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Skyline Champion Corp - Quarter Report: 2005 February (Form 10-Q)

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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

     
For the quarterly period ended
  February 28, 2005
 

or

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

             
For the transition period from
      to    
 
     
     
Commission File Number:
  1-4714
 

SKYLINE CORPORATION


(Exact name of registrant as specified in its charter)
     
Indiana
  35-1038277
 
(State or other jurisdiction of
  (I.R.S. Employer Identification No.)
incorporation or organization)
   
       
P. O. Box 743, 2520 By-Pass Road, Elkhart, Indiana
    46515
 
(Address of principal executive offices)
    (Zip Code)

(574) 294-6521


(Registrant’s telephone number, including area code)

     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. [X] Yes [ ] No

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). [X] Yes [ ] No

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

     
  Shares Outstanding
Title of Class   April 8, 2005
Common Stock   8,391,244

 


 

SKYLINE CORPORATION

Form 10-Q Quarterly Report

INDEX

             
            Page No.
   
 
           
 
  Item 1.   Financial Statements    
 
           
 
      Consolidated Balance Sheets as   2-3
 
        of February 28, 2005 and May 31, 2004    
 
           
 
      Consolidated Statements of Earnings and   4
 
        Retained Earnings for the three-month and    
 
        nine-month periods ended February 28,    
 
        2005 and February 29, 2004    
 
           
 
      Consolidated Statements of Cash Flows   5
 
        for the nine-month periods ended    
 
        February 28, 2005 and February 29, 2004    
 
           
 
      Notes to the Consolidated Financial   6-10
 
        Statements    
 
           
 
  Item 2.   Management’s Discussion and Analysis   11-18
 
        of Financial Condition and Results of    
 
        Operations    
 
           
 
  Item 4.   Controls and Procedures   19
 
           
 
           
 
  Item 1.   Legal Proceedings   20
 
           
 
  Item 6.   Exhibits   20
 
           
 
  Signatures       21
 
           
 
  Index to Exhibits   22
 
           
 
  Certifications      

1


 

Part I.

Item 1. Financial Statements

Skyline Corporation and Subsidiary Companies

Consolidated Balance Sheets
(Unaudited)
(Dollars in thousands)

                 
    February 28, 2005   May 31, 2004
            (As Restated
            See Note 3)
ASSETS
               
 
               
Current Assets
               
Cash
  $ 8,056     $ 8,838  
U.S. Treasury Bills, at cost plus accrued interest
    96,157       141,611  
U.S. Treasury Notes, at cost plus accrued interest
    45,224        
Accounts receivable, trade, less allowance for doubtful accounts of $150
    24,571       26,090  
Inventories
    10,099       9,895  
Other current assets
    6,259       9,046  
 
               
Total Current Assets
    190,366       195,480  
 
               
 
               
Property, Plant and Equipment, At Cost
               
Land
    6,572       6,572  
Buildings and improvements
    63,884       63,241  
Machinery and equipment
    28,511       27,206  
 
               
 
    98,967       97,019  
Less accumulated depreciation
    (62,320 )     (60,089 )
 
               
Net Property, Plant and Equipment
    36,647       36,930  
 
               
Other Assets
    9,066       8,758  
 
               
 
               
Total Assets
  $ 236,079     $ 241,168  
 
               

The accompanying notes are an integral part of the consolidated financial statements.

