SKYLINE CHAMPION CORPORATION The following should be read in conjunction withSkyline Champion Corporation's condensed consolidated financial statements and the related notes that appear in Item 1 of this Report. OverviewSkyline Champion Corporation (the "Company") is a leading producer of factory-built housing in theU.S. andCanada . The Company serves as a complete solutions provider across complementary and vertically integrated businesses including manufactured offsite construction, company-owned retail locations, and transportation logistics services. The Company is the largest independent publicly traded factory-built solutions provider inNorth America (based on revenue) and markets its homes under several nationally recognized brand names includingSkyline Homes ,Champion Home Builders ,Genesis Homes ,Athens Park Models,Dutch Housing ,Excel Homes , Homes of Merit, New Era,Redman Homes ,ScotBilt Homes ,Shore Park , Silvercrest, andTitan Homes in theU.S. , andModuline and SRI Homes in westernCanada . The Company operates 35 manufacturing facilities throughout theU.S. and five manufacturing facilities in westernCanada that primarily construct factory-built, timber-framed, manufactured and modular houses that are sold mainly to independent retailers, builders/developers, and manufactured home community operators. The Company's retail operations consist of 18 sales centers that sell manufactured homes to consumers primarily in the southernU.S. The Company's transportation business engages independent owners/drivers to transport manufactured homes, recreational vehicles, and other products throughout theU.S. andCanada . Industry and Company Outlook SinceJuly 2020 ,U.S. and Canadian housing industry demand has been robust. The limited availability of existing homes for sale and the broader need for newly built affordable, single-family housing has continued to drive demand for new homes in these markets. In recent years, manufactured home construction experienced revenue growth due to a number of favorable demographic trends and demand drivers inthe United States , including underlying growth trends in key homebuyer groups, such as the population over 55 years of age, the population of first-time home buyers, and the population of households earning less than$60,000 per year. We have also seen a number of market trends pointing to increased sales of accessory dwelling units and urban-to-rural migration as customers accommodate working-from-home patterns, as well as people seeking rent-to-own single-family options. The robust demand environment has resulted in backlog of$1,369 million as ofOctober 2, 2021 compared to$390.1 million as ofSeptember 26, 2020 . Generally higher backlog at our manufacturing facilities creates an opportunity to increase production efficiencies. Although the higher demand brings opportunities, it also has resulted in significant increases in certain material input costs, most significantly forest products for much of fiscal 2022. In addition, we are also experiencing supply disruption, higher freight costs and fluctuating prices for many of our other material inputs. Finding and retaining qualified labor continues to be a challenge for our plants which requires us to review our compensation programs and adjust accordingly. We manage our business to anticipate or quickly react to these supply challenges and cost increases and generally are able to pass along increased costs to our customers. Historically, order cancellation rates have been very low, but the longer lead-time caused by larger backlogs and changing prices could result in cancellations in future periods. For the six months endedOctober 2, 2021 , approximately 77% of the Company'sU.S. manufacturing sales were generated from the manufacture of homes that comply with theU.S. Department of Housing and Urban Development ("HUD") code construction standard in theU.S. Industry shipments of HUD-code homes are reported on a one-month lag. According to data reported by theManufactured Housing Institute ("MHI"), HUD-code industry home shipments were 43,949 and 36,312 units during the five months endedAugust 31, 2021 and 2020, respectively. Based on industry data, the Company'sU.S. wholesale market share of HUD code homes sold was 19.5% and 15.6%, for the five months endedAugust 31, 2021 and 2020, respectively. Annual shipments have generally increased each year since calendar year 2009 when only 50,000 HUD-coded manufactured homes were shipped, the lowest level since the industry began recording statistics in 1959. While shipments of HUD-coded manufactured homes have improved modestly in recent years, manufactured housing's most recent annual shipment levels still operate at lower levels than the long-term historical average of over 200,000 units. Acquisitions and Expansions
Over the last several years, demand for the Company's products, primarily
affordable housing in the
The Company has increased capacity through strategic acquisitions and expansions of its manufacturing operations. The Company is focused on growing in strong housing markets across theU.S. OnJune 21, 2021 , the Company acquired two idle facilities inNavasota, Texas in order to strengthen its production capabilities in theTexas market. The Company intends to initiate production in one of these facilities by the end of fiscal 2022. OnFebruary 28, 2021 , the Company acquired ScotBilt. In calendar 2020, ScotBilt shipped over 1,600 homes from its two manufacturing facilities inGeorgia providing affordable housing throughoutAlabama ,Florida ,Georgia and the Carolinas. ScotBilt has approximately 400 employees in its two 15 -------------------------------------------------------------------------------- manufacturing facilities. The Company believes ScotBilt is an excellent fit because of the compatible company cultures and because of ScotBilt's strong presence in the attractive Mid-South region, which helps to balance national distribution and complements the Company's existing manufacturing footprint. The operations of ScotBilt are included in the financial results of the Company since the date of the acquisition. OnJanuary 14, 2021 , the Company acquired two idled facilities inPembroke, North Carolina , which provides an opportunity to further expand its manufacturing footprint in the South and Southeast markets. The Company is currently assessing prospects for initiating production in one or both of these facilities. The Company's acquisitions and investments are part of a strategy to grow and diversify revenue with a focus on increasing the Company's HUD and modular homebuilding presence in theU.S. as well as improving the results of operations. These acquisitions and investments are included in the Company's consolidated results for periods subsequent to their respective acquisition dates.
