The following should be read in conjunction with Skyline 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. See also Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Form 10-K for the year ended April 3, 2021, which provides additional information on comparisons of fiscal years 2021 and 2020.
The Company is a leading producer of factory-built housing in the U.S. and Canada. The Company serves as a complete solutions provider across complementary and vertically integrated businesses including manufactured construction, company-owned retail locations, construction services, and transportation logistics. The Company is the largest independent publicly traded factory-built solutions provider in North America based on revenue, and markets its homes under several nationally recognized brand names including Skyline Homes, Champion Home Builders, Genesis Homes, Athens Park Models, Dutch Housing, Atlantic Homes, Excel Homes, Homes of Merit, New Era, Redman Homes, ScotBilt Homes, Shore Park, Silvercrest, and Titan Homes in the U.S. and Moduline and SRI Homes in western Canada. The Company operates 36 manufacturing facilities throughout the U.S. and five manufacturing facilities in western Canada 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 southern U.S. The Company's transportation business engages independent owners/drivers to transport manufactured homes, recreational vehicles, and other products throughout the U.S. and Canada.
Over last several years, demand for the Company's products, primarily affordable housing in the U.S., has continued to improve. As a result, the Company has focused on operational improvements to increase the capacity utilization and profitability at its existing manufacturing facilities as well as executing measured expansion of its manufacturing footprint. The Company is focused on growing in strong housing markets across the U.S. and Canada. In June, 2021, the Company acquired two idle facilities in Navasota, Texas in order to increase its production capabilities in the Texas market. The Company began production and completed the certification process at one of those facilities during the fourth quarter of fiscal 2022. On February 28, 2021, the Company acquired ScotBilt, which operates two manufacturing facilities in Georgia providing affordable housing throughout Alabama, Florida, Georgia and the Carolinas. ScotBilt helped to balance the Company's national distribution and complements the Company's existing manufacturing footprint in the attractive mid-south region. The operations of ScotBilt are included in the financial results of Skyline Champion since the date of the acquisition. During fiscal 2022, the Company completed the successful cultural, processes, systems and internal controls integration at the acquired facilities. In January, 2021, the Company acquired two idle facilities in Pembroke, North Carolina which provide an opportunity to further expand its manufacturing footprint in the Southeast markets. The Company is currently renovating one of those facilities for expected production in late fiscal 2023. The Company's 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 the U.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 -------------------------------------------------------------------------------- Since July 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 in the 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 2022 of $1.6 billion compared to $858.6 million at the end of fiscal 2021. 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 raw material and labor costs. In addition, we are experiencing intermittent supply disruption and higher freight costs. Finding and retaining qualified labor continues to be a challenge for our plants which requires us to review our compensation programs and adjust accordingly. We manage our business to anticipate or quickly react to these supply challenges and cost increases and generally are able to pass along increased costs to our customers. Historically, order cancellation rates have been very low, but the longer lead-time caused by larger backlogs and changing prices could result in higher cancellations in future periods. For fiscal 2022, approximately 82% of the Company's U.S. manufacturing sales were generated from the manufacture of homes that comply with the Federal HUD code construction standard in the U.S. Industry shipments of HUD-code homes are reported on a one-month lag. According to data reported by MHI, HUD-code industry home shipments were 108,964, 95,588, and 97,553 units during fiscal 2022, 2021, and 2020, respectively. Based on industry data, the Company's U.S. wholesale market share of HUD code homes sold was 19.3%, 16.9%, and 16.5% in fiscal 2022, 2021, and 2020, respectively. Annual industry 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, current manufactured housing shipments are still at lower levels than the long-term historical average of over 200,000 units per year. Manufactured home sales represent approximately nine percent of all U.S. single family home starts.
