SKYLINE CHAMPION CORPORATION The following should be read in conjunction withSkyline Champion Corporation's consolidated financial statements and the related notes that appear elsewhere in this Annual Report. Certain statements set forth below under this caption constitute forward-looking statements. See Part I, "Cautionary Statement About Forward-Looking Statements," of this Annual Report on Form 10-K for additional factors relating to such statements, and see Item 1A, "Risk Factors," of this Annual Report for a discussion of certain risks applicable to our business, financial condition, results of operations and cash flows.
Overview
The Company is a leading producer of factory-built housing in theU.S. andCanada . The Company serves as a complete solutions provider across complementary and vertically integrated businesses including manufactured construction, company-owned retail locations, and transportation logistics. The Company is the largest independent publicly traded factory-built solutions provider inNorth America based on revenue, and markets its homes under several nationally recognized brand names includingSkyline Homes ,Champion Home Builders ,Genesis Homes , Athens Park Models,Dutch Housing ,Excel Homes , Homes of Merit, New Era,Redman Homes ,ScotBilt Homes ,Shore Park , Silvercrest, andTitan Homes in theU.S. andModuline and SRI Homes in westernCanada . The Company operates 35 manufacturing facilities throughout theU.S. and five manufacturing facilities in westernCanada that primarily construct factory-built, timber-framed manufactured and modular houses that are sold primarily to independent retailers, builders/developers, and manufactured home community operators. The Company's retail operations consist of 18 sales centers that sell manufactured homes to consumers primarily in the southernU.S. The Company's transportation business engages independent owners/drivers to transport manufactured homes, recreational vehicles, and other products throughout theU.S. andCanada .
Acquisitions and Expansions
Over the last several years, demand for the Company's products, primarily
affordable housing in the
The Company has increased capacity through strategic acquisitions and expansions of its manufacturing operations. The Company is focused on growing in strong HUD markets across theU.S. as well as further expanding into the Northeast and MidwestU.S. modular housing markets. OnFebruary 28, 2021 , the Company acquiredScotBilt Homes, LLC and related companies fromSHI Group Holdings, Inc. (collectively, "ScotBilt"). In calendar 2020, ScotBilt shipped over 1,600 homes from its two manufacturing facilities inGeorgia providing affordable housing throughoutAlabama ,Florida ,Georgia and the Carolinas. ScotBilt has approximately 400 employees in its two manufacturing facilities. The Company believes ScotBilt is an excellent fit given the compatible company cultures, and ScotBilt's strong presence in the attractive mid-south region, which helps to balance national distribution and complements the Company's existing manufacturing footprint. The operations of ScotBilt are included in the financial results ofSkyline Champion since the date of the acquisition. OnJanuary 14, 2021 , the Company acquired two idled facilities inPembroke, North Carolina which may provide an opportunity to further expand its manufacturing footprint in the Southeast markets. The Company is currently assessing prospects for initiating production in one or both of those facilities. In addition to those acquisitions, the Company expanded capacity through initiating production at a previously idle manufactured housing facility inLeesville, Louisiana inJune 2019 . During fiscal 2019, the Company completed its expansion of theCorona, California facility by adding a second production line and expanded itsLeola, Pennsylvania campus by adding an additional plant. Production at theLeola facility began inApril 2019 . The Exchange, discussed below, added eight manufacturing plants to the Company during fiscal 2019. These acquisitions and investments are part of a strategy to grow and diversify revenue with a focus on increasing the Company's HUD and modular homebuilding presence in theU.S. as well as improving the results of operations. These acquisitions and investments are included in the consolidated results for periods subsequent to their respective acquisition dates. 24 --------------------------------------------------------------------------------
Combination with Skyline
OnJanuary 5, 2018 ,Champion Holdings and Skyline entered into an Exchange Agreement pursuant to which the two companies agreed to combine their operations. The Exchange was completed onJune 1, 2018 and was accounted for as a reverse acquisition under the acquisition method of accounting as provided by FASB ASC 805, Business Combinations ("ASC 805").Champion Holdings was determined to be the acquirer for accounting and financial reporting purposes. The assets acquired and liabilities assumed byChampion Holdings as a result of the Exchange were recorded at their respective fair values and added to the carrying value ofChampion Holdings existing assets and liabilities. AsChampion Holdings is the accounting acquirer, reported financial results forSkyline Champion Corporation for fiscal 2019 are comprised of: 1) the results ofChampion Holdings throughJune 1, 2018 and 2) the combined operations of the Company, after giving effect to the Exchange, fromJune 1, 2018 throughMarch 30, 2019 . All annual periods presented prior to the effective date of the Exchange are comprised solely of the results ofChampion Holdings and all annual periods presented subsequent to fiscal 2019 are comprised solely of the results of the Company. Industry and Company Outlook SinceJuly 2020 ,U.S. and Canadian housing industry demand has been robust. The limited availability of existing homes for sale and the broader need for newly built affordable, single-family housing has continued to drive demand for new homes in these markets. In recent years, manufactured home construction experienced revenue growth due to a number of favorable demographic trends and demand drivers inthe United States , including underlying growth trends in key homebuyer groups, such as the population over 55 years of age, the population of first-time home buyers, and the population of households earning less than$60,000 per year. More recently, we have seen a number of market trends pointing to increased sales of ADUs and urban-to-rural migration as customers accommodate working-from-home patterns, as well as people seeking rent-to-own single-family options. The robust demand environment has resulted in backlog at the end of fiscal 2021 of$858.6 million compared to$127.5 million at the end of fiscal 2020. Generally higher backlog at our manufacturing facilities creates an opportunity to increase production efficiencies. Although the higher demand brings opportunities, it also has resulted in significant increases in certain material input costs, especially forest products. We manage our business to anticipate these cost increases and generally are able to pass them along to our customers. For fiscal 2021, approximately 77% of the Company'sU.S. manufacturing sales were generated from the manufacture of homes that comply with the Federal HUD code construction standard in theU.S. According to data reported by MHI, HUD-code industry home shipments were 95,588, 97,553 and 93,377 units during fiscal 2021, 2020, and 2019, respectively. Based on industry data, the Company'sU.S. wholesale market share of HUD code homes sold was 16.9%, 16.5%, and 16.6% in fiscal 2021, 2020, and 2019, respectively. Annual shipments have generally increased each year since calendar year 2009 when only 50,000 HUD-coded manufactured homes were shipped, the lowest level since the industry began recording statistics in 1959. While shipments of HUD-coded manufactured homes have improved modestly in recent years, manufactured housing's most recent annual shipment levels still operate at lower levels than the long-term historical average of over 200,000 units annually.
COVID-19 Pandemic
The outbreak of a novel strain of coronavirus ("COVID-19") was declared a global
pandemic by the World Health Organization in March 2020 . There remains continued
uncertainty regarding the extent and duration of the impact that the COVID-19
pandemic will have on the economy, the housing market, and the Company, as well
as the Company's employees, customers, and suppliers.
