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 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 in theU.S. , 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$1.5 billion as ofJanuary 1, 2022 compared to$488.5 million as ofDecember 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 raw material and labor costs. In addition, we are experiencing intermittent supply disruption and higher freight costs. 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 higher cancellations in future periods. For the nine months endedJanuary 1, 2022 , approximately 78% 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 71,281 and 61,492 units during the eight months endedNovember 30, 2021 and 2020, respectively. Based on industry data, the Company'sU.S. wholesale market share of HUD code homes sold was 19.4% and 16.2%, for the eight months endedNovember 30, 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, current manufactured housing shipments are still at lower levels than the long-term historical average of over 200,000 units a year.
Acquisitions and Expansions
Over the last several years, demand for the Company's products, primarily affordable housing in theU.S. , has continued to improve. As a result, the Company has focused on operational improvements to make existing manufacturing facilities more profitable as well as executing measured expansion of its manufacturing and retail footprints. 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 began certification of the manufacturing operations at one of these facilities in the third quarter of fiscal 2022, and expects to begin delivering products from that facility in the fourth fiscal quarter. OnFebruary 28, 2021 , the Company acquired ScotBilt, which operates two manufacturing facilities inGeorgia that provide affordable housing throughoutAlabama ,Florida ,Georgia and the Carolinas. The operations of ScotBilt are included in the financial results of the Company since the date of the acquisition. OnJanuary 14, 2021 , the Company 15
-------------------------------------------------------------------------------- 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. Although the
Company has generally been able to navigate the production challenges caused by
the pandemic in fiscal 2022, 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. The Company's U.S. operations
incurred $2.2 million of expense related to the extended benefits during the
nine months ended December 26, 2020 . Various government programs were enacted 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 U.S. 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 $6.2 million for payroll subsidies under CEWS and $0.6
million for payroll subsidies under the CARES Act during the nine months ended
December 26, 2020 . No payroll subsidy was recognized under CEWS or Cares Act
during the three months ended December 26, 2020 . In addition, the CARES Act
allowed for deferring payment of certain payroll taxes. Through December 2020
the Company deferred $11.8 million of payroll taxes . The Company repaid $5.9
million in the current quarter, with the remaining amount expected to be paid in
December 2022 .
16
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UNAUDITED INCOME STATEMENTS FOR THE THIRD QUARTER OF FISCAL 2022 VS. 2021
Three months ended
January 1, December 26,
(Dollars in thousands) 2022 2020
Results of Operations Data:
Net sales $ 534,690 $ 377,581
Cost of sales 377,451 305,797
Gross profit 157,239 71,784
Selling, general, and administrative expenses 65,825 44,286
Operating income 91,414 27,498
Interest expense, net 508 795
Other income (expense) 7 (180 )
Income before income taxes 90,899 26,883
Income tax expense 23,277 5,284
Net income $ 67,622 $ 21,599
Reconciliation of Adjusted EBITDA:
Net income $ 67,622 $ 21,599
Income tax expense 23,277 5,284
Interest expense, net 508 795
Depreciation and amortization 5,250 4,386
Adjusted EBITDA $ 96,657 $ 32,064
As a percent of net sales:
Gross profit 29.4 % 19.0 %
Selling, general, and administrative expenses 12.3 % 11.7 %
Operating income 17.1 % 7.3 %
Net income 12.6 % 5.7 %
Adjusted EBITDA 18.1 % 8.5 %
NET SALES
The following table summarizes net sales for the three months ended January 1,
2022 and December 26, 2020 :
Three months ended
January 1, December 26, $ %
(Dollars in thousands) 2022 2020 Change Change