COVID-19 Pandemic
The outbreak of a novel strain of coronavirus ("COVID-19") was declared a global
pandemic by the World Health Organization in March 2020 . There remains continued
uncertainty regarding the extent and duration of the impact that the COVID-19
pandemic will have on the economy, the housing market, and the Company, as well
as the Company's employees, customers, and suppliers.
The Company has prioritized the safety and well-being of its employees and
customers and has implemented standards to operate in accordance with
social-distancing protocols and public health authority guidelines. Beginning in
March 2020 , the Company took actions to temporarily idle certain facilities in
response to government shutdown orders or reduced demand. By late April 2020 ,
most of the temporarily idled manufacturing facilities had reopened, but at
reduced production levels due to employee absenteeism, difficulty hiring new
team members, and social distancing protocols. During fiscal 2021, the Company
experienced intermittent closures due to COVID-19 outbreaks at the facilities or
surrounding communities causing higher than normal absenteeism. In the second
half of fiscal 2021, the Company was able to increase daily production rates
over the levels achieved in the prior fiscal year period as direct labor
staffing levels increased and production efficiencies improved. As of October 2,
2021 , availability of labor and certain materials remain subject to disruption
and uncertainty. Prices for key raw materials have experienced increased
volatility and, overall, manufacturing costs have trended higher than prior
periods.
As part of the initial response to the pandemic, the Company offered extended
benefits to employees, including increased sick pay and waived premium payments
on healthcare benefits for furloughed employees during the first quarter of
fiscal 2021. The Company's U.S. operations incurred $1.9 million of expense
related to the extended benefits. Various government programs have been
announced to provide financial relief for affected businesses, including the
Employee Retention Credit under the Coronavirus Aid, Relief, and Economic
Security Act ("CARES Act") in the United States and the Canada Emergency Wage
Subsidy ("CEWS") under the COVID-19 Economic Response Plan in Canada . CEWS
provided a cash subsidy of up to 75% of eligible employees' remuneration,
subject to certain criteria. The Company recognized $2.6 million and $6.2
million , respectively, for payroll subsidies under CEWS during the three and six
months ended September 26, 2020 . The Company also recognized $0.6 million for
payroll subsidies under the CARES Act during the first quarter of fiscal 2021.
In addition, the CARES Act allowed for deferring payment of certain payroll
taxes. Through October 2, 2021 , the Company has deferred $11.8 million of
payroll taxes that will be paid beginning in December 2021 .
16
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UNAUDITED INCOME STATEMENTS FOR THE SECOND QUARTER OF FISCAL 2022 VS. 2021
Three months ended
October 2, September 26,
(Dollars in thousands) 2021 2020
Results of Operations Data:
Net sales $ 524,225 $ 322,366
Cost of sales 394,898 259,573
Gross profit 129,327 62,793
Selling, general, and administrative expenses 61,340 41,373
Operating income 67,987 21,420
Interest expense, net 845 864
Other income (expense) 11 (2,599 )
Income before income taxes 67,131 23,155
Income tax expense 16,408 5,644
Net income $ 50,723 $ 17,511
Reconciliation of Adjusted EBITDA:
Net income $ 50,723 $ 17,511
Income tax expense 16,408 5,644
Interest expense, net 845 864
Depreciation and amortization 5,138 4,408
Equity-based compensation (for awards granted prior to December 31, 2018) - 388 Other - 122 Adjusted EBITDA$ 73,114 $ 28,937 As a percent of net sales: Gross profit 24.7 % 19.5 % Selling, general, and administrative expenses 11.7 % 12.8 % Operating income 13.0 % 6.6 % Net income 9.7 % 5.4 % Adjusted EBITDA 13.9 % 9.0 % NET SALES
The following table summarizes net sales for the three months ended
Three months ended
October 2, September 26, $ %
(Dollars in thousands) 2021 2020 Change Change
Net sales $ 524,225 $ 322,366 $ 201,859 62.6 %
U.S. manufacturing and retail net sales $ 471,699 $ 283,360 $ 188,339 66.5 %
U.S. homes sold 5,902 4,689 1,213 25.9 %
U.S. manufacturing and retail average
home selling price $ 79.9 $ 60.4 $ 19.5 32.3 %
Canadian manufacturing net sales $ 38,501 $ 24,558 $ 13,943 56.8 %
Canadian homes sold 358 302 56 18.5 %
Canadian manufacturing average home
selling price $ 107.5 $ 81.3 $ 26.2 32.2 %
Corporate/Other net sales $ 14,025 $ 14,448 $ (423 ) (2.9 %)
U.S. manufacturing facilities in
operation at end of period 35 33
U.S. retail sales centers in operation
at end of period 18 18
Canadian manufacturing facilities in
operation at end of period 5 5
Net sales for the three months ended October 2, 2021 were $524.2 million , an
increase of $201.9 million , or 62.6%, over the three months ended September 26,
2020 . The following is a summary of the change by operating segment.
