Skyline Champion Corp - Quarter Report: 2004 November (Form 10-Q)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

or

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

SKYLINE CORPORATION

(574) 294-6521

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

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

SKYLINE CORPORATION

Form 10-Q Quarterly Report

INDEX

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Part I.

Item 1. Financial Statements

Skyline Corporation and Subsidiary Companies

Consolidated Balance Sheets
(Unaudited)
(Dollars in thousands)

The accompanying notes are a part of the consolidated financial statements.

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Skyline Corporation and Subsidiary Companies

Consolidated Balance Sheets
(Unaudited)
(Dollars in thousands, except per share data)

The accompanying notes are a part of the consolidated financial statements.

3

Skyline Corporation and Subsidiary Companies

Consolidated Statements of Earnings and Retained Earnings
For the three-month and six-month periods ended November 30, 2004 and 2003
(Unaudited)
(Dollars in thousands, except per share data)

The accompanying notes are a part of the consolidated financial statements.

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Skyline Corporation and Subsidiary Companies

Consolidated Statements of Cash Flows
For the six-month periods ended November 30, 2004 and 2003
Increase (Decrease) in Cash
(Unaudited)
(Dollars in thousands)

The accompanying notes are a part of the consolidated financial statements.

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Skyline Corporation and Subsidiary Companies

Notes to the Consolidated Financial Statements
(Unaudited)

NOTE 1 Nature of Operations, Accounting Policies and Restatement of 2003 Consolidated Statement of Cash Flows

The accompanying unaudited interim consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the consolidated financial position as of November 30, 2004, in addition to the consolidated results of operations and consolidated cash flows for the six-month periods ended November 30, 2004 and 2003.

The Corporation has restated its Consolidated Statement of Cash Flows for the six-month period ended November 30, 2003 as more fully described in Note 3.

The unaudited interim consolidated financial statements included herein have been prepared pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly, certain information and footnote disclosures normally accompanying the annual consolidated financial statements have been omitted. The interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Corporation’s latest annual report on Form 10-K, except for the Consolidated Statement of Cash Flows which are being restated as discussed in the Corporation's most recent Form 8-K.

Inventories are stated at cost, determined under the first-in, first-out method, which is not in excess of market. Physical inventory counts are taken at the end of each reporting quarter. Total inventories for the periods presented consisted of (dollars in thousands):

The Corporation provides the retail purchaser of its manufactured homes with a fifteen-month warranty against defects in design, materials and workmanship. Recreational vehicles are covered by a two-year warranty.

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Skyline Corporation and Subsidiary Companies

Notes to the Consolidated Financial Statements (continued)
(Unaudited)

NOTE 1 Nature of Operations and Accounting Policies (continued)

The warranties are backed by a corporate service department and an extensive field service system. Estimated warranty costs are accrued at the time of sale based upon current sales, historical experience and management’s judgment regarding anticipated rates of warranty claims. The adequacy of the recorded warranty liability is periodically assessed and the amount is adjusted as necessary. A reconciliation of accrued warranty and related expenses is as follows (dollars in thousands):

The Corporation was contingently liable at November 30, 2004 under repurchase agreements with certain financial institutions providing inventory financing for retailers of its products. Under these arrangements, which are customary in the manufactured housing and recreational vehicle industries, the Corporation agrees to repurchase homes in the event of default by the retailer at declining prices over the term of the agreement, generally 12 months. The maximum repurchase liability is the total amount that would be paid upon the default of all the Corporation’s independent dealers. The maximum potential repurchase liability, without reduction for the resale value of the repurchased units, was approximately $106 million at November 30, 2004 and $100 million at May 31, 2004. The risk of loss under these agreements is spread over many retailers and financial institutions. The loss, if any, under these agreements is the difference between the repurchase cost and the resale value of the units. The allowance for doubtful accounts includes a reserve for potential net losses on repurchased units. There were no repurchases in the six-month periods ending November 30, 2004 and 2003.

