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Skyline Champion Corp - Quarter Report: 2007 November (Form 10-Q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
     
ý   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 30, 2007
or
     
o   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
incorporation or organization)
  Identification No.)
 
   
P. O. Box 743, 2520 By-Pass Road Elkhart, Indiana
   46515
 
(Address of principal executive offices)
  (Zip Code)
Registrant’s telephone number, including area code: (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.      ý Yes o No
          Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
         
Large accelerated filer o   Accelerated filer ý   Non-accelerated filer o
          Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).     o Yes  ý No
          Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
     
    Shares Outstanding
Title of Class   January 4, 2008
Common Stock   8,391,244
 
 

 


 

Form 10-Q
INDEX
             
        Page No.
Financial Information          
 
           
Financial Statements        
 
           
 
Consolidated Balance Sheets as of November 30, 2007 and May 31, 2007     2  
 
           
 
  Consolidated Statements of Earnings and Retained Earnings for the three-month and six-month periods ended November 30, 2007 and 2006     4  
 
           
 
  Consolidated Statements of Cash Flows for the six-month periods ended November 30, 2007 and 2006     5  
 
           
 
  Notes to the Consolidated Financial Statements     6  
 
           
Management’s Discussion and Analysis of Financial Condition and Results of Operations     10  
 
           
Quantitative and Qualitative Disclosures About Market Risk     18  
 
           
Controls and Procedures     18  
 
           
PART II.          
 
           
Legal Proceedings     19  
 
           
Risk Factors     19  
 
           
Exhibits     19  
 
           
      20  

1


 

PART I. Financial Information
Item 1.    Financial Statements
Skyline Corporation and Subsidiary Companies
Consolidated Balance Sheets
                 
    November 30, 2007     May 31, 2007  
    (Unaudited)          
    (Dollars in thousands)  
 
               
ASSETS
               
 
               
Current Assets:
               
Cash
  $ 8,314     $ 8,376  
U.S. Treasury Bills, at cost plus accrued interest
    115,740       115,864  
Accounts receivable, trade, less allowance for doubtful accounts of $100
    13,995       22,760  
Inventories
    10,978       10,561  
Other current assets
    11,783       11,381  
 
           
Total Current Assets
    160,810       168,942  
 
           
 
               
Property, Plant and Equipment, at Cost:
               
Land
    5,557       5,557  
Buildings and improvements
    67,088       66,629  
Machinery and equipment
    31,036       30,712  
 
           
 
    103,681       102,898  
Less accumulated depreciation
    68,173       67,092  
 
           
 
               
Net Property, Plant and Equipment
    35,508       35,806  
 
           
 
               
Other Assets
    10,365       10,192  
 
           
Total Assets
  $ 206,683     $ 214,940  
 
           
The accompanying notes are an integral part of the consolidated financial statements.

2


 

Item 1.    Financial Statements — (Continued).
Skyline Corporation and Subsidiary Companies
Consolidated Balance Sheets
                 
    November 30, 2007     May 31, 2007  
    (Unaudited)          
    (Dollars in thousands,  
    except share and per share data)  
 
               
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
 
               
Current Liabilities:
               
Accounts payable, trade
  $ 2,397     $ 5,162  
Accrued salaries and wages
    4,040       6,064  
Accrued profit sharing
    1,182       1,684  
Accrued marketing programs
    5,570       3,823  
Accrued warranty and related expenses
    7,343       7,300  
Other accrued liabilities
    2,581       3,081  
 
           
Total Current Liabilities
    23,113       27,114  
 
           
 
               
Other Deferred Liabilities
    9,952       10,011  
 
           
 
               
Commitments and Contingencies-See Note 1
               
 
               
Shareholders’ Equity:
               
Common stock, $.0277 par value, 15,000,000 shares authorized; issued 11,217,144 shares
    312       312  
Additional paid-in capital
    4,928       4,928  
Retained earnings
    234,122       238,319  
Treasury stock, at cost, 2,825,900 shares
    (65,744 )     (65,744 )
 
           
Total Shareholders’ Equity
    173,618       177,815  
 
           
Total Liabilities and Shareholders’ Equity
  $ 206,683     $ 214,940  
 
           
The accompanying notes are an integral part of the consolidated financial statements.

