Champion Homes, Inc. (SKY) FY 2024 MD&A

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 1, 2023, which provides additional information on comparisons of fiscal years 2023 and 2022.

Overview

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 Homes, Genesis Homes, Regional Homes, Athens Park Models, Dutch Housing, Atlantic Homes, Excel Homes, Homes of Merit, All American Homes, 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 43 manufacturing facilities throughout the U.S. and 5 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 74 sales centers that sell manufactured homes to consumers across the U.S. while the construction services business installs and sets up factory-built homes. The Company’s transportation business engages independent owners/drivers to transport manufactured homes, recreational vehicles, and other products throughout the U.S. and Canada.

Acquisitions and Expansions

The Company is focused on operational improvements to increase capacity utilization and profitability at its existing manufacturing facilities as well as measured expansion of its manufacturing and retail footprint through facility and equipment investments and acquisitions. Those investments will help improve the Company's ability to satisfy demand for affordable housing. During fiscal 2023, robust demand for housing began to slow as inflation and higher interest rates made housing less affordable. Because the Company offers a more affordable price point than other housing options, the economic environment drives an even greater need for attainable housing solutions. As a result, the Company continues to focus on growing in strong housing markets across the U.S. and Canada, as well as expanding products and services to provide more holistic affordable solutions to homebuyers.

In October 2023, the Company acquired Regional Homes, which operates three manufacturing facilities in Alabama and 44 retail sales centers across the Southeast U.S. Regional's strong presence in large HUD markets in the Southeast U.S. greatly expanded our captive retail and manufacturing distribution in the region. In July 2022, the Company acquired 12 Factory Expo retail sales centers from Alta Cima Corporation, which expanded the internal retail network across a broader portion of the U.S. In May 2022, the Company acquired Manis Custom Builders, Inc. ("Manis") in order to expand its manufacturing footprint and further streamline its product offering in the Carolinas.

In addition to those acquisitions, the Company is also focused on enhancing its U.S. manufacturing production capacity through various plant start-ups in strategic locations. As a result, the Company began production in previously idled or acquired facilities in Decatur, Indiana and Bartow, Florida in fiscal 2024, a facility in Pembroke, North Carolina in the fourth quarter of fiscal 2023 and a facility in Navasota, Texas in the fourth quarter of fiscal 2022. The Company owns six idle manufacturing facilities that could be used for further manufacturing capacity expansion in future periods.

During fiscal 2024, the Company made an equity investment in ECN. The investment, in part, facilitated the creation of a captive finance company in partnership with Triad. The captive finance company, Champion Financing, provides factory-built home floor plan and consumer loans to retailers and homebuyers. The Company believes this offering will provide customers needed financing solutions and improve the Company's market share.

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The Company's acquisitions and investments are part of a strategy to grow and diversify revenue with a focus on increasing the Company’s homebuilding presence in the U.S. as well as improving the results of operations through streamlining production of similar product categories. These acquisitions and investments are included in the Company's consolidated results for periods subsequent to their respective acquisition dates.

Industry and Company Outlook

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 the U.S. and Canadian 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 rent-to-own single-family options.

Inflation and higher interest rates have continued to impact demand for the Company's products in both the U.S. and Canada. However, as interest rates stabilized in fiscal 2024, the Company saw an increase in orders from customers over the prior year. Although orders were higher, sales during fiscal 2023 outpaced those in fiscal 2024 as a result of higher production to fill elevated backlog carried over from prior years. The Company's backlog at the end of fiscal 2024 was $315.8 million compared to $308.1 million at the end of fiscal 2023 and $1.6 billion at the end of fiscal 2022.

For fiscal 2024, approximately 88% 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. According to data reported by MHI, HUD-code industry home shipments were 92,288, 104,374, and 108,964 units during fiscal 2024, 2023, and 2022, respectively. Based on industry data, the Company’s U.S. wholesale market share of HUD code homes sold was 19.9%, 20.4%, and 19.3% in fiscal 2024, 2023, and 2022, 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 9% of all U.S. single family home starts.

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RESULTS OF OPERATIONS FOR FISCAL 2024 VS. 2023

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FISCAL PERIODS

The Company’s fiscal year is a 52- or 53-week period that ends on the Saturday nearest March 31. Fiscal 2024 and 2023 were each 52-week periods.

NET SALES

The following table summarizes net sales for fiscal 2024 and 2023:

Net sales for fiscal 2024 were $2.0 billion, a decrease of $581.7 million, or 22.3%, over fiscal 2023. The following is a summary of the change by operating segment.

