UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
For the quarterly period ended February 28, 2013
or
For the transition period from to
Commission file number: 1-4714
SKYLINE CORPORATION
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
P. O. Box 743, 2520 By-Pass Road
Elkhart, Indiana
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. x Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ¨ Yes x No
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
Title of Class
April 5, 2013
Common Stock
INDEX
Financial Statements
Consolidated Balance Sheets as of February 28, 2013 and May 31, 2012
Consolidated Statements of Operations and Retained Earnings for the three-month and nine-month periods ended February 28, 2013 and February 29, 2012
Consolidated Statements of Cash Flows for the nine-month periods ended February 28, 2013 and February 29, 2012
Notes to the Consolidated Financial Statements
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Controls and Procedures
Legal Proceedings
Risk Factors
Exhibits
PART I — FINANCIAL INFORMATION
Skyline Corporation and Subsidiary Companies
Consolidated Balance Sheets
(Dollars in thousands)
Current Assets:
Cash
Restricted cash
U.S. Treasury Bills, at cost plus accrued interest
Accounts receivable
Note receivable, current
Inventories
Other current assets
Total Current Assets
Note Receivable, non-current
Property, Plant and Equipment, at Cost:
Land
Buildings and improvements
Machinery and equipment
Less accumulated depreciation
Idle property, net of accumulated depreciation
Net Property, Plant and Equipment
Other Assets
Total Assets
The accompanying notes are an integral part of the consolidated financial statements.
1
Consolidated Balance Sheets— (Continued)
(Dollars in thousands, except share and per share amounts)
Current Liabilities:
Accounts payable, trade
Accrued salaries and wages
Accrued marketing programs
Accrued warranty and related expenses
Accrued workers’ compensation
Other accrued liabilities
Total Current Liabilities
Other Deferred Liabilities
Commitments and Contingencies – See Note 8
Shareholders’ Equity:
Common stock, $.0277 par value, 15,000,000 shares authorized; issued 11,217,144 shares
Additional paid-in capital
Retained earnings
Treasury stock, at cost, 2,825,900 shares
Total Shareholders’ Equity
Total Liabilities and Shareholders’ Equity
2
Consolidated Statements of Operations and Retained Earnings
For the Three-Month and Nine-Month Periods Ended February 28, 2013 and
February 29, 2012 (Unaudited)
OPERATIONS
Net sales
Cost of sales
Gross profit (loss)
Selling and administrative expenses
Gain on sale of idle property, plant and equipment
Operating loss
Interest income
Loss before income taxes
Benefit from income taxes
Net loss
Basic loss per share
Cash dividends per share
Weighted average number of common shares outstanding
RETAINED EARNINGS
Balance at beginning of period
Cash dividends paid
Balance at end of period
3
Consolidated Statements of Cash Flows
For the Nine-Month Periods Ended February 28, 2013 and February 29, 2012 (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation
Change in assets and liabilities:
Accrued interest receivable
Accrued liabilities
Other, net
Net cash used in operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from principal payments of U.S. Treasury Bills
Purchase of U.S. Treasury Bills
Proceeds from sale of idle property, plant and equipment
Proceeds from note receivable
Purchase of property, plant and equipment
Net cash provided by investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Net cash used in financing activities
Net decrease in cash
Cash at beginning of period
Cash at end of period
NON-CASH TRANSACTIONS:
Note receivable from sale of idle property, plant and equipment
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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 February 28, 2013, the consolidated results of operations for the three-month and nine-month periods ended February 28, 2013 and February 29, 2012, and the consolidated cash flows for the nine-month periods ended February 28, 2013 and February 29, 2012. 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, 2012 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.
The following is a summary of the accounting policies that have a significant effect on the Consolidated Financial Statements.
Investments — The Corporation invests in United States Government securities, which are typically held until maturity and are therefore classified as held-to-maturity and carried at amortized cost.
Accounts Receivable — Trade receivables are based on the amounts billed to dealers and communities. The Corporation does not accrue interest on any of its trade receivables, nor does it have an allowance for credit losses due to favorable collections experience. If a loss occurs, the Corporation’s policy is to recognize it in the period when collectability cannot be reasonably assured.
Inventories — Inventories are stated at the lower of cost or market. Cost is determined under the first-in, first-out method. Physical inventory counts are taken at the end of each reporting quarter.