The Company has prioritized the safety and well-being of its employees and
customers and has implemented standards to operate in accordance with
social-distancing protocols and public health authority guidelines. Beginning in
March 2020 , the Company took actions to temporarily idle certain facilities in
response to government shutdown orders or reduced demand. By late April 2020 ,
most of the temporarily idled manufacturing facilities had reopened, but at
reduced production levels due to employee absenteeism, difficulty hiring new
team members and social distancing protocols. As of April 3, 2021 , only one
manufacturing facility remained temporarily idled due to labor availability
constraints. During fiscal 2021, the Company experienced intermittent closures
of its manufacturing facilities due to COVID-19 outbreaks at the facilities or
surrounding communities causing higher than normal absenteeism. By the end of
the fiscal year, the Company was able to increase daily production rates over
the levels achieved in the prior year period as direct labor staffing levels
increased and production efficiencies improved. The Company's availability of
labor and certain materials was negatively impacted throughout fiscal 2021, and
remains subject to disruption and uncertainty. Prices for key raw materials have
experienced increased volatility and, overall, manufacturing costs have trended
higher than prior periods.
Since the start of the fiscal year, the Company's retail operations have
adjusted their operating procedures to comply with local and state mandates, and
have generally remained open but have shifted from physical visits to a larger
online presence. The Company
25
-------------------------------------------------------------------------------- consolidated its retail footprint by closing three retail sales centers during the second quarter of fiscal 2021 in an effort to optimize costs while taking advantage of an increase in distribution through digital marketing efforts. We have strong local independent retailers to serve customers in those areas. In response to the pandemic, the Company offered extended benefits to employees, including increased sick pay and waived premium payments on healthcare benefits for furloughed employees. The Company'sU.S. operations incurred$2.2 million of expense related to those extended benefits. Various government programs provided financial relief for affected businesses, including the Employee Retention Credit under the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") and state level programs inthe United States and theCanada Emergency Wage Subsidy ("CEWS") under the COVID-19 Economic Response Plan inCanada . CEWS provides a cash subsidy of up to 75% of eligible employees' remuneration, subject to certain criteria. The Company recognized$6.2 million for payroll subsidies under CEWS during fiscal 2021. The Company also recognized$0.7 million during the fiscal year for wage subsidies under the CARES Act and other state level programs inthe United States . In addition, the CARES Act allows for deferring payment of certain payroll taxes. ThroughApril 3, 2021 , the Company has deferred$11.8 million of payroll taxes that will be paid beginning inDecember 2021 .
RESULTS OF OPERATIONS FOR FISCAL 2021 VS. 2020
Year Ended
April 3, March 28,
(Dollars in thousands) 2021 2020
Results of Operations Data:
Net sales $ 1,420,881 $ 1,369,730
Cost of sales 1,133,186 1,090,755
Gross profit 287,695 278,975
Selling, general, and administrative expenses 178,936 192,520
Operating income 108,759 86,455
Interest expense, net 3,248 1,401
Other income, net (5,889 ) -
Income from operations before income taxes 111,400 85,054
Income tax expense 26,501 26,894
Net income $ 84,899 $ 58,160
Reconciliation of Adjusted EBITDA:
Net income $ 84,899 $ 58,160
Income tax expense 26,501 26,894
Interest expense, net 3,248 1,401
Depreciation and amortization 17,704 18,546
Equity-based compensation (for awards granted prior
to
1,359 4,576
Transaction costs 1,044
-
Acquisition integration costs -
2,674
Fair market value adjustment for asset classified as held for sale -
986
Property, plant, and equipment impairment charge -
550
Restructuring costs and other - 577 Adjusted EBITDA$ 134,755 $ 114,364 As a percent of net sales: Gross profit 20.2 % 20.4 % Selling, general and administrative expenses 12.6 % 14.1 % Operating income 7.7 % 6.3 % Net income 6.0 % 4.2 % Adjusted EBITDA 9.5 % 8.3 % 26
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FISCAL PERIODS The Company's fiscal year is a 52- or 53-week period that ends on the Saturday nearestMarch 31 . Fiscal 2021 was a 53-week period and fiscal 2020 was a 52-week period. The results of operations and discussion below should be read considering the impact of an additional week of operation in fiscal 2021.
The following table summarizes net sales for fiscal 2021 and 2020:
Year Ended
April 3, March 28, $ %
(Dollars in thousands) 2021 2020 Change Change
Net sales $ 1,420,881 $ 1,369,730 $ 51,151 3.7 %
3.3 %
U.S. homes sold 19,983 20,110 (127 ) (0.6 %)
U.S. manufacturing and retail average
home selling price $ 63.4 $ 61.0 $ 2.4 3.9 %
Canadian manufacturing net sales $ 101,328 $ 84,196 $ 17,132 20.3 %
Canadian homes sold 1,231 1,002 229 22.9 %
Canadian manufacturing average home
selling price $ 82.3 $ 84.0 $ (1.7 ) (2.0 %)
Corporate/Other net sales $ 53,245 $ 59,141 $ (5,896 ) (10.0 %)
U.S. manufacturing facilities in
operation at year end 35 33 2 6.1 %
U.S. retail sales centers in operation
at year end 18 21 (3 ) (14.3 %)
Canadian manufacturing facilities in
operation at year end 5 5 - - %
Net sales for fiscal 2021 were $1,420.9 million , an increase of $51.2 million ,
or 3.7%, over fiscal 2020. The following is a summary of the change by operating
segment.
U.S. Factory-built Housing :
Fiscal 2021 net sales for the Company's U.S. manufacturing and retail operations
increased by $39.9 million , or 3.3%, over fiscal 2020 primarily due to the extra
week of production in fiscal 2021, additional revenue generated from the
ScotBilt operations and a 3.9% increase in ASP resulting from price increases
enacted to offset raw material inflation. Net sales were negatively impacted by
a reduction in the number of homes sold during the period, primarily a result of
COVID-19 related plant shutdowns in the first quarter of the fiscal year.
Although COVID-19 had a negative effect on demand and our ability to produce
homes in the first half of the fiscal year, overall, the impact of the virus on
consumer behavior have been favorable driving significant improvement in demand
in the second half of the fiscal year. As a result, our production rate at the
end of the year was higher than immediately prior to the outbreak.
The Canadian Factory-built Housing segment net sales increased by$17.1 million , or 20.3%, for fiscal 2021 compared to the prior year, primarily due to a 22.9% increase in homes sold, offset by a 2.0% decrease in ASP. Although volume was up, we saw a shift in consumer preferences to smaller homes which led to the decrease in ASP. Demand for housing inCanada improved during fiscal 2021 as a result of COVID-19 similar to the market factors witnessed in theU.S. , offsetting a trend of decreasing demand experienced in recent years. Net sales for the Canadian segment were also favorably impacted by approximately$0.5 million as the Canadian dollar strengthened relative to theU.S. dollar during fiscal 2021 as compared to the same period of the prior year.