3


 

Item 1.    Financial Statements — (Continued).
Skyline Corporation and Subsidiary Companies
Consolidated Statements of Earnings and Retained Earnings
For the three-month and six-month periods ended November 30, 2007 and 2006
                                 
    Three-Months Ended     Six-Months Ended  
    2007     2006     2007     2006  
            (Unaudited)          
            (Dollars in thousands,          
            except per share amounts)          
 
                               
EARNINGS
                               
Sales
  $ 77,198     $ 94,786     $ 173,592     $ 210,592  
Cost of sales
    71,375       84,477       157,450       187,227  
 
                       
Gross profit
    5,823       10,309       16,142       23,365  
Selling and administrative expense
    9,747       10,779       20,350       22,249  
 
                       
Operating (loss) earnings
    (3,924 )     (470 )     (4,208 )     1,116  
Interest income
    1,158       1,476       2,541       2,936  
 
                       
(Loss) earnings before income taxes
    (2,766 )     1,006       (1,667 )     4,052  
 
                       
(Benefit) provision for income taxes:
                               
Federal
    (911 )     343       (589 )     1,378  
State
    31       38       99       153  
 
                       
 
    (880 )     381       (490 )     1,531  
 
                       
Net (loss) earnings
  $ (1,886 )   $ 625     $ (1,177 )   $ 2,521  
 
                       
Basic (loss) earnings per share
  $ (.22 )   $ .07     $ (.14 )   $ .30  
 
                       
Cash dividends per share
  $ .18     $ .18     $ .36     $ 2.36  
 
                       
Weighted average number of common shares outstanding
    8,391,244       8,391,244       8,391,244       8,391,244  
 
                       
 
                               
RETAINED EARNINGS
                               
Balance at beginning of period
  $ 237,518     $ 241,860     $ 238,319     $ 258,258  
Net (loss) earnings
    (1,886 )     625       (1,177 )     2,521  
Cash dividends paid
    (1,510 )     (1,510 )     (3,020 )     (19,804 )
 
                       
Balance at end of period
  $ 234,122     $ 240,975     $ 234,122     $ 240,975  
 
                       
The accompanying notes are an integral part of the consolidated financial statements.

4


 

Item 1.    Financial Statements — (Continued).
Skyline Corporation and Subsidiary Companies
Consolidated Statements of Cash Flows
For the six-month periods ended November 30, 2007 and 2006
                 
    2007     2006  
    (Unaudited)  
    (Dollars in thousands)  
 
               
CASH FLOWS FROM OPERATING ACTIVITIES:
               
Net (loss) earnings
  $ (1,177 )   $ 2,521  
Adjustments to reconcile net (loss) earnings to net cash provided from operating activities:
               
Depreciation
    1,504       1,478  
Working capital items:
               
Accrued interest receivable
    251       (700 )
Accounts receivable
    8,765       12,821  
Inventories
    (417 )     (658 )
Other current assets
    (402 )     (1,744 )
Accounts payable, trade
    (2,765 )     (5,290 )
Accrued liabilities
    (1,236 )     (3,272 )
Income taxes payable
          (1,416 )
Other, net
    (118 )     (27 )
 
           
Net cash provided from operating activities
    4,405       3,713  
 
           
 
               
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Proceeds from principal payments of U.S. Treasury Bills
    206,176       76,769  
Purchase of U.S. Treasury Bills
    (206,303 )     (147,113 )
Proceeds from maturity of U.S. Treasury Notes
          90,000  
Purchase of property, plant and equipment
    (1,260 )     (2,664 )
Other, net
    (60 )     (58 )
 
           
Net cash (used in) provided from investing activities
    (1,447 )     16,934  
 
           
 
               
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Cash dividends paid
    (3,020 )     (19,804 )
 
           
Net cash used in financing activities
    (3,020 )     (19,804 )
 
           
Net (decrease) increase in cash
    (62 )     843  
 
Cash at beginning of year
    8,376       10,059  
 
           
Cash at end of quarter
  $ 8,314     $ 10,902  
 
           
The accompanying notes are an integral part of the consolidated financial statements.