Note Receivable — The Corporation’s note receivable represents the amount owed for the sale of two idle recreational vehicle facilities in Hemet, California; less cash received on the date of closing and cash received from principal repayments through February 28, 2013. Interest is accrued on a monthly basis. In addition, no allowance for credit losses exist due to favorable collections experience. The Corporation’s management evaluates the credit quality of the note on a monthly basis. The Corporation’s policy is to recognize a loss in the period when collectability cannot be reasonably assured.
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Notes to the Consolidated Financial Statements (Unaudited) — (Continued)
NOTE 1 Nature of Operations, Accounting Policies of Consolidated Financial Statements— (Continued)
Property, Plant and Equipment — Property, plant and equipment are stated at cost. Depreciation is computed over the estimated useful lives of the assets using the straight-line method for financial statement reporting and accelerated methods for income tax reporting purposes.
Estimated useful lives for significant classes of property, plant and equipment, including idle property, are as follows: Building and improvements 10 to 30 years; machinery and equipment 5 to 8 years.
At February 28, 2013, Idle property, net of accumulated depreciation consisted of manufacturing facilities in the following locations: Ocala, Florida; Elkhart, Indiana; Halstead, Kansas; Mocksville, North Carolina and Fair Haven, Vermont. At May, 31, 2012, Idle property, net of accumulated depreciation consisted of manufacturing facilities in the following locations: Hemet, California; Ocala, Florida; Elkhart, Indiana; Halstead, Kansas; Mocksville, North Carolina and Fair Haven, Vermont.
Long-lived assets are reviewed for impairment whenever events indicate that the carrying amount of an asset may not be recoverable from projected future cash flows. If the carrying value of a long-lived asset is impaired, an impairment charge is recorded for the amount by which the carrying value of the long-lived asset exceeds its fair value. The Company believes no impairment of long-lived assets exists at February 28, 2013.
Warranty — The Corporation provides the retail purchaser of its 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. 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.
Income Taxes — The Corporation recognizes deferred tax assets based on differences between the carrying values of assets for financial and tax reporting purposes. The realization of the deferred tax assets is dependent upon the generation of sufficient future taxable income. Generally accepted accounting principles require that an entity consider both negative and positive evidence in determining whether a valuation allowance is warranted. In comparing negative and positive evidence, continual losses in recent years is considered significant, negative, objective evidence that deferred tax assets may not be realized in the future, and generally is assigned more weight than subjective positive evidence of the realizability of deferred tax assets.
As a result of its extensive evaluation of both positive and negative evidence, management maintains a full valuation allowance against its deferred tax assets. The Corporation reports a liability, if any, for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. The Corporation recognizes interest and penalties, if any, related to unrecognized tax benefits in income tax expense.
6
Management’s Plan — The Corporation’s management is actively pursuing strategies to increase sales and decrease costs. These strategies include but are not limited to:
By implementing these strategies, and having a significant position of its working capital in cash and U.S. Treasury Bills, the Corporation continues to remain diligent for any challenges that may occur.
NOTE 2 Restricted Cash
In the second quarter of fiscal 2013, the Corporation entered into an agreement to build and sell 60 manufactured homes to Stewart Homes, Inc., one of its dealers. Stewart Homes Inc. also entered into an agreement to sell these homes to Oakridge Family Homes, L.P., a California limited partnership. As a function of Oakridge Family Homes, L.P. purchasing the 60 homes, the Corporation pledged a $600,000 certificate of deposit as security for certain performances. The Certificate of Deposit will remain pledged until terms of the Certificate of Deposit Proceeds and Security Agreement between the Corporation and Oakridge Family Homes, L.P. are completed, which is expected to occur within one year.
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NOTE 3 Investments
The following is a summary of investments:
February 28, 2013
U. S. Treasury Bills
May 31, 2012
The fair value is determined by a secondary market for U.S. Government Securities. At May 31, 2012, the U.S. Treasury Bills matured within four months. At February 28, 2013, the U.S. Treasury Bills mature within two months.
NOTE 4 Inventories
Total inventories consist of the following:
Raw materials
Work in process
Finished goods
NOTE 5 Note Receivable
During the second quarter of fiscal 2013, the Corporation sold two idle recreational vehicle facilities in Hemet, California. The sale of the facilities included a down payment of $500,000 and a promissory note of $1,700,000 to the Corporation. Selling expenses related to the sale, which were paid by the Corporation, were approximately $152,000. This resulted in net cash received from the transaction of approximately $348,000. The note bears an interest rate of 6 percent per annum, requires monthly payments following a 20 year amortization schedule, and provides for a final payment after 6 years. In addition, the two facilities are collateral for the note. The current and non-current balance of $1,689,000 represents the original amount of the note less principal payments received through February 28, 2013.