In November 2004 the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 151, “Inventory Costs, an amendment of ARB No.43, Chapter 4” (SFAS 151). SFAS 151 amends the guidance in ARB No. 43, Chapter 4, “Inventory Pricing”, and requires that allocation of fixed production overheads to the cost of production be based on normal capacity of the production facilities. This pronouncement is effective for the Corporation beginning June 1, 2006. The Corporation does not expect the adoption of this pronouncement to have a material impact on its future financial condition or results of operations.

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Skyline Corporation and Subsidiary Companies

Notes to the Consolidated Financial Statements (continued)
(Unaudited)

NOTE 1 Nature of Operations and Accounting Policies (continued)

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

Certain prior period amounts have been reclassified to conform with the current period presentation.

NOTE 2 Industry Segment Information
(Dollars in thousands)

Operating earnings represent earnings before interest income and provision for income taxes with non-traceable operating expenses being allocated to industry segments based on percentages of sales.

NOTE 3 Reclassification of Interest Income Earned

The Corporation has historically recorded all proceeds received from the sale or maturity of U.S. Treasury Bills as an investing activity in the Consolidated Statement of Cash Flows. In connection with the preparation of the unaudited consolidated financial statements for the six-month period ended November 30, 2004, the Corporation determined that the proceeds received upon sale or maturity of the U.S. Treasury Bills represents an investing cash inflow for the amount of the original investment and an operating cash inflow for the interest received.

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Skyline Corporation and Subsidiary Companies

Notes to the Consolidated Financial Statements (continued)
(Unaudited)

NOTE 3 Reclassification of Interest Income Earned (continued)

Accordingly, the Corporation has restated its Consolidated Statement of Cash Flows for the six-month period ended November 30, 2003, to properly allocate the proceeds from the sale or maturity of U.S. Treasury Bills between operating and investing activities. The restatement had no effect on the total or per-share amount of net earnings or retained earnings for the period. The restatement of the Consolidated Statement of Cash Flows had the following effect:

Certain other prior period amounts have been reclassified on the Consolidated Statement of Cash Flows to conform with current year presentation.

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

Skyline Corporation and Subsidiary Companies
Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

The Corporation sells manufactured housing and towable recreational vehicle products to independent dealers and manufactured housing communities located throughout the United States. To better serve the needs of its dealers, the Corporation has twenty-two manufacturing facilities in eleven states. Manufactured housing and recreational vehicles are sold to dealers either through floor plan financing with various financial institutions or on a cash basis. While the Corporation maintains production of manufactured homes and recreational vehicles throughout the year, seasonal fluctuations in sales do occur. Sales and production of manufactured homes are affected by winter weather conditions at the Corporation’s northern plants. Recreational vehicle sales are generally higher in the spring and summer months than in the fall and winter months.

Sales in both business segments are affected by the strength of the U.S. economy, interest rate levels, consumer confidence and the availability of wholesale and retail financing. The manufactured housing segment is currently affected by an industry recession. This recession, caused primarily by restrictive retail financing, economic uncertainty and global tensions, has resulted in industry sales to be the lowest in decades. In the recreational vehicle segment, the Corporation sells travel trailers, fifth wheels and park models. Industry sales of travel trailers and fifth wheels have seen steady growth in recent years.

Despite the recession in the manufactured housing industry, demand for multi-section homes is increasing. This product is often sold as part of a land-home package and is financed with a conventional mortgage. Multi-section homes have an appearance similar to site-built homes and are notably less expensive. The Corporation is capitalizing on the increased demand for multi-section homes by expanding manufacturing capabilities. Twelve manufactured housing facilities obtained approval from applicable state and local governmental entities to produce modular homes, which will extend existing product offerings.

The recreational vehicle segment is witnessing a shift in consumer demand for both metal-sided products and products with bonded fiberglass exteriors. The Corporation is positioning itself to take advantage of the expanding towable recreational vehicle segment in which it competes.

Restatement of Cash Flow Activity

The accompanying Management’s Discussion and Analysis of Financial Condition and Results of Operations gives effect to the restatement of the Consolidated Statement of Cash Flow for the six-month period ended November 30, 2003, as described in Note 3 to the Consolidated Financial Statements.