2


 

Skyline Corporation and Subsidiary Companies

Consolidated Balance Sheets (continued)
(Unaudited)
(Dollars in thousands)

                 
    February 28, 2005   May 31, 2004
            (As Restated
            See Note 3)
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
 
               
Current Liabilities
               
Accounts payable, trade
  $ 7,921     $ 7,776  
Accrued salaries and wages
    4,733       6,222  
Accrued profit sharing
    2,003       2,454  
Accrued marketing programs
    10,518       5,368  
Accrued warranty and related expenses
    7,658       7,321  
Other accrued liabilities
    4,279       2,735  
Income taxes payable
          166  
 
               
Total Current Liabilities
    37,112       32,042  
 
               
 
               
Other Deferred Liabilities
    11,068       10,642  
 
               
 
               
Commitments and Contingencies- See Note 1
               
 
               
Shareholders’ Equity
               
Common stock, $.0277 par value, 15,000,000 shares authorized; 11,217,144 shares issued
    312       312  
Additional paid-in capital
    4,928       4,928  
Retained earnings
    248,403       258,988  
Treasury stock, at cost, 2,825,900 shares at February 28, 2005 and May 31, 2004
    (65,744 )     (65,744 )
 
               
Total Shareholders’ Equity
    187,899       198,484  
 
               
 
               
Total Liabilities and Shareholders’ Equity
  $ 236,079     $ 241,168  
 
               

The accompanying notes are an integral part of the consolidated financial statements.

3


 

Skyline Corporation and Subsidiary Companies

Consolidated Statements of Earnings and Retained Earnings
For the three-month and nine-month periods ended February 28, 2005 and February 29, 2004
(Unaudited)
(Dollars in thousands, except per share data)

                                 
    Three-Months Ended   Nine-Months Ended
    2005   2004   2005   2004
            (As Restated           (As Restated
            See Note 3)           See Note 3)
EARNINGS
                               
Sales
  $ 96,219     $ 91,255     $ 334,817     $ 316,400  
Cost of sales
    86,789       82,910       299,626       280,019  
 
                               
Gross profit
    9,430       8,345       35,191       36,381  
Selling and administrative Expenses
    10,709       9,803       32,894       31,625  
 
                               
Operating (loss) earnings
    (1,279 )     (1,458 )     2,297       4,756  
Interest income
    672       314       1,594       940  
 
                               
(Loss) earnings before income taxes
    (607 )     (1,144 )     3,891       5,696  
Taxes (Benefit) provision for income taxes:
                               
Federal
    (194 )     (337 )     1,325       1,923  
State
    (62 )     (89 )     229       386  
 
                               
 
    (256 )     (426 )     1,554       2,309  
 
                               
Net (loss) earnings
  $ (351 )   $ (718 )   $ 2,337     $ 3,387  
 
                               
Basic (loss) earnings per share
  $ (.04 )   $ (.09 )   $ .28     $ .40  
 
                               
Cash dividends per share
  $ .18     $ .18     $ 1.54     $ .54  
 
                               
Weighted average common Shares outstanding
    8,391,244       8,391,244       8,391,244       8,391,244  
 
                               
RETAINED EARNINGS
                               
Balance at beginning of period
  $ 250,264     $ 259,973     $ 258,988     $ 258,889  
Add net (loss) earnings
    (351 )     (718 )     2,337       3,387  
Less cash dividends paid
    (1,510 )     (1,511 )     (12,922 )     (4,532 )
 
                               
Balance at end of period
  $ 248,403     $ 257,744     $ 248,403     $ 257,744  
 
                               

The accompanying notes are an integral part of the consolidated financial statements.

4


 

Skyline Corporation and Subsidiary Companies

Consolidated Statements of Cash Flows
For the nine-month periods ended February 28, 2005 and February 29, 2004
Increase (Decrease) in Cash
(Unaudited)
(Dollars in thousands)

                 
    2005   2004
            (As Restated
            See Note 3)
 
               
CASH FLOWS FROM OPERATING ACTIVITIES:
               
Net earnings
  $ 2,337     $ 3,387  
 
               
Adjustments to reconcile net earnings to net cash provided by operating activities:
               
Depreciation
    2,487       2,562  
Working Capital Items:
               
Accounts receivable
    1,519       (930 )
Accrued interest receivable
    (229 )     169  
Inventories
    (204 )     (352 )
Other current assets
    2,787       (1,064 )
Accounts payable, trade
    145       48  
Accrued liabilities
    5,091       4,044  
Income taxes payable
    (166 )     (1,786 )
Other, net
    245       158  
 
