Notes to Consolidated Financial Statements
NOTE 1
|
Nature of Operations, Accounting Policies of Consolidated Financial Statements
|
Nature of operations
Skyline Corporations core ongoing business activities consists of designing, producing and
marketing manufactured housing, modular housing and park models to independent dealers and manufactured housing communities throughout the United States and Canada. Manufactured housing represents homes built according to a national code, modular
housing represents homes built to a local code, and park models are built to specifications established by the American National Standards Institute. These dealers and communities often utilize floor plan financing arrangements with lending
institutions. The Corporations net sales are predominately from its housing products.
Note 2 of Notes to
Consolidated Financial Statement describes the recreational vehicle segment that was sold in fiscal 2015. Accordingly, the accompanying financial statements (including footnote disclosures unless otherwise indicated) reflect these operations as
discontinued operations apart from the Corporations continuing housing operations.
The following is a summary of the
accounting policies that have a significant effect on the consolidated financial statements.
Basis of presentation
The consolidated financial statements include the accounts of Skyline Corporation and its wholly-owned subsidiaries of Skyline Homes, Inc., Homette Corporation and Layton Homes Corp. (the Corporation). All intercompany
transactions have been eliminated. Certain prior amounts related to deferred tax assets have been reclassified to conform to current period presentation.
Accounting Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. These
estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates. Key estimates would include accruals for warranty and marketing programs as well as valuations for long-lived assets and deferred tax assets.
Revenue recognition
Substantially all of the Corporations products are made to order. Revenue is recognized upon
completion of the following: an order for a unit is received from a dealer or community (customer); written or verbal approval for payment is received from a customers financial institution or payment is received; a common carrier signs
documentation accepting responsibility for the unit as agent for the customer; and the unit is removed from the Corporations premises for delivery to a customer. Freight billed to customers is considered sales revenue, and the related freight
costs are cost of sales. Volume based rebates paid to dealers are classified as a reduction of sales revenue. Sales of parts are classified as revenue.
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 Corporations policy is to recognize it in the period when collectability cannot be reasonably assured. Deposits from customers are classified as
current liabilities.
Inventories
Inventories are stated at the lower of cost or net realizable value. Cost is
determined under the first-in, first-out method. Physical inventory counts are taken at the end of each reporting quarter.
Workers Compensation Security Deposit
Workers compensation security deposit represents funds placed with the
Corporations workers compensation insurance carrier to offset future medical net claims and benefits.
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
30
Skyline Corporation and Subsidiary Companies
Notes to Consolidated Financial Statements (Continued)
NOTE 1.
|
Nature of Operations, Accounting Policies of Consolidated Financial Statements (Continued)
|
Property, Plant and Equipment (Continued)
reporting and accelerated methods for income tax reporting purposes. Estimated useful lives for significant classes of property, plant and equipment are as follows: Building and improvements 10
to 30 years; machinery and equipment 5 to 8 years.
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 May 31, 2017.
Warranty
The Corporation provides the retail purchaser of its homes and park models with a full fifteen-month warranty against defects in design, materials and workmanship. The warranties are backed by service departments located at the
Corporations 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 managements 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, losses in fiscal years 2008 to 2015 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 valuation allowance against substantially all of 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.
Earnings per Share
Basic earnings per common share is computed based on the weighted-average number of
common shares outstanding during the reporting period. Diluted earnings per share is computed based on the combination of dilutive common share equivalents, comprised of shares issuable under the Corporations Stock Incentive Plan and the
weighted-average number of common shares outstanding during the reporting period.
Dilutive common share equivalents include
the dilutive effect of in-the-money options to purchase shares, which is calculated based on the average share price for each period using the treasury stock method, as well as restricted stock awards. 225,000 of 274,000 stock options granted under
the 2015 Stock Incentive Plan had a dilutive effect on earnings per share for the year ended May 31, 2017.
Consolidated statements of cash flows
The Corporations cash flows were not affected by income taxes in fiscal 2017 and
2016. Cash flows were affected by interest paid of approximately $241,000 in fiscal 2017. Cash flows were affected by interest paid of approximately $237,000 in fiscal 2016.
