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EX-32 - EX-32 - Skyline Champion Corpd361528dex32.htm
EX-31.2 - EX-31.2 - Skyline Champion Corpd361528dex312.htm
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EX-10.2 - EX-10.2 - Skyline Champion Corpd361528dex102.htm
EX-10.1 - EX-10.1 - Skyline Champion Corpd361528dex101.htm

 

 

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 February 28, 2017

or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number: 1-4714

 

 

SKYLINE CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

Indiana   35-1038277

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

P. O. Box 743, 2520 By-Pass Road

Elkhart, Indiana

  46515
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code:

(574) 294-6521

 

 

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of 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 and post such files).    ☒  Yes    ☐  No

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

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer      Smaller reporting company  

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

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

 

Title of Class

 

Shares Outstanding

April 14, 2017

Common Stock, $.0277 Par Value   8,391,244

 

 

 


FORM 10-Q

INDEX

 

   PART I FINANCIAL INFORMATION  
         Page No.  

Item 1.

  

Financial Statements

 
  

Consolidated Balance Sheets as of February 28, 2017 and May  31, 2016

    1  
  

Consolidated Statements of Operations for the three-month and nine-month periods ended February 28, 2017 and February 29, 2016

    3  
  

Consolidated Statements of Cash Flows for the nine-months periods ended February 28, 2017 and February 29, 2016

    4  
  

Notes to the Consolidated Financial Statements

    5  

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

    12  

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

    23  

Item 4.

  

Controls and Procedures

    23  
     PART II OTHER INFORMATION      

Item 1.

  

Legal Proceedings

    23  

Item 1A.

  

Risk Factors

    23  

Item 6.

   Exhibits     24  

Signatures

    25  


PART I FINANCIAL INFORMATION

 

Item 1. Financial Statements.

Skyline Corporation and Subsidiary Companies

Consolidated Balance Sheets

(Dollars in thousands)

 

     February 28, 2017      May 31, 2016  
     (Unaudited)         
ASSETS      

Current Assets:

     

Cash

   $ 5,232      $ 7,659  

Accounts receivable

     14,857        15,153  

Inventories

     13,619        11,381  

Workers’ compensation security deposit

     690        1,294  

Other current assets

     776        331  
  

 

 

    

 

 

 

Total Current Assets

     35,174        35,818  
  

 

 

    

 

 

 

Property, Plant and Equipment, at Cost:

     

Land

     2,996        2,996  

Buildings and improvements

     37,279        36,624  

Machinery and equipment

     17,364        16,977  
  

 

 

    

 

 

 
     57,639        56,597  

Less accumulated depreciation

     45,690        44,952  
  

 

 

    

 

 

 
     11,949        11,645  

Other Assets

     7,241        7,515  
  

 

 

    

 

 

 

Total Assets

   $ 54,364      $ 54,978  
  

 

 

    

 

 

 

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

 

1


Item 1. Financial Statements — (Continued).

Skyline Corporation and Subsidiary Companies

Consolidated Balance Sheets — (Continued)

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

 

     February 28, 2017     May 31, 2016  
     (Unaudited)        
LIABILITIES AND SHAREHOLDERS’ EQUITY     

Current Liabilities:

    

Accounts payable, trade

   $ 3,776     $ 3,921  

Accrued salaries and wages

     2,555       3,557  

Accrued marketing programs

     3,090       1,767  

Accrued warranty

     5,686       4,817  

Customer deposits

     1,664       1,521  

Other accrued liabilities

     2,918       2,448  
  

 

 

   

 

 

 

Total Current Liabilities

     19,689       18,031  
  

 

 

   

 

 

 

Long-Term Liabilities:

    

Deferred compensation expense

     4,921       5,002  

Accrued warranty

     2,500       2,500  

Life insurance loans

     4,312       4,312  
  

 

 

   

 

 

 

Total Long-Term Liabilities

     11,733       11,814  
  

 

 

   

 

 

 

Commitments and Contingencies – See Note 8

    

Shareholders’ Equity:

    

Common stock, $.0277 par value, 15,000,000 shares authorized; issued 11,217,144 shares

     312       312  

Additional paid-in capital

     5,117       5,010  

Retained earnings

     83,257       85,555  

Treasury stock, at cost, 2,825,900 shares

     (65,744     (65,744
  

 

 

   

 

 

 

Total Shareholders’ Equity

     22,942       25,133  
  

 

 

   

 

 

 

Total Liabilities and Shareholders’ Equity

   $ 54,364     $ 54,978  
  

 

 

   

 

 

 

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

 

2


Item 1. Financial Statements — (Continued).

 

Skyline Corporation and Subsidiary Companies

Consolidated Statements of Operations

For the Three-Months and Nine-Months Ended February 28, 2017 and February 29, 2016

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

 

     Three-Months Ended     Nine-Months Ended  
     February 28,
2017
    February 29,
2016
    February 28,
2017
    February 29,
2016
 
     (Unaudited)     (Unaudited)  

OPERATIONS

        

Net sales

   $ 51,640     $ 47,697     $ 177,042     $ 155,123  

Cost of sales

     48,421       42,887       162,013       138,443  
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     3,219       4,810       15,029       16,680  

Selling and administrative expenses

     5,581       5,246       17,070       16,105  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating (loss) income

     (2,362     (436     (2,041     575  

Interest expense

     (85     (78     (257     (236
  

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from continuing operations before income taxes

     (2,447     (514     (2,298     339  

Income tax expense

     —         —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from continuing operations

     (2,447     (514     (2,298     339  

(Loss) income from discontinued operations, net of taxes

     —         (6     —         13  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

   $ (2,447   $ (520   $ (2,298   $ 352  
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted (loss) income per share

   $ (.29   $ (.06   $ (.27   $ .04  
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted (loss) income per share from continuing operations

   $ (.29   $ (.06   $ (.27   $ .04  
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted income (loss) per share from discontinued operations

   $ —       $ —       $ —       $ —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average number of common Shares outstanding:

        

Basic

     8,391,244       8,391,244       8,391,244       8,391,244  
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

     8,391,244       8,391,244       8,391,244       8,391,244  
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

3


Item 1. Financial Statements — (Continued).

