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of December 28, 2019 (unaudited) and March 30, 2019
1
Condensed Consolidated Statements of Operations (unaudited) for the three and nine months ended December 28, 2019 and December 29, 2018
2
Condensed Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the three and nine months ended December 28, 2019 and December 29, 2018
3
Condensed Consolidated Statements of Cash Flows (unaudited) for the nine months ended December 28, 2019 and December 29, 2018
4
Condensed Consolidated Statements of Stockholders’ Equity (unaudited) for the three and nine months ended December 28, 2019 and December 29, 2018
5
Notes to Condensed Consolidated Financial Statements
6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
17
Item 3. Quantitative and Qualitative Disclosures About Market Risk
29
Item 4. Controls and Procedures
PART II – OTHER INFORMATION
Item 1. Legal Proceedings
30
Item 1A. Risk Factors
Item 6. Exhibits
31
SIGNATURES
32
i
PART I - FINANCIAL INFORMATION
Item 1.
Financial Statements
Condensed Consolidated Balance Sheets
(Dollars and shares in thousands, except per share amounts)
December 28,
2019
March 30,
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents
$
171,287
126,634
Trade accounts receivable, net
42,233
57,649
Inventories, net
107,938
122,638
Other current assets
13,377
11,369
Total current assets
334,835
318,290
Long-term assets:
Property, plant, and equipment, net
110,944
108,587
Goodwill
173,521
173,406
Amortizable intangible assets, net
44,714
48,936
Deferred tax assets
30,435
34,058
Other noncurrent assets
30,029
16,677
Total assets
724,478
699,954
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Floor plan payable
32,375
33,321
Accounts payable
27,325
43,421
Other current liabilities
118,603
129,561
Total current liabilities
178,303
206,303
Long-term liabilities:
Long-term debt
39,330
54,330
Deferred tax liabilities
3,746
3,422
Other
33,902
23,927
Total long-term liabilities
76,978
81,679
Stockholders' Equity:
Common stock, $0.0277 par value, 115,000 shares authorized, 56,666 and 56,657 shares issued (including 145 and 290 shares subject to restriction) as of December 28, 2019 and March 30, 2019, respectively
1,570
1,569
Additional paid-in capital
483,371
479,226
Accumulated deficit
(6,046
)
(58,208
Accumulated other comprehensive loss
(9,698
(10,615
Total stockholders’ equity
469,197
411,972
Total liabilities and stockholders’ equity
See accompanying Notes to Condensed Consolidated Financial Statements.
Condensed Consolidated Statements of Operations
(Unaudited, dollars in thousands, except per share amounts)
Three Months Ended
Nine Months Ended
December 29,
2018
Net sales
342,239
354,671
1,068,585
1,032,368
Cost of sales
273,338
289,935
849,594
853,472
Gross profit
68,901
64,736
218,991
178,896
Selling, general, and administrative expenses
45,237
48,848
145,354
222,005
Operating income (loss)
23,664
15,888
73,637
(43,109
Interest expense, net
328
813
1,019
2,712
Other expense
—
125
7,845
Income (loss) before income taxes
23,336
14,950
72,618
(53,666
Income tax expense
6,299
4,437
20,456
13,699
Net income (loss)
17,037
10,513
52,162
(67,365
Net income (loss) per share:
Basic
0.30
0.19
0.92
(1.28
Diluted
Condensed Consolidated Statements of Comprehensive Income (Loss)
Other comprehensive (loss) income:
Foreign currency translation adjustments
548
(2,099
917
(2,206
Total comprehensive income (loss)
17,585
8,414
53,079
(69,571
Condensed Consolidated Statements of Cash Flows
(Unaudited, dollars in thousands)
Cash flows from operating activities
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation
9,826
8,219
Amortization of intangible assets
4,069
3,316
Amortization of deferred financing fees
384
409
Fair market value adjustment for asset classified as held for sale
986
Equity-based compensation
6,168
97,589
Deferred taxes
4,222
3,223
Loss on disposal of property, plant, and equipment
126
Foreign currency transaction (gain) loss
(93
188
Change in assets and liabilities net of business acquired:
Accounts receivable
15,441
Inventories
14,980
4,991
Prepaids and other assets
(6,199
(286
(16,130
(11,756
Accrued expenses and other liabilities
(12,865
4,975
Net cash provided by operating activities
73,077
51,918
Cash flows from investing activities
Additions to property, plant, and equipment
(12,110
(7,627
Cash acquired in business acquisition
9,722
Proceeds from disposal of property, plant, and equipment
44
Proceeds from sale of held for sale asset
1,100
Decrease in note receivable
284
Net cash (used in) provided by investing activities
(10,966
2,396
Cash flows from financing activities
Changes in floor plan financing, net
(946
9,133
Borrowings on revolving debt facility
46,900
Payments on revolving debt facility
(15,000
Payments on term-loans and other debt
(46,900
Payments for deferred financing fees
(2,169
Stock option exercises
109
1,615
Tax payments for equity-based compensation
(2,131
(4,117
Members' capital distribution
(65,277
Net cash used in financing activities
(17,968
(60,815
Effect of exchange rate changes on cash, cash equivalents, and restricted cash
510
(1,130
Net increase (decrease) in cash, cash equivalents, and restricted cash
44,653
(7,631
Cash, cash equivalents, and restricted cash at beginning of period
136,616
Cash, cash equivalents, and restricted cash at end of period
128,985
Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited, dollars and shares in thousands)
Three Months Ended December 28, 2019
Shares
Amount
Members'
Contributed
Capital
Additional
Paid in
Retained
Earnings
(Accumulated
Deficit)
Accumulated
Comprehensive
Loss
Total
Balance at September 28, 2019
56,665
481,909
(23,083
(10,246
450,150
Net income
1,465
Net common stock issued under equity-based compensation plans
(3
Balance at December 28, 2019
56,666
Nine Months Ended December 28, 2019
Balance at March 30, 2019
56,657
9
(2,023
(2,022
Three Months Ended December 29, 2018
Balance at September 29, 2018
56,713
1,571
472,176
(77,878
(9,400
386,469
3,662
Balance at December 29, 2018
475,838
(11,499
398,545
Nine Months Ended December 29, 2018
Balance at April 1, 2018
140,076
22,514
(9,293
153,297
Net loss
Members' capital distributions
(42,763
(22,514
Exchange of membership interest for shares of Skyline Champion Corporation
56,143
1,555
(97,313
380,923
285,165
570
16
(2,674
(2,658
Components of accumulated other comprehensive loss consisted solely of foreign currency translation adjustments.
1.
Basis of Presentation and Business
On June 1, 2018, Skyline Champion Corporation (formerly known as Skyline Corporation), an Indiana corporation (the “Company”), and Champion Enterprises Holdings, LLC (“Champion Holdings”) completed the transactions contemplated by the Share Contribution & Exchange Agreement (the “Exchange Agreement”), dated as of January 5, 2018, by and between the Company and Champion Holdings. Under the Exchange Agreement, (i) Champion Holdings contributed to the Company all of the issued and outstanding equity interests of each of Champion Holdings’ wholly-owned operating subsidiaries (the “Contributed Shares”), and (ii) in exchange for the Contributed Shares, the Company issued to the members of Champion Holdings, in the aggregate, 47,752,008 shares of Company common stock (“Skyline Common Stock”) (such issuance, the “Shares Issuance”). Immediately following the Shares Issuance, the members of Champion Holdings collectively held 84.5%, and the Company’s pre-closing shareholders collectively held 15.5%, of the issued and outstanding Skyline Common Stock on a fully-diluted basis. The contribution of the Contributed Shares by Champion Holdings to Skyline, and the Shares Issuance by the Company to the members of Champion Holdings are collectively referred to herein as the “Exchange.”