17
--------------------------------------------------------------------------------Net sales for the Company'sU.S. manufacturing and retail operations increased by$188.3 million , or 66.5%, for the three months endedOctober 2, 2021 compared to the three months endedSeptember 26, 2020 . The change was primarily due to an increase in the number of homes sold during the period of 25.9%, an increase in the average home selling price of 32.3%, and the impact of the acquisition of ScotBilt. Demand for our products has increased significantly in recent periods and we have been able to increase production in response to that demand. The average selling price increased during the period due to pricing actions enacted in response to rising material, freight, and labor costs. Generally, we are able to pass the increase in input costs along to our customers.
The Canadian Factory-built Housing segment net sales increased by$13.9 million , or 56.8% for the three months endedOctober 2, 2021 compared to the same period in the prior fiscal year, primarily due to an 18.5% increase in the number of homes sold and a 32.2% increase in average home selling price. The increase in volume was due to an increase in demand and production rates. The increase in average selling price was due to pricing actions enacted in response to rising material and labor costs. On a constant currency basis, net sales for the Canadian segment were unfavorably impacted by approximately$0.6 million due to fluctuations in the translation of the Canadian dollar to theU.S. dollar during the three months endedOctober 2, 2021 as compared to the same period of the prior fiscal year. Corporate/Other: Net sales for Corporate/Other includes the Company's transportation business and the elimination of intersegment sales. For the three months endedOctober 2, 2021 , net sales decreased$0.4 million , or 2.9%, primarily attributable to lower revenue from the shipment of recreational vehicles. GROSS PROFIT
The following table summarizes gross profit for the three months ended
Three months ended
October 2, September 26, $ %
(Dollars in thousands) 2021 2020 Change Change
Gross profit:
U.S. Factory-built Housing $ 116,604 $ 54,546 $ 62,058 113.8 %
Canadian Factory-built Housing 8,868 4,787 4,081 85.3 %
Corporate/Other 3,855 3,460 395 11.4 %
Total gross profit $ 129,327 $ 62,793 $ 66,534 106.0 %
Gross profit as a percent of net sales 24.7 % 19.5 %
Gross profit as a percent of sales during the three months ended October 2, 2021
was 24.7% compared to 19.5% during the three months ended September 26, 2020 .
The following is a summary of the change by operating segment.
Gross profit for theU.S. Factory-built Housing segment increased by$62.1 million , or 113.8%, during the three months endedOctober 2, 2021 compared to the same period in the prior fiscal year. Gross profit was 24.7% as a percent of segment net sales for the three months endedOctober 2, 2021 , compared to 19.2% in the same period of the prior fiscal year. The increase in gross profit is due to the increase in homes sold and operational efficiencies and increased leverage of manufacturing fixed costs resulting from higher production volumes.
Gross profit for theCanadian Factory-built Housing segment increased by$4.1 million , or 85.3%, during the three months endedOctober 2, 2021 , compared to the same period in the prior fiscal year, primarily due to increased sales volume. Gross profit as a percent of net sales was 23.0% for the three months endedOctober 2, 2021 , compared to 19.5% in the same period of the prior fiscal year. The improvement is due to direct labor and manufacturing efficiencies from the increase in home sales, partially offset by higher material costs. 18 --------------------------------------------------------------------------------
Corporate/Other:
Gross profit for the Corporate/Other segment increased$0.4 million , or 11.4%, during the three months endedOctober 2, 2021 , compared to the same period of the prior fiscal year, as a result of changes in revenue mix.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
Selling, general, and administrative expenses include foreign currency transaction gains and losses, equity compensation, and intangible amortization expense. The following table summarizes selling, general, and administrative expenses for the three months endedOctober 2, 2021 andSeptember 26, 2020 : Three months ended October 2, September 26, $ % (Dollars in thousands) 2021 2020 Change Change Selling, general, and administrative expenses: U.S. Factory-built Housing$ 43,014 $ 29,601 $ 13,413 45.3 % Canadian Factory-built Housing 2,751 1,683 1,068 63.5 % Corporate/Other 15,575 10,089 5,486 54.4 % Total selling, general, and administrative expenses$ 61,340 $ 41,373 $ 19,967 48.3 % Selling, general, and administrative expense as a percent of net sales 11.7 % 12.8 % Selling, general, and administrative expenses were$61.3 million for the three months endedOctober 2, 2021 , an increase of$20.0 million , or 48.3%, compared to the same period in the prior fiscal year. The following is a summary of the change by operating segment.U.S. Factory-built Housing : Selling, general, and administrative expenses for theU.S. Factory-built Housing segment increased$13.4 million , or 45.3%, during the three months endedOctober 2, 2021 , as compared to the same period in the prior fiscal year. Selling, general, and administrative expenses as a percent of segment net sales decreased to 9.1% for the three months endedOctober 2, 2021 , compared to 10.4% during the comparable period of the prior fiscal year, primarily due to increased leverage of fixed costs resulting from the increase in sales. The increase in expenses resulted from the following factors: (i) higher sales commissions and incentive compensation, which is generally based on sales volume or a measure of profitability; (ii) higher wage expense from headcount increases due to the growth in housing demand; and (iii) the impact of the acquisition of the ScotBilt operations.
