e10vq

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended November 30, 2006


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 1-4714

SKYLINE CORPORATION

(Exact name of registrant as specified in its charter)


Indiana		35-1038277

(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

P. O. Box 743, 2520 By-Pass Road, Elkhart, Indiana		46515

(Address of principal executive offices)		(Zip Code)

(574) 294-6521

Registrant’s telephone number, including area code:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated filer o Accelerated filer þ Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes þ No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


		Shares Outstanding
Title of Class		January 5, 2007

Common Stock		8,391,244

PART I.

Item 1. Financial Statements.

Skyline Corporation and Subsidiary Companies

Consolidated Balance Sheets


	November 30, 2006		May 31, 2006
(Dollars in thousands)	(Unaudited)
ASSETS

Current Assets
Cash	$	10,902	$	10,059
U.S. Treasury Bills, at cost plus accrued interest		123,756		52,607
U.S. Treasury Notes, at cost plus accrued interest		—		90,105
Accounts receivable, trade, less allowance for doubtful accounts of $100		18,938		31,759
Inventories		11,966		11,308
Other current assets		10,281		8,537

Total Current Assets		175,843		204,375


Property, Plant and Equipment, at Cost
Land		5,557		5,557
Buildings and improvements		65,614		64,721
Machinery and equipment		30,050		28,478

		101,221		98,756
Less accumulated depreciation		65,987		64,687


Net Property, Plant and Equipment		35,234		34,069


Other Assets		10,268		9,959

	$	221,345	$	248,403

The accompanying notes are an integral part of the consolidated financial statements.

Item 1. Financial Statements (continued).

Skyline Corporation and Subsidiary Companies

Consolidated Balance Sheets


	November 30, 2006			May 31, 2006
(Dollars in thousands, except per share data)	(Unaudited)
LIABILITIES AND SHAREHOLDERS’ EQUITY

Current Liabilities
Accounts payable, trade	$	3,494		$	8,784
Accrued salaries and wages		6,354			9,279
Accrued profit sharing		1,299			2,620
Accrued marketing programs		8,037			6,418
Accrued warranty and related expenses		8,458			8,111
Other accrued liabilities		2,530			3,522
Income taxes payable		—			1,416

Total Current Liabilities		30,172			40,150


Other Deferred Liabilities		10,702			10,499


Commitments and Contingencies- See Note 1

Shareholders’ Equity
Common stock, $.0277 par value, 15,000,000 shares authorized; issued 11,217,144 shares		312			312
Additional paid-in capital		4,928			4,928
Retained earnings		240,975			258,258
Treasury stock, at cost, 2,825,900 shares at November 30, 2006 and May 31, 2006		(65,744	)		(65,744	)

Total Shareholders’ Equity		180,471			197,754


	$	221,345		$	248,403

The accompanying notes are an integral part of the consolidated financial statements.

Item 1. Financial Statements (continued).

Skyline Corporation and Subsidiary Companies

Consolidated Statements of Earnings and Retained Earnings

For the three-month and six-month periods ended November 30, 2006 and 2005
(Unaudited)


	Three-Months Ended						Six-Months Ended
(Dollars in thousands, except per share data)	2006			2005			2006			2005
EARNINGS
Sales	$	94,786		$	136,487		$	210,592		$	254,833
Cost of sales		84,477			118,659			187,227			223,301

Gross profit		10,309			17,828			23,365			31,532
Selling and administrative expense		10,779			11,626			22,249			23,098

Operating (loss) earnings		(470	)		6,202			1,116			8,434
Interest income		1,476			1,199			2,936			2,224
Gain on sale of idle property, plant and equipment		—			—			—			464

Earnings before income taxes		1,006			7,401			4,052			11,122

Provision for income taxes:
Federal		343			2,431			1,378			3,643
State		38			465			153			630

		381			2,896			1,531			4,273


Net earnings	$	625		$	4,505		$	2,521		$	6,849


Basic earnings per share	$	.07		$	.54		$	.30		$	.82

Cash dividends per share	$	.18		$	.18		$	2.36		$	.36


Weighted average number of common shares outstanding		8,391,244			8,391,244			8,391,244			8,391,244


RETAINED EARNINGS
Balance at beginning of period	$	241,860		$	250,841		$	258,258		$	250,007
Net earnings		625			4,505			2,521			6,849
Cash dividends paid		(1,510	)		(1,510	)		(19,804	)		(3,020	)

Balance at end of period	$	240,975		$	253,836		$	240,975		$	253,836

The accompanying notes are an integral part of the consolidated financial statements.