 

Skyline Corporation and Subsidiary Companies

Consolidated Statements of Cash Flows

For the Nine-Months Ended February 28, 2017 and February 29, 2016

(Dollars in thousands)

 

     2017     2016  
     (Unaudited)  

CASH FLOWS FROM OPERATING ACTIVITIES:

  

Net (loss) income

   $ (2,298   $ 352  

Adjustments to reconcile net (loss) income to net cash from operating activities:

    

Depreciation

     779       780  

Amortization of debt financing costs

     77       58  

Share-based compensation

     107       57  

Change in assets and liabilities:

    

Accounts receivable

     296       2,550  

Inventories

     (2,238     (1,804

Workers’ compensation security deposit

     604       (17

Other current assets

     (445     23  

Accounts payable, trade

     (145     (652

Accrued liabilities

     1,803       491  

Other, net

     170       (212
  

 

 

   

 

 

 

Net cash from operating activities

     (1,290     1,626  
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Purchase of property, plant and equipment

     (1,094     (312

Other, net

     (43     (49
  

 

 

   

 

 

 

Net cash from investing activities

     (1,137     (361
  

 

 

   

 

 

 

Net (decrease) increase in cash

     (2,427     1,265  

Cash at beginning of period

     7,659       4,995  
  

 

 

   

 

 

 

Cash at end of period

   $ 5,232     $ 6,260  
  

 

 

   

 

 

 

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

 

4


Item 1. Financial Statements — (Continued).

 

Skyline Corporation and Subsidiary Companies

Notes to Consolidated Financial Statements (Unaudited)

NOTE 1    Basis of Presentation

The accompanying unaudited interim consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the consolidated financial position as of February 28, 2017, in addition to the consolidated results of operations and cash flows for the three-month and nine-month periods ended February 28, 2017 and February 29, 2016. 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 audited consolidated balance sheet as of May 31, 2016, and the unaudited interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Corporation’s latest annual report on Form 10-K.

NOTE 2    Discontinued Operations

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

The following table summarizes the results of discontinued operations:

 

     Three-Months Ended     Nine-Months Ended  
     February 28,
2017
     February 29,
2016
    February 28,
2017
     February 29,
2016
 
     (Unaudited)     (Unaudited)  
     (Dollars in thousands)     (Dollars in thousands)  

Net Sales

   $ —        $ 5     $ —        $ 71  
  

 

 

    

 

 

   

 

 

    

 

 

 

Operating (loss) income of discontinued operations

   $ —        $ (6   $ —        $ 13  
  

 

 

    

 

 

   

 

 

    

 

 

 

(Loss) income before income taxes

     —          (6     —          13  

Income tax expense

                 —                      —                     —                      —    
  

 

 

    

 

 

   

 

 

    

 

 

 

(Loss) income from discontinued, operations, net of taxes

   $ —        $ (6   $ —        $ 13  
  

 

 

    

 

 

   

 

 

    

 

 

 

 

5


Item 1. Financial Statements — (Continued).

Skyline Corporation and Subsidiary Companies

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

 

NOTE 3    Inventories

Total inventories consist of the following:

 

     February 28, 2017      May 31, 2016  
     (Unaudited)         
     (Dollars in thousands)  

Raw materials

   $ 8,880      $ 7,198  

Work in process

     4,033        3,447  

Finished goods

     706        736  
  

 

 

    

 

 

 
   $ 13,619      $ 11,381  
  

 

 

    

 

 

 

NOTE 4    Other Assets

Other assets consist primarily of the cash surrender value of life insurance policies which totaled $6,944,000 and $6,885,000 at February 28, 2017 and May 31, 2016, respectively.

NOTE 5    Warranty

A reconciliation of accrued warranty is as follows:

 

     Nine-Months Ended  
     February 28, 2017      February 29, 2016  
     (Unaudited)      (Unaudited)  
     (Dollars in thousands)      (Dollars in thousands)  

Balance at the beginning of the period

   $ 7,317      $ 6,911  

Accruals for warranties

     6,078        5,087  

Settlements made during the period

     (5,209      (4,843
  

 

 

    

 

 

 

Balance at the end of the period

     8,186        7,155  

Non-current balance

     2,500        2,400  
  

 

 

    

 

 

 

Accrued warranty

   $ 5,686      $ 4,755  
  

 

 

    

 

 

 

At February 28, 2017, the total current obligation for warranty and related expenses associated with discontinued operations is estimated to be $115,000 as compared to $150,000 at May 31, 2016.

 

6


Item 1. Financial Statements — (Continued).

Skyline Corporation and Subsidiary Companies

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

 

NOTE 6    Life Insurance Loans

Life insurance loans have no fixed repayment schedule, and have interest rates ranging from 4.2 percent to 7.4 percent. The weighted average interest rate is 5.2 percent.

NOTE 7    Income Taxes

At February 28, 2017, the Corporation’s gross deferred tax assets of approximately $49.8 million consist of approximately $34.8 million in federal net operating loss and tax credit carryforwards, $7.8 million in state net operating loss carryforwards and $7.2 million resulting from temporary differences between financial and tax reporting. The federal net operating loss and tax credit carryforwards have a life expectancy of between eleven and twenty years. The state net operating loss carryforwards have a life expectancy, depending on the state where a loss was incurred, between one and twenty years. The Corporation has recorded a full valuation allowance against this asset. If the Corporation, after considering future negative and positive evidence regarding the realization of deferred tax assets, determines that a lesser valuation allowance is warranted, it would record a reduction to income tax expense and the valuation allowance in the period of determination.

