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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 June 29, 2019

or

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

For the transition period from                      to                     

Commission file number: 001-04714

 

Skyline Champion Corporation

(Exact name of registrant as specified in its charter)

 

Indiana

 

35-1038277

(State of Incorporation)

 

(I.R.S. Employer Identification No.)

P.O. Box 743

 

 

2520 By-Pass Road

 

 

Elkhart, Indiana

 

46515

(Address of Principal Executive Offices)

 

(Zip Code)

 

(574) 294-6521

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common Stock

 

SKY

 

New York Stock Exchange

 

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes   No

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

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [

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

Number of shares of common stock outstanding as of July 29, 2019: 56,720,715

 

 

 

 


 

SKYLINE CHAMPION CORPORATION

FORM 10-Q

 

TABLE OF CONTENTS

 

PART I – FINANCIAL INFORMATION

 

 

 

Item 1. Financial Statements

 

Condensed Consolidated Balance Sheets as of June 29, 2019 (unaudited) and March 30, 2019

1

Condensed Consolidated Statements of Operations (unaudited) for the three months ended June 29, 2019 and June 30, 2018

2

Condensed Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the three months ended June 29, 2019 and June 30,2018

3

Condensed Consolidated Statements of Cash Flows (unaudited) for the three months ended June 29, 2019 and June 30, 2018

4

Condensed Consolidated Statements of Stockholders’ Equity (unaudited) for the three months ended June 29, 2019 and June 30, 2018

5

Notes to Condensed Consolidated Financial Statements

6

 

 

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

16

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

24

 

 

Item 4. Controls and Procedures

24

 

 

PART II – OTHER INFORMATION

 

 

 

Item 1. Legal Proceedings

25

 

 

Item 1A. Risk Factors

25

 

 

Item 6. Exhibits

26

 

 

SIGNATURES

27

 

 

 

i


 

PART I - FINANCIAL INFORMATION

Item 1.

Financial Statements

Skyline Champion Corporation

Condensed Consolidated Balance Sheets

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

 

 

 

June 29,

2019

 

 

March 30,

2019

 

 

 

(unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

143,647

 

 

$

126,634

 

Trade accounts receivable, net

 

 

57,692

 

 

 

57,649

 

Inventories

 

 

113,190

 

 

 

122,638

 

Other current assets

 

 

14,078

 

 

 

11,369

 

Total current assets

 

 

328,607

 

 

 

318,290

 

Long-term assets:

 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

 

110,236

 

 

 

108,587

 

Goodwill

 

 

173,521

 

 

 

173,406

 

Amortizable intangible assets, net

 

 

47,421

 

 

 

48,936

 

Deferred tax assets

 

 

32,948

 

 

 

34,058

 

Other noncurrent assets

 

 

29,758

 

 

 

16,677

 

Total assets

 

$

722,491

 

 

$

699,954

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Floor plan payable

 

$

32,668

 

 

$

33,321

 

Accounts payable

 

 

45,037

 

 

 

43,421

 

Other current liabilities

 

 

126,771

 

 

 

129,561

 

Total current liabilities

 

 

204,476

 

 

 

206,303

 

Long-term liabilities:

 

 

 

 

 

 

 

 

Long-term debt

 

 

49,330

 

 

 

54,330

 

Deferred tax liabilities

 

 

3,581

 

 

 

3,422

 

Other

 

 

32,936

 

 

 

23,927

 

Total long-term liabilities

 

 

85,847

 

 

 

81,679

 

 

 

 

 

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

 

 

 

Common stock, $0.0277 par value, 115,000 shares authorized, 56,657 shares issued as of both June 29, 2019 and March 30, 2019 (including 290 shares subject to restriction)

 

 

1,569

 

 

 

1,569

 

Additional paid-in capital

 

 

481,143

 

 

 

479,226

 

Accumulated deficit

 

 

(40,828

)

 

 

(58,208

)

Accumulated other comprehensive loss

 

 

(9,716

)

 

 

(10,615

)

Total stockholders’ equity

 

 

432,168

 

 

 

411,972

 

Total liabilities and stockholders’ equity

 

$

722,491

 

 

$

699,954

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

1


 