8
NOTE 6 Warranty
A reconciliation of accrued warranty and related expenses is as follows:
Balance at the beginning of the period
Accruals for warranties
Settlements made during the period
Balance at the end of the period
Non-current balance included in other deferred liabilities
NOTE 7 Income Taxes
The Corporation’s gross deferred tax assets of approximately $41 million consist of approximately $27 million in federal net operating loss and tax credit carryforwards, $7 million in state net operating loss carryforwards, and $7 million resulting from temporary differences between financial and tax reporting. The federal net operating loss and tax credit carryforwards have a life expectancy of twenty years. The state net operating loss carryforwards have a life expectancy, depending on the state where a loss was incurred, between five and twenty years. If the Corporation, after considering future negative and positive evidence regarding the realization of deferred tax assets, determines that a lesser valuation allowance is warranted, it would record a reduction to income tax expense and the valuation allowance in the period of determination.
NOTE 8 Commitments and Contingencies
The Corporation was contingently liable at February 28, 2013 under repurchase agreements with certain financial institutions providing inventory financing for dealers 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 dealer at declining prices over the term of the agreement. The period to potentially repurchase units is between 12 to 24 months.
The maximum repurchase liability is the total amount that would be paid upon the default of the Corporation’s independent dealers. The maximum potential repurchase liability, without reduction for the resale value of the repurchased units, was approximately $74 million at February 28, 2013 and approximately $64 million at May 31, 2012.
9
NOTE 8 Commitments and Contingencies — (Continued)
The risk of loss under these agreements is spread over many dealers 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 Corporation estimates the fair value of this commitment considering both the contingent losses and the value of the guarantee. This amount has historically been insignificant. The Corporation believes that any potential loss under the agreements in effect at February 28, 2013 will not be material to its financial position or results of operations. In addition, there were no obligations or net losses from repurchased units for the first nine months of fiscal 2013 and 2012.
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.
As referenced in Note 2 in the Notes to Consolidated Financial Statements, the Corporation pledged a $600,000 certificate of deposit as security for certain performances in providing 60 manufactured homes to Oakridge Family Homes, L.P. The Certificate of Deposit will remain pledged until terms of the Certificate of Deposit Proceeds and Security Agreement between the Corporation and Oakridge Family Homes, L.P. are completed, which is expected to occur within one year.
NOTE 9 Industry Segment Information
The Corporation designs, produces and markets manufactured housing, modular housing and recreational vehicles (travel trailers, fifth wheels and park models). Manufactured housing represents homes built according to a national building code; modular housing represents homes built to a local building code. The percentage allocation of manufactured housing and recreational vehicle net sales is:
Domestic Manufactured Housing
Modular Housing
Domestic
Canadian
Total Housing
Recreational Vehicles
Total Recreational Vehicles
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NOTE 9 Industry Segment Information — (Continued)
NET SALES
Total Net Sales
LOSS BEFORE INCOME TAXES
Operating Loss
Housing
Recreational vehicles
General corporate expense
Total operating loss
Total operating loss represents operating losses before interest income 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.
NOTE 10 Gain on Sale of Idle Property, Plant and Equipment
During the second quarter of fiscal 2013, the Corporation sold two idle recreational vehicle facilities located in Hemet, California. The gain on the sale of these facilities was $1,411,000. During the second quarter of fiscal 2012, the Corporation sold idle housing facilities in Ocala, Florida and Ephrata, Pennsylvania. The gain on the sale of these facilities was $1,114,000 and $1,386,000, respectively.
Subsequent to February 28, 2013, the Corporation sold its idle manufactured housing facility located in Mocksville, North Carolina. The gain on this facility was approximately $225,000.
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Overview
The Corporation designs, produces and markets manufactured housing, modular housing and recreational vehicles (travel trailers, fifth wheels and park models) to independent dealers and manufactured housing communities located throughout the United States and Canada. To better serve the needs of its dealers and communities, the Corporation has eleven manufacturing facilities in nine states. Manufactured housing, modular 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 housing, modular homes and recreational vehicles throughout the year, seasonal fluctuations in sales do occur. Sales and production of manufactured housing and modular housing 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.