5


 

Item 1.    Financial Statements — (Continued).
Skyline Corporation and Subsidiary Companies
Notes to the Consolidated Financial Statements (Unaudited)
NOTE 1 Nature of Operations, Accounting Policies of Consolidated Financial Statements
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, 2007, in addition to the consolidated results of operations and consolidated cash flows for the three-month and six-month periods ended November 30, 2007 and 2006. Due to the seasonal nature of the Corporation’s business, interim results are not necessarily indicative of results for the entire year.
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 audited consolidated balance sheet as of May 31, 2007 and the unaudited 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.
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 consist of the following:
                 
    November 30, 2007     May 31, 2007  
    (Dollars in thousands)  
 
               
Raw Materials
  $ 5,032     $ 5,098  
Work In Process
    5,430       5,463  
Finished Goods
    516        
 
           
 
  $ 10,978     $ 10,561  
 
           
The Corporation provides the retail purchaser of its manufactured homes with a full fifteen-month warranty against defects in design, materials and workmanship. Recreational vehicles are covered by a one-year warranty. The warranties are backed by service departments located at the Corporation’s manufacturing facilities and an extensive field service system.

6


 

Item 1.    Financial Statements — (Continued).
Skyline Corporation and Subsidiary Companies
Notes to the Consolidated Financial Statements (Unaudited) — (Continued)
NOTE 1 Nature of Operations, Accounting Policies of Consolidated Financial Statements (Continued)
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:
                 
    Six Months Ended  
    November 30,  
    2007     2006  
    (Dollars in thousands)  
 
               
Balance at the beginning of the period
  $ 10,600     $ 12,111  
 
               
Accruals for warranties
    4,515       6,340  
 
               
Settlements made during the period
    (4,472 )     (5,993 )
 
           
 
               
Balance at the end of the period
    10,643       12,458  
 
               
Non-current balance included in other deferred liabilities
    3,300       4,000  
 
           
 
               
Accrued warranty and related expenses
  $ 7,343     $ 8,458  
 
           
The Corporation was contingently liable at November 30, 2007 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 units 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 $78 million at November 30, 2007 and $89 million at May 31, 2007.
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.

7


 

Item 1.    Financial Statements — (Continued).
Skyline Corporation and Subsidiary Companies
Notes to the Consolidated Financial Statements (Unaudited) — (Continued)
NOTE 1 Nature of Operations, Accounting Policies of Consolidated Financial Statements (Continued)
The Corporation believes that any likely loss under the agreements in effect at November 30, 2007 will not be material to the Corporation’s financial position or results of operations.
The amounts of obligations from repurchased units and incurred net losses for the periods presented are as follows:
                                 
    Three-Months Ended     Six-Months Ended  
    November 30,     November 30,  
    2007     2006     2007     2006  
    (Dollars in thousands)  
 
                               
Number of units repurchased
    43       21       43       58  
Obligations from units repurchased
  $ 736     $ 310     $ 736     $ 941  
Net losses on repurchased units
                       
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.
In the first quarter of fiscal 2008, the Corporation adopted Financial Accounting Standards Board, (FASB), Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”, (FIN No. 48). This Interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with Statement of Financial Accounting Standards (SFAS) No. 109, “Accounting for Income Taxes”. The Corporation adopted FIN No. 48 with no material impact on its consolidated financial statements.
The amount of unrecognized tax benefit at June 1, 2007 totaled approximately $100,000. This amount would increase operating income thus impacting the Corporation’s effective tax rate, if ultimately recognized in income.
For the majority of taxing jurisdictions the Corporation is no longer subject to examination by taxing authorities for years before 2004. State income tax expense reflects minimum amounts required by certain taxing jurisdictions in which the Corporation operates.
The Corporation does not expect the amount of unrecognized tax benefits to significantly increase in the next twelve months. Interest and penalties related to income tax matters are recognized in income tax expense. Accruals for interest and penalties at November 30, 2007 were insignificant.
The Corporation has also determined that the adoption of any other recently issued accounting standard is not expected to have a material impact on its future financial condition or results of operation.

8


 

Item 1.    Financial Statements — (Continued).
Skyline Corporation and Subsidiary Companies
Notes to the Consolidated Financial Statements (Unaudited) — (Continued)
NOTE 2 Industry Segment Information
The Corporation designs, produces and distributes manufactured housing (single-section, multi-section and modular homes) and towable recreational vehicles (travel trailers, fifth wheels and park models). In the first six months of fiscal years 2008 and 2007, manufactured housing represented approximately 75 percent of total sales, while recreational vehicles accounted for approximately 25 percent.
Total operating (loss) earnings represent (loss) earnings before interest income and (benefit) provision for income taxes with non-traceable operating expenses being allocated to industry segments based on percentages of sales. General corporate expenses are not allocated to the industry segments.
                                 
