Skyline Champion(SKY) - 2019 Q4 - Annual Report

PART I Item 1. Business Skyline Champion, North America's largest factory-built housing company, offers diverse homes and aims for growth through strategic initiatives - Skyline Champion Corporation was formed on June 1, 2018, through the combination of Skyline Corporation and Champion Enterprises Holdings, LLC, with Champion Holdings as the accounting acquirer[12][133] - The company is North America's largest independent publicly traded factory-built housing company, with pro forma net sales of $1.4 billion in fiscal year 2019[13] - The company operates 36 manufacturing facilities across 17 U.S. states and three Canadian provinces, 21 factory-direct retail sales centers, and a logistics business[13][14][128] - Strategic initiatives include capitalizing on favorable demographic trends, expanding sales in existing and new geographies, enhancing margins through operational initiatives, and expanding quality products through innovation[19][20][21][24][25] Market Position (2018 Units Produced) | Position | Market Segment | | :------- | :------------- | | Number two | Manufactured housing (U.S.) | | Top three | Most major U.S. regional markets | | Leading | Western Canada | | Leading | Park model RV sales and modular home sales | Item 1A. Risk Factors The company faces risks from cyclical housing demand, economic sensitivity, supply chain, labor shortages, integration, and compliance - The factory-built housing industry is cyclical and seasonal, with sales typically higher from March to November, making results subject to fluctuations[62] - Demand is sensitive to economic conditions like employment rates, consumer confidence, and interest rates, with increases potentially limiting purchasing power[63][65] - The company relies heavily on independent distributors (over 90% of fiscal 2019 shipments), and relationship issues could lead to sales declines[71] - Material prices (e.g., lumber, insulation, steel) can fluctuate significantly, potentially affecting production and profit margins if costs cannot be passed to customers[72] - Labor shortages and high turnover rates in the homebuilding industry can increase production costs and cause construction delays[74] - The integration of Skyline and Champion Holdings operations may not be successful, potentially leading to operational disruptions and failure to realize anticipated synergies[98][101] - The company does not anticipate paying cash dividends for the foreseeable future, intending to retain earnings for business development and growth[105] Item 1B. Unresolved Staff Comments No unresolved staff comments were reported - No unresolved staff comments were reported[108] Item 2. Properties As of March 30, 2019, the company operates 36 manufacturing facilities, 21 retail centers, and 9 logistics terminals, with most manufacturing facilities owned Operating Facilities as of March 30, 2019 | Location | Owned/Leased | | :------- | :----------- | | United States | | | Chandler, Arizona | Leased * | | Corona, California | Leased | | Lindsay, California | Owned | | San Jacinto, California | Owned | | Woodland, California | Owned | | Lake City, Florida (two facilities) | Leased * | | Ocala, Florida | Owned | | Weiser, Idaho | Owned | | Topeka, Indiana (three facilities) | Owned | | Arkansas City, Kansas | Owned | | Benton, Kentucky | Leased | | Worthington, Minnesota | Owned | | Lillington, North Carolina | Owned | | York, Nebraska | Owned | | Sangerfield, New York | Owned | | Sugar Creek, Ohio | Owned | | McMinnville, Oregon | Owned | | Claysburg, Pennsylvania | Owned | | Ephrata, Pennsylvania | Owned | | Leola, Pennsylvania | Owned | | Liverpool, Pennsylvania | Owned | | Strattanville, Pennsylvania | Owned | | Dresden, Tennessee | Leased | | Athens, Texas | Owned | | Burleson, Texas (two facilities) | Owned | | Mansfield, Texas | Owned | | Lancaster, Wisconsin | Owned | | Canada | | | Lethbridge, Alberta | Leased * | | Medicine Hat, Alberta | Owned | | Penticton, British Columbia | Owned | | Kelowna, British Columbia | Leased | | Estevan, Saskatchewan | Owned | * -- land only leased; facility owned - The company maintains corporate offices in Elkhart, Indiana, and Troy, Michigan, along with 21 retail sales centers and nine logistics terminals, all leased properties[110] - As of March 30, 2019, the company owns or leases five idle manufacturing facilities for potential additional production capacity[111] Item 3. Legal Proceedings The company is involved in ordinary course legal proceedings, with management believing no material adverse effect on financial position or operations - The company is party to legal proceedings, including claims alleging breach of warranties and governmental agency proceedings related to occupational safety and employment regulations[112] - Management does not believe that current litigation will have a material adverse effect on the company's consolidated financial position, liquidity, or results of operations[112] Item 4. Mine Safety Disclosures Mine Safety Disclosures are not applicable to the company - Mine Safety Disclosures are not applicable[113] PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Skyline Champion's common stock trades on NYSE (SKY), with 556 record holders as of May 2019; no future dividends are planned - The company's common stock is traded on the New York Stock Exchange (NYSE) under the symbol SKY[116] - As of May 17, 2019, there were approximately 556 holders of record of the common stock[117] - The company does not currently pay dividends, planning to retain future earnings for growth, though a special cash dividend of $0.62381 per share was paid on May 31, 2018[118][119] Cumulative Total Stockholder Return (March 31, 2014 - March 31, 2019) | | March 31, 2014 | March 31, 2015 | March 31, 2016 | March 31, 2017 | March 31, 2018 | March 31, 2019 | | :--------------------- | :------------- | :------------- | :------------- | :------------- | :------------- | :------------- | | Skyline Champion Corporation | $100.00 | $58.51 | $153.06 | $155.70 | $363.64 | $314.05 | | Russell 3000 | 100.00 | 112.37 | 111.98 | 132.21 | 150.48 | 163.67 | | Cavco Industries, Inc. | 100.00 | 95.68 | 119.13 | 148.37 | 221.48 | 149.82 | Item 6. Selected Financial Data This section presents selected consolidated financial data for fiscal years 2015-2019, reflecting key operational, balance sheet, and cash