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 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. During fiscal 2021, the Company experienced intermittent closures due to COVID-19 outbreaks at the facilities or surrounding communities causing higher than normal absenteeism. In the second half of fiscal 2021, the Company was able to increase daily production rates over the levels achieved in the prior fiscal year period as direct labor staffing levels increased and production efficiencies improved. Although the Company has generally been able to navigate the production challenges caused by the pandemic in fiscal 2022, availability of labor and certain raw materials remains uncertain due to continued labor shortages and supply chain disruptions. Prices for most raw materials and components have experienced increased volatility and, overall, labor, transportation and other manufacturing costs have trended higher than prior periods. As part of the initial 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's U.S. operations incurred $2.2 million of expense during fiscal 2021 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 in the United States and the Canada Emergency Wage Subsidy ("CEWS") under the COVID-19 Economic Response Plan in Canada. CEWS provided 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 and $0.7 million for payroll subsidies under the CARES Act during fiscal 2021. In addition, the CARES Act allows for deferring payment of certain payroll taxes. Through December 2020, the Company deferred $11.8 million of payroll taxes, of which, the Company repaid $5.9 million in the third quarter of fiscal 2022, with the remaining amount expected to be paid in December 2022. 25 --------------------------------------------------------------------------------
RESULTS OF OPERATIONS FOR FISCAL 2022 VS. 2021
Year Ended April 2, April 3, (Dollars in thousands) 2022 2021 Results of Operations Data: Net sales $ 2,207,229 $ 1,420,881 Cost of sales 1,618,106 1,133,186 Gross profit 589,123 287,695 Selling, general, and administrative expenses 256,218 178,936 Operating income 332,905 108,759 Interest expense, net 2,512 3,248 Other income, net (36 ) (5,889 ) Income from operations before income taxes 330,429 111,400 Income tax expense 82,385 26,501 Net income $ 248,044 $ 84,899 Reconciliation of Adjusted EBITDA: Net income $ 248,044 $ 84,899 Income tax expense 82,385 26,501 Interest expense, net 2,512 3,248 Depreciation and amortization 20,936
Equity-based compensation (for awards granted prior to December 31, 2018) - 1,359 Transaction costs - 1,044 Adjusted EBITDA $ 353,877 $ 134,755 As a percent of net sales: Gross profit 26.7 % 20.2 % Selling, general and administrative expenses 11.6 % 12.6 % Operating income 15.1 % 7.7 % Net income 11.2 % 6.0 % Adjusted EBITDA 16.0 % 9.5 % FISCAL PERIODS The Company's fiscal year is a 52- or 53-week period that ends on the Saturday nearest March 31. Fiscal 2022 was a 52-week period and fiscal 2021 was a 53-week period. The results of operations and discussion below should be read considering the impact of an additional week of operation in the prior year.
The following table summarizes net sales for fiscal 2022 and 2021:
Year Ended April 2, April 3, $ % (Dollars in thousands) 2022 2021 Change Change Net sales $ 2,207,229 $ 1,420,881 $ 786,348 55.3 %
U.S. manufacturing and retail net sales $ 1,991,066 $ 1,266,308 $ 724,758
57.2 % U.S. homes sold 24,686 19,983 4,703 23.5 % U.S. manufacturing and retail average home selling price $ 80.7 $ 63.4 $ 17.3 27.3 % Canadian manufacturing net sales $ 159,124 $ 101,328 $ 57,796 57.0 % Canadian homes sold 1,479 1,231 248 20.1 % Canadian manufacturing average home selling price $ 107.6 $ 82.3 $ 25.3 30.7 % Corporate/Other net sales $ 57,039 $ 53,245 $ 3,794 7.1 % U.S. manufacturing facilities in operation at year end 36 35 1 3 % U.S. retail sales centers in operation at year end 18 18 - - % Canadian manufacturing facilities in operation at year end 5 5 - - % 26
-------------------------------------------------------------------------------- Net sales for fiscal 2022 were $2.2 billion an increase of $786.3 million, or 55.3%, over fiscal 2021. The following is a summary of the change by operating segment.
Fiscal 2022 net sales for the Company's U.S. manufacturing and retail operations increased by $724.8 million, or 57.2%, over fiscal 2021. The increase was primarily due to an increase in the number of homes sold during the period of 23.5% and an increase in the average home selling price of 27.3%. Homes sold were higher due to increased demand for our products and the impact of the acquisition of ScotBilt, partially offset by one less week of production in fiscal 2022 compared to fiscal 2021. Demand for our products increased significantly during fiscal 2022 and we have been able to increase production in response to that demand organically and through our acquisition of ScotBilt. The average selling price increased in fiscal 2022 compared to the prior fiscal year due to pricing actions enacted in response to rising material, freight, and labor costs as well as a shift in product mix to larger homes with more features and amenities. Generally, we are able to pass the increase in input costs to our customers.
The Canadian Factory-built Housing segment net sales increased by $57.8 million, or 57.0% for fiscal 2022 compared to the prior year, primarily due to a 20.1% increase in homes sold and a 30.7% increase in average selling price per new home. The increase in homes sold was driven by increased production in response to strong demand. The increase in average selling price was due to pricing actions enacted in response to rising material and labor costs. Net sales for the Canadian segment were also favorably impacted by approximately $8.2 million as the Canadian dollar strengthened relative to the U.S. dollar during fiscal 2022 as compared to the prior year.