NOTE 8    Commitments and Contingencies

The Corporation was contingently liable at February 28, 2017 and May 31, 2016, under repurchase agreements with certain financial institutions providing inventory financing for dealers of its products. Under these arrangements, which are customary in the manufactured housing and park model industries, the Corporation agrees to repurchase units in the event of default by the dealer at declining prices over the term of the agreement. The period to potentially repurchase units is between 12 to 24 months. The maximum repurchase liability is the total amount that would be paid upon the default of the Corporation’s independent dealers.

The maximum potential repurchase liability, without reduction for the resale value of the repurchased units, was approximately $27 million at February 28, 2017 and $25 million at May 31, 2016. As a result of the Corporation’s favorable experience regarding repurchased units, which is largely due to the strength of dealers selling the Corporation’s products, the Corporation maintained at February 28, 2017 and May 31, 2016, a $100,000 loss reserve that is a component of other accrued liabilities. The risk of loss under these agreements is spread over many dealers and financial institutions. The loss, if any, under these agreements is the difference between the repurchase cost and the resale value of the units. The Corporation estimates the fair value of this commitment considering both the contingent losses and the value of the guarantee.

 

7


Item 1. Financial Statements — (Continued).

Skyline Corporation and Subsidiary Companies

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

NOTE 8    Commitments and Contingencies — (Continued)

 

This amount has historically been insignificant. The Corporation believes that any potential loss under the agreements in effect at February 28, 2017 will not be material to its financial position or results of operations. There were no obligations or incurred net losses from repurchased units for the three and nine month periods ended February 28, 2017 and February 29, 2016.

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

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

NOTE 9    Secured Revolving Credit Facility

On March 20, 2015, the Corporation (“Borrower(s)”) entered into a Loan and Security Agreement (the “Loan Agreement”) with First Business Capital Corp. (“First Business Capital”). Under the Loan Agreement, First Business Capital will provide a secured revolving credit facility to the Borrowers for a term of three years, renewable on an annual basis thereafter with each renewal for a successive one-year term. The Corporation may obtain loan advances up to a maximum of $10,000,000 subject to certain collateral-obligation ratios. In addition, loan advances bear interest at 3.75% in excess of The Wall Street Journal’s published one year LIBOR rate, and are secured by substantially all of the Borrowers’ assets, now owned or hereafter acquired. Interest is payable monthly, in arrears, and all principal and accrued but unpaid interest is due and payable upon termination of the Loan Agreement. First Business Capital also agreed under the Loan Agreement to issue, or cause to be issued by a bank affiliate or other bank, letters of credit for the account of the Corporation. However, no advances have yet been made in connection with such letters of credit.

In the third quarter of fiscal 2017, the Corporation did not meet a covenant requiring the year to date net loss not to exceed $1,750,000, and a covenant requiring net worth as of February 28, 2017 to not be below $23,383,000. The inability to meet these covenants represent an event of default, which if not waived could negatively affect the Corporation’s ability to obtain financing under the facility and thereby have an adverse effect on liquidity. Subsequent to February 28, 2017, the Corporation received a waiver for the default that occurred in the third quarter and paid to First Business Capital an accommodation fee of $50,000. Except as provided herein, the Loan Agreement and all other loan documentation related thereto shall remain in full force and effect in accordance with their terms.

 

8


Item 1. Financial Statements — (Continued).

Skyline Corporation and Subsidiary Companies

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

 

NOTE 10 Stock-Based Compensation

On June 25, 2015, the Corporation’s Board of Directors approved the 2015 Stock Incentive Plan (“Plan”), which allows the granting of stock options and other equity awards to directors, officers, employees, and eligible independent contractors of the Corporation and is intended to retain and reward key employees’ performance and efforts as they relate to the Corporation’s long-term objectives and strategic plan. The Plan was subsequently approved by shareholders at the Corporation’s annual shareholder meeting on September 21, 2015. A total of 700,000 shares of Common Stock have been reserved for issuance under the Plan. Stock option awards are granted with an exercise price equal to, or greater than, the market price of the Corporation’s stock at the date of grant and vest over a period of time as determined by the Corporation at the date of grant up to the contractual ten-year life at which time the options expire. Restricted stock awards are priced no less than 100 percent of market price of the Corporation’s stock at the date of grant, and the awards made to date fully vest after five years.

Stock Options – The following tables summarize option activity for the nine months ended February 28, 2017 and February 29, 2016:

 

     Number
of

Shares
     Weighted
Average
Exercise
Price
     Weighted
Average
Remaining
Contractual
Term
(years)
     Aggregate
Intrinsic
Value

(in
thousands)
 

Options outstanding at May 31, 2015

     —        $        

Granted

     225,000        3.28        
  

 

 

    

 

 

       

Options outstanding at February 29, 2016

     225,000      $ 3.28        9.39      $ 169  
  

 

 

    

 

 

    

 

 

    

 

 

 

Options outstanding at May 31, 2016

     225,000      $ 3.28        

Granted

     49,000        10.23        
  

 

 

    

 

 

       

Options outstanding at February 28, 2017

     274,000      $ 4.79        8.65      $ 1,988  
  

 

 

    

 

 

    

 

 

    

 

 

 

Vested and exercisable options at February 28, 2017

     45,000      $ 3.28        8.39      $ 395  
  

 

 

    

 

 

    

 

 

    

 

 

 

The weighted average grant-date fair value of options granted during the first nine months of fiscal 2017 and 2016 were $7.58 and $2.19, respectively.

 

9


Item 1. Financial Statements — (Continued).

