0000278166cvco:Fiscal2018Member2021-10-02
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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ý☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended December 30, 2017October 2, 2021
OR
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¨☐ | 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 000-08822
Cavco Industries, Inc.CAVCO INDUSTRIES INC.
(Exact name of registrant as specified in its charter)
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Delaware | 56-2405642 |
(State or other jurisdiction of incorporation or organization)
| (I.R.S. Employer Identification No.)
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10013636 North Central Avenue, Suite 800
Phoenix, Arizona 85004 Ave, Ste 1200 |
| Phoenix | Arizona | 85012 | |
(Address of principal executive offices, including zip code) |
602-256-6263(602) 256-6263
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last year)
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class | Trading Symbol | Name of each exchange on which registered |
Common Stock, par value $0.01 | CVCO | The Nasdaq Stock Market LLC |
| | (Nasdaq Global Select Market) |
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. Yes ý☒ No ¨☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý☒ No ¨☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or a small reportingan emerging growth company. See definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filerAccelerated Filer | ¨☒ | Accelerated filerFiler | ý☐ |
Non-accelerated filerFiler | ¨ (Do not check if a smaller reporting company) ☐ | Smaller reporting companyReporting Company | ¨☐ |
Emerging Growth Company | ¨
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨☐
Indicate by check mark whether the Registrantregistrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨☐ No ý☒
As of February 2, 2018, 9,036,705October 29, 2021, 9,177,315 shares of Registrant'sthe registrant's Common Stock, $.01 par value, were outstanding.
CAVCO INDUSTRIES, INC.
FORM 10-Q
December 30, 2017October 2, 2021
TABLE OF CONTENTS
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
CAVCO INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
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| December 30, 2017 | | April 1, 2017 |
| (Unaudited) | | |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 138,974 |
| | $ | 132,542 |
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Restricted cash, current | 9,993 |
| | 11,573 |
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Accounts receivable, net | 41,501 |
| | 31,221 |
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Short-term investments | 14,502 |
| | 11,289 |
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Current portion of consumer loans receivable, net | 32,186 |
| | 31,115 |
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Current portion of commercial loans receivable, net | 6,823 |
| | 7,932 |
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Inventories | 105,872 |
| | 93,855 |
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Prepaid expenses and other current assets | 34,112 |
| | 28,033 |
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Deferred income taxes, current | — |
| | 9,204 |
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Total current assets | 383,963 |
| | 356,764 |
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Restricted cash | 728 |
| | 724 |
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Investments | 34,631 |
| | 30,256 |
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Consumer loans receivable, net | 62,806 |
| | 64,686 |
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Commercial loans receivable, net | 20,031 |
| | 17,901 |
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Property, plant and equipment, net | 58,969 |
| | 56,964 |
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Goodwill and other intangibles, net | 83,025 |
| | 80,021 |
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Total assets | $ | 644,153 |
| | $ | 607,316 |
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LIABILITIES AND STOCKHOLDERS' EQUITY | | | |
Current liabilities: | | | |
Accounts payable | $ | 19,835 |
| | $ | 24,010 |
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Accrued liabilities | 123,661 |
| | 109,789 |
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Current portion of securitized financings and other | 5,761 |
| | 6,417 |
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Total current liabilities | 149,257 |
| | 140,216 |
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Securitized financings and other | 51,530 |
| | 51,574 |
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Deferred income taxes | 7,794 |
| | 21,118 |
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Stockholders' equity: | | | |
Preferred stock, $.01 par value; 1,000,000 shares authorized; No shares issued or outstanding | — |
| | — |
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Common stock, $.01 par value; 40,000,000 shares authorized; Outstanding 9,035,294 and 8,994,968 shares, respectively | 90 |
| | 90 |
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Additional paid-in capital | 245,605 |
| | 244,791 |
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Retained earnings | 187,572 |
| | 148,141 |
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Accumulated other comprehensive income | 2,305 |
| | 1,386 |
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Total stockholders' equity | 435,572 |
| | 394,408 |
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Total liabilities and stockholders' equity | $ | 644,153 |
| | $ | 607,316 |
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| October 2, 2021 | | April 3, 2021 |
ASSETS | (Unaudited) | | |
Current assets | | | |
Cash and cash equivalents | $ | 224,291 | | | $ | 322,279 | |
Restricted cash, current | 19,850 | | | 16,693 | |
Accounts receivable, net | 72,038 | | | 47,396 | |
Short-term investments | 18,867 | | | 19,496 | |
Current portion of consumer loans receivable, net | 26,475 | | | 37,690 | |
Current portion of commercial loans receivable, net | 31,307 | | | 14,568 | |
Current portion of commercial loans receivable from affiliates, net | 294 | | | 4,664 | |
Inventories | 190,394 | | | 131,234 | |
Prepaid expenses and other current assets | 49,482 | | | 57,779 | |
Total current assets | 632,998 | | | 651,799 | |
Restricted cash | 335 | | | 335 | |
Investments | 35,650 | | | 35,010 | |
Consumer loans receivable, net | 32,124 | | | 37,108 | |
Commercial loans receivable, net | 36,685 | | | 20,281 | |
Commercial loans receivable from affiliates, net | 3,647 | | | 4,801 | |
Property, plant and equipment, net | 156,397 | | | 96,794 | |
Goodwill | 106,487 | | | 75,090 | |
Other intangibles, net | 35,404 | | | 14,363 | |
Operating lease right-of-use assets | 16,706 | | | 16,252 | |
Total assets | $ | 1,056,433 | | | $ | 951,833 | |
LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST, AND STOCKHOLDERS' EQUITY | | | |
Current liabilities | | | |
Accounts payable | $ | 42,549 | | | $ | 32,120 | |
Accrued expenses and other current liabilities | 237,462 | | | 203,133 | |
Current portion of secured financings and other | 2,260 | | | 1,851 | |
Total current liabilities | 282,271 | | | 237,104 | |
Operating lease liabilities | 13,240 | | | 13,361 | |
Secured financings and other | 17,305 | | | 10,335 | |
Deferred income taxes | 9,373 | | | 7,393 | |
Redeemable noncontrolling interest | 1,128 | | | — | |
Stockholders' equity | | | |
Preferred stock, $0.01 par value; 1,000,000 shares authorized; No shares issued or outstanding | — | | | — | |
Common stock, $0.01 par value; 40,000,000 shares authorized; Issued 9,275,016 and 9,241,256 shares, respectively | 93 | | | 92 | |
Treasury stock, at cost; 98,201 and 6,600 shares, respectively | (21,877) | | | (1,441) | |
Additional paid-in capital | 259,116 | | | 253,835 | |
Retained earnings | 495,713 | | | 431,057 | |
Accumulated other comprehensive income | 71 | | | 97 | |
Total stockholders' equity | 733,116 | | | 683,640 | |
Total liabilities, redeemable noncontrolling interest and stockholders' equity | $ | 1,056,433 | | | $ | 951,833 | |
See accompanying Notes to Consolidated Financial Statements
CAVCO INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands, except per share amounts)
(Unaudited)
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| Three Months Ended | | Six Months Ended |
| October 2, 2021 | | September 26, 2020 | | October 2, 2021 | | September 26, 2020 |
Net revenue | $ | 359,543 | | | $ | 257,976 | | | $ | 689,965 | | | $ | 512,777 | |
Cost of sales | 269,615 | | | 204,435 | | | 526,024 | | | 403,913 | |
Gross profit | 89,928 | | | 53,541 | | | 163,941 | | | 108,864 | |
Selling, general and administrative expenses | 45,372 | | | 35,453 | | | 86,204 | | | 70,776 | |
Income from operations | 44,556 | | | 18,088 | | | 77,737 | | | 38,088 | |
Interest expense | (203) | | | (194) | | | (367) | | | (390) | |
Other income, net | 4,668 | | | 1,702 | | | 7,129 | | | 3,578 | |
Income before income taxes | 49,021 | | | 19,596 | | | 84,499 | | | 41,276 | |
Income tax expense | (11,338) | | | (4,547) | | | (19,770) | | | (9,553) | |
Net income | 37,683 | | | 15,049 | | | 64,729 | | | 31,723 | |
Less: net income attributable to redeemable noncontrolling interest | 73 | | | — | | | 73 | | | — | |
Net income attributable to Cavco common stockholders | $ | 37,610 | | | $ | 15,049 | | | $ | 64,656 | | | $ | 31,723 | |
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Comprehensive income | | | | | | | |
Net income | $ | 37,683 | | | $ | 15,049 | | | $ | 64,729 | | | $ | 31,723 | |
Reclassification adjustment for securities sold | — | | | 7 | | | 1 | | | 33 | |
Applicable income taxes | — | | | (2) | | | — | | | (7) | |
Net change in unrealized position of investments held | (16) | | | 3 | | | (34) | | | 62 | |
Applicable income taxes | 3 | | | (1) | | | 7 | | | (13) | |
Comprehensive income | 37,670 | | | 15,056 | | | 64,703 | | | 31,798 | |
Less: comprehensive income attributable to redeemable noncontrolling interest | 73 | | | — | | | 73 | | | — | |
Comprehensive income attributable to Cavco common stockholders | $ | 37,597 | | | $ | 15,056 | | | $ | 64,630 | | | $ | 31,798 | |
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Net income per share attributable to Cavco common stockholders | | | | | | | |
Basic | $ | 4.09 | | | $ | 1.64 | | | $ | 7.03 | | | $ | 3.46 | |
Diluted | $ | 4.06 | | | $ | 1.62 | | | $ | 6.97 | | | $ | 3.42 | |
Weighted average shares outstanding | | | | | | | |
Basic | 9,190,866 | | | 9,182,945 | | | 9,194,577 | | | 9,178,609 | |
Diluted | 9,273,136 | | | 9,295,409 | | | 9,274,440 | | | 9,280,080 | |
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| Three Months Ended | | Nine Months Ended |
| December 30, 2017 | | December 31, 2016 | | December 30, 2017 | | December 31, 2016 |
Net revenue | $ | 221,383 |
| | $ | 202,310 |
| | $ | 628,706 |
| | $ | 575,799 |
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Cost of sales | 171,527 |
| | 158,766 |
| | 502,330 |
| | 459,896 |
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Gross profit | 49,856 |
| | 43,544 |
| | 126,376 |
| | 115,903 |
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Selling, general and administrative expenses | 26,045 |
| | 26,003 |
| | 78,503 |
| | 76,119 |
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Income from operations | 23,811 |
| | 17,541 |
| | 47,873 |
| | 39,784 |
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Interest expense | (1,236 | ) | | (1,091 | ) | | (3,305 | ) | | (3,384 | ) |
Other income, net | 1,094 |
| | 829 |
| | 3,251 |
| | 2,407 |
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Income before income taxes | 23,669 |
| | 17,279 |
| | 47,819 |
| | 38,807 |
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Income tax expense | (2,242 | ) | | (4,996 | ) | | (8,457 | ) | | (11,740 | ) |
Net income | $ | 21,427 |
| | $ | 12,283 |
| | $ | 39,362 |
| | $ | 27,067 |
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Comprehensive income: | | | | | | | |
Net income | $ | 21,427 |
| | $ | 12,283 |
| | $ | 39,362 |
| | $ | 27,067 |
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Unrealized gain on available-for-sale securities, net of tax | 315 |
| | 253 |
| | 919 |
| | 1,077 |
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Comprehensive income | $ | 21,742 |
| | $ | 12,536 |
| | $ | 40,281 |
| | $ | 28,144 |
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Net income per share: | | | | | | | |
Basic | $ | 2.37 |
| | $ | 1.37 |
| | $ | 4.36 |
| | $ | 3.02 |
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Diluted | $ | 2.33 |
| | $ | 1.35 |
| | $ | 4.28 |
| | $ | 2.98 |
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Weighted average shares outstanding: | | | | | | | |
Basic | 9,030,100 |
| | 8,992,456 |
| | 9,019,311 |
| | 8,970,008 |
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Diluted | 9,214,898 |
| | 9,102,562 |
| | 9,186,042 |
| | 9,096,442 |
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See accompanying Notes to Consolidated Financial Statements
CAVCO INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
| | | Nine Months Ended | | Six Months Ended |
| December 30, 2017 | | December 31, 2016 | | October 2, 2021 | | September 26, 2020 |
OPERATING ACTIVITIES | | | | OPERATING ACTIVITIES | | | |
Net income | $ | 39,362 |
| | $ | 27,067 |
| Net income | $ | 64,729 | | | $ | 31,723 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | |
Adjustments to reconcile net income to net cash provided by operating activities | | Adjustments to reconcile net income to net cash provided by operating activities | |
Depreciation and amortization | 2,975 |
| | 2,762 |
| Depreciation and amortization | 3,190 | | | 3,182 | |
Provision for credit losses | 484 |
| | 441 |
| Provision for credit losses | (74) | | | 223 | |
Deferred income taxes | (4,617 | ) | | (1,001 | ) | Deferred income taxes | 1,987 | | | (18) | |
Stock-based compensation expense | 1,918 |
| | 1,743 |
| Stock-based compensation expense | 2,417 | | | 2,048 | |
Non-cash interest income, net | (693 | ) | | (926 | ) | Non-cash interest income, net | (770) | | | (2,596) | |
Incremental tax benefits from option exercises | — |
| | (2,349 | ) | |
Gain on sale of property, plant and equipment, net | (55 | ) | | (256 | ) | |
Gain on sale of loans and investments, net | (7,335 | ) | | (5,832 | ) | |
Changes in operating assets and liabilities: | | | | |
Restricted cash | 1,143 |
| | 905 |
| |
(Gain) loss on sale or retirement of property, plant and equipment, net | | (Gain) loss on sale or retirement of property, plant and equipment, net | (41) | | | 242 | |
Gain on investments and sale of loans, net | | Gain on investments and sale of loans, net | (12,555) | | | (9,597) | |
Changes in operating assets and liabilities, net of acquisitions | | Changes in operating assets and liabilities, net of acquisitions | |
Accounts receivable | (8,914 | ) | | (6,627 | ) | Accounts receivable | (3,136) | | | 5,948 | |
Consumer loans receivable originated | (96,766 | ) | | (86,838 | ) | Consumer loans receivable originated | (85,370) | | | (82,352) | |
Proceeds from sales of consumer loans | 91,157 |
| | 77,260 |
| Proceeds from sales of consumer loans | 101,556 | | | 80,589 | |
Principal payments on consumer loans receivable | 10,615 |
| | 8,786 |
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Principal payments received on consumer loans receivable | | Principal payments received on consumer loans receivable | 6,875 | | | 6,974 | |
Inventories | (10,090 | ) | | 8,169 |
| Inventories | (19,980) | | | 1,663 | |
Prepaid expenses and other current assets | (3,191 | ) | | 29 |
| Prepaid expenses and other current assets | 993 | | | 11,536 | |
Commercial loans receivable | (964 | ) | | 2,134 |
| Commercial loans receivable | 3,331 | | | 4,691 | |
Accounts payable and accrued liabilities | 355 |
| | 3,332 |
| |
Accounts payable and accrued expenses and other current liabilities | | Accounts payable and accrued expenses and other current liabilities | 16,935 | | | 20,353 | |
Net cash provided by operating activities | 15,384 |
| | 28,799 |
| Net cash provided by operating activities | 80,087 | | | 74,609 | |
INVESTING ACTIVITIES | | | | INVESTING ACTIVITIES | | | |
Purchases of property, plant and equipment | (3,025 | ) | | (4,343 | ) | Purchases of property, plant and equipment | (4,671) | | | (3,773) | |
Payments for Lexington Homes, net | (1,638 | ) | | — |
| |
Payments for acquisitions, net | | Payments for acquisitions, net | (151,309) | | | — | |
Proceeds from sale of property, plant and equipment | 436 |
| | 296 |
| Proceeds from sale of property, plant and equipment | 53 | | | 77 | |
Purchases of investments | (9,736 | ) | | (7,625 | ) | Purchases of investments | (6,251) | | | (4,440) | |
Proceeds from sale of investments | 7,401 |
| | 8,011 |
| Proceeds from sale of investments | 6,133 | | | 8,054 | |
Net cash used in investing activities | (6,562 | ) | | (3,661 | ) | Net cash used in investing activities | (156,045) | | | (82) | |
FINANCING ACTIVITIES | | | | FINANCING ACTIVITIES | | | |
Payments from exercise of stock options | (1,104 | ) | | (1,483 | ) | |
Incremental tax benefits from exercise of stock options | — |
| | 2,349 |
| |
Proceeds from (payments for) exercise of stock options | | Proceeds from (payments for) exercise of stock options | 2,865 | | | (11) | |
Proceeds from secured financings and other | 5,103 |
| | 2,269 |
| Proceeds from secured financings and other | — | | | 64 | |
Payments on securitized financings | (6,389 | ) | | (6,294 | ) | |
Payments on secured financings and other | | Payments on secured financings and other | (1,122) | | | (918) | |
Payments for common stock repurchases | | Payments for common stock repurchases | (20,436) | | | — | |
Distributions to noncontrolling interest | | Distributions to noncontrolling interest | (180) | | | — | |
Net cash used in financing activities | (2,390 | ) | | (3,159 | ) | Net cash used in financing activities | (18,873) | | | (865) | |
Net increase in cash and cash equivalents | 6,432 |
| | 21,979 |
| |
Cash and cash equivalents at beginning of the period | 132,542 |
| | 97,766 |
| |
Cash and cash equivalents at end of the period | $ | 138,974 |
| | $ | 119,745 |
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Supplemental disclosures of cash flow information: | | | | |
Cash paid during the year for income taxes | $ | 12,195 |
| | $ | 11,595 |
| |
Cash paid during the year for interest | $ | 2,221 |
| | $ | 2,605 |
| |
Net (decrease) increase in cash, cash equivalents and restricted cash | | Net (decrease) increase in cash, cash equivalents and restricted cash | (94,831) | | | 73,662 | |
Cash, cash equivalents and restricted cash at beginning of the fiscal year | | Cash, cash equivalents and restricted cash at beginning of the fiscal year | 339,307 | | | 255,607 | |
Cash, cash equivalents and restricted cash at end of the period | | Cash, cash equivalents and restricted cash at end of the period | $ | 244,476 | | | $ | 329,269 | |
Supplemental disclosures of cash flow information | | Supplemental disclosures of cash flow information | | | |
Cash paid for income taxes | | Cash paid for income taxes | $ | 19,127 | | | $ | 7,865 | |
Cash paid for interest | | Cash paid for interest | $ | 195 | | | $ | 251 | |
Supplemental disclosures of noncash activity | | Supplemental disclosures of noncash activity | | | |
Change in GNMA loans eligible for repurchase | | Change in GNMA loans eligible for repurchase | $ | (8,830) | | | $ | 16,170 | |
Right-of-use assets recognized and operating lease obligations incurred | | Right-of-use assets recognized and operating lease obligations incurred | $ | 2,205 | | | $ | 5,617 | |
Fair value of assets acquired under finance leases | | Fair value of assets acquired under finance leases | $ | 7,398 | | | $ | — | |
Finance lease obligations incurred | | Finance lease obligations incurred | $ | 6,043 | | | $ | — | |
See accompanying Notes to Consolidated Financial Statements
CAVCO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited Consolidated Financial Statements of Cavco Industries, Inc., and its subsidiaries (collectively, "we," "us," "our," the "Company" or "Cavco"), have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"(the "SEC") for Quarterly Reports on Form 10-Q and Article 10 of SEC Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles ("GAAP") have been condensed or omitted pursuant to such rules and regulations.
In the opinion of management, these financial statements include all of theadjustments, including normal recurring adjustments, that are necessary to fairly state the Company's Consolidated Financial Statements. Certain prior period amountsresults for the periods presented. We have been reclassified to conform to current period classification. The Company has evaluated subsequent events after the balance sheet date through the date of the filing of this report with the SEC;SEC, and there were no disclosable subsequent events. These Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and the Notes to the Consolidated Financial Statements included in the Company'sour 2021 Annual Report on Form 10-K for the year ended April 1, 2017,3, 2021, filed with the SEC on June 13, 2017.("Form 10-K").
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and the accompanying Notes. ActualThe uncertainty created by the novel coronavirus COVID-19 pandemic has made such estimates more difficult and subjective. Due to that and other uncertainties, actual results could differ from those estimates. The Consolidated Statements of Comprehensive Income and Consolidated Statements of Cash Flows for the interim periods are not necessarily indicative of the results or cash flows for the full year. The Company operates on a 52-53 week fiscal year ending on the Saturday nearest to March 31st of each year. Each fiscal quarter consists of 13 weeks, with an occasional fourth quarter extending to 14 weeks, if necessary, for the fiscal year to end on the Saturday nearest to March 31.31st. The Company's current fiscal year will end on March 31, 2018.April 2, 2022 and will include 52 weeks.
The Company operates principallyWe operate in two2 segments: (1) factory-built housing, which includes wholesale and retail systems-builtfactory-built housing operations, and (2) financial services, which includes manufactured housing consumer finance and insurance. The Company designsWe design and buildsbuild a wide variety of affordable manufactured homes, modular homes and park model RVs in 20 factoriesthrough 26 homebuilding production lines located throughout the United States, which are sold to a network of independent retailers, through the Company's 41 Company-owned retail stores and todistributors, community owners and developers. Ourdevelopers and through our 46 Company-owned retail stores. The financial services groupsegment is comprised of a mortgagefinance subsidiary, CountryPlace Acceptance Corp. ("CountryPlace"), and an insurance subsidiary, Standard Casualty Co.Company ("Standard Casualty"). CountryPlace is an approved Federal National Mortgage Association ("FNMA" or "Fannie Mae") and Federal Home Loan Mortgage Corporation ("FHLMC" or "Freddie Mac") seller/servicer and a Government National Mortgage Association ("GNMA" or "Ginnie Mae") mortgage-backed securities issuer whichthat offers conforming mortgages, non-conforming mortgages and home-only loans to purchasers of factory-built homes. Standard Casualty provides property and casualty insurance primarily to owners of manufactured homes.
On April 3, 2017,September 24, 2021, we acquired the Company acquired Lexington Homes, Inc.business and certain assets and liabilities of The Commodore Corporation ("Lexington"Commodore"), which produces manufactured homes distributed in the Southeastern United States. This operation, with one manufactured housing production facility in Lexington, Mississippi, provides for further operating capacity, increased home production capabilitiesincluding its six manufacturing facilities and further distribution into certain markets.two wholly-owned retail locations. The acquisition was accounted for as a business combination and the results of operations have beenare included sincein our Consolidated Financial Statements from the date of acquisition. Our purchase price allocation is preliminary and subject to revision as more detailed analyses are completed and additional information about fair value of assets and liabilities becomes available, including additional information relating to tax matters and finalization of our valuation of identified intangible assets. Pro forma results of operations for the acquisition have not been presented because the effects of the business combination were not material to our consolidated results of operations.See Note 21.
Recent Accounting Pronouncements. In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes ("ASU 2015-17"). ASU 2015-17 became effective in the current fiscal year. Therefore, we now present all deferred tax liabilities and assets as noncurrent on the balance sheet instead of separating these items into current and noncurrent amounts. The prior period was not retrospectively adjusted. In addition in March 2016, the FASB issued ASU 2016-09, Compensation- Stock Compensation (Topic 718) ("ASU 2016-09"), which also became effective in the current fiscal year. As a result of this required implementation, excess tax benefits are recorded on exercises of stock options as a reduction of income tax expense in the consolidated statement of comprehensive income, whereas they were previously recognized in equity.
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASU 2014-09"), which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The standard requires entities to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new guidance also includes a cohesive set of disclosure requirements intended to provide users of financial statements with comprehensive information about the nature, amount, timing and uncertainty of revenue and cash flows arising from a company's contracts with customers. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which deferred the effective date of the new revenue standard. Accordingly, the updated standard is effective for us beginning with the first quarter of the Company's fiscal year 2019. Our implementation approach has included performing a detailed study of the various types of agreements that we have with our customers and assessing conformity of our current accounting practices with the new standard. We are making progress in determining the impact of this guidance; however, we are still evaluating the full effects ASU 2014-09 will have on the Company's Consolidated Financial Statements and disclosures. We expect to adopt this guidance using the modified retrospective transition method.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities ("ASU 2016-01"). ASU 2016-01 will be effective beginning with the first quarter of the Company's fiscal year 2019. Upon adoption, we will be required to reclassify the gain (loss) related to our equity investment securities classified as available-for-sale from accumulated other comprehensive income ("AOCI") to retained earnings as a cumulative-effect adjustment and begin recording future changes in fair value through earnings. As of December 30, 2017, we had a gain of $2.3 million recorded in AOCI for our available-for-sale equity investments. The impact on the Company's Consolidated Financial Statements at adoption will depend on the net unrealized gains (losses) recorded in AOCI for these equity investments as of the date of adoption.
In February 2016, the FASB issued ASU 2016-02, Leases(Topic 842) ("ASU 2016-02"). ASU 2016-02 will be effective beginning with the first quarter of the Company's fiscal year 2020, with early adoption permitted. The amendments require the recognition of leased assets and the related liabilities on the balance sheet for most leases, and recognition of expenses in the income statement in a manner similar to current accounting treatment. In addition, disclosures of key information about leasing arrangements will be required. Upon adoption, leases will be recognized and measured at the beginning of the earliest period presented using a modified retrospective approach. The Company is currently evaluating the effect this ASU will have on the Company's Consolidated Financial Statements and disclosures.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"). ASU 2016-13 changes the impairment model for most financial assets and certain other instruments to base measurement on expected losses through a forward-looking model rather than a model based on incurred losses. The guidance also requires increased disclosures. ASU 2016-01 will be effective beginning with the first quarter of the Company's fiscal year 2021. The Company is currently evaluating the effect ASU 2016-13 will have on the Company's Consolidated Financial Statements and disclosures.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force ("ASU 2016-18"), which provides guidance on the presentation of restricted cash or restricted cash equivalents in the statement of cash flows. ASU 2016-18 will be effective beginning with the first quarter of the Company's fiscal year 2019. The adoption of ASU 2016-18 will only change the presentation of the Consolidated Statement of Cash Flows and is not expected to have a material impact on the consolidated financial statements.
In March 2017, the FASB issued ASU 2017-08, Receivables — Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities ("ASU 2017-08"), which requires the premium on callable debt securities to be amortized to the earliest call date as opposed to the contractual life of the security. ASU 2017-08 will be effective beginning with the first quarter of the Company's fiscal year 2020. The Company is currently evaluating the effect ASU 2017-08 will have on the Company's Consolidated Financial Statements and disclosures.