The Exchange was treated as a purchase of the Company by Champion Holdings for accounting and financial reporting purposes. As a result, the financial results for the nine months ending December 29, 2018 are comprised of the results of 1) Champion Holdings for the period between April 1, 2018 and May 31, 2018 and 2) the Company, after giving effect to the Exchange, from June 1, 2018 through December 29, 2018.
The accompanying unaudited condensed consolidated financial statements of the Company, have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for Quarterly Reports on Form 10-Q and Article 10 of SEC Regulation S-X. Accordingly, certain information and footnote disclosures normally included 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 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 Company has evaluated subsequent events after the balance sheet date through the date of the filing 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 to the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K, which was filed with the SEC on May 23, 2019.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and the accompanying notes thereto. Actual results could differ from those estimates. The condensed consolidated statements of comprehensive income (loss) 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 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 2020”, will end on March 28, 2020. References to “fiscal 2019” refer to the Company’s fiscal year ended March 30, 2019. The three and nine months ended December 28, 2019 and December 29, 2018 each included 13 weeks and 39 weeks, respectively.
The Company’s operations consist of manufacturing, retail and transportation activities. The Company operates 33 manufacturing facilities throughout the United States (“U.S.”) and five manufacturing facilities in western Canada that primarily construct factory-built, timber-framed manufactured, and modular houses that are sold primarily to independent retailers and builders/developers. The Company’s retail operations consist of 21 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 recreational vehicles throughout the U.S. and Canada and manufactured houses in certain regions of the U.S.
Recently Adopted Accounting Pronouncements: In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842) (“ASC 842”), to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. A lessee should recognize in the consolidated balance sheet a liability to make lease payments (the lease liability) and an asset representing its right to use the underlying asset for the lease term. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee have not significantly changed from previous requirements. This ASC 842 is effective for fiscal years beginning after December 31, 2018 and modified retrospective application is permitted.
The Company adopted ASC 842 as of March 31, 2019, the first day of fiscal 2020 using the modified retrospective approach and without restating comparative periods. The Company has elected to apply the transition package of three practical expedients which allow companies not to reassess whether agreements contain leases, the classification of leases, and the capitalization of initial direct costs. The Company did not elect the practical expedient which permits the use of hindsight when determining the lease term and assessing right-of-use assets for impairment. As permitted by the standard, the Company elected to: 1) recognize lease expense for leases with a term of 12 months or less on a straight-line basis over the lease term and will not recognize any right of use assets or lease liabilities for those leases, and 2) not separate lease and non-lease components.
Notes to Condensed Consolidated Financial Statements - Continued
The primary financial statement impact upon adoption was the recognition, on a discounted basis, of the Company's minimum commitments under non-cancelable operating leases as right of use assets and obligations on the consolidated balance sheets. The adoption of ASC 842 resulted in the recognition of lease-related assets and liabilities of $13.7 million. The standard did not have a material impact on the Company's results of operations or cash flows.
Recently Issued Accounting Pronouncements Pending Adoption: In January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The standard simplifies the accounting for goodwill impairments and allows a goodwill impairment charge to be based on the amount of a reporting unit’s carrying value in excess of its fair value. This eliminates the requirement to calculate the implied fair value of goodwill or what is known as “Step 2” under the current guidance. This guidance is effective for annual and interim periods of public entities beginning after December 15, 2019, with early adoption permitted. The Company is currently assessing the potential impact this ASU will have on its consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This guidance requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. This guidance also requires enhanced disclosures regarding significant estimates and judgments used in estimating credit losses. The new guidance is effective for fiscal years beginning after December 15, 2019. Early adoption is permitted for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company is currently evaluating the impact that the adoption of this guidance will have on its consolidated financial statements.
There were no other accounting standards recently issued that are expected to have a material impact on the Company’s financial position or results of operations.
2.
Business Combination
The Exchange was completed on June 1, 2018 and was accounted for as a reverse acquisition under the acquisition method of accounting as provided by the FASB Accounting Standards Codification 805, Business Combinations. Champion Holdings was deemed to be the acquirer for accounting and financial reporting purposes. The assets acquired and liabilities assumed as a result of the Exchange were recorded at their respective fair values and added to the carrying value of Champion Holdings’ existing assets and liabilities. The Company incurred acquisition-related costs of approximately $6.9 million for the nine months ended December 29, 2018, which were classified as other expense in the condensed consolidated statements of operations. No acquisition-related costs were incurred during the three months ended December 29, 2018. Additionally, the Company incurred approximately $6.0 million in equity-based compensation expense related to former Skyline employees during the first quarter of fiscal 2019, which is recorded in selling, general, and administrative expenses in the condensed consolidated statements of operations. These types of costs were not incurred during fiscal 2020.
The purchase price of the acquisition was determined with reference to the value of equity (common stock) of the Company based on the closing price on June 1, 2018 of $33.39 per share. The purchase price has been allocated to the assets acquired and liabilities assumed using their estimated fair values at June 1, 2018, the closing of the Exchange. The purchase price and the allocation have been used to prepare the accompanying condensed consolidated financial statements.
The purchase price was allocated as follows:
(Dollars in thousands)
Allocation
Cash
Trade accounts receivable
13,876
Inventory
19,028
Assets held for sale
2,086
Property, plant, and equipment
40,220
Deferred tax assets, net
7,034
Other assets
6,706
Accounts payable and accrued liabilities
(36,027
Intangibles
52,065
170,342
Total purchase price allocation
285,052
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 operational improvements through sharing of best practices. Goodwill, which is not deductible for income tax purposes, was allocated to the U.S. Factory-built Housing reporting unit.
Cash, trade receivables, other assets, accounts payable, and accrued liabilities were generally stated at historical carrying values given the short-term nature of these assets and liabilities. Intangible assets consist primarily of amounts recognized for the fair value of customer relationships and trade names and were based on an independent appraisal. Customer-based assets include the Company’s established relationships with its customers and the ability of those customers to generate future economic profits for the Company. The Company estimates that these intangible assets have a weighted average useful life of ten years. Fair value estimates of property, plant, and equipment were based on independent appraisals and broker opinions of value, giving consideration to the highest and best use of the assets. Key assumptions used in the
7
appraisals were based on a combination of market and cost approaches, as appropriate. Level 3 fair value estimates of $40.2 million related to property, plant, and equipment and $52.1 million related to intangible assets were recognized in the accompanying condensed consolidated balance sheet as a result of the allocation of the purchase price from the Exchange. The Company determined $2.1 million of property acquired in the Exchange met the definition of held for sale at the acquisition date and was classified in other current assets. The fair value less cost to sell of this held for sale property was evaluated each reporting period to determine if it has changed. A loss of $1.0 million was recorded during the first quarter of fiscal 2020 related to this held for sale property based on updated market information. The sale of the property was completed during the third quarter of fiscal 2020 for $1.1 million. Assets held for sale were $2.1 million as of March 30, 2019. For further information on acquired assets measured at fair value, see Note 5, Goodwill and Intangible Assets.
The Company allocated a portion of the purchase price to certain realizable deferred tax assets totaling $27.3 million. Deferred tax assets are primarily federal and state net operating loss carryforwards and credits offset by a valuation allowance for certain state net operating loss carryforwards that are not expected to be realized. The deferred tax assets are offset by deferred tax liabilities of $20.3 million resulting from the purchase price allocation step-up in fair value that exceed the historical tax basis.
The statement of operations for the three and nine months ended December 29, 2018 includes $63.2 million and $153.3 million, respectively, of net sales attributable to the acquired Skyline operations.