Item 1. Financial Statements (continued).

Skyline Corporation and Subsidiary Companies

Consolidated Statements of Cash Flows

For the six-month periods ended November 30, 2006 and 2005
Increase (Decrease) in Cash
(Unaudited)


(Dollars in thousands)	2006			2005
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings	$	2,521		$	6,849
Adjustments to reconcile net earnings to net cash provided from operating activities:
Depreciation		1,478			1,507
Gain on sale of idle property, plant and equipment		—			(464	)
Working capital items:
Accrued interest receivable		(700	)		(429	)
Accounts receivable		12,821			(2,124	)
Inventories		(658	)		(1,143	)
Other current assets		(1,744	)		(2,052	)
Accounts payable, trade		(5,290	)		813
Accrued liabilities		(3,272	)		4,038
Income taxes payable		(1,416	)		810
Other, net		(27	)		80

Net cash provided from operating activities		3,713			7,885


CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from principal payments of U.S. Treasury Bills		76,769			109,699
Purchase of U.S. Treasury Bills		(147,113	)		(72,036	)
Proceeds from maturity of U.S. Treasury Notes		90,000			—
Purchase of U.S. Treasury Notes		—			(44,325	)
Net proceeds from sale of idle property, plant and equipment		—			1,493
Purchase of property, plant and equipment		(2,664	)		(1,194	)
Other, net		(58	)		(61	)

Net cash provided from (used in) investing activities		16,934			(6,424	)


CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends paid		(19,804	)		(3,020	)

Net cash used in financing activities		(19,804	)		(3,020	)

Net increase (decrease) in cash		843			(1,559	)
Cash at beginning of year		10,059			12,406

Cash at end of quarter	$	10,902		$	10,847

The accompanying notes are an integral part of the consolidated financial statements.

Item 1. Financial Statements (continued).

Skyline Corporation and Subsidiary Companies

Notes to the Consolidated Financial Statements

(Unaudited)

NOTE 1 Nature of Operations, Accounting Policies of Consolidated Financial Statements

The accompanying unaudited interim consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the consolidated financial position as of November 30, 2006, in addition to the consolidated results of operations and consolidated cash flows for the three-month and six-month periods ended November 30, 2006 and 2005. Due to the seasonal nature of the Corporation’s business, interim results are not necessarily indicative of results for the entire year.

The unaudited interim consolidated financial statements included herein have been prepared pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly, certain information and footnote disclosures normally accompanying the annual consolidated financial statements have been omitted. The audited consolidated balance sheet as of May 31, 2006 and the unaudited interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Corporation’s latest annual report on Form 10-K.

Inventories are stated at cost, determined under the first-in, first-out method, which is not in excess of market. Finished goods consist primarily of homes on display at various manufacturing facilities. Physical inventory counts are taken at the end of each reporting quarter. Total inventories for the periods presented consisted of (dollars in thousands):


	November 30, 2006		May 31, 2006
Raw Materials	$	5,442	$	5,604
Work In Process		5,707		5,674
Finished Goods		817		30

	$	11,966	$	11,308

The Corporation provides the retail purchaser of its manufactured homes with a fifteen-month warranty against defects in design, materials and workmanship. Recreational vehicles are covered by a one-year warranty.

Item 1. Financial Statements (continued).