From time to time, new accounting pronouncements are issued by the FASB and other regulatory bodies that are adopted by the Company as of the specified effective dates. Unless otherwise discussed, management believes that the impact of recently issued standards, which are not yet effective, will not have a material impact on the Company's Consolidated Financial Statements upon adoption.
Forbelow, for a description of other significant accounting policies we used by the Company in the preparation of itsour Consolidated Financial Statements, please refer to Note 1 of the Notes to Consolidated Financial Statements included in the Form 10-K.
Redeemable Noncontrolling Interest. In fiscal year 2017, we purchased a 50% interest in Craftsman Homes, LLC and Craftsman Homes Development, LLC (collectively known as “Craftsman" or the "Entities") from a third-party ("Seller"). Craftsman is a manufactured home street retailer in Nevada with four locations selling Company and other manufacturer branded homes. They also provide general construction to setup the home property and assist with multi-home developments and multi-family dwellings.
On July 4, 2021, we entered into an agreement (the "Craftsman Purchase Agreement") with the Seller to obtain the remaining 50% ownership in Craftsman, owned by the Seller, to be purchased over time. As provided in the Craftsman Purchase Agreement, 20% of the equity of Craftsman owned by the Seller was obtained as of July 4, 2021 by us for cash and, as a result, we obtained a controlling ownership interest. We accounted for this transaction as a business combination to be achieved in stages (see Note 21) and consolidated the entities while recognizing a noncontrolling interest for the remaining Seller ownership as discussed below.
The Craftsman Purchase Agreement calls for an additional 20% of the equity of Craftsman owned by the Seller to be purchased on December 31, 2023 by us for cash. As mandatory redemption of this ownership interest is required, $2.5 million for the fair value of this portion of the noncontrolling interest is recorded in the long-term liabilities section of the Consolidated Balance Sheet under the Secured financings and other caption. In each reporting period hereafter, until purchased by the Company, the mandatorily redeemable noncontrolling interest is adjusted to its current redemption value, based on a predetermined formula. Adjustments in the redemption value to the mandatorily redeemable noncontrolling interest are recorded to Interest expense.
After December 31, 2023, the Seller has the right to require Cavco to purchase all of Seller's remaining 10% ownership (“Put Right”) for an amount specified in the Agreement that is designed to approximate fair value. Likewise, Cavco has the right to require Seller to sell their remaining 10% ownership (“Call Right”) based on the same timing as described above for the Put Right. The purchase price to be payable by the Company for the purchase of Seller's remaining ownership pursuant to the exercise of the Put Right or the Call Right will be settled in cash. As redemption of this remaining ownership is not a current obligation, $1.2 million for the initial fair value of this portion of the noncontrolling interest is classified as a temporary equity mezzanine item between liabilities and stockholders' equity in the Consolidated Balance Sheet under the Redeemable noncontrolling interest caption. The amount of income attributable to this noncontrolling interest is included in the Consolidated Statements of Comprehensive Income on the face of the Consolidated Statements of Comprehensive Income.
2. Revenue from Contracts with Customers
The following table summarizes customer contract revenues disaggregated by reportable segment and source (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| October 2, 2021 | | September 26, 2020 | | October 2, 2021 | | September 26, 2020 |
Factory-built housing | | | | | | | |
U.S. Housing and Urban Development code homes | $ | 285,947 | | | $ | 197,723 | | | $ | 548,337 | | | $ | 387,169 | |
Modular homes | 31,386 | | | 20,483 | | | 58,003 | | | 41,266 | |
Park model RVs | 9,728 | | | 9,027 | | | 19,399 | | | 22,749 | |
Other | 15,033 | | | 13,734 | | | 28,638 | | | 27,873 | |
| 342,094 | | | 240,967 | | | 654,377 | | | 479,057 | |
Financial services | | | | | | | |
Insurance agency commissions received from third-party insurance companies | 850 | | | 777 | | | 1,723 | | | 1,547 | |
Other | 16,599 | | | 16,232 | | | 33,865 | | | 32,173 | |
| 17,449 | | | 17,009 | | | 35,588 | | | 33,720 | |
| $ | 359,543 | | | $ | 257,976 | | | $ | 689,965 | | | $ | 512,777 | |
3. Restricted Cash
Restricted cash consistsconsisted of the following (in thousands):
| | | December 30, 2017 | | April 1, 2017 | | October 2, 2021 | | April 3, 2021 |
Cash related to CountryPlace customer payments to be remitted to third parties | $ | 8,399 |
| | $ | 9,998 |
| Cash related to CountryPlace customer payments to be remitted to third parties | $ | 18,820 | | | $ | 16,049 | |
Cash related to CountryPlace customer payments on securitized loans to be remitted to bondholders | 958 |
| | 1,391 |
| |
Cash related to workers' compensation insurance held in trust | 355 |
| | 354 |
| |
Other restricted cash | 1,009 |
| | 554 |
| Other restricted cash | 1,365 | | | 979 | |
| $ | 10,721 |
| | $ | 12,297 |
| | 20,185 | | | 17,028 | |
Less current portion | | Less current portion | (19,850) | | | (16,693) | |
| | | $ | 335 | | | $ | 335 | |
Corresponding amounts for customer payments to be remitted to third parties are recorded in accounts payableAccounts payable.
The following table provides a reconciliation of Cash and accrued liabilities for customer payments, depositscash equivalents and other restricted cash.Restricted cash reported within the Consolidated Balance Sheets to the combined amounts shown on the Consolidated Statements of Cash Flows (in thousands):
| | | | | | | | | | | |
| October 2, 2021 | | September 26, 2020 |
Cash and cash equivalents | $ | 224,291 | | | $ | 312,243 | |
Restricted cash | 20,185 | | | 17,026 | |
| $ | 244,476 | | | $ | 329,269 | |
3.
4. Investments
Investments consistconsisted of the following (in thousands):
| | | | | | | | | | | |
| October 2, 2021 | | April 3, 2021 |
Available-for-sale debt securities | $ | 18,179 | | | $ | 14,946 | |
Marketable equity securities | 16,566 | | | 17,600 | |
Non-marketable equity investments | 19,772 | | | 21,960 | |
| 54,517 | | | 54,506 | |
Less current portion | (18,867) | | | (19,496) | |
| $ | 35,650 | | | $ | 35,010 | |
|
| | | | | | | |
| December 30, 2017 | | April 1, 2017 |
Available-for-sale investment securities | $ | 30,487 |
| | $ | 24,162 |
|
Non-marketable equity investments | 18,646 |
| | 17,383 |
|
| $ | 49,133 |
| | $ | 41,545 |
|
The following tables summarize the Company's available-for-sale investment securities, gross unrealized gains and losses and fair value, aggregated by investment category (in thousands):
|
| | | | | | | | | | | | | | | |
| December 30, 2017 |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
U.S. Treasury and government debt securities | $ | 300 |
| | $ | — |
| | $ | (4 | ) | | $ | 296 |
|
Residential mortgage-backed securities | 7,510 |
| | 1 |
| | (104 | ) | | 7,407 |
|
State and political subdivision debt securities | 6,924 |
| | 142 |
| | (142 | ) | | 6,924 |
|
Corporate debt securities | 1,658 |
| | 2 |
| | (23 | ) | | 1,637 |
|
Marketable equity securities | 7,627 |
| | 3,947 |
| | (113 | ) | | 11,461 |
|
Certificates of deposit | 2,762 |
| | — |
| | — |
| | 2,762 |
|
| $ | 26,781 |
| | $ | 4,092 |
| | $ | (386 | ) | | $ | 30,487 |
|
|
| | | | | | | | | | | | | | | |
| April 1, 2017 |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
U.S. Treasury and government debt securities | $ | 650 |
| | $ | — |
| | $ | (1 | ) | | $ | 649 |
|
Residential mortgage-backed securities | 5,646 |
| | 3 |
| | (90 | ) | | 5,559 |
|
State and political subdivision debt securities | 7,195 |
| | 145 |
| | (117 | ) | | 7,223 |
|
Corporate debt securities | 1,698 |
| | 4 |
| | (23 | ) | | 1,679 |
|
Marketable equity securities | 5,752 |
| | 2,430 |
| | (130 | ) | | 8,052 |
|
Certificates of deposit | 1,000 |
| | — |
| | — |
| | 1,000 |
|
| $ | 21,941 |
| | $ | 2,582 |
| | $ | (361 | ) | | $ | 24,162 |
|
The following tables show the gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| December 30, 2017 |
| Less than 12 Months | | 12 Months or Longer | | Total |
| Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
U.S. Treasury and government debt securities | $ | 296 |
| | $ | (4 | ) | | $ | — |
| | $ | — |
| | $ | 296 |
| | $ | (4 | ) |
Residential mortgage-backed securities | 3,308 |
| | (32 | ) | | 3,860 |
| | (72 | ) | | 7,168 |
| | (104 | ) |
State and political subdivision debt securities | 2,649 |
| | (22 | ) | | 2,309 |
| | (120 | ) | | 4,958 |
| | (142 | ) |
Corporate debt securities | 1,012 |
| | (8 | ) | | 372 |
| | (15 | ) | | 1,384 |
| | (23 | ) |
Marketable equity securities | 1,032 |
| | (91 | ) | | 104 |
| | (22 | ) | | 1,136 |
| | (113 | ) |
| $ | 8,297 |
| | $ | (157 | ) | | $ | 6,645 |
| | $ | (229 | ) | | $ | 14,942 |
| | $ | (386 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| April 1, 2017 |
| Less than 12 Months | | 12 Months or Longer | | Total |
| Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
U.S. Treasury and government debt securities | $ | 349 |
| | $ | (1 | ) | | $ | — |
| | $ | — |
| | $ | 349 |
| | $ | (1 | ) |
Residential mortgage-backed securities | 3,449 |
| | (38 | ) | | 1,962 |
| | (52 | ) | | 5,411 |
| | (90 | ) |
State and political subdivision debt securities | 1,948 |
| | (36 | ) | | 2,084 |
| | (81 | ) | | 4,032 |
| | (117 | ) |
Corporate debt securities | 1,424 |
| | (23 | ) | | — |
| | — |
| | 1,424 |
| | (23 | ) |
Marketable equity securities | 1,393 |
| | (90 | ) | | 157 |
| | (40 | ) | | 1,550 |
| | (130 | ) |
| $ | 8,563 |
| | $ | (188 | ) | | $ | 4,203 |
| | $ | (173 | ) | | $ | 12,766 |
| | $ | (361 | ) |
Based on the Company's ability and intent to hold the investments for a reasonable period of time sufficient for a forecasted recovery of fair value, the Company does not consider any investments to be other-than-temporarily impaired at December 30, 2017.
As of December 30, 2017 and April 1, 2017, the Company's investmentsInvestments in marketable equity securities consist of investments in the common stock of industrial and other companies.Our non-marketable equity investments include investments in community-based initiatives that buy and sell our homes and provide home-only financing to residents of certain manufactured home communities and other distribution operations.
The amortized cost and fair value of the Company'sour investments in available-for-sale debt securities, by security type are shown in the table below (in thousands).
| | | | | | | | | | | | | | | | | | | | | | | |
| October 2, 2021 | | April 3, 2021 |
| Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
Residential mortgage-backed securities | $ | 2,352 | | | $ | 2,365 | | | $ | 2,787 | | | $ | 2,804 | |
State and political subdivision debt securities | 7,942 | | | 8,023 | | | 7,239 | | | 7,345 | |
Corporate debt securities | 7,795 | | | 7,791 | | | 4,797 | | | 4,797 | |
| $ | 18,089 | | | $ | 18,179 | | | $ | 14,823 | | | $ | 14,946 | |
The amortized cost and fair value of our investments in available-for-sale debt securities, by contractual maturity, are shown in the table below (in thousands). Expected maturities differ from contractual maturities as borrowers may have the right to call or prepay obligations, with or without callpenalties.
| | | | | | | | | | | |
| October 2, 2021 |
| Amortized Cost | | Fair Value |
Due in less than one year | $ | 1,611 | | | $ | 1,618 | |
Due after one year through five years | 11,807 | | | 11,792 | |
Due after five years through ten years | 1,268 | | | 1,321 | |
Due after ten years | 1,051 | | | 1,083 | |
Mortgage-backed securities | 2,352 | | | 2,365 | |
| $ | 18,089 | | | $ | 18,179 | |
There were no gross gains or
prepayment penalties. |
| | | | | | | |
| December 30, 2017 |
| Amortized Cost | | Fair Value |
Due in less than one year | $ | 280 |
| | $ | 279 |
|
Due after one year through five years | 4,223 |
| | 4,157 |
|
Due after five years through ten years | 2,602 |
| | 2,536 |
|
Due after ten years | 9,287 |
| | 9,292 |
|
| $ | 16,392 |
| | $ | 16,264 |
|
Realized gains and losses fromrealized on the sale of available-for-sale debt securities are determined usingduring the specific identification method. Grossthree and six months ended October 2, 2021. For the three and six months ended September 26, 2020, there were no gross gains realized on the salessale of investmentavailable-for-sale debt securities for the three and nine months ended December 30, 2017 were approximately $147,000 and $882,000, respectively. Grossgross losses realized were approximately $41,000$5,000.
Net investment gains and $163,000 for the three and nine months ended December 30, 2017, respectively. Gross gains realizedlosses on the sales of investmentmarketable equity securities for the three and nine months ended December 31, 2016 were approximately $386,000 and $1.0 million, respectively. Gross losses realized were approximately $46,000 and $303,000 for the three and nine months ended December 31, 2016, respectively.as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| October 2, 2021 | | September 26, 2020 | | October 2, 2021 | | September 26, 2020 |
Marketable equity securities | | | | | | | |
Net gain recognized during the period | $ | 243 | | | $ | 1,251 | | | $ | 1,939 | | | $ | 3,281 | |
Less: Net (gains) losses recognized on securities sold during the period | (143) | | | 27 | | | (279) | | | (6) | |
Unrealized gains recognized during the period on securities still held | $ | 100 | | | $ | 1,278 | | | $ | 1,660 | | | $ | 3,275 | |
4.
5. Inventories
Inventories consistconsisted of the following (in thousands):
| | | | | | | | | | | |
| October 2, 2021 | | April 3, 2021 |
Raw materials | $ | 78,810 | | | $ | 54,336 | |
Work in process | 27,983 | | | 19,149 | |
Finished goods | 83,601 | | | 57,749 | |
| $ | 190,394 | | | $ | 131,234 | |
|
| | | | | | | |
| December 30, 2017 | | April 1, 2017 |
Raw materials | $ | 37,934 |
| | $ | 31,506 |
|
Work in process | 11,671 |
| | 11,768 |
|
Finished goods and other | 56,267 |
| | 50,581 |
|
| $ | 105,872 |
| | $ | 93,855 |
|
6. Consumer Loans Receivable
The Company acquired consumer loans receivable during the first quarter of fiscal 2012 as part of the Palm Harbor transaction. Acquired consumer loans receivable held for investment were acquired at fair value and subsequently are accounted for in accordance with Accounting Standards Codification ("ASC") 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality ("ASC 310-30"). Consumer loans receivable held for sale are carried at the lower of cost or market and construction advances are carried at the amount advanced less a valuation allowance. The following table summarizes consumer loans receivable (in thousands):
|
| | | | | | | |
| December 30, 2017 | | April 1, 2017 |
Loans held for investment (acquired on Palm Harbor Acquisition Date) | $ | 54,013 |
| | $ | 60,513 |
|
Loans held for investment (originated after Palm Harbor Acquisition Date) | 17,956 |
| | 11,108 |
|
Loans held for sale | 12,361 |
| | 18,570 |
|
Construction advances | 12,407 |
| | 6,957 |
|
Consumer loans receivable | 96,737 |
| | 97,148 |
|
Deferred financing fees and other, net | (1,370 | ) | | (1,095 | ) |
Allowance for loan losses | (375 | ) | | (252 | ) |
Consumer loans receivable, net | $ | 94,992 |
| | $ | 95,801 |
|
The allowance for loan losses is developed at the loan level and allocated to specific individual loans or to impaired loans. A range of probable losses is calculated after giving consideration to, among other things, the loan characteristics, and historical loss experience. The Company then makes a determination of the best estimate within the range of loan losses. The allowance for loan losses reflects the Company’s judgment of the probable loss exposure on its loans held for investment portfolio.
As of the date of the Palm Harbor acquisition, management evaluated consumer loans receivable held for investment by CountryPlace to determine whether there was evidence of deterioration of credit quality and if it was probable that CountryPlace would be unable to collect all amounts due according to the loans' contractual terms. The Company also considered expected prepayments and estimated the amount and timing of undiscounted expected principal, interest and other cash flows. The Company determined the excess of the loan pool's scheduled contractual principal and contractual interest payments over all cash flows expected as of the date of the Palm Harbor transaction as an amount that includes interest that cannot be accreted into interest income (the non-accretable difference). The cash flow expected to be collected in excess of the carrying value of the acquired loans includes interest that is accreted into interest income over the remaining life of the loans (referred to as accretable yield). Interest income on consumer loans receivable is recognized as net revenue.
|
| | | | | | | |
| December 30, 2017 | | April 1, 2017 |
| (in thousands) |
Consumer loans receivable held for investment – contractual amount | $ | 125,307 |
| | $ | 142,391 |
|
Purchase discount | | | |
Accretable | (48,268 | ) | | (56,686 | ) |
Non-accretable | (22,922 | ) | | (25,032 | ) |
Less consumer loans receivable reclassified as other assets | (104 | ) | | (160 | ) |
Total acquired consumer loans receivable held for investment, net | $ | 54,013 |
| | $ | 60,513 |
|
The Company continues to estimate cash flows expected to be collected over the life of the acquired loans. As of the balance sheet date, the Company evaluates whether the present value of expected cash flows, determined using the effective interest rate, has decreased from the value at acquisition and, if so, recognizes an allowance for loan loss. The present value of any subsequent increase in the loan pool's actual cash flows expected to be collected is used first to reverse any existing allowance for loan loss. Any remaining increase in cash flows expected to be collected adjusts the amount of accretable yield recognized on a prospective basis over the loan pool's remaining life. The weighted averages of assumptions used in the calculation of expected cash flows to be collected are as follows:
|
| | | | | |
| December 30, 2017 | | April 1, 2017 |
Prepayment rate | 14.0 | % | | 13.8 | % |
Default rate | 1.2 | % | | 1.1 | % |
Assuming there was a 1% unfavorable variation from the expected level, for each key assumption, the expected cash flows for the life of the portfolio, as of December 30, 2017, would decrease by approximately $1.4 million and $4.0 million for the expected prepayment rate and expected default rate, respectively.
The changes in accretable yield on acquired consumer loans receivable held for investment were as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| December 30, 2017 | | December 31, 2016 | | December 30, 2017 | | December 31, 2016 |
Balance at the beginning of the period | $ | 51,180 |
| | $ | 62,209 |
| | $ | 56,686 |
| | $ | 69,053 |
|
Accretion | (2,068 | ) | | (2,399 | ) | | (6,441 | ) | | (7,363 | ) |
Reclassifications to non-accretable discount | (844 | ) | | (872 | ) | | (1,977 | ) | | (2,752 | ) |
Balance at the end of the period | $ | 48,268 |
| | $ | 58,938 |
| | $ | 48,268 |
| | $ | 58,938 |
|
The consumer loans held for investment have the following characteristics:
|
| | | | | |
| December 30, 2017 | | April 1, 2017 |
Weighted average contractual interest rate | 8.67 | % | | 8.87 | % |
Weighted average effective interest rate | 9.51 | % | | 9.35 | % |
Weighted average months to maturity | 166 |
| | 165 |
|
The Company's consumer loans receivable balance consists of fixed-rate, fixed-term and fully-amortizing single-family home loans. These loans are either secured by a manufactured home, excluding the land upon which the home is located (chattel personal property loans), or by a combination of the home and the land upon which the home is located (real property mortgage loans). The real property mortgage loans are primarily for manufactured homes. Combined land and home loans are further disaggregated by the type of loan documentation: those conforming to the requirements of Government-Sponsored Enterprises ("GSEs"), and those that are non-conforming. In most instances, CountryPlace's loans are secured by a first-lien position and are provided for the consumer purchase of a home. Unsecuritized consumer loans held for investment include chattel personal property loans originated under the Company's chattel lending programs. Accordingly, CountryPlace classifies its loans receivable as follows: chattel loans, conforming mortgages, non-conforming mortgages and other loans.
In measuring credit quality within each segment and class, CountryPlace uses commercially available credit scores (such as FICO®). At the time of each loan's origination, CountryPlace obtains credit scores from each of the three primary credit bureaus, if available. To evaluate credit quality of individual loans, CountryPlace uses the mid-point of the available credit scores or, if only two scores are available, the Company uses the lower of the two. CountryPlace does not update credit bureau scores after the time of origination.
The following table disaggregates CountryPlace's gross consumer loans receivable for each class by portfolio segment and credit quality indicator as of the time of origination (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| December 30, 2017 |
| Consumer Loans Held for Investment | | | | | | |
| Securitized 2005 | | Securitized 2007 | | Unsecuritized | | Construction Advances | | Consumer Loans Held For Sale | | Total |
Asset Class | | | | | | | | | | | |
Credit Quality Indicator (FICO® score) | | | | | | | | |
Chattel loans | | | | | | | | | | | |
0-619 | $ | 502 |
| | $ | 366 |
| | $ | 352 |
| | $ | — |
| | $ | — |
| | $ | 1,220 |
|
620-719 | 10,548 |
| | 7,312 |
| | 7,652 |
| | — |
| | 383 |
| | 25,895 |
|
720+ | 11,104 |
| | 6,792 |
| | 9,286 |
| | — |
| | 1,743 |
| | 28,925 |
|
Other | 50 |
| | — |
| | 368 |
| | — |
| | — |
| | 418 |
|
Subtotal | 22,204 |
| | 14,470 |
| | 17,658 |
| | — |
| | 2,126 |
| | 56,458 |
|
Conforming mortgages | | | | | | | | | | |
0-619 | — |
| | — |
| | 158 |
| | 41 |
| | — |
| | 199 |
|
620-719 | — |
| | — |
| | 1,891 |
| | 6,396 |
| | 7,192 |
| | 15,479 |
|
720+ | — |
| | — |
| | 327 |
| | 5,970 |
| | 2,927 |
| | 9,224 |
|
Other | — |
| | — |
| | — |
| | — |
| | 116 |
| | 116 |
|
Subtotal | — |
| | — |
| | 2,376 |
| | 12,407 |
| | 10,235 |
| | 25,018 |
|
Non-conforming mortgages | | | | | | | | | | |
0-619 | 83 |
| | 413 |
| | 1,066 |
| | — |
| | — |
| | 1,562 |
|
620-719 | 1,180 |
| | 4,608 |
| | 3,178 |
| | — |
| | — |
| | 8,966 |
|
720+ | 1,475 |
| | 2,562 |
| | 399 |
| | — |
| | — |
| | 4,436 |
|
Other | — |
| | — |
| | 286 |
| | — |
| | — |
| | 286 |
|
Subtotal | 2,738 |
| | 7,583 |
| | 4,929 |
| | — |
| | — |
| | 15,250 |
|
Other loans | | | | | | | | | | |
Subtotal | — |
| | — |
| | 11 |
| | — |
| | — |
| | 11 |
|
| $ | 24,942 |
| | $ | 22,053 |
| | $ | 24,974 |
| | $ | 12,407 |
| | $ | 12,361 |
| | $ | 96,737 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| April 1, 2017 |
| Consumer Loans Held for Investment | | | | | | |
| Securitized 2005 | | Securitized 2007 | | Unsecuritized | | Construction Advances | | Consumer Loans Held For Sale | | Total |
Asset Class | | | | | | | | | | | |
Credit Quality Indicator (FICO® score) | | | | | | | | |
Chattel loans | | | | | | | | | | | |
0-619 | $ | 705 |
| | $ | 411 |
| | $ | 393 |
| | $ | — |
| | $ | — |
| | $ | 1,509 |
|
620-719 | 11,681 |
| | 8,072 |
| | 5,406 |
| | — |
| | 697 |
| | 25,856 |
|
720+ | 12,748 |
| | 7,800 |
| | 5,081 |
| | — |
| | 3,097 |
| | 28,726 |
|
Other | 51 |
| | — |
| | 433 |
| | — |
| | — |
| | 484 |
|
Subtotal | 25,185 |
| | 16,283 |
| | 11,313 |
| | — |
| | 3,794 |
| | 56,575 |
|
Conforming mortgages | | | | | | | | | | |
0-619 | — |
| | — |
| | 161 |
| | 261 |
| | 99 |
| | 521 |
|
620-719 | — |
| | — |
| | 1,792 |
| | 4,231 |
| | 10,553 |
| | 16,576 |
|
720+ | — |
| | — |
| | 247 |
| | 2,465 |
| | 4,124 |
| | 6,836 |
|
Subtotal | — |
| | — |
| | 2,200 |
| | 6,957 |
| | 14,776 |
| | 23,933 |
|
Non-conforming mortgages | | | | | | | | | | |
0-619 | 86 |
| | 435 |
| | 1,327 |
| | — |
| | — |
| | 1,848 |
|
620-719 | 1,242 |
| | 4,947 |
| | 3,372 |
| | — |
| | — |
| | 9,561 |
|
720+ | 1,527 |
| | 2,909 |
| | 484 |
| | — |
| | — |
| | 4,920 |
|
Other | — |
| | — |
| | 299 |
| | — |
| | — |
| | 299 |
|
Subtotal | 2,855 |
| | 8,291 |
| | 5,482 |
| | — |
| | — |
| | 16,628 |
|
Other loans | | | | | | | | | | | |
Subtotal | — |
| | — |
| | 12 |
| | — |
| | — |
| | 12 |
|
| $ | 28,040 |
| | $ | 24,574 |
| | $ | 19,007 |
| | $ | 6,957 |
| | $ | 18,570 |
| | $ | 97,148 |
|
Loan contracts secured by collateral that is geographically concentrated could experience higher rates of delinquencies, default and foreclosure losses than loan contracts secured by collateral that is more geographically dispersed. Forty-three percent of the outstanding principal balance of consumer loans receivable portfolio is concentrated in Texas and 10% is concentrated in Florida. Other than Texas and Florida, no other state had concentrations in excess of 10% of the principal balance of the consumer loans receivable as of December 30, 2017.