Skyline Corporation and Subsidiary Companies

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

NOTE 10 Stock-Based Compensation — (Continued)

 

     Number of
Shares
     Weighted
Average
Grant-Date
Fair Value
 

Non-vested options at May 31, 2015

     —        $ —    

Granted

     225,000        2.19  

Vested

     —          —    
  

 

 

    

 

 

 

Non-vested options at February 29, 2016

     225,000      $ 2.19  
  

 

 

    

 

 

 

Non-vested options at May 31, 2016

     225,000      $ 2.19  

Granted

     49,000        7.58  

Vested

     (45,000      2.19  
  

 

 

    

 

 

 

Non-vested options at February 28, 2017

     229,000      $ 3.34  
  

 

 

    

 

 

 

Stock-based compensation expense for the third quarter of fiscal 2017 and 2016 was approximately $39,000 and $22,000, respectively. Stock-based compensation expense for the first nine months of fiscal 2017 and 2016 was approximately $101,000 and $57,000, respectively. Total unrecognized compensation expense related to stock options outstanding at February 28, 2017 was approximately $680,000 and is to be recorded over a weighted-average life of 3.6 years.

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

The fair value of the options granted during the first nine months of fiscal 2017 and 2016 were estimated at the date of grant using the following weighted average assumptions:

 

     2017     2016  

Volatility

     64.3     55.8

Risk-free interest rate

     2.14     2.22

Expected option life in years

     7.50       9.72  

Dividend yield

     0     0

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

 

10


Item 1. Financial Statements — (Continued).

Skyline Corporation and Subsidiary Companies

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

NOTE 10 Stock-Based Compensation — (Continued)

 

Restricted Stock – In the third quarter of fiscal 2017, the Corporation issued 15,000 shares of restricted stock valued at approximately $216,000. The value was determined using the market price of the Corporation’s common stock at the date of grant. The restricted stock’s value is to be expensed over a five year vesting period using a straight-line method. Compensation expense for the third quarter was approximately $6,000, and unrecognized compensation expense at February 28, 2017 was approximately $210,000.

NOTE 11 Earnings Per Share

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

 

     Three-Months Ended      Nine-Months Ended  
     February 28,
2017
     February 29,
2016
     February 28,
2017
     February 29,
2016
 
     (Unaudited)      (Unaudited)  

Net (loss) income

   $ (2,447    $ (520    $ (2,298    $ 352  
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average share outstanding:

           

Basic

     8,391,244        8,391,244        8,391,244        8,391,244  

Common stock equivalents - treasury stock method

     —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted

     8,391,244        8,391,244        8,391,244        8,391,244  

Net (loss) income per share:

           

Basic

   $ (.29    $ (.06    $ (.27    $ .04  
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted

   $ (.29    $ (.06    $ (.27    $ .04  
  

 

 

    

 

 

    

 

 

    

 

 

 

For the third quarter of fiscal 2017 and fiscal 2016, there were 175,484 and 86,871 anti-dilutive common stock equivalents excluded from the computation of diluted earnings per share, respectively. There were 161,368 and 119,569 anti-dilutive common stock equivalents excluded from the computation of diluted earnings per share for the nine months ended February 28, 2017 and February 29, 2016, respectively.

 

11


Item 1. Financial Statements — (Continued).

Skyline Corporation and Subsidiary Companies

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

 

NOTE 12 Restructuring Activities

On February 14, 2017, the Corporation entered into a restructuring plan involving the suspension of operations at the Mansfield, Texas facility. Subsequent to the end of the third quarter of fiscal 2017, the Corporation continued its restructuring plan with the announcement of the suspension of operations at the Elkhart, Indiana facility. The plan for the Elkhart facility is referenced in Note 13. The restructuring does not represent a strategic shift in operations due to an expectation to have a portion of customers of these two facilities serviced by manufacturing facilities located in Arkansas City, Kansas and Sugarcreek, Ohio.

The suspension of operations in Mansfield was due to the plant being unable to profitably operate since it was converted from producing recreational vehicles to manufactured housing in fiscal 2014. Production will continue until the backlog is fulfilled in April 2017. The Corporation has not entered into one-time termination agreements and has not incurred nor anticipates material costs related to the termination of contracts such as leases related to the restructuring. In addition, the Corporation expenses other costs related to the restructuring as incurred but has not incurred material costs related to the restructuring as of February 28, 2017. The Corporation has not recorded a liability related to the restructuring as of February 28, 2017.

On February 24, 2017, the Corporation entered into a Real Estate Purchase Agreement to sell real property and substantially all of the equipment located in Mansfield. Raw materials, inventory and licensed vehicles were excluded from the sale. The sale was completed on April 11, 2017 for a net sales price of approximately $2,212,000, resulting in an estimated gain of approximately $1,400,000 that will be recognized in the fourth quarter. The assets sold were security under the Corporation’s Secured Revolving Credit Facility with First Business Capital. First Business Capital released its lien on the real property subject to $1,100,000 of the net sales proceeds being held in a cash collateral account at First Business Bank, an affiliate of First Business Capital.

NOTE 13 Subsequent Events

On March 1, 2017, the Corporation announced the suspension of operations at the Elkhart, Indiana facility. The suspension was due to the plant being unable to profitably operate since it opened in June 2016. Production was completed on March 8, 2017. There were no one-time termination or contract costs incurred with this exit activity to be accrued in the third quarter of fiscal 2017. Other exit costs, which are not expected to be significant, will be expensed as incurred.

 

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

Overview

The Corporation designs, produces and markets manufactured housing, modular housing and park models to independent dealers, developers, campgrounds and manufactured housing communities located throughout the United States and Canada. To better serve the needs of its

 

12


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

Overview — (Continued)

 

dealers, developers, campgrounds and communities, the Corporation has multiple facilities in several states. Manufactured housing, modular housing and park models are sold to customers either through floor plan financing with various financial institutions, credit terms, or on a cash basis. While the Corporation maintains production of manufactured housing, modular homes and park models throughout the year, seasonal fluctuations in sales do occur.