Skyline Champion Corporation

Condensed Consolidated Statements of Operations

(Unaudited, dollars in thousands, except per share amounts)

 

 

 

Three Months Ended

 

 

 

June 29,

2019

 

 

June 30,

2018

 

Net sales

 

$

371,888

 

 

$

322,261

 

Cost of sales

 

 

295,853

 

 

 

267,101

 

Gross profit

 

 

76,035

 

 

 

55,160

 

Selling, general, and administrative expenses

 

 

51,715

 

 

 

45,088

 

Operating income

 

 

24,320

 

 

 

10,072

 

Interest expense, net

 

 

309

 

 

 

1,072

 

Other expense

 

 

 

 

 

6,413

 

Income before income taxes

 

 

24,011

 

 

 

2,587

 

Income tax expense

 

 

6,631

 

 

 

3,440

 

Net income (loss)

 

$

17,380

 

 

$

(853

)

Net income (loss) per share:

 

 

 

 

 

 

 

 

Basic

 

$

0.31

 

 

$

(0.02

)

Diluted

 

$

0.31

 

 

$

(0.02

)

 

See accompanying Notes to Condensed Consolidated Financial Statements.

2


 

Skyline Champion Corporation

Condensed Consolidated Statements of Comprehensive Income (Loss)

(Unaudited, dollars in thousands, except per share amounts)

 

 

 

Three Months Ended

 

 

 

June 29,

2019

 

 

June 30,

2018

 

Net income (loss)

 

$

17,380

 

 

$

(853

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

899

 

 

 

(695

)

Total comprehensive income (loss)

 

$

18,279

 

 

$

(1,548

)

 

See accompanying Notes to Condensed Consolidated Financial Statements.

3


 

Skyline Champion Corporation

Condensed Consolidated Statements of Cash Flows

(Unaudited, dollars in thousands)

 

 

 

Three Months Ended

 

 

 

June 29,

2019

 

 

June 30,

2018

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net income (loss)

 

$

17,380

 

 

$

(853

)

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

 

 

 

 

 

 

 

 

Depreciation

 

 

3,110

 

 

 

2,430

 

Amortization of intangible assets

 

 

1,362

 

 

 

481

 

Amortization of deferred financing fees

 

 

131

 

 

 

159

 

Fair market value adjustment for asset classified as held for sale

 

 

986

 

 

 

 

Equity-based compensation

 

 

1,917

 

 

 

8,088

 

Deferred taxes

 

 

1,545

 

 

 

1,251

 

Gain on disposal of property, plant and equipment

 

 

(12

)

 

 

(1

)

Foreign currency transaction (gain) loss

 

 

(72

)

 

 

67

 

Change in assets and liabilities net of business acquired:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

55

 

 

 

(178

)

Inventories

 

 

9,786

 

 

 

2,648

 

Accounts payable

 

 

1,568

 

 

 

(3,306

)

Prepaids and other assets

 

 

(3,706

)

 

 

(1,615

)

Accrued expenses and other liabilities

 

 

(7,270

)

 

 

(4,906

)

Net cash provided by operating activities

 

 

26,780

 

 

 

4,265

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Additions to property, plant, and equipment

 

 

(4,526

)

 

 

(2,020

)

Cash acquired in business acquisition

 

 

 

 

 

9,722

 

Proceeds from disposal of property, plant and equipment

 

 

12

 

 

 

1

 

Decrease in note receivable

 

 

 

 

 

35

 

Net cash (used in) provided by investing activities

 

 

(4,514

)

 

 

7,738

 

Cash flows from financing activities

 

 

 

 

 

 

 

 

Changes in floor plan financing, net

 

 

(653

)

 

 

(325

)

Borrowings on revolving debt facility

 

 

 

 

 

46,900

 

Payments on revolving debt facility

 

 

(5,000

)

 

 

 

Payments on term-loans and other debt

 

 

 

 

 

(46,900

)

Payments for deferred financing fees

 

 

 

 

 

(1,900

)

Members' capital distribution

 

 

 

 

 

(65,277

)

Net cash used in financing activities

 

 

(5,653

)

 

 

(67,502

)

Effect of exchange rate changes on cash, cash equivalents and restricted cash

 