               
Total Adjustments
    11,675       2,849  
 
               
Net cash provided by operating activities
    14,012       6,236  
 
               
 
               
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Proceeds from principal payments of U.S. Treasury Bills
    275,776       301,344  
Purchase of U.S. Treasury Bills
    (230,387 )     (302,420 )
Purchase of U.S. Treasury Notes
    (44,930 )      
Proceeds from sale of idle property, plant and equipment
          644  
Purchase of property, plant and equipment
    (2,236 )     (1,468 )
Other, net
    (95 )     (111 )
 
               
Net cash used in investing activities
    (1,872 )     (2,011 )
 
               
 
               
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Cash dividends paid
    (12,922 )     (4,532 )
 
               
Net cash used in financing activities
    (12,922 )     (4,532 )
 
               
Net decrease in cash
    (782 )     (307 )
Cash at beginning of year
    8,838       8,736  
 
               
Cash at end of quarter
  $ 8,056     $ 8,429  
 
               

The accompanying notes are an integral part of the consolidated financial statements.

5


 

Skyline Corporation and Subsidiary Companies

Notes to the Consolidated Financial Statements
(Unaudited)

NOTE 1 Nature of Operations and Accounting Policies

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 February 28, 2005, in addition to the consolidated results of operations and consolidated cash flows for the nine-month periods ended February 28, 2005 and February 29, 2004.

The Corporation has restated its Consolidated Financial Statements for the three-month and nine-month periods ended February 29, 2004 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/A.

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):

                 
    February 28, 2005   May 31, 2004
 
               
Raw Materials
  $ 4,695     $ 4,158  
Work In Process
    5,136       5,650  
Finished Goods
    268       87  
 
               
 
  $ 10,099     $ 9,895  
 
               

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.

6


 

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):

                 
    Nine-Months Ended
    February 28,   February 29,
    2005   2004
 
               
Balance at the beginning of the period
  $ 11,121     $ 10,609  
Accruals for warranties
    9,315       8,446  
Settlements made during the period
    (8,778 )     (8,033 )
 
               
Balance at the end of the period
    11,658       11,022  
Non-current balance included in other deferred liabilities
    4,000       3,800  
 
               
Accrued warranty and related expenses
  $ 7,658     $ 7,222  
 
               

The Corporation was contingently liable at February 28, 2005 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 $104 million at February 28, 2005 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 nine-month periods ending February 28, 2005 and February 29, 2004.

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.

7


 

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)

                                 
    Three-Months Ended   Nine-Months Ended
    February 28,   February 29,   February 28,   February 29,
    2005   2004   2005   2004
 
                               
SALES
                               
Manufactured housing
  $ 69,772     $ 65,084     $ 246,847     $ 229,129  
Recreational vehicles
    26,447       26,171       87,970       87,271  
 
                               
Total sales
  $ 96,219     $ 91,255     $ 334,817     $ 316,400  
 
                               
 
                               
EARNINGS (LOSS) BEFORE INCOME TAXES
                               
OPERATING EARNINGS (LOSS)
                               
Manufactured housing
  $ 685     $ 108     $ 7,831     $ 8,030  
Recreational vehicles
    (1,075 )     (978 )     (3,138 )     (716 )
General corporate expense
    (889 )     (588 )     (2,396 )     (2,558 )
 
                               
Total operating (loss) earnings
    (1,279 )     (1,458 )     2,297       4,756  
Interest income
    672       314       1,594       940  
 
                               
(Loss) earnings before income taxes
  $ (607 )   $ (1,144 )   $ 3,891     $ 5,696  
 
                               

Operating earnings (loss) 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 Restatements

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. Management has 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. Accordingly, the Corporation has restated its Consolidated Statement of Cash Flows for the nine-month period ended February 29, 2004 to properly classify the proceeds from the sale or maturity of U.S. Treasury Bills as either operating or investing activities. The restatement had no impact on total cash flows.