Recently issued accounting pronouncements
In February 2016, the Financial Accounting Standards Board, (FASB), issued Accounting Standards Update (ASU) No. 2016-02,
Leases
. ASU
2016-02 requires lessees to recognize the following for all leases (with the exception of short-term leases) at the commencement date:
|
|
|
A lease liability, which is a lessees obligation to make lease payments arising from a lease, measured on a discounted basis; and
|
31
Skyline Corporation and Subsidiary Companies
Notes to Consolidated Financial Statements (Continued)
NOTE 1.
|
Nature of Operations, Accounting Policies of Consolidated Financial Statements (Continued)
|
Recently issued accounting pronouncements (continued)
|
|
|
A right-of-use asset, which is an asset that represents the lessees right to use, or control the use of, a specified asset for the lease term.
|
Public business entities should apply the amendments in ASU 2016-02 for fiscal years beginning after
December 15, 2018, including interim periods within those fiscal years. Early application is permitted for all public business entities upon issuance.
Lessees must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The
modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees may not apply a full retrospective transition approach. The Corporation anticipates
implementing this pronouncement without a material effect on financial condition and results of operations.
In July 2015, FASB
issued ASU No. 2015-11,
Inventory,
which requires an entity to measure inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably
predictable costs of completion, disposal and transportation. Public business entities should apply ASU No. 2015-11 for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The Corporation
anticipates implementing this pronouncement without a material effect on financial condition and results of operations.
In March 2016, FASB issued ASU No. 2016-09,
Improvements to Employee Share-Based Payment Accounting
. ASU 2016-09
simplifies the accounting for share-based payment transactions related to: the income tax consequences related to exercised or vested share-based payment awards; the classification of awards as either assets or liabilities; and the classification in
the consolidated statements of cash flows. In addition, ASU 2016-09 provides an accounting policy election to account for forfeitures as they occur. For public entities, this update is effective for annual periods beginning after December 15,
2016, and for annual and interim periods thereafter. Early application is permitted. The Corporation has elected to continue its current policy of estimating forfeitures rather than recognizing forfeitures when they occur, and anticipates
implementing this pronouncement without a material effect on financial condition and results of operations upon adoption on June 1, 2017.
In May 2014, FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 66)
. The core principal of ASU 2014-09 is that an entity should recognize revenue to depict the transfer
of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. For a public entity, this guidance is effective for annual reporting periods
after December 15, 2016, including interim periods within that reporting period. Early application is permitted. Subsequent to the issuance of ASU No. 2014-09, FASB issued ASU No. 2015-14, which deferred the effective date of ASU
2014-09 by one year. In addition, FASB subsequently issued ASU 2016-08,
Principal versus Agent Considerations
, ASU 2016-10,
Identifying Performance Obligations and Licensing
, ASU 2016-11,
Rescission of SEC Guidance Because of
Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting
, and ASU 2016-12,
Narrow-Scope Improvements and Practical Expedients
. The Corporation is currently evaluating how the
adoption of ASU 2014-09 will impact its financial position and result of operations.
In November 2015, FASB issued ASU
No. 2015-17,
Balance Sheet Classification of Deferred Taxes
. ASU 2015-17 requires deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. For public companies this update is
effective for annual periods beginning after December 15,
32
Skyline Corporation and Subsidiary Companies
Notes to Consolidated Financial Statements (Continued)
NOTE 1.
|
Nature of Operations, Accounting Policies of Consolidated Financial Statements (Continued)
|
Recently issued accounting pronouncements (continued)
2016, and for annual and interim periods thereafter. Early application is permitted as of the beginning of an interim or annual period. The Corporation adopted this pronouncement at the beginning
of fiscal 2017 without a material effect on financial condition and results of operations.
NOTE 2
|
Discontinued Operations
|
During September 2014, the Corporation made a strategic decision to exit the recreational vehicle industry in order to focus on its core
housing business. As a result, on October 7, 2014, the Corporation completed the sale of certain assets associated with its recreational vehicle segment to Evergreen Recreational Vehicles, LLC.