Net sales $ 534,690 $ 377,581 $ 157,109 41.6 %
U.S. manufacturing and retail net sales $ 484,319 $ 336,358 $ 147,961 44.0 %
U.S. homes sold 5,832 5,343 489 9.2 %
U.S. manufacturing and retail average
home selling price $ 83.0 $ 63.0 $ 20.0 31.7 %
Canadian manufacturing net sales $ 36,910 $ 26,351 $ 10,559 40.1 %
Canadian homes sold 336 318 18 5.7 %
Canadian manufacturing average home
selling price $ 109.9 $ 82.9 $ 27.0 32.6 %
Corporate/Other net sales $ 13,461 $ 14,872 $ (1,411 ) (9.5 %)
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 January 1, 2022 were $534.7 million , an
increase of $157.1 million , or 41.6%, over the three months ended December 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$148.0 million , or 44.0%, for the three months endedJanuary 1, 2022 compared to the three months endedDecember 26, 2020 . The change was primarily due to an increase in the number of homes sold during the period of 9.2%, an increase in the average home selling price of 31.7%, 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 as well as a shift in product mix to larger homes with more features and amenities. 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$10.6 million , or 40.1% for the three months endedJanuary 1, 2022 compared to the same period in the prior fiscal year, primarily due to a 5.7% increase in the number of homes sold and a 32.6% increase in average home selling price. The increase in volume was due to an increase in homes sold driven by strong demand. 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 also favorably impacted by approximately$1.8 million due to fluctuations in the translation of the Canadian dollar to theU.S. dollar during the three months endedJanuary 1, 2022 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 endedJanuary 1, 2022 , net sales decreased$1.4 million , or 9.5%, 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
January 1, December 26, $ %
(Dollars in thousands) 2022 2020 Change Change
Gross profit:
U.S. Factory-built Housing $ 143,333 $ 62,943 $ 80,390 127.7 %
Canadian Factory-built Housing 10,251 5,372 4,879 90.8 %
Corporate/Other 3,655 3,469 186 5.4 %
Total gross profit $ 157,239 $ 71,784 $ 85,455 119.0 %
Gross profit as a percent of net sales 29.4 % 19.0 %
Gross profit as a percent of sales during the three months ended January 1, 2022
was 29.4% compared to 19.0% during the three months ended December 26, 2020 . The
following is a summary of the change by operating segment.
Gross profit for theU.S. Factory-built Housing segment increased by$80.4 million , or 127.7%, during the three months endedJanuary 1, 2022 compared to the same period in the prior fiscal year. Gross profit was 29.6% as a percent of segment net sales for the three months endedJanuary 1, 2022 , compared to 18.7% in the same period of the prior fiscal year. Margin improvement was driven primarily by price increases in response to rising input costs and the timing of certain price adjustments for raw materials under our buying programs. We have also focused on product simplification and material SKU rationalization to improve operational efficiencies to better leverage increased production and manufacturing fixed costs.
Gross profit for theCanadian Factory-built Housing segment increased by$4.9 million , or 90.8%, during the three months endedJanuary 1, 2022 , 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 27.8% for the three months endedJanuary 1, 2022 , compared to 20.4% in the same period of the prior fiscal year. Margin improvement was driven by price increases in response to rising material and labor costs, as well as direct labor and manufacturing efficiencies, and increased leverage of manufacturing fixed costs. 18 --------------------------------------------------------------------------------
Corporate/Other:
Gross profit for the Corporate/Other segment increased$0.2 million , or 5.4%, during the three months endedJanuary 1, 2022 , 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 endedJanuary 1, 2022 andDecember 26, 2020 : Three months ended January 1, December 26, $ % (Dollars in thousands) 2022 2020 Change Change Selling, general, and administrative expenses: U.S. Factory-built Housing$ 49,208 $ 31,324 $ 17,884 57.1 % Canadian Factory-built Housing 2,958 2,682 276 10.3 % Corporate/Other 13,659 10,280 3,379 32.9 % Total selling, general, and administrative expenses$ 65,825 $ 44,286 $ 21,539 48.6 % Selling, general, and administrative expense as a percent of net sales 12.3 % 11.7 % Selling, general, and administrative expenses were$65.8 million for the three months endedJanuary 1, 2022 , an increase of$21.5 million , or 48.6%, 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$17.9 million , or 57.1%, during the three months endedJanuary 1, 2022 , as compared to the same period in the prior fiscal year. Selling, general, and administrative expenses as a percent of segment net sales increased to 10.2% for the three months endedJanuary 1, 2022 , compared to 9.3% 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 increased headcount as we staffed to respond 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$0.3 million , or 10.3%, for the three months endedJanuary 1, 2022 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 8.0% for the three months endedJanuary 1, 2022 , compared to 10.2% during the comparable period of the prior fiscal year. The higher expenses are a result of an increase in incentive compensation which is generally based on a measure of profitability. 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$3.4 million , or 32.9%, during the three months endedJanuary 1, 2022 , compared to the same period of the prior fiscal year, due to an increase in equity compensation, as well as$2.2 million of costs related to investments made to enhance our customer buying experience and supporting systems. 19
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INTEREST EXPENSE, NET
The following table summarizes the components of interest expense, net for the
three months ended
Three months ended
January 1, December 26, $ %
(Dollars in thousands) 2022 2020 Change Change
Interest expense $ 701 $ 946 $ (245 ) (25.9 %)
Less: Interest income (193 ) (151 ) (42 ) 27.8 %
Interest expense, net $ 508 $ 795 Interest expense, net was$0.5 million for the three months endedJanuary 1, 2022 , a decrease of$0.3 million compared to the same period of the prior fiscal year. The net decrease in expense was primarily due to lower average outstanding borrowings on long-term debt, offset in part by higher average borrowings on floor plan payables. The Company repaid the outstanding balance on its revolving credit facility during the second quarter of fiscal 2022. INCOME TAX EXPENSE
The following table summarizes income tax expense for the three months ended
Three months ended
January 1, December 26, $ %
(Dollars in thousands) 2022 2020 Change Change
Income tax expense $ 23,277 $ 5,284 $ 17,993 340.5 %
Effective tax rate 25.6 % 19.7 %
Income tax expense for the three months ended January 1, 2022 was $23.3 million ,
representing an effective tax rate of 25.6%, compared to income tax expense of
$5.3 million , representing an effective tax rate of 19.7% for the three months
ended December 26, 2020 . The change in the effective tax rate for the three
months ended January 1, 2022 compared with the same period of the prior year,
was primarily due to the recognition of a tax benefit of $1.7 million during the
third quarter of fiscal 2021 related to a U.S. R&D tax credit study.
The Company's effective tax rate for the three months ended January 1, 2022
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 related to equity
compensation. The Company's effective tax rate for the three months ended
December 26, 2020 differed 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 (including the R&D study), and results in foreign
jurisdictions.
ADJUSTED EBITDA
The following table reconciles net income, the most directly comparable U.S.
GAAP measure, to Adjusted EBITDA, a non-GAAP financial measure, for the three
months ended January 1, 2022 and December 26, 2020 :
Three months ended
January 1, December 26, $ %
(Dollars in thousands) 2022 2020 Change Change
Net income $ 67,622 $ 21,599 $ 46,023 213.1 %
Income tax expense 23,277 5,284 17,993 340.5 %
Interest expense, net 508 795 (287 ) (36.1 %)
Depreciation and amortization 5,250 4,386 864 19.7 %
Adjusted EBITDA $ 96,657 $ 32,064 $ 64,593 201.5 %
Adjusted EBITDA for the three months ended January 1, 2022 was $96.7 million , an
increase of $64.6 million from the same period of the prior fiscal year. The
increase is primarily a result of higher operating income due to increases in
net sales volume and gross margins, partially offset by higher SG&A expenses.