flow items Selected Consolidated Financial Data (Fiscal Years Ended March 2015-2019) | Statement of Operations Data (Dollars in thousands) | March 30, 2019 | March 31, 2018 | April 1, 2017 | April 2, 2016 | March 28, 2015 | | :---------------------------------- | :------------- | :------------- | :------------ | :------------ | :------------- | | Net Sales | $1,360,043 | $1,064,722 | $861,319 | $751,703 | $737,230 | | Cost of sales | 1,114,684 | 887,611 | 717,364 | 638,571 | 649,798 | | Gross Margin | 245,359 | 177,111 | 143,955 | 113,132 | 87,432 | | Selling, general and administrative expenses | 270,158 | 122,582 | 105,175 | 92,394 | 87,279 | | Operating (loss) income | (29,742) | 54,589 | 34,650 | 17,158 | (11,600) | | Net (loss) income | $(58,208) | $15,800 | $51,910 | $(20) | $(17,367) | | Other financial information (Dollars in thousands) | | | | | | | Cash flows provided by continuing operations | $65,228 | $31,623 | $34,289 | $37,258 | $13,595 | | Total assets | $699,954 | $395,398 | $328,021 | $255,349 | $284,348 | | Long-term debt | $54,330 | $58,927 | $59,331 | $59,749 | $60,287 | Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes the company's financial condition and operations, covering formation, acquisitions, industry outlook, performance, liquidity, and accounting policies Overview Skyline Champion Corporation, formed on June 1, 2018, is a leading North American factory-built housing producer with integrated operations - Skyline Champion Corporation was formed on June 1, 2018, by combining Skyline Corporation and Champion Enterprises Holdings, LLC[127] - The company is a leading provider of factory-built housing solutions in North America, with vertically integrated manufacturing, retail, and transportation logistics businesses[128] - As of March 30, 2019, the company operates 31 U.S. and 5 Canadian manufacturing facilities, 21 retail sales centers, and a transportation business[128] Acquisitions and Expansions Skyline Champion expanded its manufacturing and retail footprint through strategic acquisitions and facility expansions to meet increasing demand - The company increased capacity through strategic acquisitions and expansions, including adding a second production line at its Corona, California facility in fiscal 2019[130] - New plants were opened or are expected to open in Leesville, Louisiana (June 2019) and Leola, Pennsylvania (April 2019)[130] - Acquisitions include Innovative Building Systems, LLC (IBS) in September 2016, adding five modular manufacturing facilities and two retail sales centers[130] - Retail operations expanded with three new sales centers in fiscal 2018 and five in fiscal 2017, aiming to increase market presence and manufacturing utilization[131] Combination with Skyline The Champion Holdings and Skyline Exchange, completed on June 1, 2018, was a reverse acquisition, with fiscal 2019 results reflecting the combined entity - The Exchange was completed on June 1, 2018, and treated as a reverse acquisition, with Champion Holdings identified as the accounting acquirer[133] - Fiscal 2019 financial results include Champion Holdings' pre-Exchange results and the combined operations post-Exchange, while prior periods reflect solely Champion Holdings' results[133] - The preliminary purchase price allocation resulted in goodwill primarily from expected synergies in procurement and operational improvements[345] Industry and Company Outlook In fiscal 2019, HUD-code homes comprised 76% of U.S. manufacturing sales, with market share growing to 16.6% due to Skyline operations - For fiscal 2019, 76% of the company's U.S. manufacturing sales were HUD-code homes[134] HUD-Code Home Shipments and Market Share | Metric | Fiscal Year 2019 | Fiscal Year 2018 | | :----- | :--------------- | :--------------- | | Industry Shipments (units) | 93,377 (93,265 excl. FEMA) | 95,044 (90,629 excl. FEMA) | | Company's HUD Market Share | 16.6% | 13.9% | U.S. Modular Home Shipments and Market Share | Metric | 12 Months Ended Dec 31, 2018 | 12 Months Ended Dec 31, 2017 | | :----- | :--------------------------- | :--------------------------- | | Industry Shipments (units) | 15,530 | 14,149 | | Company's Modular Market Share | 13.1% | 11.1% | - Approximately 18% of the company's U.S. manufacturing sales in fiscal 2019 were modular homes, with market presence improving due to the IBS Acquisition[135] Results of Operations for Fiscal Year 2019 vs. 2018 In fiscal 2019, net sales increased by 27.7% to $1.36 billion, but operating and net income shifted to losses due to higher SG&A expenses Key Financial Highlights (FY2019 vs. FY2018) | Metric (Dollars in thousands) | FY2019 | FY2018 | Change ($) | Change (%) | | :---------------------------- | :----- | :----- | :--------- | :--------- | | Net sales | $1,360,043 | $1,064,722 | $295,321 | 27.7% | | Gross profit | $245,359 | $177,111 | $68,248 | 38.5% | | Gross profit as % of net sales | 18.0% | 16.6% | 1.4 pp | | | Selling, general and administrative expenses | $275,101 | $122,522 | $152,579 | 124.5% | | Operating (loss) income | $(29,742) | $54,589 | $(84,331) | -154.5% | | Net (loss) income | $(58,208) | $15,800 | $(74,008) | -468.4% | | Adjusted EBITDA | $97,091 | $64,608 | $32,483 | 50.3% | - U.S. Factory-built Housing net sales increased by $317.2 million (36.9%), driven by Skyline operations inclusion ($218.8 million) and a 13.6% increase in average home selling price[139] - Selling, general and administrative expenses surged by $152.6 million (124.5%), primarily due to $101.4 million in non-cash equity-based compensation and $7.6 million in Skyline integration costs[148][151] - Adjusted EBITDA increased by $32.5 million (50.3%) to $97.1 million, reflecting increased operating income after adjusting for non-cash and integration costs[157] Pro Forma Results of Operations Unaudited pro forma fiscal 2019 results show net sales of $1.41 billion, with gross profit at 18.0%, but a net loss of $(43.5) million due to higher SG&A - Pro forma net sales for fiscal 2019 were $1.41 billion, an increase of $108.6 million over the prior year, driven by increased units and higher average home selling prices[162] - Pro forma gross profit increased by $46.3 million in fiscal 2019, with gross profit as a percent of net sales improving to 18.0% from 15.9%, due to synergy capture and operational improvements[163] - Pro forma selling, general and administrative expenses rose