    Three Months Ended     Six Months Ended  
    November 30,     November 30,  
    2007     2006     2007     2006  
    (Dollars in thousands)  
 
                               
SALES
                               
Manufactured housing
  $ 58,383     $ 72,618     $ 130,711     $ 157,101  
Recreational vehicles
    18,815       22,168       42,881       53,491  
 
                       
Total sales
  $ 77,198     $ 94,786     $ 173,592     $ 210,592  
 
                       
 
                               
(LOSS) EARNINGS BEFORE INCOME TAXES
                               
Operating (Loss) Earnings
                               
Manufactured housing
  $ (944 )   $ 1,268     $ 1,143     $ 3,786  
Recreational vehicles
    (2,352 )     (823 )     (4,109 )     (1,050 )
General corporate expense
    (628 )     (915 )     (1,242 )     (1,620 )
 
                       
Total operating (loss) earnings
    (3,924 )     (470 )     (4,208 )     1,116  
Interest income
    1,158       1,476       2,541       2,936  
 
                       
(Loss) earnings before income taxes
  $ (2,766 )   $ 1,006     $ (1,667 )   $ 4,052  
 
                       

9


 

Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
Overview
The Corporation designs, produces and distributes manufactured housing (single-section, multi-section and modular homes) and towable recreational vehicles (travel trailer, fifth wheels and park models) to independent dealers and manufactured housing communities located throughout the United States (U.S.). To better serve the needs of its dealers and communities, the Corporation has twenty-one manufacturing facilities in eleven states. Manufactured housing and recreational vehicles are sold to dealers and communities 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 a protracted downturn. This downturn, caused primarily by restrictive retail financing and economic uncertainty, has resulted in industry sales which over the last four years have been the lowest in decades. The manufactured housing industry has been further negatively impacted by the decline in the U.S housing market. In the recreational vehicle segment, the Corporation sells travel trailers, fifth wheels and park models. Industry demand for travel trailers and fifth wheels has softened in the current fiscal year. Based on the latest information available from the Recreational Vehicle Industry Association, national shipments of travel trailers and fifth wheels totaled approximately 135,000 units for the six-months ending October 31, 2007. This amount is lower than the approximately 140,000 units shipped during the six-months ending October 31, 2006.
Demand remains stronger for multi-section versus single-section homes. Multi-section homes are often sold as part of a land-home package and are financed with a conventional mortgage. These homes have an appearance similar to site-built homes and are notably less expensive. Ten of the Corporation’s manufactured housing facilities have obtained approval from applicable state and local governmental entities to produce modular homes, which will help meet the demand for multi-section homes.
The recreational vehicle segment in which the Corporation operates is a very competitive ever-changing market. Similar to the trend in the non-motorized recreational vehicle industry as a whole, this segment is currently experiencing decreased demand for travel trailers and fifth wheels.

10


 

Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations — (Continued).
 
Results of Operations — Three-Month Period Ended November 30, 2007 Compared to the
Three-Month Period Ended November 30, 2006 (Unaudited)
Sales and Unit Shipments
                                         
    2007     Percent     2006     Percent     Decrease  
    (Dollars in thousands)  
 
                                       
Sales
                                       
Manufactured Housing
  $ 58,383       75.6     $ 72,618       76.6     $ 14,235  
Recreational Vehicles
    18,815       24.4       22,168       23.4       3,353  
 
                             
Total Sales
  $ 77,198       100.0     $ 94,786       100.0     $ 17,588  
 
                             
 
                                       
Unit Shipments
                                       
Manufactured Housing
    1,283       51.8       1,487       51.2       204  
Recreational Vehicles
    1,192       48.2       1,416       48.8       224  
 
                             
Total Unit Shipments
    2,475       100.0       2,903       100.0       428  
 
                             
Manufactured housing sales decreased due to an overall softening of demand, which is consistent with the experience of the manufactured housing industry as a whole.
Recreational vehicle sales decreased due to an overall softening of demand. Furthermore, sales were negatively impacted by an increase in consumer demand for fiberglass bonded wall construction. The Corporation addressed this shift in demand by opening a previously idled facility which is dedicated to producing travel trailers with fiberglass bonded wall construction. This facility commenced operations in the third quarter of fiscal year 2007.
Cost of Sales
                                         
            Percent             Percent        
    2007     of Sales*     2006     of Sales*     Decrease  
    (Dollars in thousands)  
 
                                       
Manufactured Housing
  $ 52,715       90.3     $ 63,935       88.0     $ 11,220  
Recreational Vehicles
    18,660       99.2       20,542       92.7       1,882  
 
                                 
 
                                       
Consolidated
  $ 71,375       92.5     $ 84,477       89.1     $ 13,102  
 
                                 
*The percentages for manufactured housing and recreational vehicles are based on segment sales. The percentage for consolidated cost of sales is based on total sales.