Collateral for repossessed loans is acquired through foreclosure or similar proceedings and is recorded at the estimated fair value of the home, less the costs to sell. At repossession, the fair value of the collateral is computed based on the historical recovery rates of previously charged-off loans; the loan is charged off and the loss is charged to the allowance for loan losses. On a monthly basis, the fair value of the collateral is adjusted to the lower of the amount recorded at repossession or the estimated sales price less estimated costs to sell, based on current information. Repossessed homes totaled approximately $1.5 million and $1.2 million as of December 30, 2017 and April 1, 2017, respectively, and are included in prepaid and other assets in the consolidated balance sheet. Foreclosure or similar proceedings in progress totaled approximately $1.2 million and $694,000 as of December 30, 2017 and April 1, 2017, respectively.
6. Commercial Loans Receivable and Allowance for Loan Loss
The Company's commercial loans receivable balance consists of two classes: (i) direct financing arrangements for the home product needs of our independent retailers, communities and developers; and (ii) amounts loaned by the Company under participation financing programs.
Under the terms of the direct programs, the Company provides funds for the independent retailers, communities and developers' financed home purchases. The notes are secured by the homes as collateral and, in some instances, other security depending on the circumstances. The other terms of direct arrangements vary depending on the needs of the borrower and the opportunity for the Company.
Under the terms of the participation programs, the Company provides loans to independent floor plan lenders, representing a significant portion of the funds that such financiers then lend to retailers to finance their inventory purchases. The participation commercial loan receivables are unsecured general obligations of the independent floor plan lenders.
Commercial loans receivables, net, consist of the following by class of financing notes receivable (in thousands):
|
| | | | | | | |
| December 30, 2017 | | April 1, 2017 |
Direct loans receivable | $ | 25,801 |
| | $ | 24,959 |
|
Participation loans receivable | 1,206 |
| | 1,084 |
|
Allowance for loan loss | (153 | ) | | (210 | ) |
| $ | 26,854 |
| | $ | 25,833 |
|
The commercial loans receivable balance has the following characteristics:
|
| | | | | |
| December 30, 2017 | | April 1, 2017 |
Weighted average contractual interest rate | 6.0 | % | | 5.6 | % |
Weighted average months to maturity | 7 |
| | 6 |
|
The Company evaluates the potential for loss from its participation loan programs based on each independent lender's overall financial stability, as well as historical experience, and has determined that an applicable allowance for loan loss was not needed at either December 30, 2017 or April 1, 2017.
With respect to direct programs with communities and developers, borrower activity is monitored on a regular basis and contractual arrangements are in place to provide adequate loss mitigation in the event of a default. For direct programs with independent retailers, the risk of loss is spread over numerous borrowers. Borrower activity is monitored in conjunction with third-party service providers, where applicable, to estimate the potential for loss on the related notes receivable, considering potential exposures, including repossession costs, remarketing expenses, impairment of value and the risk of collateral loss. The Company has historically been able to resell repossessed unused homes, thereby mitigating loss experience. If a default occurs and collateral is lost, the Company is exposed to loss of the full value of the home loan. If the Company determines that it is probable that a borrower will default, a specific reserve is determined and recorded within the estimated allowance for loan loss. The Company recorded an allowance for loan loss of $153,000 and $130,000 at December 30, 2017 and December 31, 2016, respectively.
| | | | | | | | | | | |
| October 2, 2021 | | April 3, 2021 |
Loans held for investment, previously securitized | $ | 28,631 | | | $ | 31,949 | |
Loans held for investment | 16,207 | | | 18,690 | |
Loans held for sale | 10,253 | | | 15,587 | |
Construction advances | 7,485 | | | 13,801 | |
| 62,576 | | | 80,027 | |
Deferred financing fees and other, net | (1,178) | | | (2,041) | |
Allowance for loan losses | (2,799) | | | (3,188) | |
| 58,599 | | | 74,798 | |
Less current portion | (26,475) | | | (37,690) | |
| $ | 32,124 | | | $ | 37,108 | |
The following table represents changes in the estimated allowance for loan losses, including related additions and deductions to the allowance for loan loss applicable to the direct programslosses (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| October 2, 2021 | | September 26, 2020 | | October 2, 2021 | | September 26, 2020 |
Allowance for loan losses at beginning of period | $ | 2,918 | | | $ | 4,012 | | | $ | 3,188 | | | $ | 1,767 | |
Impact of adoption of Financial Accounting Standards Board's Accounting Standards Update 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13") | — | | | — | | | — | | | 2,276 | |
Change in estimated loan losses, net | 210 | | | (94) | | | (57) | | | 67 | |
Charge-offs | (329) | | | (8) | | | (332) | | | (200) | |
Allowance for loan losses at end of period | $ | 2,799 | | | $ | 3,910 | | | $ | 2,799 | | | $ | 3,910 | |
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| December 30, 2017 | | December 31, 2016 | | December 30, 2017 | | December 31, 2016 |
Balance at beginning of period | $ | 242 |
| | $ | 126 |
| | $ | 210 |
| | $ | 128 |
|
Provision for inventory finance credit losses | (89 | ) | | 4 |
| | (57 | ) | | 2 |
|
Loans charged off, net of recoveries | — |
| | — |
| | — |
| | — |
|
Balance at end of period | $ | 153 |
| | $ | 130 |
| | $ | 153 |
| | $ | 130 |
|
The consumer loans held for investment had the following characteristics: | | | | | | | | | | | |
| October 2, 2021 | | April 3, 2021 |
Weighted average contractual interest rate | 8.2 | % | | 8.3 | % |
Weighted average effective interest rate | 8.8 | % | | 9.3 | % |
Weighted average months to maturity | 157 | | 162 |
The following table disaggregatesis a consolidated summary of the delinquency status of the outstanding amortized cost of consumer loans receivable (in thousands):
| | | | | | | | | | | |
| October 2, 2021 | | April 3, 2021 |
Current | $ | 59,602 | | | $ | 76,378 | |
31 to 60 days | 110 | | | 508 | |
61 to 90 days | 2,502 | | | 21 | |
91+ days | 362 | | | 3,120 | |
| $ | 62,576 | | | $ | 80,027 | |
The following tables disaggregate gross consumer loans receivable by credit quality indicator and fiscal year of origination (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| October 2, 2021 |
| 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | Prior | | Total |
Prime- FICO score 680 and greater | $ | 6,664 | | | $ | 5,077 | | | $ | 2,776 | | | $ | 1,408 | | | $ | 765 | | | $ | 22,669 | | | $ | 39,359 | |
Near Prime- FICO score 620-679 | 2,247 | | | 3,445 | | | 2,175 | | | 1,856 | | | 1,354 | | | 9,978 | | | 21,055 | |
Sub-Prime- FICO score less than 620 | — | | | 21 | | | 53 | | | — | | | — | | | 1,547 | | | 1,621 | |
No FICO score | — | | | 149 | | | 19 | | | 27 | | | — | | | 346 | | | 541 | |
| $ | 8,911 | | | $ | 8,692 | | | $ | 5,023 | | | $ | 3,291 | | | $ | 2,119 | | | $ | 34,540 | | | $ | 62,576 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| April 3, 2021 |
| 2021 | | 2020 | | 2019 | | 2018 | | 2017 | | Prior | | Total |
Prime- FICO score 680 and greater | $ | 18,250 | | | $ | 3,575 | | | $ | 1,718 | | | $ | 971 | | | $ | 1,959 | | | $ | 23,375 | | | $ | 49,848 | |
Near Prime- FICO score 620-679 | 10,227 | | | 2,744 | | | 1,794 | | | 1,364 | | | 500 | | | 10,401 | | | 27,030 | |
Sub-Prime- FICO score less than 620 | 348 | | | 53 | | | — | | | — | | | 84 | | | 1,579 | | | 2,064 | |
No FICO score | 576 | | | — | | | 28 | | | — | | | — | | | 481 | | | 1,085 | |
| $ | 29,401 | | | $ | 6,372 | | | $ | 3,540 | | | $ | 2,335 | | | $ | 2,543 | | | $ | 35,836 | | | $ | 80,027 | |
As of October 2, 2021, 36% of the outstanding principal balance of the consumer loans receivable portfolio was concentrated in Texas and 18% was concentrated in Florida. As of April 3, 2021, 35% of the outstanding principal balance of the consumer loans receivable portfolio was concentrated in Texas and 20% was concentrated in Florida. Other than Texas and Florida, no state had concentrations in excess of 10% of the principal balance of the consumer loans receivable as of October 2, 2021 or April 3, 2021.
Repossessed homes totaled approximately $893,000 and $518,000 as of October 2, 2021 and April 3, 2021, respectively, and are included in Prepaid expenses and other current assets in the Consolidated Balance Sheets. Foreclosure or similar proceedings in progress totaled approximately $927,000 and $1.1 million as of October 2, 2021 and April 3, 2021, respectively.
7. Commercial Loans Receivable
The commercial loans receivable balance consists of direct financing arrangements for the home product needs of our independent distributors, community owners and developers and amounts loaned by us under participation financing programs.
Commercial loans receivable, net consisted of the following (in thousands):
| | | | | | | | | | | |
| October 2, 2021 | | April 3, 2021 |
Loans receivable | $ | 73,006 | | | $ | 45,377 | |
Allowance for loan losses | (826) | | | (816) | |
Deferred financing fees, net | (247) | | | (247) | |
| 71,933 | | | 44,314 | |
Less current portion of commercial loans receivable (including from affiliates), net | (31,601) | | | (19,232) | |
| $ | 40,332 | | | $ | 25,082 | |
The commercial loans receivable balance had the following characteristics:
| | | | | | | | | | | |
| October 2, 2021 | | April 3, 2021 |
Weighted average contractual interest rate | 6.3 | % | | 6.4 | % |
Weighted average months outstanding | 10 | | 11 |
The following table represents changes in the estimated allowance for loan losslosses, including related additions and deductions to the allowance for each class of financing receivable by evaluation methodologyloan losses (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| October 2, 2021 | | September 26, 2020 | | October 2, 2021 | | September 26, 2020 |
Balance at beginning of period | $ | 785 | | | $ | 828 | | | $ | 816 | | | $ | 393 | |
Impact of adoption of ASU 2016-13 | — | | | — | | | — | | | 435 | |
Change in estimated loan losses, net | 41 | | | (39) | | | 10 | | | (39) | |
Balance at end of period | $ | 826 | | | $ | 789 | | | $ | 826 | | | $ | 789 | |
|
| | | | | | | | | | | | | | | |
| Direct Commercial Loans | | Participation Commercial Loans |
| December 30, 2017 | | April 1, 2017 | | December 30, 2017 | | April 1, 2017 |
Inventory finance notes receivable: | | | | | | | |
Collectively evaluated for impairment | $ | 15,253 |
| | $ | 13,688 |
| | $ | — |
| | $ | — |
|
Individually evaluated for impairment | 10,548 |
| | 11,271 |
| | 1,206 |
| | 1,084 |
|
| $ | 25,801 |
| | $ | 24,959 |
| | $ | 1,206 |
| | $ | 1,084 |
|
Allowance for loan loss: | | | | | | | |
Collectively evaluated for impairment | $ | (153 | ) | | $ | (137 | ) | | $ | — |
| | $ | — |
|
Individually evaluated for impairment | — |
| | (73 | ) | | — |
| | — |
|
| $ | (153 | ) | | $ | (210 | ) | | $ | — |
| | $ | — |
|
Loans are subject to regular reviewAs of October 2, 2021 and are given management's attention whenever a problem situation appears to be developing. Loans with indicators of potential performance problems are placed on watch list status and are subject to additional monitoring and scrutiny. Nonperforming status includes loans accounted for on a non-accrual basis and accruing loans with principal payments past due 90 days or more. The Company's policy is to place loans on nonaccrual status when interest is past due and remains unpaid 90 days or more or whenApril 3, 2021, there is a clear indication that the borrower has the inability or unwillingness to meet payments as they become due. The Company will resume accrual of interest once these factors have been remedied. At December 30, 2017, there arewere no commercial loans that areconsidered watch list or nonperforming. The following table disaggregates our commercial loans receivable by fiscal year of origination (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | October 2, 2021 | | | | |
| | 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | Prior | | Total | | | | |
Performing | | $ | 25,069 | | | $ | 35,259 | | | $ | 7,338 | | | $ | 2,669 | | | $ | 1,379 | | | $ | 1,292 | | | $ | 73,006 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | April 3, 2021 | | | | |
| | 2021 | | 2020 | | 2019 | | 2018 | | 2017 | | Prior | | Total | | | | |
Performing | | $ | 30,627 | | | $ | 8,677 | | | $ | 3,206 | | | $ | 1,864 | | | $ | 1,003 | | | $ | — | | | $ | 45,377 | | | | | |
At October 2, 2021, there were no commercial loans 90 days or more past due that arewere still accruing interest. Payments received on nonaccrual loans are recorded on a cash basis, first to interest and then to principal. At December 30, 2017, the Company waswe were not aware of any potential problem loans that would have a material effect on the commercial receivablesloans receivable balance. Charge-offs occur when it becomes probable that
As of October 2, 2021, 34% of our outstanding amounts will not be recovered.
The following table disaggregates the Company's inventory finance receivables by class and credit quality indicator (in thousands):
|
| | | | | | | | | | | | | | | |
| Direct Commercial Loans | | Participation Commercial Loans |
| December 30, 2017 | | April 1, 2017 | | December 30, 2017 | | April 1, 2017 |
Risk profile based on payment activity: | | | | | | | |
Performing | $ | 25,801 |
| | $ | 24,886 |
| | $ | 1,206 |
| | $ | 1,084 |
|
Watch list | — |
| | — |
| | — |
| | — |
|
Nonperforming | — |
| | 73 |
| | — |
| | — |
|
| $ | 25,801 |
| | $ | 24,959 |
| | $ | 1,206 |
| | $ | 1,084 |
|
The Company has concentrations of commercial loans receivable related to factory-built homesprincipal balance was concentrated in excessPennsylvania. As of 10% located in the following states, measured as a percentageApril 3, 2021, 13% of our outstanding commercial loans receivablesreceivable principal balance outstanding:
|
| | | | | |
| December 30, 2017 | | April 1, 2017 |
Arizona | 15.7 | % | | 21.3 | % |
Oregon | 13.8 | % | | 15.7 | % |
Texas | 13.1 | % | | 11.0 | % |
Washington | 10.7 | % | | 6.0 | % |
The risks created by these concentrations have been consideredwas concentrated in the determination of the adequacy of the allowance for loan losses. The Company did not haveArizona. No other state had concentrations in excess of 10% of the principal balance of the commercialconsumer loans receivables in any other statesreceivable as of December 30, 2017. AsOctober 2, 2021 or April 3, 2021.
As of December 30, 2017 and April 1, 2017, the Company
We had concentrations with one independent third-party and its affiliates that equaled 19%12% and 23%18% of the net commercial loans receivable principal balance outstanding, respectively, all of which was secured.secured, as of October 2, 2021 and April 3, 2021.
7.8. Property, Plant and Equipment, net
Property, plant and equipment, are carried at cost. Depreciation is calculated using the straight-line method over the estimated useful lives of each asset. Estimated useful lives for significant classes of assets are as follows: (i) buildings and improvements, 10 to 39 years, and (ii) machinery and equipment, 3 to 25 years. Repairs and maintenance charges are expensed as incurred. Property, plant and equipment consist of the following (in thousands):
|
| | | | | | | |
| December 30, 2017 | | April 1, 2017 |
Property, plant and equipment, at cost: | | | |
Land | $ | 23,276 |
| | $ | 22,897 |
|
Buildings and improvements | 36,705 |
| | 34,180 |
|
Machinery and equipment | 22,953 |
| | 21,618 |
|
| 82,934 |
| | 78,695 |
|
Accumulated depreciation | (23,965 | ) | | (21,731 | ) |
Property, plant and equipment, net | $ | 58,969 |
| | $ | 56,964 |
|
Included in the amounts above are certain assets under a capital lease. See Note 8 for additional information.
8. Capital Lease
On April 3, 2017, in connection with the purchase of Lexington Homes, the Company recorded capital leases covering the manufacturing facilities and land in Lexington, Mississippi. The following amounts were recorded for the leased assets as of December 30, 2017 (in thousands):
|
| | | |
| December 30, 2017 |
Land | $ | 698 |
|
Buildings and improvements | 1,050 |
|
| 1,748 |
|
Accumulated amortization | (26 | ) |
Leased assets, net | $ | 1,722 |
|
The future minimum payments under the leases as of December 30, 2017 are as follows (in thousands):
|
| | | |
FY 2018 | $ | 34 |
|
FY 2019 | 709 |
|
FY 2020 | 459 |
|
FY 2021 | — |
|
FY 2022 | — |
|
Thereafter | — |
|
Total remaining lease payments | $ | 1,202 |
|
Less: Amount representing interest | (61 | ) |
Present value of future minimum lease payments | $ | 1,141 |
|
9. Goodwill and Other Intangibles
Intangible assets principally consist of goodwill, trademarks and trade names, state insurance licenses, customer relationships, and other, which includes technology, insurance policies and renewal rights and other. Goodwill, trademarks and trade names and state insurance licenses are indefinite-lived intangible assets and are evaluated for impairment annually and whenever events or circumstances indicate that more likely than not impairment has occurred. During the nine months ended December 30, 2017 and December 31, 2016, no impairment expense was recorded. Finite-lived intangibles are amortized over their estimated useful lives on a straight-line basis and are reviewed for possible impairment whenever events or changes in circumstances indicate that carrying amounts may not be recoverable. The value of customer relationships is amortized over 4 to 15 years and other intangibles over 7 to 15 years.
Goodwill and other intangibles consistnet, consisted of the following (in thousands):
| | | | | | | | | | | |
| October 2, 2021 | | April 3, 2021 |
Property, plant and equipment, at cost | | | |
Land | $ | 42,407 | | | $ | 28,314 | |
Buildings and improvements | 108,577 | | | 71,827 | |
Machinery and equipment | 45,628 | | | 34,146 | |
| 196,612 | | | 134,287 | |
Accumulated depreciation | (40,215) | | | (37,493) | |
| $ | 156,397 | | | $ | 96,794 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| December 30, 2017 | | April 1, 2017 |
| Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
Indefinite lived: | | | | | | | | | | | |
Goodwill | $ | 72,833 |
| | $ | — |
| | $ | 72,833 |
| | $ | 69,753 |
| | $ | — |
| | $ | 69,753 |
|
Trademarks and trade names | 7,200 |
| | — |
| | 7,200 |
| | 7,000 |
| | — |
| | 7,000 |
|
State insurance licenses | 1,100 |
| | — |
| | 1,100 |
| | 1,100 |
| | — |
| | 1,100 |
|
Total indefinite-lived intangible assets | 81,133 |
| | — |
| | 81,133 |
| | 77,853 |
| | — |
| | 77,853 |
|
Finite lived: | | | | | | | | | | | |
Customer relationships | 7,100 |
| | (5,703 | ) | | 1,397 |
| | 7,100 |
| | (5,543 | ) | | 1,557 |
|
Other | 1,384 |
| | (889 | ) | | 495 |
| | 1,384 |
| | (773 | ) | | 611 |
|
Total goodwill and other intangible assets | $ | 89,617 |
| | $ | (6,592 | ) | | $ | 83,025 |
| | $ | 86,337 |
| | $ | (6,316 | ) | | $ | 80,021 |
|
The Company recognized amortizationDepreciation expense on intangible assetswas $1.4 million for each of $92,000during the three month periods ending October 2, 2021 and September 26, 2020. Depreciation expense for the six months ended December 30, 2017October 2, 2021 and December 31, 2016,September 26, 2020 was $2.9 million and $2.8 million, respectively. Amortization expenseIncluded in the balances above are certain assets under finance leases. See Note 9 for further information.
9. Leases
We lease certain production and retail locations, office space and equipment. During the period ended October 2, 2021, we executed various lease renewals and acquired certain assets under finance leases.
The following table provides information about the financial statement classification of $276,000our lease balances reported within the Consolidated Balance Sheets as of October 2, 2021 and April 3, 2021 (in thousands):
| | | | | | | | | | | | | | | | | |
| Classification | | October 2, 2021 | | April 3, 2021 |
ROU assets | | | | | |
Operating lease assets | Operating lease right-of-use assets | | $ | 16,706 | | | $ | 16,252 | |
Finance lease assets | Property, plant and equipment, net (1) | | 8,352 | | | 986 | |
Total lease assets | | | $ | 25,058 | | | $ | 17,238 | |
| | | | | |
Lease Liabilities | | | | | |
Current: | | | | | |
Operating lease liabilities | Accrued expenses and other current liabilities | | $ | 4,783 | | | $ | 4,184 | |
Finance lease liabilities | Current portion of secured credit facilities and other | | 401 | | | 71 | |
Non-current: | | | | | |
Operating lease liabilities | Operating lease liabilities | | 13,240 | | | 13,361 | |
Finance lease liabilities | Secured credit facilities and other | | 5,923 | | | 233 | |
Total lease liabilities | | | $ | 24,347 | | | $ | 17,849 | |
(1) Recorded net of accumulated amortization of $149,000 and $143,000 as of October 2, 2021 and April 3, 2021, respectively.
The present value of minimum payments for future fiscal years under non-cancelable leases as of October 2, 2021 was recognized duringas follows (in thousands): | | | | | | | | | | | | | | | | | |
| Operating Leases | | Finance Leases | | Total |
Remainder of 2022 | $ | 2,449 | | | $ | 206 | | | $ | 2,655 | |
2023 | 4,667 | | | 411 | | | 5,078 | |
2024 | 4,121 | | | 411 | | | 4,532 | |
2025 | 3,103 | | | 411 | | | 3,514 | |
2026 | 3,127 | | | 387 | | | 3,514 | |
2027 | 1,087 | | | 338 | | | 1,425 | |
Thereafter | 1,439 | | | 10,415 | | | 11,854 | |
| 19,993 | | | 12,579 | | | 32,572 | |
Less amount representing interest | (1,970) | | | (6,255) | | | (8,225) | |
| 18,023 | | | 6,324 | | | 24,347 | |
Less current portion | (4,783) | | | (401) | | | (5,184) | |
| $ | 13,240 | | | $ | 5,923 | | | $ | 19,163 | |
The following table provides information about the nine months ended December 30, 2017weighted average remaining lease terms and December 31, 2016, respectively.weighted average discount rates as of October 2, 2021: | | | | | | | | | | | |
| Remaining Lease Term (Years) | | Discount Rate |
Operating leases | 4.9 | | 4.5 | % |
Finance leases | 34.9 | | 4.5 | % |
10. Accrued LiabilitiesGoodwill and Other Intangibles
Accrued liabilities consistGoodwill and other intangibles, net, consisted of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| October 2, 2021 | | April 3, 2021 |
| Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
Indefinite-lived | | | | | | | | | | | |
Goodwill | $ | 106,487 | | | $ | — | | | $ | 106,487 | | | $ | 75,090 | | | $ | — | | | $ | 75,090 | |
Trademarks and trade names | 15,680 | | | — | | | 15,680 | | | 8,900 | | | — | | | 8,900 | |
State insurance licenses | 1,100 | | | — | | | 1,100 | | | 1,100 | | | — | | | 1,100 | |
| 123,267 | | | — | | | 123,267 | | | 85,090 | | | — | | | 85,090 | |
Finite-lived | | | | | | | | | | | |
Customer relationships | 25,400 | | | (7,413) | | | 17,987 | | | 11,300 | | | (7,097) | | | 4,203 | |
Other | 1,924 | | | (1,287) | | | 637 | | | 1,424 | | | (1,264) | | | 160 | |
| $ | 150,591 | | | $ | (8,700) | | | $ | 141,891 | | | $ | 97,814 | | | $ | (8,361) | | | $ | 89,453 | |
|
| | | | | | | |
| December 30, 2017 | | April 1, 2017 |
Customer deposits | $ | 22,492 |
| | $ | 15,986 |
|
Salaries, wages and benefits | 20,314 |
| | 22,029 |
|
Unearned insurance premiums | 16,083 |
| | 17,488 |
|
Estimated warranties | 16,040 |
| | 15,479 |
|
Accrued volume rebates | 9,715 |
| | 5,686 |
|
Company repurchase option on certain loans sold | 6,516 |
| | 5,858 |
|
Insurance loss reserves | 4,956 |
| | 5,239 |
|
Accrued insurance | 4,358 |
| | 4,113 |
|
Deferred margin | 2,906 |
| | 2,906 |
|
Reserve for repurchase commitments | 1,634 |
| | 1,749 |
|
Accrued taxes | 1,174 |
| | 1,682 |
|
Capital lease obligation | 1,141 |
| | — |
|
Other | 16,332 |
| | 11,574 |
|
| $ | 123,661 |
| | $ | 109,789 |
|
Changes in the carrying amount of Goodwill were as follows for the six months ended October 2, 2021 (in thousands). See Note 21 for further information. | | | | | | | | |
Balance at beginning of period | | $ | 75,090 | |
Goodwill recognized on Craftsman acquisition | | 3,933 | |
Goodwill recognized on Commodore acquisition | | 27,464 | |
Balance at end of period | | $ | 106,487 | |
Amortization expense recognized on intangible assets was $166,000 and $187,000 for the three months ended October 2, 2021 and September 26, 2020, respectively. Amortization expense recognized on intangible assets was $339,000 and $374,000 for the six months ended October 2, 2021 and September 26, 2020, respectively.