Skyline Corporation and Subsidiary Companies

Notes to the Consolidated Financial Statements
(Unaudited)

NOTE 1 Nature of Operations, Accounting Policies of Consolidated Financial Statements (continued)

The warranties are backed by service departments located at our manufacturing facilities and an extensive field service system. Estimated warranty costs are accrued at the time of sale based upon current sales, historical experience and management’s judgment regarding anticipated rates of warranty claims. The adequacy of the recorded warranty liability is periodically assessed and the amount is adjusted as necessary. A reconciliation of accrued warranty and related expenses is as follows (dollars in thousands):


	Six Months Ended
	November 30,
	2006			2005
Balance at the beginning of the period	$	12,111		$	11,700
Accruals for warranties		6,340			5,892
Settlements made during the period		(5,993	)		(5,792	)

Balance at the end of the period		12,458			11,800
Non-current balance included in other deferred liabilities		4,000			4,000

Accrued warranty and related expenses	$	8,458		$	7,800

The Corporation was contingently liable at November 30, 2006 under repurchase agreements with certain financial institutions providing inventory financing for retailers of its products. Under these arrangements, which are customary in the manufactured housing and recreational vehicle industries, the Corporation agrees to repurchase units in the event of default by the retailer at declining prices over the term of the agreement, generally 12 months. The maximum repurchase liability is the total amount that would be paid upon the default of all the Corporation’s independent dealers. The maximum potential repurchase liability, without reduction for the resale value of the repurchased units, was approximately $108 million at November 30, 2006 and $110 million at May 31, 2006. The risk of loss under these agreements is spread over many retailers 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 allowance for doubtful accounts includes a reserve for potential net losses on repurchased units.

Item 1. Financial Statements (continued).

Skyline Corporation and Subsidiary Companies

Notes to the Consolidated Financial Statements
(Unaudited)

NOTE 1 Nature of Operations, Accounting Policies of Consolidated Financial Statements (continued)

The amounts of obligations from repurchased units and incurred net losses for the periods presented are as follows (dollars in thousands):


	Three-Months Ended				Six-Months Ended
	November 30,				November 30,
	2006		2005		2006		2005
Number of units repurchased		21		2		58		2
Obligations from units repurchased	$	310	$	80	$	941	$	80
Net losses on repurchased units		—		—		—		—

The Corporation is a party to various pending legal proceedings in the normal course of business. Management believes that any losses resulting from such proceedings would not have a material adverse effect on the Corporation’s results of operations or financial position.

Certain prior period amounts have been reclassified to conform with the current period presentation.

In June 2006, the Financial Accounting Standards Board (FASB), issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”, (FIN No. 48). This Interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with Statement of Financial Accounting Standards (SFAS) No. 109, “Accounting for Income Taxes”. FIN No. 48 is effective for fiscal years beginning after December 15, 2006. The Corporation is currently analyzing the impact of this Interpretation on its consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”. This statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and adoption is not expected to have a material impact on the Corporation’s consolidated financial statements.

In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin (“SAB”) No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.” SAB 108 provides guidance on evaluating the materiality of prior periods’ misstatements, quantifying the effects of correcting misstatements in the current period and criteria for restatement of prior periods. SAB 108 is effective for fiscal years ending after November 15, 2006. The Corporation does not expect its adoption to have a material impact on its consolidated financial statements.

Item 1. Financial Statements (continued).

Skyline Corporation and Subsidiary Companies

Notes to the Consolidated Financial Statements
(Unaudited)

NOTE 2 Industry Segment Information

The Corporation designs, produces and distributes manufactured housing (single-section, multi-section and modular homes) and towable recreational vehicles (including travel trailers, fifth wheels and park models). In the first six months of fiscal years 2007 and 2006, manufactured housing represented 75 percent and 77 percent of total sales, respectively, while recreational vehicles accounted for the remaining 25 percent and 23 percent, respectively.


	Three Months Ended						Six Months Ended
	November 30,						November 30,
(Dollars in thousands)	2006			2005			2006			2005
SALES
Manufactured housing	$	72,618		$	103,371		$	157,101		$	195,807
Recreational vehicles		22,168			33,116			53,491			59,026

Total sales	$	94,786		$	136,487		$	210,592		$	254,833


EARNINGS BEFORE INCOME TAXES
OPERATING EARNINGS (LOSS)
Manufactured housing	$	1,268		$	6,870		$	3,786		$	11,099
Recreational vehicles		(823	)		(46	)		(1,050	)		(1,225	)
General corporate expense		(915	)		(622	)		(1,620	)		(1,440	)

Total operating (loss) earnings		(470	)		6,202			1,116			8,434
Interest income		1,476			1,199			2,936			2,224
Gain on sale of idle property, plant and equipment		—			—			—			464

Earnings before income taxes	$	1,006		$	7,401		$	4,052		$	11,122

Operating earnings (loss) represent earnings (losses) before interest income, gain on sale of idle property, plant and equipment and provision for income taxes with non-traceable operating expenses being allocated to industry segments based on percentages of sales.


Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Overview

The Corporation sells manufactured housing and towable recreational vehicle products to independent dealers and manufactured housing communities located throughout the United States (U.S.). To better serve the needs of its dealers, the Corporation has twenty-one manufacturing facilities in eleven states. Manufactured housing and recreational vehicles are sold to dealers either through floor plan financing with various financial institutions or on a cash basis. While the Corporation maintains production of manufactured homes and recreational vehicles throughout the year, seasonal fluctuations in sales do occur. Sales and production of manufactured homes are affected by winter weather conditions at the Corporation’s northern plants. Recreational vehicle sales are generally higher in the spring and summer months than in the fall and winter months.

Sales in both business segments are affected by the strength of the U.S. economy, interest rate levels, consumer confidence and the availability of wholesale and retail financing. The manufactured housing segment is currently affected by a protracted downturn. This downturn, caused primarily by restrictive retail financing and economic uncertainty, has resulted in industry sales which over the last four years have been the lowest in decades. The manufactured housing industry has been further negatively impacted by the recent decline in new housing starts in the U.S. In the recreational vehicle segment, the Corporation sells travel trailers, fifth wheels and park models. Industry sales of travel trailers and fifth wheels have seen steady growth in recent years. Demand for travel trailers, however, has softened in recent months when compared to last year. Travel trailer sales in the prior year included units sold as part of hurricane relief efforts in the Gulf coast region of the United States.

Demand remains strong for multi-section versus single-section homes. Multi-section homes are often sold as part of a land-home package and are financed with a conventional mortgage. Multi-section homes have an appearance similar to site-built homes and are notably less expensive. Nine of the Corporation’s manufactured housing facilities have obtained approval from applicable state and local governmental entities to produce modular homes, which will help meet the demand for multi-section homes.

The recreational vehicle segment in which the Corporation operates is a very competitive ever-changing market. Similar to the trend in the non-motorized recreational vehicle industry, this segment is currently experiencing decreased demand for travel trailers.


Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued).

Results of Operations – Three-Month Period Ended November 30, 2006 Compared to the Three-Month Period Ended November 30, 2005 (Unaudited)

Sales and Unit Shipments


									Change
(Dollars in thousands)	2006		Percent		2005		Percent		(Decrease)
Sales
Manufactured Housing	$	72,618		76.6	$	103,371		75.7	$	(30,753	)
Recreational Vehicles		22,168		23.4		33,116		24.3		(10,948	)

Total Sales	$	94,786		100.0	$	136,487		100.0	$	(41,701	)


Unit Shipments
Manufactured Housing		1,487		51.2		2,276		49.3		(789	)
Recreational Vehicles		1,416		48.8		2,345		50.7		(929	)

Total Unit Shipments		2,903		100.0		4,621		100.0		(1,718	)

Manufactured housing sales decreased due to an overall softening of demand. This decline is consistent with the experience of the manufactured housing industry as a whole.

Recreational vehicle sales decreased due to a softening in demand, particularly for travel trailers. The decline in travel trailer sales is consistent with the experience of that particular segment of the recreational vehicle industry. In addition, prior year sales included approximately 580 units related to hurricane relief sold to independent dealers for approximately $5 million.

Cost of Sales


			Percent of				Percent of		Change
(Dollars in thousands)	2006		Sales *		2005		Sales *		(Decrease)
Manufactured Housing	$	63,935		88.0	$	88,432		85.5	$	(24,497	)
Recreational Vehicles		20,542		92.7		30,227		91.3		(9,685	)

Consolidated	$	84,477		89.1	$	118,659		86.9	$	(34,182	)


*		The percentages for manufactured housing and recreational vehicles are based on segment sales. The percentage for consolidated cost of sales is based on total sales.