 

400

 

 

 

(226

)

Net increase (decrease) in cash, cash equivalents and restricted cash

 

 

17,013

 

 

 

(55,725

)

Cash, cash equivalents and restricted cash at beginning of period

 

 

126,634

 

 

 

136,616

 

Cash, cash equivalents and restricted cash at end of period

 

$

143,647

 

 

$

80,891

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

 

4


Skyline Champion Corporation

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited, dollars and shares in thousands)

 

 

 

 

For the Three Months Ended June 29, 2019

 

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Members'

Contributed

Capital

 

 

Additional

Paid in

Capital

 

 

Retained

Earnings

(Accumulated

Deficit)

 

 

Accumulated

Other

Comprehensive

Loss

 

 

Total

 

Balance at March 30, 2019

 

 

56,657

 

 

$

1,569

 

 

$

 

 

$

479,226

 

 

$

(58,208

)

 

$

(10,615

)

 

$

411,972

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

17,380

 

 

 

 

 

 

17,380

 

Equity-based compensation

 

 

 

 

 

 

 

 

 

 

 

1,917

 

 

 

 

 

 

 

 

 

1,917

 

Foreign currency translation adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

899

 

 

 

899

 

Balance at June 29, 2019

 

 

56,657

 

 

$

1,569

 

 

$

 

 

$

481,143

 

 

$

(40,828

)

 

$

(9,716

)

 

$

432,168

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended June 30, 2018

 

 

 

Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Members'

Contributed

Capital

 

 

Additional

Paid in

Capital

 

 

Retained

Earnings

(Accumulated

Deficit)

 

 

Accumulated

Other

Comprehensive

Loss

 

 

Total

 

Balance at March 31, 2018

 

 

 

 

$

 

 

$

140,076

 

 

$

 

 

$

22,514

 

 

$

(9,293

)

 

$

153,297

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(853

)

 

 

 

 

 

(853

)

Members' capital distributions

 

 

 

 

 

 

 

 

(42,763

)

 

 

 

 

 

 

(22,514

)

 

 

 

 

 

(65,277

)

Exchange of membership interest for shares of Skyline Champion Corporation

 

 

56,143

 

 

 

1,555

 

 

 

(97,313

)

 

 

380,923

 

 

 

 

 

 

 

 

 

285,165

 

Equity-based compensation

 

 

45

 

 

 

1

 

 

 

 

 

 

7,931

 

 

 

 

 

 

 

 

 

7,932

 

Foreign currency translation adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(695

)

 

 

(695

)

Balance at June 30, 2018

 

 

56,188

 

 

$

1,556

 

 

$

 

 

$

388,854

 

 

$

(853

)

 

$

(9,988

)

 

$

379,569

 

 

Components of accumulated other comprehensive loss consisted solely of foreign currency translation adjustments.

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

5


Skyline Champion Corporation

Notes to Condensed Consolidated Financial Statements

 

1.

Basis of Presentation and Business

On June 1, 2018, Skyline Champion Corporation (formerly known as Skyline Corporation), an Indiana corporation (the “Company”) and Champion Enterprises Holdings, LLC (“Champion Holdings”) completed the transactions contemplated by the Share Contribution & Exchange Agreement (the “Exchange Agreement”), dated as of January 5, 2018, by and between the Company and Champion Holdings. Under the Exchange Agreement, (i) Champion Holdings contributed to the Company all of the issued and outstanding equity interests of each of Champion Holdings’ wholly-owned operating subsidiaries (the “Contributed Shares”), and (ii) in exchange for the Contributed Shares, the Company issued to the members of Champion Holdings, in the aggregate, 47,752,008 shares of the Company common stock (“Skyline Common Stock”) (such issuance, the “Shares Issuance”). Immediately following the Shares Issuance, the members of Champion Holdings collectively held 84.5%, and the Company’s pre-closing shareholders collectively held 15.5%, of the issued and outstanding Skyline Common Stock on a fully-diluted basis. The contribution of the Contributed Shares by Champion Holdings to Skyline, and the Shares Issuance by the Company to the members of Champion Holdings are collectively referred to herein as the “Exchange.”