A summary of the results of operations for the Company, on an as reported and on a pro forma basis, are as follows:
December 29, 2018
Reported
Pro forma
1,078,172
(52,256
The pro forma results are based on adding the historical results of operations of Champion Holdings and Skyline and adjusting those historical amounts for the amortization of intangibles created in the Exchange; the increase in depreciation as a result of the step-up in fair value of property, plant, and equipment; removing transaction costs directly associated with the Exchange; removing equity-based compensation expense directly resulting from the Exchange; reflecting the financing arrangements entered into in connection with the Exchange, and adjusting those items for income taxes. The pro forma disclosures do not give effect to the potential impact of current financial conditions, any anticipated synergies, operating efficiencies or cost savings that may result from the Exchange or any integration costs. The pro forma data is intended for informational purposes and is not indicative of the future results of operations.
The Exchange Agreement provided that Champion Holdings was permitted to pay a capital distribution prior to completion of the Exchange to the extent it had cash in excess of debt and other debt-like items and unpaid Exchange fees and expenses. Prior to the completion of the Exchange, Champion Holdings made a capital distribution to its members equal to an aggregate of $65.3 million (of which $22.5 million was reflected as a reduction to retained earnings and $42.8 million was reflected as a reduction to members’ contributed capital).
3.
The components of inventory, net of reserves for obsolete inventory, were as follows:
Raw materials
49,242
48,531
Work in process
15,235
13,973
Finished goods and other
43,461
60,134
Total inventories
At December 28, 2019 and March 30, 2019, reserves for obsolete inventory were $4.5 million and $4.1 million, respectively.
4.
Property, Plant, and Equipment
Property, plant, and equipment are stated at cost. Depreciation is calculated primarily on a straight-line basis, 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 three months ended December 28, 2019 and December 29, 2018 was $3.2 million and $2.9 million, respectively. Depreciation expense for the nine months ended December 28, 2019 and December 29, 2018 was $9.8 million and $8.2 million, respectively.
8
The components of property, plant, and equipment were as follows:
Land and improvements
35,615
34,264
Buildings and improvements
87,072
83,973
Machinery and equipment
49,288
42,476
Construction in progress
4,124
3,619
Property, plant, and equipment, at cost
176,099
164,332
Less: accumulated depreciation
(65,155
(55,745
5.
Goodwill and Intangible Assets
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 December 28, 2019 and March 30, 2019, the Company had goodwill of $173.5 million and $173.4 million, respectively. The change from March 30, 2019 was a result of the finalization of the allocation of net assets recognized in connection with the Exchange.
Intangible Assets
The components of amortizable intangible assets were as follows:
December 28, 2019
March 30, 2019
Customer
Relationships
Trade
Names
Gross carrying amount
48,743
13,220
61,963
48,782
13,173
61,955
Accumulated amortization
(12,407
(4,842
(17,249
(9,052
(3,967
(13,019
Amortizable intangibles, net
36,336
8,378
39,730
9,206
The Company recognized finite-lived intangibles for customer relationships of $43.1 million and trade names of $9.0 million as a result of the allocation of the purchase price from the Exchange. The fair value of the customer relationship intangible asset was estimated using the multi-period excess earnings method of the income approach. The fair value of the customer relationship intangible asset was determined based on estimates and assumptions of projected cash flows attributable to the acquired customer relationships, the annual attrition rate of existing customer relationships, the contributory asset charges attributable to the assets that support the customer relationships, such as net working capital, property, plant, and equipment, trade name, and workforce, the economic life and the discount rate as determined at the time of the final valuation. The fair value of the trade name intangible asset was estimated using the relief-from-royalty method of the income approach. The fair value of the trade names intangible asset was determined based on estimates and assumptions used for the expected life of the intangible asset, the royalty rate and the discount rate that reflects the level of risk associated with the future cash flows as determined at the time of the final valuation. During the three months ended December 28, 2019 and December 29, 2018, amortization of intangible assets was $1.4 million and $1.6 million, respectively. During the nine months ended December 28, 2019 and December 29, 2018, amortization of intangible assets was $4.1 million and $3.3 million, respectively.
6.
Other Current Liabilities
The components of other current liabilities were as follows:
Customer deposits
19,947
27,873
Accrued volume rebates
20,766
21,020
Accrued warranty obligations
20,035
17,886
Accrued compensation and payroll taxes
24,431
32,075
Accrued insurance
15,674
16,245
17,750
14,462
Total other current liabilities
7.
Accrued Warranty Obligations
Changes in the accrued warranty obligations were as follows:
Balance at the beginning of the period
24,437
22,871
23,346
15,430
Warranty assumed in the Exchange
6,259
Warranty expense
9,727
9,167
28,060
25,834
Cash warranty payments
(9,169
(8,972
(26,411
(24,457
Balance at end of period
24,995
23,066
Less: noncurrent portion in other long-term liabilities
(4,960
(5,700
Total current portion
17,366
8.
Debt and Floor Plan Payable
Long-term debt consisted of the following:
Revolving credit facility maturing in 2023
26,900
41,900
Obligations under industrial revenue bonds due 2029
12,430
Total debt
Less: current portion
Total long-term debt
On June 5, 2018, the Company entered into a credit agreement (the “Credit Agreement”) with a syndicate of banks. The Credit Agreement provides for a revolving credit facility of up to $100.0 million, including a letter of credit sub-facility of not less than $45.0 million. Initial borrowings under the Credit Agreement were used to repay the Company’s existing $46.9 million term loans (“Term Loans”) and replace the Company’s existing cash collateralized stand-alone letter of credit facility. The revolving credit facility allows the Company to draw down, repay and re-draw loans on the available funds during the term of the Credit Agreement. During the three and nine months ended December 28, 2019, the Company repaid $5.0 million and $15.0 million, respectively, of amounts previously drawn on the revolving credit facility.
The Credit Agreement matures on June 5, 2023 and has no scheduled amortization. The interest rate on borrowings under the Credit Agreement adjusts based on the first lien net leverage of the Company from a high of LIBOR plus 2.25% and ABR plus 1.25% when the first lien net leverage is equal to or greater than 2.00:1.00, to a low of LIBOR plus 1.50% and ABR plus 0.50% when the first lien net leverage is below 0.50:1.00. In addition, the Company is obligated to pay an unused line fee ranging between 0.40% and 0.25% (depending on the first lien net leverage) in respect of unused commitments under the Credit Agreement. At December 28, 2019 the interest rate on borrowings under the Credit Agreement was 3.2%. At December 28, 2019, letters of credit issued under the Credit Agreement totaled $28.7 million. Total available borrowings under the Credit Agreement as of December 28, 2019 were $44.4 million.
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 December 28, 2019, including related costs and fees, was 3.78%. At March 30, 2019, the weighted average interest rate was 3.62%. The industrial revenue bonds require lump-sum payments of principal upon maturity in 2029.
The 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 Credit Agreement as of December 28, 2019.
Floor Plan Payable
The Company’s retail operations utilize floor plan financing to fund the purchase of manufactured homes for display or resale. At December 28, 2019 and March 30, 2019, the Company had outstanding borrowings on floor plan financing agreements of $32.4 million and $33.3 million, respectively. Total credit line capacity provided under the agreements was $48.0 million as of December 28, 2019. Borrowings are secured by the homes and are required to be repaid when the Company sells the home to a customer.
10
9.
Revenue Recognition
The following tables disaggregate the Company’s revenue by sales category for the three and nine months ended December 28, 2019 and December 29, 2018:
U.S.
Factory-Built
Housing
Canadian
Corporate/
Manufacturing and retail
304,568
22,809
327,377
Commercial
250
Transportation
14,612
304,818
944,472
72,916
1,017,388
4,781
46,416
949,253
308,013
27,130
335,143
1,505
18,023
309,518
870,816
79,885
950,701
11,441
70,226
882,257
11
10.