Manufactured Housing, Modular Housing and Park Model Industry Conditions

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

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

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

 

Manufactured Housing

   2012      2013     2014     2015     2016  

Industry

     54,901        60,210       64,331       70,544       81,119  

Percentage Increase

        9.7     6.8     9.7     15.0

Corporation

     1,848        2,205       2,678       2,872       3,606  

Percentage Increase

        19.3     21.5     7.2     25.6

Modular Housing

                               

*Industry

     13,290        14,020       13,844       13,974       13,881  

Percentage Increase (Decrease)

        5.5     (1.3 %)      0.9     (0.7 %) 

**Corporation

     382        350       477       341       334  

Percentage Increase (Decrease)

        (8.4 %)      36.3     (28.5 %)      (2.1 %) 

Park Models

                               

Industry

     2,780        3,598       3,781       3,649       3,699  

Percentage Increase (Decrease)

        29.4     5.1     (3.5 %)      0.5

Corporation

     138        171       307       380       419  

Percentage Increase

        23.9     79.5     23.8     10.3

 

13


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

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

 

* Domestic shipment only. Canadian industry shipments not available.
** Includes domestic and Canadian unit shipments

Fiscal 2017 Third Quarter and First Nine Months Results

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

 

    Net sales were $51,640,000, an approximate 8.3 percent increase from the $47,697,000 reported in the same period a year ago.

 

    Loss from continuing operations was $2,447,000 as compared to a loss of $514,000 for the same period a year ago.

 

    No income or loss from discontinued operations as compared to a loss of $6,000 for the same period a year ago.

 

    Net loss for fiscal 2017 was $2,447,000 as compared to a net loss of $520,000 for fiscal 2016. On a basic per share basis, net loss was $.29 as compared to a net loss of $.06 for the comparable period a year ago.

 

    Net sales attributable to Elkhart and Mansfield were $7,573,000 as compared to Mansfield’s net sales of $2,305,000 in the same period a year ago.

 

    Net losses attributable to Elkhart and Mansfield before corporate allocation were $945,000 as compared to Mansfield’s net loss of $606,000 in the comparable period a year ago.

The Corporation experienced the following results during the first nine months of fiscal 2017:

 

    Net sales were $177,042,000, an approximate 14.1 percent increase from the $155,123,000 reported in the same period a year ago.

 

    Loss from continuing operations was $2,298,000 as compared to income of $339,000 for the same period a year ago.

 

    No income or loss from discontinued operations as compared to income of $13,000 for the same period a year ago.

 

    Net loss for fiscal 2017 was $2,298,000 as compared to a net income of $352,000 for fiscal 2016. On a basic per share basis, net loss was $.27 as compared to a net income of $.04 for the comparable period a year ago.

 

    Net sales attributable to Elkhart and Mansfield were $20,866,000 as compared to Mansfield’s net sales of $9,213,000 in the same period a year ago.

 

    Net losses attributable to Elkhart and Mansfield before corporate allocation were $3,462,000 as compared to Mansfield’s net loss of $1,802,000 in the comparable period a year ago.

Discontinued Operations

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

 

14


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

Discontinued Operations — (Continued)

 

The following table summarizes the results of discontinued operations:

 

     Three-Months Ended      Nine-Months Ended  
     February 28,
2017
     February 29,
2016
     February 28,
2017
     February 29,
2016
 
    

(Unaudited)

(Dollars in thousands)

    

(Unaudited)

(Dollars in thousands)

 

Net Sales

   $ —        $ 5      $ —        $ 71  
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating (loss) income of discontinued operations

     —        $ (6      —        $ 13  
  

 

 

    

 

 

    

 

 

    

 

 

 

(Loss) income before income taxes

     —          (6      —          13  

Income tax expense

     —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

(Loss) income from discontinued operations, net of taxes

   $ —        $ (6    $ —        $ 13  
  

 

 

    

 

 

    

 

 

    

 

 

 

Mansfield, Texas and Elkhart, Indiana Facilities

On February 14, 2017, the Corporation entered into a restructuring plan involving the suspension of operations at the Mansfield, Texas facility. Subsequent to the end of the third quarter of fiscal 2017, the Corporation continued its restructuring plan with the announcement of the suspension of operations at the Elkhart, Indiana facility. The Corporation ceased production at its Elkhart, Indiana facility on March 8, 2017, and at its Mansfield, Texas facility on April 10, 2017. The Corporation has not entered into one-time termination agreements and has not incurred nor anticipates material costs related to the termination of contracts such as leases related to the restructuring. In addition, the Corporation expenses other costs related to the restructuring as incurred but has not incurred material costs related to the restructuring as of February 28, 2017. The Corporation has not recorded a liability related to the restructuring as of February 28, 2017. The Corporation anticipates that a portion of customers previously served by these plants will be serviced by its facilities in Arkansas City, Kansas and Sugarcreek, Ohio.

Net sales and net losses incurred by these facilities, excluding corporate overhead allocations were as follows:

 

     Fiscal 2016           Fiscal 2017  
     (Unaudited)           (Unaudited)  
     (Dollars in thousands)           (Dollars in thousands)  
     1st
Quarter
    2nd
Quarter
    3rd
Quarter
    4th
Quarter
    1st
Quarter
    2nd
Quarter
    3rd
Quarter
 

Net Sales

   $ 3,106     $ 3,802     $ 2,305     $ 3,375     $ 5,201     $ 8,092     $ 7,573  

Cost of Sales

   $ 3,455     $ 3,863     $ 2,694     $ 3,823     $ 5,881     $ 8,966     $ 8,087  

Selling and administrative expenses

   $ 381     $ 405     $ 217     $ 288     $ 475     $ 488     $ 431  

Net Profit (Loss)

   $ (730   $ (466   $ (606   $ (736   $ (1,155   $ (1,362   $ (945

 

15


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

Mansfield, Texas and Elkhart, Indiana Facilities — (Continued)

 

On February 24, 2017, the Corporation entered into a Real Estate Purchase Agreement to sell the real property and substantially all of the equipment located in Mansfield. Raw materials, inventory and licensed vehicles were excluded from the sale. The sale was completed on April 11, 2017 for a net sales price of approximately $2,212,000, resulting in an estimated gain of approximately $1,400,000 that will be recognized in the fourth quarter. The assets sold were security under the Corporation’s Secured Revolving Credit Facility with First Business Capital Corp (“First Business Capital”). First Business Capital released its lien on the real property subject to $1,100,000 of the net sales proceeds being held in a cash collateral account at First Business Bank, an affiliate of First Business Capital.