The following table summarizes the results of discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
May 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(Dollars in thousands)
|
|
Net Sales
|
|
$
|
|
|
|
$
|
71
|
|
|
|
|
|
|
|
|
|
|
Operating loss of discontinued operations
|
|
$
|
|
|
|
$
|
(195
|
)
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
|
|
|
|
(195
|
)
|
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations, net of taxes
|
|
$
|
|
|
|
$
|
(195
|
)
|
|
|
|
|
|
|
|
|
|
Total
inventories from continuing operations consist of the following:
|
|
|
|
|
|
|
|
|
|
|
May 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(Dollars in thousands)
|
|
Raw materials
|
|
$
|
7,734
|
|
|
$
|
7,198
|
|
Work in process
|
|
|
4,030
|
|
|
|
3,447
|
|
Finished goods
|
|
|
469
|
|
|
|
736
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
12,233
|
|
|
$
|
11,381
|
|
|
|
|
|
|
|
|
|
|
NOTE 4
|
Net Gain on Sale of Property, Plant and Equipment
|
In the fourth quarter of fiscal 2017, the Corporation sold real property and substantially all of the equipment at its former facility located in Mansfield, Texas. The net sales price was $2,212,000,
resulting in a gain of $1,502,000. The assets sold were security under the Corporations Secured Revolving Credit Facility with First Business Capital. First Business Capital released its lien on the real property subject to $1,100,000 of the
net sales proceeds being held in a cash collateral account at First Business Bank, an affiliate of First Business Capital. The gain was offset by $222,000 in losses associated with the disposal of Mansfield equipment not sold, and the sale or
disposal of equipment used by the Corporations former facility in Elkhart, Indiana.
Other
assets consist primarily of the cash surrender value of life insurance policies which totaled $7,093,000 and $6,885,000 at May 31, 2017 and 2016, respectively.
33
Skyline Corporation and Subsidiary Companies
Notes to Consolidated Financial Statements (Continued)
A
reconciliation of accrued warranty is as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
May 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(Dollars in thousands)
|
|
Balance at the beginning of the period
|
|
$
|
7,317
|
|
|
$
|
6,911
|
|
Accruals for warranties
|
|
|
7,757
|
|
|
|
6,898
|
|
Settlements made during the period
|
|
|
(7,517
|
)
|
|
|
(6,492
|
)
|
|
|
|
|
|
|
|
|
|
Balance at the end of the period
|
|
|
7,557
|
|
|
|
7,317
|
|
Non-current balance
|
|
|
2,800
|
|
|
|
2,500
|
|
|
|
|
|
|
|
|
|
|
Accrued warranty
|
|
$
|
4,757
|
|
|
$
|
4,817
|
|
|
|
|
|
|
|
|
|
|
NOTE 7
|
Life Insurance Loans
|
Life insurance loans have no fixed repayment schedule, and have interest rates ranging from 4.2 percent to 7.4 percent. The weighted
average interest rate is 5.2 percent. Prepaid interest associated with the life insurance loans totaled approximately $88,000 at May 31, 2017 and May 31, 2016, respectively; which is recorded in Other current assets.
NOTE 8
|
Customer Concentration
|
During fiscal 2017, no individual customer had net sales exceeding 10 percent of total net sales. During fiscal 2016, net sales to Sun
Home Services, Inc. (Sun Home) totaled $22,231,000 or 10 percent of total net sales. Based on past sales to Sun Home, the Corporation could have a material adverse effect on its financial condition and results of operations if the
Corporation experienced a loss of this customer or if the volume of sales significantly decreased.
The
Corporation had no federal and state income tax benefit or expense for the years ended May 31, 2017 and 2016.
The
difference between the Corporations statutory federal income tax rate of 34 percent in fiscal 2017 and 2016, and the effective income tax rate is due primarily to state income taxes and changes in deferred tax assets valuation allowance and
are as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
May 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(Dollars in thousands)
|
|
Income taxes at statutory federal rate
|
|
$
|
2
|
|
|
$
|
637
|
|
Income taxes on permanent differences
|
|
|
215
|
|
|
|
167
|
|
State income taxes
|
|
|
38
|
|
|
|
199
|
|
State net operating loss
|
|
|
104
|
|
|
|
252
|
|
New Energy Efficient Home Credit
|
|
|
(142
|
)
|
|
|
(237
|
)
|
Decrease in deferred tax assets valuation allowance
|
|
|
(348
|
)
|
|
|
(1,031
|
)
|
Other, net
|
|
|
131
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
34
Skyline Corporation and Subsidiary Companies
Notes to Consolidated Financial Statements (Continued)
NOTE 9.