Selling, general, and administrative expenses for theCanadian Factory-built Housing segment increased$1.1 million , or 63.5%, for the three months endedOctober 2, 2021 when compared to the same period of the prior fiscal year. Selling, general, and administrative expenses as a percent of segment net sales increased to 7.1% for the three months endedOctober 2, 2021 , compared to 6.9% during the comparable period of the prior fiscal year. The increase in expenses resulted from an increase in commissions and incentive compensation as well as wage expense from headcount increases due to the growth in housing demand.
Corporate/Other:
Selling, general, and administrative expenses for Corporate/Other includes the Company's transportation operations, corporate costs incurred for all segments, and intersegment eliminations. Selling, general, and administrative expenses for Corporate/Other increased$5.5 million , or 54.4%, during the three months endedOctober 2, 2021 , compared to the same period of the prior fiscal year, due to an increase in employee compensation, primarily equity and incentive compensation as well as$2.1 million of costs related to investments made to enhance our customer buying experience and supporting systems. 19 --------------------------------------------------------------------------------
INTEREST EXPENSE, NET
The following table summarizes the components of interest expense, net for the
three months ended
Three months ended
October 2, September 26, $ %
(Dollars in thousands) 2021 2020 Change Change
Interest expense $ 993 $ 974 $ 19 2.0 %
Less: Interest income (148 ) (110 ) (38 ) 34.5 %
Interest expense, net $ 845 $ 864 Interest expense, net was$0.8 million for the three months endedOctober 2, 2021 , remaining consistent with the same period of the prior fiscal year. The Company wrote off$0.3 million of deferred financing fees during the second quarter endedOctober 2, 2021 , which offset the reduction in interest expense from lower average outstanding borrowing balance on the Company's revolving credit facility during the second quarter endedOctober 2, 2021 versus the same quarter in fiscal 2021. OTHER EXPENSE (INCOME)
The following table summarizes other income for the three months ended
Three months ended
October 2, September 26, $ %
(Dollars in thousands) 2021 2020 Change Change
Other expense (income) $ 11 $ (2,599 ) $ 2,610 (100.4 %)
Other income decreased $2.6 million , or 100.4%, during the three months ended
October 2, 2021 , as compared to the same period of the prior fiscal year. The
decrease is due to a reduction in the wage subsidies provided by a Canadian
government sponsored financial assistance program initially enacted in response
to the pandemic.
INCOME TAX EXPENSE
The following table summarizes income tax expense for the three months ended
Three months ended
October 2, September 26, $ %
(Dollars in thousands) 2021 2020 Change Change
Income tax expense $ 16,408 $ 5,644 $ 10,764 190.7 %
Effective tax rate 24.4 % 24.4 %
Income tax expense for the three months ended October 2, 2021 was $16.4 million ,
representing an effective tax rate of 24.4%, compared to income tax expense of
$5.6 million , representing an effective tax rate of 24.4% for the three months
ended September 26, 2020 .
20
-------------------------------------------------------------------------------- The Company's effective tax rate for the three months endedOctober 2, 2021 differs from the federal statutory income tax rate of 21.0% due primarily to the effect of state and local income taxes, non-deductible expenses, tax credits, results in foreign jurisdictions, and tax benefits from vested equity compensation. The Company's effective tax rate for the three months endedSeptember 26, 2020 differs from the federal statutory income tax rate of 21.0% due primarily to the effect of non-deductible expenses, state and local income taxes, tax credits, and results in foreign jurisdictions.
ADJUSTED EBITDA
The following table reconciles net income, the most directly comparableU.S. GAAP measure, to Adjusted EBITDA, a non-GAAP financial measure, for the three months endedOctober 2, 2021 andSeptember 26, 2020 : Three months ended October 2, September 26, $ % (Dollars in thousands) 2021 2020 Change Change Net income$ 50,723 $ 17,511 $ 33,212 * Income tax expense 16,408 5,644 10,764 * Interest expense, net 845 864 (19 ) (2.2 %) Depreciation and amortization 5,138 4,408 730 16.6 % Equity-based compensation (for awards granted prior to December 31, 2018) - 388 (388 ) * Other - 122 (122 ) * Adjusted EBITDA$ 73,114 $ 28,937 $ 44,177 *
* indicates that the calculated percentage is not meaningful
Adjusted EBITDA for the three months endedOctober 2, 2021 was$73.1 million , an increase of$44.2 million from the same period of the prior fiscal year. The increase is primarily a result of higher operating income due to increases in sales volume and gross margin, partially offset by higher SG&A expenses.