11


 

Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations — (Continued).
 
Results of Operations — Three-Month Period Ended November 30, 2007 Compared to the
Three-Month Period Ended November 30, 2006 (Unaudited) — (Continued)
Cost of Sales — (Continued)
Manufactured housing cost of sales decreased due to less sales volume and the variable nature of many of the direct manufacturing costs. As a percentage of sales, cost of sales increased as a result of certain manufacturing overhead costs remaining relatively constant despite lower sales.
Recreational vehicle cost of sales decreased due to less sales volume and the variable nature of many of direct manufacturing costs. As a percentage of sales, cost of sales increased due to the introduction of various option packages. These packages, designed to meet competition in the marketplace, are aggressively priced relative to option packages sold in the previous year. The cost of sales percentage also increased as a result of certain manufacturing overhead costs remaining relatively constant despite lower sales.
Selling and Administrative Expenses
                                         
            Percent of             Percent of        
    2007     Sales     2006     Sales     Decrease  
    (Dollars in thousands)  
 
                                       
Selling and Administrative Expenses
  $ 9,747       12.6     $ 10,779       11.4     $ 1,032  
Selling and administrative expenses decreased primarily due to a decrease in performance based compensation, along with certain selling and administrative expenses. As a percentage of sales, selling and administrative expenses increased due to certain costs being fixed despite lower sales.
Operating (Loss) Earnings
                                         
            Percent of             Percent of        
    2007     Sales *     2006     Sales *     Decrease  
    (Dollars in thousands)  
 
                                       
Manufactured Housing
  $ (944 )     (1.6 )   $ 1,268       1.7     $ 2,212  
Recreational Vehicles
    (2,352 )     (12.5 )     (823 )     (3.7 )     1,529  
General Corporate Expenses
    (628 )     (0.8 )     (915 )     (1.0 )     287  
 
                                 
 
Total Operating (Loss) Earnings
  $ (3,924 )     (5.1 )   $ (470 )     (0.5 )   $ 3,454  
 
                                 
*The percentages for manufactured housing and recreational vehicles are based on segment sales. The percentage for general corporate expenses and total operating (loss) earnings are based on total sales.

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Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations — (Continued).
 
Results of Operations — Three-Month Period Ended November 30, 2007 Compared to the
Three-Month Period Ended November 30, 2006 (Unaudited) — (Continued)
Operating (Loss) Earnings — (Continued)
Operating earnings for manufactured housing decreased primarily due to the impact of decreased sales on the components of earnings as noted above.
The operating loss for recreational vehicles increased primarily by the impact of decreased sales on the components of earnings as noted above.
Decreases in general corporate expenses occurred primarily in costs associated with performance based compensation.
Interest Income
                         
    2007     2006     Decrease  
    (Dollars in thousands)  
 
                       
Interest Income
  $ 1,158     $ 1,476     $ 318  
Interest income is directly related to the amount available for investment and the prevailing yields of U.S. Government Securities.

13


 

     
Item 2.
  Management’s Discussion and Analysis of Financial Condition and Results of Operations — (Continued).
 
 
Results of Operations – Six-Month Period Ended November 30, 2007 Compared to the
Six-Month Period Ended November 30, 2006 (Unaudited)
Sales and Unit Shipments
                                         
    2007     Percent     2006     Percent     Decrease  
    (Dollars in thousands)  
 
                                       
Sales
                                       
Manufactured Housing
  $ 130,711       75.3     $ 157,101       74.6     $ 26,390  
Recreational Vehicles
    42,881       24.7       53,491       25.4       10,610  
 
                             
Total Sales
  $ 173,592       100.0     $ 210,592       100.0     $ 37,000  
 
                             
 
                                       
Unit Shipments
                                       
Manufactured Housing
    2,780       49.3       3,272       48.5       492  
Recreational Vehicles
    2,855       50.7       3,481       51.5       626  
 