|
Income Taxes (Continued)
|
Components of the net noncurrent deferred tax assets include:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
May 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(Dollars in thousands)
|
|
Accrued marketing programs
|
|
$
|
142
|
|
|
$
|
181
|
|
Accrued warranty expense
|
|
|
2,979
|
|
|
|
2,888
|
|
Accrued workers compensation
|
|
|
1,151
|
|
|
|
1,011
|
|
Accrued vacation
|
|
|
178
|
|
|
|
346
|
|
Liability for certain post-retirement benefits
|
|
|
1,762
|
|
|
|
1,850
|
|
Federal net operating loss carryforward
|
|
|
32,119
|
|
|
|
32,380
|
|
Federal tax credit carryforward
|
|
|
1,910
|
|
|
|
1,787
|
|
State net operating loss carryforward
|
|
|
7,566
|
|
|
|
7,717
|
|
Depreciation
|
|
|
684
|
|
|
|
714
|
|
Other
|
|
|
221
|
|
|
|
134
|
|
|
|
|
|
|
|
|
|
|
Total gross noncurrent deferred tax assets
|
|
|
48,712
|
|
|
|
49,008
|
|
Valuation allowance
|
|
|
(48,660
|
)
|
|
|
(49,008
|
)
|
|
|
|
|
|
|
|
|
|
Net noncurrent deferred tax assets
|
|
$
|
52
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
At May 31, 2017, the Corporation had gross federal net operating loss carryforwards of approximately
$94 million and gross state net operating loss carryforwards of approximately $103 million. The federal net operating loss and tax credit carryforwards have a life expectancy of between eleven and eighteen years. The state net operating loss
carryforwards have a life expectancy, depending on the state where a loss was incurred, between one and twenty years.
The
Corporation has recorded a full valuation allowance against this asset, aside from $52,000 associated with an alternative minimum tax credit recognized primarily in fiscal year 2017. 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. For fiscal 2017, the
Corporation reported the utilization of previously fully-reserved federal net operating loss carryforwards of $166,000 and state operating loss carryforwards of $47,000 and released corresponding amounts of the valuation allowance to offset federal
and state income tax expense.
Income tax returns are filed in the U.S. federal jurisdiction and in several state
jurisdictions. For the majority of taxing jurisdictions the Corporation is no longer subject to examination by taxing authorities for years before 2013. The Corporation did not incur any interest or penalties related to income tax matters in fiscal
years 2017 and 2016.
The Corporation has no unrecognized tax benefits in its financial statements during fiscal years 2017 and
2016, and does not expect any significant changes related to unrecognized tax benefits in the twelve months following May 31, 2017.
NOTE 10
|
Commitments and Contingencies
|
The Corporation was contingently liable at May 31, 2017 and 2016, under repurchase agreements with certain financial institutions providing inventory financing for dealers of its products. Under
these arrangements,
35
Skyline Corporation and Subsidiary Companies
Notes to Consolidated Financial Statements (Continued)
NOTE 10
|
Commitments and Contingencies (Continued)
|
which are customary in the manufactured housing and park model 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 Corporations independent dealers.
The maximum potential
repurchase liability for continuing and discontinued operations, without reduction for the resale value of the repurchased units, was approximately $30 million at May 31, 2017 and approximately $25 million at May 31, 2016. As a result of
favorable experience regarding repurchased units, which is largely due to the strength of dealers selling the Corporations products, the Corporation maintained at May 31, 2017 and May 31, 2016, a $100,000 loss reserve that is a
component of other accrued liabilities. 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 May 31, 2017 will not be material to its financial position or results of operations.
The amounts
of obligations from repurchased units, all of which were from discontinued operations, and incurred net losses for the periods presented are as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
May 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(Dollars in thousands)
|
|
Number of units repurchased
|
|
|
|
|
|
|
6
|
|
Obligations from units repurchased
|
|
$
|
|
|
|
$
|
115
|
|
Net losses on repurchased units
|
|
$
|
|
|
|
$
|
50
|
|
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 Corporations results of operations or financial position.