UNAUDITED INCOME STATEMENTS FOR THE FIRST HALF OF FISCAL 2022 VS. 2021
Six months ended
October 2, September 26,
(Dollars in thousands) 2021 2020
Results of Operations Data:
Net sales $ 1,034,422 $ 595,651
Cost of sales 793,565 478,855
Gross profit 240,857 116,796
Selling, general, and administrative expenses 115,363 82,180
Operating income 125,494 34,616
Interest expense, net 1,494 1,806
Other income (43 ) (6,813 )
Income before income taxes 124,043 39,623
Income tax expense 30,419 10,209
Net income $ 93,624 $ 29,414
Reconciliation of Adjusted EBITDA:
Net income $ 93,624 $ 29,414
Income tax expense 30,419 10,209
Interest expense, net 1,494 1,806
Depreciation and amortization 10,283 8,690
Equity-based compensation (for awards granted prior to December 31, 2018) - 1,358 Adjusted EBITDA$ 135,820 $ 51,477 As a percent of net sales: Gross profit 23.3 % 19.6 % Selling, general, and administrative expenses 11.2 % 13.8 % Operating income 12.1 % 5.8 % Net income 9.1 % 4.9 % Adjusted EBITDA 13.1 % 8.6 % 21
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The following table summarizes net sales for the six months ended
Six months ended
October 2, September 26, $ %
(Dollars in thousands) 2021 2020 Change Change
Net sales $ 1,034,422 $ 595,651 $ 438,771 73.7 %
U.S. manufacturing and retail net sales $ 929,019 $ 532,219 $ 396,800 74.6 %
U.S. homes sold 12,274 8,717 3,557 40.8 %
U.S. manufacturing and retail average
home selling price $ 75.7 $ 61.1 $ 14.6 23.9 %
Canadian manufacturing net sales $ 76,332 $ 39,753 $ 36,579 92.0 %
Canadian homes sold 743 494 249 50.4 %
Canadian manufacturing average home
selling price $ 102.7 $ 80.5 $ 22.2 27.6 %
Corporate/Other net sales $ 29,071 $ 23,679 $ 5,392 22.8 %
U.S. manufacturing facilities in
operation at end of period 35 33
U.S. retail sales centers in operation
at end of period 18 18
Canadian manufacturing facilities in
operation at end of period 5 5
Net sales for the six months ended October 2, 2021 were $1,034.4 million , an
increase of $438.8 million , or 73.7%, over the six months ended September 26,
2020 . The following is a summary of the change by operating segment.
Net sales for the Company'sU.S. manufacturing and retail operations increased by$396.8 million , or 74.6%, for the six months endedOctober 2, 2021 compared to the six months endedSeptember 26, 2020 . The increase was primarily due to an increase in the number of homes sold during the period of 3,557, an increase in the average selling price of 23.9%, and the impact of the acquisition of ScotBilt. The increase in the number of homes sold was a result of increased production levels at many of the Company's manufacturing locations in reaction to strong demand. The average selling price increased due to pricing actions enacted in response to rising material and labor costs. Generally, we are able to pass the increase in input costs along to our customers. Net sales in the six months endedSeptember 26, 2020 were more negatively impacted by COVID-19 related plant shutdowns and higher than normal absenteeism.
The Canadian Factory-built Housing segment net sales increased by$36.6 million , or 92.0%, for the six months endedOctober 2, 2021 compared to the same period in the prior fiscal year, primarily due to an increase in homes sold of 249, coupled with a 27.6% increase in average home selling price. The increase in volume was due to an increase in demand and production rates. The increase in average selling price was due to pricing actions enacted in response to rising material and labor costs. On a constant currency basis, net sales for the Canadian segment were favorably impacted by approximately$6.8 million due to fluctuations in the translation of the Canadian dollar to theU.S. dollar during the first six months of fiscal 2022 as compared to the same period of the prior fiscal year. Net sales in the six months endedSeptember 26, 2020 were more negatively impacted by COVID-19 related plant shutdowns and higher than normal absenteeism. Corporate/Other: Net sales for Corporate/Other includes the Company's transportation business and the elimination of intersegment sales. For the six months endedOctober 2, 2021 , net sales increased$5.4 million , or 22.8%, primarily attributable to an increase in shipments of manufactured homes and recreational vehicles. 22
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GROSS PROFIT
The following table summarizes gross profit for the six months endedOctober 2, 2021 andSeptember 26, 2020 : Six months ended October 2, September 26, $ % (Dollars in thousands) 2021 2020 Change Change Gross profit: U.S. Factory-built Housing$ 215,815 $ 102,956 $ 112,859 109.6 % Canadian Factory-built Housing 17,193 7,569 9,624 127.2 % Corporate/Other 7,849 6,271 1,578 25.2 % Total gross profit$ 240,857 $ 116,796 $ 124,061 106.2 % Gross profit as a percent of net sales 23.3 % 19.6 % Gross profit as a percent of sales during the six months endedOctober 2, 2021 was 23.3% compared to 19.6% during the six months endedSeptember 26, 2020 . The following is a summary of the change by operating segment.
Gross profit for theU.S. Factory-built Housing segment increased by$112.9 million , or 109.6%, during the six months endedOctober 2, 2021 compared to the same period in the prior fiscal year. Gross profit was 23.2% as a percent of segment net sales for the six months endedOctober 2, 2021 compared to 19.3% in the same period of the prior fiscal year. The increase in gross profit is due to operational efficiencies and increased leverage of manufacturing fixed costs resulting from higher production volumes and a reduction of COVID-19 related sick-pay and health benefits provided in the prior fiscal year, all partially offset by higher material costs.