Corporate/Other:
Net sales for Corporate/Other includes the Company's transportation business and the elimination of intersegment sales. For fiscal 2021, net sales for the segment decreased by$5.9 million , or 10.0%, compared to fiscal 2020. The decrease was primarily attributable to lower net sales in the Company's transportation business to third-party customers, primarily a result of lower shipments of recreational vehicles ("RV") in theU.S. , as well as changes in customer mix. Similar to the manufactured housing industry, RV demand was initially negatively impacted by COVID-19, but has rebounded more recently. 27 --------------------------------------------------------------------------------
GROSS PROFIT
The following table summarizes gross profit for fiscal 2021 and 2020:
Year Ended
April 3, March 28, $ %
(Dollars in thousands) 2021 2020 Change Change
Gross profit:
U.S. Factory-built Housing $ 252,880 $ 250,222 $ 2,658 1.1 %
Canadian Factory-built Housing 21,552 16,512 5,040 30.5 %
Corporate/Other 13,263 12,241 1,022 8.3 %
Total gross profit $ 287,695 $ 278,975 $ 8,720 3.1 %
Gross profit as a percent of net sales 20.2 % 20.4 %
Gross profit as a percent of sales during fiscal 2021 was 20.2% compared to 20.4% during fiscal 2020. The following is a summary of the change by operating segment.
U.S. Factory-built Housing : Gross profit for theU.S. Factory-built Housing segment increased by$2.7 million , or 1.1%, during fiscal 2021 compared to the prior year. The increase in gross profit is due to the increase in revenue in fiscal 2021. As a percent of net sales, gross profit was 20.0% for fiscal 2021 compared to 20.4% in the prior year. The year-over-year decrease in gross margin was primarily due to rapid increases in raw material inflation, especially related to forest products. In addition, in response to the pandemic, the Company offered extended benefits to employees, including increased sick pay and waived premium payments on healthcare benefits for furloughed employees. Finally, gross margin was negatively impacted by production inefficiency caused by higher than normal employee absenteeism as well as social distancing protocols caused by COVID-19.
Gross profit for theCanadian Factory-built Housing segment increased by$5.0 million , or 30.5%, during fiscal 2021 compared to the prior year due to the increase in revenue. Gross margin increased to 21.3% as a percent of segment net sales from 19.6% due to direct labor and manufacturing efficiencies from the increase in home sales volumes.
Corporate/Other:
Gross profit for the Corporate/Other segment increased by$1.0 million , or 8.3%, during fiscal 2021 compared to the same period in the prior year. Corporate/Other gross profit improved as a percent of segment net sales to 24.9% from 20.7%. Gross margin for the Company's transportation business improved due to a change in revenue mix and lower variable expenses. The change in revenue mix is primarily due to transporting a larger percentage of manufactured homes during the year which generally have a higher gross margin.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
Selling, general, and administrative ("SG&A") expenses include foreign currency
transaction gains and losses, equity compensation, and intangible amortization
expense. The following table summarizes selling, general, and administrative
expenses for fiscal 2021 and 2020:
Year Ended
April 3, March 28, $ %
(Dollars in thousands) 2021 2020 Change Change
Selling, general, and administrative
expenses:
U.S. Factory-built Housing $ 126,141 $ 135,329 $ (9,188 ) (6.8 %)
Canadian Factory-built Housing 9,059 8,313 746 9.0 %
Corporate/Other 43,736 48,878 (5,142 ) (10.5 %)
Total selling, general, and
administrative expenses $ 178,936 $ 192,520 $ (13,584 ) (7.1 %)
Selling, general, and administrative
expenses as a percent of net sales 12.6 % 14.1 %
28
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SG&A expenses were
SG&A expenses for theU.S. Factory-built Housing segment decreased by$9.2 million , or 6.8%, during fiscal 2021 as compared to the prior year. SG&A expenses, as a percent of segment net sales, were 10.0% for fiscal 2021 compared to 11.0% for fiscal 2020. SG&A costs decreased due to a combination of factors primarily driven by reductions of approximately$8.0 million for travel and marketing related expenses mostly due to COVID-19, offset in part by: (i) higher incentive compensation, which is generally based on sales volume or a measure of profitability, (ii) an increase in salaries and benefits to maintain competitive compensation packages to retain and recruit team members, (iii) the addition of the ScotBilt operations subsequent to the acquisition, and (iv) the extra week of operations in fiscal 2021 compared to fiscal 2020.
SG&A expenses for theCanadian Factory-built Housing segment increased by$0.7 million , or 9.0%, during fiscal 2021 as compared to the prior year. SG&A expenses, as a percent of segment net sales, were 8.9% for fiscal 2021 compared to 9.9% for fiscal 2020. The increase in cost is generally a function of the increase in net sales and profits for the segment which translates to higher sales commissions and incentive compensation.
Corporate/Other:
SG&A expenses for Corporate/Other includes the Company's transportation operations, corporate costs incurred for all segments, and intersegment eliminations. SG&A expenses for Corporate/Other decreased by$5.1 million , or 10.5%, during fiscal 2021 as compared to the prior year. SG&A expenses, as a percent of segment net sales, were 82.1% for fiscal 2021 compared to 82.6% for fiscal 2020. The decrease is mainly due to: (i) lower equity-based compensation expense of$2.2 million , (ii)$2.7 million of non-recurring costs in fiscal 2020 related to finalizing the integration of Skyline, and (iii)$1.5 million of non-recurring expense in fiscal 2020 for the impairment of certain fixed assets, partially offset by$3.4 million of costs incurred in fiscal 2021 related to investments in the development of our digital customer experience.
INTEREST EXPENSE
The following table summarizes the components of interest expense, net for
fiscal 2021 and 2020:
Year Ended
April 3, March 28, $ %
(Dollars in thousands) 2021 2020 Change Change
Interest expense $ 3,813 $ 4,632 $ (819 ) (17.7 %)
Interest income (565 ) (3,231 ) 2,666 (82.5 %)
Interest expense, net $ 3,248 $ 1,401 $
1,847 131.8 %
Average outstanding floor plan payable
Interest expense, net was$3.2 million for fiscal 2021, an increase of$1.8 million compared to the prior year. The increase was primarily related to lower interest income recognized during the period even though the Company has increased its average cash balances. Average rates of interest decreased significantly in fiscal 2021 negatively impacting interest income. The decrease in interest rates favorably impacted interest expense for our floor plan payable balance and long-term debt. The weighted average interest rate on our revolving credit facility was 1.8% in fiscal 2021 compared to 3.5% in fiscal 2020. The weighted average interest rate on the floorplan payable was 5.1% atApril 3, 2021 compared to 5.7% atMarch 28, 2020 .