Leases
The Company has operating leases for land, manufacturing and office facilities, and equipment. The Company's lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise such option. The Company's leases do not contain material residual value guarantees or material restrictive covenants. Operating lease expense is recognized on a straight-line basis over the lease terms. Lease expense included in the accompanying condensed consolidated statement of operations is shown below:
Operating lease expense
1,359
4,234
Short-term lease expense
402
1,005
Total lease expense
1,761
5,239
Operating lease assets and obligations included in the accompanying condensed consolidated balance sheet are shown below:
Right-of-use assets under operating leases:
Other long-term assets
11,616
Lease obligations under operating leases:
3,826
Other long-term liabilities
7,790
Total lease obligation
Maturities of lease obligations as of December 28, 2019, are shown below:
Fiscal 2020 (1)
1,133
Fiscal 2021
4,155
Fiscal 2022
3,090
Fiscal 2023
2,234
Fiscal 2024
912
Thereafter
2,214
Total undiscounted cash flows
13,738
Less: imputed interest
(2,122
Lease obligations under operating leases
(1)
For remaining period in fiscal year.
The weighted average lease term and discount rate for operating leases are shown below:
Weighted average remaining lease term (in years)
5.1
Weighted average discount rate
5.6
The discount rate used to measure a lease obligation should be the rate implicit in the lease; however, the Company’s operating leases generally do not provide an implicit rate. Accordingly, the Company uses its incremental borrowing rate at lease commencement to determine the present value of lease payments. The incremental borrowing rate is an entity-specific rate which represents the rate of interest a lessee would pay to borrow on a collateralized basis over a similar term with similar payments.
Cash flow information related to operating leases is shown below:
Non-cash activity:
Right-of-use assets obtained in exchange for operating lease obligations
1,711
Operating cash flows:
Cash paid related to operating lease obligations
4,262
12
11.
Income Taxes
For the three months ended December 28, 2019 and December 29, 2018, the Company recorded $6.3 million and $4.4 million of income tax expense and had an effective tax rate of 27.0% and 29.7%, respectively. For the nine months ended December 28, 2019 and December 29, 2018, the Company recorded $20.5 million and $13.7 million of income tax expense and had an effective tax rate of 28.2% and (25.5%), respectively. The change in the effective tax rate for the three and nine months ended December 28, 2019, compared with the same respective periods of the prior year, was primarily due to costs related to the Exchange including non-deductible equity-based compensation for which no tax benefit could be recognized.
The Company’s effective tax rate for the three and nine months ended December 28, 2019 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 and results in foreign jurisdictions. The Company’s effective tax rate for the three and nine months ended December 29, 2018 differed from the federal statutory rate primarily due to the effect of non-deductible expenses, state and local income taxes, one-time charges related to the Exchange and results in foreign jurisdictions and non-taxable entities.
During the nine months ended December 28, 2019, the Company’s uncertain tax position did not change. During the nine months ended December 29, 2018, the Company’s uncertain tax position decreased by $0.7 million due to expiration of certain statutes of limitations. The Company estimates a $0.6 million decrease to uncertain tax benefits in the next twelve months due to the expiration of statutes of limitations. The Company records interest and penalties related to uncertain tax positions as a component of income tax expense. Net interest and penalties for the periods presented herein were not significant.
12.
Earnings Per Share
Basic net income (loss) per share (“EPS”) attributable to the Company was computed by dividing net income (loss) attributable to the Company by the average number of common shares outstanding during the period. Certain of the Company’s time-vesting restricted share awards are considered participating securities. Diluted earnings per common share is computed based on the more dilutive of (i) the two-class method, assuming the participating securities are not exercised or converted; or (ii) the summation of average common shares outstanding and additional common shares that would have been outstanding if the dilutive potential common shares had been issued.
During the three and nine months ended December 28, 2019 and the three months ended December 29, 2018, the two-class method was more dilutive. The two-class method was not applicable to the computation for the nine months ended December 29, 2018 given the net loss recorded for that period. The number of shares used to calculate earnings per share prior to the Exchange was determined based on the exchange ratio, as defined in the Exchange Agreement.
The following table sets forth the computation of basic and diluted earnings per common share:
(Dollars and shares in thousands, except per share data)
Numerator:
Undistributed earnings allocated to participating securities
(44
(86
(196
Net income (loss) attributable to the Company's common shareholders
16,993
10,427
51,966
Denominator:
Basic weighted average shares outstanding
56,521
56,249
56,457
52,595
Dilutive securities
267
248
Diluted weighted average shares outstanding
56,788
56,705
Basic net income (loss) per share
Diluted net income (loss) per share
13.
Transactions with Related Parties
Prior to the Exchange, the Company was party to a Management Advisory Services Agreement (“Services Agreement”) with Centerbridge Advisors, LLC; MAK Management L.P.; and Sankaty Advisors, LLC (collectively, the “Managers”), affiliates of which collectively owned a majority of the units of Champion Holdings and the Company’s common stock (the “Principal Shareholders”), whereby the Principal Shareholders provided management, consulting, financial and other advisory services to Champion Holdings. Management fee expense during fiscal 2019, recognized prior to the Exchange, was $0.3 million. The Services Agreement was terminated in connection with the Exchange. The
13
Management fee expense is included in selling, general, and administrative expenses in the accompanying condensed consolidated statements of operation.
14.
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 segment primarily based on net sales, earnings before interest, taxes, depreciation and amortization (“EBITDA”) and operating assets.
The Company operates in two 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 Company’s transportation operations, corporate costs directly incurred for all segments and intersegment 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 include cash and certain deferred tax items not specifically allocated to another segment.
14
Selected financial information by reportable segment was as follows:
Net sales:
U.S. Factory-built Housing
Canadian Factory-built Housing
Corporate/Other
Consolidated net sales
Operating income:
U.S. Factory-built Housing EBITDA
33,165
30,637
104,624
80,240
Canadian Factory-built Housing EBITDA
1,786
2,569
9,085
9,123
Corporate/Other EBITDA
(6,771
(12,741
(26,177
(120,937
(3,171
(2,944
(9,826
(8,219
Amortization
(1,345
(1,633
(4,069
(3,316
Consolidated operating income (loss)
Depreciation:
2,659
2,486
8,365
6,946
255
237
744
695
257
221
717
578
Consolidated depreciation
3,171
2,944
Amortization of intangible assets:
1,345
1,572
3,134
61
182
Consolidated amortization of intangible assets
1,633
Capital expenditures:
1,981
1,463
9,483
4,919
414
158
842
572
306
1,322
1,785
2,136
Consolidated capital expenditures
2,701
2,943
12,110
7,627
Total Assets:
U.S. Factory-built Housing (1)
474,427
488,878
Canadian Factory-built Housing (1)
62,430
59,260
Corporate/Other (1)
187,621
151,816
Consolidated total assets
Deferred tax assets for the Canadian operations are reflected in the Canadian Factory-built Housing segment. U.S. deferred tax assets are presented in Corporate/Other because an allocation between segments is not practicable.
15.
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 their agreement to pay the financial 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 and pre-defined curtailment arrangements. The Company accounts for the guarantees under its repurchase agreements with the retailers’ financing institutions by estimating and deferring a portion of the related product sale that represents the estimated fair value of the repurchase obligation. The estimated fair value takes into account the estimate of the loss the Company will incur upon resale of any repurchases. This estimate is based on recent historical experience supplemented by management’s assessment of current economic and other conditions affecting the Company’s retailers. The reserve for estimated losses under repurchase agreements was $0.9 million at December 28, 2019 and $1.0 million at March 30, 2019. Excluding the
15
resale value of the homes, the contingent repurchase obligation as of December 28, 2019 was estimated to be approximately $147.9 million. Losses incurred on homes repurchased were immaterial during each of the three and nine months ended December 28, 2019 and December 29, 2018.
In addition to the repurchase agreements, the Company has agreed to guarantee a portion of certain retailers’ outstanding loans to a floor plan lender. At December 28, 2019, those guarantees totaled $0.6 million, all of which was outstanding at the end of the period.