to $272.3 million in fiscal 2019, primarily due to a $92.2 million increase in non-cash equity-based compensation and $7.6 million in Skyline integration costs[164] Pro Forma Financial Highlights (FY2019 vs. FY2018) | Metric (Dollars in thousands) | FY2019 (unaudited) | FY2018 (unaudited) | | :---------------------------- | :----------------- | :----------------- | | Net sales | $1,405,847 | $1,297,159 | | Gross profit | $253,075 | $206,810 | | Selling, general and administrative expenses | $272,277 | $148,475 | | Operating (loss) income | $(19,202) | $58,335 | | Net (loss) income | $(43,460) | $25,655 | | Adjusted EBITDA | $100,903 | $75,953 | Backlog As of March 30, 2019, home order backlog decreased to $142.7 million from $154.8 million, influenced by prior FEMA demand and a softer Canadian economy Home Order Backlog | Metric | March 30, 2019 | March 31, 2018 | | :----- | :------------- | :------------- | | Backlog (wholesale sales values) | $142.7 million | $154.8 million | - The decrease in backlog was attributed to higher prior-year backlog from FEMA unit production and a softening Canadian economy affecting Canadian operations[167] Results of Operations for Fiscal Year 2018 vs. 2017 In fiscal 2018, net sales increased by 23.6% to $1.06 billion, and operating income rose by 57.5%, but net income decreased to $15.8 million due to higher tax expense Key Financial Highlights (FY2018 vs. FY2017) | Metric (Dollars in thousands) | FY2018 | FY2017 | Change ($) | Change (%) | | :---------------------------- | :----- | :----- | :--------- | :--------- | | Net sales | $1,064,722 | $861,319 | $203,403 | 23.6% | | Gross profit | $177,111 | $143,955 | $33,156 | 23.0% | | Gross profit as % of net sales | 16.6% | 16.7% | -0.1 pp | | | Selling, general and administrative expenses | $122,522 | $109,305 | $13,217 | 12.1% | | Operating income | $54,589 | $34,650 | $19,939 | 57.5% | | Net income | $15,800 | $51,910 | $(36,110) | -69.6% | | Adjusted EBITDA | $64,608 | $45,447 | $19,161 | 42.2% | - U.S. Factory-built Housing net sales increased by $182.2 million (26.9%), driven by a 22.4% increase in homes sold and a 3.7% increase in average home selling price[171] - Income tax expense increased significantly to $27.3 million in fiscal 2018 from a benefit of $(23.3) million in fiscal 2017, primarily due to deferred tax re-measurement at the new 21% corporate income tax rate[186] - Adjusted EBITDA increased by $19.2 million (42.2%) to $64.6 million, primarily due to a $19.9 million increase in operating income[190] Liquidity and Capital Resources Liquidity stems from operations, cash, and a $100 million revolving credit facility; fiscal 2019 operating cash flow increased to $65.2 million - Primary liquidity sources are cash flows from operations, existing cash balances, and a $100.0 million revolving credit facility[191][195] Summary Cash Flow Information (FY2017-FY2019) | Cash Flow Category (Dollars in thousands) | FY2019 | FY2018 | FY2017 | | :---------------------------------------- | :----- | :----- | :----- | | Net cash provided by operating activities | $65,228 | $31,623 | $33,459 | | Net cash used in investing activities | $(2,030) | $(8,621) | $(18,737) | | Net cash (used in) provided by financing activities | $(72,518) | $10,336 | $3,694 | | Net (decrease) increase in cash and cash equivalents | $(9,982) | $33,924 | $17,830 | | Cash, cash equivalents and restricted cash at end of period | $126,634 | $136,616 | $102,692 | - Cash provided by operating activities increased to $65.2 million in fiscal 2019 from $31.6 million in fiscal 2018, driven by higher operating income and non-cash expenses[192] - Cash used in financing activities in fiscal 2019 was mainly due to a $65.2 million capital distribution to Champion Holdings members and a $5.0 million paydown on revolving debt[194] Contractual Obligations and Commitments As of March 30, 2019, contractual obligations include $41.9 million in credit facility debt and $18.5 million in operating leases, with significant contingent liabilities Contractual Obligations as of March 30, 2019 (Dollars in thousands) | Obligation | Total | <1 Year | 1 to 3 Years | 3 to 5 Years | >5 Years | | :----------------------------------- | :---- | :------ | :----------- | :----------- | :------- | | Revolving credit facility maturing in 2023 | $41,900 | $— | $— | $41,900 | $— | | Obligations under industrial revenue bonds due 2029 | 12,430 | — | — | — | 12,430 | | Operating leases | 18,455 | 5,302 | 6,842 | 3,313 | 2,998 | | Total | $72,785 | $5,302 | $6,842 | $45,213 | $15,428 | - Contingent repurchase obligation with floor plan lenders was approximately $173.4 million as of March 30, 2019, without reduction for resale value[203] - The company had $21.0 million in letters of credit and $23.6 million in surety bonds outstanding as of March 30, 2019[203] - Guarantees for a portion of customers' floor plan obligations totaled $0.8 million as of March 30, 2019[206] Non GAAP Measures - Adjusted EBITDA Adjusted EBITDA is a non-GAAP measure used for evaluating operating performance, planning, and stakeholder communication, excluding various non-operating items - Adjusted EBITDA is defined as net income or loss plus income taxes, net interest expense, depreciation and amortization, discontinued operations, foreign currency gains/losses, equity-based compensation, non-cash restructuring charges, and other non-operating costs[208] - Management uses Adjusted EBITDA for planning, internal budgeting, communication with stakeholders, incentive compensation, and evaluating operating performance for capital investments and acquisitions[210] - Adjusted EBITDA is considered useful to investors as it measures operating performance without regard to items that can vary substantially based on accounting methods, capital structure, and asset acquisition methods[209] Critical Accounting Policies Critical accounting policies involve significant estimates for acquisitions, revenue, self-insured risks, warranties, and asset impairment, with actual results potentially differing materially - Key accounting policies requiring significant estimates include business combinations, reserves for obsolete inventory, accrued warranty costs, asset impairment analyses, insurance reserves, repurchase reserves, and deferred tax valuation allowances[211] - Revenue from manufacturing shipments is generally recognized when wholesale financing