The Exchange was treated as a purchase of the Company by Champion Holdings for accounting and financial reporting purposes. As a result, the financial results for the three months ending June 30, 2018 are comprised of 1) the results of Champion Holdings for the period between April 1, 2018 and May 31, 2018 and 2) the Company, after giving effect to the Exchange, from June 1, 2018 through June 30, 2018.

The accompanying unaudited condensed consolidated financial statements of the Company, have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for Quarterly Reports on Form 10-Q and Article 10 of SEC Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with United States Generally Accepted Accounting Principles (“U.S. GAAP”) have been condensed or omitted pursuant to such rules and regulations.

The condensed consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries after elimination of intercompany balances and transactions. In the opinion of management, these statements include all normal recurring adjustments necessary to fairly state the Company’s consolidated results of operations, cash flows and financial position. The Company has evaluated subsequent events after the balance sheet date through the date of the filing of this report with the SEC. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes to the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K, which was filed with the SEC on May 23, 2019.

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and the accompanying notes thereto. Actual results could differ from those estimates. The condensed consolidated statements of comprehensive income (loss) and condensed consolidated statements of cash flows for the interim periods are not necessarily indicative of the results of operations or cash flows for the full year.

The Company’s fiscal year is a 52- or 53-week period that ends on the Saturday nearest to March 31. The Company’s current fiscal year, “fiscal 2020”, will end on March 28, 2020. References to “fiscal 2019” refer to the Company’s fiscal year ended March 30, 2019. The three months ended June 29, 2019 and June 30, 2018 each included 13 weeks.  

The Company’s operations consist of manufacturing, retail and transportation activities. The Company operates 33 manufacturing facilities throughout the United States (“U.S.”) and five manufacturing facilities in western Canada that primarily construct factory-built, timber-framed manufactured and modular houses that are sold primarily to independent retailers and builders/developers. The Company’s retail operations consist of 21 sales centers that sell manufactured houses to consumers primarily in the Southern U.S. The Company’s transportation business engages independent owners/drivers to transport recreational vehicles throughout the U.S. and Canada and manufactured houses in certain regions of the U.S.

Recently Adopted Accounting Pronouncements: In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842) (“ASC 842”), to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. A lessee should recognize in the consolidated balance sheet a liability to make lease payments (the lease liability) and an asset representing its right to use the underlying asset for the lease term. The recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee have not significantly changed from previous requirements. This ASC 842 is effective for fiscal years beginning after December 31, 2018 and modified retrospective application is permitted.

The Company adopted ASC 842 as of March 31, 2019, the first day of fiscal 2020 using the modified retrospective approach and without restating comparative periods. The Company has elected to apply the transition package of three practical expedients which allow companies not to reassess whether agreements contain leases, the classification of leases, and the capitalization of initial direct costs. The Company did not elect the practical expedient which permits the use of hindsight when determining the lease term and assessing right-of-use assets for impairment. As permitted by the standard, the Company elected to: 1) recognize lease expense for leases with a term of 12 months or less on a straight-line basis over the lease term and will not recognize any right of use assets or lease liabilities for those leases, and 2) not separate lease and non-lease components.

 

6


Skyline Champion Corporation

Notes to Condensed Consolidated Financial Statements - Continued

 

The primary financial statement impact upon adoption was the recognition, on a discounted basis, of the Company's minimum commitments under non-cancelable operating leases as right of use assets and obligations on the consolidated balance sheets. The adoption of ASC 842 resulted in the recognition of lease-related assets and liabilities of $13.7 million. The standard did not have a material impact on the Company's results of operations or cash flows.

Recently Issued Accounting Pronouncements Pending Adoption: In January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The standard simplifies the accounting for goodwill impairments and allows a goodwill impairment charge to be based on the amount of a reporting unit’s carrying value in excess of its fair value. This eliminates the requirement to calculate the implied fair value of goodwill or what is known as “Step 2” under the current guidance. This guidance is effective for annual and interim periods of public entities beginning after December 15, 2019, with early adoption permitted. The Company is currently assessing the potential impact this ASU will have on its consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This guidance requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. This guidance also requires enhanced disclosures regarding significant estimates and judgments used in estimating credit losses. The new guidance is effective for fiscal years beginning after December 15, 2019. Early adoption is permitted for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company is currently evaluating the impact that the adoption of this guidance will have on its consolidated financial statements.