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

Skyline Corporation and Subsidiary Companies
Management’s Discussion and Analysis of Financial Condition and Results of Operations

Sales and Unit Shipments
(Dollars in thousands)

Manufactured housing unit sales continue to be affected by difficult market conditions, restrictive retail financing, economic uncertainty and increased global tensions. Average sales per unit rose due to increased selling prices and a product mix shift toward multi-section homes. Selling prices increased as a result of unprecedented increases in the cost of lumber, lumber-related materials and steel. Multi-section homes represent 81.5 percent of total unit sales for the three-month period ended November 30, 2004 versus 78.9 percent for the three-month period ended November 30, 2003.

Recreational vehicle sales declined due to a product mix shift toward travel trailers. This product has an average selling price that is lower than fifth wheel recreational vehicles and park models. Travel trailers represent 81.9 percent of total unit sales for the three-month period ended November 30, 2004 versus 71.6 percent for the three-month period ended November 30, 2003.

Recreational vehicle unit sales decreased as a result of a continued shift in consumer demand toward products with bonded fiberglass exteriors. The Corporation currently offers a limited number of models with this exterior.

Cost of Sales
(Dollars in thousands)

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

Skyline Corporation and Subsidiary Companies
Management’s Discussion and Analysis of Financial Condition and Results of Operations

Cost of sales as a percentage of sales for both business segments rose primarily due to increased cost of lumber, lumber-related materials and steel. In addition, the Corporation experienced rising costs associated with workers compensation and warranty. The recreational vehicles segment was also impacted by startup costs for a new recreational vehicle facility.

Selling and Administrative Expenses
(Dollars in thousands)

Expenses as a percentage of sales were flat between the two periods.

Operating Earnings (Loss)
(Dollars in thousands)

As noted above, increased costs of material, workers compensation and warranty negatively affected operating earnings for both segments. The manufactured housing segment had increased sales volume discounts resulting from existing marketing programs. The recreational vehicle segment was further impacted by startup costs of $214,000 for a new facility, a product mix shift toward travel trailers and consumer demand for products with bonded fiberglass exteriors.

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

Skyline Corporation and Subsidiary Companies
Management’s Discussion and Analysis of Financial Condition and Results of Operations

Interest Income
(Dollars in thousands)

Interest income is directly related to the amount available for investment and the prevailing yields of U.S. Government Securities.

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

Skyline Corporation and Subsidiary Companies
Management’s Discussion and Analysis of Financial Condition and Results of Operations

Sales and Unit Shipments
(Dollars in thousands)

Manufactured housing unit sales continue to be affected by difficult market conditions, restrictive retail financing, economic uncertainty and increased global tensions. Average sales per unit rose due to increased selling prices and a product mix shift toward multi-section homes. Selling prices increased as a result of unprecedented increases in the cost of lumber, lumber-related materials and steel. Multi-section homes represent 81.8 percent of total unit sales for the six-month period ended November 30, 2004 versus 80.1 percent for the six-month period ended November 30, 2003.

Recreational vehicle sales stayed relatively flat despite a product mix shift toward travel trailers and changing consumer taste for models with bonded fiberglass exteriors.

Cost of Sales
(Dollars in thousands)

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

Skyline Corporation and Subsidiary Companies
Management’s Discussion and Analysis of Financial Condition and Results of Operations

Cost of sales for both business segments rose primarily due to increased cost of lumber,
lumber-related materials and steel. In addition, the Corporation experienced rising costs associated with workers compensation and warranty. The recreational vehicles segment was also impacted by startup costs for a new recreational vehicle facility.

Selling and Administrative Expenses
(Dollars in thousands)

The decrease as a percentage of sales is due to a smaller proportion of fixed and semi-fixed costs resulting from higher sales.

Operating Earnings (Loss)
(Dollars in thousands)

As noted above, increased costs of material, workers compensation and warranty negatively affected operating earnings for both segments. The manufactured housing segment had increased sales volume discounts resulting from existing marketing programs. The recreational vehicle segment was further impacted by startup costs of $705,000 for a new facility.

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

Skyline Corporation and Subsidiary Companies
Management’s Discussion and Analysis of Financial Condition and Results of Operations

Interest Income
(Dollars in thousands)

Interest income is directly related to the amount available for investment and the prevailing yields of U.S. Government Securities.