Gross profit for theCanadian Factory-built Housing segment increased by$9.6 million , or 127.2% during the six months endedOctober 2, 2021 compared to the same period in the prior fiscal year primarily due to increased sales volume. Gross profit as a percent of net sales was 22.5% for the six months endedOctober 2, 2021 , compared to 19.0% in the same period of the prior fiscal year primarily due to operational efficiencies from the increase in home sales, partially offset by higher material and labor costs.
Corporate/Other:
Gross profit for the Corporate/Other segment increased$1.6 million , or 25.2%, during the six months endedOctober 2, 2021 compared to the same period of the prior fiscal year, primarily due to increased net sales in the Company's transportation operations.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
Selling, general, and administrative expenses include foreign currency transaction gains and losses, equity compensation, and intangible amortization expense. The following table summarizes selling, general, and administrative expenses for the six months endedOctober 2, 2021 andSeptember 26, 2020 : Six months ended October 2, September 26, $ % (Dollars in thousands) 2021 2020 Change Change Selling, general, and administrative expenses: U.S. Factory-built Housing$ 83,769 $ 57,977 $ 25,792 44.5 % Canadian Factory-built Housing 5,696 3,289 2,407 73.2 % Corporate/Other 25,898 20,914 4,984 23.8 % Total selling, general, and administrative expenses$ 115,363 $ 82,180 $ 33,183 40.4 % Selling, general, and administrative expense as a percent of net sales 11.2 % 13.8 % Selling, general, and administrative expenses were$115.4 million for the six months endedOctober 2, 2021 , an increase of$33.2 million , or 40.4%, compared to the same period in the prior fiscal year. The following is a summary of the change by operating segment. 23
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U.S. Factory-built Housing : Selling, general, and administrative expenses for theU.S. Factory-built Housing segment increased$25.8 million , or 44.5%, during the six months endedOctober 2, 2021 as compared to the same period in the prior fiscal year. Selling, general, and administrative expenses, as a percent of segment net sales decreased to 9.0% for the six months endedOctober 2, 2021 compared to 10.9% during the comparable period of the prior fiscal year. The increase in expenses resulted from the following factors: (i) higher sales commissions and incentive compensation, which is generally based on sales volume or a measure of profitability; (ii) higher wage expense from headcount increases to support increased production; (iii) an increase in travel expenses compared to the same period in the prior fiscal year; and (iv) the impact of the acquisition of the ScotBilt operations.
Selling, general, and administrative expenses for theCanadian Factory-built Housing segment increased$2.4 million , or 73.2%, for the six months endedOctober 2, 2021 when compared to the same period of the prior fiscal year. Selling, general, and administrative expenses as a percent of segment net sales decreased to 7.5% for the six months endedOctober 2, 2021 compared to 8.3% during the comparable period of the prior fiscal year. The increase in selling, general, and administrative expenses resulted from an increase in commissions and incentive compensation as well as wage expense from additional headcount to support the increase in production.
Corporate/Other:
Selling, general, and administrative expenses for Corporate/Other includes the Company's transportation operations, corporate costs incurred for all segments, and intersegment eliminations. Selling, general, and administrative expenses for Corporate/Other increased$5.0 million , or 23.8%, during the six months endedOctober 2, 2021 as compared to the same period of the prior fiscal year due to an increase in wages, incentive and equity compensation costs as well as$1.9 million for the investment made to enhance our customer buying experience and supporting systems. INTEREST EXPENSE, NET
The following table summarizes the components of interest expense, net for the
six months ended
Six months ended
October 2, September 26, $ %
(Dollars in thousands) 2021 2020 Change Change
Interest expense $ 1,801 $ 2,061 $ (260 ) (12.6 %)
Less: Interest income (307 ) (255 ) (52 ) 20.4 %
Interest expense, net $ 1,494 $ 1,806 Interest expense, net was$1.5 million for the six months endedOctober 2, 2021 , a decrease of$0.3 million , or 17.3%, compared to the same period of the prior fiscal year. The net decrease in expense was primarily due to a lower average outstanding balance on the Company's revolving credit facility, partially offset by the write-off of deferred financing fees of$0.3 million in association with the previously existing revolving credit facility.
OTHER EXPENSE (INCOME)
The following table summarizes other income for the six months ended
Six months ended
October 2, September 26, $ %
(Dollars in thousands) 2021 2020 Change Change
Other expense (income) $ (43 ) $ (6,813 ) $ 6,770 (99.4 %)
Other income decreased
24
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enacted in response to the COVID-19 pandemic. The programs included a Canadian
wage subsidy benefit of $6.2 million and U.S. federal and state wage subsidy
benefit of $0.6 million during the six months ended September 26, 2020 .