20
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UNAUDITED INCOME STATEMENTS FOR THE FIRST NINE MONTHS OF FISCAL 2022 VS. 2021
Nine months ended
January 1, December 26,
(Dollars in thousands) 2022 2020
Results of Operations Data:
Net sales $ 1,569,112 $ 973,232
Cost of sales 1,171,016 784,652
Gross profit 398,096 188,580
Selling, general, and administrative expenses 181,188 126,466
Operating income 216,908 62,114
Interest expense, net 2,002 2,601
Other income (36 ) (6,993 )
Income before income taxes 214,942 66,506
Income tax expense 53,696 15,493
Net income $ 161,246 $ 51,013
Reconciliation of Adjusted EBITDA:
Net income $ 161,246 $ 51,013
Income tax expense 53,696 15,493
Interest expense, net 2,002 2,601
Depreciation and amortization 15,533 13,076
Equity-based compensation (for awards granted prior to December 31, 2018) - 1,358 Adjusted EBITDA$ 232,477 $ 83,541 As a percent of net sales: Gross profit 25.4 % 19.4 % Selling, general, and administrative expenses 11.5 % 13.0 % Operating income 13.8 % 6.4 % Net income 10.3 % 5.2 % Adjusted EBITDA 14.8 % 8.6 % NET SALES The following table summarizes net sales for the nine months endedJanuary 1, 2022 andDecember 26, 2020 : Nine months ended January 1, December 26, $ % (Dollars in thousands) 2022 2020 Change Change Net sales$ 1,569,112 $ 973,232 $ 595,880 61.2 % U.S. manufacturing and retail net sales$ 1,413,338 $ 868,577 $ 544,761 62.7 % U.S. homes sold 18,106 14,060 4,046 28.8 %U.S. manufacturing and retail average home selling price$ 78.1 $ 61.8$ 16.3 26.4 % Canadian manufacturing net sales$ 113,242 $ 66,104 $ 47,138 71.3 % Canadian homes sold 1,079 812 267 32.9 % Canadian manufacturing average home selling price$ 105.0 $ 81.4$ 23.6 29.0 % Corporate/Other net sales$ 42,532 $ 38,551 $ 3,981 10.3 %U.S. manufacturing facilities in operation at end of period 35 33U.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 nine months endedJanuary 1, 2022 were$1,569.1 million , an increase of$595.9 million , or 61.2%, over the nine months endedDecember 26, 2020 . The following is a summary of the change by operating segment. 21 --------------------------------------------------------------------------------
Net sales for the Company'sU.S. manufacturing and retail operations increased by$544.8 million , or 62.7%, for the nine months endedJanuary 1, 2022 compared to the nine months endedDecember 26, 2020 . The increase was primarily due to an increase in the number of homes sold during the period of 4,046 and an increase in the average selling price of 26.4%. The increase in the number of homes sold was a result of increased production levels at many of the Company's manufacturing locations in response to strong demand for our products, as well as the addition of production volume through the acquisition of ScotBilt. The average selling price increased over the prior year due to pricing actions enacted in response to rising material and labor costs. Generally, we are able to pass increases in input costs along to our customers. The improvement this year is also a result of a negative impact to sales in the prior fiscal year caused by COVID-19 related plant shutdowns and higher than normal absenteeism.
The Canadian Factory-built Housing segment net sales increased by$47.1 million , or 71.3%, for the nine months endedJanuary 1, 2022 compared to the same period in the prior fiscal year, primarily due to an increase in homes sold of 267 and a 29.0% increase in average home selling price. The increase in volume was due to an increase in production rates in response to strong housing demand. The increase in average selling price was due to pricing actions enacted in response to rising material and labor costs. In addition, on a constant currency basis, net sales for the Canadian segment were favorably impacted by approximately$8.4 million due to fluctuations in the translation of the Canadian dollar to theU.S. dollar during the first nine months of fiscal 2022 as compared to the same period of the prior fiscal year. Net sales during the nine months endedDecember 26, 2020 were 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 nine months endedJanuary 1, 2022 , net sales increased$4.0 million , or 10.3%, primarily attributable to an increase in shipments of manufactured homes and recreational vehicles. GROSS PROFIT The following table summarizes gross profit for the nine months endedJanuary 1, 2022 andDecember 26, 2020 : Nine months ended January 1, December 26, $ % (Dollars in thousands) 2022 2020 Change Change Gross profit: U.S. Factory-built Housing$ 359,148 $ 165,899 $ 193,249 116.5 % Canadian Factory-built Housing 27,444 12,941 14,503 112.1 % Corporate/Other 11,504 9,740 1,764 18.1 % Total gross profit$ 398,096 $ 188,580 $ 209,516 111.1 % Gross profit as a percent of net sales 25.4 % 19.4 % Gross profit as a percent of sales during the nine months endedJanuary 1, 2022 was 25.4% compared to 19.4% during the nine months endedDecember 26, 2020 . The following is a summary of the change by operating segment.
Gross profit for theU.S. Factory-built Housing segment increased by$193.2 million , or 116.5%, during the nine months endedJanuary 1, 2022 compared to the same period in the prior fiscal year. Gross profit was 25.4% as a percent of segment net sales for the nine months endedJanuary 1, 2022 compared to 19.1% 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 higher average selling prices during fiscal 2022. Higher input costs for materials and labor have generally been offset to date by increasing the prices of our products. The improvement is also a result of less COVID-19 related sick-pay and health benefits which were provided in the prior fiscal year.