At December 28, 2019, the Company was contingently obligated for approximately $28.7 million under letters of credit, primarily consisting of $12.7 million to support long-term debt, $15.7 million to support the casualty insurance program, and $0.3 million to support bonding agreements. The letters of credit are backed by a sub-facility under the New Credit Agreement. The Company was also contingently obligated for $24.2 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 United Kingdom historically provided certain guarantees to two customers. Those guarantees provide contractual liability for proven construction defects up to 12 years from the date of delivery of certain products. The guarantees remain a contingent liability of the Company which declines over time through October 2027. As of the date 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 sell business assets and in financing arrangements. The Company is subject to various legal proceedings and claims that arise in the ordinary course of its 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.
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 I of this Report.
Overview
On June 1, 2018, Skyline Champion Corporation (the “Company”) was formed by Skyline Corporation (“Skyline”) and Champion Enterprises Holdings, LLC (“Champion Holdings”) combining their operations pursuant to the Share Contribution & Exchange Agreement (the “Exchange Agreement”), dated as of January 5, 2018, by and between Skyline and Champion Holdings, as described in further detail below. Champion Holdings was formed as a Delaware limited liability company in 2010. Skyline was originally incorporated in Indiana in 1959.
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, Genesis Homes, Athens Park Models, Dutch Housing, Excel Homes, Homes of Merit, New Era, Redman Homes, Shore Park, Silvercrest, Titan Homes in the U.S. and Moduline and SRI Homes in western Canada. The Company operates 33 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 primarily to independent retailers, builders/developers, and manufactured home community operators. The Company’s retail operations consist of 21 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 and recreational vehicles throughout the U.S. and Canada.
Acquisitions and Expansions
Over the last several years, market demand for the Company’s products, primarily affordable housing in the U.S., has continued to improve. As a result, the Company has focused on operational improvements to make existing manufacturing facilities more profitable as well as executing measured expansion of its manufacturing and retail footprint.
In response to the increasing demand for affordable housing in the U.S., the Company has increased capacity through strategic acquisitions and expansions of its manufacturing footprint. The Company is focused on growing in strong HUD-markets across the U.S. as well as further expanding into the Northeast and Midwest U.S. modular housing markets. During June 2019, the Company began production at its newest manufactured housing facility in Leesville, Louisiana. During fiscal 2019, the Company completed its expansion of its Corona, California facility by adding a second production line and expanded its Leola, Pennsylvania campus by adding an additional plant. Production at the Leola facility began in April 2019. The Exchange added eight plants to the Company’s manufacturing footprint in fiscal 2019 (described in more detail below). In April 2017, the Company completed the purchase of a factory-built housing plant in Mansfield, Texas. In January 2017, the Company restarted operations at the Liverpool, Pennsylvania location, which was one of five modular manufacturing facilities acquired through a series of transactions with Innovative Building Systems, LLC and its subsidiaries. (“IBS” or the “IBS Acquisition”). The other facilities acquired from IBS are idle and provide the Company with opportunity to add capacity.
The Company has also focused on expansion of its company-owned retail operations, opening three additional retail sales centers during fiscal 2018 and five during fiscal 2017. Management believes retail expansion provides an opportunity to increase the Company’s presence in market segments that are not currently served through its independent retail network, while also providing for expansion and increased utilization of existing manufacturing operations.
These 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 well as improving the results of operations. These acquisitions and investments are included in the consolidated results for periods subsequent to their respective acquisition dates.
Combination with Skyline
On January 5, 2018, Champion Holdings and Skyline entered into an Exchange Agreement pursuant to which the two companies agreed to combine their operations. The Exchange was completed on June 1, 2018 and was accounted for as a reverse acquisition under the acquisition method of accounting as provided by FASB Accounting Standards Codification 805, Business Combinations (“ASC 805”). Champion Holdings was determined to be the acquirer for accounting and financial reporting purposes. The assets acquired and liabilities assumed by Champion Holdings as a result of the Exchange were recorded at their respective fair values and added to the carrying value of Champion Holdings existing assets and liabilities. As Champion Holdings is the accounting acquirer, the Company’s financial results for the nine months ending December 29, 2018 are comprised of the results of 1) Champion Holdings for the period between April 1, 2018 and May 31, 2018 and 2) the Company, after giving effect to the Exchange, from June 1, 2018 through December 29, 2018.
Industry and Company Outlook
For the nine months ended December 28, 2019, approximately 77% of the Company’s U.S. manufacturing sales were generated from the manufacture of homes that comply with the Federal HUD-code construction standard in the U.S. Industry shipments of HUD-code homes were 87,897 during the eleven months ended November 30, 2019 compared to 90,556 units shipped in same period of the prior year. The Company’s HUD market share during those periods was 17.1% versus 15.4% in the comparable period of the prior year. Industry sales of HUD-code homes have increased since 2009, when 50,000 HUD-code homes were sold. Fewer factory-built homes were sold in 2009 than in any year since 1959. While HUD-code factory-built home shipments have improved modestly over the past few years, the industry continues to operate at relatively low levels compared to historical shipment statistics. For instance, the long-term average for manufactured home shipments since 1960 is approximately 222,000 units per year.
For the nine months ended December 28, 2019, approximately 17% of the Company’s U.S. manufacturing sales were modular. The industry reports U.S. modular market shipments quarterly and three months in arrears. Industry shipments of modular homes in the U.S. were 10,843 during the first nine months of calendar year 2019, which was 7.1% lower than the 11,669 units shipped in the comparable period of the prior year. The Company’s modular market share during these periods was 14.0% and 12.1%, respectively. Modular home sales across the industry have generally been stable since 2009.
UNAUDITED RESULTS OF OPERATIONS FOR Q3 FISCAL 2020 VS. 2019
Results of Operations Data:
Operating income
Income before income taxes
Reconciliation of Adjusted EBITDA:
Depreciation and amortization
4,516
4,577
Equity-based compensation (for awards granted prior to December 31, 2018)
965
(68
155
Acquisition integration costs
560
1,998
Restructuring costs and other
108
252
Adjusted EBITDA
29,745
26,407
As a percent of net sales:
20.1
%
18.3
13.2
13.8
6.9
4.5
5.0
3.0
8.7
7.4
18
NET SALES
The following table summarizes net sales for the three months ended December 28, 2019 and December 29, 2018:
Change
(12,432
(3.5
%)
U.S. manufacturing and retail net sales
(4,700
(1.5
U.S. homes sold
5,033
5,019
0.3
U.S. manufacturing and retail average home selling price
60.6
61.7
(1.1
(1.8
Canadian manufacturing net sales
(4,321
(15.9
Canadian homes sold
276
329
(53
(16.1
Canadian manufacturing average home selling price
82.6
82.5
0.1
Corporate/Other net sales
(3,411
(18.9
U.S. manufacturing facilities in operation at end of period
33
6.5
U.S. retail sales centers in operation at end of period
21
Canadian manufacturing facilities in operation at end of period
Net sales for the three months ended December 28, 2019 were $342.2 million, a decrease of $12.4 million, or 3.5% compared to the three months ended December 29, 2018. The following is a summary of the change by operating segment.
U.S. Factory-built Housing:
Sales of homes for the Company’s U.S. manufacturing and retail operations decreased by $4.7 million, or 1.5% for the three months ended December 28, 2019 compared to the same period in the prior year. The decrease was due to a 1.8% decrease in average home selling prices resulting from a shift in product mix. Product mix fluctuations result from consumer preferences regarding the size and styles of homes selected for purchase, as well as opting for home upgrade packages as well as regional housing dynamics. The Company sold more single section homes in the three months ended December 28, 2019 compared to the same period in the prior year. Single section homes have a lower average selling price than multi-section homes.