Secured Revolving Credit Facility

On March 20, 2015, the Corporation (“Borrower(s)”) entered into a Loan and Security Agreement (the “Loan Agreement”) with First Business Capital Corp. Under the Loan Agreement, First Business Capital will provide a secured revolving credit facility to the Borrowers for a term of three years, renewable on an annual basis thereafter with each renewal for a successive one-year term. The Corporation may obtain loan advances up to a maximum of $10,000,000 subject to certain collateral-obligation ratios. In addition, loan advances bear interest at 3.75% in excess of The Wall Street Journal’s published one year LIBOR rate, and are secured by substantially all of the Borrowers’ assets, now owned or hereafter acquired. Interest is payable monthly, in arrears, and all principal and accrued but unpaid interest is due and payable upon termination of the Loan Agreement. First Business Capital also agreed under the Loan Agreement to issue, or cause to be issued by a bank affiliate or other bank, letters of credit for the account of the Corporation. However, no advances have yet been made in connection with such letters of credit.

In the third quarter of fiscal 2017, the Corporation did not meet a covenant requiring the year to date net loss not to exceed $1,750,000, and a covenant requiring net worth as of February 28, 2017 to not be below $23,383,000. The inability to meet these covenants represent an event of default, which if not waived could negatively affect the Corporation’s ability to obtain financing under the facility and thereby have an adverse effect on liquidity. Subsequent to February 28, 2017, the Corporation received a waiver for the default that occurred in the third quarter and paid to First Business Capital an accommodation fee of $50,000. Except as provided herein, the Loan Agreement and all other loan documentation related thereto shall remain in full force and effect in accordance with their terms.

Results of Operations – Three-Month Period Ended February 28, 2017 Compared to Three-Month Period Ended February 29, 2016

Net Sales and Unit Shipments

 

     February 28,
2017
     Percent      February 29,
2016
     Percent      Increase
(Decrease)
 
     (Unaudited)  
     (Dollars in thousands)  

Net Sales

              

Manufactured Housing

   $ 44,045        85.3      $ 38,709        81.2      $ 5,336  

Modular Housing

     3,119        6.0        5,084        10.6        (1,965

Park Models

     4,476        8.7        3,904        8.2        572  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Net Sales

   $ 51,640        100.0      $ 47,697        100.0      $ 3,943  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

16


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

Results of Operations – Three-Month Period Ended February 28, 2017 Compared to Three-Month Period Ended February 29, 2016 — (Continued)

Net Sales and Unit Shipments — (Continued)

 

     February 28,
2017
     Percent      February 29,
2016
     Percent      Increase
(Decrease)
 
     (Unaudited)  
     (Dollars in thousands)  

Unit Shipments

              

Manufactured Housing

     820        84.2        695        79.7        125  

Modular Housing

     45        4.6        73        8.4        (28

Park Models

     109        11.2        104        11.9        5  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Unit Shipments

     974        100.0        872        100.0        102  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net sales increased approximately 8.3 percent. The increase was comprised of a 13.8 percent increase in manufactured housing net sales, a 38.7 percent decrease in modular housing net sales, and a 14.7 percent increase in park model net sales. Current quarter net manufactured housing sales includes approximately $4,300,000 attributable to the Elkhart, Indiana facility which commenced operations in June 2016. Modular net sales declined primarily due to decreased demand from Midwest-based dealers as manufactured housing products are able to satisfy demand from retail customers. Park model net sales rose as a result of Management’s initiative to increase this product’s exposure at substantially all of the Corporation’s facilities.

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

 

     February 28, 2017
Skyline
    February 28, 2017
Industry
 

Manufactured Housing

     18.0     25.4

Modular Housing

     (38.4 %)      Not Available  

Park Models

     4.8     11.4

Total

     11.7     Not Available  

Compared to the prior year, the average net sales price for manufactured housing and modular housing decreased 3.6 and 0.5 percent, respectively, primarily as a result of homes sold with less square footage and fewer amenities and was partially offset by a price increase. The average sales price for park models increased 9.4 percent as a result of a price increase and product sold with greater square footage and additional amenities.

 

17


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

Results of Operations – Three-Month Period Ended February 28, 2017 Compared to Three-Month Period Ended February 29, 2016 — (Continued)

 

Cost of Sales

 

     February 28,
2017
     Percent of
Net Sales
     February 29,
2016
     Percent of
Net Sales
     Increase  
     (Unaudited)  
     (Dollars in Thousands)  

Cost of Sales

   $ 48,421        93.8      $ 42,887        89.9      $ 5,534  

Cost of sales, in dollars, increased primarily as a result of increased net sales. Current quarter cost of sales includes approximately $4,448,000 attributable to the Elkhart, Indiana facility. As a percentage of net sales, cost of sales increased primarily due to higher manufacturing labor costs associated with hiring and training employees at facilities which are increasing production output. In addition, newly hired, inexperienced employees contributed to an increase in workers’ compensation and warranty costs for the period.

Selling and Administrative Expenses

 

     February 28,
2017
     Percent of
Net Sales
     February 29,
2016
     Percent of
Net Sales
     Increase  
     (Unaudited)  
     (Dollars in thousands)  

Selling and administrative expenses

   $ 5,581        10.8      $ 5,246        11.0      $ 335  

Selling and administrative expenses increased primarily as a result of $175,000 in costs associated with the Elkhart, Indiana facility. As a percentage of net sales, selling and administrative expenses declined due to certain costs remaining relatively constant amid rising sales.