There were no other accounting standards recently issued that are expected to have a material impact on the Company’s financial position or results of operations.

2.

Business Combination

The Exchange was completed on June 1, 2018 and was accounted for as a reverse acquisition under the acquisition method of accounting as provided by the FASB Accounting Standards Codification 805, Business Combinations. Champion Holdings was deemed to be the acquirer for accounting and financial reporting purposes. The assets acquired and liabilities assumed as a result of the Exchange were recorded at their respective fair values and added to the carrying value of Champion Holdings’ existing assets and liabilities. The Company incurred acquisition-related costs of approximately $6.4 million for the three months ended June 30, 2018 which was classified as other expense in the condensed consolidated statements of operations. Additionally, the Company incurred approximately $6.0 million in stock compensation expense related to former Skyline employees during the three months ended June 30, 2018, which is recorded in selling, general and administrative expenses in the condensed consolidated statements of operations. These types of costs were not incurred in the three months ended June 29, 2019.

The purchase price of the acquisition was determined with reference to the value of equity (common stock) of the Company based on the closing price on June 1, 2018 of $33.39 per share. The purchase price has been allocated to the assets acquired and liabilities assumed using their estimated fair values at June 1, 2018, the closing of the Exchange. The purchase price and the allocation have been used to prepare the accompanying condensed consolidated financial statements.

The purchase price was allocated as follows:

 

(Dollars in thousands)

 

Allocation at

March 30, 2019

 

 

Changes to

Allocation

 

 

Final Allocation at June 29, 2019

 

Cash

 

$

9,722

 

 

$

 

 

$

9,722

 

Trade accounts receivable

 

 

13,876

 

 

 

 

 

 

13,876

 

Inventory

 

 

19,028

 

 

 

 

 

 

19,028

 

Assets held for sale

 

 

2,086

 

 

 

 

 

 

2,086

 

Property, plant and equipment

 

 

40,220

 

 

 

 

 

 

40,220

 

Deferred tax assets, net

 

 

6,996

 

 

 

38

 

 

 

7,034

 

Other assets

 

 

6,706

 

 

 

 

 

 

6,706

 

Accounts payable and accrued liabilities

 

 

(36,027

)

 

 

 

 

 

(36,027

)

Intangibles

 

 

52,218

 

 

 

(153

)

 

 

52,065

 

Goodwill

 

 

170,227

 

 

 

115

 

 

 

170,342

 

Total purchase price allocation

 

$

285,052

 

 

$

 

 

$

285,052

 

 

Goodwill is primarily attributable to expected synergies from the combination of the companies, including, but not limited to, expected cost synergies through procurement activities and operational improvements through sharing of best practices. Goodwill, which is not deductible for income tax purposes, was allocated to the U.S. Factory-built Housing reporting unit.

Cash, trade receivables, other assets, accounts payable, accrued and other liabilities were generally stated at historical carrying values given the short-term nature of these assets and liabilities. Intangible assets consist primarily of amounts recognized for the fair value of customer relationships and trade names and were based on an independent appraisal. Customer-based assets include the Company’s established relationships with its customers and the ability of those customers to generate future economic profits for the Company. The Company estimates that these intangible assets have a weighted average useful life of ten years. Fair value estimates of property, plant, and equipment were based on independent appraisals and broker opinions of value, giving consideration to the highest and best use of the assets. Key assumptions used in the

7


Skyline Champion Corporation

Notes to Condensed Consolidated Financial Statements - Continued

 

appraisals were based on a combination of market and cost approaches, as appropriate. Level 3 fair value estimates of $40.2 million related to property, plant and equipment and $52.1 million related to intangible assets were recorded in the accompanying condensed consolidated balance sheet as of June 29, 2019. The Company determined $2.1 million of property acquired in the Exchange met the definition of held for sale at the acquisition date and was classified in other current assets. The fair value less cost to sell of this held for sale property is evaluated each reporting period to determine if it has changed. A loss of $1.0 million was recorded during the three months ended June 29, 2019 related to this held for sale property based on updated market information. Assets held for sale were $1.1 million and $2.1 million as of June 29, 2019 and March 30, 2019, respectively. For further information on acquired assets measured at fair value, see Note 5, Goodwill and Intangible Assets.