Manufactured and modular housing are marketed under a number of trademarks, and are available in a variety of dimensions. Manufactured housing products are built according to standards established by the U.S. Department of Housing and Urban Development. Modular homes are built according to state, provincial or local building codes. Recreational vehicles include travel trailers, fifth wheels and park models. Travel trailers and fifth wheels are marketed under the following trademarks: “Aljo”; “AlumaSky”; “Koala”; “Layton”; “Mountain View”; “Nomad”; “Skycat”; “Texan”; “Wagoneer”; “Walkabout”; and “Weekender”. Park models are marketed under the following trademarks: “Cabin Series”; “Cedar Cove”; “Kensington”; “Shore Park Homes”; “Stone Harbor”; and “Vacation Villa”. The Corporation’s recreational vehicles are intended to provide temporary living accommodations for individuals seeking leisure travel and outdoor recreation.
Manufactured Housing, Modular Housing and Recreational Vehicle Industry Conditions
Sales of manufactured housing, modular housing and recreational vehicles are affected by the strength of the U.S. economy, interest rate and employment levels, consumer confidence and the availability of wholesale and retail financing. The manufactured housing industry has until recently been affected by declining or stagnating unit shipments. This decline or stagnation, caused primarily by adverse economic conditions, tightening retail and wholesale credit markets and a depressed site-built housing market, is resulting in historically low industry shipments.
12
Manufactured Housing, Modular Housing and Recreational Vehicle Industry Conditions— (Continued)
Total shipments for calendar 2012 were approximately 55,000 units, a 6 percent increase from the previous year’s total of approximately 52,000 units.
Tight credit markets for retail and wholesale financing have become a significant challenge for the manufactured housing industry. According to the Manufactured Housing Institute, a lack of retail financing options and restrictive credit standards has negatively affected manufactured home buyers. In addition, a significant decline has occurred in wholesale financing, especially as national floor plan lenders have decreased lending to industry dealers.
The domestic modular housing industry has challenges similar to the manufactured housing industry, such as restrictive retail and wholesale financing, and a depressed site-built housing market. From calendar 2006 to 2012, total shipments decreased from approximately 39,000 to 12,000 units, a decline of 69 percent. Information related to the Canadian modular housing industry is not available.
Sales of recreational vehicles are influenced by changes in consumer confidence, employment levels, the availability of retail and wholesale financing and gasoline prices. Industry unit sales of travel trailers and fifth wheels have varied in recent years. From calendar 2007 to the first half of 2009 unit sales decreased as a result of recessionary conditions, decreased household wealth, tightening credit markets for retail and wholesale financing, and excess inventory of new recreational vehicles. Unit sales, however, started increasing in the last half of calendar 2009 and continue to date. The Recreational Vehicle Industry Association (RVIA) notes that continued growth in recreational vehicle shipments is due to a combination of easing credit terms and availability of loans, gains in household wealth, and modest gains in after-tax incomes and employment. These positive changes, however, could be negatively affected by lower government spending and higher payroll and income taxes.
Third Quarter Fiscal 2013 Results
The Corporation experienced the following results during the third quarter of fiscal 2013:
13
Third Quarter Fiscal 2013 Results — (Continued)
The Corporation’s housing segment experienced increased net sales in the third quarter of fiscal 2013 as compared to the third quarter of fiscal 2012, and management cannot determine with certainty if this trend will continue. This uncertainty is based on continuing negative economic conditions previously referenced.
The recreational vehicle segment experienced decreased net sales in the third quarter of fiscal 2013. Regarding the business environment for the remainder of fiscal 2013 and fiscal 2014, the RVIA forecasts calendar 2013 travel trailer and fifth wheel shipments of approximately 261,000 units; a 7 percent increase from calendar 2012’s total of approximately 243,000 units. Despite this favorable trend, business conditions for the remainder of fiscal 2013 and fiscal 2014 could be negatively impacted by adverse factors previously referenced by the RVIA.
Management’s Plan
The Corporation is actively pursuing strategies to increase sales and decrease costs. These strategies include but are not limited to:
14
Results of Operations – Three-Month Period Ended February 28, 2013 Compared to Three-Month Period Ended February 29, 2012 (Unaudited)
Net Sales and Unit Shipments
Net Sales
Domestic Manufactured
Unit shipments
Total Unit Shipments
15
Results of Operations – Three-Month Period Ended February 28, 2013 Compared to Three-Month Period Ended February 29, 2012 (Unaudited) — (Continued)
Net Sales and Unit Shipments — (Continued)
Housing net sales increased approximately 16 percent. The increase was the outcome of the following factors:
Housing unit shipments increased approximately 9 percent. The increase was the outcome of the following factors:
Total domestic manufactured housing unit shipments increased approximately 13 percent. Industry unit shipments for these products decreased approximately 8 percent from November 2012 to January 2013, the latest three months available, as compared to the same period the year prior. Current industry unit shipment data for modular housing is not available.