Liquidity and Capital Resources
(Dollars in thousands)

The Corporation’s policy is to invest in U.S. Government Securities when cash exceeds immediate operating requirements. Current assets exclusive of cash and U.S. Treasury Bill and Notes decreased due to a $1,338,000 decrease in other current assets. Other current assets declined due to a reduction in a prepayment for the Corporation’s future estimated cost of workers’ compensation benefits.

Various factors contributed to the increase in current liabilities. Accrued profit sharing decreased $1,119,000 due to the timing of a yearly contribution to the Corporation’s profit sharing plan. Accrued marketing programs increased $5,250,000 due to higher sales and the timing of payments for an ongoing marketing program

Capital expenditures totaled $1,867,000 for the six-months ended November 30, 2004 compared to $1,246,000 in the previous year. Capital expenditures during this period were made primarily to replace or refurbish machinery, equipment and facilities in addition to improving manufacturing efficiencies.

A special dividend of $8,391,000 ($1.00 per share) was paid on November 1, 2004 to shareholders of the Corporation’s common stock at the close of business October 14, 2004.

The cash provided by operating activities, along with current cash and other short-term investments, is expected to be adequate to fund any capital expenditures and treasury stock purchases during the year. Historically, the Corporation’s financing needs have been met through funds generated internally.

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Skyline Corporation and Subsidiary Companies
Management’s Discussion and Analysis of Financial Condition and Results of Operations

The provisions for federal income taxes in each year approximates the statutory rate and for state income taxes reflects current state rates effective for the period based upon activities within the taxable entities.

The consolidated financial statements included in this report reflect transactions in the dollar values in which they were incurred and, therefore, do not attempt to measure the impact of inflation. The Corporation however, recently experienced significant increases in the cost of lumber, lumber-related materials and steel. Although the Corporation was unable to recover all of the increases in the first half of fiscal 2005, on a long-term basis it has demonstrated an ability to adjust selling prices in reaction to changing costs due to inflation. The Corporation believes that except as noted above, inflation has not had a material effect on its operations during the six-month period ended
November 30, 2004.

The Sarbanes-Oxley Act of 2002 has introduced many new requirements applicable to the company regarding corporate governance and reporting. Section 404 of the Act requires management to report on the Corporation’s internal controls over financial reporting. The Corporation may devote substantial time and cost during fiscal year 2005 to ensure compliance. Management is making every effort to comply with Section 404 in a timely fashion.

Forward Looking Information

Certain statements in this report are considered forward looking as indicated by the Private Securities Litigation Reform Act of 1995. These statements involve uncertainties that may cause actual results to materially differ from expectations as of the report date. These uncertainties include but are not limited to:

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Item 4: Controls and Procedures

Evaluation of disclosure controls and procedures: Under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, the Corporation has evaluated the effectiveness of the design and operation of its disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures as remediated and discussed below are effective such that information related to the Corporation required to be disclosed in the Securities and Exchange Commission (“SEC”) reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to the Corporation’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Restatement of Consolidated Statements of Cash Flows: As set forth in Note 3 to the financial statements herein, the Corporation restated its Consolidated Statements of Cash Flows for the six-months ended November 30, 2003. The restatement resulted from a deficiency in the Corporation’s internal controls over financial reporting regarding the classification of proceeds received from the sale or maturity of U.S. Treasury Bills. Pursuant to Public Company Accounting Oversight Board Standard No. 2, which will first be applicable to the Corporation as of May 31, 2005, a restatement of previously issued financial statements to reflect the correction of a misstatement should be regarded as at least a significant deficiency. The Corporation has implemented changes to its internal controls over financial reporting regarding the classification of proceeds received from the sale or maturity of U.S. Treasury Bills to remediate this significant deficiency.

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PART II

Item 1. Legal Proceedings

Information with respect to this Item for the period covered by this Form 10-Q has been reported in Item 3, entitled “Legal Proceedings” of the Form 10-K for the fiscal year ended May 31, 2004 filed by the registrant with the Commission.

Item 6. Exhibits

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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INDEX TO EXHIBITS

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