Canadian Factory-built Housing:
The Canadian Factory-built Housing segment net sales decreased by $4.3 million, or 15.9% for the three months ended December 28, 2019 compared to the same period in the prior year. The decrease was due to a 16.1% decrease in homes sold. Net sales for the Canadian segment were unfavorably impacted by approximately $0.2 million as the Canadian dollar weakened compared to the U.S. dollar during the third quarter of fiscal 2020 as compared to the same period of the prior 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 December 28, 2019, net sales decreased $3.4 million, or 18.9%. The decrease was primarily attributable to lower net sales in the Company’s transportation business primarily as a result of fewer shipments associated with reduced RV demand in the U.S.
GROSS PROFIT
The following table summarizes gross profit for the three months ended December 28, 2019 and December 29, 2018:
Gross profit:
61,200
57,118
4,082
7.1
4,512
5,046
(534
(10.6
3,189
2,572
617
24.0
Total gross profit
4,165
6.4
Gross profit as a percent of net sales
Gross profit as a percent of net sales during the three months ended December 28, 2019 was 20.1% compared to 18.3% during three months ended December 29, 2018. The following is a summary of the change by operating segment.
19
Gross profit for the U.S. Factory-built Housing segment increased by $4.1 million, or 7.1%, during the three months ended December 28, 2019 compared to the same period in the prior year. Gross profit was 20.1% as a percent of segment net sales for the three months ended December 28, 2019 compared to 18.5% in the same period of the prior year. Gross profit expansion was driven by procurement and operational synergies related to the Exchange, refinement of product offerings, and plant operating improvements, all of which were partially offset by labor inflation.
Gross profit for the Canadian Factory-built Housing segment decreased $0.5 million, or 10.6%, during the three months ended December 28, 2019 compared to the same period in the prior year. Gross profit as a percent of net segment sales was 19.8% for the three months ended December 28, 2019, compared to 18.6% in the same period of the prior year. Although the Canadian Factory-built Housing segment saw lower volume compared to the prior period, margins improved due to lower material cost inputs.
Gross profit for the Corporate/Other segment increased $0.6 million, or 24.0%, during the three months ended December 28, 2019 compared to the same period in the prior year. Corporate/Other gross profit improved as a percent of segment net sales to 21.8% from 14.3 %. Gross margins for the Company’s transportation business improved as a percent of sales due to a change in revenue mix and lower variable expenses.
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 December 28, 2019 and December 29, 2018:
Selling, general, and administrative expenses:
32,039
30,539
1,500
4.9
2,980
2,787
193
10,218
15,522
(5,304
(34.2
Total selling, general, and administrative expenses
(3,611
(7.4
Selling, general, and administrative expense as a percent of net sales
Selling, general, and administrative expenses were $45.2 million for the three months ended December 28, 2019, a decrease of $3.6 million compared to the same period in the prior year. The following is a summary of the change by operating segment.
Selling, general, and administrative expenses for the U.S. Factory-built Housing segment increased $1.5 million, or 4.9%, during the three months ended December 28, 2019 as compared to the same period in the prior year. Selling, general, and administrative expenses, as a percent of segment net sales, was 10.5% for the three months ended December 28, 2019 compared to 9.9% during the comparable period in the prior year. The increase in selling, general, and administrative expenses was a combination of (i) additional headcount and investment to support capacity expansion at newly opened manufacturing facilities and (ii) increases in salaries and benefits to maintain competitive compensation packages to retain and recruit team members.
Selling, general, and administrative expenses for the Canadian Factory-built Housing segment increased $0.2 million, or 6.9%, during the three months ended December 28, 2019 as compared to the same period of the prior year. As a percent of segment net sales, selling, general, and administrative expenses for the Canadian segment was 13.1% for the three months ended December 28, 2019 compared to 10.3% for the same period in the prior year. The increase as a percentage of sales is due to the decrease in sales volume.
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 decreased $5.3
20
million, or 34.2%, during the three months ended December 28, 2019 as compared to the same period of the prior year. The decrease is primarily due to a decrease in equity-based compensation, integration costs related to the Exchange, and the benefit of run rate synergies from the Exchange.
INTEREST EXPENSE, NET
The following table summarizes the components of interest expense, net for the three months ended December 28, 2019 and December 29, 2018:
Interest expense
1,111
1,308
(197
(15.1
Interest income
(783
(495
(288
58.2
(485
(59.7
Average outstanding floor plan payable
32,178
35,973
Average outstanding long-term debt
42,663
59,330
Interest expense, net was $0.3 million for the three months ended December 28, 2019, a decrease of $0.5 million compared to the same period in the prior year. The decrease was related to: (i) higher interest income recognized during the period as a result of higher average cash balances invested in short term facilities and (ii) lower outstanding balance on the credit facility and floor plan payable as compared to the same period in the prior year.
INCOME TAX EXPENSE
The following table summarizes income tax expense for the three months ended December 28, 2019 and December 29, 2018:
1,862
42.0
Effective tax rate
27.0
29.7
Income tax expense for the three months ended December 28, 2019 was $6.3 million, representing an effective tax rate of 27.0%, compared to income tax expense of $4.4 million, representing an effective tax rate of 29.7%, for the three months ended December 29, 2018.
The Company’s effective tax rate for the three months ended December 28, 2019 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, and results in foreign jurisdictions. The Company’s effective tax rate for the three months ended December 29, 2018 differed from the federal statutory rate of 21.0% primarily due to the effect of non-deductible expenses, state and local income taxes, one-time charges related to the Exchange including non-deductible equity-based compensation and results of operations in foreign jurisdictions and non-taxable entities.
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 three months ended December 28, 2019 and December 29, 2018:
6,524
62.1
(61
(1.3
(2,697
(73.6
(223
*
(1,438
(72.0
(144
(57.1
3,338
12.6
* indicates that the calculated percentage is not meaningful
Adjusted EBITDA for the three months ended December 28, 2019 was $29.7 million, an increase of $3.3 million from the same period of the prior year. The increase is primarily due to improved gross profits generated by lower material cost inputs and procurement and operational synergies related to the Exchange. See Adjusted EBITDA definition below for additional information regarding the definition and use of this metric in evaluating the Company’s results.
UNAUDITED RESULTS OF OPERATIONS FOR THE FIRST NINE MONTHS OF FISCAL 2020 VS. 2019
13,895
11,535
3,606
Transaction costs
6,905
1,938
5,500
Equity-offering costs
816
343
1,362
94,312
72,941
20.5
17.3
13.6
21.5
(4.2
(6.5
8.8
22
The following table summarizes net sales for the nine months ended December 28, 2019 and December 29, 2018:
36,217
3.5
66,996
7.6
15,507
14,606
901
6.2
61.2
60.4
0.8
1.3
(6,969
(8.7
872
1,003
(131
(13.1
83.6
79.6
4.0
(23,810
(33.9
Net sales for the nine months ended December 28, 2019 were $1,069 million, an increase of $36.2 million, or 3.5% over the nine months ended December 29, 2018. The following is a summary of the change by operating segment.
The U.S. Factory-built Housing segment accounted for the Company’s overall net sales growth for the nine months ended December 28, 2019 compared to the same period in the prior year. Sales of homes for the Company’s U.S. manufacturing and retail operations increased by $67.0 million, or 7.6%. The number of homes sold during the nine months ended December 28, 2019 increased by 901 units, or 6.2%. Net sales increased by $50.4 million due to the inclusion of the Skyline operations for all nine months of fiscal 2020 compared to the same period of the prior year which only included seven months of Skyline operations. The remainder of the increase was due to a combination of factors which included additional manufacturing capacity, plant operating improvements, and an increase in the average home selling price which was driven primarily by product mix. Product mix fluctuations result from consumer preferences regarding the sizes and styles of homes selected for purchase, opting for home upgrade packages, as well as regional housing dynamics.