The Corporation utilizes a combination of insurance coverage and self-insurance for certain items, including workers compensation
and group health benefits. Liabilities for workers compensation are recognized for estimated future medical costs and indemnity costs. Liabilities for group health benefits are recognized for claims incurred but not paid. Insurance reserves
are estimated based upon a combination of historical data and actuarial information. Actual results could differ from these estimates.
NOTE 11
|
Secured Revolving Credit Facility
|
On March 20, 2015, the Corporation (Borrower(s)) entered into a Loan and Security Agreement (the Loan Agreement) with First Business Capital Corp. (First Business
Capital). Under the Loan Agreement, First Business Capital will provide a secured revolving credit facility to the Borrowers for a term of three years, renewable on an annual basis thereafter with each renewal for a successive one-year term.
The Corporation may obtain loan advances up to a maximum of $10,000,000 subject to certain collateral-obligation ratios. In addition, loan advances bear interest at 3.75% in excess of
The Wall Street Journals
published one-year LIBOR
rate, and are secured by substantially all of the Borrowers assets, now owned or hereafter acquired. Interest is payable monthly, in arrears, and all principal and accrued but unpaid interest is due and payable upon termination of the
36
Skyline Corporation and Subsidiary Companies
Notes to Consolidated Financial Statements (Continued)
NOTE 11
|
Secured Revolving Credit Facility (Continued)
|
Loan Agreement. First Business Capital also agreed under the Loan Agreement to issue, or cause to be issued by a bank affiliate or other bank, letters of credit for the account of the
Corporation. However, no advances have yet been made in connection with such letters of credit.
During the first quarter of
fiscal 2016, the Corporation on two occasions did not meet a covenant requiring a monthly loss not exceeding $500,000. Consequently, the Corporation received in the second quarter a waiver of the defaults that occurred. In addition, the following
modifications were made to the Loan Agreement.
|
|
|
A covenant specifying that a monthly loss not exceed $500,000 was modified to $1,500,000 for December 2015, $1,000,000 for January 2016, and $1,000,000
for February, 2016. Following February 2016, the maximum monthly net loss as noted in the original Loan Agreement returns to $500,000 for March to May 2016, and $250,000 thereafter;
|
|
|
|
The limit for the lease, purchase or acquisition of any asset increased from $600,000 per year to $800,000 per year; and
|
|
|
|
The monthly bank assessment fee increased from .25% per annum to .35% per annum.
|
In June 2016, additional amendments were made to the Loan Agreement:
|
|
|
An increase in the capital expenditure limit for the fiscal year ended May 31, 2016 from $800,000 in the aggregate to $1,250,000 in the aggregate;
|
|
|
|
An increase in the capital expenditure limit for the fiscal year ending May 31, 2017 from $800,000 in the aggregate to $1,500,000 in the
aggregate. In the absence of any subsequent amendment, the capital expenditure limit for subsequent fiscal years shall remain at $800,000 in the aggregate per fiscal year; and
|
|
|
|
A covenant specifying that a monthly net loss in fiscal 2017 not exceed $250,000 was increased to $500,000 for June 2016, $1,000,000 for July 2016, and
$1,000,000 for December 2016. Such increases were effective only for the months identified. In the absence of any subsequent amendment, the maximum monthly net loss for all other months of fiscal year 2017 and thereafter remain at $250,000.
|
In November 2016, the Corporation did not meet a covenant requiring a monthly loss not to exceed $250,000.
Subsequent to November 30, 2016, the Corporation received a waiver for the default that occurred in the second quarter. In addition, the Loan Agreement was modified to eliminate the monthly maximum Net Loss covenant effective with the fiscal
month ended December 31, 2016.
In the third quarter of fiscal 2017, the Corporation did not meet a covenant requiring the
year to date net loss not to exceed $1,750,000, and a covenant requiring net worth as of February 28, 2017 to not be below $23,383,000. Subsequent to February 28, 2017, the Corporation received a waiver for the default that occurred in the
third quarter and paid to First Business Capital an accommodation fee of $50,000. The Corporation was in compliance with loan agreement covenants as of May 31, 2017.
On July 21, 2017, the Corporation terminated the Loan Agreement in connection with its entry into a new Credit Agreement with JPMorgan Chase Bank, N.A. having terms more favorable to the Corporation.