Manufactured housing cost of sales decreased due to declining sales. As a percentage of sales, however, cost of sales increased due primarily to a rise in warranty costs as a percentage of sales.

Recreational vehicles cost of sales decreased due to declining sales. As a percentage of sales, however, cost of sales increased due to warranty costs remaining constant despite a drop in sales. In addition, warranty and overhead costs were incurred relating to a recreational vehicle facility that was idled at the end of fiscal 2006.


Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued).

Results of Operations – Three-Month Period Ended November 30, 2006 Compared to the Three-Month Period Ended November 30, 2005 (Unaudited) (continued)

Selling and Administrative Expenses


				Percent of						Percent of			Change
(Dollars in thousands)	2006			Sales			2005			Sales			(Decrease)
Selling and Administrative Expenses	$	10,779			11.4		$	11,626			8.5		$	(847	)
Selling and administrative expenses decreased primarily due to decreased sales and efforts to control costs. As a percentage of sales, selling and administrative expenses increased due to certain costs being fixed despite lower sales. Operating Earnings (Loss)
													Change in
													Operating
				Percent of						Percent of			Earnings
(Dollars in thousands)	2006			Sales *			2005			Sales *			(Decrease)
Manufactured Housing	$	1,268			1.7		$	6,870			6.6		$	(5,602	)
Recreational Vehicles		(823	)		(3.7	)		(46	)		(0.1	)		(777	)
General Corporate Expenses		(915	)		(1.0	)		(622	)		(0.5	)		(293	)

Total Operating (Loss) Earnings	$	(470	)		(0.5	)	$	6,202			4.5		$	(6,672	)


*		The percentages for manufactured housing and recreational vehicles are based on segment sales. The percentage for general corporate expenses and total operating earnings (loss) are based on total sales.

Operating earnings for manufactured housing dropped primarily due to decreased sales. In addition, unit sales of single-section homes increased from 17 percent in 2005 to 22 percent in 2006. Single-section homes have lower margins as compared to multi-section homes.

The operating loss for recreational vehicles increased due to decreased sales.

General corporate expenses increased as a result of fluctuating discount rates which caused a change in valuation of the Corporation’s liability for certain post-retirement benefits.

Interest Income


					Change
(Dollars in thousands)	2006		2005		Increase
Interest Income	$	1,476	$	1,199	$	277

Interest income is directly related to the amount available for investment and the prevailing yields of U.S. Government Securities.


Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued).

Results of Operations – Six-Month Period Ended November 30, 2006 Compared to the Six-Month Period Ended November 30, 2005 (Unaudited) (continued)

Sales and Unit Shipments


									Change
(Dollars in thousands)	2006		Percent		2005		Percent		(Decrease)
Sales
Manufactured Housing	$	157,101		74.6	$	195,807		76.8	$	(38,706	)
Recreational Vehicles		53,491		25.4		59,026		23.2		(5,535	)

Total Sales	$	210,592		100.0	$	254,833		100.0	$	(44,241	)


Unit Shipments
Manufactured Housing		3,272		48.5		4,337		51.6		(1,065	)
Recreational Vehicles		3,481		51.5		4,063		48.4		(582	)

Total Unit Shipments		6,753		100.0		8,400		100.0		(1,647	)

Manufactured housing sales decreased due to an overall softening of demand. This decline is consistent with the experience of the manufactured housing industry as a whole.

Cost of Sales


			Percent				Percent of		Change
(Dollars in thousands)	2006		of Sales*		2005		Sales *		(Decrease)
Manufactured Housing	$	138,422		88.1	$	168,773		86.2	$	(30,351	)
Recreational Vehicles		48,805		91.2		54,528		92.4		(5,723	)

Consolidated	$	187,227		88.9	$	223,301		87.6	$	(36,074	)


*		The percentages for manufactured housing and recreational vehicles are based on segment sales. The percentage for consolidated cost of sales is based on total sales.

Manufactured housing cost of sales decreased due to declining sales. As a percentage of sales, however, cost of sales increased due primarily to a rise in warranty costs as a percentage of sales.