8


 

Skyline Corporation and Subsidiary Companies

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

NOTE 3 Restatements (continued)

The Corporation has also determined in its review of its Consolidated Financial Statements that historically certain of its accounts have been misclassified. These misclassifications, which the Corporation believes are immaterial and would not themselves require restatement, include the recording of sales of parts as a reduction in cost of sales rather than an increase in revenue, the reporting of certain employee benefits as relating entirely to administrative expenses instead of allocating the amounts related to manufacturing to cost of sales, and the reporting of certain assets and liabilities as current when a portion should properly be classified as non-current. Accordingly, the Corporation’s Consolidated Financial Statements have also been restated for the three-month and nine-month periods ended February 29, 2004, and as of May 31, 2004, to reflect these changes in classification. The restatements had no effect on the total or per-share amount of net earnings (loss) or shareholders’ equity for any periods. The restatements of the Consolidated Financial Statements had the following effects (dollars in thousands):

                         
    May 31, 2004  
                    As Previously  
    As Restated     Adjustments     Reported  
Consolidated Balance Sheet
                       
 
                       
Other current assets
  $ 9,046     $ (3,447 )   $ 12,493  
Total current assets
  $ 195,480     $ (3,447 )   $ 198,927  
Other assets (non-current)
  $ 8,758     $ 3,447     $ 5,311  
Accrued warranty and related expenses
  $ 7,321     $ (3,800 )   $ 11,121  
Other accrued liabilities
  $ 2,735     $ (1,100 )   $ 3,835  
Total current liabilities
  $ 32,042     $ (4,900 )   $ 36,942  
Other deferred liabilities
  $ 10,642     $ 4,900     $ 5,742  
                         
    Three-Months Ended  
    February 29, 2004  
                    As Previously  
    As Restated     Adjustments     Reported  
Consolidated Statements of Earnings and Retained Earnings
                       
 
                       
Sales
  $ 91,255     $ 260     $ 90,995  
Cost of sales
  $ 82,910     $ 1,311     $ 81,599  
Gross profit
  $ 8,345     $ (1,051 )   $ 9,396  
Selling and administrative expenses
  $ 9,803     $ (1,051 )   $ 10,854  

9


 

Skyline Corporation and Subsidiary Companies

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

NOTE 3 Restatements (continued)

                         
    Nine-Months Ended  
    February 29, 2004  
                    As Previously  
    As Restated     Adjustments     Reported  
Consolidated Statements of Earnings and Retained Earnings
                       
 
                       
Sales
  $ 316,400     $ 1,143     $ 315,257  
Cost of sales
  $ 280,019     $ 4,441     $ 275,578  
Gross profit
  $ 36,381     $ (3,298 )   $ 39,679  
Selling and administrative expenses
  $ 31,625     $ (3,298 )   $ 34,923  
 
                       
Consolidated Statements of Cash Flows
                       
 
                       
Net cash provided by operating activities
  $ 6,236     $ 1,239     $ 4,997  
Net cash used in investing activities
  $ (2,011 )   $ (1,239 )   $ (772 )

10


 

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. Eight 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.

Restatements

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. Management has 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. The Corporation has also determined in its review of its Consolidated Financial Statements that historically certain of its accounts have been misclassified. These misclassifications, which the Corporation believes are immaterial and would not themselves require restatement, include the recording of sales of parts as a reduction in cost of sales rather than an increase in revenue, the reporting of certain employee benefits as relating entirely to administrative expenses instead of allocating the amounts related to manufacturing to cost of sales, and the reporting of certain assets and liabilities as current when a portion should more properly be classified as non-current.

11


 

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

 

Restatements (continued)

The accompanying Management’s Discussion and Analysis of Financial Condition and Results of Operations reflects the restatement of the interest received in the Consolidated Statement of Cash Flows and the immaterial misclassifications in the Consolidated Financial Statements for the three-month and nine-month periods ended February 29, 2004 as described in Note 3 to the Consolidated Financial Statements.