OTHER INCOME, NET
The following table summarizes other income, net for fiscal 2021 and 2020:
Year Ended
April 3, March 28, $ %
(Dollars in thousands) 2021 2020 Change Change
Other income, net $ (5,889 ) $ - $ (5,889 ) *
* indicates that the calculated percentage is not meaningful
29
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Other income, net for fiscal 2021 primarily consisted of income related to wage
subsidies provided by certain U.S. and Canadian government sponsored financial
assistance programs enacted in response to the COVID-19 pandemic. The Company
recognized $6.2 million for payroll subsidies under CEWS, and $0.7 million under
the CARES Act. The Company incurred transaction costs of $1.0 million during
fiscal 2021 related to the acquisition of ScotBilt, partially offsetting the
payroll subsidies.
INCOME TAX EXPENSE
The following table summarizes income tax expense for fiscal 2021 and 2020:
Year Ended
April 3, March 28, $ %
(Dollars in thousands) 2021 2020 Change Change
Income tax expense $ 26,501 $ 26,894 $ (393 ) (1.5 %)
Effective tax rate 23.8 % 31.6 %
Income tax expense for fiscal 2021 was $26.5 million , representing an effective
tax rate of 23.8%, compared to income tax expense of $26.9 million , representing
an effective tax rate of 31.6%, for fiscal 2020.
The Company's effective tax rate for fiscal 2021 differs from the federal
statutory income tax rate of 21.0%, due primarily to the effect of
non-deductible expenses, tax credits, state and local income taxes, and results
in foreign jurisdictions. The Company's effective tax rate for fiscal 2020
differed from the federal statutory income tax rate of 21.0%, due primarily to
the effect of non-deductible expenses, tax credits, state and local income
taxes, changes in valuation allowances, and results in foreign jurisdictions.
ADJUSTED EBITDA
The following table reconciles net income, the most directly comparableU.S. GAAP measure, to Adjusted EBITDA, a non-GAAP financial measure, for fiscal 2021 and 2020: Year Ended April 3, March 28, $ % (Dollars in thousands) 2021 2020 Change Change Net income$ 84,899 $ 58,160 $ 26,739 46.0 % Income tax expense 26,501 26,894 (393 ) (1.5 %) Interest expense, net 3,248 1,401 1,847 131.8 % Depreciation and amortization 17,704 18,546 (842 ) (4.5 %) Equity-based compensation (for awards granted prior to December 31, 2018) 1,359 4,576 (3,217 ) (70.3 %) Transaction costs 1,044 - 1,044 * Acquisition integration costs - 2,674 (2,674 ) * Fair market value adjustment for asset classified as held for sale - 986 (986 ) * Property, plant, and equipment impairment charge - 550 (550 ) * Restructuring costs and other - 577 (577 ) * Adjusted EBITDA$ 134,755 $ 114,364 $ 20,391 17.8 %
* indicates that the calculated percentage is not meaningful
Adjusted EBITDA for fiscal 2021 was$134.8 million , an increase of$20.4 million over fiscal 2020. The increase is primarily a result of increased operating income after adjusting for the effect of depreciation and amortization, transaction, integration and restructuring costs, and non-cash equity-based compensation incurred in connection with the Exchange. The increase in operating income is primarily due to increases in net sales, gross profit and lower selling, general, and administrative costs. See the definition of Adjusted EBITDA under "Non-GAAP Financial Measures" below for additional information regarding the definition and use of this metric in evaluating the Company's results. 30
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RESULTS OF OPERATIONS FOR FISCAL 2020 VS. 2019
Year Ended
March 28, March 30,
(Dollars in thousands) 2020 2019
Results of Operations Data:
Net sales $ 1,369,730 $ 1,360,043
Cost of sales 1,090,755 1,114,684
Gross profit 278,975 245,359
Selling, general, and administrative expenses 192,520 275,101
Operating income (loss) 86,455 (29,742 )
Interest expense, net 1,401 3,290
Other expense - 8,271
Income (loss) from operations before income taxes 85,054 (41,303 )
Income tax expense 26,894 16,905
Net income (loss) $ 58,160 $ (58,208 )
Reconciliation of Adjusted EBITDA:
Net income (loss) $ 58,160 $ (58,208 )
Income tax expense 26,894 16,905
Interest expense, net 1,401 3,290
Depreciation and amortization 18,546 16,079
Equity-based compensation (for awards granted prior
to
4,576 101,025
Transaction costs -
8,201
Acquisition integration costs 2,674
7,966
Restructuring costs 366
1,640
Fair market value adjustment for assets classified as held for sale
986 -
Property, plant, and equipment impairment charge 550 - Other 211 193 Adjusted EBITDA$ 114,364 $ 97,091 As a percent of net sales: Gross profit 20.4 % 18.0 % Selling, general and administrative expenses 14.1 % 20.2 % Operating (loss) income 6.3 % (2.2 %) Net income (loss) 4.2 % (4.3 %) Adjusted EBITDA 8.3 % 7.1 % NET SALES
The following table summarizes net sales for fiscal 2020 and 2019:
Year Ended
March 28, March 30, $ %
(Dollars in thousands) 2020 2019 Change Change
Net sales $ 1,369,730 $ 1,360,043 $ 9,687 0.7 %48,706 4.1 % U.S. homes sold 20,110 19,443 667 3.4 %U.S. manufacturing and retail average home selling price$ 61.0 $ 60.6 $ 0.4 0.7 %
Canadian manufacturing net sales
1,002 1,232 (230 ) (18.7 %)
Canadian manufacturing average home
selling price $ 84.0 $ 80.0 $ 4 5.0 %
Corporate/Other net sales $ 59,141 $ 83,789 $ (24,648 ) (29.4 %)
U.S. manufacturing facilities in
operation at year end 33 31 2 6.5 %
U.S. retail sales centers in operation
at year end 21 21 - - %
Canadian manufacturing facilities in
operation at year end 5 5 - - %
31
-------------------------------------------------------------------------------- Net sales for fiscal 2020 were$1,369.7 million , an increase of$9.7 million , or 0.7% over fiscal 2019. The following is a summary of the change by operating segment.U.S. Factory-built Housing : Sales of homes for the Company'sU.S. manufacturing and retail operations increased by$48.7 million , or 4.1%. The net sales increase was attributable to the following factors including: (i) an increase of 667, or 3.4%, in the number of homes sold and (ii) a 0.7% increase in the average home selling price. The inclusion of the Skyline operations for the full year of fiscal 2020 added$48.2 million of sales, as fiscal 2019 included only ten months of Skyline operations.
The Canadian Factory-built Housing segment net sales decreased by$14.4 million , or 14.6% for fiscal 2020 compared to the same period in the prior year, primarily due to an 18.7% decrease in homes sold. This decrease was partially offset by a 5.0% increase the average selling price of homes. The number of homes sold decreased due to the decline in factory-built housing demand in theBritish Columbia andAlberta provinces versus the same period in the prior year. The decline in demand was and is due to oil and energy-related market dynamics in westernCanada . Net sales for the Canadian segment were also unfavorably impacted by approximately$1.3 million as the Canadian dollar weakened relative to theU.S. dollar during fiscal 2020 as compared to the same period of the prior year.