Recreational vehicle cost of sales also decreased due to declining sales. As a percentage of sales, cost of sales decreased due to a change in product mix.


Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued).

Results of Operations – Six-Month Period Ended November 30, 2006 Compared to the Six-Month Period Ended November 30, 2005 (Unaudited) (continued)

Selling and Administrative Expenses


				Percent of						Percent of			Change
(Dollars in thousands)	2006			Sales			2005			Sales			(Decrease)
Selling and Administrative Expenses	$	22,249			10.6		$	23,098			9.1		$	(849	)
Selling and administrative expenses decreased primarily due to decreased sales and efforts to control costs. As a percentage of sales, selling and administrative expenses increased due to certain costs being fixed despite lower sales. Operating Earnings (Loss)

													Change in
													Operating
													Earnings
				Percent of						Percent of			Increase
( Dollars in thousands)	2006			Sales *			2005			Sales *			(Decrease)
Manufactured Housing	$	3,786			2.4		$	11,099			5.7		$	(7,313	)
Recreational Vehicles		(1,050	)		(2.0	)		(1,225	)		(2.1	)		175
General Corporate Expenses		(1,620	)		(0.8	)		(1,440	)		(0.6	)		(180	)

Total Operating Earnings	$	1,116			(0.5	)	$	8,434			3.3		$	(7,318	)


*		The percentages for manufactured housing and recreational vehicles are based on segment sales. The percentage for general corporate expenses and total operating earnings are based on total sales.

Operating earnings for the manufactured housing dropped primarily due to decreased sales. In addition, unit sales of single-section homes increased from 18 percent in 2005 to 21 percent in 2006. Single-section homes have lower margins as compared to multi-section homes.

The operating loss for recreational vehicles decreased as a result of slightly improved margins on units sold.

General corporate expenses increased as a result of fluctuating discount rates which caused a change in valuation of the Corporation’s liability for certain post-retirement benefits.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued).

Interest Income


					Change
(Dollars in thousands)	2006		2005		Increase
Interest Income	$	2,936	$	2,224	$	712

Interest income is directly related to the amount available for investment and the prevailing yields of U.S. Government Securities.

Liquidity and Capital Resources


	November 30,		May 31,		Change
(Dollars in thousands)	2006		2006		(Decrease)
Cash and U.S. Treasury Bills and Notes	$	134,658	$	152,771	$	(18,113	)
Current assets, exclusive of cash and U.S. Treasury Bills and Notes	$	41,185	$	51,604	$	(10,419	)
Current liabilities	$	30,172	$	40,150	$	(9,978	)
Working capital	$	145,671	$	164,225	$	(18,554	)

The Corporation’s policy is to invest its excess cash, which exceeds its operating needs, in U.S. Government Securities. Cash and U.S. Treasury Bills and Notes decreased due primarily to a $16,782,000 special dividend paid on August 1, 2006. Current assets, exclusive of cash and U.S. Treasury Bills and Notes, decreased primarily due to a decline in accounts receivable of $12,821,000. This decline is attributable to lower sales in November 2006 as compared to May 2006.

Current liabilities decreased due to declines in accounts payable, $5,290,000, accrued salaries and wages, $2,925,000, and income taxes payable, $1,416,000. Accounts payable dropped because of lower sales in November 2006 as compared to May 2006. Accrued salaries and wages decreased due to annual payments of performance based compensation to employees and due to fewer employees in November 2006. Income taxes payable decreased due to the timing of tax payments at November 30, 2006 as compared to May 31, 2006, and the decline in pre-tax profits.

Capital expenditures totaled $2,664,000 for the six months ended November 30, 2006 as compared to $1,194,000 in the comparable period of the previous year. Building and land improvements increased approximately $700,000. Additional capital expenditures during this period were made primarily to replace or refurbish machinery and equipment in addition to improving manufacturing efficiencies.

The cash provided by operating activities, along with current cash and other short-term investments, is expected to be adequate to fund any capital expenditures and treasury stock purchases during the year. Historically, the Corporation’s financing needs have been met through funds generated internally.


Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued).

Other Matters

The provision for federal income taxes in each year approximates the statutory rate and for state income taxes reflects current state rates effective for the period based upon activities within the taxable entities.