Results of Operations – Three-Month Period Ended February 28, 2005 Compared to the
Three-Month Period Ended February 29, 2004

Sales and Unit Shipments
(Dollars in thousands)

                                         
                                    Change
                                    Increase
    2005   Percent   2004   Percent   (Decrease)
Sales
                                       
Manufactured Housing
  $ 69,772       72.5     $ 65,084       71.3     $ 4,688  
Recreational Vehicles
    26,447       27.5       26,171       28.7       276  
 
                                       
Total Sales
  $ 96,219       100.0     $ 91,255       100.0     $ 4,964  
 
                                       
 
                                       
Unit Shipments
                                       
Manufactured Housing
    1,580       48.8       1,583       46.6       (3 )
Recreational Vehicles
    1,660       51.2       1,811       53.4       (151 )
 
                                       
Total Unit Shipments
    3,240       100.0       3,394       100.0       (154 )
 
                                       

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 February 28, 2005 versus 80.6 percent for the three-month period ended February 29, 2004.

Recreational vehicle dollar sales rose due to increased selling prices meant to offset increased material costs in lumber, lumber-related products and steel.

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.

12


 

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

 

Results of Operations – Three-Month Period Ended February 28, 2005 Compared to the Three-Month Period Ended February 29, 2004 (continued)

Cost of Sales
(Dollars in thousands)

                                         
                                    Change
            Percent of           Percent of   Increase
    2005   Segment Sales   2004   Segment Sales   (Decrease)
Manufactured Housing
  $ 62,269       89.2     $ 58,800       90.3     $ 3,469  
Recreational Vehicles
    24,520       92.7       24,110       92.1       410  
 
                                       
 
                                       
 
          Percent of           Percent of        
 
          Total Sales           Total Sales        
Consolidated
  $ 86,789       90.2     $ 82,910       90.8     $ 3,879  
 
                                       

Manufactured housing cost of sales as a percentage of sales declined due to increased selling prices offsetting material cost increases.

Recreational vehicle cost of sales rose primarily due to increased warranty costs, and costs associated with an idled recreational vehicle facility.

Selling and Administrative Expenses
(Dollars in thousands)

                                         
                                    Change
            Percent of           Percent of   Increase
    2005   Sales   2004   Sales   (Decrease)
Selling and Administrative Expenses
  $ 10,709       11.1     $ 9,803       10.7     $ 906  

Expenses rose due to increases in the following forms of compensation: salaries and wages; sales volume based commissions; bonuses based on operating profit; and a change in valuation of the Corporation’s liability for certain post-retirement benefits.

13


 

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

 

Results of Operations – Three-Month Period Ended February 28, 2005 Compared to the Three-Month Period Ended February 29, 2004 (continued)

Operating Earnings (Loss)
(Dollars in thousands)

                                         
                                    Change in
                                    Operating
                                    Earnings
            Percent of           Percent of   Increase
    2005   Segment Sales   2004   Segment Sales   (Decrease)
Manufactured Housing
  $ 685       1.0     $ 108       0.2     $ 577  
Recreational Vehicles
    (1,075 )     (4.1 )     (978 )     (3.7 )     (97 )
 
                                       
 
          Percent of           Percent of        
 
          Total Sales           Total Sales        
General Corporate Expenses
    (889 )     (0.9 )     (588 )     (0.6 )     (301 )
 
                                       
 
                                       
Total Operating (Loss)
  $ (1,279 )     (1.3 )   $ (1,458 )     (1.6 )   $ 179  
 
                                       

Operating earnings for manufactured housing improved due to increased selling prices offsetting increased material costs. In addition, multi-section homes represented a greater percentage of total unit sales.

Operating loss for recreational vehicles increased due to $112,000 in costs associated with a facility that was idled in the third fiscal quarter.