Corporate/Other:
Net sales for Corporate/Other includes the Company's transportation business and the elimination of intersegment sales. For fiscal 2020, net sales decreased by$24.6 million , or 29.4%. The decrease was primarily attributable to lower net sales in the Company's transportation business primarily as a result of lower shipments associated with reduced RV demand in theU.S. and changes in customer mix, partially offset by increased net sales of manufactured housing products.
GROSS PROFIT
The following table summarizes gross profit for fiscal 2020 and 2019:
Year Ended
March 28, March 30, $ %
(Dollars in thousands) 2020 2019 Change Change
Gross profit:
U.S. Factory-built Housing $ 250,222 $ 214,142 $ 36,080 16.8 %
Canadian Factory-built Housing 16,512 18,309 (1,797 ) (9.8 %)
Corporate/Other 12,241 12,908 (667 ) (5.2 %)
Total gross profit $ 278,975 $ 245,359 $ 33,616 13.7 %
Gross profit as a percent of net sales 20.4 % 18.0 %
Gross profit as a percent of sales during fiscal 2020 was 20.4% compared to 18.0% during fiscal 2019. The following is a summary of the change by operating segment.
U.S. Factory-built Housing : Gross profit for theU.S. Factory-built Housing segment increased by$36.1 million , or 16.8%, during fiscal 2020 compared to the prior year. The increase in gross profit is due to the increase in sales volume and improved margins resulting from a reduction in manufacturing costs. Gross profit was 20.4% as a percent of segment net sales for fiscal 2020 compared to 18.2% in the prior year. Gross profit expansion was driven by favorable material pricing, procurement and operational synergies related to the Exchange, and plant operating improvements, all of which were partially offset by labor inflation.
Gross profit for theCanadian Factory-built Housing segment decreased by$1.8 million , or 9.8%, during fiscal 2020 compared to the prior year and increased to 19.6% as a percent of segment net sales from 18.6%. Although theCanadian Factory-built Housing segment saw lower volume compared to the prior period, margins improved due to higher average selling prices on homes sold. 32 --------------------------------------------------------------------------------
Corporate/Other:
Gross profit for the Corporate/Other segment decreased by$0.7 million , or 5.2%, during fiscal 2020 compared to the same period in the prior year. However, Corporate/Other gross profit improved as a percent of segment net sales to 20.7% from 15.4%. Gross margins for the Company's transportation business improved as a percent of sales due to a change in revenue mix and lower variable expenses. A portion of the change in revenue mix is due in part to changes in the customer base, which included less brokered business to other providers at lower margins in response to the decline in revenue caused by the softening market demand for RVs.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES:
The following table summarizes selling, general, and administrative expenses for
fiscal 2020 and 2019:
Year Ended
March 28, March 30, $ %
(Dollars in thousands) 2020 2019 Change Change
Selling, general, and administrative
expenses:
U.S. Factory-built Housing $ 135,329 $ 116,379 $ 18,950 16.3 %
Canadian Factory-built Housing 8,313 9,058 (745 ) (8.2 %)
Corporate/Other 48,878 149,664 (100,786 ) (67.3 %)
Total selling, general, and
administrative expenses $ 192,520 $ 275,101 $ (82,581 ) (30.0 %)
Selling, general, and administrative
expenses as a percent of net sales 14.1 % 20.2 %
Selling, general, and administrative expenses were $192.5 million for fiscal
2020, a decrease of $82.6 million compared to the prior year. The following is a
summary of the change by operating segment.
Selling, general, and administrative expenses for theU.S. Factory-built Housing segment increased by$19.0 million , or 16.3%, during fiscal 2020 as compared to the prior year. Selling, general, and administrative expenses, as a percent of segment net sales, was 11.0% for fiscal 2020 compared to 9.9% during fiscal 2019. SG&A costs increased due to a combination of factors, and was primarily driven by: (i) an increase in salaries and benefits to maintain competitive compensation packages to retain and recruit team members, and (ii) higher sales commissions and incentive compensation, which is generally based on sales volume or a measure of profitability. The increase in salaries, benefits, and incentive compensation was approximately$7.7 million in total. In addition, the inclusion of the Skyline operations for all twelve months of fiscal 2020 increased SG&A expenses by$4.7 million compared to fiscal 2019, which included only ten months of Skyline operations. Lastly, the Company recorded additional SG&A costs for theLeesville, LA capacity expansion of$2.0 million and increased spending on marketing and advertising initiatives of$1.0 million during fiscal 2020.
Selling, general, and administrative expenses for theCanadian Factory-built Housing segment decreased by$0.7 million , or 8.2%, during fiscal 2020 as compared to fiscal 2019. As a percent of segment net sales, selling, general, and administrative expenses for the Canadian segment was 9.9% for fiscal 2020 compared to 9.2% for fiscal 2019. Selling, general, and administrative expense as a percentage of net sales increased in the current period due to the decrease in net sales and reduced leverage of fixed costs. 33 --------------------------------------------------------------------------------
Corporate/Other:
Selling, general, and administrative expenses for Corporate/Other includes the Company's transportation operations, corporate costs incurred for all segments, and intersegment eliminations. Selling, general, and administrative expenses for Corporate/Other decreased by$100.8 million , or 67.3%, during fiscal 2020 as compared to fiscal 2019. The decrease is mainly due to a change in equity-based compensation expense of$93.7 million , primarily related to the Exchange and secondary offerings that occurred in the prior year, as well as a reduction in acquisition integration and restructuring costs of$6.6 million . This decrease was partially offset by a fair market value adjustment charge of$1.0 million related to property acquired in the Exchange.
INTEREST EXPENSE, NET
The following table summarizes the components of interest expense, net for
fiscal 2020 and 2019:
Year Ended
March 28, March 30, $ %
(Dollars in thousands) 2020 2019 Change Change
Interest expense $ 4,632 $ 5,333 $ (701 ) (13.1 %)
Interest income (3,231 ) (2,043 ) (1,188 ) 58.1 %
Interest expense, net $ 1,401 $ 3,290 $
(1,889 ) (57.4 %)
Average outstanding floor plan payable
Interest expense, net was$1.4 million for fiscal 2020, a decrease of$1.9 million compared to the prior year. The decrease was primarily related to higher interest income recognized during the period as a result of higher average cash balances invested in short term facilities. In addition, the Company incurred reduced interest expense due to; (i) a lower weighted average interest rate on its revolving credit facility of 3.5% as compared to 4.7%, and (ii) lower average outstanding balances on its credit facilities as compared to the same period in the prior year. OTHER EXPENSE
The following table summarizes other expense for fiscal 2020 and 2019:
Year Ended
March 28, March 30, $ %
(Dollars in thousands) 2020 2019 Change Change
Other expense $ - $ 8,271 $ (8,271 ) (100.0 %)
Other expense for fiscal 2019 primarily consisted of $8.2 million of expenses
for legal, accounting, and advisory services related to the Exchange and four
offerings of the Company's common stock subsequent to the Exchange
("Offerings"), as well as $0.1 million for the deductible on an insured loss at
one of the Company's retail sales centers. The Company incurred no such costs in
fiscal 2020.