The Canadian Factory-built Housing segment net sales decreased by $7.0 million, or 8.7% for the nine months ended December 28, 2019 compared to the same period in the prior year, primarily due to a 13.1% decrease in number of homes sold, partially offset by a 5.0% increase in average home selling price which was a result of pricing actions taken by the Company as well as shifts in product mix. The number of homes sold decreased due to the decline in housing demand in the British Columbia and Alberta provinces versus the same period in the prior year. On a constant currency basis, net sales for the Canadian segment were unfavorably impacted by approximately $1.5 million as the Canadian dollar weakened compared to the U.S. dollar during the first nine months of fiscal 2020 as compared to the same period of the prior year.
Net sales for Corporate/Other includes the Company’s transportation business and the elimination of intersegment sales. For the nine months ended December 28, 2019, net sales decreased $23.8 million, or 33.9%. The decrease was primarily attributable to lower net sales in the Company’s transportation business primarily as a result of lower shipments associated with reduced RV demand in the U.S.
23
The following table summarizes gross profit for the nine months ended December 28, 2019 and December 29, 2018:
194,876
153,147
41,729
27.2
15,091
14,988
103
0.7
9,024
10,761
(1,737
40,095
22.4
Gross profit as a percent of sales during the nine months ended December 28, 2019 was 20.5% compared to 17.3% during nine months ended December 29, 2018. The following is a summary of the change by operating segment.
Gross profit for the U.S. Factory-built Housing segment increased by $41.7 million, or 27.2%, during the nine months ended December 28, 2019 compared to the same period in the prior year. The increase in gross profit is due to the increase in sales volumes and improved margins. Gross profit was 20.5% as a percent of segment net sales for the nine months ended December 28, 2019 compared to 17.4% in the same period of the prior year. Gross profit expansion was driven by favorable material pricing, refinement of product offerings, plant operating improvements, and procurement and operational synergies related to the Exchange, all of which were partially offset by labor inflation.
Gross profit for the Canadian Factory-built Housing segment remained flat during the nine months ended December 28, 2019 compared to the same period in the prior year. Gross profit as a percent of net sales was 20.7% for the nine months ended December 28, 2019, compared to 18.8% in the same period of the prior year. Although the Canadian Factory-built Housing segment saw lower volume compared to the prior period, margins improved due to lower cost of material.
Gross profit for the Corporate/Other segment decreased $1.7 million, or 16.1%, during the nine months ended December 28, 2019 compared to the same period in the prior year due to lower sales volume. Corporate/Other gross profit improved as a percent of segment net sales to 19.4% from 15.3%. Gross margins for the Company’s transportation business improved as a percent of sales due to a change in revenue mix and lower variable expenses. A portion of the change in revenue mix is due in part to less brokered business to other providers at lower margins in response to the decline in revenue caused by the softening market demand for RVs.
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 nine months ended December 28, 2019 and December 29, 2018:
102,686
82,987
19,699
23.7
6,749
6,753
(4
(0.1
35,919
132,265
(96,346
(72.8
(76,651
(34.5
Selling, general, and administrative expenses were $145.4 million for the nine months ended December 28, 2019, a decrease of $76.7 million compared to the same period in the prior year, primarily due to equity-based compensation expense recognized in the prior year, as explained below. The following is a summary of the change by operating segment.
24
Selling, general, and administrative expenses for the U.S. Factory-built Housing segment increased $19.7 million, or 23.7%, during the nine months ended December 28, 2019 as compared to the same period in the prior year. Selling, general, and administrative expenses, as a percent of segment net sales, was 10.8% for the nine months ended December 28, 2019 compared to 9.4% during the comparable period in the prior year. The first nine months of fiscal 2019 only included seven months of Skyline operations, while the same period in the current year included nine months of Skyline operations. The additional two months of Skyline activity, as well as intangible amortization related to the Exchange, increased selling, general, and administrative expenses by $4.5 million. The Company recorded additional SG&A costs for the Leesville, LA capacity expansion of $2.4 million during the nine months ended December 28, 2019. The remainder of the increase in selling, general, and administrative expenses was a combination of factors which include (i) higher sales commissions and incentive compensation, which is generally based on sales volume or a measure of profitability, and (ii) an increase in salaries and benefits to maintain competitive compensation packages to retain and recruit team members.
Selling, general, and administrative expenses for the Canadian Factory-built Housing segment remained flat for nine months ended December 28, 2019 when compared to the same period of the prior year. As a percent of segment net sales, selling, general, and administrative expenses for the Canadian segment was 9.3% and 8.5% for the nine months ended December 28, 2019 and December 29, 2018, respectively. Selling, general, and administrative expense as a percentage of net sales increased in the current period due to the decrease in net sales.
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 decreased $96.3 million, or 72.8%, during the nine months ended December 28, 2019 as compared to the same period of the prior year. The decrease is mainly related to a change in equity-based compensation expense of $93.9 million related to the Exchange and secondary offerings that occurred in the prior year, as well as a reduction in acquisition integration and restructuring costs of $4.4 million. This decrease was partially offset by a fair market value adjustment charge of $1.0 million related to property acquired in the Exchange.
The following table summarizes the components of interest expense, net for the nine months ended December 28, 2019 and December 29, 2018:
3,577
4,007
(430
(10.7
(2,558
(1,295
(1,263
97.5
(1,693
(62.4
31,880
31,596
47,663
59,258
Interest expense, net was $1.0 million for the nine months ended December 28, 2019, a decrease of $1.7 million compared to the same period in the prior year. The decrease was primarily related to higher interest income recognized during the period as a result of higher average cash balances invested in short term facilities. In addition, the Company incurred reduced interest expense due to (i) a lower weighted average interest rate on its revolving credit facility of 3.7% as compared to 4.8%, and (ii) lower average outstanding balances on its credit facilities as compared to the same period in the prior year.
OTHER EXPENSE
The following table summarizes other expense for the nine months ended December 28, 2019 and December 29, 2018:
(7,845
(100.0
25
Other expense for the nine months ended December 29, 2018 primarily consists of $6.9 million of expenses related to legal, accounting, and advisory services associated with the Exchange. The Company also incurred $0.8 million of expenses for legal, accounting, and advisory services related to the secondary offerings.
The following table summarizes income tax expense for the nine months ended December 28, 2019 and December 29, 2018:
6,757
49.3
28.2
(25.5
Income tax expense for the nine months ended December 28, 2019 was $20.5 million, representing an effective tax rate of 28.2%, compared to income tax expense of $13.7 million, representing an effective tax rate of (25.5%), for the nine months ended December 29, 2018.
The Company’s effective tax rate for the nine months ended December 28, 2019 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, and results in foreign jurisdictions. The Company’s effective tax rate for the nine months ended December 29, 2018 differed from the federal statutory rate of 21.0% primarily due the effect of non-deductible expenses, state and local income taxes, one-time charges related to the Exchange including non-deductible equity-based compensation and results of operations in foreign jurisdictions and non-taxable entities.
The following table reconciles net income, the most directly comparable U.S. GAAP measure, to Adjusted EBITDA, a non-GAAP financial measure, for the nine months ended December 28, 2019 and December 29, 2018:
119,527
2,360
(93,983
(96.3
(281
(6,905
(3,562
(64.8
(816
(1,019
(74.8
21,371
29.3
Adjusted EBITDA for the nine months ended December 28, 2019 was $94.3 million, an increase of $21.4 million from the same period of the prior year. The increase is primarily a result of increased operating income after adjusting for the effect of increased depreciation and amortization, transaction-related expenses, integration costs, restructuring costs and equity-based compensation incurred in connection with the Exchange. The increase in operating income is primarily due to an increase in sales volume from the inclusion of the Skyline operations and an improvement in gross profit margins partially offset by higher selling, general, and administrative costs. See Adjusted EBITDA definition below for additional information regarding the definition and use of this metric in evaluating the Company’s results.