Gross profit for theCanadian Factory-built Housing segment increased by$14.5 million , or 112.1% during the nine months endedJanuary 1, 2022 compared to the same period in the prior fiscal year primarily due to increased sales volumes and the price of our products. Gross profit as a percent of net sales was 24.2% for the nine months endedJanuary 1, 2022 , compared to 19.6% in the same period of the prior 22
-------------------------------------------------------------------------------- fiscal year. The increase in gross profit as a percent of sales is primarily due to operational leverage from the increase in homes sold, partially offset by higher material costs. Corporate/Other: Gross profit for the Corporate/Other segment increased$1.8 million , or 18.1%, during the nine months endedJanuary 1, 2022 compared to the same period of the prior fiscal year, primarily due to increased net sales and the product mix within 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 nine months endedJanuary 1, 2022 andDecember 26, 2020 : Nine months ended January 1, December 26, $ % (Dollars in thousands) 2022 2020 Change Change Selling, general, and administrative expenses: U.S. Factory-built Housing$ 132,977 $ 89,301 $ 43,676 48.9 % Canadian Factory-built Housing 8,654 5,971 2,683 44.9 % Corporate/Other 39,557 31,194 8,363 26.8 % Total selling, general, and administrative expenses$ 181,188 $ 126,466 $ 54,722 43.3 % Selling, general, and administrative expense as a percent of net sales 11.5 % 13.0 % Selling, general, and administrative expenses were$181.2 million for the nine months endedJanuary 1, 2022 , an increase of$54.7 million , or 43.3%, 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$43.7 million , or 48.9%, during the nine months endedJanuary 1, 2022 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 9.4% for the nine months endedJanuary 1, 2022 compared to 10.3% 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 sales; (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$2.7 million , or 44.9%, for the nine months endedJanuary 1, 2022 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 7.6% for the nine months endedJanuary 1, 2022 compared to 9.0% 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 sales.
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$8.4 million , or 26.8%, during the nine months endedJanuary 1, 2022 as compared to the same period of the prior fiscal year due to$4.2 million of costs related to investments made to enhance our customer buying experience and supporting systems and an increase in incentive, equity compensation costs, and wage expense from additional headcount. 23 --------------------------------------------------------------------------------
INTEREST EXPENSE, NET
The following table summarizes the components of interest expense, net for the
nine months ended
Nine months ended
January 1, December 26, $ %
(Dollars in thousands) 2022 2020 Change Change
Interest expense$ 2,502 $ 3,007 $ (505 ) (16.8 %) Less: Interest income (500 ) (406 ) (94 ) 23.2 % Interest expense, net$ 2,002 $ 2,601
Interest expense, net was$2.0 million for the nine months endedJanuary 1, 2022 , a decrease of$0.6 million , or 23.0%, compared to the same period of the prior fiscal year. The net decrease in expense was primarily due to lower average outstanding borrowings on long-term debt, offset in part by higher average borrowings on floor plan payables. The Company repaid the outstanding balance on its revolving credit facility during the second quarter of fiscal 2022. OTHER EXPENSE (INCOME)
The following table summarizes other income for the nine months ended
Nine months ended
January 1, December 26, $ %
(Dollars in thousands) 2022 2020 Change Change
Other income $ (36 ) $ (6,993 ) $ 6,957 (99.5 %)
Other income decreased $7.0 million , or 99.5%, during the nine months ended
January 1, 2022 , compared to the same period of the prior fiscal year. The
decrease is due to a reduction in the wage subsidies provided by government
sponsored financial assistance programs that were enacted in response to the
COVID-19 pandemic during fiscal 2021. The programs included a Canadian wage
subsidy benefit of $6.2 million and U.S. federal and state wage subsidy benefits
of $0.8 million recognized in the nine months ended December 26, 2020 which did
not recur in the current year.
INCOME TAX EXPENSE
The following table summarizes income tax expense for the nine months ended
Nine months ended
January 1, December 26, $ %
(Dollars in thousands) 2022 2020 Change Change
Income tax expense $ 53,696 $ 15,493 $ 38,203 246.6 %
Effective tax rate 25.0 % 23.3 %
Income tax expense for the nine months ended January 1, 2022 was $53.7 million ,
representing an effective tax rate of 25.0%, compared to income tax expense of
$15.5 million , representing an effective tax rate of 23.3% for the nine months
ended December 26, 2020 . The change in the effective tax rate for the nine
months ended January 1, 2022 compared with the same period of the prior year,
was primarily due to the recognition of a tax benefit of $1.7 million during the
third quarter of fiscal 2021 related to a U.S. R&D tax credit study.