Interest Income
(Dollars in thousands)

                         
                    Change
    February 28,   February 29,   Increase
    2005   2004   (Decrease)
Interest Income
  $ 672     $ 314     $ 358  

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

14


 

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

 

Results of Operations – Nine-Month Period Ended February 28, 2005 Compared to the Nine-Month Period Ended February 29, 2004

Sales and Unit Shipments
(Dollars in thousands)

                                         
                                    Change
                                    Increase
    2005   Percent   2004   Percent   (Decrease)
Sales
                                       
Manufactured Housing
  $ 246,847       73.7     $ 229,129       72.4     $ 17,718  
Recreational Vehicles
    87,970       26.3       87,271       27.6       699  
 
                                       
Total Sales
  $ 334,817       100.0     $ 316,400       100.0     $ 18,417  
 
                                       
 
                                       
Unit Shipments
                                       
Manufactured Housing
    5,648       49.3       5,784       49.2       (136 )
Recreational Vehicles
    5,802       50.7       5,977       50.8       (175 )
 
                                       
Total Unit Shipments
    11,450       100.0       11,761       100.0       (311 )
 
                                       

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 81.7 percent of total unit sales for the nine-month period ended February 28, 2005 versus 80.2 percent for the nine-month period ended February 29, 2004.

Recreational vehicle dollar sales rose due to increased selling prices meant to offset increased material costs in lumber, lumber-related products and steel.

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)

                                         
                                    Change
            Percent of           Percent of   Increase
    2005   Segment Sales   2004   Segment Sales   (Decrease)
Manufactured Housing
  $ 217,767       88.2     $ 201,164       87.8     $ 16,603  
Recreational Vehicles
    81,859       93.1       78,855       90.4       3,004  
 
                                       
 
                                       
 
          Percent of           Percent of        
 
          Total Sales           Total Sales        
Consolidated
  $ 299,626       89.5     $ 280,019       88.5     $ 19,607  
 
                                       

15


 

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

 

Results of Operations – Nine-Month Period Ended February 28, 2005 Compared to the
Nine-Month Period Ended February 29, 2004 (continued)

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 costs associated with a facility idled in the third fiscal quarter.

Selling and Administrative Expenses
(Dollars in thousands)

                                         
                                    Change
            Percent of           Percent of   Increase
    2005   Sales   2004   Sales   (Decrease)
Selling and Administrative Expenses
  $ 32,894       9.8     $ 31,625       10.0     $ 1,269  

Expenses rose due to increases in the following forms of compensation: salaries and wages; sales volume based commissions; bonuses based on operating profit; and a change in valuation of the Corporation’s liability for certain post-retirement benefits.

Operating Earnings (Loss)
(Dollars in thousands)

                                         
                                    Change in
                                    Operating
                                    Earnings
            Percent of           Percent of   Increase
    2005   Segment Sales   2004   Segment Sales   (Decrease)
Manufactured Housing
  $ 7,831       3.2     $ 8,030       3.5     $ (199 )
Recreational Vehicles
    (3,138 )     (3.6 )     (716 )     (0.8 )     (2,422 )
 
                                       
 
          Percent of           Percent of        
 
          Total Sales           Total Sales        
General Corporate Expenses
    (2,396 )     (0.7 )     (2,558 )     (0.8 )     162  
 
                                       
 
                                       
Total Operating Earnings
  $ 2,297       0.7     $ 4,756       1.5     $ (2,459 )
 
                                       

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 $817,000 in costs for a facility that was idled in the Corporation’s third fiscal quarter.