Interest Expense

 

     February 28,
2017
     February 29,
2016
     Increase
(Decrease)
 
     (Unaudited)  
     (Dollars in thousands)  

Interest on life insurance policies loans

   $ 55      $ 55      $ —    

Amortization on debt financing costs

     26        19        7  

Interest on secured revolving credit facility

     4        4        —    
  

 

 

    

 

 

    

 

 

 
   $ 85      $ 78      $ 7  
  

 

 

    

 

 

    

 

 

 

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

 

18


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

 

Results of Operations – Nine-Month Period Ended February 28, 2017 Compared to Nine-Month Period Ended February 29, 2016

Net Sales and Unit Shipments

 

     February 28,
2017
     Percent      February 29,
2016
     Percent      Increase
(Decrease)
 
     (Unaudited)  
     (Dollars in thousands)  

Net Sales

              

Manufactured Housing

   $ 148,009        83.6      $ 127,300        82.1      $ 20,709  

Modular Housing

     16,982        9.6        19,671        12.7        (2,689

Park Models

     12,051        6.8        8,152        5.2        3,899  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Net Sales

   $ 177,042        100.0      $ 155,123        100.0      $ 21,919  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Unit Shipments

              

Manufactured Housing

     2,805        83.7        2,325        82.1        480  

Modular Housing

     242        7.2        291        10.3        (49

Park Models

     306        9.1        216        7.6        90  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Unit Shipments

     3,353        100.0        2,832        100.0        521  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net sales increased approximately 14.1 percent. The increase was comprised of a 16.3 percent increase in manufactured housing net sales, a 13.7 percent decrease in modular housing net sales, and a 47.8 percent increase in park model net sales. Current period net manufactured housing sales includes approximately $10,554,000 attributable to the Elkhart, Indiana facility which commenced operations in June 2016. Modular net sales declined primarily due to decreased need from Midwest-based dealers as manufactured housing products are able to satisfy demand from retail customers. Park model net sales rose as a result of Management’s initiative to increase this product’s exposure at substantially all of the Corporation’s facilities.

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

 

     February 28, 2017
Skyline
    February 28, 2017
Industry
 

Manufactured Housing

     20.6     15.2

Modular Housing

     (16.8 %)      Not Available  

Park Models

     41.7     10.6

Total

     18.4     Not Available  

Compared to the prior year, the average net sales price for manufactured housing decreased 3.6 primarily as a result of homes sold with less square footage and fewer amenities and was partially offset by a price increase. The average net sales price for modular housing and park models increased 3.8 and 4.3 percent, respectively, as a result of a price increase and product sold with greater square footage and additional amenities.

 

19


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

Results of Operations – Nine-Month Period Ended February 28, 2017 Compared to Nine-Month Period Ended February 29, 2016 — (Continued)

 

Cost of Sales

 

     February 28,
2017
     Percent of
Net Sales
     February 29,
2016
     Percent of
Net Sales
     Increase  
     (Unaudited)  
     (Dollars in Thousands)  

Cost of Sales

   $ 162,013        91.5      $ 138,443        89.2      $ 23,570  

Cost of sales, in dollars, increased primarily as a result of increased net sales. Current period cost of sales includes approximately $11,618,000 attributable to the Elkhart, Indiana facility. As a percentage of net sales, cost of sales increased primarily due to higher manufacturing labor costs associated with hiring and training employees at facilities which are increasing production output. In addition, newly hired, inexperienced employees contributed to an increase in workers’ compensation costs for the period.

Selling and Administrative Expenses

 

     February 28,
2017
     Percent of
Net Sales
     February 29,
2016
     Percent of
Net Sales
     Increase  
     (Unaudited)  
     (Dollars in thousands)  

Selling and administrative expenses

   $ 17,070        9.6      $ 16,105        10.4      $ 965  

Selling and administrative expenses increased primarily as a result of $541,000 in costs associated with the Elkhart, Indiana facility. In addition, the Corporation benefitted in prior year from a $250,000 final payment received in the second quarter on an account that had been previously fully reserved. As a percentage of net sales, selling and administrative expenses declined due to certain costs remaining relatively constant amid rising sales.

Interest Expense

 

     February 28,
2017
     February 29,
2016
     Increase
(Decrease)
 
     (Unaudited)  
     (Dollars in thousands)  

Interest on life insurance policies loans

   $ 166      $ 167      $ (1

Amortization on debt financing costs

     77        58        19  

Interest on secured revolving credit facility

     14        11        3  
  

 

 

    

 

 

    

 

 

 
   $ 257      $ 236      $ 21  
  

 

 

    

 

 

    

 

 

 

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

 

20


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

 

Liquidity and Capital Resources

 

     February 28, 2017
(Unaudited)
     May 31, 2016      Increase
(Decrease)
 
     (Dollars in thousands)  

Cash

   $ 5,232      $ 7,659      $ (2,427

Current assets, exclusive of cash

   $ 29,942      $ 28,159      $ 1,783  

Current liabilities

   $ 19,689      $ 18,031      $ 1,658  

Working capital

   $ 15,485      $ 17,787      $ (2,302

As noted in the Consolidated Statements of Cash Flows for the nine month period ended February 28, 2017, cash decreased due to cash used in operating activities of $1,290,000 and cash used in investing activities of $1,137,000. Current assets, exclusive of cash, increased primarily due to a $2,238,000 increase in Inventories; offset by a $604,000 decrease in Workers’ compensation security deposit. Raw material inventories increased due to anticipated production scheduled to occur in the fourth fiscal quarter. Work in process inventories increased due to increased production as February 28, 2017 as compared to May 31, 2016. Workers’ compensation security deposit decreased to fund workers’ compensation claims for the current fiscal year.