INCOME TAX EXPENSE
The following table summarizes income tax expense for the six months ended
Six months ended
October 2, September 26, $ %
(Dollars in thousands) 2021 2020 Change Change
Income tax expense $ 30,419 $ 10,209 $ 20,210 198.0 %
Effective tax rate 24.5 % 25.8 %
Income tax expense for the six months ended October 2, 2021 was $30.4 million ,
representing an effective tax rate of 24.5%, compared to income tax expense of
$10.2 million , representing an effective tax rate of 25.8% for the six months
ended September 26, 2020 .
The Company's effective tax rate for the six months ended October 2, 2021
differs from the federal statutory income tax rate of 21.0% due primarily to the
effect of state and local income taxes, non-deductible expenses, tax credits,
results in foreign jurisdictions, and tax benefits from vested equity
compensation. The Company's effective tax rate for the six months ended
September 26, 2020 differs from the federal statutory income tax rate of 21.0%
due primarily to the effect of non-deductible expenses, state and local income
taxes, tax credits, and results in foreign jurisdictions.
25
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ADJUSTED EBITDA
The following table reconciles net income, the most directly comparable
Six months ended
October 2, September 26, $ %
(Dollars in thousands) 2021 2020 Change Change
Net income $ 93,624 $ 29,414 $ 64,210 *
Income tax expense 30,419 10,209 20,210 *
Interest expense, net 1,494 1,806 (312 ) (17.3 %)
Depreciation and amortization 10,283 8,690 1,593 18.3 %
Equity-based compensation (for awards
granted prior to December 31, 2018) - 1,358 (1,358 ) *
Adjusted EBITDA $ 135,820 $ 51,477 $ 84,343 *
* Indicates that the calculated percentage is not meaningful
Adjusted EBITDA for the six months endedOctober 2, 2021 was$135.8 million , an increase of$84.3 million , from the same period of the prior fiscal year. The increase is primarily a result of higher operating income due to increases in sales volume and gross margin, partially offset by higher SG&A expenses. The Company defines Adjusted EBITDA as net income or loss plus; (a) the provision for income taxes; (b) interest expense, net; (c) depreciation and amortization; (d) gain or loss from discontinued operations; (e) equity based compensation for awards granted prior toDecember 31, 2018 ; (f) non-cash restructuring charges and impairment of assets; and (g) other non-operating costs including those for the acquisition and integration or disposition of businesses and idle facilities. Adjusted EBITDA is not a measure of earnings calculated in accordance withU.S. GAAP and should not be considered an alternative to, or more meaningful than, net income or loss prepared on aU.S. GAAP basis. Adjusted EBITDA does not purport to represent cash flow provided by, or used in, operating activities as defined byU.S. GAAP, which is presented in the Statement of Cash Flows. In addition, Adjusted EBITDA is not necessarily comparable to similarly titled measures reported by other companies. In evaluating Adjusted EBITDA, investors should be aware that, in the future, the Company may incur expenses similar to those adjusted for in this presentation. This presentation of Adjusted EBITDA should not be construed as an implication that the Company's future results will be unaffected by unusual or nonrecurring items. Adjusted EBITDA has important limitations as an analytical tool and you should not consider it in isolation or as a substitute for analysis of our results as reported underU.S. GAAP. Some of these limitations are:
Adjusted EBITDA:
? does not reflect the interest expense on our debt; ? excludes impairments; and ? does not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments;
Also about Adjusted EBITDA:
? although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements; and ? other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure. Given these limitations, Adjusted EBITDA should not be considered as a measure of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on ourU.S. GAAP results and using non-GAAP financial measures only on a supplemental basis. 26 --------------------------------------------------------------------------------
BACKLOG
Although orders from customers can be cancelled at any time without penalty, and unfilled orders are not necessarily an indication of future business, the Company's unfilledU.S. and Canadian manufacturing orders atOctober 2, 2021 totaled$1,369 million compared to$390.1 million atSeptember 26, 2020 . The increase in backlog was driven by increased demand for single-family homes, which resulted in order levels that significantly outpaced production in both theU.S. andCanada . Our ability to increase production rates to keep pace with orders is limited by individual plant capacity, the availability of and time needed to train new employees, employee attendance and availability of materials, including (most recently) raw material allocations by certain of our suppliers. We may experience greater order cancellations in the future as a result of higher prices and the longer time required to manufacture and deliver our products.