is approved, the home is shipped, and title transfers; retail sales revenue is recognized upon delivery, setup, acceptance, and title transfer[213][214] - The company is self-insured for a significant portion of its general, product liability, workers' compensation, auto, health, and property insurance, with estimated costs accrued based on historical experience[217] - Warranty costs are accrued as cost of sales at the time of sale, based on estimates of future claims considering the number of homes under warranty and historical service costs[218][219] - Goodwill is tested for impairment annually or more frequently if circumstances indicate impairment, using a qualitative assessment or by comparing fair value to net book value[221] - The company maintains a reserve for estimated losses under repurchase agreements, which was $1.0 million at March 30, 2019, for contingent obligations totaling approximately $173.4 million[224] Off Balance Sheet Arrangements As of March 30, 2019, off-balance sheet arrangements include a $173.4 million contingent repurchase obligation, $21.0 million in letters of credit, and $23.6 million in surety bonds - Off-balance sheet arrangements as of March 30, 2019, include a contingent repurchase obligation of approximately $173.4 million, letters of credit totaling $21.0 million, and surety bonds totaling $23.6 million[226] Other Matters Inflation has not materially affected profitability, with commodity price increases generally passed on; the housing industry is seasonal, with sales peaking from March to November - Inflation has not had a material effect on profitability over the past three years, as commodity price increases have generally been passed on to customers or mitigated[227] - The housing industry, including factory-built homes, is seasonal, with sales typically peaking from March to November[228] Recently Issued Accounting Standards This section refers to Note 1, 'Summary of Significant Accounting Policies,' for new accounting pronouncements - Information regarding new accounting pronouncements is detailed in Note 1, 'Summary of Significant Accounting Policies,' of the Consolidated Financial Statements[229] Item 7A. Quantitative and Qualitative Disclosures About Market Risk The company faces interest rate risk on variable-rate debt (100 bps increase adds $0.8 million annual expense) and foreign exchange risk from Canadian operations (1.0% change impacts $1.0 million sales) - The company's debt obligations under the Credit Agreement, industrial revenue bonds, and floor plan financing arrangements are all at variable interest rates[233] Impact of 100 Basis Point Interest Rate Increase (as of March 30, 2019) | Debt Type | Outstanding Borrowings (Millions) | Additional Annual Interest Expense (Millions) | | :-------------------------------- | :------------------------------ | :------------------------------------------ | | Revolving credit facility | $41.9 | $0.4 | | Industrial revenue bonds | $12.4 | $0.1 | | Floor plan financing arrangements | $33.3 | $0.3 | | Total | $87.6 | $0.8 | - The company is exposed to foreign exchange risk from its Canadian operations, with fiscal 2019 net sales of $98.6 million Canadian dollars; a 1.0% change in exchange rates would change consolidated sales by $1.0 million[234] Item 8. Financial Statements and Supplementary Data Financial statements and supplementary data are filed under Item 15 of this report - Financial statements and supplementary data are filed under Item 15 of this report[235] Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure No changes in or disagreements with accountants on accounting and financial disclosure were reported - No changes in or disagreements with accountants on accounting and financial disclosure were reported[236] Item 9A. Controls and Procedures As of March 30, 2019, disclosure controls and internal control over financial reporting were effective, with a prior material weakness remediated - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of March 30, 2019, excluding Champion Holdings' operations[237] - Management concluded that the company's internal control over financial reporting was effective as of March 30, 2019[238] - A material weakness in raw materials inventory accuracy and valuation, reported in fiscal 2017, was remediated in fiscal 2019 through ERP implementation and enhanced inventory count procedures[104][242] - The scope of management's assessment of internal control over financial reporting excluded Champion Holdings and its subsidiaries, representing 92% of total assets and 84% of total revenues for fiscal year ended March 30, 2019[240] Item 9B. Other Information No other information is reported in this section - No other information is reported in this section[243] PART III Item 10. Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2019 Proxy Statement; a Code of Conduct is also adopted - Information on directors, executive officers, and corporate governance is incorporated by reference from the 2019 Proxy Statement[246] - The company has adopted a written Code of Business Conduct and Ethics, applicable to all directors, officers, and employees, available on its website[247] Item 11. Executive Compensation Executive compensation information is incorporated by reference from the 2019 Proxy Statement - Executive compensation information is incorporated by reference from the 2019 Proxy Statement[248] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership information is incorporated by reference from the 2019 Proxy Statement; as of March 30, 2019, 450,366 securities were issuable from outstanding options - Information on security ownership of certain beneficial owners and management is incorporated by reference from the 2019 Proxy Statement[249] Equity Compensation Plan Information (as of March 30, 2019) | Plan Category | Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights (A) | Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights (B) | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (A)) (C) | | :-------------------------------------- | :------------------------------------------------------------------------------ | :------------------------------------------------------------------------------ | :---------------------------------------------------------------------------------------------------------------------------------------------------- | | Equity compensation