                             
Total Unit Shipments
    5,635       100.0       6,753       100.0       1,118  
 
                             
Manufactured housing sales decreased due to an overall softening of demand, which is consistent with the experience of the manufactured housing industry as a whole.
Recreational vehicle sales decreased due to an overall softening of demand. Furthermore, sales were negatively impacted by an increase in consumer demand for fiberglass bonded wall construction. The Corporation addressed this shift in demand by opening a previously idled facility which is dedicated to producing travel trailers with fiberglass bonded wall construction. This facility commenced operations in the third quarter of fiscal year 2007.
Cost of Sales
                                         
            Percent           Percent        
    2007     of Sales*     2006     of Sales*     Decrease  
    (Dollars in thousands)  
 
                                       
Manufactured Housing
  $ 115,701       88.5     $ 138,422       88.1     $ 22,721  
Recreational Vehicles
    41,749       97.4       48,805       91.2       7,056  
 
                                 
 
                                       
Consolidated
  $ 157,450       90.7     $ 187,227       88.9     $ 29,777  
 
                                 
*The percentages for manufactured housing and recreational vehicles are based on segment sales. The percentage for consolidated cost of sales is based on total sales.

14


 

     
Item 2.
  Management’s Discussion and Analysis of Financial Condition and Results of Operations — (Continued).
 
 
Results of Operations – Six-Month Period Ended November 30, 2007 Compared to the
Six-Month Period Ended November 30, 2006 (Unaudited
) — (Continued)
Cost of Sales — (Continued)
Manufactured housing cost of sales decreased due to less sales volume and the variable nature of many of the direct manufacturing costs. As a percentage of sales, cost of sales increased as a result of certain manufacturing overhead costs remaining relatively constant despite lower sales.
Recreational vehicle cost of sales decreased due to less sales volume and the variable nature of many of direct manufacturing costs. As a percentage of sales, cost of sales increased due to the introduction of various option packages. These packages, designed to meet competition in the marketplace, are aggressively priced relative to option packages sold in the previous year. The cost of sales percentage also increased as a result of certain manufacturing overhead costs remaining relatively constant despite lower sales.
Selling and Administrative Expenses
                                         
            Percent             Percent        
    2007     of Sales     2006     of Sales     Decrease  
    (Dollars in thousands)  
 
                                       
Selling and Administrative Expenses
  $ 20,350       11.7     $ 22,249       10.6     $ 1,899  
Selling and administrative expenses decreased primarily due to a decrease in performance based compensation along with certain selling and administrative expenses. As a percentage of sales, selling and administrative expenses increased due to certain costs being fixed despite lower sales.
Operating (Loss) Earnings
                                         
            Percent             Percent        
    2007     of Sales*     2006     of Sales*     Decrease  
    (Dollars in thousands)  
 
                                       
Manufactured Housing
  $ 1,143       0.9     $ 3,786       2.4     $ 2,643  
Recreational Vehicles
    (4,109 )     (9.6 )     (1,050 )     (2.0 )     3,059  
General Corporate Expenses
    (1,242 )     (0.7 )     (1,620 )     (0.8 )     378  
 
                                 
 
                                       
Total Operating (Loss) Earnings
  $ (4,208 )     (2.4 )   $ 1,116       (0.5 )   $ 5,324  
 
                                 
*The percentages for manufactured housing and recreational vehicles are based on segment sales. The percentage for general corporate expenses and total operating (loss) earnings are based on total sales.

15


 

     
Item 2.
  Management’s Discussion and Analysis of Financial Condition and Results of Operations — (Continued).
 
 
Results of Operations – Six-Month Period Ended November 30, 2007 Compared to the
Six-Month Period Ended November 30, 2006 (Unaudited
) — (Continued)
Operating (Loss) Earnings — (Continued)
Operating earnings for manufactured housing decreased primarily due to the impact of decreased sales on the components of earnings as noted above.
The operating loss for recreational vehicles increased primarily by the impact of decreased sales on the components of earnings as noted above.
Decreases in general corporate expenses occurred primarily in costs associated with performance based compensation.
Interest Income
                         
    2007     2006     Decrease  
    (Dollars in thousands)  
Interest Income
  $ 2,541     $ 2,936     $ 395  
Interest income is directly related to the amount available for investment and the prevailing yields of U.S. Government Securities.
Liquidity and Capital Resources
                         
    November 30,   May 31,    
    2007   2007   Decrease
    (Dollars in thousands)
 
                       
Cash and U.S. Treasury Bills
  $ 124,054     $ 124,240     $ 186  
Current assets, exclusive of cash and U.S. Treasury Bills
  $ 36,756     $ 44,702     $ 7,946  
Current liabilities
  $ 23,113     $ 27,114     $ 4,001  
Working capital
  $ 137,697     $ 141,828     $ 4,131  

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Item 2.
  Management’s Discussion and Analysis of Financial Condition and Results of Operations — (Continued).
 