Liquidity and Capital Resources
Sources and Uses of Cash
The following table presents summary cash flow information for the six months
ended
Six months ended
October 2, September 26,
(Dollars in thousands) 2021 2020
Net cash provided by (used in):
Operating activities $ 88,887 $ 63,842
Investing activities (15,246 ) (1,334 )
Financing activities (25,553 ) (8,936 )
Effect of exchange rate changes on cash, cash equivalents (411 ) 1,259
Net increase in cash and cash equivalents 47,677 54,831
Cash and cash equivalents at beginning of period 262,581 209,455
Cash and cash equivalents at end of period$ 310,258 $ 264,286 The Company's primary sources of liquidity are cash flows from operations and existing cash balances. Cash balances and cash flows from operations for the next year are expected to be adequate to cover working capital requirements, capital expenditures, and debt payment obligations. The Company does not have any scheduled long-term debt maturities in the next twelve months. OnJuly 7, 2021 , the Company entered into an Amended and Restated Credit Agreement which provides for a$200.0 million revolving credit facility, including a$45.0 million letter of credit sub-facility. AtOctober 2, 2021 $169.6 million was available for borrowing under the Amended Credit Agreement. The Company's revolving credit facility includes (i) a maximum consolidated total net leverage ratio of 3.25 to 1.00, subject to an upward adjustment upon the consummation of a material acquisition, and (ii) a minimum interest coverage ratio of 3.00 to 1.00. The Company anticipates compliance with its debt covenants and projects its level of cash availability to be in excess of cash needed to operate the business for the next year. In the event operating cash flow and existing cash balances were deemed inadequate to support the Company's liquidity needs, and one or more capital resources were to become unavailable, the Company would revise operating strategies accordingly. Cash provided by operating activities was$88.9 million for the six months endedOctober 2, 2021 compared to$63.8 million for the six months endedSeptember 26, 2020 . Cash provided by operating activities increased due to higher net income, partially offset by an increase in inventory from higher material costs and higher stocking levels to mitigate supply chain challenges, an increase in accounts receivable from higher sales volumes, and an increase in prepaid and other assets primarily from the capitalization of cloud computing costs in fiscal 2022. Cash used in investing activities was$15.2 million for the six months endedOctober 2, 2021 compared to$1.3 million for the six months endedSeptember 26, 2020 . The increase in cash used for investing activities was primarily related to an increase in capital expenditures in the current period which was related to the acquisition of two idle manufacturing facilities inTexas and investments in plant operations which were deferred in the prior-year due to the pandemic. The Company suspended all but critical capital projects in the first half of fiscal 2021 due to COVID-19 concerns. Capital spending in the first half of fiscal 2022 reflects our reversion to normal, planned spending. Cash used in financing activities was$25.6 million for the six months endedOctober 2, 2021 compared to$8.9 million for the six months endedSeptember 26, 2020 . The increase in cash used for financing was primarily related to the repayment of the Company's previously existing revolving credit facility and payments of deferred financing fees related to the Amended Credit Agreement. Critical Accounting Policies For a discussion of our critical accounting policies that management believes affect its more significant judgments and estimates used in the preparation of our Consolidated Financial Statements, see Part II, Item 7 of the Fiscal 2021 Annual Report, under the heading "Critical Accounting Policies." There have been no significant changes in our significant accounting policies or critical accounting estimates discussed in the Fiscal 2021 Annual Report. 27 --------------------------------------------------------------------------------
Recently Issued Accounting Pronouncements
For information on the impact of recently issued accounting pronouncements, see Note 1, "Basis of Presentation - Recently Issued Accounting Pronouncements," to the condensed consolidated financial statements included in this Report.
Forward-Looking Statements
Some of the statements in this Report are not historical in nature and are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements about our expectations regarding our future liquidity, earnings, expenditures, and financial condition. These statements are often identified by the words "will," "could", "should," "anticipate," "believe," "expect," "intend," "estimate," "hope," or similar expressions. These statements reflect management's current views with respect to future events and are subject to risks and uncertainties. There are risks and uncertainties, many of which are beyond our control, that could cause our actual results to differ materially from those in our forward-looking statements, including regional, national and international economic, financial, public health and labor conditions, and the following: ? The COVID-19 pandemic, which has had, and could continue to have, significant adverse effects on us; ? supply-related issues, including prices and availability of materials; ? labor-related issues; ? the cyclicality and seasonality of the housing industry and its sensitivity to changes in general economic or other business conditions; ? demand fluctuations in the housing industry; ? the possible unavailability of additional capital when needed; ? competition and competitive pressures; ? changes in consumer preferences for our products or our failure to gauge those preferences; ? quality problems, including the quality of parts sourced from suppliers and related liability and reputational issues; ? data security breaches, cybersecurity attacks, and other information technology disruptions; ? the potential disruption of operations caused by the conversion to new information systems; ? the extensive regulation affecting the production and sale of factory-built housing and the effects of possible changes in laws with which we must comply; ? the potential impact of natural disasters on sales and raw material costs; ? the risks associated with mergers and acquisitions, including integration of operations and information systems; ? periodic inventory adjustments by, and changes to relationships with, independent retailers; ? changes in interest and foreign exchange rates; ? insurance coverage and cost issues; ? the possibility that all or part of our intangible assets, including goodwill, might become impaired; ? the possibility that our risk management practices may leave us exposed to unidentified or unanticipated risks; and ? other risks described in Part I - Item 1A, "Risk Factors," included in the Fiscal 2021 Annual Report, as well as the risks and information provided from time to time in our other periodic reports filed with theSecurities and Exchange Commission . If any of the risks or uncertainties referred to above materializes or if any of the assumptions underlying our forward-looking statements proves to be incorrect, then differences may arise between our forward-looking statements and our actual results, and such differences may be material. Investors should not place undue reliance on our forward-looking statements, which speak only as of the date of this report. We assume no obligation to update, amend or clarify them to reflect events, new information or circumstances occurring after the date hereof, except as required by law. 28
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