The Company's effective tax rate for the nine months ended January 1, 2022
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 related to equity
compensation. The Company's effective tax rate for the nine months ended
December 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 (including the R&D study), and results in foreign
jurisdictions.
24
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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 nine months endedJanuary 1, 2022 andDecember 26, 2020 : Nine months ended January 1, December 26, $ % (Dollars in thousands) 2022 2020
Change Change
Net income$ 161,246 $ 51,013 $ 110,233 216.1 % Income tax expense 53,696 15,493 38,203 246.6 % Interest expense, net 2,002 2,601 (599 ) (23.0 %) Depreciation and amortization 15,533 13,076 2,457 18.8 % Equity-based compensation (for awards granted prior to December 31, 2018) - 1,358 (1,358 ) (100.0 %) Adjusted EBITDA$ 232,477 $ 83,541 $ 148,936 178.3 % Adjusted EBITDA for the nine months endedJanuary 1, 2022 was$232.5 million , an increase of$148.9 million , from the same period of the prior fiscal year. The increase is primarily a result of higher operating income due to increases in net sales volume and gross margins, partially offset by higher SG&A expenses and the reduction in wage subsidies received in the prior year. 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. 25 --------------------------------------------------------------------------------
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 atJanuary 1, 2022 totaled$1.5 billion compared to$488.5 million atDecember 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 certain allocations of raw materials by 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 nine months
ended
Nine months ended
January 1, December 26,
(Dollars in thousands) 2022 2020
Net cash provided by (used in):
Operating activities $ 164,406 $ 103,816
Investing activities (22,921 ) (1,213 )
Financing activities (21,355 ) (47,938 )
Effect of exchange rate changes on cash, cash equivalents (578 ) 2,940
Net increase in cash and cash equivalents 119,552 57,605
Cash and cash equivalents at beginning of period 262,581
209,455
Cash and cash equivalents at end of period$ 382,133 $ 267,060 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 and capital expenditures. 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. AtJanuary 1, 2022 ,$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$164.4 million for the nine months endedJanuary 1, 2022 compared to$103.8 million for the nine months endedDecember 26, 2020 . Cash provided by operating activities increased due to higher net income in the current year, partially offset by an increase in inventory from higher material costs and higher stocking levels to mitigate supply chain challenges, an increase in prepaid and other assets primarily from the capitalization of$15.4 million of cloud computing costs in fiscal 2022, and a$5.9 million payment of payroll taxes which were deferred in the prior fiscal year under the CARES Act regulations. Cash used in investing activities was$22.9 million for the nine months endedJanuary 1, 2022 compared to$1.2 million for the nine months endedDecember 26, 2020 . The increase was primarily related to an increase in capital expenditures in the current period. The Company acquired two idle manufacturing facilities inTexas and made investments in plant improvements to facilitate increased production or operational efficiencies. The Company deferred all non-essential spending in the first half of fiscal 2021 due to COVID-19 concerns. Cash used in financing activities was$21.4 million for the nine months endedJanuary 1, 2022 compared to$47.9 million for the nine months endedDecember 26, 2020 . The decrease in cash used for financing was primarily related to lower repayments during fiscal 2022 of the Company's previously existing revolving credit facility. The Company also saw an increase in floor plan financing during fiscal 2022, which had decreased in fiscal 2021 in response to lowering financed retail inventories in response to the pandemic. 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 26 -------------------------------------------------------------------------------- Accounting Policies." There have been no significant changes in our significant accounting policies or critical accounting estimates discussed in the Fiscal 2021 Annual Report.
Recently Issued Accounting Pronouncements
For information on the impact of recently issued accounting pronouncements, see Note 1, "Basis of Presentation - Recently Issued Accounting Pronouncements," to the condensed consolidated financial statements included in this Report.
Forward-Looking Statements
Some of the statements in this Report are not historical in nature 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. 27
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