U.S. Factory-built Housing:

Fiscal 2024 net sales for the Company’s U.S. manufacturing and retail operations decreased by $525.8 million, or 21.8%, from fiscal 2023. The decrease was primarily due to a 15.3% decrease in the number of homes sold during the period, as well as a 7.7% decrease in the average home selling price. The decrease in the number of homes sold was due to lower customer demand, lower production volume and the lack of disaster relief housing sales to FEMA compared to the prior year. The average selling price decrease was due, in part, to customers choosing smaller homes with fewer or lower cost options, generally as a result of pressure on consumers caused by higher borrowing costs, and the lack of disaster relief housing sales to FEMA which were $200.3 million in fiscal 2023. FEMA units generally have more specifications than our typical products and therefore drive a higher average selling price per home. The overall decline in sales was partially offset by contributions from the start-up of new plants and the addition of Regional Homes which contributed $227.8 million in net sales in the period since the completion of the acquisition.

Canadian Factory-built Housing:

The Canadian Factory-built Housing segment net sales decreased by $35.2 million, or 24.4% in fiscal 2024 compared to the prior year, primarily due to a 24.1% decrease in homes sold. The decrease in homes sold is due to lower customer demand caused by inflation and rising interest rates. Net sales for the Canadian segment were also unfavorably impacted by approximately $2.8 million as the Canadian dollar weakened relative to the U.S. dollar during fiscal 2024 as compared to the prior year.

Corporate/Other:

Net sales for Corporate/Other includes the Company’s transportation business and the elimination of intersegment sales. During fiscal 2024, net sales for the segment decreased by $20.7 million, or 40.6%, compared to fiscal 2023. The decrease was primarily attributable to the decrease in recreational vehicle shipments, in part a function of lower demand in that industry, and in part a shift in focus of this business unit on expanding shipments for manufactured housing.

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GROSS PROFIT

The following table summarizes gross profit for fiscal 2024 and 2023:

Gross profit as a percent of sales during fiscal 2024 was 24.0% compared to 31.4% during fiscal 2023. 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 decreased by $317.4 million, or 41.9%, during fiscal 2024 compared to the prior year. As a percent of net sales, gross profit was 23.3% for fiscal 2024 compared to 31.4% in the prior fiscal year. The decrease in gross profit is primarily a factor of the decrease in sales as discussed above. Additionally, the Company incurred a charge of $34.5 million in fiscal 2024 for estimated costs to remediate water intrusion in certain homes built in one of its manufacturing facilities from fiscal 2016 through fiscal 2021. The decrease in gross profit as a percent of net sales is being driven by changes in product mix to smaller homes with less options, the decrease in FEMA sales which are generally at higher prices than our core products, increased pricing pressure caused by a decrease in orders, and the impact of the water intrusion charge. The Company is attempting to recover costs from the manufacturer of the product found to be the cause of the water intrusion, but did not record any offset to future costs as of March 30, 2024. The acquisition of Regional Homes also negatively impacted gross profit in fiscal 2024 since that business has historically generated lower margins than the legacy Skyline Champion operations, coupled with certain fair value adjustments of assets required under purchase accounting.

Canadian Factory-built Housing:

Gross profit for the Canadian Factory-built Housing segment decreased by $14.2 million, or 31.7%, during fiscal 2024 compared to the prior year. The decrease in gross profit was due to lower sales volumes. Gross profit decreased to 27.9% as a percent of segment net sales from 30.9% in the prior year due to decreased leverage of fixed manufacturing costs.

Corporate/Other:

Gross profit for the Corporate/Other segment decreased by $1.4 million, or 8.3%, during fiscal 2024 compared to the same period in the prior year.

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 2024 and 2023:

SG&A expenses were $310.6 million during fiscal 2024, an increase of $10.2 million compared to the prior year. The following is a summary of the change by operating segment.

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U.S. Factory-built Housing:

SG&A expenses for the U.S. Factory-built Housing segment increased by $10.9 million, or 4.9%, during fiscal 2024 as compared to the prior year. SG&A expenses, as a percent of segment net sales, increased to 12.3% in fiscal 2024 compared to 9.2% during fiscal 2023. The acquisition of Regional Homes was the primary driver of the increase in SG&A expenses. Regional Homes contributed $42.6 million of SG&A expenses since the date of acquisition. Absent the effect of the Regional Homes acquisition, SG&A expenses for the segment would have been lower by $31.8 million, which was a result of a decline in commissions and incentive compensation that is driven by sales and profitability. SG&A as a percent of sales was negatively impacted by less absorption of certain fixed costs and the expansion of company-owned retail sales centers, which historically operate at a higher percentage of SG&A expenses compared to manufacturing operations.