plans approved by stockholders | 450,366 | $15.00 | 5,200,562 | | Equity compensation plans not approved by stockholders | — | — | — | | Total | 450,366 | $15.00 | 5,200,562 | Item 13. Certain Relationships and Related Transactions, and Director Independence Information on certain relationships, related party transactions, and director independence is incorporated by reference from the 2019 Proxy Statement - Information on certain relationships, related party transactions, and director independence is incorporated by reference from the 2019 Proxy Statement[252] Item 14. Principal Accountant Fees and Services Information on principal accountant fees and services is incorporated by reference from the 2019 Proxy Statement - Information on principal accountant fees and services is incorporated by reference from the 2019 Proxy Statement[253] PART IV Item 15. Exhibits and Financial Statement Schedules This section lists financial statements, schedules, and a comprehensive list of exhibits filed with the Form 10-K, including key agreements and governance documents - Financial Statements are listed in the Index to Consolidated Financial Statements on page F-1 of this report[258] - Schedule II – Valuation and Qualifying Accounts is included, while other financial statement schedules are omitted as not required or information is presented elsewhere[255] - A comprehensive list of exhibits is provided, including the Share Contribution & Exchange Agreement, corporate governance documents, Credit Agreement, and various equity incentive plan documents[256][259][262] Item 16. 10-K Summary A 10-K Summary is not applicable - A 10-K Summary is not applicable[262] SIGNATURES Signatures Details The report is signed by authorized representatives of Skyline Champion Corporation, including key officers and directors, on May 23, 2019 - The report is signed by Keith Anderson (CEO), Laurie Hough (EVP, CFO, and Treasurer), Tim Burkhardt (VP and Controller), and several Directors[264][265] - All signatures are dated May 23, 2019[265] INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Index to Consolidated Financial Statements Details This section indexes consolidated financial statements, including auditor reports, balance sheets, statements of operations, cash flows, equity, and notes - The index lists Reports of Ernst & Young LLP, Consolidated Balance Sheets, Statements of Operations, Comprehensive (Loss) Income, Cash Flows, Equity, Notes to Consolidated Financial Statements, and Schedule II – Valuation and Qualifying Accounts[267] Reports of Independent Registered Public Accounting Firm Opinion on the Financial Statements Ernst & Young LLP issued an unqualified opinion on the company's consolidated financial statements for fiscal years 2017-2019, affirming fair presentation in conformity with U.S. GAAP - Ernst & Young LLP provided an unqualified opinion on the consolidated financial statements for fiscal years 2019, 2018, and 2017[269] - The financial statements are deemed to present fairly, in all material respects, the financial position, results of operations, and cash flows in conformity with U.S. GAAP[269] Opinion on Internal Control Over Financial Reporting Ernst & Young LLP issued an unqualified opinion on the effectiveness of internal control over financial reporting as of March 30, 2019, excluding Champion Enterprise Holdings - Ernst & Young LLP issued an unqualified opinion on the effectiveness of Skyline Champion Corporation's internal control over financial reporting as of March 30, 2019[275] - The audit of internal control over financial reporting excluded Champion Enterprise Holdings, LLC and its subsidiaries, representing 92% of total assets and 84% of total revenues[276] Consolidated Financial Statements Consolidated Balance Sheets Consolidated Balance Sheets show total assets increased to $699.9 million and total equity to $412.0 million as of March 30, 2019, primarily due to the Exchange Consolidated Balance Sheet Highlights (Dollars in thousands) | Metric | March 30, 2019 | March 31, 2018 | | :-------------------------------- | :------------- | :------------- | | ASSETS | | | | Cash and cash equivalents | $126,634 | $113,731 | | Inventories | $122,638 | $98,022 | | Property, plant and equipment, net | $108,587 | $67,960 | | Goodwill | $173,406 | $3,179 | | Amortizable intangible assets, net | $48,936 | $1,542 | | Total assets | $699,954 | $395,398 | | LIABILITIES AND EQUITY | | | | Total current liabilities | $206,303 | $167,114 | | Long-term debt | $54,330 | $58,927 | | Total equity | $411,972 | $153,297 | - Total assets increased by $304.6 million (77.0%) from March 31, 2018, to March 30, 2019, primarily due to the Exchange, which significantly increased goodwill and amortizable intangible assets[285] - Total equity increased by $258.7 million (168.7%) from March 31, 2018, to March 30, 2019, reflecting the impact of the Exchange[285] Consolidated Statements of Operations Consolidated Statements of Operations show fiscal 2019 net sales increased by 27.7% to $1.36 billion, but a net loss of $(58.2) million resulted from increased SG&A expenses Consolidated Statements of Operations Highlights (Dollars in thousands) | Metric | FY2019 | FY2018 | FY2017 | | :---------------------------------------- | :----- | :----- | :----- | | Net sales | $1,360,043 | $1,064,722 | $861,319 | | Gross profit | $245,359 | $177,111 | $143,955 | | Selling, general, and administrative expenses | $270,158 | $122,582 | $105,175 | | Operating (loss) income | $(29,742) | $54,589 | $34,650 | | Net (loss) income | $(58,208) | $15,800 | $51,910 | | Basic net (loss) income per share | $(1.09) | $0.33 | $1.09 | | Diluted net (loss) income per share | $(1.09) | $0.33 | $1.09 | - Net sales increased by $295.3 million (27.7%) in fiscal 2019 compared to fiscal 2018[288] - The company reported a net loss of $(58.2) million in fiscal 2019, a significant decrease from a net income of $15.8 million in fiscal 2018, largely due to increased selling, general, and administrative expenses[288] Consolidated Statements of Comprehensive (Loss) Income Consolidated Statements of Comprehensive (Loss) Income show a total comprehensive loss of $(59.5) million in fiscal 2019, primarily due to net loss and foreign currency adjustments Consolidated Statements of Comprehensive (Loss) Income (Dollars in thousands) | Metric | FY2019 | FY2018 | FY2017 | | :-------------------------------- | :----- | :----- | :----- | | Net (loss) income | $(58,208) | $15,800 | $51,910 | | Foreign currency translation adjustments | $(1,322) | $854 | $2,117 | | Amounts reclassified from accumulated other comprehensive income to discontinued U.K. operations | $— | $— | $(7,776) | | Pension related adjustments | $— | $— | $214 | | Total comprehensive (loss) income | $(59,530) | $16,654 | $46,465 | - Total comprehensive loss for fiscal 2019 was $(59.5) million, compared to total comprehensive income of $16.7 million in fiscal 2018[291] - Foreign currency translation adjustments resulted in a loss of $(1.3) million in fiscal 2019, following gains in prior years[291] Consolidated Statements of Cash Flows Consolidated Statements of Cash Flows show net cash from operations increased to $65.2 million in fiscal 2019, with financing activities using $(72.5) million for distributions and debt paydowns Consolidated Statements of Cash Flows (Dollars in thousands) | Cash Flow Category | FY2019 | FY2018 | FY2017 | | :---------------------------------------- | :----- | :----- | :----- | | Net cash provided by operating activities | $65,228 | $31,623 | $33,459 | | Net cash used in investing activities | $(2,030) | $(8,621) | $(18,737) | | Net cash (used in) provided by financing activities | $(72,518) | $10,336 | $3,694 | | Net (decrease) increase in cash and cash equivalents | $(9,982) | $33,924 | $17,830 | | Cash, cash equivalents and restricted cash at end of period | $126,634 | $136,616 | $102,692 | - Net cash provided by operating activities increased by $33.6 million (106.3%) from fiscal 2018 to fiscal 2019[294] - Net cash used in financing activities in fiscal 2019 was $(72.5) million, primarily due to a $65.3 million members' capital distribution and $5.0 million in revolving debt payments[294] Consolidated Statements of Equity Consolidated Statements of Equity show total equity increased from $153.3 million to $412.0 million, driven by stock exchange and equity compensation, offset by net loss and distributions Consolidated Statements of Equity Highlights (Dollars in thousands) | Metric | Balance at April 2, 2016 | Balance at April 1, 2017 | Balance at March 31, 2018 | Balance at March 30, 2019 | | :---------------------------------------- | :----------------------- | :----------------------- | :------------------------ | :------------------------ | | Members' Contributed Capital | $139,714 | $140,322 | $140,076 | $— | | Common Stock Amount | $— | $— | $— | $1,569 | | Additional Paid in Capital | $— | $— | $— | $479,226 | | Retained Earnings (Accumulated Deficit) | $(45,196) | $6,714 | $22,514 | $(58,208) | | Accumulated Other Comprehensive Loss | $(4,702) | $(10,147) | $(9,293) | $(10,615) | | Total Equity | $89,816 | $136,889 | $153,297 | $411,972 | - Total equity increased by $258.7 million from March 31, 2018, to March 30, 2019[296] - Key drivers of equity changes in fiscal 2019 include the exchange of membership interest for common stock ($285.1 million) and equity-based compensation ($102.0 million), offset by a net loss of $(58.2) million and members' capital distributions of $(65.3) million[296] Notes to Consolidated Financial Statements 1. Summary of Significant Accounting Policies This note outlines the company's significant accounting policies, including reverse acquisition basis, revenue recognition, asset valuation, and recently adopted and pending accounting pronouncements - The Exchange on June 1, 2018, was treated as a reverse acquisition, with Champion Holdings as the accounting acquirer; fiscal 2019 results combine pre-Exchange Champion Holdings with post-Exchange combined entity results[300] - Revenue is recognized when performance obligations are satisfied, typically at the point of transfer of control for products; for long-term construction contracts, revenue is recognized over time using the percentage-of-completion method[308][375][377] - Inventories are valued at the lower of cost or market using the first-in, first-out method[319] - Goodwill is not amortized but tested for impairment annually; in fiscal 2019, a qualitative assessment indicated no impairment risk[325][326] - The company adopted ASC 606 (Revenue from Contracts with Customers) and ASU 2016-18 (Restricted Cash) on April 1, 2018, with no material impact on revenues from ASC 606[336][337] - ASU 2016-02 (Leases) will be adopted on March 31, 2019, leading to recognition of lease-related assets and liabilities between $12.0 million and $15.0 million on the balance sheet, without material impact on results or cash flows[338][340] 2. Business Combination and Acquisitions The Champion Holdings-Skyline Exchange on June 1, 2018, was a reverse acquisition, generating $170.2 million in goodwill; acquired Skyline operations contributed $218.8 million in fiscal 2019 net sales - The Exchange was completed on June 1, 2018, and accounted for as a reverse acquisition, with Champion Holdings as the accounting acquirer[343] Preliminary Purchase Price Allocation (Dollars in thousands) | Asset/Liability | Preliminary Allocation at March 30, 2019 | | :-------------------------------- | :------------------------------------- | | Cash | $9,722 | | Trade accounts receivable | $13,876 | | Inventory | $19,028 | | Property, plant and equipment | $40,220 | | Deferred tax assets, net | $6,996 | | Intangibles | $52,218 | | Goodwill | $170,227 | | Accounts payable and accrued liabilities | $(36,027) | | Total purchase price allocation | $285,052 | - The acquired Skyline operations contributed $218.8 million in net sales to fiscal 2019[348] - Prior acquisitions include a manufactured housing plant in Mansfield, Texas ($2.2 million cash, 2017) and Innovative Building Systems, LLC (IBS) ($14.3 million cash, 2016), which added modular manufacturing facilities and retail sales centers[351][352] 3. Discontinued Operations The company disposed of its U.K. operations on January 20, 2017, recognizing a $0.6 million net gain in fiscal 2017, primarily from reclassified translation adjustments and pension losses - The company completed the disposition of its U.K. operations on January 20, 2017[355] Pretax Income of Discontinued Operations (FY2017, Dollars in thousands) | Major line items | Amount | | :------------------------------------------------ | :----- | | Revenue | $21,137 | | Cost of sales | $(18,306) | | Selling, general and administrative expenses | $(5,016) | | Reclassifications from accumulated other comprehensive income | $7,562 | | Other | $10 | | Pretax income of discontinued operations | $5,387 | | Pretax loss on sale of U.K. operations | $(4,803) | | Total pretax gain of U.K. operations | $584 | | Income tax expense | $(1) | | Gain on discontinued operations, net of tax | $583 | - The net gain was primarily driven by the reclassification of $7.6 million in cumulative translation adjustment gains and defined benefit pension plan losses from accumulated other comprehensive loss[356] 4. Cash, Cash Equivalents and Restricted Cash As of March 30, 2019, total cash, cash equivalents, and restricted cash was $126.6 million, with restricted cash eliminated in fiscal 2019 due to the Credit Agreement Cash, Cash Equivalents and Restricted Cash (Dollars in thousands) | Metric | March 30, 2019 | March 31, 2018 | April 1, 2017 | | :---------------------------------------- | :------------- | :------------- | :------------ | | Balance sheet - cash and cash equivalents | $126,634 | $113,731 | $81,012 | | Balance sheet - restricted cash | $— | $22,885 | $21,680 | | Statement of cash flows - cash, cash equivalents and restricted cash | $126,634 | $136,616 | $102,692 | - Restricted cash, previously collateral for letters of credit, was reduced to zero in fiscal 2019 due to the new Credit Agreement[317][370] 5. Inventories Net inventory increased to $122.6 million at March 30, 2019, primarily in raw materials and finished goods; obsolete inventory reserves were $4.1 million Components of Net Inventory (Dollars in thousands) | Component | March 30, 2019 | March 31, 2018 | | :------------------ | :------------- | :------------- | | Raw materials | $48,531 | $37,852 | | Work in process | $13,973 | $10,004 | | Finished goods and other | $60,134 | $50,166 | | Total inventories | $122,638 | $98,022 | - Total inventories increased by $24.6 million (25.1%) from March 31, 2018, to March 30, 2019[358] - Reserves for obsolete inventory were $4.1 million at March 30, 2019, up from $3.5 million at March 31, 2018[358] 6. Property, Plant, and Equipment Net PP&E increased to $108.6 million at March 30, 2019, primarily due to the Exchange; depreciation was $11.3 million, and idle facilities had a $9.6 million net book value Components of PP&E (Dollars in thousands) | Component | March 30, 2019 | March 31, 2018 | | :-------------------------------- | :------------- | :------------- | | Land and improvements | $34,264 | $22,071 | | Buildings and improvements | $83,973 | $58,179 | | Machinery and equipment | $42,476 | $31,924 | | Construction in progress | $3,619 | $919 | | Property, plant and equipment, at cost | $164,332 | $113,093 | | Less accumulated depreciation | $(55,745) | $(45,133) | | Property, plant, and equipment, net | $108,587 | $67,960 | - Net PP&E increased by $40.6 million (59.7%) from March 31, 2018, to March 30, 2019, largely due to the Exchange[360] - Depreciation expense was $11.3 million in fiscal 2019, up from $7.8 million in fiscal 2018[359] - At March 30, 2019, the company owned five idle manufacturing facilities and two idle retail sales centers with a net book value of $9.6 million[322] 7. Goodwill and Intangible Assets Goodwill increased to $173.4 million and amortizable intangible assets to $48.9 million at March 30, 2019, primarily due to the Exchange; amortization expense was $4.8 million in fiscal 2019 Goodwill and Amortizable Intangible Assets (Dollars in thousands) | Metric | March 30, 2019 | March 31, 2018 | | :-------------------------------- | :------------- | :------------- | | Goodwill | $173,406 | $3,179 | | Amortizable intangibles, net | $48,936 | $1,542 | | Weighted average remaining amortization period (years) | 8.0 | 5.4 | - The increase in goodwill and intangible assets is primarily a result of the preliminary estimate recognized in the Exchange[361][362] - Amortization expense for intangible assets was $4.8 million in fiscal 2019, significantly up from $0.5 million in fiscal 2018[363] 8. Other Current Liabilities Total other current liabilities increased to $129.6 million at March 30, 2019, primarily due to higher customer deposits, accrued rebates, warranty obligations, and compensation Components of Other Current Liabilities (Dollars in thousands) | Component | March 30, 2019 | March 31, 2018 | | :---------------------------------------- | :------------- | :------------- | | Customer deposits and receipts in excess of revenues | $28,392 | $24,557 | | Accrued volume rebates | $21,020 | $17,037 | | Accrued warranty obligations | $17,886 | $12,530 | | Accrued compensation and payroll taxes | $32,075 | $24,100 | | Accrued insurance | $16,245 | $11,112 | | Other | $13,943 | $10,776 | | Total other current liabilities | $129,561 | $100,112 | - Total other current liabilities increased by $29.4 million (29.4%) from March 31, 2018, to March 30, 2019[364] 9. Accrued Warranty Obligations Accrued warranty obligations increased to $23.3 million at March 30, 2019, due to assumed warranty and expense, partially offset by cash payments Changes in Accrued Warranty Obligations (Dollars in thousands) | Metric | FY2019 | FY2018 | | :-------------------------------- | :----- | :----- | | Balance at the beginning of the period | $15,430 | $14,534 | | Warranty assumed in the Exchange | $6,259 | $— | | Warranty expense | $37,298 | $23,855 | | Cash warranty payments | $(35,641) | $(22,959) | | Balance at end of period | $23,346 | $15,430 | - Accrued warranty obligations increased by $7.9 million (51.3%) from March 31, 2018, to March 30, 2019[365] 10. Debt and Floor Plan Payable Long-term debt decreased to $54.3 million at March 30, 2019, including a $100.0 million revolving credit facility; floor plan payable increased to $33.3 million Long-term Debt (Dollars in thousands) | Debt Type | March 30, 2019 | March 31, 2018 | | :-------------------------------- | :------------- | :------------- | | Revolving credit facility maturing in 2023 | $41,900 | $— | | Obligations under industrial revenue bonds due 2029 | $12,430 | $12,430 | | Term Loans due March 2020 | $— | $46,897 | | Total debt | $54,330 | $59,331 | - The company entered into a new $100.0 million revolving credit facility on June 5, 2018, replacing existing term loans and a cash-collateralized letter of credit facility[367] - As of March 30, 2019, $41.9 million was outstanding under the revolving credit facility, with $37.1 million