Expected amortization for future fiscal years is as follows (in thousands): | | | | | |
Remainder of fiscal year | $ | 1,985 | |
2023 | 3,291 | |
2024 | 1,749 | |
2025 | 1,686 | |
2026 | 1,666 | |
2027 | 1,577 | |
Thereafter | 6,670 | |
11. WarrantiesAccrued Expenses and Other Current Liabilities
Homes are generally warranted against manufacturing defects for a period of one year commencing at the time of sale to the retail customer. Estimated costs relating to home warranties are recorded at the date of sale. The Company has recorded a liability for estimated future warranty costs relating to homes sold based upon management's assessment of historical experience factors, an estimateAccrued expenses and other current liabilities consisted of the amount of homes in the distribution channel and current industry trends. following (in thousands):
| | | | | | | | | | | |
| October 2, 2021 | | April 3, 2021 |
Customer deposits | $ | 49,219 | | | $ | 41,835 | |
Salaries, wages and benefits | 44,161 | | | 37,737 | |
Estimated warranties | 25,745 | | | 18,032 | |
Unearned insurance premiums | 24,498 | | | 22,643 | |
Accrued volume rebates | 22,008 | | | 12,132 | |
Company repurchase options on certain loans sold | 17,151 | | | 25,938 | |
| | | |
| | | |
| | | |
| | | |
| | | |
Other | 54,680 | | | 44,816 | |
| $ | 237,462 | | | $ | 203,133 | |
12. Warranties
Activity in the liability for estimated warranties was as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| October 2, 2021 | | September 26, 2020 | | October 2, 2021 | | September 26, 2020 |
Balance at beginning of period | $ | 19,344 | | | $ | 18,538 | | | $ | 18,032 | | | $ | 18,678 | |
Purchase accounting additions | 6,928 | | | — | | | 6,928 | | | — | |
Charged to costs and expenses | 7,994 | | | 6,232 | | | 17,119 | | | 12,579 | |
Payments and deductions | (8,521) | | | (6,965) | | | (16,334) | | | (13,452) | |
Balance at end of period | $ | 25,745 | | | $ | 17,805 | | | $ | 25,745 | | | $ | 17,805 | |
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| December 30, 2017 | | December 31, 2016 | | December 30, 2017 | | December 31, 2016 |
Balance at beginning of period | $ | 16,470 |
| | $ | 14,046 |
| | $ | 15,479 |
| | $ | 13,371 |
|
Purchase accounting additions | — |
| | — |
| | 838 |
| | — |
|
Charged to costs and expenses | 5,907 |
| | 6,030 |
| | 18,529 |
| | 18,310 |
|
Payments and deductions | (6,337 | ) | | (4,675 | ) | | (18,806 | ) | | (16,280 | ) |
Balance at end of period | $ | 16,040 |
| | $ | 15,401 |
| | $ | 16,040 |
| | $ | 15,401 |
|
13. Debt, Finance Lease and Mandatorily Redeemable Noncontrolling Interest Obligations
Debt obligations consist of amounts related to loans sold that did not qualify for loan sale accounting treatment. The following table summarizes debt, finance lease and mandatorily redeemable noncontrolling interest obligations (in thousands):
| | | | | | | | | | | |
| October 2, 2021 | | April 3, 2021 |
Secured term loan | $ | 7,718 | | | $ | 8,210 | |
Finance lease obligations | 6,324 | | | 304 | |
Other secured financings | 3,052 | | | 3,672 | |
Mandatorily redeemable noncontrolling interest | 2,471 | | | — | |
| 19,565 | | | 12,186 | |
Less current portion | (2,260) | | | (1,851) | |
| $ | 17,305 | | | $ | 10,335 | |
|
| | | | | | | |
| December 30, 2017 | | April 1, 2017 |
Acquired securitized financings (acquired as part of the Palm Harbor transaction) | | | |
Securitized financing 2005-1 | $ | 21,236 |
| | $ | 23,756 |
|
Securitized financing 2007-1 | 23,140 |
| | 25,728 |
|
Other secured financings | 5,007 |
| | 4,987 |
|
Secured Term Loans | 7,908 |
| | 3,520 |
|
Total securitized financings and other, net | $ | 57,291 |
| | $ | 57,991 |
|
The Company acquired CountryPlace's securitized financings during the first quarter of fiscal year 2012 as a part of the Palm Harbor acquisition. Acquired securitized financings were recorded at fair value at the time of acquisition, which resulted in a discount, and subsequently are accounted for in a manner similar to ASC 310-30 to accrete the discount.
The Company considers expected prepayments and estimates the amount and timing of undiscounted expected principal, interest and other cash flows for securitized consumer loans receivable held for investment to determine the expected cash flows on securitized financings and the contractual payments. The amount of contractual principal and contractual interest payments due on the securitized financings in excess of all cash flows expected as of the date of the Palm Harbor acquisition include interest that cannot be accreted into interest expense (the non-accretable difference). The remaining amount is accreted into interest expense over the remaining life of the obligation (referred to as accretable yield). The following table summarizes acquired securitized financings (in thousands):
|
| | | | | | | |
| December 30, 2017 | | April 1, 2017 |
Securitized financings – contractual amount | $ | 49,155 |
| | $ | 57,120 |
|
Purchase discount | | | |
Accretable | (4,779 | ) | | (7,636 | ) |
Non-accretable (1) | — |
| | — |
|
Total acquired securitized financings, net | $ | 44,376 |
| | $ | 49,484 |
|
(1) There is no non-accretable difference, as the contractual payments on acquired securitized financing are determined by the cash collections from the underlying loans.
Over the life of the loans, the Company continues to estimate cash flows expected to be paid on securitized financings. The Company evaluates at the balance sheet date whether the present value of its securitized financings, determined using the effective interest rate, has increased or decreased. The present value of any subsequent change in cash flows expected to be paid adjusts the amount of accretable yield recognized on a prospective basis over the securitized financing's remaining life.
The changes in accretable yield on securitized financings were as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| December 30, 2017 | | December 31, 2016 | | December 30, 2017 | | December 31, 2016 |
Balance at the beginning of the period | $ | 5,709 |
| | $ | 9,790 |
| | $ | 7,636 |
| | $ | 12,333 |
|
Accretion | (820 | ) | | (923 | ) | | (2,536 | ) | | (2,829 | ) |
Adjustment to cash flows | (110 | ) | | (111 | ) | | (321 | ) | | (748 | ) |
Balance at the end of the period | $ | 4,779 |
| | $ | 8,756 |
| | $ | 4,779 |
| | $ | 8,756 |
|
On July 12, 2005, prior to the Company's acquisition of Palm Harbor and CountryPlace, CountryPlace completed its initial securitization (2005-1) for approximately $141.0 million of loans, which was funded by issuing bonds totaling approximately $118.4 million. The bonds were issued in four different classes: Class A-1 totaling $36.3 million with a coupon rate of 4.23%; Class A-2 totaling $27.4 million with a coupon rate of 4.42%; Class A-3 totaling $27.3 million with a coupon rate of 4.80%; and Class A-4 totaling $27.4 million with a coupon rate of 5.20%. The bonds mature at varying dates and at issuance had an expected weighted average maturity of 4.66 years. For accounting purposes, this transaction was structured as a securitized borrowing. As of December 30, 2017, the Class A-1, Class A-2, and Class A-3 bonds have been retired.
On March 22, 2007, prior to the Company's acquisition of Palm Harbor and CountryPlace, CountryPlace completed its second securitization (2007-1) for approximately $116.5 million of loans, which was funded by issuing bonds totaling approximately $101.9 million. The bonds were issued in four classes: Class A-1 totaling $28.9 million with a coupon rate of 5.484%; Class A-2 totaling $23.4 million with a coupon rate of 5.232%; Class A-3 totaling $24.5 million with a coupon rate of 5.593%; and Class A-4 totaling $25.1 million with a coupon rate of 5.846%. The bonds mature at varying dates and at issuance had an expected weighted average maturity of 4.86 years. For accounting purposes, this transaction was also structured as a securitized borrowing. As of December 30, 2017, the Class A-1, Class A-2 and Class A-3 bonds have been retired.
CountryPlace's securitized debt is subject to provisions that require certain levels of overcollateralization. Overcollateralization is equal to CountryPlace's equity in the bonds. Failure to satisfy these provisions could cause cash, which would normally be distributed to CountryPlace, to be used for repayment of the principal of the related Class A bonds until the required overcollateralization level is reached. During periods when the overcollateralization is below the specified level, cash collections from the securitized loans in excess of servicing fees payable to CountryPlace and amounts owed to the Class A bondholders, trustee and surety, are applied to reduce the Class A debt until such time the overcollateralization level reaches the specified level. Therefore, failure to meet the overcollateralization requirement could adversely affect the timing of cash flows received by CountryPlace. However, principal payments of the securitized debt, including accelerated amounts, is payable only from cash collections from the securitized loans and no additional sources of repayment are required or permitted. As of December 30, 2017, the 2005-1 and 2007-1 securitized portfolios were within the required overcollateralization level.
The Company hasWe entered into secured credit facilities with independent third partythird-party banks totaling $15.0 million and maturity dates of ten years. The proceeds are used by the Company to originate and hold consumer chattel personal propertyhome-only loans secured by manufactured homes, which arewere pledged as collateral to the facility.facilities. Those facilities have since been converted into an amortizing loan with maturity dates starting in 2028 and payments based on a 20 or 25-year amortization period, resulting in a balloon payment due upon maturity. The maximum advance for loans under these programs is 80%outstanding balance of the outstanding collateral principal balance,converted loans was $7.7 million as of October 2, 2021 and $8.2 million as of April 3, 2021 with the Company providing the remaining funds. One of the facilities has a floating interest rate during a one year warehouse period in which the Company has the option to convert all or a portion of the loan to a fixed rate. During the warehouse period, this facility bears interest at an annual rate of theweighted average one month LIBOR rate plus 3.50%. Upon conversion, converted balances bear interest at the 10 year US Treasury bond rate plus 2.75% with the rate fixed at time of conversion. The other facility has a fixed interest rate of 4.75%4.91%. Payments are based on 20 year amortization schedules with balloon payments due upon maturity.
13.14. Reinsurance and Insurance Loss Reserves
Standard Casualty is primarily a specialty writer of manufactured home physical damage insurance. Certain of Standard Casualty's premiums and benefits are assumed from and ceded to other insurance companies under various reinsurance agreements. The ceded reinsurance agreements provide Standard Casualty with increased capacity to write larger risks and maintain its exposure to loss within its capital resources. Standard Casualty remainsWe remain obligated for amounts ceded in the event that the reinsurers do not meet their obligations. Substantially all
The effects of reinsurance on premiums written and earned arewere as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended |
| October 2, 2021 | | September 26, 2020 |
| Written | | Earned | | Written | | Earned |
Direct premiums | $ | 6,310 | | | $ | 6,323 | | | $ | 4,915 | | | $ | 5,145 | |
Assumed premiums—nonaffiliated | 8,240 | | | 7,630 | | | 7,593 | | | 7,043 | |
Ceded premiums—nonaffiliated | (3,714) | | | (3,714) | | | (2,853) | | | (2,853) | |
| $ | 10,836 | | | $ | 10,239 | | | $ | 9,655 | | | $ | 9,335 | |
| | | | | | | |
| Six Months Ended |
| October 2, 2021 | | September 26, 2020 |
| Written | | Earned | | Written | | Earned |
Direct premiums | $ | 13,149 | | | $ | 12,319 | | | $ | 10,680 | | | $ | 10,330 | |
Assumed premiums—nonaffiliated | 16,814 | | | 15,008 | | | 15,246 | | | 13,833 | |
Ceded premiums—nonaffiliated | (7,361) | | | (7,361) | | | (6,055) | | | (6,055) | |
| $ | 22,602 | | | $ | 19,966 | | | $ | 19,871 | | | $ | 18,108 | |
|
| | | | | | | | | | | | | | | |
| Three Months Ended |
| December 30, 2017 | | December 31, 2016 |
| Written | | Earned | | Written | | Earned |
Direct premiums | $ | 3,796 |
| | $ | 4,120 |
| | $ | 3,735 |
| | $ | 4,008 |
|
Assumed premiums—nonaffiliate | 5,428 |
| | 6,296 |
| | 5,504 |
| | 6,146 |
|
Ceded premiums—nonaffiliate | (2,816 | ) | | (2,816 | ) | | (3,063 | ) | | (3,063 | ) |
Net premiums | $ | 6,408 |
| | $ | 7,600 |
| | $ | 6,176 |
| | $ | 7,091 |
|
|
| | | | | | | | | | | | | | | |
| Nine Months Ended |
| December 30, 2017 | | December 31, 2016 |
| Written | | Earned | | Written | | Earned |
Direct premiums | $ | 11,790 |
| | $ | 12,407 |
| | $ | 11,870 |
| | $ | 11,926 |
|
Assumed premiums—nonaffiliate | 17,898 |
| | 18,889 |
| | 18,603 |
| | 17,719 |
|
Ceded premiums—nonaffiliate | (10,073 | ) | | (10,073 | ) | | (9,360 | ) | | (9,360 | ) |
Net premiums | $ | 19,615 |
| | $ | 21,223 |
| | $ | 21,113 |
| | $ | 20,285 |
|
Typical insurance policies written or assumed by Standard Casualty have a maximum coverage of $300,000$300,000 per claim, of which Standard cedes $175,000we cede $150,000 of the risk of loss per reinsurance. Therefore, Standard Casualty maintainsour risk of loss is limited to $125,000$150,000 per claim on typical policies.policies, subject to the reinsurers meeting their obligations. After this limit, amounts are recoverable by Standard Casualty through reinsurance for catastrophic losses in excess of $1.5$2 million per occurrence, up to a maximum of $43.5$55 million in the aggregate.aggregate for that occurrence.
Purchasing reinsurance contracts protects Standard Casualty from frequency and/or severityestablishes reserves for claims and claims expense on reported and unreported claims of losses incurred on insurance policies issued, such asnon-reinsured losses. The following details the activity in the case of a catastrophe that generates a large number of serious claims on multiple policies at the same time.
14. Income Taxes
The Company's deferred tax assets primarily result from financial statement accruals not currently deductible for tax purposes and differences in the acquired basis of certain assets, and its deferred tax liabilities primarily result from tax amortization of goodwill and other intangible assets.
The Company complies with the provisions of ASC 740, Income Taxes ("ASC 740"), which clarifies the accounting for income taxes by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. ASC 740 also provides guidance on derecognizing, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. The amount of unrecognized tax benefits recorded by the Company is insignificant and the impact on the effective tax rate if all unrecognized tax benefits were recognized would be insignificant. The Company classifies interest and penalties related to unrecognized tax benefits in tax expense.
Income tax returns are filed in the U.S. federal jurisdiction and in several state jurisdictions. In August 2017, the Company received a notice of examination from the Internal Revenue Service ("IRS") reserve for the Company’s federal income tax return for the fiscal yearsix months ended AprilOctober 2, 2016. In general, the Company is no longer subject to examination by the IRS for years before fiscal year 2015 or state2021 and local income tax examinations by tax authorities for years before fiscal year 2013. The Company believes that its income tax filing positions and deductions will be sustained on audit and does not anticipate any adjustments that will result in a material change to the Company's financial position. The total amount of unrecognized tax benefit related to any particular tax position is not anticipated to change significantly within the next 12 months. The provision for income taxes generally represents income taxes paid or payable for the current year plus the change in deferred taxes during the year.September 26, 2020 (in thousands): | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| October 2, 2021 | | September 26, 2020 | | October 2, 2021 | | September 26, 2020 |
Balance at beginning of period | $ | 8,348 | | | $ | 6,730 | | | $ | 7,451 | | | $ | 5,582 | |
Net incurred losses during the year | 7,282 | | | 7,477 | | | 15,257 | | | 13,460 | |
Net claim payments during the year | (8,280) | | | (7,320) | | | (15,358) | | | (12,155) | |
Balance at end of period | $ | 7,350 | | | $ | 6,887 | | | $ | 7,350 | | | $ | 6,887 | |
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the "Tax Act"), which made broad and complex changes to the U.S. tax code. In connection with lower federal income tax liability related to the Tax Act and revaluation of the net deferred income tax balance, the Company has recorded a net tax benefit of $5.6 millionin the third quarter ended December 30, 2017.
15. Commitments and Contingencies
Repurchase Contingencies. The Company isWe are contingently liable under terms of repurchase agreements with financial institutions providing inventory financing forto independent retailersdistributors of itsour products. These arrangements, which are customary in the industry, provide for the repurchase of products sold to retailersdistributors in the event of default by the retailer. The risk of loss under these agreements is spread over numerous retailers. The price the Company is obligated to pay generally declines over the period of the agreement (generally 18 to 36 months, calculated from the date of sale to the retailer) and the risk of loss is further reduced by the resale value of the repurchased homes. distributor.
The maximum amount for which the Company was contingentlywe were liable under such agreements approximated $45.0$95.7 million and $74.2 million at December 30, 2017,October 2, 2021 and April 3, 2021, respectively, without reduction for the resale value of the homes. The Company applies ASC 460, Guarantees ("ASC 460"), and ASC 450-20, Loss Contingencies ("ASC 450-20"), to account for its liabilityhomes that are repurchased. We had a reserve for repurchase commitments. Under the provisionscommitments of ASC 460, the Company records the greater of the estimated value of the non-contingent obligation or a contingent liability for each repurchase arrangement under the provisions of ASC 450-20. The Company recorded an estimated liability of $1.6 million and $1.7$2.7 million at December 30, 2017October 2, 2021 and $2.3 million at April 1, 2017, respectively, related to the commitments pertaining to these agreements.3, 2021.
Letters of Credit. To secure certain reinsurance contracts, Standard Casualty maintains an irrevocable letter of credit of $7.0 million to provide assurance that Standard Casualty will fulfill its reinsurance obligations. This letter of credit is secured by certain of the Company's investments.
Construction-Period Mortgages. CountryPlace funds We fund construction-period mortgages through periodic advances during the period of home construction. At the time of initial funding, CountryPlace commitswe commit to fully fund the loan contract in accordance with a predetermined schedule. Subsequent advances are contingent upon the performance of contractual obligations by the seller of the home and the borrower. Cumulative advances on construction-period mortgages are carried in the consolidated balance sheet at the amount advanced less a valuation allowance, which are included in consumer loans receivable. The total loan contract amount, less cumulative advances, represents an off-balance sheet contingent commitment of CountryPlace to fund future advances.
Loan contracts with off-balance sheet commitments are summarized below (in thousands):
| | | | | | | | | | | |
| October 2, 2021 | | April 3, 2021 |
Construction loan contract amount | $ | 22,466 | | | $ | 37,628 | |
Cumulative advances | (7,485) | | | (13,801) | |
| $ | 14,981 | | | $ | 23,827 | |
|
| | | | | | | |
| December 30, 2017 | | April 1, 2017 |
Construction loan contract amount | $ | 26,647 |
| | $ | 18,031 |
|
Cumulative advances | (12,407 | ) | | (6,957 | ) |
Remaining construction contingent commitment | $ | 14,240 |
| | $ | 11,074 |
|
Representations and Warranties of Mortgages Sold. CountryPlace sells We sell loans to GSEsGovernment-Sponsored Enterprises ("GSEs") and whole-loan purchasers and financesfinance certain loans with long-term credit facilities secured by the respective loans. In connection with these activities, CountryPlace provideswe provide to the GSEs and whole-loan purchasers and lenders representations and warranties related to the loans sold or financed. These representations and warranties generally relate to the ownership of the loan, the validity of the lien securing the loan, the loan's compliance with the criteria for inclusion in the sale transactions, including compliance with underwriting standards or loan criteria established by the buyer, and CountryPlace's ability to deliver documentation in compliance with applicable laws. Generally, representations and warranties may be enforced at any time over the life of the loan. Upon a breach of a representation, CountryPlacewe may be required to repurchaserepurchase the loan or to indemnify a party for incurred losses. Repurchase demands and claims for indemnification payments are reviewed on a loan-by-loan basis to validate if there has been a breach requiring repurchase. CountryPlace manages the risk of repurchase through underwriting and quality assurance practices and by servicing the mortgage loans to investor standards. CountryPlace maintainsWe maintain a reserve for these contingent repurchase and indemnification obligations.obligations. This reserve of $1.0$1.2 million and $885,000 as of December 30, 2017October 2, 2021 and April 1, 2017, respectively,3, 2021, included in accruedAccrued expenses and other current liabilities, reflects management's estimate of probable loss. CountryPlace considersThere were no claim requests that resulted in the execution of an indemnification agreement or in the repurchase of a variety of assumptions, including borrower performance (both actual and estimated future defaults), historical repurchase demands and loan defect rates to estimateduring the liability for loan repurchases and indemnifications.six months ended October 2, 2021.
Interest Rate Lock Commitments. In originating loans for sale, CountryPlace issueswe issue interest rate lock commitments ("IRLCs") to prospective borrowers and third-party originators. These IRLCs represent an agreement to extend credit to a loan applicant, or an agreement to purchase a loan from a third-party originator, whereby the interest rate on the loan is set prior to loan closing or sale.borrowers. These IRLCs bind CountryPlaceus to fund the approved loan at the specified rate regardless of whether interest rates or market prices for similar loans have changed between the commitment date and the closing date. As such, outstanding IRLCs are subject to interest rate risk and related loan sale price risk during the period from the date of the IRLC through the earlier of the loan sale date or IRLC expiration date. The loan commitments generally range between 30 and 180 days; however, borrowers are not obligated to close the related loans. As a result, CountryPlace is subject to fallout risk related to IRLCs, which is realized if approved borrowers choose not to close on the loans within the terms of the IRLCs unless the commitment is successfully paired with another loan that may mitigate losses from fallout.
As of December 30, 2017, CountryPlaceOctober 2, 2021, we had outstanding IRLCs with a notional amount of $10.5 million and are recorded at fair value in accordance with ASC 815, Derivatives and Hedging ("ASC 815"). ASC 815 clarifies that the expected net future cash flows related to the associated servicing of a loan should be included in the measurement of all written loan commitments that are accounted for at fair value through earnings. The estimated fair values of IRLCs are recorded in other assets in the consolidated balance sheets. The fair value of IRLCs is based on the value of the underlying mortgage loan adjusted for: (i) estimated cost to complete and originate the loan and (ii) the estimated percentage of IRLCs that will result in closed mortgage loans. The initial and subsequent changes in the value of IRLCs are a component of gain (loss) on mortgage loans held for sale.$29.5 million. During the three and nine months ended December 30, 2017, CountryPlaceOctober 2, 2021 and September 26, 2020, we recognized lossesof $31,000$5,000 and $46,000$19,000, respectively, on outstanding IRLCs. For the outstanding IRLCs, respectively. During the three and ninesix months ended December 31, 2016, CountryPlaceOctober 2, 2021 and September 26, 2020, we recognized lossesgains of $17,000$42,000 and $7,000, respectively, on the outstanding IRLCs.losses of $144,000, respectively.
Forward Sales Commitments. CountryPlace managesWe manage the risk profiles of a portion of itsthe outstanding IRLCs and mortgage loans held for sale by entering into forward sales of mortgage-backed securities ("MBS") and whole loan sale commitments.commitments (collectively "Commitments"). As of December 30, 2017, CountryPlaceOctober 2, 2021, we had $38.8$33.5 million in outstanding notional forward sales Commitments. We recognized non-cash gains of MBSs$79,000 and forward sales commitments. Commitments to forward sales$118,000 in the second quarter of whole loans are typically2022 and 2021, respectively.During the six months ended October 2, 2021 and September 26, 2020, we recognized losses of $268,000 and gains of $1.1 million, respectively.
Legal Matters. On September 2, 2021, the SEC filed a civil complaint in the United States District Court, District of Arizona, naming the Company along with the Company’s former Chairman, President & Chief Executive Officer and the Company’s former Chief Financial Officer, alleging violations of the antifraud and internal accounting control provisions of the Securities Exchange Act of 1934 based on trading in the shares of another company directed by the former CEO that resulted in an amount proportionate withunrealized gain of approximately $260,000. In the amount of IRLCs expectedprior year, the Company recorded an accrual relating to closethis loss contingency. The SEC action follows an investigation that began in particular time frames, assuming no change in mortgage interest rates, for the respective loan products intended for whole loan sale.
The estimated fair values of forward sales of MBS and forward sale commitments are based on quoted market values and are recorded within other current assets in the consolidated balance sheets. During the three and nine months ended December 30, 2017, CountryPlace recognized gains of $384,000 and $312,000, respectively, on forward sales and whole loan sale commitments. CountryPlace recognized gains of $150,000 and $139,000 on forward sales and whole loan sale commitments during the three and nine months ended December 31, 2016, respectively.
Legal Matters.2018. The Company is partyfiled a summary judgment to certain legal proceedings that arise in the ordinary course and are incidental to its business. Certain of the claims pending againstdismiss on November 2, 2021. While the Company in these proceedings allege, among other things, breachcannot predict with certainty the resolution of contract and warranty, product liability and personal injury. Although litigation is inherently uncertain, based on past experience and the information currently available, management doesthis matter, we do not believe that the currently pending and threatened litigation or claimsthis proceeding will have a material adverse effect on the Company'sCompany’s Consolidated Financial Statements.
We are party to certain other lawsuits in the ordinary course of business. Based on management's present knowledge of the facts and, in certain cases, advice of outside counsel, management does not believe that loss contingencies arising from pending matters are likely to have a material adverse effect on our consolidated financial position, liquidity or results of operations.operations after taking into account any existing reserves, which reserves are included in Accrued expenses and other current liabilities in the Consolidated Balance Sheets. However, future events or circumstances currently unknown to management will determine whether the resolution of pending or threatened litigation or claims will ultimately have a material effect on the Company'sour consolidated financial position, liquidity or results of operations in any future reporting periods.