Canadian Factory-built Housing:

SG&A expenses for the Canadian Factory-built Housing segment decreased $2.3 million, or 18.1% compared to the prior year, primarily due to lower incentive compensation which is based on sales volume or profitability and reductions in wages due to staffing adjustments. SG&A expenses, as a percent of segment net sales, were 9.7% during fiscal 2024 compared to 9.0% in fiscal 2023. The increase in SG&A as a percent of net sales is a the result of less absorption of certain fixed costs.

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 $1.7 million, or 2.5%, during fiscal 2024 as compared to the prior year. The increase is mainly due to increased equity compensation and investments made to enhance our online customer experience and support systems, offset in part by lower corporate incentive compensation which is measured against sales and profitability targets.

INTEREST (INCOME) EXPENSE, NET

The following table summarizes the components of interest (income), net for fiscal 2024 and 2023:

Interest income, net was $28.3 million during fiscal 2024, compared to $15.0 million in the prior year. The change was primarily due to higher interest income from higher average invested cash balances and higher interest rates in fiscal 2024 compared to fiscal 2023, offset in part by higher interest expense related to floor plan payables and long-term debt acquired in conjunction with the purchase of Regional Homes in fiscal 2024.

OTHER (EXPENSE) INCOME, NET

The following table summarizes other income, net for fiscal 2024 and 2023:

Other expense (income), net increased $3.2 million during fiscal 2024 compared to the prior year. In fiscal 2024, the Company incurred $3.3 million of acquisition costs associated with the purchase of Regional Homes and the investment in ECN, partially offset by dividend income of $0.6 million from the investment in ECN Preferred Shares. During the first quarter of fiscal 2023, the Company received insurance proceeds for partial settlement of certain Champion Homes Builders' pre-bankruptcy workers' compensation claims, which was partially offset by transaction costs incurred for the acquisition of Manis.

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INCOME TAX EXPENSE

The following table summarizes income tax expense for fiscal 2024 and 2023:

Income tax expense during fiscal 2024 was $47.1 million, representing an effective tax rate of 23.5%, compared to income tax expense of $132.1 million, representing an effective tax rate of 24.7%, in fiscal 2023. The rate change from fiscal 2023 to fiscal 2024 is due to lower income before tax and an increase in tax credits in fiscal 2024.

The Company’s effective tax rate for both fiscal 2024 and 2023 differs from the federal statutory income tax rate of 21.0%, due primarily to the effect of non-deductible expenses, state and local income taxes, and foreign rate differential, partially offset by tax credits.

ADJUSTED EBITDA

The following table reconciles net income, the most directly comparable U.S. GAAP measure, to Adjusted EBITDA, a non-GAAP financial measure, for fiscal 2024 and 2023:

* indicates that the calculated percentage is not meaningful

Adjusted EBITDA for fiscal 2024 was $245.3 million, a decrease of $299.7 million from fiscal 2023. The decrease is primarily a result of lower operating income due to decreases in sales volume, average selling prices, gross margins and higher SG&A expenses, partially offset by the incremental operating income generated by Regional Homes for the period after the acquisition. 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 unfilled U.S. and Canadian manufacturing orders at March 30, 2024 totaled $315.8 million compared to $308.1 million at April 1, 2023. The increase in backlog was primarily driven by higher net orders and the acquisition of Regional Homes.

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LIQUIDITY AND CAPITAL RESOURCES

The following table presents summary cash flow information for fiscal 2024 and 2023:

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. The Company has 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 March 30, 2024, there were no borrowings under the Amended Credit Agreement and letters of credit issued under the Credit Agreement totaled $34.0 million. Total available borrowings under the Credit Agreement as of March 30, 2024 were $166.0 million. 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 $222.7 million in fiscal 2024 compared to $416.2 million in fiscal 2023. The decrease was primarily driven by lower net income in fiscal 2024, partially offset by more favorable changes in working capital items.

Cash used in investing activities was $485.7 million in fiscal 2024 versus $61.2 million in fiscal 2023. The increase in cash used for investing activities was primarily related to the Company's acquisition of Regional Homes, net of cash acquired, totaling $283.2 million, and the Company's investment in ECN common and preferred stock of $143.4 million in fiscal 2024.

In fiscal 2024, cash provided by financing activities was $10.9 million, versus $37.0 million used for financing activities in the prior fiscal year. The year over year increase was primarily related to net borrowings under floor plan financing arrangements. Fiscal 2024 included a $15.4 million increase in floor plan borrowings while fiscal 2023 included a $35.5 million net repayment. The change is a result of the Company's strategic utilization of floor plan borrowings and cash available to finance working capital.