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) foreign currency gains and losses, (f) equity-based compensation awards granted prior to December 31, 2018, (g) restructuring charges and other, (h) impairment of assets, and (i) 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, net sales, operating income or earnings per share prepared on a U.S. GAAP basis. The Company believes that Adjusted EBITDA is commonly used by investors to evaluate its performance and that of its competitors. However, the Company’s use of Adjusted EBITDA may vary from that of others in its industry.
26
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 inference 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:
•
does not reflect the interest expense on our debt;
excludes impairments; and
does not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments;
although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements; and
other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.
Because of 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.
BACKLOG
Although orders from customers can be cancelled at any 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 December 28, 2019 totaled $133.1 million compared to $181.3 million at December 29, 2018. The reduction in backlog is driven by a decrease in order rates from customers. The timing of customer orders are driven by manufacturer delivery times which are shorter, generally, than the same time last year. In addition, backlog for Canadian operations was lower in the current period due to continued softness in the western Canada housing markets.
Liquidity and Capital Resources
Sources and Uses of Cash
The following table presents summary cash flow information for the nine months ended December 28, 2019 and December 29, 2018:
Net cash provided by (used in):
Operating activities
Investing activities
Financing activities
Effect of exchange rate changes on cash, cash equivalents
The Company’s primary sources of liquidity are cash flows from operations, existing cash balances, and borrowings under available credit facilities. The Company has $44.4 million of unused borrowing capacity under its revolving credit facility. Cash balances and cash flow from operations for the next year are expected to be adequate to fund capital expenditures. The level of cash availability is projected to be in excess of cash needed to operate the business for the next year. In the event operating cash flow is inadequate and one or more capital resources were to become unavailable, the Company would revise operating strategies accordingly.
Cash provided by operating activities was $73.1 million during the nine months ended December 28, 2019 compared to $51.9 million during the nine months ended December 29, 2018. Cash was generated by operating income (before non-cash charges) from higher sales and operating margins compared to the prior year. Additionally, there were no transaction expenses incurred for the Skyline acquisition or secondary offering costs through the third quarter of fiscal 2020 compared to $7.7 million in the same period of the prior year, which contributed to the positive increase in cash provided by operating activities compared to the prior period.
27
Cash used in investing activities was $11.0 million for the nine months ended December 28, 2019, primarily related to the $12.1 million of capital expenditures, partially offset by proceeds of $1.1 million from the disposition of a held for sale property. The expenditures for capital items are part of the Company’s focus on safety and operating efficiency initiatives as well as the expansion of production capacity with the investment in the new Leesville, Louisiana manufacturing facility. Cash provided by investing activities was $2.4 million during the nine months ended December 29, 2018 as a result of cash acquired in the Exchange of $9.7 million and payments received on notes receivable of $0.3 million, partially offset by capital expenditures of $7.6 million.
Cash used in financing activities was $18.0 million for the nine months ended December 28, 2019, primarily related to the $15.0 million repayment on the revolving credit facility, $2.1 million for tax payments of equity based compensation, and $0.9 million, net repayment on the floor plan payable balance. Cash used in financing activities for the nine months ended December 29, 2018 was $60.8 million, primarily as a result of distributions to Champion Holdings’ members of $65.3 million prior to completion of the Exchange and $2.2 million of additional payments made for deferred financing fees. The Company borrowed $46.9 million under the revolving credit agreement during the nine months ended December 29, 2018 and utilized the proceeds to repay term loans. Additionally, the Company borrowed $9.1 million from its floor plan financing arrangements.
Critical Accounting Policies
For a discussion of our critical accounting policies that management believes affect its more significant judgments and estimates used in the preparation of our Consolidated Financial Statements, see Part II, Item 7 of the Company’s Annual Report on Form 10-K for fiscal 2019 (the “Fiscal 2019 Annual Report”), under the heading "Critical Accounting Policies." There have been no significant changes in our significant accounting policies or critical accounting estimates discussed in the 2019 Annual Report on Form 10-K, with the exception of adoption of the new lease standard described in Note 10, “Leases,” to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q (this “Report”).
Recently Issued Accounting Pronouncements
For information on the impact of recently issued accounting pronouncements, see Note 1, “Basis of Presentation – Recently Issued Accounting Pronouncements,” to the condensed consolidated financial statements included in this Report.
Forward-Looking Statements
Some of the statements in this Report are not historical in nature are forward-looking statements within the meaning of the 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 often identified by the words “will,” “should,” “anticipate,” “believe,” “expect,” “intend,” “estimate,” “hope,” or similar expressions. These statements reflect management’s current views with respect to future events and are subject to risks and uncertainties. There are important factors, many of which are beyond our control, that could cause actual results to differ materially from those in forward-looking statements include the following:
local, regional, national and international economic and financial market conditions and the impact they may have on the Company and our customers and our assessment of that impact;
demand fluctuations in the U.S. and Canadian housing industry;
the impact of customer preferences;
regulations pertaining to the housing and park model RV industries;
general or seasonal weather conditions affecting sales;
the potential impact of natural disasters on sales and raw material costs;
the prices and availability of materials;
periodic inventory adjustments by, and changes to relationships with, independent retailers;
changes in interest and foreign exchange rates;
more stringent credit standards or financing terms may be imposed by lenders on us, our dealers or customers;
the ability to service debt;
the impact of inflation;
the impact of labor costs, shortage, and turnover;
competitive pressures on pricing and promotional costs;
the availability of insurance coverage and changes in insurance costs;
28
the timely development and acceptance of new products and services and perceived overall value of these products and services by others;
greater than expected costs or difficulties related to the integration of new products and lines of business;
acquisitions and the integration of acquired businesses;
the effect of changes in laws and regulations with which we must comply;
the effect of changes in accounting policies and practices and auditing requirements; and
management’s ability to attract and retain executive officers and key personnel.
The forward-looking statements in this Report are made as of the date hereof, and we do not assume any obligation to update, amend or clarify them to reflect events, new information or circumstances occurring after the date hereof.
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For a discussion of the Company’s interest rate and foreign exchange risks, see Part II, Item 7A of the Fiscal 2019 Annual Report, under the heading "Quantitative and Qualitative Disclosures about Market Risk." There were no significant changes in the Company’s market risk to the market risk information included in the 2019 Annual Report on Form 10-K.
Item 4.
CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures
The Company maintains disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the specified time periods and accumulated and communicated to management, including the principal 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 (pursuant to Rules 13a-15(e) or 15d-15(e) of the Exchange Act) at December 28, 2019. Based upon this evaluation, the CEO and CFO concluded that the Company’s disclosure controls and procedures were effective as of December 28, 2019.
Changes in internal control over financial reporting
There have been no changes in our internal control over financial reporting during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’ internal control over financial reporting.
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 15, “Commitments, Contingencies and Legal Proceedings – Legal Proceedings,” to the condensed consolidated financial statements included in this Report.
Item 1A.
RISK FACTORS
In addition to the other information set forth in this Report, you should carefully consider the factors described in Part 1, Item 1A., “Risk Factors,” in our Fiscal 2019 Annual Report, which could materially affect our business, financial condition or future results. There have been no material changes to the disclosure on these matters set forth in the Fiscal 2019 Annual Report.
Item 6.
EXHIBITS
Exhibit
Number
Description
31.1
Certification of Chief Executive Officer pursuant to Exchange Act rules 13a-4 and 15d-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. †
31.2
Certification of Chief Financial Officer pursuant to Exchange Act rules 13a-4 and 15d-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. †
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. §1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. †
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.
†
Filed herewith.
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.
Registrant
Signature
Title
Date
/s/ Mark Yost
Chief Executive Officer
January 29, 2020
Mark Yost
(Principal Executive Officer)
/s/ Laurie Hough
Executive Vice President, Chief Financial Officer, and Treasurer
Laurie Hough
(Principal Financial Officer)