Current liabilities increased primarily as a result of a $869,000 increase in Accrued warranty and a $1,323,000 increase in accrued marketing programs; offset by a $1,002,000 decrease in Accrued salaries and wages. Accrued warranty rose due to increased unit sales. Accrued marketing programs rose as a result of accruals for an ongoing marketing program for manufactured housing customers. Accruals are made monthly, and the majority of payments are made during the Corporation’s fourth fiscal quarter. Accrued salaries and wages decreased due to the timing of payments to employees at February 28, 2017 as compared to May 31, 2016.

Capital expenditures totaled $1,094,000 for the first nine months of fiscal 2017 as compared to $312,000 for the first nine months of fiscal 2016. The increase is the result of building improvements, purchasing equipment for the Elkhart, Indiana facility, and replacing equipment that had reached its full economic useful life.

In the third quarter of fiscal 2017, the Corporation did not meet a covenant requiring the year to date net loss not to exceed $1,750,000, and a covenant requiring net worth as of February 28, 2017 to not be below $23,383,000. The inability to meet these covenants represent an event of default, which if not waived could negatively affect the Corporation’s ability to obtain financing under the facility and thereby have an adverse effect on liquidity. Subsequent to February 28, 2017, the Corporation received a waiver for the default that occurred in the third quarter and paid to First Business Capital an accommodation fee of $50,000. Except as provided herein, the Loan Agreement and all other loan documentation related thereto shall remain in full force and effect in accordance with their terms.

If necessary, the Corporation has the ability to borrow approximately $2,300,000 under the cash surrender value of certain life insurance policies.

 

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

 

Impact of Inflation

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. On a long-term basis, the Corporation has adjusted selling prices in reaction to changing costs due to inflation.

Forward Looking Information

The preceding Management’s Discussion and Analysis contains forward-looking statements within the meaning of The Private Securities Litigation Reform Act of 1995. Forward-looking statements are also made elsewhere in this report. The Corporation publishes other forward-looking statements from time to time.

Statements that are not historical in nature, including those containing words such as “anticipate,” “estimate,” “should,” “expect,” “believe,” “intend,” and similar expressions, are intended to identify forward-looking statements. We caution to be aware of the speculative nature of “forward-looking statements.” Although these statements reflect the Corporation’s good faith belief based on current expectations, estimates, and projections about (among other things) the industry and the markets in which the Corporation operates, they are not guarantees of future performance.

Whether actual results will conform to management’s expectations and predictions is subject to a number of known and unknown risks and uncertainties, including the following:

 

    Consumer confidence and economic uncertainty;

 

    Availability of wholesale and retail financing;

 

    The health of the U.S. housing market as a whole;

 

    Regulations pertaining to the housing and park model industries;

 

    The cyclical nature of the manufactured housing and park model industries;

 

    General or seasonal weather conditions affecting sales;

 

    Potential impact of natural disasters on sales and raw material costs;

 

    Potential periodic inventory adjustments by independent retailers;

 

    Interest rate levels;

 

    Impact of inflation;

 

    Impact of labor costs;

 

    Competitive pressures on pricing and promotional costs;

 

    Catastrophic events impacting insurance costs;

 

    The availability of insurance coverage for various risks to the Corporation;

 

    Market demographics; and

 

    Management’s ability to attract and retain executive officers and key personnel.

Consequently, all of the Corporation’s forward-looking statements are qualified by these cautionary statements. The Corporation may not realize the results anticipated by management or, even if the Corporation substantially realizes the results management anticipates, the results may not have the consequences to, or effects on, the Corporation or its business or operations that management expects. Such differences may be material. Except as required by applicable laws, the Corporation does not intend to publish updates or revisions of any forward-looking statements management makes to reflect new information, future events or otherwise.

 

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Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Not applicable.

 

Item 4. Controls and Procedures.

Management’s Conclusions Regarding Effectiveness of Disclosure Controls and Procedures

As of February 28, 2017, the Corporation conducted an evaluation, under the supervision and with the participation of management including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”)). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Corporation’s disclosure controls and procedures are effective for the period ended February 28, 2017 to ensure that material information required to be disclosed by the Corporation in the reports that are filed or submitted under the Exchange Act is recorded, processed, summarized, and reported as and when required.

Changes in Internal Control Over Financial Reporting

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 third quarter ended February 28, 2017 that materially affected, or is reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

PART II OTHER INFORMATION

 

Item 1. Legal Proceedings:

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.

 

Item 1A. Risk Factors.

There were no material changes in the risk factors disclosed in Item 1A of the Corporation’s Form 10-K for the year ended May 31, 2016.

 

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PART II OTHER INFORMATION (CONTINUED)

 

Item 6. Exhibits.

Exhibits (Numbered according to Item 601 of Regulation S-K, Exhibit Table)

 

  10.1    Letter of Default Waiver dated April 11, 2017 by and among Skyline Corporation, Homette Corporation, Layton Homes Corp., Skyline Homes Inc., and First Business Capital Corp.
  10.2    Fourth Amendment to Loan and Security Agreement dated April 11, 2017 by and among Skyline Corporation, Homette Corporation, Layton Homes Corp., Skyline Homes Inc., and First Business Capital Corp.
  31.1    Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 – Rule 13a-14(a)/15d-14(a).
  31.2    Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 – Rule 13a-14(a)/15d-14(a).
  32    Certification of Periodic Financial Reports Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101    The following materials from the Corporation’s Form 10-Q for the fiscal quarter ended November 30, 2016 formatted in an XBRL Interactive Data File: (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Operations and Retained Earnings; (iii) Consolidated Statements of Cash Flows; and (iv) Notes to Consolidated Financial Statements, with detailed tagging of notes and financial statement schedules.

 

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Signatures

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.

 

      SKYLINE CORPORATION
DATE: April 14, 2017      

/s/ Jon S. Pilarski

      Jon S. Pilarski
      Chief Financial Officer
DATE: April 14, 2017      

/s/ Martin R. Fransted

      Martin R. Fransted
      Controller

 

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