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

Credit Facility

The Amended Credit Agreement matures in July 2026 and has no scheduled amortization. The interest rate on borrowings under the Amended Credit Agreement is based on the Secured Overnight Financing Rate ("SOFR") plus a benchmark Replacement Rate Adjustment ("Replacement Rate"), plus an interest rate spread. The interest rate spread adjusts based on the consolidated total net leverage of the Company from a high of 1.875% when the consolidated total net leverage ratio is equal to or greater than 2.25:1.00, to a low of 1.125% when the consolidated total net leverage is below 0.50:1.00. Alternatively for same day borrowings, the interest rate is based on an Alternative Base Rate ("ABR") plus an interest rate spread that ranges from a high of 0.875% to a low of 0.125% based on the consolidated total net leverage ratio. 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.

Letter of Credit Facility

The Company has a letter of credit sub-facility under the Amended Credit Agreement. At March 30, 2024, letters of credit issued under the sub-facility totaled $34.0 million.

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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.

Notes Payable

As part of the acquisition of Regional Homes, the Company assumed notes payable to Romeo Juliet, LLC, a subsidiary of Wells Fargo Community Investment Holdings, Inc. ("WFC") of $7.3 million, which mature at various dates from 2026 through 2039. The notes have a fixed rate of 5.42% and are secured by certain assets of Regional Homes. In addition, the Company assumed a note payable to United Bank of $4.9 million with a fixed interest rate of 3.85% that is secured by a Note Receivable from HHB Investment Fund, LLC, a subsidiary of WFC.

Floor Plan Payable

At March 30, 2024, the Company had outstanding borrowings on floor plan financing arrangements of $91.3 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 $248.0 million. Floor plan payables 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 at March 30, 2024, including surety bonds and letters of credit totaling $15.1 million and $34.0 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 March 30, 2024 is approximately $296.3 million, without reduction for the resale value of the homes collateralizing the potential repurchases. 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 $1.8 million at March 30, 2024. 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.

Product Liability - Water Intrusion

The Company has received consumer complaints for damages related to water intrusion in homes built in one of its manufacturing facilities prior to fiscal 2022. The Company has investigated, and believes, the cause of the damage is the result of materials that did not perform in accordance with the manufacturer's contractual obligations. The Company has identified that certain homes constructed over that period that may be affected. Based on the results of ongoing investigation and repair efforts, the Company has developed a remediation plan under Subpart I of the HUD code and has submitted that plan to HUD for approval. The plan calls for inspection and repair of affected homes if there is evidence of damage, or procedures to mitigate the opportunity for future damage. As a result of the proposal, the Company recorded charges to execute the remediation plan of $34.5 million during the fourth quarter of fiscal 2024. The Company estimated the charges by establishing a range of total expected costs determined by an actuary using a Monte Carlo simulation. The analysis resulted in a range of losses between $34.5 million and $85.0 million. The Company was not able to determine a value in the range that was more likely than any other value, and as prescribed by U.S. GAAP, recorded the charge for remediation based on the low end of the range of potential losses. The Company will monitor the results of the inspection and repair activities, including actual repair costs, and may revise the amount of the estimated liability, which could result in an increase or decrease in the estimated liability in future periods. The liability is included in Other current liabilities in the accompanying consolidated balance sheets.

Based on the Company's investigation into the cause of the water intrusion, including third-party testing of the material at issue, the Company believes it is possible that it will recover some or all of the estimated remediation costs. The Company will attempt to recover those costs from the manufacturer of the material, the distributor of the material, their related insurance providers or from the Company's insurance providers. However, the Company is unable to record an offset for any estimated costs at this time in accordance with U.S. GAAP.

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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 expenses or minus income for: (a) the provision for income taxes; (b) interest income or expense, net; (c) depreciation and amortization; (d) gain or loss from discontinued operations; (e) non-cash restructuring charges and impairment of assets; (f) equity in net earnings or losses of affiliates; (g) charges related to the remediation of the water intrusion product liability claims; and (h) other non-operating income or expense including but not limited to those costs 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 certain incentive compensation programs; 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 $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

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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 $700,000 per occurrence. Estimated self-insurance costs are accrued for all expected future expenditures for reported and unreported claims based on historical experience.

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

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 2024, 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.

Reserve for Repurchase Commitments

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 March 30, 2024 was estimated to be approximately $296.3 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 $1.8 million at March 30, 2024.

OTHER MATTERS

Inflation

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 our 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.

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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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