16


 

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

 

Results of Operations – Nine-Month Period Ended February 28, 2005 Compared to the Nine-Month Period Ended February 29, 2004 (continued)

Interest Income
(Dollars in thousands)

                         
                    Change  
                    Increase  
    2005     2004     (Decrease)  
Interest Income
  $ 1,594     $ 940     $ 654  

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)

                         
    February 29,     May 31,     Change  
    2005     2004     Increase  
                    (Decrease)  
Cash and U.S. Treasury Bills and Notes
  $ 149,437     $ 150,449     $ (1,012 )
Current Assets Exclusive of Cash and U.S. Treasury Bills and Notes
  $ 40,929     $ 45,031     $ (4,102 )
Current Liabilities
  $ 37,112     $ 32,042     $ 5,070  
Working Capital
  $ 153,254     $ 163,438     $ (10,184 )

The Corporation’s policy is to invest in U.S. Government Securities when cash exceeds operating requirements. Currents assets exclusive of cash and U. S. Treasury Bills and Notes decreased due to a $1,519,000 seasonal decline in accounts receivable, and a $2,787,000 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.

Current liabilities increased primarily due to a $5,150,000 rise in accrued marketing programs. The increase is due to higher sales and the timing of an ongoing marketing program.

Capital expenditures totaled $2,236,000 for the nine-months ended February 28, 2005 compared to $1,468,000 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.

17


 

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

 
Other Matters

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 nine-month period ended February 28, 2005.

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. If necessary the Corporation will 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:

  •   Cyclical nature of the manufactured housing and recreational vehicle industries
 
  •   General or seasonal weather conditions affecting sales
 
  •   Potential periodic inventory adjustments by independent retailers
 
  •   Availability of wholesale and retail financing
 
  •   Interest rate levels
 
  •   Impact of inflation
 
  •   Cost of labor and raw materials
 
  •   Competitive pressures on pricing and promotional costs
 
  •   Catastrophic events impacting insurance costs
 
  •   Consumer confidence and economic uncertainty
 
  •   Market demographics
 
  •   Management’s ability to attract and retain executive officers and key personnel
 
  •   Increased global tensions, market disruption resulting from a terrorist or other attack and any armed conflict involving the United States.

18


 

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) or 15d-15(e) under the Securities Exchange Act of 1934), as of the end of the period covered by this report and have determined such disclosure controls and procedures were effective.

Changes in Internal Controls Over Financial Reporting: Subsequent to the filing of the Corporation’s Annual Report on Form 10-K for the period ended May 31, 2004, the Corporation identified a material weakness in its internal control over financial reporting related to classification of items in its 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 nine-months ended February 29, 2004. The restatement resulted from a material weakness 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.

The Corporation implemented the following changes to its internal controls over financial reporting to address the material weakness noted above, and the misclassifications further discussed in Note 3 to the financial statements:

  •   An extensive review of Generally Accepted Accounting Principles (GAAP) pertaining to proper classifications of accounts in the financial statements of the Corporation.
 
  •   A quarterly review of newly issued GAAP pronouncements for possible classification impacts on the financial statements of the Corporation.
 
  •   A quarterly review of the Corporation’s accounts for changes in the nature of the business that may have an impact on classifications within the financial statements and related disclosures.

19


 

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/A for the fiscal year ended May 31, 2004 filed by the registrant with the Commission.

Item 6. Exhibits

(31.1)   Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002-Rule 13a-14(a)/15d-14(a)
 
(31.2)   Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002-Rule 13a-14(a)/15d-14(a)
 
(32.1)   Certification of Periodic Financial Reports Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
(32.2)   Certification of Periodic Financial Reports Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

20


 

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.

     
  SKYLINE CORPORATION
 
   
 
   
DATE: April 8, 2005
  /s/ James R. Weigand
                                                              
  James R. Weigand
  Chief Financial Officer
 
   
DATE: April 8, 2005
  /s/ Jon S. Pilarski
                                                              
  Jon S. Pilarski
  Corporate Controller

21


 

INDEX TO EXHIBITS

     
Exhibit Number   Descriptions
   
31.1
  Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002-Rule 13a-14(a)/15d-14(a)
   
31.2
  Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002-Rule 13a-14(a)/15d-14(a)
   
32.1
  Certification of Periodic Financial Reports Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   
32.2
  Certification of Periodic Financial Reports Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

22