Income Tax Expense
The following table summarizes income tax expense for fiscal 2020 and 2019:
Year Ended
March 28, March 30, $ %
(Dollars in thousands) 2020 2019 Change Change
Income tax expense $ 26,894 $ 16,905 $ 9,989 59.1 %
Effective tax rate 31.6 % (40.9 %)
Income tax expense for fiscal 2020 was $26.9 million , representing an effective
tax rate of 31.6%, compared to income tax expense of $16.9 million , representing
an effective tax rate of (40.9%), for fiscal 2019.
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The Company's effective tax rate for fiscal 2020 differs from the federal
statutory income tax rate of 21.0%, due primarily to the effect of
non-deductible expenses, tax credits, state and local income taxes, changes in
valuation allowances, and results in foreign jurisdictions. The Company's
effective tax rate for fiscal 2019 differed from the federal statutory income
tax rate of 21.0%, due primarily to the effect of non-deductible expenses, many
of which were a result of the Exchange, state and local income taxes, and
results in foreign jurisdictions.
Adjusted EBITDA
The following table reconciles net income, the most directly comparableU.S. GAAP measure, to Adjusted EBITDA, a non-GAAP financial measure, for fiscal 2020 and 2019: Year Ended March 28, March 30, $ % (Dollars in thousands) 2020 2019 Change Change Net income (loss)$ 58,160 $ (58,208 ) $ 116,368 * Income tax expense 26,894 16,905 9,989 59.1 % Interest expense, net 1,401 3,290 (1,889 ) (57.4 %) Depreciation and amortization 18,546 16,079 2,467 15.3 % Equity-based compensation (for awards granted prior to December 31, 2018) 4,576 101,025 (96,449 ) * Transaction costs - 8,201 (8,201 ) (1.00 ) Acquisition integration costs 2,674 7,966 (5,292 ) * Fair market value adjustment for asset classified as held for sale 986 - 986 * Property, plant, and equipment impairment charge 550 - 550 * Restructuring costs and other 577 1,833 (1,256 ) * Adjusted EBITDA$ 114,364 $ 97,091 $ 17,273 17.8 %
* indicates that the calculated percentage is not meaningful
Adjusted EBITDA for fiscal 2020 was$114.4 million , an increase of$17.3 million over fiscal 2019. The increase is primarily a result of increased operating income after adjusting for the effect of increased depreciation and amortization, transaction, integration and restructuring costs, and non-cash equity-based compensation incurred in connection with the Exchange, and the Offerings and the integration of Skyline. The increase in operating income is primarily due to improvements in sales volumes and gross profit margins as a percent of net sales partially offset by higher selling, general, and administrative costs. See the definition of Adjusted EBITDA under "Non-GAAP Financial Measures" below for additional information regarding the definition and use of this metric in evaluating the Company's results.
BACKLOG
Although orders from customers can be cancelled at any time without penalty, and unfilled orders are not necessarily an indication of future business, the Company's unfilledU.S. and Canadian manufacturing orders atApril 3, 2021 totaled$858.6 million compared to$127.5 million atMarch 28, 2020 . The increase in backlog is driven by increased demand for single-family homes which has resulted in order levels that have significantly outpaced production in both theU.S. andCanada . Production levels, which vary by plant, gradually increased each quarter in fiscal 2021 and surpassed last year's average daily production rates in both the third and fourth quarters of fiscal 2021. Increasing production rates to keep pace with orders is limited by individual plant capacity, time to train new employees, employee attendance and availability of materials. Production may also be limited by additional instances of COVID-19 related impacts, including intermittent facility shutdowns and supply channel disruption, including most recently raw material allocations by certain suppliers. 35
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LIQUIDITY AND CAPITAL RESOURCES
The following table presents summary cash flow information for fiscal 2021,
2020, and 2019:
Year Ended
April 3, March 28, March 30,
(Dollars in thousands) 2021 2020 2019
Net cash provided by (used in):
Operating activities $ 153,897 $ 76,743 $ 65,228
Investing activities (56,808 ) (14,093 ) (2,030 )
Financing activities (47,813 ) 21,569 (72,518 )
Effect of exchange rate changes 3,850 (1,398 ) (662 )
Net increase (decrease) in cash, cash
equivalents, and restricted cash 53,126 82,821 (9,982 )
Cash, cash equivalents, and restricted
cash at beginning of period 209,455 126,634 136,616
Cash, cash equivalents, and restricted cash at end of period$ 262,581 $ 209,455 $ 126,634 The Company's primary sources of liquidity are cash flows from operations and existing cash balances. Cash balances and cash flow from operations for the next year are expected to be adequate to cover working capital requirements, fund capital expenditures, and floor plan payment obligations. The Company does not have any scheduled long term debt maturities in the next twelve months. The Company's revolving credit facility includes a leverage ratio covenant that requires the Company's first lien debt levels to remain less than 2.75x consolidated trailing twelve-month EBITDA. The leverage ratio was increased to 3.0x consolidated trailing twelve-month EBITDA for the four quarters after the acquisition of ScotBilt. The Company anticipates compliance with its leverage ratio debt covenant and projects its level of cash availability to be in excess of cash needed to operate the business for the next year. In the event operating cash flow and existing cash balances were deemed inadequate to support the Company's liquidity needs, and one or more capital resources were to become unavailable, the Company would revise operating strategies accordingly. Cash provided by operating activities was$153.9 million in fiscal 2021 compared to$76.7 million in fiscal 2020. Cash was generated by operating income (before non-cash charges) from higher sales and operating margins compared to the prior year. Operating cash was also favorably impacted by changes in other working capital items, primarily an increase in customer deposits of$36.4 million . We generally collect a deposit at the time an order is placed by a customer. The significant increase in backlog discussed above drove the increase in deposits. We expect deposit levels to return to historical levels in the future which will negatively impact operating cash flows. The favorable changes in working capital items were partially offset by an increase in inventory compared to the prior period which was a result of rising material prices and increasing the amount of raw materials stocked as a result of supply channel challenges. Cash provided by operating activities was$76.7 million in fiscal 2020 compared to$65.2 million in fiscal 2019. Cash was generated by operating income (before non-cash charges) from higher sales and operating margins compared to the prior year. Additionally, there were no transaction expenses incurred for the Skyline acquisition or secondary offering costs in fiscal 2020 compared to$8.2 million in the same period of the prior year. The increase was partially offset by cash used for other working capital items. Cash used in investing activities was$56.8 million in fiscal 2021 versus$14.1 million in 2020. The increase is primarily related to the cash paid for the acquisition of ScotBilt, net of cash acquired, of$52.5 million , partially offset by a decrease in capital expenditures compared to the prior year. Cash used in investing activities was$14.1 million in fiscal 2020 versus$2.0 million in 2019. The increase is primarily related to the benefit of$9.7 million of cash acquired in the Exchange in fiscal 2019, and an increase in capital expenditures of$3.3 million , partially offset by proceeds of$1.1 million from the disposition of a held for sale property. The expenditures for capital items are part of the Company's focus on safety and operating efficiency initiatives as well as the expansion of production capacity. In fiscal 2021, cash used in financing activities was$47.8 million , versus the prior year which had net cash provided by financing activities of$21.6 million . Cash used in financing activities in fiscal 2021 is primarily a result of payments made on the revolving credit facility and floor plan financing facilities totaling$38.0 million and$8.2 million , respectively. In fiscal 2020, cash provided by financing activities was$21.6 million , versus the prior year which had net cash used in financing activities of$72.5 million . 36 -------------------------------------------------------------------------------- OnJune 5, 2018 , the Company entered into a credit agreement (the "Credit Agreement") with a syndicate of banks. The Credit Agreement provides for a revolving credit facility of up to$100.0 million , including a letter of credit sub-facility of not less than$45.0 million . Initial borrowings in fiscal 2019 under the Credit Agreement were used to repay the Company's prior$46.9 million term loans and replace the Company's prior cash collateralized stand-alone letter of credit facility. The interest rate on borrowing under the Credit Agreement is based on LIBOR and was 1.6% atApril 3, 2021 . The Company borrowed$38.0 million under the Credit Agreement inMarch 2020 to maximize financial flexibility in response to the impact of COVID-19. Those funds were repaid during fiscal 2021. The Company had$42.7 million available to borrow against the Credit Agreement atApril 3, 2021 .