 

The Company allocated a portion of the purchase price to certain realizable deferred tax assets totaling $27.3 million. Deferred tax assets are primarily federal and state net operating loss carryforwards and credits offset by a valuation allowance for certain state net operating loss carryforwards that are not expected to be realized. The deferred tax assets are offset by deferred tax liabilities of $20.3 million resulting from the purchase price allocation step-up in fair value that exceed the historical tax basis.

The statement of operations for the three months ended June 30, 2018 includes $22.1 million of net sales attributable to the acquired Skyline operations.

A summary of the results of operations for the Company, on an as reported and on a pro forma basis, are as follows:

 

 

 

Three Months Ended

June 30, 2018

 

(Dollars in thousands)

 

Reported

 

 

Pro forma

 

Net sales

 

$

322,261

 

 

$

368,065

 

Net (loss) income

 

 

(853

)

 

 

14,256

 

 

The pro forma results are based on adding the historical results of operations of Champion Holdings and Skyline and adjusting those historical amounts for the amortization of intangibles created in the Exchange; the increase in depreciation as a result of the step-up in fair value of property, plant and equipment; removing transaction costs directly associated with the Exchange; removing equity-based compensation expense directly resulting from the Exchange; reflecting the financing arrangements entered into in connection with the Exchange, and adjusting those items for income taxes. The pro forma disclosures do not give effect to the potential impact of current financial conditions, any anticipated synergies, operating efficiencies or cost savings that may result from the Exchange or any integration costs. The pro forma data is intended for informational purposes and is not indicative of the future results of operations.

The Exchange Agreement provided that Champion Holdings was permitted to pay a capital distribution prior to completion of the Exchange to the extent it had cash in excess of debt and other debt-like items and unpaid Exchange fees and expenses. Prior to the completion of the Exchange, Champion Holdings made a capital distribution to its members equal to an aggregate of $65.3 million (of which $22.5 million was reflected as a reduction to retained earnings and $42.8 million was reflected as a reduction to members’ contributed capital).

 

3.

Inventories

The components of net inventory, including inventory for the Company’s manufacturing and retail operations, were as follows:

 

(Dollars in thousands)

 

June 29,

2019

 

 

March 30,

2019

 

Raw materials

 

$

46,660

 

 

$

48,531

 

Work in process

 

 

13,549

 

 

 

13,973

 

Finished goods and other

 

 

52,981

 

 

 

60,134

 

Total inventories

 

$

113,190

 

 

$

122,638

 

 

At both June 29, 2019 and March 30, 2019, reserves for obsolete inventory were $4.1 million.

 

 

4.

Property, Plant, and Equipment

Property, plant and equipment are stated at cost. Depreciation is calculated primarily on the straight-line method, generally over the following estimated useful lives: land improvements – 3 to 10 years; buildings and improvements – 8 to 25 years; and vehicles and machinery and equipment – 3 to 8 years. Depreciation expense for the three months ended June 29, 2019 and June 30, 2018 was $3.1 million and $2.4 million, respectively.   

8


Skyline Champion Corporation

Notes to Condensed Consolidated Financial Statements - Continued

 

The components of property, plant, and equipment were as follows:

 

(Dollars in thousands)

 

June 29,

2019

 

 

March 30,

2019

 

Land and improvements

 

$

34,412

 

 

$

34,264

 

Buildings and improvements

 

 

84,958

 

 

 

83,973

 

Machinery and equipment

 

 

43,195

 

 

 

42,476

 

Construction in progress

 

 

6,668

 

 

 

3,619

 

Property, plant and equipment, at cost

 

 

169,233

 

 

 

164,332

 

Less: accumulated depreciation

 

 

(58,997

)

 

 

(55,745

)

Property, plant, and equipment, net

 

$

110,236

 

 

$

108,587

 

 

5.