available to borrow[368] - Floor plan payable for retail operations increased to $33.3 million at March 30, 2019, from $29.8 million at March 31, 2018, with financing arrangements allowing borrowings up to $47.0 million[373] 11. Revenue Recognition Revenue is recognized upon transfer of control for products or over time for long-term contracts; disaggregated by U.S. and Canadian Factory-Built Housing and Corporate/Other segments - Revenue for sales to independent retailers and builders/developers is recognized when wholesale financing is approved, the home is shipped, and title has transferred[375] - Retail sales to consumers are recognized when the home is delivered, set up, accepted, and title has transferred, with funds received from the finance company or buyer[376] - Commercial revenue for long-term construction contracts is recognized over time using the percentage-of-completion method[377] Disaggregated Revenue by Sales Category (Dollars in thousands) | Sales Category | FY2019 | FY2018 | FY2017 | | :----------------------- | :----- | :----- | :----- | | U.S. Factory-Built Housing | | | | | Manufacturing and retail | $1,166,245 | $841,354 | $660,984 | | Commercial | $11,442 | $19,134 | $17,312 | | Canadian Factory-built Housing | | | | | Manufacturing and retail | $98,567 | $96,603 | $92,631 | | Corporate/Other | | | | | Transportation | $83,789 | $107,631 | $90,392 | | Total | $1,360,043 | $1,064,722 | $861,319 | 12. Income Taxes Fiscal 2019 income tax expense was $16.9 million, with an effective rate of (40.9%), influenced by non-deductible expenses; deferred tax assets increased to $60.9 million Income Tax Expense (Benefit) (Dollars in thousands) | Metric | FY2019 | FY2018 | FY2017 | | :-------------------------------- | :----- | :----- | :----- | | Total income tax expense (benefit) | $16,905 | $27,316 | $(23,321) | | Effective tax rate | (40.9%) | 63.4% | (83.3%) | - The effective tax rate for fiscal 2019 was (40.9%), differing from the federal statutory rate due to non-deductible expenses from the Exchange, state/local taxes, and foreign results[156] - The Tax Cuts and Jobs Act (2017) reduced the corporate income tax rate from 35% to 21%, leading to a provisional $9.4 million U.S. federal income tax expense in fiscal 2018 for deferred tax re-measurement[381][383] Deferred Tax Assets and Liabilities (Dollars in thousands) | Component | March 30, 2019 | March 31, 2018 | | :-------------------------------- | :------------- | :------------- | | Gross deferred tax assets | $60,910 | $37,853 | | Gross deferred tax liabilities | $22,981 | $4,504 | | Valuation allowance | $(7,293) | $(6,353) | | Net deferred tax assets | $30,636 | $26,996 | - As of March 30, 2019, the company has U.S. federal NOL carryforwards of $67.7 million and state NOL carryforwards in various jurisdictions[388] 13. Equity-Based Compensation Equity-based compensation expense surged to $102.0 million in fiscal 2019, primarily due to a $95.1 million incremental fair value from modified restricted share awards related to the Exchange Equity-Based Compensation Expense (Dollars in thousands) | Fiscal Year | Expense | | :---------- | :------ | | 2019 | $102,000 | | 2018 | $600 | | 2017 | $600 | - The significant increase in fiscal 2019 expense includes $6.0 million related to former Skyline employees and $95.1 million from the incremental fair value of modified restricted share awards that vested due to public offerings[343][392] - The company's 2018 Equity Incentive Plan allows for grants of options, stock appreciation rights, restricted stock/units, and performance awards[392] - Total unrecognized equity-based compensation was $8.4 million at March 30, 2019, with $6.1 million expected to be recognized in fiscal 2020[391] Weighted-Average Grant Date Fair Value for Awards Granted in FY2019 | Award Type | Weighted Average Grant Date Fair Value Per Share/Unit | | :---------------------- | :---------------------------------------------------- | | Options | $3.93 | | Performance Share Units | $3.62 | | Restricted Share Units | $14.24 | | Restricted Share Awards | $29.77 | 14. Earnings Per Share Basic and diluted EPS are computed using the two-class method; fiscal 2019 basic and diluted EPS from continuing operations was $(1.09), reflecting the net loss - Basic and diluted net (loss) income per share are computed using the two-class method, as the company's time-vesting and performance-vesting restricted share awards are considered participating securities[399] - All common stock outstanding amounts are calculated as if the Shares Issuance occurred on April 3, 2016[399] Basic and Diluted Earnings Per Share (Dollars and shares in thousands, except per share data) | Metric | FY2019 | FY2018 | FY2017 | | :---------------------------------------- | :----- | :----- | :----- | | Net (loss) income from continuing operations | $(58,208) | $15,800 | $51,327 | | Basic weighted average shares outstanding | 53,491 | 44,491 | 44,489 | | Diluted weighted average shares outstanding | 53,491 | 44,491 | 44,489 | | Basic net (loss) income per share | $(1.09) | $0.33 | $1.09 | | Diluted net (loss) income per share | $(1.09) | $0.33 | $1.09 | - Securities that could potentially dilute basic EPS in the future but were considered antidilutive in fiscal 2019 include 146 thousand options, 158 thousand restricted share units, and 146 thousand performance share units, totaling 450 thousand dilutive securities[401] 15. Retirement Plans The company sponsors defined contribution savings plans for U.S. and Canadian employees, with U.S. matching 50% of the first 6% of pay, incurring $0.6 million in expense for both in fiscal 2019 - The U.S. subsidiary sponsors a defined contribution savings plan, matching 50% of the first 6% of pay contributed, with an expense of $0.6 million in fiscal 2019[402] - Canadian subsidiaries also have employer-sponsored defined contribution plans, with expenses of $0.6 million in fiscal 2019[403] 16. Transactions with Related Parties Prior to the Exchange, the company incurred $0.3 million in management fees with Principal Shareholders; post-Exchange, it entered into registration and investor rights agreements with them and a transition services agreement with Champion Holdings - Prior to the Exchange, the company had a Management Advisory Services Agreement with Principal Shareholders, incurring $0.3 million in management fee expense in **fiscal 2019