16. Stockholders' Equity and Redeemable Noncontrolling Interest
The following table represents changes in stockholders' equity attributable to Cavco's stockholders and redeemable noncontrolling interest for each quarterly period during the ninesix months ended December 30, 2017October 2, 2021 (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Equity Attributable to Cavco Stockholders | | | |
| | | | | Treasury Stock | | Additional paid-in capital | | Retained earnings | | Accumulated other comprehensive income | | Total | | | Redeemable Noncontrolling Interest |
| Common Stock | | | | | | | |
| Shares | | Amount | | | | | | | |
Balance, April 3, 2021 | 9,241,256 | | | $ | 92 | | | $ | (1,441) | | | $ | 253,835 | | | $ | 431,057 | | | $ | 97 | | | $ | 683,640 | | | | $ | — | |
Net income | — | | | — | | | — | | | — | | | 27,046 | | | — | | | 27,046 | | | | — | |
Other comprehensive income, net | — | | | — | | | — | | | — | | | — | | | (13) | | | (13) | | | | — | |
Issuance of common stock under stock incentive plans | 4,465 | | | — | | | — | | | 136 | | | — | | | — | | | 136 | | | | — | |
Stock-based compensation | — | | | — | | | — | | | 1,100 | | | — | | | — | | | 1,100 | | | | — | |
Common stock repurchases | — | | | — | | | (12,842) | | | — | | | — | | | — | | | (12,842) | | | | — | |
Balance, July 3, 2021 | 9,245,721 | | | $ | 92 | | | $ | (14,283) | | | $ | 255,071 | | | $ | 458,103 | | | $ | 84 | | | $ | 699,067 | | | | $ | — | |
Initial value of noncontrolling interest upon transaction | — | | | — | | | — | | | — | | | — | | | — | | | — | | | | 1,235 | |
Net income | — | | | — | | | — | | | — | | | 37,610 | | | — | | | 37,610 | | | | 73 | |
Other comprehensive income, net | — | | | — | | | — | | | — | | | — | | | (13) | | | (13) | | | | — | |
Issuance of common stock under stock incentive plans | 29,295 | | | 1 | | | — | | | 2,728 | | | — | | | — | | | 2,729 | | | | — | |
Stock-based compensation | — | | | — | | | — | | | 1,317 | | | — | | | — | | | 1,317 | | | | — | |
Common stock repurchases | — | | | — | | | (7,594) | | | — | | | — | | | — | | | (7,594) | | | | — | |
Distributions | — | | | — | | | — | | | — | | | — | | | — | | | — | | | | (180) | |
Balance, October 2, 2021 | 9,275,016 | | | $ | 93 | | | $ | (21,877) | | | $ | 259,116 | | | $ | 495,713 | | | $ | 71 | | | $ | 733,116 | | | | $ | 1,128 | |
| | | | | | | | | | | | | | | | |
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| | | | | Additional paid-in capital | | Retained earnings | | Accumulated other comprehensive income | | Total |
| Common Stock | | | | |
| Shares | | Amount | | | | |
Balance, April 1, 2017 | 8,994,968 |
| | $ | 90 |
| | $ | 244,791 |
| | $ | 148,141 |
| | $ | 1,386 |
| | $ | 394,408 |
|
Cumulative effect of implementing ASU 2016-09 | — |
| | — |
| | — |
| | 69 |
| | — |
| | 69 |
|
Stock option exercises, including incremental tax benefits | 40,326 |
| | — |
| | (1,104 | ) | |
|
| | — |
| | (1,104 | ) |
Share-based compensation | — |
| | — |
| | 1,918 |
| | — |
| | — |
| | 1,918 |
|
Net income | — |
| | — |
| | — |
| | 39,362 |
| | — |
| | 39,362 |
|
Unrealized gain on available-for-sale securities | — |
| | — |
| | — |
| | — |
| | 919 |
| | 919 |
|
Balance, December 30, 2017 | 9,035,294 |
| | $ | 90 |
| | $ | 245,605 |
| | $ | 187,572 |
| | $ | 2,305 |
| | $ | 435,572 |
|
| |
(1) | Other comprehensive income is comprised of unrealized gains and losses on available-for-sale investments. Unrealized gains before tax effect on available-for-sale securities were $1.5 million for the nine months ended December 30, 2017.
|
17. Stock-Based Compensation
The Company maintains stock incentive plans whereby stock option grants or awards of restricted stock may be made to certain officers, directors and key employees. As of December 30, 2017, the plans, which are shareholder approved, permit the award of up to 1,650,000 shares of the Company's common stock, of which 339,251 shares were still available for grant. When options are exercised, new shares of the Company's common stock are issued. Stock options may not be granted below 100% of the fair market value of the Company's common stock at the date of grant and generally expire seven years from the date of grant. Stock options and awards of restricted stock typically vest over a one to five year period as determined by the plan administrator (the Compensation Committee of the Board of Directors, which consists of independent directors). The stock incentive plans provide for accelerated vesting of stock options upon a change in control (as defined in the plans).
Stock-based compensation cost charged against income for the three and nine months ended December 30, 2017 was $398,000 and $1.9 million, respectively. The Company recorded stock-based compensation expense of $386,000 and $1.7 million for three and nine months ended December 31, 2016, respectively.
As of December 30, 2017, total unrecognized compensation cost related to stock options was approximately $3.8 million and the related weighted-average period over which the expense is expected to be recognized is approximately 3.17 years.
The following table summarizesrepresents changes in stockholders' equity attributable to Cavco's stockholders and redeemable noncontrolling interest for each quarterly period during the option activity within the Company's stock-based compensation plans for the ninesix months ended December 30, 2017September 26, 2020 (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Equity Attributable to Cavco Stockholders | | | |
| | | | | Treasury Stock | | Additional paid-in capital | | Retained earnings | | Accumulated other comprehensive income | | Total | | | Redeemable Noncontrolling Interest |
| Common Stock | | | | | | | |
| Shares | | Amount | | | | | | | |
Balance, March 28, 2020 | 9,173,242 | | | $ | 92 | | | $ | — | | | $ | 252,260 | | | $ | 355,144 | | | $ | 90 | | | $ | 607,586 | | | | $ | — | |
Cumulative effect of implementing ASU 2016-13, net | — | | | — | | | — | | | — | | | (733) | | | — | | | (733) | | | | — | |
Net income | — | | | — | | | — | | | — | | | 16,674 | | | — | | | 16,674 | | | | — | |
Other comprehensive income, net | — | | | — | | | — | | | — | | | — | | | 68 | | | 68 | | | | — | |
Issuance of common stock under stock incentive plans | 3,822 | | | — | | | — | | | (533) | | | — | | | — | | | (533) | | | | — | |
Stock-based compensation | — | | | — | | | — | | | 945 | | | — | | | — | | | 945 | | | | — | |
Balance, June 27, 2020 | 9,177,064 | | | $ | 92 | | | $ | — | | | $ | 252,672 | | | $ | 371,085 | | | $ | 158 | | | $ | 624,007 | | | | $ | — | |
Net income | — | | | — | | | — | | | — | | | 15,049 | | | — | | | 15,049 | | | | — | |
Other comprehensive income, net | — | | | — | | | — | | | — | | | — | | | 7 | | | 7 | | | | — | |
Issuance of common stock under stock incentive plans | 11,098 | | | — | | | — | | | 522 | | | — | | | — | | | 522 | | | | — | |
Stock-based compensation | — | | | — | | | — | | | 1,103 | | | — | | | — | | | 1,103 | | | | — | |
Balance, September 26, 2020 | 9,188,162 | | | $ | 92 | | | $ | — | | | $ | 254,297 | | | $ | 386,134 | | | $ | 165 | | | $ | 640,688 | | | | $ | — | |
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| | |
| Number
of Shares
|
Outstanding at April 1, 2017 | 464,930 |
|
Granted | 42,000 |
|
Exercised | (74,575 | ) |
Canceled or expired | (800 | ) |
Outstanding at December 30, 2017 | 431,555 |
|
Exercisable at December 30, 2017 | 217,071 |
|
18.17. Earnings Per Share
Basic earnings per common share is computed based on the weighted-average number of common shares outstanding during the reporting period. Diluted earnings per common share is computed based on the combination of dilutive common share equivalents, comprised of shares issuable under the Company's stock-based compensation plans and the weighted-average number of common shares outstanding during the reporting period. Dilutive common share equivalents include the dilutive effect of in-the-money options to purchase shares, which is calculated based on the average share price for each period using the treasury stock method. The following table sets forth the computation of basic and diluted earnings per share (dollars in thousands, except per share amounts):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| October 2, 2021 | | September 26, 2020 | | October 2, 2021 | | September 26, 2020 |
Net income attributable to Cavco common stockholders | $ | 37,610 | | | $ | 15,049 | | | $ | 64,656 | | | $ | 31,723 | |
Weighted average shares outstanding | | | | | | | |
Basic | 9,190,866 | | | 9,182,945 | | | 9,194,577 | | | 9,178,609 | |
Effect of dilutive securities | 82,270 | | | 112,464 | | | 79,863 | | | 101,471 | |
Diluted | 9,273,136 | | | 9,295,409 | | | 9,274,440 | | | 9,280,080 | |
Net income per share attributable to Cavco common stockholders | | | | | | | |
Basic | $ | 4.09 | | | $ | 1.64 | | | $ | 7.03 | | | $ | 3.46 | |
Diluted | $ | 4.06 | | | $ | 1.62 | | | $ | 6.97 | | | $ | 3.42 | |
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| December 30, 2017 | | December 31, 2016 | | December 30, 2017 | | December 31, 2016 |
Net income | $ | 21,427 |
| | $ | 12,283 |
| | $ | 39,362 |
| | $ | 27,067 |
|
Weighted average shares outstanding: | | | | | | | |
Basic | 9,030,100 |
| | 8,992,456 |
| | 9,019,311 |
| | 8,970,008 |
|
Common stock equivalents—treasury stock method | 184,798 |
| | 110,106 |
| | 166,731 |
| | 126,434 |
|
Diluted | 9,214,898 |
| | 9,102,562 |
| | 9,186,042 |
| | 9,096,442 |
|
Net income per share: | | | | | | | |
Basic | $ | 2.37 |
| | $ | 1.37 |
| | $ | 4.36 |
| | $ | 3.02 |
|
Diluted | $ | 2.33 |
| | $ | 1.35 |
| | $ | 4.28 |
| | $ | 2.98 |
|
Anti-dilutive common stock equivalents excluded from the computation of diluted earnings per share for the three and nine months ended December 30, 2017October 2, 2021 and September 26, 2020 were 4,9412,808 and 5,549,20,582, respectively. There were 18,455 and 9,385 anti-dilutiveAnti-dilutive common stock equivalents excluded from the computation of diluted earnings per share for the three and ninesix months ended December 31, 2016,October 2, 2021 and September 26, 2020 were 5,417 and 30,182, respectively.
19.
18. Fair Value Measurements
The book value and estimated fair value of the Company'sour financial instruments arewere as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| October 2, 2021 | | April 3, 2021 |
| Book Value | | Estimated Fair Value | | Book Value | | Estimated Fair Value |
Available-for-sale debt securities | $ | 18,179 | | | $ | 18,179 | | | $ | 14,946 | | | $ | 14,946 | |
Marketable equity securities | 16,566 | | | 16,566 | | | 17,600 | | | 17,600 | |
Non-marketable equity investments | 19,772 | | | 19,772 | | | 21,960 | | | 21,960 | |
Consumer loans receivable | 58,599 | | | 65,641 | | | 74,798 | | | 86,209 | |
| | | | | | | |
| | | | | | | |
Commercial loans receivable | 71,933 | | | 70,363 | | | 44,314 | | | 42,379 | |
Secured financings and other | (19,565) | | | (19,454) | | | (12,186) | | | (12,340) | |
| | | | | | | |
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| | | | | | | | | | | | | | | |
| December 30, 2017 | | April 1, 2017 |
| Book Value | | Estimated Fair Value | | Book Value | | Estimated Fair Value |
Available-for-sale securities (1) | $ | 30,487 |
| | $ | 30,487 |
| | $ | 24,162 |
| | $ | 24,162 |
|
Non-marketable equity investments (2) | 18,646 |
| | 18,646 |
| | 17,383 |
| | 17,383 |
|
Consumer loans receivable (3) | 94,992 |
| | 116,895 |
| | 95,801 |
| | 121,021 |
|
Interest rate lock commitment derivatives (4) | (10 | ) | | (10 | ) | | 35 |
| | 35 |
|
Forward loan sale commitment derivatives (4) | 226 |
| | 226 |
| | (86 | ) | | (86 | ) |
Commercial loans receivable (5) | 26,854 |
| | 26,872 |
| | 25,833 |
| | 25,841 |
|
Securitized financings and other (6) | (57,291 | ) | | (61,612 | ) | | (57,991 | ) | | (61,270 | ) |
Mortgage servicing rights (7) | 1,312 |
| | 1,312 |
| | 1,110 |
| | 1,110 |
|
| |
(1) | For Level 1 classified securities, the fair value is based on quoted market prices. The fair value of Level 2 securities is based on other inputs, as further described below. |
| |
(2) | The fair value approximates book value based on the non-marketable nature of the investments. |
| |
(3) | Includes consumer loans receivable held for investment, held for sale and construction advances. The fair value of the loans held for investment is based on the discounted value of the remaining principal and interest cash flows. The fair value of the loans held for sale are estimated based on recent GSE mortgage-backed bond prices. The fair value of the construction advances approximates book value and the sales price of these loans is estimated based on construction completed. |
| |
(4) | The fair values are based on changes in GSE mortgage-backed bond prices and, additionally for IRLCs, pull through rates. |
| |
(5) | The fair value is estimated using market interest rates of comparable loans. |
| |
(6) | The fair value is estimated using recent public transactions of similar asset-backed securities. |
| |
(7) | The fair value of the mortgage servicing rights is based on the present value of expected net cash flows related to servicing these loans. |
In accordance with ASC 820, See Note 19, Fair Value Measurements, and Disclosures ("ASC 820"), fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price)Fair Value of Financial Instruments caption in Note 1, Summary of Significant Accounting Policies, in the principal or most advantageous marketForm 10-K for the asset or liability in an orderly transaction between market participantsmore information on the measurement date. ASC 820 also establishes amethodologies we use in determining fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
|
| |
Level 1 – | Quoted prices in active markets for identical assets or liabilities. |
Level 2 – | Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
Level 3 – | Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
The Company utilizes the market approach to measure fair value for its financial assets and liabilities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.
When the Company uses observable market prices for identical securities that are traded in less active markets, it classifies such securities as Level 2. When observable market prices for identical securities are not available, the Company prices its marketable debt instruments using non-binding market consensus prices that are corroborated with observable market data; quoted market prices for similar instruments; or pricing models, such as a discounted cash flow model, with all significant inputs derived from or corroborated with observable market data. Non-binding market consensus prices are based on the proprietary valuation models of pricing providers or brokers. These valuation models incorporate a number of inputs, including non-binding and binding broker quotes; observable market prices for identical or similar securities; and the internal assumptions of pricing providers or brokers that use observable market inputs and, to a lesser degree, unobservable market inputs.
Financial instruments measured at fair value on a recurring basis are summarized below (in thousands):
|
| | | | | | | | | | | | | | | |
| December 30, 2017 |
| Total | | Level 1 | | Level 2 | | Level 3 |
Securities issued by the U.S Treasury and Government (1) | $ | 296 |
| | $ | — |
| | $ | 296 |
| | $ | — |
|
Mortgage-backed securities (1) | 7,407 |
| | — |
| | 7,407 |
| | — |
|
Securities issued by states and political subdivisions (1) | 6,924 |
| | — |
| | 6,924 |
| | — |
|
Corporate debt securities (1) | 1,637 |
| | — |
| | 1,637 |
| | — |
|
Marketable equity securities (1) | 11,461 |
| | 11,461 |
| | — |
| | — |
|
Interest rate lock commitment derivatives (2) | (10 | ) | | — |
| | — |
| | (10 | ) |
Forward loan sale commitment derivatives (2) | 226 |
| | — |
| | — |
| | 226 |
|
Mortgage servicing rights (3) | 1,312 |
| | — |
| | — |
| | 1,312 |
|
| |
(1) | Unrealized gains or losses on investments are recorded in accumulated other comprehensive income (loss) at each measurement date. |
| |
(2) | Gains or losses on derivatives are recognized in current period earnings through cost of sales. |
| |
(3) | Changes in the fair value of mortgage servicing rights are recognized in the current period earnings through net revenue. |
No transfers between Level 1, Level 2 or Level 3 occurred during the nine months ended December 30, 2017. The Company's policy regarding the recording of transfers between levels is to record any such transfers at the end of the reporting period.
Financial instruments for which fair value is disclosed but not required to be recognized in the balance sheet on a recurring basis are summarized below (in thousands):
|
| | | | | | | | | | | | | | | |
| December 30, 2017 |
| Total | | Level 1 | | Level 2 | | Level 3 |
Loans held for investment | $ | 91,627 |
| | $ | — |
| | $ | — |
| | $ | 91,627 |
|
Loans held for sale | 12,861 |
| | — |
| | — |
| | 12,861 |
|
Loans held—construction advances | 12,407 |
| | — |
| | — |
| | 12,407 |
|
Commercial loans receivable | 26,872 |
| | — |
| | — |
| | 26,872 |
|
Securitized financings and other | (61,612 | ) | | — |
| | (61,612 | ) | | — |
|
Non-marketable equity investments | 18,646 |
| | — |
| | — |
| | 18,646 |
|
No recent sales have been executed in an orderly market of manufactured home loan portfolios with comparable product features, credit characteristics or performance. Therefore, loans held for investment are measured using Level 3 inputs that are calculated using estimated discounted future cash flows from the evaluation of loan credit quality and performance history to determine expected prepayments and defaults on the portfolio, discounted with rates considered to reflect current market conditions. Loans held for sale are measured at the lower of cost or fair value using inputs that consist quoted market prices for mortgage-backed securities or investor purchase commitments for similar types of loan commitments on hand from investors. These loans are held for relatively short periods, typically no more than 45 days. As a result, changes in loan-specific credit risk are not a significant component of the change in fair value and changes are largely driven by changes in interest rates or investor yield requirements. The cost of loans held for sale is lower than the fair value as of December 30, 2017. As noted above, activity in the manufactured housing asset-backed securities market is infrequent with no reliable market price information. As such, to determine the fair value of securitized financings, management evaluates the credit quality and performance history of the underlying loan assets to estimate the expected prepayment of the debt and credit spreads, based on market activity for similar rated bonds from other asset classes with similar durations.
ASC 825, Financial Instruments ("ASC 825"), requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate fair value. Fair value estimates are made as of a specific point in time based on the characteristics of the financial instruments and the relevant market information. Where available, quoted market prices are used. In other cases, fair values are based on estimates using other valuation techniques. These techniques involve uncertainties and are significantly affected by the assumptions used and the judgments made regarding risk characteristics of various financial instruments, discount rates, estimates of future cash flows, future expected loss experience and other factors. Changes in assumptions could significantly affect these estimates and the resulting fair values. Derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in an immediate sale of the instrument. Also, because of differences in methodologies and assumptions used to estimate fair values, the Company's fair values should not be compared to those of other companies.
Under ASC 825, fair value estimates are based on existing financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Accordingly, the aggregate fair value amounts presented do not represent the underlying market value of the Company.
The Company records impairment losses on long-lived assets held for sale when the fair value of such long-lived assets is below their carrying values. The Company records impairment charges on long-lived assets used in operations when events and circumstances indicate that long-lived assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than their carrying amounts. No impairment charges were recorded during the nine months ended December 30, 2017.
Mortgage Servicing. Mortgage Servicing Rights ("MSRs") are the rights to receive a portion of the interest coupon and fees collected from the mortgagors for performing specified mortgage servicing activities, which consist of collecting loan payments, remitting principal and interest payments to investors, managing escrow accounts, performing loss mitigation activities on behalf of investors and otherwise administering the loan servicing portfolio.activities. MSRs are initially recorded at fair value. Changes | | | | | | | | | | | |
| October 2, 2021 | | April 3, 2021 |
Number of loans serviced with MSRs | 4,533 | | | 4,647 | |
Weighted average servicing fee (basis points) | 34.39 | | | 33.57 | |
Capitalized servicing multiple | 73.7 | % | | 45.9 | % |
Capitalized servicing rate (basis points) | 25.36 | | | 15.42 | |
Serviced portfolio with MSRs (in thousands) | $ | 586,547 | | | $ | 593,939 | |
MSRs (in thousands) | $ | 1,488 | | | $ | 916 | |
19. Employee Benefit Plans
As part of the Commodore acquisition, we entered into a Transition Services Agreement ("TSA") with the seller whereby we lease Commodore employees from the seller while we transition them to our payroll systems. Expenses related to the TSA totaled $1.4 million for the three and six months ended October 2, 2021.
Commodore participates in the IAM National Pension Fund, a multiemployer defined benefit plan. Participation in this plan is available to all hourly employees who are members of the participating collective bargaining unit. Once the TSA ends, we will contribute to the plan a specified amount per hour worked for each eligible employee. Benefits under this plan are based on a fixed monthly benefit rate per year of credited service. The risks of participating in this multiemployer plan differ from single-employer plans. The potential risks include, but are not limited to, the use of the Company's contributions to provide benefits to employees of other participating employers, the Company becoming obligated for other participating employers' unfunded obligations and, upon the Company's withdrawal from the plan, the Company being required to pay the plan an amount based on the underfunded status of the plan, referred to as a withdrawal liability.
20. Related Party Transactions
We have non-marketable equity investments in other distribution operations outside of Company-owned retail stores. In the ordinary course of business, we sell homes and lend to certain of these operations through our commercial lending programs. For the three and six months ended October 2, 2021, the total amount of sales to non-consolidated related parties was $14.0 million and $28.8 million, respectively. For the three and six months ended September 26, 2020, the total amount of sales to non-consolidated related parties was$10.3 million and $23.0 million, respectively. As of October 2, 2021, receivables from non-consolidated related parties included $3.9 million of accounts receivable and $3.9 million of commercial loans outstanding. As of April 3, 2021, receivables from non-consolidated related parties included $4.7 million of accounts receivable and $9.5 million of commercial loans outstanding.
21. Acquisitions
Craftsman Homes, LLC and Craftsman Development, LLC Acquisition
In fiscal year 2017, we purchased a 50% ownership interest in Craftsman for $1.3 million to expand our retail presence in Nevada. At the time of the acquisition of that ownership, we concluded that we were not considered to be the primary beneficiary and therefore did not consolidate the Entities. Since the date of acquisition, we have recorded a non-marketable equity investment for the ownership, with changes to that investment for earnings and distributions from the Entities.
On July 4, 2021, we obtained an additional 20% ownership interest in the Entities utilizing the same pre-tax income multiple as the 2017 purchase. As we now have a controlling interest, we have consolidated the Entities and remeasured the Entities' assets and liabilities to fair value, subsequentincluding our previous equity investment of $2.9 million in the Entities. As a result of the remeasurement, we recorded a gain of $3.3 million in Other income, net in the Consolidated Statements of Comprehensive Income.
The purchase price on July 4, 2021 for 20% ownership was $2.5 million, valuing the Entities at $12.4 million. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date (in thousands). Certain estimated values are not yet finalized and are subject to change, which could be significant. The allocation of the purchase price is still preliminary due to the initial capitalizationshort duration since the acquisition date and will be finalized upon completion of the analysis of the fair values of Craftsman's assets and specified liabilities. We expect to finalize these amounts as soon as possible but no later than one year from the acquisition date.
| | | | | |
| July 4, 2021 |
Cash | $ | 6,466 | |
Accounts receivable | 577 | |
Inventories | 7,393 | |
Property, plant and equipment | 189 | |
Other current assets | 846 | |
Intangible assets(1) | 2,980 | |
Total identifiable assets acquired | 18,451 | |
Accounts payable and accrued liabilities | 10,028 | |
Net identifiable assets acquired | 8,423 | |
Goodwill(2) | 3,933 | |
Net assets acquired | $ | 12,356 | |
(1) Includes $3.0 million assigned to trademarks and trade names, which are considered indefinite lived intangible assets and are not subject to amortization.
(2) Attributable to the Factory-built housing segment, all of which will be deductible for income tax purposes.
We recorded a Redeemable noncontrolling interest for the remaining 30% ownership. As 20% of this is considered mandatorily redeemable per the Agreement, $2.5 million for the fair value of this portion of the noncontrolling interest is recorded in the Company's resultslong-term liabilities section of operations. The Company recognizes MSRs on all loans sold to investors that meet the requirementsConsolidated Balance Sheet under the Secured financings and other caption. As we are not currently obligated for sale accounting andthe redemption of the remaining 10% ownership, $1.2 million for which servicing rights are retained.
The Company applies fair value accounting to MSRs, with all changes in fair value recorded to net revenue in accordance with ASC 860-50, Servicing Assets and Liabilities. Thethe initial fair value of MSRsthis portion of the noncontrolling interest is basedclassified as a temporary equity mezzanine item between liabilities and stockholders’ equity in the Consolidated Balance Sheet under the Redeemable noncontrolling interest caption.
Since the acquisition date, Craftsman contributed Net revenue of $4.5 million for the three and six months ended October 2, 2021. Craftsman increased consolidated Net income on the presentConsolidated Statements of Comprehensive Income for the three and six months ended October 2, 2021 by $243,000. Net income from the Craftsman acquisition included required purchase accounting adjustments whereby home product inventory is recorded at fair value upon acquisition.
Commodore Homes Acquisition
On September 24, 2021, we purchased certain manufactured housing assets and assumed certain liabilities of Commodore, including its six manufacturing facilities and two wholly-owned retail locations. In addition to manufacturing, Commodore also participates in commercial lending operations with its dealers. The transaction was accounted for as a business combination and the results of operations have been included in the accompanying Consolidated Financial Statements since the date of acquisition.
The acquisition of Commodore brings beneficial geographic addition to our footprint with strong operations in the Northeast/Midwest/Mid-Atlantic markets and provides a platform for future growth, with the potential for cost and revenue synergies.
The acquisition-date fair value of the expectedtotal consideration was $156.1 million, which was paid in cash and is subject to future cash flowsadjustments upon the finalization of closing financial statements. We have expensed $2.7 million in acquisition related to servicing these loans. deal costs in Selling, general and administrative expense in the Consolidated Statements of Comprehensive Income, and have not incurred debt in connection with the purchase or subsequent operations.
The revenue componentsfollowing table summarizes the estimated fair values of the cash flowsassets acquired and liabilities assumed at the
acquisition date (in thousands). Certain estimated values are servicing fees, interest earned on custodial accountsnot yet finalized and other ancillary income.are subject to change, which could be significant. The expense components include operating costs related to servicingallocation of the loans (including delinquency and foreclosure costs) and interest expenses on servicer advances that the Company believes are consistent with the assumptions major market participants use in valuing MSRs. The expected cash flows are primarily impacted by prepayment estimates, delinquencies and market discounts. Generally, the value of MSRspurchase price is expected to increase when interest rates rise and decrease when interest rates decline,still preliminary due to the effect those changes in interest rates haveshort duration since the acquisition date and will be finalized upon completion of the analysis of the fair values of Commodore's assets and specified liabilities. We expect to finalize these amounts as soon as possible but no later than one year from the acquisition date.
| | | | | |
| September 24, 2021 |
Cash | $ | 619 | |
Accounts receivable | 20,930 | |
Commercial loans | 30,960 | |
Inventories | 31,787 | |
Property, plant and equipment(1) | 57,606 | |
Other current assets | 534 | |
Intangible assets(2) | 18,400 | |
Total identifiable assets acquired | 160,836 | |
Accounts payable and accrued liabilities | 32,249 | |
Net identifiable assets acquired | 128,587 | |
Goodwill(3) | 27,464 | |
Net assets acquired | $ | 156,051 | |
(1) Includes assets acquired under finance leases. See Note 9 for additional information.