As of the date of termination, the Corporation did not have any borrowings outstanding under the Loan Agreement. In addition, the Corporation did not incur any early termination penalties in connection with the termination of the Loan Agreement.
Information regarding the Credit Agreement with JPMorgan Chase Bank, N.A. is noted in Note 18, Subsequent Events, of Notes to Consolidated Financial Statements.
37
Skyline Corporation and Subsidiary Companies
Notes to Consolidated Financial Statements (Continued)
NOTE 12
|
Stock-Based Compensation
|
In the first quarter of fiscal 2016, the Corporations Board of Directors approved the 2015 Stock Incentive Plan (Plan),
which allows the granting of stock options and other equity awards to directors, officers, employees, and eligible independent contractors of the Corporation and is intended to retain and reward key employees performance and efforts as they
relate to the Corporations long-term objectives and strategic plan. The Plan was subsequently approved by shareholders at the Corporations annual shareholder meeting on September 21, 2015. A total of 700,000 shares of Common Stock
have been reserved for issuance under the Plan. Stock option awards are granted with an exercise price equal to the market price of the Corporations stock at the date of grant and vest over a period of time as determined by the Corporation at
the date of grant up to the contractual ten-year life at which time the options expire. Restricted stock awards are priced no less than 100 percent of market price of the Corporations stock at the date of grant, and the awards made to date
fully vest after five years.
Stock Options The following tables summarize option activity for the years ended
May 31, 2017 and 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Term (years)
|
|
|
Aggregate
Intrinsic
Value
(in thousands)
|
|
Options outstanding at June 1, 2015
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
225,000
|
|
|
|
3.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at May 31, 2016
|
|
|
225,000
|
|
|
$
|
3.28
|
|
|
|
9.14
|
|
|
$
|
1,584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
49,000
|
|
|
|
11.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at May 31, 2017
|
|
|
274,000
|
|
|
$
|
4.79
|
|
|
|
8.40
|
|
|
$
|
128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and exercisable options at May 31, 2017
|
|
|
45,000
|
|
|
$
|
3.28
|
|
|
|
8.14
|
|
|
$
|
89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average grant-date fair value of options granted during fiscal 2017 and 2016 were $7.58 and
$2.19, respectively.
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
|
Weighted
Average
Grant-Date
Fair Value
|
|
Non-vested options at May 31, 2015
|
|
|
|
|
|
$
|
|
|
Granted
|
|
|
225,000
|
|
|
|
2.19
|
|
Vested
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested options at May 31, 2016
|
|
|
225,000
|
|
|
$
|
2.19
|
|
Granted
|
|
|
49,000
|
|
|
|
7.58
|
|
Vested
|
|
|
(45,000
|
)
|
|
|
2.19
|
|
|
|
|
|
|
|
|
|
|
Non-vested options at May 31, 2017
|
|
|
229,000
|
|
|
$
|
3.34
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense for fiscal 2017 and 2016 was approximately $144,000 and $82,000,
respectively. Total unrecognized compensation expense related to stock options outstanding at May 31, 2017 was approximately $637,000 and is to be recorded over a weighted-average life of 3.4 years.
The Corporation records all stock-based payments, including grants of stock options, in the consolidated statements of operations based on
their fair values at the date of grant. The Corporation currently uses the
38
Skyline Corporation and Subsidiary Companies
Notes to Consolidated Financial Statements (Continued)
NOTE 12
|
|
Stock Based Compensation (Continued)
|
Black-Scholes
option pricing model to determine the fair value of stock options. The determination of the fair value of stock options on the date of grant
using an option-pricing model is affected by stock price as well as assumptions that include expected stock price volatility over the term of the awards, expected life of the awards, risk-free interest rate, and expected dividends.
The fair value of the options granted during fiscal 2017 and 2016 were estimated at the date of grant using the following weighted average
assumptions:
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
Volatility
|
|
|
64.3
|
%
|
|
|
55.8
|
%
|
Risk-free interest rate
|
|
|
2.14
|
%
|
|
|
2.22
|
%
|
Expected option life in years
|
|
|
7.50
|
|
|
|
9.72
|
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Volatility is estimated based on historical volatility measured monthly for a time period equal to the
expected life of the option ending on the date of grant. The risk-free interest rate is determined based on observed U.S. Treasury yields in effect at the time of the grant for maturities equivalent to the expected life of the options. The expected
option life (estimated average period of time the options will be outstanding) is estimated based on the expected exercise date of the options. The expected dividend yield of zero is estimated based on the dividend yield at the time of grant as
adjusted for any expected changes during the life of the options.