Compared to prior year, the average net sales price for domestic manufactured housing and Canadian modular housing increased approximately 8 percent and 17 percent, respectively. These increases were the result of homes sold with larger square footage and greater amenities; in addition to sales price adjustments resulting from higher material costs. The average net sales price for domestic modular housing increased 2 percent; primarily due to sales price adjustments resulting from higher material costs.
Recreational vehicle net sales decreased approximately 16 percent. The decrease was the outcome of the following factors:
16
Recreational vehicle unit shipments decreased approximately 22 percent. The decrease was the outcome of the following factors:
Unit shipments for travel trailers and fifth wheels decreased approximately 23 percent. Industry shipments for these products from November 2012 to January 2013, the latest three months available, as compared to the same period the year prior increased approximately 21 percent. The Corporation’s unit shipments lagged the industry due to decreased demand from Canadian dealers. In addition, some competitors maintained larger quantities of finished goods inventory; resulting in an ability to meet dealer demand immediately. Current industry unit shipment data for park models is not available.
The average net sales price per unit for recreational vehicle products in the third quarter of fiscal year 2013 as compared to the third quarter of fiscal year 2012 increased approximately 8 percent; primarily due to recreational vehicles sold with larger square footage and greater amenities; in addition to sales price adjustments resulting from higher material costs.
Cost of Sales
Consolidated
Housing cost of sales increased due to increased unit shipments. As a percentage of net sales, housing cost of sales decreased primarily due to certain manufacturing costs remaining fixed or declining amid rising sales.
Recreational vehicle cost of sales decreased due to declining unit shipments. As a percentage of net sales, recreational vehicle cost of sales increased due to certain manufacturing costs remaining fixed amid declining sales.
17
Selling and Administrative Expenses
Selling and administrative expenses, in dollars and as a percent of net sales, decreased primarily as a result of a decline in salaries, wages and performance based compensation as a part of the Corporation’s continuing efforts to reduce costs.
Loss Before Income Taxes
The operating loss for the housing segment decreased due to increased net sales, and decreased manufacturing, selling and administrative expenses.
The operating loss for the recreational vehicle segments decreased primarily as a result of decreased selling and administrative expenses.
General corporate expenses decreased mainly due to a $200,000 charge occurring in the third quarter of fiscal 2012. This charge was related to the Corporation’s liability for retirement and death benefits offered to current or former employees. The charge occurred as a result of a change in the interest rate used in valuing the liability.
For the quarter ended February 28, 2013, interest income consisted of $23,000 from the Corporation’s note receivable and $2,000 from investment in U.S. Treasury Bills. For the quarter ended February 29, 2012, interest income consisted of $3,000 from investment from U.S. Treasury Bills.
18
Results of Operations – Nine-Month Period Ended February 28, 2013 Compared to Nine-Month Period Ended February 29, 2012 (Unaudited)
Total Sales
19
Results of Operations – Nine-Month Period Ended February 28, 2013 Compared to Nine-Month Period Ended February 29, 2012 (Unaudited) — (Continued)
Housing net sales increased approximately 1 percent. The increase was the outcome of the following factors:
Housing unit shipments decreased approximately 4 percent. The decrease was the outcome of the following factors:
Total domestic manufactured housing unit shipments decreased approximately 5 percent. Industry unit shipments for these products decreased approximately 1 percent from May 2012 to January 2013, the latest nine months available, as compared to the same period the year prior. Current industry unit shipment data for modular housing is not available. Adverse conditions that caused the Corporation’s unit shipments to lag the industry include:
Compared to prior year, the average net sales price for domestic manufactured housing increased approximately 4 percent primarily due to sales price adjustments resulting from higher material costs. The average net sales price for domestic modular and Canadian modular housing products increased approximately 13 percent and 15 percent, respectively. These increases are the result of homes being sold with larger square footage and greater amenities; in addition to sales price adjustments resulting from higher material costs.
Recreational vehicle net sales revenue decreased approximately 9 percent. The decrease the outcome of the following factors:
20
Recreational vehicle unit shipments decreased approximately 13 percent. The decrease was the outcome of the following factors:
Unit shipments for travel trailers and fifth wheels decreased approximately 13 percent. Industry shipments for these products from May 2012 to January 2013, the latest nine months available, as compared to the same period the year prior increased approximately 17 percent. The Corporation’s unit shipments lagged the industry due to decreased demand from Canadian dealers. In addition, some competitors maintained larger quantities of finished goods inventory; resulting in the ability to meet dealer demand immediately. Current industry unit shipment data for park models is not available.