The consolidated financial statements included in this report reflect transactions in the dollar values in which they were incurred and, therefore, do not attempt to measure the impact of inflation. On a long-term basis, the Corporation has demonstrated an ability to adjust selling prices in reaction to changing costs due to inflation. The Corporation believes that inflation has not had a material effect on its operations during the first half of fiscal 2007.

Forward Looking Information

Certain statements in this report are considered forward looking as indicated by the Private Securities Litigation Reform Act of 1995. These statements involve uncertainties that may cause actual results to materially differ from expectations as of the report date. These uncertainties include but are not limited to:

	•		Cyclical nature of the manufactured housing and recreational vehicle industries

	•		General or seasonal weather conditions affecting sales

	•		Potential impact of hurricanes and other natural disasters on sales and raw material costs

	•		Potential periodic inventory adjustments by independent retailers

	•		Availability of wholesale and retail financing

	•		Interest rate levels

	•		Impact of inflation

	•		Impact of rising fuel costs

	•		Cost of labor and raw materials

	•		Competitive pressures on pricing and promotional costs

	•		Catastrophic events impacting insurance costs

	•		The availability of insurance coverage for various risks to the Corporation

	•		Consumer confidence and economic uncertainty

	•		The health of the U.S. housing market as a whole

	•		Market demographics

	•		Management’s ability to attract and retain executive officers and key personnel

	•		Increased global tensions, market disruption resulting from a terrorist or other attack and any armed conflict involving the United States.


Item 3.		Quantitative and Qualitative Disclosures About Market Risk.

The Corporation invests in United States Government Securities. These securities are typically held until maturity and are therefore classified as held-to-maturity and carried at amortized cost. Changes in interest rates do not have a significant effect on the fair value of these investments.


Item 4.		Controls and Procedures.

Management’s Conclusions Regarding Effectiveness of Disclosure Controls and Procedures

As of November 30, 2006, the Corporation conducted an evaluation, under the supervision and participation of management including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Corporation’s disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934).

Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Corporation’s disclosure controls and procedures are effective as of November 30, 2006

Changes in Internal Control over Financial Reporting

No change in the Corporation’s internal control over financial reporting (as such term is defined in Exchange Act Rule 13a-15(f)) occurred during the second quarter ended November 30, 2006 that materially affected, or is reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

PART II.


Item 1.		Legal Proceedings.

Information with respect to this Item for the period covered by this Form 10-Q has been reported in Item 3, entitled “Legal Proceedings” of the Form 10-K for the fiscal year ended May 31, 2006 filed by the registrant with the Commission.


Item 1A.		Risk Factors.

There were no material changes in the risk factors disclosed in Item 1A of the Corporation’s Form 10-K for the year ended May 31, 2006.

Item 6. Exhibits.


(3 (ii))		By-Laws

(31.1)		Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002-Rule 13a-14(a)/15d-14(a)

(31.2)		Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002-Rule 13a-14(a)/15d-14(a)

(32.1)		Certification of Periodic Financial Reports Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(32.2)		Certification of Periodic Financial Reports Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


	Page No.
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of November 30, 2006 and May 31, 2006		2
Consolidated Statements of Earnings and Retained Earnings for the three-month and six-month periods ended November 30, 2006 and 2005		4
Consolidated Statements of Cash Flows for the six-month periods ended November 30, 2006 and 2005		5
Notes to the Consolidated Financial Statements		6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		10
Item 3. Quantitative and Qualitative Disclosures About Market Risk		16
Item 4. Controls and Procedures		17
Part II. Other Information
Item 1. Legal Proceedings		17
Item 1A. Risk Factors		17
Item 6. Exhibits		18
Signatures		19
By-Laws
302 Certification of Chief Executive Officer
302 Certification of Chief Financial Officer
906 Certification of Periodic Financial Reports
906 Certification of Periodic Financial Reports


		SKYLINE CORPORATION

DATE: January 5, 2007		/s/ James R. Weigand James R. Weigand
		Chief Financial Officer

DATE: January 5, 2007		/s/ Jon S. Pilarski Jon S. Pilarski
		Corporate Controller

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