(2) Includes $11.8 million assigned to customer-related intangibles, subject to a useful life of 11 years amortized on prepayment estimates. Other factors noteda straight-line basis; $3.8 million assigned to trademarks and trade names, which are considered indefinite lived intangible assets and are not subject to amortization; $2.3 million for acquired sales order backlogs that will be amortized over the period to produce the associated backlog; and $0.5 million for a covenant not to compete from the sellers, amortized on a straight-line basis over the term of 5 years.
(3) Attributable to the Factory-built housing segment, all of which will be deductible for income tax purposes.
Since the acquisition date, Commodore contributed Net revenue of $4.4 million for the three and six months ended October 2, 2021. Commodore decreased consolidated Net income on the Consolidated Statements of Comprehensive Income for the three and six months ended October 2, 2021 by $645,000. The Net loss from the Commodore acquisition included required purchase accounting adjustments whereby home product inventory is recorded at fair value upon acquisition.
Pro Forma Impact of Acquisitions. The following table presents supplemental pro forma information as if the above as well as the overall market demand for MSRs may also affect the valuation.acquisitions occurred on March 29, 2020 (in thousands, except per share data):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| October 2, 2021 | | September 26, 2020 | | October 2, 2021 | | September 26, 2020 |
Net revenue | $ | 444,303 | | | $ | 327,491 | | | $ | 856,054 | | | $ | 635,061 | |
Net income attributable to Cavco common stockholders | 38,331 | | | 20,665 | | | 66,161 | | | 37,494 | |
Diluted net income per share | 4.13 | | | 2.22 | | | 7.13 | | | 4.04 | |
|
| | | | | | | |
| December 30, 2017 | | April 1, 2017 |
Number of loans serviced with MSRs | 4,274 |
| | 4,041 |
|
Weighted average servicing fee (basis points) | 32.00 |
| | 31.42 |
|
Capitalized servicing multiple | 80.81 | % | | 74.79 | % |
Capitalized servicing rate (basis points) | 25.86 |
| | 23.50 |
|
Serviced portfolio with MSRs (in thousands) | $ | 507,530 |
| | $ | 472,492 |
|
Mortgage servicing rights (in thousands) | $ | 1,312 |
| | $ | 1,110 |
|
20.22. Business Segment Information
The Company operatesWe operate principally in two2 segments: (1) factory-built housing, which includes wholesale and retail systems-builtfactory-built housing operations and (2) financial services, which includes manufactured housing consumer finance and insurance. The following table details net revenue and income before income taxesprovides selected financial data by segment (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| October 2, 2021 | | September 26, 2020 | | October 2, 2021 | | September 26, 2020 |
Net revenue | | | | | | | |
Factory-built housing | $ | 342,094 | | | $ | 240,967 | | | $ | 654,377 | | | $ | 479,057 | |
Financial services | 17,449 | | | 17,009 | | | 35,588 | | | 33,720 | |
| $ | 359,543 | | | $ | 257,976 | | | $ | 689,965 | | | $ | 512,777 | |
| | | | | | | |
Income before income taxes | | | | | | | |
Factory-built housing | $ | 46,893 | | | $ | 17,452 | | | $ | 80,452 | | | $ | 35,902 | |
Financial services | 2,128 | | | 2,144 | | | 4,047 | | | 5,374 | |
| $ | 49,021 | | | $ | 19,596 | | | $ | 84,499 | | | $ | 41,276 | |
| | | | | | | | | | | |
| October 2, 2021 | | April 3, 2021 |
Total assets: | | | |
Factory-built housing | $ | 819,879 | | | $ | 711,579 | |
Financial services | 236,554 | | | 240,254 | |
| $ | 1,056,433 | | | $ | 951,833 | |
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| December 30, 2017 | | December 31, 2016 | | December 30, 2017 | | December 31, 2016 |
Net revenue: | | | | | | | |
Factory-built housing | $ | 207,183 |
| | $ | 188,546 |
| | $ | 587,445 |
| | $ | 536,513 |
|
Financial services | 14,200 |
| | 13,764 |
| | 41,261 |
| | 39,286 |
|
| $ | 221,383 |
| | $ | 202,310 |
| | $ | 628,706 |
| | $ | 575,799 |
|
| | | | | | | |
| | | | | | | |
Income before income taxes: | | | | | | | |
Factory-built housing | $ | 18,393 |
| | $ | 12,370 |
| | $ | 40,147 |
| | $ | 33,437 |
|
Financial services | 5,276 |
| | 4,909 |
| | 7,672 |
| | 5,370 |
|
| $ | 23,669 |
| | $ | 17,279 |
| | $ | 47,819 |
| | $ | 38,807 |
|
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Introduction
The following should be read in conjunction with Cavco Industries, Inc. and its subsidiaries' (collectively, the "Company" or "Cavco") Consolidated Financial Statements and the related Notes that appear in Item 1 of this Report. References to "Note" or "Notes" pertain to the Notes to the Company's Consolidated Financial Statements.
Overview
Headquartered in Phoenix, Arizona, the Company designs and produces factory-built homes primarily distributed through a network of independent and Company-owned retailers. We are the second largest producer of manufactured homes in the United States, based on reported wholesale shipments, marketed under a variety of brand names, including Cavco Homes, Fleetwood Homes, Palm Harbor Homes, Fairmont Homes, Friendship Homes, Chariot Eagle and Lexington Homes. The Company is also a leading builder of park model RVs, vacation cabins and systems-built commercial structures, as well as modular homes built primarily under the Nationwide Homes brand. Cavco's mortgage subsidiary, CountryPlace Acceptance Corp. ("CountryPlace"), is an approved Federal National Mortgage Association ("FNMA" or "Fannie Mae") and Federal Home Loan Mortgage Corporation ("FHLMC" or "Freddie Mac") seller/servicer, and a Government National Mortgage Association ("GNMA" or "Ginnie Mae") mortgage-backed securities issuer that offers conforming mortgages, non-conforming mortgages and home-only loans to purchasers of factory-built homes. Our insurance subsidiary, Standard Casualty Co. ("Standard Casualty"), provides property and casualty insurance primarily to owners of manufactured homes.
Company Growth
From its inception in 1965, Cavco traditionally served affordable housing markets in the southwestern United States principally through manufactured home production. During the period from 1997 to 2000, Cavco was purchased by and became a wholly-owned subsidiary of Centex Corporation, which operated the Company until 2003, when Cavco became a stand-alone publicly-held Company traded on the NASDAQ Global Select Market under the ticker symbol CVCO.
Beginning in 2007, the overall housing industry experienced a multi-year decline, which included the manufactured housing industry. Since this downturn, Cavco strategically expanded its factory operations and related business initiatives primarily through the acquisition of industry competitor operations. This development has enabled the Company to more broadly participate in the overall housing industry recovery.
In 2009, the Company acquired certain manufactured housing assets and liabilities of Fleetwood Enterprises, Inc. ("Fleetwood"). The assets purchased included seven operating production facilities as well as idle factories. During fiscal year 2011, the Company acquired certain manufactured housing assets and liabilities of Palm Harbor Homes, Inc., a Florida corporation. The assets purchased included five operating production facilities as well as idle factories, 49 operating retail locations, a manufactured housing finance company and a homeowners insurance company. These acquisitions expanded the Company’s presence across the United States.
In 2015, the Company purchased the business and operating assets of Chariot Eagle, a Florida-based manufacturer of park model RVs and manufactured homes, as well as certain assets and liabilities of Fairmont Homes. These transactions provided additional home production capabilities, grew the Company's offering of park model RV product lines and further strengthened our market position in the Southeast, Midwest, the western Great Plains states and several provinces in Canada.
On April 3, 2017, the Company purchased Lexington Homes, which operates one manufacturing facility in Lexington, Mississippi. This transaction was accounted for as a business combination and provides additional home production capabilities and increased distribution into new markets in the Southeast.
The Company operates 20 homebuilding facilities located in Millersburg and Woodburn, Oregon; Nampa, Idaho; Riverside, California; Phoenix and Goodyear, Arizona; Austin, Fort Worth, Seguin and Waco, Texas; Montevideo, Minnesota; Nappanee, Indiana; Lafayette, Tennessee; Lexington, Mississippi; Martinsville and Rocky Mount, Virginia; Douglas, Georgia; and Ocala and Plant City, Florida. The majority of the homes produced are sold to and distributed by independently owned retailers located primarily throughout the United States and Canada. In addition, our homes are sold through 41 Company-owned U.S. retail locations.
We continually review our product offerings throughout the combined organization and strive to improve product designs, production methods and marketing strategies. The supportive market response to our acquisitions has been encouraging and we believe that these expansions provide positive long-term strategic benefits for the Company. We plan to focus on developing synergies among all operations, which continue to have significant organic growth potential.
Industry and Company Outlook
According to data reported by the Manufactured Housing Institute ("MHI"), industry home shipments continue to improve, increasing 15.5% for the first 11 months of calendar 2017 compared to the same period in the prior year. During calendar year 2016 our industry shipped approximately 81,000 HUD code manufactured homes, an increase of 14.1% over the approximately 71,000 homes shipped in 2015. Shipments were 64,000 in 2014, 60,000 in 2013 and 55,000 in calendar year 2012, among the lowest levels since industry shipment statistics began to be recorded in 1959. Annual home shipments from 2009 to 2016 were less than the annual home shipments for each of the 40 years from 1969 to 2008. While industry HUD code manufactured home shipments have improved modestly in recent years, the manufactured housing industry continues to operate at relatively low levels compared to historical shipment statistics.
We believe that employment rates and underemployment among potential home buyers who favor affordable housing as well as consumer confidence levels are improving from low levels reported in recent years. "First-time" and "move-up" buyers of affordable homes are historically among the largest segments of new manufactured home purchasers. Included in this group are lower-income households that were particularly affected by an extended period of persistently low employment rates and underemployment. The process of repairing damaged credit among consumers and efforts to save for a home loan down-payment often require substantial time; however, improving consumer confidence in the U.S. economy is evident among manufactured home buyers interested in our products for seasonal or retirement living that have been concerned about financial stability, and now appear to be less hesitant to commit to a new home purchase. We believe sales of our products may continue to increase as employment and consumer confidence levels continue to recover.
The two largest manufactured housing consumer demographics, young adults and those who are 55+ years old, are both growing. The U.S. adult population is estimated to expand by approximately 12.1 million between 2017 and 2022. Young adults born from 1976 to 1995, sometimes referred to as Gen Y, represent a large segment of the population. Late-stage Gen Y is approximately 2 million people larger than the next age category born from 1966 to 1975, Gen X, and is considered to be in the peak home-buying years. Gen Y represents prime first-time home buyers who may be attracted by the affordability, diversity of style choices and location flexibility of factory-built homes. The age 55 and older category is reported to be the fastest growing segment of the U.S. population. This group is similarly interested in the value proposition; however, they are also motivated by the energy efficiency and low maintenance requirements of systems-built homes, and by the lifestyle offered by planned communities that are specifically designed for homeowners that fall into this age group.
The housing industry is subject to seasonal fluctuations based on new home buyer purchasing patterns. Cavco’s Company-owned retail stores experience decreased home buyer traffic during holidays and popular vacation periods. Still, diversification among Cavco’s product lines and operations have served to partially offset the extent of seasonal fluctuations. Demand for our core single-family new home products typically peaks each spring and summer before declining in the winter, consistent with the overall housing industry, although this pattern was partially interrupted during the winter of fiscal years 2018 and 2017, as the Company has produced a limited number of disaster-relief homes for the Federal Emergency Management Agency ("FEMA"). Demand patterns for park model and cabin RVs and homes used primarily for retirement seasonal living partially offset the general housing seasonality.
The Company's mortgage subsidiary experiences minimal seasonal fluctuation in its mortgage origination activities as a result of the time needed for loan application approval processes and subsequent home loan closing activities. The mortgage subsidiary realizes no seasonal impacts from its mortgage servicing operations. Revenue for the home insurance subsidiary is not substantially impacted by seasonality as it recognizes revenue from policy sales ratably over each policy’s term year. However, the insurance subsidiary is subject to adverse effects from excessive policy claims that may occur during periods of inclement weather, including seasonal spring storms or fall hurricane activity in Texas where most of its policies are underwritten.
In August 2017, Hurricane Harvey produced the largest recorded rain volume for a single weather event in U.S. history, resulting in historic flooding and widespread property damage, primarily in southeast Texas. Although our insurance subsidiary does not write policies for manufactured home residents in gulf coast counties or in flood plains, the enormity of this event caused high homeowners' insurance claim volume inland and in non-flood plain areas. The insurance subsidiary’s catastrophic reinsurance contracts serve to limit financial exposure to a pre-established retention amount of $1.5 million; however, these contracts also carry the requirement for the Company to pay additional premiums in order to reinstate reinsurance coverage for the remainder of 2017, further adding to costs incurred as a result of the hurricane.
In September 2017, Hurricane Irma caused significant property damage in Florida. The insurance subsidiary conducts no operations in Florida and was not adversely affected by this storm.
These storms also impacted the factory-built housing segment during the second quarter of fiscal year 2018. The flooding from Hurricane Harvey caused substantial new home inventory damage at certain Company-owned retail centers. In addition, both storms caused a limited number of lost production days at manufacturing facilities in the affected areas, resulting in lower sales volume in the quarter. Additionally, as consumer home-site damage and economic disruption in Texas and Florida delayed several home sales in process that would have otherwise been recorded during that quarter.
It has been widely reported that the overall economic toll in the affected market areas is substantial. There has been somewhat increased consumer demand for replacement of homes lost as a result of these events, which we expect to continue for several quarters. This may include demand for additional disaster-relief manufactured home orders from federal and state agencies. The Company has been initially participating by producing a limited number of disaster-relief homes already ordered by FEMA. These homes are being built in factories located in unaffected regions of the country, primarily during the winter months to lessen disruptions to existing order demand from our core customer base.
While there has been modest growth in our industry, consumer financing for retail purchases of manufactured homes needs to become more available before marked emergence from historically lower home shipment levels can occur. Restrictive underwriting guidelines, irregular appraisal processes, higher interest rates compared to site-built homes, regulatory burdens, a limited number of institutions lending to manufactured home buyers and limited secondary market availability for manufactured home loans are significant constraints to industry growth. We are working directly with other industry participants to develop manufactured home consumer financing loan portfolios to attract industry financiers interested in furthering or expanding lending opportunities in the industry. Additionally, we continue to invest in community-based lending initiatives that provide home-only financing to new residents of certain manufactured home communities. Our mortgage subsidiary has invested in and developed home-only lending programs to grow sales of homes through traditional distribution points as well. We believe that growing our participation in home-only lending may provide additional sales growth opportunities for our factory-built housing operations.
We are also working through industry trade associations to encourage favorable legislative and GSE action to address the mortgage financing needs of potential buyers of affordable homes. Federal law requires the GSEs to issue a regulation to implement the "Duty to Serve" requirements specified in the Federal Housing Enterprises Financial Safety and Soundness Act of 1992, as amended by the Housing and Economic Recovery Act of 2008. On December 18, 2017, FNMA and FHLMC released their final Underserved Markets Plan that describes, with specificity, the actions they will take over a three-year period to fulfill the "Duty to Serve" obligation. The focus of each of the three-year plans is to establish steps to ensure chattel loans can be purchased in bulk prior to proceeding with a chattel loan pilot. Expansion of the secondary market for chattel lending through the GSEs could provide further demand for housing, as lending options would likely become more available to home buyers. Although some limited progress has been made in the area, meaningful positive impact in the form of increased home orders has yet to be realized. See "Regulatory Developments" below.
Based on the relatively low cost associated with manufactured home ownership, our products have traditionally competed with rental housing's monthly payment affordability. Rental housing activity is reported to have continued to increase in recent years. As a result, tenant housing vacancy rates appear to have declined, causing a corresponding rise in associated rental rates. These rental market factors may cause some renters to become interested buyers of affordable housing alternatives including manufactured homes.
Further, with respect to the general rise in demand for rental housing, we have realized a larger proportion of orders from developers and community owners for new manufactured homes intended for use as rental housing. The Company is responsive to the unique product and related requirements of these home buyers and values the opportunity to provide homes that are well suited for these purposes.
The backlog of sales orders at December 30, 2017 varied among our 20 factories and in total was approximately $207 million compared to $91 million at December 31, 2016. Retailers may cancel orders prior to production without penalty. Accordingly, until the production of a particular home has commenced, we do not consider our backlog to be firm orders. In response to this accelerating demand, we have raised production levels by increasing our workforce size and capabilities. However, the constrained labor market is a key challenge to further increasing production to keep pace with increased order rates. In addition, we have implemented higher product pricing to offset rising input costs, including labor and material price increases, although large backlogs may cause deferred realization of the full benefits.
The Company participates in certain commercial loan programs with members of the Company's independent wholesale distribution chain. Under these programs, the Company provides a significant amount of the funds that independent financiers then lend to distributors to finance retail inventories of our products. In addition, the Company has entered into direct commercial loan arrangements with distributors, communities and developers under which the Company provides funds for financing homes (see Note 6 to the Consolidated Financial Statements). The Company's involvement in commercial loans has increased the availability of manufactured home financing to distributors and users of our products. We believe that our participation in wholesale financing is helpful to retailers, communities and developers and allows our homes additional opportunities for exposure to potential home buyers. These initiatives support the Company's ongoing efforts to expand our distribution base in all of our markets with existing and new customers. However, the initiatives expose the Company to risks associated with the creditworthiness of certain customers and business partners, including independent retailers, developers, communities and inventory financing partners.
With manufacturing facilities strategically positioned across the United States, we utilize local market research to design homes to meet the demands of our customers. We have the ability to customize floor plans and designs to fulfill specific needs and interests. By offering a full range of homes from entry-level models to large custom homes with the ability to engineer designs in-house, we can accommodate virtually any customer request. In addition to homes built to the federal HUD code, we construct modular homes that conform to state and local codes, park model RVs and cabins and light commercial buildings at many of our manufacturing facilities.
We employ a concerted effort to identify niche market opportunities where our diverse product lines and custom building capabilities provide us with a competitive advantage. Our green building initiatives involve the creation of an energy efficient envelope and higher utilization of renewable materials. These homes provide environmentally-friendly maintenance requirements, typically lower utility costs, specially designed ventilation systems and sustainability. Cavco also builds homes designed to use alternative energy sources, such as solar and wind. From bamboo flooring and tankless water heaters to solar-powered homes, our products are diverse and tailored to a wide range of consumer interests. Innovation in housing design is a forte of the Company and we continue to introduce new models at competitive price points with expressive interiors and exteriors that complement home styles in the areas in which they are located.
We maintain a conservative cost structure in an effort to build added value into our homes. We have placed a consistent focus on developing synergies among all operations. In addition, the Company has worked diligently to maintain a solid financial position. Our balance sheet strength and position in cash and cash equivalents should help avoid liquidity problems and enable us to act effectively as market opportunities present themselves.
In 2008, we announced a stock repurchase program, under which a total of $10.0 million may be used to repurchase our outstanding common stock. The repurchases may be made in the open market or in privately negotiated transactions in compliance with applicable state and federal securities laws and other legal requirements. The level of repurchase activity is subject to market conditions and other investment opportunities. The plan does not obligate us to acquire any particular amount of common stock and may be suspended or discontinued at any time. The repurchase program will be funded using our available cash. No repurchases have been made under this program to date.
Regulatory Developments
In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act" or the "Act") was passed into law. The Dodd-Frank Act is a sweeping piece of legislation and the financial services industry continues to implement necessary changes in procedures and business practices. The Act established the Consumer Financial Protection Bureau ("CFPB") to regulate consumer financial products and services. Although many rules have been implemented, the full impact will not be known for years as rule revisions and the enforcement of rules continue to evolve, as the courts consider limits of CFPB's authority. Enforcement actions are in the early stages and the effects of possible litigation related to the regulations remains unknown.
In 2014, certain CFPB mortgage finance rules required under the Dodd-Frank Act became effective. The rules apply to consumer credit transactions secured by a dwelling, which include real property mortgages and chattel loans (financed without land) secured by manufactured homes. The rules defined standards for origination of "Qualified Mortgages," established specific requirements for lenders to prove borrowers' ability to repay loans, and outlined the conditions under which Qualified Mortgages are subject to safe harbor limitations on liability to borrowers. The rules also established interest rates and other cost parameters for determining which Qualified Mortgages fall under safe harbor protection. Among other issues, Qualified Mortgages with interest rates and other costs outside the limits are deemed "rebuttable" by borrowers and expose the lender and its assignees (including investors in loans, pools of loans and instruments secured by loans or loan pools) to possible litigation and penalties.
While many manufactured homes are currently financed with agency-conforming mortgages in which the ability to repay is verified, and interest rates and other costs are within the safe harbor limits established under the CFPB mortgage finance rules, certain loans to finance the purchase of manufactured homes, especially chattel loans and non-conforming land-home loans, may fall outside the safe harbor limits. The rules have caused some lenders to curtail underwriting such loans, and some investors are reluctant to own or participate in owning such loans because of the uncertainty of potential litigation and other costs. As a result, some prospective buyers of manufactured homes may be unable to secure the financing necessary to complete purchases. In addition, compliance with the law and ongoing rule implementation has caused lenders to incur additional costs to implement new processes, procedures, controls and infrastructure required to comply with the regulations. Compliance may constrain lenders' ability to profitably price certain loans. Failure to comply with these regulations, changes in these or other regulations, or the imposition of additional regulations, could affect our earnings, limit our access to capital and have a material adverse effect on our business and results of operations.
The CFPB rules amending the Truth in Lending Act ("TILA") and the Real Estate Settlement Procedures Act ("RESPA") expanded the types of mortgage loans that are subject to the protections of the Home Ownership and Equity Protections Act of 1994 ("HOEPA"), revised and expanded the tests for coverage under HOEPA, and imposed additional restrictions on mortgages that are covered by HOEPA. As a result, certain manufactured home loans are subject to HOEPA limits on interest rates and fees. Loans with rates or fees in excess of the limits are deemed High Cost Mortgages and provide additional protections for borrowers, including with respect to determining the value of the home. Most loans for the purchase of manufactured homes have been written at rates and fees that would not appear to be considered High Cost Mortgages under the new rule. Although some lenders may continue to offer loans that are now deemed High Cost Mortgages, the rate and fee limits appear to have deterred some lenders from offering loans to certain borrowers and may continue to make them reluctant to enter into loans subject to the provisions of HOEPA. As a result, some prospective buyers of manufactured homes may be unable to secure financing necessary to complete manufactured home purchases.
The Dodd-Frank Act amended provisions of TILA to require rules for appraisals on principal residences securing higher-priced mortgage loans ("HPML"). Certain loans secured by manufactured homes, primarily chattel loans, could be considered HPMLs. Among other things, the rule requires creditors to provide copies of appraisal reports to borrowers prior to loan closing. To implement these amendments, the CFPB adopted the HPML Appraisal Rule effective December 30, 2014 and loans secured by new manufactured homes were exempt from the rule until July 18, 2015. While effects of these requirements are not fully known, some prospective home buyers may be deterred from completing a manufactured home purchase as a result of appraised values.
The Dodd-Frank Act also required integrating disclosures provided by lenders to borrowers under TILA and RESPA. The final rule became effective October 3, 2015. The TILA-RESPA Integrated Disclosure ("TRID") mandated extensive changes to the mortgage loan closing process and necessitated significant changes to mortgage origination systems. Since its implementation, technical ambiguities in the rule have resulted in lender and investor uncertainty regarding acceptable cures and tolerances for disclosure and estimate errors. It is not yet fully known how the GSEs and HUD will view TRID compliance, how they will apply their own interpretations of TRID to their repurchase and claims review processes, or how the market for private-label securitizations may be impacted.
Regulation C of the Home Mortgage Disclosure Act ("HMDA") enacted in 1975 requires certain financial institutions, including non-depository institutions, to collect, record, report and disclose information about their mortgage lending activity. The data-related requirements in the HMDA and Regulation C are used to identify potential discriminatory lending patterns and enforce anti-discrimination statutes. The Dodd-Frank Act transferred rulemaking authority for HMDA to the CFPB, effective in 2011. It also amended the HMDA to require financial institutions to report additional data points and to collect, record and report additional information. The CFPB issued a final rule amending Regulation C, which became effective on January 1, 2018. Regulation C generally applies to consumer-purpose, closed-end loans and open-end lines of credit that are secured by a dwelling. Non-depository financial institutions are subject to Regulation C if they originate at least 25 covered closed-end mortgage loans or at least 100 covered open-end lines of credit in each of the two preceding calendar years. Violations of Regulation C, including incomplete, inaccurate, or omitted data are subject to administrative sanctions, including civil money penalties and compliance can be enforced by the Federal Reserve Board, Federal Deposit Insurance Corporation, the Office of the Comptroller of Currency, the National Credit Union Administration, HUD, or the CFPB.
New Federal Housing Administration ("FHA") Title I program guidelines became effective on June 1, 2010 and provide Ginnie Mae the ability to securitize manufactured home FHA Title I loans. These guidelines were intended to allow lenders to obtain new capital, which can then be used to fund new loans for our customers. Chattel loans have languished for several years and these changes were meant to broaden chattel financing availability for prospective homeowners. However, we are aware of only a small number of loans currently being securitized under the Ginnie Mae program.
The Secure and Fair Enforcement for Mortgage Licensing Act of 2008 ("SAFE Act") established requirements for the licensing and registration of all individuals that are Mortgage Loan Originators ("MLOs"). MLOs must be registered or licensed by the states. Traditionally, manufactured housing retailers have assisted home buyers with securing financing for the purchase of homes. This assistance may have included assisting with loan applications and presenting terms of loans. Under the SAFE Act, these activities are prohibited unless performed by a registered or licensed MLO. Although the definition of an MLO contains exemptions for administrative and other specific functions and industries, manufactured housing retailers are no longer able to negotiate rates and terms for loans unless they are licensed as MLOs. Compliance may require manufactured housing retailers to become licensed lenders and employ MLOs, or alter business practices related to assisting home buyers in securing financing. This may result in increased costs for retailers who elect to employ MLOs, penalties assessed against or litigation costs incurred by retailers found to be in violation, reduced home sales from home buyers' inability to secure financing without retailer assistance, or increased costs to home buyers or reduced transaction profitability for retailers as a result of the additional cost of mandatory MLO involvement.