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
Credit Facility
The Credit Agreement matures onJune 5, 2023 and has no scheduled amortization. The interest rate under the Credit Agreement will adjust based on the first lien net leverage of the Company which will range from a high of LIBOR plus 2.25% and ABR plus 1.25% when first lien net leverage is equal to or greater than 2.00:1.00, to a low of LIBOR plus 1.50% and ABR plus 0.50% when first lien net leverage is below 0.50:1.00. In addition, the Company is obligated to pay a commitment fee ranging between 0.25% and 0.40% (depending on first lien net leverage) in respect of unused commitments under the Credit Agreement.
Letter of Credit Facility
The Company has a letter of credit sub-facility under the Credit Agreement. AtApril 3, 2021 , letters of credit issued under the sub-facility totaled$30.4 million . Industrial Revenue Bonds Obligations under industrial revenue bonds are supported by letters of credit and bear interest based on a municipal bond index rate. The industrial revenue bonds require lump-sum payments of principal upon maturity in 2029.
Floor Plan Payable
AtApril 3, 2021 , the Company had outstanding borrowings on floor plan financing arrangements of$25.7 million . The Company's retail operations utilize floor plan financing to fund the acquisition of manufactured homes for display or resale. The arrangements provide for borrowings up to$48.0 million . Borrowings are secured by the homes acquired and are required to be repaid when the Company sells the financed home to a customer.
Contingent Obligations
The Company has contingent liabilities and obligations atApril 3, 2021 , including surety bonds and letters of credit totaling$34.4 million and$30.4 million , respectively. Additionally, the Company is contingently obligated under repurchase agreements with certain lending institutions that provide floor plan financing to independent retailers. The contingent repurchase obligation as ofApril 3, 2021 is approximately$219.5 million , without reduction for the resale value of the homes. The Company has the ability to resell the repurchased collateral to other retailers, and losses incurred on repurchased homes have been insignificant in recent periods. The reserve for estimated losses under repurchase agreements was$1.4 million atApril 3, 2021 . See "Critical Accounting Polices - Reserve for Repurchase Commitments" below. The Company has provided various representations, warranties, and other standard indemnifications in the ordinary course of its business in agreements to acquire and sell business assets and in financing arrangements. The Company is subject to various legal proceedings and claims that arise in the ordinary course of its business. In the normal course of business, the Company's subsidiaries historically provided certain parent company guarantees to twoU.K. customers. These guarantees provided contractual liability for proven construction defects up to 12 years from the date of delivery of the units. The guarantees remain a contingent liability subsequent to the fiscal 2017 disposition of theU.K. operations, which declines over time throughOctober 2027 . As of the date of this report, no claims have been reported under the terms of the guarantees.
Management believes the ultimate liability with respect to these contingent obligations will not have a material effect on the Company's consolidated financial position, results of operations or cash flows.
37
--------------------------------------------------------------------------------NON-GAAP FINANCIAL MEASURES - ADJUSTED EBITDA
The Company defines Adjusted Earnings Before Interest Taxes and Depreciation and
Amortization ("Adjusted EBITDA ") as net income or loss plus; (a) the provision
for income taxes; (b) interest expense, net; (c) depreciation and amortization;
(d) gain or loss from discontinued operations; (e) equity based compensation for
awards granted prior to December 31, 2018 ; (f) non-cash restructuring charges
and impairment of assets; and (g) other non-operating costs including those for
the acquisition and integration or disposition of businesses and idle
facilities. Adjusted EBITDA is not a measure of earnings calculated in
accordance with U.S. GAAP and should not be considered an alternative to, or
more meaningful than, net income or loss prepared on a U.S. GAAP basis. Adjusted
EBITDA does not purport to represent cash flow provided by, or used in,
operating activities as defined by U.S. GAAP, which is presented in the
Statement of Cash Flows. In addition, Adjusted EBITDA is not necessarily
comparable to similarly titled measures reported by other companies.
Adjusted EBITDA is presented as a supplemental measure of the Company's
financial performance that management believes is useful to investors, because
the excluded items may vary significantly in timing or amounts and/or may
obscure trends useful in evaluating and comparing the Company's operating
activities across reporting periods. Management believes Adjusted EBITDA is
useful to an investor in evaluating operating performance for the following
reasons: (i) Adjusted EBITDA is widely used by investors to measure a company's
operating performance without regard to items such as interest income and
expense, taxes, depreciation and amortization and equity-based compensation,
which can vary substantially from company to company depending upon accounting
methods and the book value of assets, capital structure and the method by which
assets were acquired; and (ii) analysts and investors use Adjusted EBITDA as a
supplemental measure to evaluate the overall operating performance of companies
in the industry.
Management uses Adjusted EBITDA for planning purposes, including the preparation
of internal annual operating budget and periodic forecasts: (i) in
communications with the board of directors and investors concerning financial
performance; (ii) as a factor in determining bonuses under management's annual
incentive compensation program; and (iii) as a measure of operating performance
used to determine the ability to provide cash flows to support investments in
capital assets, acquisitions and working capital requirements for operating
expansion.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our significant accounting policies are more fully described in Note 1, "Summary of Significant Accounting Policies," to the consolidated financial statements included in this Report. Certain of our accounting policies require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Assumptions and estimates of future earnings and cash flow are used in the periodic analyses of the recoverability of goodwill, intangible assets, deferred tax assets and property, plant, and equipment. Historical experience and trends are used to estimate reserves, including reserves for self-insured risks, warranty costs, and wholesale repurchase losses. The Company considers an accounting estimate to be critical if it requires us to make assumptions about matters that were uncertain at the time the estimate was made and changes in the estimate would have had a significant impact on our consolidated financial position or results of operations. The Company believes that the following discussion addresses the Company's critical accounting estimates.