Restricted Stock In the third quarter of fiscal 2017,
the Corporation issued 15,000 shares of restricted stock valued at approximately $216,000. No restricted stock was vested at May 31, 2017, and the non-vested shares had a weighted average grant date fair value of $14.40 per share. The value was
determined using the market price of the Corporations common stock at the date of grant. The restricted stocks value is to be expensed over a five-year vesting period using a straight-line method. Compensation expense for fiscal 2017 was
approximately $17,000, and unrecognized compensation expense at May 31, 2017 was approximately $199,000.
NOTE 13
|
Earnings Per Share
|
Basic
earnings per common share is computed based on the weighted-average number of common shares outstanding during the reporting period. Diluted earnings per common share is computed based on the combination of dilutive common share equivalents,
comprised of shares issuable under the Corporations Stock Incentive Plan and the weighted-average number of common shares outstanding during the reporting period.
Dilutive common share equivalents include the dilutive effect of in-the-money options to purchase shares, which is calculated based on the average share price for each period using the treasury stock
method, as well as shares of restricted stock.
39
Skyline Corporation and Subsidiary Companies
Notes to Consolidated Financial Statements (Continued)
NOTE 13
|
|
Earnings Per Share (Continued)
|
The following table sets forth the computation of basic and diluted earnings per share
(dollars in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
May 31,
|
|
|
|
2017
|
|
|
2016
|
|
Net income
|
|
$
|
5
|
|
|
$
|
1,678
|
|
|
|
|
|
|
|
|
|
|
Weighted average share outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
8,391,244
|
|
|
|
8,391,244
|
|
Common stock equivalentstreasury stock method
|
|
|
121,130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
8,512,374
|
|
|
|
8,391,244
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
.00
|
|
|
$
|
.20
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
.00
|
|
|
$
|
.20
|
|
|
|
|
|
|
|
|
|
|
For fiscal 2017 and fiscal 2016, there were 57,994 and 13,914 anti-dilutive common stock equivalents
excluded from the computation of diluted earnings per share, respectively.
NOTE 14
|
Restructuring Activities
|
In the third and fourth quarters of fiscal 2017, the Corporation entered into a restructuring plan involving the suspension of operations
at the Elkhart, Indiana and Mansfield, Texas facilities. The restructuring does not represent a strategic shift in operations due to an expectation to have a portion of customers of these two facilities serviced by manufacturing facilities located
in Arkansas City, Kansas and Sugarcreek, Ohio.
The suspension of operations in Mansfield was due to the plant being unable to
profitably operate since it was converted from producing recreational vehicles to manufactured housing in fiscal 2014. The suspension in Elkhart was due to the plant being unable to profitably operate since it opened in June 2016. There were neither
one-time termination agreements nor material costs related to the termination of contracts such as leases related to the restructuring. Inventory and fixed asset sale and disposal losses related to the restructuring totaled $170,000 and $222,000,
respectively. The Corporation does not have a liability related to the restructuring as of May 31, 2017. As referenced in Note 4, Net Gain on Sale of Property, Plant and Equipment, to Notes to Consolidated Financial Statements, the Mansfield
facility was sold in the fourth quarter.
The
Corporations Board of directors from time to time has authorized the repurchase of shares of the Corporations common stock, in the open market or through negotiated transactions, at such times and at such prices as management may decide.
In fiscal 2017 and 2016, the Corporation did not acquire any shares of its common stock.
The
Corporation has an employee savings plan (the 401(k) Plan) that is intended to provide participating employees with an additional method of saving for retirement. The 401(k) Plan covers all employees who meet certain minimum
participation requirements. The Corporation does not provide a matching contribution to the 401(k) Plan, but can make discretionary profit sharing contributions. No profit sharing contributions were made in fiscal 2017 and 2016.