The average net sales price per unit for recreational vehicle products in the first nine months of fiscal year 2013 as compared to the first nine months of fiscal year 2012 increased approximately 4 percent; primarily due to sales price adjustments resulting from higher material costs.
Housing cost of sales decreased due to decreased unit shipments, lower manufacturing expenses and improved margins on products sold. As a percentage of net sales, cost of sales declined as a result of lower manufacturing expenses and improved margins on products sold.
Recreational vehicle cost of sales declined due to decreased unit shipments.
21
Gain on Sale of Idle Property, Plant and Equipment
In the second quarter of fiscal 2013, the Corporation sold two idle recreational vehicle facilities in Hemet, California. The gain on the sale of these facilities was $1,411,000.
In the second quarter of fiscal 2012, the Corporation sold idle housing facilities located in Ocala, Florida and Ephrata, Pennsylvania. The gain on the sale of these facilities was $1,114,000 and $1,386,000, respectively.
Subsequent to February 28, 2013, the Corporation sold its idle housing plant located in Mocksville, North Carolina. The gain on the sale of this facility is approximately $225,000.
22
Loss Before Income Taxes — (Continued)
The operating loss for the housing segment decrease due to increased net sales, improved margins on products sold, and decreased manufacturing, selling and administrative expenses.
Recreational vehicle operating loss decreased primarily due to decreased selling and administrative expenses.
General corporate expenses decreased as a result of the closure of the Corporation’s aviation department. In addition, the Corporation incurred in the first nine months of fiscal 2012 a $250,000 charge related to the Corporation’s liability for retirement and death benefits offered to certain current and former employees. The charge occurred as a result of a change in the interest rate used in valuing the liability.
For the nine months ended February 28, 2013, interest income consisted of $29,000 from the Corporation’s note receivable and $8,000 from investment in U.S Treasury Bills. For the nine months ended February 29, 2012, interest income consisted of $14,000 from investment in U.S. Treasury Bills.
Liquidity and Capital Resources
Cash, Restricted Cash and U.S. Treasury Bills
Current assets, exclusive of cash, restricted cash and U.S. Treasury Bills
Current liabilities
Working capital
The Corporation’s policy is to invest its excess cash, which exceeds its operating needs, in U.S. Government Securities. Cash and U.S. Treasury Bills decreased primarily due to a net loss of $10,558,000. Current assets, exclusive of cash and U.S. Treasury Bills, increased mainly due to a $1,981,000 increase in inventories and a $2,515,000 increase in accounts receivable. Inventories increased primarily as a result of greater production occurring at February 28, 2013 as compared to May 31, 2012. In addition, the Corporation carried recreational vehicles in finished goods inventory in order to more quickly fulfill dealer demand. Accounts receivable increased due to the timing of payments from dealers at February 28, 2013 as compared to May 31, 2012.
Current liabilities increased primarily as a result of a $1,607,000 increase in accrued marketing programs. This increase is due to accruals for an ongoing marketing program for manufactured housing dealers. Accruals are made monthly, and the majority of payments are made during the Corporation’s fourth fiscal quarter.
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Liquidity and Capital Resources — (Continued)
The Corporation’s current cash and other short-term investments are expected to be adequate to fund operating cash needs in addition to any capital expenditures for the remainder of the fiscal year. Although the Corporation has experienced decreased liquidity, its financing needs have been met with a combination of cash on hand and funds generated through the sale of assets. In addition, various strategies are being pursued to improve financial performance. These strategies are referenced in the “Third Quarter Fiscal 2013 Results” section of Item 2.
Impact of Inflation
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.
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:
Consumer confidence and economic uncertainty
Availability of wholesale and retail financing
The health of the U.S. housing market
Cyclical nature of the manufactured housing and recreational vehicle industries
General or seasonal weather conditions affecting sales
Potential impact of natural disasters on sales and raw material costs
Potential periodic inventory adjustments by independent retailers
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
Market demographics
Management’s ability to attract and retain executive officers and key personnel.
Not applicable.
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Management’s Conclusions Regarding Effectiveness of Disclosure Controls and Procedures
As of February 28, 2013, 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 for the period ended February 28, 2013.
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 third quarter ended February 28, 2013 that materially affected, or is reasonably likely to materially affect, the Corporation’s internal control over financial reporting.
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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, 2012 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, 2012.
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
Exhibit Number
Descriptions