Net sales for Corporate/Other includes the Company's transportation business and the elimination of intersegment sales. During fiscal 2022, net sales for the segment increased by $3.8 million, or 7.1%, compared to fiscal 2021. The increase was primarily attributable to an increase in shipments of manufactured homes and recreational vehicles.
The following table summarizes gross profit for fiscal 2022 and 2021:
Year Ended April 2, April 3, $ % (Dollars in thousands) 2022 2021 Change Change Gross profit: U.S. Factory-built Housing $ 530,252 $ 252,880 $ 277,372 109.7 % Canadian Factory-built Housing 43,493 21,552 21,941 101.8 % Corporate/Other 15,378 13,263 2,115 15.9 % Total gross profit $ 589,123 $ 287,695 $ 301,428 104.8 % Gross profit as a percent of net sales 26.7 % 20.2 %
Gross profit as a percent of sales during fiscal 2022 was 26.7% compared to 20.2% during fiscal 2021. The following is a summary of the change by operating segment.
U.S. Factory-built Housing: Gross profit for the U.S. Factory-built Housing segment increased by $277.4 million, or 109.7%, during fiscal 2022 compared to the prior year. The increase in gross profit is due to the increase in revenue in fiscal 2022. As a percent of net sales, gross profit was 26.6% for fiscal 2022 compared to 20.0% in the prior fiscal year. The year-over-year increase in gross margin was primarily due to a combination of improved operational and labor efficiencies and price increases we implemented in response to rising input costs. We have focused on product simplification and material SKU rationalization to improve operational efficiencies to better leverage increased production and manufacturing fixed costs.
Gross profit for the Canadian Factory-built Housing segment increased by $21.9 million, or 101.8%, during fiscal 2022 compared to the prior year due to the increase in sales volume. Gross margin increased to 27.3% as a percent of segment net sales from 21.3% due to price increases in response to rising material and labor costs, as well as direct labor and manufacturing efficiencies from the increase in home sales volumes.
27 -------------------------------------------------------------------------------- Gross profit for the Corporate/Other segment increased by $2.1 million, or 15.9%, during fiscal 2022 compared to the same period in the prior year. Corporate/Other gross profit improved as a percent of segment net sales to 27.0% from 24.9%. Gross margin for the Company's transportation business improved due to a change in revenue mix.
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 SG&A expenses for fiscal 2022 and 2021: Year Ended April 2, April 3, $ % (Dollars in thousands) 2022 2021 Change Change Selling, general, and administrative expenses: U.S. Factory-built Housing $ 187,697 $ 126,141 $ 61,556 48.8 % Canadian Factory-built Housing 12,912 9,059 3,853 42.5 % Corporate/Other 55,609 43,736 11,873 27.1 % Total selling, general, and administrative expenses $ 256,218 $ 178,936 $ 77,282 43.2 % Selling, general, and administrative expenses as a percent of net sales 11.6 % 12.6 %
SG&A expenses were $256.2 million during fiscal 2022, an increase of $77.3 million compared to the prior year. The following is a summary of the change by operating segment.
U.S. Factory-built Housing: SG&A expenses for the U.S. Factory-built Housing segment increased by $61.6 million, or 48.8%, during fiscal 2022 as compared to the prior year. SG&A expenses, as a percent of segment net sales, were 9.4% in fiscal 2022 compared to 10.0% during fiscal 2021. SG&A costs increased due to a combination of factors, primarily (i) higher sales commissions and incentive compensation, which is generally based on sales volume or a measure of profitability; (ii) higher wage expense from increased headcount as we staffed to respond to the growth in housing demand; and (iii) the impact of the acquisition of the ScotBilt operations.
SG&A expenses for the Canadian Factory-built Housing segment increased by $3.9 million, or 42.5%, during fiscal 2022 as compared to the prior year. SG&A expenses, as a percent of segment net sales, were 8.1% during fiscal 2022 compared to 8.9% in fiscal 2021. The increase in cost is generally a function of the increase in net sales and profits for the segment which translates to higher 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 increased by $11.9 million, or 27.1%, during fiscal 2022 as compared to the prior year. SG&A expenses, as a percent of segment net sales, were 97.5% during fiscal 2022 compared to 82.1% in fiscal 2021. The increase is mainly due to $5.4 million of costs related to investments made to enhance our online customer experience and supporting systems, as well as an increase in equity compensation.