 
Liquidity and Capital Resources — (Continued)
The Corporation’s policy is to invest its excess cash, which exceeds its operating needs, in U.S. Government Securities. Current assets, exclusive of cash and U.S. Treasury Bills, declined primarily due to a decrease in accounts receivable of $8,765,000. This decrease is attributed to lower sales in November 2007 as compared to May 2007.
Current liabilities decreased due to a decline in accrued salaries and wages of $2,024,000, and accounts payable of $2,765,000. Accrued salaries and wages decreased due to the timing of payroll payments at November 30, 2007 as compared to May 31, 2007. In addition, the Corporation’s employee headcount was lower at November 30, 2007 as compared to May 31, 2007. Accounts payable, trade declined due to decreased sales activity.
Capital expenditures totaled $1,260,000 for the six months ended November 30, 2007 as compared to $2,664,000 in the comparable period of the previous year. Capital expenditures were made primarily to replace or refurbish machinery and equipment in addition to improving manufacturing efficiencies.
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.
Other Matters
The provision 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 overall effective tax (benefit) rate declined due to certain state taxing authorities in jurisdictions in which the Corporation operates assessing a minimum tax.
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. On a long-term basis, the Corporation has demonstrated an ability to adjust selling prices in reaction to changing costs due to inflation. The Corporation believes that inflation has not had a material effect on its operations during the first six months of fiscal 2008.

17


 

     
Item 2.
  Management’s Discussion and Analysis of Financial Condition and Results of Operations — (Continued).
 
 
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 impact of hurricanes and other natural disasters on sales and raw material costs
 
    Potential periodic inventory adjustments by independent retailers
 
    Availability of wholesale and retail financing
 
    Interest rate levels
 
    Impact of inflation
 
    Impact of rising fuel costs
 
    Cost of labor and raw materials
 
    Competitive pressures on pricing and promotional costs
 
    Catastrophic events impacting insurance costs
 
    The availability of insurance coverage for various risks to the Corporation
 
    Consumer confidence and economic uncertainty
 
    The health of the U.S. housing market as a whole
 
    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.
     
Item 3.
  Quantitative and Qualitative Disclosures About Market Risk.
 
   
 
  The Corporation invests in United States Government Securities. These securities are intended to be held until maturity and are therefore classified as held-to-maturity and carried at amortized cost. Changes in interest rates do not have a significant effect on the fair value of these investments.
     
Item 4.
  Controls and Procedures.
 
   
 
  Management’s Conclusions Regarding Effectiveness of Disclosure Controls and Procedures
 
   
 
  As of November 30, 2007, the Corporation conducted an evaluation, under the supervision and participation of management including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Corporation’s disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934).
 
   
 
  Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Corporation’s disclosure controls and procedures are effective as of November 30, 2007.

18


 

     
Item 4.
  Controls and Procedures — (Continued).
 
   
 
  Changes in Internal Control over Financial Reporting
 
   
 
  No change in the Corporation’s internal control over financial reporting (as such term is defined in Exchange Act Rule 13a-15(f)) occurred during the second quarter ended November 30, 2007 that materially affected, or is reasonably likely to materially affect, the Corporation’s internal control over financial reporting.
PART II. Other Information
     
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, 2007 filed by the registrant with the Commission.
     
Item 1A.
  Risk Factors.
 
   
 
  There were no material changes in the risk factors disclosed in Item 1A of the Corporation’s Form 10-K for the year ended May 31, 2007.
     
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

19


 

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: January 4, 2008  /s/ Jon S. Pilarski    
  Jon S. Pilarski   
  Chief Financial Officer   
 
     
DATE: January 4, 2008  /s/ Martin R. Fransted    
  Martin R. Fransted   
  Corporate Controller   
 

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