Goodwill and Intangible Assets

Goodwill

Goodwill represents the excess of the cost of an acquired business over the fair value of the identifiable tangible and intangible assets acquired and liabilities assumed in a business combination. At June 29, 2019 and March 30, 2019, the Company had goodwill of $173.5 million and $173.4 million, respectively. The change during the three months ended June 29, 2019 was a result of the finalization of the allocation of net assets recognized in connection with the Exchange.

Intangible Assets

The components of amortizable intangible assets were as follows:

 

(Dollars in thousands)

 

June 29, 2019

 

 

March 30, 2019

 

 

 

Customer

Relationships

 

 

Trade

Names

 

 

Total

 

 

Customer

Relationships

 

 

Trade

Names

 

 

Total

 

Gross carrying amount

 

$

48,740

 

 

$

13,218

 

 

$

61,958

 

 

$

48,782

 

 

$

13,173

 

 

$

61,955

 

Accumulated amortization

 

 

(10,251

)

 

 

(4,286

)

 

 

(14,537

)

 

 

(9,052

)

 

 

(3,967

)

 

 

(13,019

)

Amortizable intangibles, net

 

$

38,489

 

 

$

8,932

 

 

$

47,421

 

 

$

39,730

 

 

$

9,206

 

 

$

48,936

 

 

The Company recognized finite-lived intangibles for customer relationships of $43.1 million and trade names of $9.0 million as a result of the allocation of the purchase price from the Exchange. The fair value of the customer relationship intangible asset was estimated using the multi-period excess earnings method of the income approach. The fair value of the customer relationship intangible asset was determined based on estimates and assumptions of projected cash flows attributable to the acquired customer relationships, the annual attrition rate of existing customer relationships, the contributory asset charges attributable to the assets that support the customer relationships, such as net working capital, property, plant and equipment, trade name, and workforce, the economic life and the discount rate as determined at the time of the final valuation. The fair value of the trade name intangible asset was estimated using the relief-from-royalty method of the income approach. The fair value of the trade names intangible asset was determined based on estimates and assumptions used for the expected life of the intangible asset, the royalty rate and the discount rate that reflects the level of risk associated with the future cash flows as determined at the time of the final valuation. During the three months ended June 29, 2019 and June 30, 2018, amortization of intangible assets was $1.4 million and $0.5 million, respectively.  

 

 

6.

Other Current Liabilities

The components of other current liabilities were as follows:

 

(Dollars in thousands)

 

June 29, 2019

 

 

March 30, 2019

 

Customer deposits and receipts in excess of revenues

 

$

24,780

 

 

$

28,392

 

Accrued volume rebates

 

 

17,561

 

 

 

21,020

 

Accrued warranty obligations

 

 

19,030

 

 

 

17,886

 

Accrued compensation and payroll taxes

 

 

25,142

 

 

 

32,075

 

Accrued insurance

 

 

18,192

 

 

 

16,245

 

Other

 

 

22,066

 

 

 

13,943

 

Total other current liabilities

 

$

126,771

 

 

$

129,561

 

 

9


Skyline Champion Corporation

Notes to Condensed Consolidated Financial Statements - Continued

 

7.

Accrued Warranty Obligations

Changes in the accrued warranty obligations were as follows:

 

 

 

Three Months Ended

 

(Dollars in thousands)

 

June 29,

2019

 

 

June 30,

2018

 

Balance at the beginning of the period

 

$

23,346

 

 

$

15,430

 

Warranty assumed in the Exchange

 

 

 

 

 

7,109

 

Warranty expense

 

 

10,530

 

 

 

7,219

 

Cash warranty payments

 

 

(9,886

)

 

 

(7,010

)

Balance at end of period

 

 

23,990

 

 

 

22,748

 

Less: noncurrent portion in other long-term liabilities

 

 

(4,960

)

 

 

(5,700

)

Total current portion

 

$

19,030

 

 

$

17,048

 

 

8.

Debt and Floor Plan Payable

Long-term debt consisted of the following:

 

(Dollars in thousands)

 

June 29, 2019

 

 

March 30, 2019

 

Revolving credit facility maturing in 2023

 

$

36,900

 

 

$

41,900

 

Obligations under industrial revenue bonds due 2029

 

 

12,430

 

 

 

12,430

 

Total debt

 

 

49,330