The following table summarizes the components of interest expense, net for fiscal 2022 and 2021: Year Ended April 2, April 3, $ % (Dollars in thousands) 2022 2021 Change Change Interest expense $ 3,245 $ 3,813 $ (568 ) (14.9 %) Interest income (733 ) (565 ) (168 ) 29.7 % Interest expense, net $ 2,512 $ 3,248 $
(736 ) (22.7 %) Average outstanding floor plan payable $ 31,485 $ 26,992 Average outstanding long-term debt $ 19,155 $ 64,663
28 -------------------------------------------------------------------------------- Interest expense, net was $2.5 million for fiscal 2022, a decrease of $0.7 million compared to the prior year. The decrease was primarily related to lower average outstanding borrowings on long-term debt, offset in part by higher average borrowings on floor plan payables. The Company repaid the outstanding balance on its revolving credit facility during the second quarter of fiscal 2022. OTHER INCOME, NET
The following table summarizes other income, net for fiscal 2022 and 2021:
Year Ended April 2, April 3, $ % (Dollars in thousands) 2022 2021 Change Change Other income, net $ (36 ) $ (5,889 ) $ 5,853 (99.4 %) Other income, net decreased $5.9 million, or 99.4%, during fiscal 2022 as compared to the prior year. The decrease is due to a reduction in the wage subsidies provided by government sponsored financial assistance programs that were enacted in response to the COVID-19 pandemic. In fiscal 2021, the Company recognized $6.2 million for payroll subsidies under CEWS, and $0.7 million under the CARES Act, which were partially offset by transaction costs of $1.0 million related to the acquisition of ScotBilt.
The following table summarizes income tax expense for fiscal 2022 and 2021:
Year Ended April 2, April 3, $ % (Dollars in thousands) 2022 2021 Change Change Income tax expense $ 82,385 $ 26,501 $ 55,884 210.9 % Effective tax rate 24.9 % 23.8 %
Income tax expense during fiscal 2022 was $82.4 million, representing an effective tax rate of 24.9%, compared to income tax expense of $26.5 million, representing an effective tax rate of 23.8%, in fiscal 2021.
The Company's effective tax rate for fiscal 2022 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 2021 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, and results in foreign jurisdictions.
The following table reconciles net income, the most directly comparable U.S. GAAP measure, to Adjusted EBITDA, a non-GAAP financial measure, for fiscal 2022 and 2021: Year Ended April 2, April 3, $ % (Dollars in thousands) 2022 2021 Change Change Net income $ 248,044 $ 84,899 $ 163,145 192.2 % Income tax expense 82,385 26,501 55,884 210.9 % Interest expense, net 2,512 3,248 (736 ) (22.7 %) Depreciation and amortization 20,936 17,704 3,232 18.3 % Equity-based compensation (for awards granted prior to December 31, 2018) - 1,359 (1,359 ) (100.0 %) Transaction costs - 1,044 (1,044 ) (100.0 %) Adjusted EBITDA $ 353,877 $ 134,755 $ 219,122 162.6 % Adjusted EBITDA for fiscal 2022 was $353.9 million, an increase of $219.1 million over fiscal 2021. The increase is primarily a result of increased operating income due to increases in net sales and gross margins, partially offset by higher SG&A expenses and the reduction in wage subsidies received in the prior year. 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. 29 --------------------------------------------------------------------------------
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 unfilled U.S. and Canadian manufacturing orders at April 2, 2022 totaled $1.6 billion compared to $858.6 million at April 3, 2021. 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 the U.S. and Canada. Our ability to increase production rates to keep pace with orders is limited by individual plant capacity, the availability of and time needed to train new employees, employee attendance and availability of materials, including certain allocations of raw materials by our suppliers. We may experience greater order cancellations in the future as a result of higher prices and the longer time required to manufacture and deliver our products.