The U.S. House of Representatives passed the Preserving Access to Manufactured Housing Act of 2017 (House of Representatives Bill 1699) on December 1, 2017 to amend some SAFE Act and TILA provisions that affect manufactured housing financing. Additionally, on June 8, 2017, the U.S. House of Representatives passed the Financial CHOICE Act (House of Representatives Bill 10), which included the legislative language of House of Representatives Bill 1699. On August 3, 2017, the U.S. Senate introduced Senate Bill 1751, companion legislation to House of Representatives Bill 1699. If signed into law, these bills would revise the triggers by which small-sized manufactured home loans are considered "High-Cost" under HOEPA and change the definition of an MLO to exclude retailers of manufactured or modular homes or their employees under certain circumstances.
The Housing and Economic Recovery Act of 2008 requires the GSEs to facilitate a secondary market for mortgages on housing for very low, low and moderate-income families in under-served markets, including manufactured housing. On January 30, 2017, the Federal Housing Finance Agency issued a final rule specifying the scope of GSE activities that are eligible to receive credit for compliance with the "Duty to Serve" rule after January 2018. On December 18, 2017, both GSEs published their final Underserved Markets Plans for activities for the years beginning January 1, 2018, and continuing through 2020. Both GSE plans include small-scale pilot programs for chattel loans secured by manufactured housing beginning in 2019, as well as initiatives to facilitate increased purchases of real property mortgages with manufactured homes under their existing single-family programs beginning in 2018.
Our sale of insurance products is subject to various state insurance laws and regulations which govern allowable charges and other insurance practices. Standard Casualty's insurance operations are regulated by the state insurance boards where it underwrites its policies. Underwriting, premiums, investments and capital reserves (including dividend payments to stockholders) are subject to the rules and regulations of these state agencies.
In 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act ("Health Reform Law"), was passed into law. As enacted, the Health Reform Law reforms, among other things, certain aspects of health insurance. The Health Reform Law could continue to increase our healthcare costs, adversely impacting the Company's earnings.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the "Tax Act"). The Tax Act makes broad and complex changes to the U.S. tax code that affect the Company include, but are not limited to, (1) reducing the U.S. federal corporate tax rate, (2) allowing bonus depreciation for full expensing of qualified property and (3) eliminating the manufacturing deduction. The Tax Act reduces the federal corporate tax rate to 21 percent in the fiscal year ending March 30, 2019. As a result of these changes, our fiscal year ending March 31, 2018, will have a blended statutory corporate tax rate of 31.5 percent, which is based on the applicable tax rates before and after the Tax Act and the number of days in the fiscal year. It is uncertain how future legislation would impact our operations.
On January 25, 2018, the U.S. Department of Housing and Urban Development ("HUD") announced a top-to-bottom review of its manufactured housing rules as part of a broader effort to identify regulations that may be ineffective, overly burdensome, or excessively costly given the critical need for affordable housing. If certain changes are made, the Company may be able to more effectively service our customers.
Governmental authorities have the power to enforce compliance with applicable regulations, and violations may result in the payment of fines, the entry of injunctions or both. Although we believe that our operations are in substantial compliance with the requirements of all applicable laws and regulations, these requirements have generally become more strict in recent years. Accordingly, we are unable to predict the ultimate cost of compliance with all applicable laws and enforcement policies.
Results of Operations
Three and nine months ended December 30, 2017compared to December 31, 2016
Net Revenue.The following tables summarize net revenue for the three and nine months ended December 30, 2017 and December 31, 2016.
|
| | | | | | | | | | | | | | |
| Three Months Ended | | | | |
| December 30, 2017 | | December 31, 2016 | | Change | | % Change |
| (Dollars in thousands) | | | | |
Net revenue: | | | | | | | |
Factory-built housing | $ | 207,183 |
| | $ | 188,546 |
| | $ | 18,637 |
| | 9.9 | % |
Financial services | 14,200 |
| | 13,764 |
| | 436 |
| | 3.2 | % |
| $ | 221,383 |
| | $ | 202,310 |
| | $ | 19,073 |
| | 9.4 | % |
| | | | | | | |
Total homes sold | 3,701 |
| | 3,486 |
| | 215 |
| | 6.2 | % |
| | | | | | | |
Net factory-built housing revenue per home sold | $ | 55,980 |
| | $ | 54,087 |
| | $ | 1,893 |
| | 3.5 | % |
|
| | | | | | | | | | | | | | |
| Nine Months Ended | | | | |
| December 30, 2017 | | December 31, 2016 | | Change | | % Change |
| (Dollars in thousands) | | | | |
Net revenue: | | | | | | | |
Factory-built housing | $ | 587,445 |
| | $ | 536,513 |
| | $ | 50,932 |
| | 9.5 | % |
Financial services | 41,261 |
| | 39,286 |
| | 1,975 |
| | 5.0 | % |
| $ | 628,706 |
| | $ | 575,799 |
| | $ | 52,907 |
| | 9.2 | % |
| | | | | | | |
Total homes sold | 10,474 |
| | 10,123 |
| | 351 |
| | 3.5 | % |
| | | | | | | |
Net factory-built housing revenue per home sold | $ | 56,086 |
| | $ | 52,999 |
| | $ | 3,087 |
| | 5.8 | % |
The increase in net revenue from the factory-built housing segment for the three and nine months ended December 30, 2017 compared to the same periods last year was from improved home sales volume and a larger proportion of higher priced homes sold.
Net factory-built housing revenue per home sold is a volatile metric dependent upon several factors. A primary factor is the price disparity between sales of homes to independent retailers, builders, communities and developers ("Wholesale") and sales of homes to consumers by Company-owned retail centers ("Retail"). Wholesale sales prices are primarily comprised of the home and the cost to ship the home from a homebuilding facility to the home-site. Retail home prices include these items and retail markup, as well as items that are largely subject to home buyer discretion, including, but not limited to, installation, utilities, site improvements, landscaping and additional services. Changes to the proportion of home sales among these distribution channels between reporting periods impacts the overall net revenue per home sold. For the nine months ended December 30, 2017, the Company sold 8,646 homes Wholesale and 1,828 Retail versus 8,141 homes Wholesale and 1,982 homes Retail in the comparable prior year period. Fluctuations in net factory-built housing revenue per home sold are the result of changes in product mix, which results from home buyer tastes and preferences as they select home types/models, as well as optional home upgrades when purchasing the home. These selections vary regularly based on consumer interests, local housing preferences and economic circumstances. Our product prices are also periodically adjusted for the cost and availability of raw materials and labor used to produce each home. For these reasons, we have experienced, and expect to continue to experience, volatility in overall net factory-built housing revenue per home sold.
Financial services segment revenue increased, resulting from more insurance policies in force in the current year compared to the prior year as well as an increase of 18.0% in home loan sales year over year. Financial services segment revenue is partially offset by lower interest income earned on securitized loan portfolios that continue to amortize. In addition, for the nine months ended December 30, 2017, increases in revenues were partially offset by $1.4 million in additional premiums paid to reinstate reinsurance coverage that was utilized to mitigate losses incident to Texas hurricane activity that occurred during the second three months of the period.
Gross Profit. The following tables summarize gross profit for the three and nine months ended December 30, 2017 and December 31, 2016.
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| | | | | | | | | | | | | | |
| Three Months Ended | | | | |
| December 30, 2017 | | December 31, 2016 | | $ Change | | % Change |
| (Dollars in thousands) | | | | |
Gross profit: | | | | | | | |
Factory-built housing | $ | 39,599 |
| | $ | 33,680 |
| | $ | 5,919 |
| | 17.6 | % |
Financial services | 10,257 |
| | 9,864 |
| | 393 |
| | 4.0 | % |
| $ | 49,856 |
| | $ | 43,544 |
| | $ | 6,312 |
| | 14.5 | % |
| | | | | | | |
Gross profit as % of Net revenue: | 22.5 | % | | 21.5 | % | | N/A |
| | 1.0 | % |
|
| | | | | | | | | | | | | | |
| Nine Months Ended | | | | |
| December 30, 2017 | | December 31, 2016 | | $ Change | | % Change |
| (Dollars in thousands) | | | | |
Gross profit: | | | | | | | |
Factory-built housing | $ | 104,018 |
| | $ | 95,792 |
| | $ | 8,226 |
| | 8.6 | % |
Financial services | 22,358 |
| | 20,111 |
| | 2,247 |
| | 11.2 | % |
| $ | 126,376 |
| | $ | 115,903 |
| | $ | 10,473 |
| | 9.0 | % |
| | | | | | | |
Gross profit as % of Net revenue: | 20.1 | % | | 20.1 | % | | N/A |
| | — | % |
Factory-built housing gross profit for the three months ended December 30, 2017 was up from higher home sales. In addition, the Company received a benefit of $3.4 million related to a favorable dispute settlement resolution, which was offset against cost of sales.
Financial services gross profit for the three and nine months ended December 30, 2017 increased from lower weather-related insurance claim costs compared to the prior year period and higher home loan sales volume. These increases were partially offset by lower interest income earned on securitized loan portfolios that continue to amortize.
Selling, General and Administrative Expenses. The following tables summarize selling, general and administrative expenses for the three and nine months ended December 30, 2017 and December 31, 2016.
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| | | | | | | | | | | | | | |
| Three Months Ended | | | | |
| December 30, 2017 | | December 31, 2016 | | $ Change | | % Change |
| (Dollars in thousands) | | | | |
Selling, general and administrative expenses: | | | | | | | |
Factory-built housing | $ | 22,226 |
| | $ | 22,079 |
| | $ | 147 |
| | 0.7 | % |
Financial services | 3,819 |
| | 3,924 |
| | (105 | ) | | (2.7 | )% |
| $ | 26,045 |
| | $ | 26,003 |
| | $ | 42 |
| | 0.2 | % |
| | | | | | | |
Selling, general and administrative expenses as % of Net revenue: | 11.8 | % | | 12.9 | % | | N/A |
| | (1.1 | )% |
|
| | | | | | | | | | | | | | |
| Nine Months Ended | | | | |
| December 30, 2017 | | December 31, 2016 | | $ Change | | % Change |
| (Dollars in thousands) | | | | |
Selling, general and administrative expenses: | | | | | | | |
Factory-built housing | $ | 66,909 |
| | $ | 64,551 |
| | $ | 2,358 |
| | 3.7 | % |
Financial services | 11,594 |
| | 11,568 |
| | 26 |
| | 0.2 | % |
| $ | 78,503 |
| | $ | 76,119 |
| | $ | 2,384 |
| | 3.1 | % |
| | | | | | | |
Selling, general and administrative expenses as % of Net revenue: | 12.5 | % | | 13.2 | % | | N/A |
| | (0.7 | )% |
Selling, general and administrative expenses related to factory-built housing increased for the three and nine months ended December 30, 2017 primarily from higher salary and incentive compensation expense from improved home sales and the acquisition of Lexington Homes.
Interest Expense. The following tables summarize interest expense for the three and nine months ended December 30, 2017 and December 31, 2016.
|
| | | | | | | | | | | | | | |
| Three Months Ended | | | | |
| December 30, 2017 | | December 31, 2016 | | $ Change | | % Change |
| (Dollars in thousands) | | | | |
Interest expense | $ | 1,236 |
| | $ | 1,091 |
| | $ | 145 |
| | 13.3 | % |
|
| | | | | | | | | | | | | | |
| Nine Months Ended | | | | |
| December 30, 2017 | | December 31, 2016 | | $ Change | | % Change |
| (Dollars in thousands) | | | | |
Interest expense | $ | 3,305 |
| | $ | 3,384 |
| | $ | (79 | ) | | (2.3 | )% |
The increase for the three months ended December 30, 2017 compared to the same period in the prior year is attributable to interest expense from secured credit facilities. These increases were partially offset by lower bond interest expense on securitized portfolios that continue to amortize. The decrease for the nine months ended December 30, 2017 compared to the same period in the prior year is attributable to lower bond interest expense on these same securitized portfolios, which was partially offset by increased interest from secured credit facilities.
Other Income, net. The following tables summarize other income, net for the three and nine months ended December 30, 2017 and December 31, 2016.
|
| | | | | | | | | | | | | | |
| Three Months Ended | | | | |
| December 30, 2017 | | December 31, 2016 | | $ Change | | % Change |
| (Dollars in thousands) | | | | |
Other income, net | $ | 1,094 |
| | $ | 829 |
| | $ | 265 |
| | 32.0 | % |
|
| | | | | | | | | | | | | | |
| Nine Months Ended | | | | |
| December 30, 2017 | | December 31, 2016 | | $ Change | | % Change |
| (Dollars in thousands) | | | | |
Other income, net | $ | 3,251 |
| | $ | 2,407 |
| | $ | 844 |
| | 35.1 | % |
The increase in other income, net, is attributable to higher interest income earned on increased balances related to commercial loans receivable in the factory-built housing segment, as well as gains from corporate investments.
Income Before Income Taxes. The following tables summarize income before income taxes for the three and nine months ended December 30, 2017 and December 31, 2016.
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| | | | | | | | | | | | | | |
| Three Months Ended | | | | |
| December 30, 2017 | | December 31, 2016 | | $ Change | | % Change |
| (Dollars in thousands) | | | | |
Income before income taxes: | | | | | | | |
Factory-built housing | $ | 18,393 |
| | $ | 12,370 |
| | $ | 6,023 |
| | 48.7 | % |
Financial services | 5,276 |
| | 4,909 |
| | 367 |
| | 7.5 | % |
| $ | 23,669 |
| | $ | 17,279 |
| | $ | 6,390 |
| | 37.0 | % |
|
| | | | | | | | | | | | | | |
| Nine Months Ended | | | | |
| December 30, 2017 | | December 31, 2016 | | $ Change | | % Change |
| (Dollars in thousands) | | | | |
Income before income taxes: | | | | | | | |
Factory-built housing | $ | 40,147 |
| | $ | 33,437 |
| | $ | 6,710 |
| | 20.1 | % |
Financial services | 7,672 |
| | 5,370 |
| | 2,302 |
| | 42.9 | % |
| $ | 47,819 |
| | $ | 38,807 |
| | $ | 9,012 |
| | 23.2 | % |
Income taxes. The following tables summarize Income taxes for the three and nine months ended December 30, 2017 and December 31, 2016.
|
| | | | | | | | | | | | | | |
| Three Months Ended | | | | |
| December 30, 2017 | | December 31, 2016 | | $ Change | | % Change |
| (Dollars in thousands) | | | | |
Income taxes | $ | 2,242 |
| | $ | 4,996 |
| | $ | (2,754 | ) | | (55.1 | )% |
|
| | | | | | | | | | | | | | |
| Nine Months Ended | | | | |
| December 30, 2017 | | December 31, 2016 | | $ Change | | % Change |
| (Dollars in thousands) | | | | |
Income taxes | $ | 8,457 |
| | $ | 11,740 |
| | $ | (3,283 | ) | | (28.0 | )% |
The effective income tax rate for the third fiscal quarter was 9.5% compared to an effective tax rate of 28.9% for the same period last year. In connection with lower federal income tax liability related to the Tax Act and revaluation of the net deferred income tax balance, the Company has recorded a net tax benefit of $5.6 millionin the third quarter ended December 30, 2017.
For the nine months ended December 30, 2017 and December 31, 2016, the effective income tax rate was 17.7% and 30.3%, respectively. In addition to the impact of the Tax Act discussed above, income tax expense for the nine months ended December 30, 2017 includes a benefit of $1.7 million related to excess tax benefits on exercises of stock options in accordance with ASU 2016-09 which was adopted in the current fiscal year.
Liquidity and Capital Resources
We believe that cash and cash equivalents at December 30, 2017, together with cash flow from operations, will be sufficient to fund our operations and provide for growth for the next 12 months and into the foreseeable future. We maintain cash in various deposit accounts, the balances of which are in excess of federally insured limits. We expect to continue to evaluate potential acquisitions of, or strategic investments in, businesses that are complementary to our Company. Such transactions may require the use of cash and have other impacts on the Company's liquidity and capital resources in the event of such a transaction. Because of the Company’s sufficient cash position, the Company has not sought external sources of liquidity, with the exception of certain credit facilities for our home-only lending programs. However, depending on our operating results and strategic opportunities, we may need to seek additional or alternative sources of financing. There can be no assurance that such financing would be available on satisfactory terms, if at all. If this financing were not available, it could be necessary for us to reevaluate our long-term operating plans to make more efficient use of our existing capital resources. The exact nature of any changes to our plans that would be considered depends on various factors, such as conditions in the factory-built housing industry and general economic conditions outside of our control.
Projected cash provided by operations in the coming year is largely dependent on sales volume and other activities. Operating activities provided $15.4 million of cash during the nine months ended December 30, 2017, compared to $28.8 million during the same period last year. Cash provided by operating activities during the current period was primarily the result of cash generated by operating income before non-cash charges and principal payments received on consumer loans receivable in the ordinary course of business. These are partially offset by: 1) loan origination activity in excess of proceeds from the sale of loans and expansion of home-only lending programs; 2) increased accounts receivable resulting from higher home sales; and 3) larger raw material levels to feed increased home sales volume and increased finished home inventory levels from timing of home sales completion. Cash provided by operating activities during the prior period was primarily the result of cash generated by operating income before non-cash charges, principal payments received on consumer loans receivable in the ordinary course of business, and lower home inventory levels from timing of home sales completions. These increases were partially offset by consumer loan originations in excess of proceeds from the sale of these loans as a result of improved loan origination activity and increases to accounts receivable resulting from higher home sales.
Consumer loans receivable originated increased to $96.8 million from $86.8 million for the nine months ended December 30, 2017 and December 31, 2016, respectively. Proceeds from sales of consumer loans provided $91.2 million in cash, compared to $77.3 million in the previous year, a net increase of $13.9 million, which relates to higher loan originations and the timing of loan sales.
With respect to consumer lending for the purchase of manufactured housing, states may classify manufactured homes for both legal and tax purposes as personal property rather than real estate. As a result, financing for the purchase of manufactured homes is characterized by shorter loan maturities and higher interest rates. Unfavorable changes in these factors and the current lack of availability of financing in the industry may have material negative effects on liquidity. See Item IA, "Risk Factors."
Cavco has entered into programs to provide some of the capital used by inventory lenders to finance wholesale home purchases by retailers. The Company has also entered into direct commercial loan arrangements with distributors, communities and developers under which the Company provides funds for financing homes and has invested in community-based lending initiatives that provide home-only financing to new residents of certain manufactured home communities (see Note 6 to the Consolidated Financial Statements). In addition, the Company has invested in and developed home-only loan pools and lending programs to attract third-party financier interest and to grow sales of new homes through traditional distribution points as well.
Investing activities used $6.6 million of cash during the nine months ended December 30, 2017, compared to $3.7 million during the same period last year. In the current year, cash was used for the purchase of Lexington Homes and other property, plant and equipment as well as investments, partially offset by investment sales. In the prior period, cash was used for the purchases of property, plant and equipment as well as investments by our insurance subsidiary for its investment portfolio, offset by investment sales.
Financing activities used $2.4 million in cash during the nine months ended December 30, 2017 primarily from payments on securitized financings and payments on stock option exercises, offset by loans accounted for as other secured financings. Financing activities used $3.2 million in cash during the nine months ended December 31, 2016, largely from payments on securitized financings, offset by loan sales accounted for as other secured financings and net cash from stock option exercises.
CountryPlace's securitized debt is subject to provisions that require certain levels of overcollateralization. Overcollateralization is equal to CountryPlace's equity in the bonds. Failure to satisfy these provisions could cause cash, which would normally be distributed to CountryPlace, to be used for repayment of the principal of the related Class A bonds until the required overcollateralization level is reached. During periods when the overcollateralization is below the specified level, cash collections from the securitized loans in excess of servicing fees payable to CountryPlace and amounts owed to the Class A bondholders, trustee and surety, are applied to reduce the Class A debt until such time the overcollateralization level reaches the specified level. Therefore, failure to meet the overcollateralization requirement could adversely affect the timing of cash flows received by CountryPlace. However, principal payments of the securitized debt, including accelerated amounts, is payable only from cash collections from the securitized loans and no additional sources of repayment are required or permitted. As of December 30, 2017, the 2005-1 and 2007-1 securitized portfolios were within the required overcollateralization level.
Critical Accounting Policies
In Part II, Item 7 of our Form 10-K, under the heading "Critical Accounting Policies," we have provided a discussion of the critical accounting policies that management believes affect its more significant judgments and estimates used in the preparation of our Consolidated Financial Statements.
Recent Accounting Pronouncements
In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes ("ASU 2015-17"). ASU 2015-17 became effective in the current fiscal year. Therefore, we now present all deferred tax liabilities and assets as noncurrent on the balance sheet instead of separating these items into current and noncurrent amounts. The prior period was not retrospectively adjusted. In addition, in March 2016, the FASB issued ASU 2016-09, Compensation- Stock Compensation (Topic 718) ("ASU 2016-09"), which also became effective in fiscal year 2018. As a result of this required implementation, excess tax benefits are recorded on exercises of stock options as a reduction of income tax expense in the consolidated statement of comprehensive income, whereas they were previously recognized in equity.
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASU 2014-09"), which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The standard requires entities to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new guidance also includes a cohesive set of disclosure requirements intended to provide users of financial statements with comprehensive information about the nature, amount, timing and uncertainty of revenue and cash flows arising from a company's contracts with customers. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which deferred the effective date of the new revenue standard. Accordingly, the updated standard is effective for us beginning with the first quarter of the Company's fiscal year 2019. Our implementation approach has included performing a detailed study of the various types of agreements that we have with our customers and assessing conformity of our current accounting practices with the new standard. We are making progress in determining the impact of this guidance; however, we are still evaluating the full effects ASU 2014-09 will have on the Company's Consolidated Financial Statements and disclosures. We expect to adopt this guidance using the modified retrospective transition method.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities ("ASU 2016-01"). ASU 2016-01 will be effective beginning with the first quarter of the Company's fiscal year 2019. Upon adoption, we will be required to reclassify the gain (loss) related to our equity investment securities classified as available-for-sale from accumulated other comprehensive income ("AOCI") to retained earnings as a cumulative-effect adjustment and begin recording future changes in fair value through earnings. As of December 30, 2017, we had a gain of $2.3 million recorded in AOCI for our available-for-sale equity investments. The impact on the Company's Consolidated Financial Statements at adoption will depend on the net unrealized gains (losses) recorded in AOCI for these equity investments as of the date of adoption.
In February 2016, the FASB issued ASU 2016-02, Leases(Topic 842) ("ASU 2016-02"). ASU 2016-02 will be effective beginning with the first quarter of the Company's fiscal year 2020, with early adoption permitted. The amendments require the recognition of leased assets and the related liabilities on the balance sheet for most leases, and recognition of expenses in the income statement in a manner similar to current accounting treatment. In addition, disclosures of key information about leasing arrangements will be required. Upon adoption, leases will be recognized and measured at the beginning of the earliest period presented using a modified retrospective approach. The Company is currently evaluating the effect this ASU will have on the Company's Consolidated Financial Statements and disclosures.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"). ASU 2016-13 changes the impairment model for most financial assets and certain other instruments to base measurement on expected losses through a forward-looking model based on incurred losses. The guidance also requires increased disclosures. ASU 2016-01 will be effective beginning with the first quarter of the Company's fiscal year 2021. The Company is currently evaluating the effect ASU 2016-13 will have on the Company's Consolidated Financial Statements and disclosures.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force ("ASU 2016-18"), which provides guidance on the presentation of restricted cash or restricted cash equivalents in the statement of cash flows. ASU 2016-18 will be effective beginning with the first quarter of the Company's fiscal year 2019. The adoption of ASU 2016-18 will only change the presentation of the Consolidated Statement of Cash Flows and is not expected to have a material impact on the consolidated financial statements.
In March 2017, the FASB issued ASU 2017-08, Receivables — Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities ("ASU 2017-08"), which requires the premium on callable debt securities to be amortized to the earliest call date as opposed to the contractual life of the security. ASU 2017-08 will be effective beginning with the first quarter of the Company's fiscal year 2020. The Company is currently evaluating the effect ASU 2017-08 will have on the Company's Consolidated Financial Statements and disclosures.
From time to time, new accounting pronouncements are issued by the FASB and other regulatory bodies that are adopted by the Company as of the specified effective dates. Unless otherwise discussed, management believes that the impact of recently issued standards, which are not yet effective, will not have a material impact on the Company's Consolidated Financial Statements upon adoption.
Forward-lookingForward-Looking Statements
Statements in this Report on Form 10-Q including those set forth in this section, may be considered "forward looking statements"include "forward-looking statements," within the meaning of Section 21E27A of the Securities Act of 1934. These forward-looking1933, Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the Private Securities Litigation Reform Act of 1995. Forward-looking statements are often identifiedcharacterized by the use of words such as "estimate,"believes," "predict,"estimates," "hope,"expects," "projects," "may," "believe,"will," "anticipate,"intends," "plan,"plans," "expect,or "anticipates," "require," "intend," "assume,"or by discussions of strategy, plans or intentions. Forward-looking statements are typically included, for example, in discussions regarding the manufactured housing and similar words.site-built housing industries; our financial performance and operating results; the expected effect of certain risks and uncertainties on our business, financial condition and results of operations; economic conditions and consumer confidence; operational and legal risks; how the Company may be affected by the novel coronavirus COVID-19 pandemic ("COVID-19") or any other pandemic or outbreak; labor shortages and the pricing and availability of raw materials; governmental regulations and legal proceedings; the availability of favorable consumer and wholesale manufactured home financing; market interest rates and Company investments and the ultimate outcome of our commitments and contingencies. Forward-looking statements contained in this Report on Form 10-Q speak only as of the date of this report or, in the case of any document incorporated by reference, the date of that document. We do not intend to publicly update or revise any forward-looking statement contained in this Report on Form 10-Q or in any document incorporated herein by reference to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time.
Forward-looking statements involve risks, uncertainties and other factors whichthat may cause our actual results, performance or achievements to be materially different from those expressed or implied by such forward-looking statements. In additionstatements, many of which are beyond our control. To the extent that our assumptions and expectations differ from actual results, our ability to meet such forward-looking statements, including the Riskability to generate positive cash flow from operations, may be significantly hindered. Factors described in Part I, Item 1A. Risk Factors in our Form 10-K, factors that could affect our results and cause them to materially differ from those contained in the forward-looking statements include, butwithout limitation, those discussed in Risk Factors in Part I, Item 1A of our 2021 Annual Report on Form 10-K filed with the Securities and Exchange Commission ("Form 10-K").