40
Skyline Corporation and Subsidiary Companies
Notes to Consolidated Financial Statements (Continued)
NOTE 17
|
Retirement and Death Benefit Plans
|
The Corporation has entered into various arrangements with certain employees or former employees for benefits to be paid in the following manner:
|
|
|
to an employees estate in the event of death
|
|
|
|
an employee in the event of retirement or disability to be paid over 10 years beginning at the date of retirement or disability
|
|
|
|
in the event of death, the employees beneficiary will receive the balance due the employee
|
The Corporation also purchased life insurance contracts on the covered employees or former employees. The present value of the principal
cost of such arrangements is being accrued over the period from the date of such arrangements to full eligibility using a discount rate of 4.0 percent in fiscal 2017 and fiscal 2016. The current and non-current amounts accrued for such arrangements
totaled $5,122,000 and $5,340,000 at May 31, 2017 and 2016, respectively. In fiscal 2017 the amount credited to operations under these arrangements was approximately $17,000. In fiscal 2016 the amount charged to operations under these
arrangements was approximately $10,000.
NOTE 18
|
|
Subsequent Events
|
On
July 21, 2017, the Corporation (the Loan Parties, and Skyline Corporation and Skyline Homes, Inc., the Borrowers and each a Borrower) entered into a Credit Agreement (the Agreement) with JPMorgan
Chase Bank, N.A. (Chase) and other ancillary agreements and documents, including a Security Agreement and Patent and Trademark Security Agreement (collectively referred to along with the Agreement as the Loan Documents).
Under the Agreement, Chase will provide a three-year revolving credit facility with loan advances to the Borrowers of up to a maximum of $10,000,000, subject to a borrowing base set forth in the Agreement (the New Facility). Loan
advances bear interest at either 50 basis points above Chases floating prime rate (CBFR) or 150 basis points in excess of the LIBOR rate for the applicable period (the Adjusted LIBO Rate). Loans are secured by the Loan
Parties assets, now owned or hereafter acquired, except for real property and any life insurance policies owned by any Borrower on the effective date of the Agreement. Interest is payable in arrears on a monthly basis in the case of the CBFR
or at the end of the applicable interest rate in the case of the Adjusted LIBO Rate, and all principal and accrued but unpaid interest is due and payable at the maturity of the New Facility. Borrowers may at any time prepay in whole or in part any
loan amounts, subject to minimum amounts and breakage costs.
Also under the Agreement, Chase agreed to issue letters of credit
for the account of the Borrowers not to exceed $500,000. No advances have yet been made in connection with such letters of credit.
As part of the closing of the financing, the Company paid Chase a closing fee of $25,000 plus legal and due diligence costs. The Loan Parties also agreed to pay the following fees to Chase during the term
of the New Facility: (i) a commitment fee payable in arrears at a rate of .25% per annum on the average daily amount of the available revolving commitment under the New Facility during the prior calendar month; and (ii) monthly letter
of credit fees payable in arrears at the applicable Adjusted LIBO Rate on the outstanding amount of letters of credit issued and outstanding during the prior month.
The Loan Documents contain covenants that limit the ability of the Loan Parties to, among other things: (i) incur other indebtedness; (ii) create or incur liens on their assets;
(iii) consummate asset sales, acquisitions, or mergers; (iv) pay dividends; (v) make certain investments; (vi) enter into certain transactions with affiliates; and (vii) amend a Loan Partys articles of incorporation or
bylaws.
The Agreement also requires compliance with a financial covenant involving a fixed charge coverage ratio as set forth
in the Agreement.
41
Skyline Corporation and Subsidiary Companies
Notes to Consolidated Financial Statements (Continued)
NOTE 18.
|
Subsequent Events (Continued)
|
If the Borrowers default in their obligations under the Agreement, then the unpaid
balances will bear interest at 2.0% per annum in excess of the rate that would apply in the absence of a default. Other remedies available to Chase upon an event of default include the right to accelerate the maturity of all obligations, the
right to foreclose on and otherwise repossess the collateral securing the obligations, and all other rights set forth in the Loan Documents.
The events of default under the Agreement include, but are not limited to, the following: (i) certain events of bankruptcy and insolvency; (ii) failure to make required payments;
(iii) misrepresentations to Chase; (iv) failure to comply with certain covenants and agreements; (v) changes in control; and (vi) a material adverse change occurs.