Acquisitions
We allocate the purchase price of an acquired business to its identifiable assets and liabilities based on estimated fair values. The excess of the purchase price over the amount allocated to the assets and liabilities, if any, is recorded as goodwill. We use all available information to estimate fair values. We typically engage outside appraisal firms to assist in the fair value determination of identifiable intangible assets and any other significant assets or liabilities. We adjust the preliminary purchase price allocation, as necessary, up to one year after the acquisition closing date as we obtain more information regarding asset valuations and liabilities assumed. Our estimates of fair value are based upon assumptions believed to be reasonable, but that are inherently uncertain, and therefore, may not be realized. Unanticipated events or circumstances may occur which could affect the accuracy of our fair value estimates, including assumptions regarding industry economic factors and business strategies. Accordingly, there can be no assurance that the estimates, assumptions, and values reflected in the valuations will be realized, and actual results could vary materially.
Reserves for Self-Insured Risks
The Company is self-insured for a significant portion of its general insurance, product liability, workers' compensation, auto, health, and property insurance. Insurance coverage is maintained for catastrophic exposures and those risks required to be insured by law. The Company is liable for the first$150,000 of incurred losses for each workers' compensation and auto liability claim and is responsible for losses up to the first$500,000 per occurrence for general, product liability, and property insurance. Generally catastrophic losses are insured up to$50 million . The health plan is subject to a stop-loss limit of$500,000 per occurrence. Estimated self-insurance costs are accrued for all expected future expenditures for reported and unreported claims based on historical experience. 38 --------------------------------------------------------------------------------
Warranty Reserves
The Company's factory-built housing operations generally provide each retail homebuyer or builder/developer with a 12-month assurance warranty from the date of retail purchase. Estimated warranty costs are accrued as cost of sales at the time of sale. Warranty provisions and reserves are based on various factors, including estimates of the amounts necessary to settle existing and future claims on homes sold as of the balance sheet date. Factors used in the estimation of the warranty liability include the estimated amount of warranty and customer service costs incurred for homes that remain in retailers' inventories before delivery to the consumer, homes purchased by consumers still within the warranty period, the timing in which work orders were completed, and the historical average costs incurred to service a home.
Impairment of Long-Lived Assets
It is the Company's policy to evaluate the recoverability of property, plant, and equipment whenever events and changes in circumstances indicate that the carrying amount of assets may not be recoverable, primarily based on estimated selling price, appraised value, or projected undiscounted future cash flows.
Impairment of
Goodwill is not amortized but is tested for impairment at least annually. Impairment testing is required more often if an event or circumstance indicates that an impairment is more likely than not to have occurred. In conducting its annual impairment testing, the Company may first perform a qualitative assessment of whether it is more likely than not that a reporting unit's fair value is less than its carrying amount. If not, no further goodwill impairment testing is required. If it is more likely than not that a reporting unit's fair value is less than its carrying amount, or if the Company elects not to perform a qualitative assessment of a reporting unit, the Company then compares the fair value of the reporting unit to the related net book value. If the net book value of a reporting unit exceeds its fair value, an impairment loss is measured and recognized. As the analysis depends upon judgments, estimates and assumptions, such testing is subject to inherent uncertainties, which could cause the fair value to fluctuate from period to period. In fiscal 2021, the Company performed qualitative assessments of its reporting units. The annual assessment was completed on of the first day of March. The assessments indicated that it was more likely than not that the fair value of each of the reporting units exceeded its respective carrying value. The Company does not believe that any reporting units are at risk for impairment.
Income Taxes and Deferred Tax Assets
Deferred tax assets and liabilities are determined based on temporary differences between the financial statement amounts and the tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. A valuation allowance is provided when the Company determines that it is more likely than not that some or all of the deferred tax assets will not be realized.
Reserve for Repurchase Commitments
As is customary in the factory-built housing industry, a significant portion of the manufacturing operations' sales to independent retailers are made pursuant to repurchase agreements with lending institutions that provide wholesale floor plan financing to the retailers. Certain homes sold pursuant to repurchase agreements are subject to repurchase, generally up to 24 months after the sale of the home to the retailer. Certain other homes sold pursuant to repurchase agreements are subject to repurchase until the home is sold by the retailer. For those homes with an unlimited repurchase period, the Company's risk of loss upon repurchase declines due to required monthly principal payments by the retailer. After 24 or 30 months from the date of the Company's sale of the home, the risk of loss on these homes is low, and by the 46th month, most programs require that the home be paid in full, at which time the Company no longer has risk of loss. Pursuant to these agreements, during the repurchase period, generally upon default by the retailer and repossession by the financial institution, the Company is obligated to repurchase the homes from the Floor Plan Lender. The contingent repurchase obligation as ofApril 3, 2021 , is estimated to be approximately$219.5 million , without reduction for the resale value of the homes. Losses under repurchase obligations represent the difference between the repurchase price and net proceeds from the resale of the homes, less accrued rebates, which will not be paid. Losses incurred on homes repurchased have been insignificant in recent periods. The reserve for estimated losses under repurchase agreements was$1.4 million atApril 3, 2021 .
Off Balance Sheet Arrangements
Off balance sheet arrangements atApril 3, 2021 consist of the contingent repurchase obligation totaling approximately$219.5 million , letters of credit totaling$30.4 million , and surety bonds totaling$34.4 million . See "Contractual Obligations and Commitments - Contingent Obligations" and "Critical Accounting Policies - Reserve for Repurchase Commitments" above for more information related to these off balance sheet arrangements. 39 --------------------------------------------------------------------------------
OTHER MATTERS Inflation Inflation of raw materials, especially commodities such as forest products, was significant during fiscal 2021. The raw material price increases have generally been passed on to customers or mitigated through working with supply chain partners, sourcing alternative materials or other operational improvements to minimize the effect on profitability. However, continued, frequent and sudden increases in specific costs, as well as price competition, can affect the ability to pass on costs and adversely impact results of operations. Therefore, there is no assurance that inflation or the impact of rising material costs will not have a significant impact on revenue or results of operations in the future.
Seasonality
The housing industry, which includes factory-built homes, is affected by seasonality. Sales during the period from March to November are traditionally higher than other months. As a result, quarterly results of a particular period are not necessarily representative of the results expected for the year.
Recently Issued Accounting Standards
Refer to Note 1, "Summary of Significant Accounting Policies," in our accompanying Consolidated Financial Statements for information regarding new accounting pronouncements.
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