The following table presents summary cash flow information for fiscal 2022, 2021, and 2020: Year Ended April 2, April 3, March 28, (Dollars in thousands) 2022 2021 2020 Net cash provided by (used in): Operating activities $ 224,479 $ 153,897 $ 76,743 Investing activities (31,967 ) (56,808 ) (14,093 ) Financing activities (19,936 ) (47,813 ) 21,569 Effect of exchange rate changes 256 3,850 (1,398 ) Net increase in cash, cash equivalents, and restricted cash 172,832 53,126
Cash, cash equivalents, and restricted cash at beginning of period 262,581 209,455
Cash, cash equivalents, and restricted cash at end of period $ 435,413 $ 262,581
The Company's primary sources of liquidity are cash flows from operations and existing cash balances. Cash balances and cash flows from operations for the next year are expected to be adequate to cover working capital requirements, capital expenditures, and strategic initiatives and investments. The Company does not have any scheduled long-term debt maturities in the next twelve months. On July 7, 2021, the Company entered into an Amended and Restated Credit Agreement which provides for a $200.0 million revolving credit facility, including a $45.0 million letter of credit sub-facility ("Amended Credit Agreement"). At April 2, 2022, $169.6 million was available for borrowing under the Amended Credit Agreement. The Company's revolving credit facility includes (i) a maximum consolidated total net leverage ratio of 3.25 to 1.00, subject to an upward adjustment upon the consummation of a material acquisition, and (ii) a minimum interest coverage ratio of 3.00 to 1.00. The Company anticipates compliance with its debt covenants and projects its level of cash availability to be in excess of cash needed to operate the business for the next year and beyond. 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 its operating strategies. Cash provided by operating activities was $224.5 million in fiscal 2022 compared to $153.9 million in fiscal 2021. Cash provided by operating activities increased due to higher net income in the current year, partially offset by an increase in inventory from higher material costs and higher stocking levels to mitigate supply chain challenges, and an increase in other assets primarily from the capitalization of $20.5 million of cloud computing costs. 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 drove the increase in deposits. The favorable changes in working capital items were partially offset by an increase in inventory compared to the prior period. Cash used in investing activities was $32.0 million in fiscal 2022 versus $56.8 million in fiscal 2021. The decrease is primarily related to the cash paid for the acquisition of ScotBilt, net of cash acquired, of $52.5 million, in fiscal 2021, partially offset by an increase in capital expenditures compared to the prior year. The Company acquired two idle manufacturing facilities in Texas in fiscal 2022 and made investments in plant improvements to facilitate increased production and operational efficiencies. Cash used in investing activities was $56.8 million in fiscal 2021 versus $14.1 million in fiscal 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. 30 -------------------------------------------------------------------------------- In fiscal 2022, cash used in financing activities was $19.9 million, versus $47.8 million in the prior fiscal year. The decrease in cash used for financing activities was primarily related to lower repayments during fiscal 2022 of the Company's previously existing revolving credit facility and an increase in floor plan financing. 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.
The Amended Credit Agreement matures in July 2026 and has no scheduled amortization. The interest rate on borrowings under the Amended Credit Agreement adjusts based on the consolidated total net leverage of the Company from a high of the London Inter-Bank Offered Rate ("LIBOR") plus 1.875% and Alternative Base Rate ("ABR") plus 0.875%, at the election of the Company, when the consolidated total net leverage ratio is equal to or greater than 2.25:1.00, to a low of LIBOR plus 1.125% and ABR plus 0.125% when the consolidated total net leverage is below 0.50:1.00. In addition, the Company is obligated to pay an unused line fee ranging between 0.15% and 0.30% (depending on the consolidated total net leverage ratio) in respect of unused commitments under the Amended Credit Agreement.
The Company has a letter of credit sub-facility under the Amended Credit Agreement. At April 2, 2022, 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.
At April 2, 2022, the Company had outstanding borrowings on floor plan financing arrangements of $35.5 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 $67.0 million. Borrowings are secured by the homes acquired and are required to be repaid when the Company sells the financed home to a customer.
The Company has contingent liabilities and obligations at April 2, 2022, including surety bonds and letters of credit totaling $35.6 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 of April 2, 2022 is approximately $339.5 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 $2.3 million at April 2, 2022. See "Critical Accounting Polices and Estimates - 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 two U.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 the U.K. operations, which declines over time through October 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.
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 31 -------------------------------------------------------------------------------- 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.
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.
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 $80 million. The Company establishes reserves for reported and unreported losses, and insurance company reimbursements, under these programs using an actuarial determined value which takes into consideration prior claim experience, estimates of losses for known occurrences and the respective volume of business activity for a given period. The health plan is currently subject to a stop-loss limit of $600,000 per occurrence. Estimated self-insurance costs are accrued for all expected future expenditures for reported and unreported claims based on historical experience.
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 32 -------------------------------------------------------------------------------- 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.
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.
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 2022, the Company performed qualitative assessments of its reporting units. The annual assessment was completed on of the first day of fiscal 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.
As is customary in the factory-built housing industry, a significant portion of the home 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 18 to 36 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 lenders. The contingent repurchase obligation as of April 2, 2022 is estimated to be approximately $339.5 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 $2.3 million at April 2, 2022. OTHER MATTERS Inflation Inflation of raw materials, especially commodities such as forest products, was significant during fiscal 2022. 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.
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. 33 --------------------------------------------------------------------------------
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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