Introduction
The following should be read in conjunction with Cavco Industries, Inc. and its subsidiaries' (collectively, "we," "us," "our," the "Company" or "Cavco") Consolidated Financial Statements and the related Notes that appear in Item 1 of this Report. References to "Note" or "Notes" pertain to the Notes to our Consolidated Financial Statements.
Company Overview
Headquartered in Phoenix, Arizona, we design and produce factory-built housing products primarily distributed through a network of independent and Company-owned retailers, planned community operators and residential developers. We are not limited to:one of the largest producers of manufactured homes in the United States, based on reported wholesale shipments. Our products are marketed under a variety of brand names including Cavco, Fleetwood, Palm Harbor, Nationwide, Fairmont, Friendship, Chariot Eagle, Destiny, Commodore, Colony, Pennwest, R-Anell, Manorwood and Midcountry. We are also one of the leading producers of park model RVs, vacation cabins and factory-built commercial structures. Our finance subsidiary, CountryPlace Acceptance Corp. ("CountryPlace"), is an approved Federal National Mortgage Association and Federal Home Loan Mortgage Corporation ("Freddie Mac") seller/servicer and a Government National Mortgage Association ("Ginnie Mae") mortgage-backed securities issuer that offers conforming mortgages, non-conforming mortgages and home-only loans to purchasers of factory-built homes. Our insurance subsidiary, Standard Casualty Company ("Standard Casualty"), provides property and casualty insurance to owners of manufactured homes.
We operate 26 homebuilding production lines located in Millersburg and Woodburn, Oregon; Riverside, California; Nampa, Idaho; Phoenix and Goodyear, Arizona; Austin, Fort Worth, Seguin and Waco, Texas; Montevideo, Minnesota; Dorchester, Wisconsin; Nappanee and Goshen, Indiana; Lafayette, Tennessee; Douglas and Moultrie, Georgia; Shippenville and Emlenton, Pennsylvania; Martinsville and Rocky Mount, Virginia; Cherryville, North Carolina; and Ocala and Plant City, Florida. The majority of the homes produced are sold to, and distributed by, independently owned and controlled retail operations located throughout the United States and Canada. In addition, our homes are sold through 46 Company-owned U.S. retail locations.
Included in the above figures are two recent acquisitions. On July 4, 2021, we purchased an additional 20% ownership in Craftsman Homes, LLC and Craftsman Homes Development, LLC (collectively known as “Craftsman") in addition to our existing 50% ownership, making us controlling owner. Craftsman is a manufactured home street retailer with four locations in Nevada selling Company and other manufacturer branded homes. They also provide general construction to setup the home property and assist with multi-home developments and multi-family dwellings. The transaction was accounted for as a business combination achieved in stages and the results of operations have been included in the accompanying Consolidated Financial Statements since the date of the acquisition of the additional 20% interest, with a reduction for the earnings of the noncontrolling shareholder.
On September 24, 2021, we purchased certain manufactured housing assets and assumed certain liabilities of The Commodore Corporation ("Commodore"), including its six manufacturing facilities and two wholly-owned retail locations. In addition to manufacturing, Commodore also participates in commercial lending operations with its dealers. The transaction was accounted for as a business combination and the results of operations have been included in the accompanying Consolidated Financial Statements since the date of acquisition.
Company and Industry Outlook
According to data reported by the Manufactured Housing Institute, industry home shipments increased 14.3% for the first 8 months of calendar year 2021 compared to the same period in the prior year, which was impacted by shutdowns related to COVID-19. However, we did not experience any significant factory shutdowns in the prior year period, in contrast to certain other industry participants.
The industry offers solutions to the affordable housing crisis and these industry shipment numbers do not represent demand; instead, they represent the industry's ability to produce in the current environment. The average price per square foot for a manufactured home is lower than a site-built home. Also, based on the relatively low cost associated with manufactured home ownership, our products have traditionally competed with rental housing's monthly payment affordability.
The two largest manufactured housing consumer demographics, young adults and those who are age 55 and older, are both growing. "First-time" and "move-up" buyers of affordable homes are historically among the largest segments of new manufactured home purchasers. Included in this group are lower-income households that are particularly affected by periods of low employment rates and underemployment. Consumer confidence is especially important among manufactured home buyers interested in our products for seasonal or retirement living.
We seek out niche market opportunities where our diverse product lines and custom building capabilities provide a competitive advantage. Our green building initiatives involve the creation of an energy efficient envelope and higher utilization of renewable materials. These homes provide environmentally-friendly maintenance requirements, typically lower utility costs and sustainability.
We maintain a conservative cost structure in an industry that is currently experiencingeffort to build added value into our homes and we work diligently to maintain a prolongedsolid financial position. Our balance sheet strength, including the position in cash and significant downturn;cash equivalents, helps avoid liquidity problems and enables us to act effectively as market opportunities or challenges present themselves.
We may not be ablecontinue to successfully integrate past acquisitions, includingmake certain commercial loan programs available to members of our wholesale distribution chain. Under direct commercial loan arrangements, we provide funds for financed home purchases by distributors, community owners and developers (see Note 7 to the recent acquisition of Lexington Homes, or any future acquisitions to attain the anticipated benefits. Past acquisitions may adversely impact the Company's liquidity;
Consolidated Financial Statements). Our involvement in vertically integrated linescommercial loans helps to increase the availability of business, including manufactured housing consumer finance, commercial financehome financing to distributors, community owners and insurance, exposesdevelopers and provides additional opportunity for product exposure to potential home buyers. While these initiatives support our ongoing efforts to expand product distribution, they expose us to risks associated with the Company to certain risks;
Tightened credit standards, curtailed lending activity by home-only lenderscreditworthiness of this customer base and increased government lending regulations have contributed to a constrained consumerour inventory financing market;partners.
The lack of an efficient secondary market for manufactured home-only loans and the limited number of institutions providing such loans results in higher borrowing costs for home-only loans and continues to constrain industry growth. We work directly with other industry participants to develop secondary market opportunities for manufactured home-only loan portfolios and expand lending availability in the industry. Additionally, we continue to invest in community-based lending initiatives that provide home-only financing to new residents of certain manufactured home communities. We also develop and invest in home-only lending programs to grow sales of homes through traditional distribution points. We believe that growing our investment and participation in home-only lending may provide additional sales growth opportunities for our financial services segment, as well as provide a means that could lead to increased home sales for our factory-built housing operations.
Operational efficiencies have declined from hiring challenges, higher and largely unpredictable factory employee absenteeism and other inefficiencies from building material supply shortages. Accordingly, our total average plant capacity utilization rate was approximately 75% during the second fiscal quarter of 2022, which remains consistent with that of our first quarter of fiscal 2022.
Housing demand remains strong as well-qualified individuals continue pursuing home-ownership, bolstered by the low home loan interest rates. Home order rates are starting to gradually decline from the extreme highs we saw in the past few quarters, but still remain above pre-COVID rates, which were considered to be strong.
Our backlogs at October 2, 2021 were $1.1 billion, up $315 million or 39.8% compared to $792 million at July 3, 2021, and up $787 million or 245.4%compared to $321 million at September 26, 2020. These increases include $279 million attributable to the Commodore acquisition. Backlog excludes home orders that have been paused or canceled at the request of the customer.
Key housing building materials include wood and wood products, gypsum wallboard, steel, windows, appliances, insulation and other petroleum-based products. Pricing and availability of wholesale financing for industry retailers is limitedcertain raw materials have recently been volatile due to a reduced number of floor plan lendersfactors in the current environment. We continue to monitor and reduced lending limits;react to inflation in these materials by maintaining a focus on our product pricing in response to higher materials costs, but such increases may lag behind the escalation of such costs. Availability of these products has not caused a production halt in the current period, but we have experienced periodic shutdowns in other periods and shortages of primary building materials have caused production inefficiencies as we have needed to change processes in response to the delay in materials.
Our participationWhile it is difficult to predict the future of housing demand, employee availability, supply chain and Company performance and operations, maintaining an appropriately sized and well-trained workforce is key to increasing production to meet increased demand, and we face challenges in certain financing programs forovercoming labor-related difficulties in the purchasecurrent environment to increase home production. We continually review the wage rates of our productsproduction employees, and have established other monetary incentive and benefit programs, with a goal of providing competitive compensation. We also provide leadership training to new managers and other employees in supervisory roles to enhance communication and improve the oversight and motivation of other employees, more extensively use online recruiting tools, update our recruitment brochures and improve the appearance and appeal of our manufacturing facilities to improve the recruitment and retention of qualified production employees and reduce annualized turnover rates. Regardless, we believe our ability to recruit the workforce we need to meet the overall need for affordable housing continues to improve.
In the financial services segment, we continue to assist customers in need by industry distributorsservicing existing loans and consumers mayinsurance policies and complying with state and federal regulations regarding loan forbearance, home foreclosures and policy cancellations. Certain loans serviced for investors expose us to cash flow deficits if customers do not make contractual monthly payments of principal and interest in a timely manner. For certain loans serviced for Ginnie Mae and Freddie Mac, and home-only loans serviced for certain other investors, we must remit scheduled monthly principal and/or interest payments and principal curtailments regardless of whether monthly mortgage payments are collected from borrowers. Ginnie Mae permits cash obligations on loans in forbearance from COVID-19 to be offset by other incoming cash flows from loans such as loan pre-payments. Although monthly collections of principal and interest from borrowers have exceeded scheduled principal and interest payments owed to investors, mandatory extended forbearance under the Coronavirus Aid, Relief and Economic Security Act and certain other regulations related to COVID-19 could negatively impact cash obligations in the future.
Results of Operations
Net Revenue.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | |
($ in thousands, except revenue per home sold) | October 2, 2021 | | September 26, 2020 | | Change |
Factory-built housing | $ | 342,094 | | | $ | 240,967 | | | $ | 101,127 | | | 42.0 | % |
Financial services | 17,449 | | | 17,009 | | | 440 | | | 2.6 | % |
| $ | 359,543 | | | $ | 257,976 | | | $ | 101,567 | | | 39.4 | % |
Factory-built homes sold | | | | | | | |
by Company-owned retail sales centers | 710 | | | 763 | | | (53) | | (6.9) | % |
to independent retailers, builders, communities & developers | 2,887 | | | 2,664 | | | 223 | | | 8.4 | % |
| 3,597 | | | 3,427 | | | 170 | | | 5.0 | % |
Net factory-built housing revenue per home sold | $ | 95,105 | | | $ | 70,314 | | | $ | 24,791 | | | 35.3 | % |
| | | | | | | |
| Six Months Ended | | | | |
($ in thousands, except revenue per home sold) | October 2, 2021 | | September 26, 2020 | | Change |
Factory-built housing | $ | 654,377 | | | $ | 479,057 | | | $ | 175,320 | | | 36.6 | % |
Financial services | 35,588 | | | 33,720 | | | 1,868 | | | 5.5 | % |
| $ | 689,965 | | | $ | 512,777 | | | $ | 177,188 | | | 34.6 | % |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Factory-built homes sold | | | | | | | |
by Company-owned retail sales centers | 1,433 | | | 1,515 | | | (82) | | (5.4) | % |
to independent retailers, builders, communities & developers | 5,864 | | | 5,261 | | | 603 | | | 11.5 | % |
| 7,297 | | | 6,776 | | | 521 | | | 7.7 | % |
Net factory-built housing revenue per home sold | $ | 89,678 | | | $ | 70,699 | | | $ | 18,979 | | | 26.8 | % |
In the factory-built housing segment, the increase in Net revenues was primarily due to an increase in the average sales price and the number of units sold. The higher home prices were driven by product price increases and a shift toward more multi-section homes. Home sales volume increased from higher factory capacity utilization.
Net factory-built housing revenue per home sold is a volatile metric dependent upon several factors. A primary factor is the price disparity between sales of homes to independent distributors, builders, communities and developers and sales of homes to consumers by Company-owned retail stores. Wholesale sales prices are primarily comprised of the home and the cost to ship the home from a homebuilding facility to the home-site. Retail home prices include these items and retail markup, as well as items that are largely subject to home buyer discretion, including, but not limited to, installation, utility connections, site improvements, landscaping and additional riskservices. Our homes are constructed in one or more floor sections ("modules") which are then installed on the customer's site. Changes in the number of credit loss,modules per home, the selection of different home types/models and optional home upgrades create changes in product mix, also causing fluctuations in this metric. The table below presents the mix of modules and homes sold for the three and six months ended October 2, 2021 and September 26, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | |
| October 2, 2021 | | September 26, 2020 | | Change |
| Modules | | Homes | | Modules | | Homes | | Modules | | Homes |
U.S. Housing and Urban Development code homes | 5,548 | | | 3,154 | | | 5,030 | | | 2,979 | | | 10.3 | % | | 5.9 | % |
Modular homes | 519 | | | 254 | | | 484 | | | 223 | | | 7.2 | % | | 13.9 | % |
Park model RVs | 189 | | | 189 | | | 225 | | | 225 | | | (16.0) | % | | (16.0) | % |
| 6,256 | | | 3,597 | | | 5,739 | | | 3,427 | | | 9.0 | % | | 5.0 | % |
| | | | | | | | | | | |
| Six Months Ended | | | | |
| October 2, 2021 | | September 26, 2020 | | Change |
| Modules | | Homes | | Modules | | Homes | | Modules | | Homes |
U.S. Housing and Urban Development code homes | 11,200 | | | 6,430 | | | 9,911 | | | 5,844 | | | 13.0 | % | | 10.0 | % |
Modular homes | 987 | | | 480 | | | 950 | | | 438 | | | 3.9 | % | | 9.6 | % |
Park model RVs | 387 | | | 387 | | | 494 | | | 494 | | | (21.7) | % | | (21.7) | % |
| 12,574 | | | 7,297 | | | 11,355 | | | 6,776 | | | 10.7 | % | | 7.7 | % |
Financial services segment revenue increased primarily due to higher volume in home loan sales and more insurance policies in force in the current year compared to the prior year, partially offset by lower interest income earned on the acquired consumer loan portfolios that continue to amortize and changes in the value of the marketable equity securities in the financial services portfolio. For the three and six months ended October 2, 2021, we recognized unrealized losses on marketable equity securities of $0.5 million and $0.1 million, respectively. For the three and six months ended September 26, 2020, we recognized gains of $0.7 million and $1.7 million, respectively.
Gross Profit.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | |
($ in thousands) | October 2, 2021 | | September 26, 2020 | | Change |
Factory-built housing | $ | 82,299 | | | $ | 46,155 | | | $ | 36,144 | | | 78.3 | % |
Financial services | 7,629 | | | 7,386 | | | 243 | | | 3.3 | % |
| $ | 89,928 | | | $ | 53,541 | | | $ | 36,387 | | | 68.0 | % |
| | | | | | | |
Gross profit as % of Net revenue | | | | | | | |
Consolidated | 25.0 | % | | 20.8 | % | | N/A | | 4.2 | % |
Factory-built housing | 24.1 | % | | 19.2 | % | | N/A | | 4.9 | % |
Financial services | 43.7 | % | | 43.4 | % | | N/A | | 0.3 | % |
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| Six Months Ended | | | | |
($ in thousands) | October 2, 2021 | | September 26, 2020 | | Change |
Factory-built housing | $ | 148,572 | | | $ | 93,147 | | | $ | 55,425 | | | 59.5 | % |
Financial services | 15,369 | | | 15,717 | | | (348) | | | (2.2) | % |
| $ | 163,941 | | | $ | 108,864 | | | $ | 55,077 | | | 50.6 | % |
| | | | | | | |
Gross profit as % of Net revenue | | | | | | | |
Consolidated | 23.8 | % | | 21.2 | % | | N/A | | 2.6 | % |
Factory-built housing | 22.7 | % | | 19.4 | % | | N/A | | 3.3 | % |
Financial services | 43.2 | % | | 46.6 | % | | N/A | | (3.4) | % |
Factory-built housing gross profit increased primarily due to increased home sales volume and higher average sales prices. We continue to monitor and react to inflation in building material prices by maintaining a focus on our product pricing; however, product price increases may lag behind the escalation of building material costs. While lumber and other lumber related product market prices have begun to decline, we have seen most other product prices increase, offsetting those declines. Gross profit as a percentage of Net revenue also increased from a shift toward more multi-section homes.
For the three months ended October 2, 2021, Financial services gross profit increased primarily due to lower weather-related claims volume, partially offset by unrealized losses on marketable equity securities. For the six months ended October 2, 2021, gross profit decreased primarily due to higher weather-related claims volume in the first quarter and unrealized losses on marketable equity securities.
Selling, General and Administrative Expenses.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | |
($ in thousands) | October 2, 2021 | | September 26, 2020 | | Change |
Factory-built housing | $ | 40,347 | | | $ | 30,725 | | | $ | 9,622 | | | 31.3 | % |
Financial services | 5,025 | | | 4,728 | | | 297 | | | 6.3 | % |
| $ | 45,372 | | | $ | 35,453 | | | $ | 9,919 | | | 28.0 | % |
Selling, general and administrative expenses as % of Net revenue | 12.6 | % | | 13.7 | % | | N/A | | (1.1) | % |
| | | | | | | |
| Six Months Ended | | | | |
($ in thousands) | October 2, 2021 | | September 26, 2020 | | Change |
Factory-built housing | $ | 75,844 | | | $ | 61,462 | | | $ | 14,382 | | | 23.4 | % |
Financial services | 10,360 | | | 9,314 | | | 1,046 | | | 11.2 | % |
| $ | 86,204 | | | $ | 70,776 | | | $ | 15,428 | | | 21.8 | % |
Selling, general and administrative expenses as % of Net revenue | 12.5 | % | | 13.8 | % | | N/A | | (1.3) | % |
Selling, general and administrative expenses related to factory-built housing increased between periods primarily from higher salary and incentive-based compensation expense and deal costs related to the Commodore acquisition which could adversely impactwere $2.1 million and $2.4 million for the Company'sthree and six months ended October 2, 2021, respectively. This was partially offset by a reduction in the amortization of the additional Director and Officer insurance premium, added in the third quarter of fiscal year 2019, which was $2.1 million and $4.2 million for the three and six months ended September 26, 2020, respectively, with no expense in the current year.
In Financial services, Selling, general and administrative expenses increased primarily from greater recognition of deferred origination costs on higher loan sales and higher compensation expense.
Other Components of Net Income.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | |
($ in thousands) | October 2, 2021 | | September 26, 2020 | | Change |
Interest expense | $ | 203 | | | $ | 194 | | | $ | 9 | | | 4.6 | % |
Other income, net | 4,668 | | | 1,702 | | | 2,966 | | | 174.3 | % |
Income tax expense | 11,338 | | | 4,547 | | | 6,791 | | | 149.4 | % |
Effective tax rate | 23.1 | % | | 23.2 | % | | N/A | | (0.1) | % |
| | | | | | | |
| Six Months Ended | | | | |
($ in thousands) | October 2, 2021 | | September 26, 2020 | | Change |
Interest expense | $ | 367 | | | $ | 390 | | | $ | (23) | | | (5.9) | % |
Other income, net | 7,129 | | | 3,578 | | | 3,551 | | | 99.2 | % |
Income tax expense | 19,770 | | | 9,553 | | | 10,217 | | | 107.0 | % |
Effective tax rate | 23.4 | % | | 23.1 | % | | N/A | | 0.3 | % |
Interest expense consists primarily of debt service on the financings of manufactured home-only loans and interest related to finance leases.
Other income, net primarily consists of realized and unrealized gains and losses on corporate investments, interest income related to commercial loan receivable balances, interest income earned on cash balances and gains and losses from the sale of property, plant and equipment. During the year, we also recognized a non-cash gain of $3.3 million on the remeasurement of the assets and liabilities of Craftsman. See Note 21 to the Consolidated Financial Statements for further information.
Liquidity and Capital Resources
We believe that cash and cash equivalents at October 2, 2021, together with cash flow from operations, will be sufficient to fund our operations and provide for growth for the next 12 months and into the foreseeable future. We maintain cash in U.S. Treasury and other money market funds, some of which are in excess of federally insured limits. We expect to continue to evaluate potential acquisitions of, or strategic investments in, businesses that are complementary to the Company, as well as other expansion opportunities. Such transactions may require the use of cash and have other impacts on our liquidity and resultscapital resources. Because of operations;
Our resultsour sufficient cash position, we have not historically sought external sources of operations could be adversely affected by significant warranty and construction defect claimsliquidity, with the exception of certain credit facilities for the home-only lending programs. Regardless, depending on factory-built housing;
We have contingent repurchase obligations related to wholesale financing provided to industry retailers;
Ourour operating results could be affected by market forces and declining housing demand;
We have incurred net lossesstrategic opportunities, we may need to seek additional or alternative sources of financing in certain prior periods and therethe future. There can be no assurance that we will generate incomesuch financing would be available on satisfactory terms, if at all. If this financing were not available, it could be necessary for us to reevaluate our long-term operating plans to make more efficient use of our existing capital resources at such time. The exact nature of any changes to our plans that would be considered depends on various factors, such as conditions in the future;
A write-off of all or partfactory-built housing industry and general economic conditions outside of our goodwill could adversely affectcontrol.
State insurance regulations restrict the amount of dividends that can be paid to stockholders of insurance companies. As a result, the assets owned by our operating resultsinsurance subsidiary are generally not available to satisfy the claims of Cavco or its legal subsidiaries. We believe that stockholders' equity at the insurance subsidiary remains sufficient and net worth;do not believe that the ability to pay ordinary dividends to Cavco will be restricted per state regulations.
The cyclical and seasonal naturefollowing is a summary of the manufactured housing industry causes our revenuesCompany's cash flows for the six months ended October 2, 2021 and September 26, 2020, respectively:
| | | | | | | | | | | | | | | | | |
| Six Months Ended | | |
(in thousands) | October 2, 2021 | | September 26, 2020 | | $ Change |
Cash, cash equivalents and restricted cash at beginning of the fiscal year | $ | 339,307 | | | $ | 255,607 | | | $ | 83,700 | |
Net cash provided by operating activities | 80,087 | | | 74,609 | | | 5,478 | |
Net cash used in investing activities | (156,045) | | | (82) | | | (155,963) | |
Net cash used in financing activities | (18,873) | | | (865) | | | (18,008) | |
Cash, cash equivalents and restricted cash at end of the period | $ | 244,476 | | | $ | 329,269 | | | $ | (84,793) | |
Net cash provided by operating resultsactivities increased primarily from higher net income and proceeds from consumer loan sales, which were $101.6 million this year compared to fluctuate, and we expect this cyclicality and seasonality to continue$80.6 million in the future;previous year. This increase was partially offset by rising costs of our raw materials and higher purchases of such materials, the timing of collections on accounts receivable and commercial loans receivable and payments on Accounts payable and Accrued expenses and other current liabilities.
Our liquidityConsumer loan originations increased $3.0 million to $85.4 million for the six months ended October 2, 2021 from $82.4 million for the six months ended September 26, 2020.
We enter into commercial loan arrangements with distributors, communities and abilitydevelopers under which we provide funds for financing homes. In addition, we enter into commercial loan arrangements with certain distributors of our products under which we provide funds for wholesale purchases. We have also invested in community-based lending initiatives that provide home-only financing to raise capital may be limited;new residents of certain manufactured home communities. For additional information regarding our commercial loans receivable, see Note 7 to the Consolidated Financial Statements. Further, we invest in and develop home-only loan pools and lending programs to attract third party financier interest in order to grow sales of new homes through traditional distribution points. Decreased lending activity provided cash of $3.3 million while the prior period net activity provided $4.7 million in cash.
The manufactured housing industry is highly competitive,Net cash used in investing activities consists of buying and increased competition may resultselling debt and marketable equity securities in lower revenue;our Financial Services segment, purchases of property, plant and equipment and funding strategic growth acquisitions. Greater cash was used in the current period for the purchase of Craftsman and Commodore.
If we are unable to establish or maintain relationshipsNet cash used in financing activities for the current period was primarily for the repurchase of common stock.
We entered into secured credit facilities with independent distributors who sell our homes, our revenue could decline;
Our business and operations are concentrated in certain geographic regions, which could be impacted by market declines;
Our results of operations can be adversely affected by labor shortages and the pricing and availability of raw materials;
If the manufactured housing industry is not able to secure favorable local zoning ordinances, our revenue could decline and our business could be adversely affected;
The loss of any of our executive officers could reduce our ability to execute our business strategy and could have a material adverse effect on our business and results of operations;
Certain provisions of our organizational documents could delay or make more difficult a change in control of our Company;
Volatility of stock price;
Deterioration in economic conditions and turmoil in financial markets could reduce our earnings and financial condition;
The cost of operations could be adversely impacted by increased costs of healthcare benefits provided to employees;
A prolonged delay by Congress and the President to approve budgets or continuing appropriation resolutionsthird-party banks to facilitate the operationsorigination of consumer home-only loans to be held for investment, secured by the manufactured homes which were subsequently pledged as collateral to the facilities. Upon completion of the federal government could delaydraw down periods, these facilities were converted into an amortizing loan based on a 20 or 25-year amortization period with a balloon payment due upon maturity. As of October 2, 2021, the completionoutstanding balance of home sales and/or cause cancellations,the converted loans was $7.7 million with a weighted average interest rate of 4.91%.
Contractual Commitments and thereby negatively impactContingencies. There were no material changes to the contractual obligations as set forth in our deliveries and revenues;Annual Report on Form 10-K.
Information technology failures or data security breaches could harm our business; andCritical Accounting Policies
We are subject to extensive regulation affectingExcept as described in Note 1 to the production and sale of manufactured housing, which could adversely affect our profitability.
We may make additional written or oral forward-looking statements from time to time in filings with the SEC or in public news releases or statements. Such additional statements may include, but are not limited to, projections of revenues, income or loss, capital expenditures, acquisitions, plans for future operations, financing needs or plans, the impact of inflation and plans relatingConsolidated Financial Statements, there have been no other significant changes to our products or services,critical accounting policies during the six months ended October 2, 2021, as well as assumptions relatingcompared to those disclosed in Part II, Item 7 of our Form 10-K, under the heading "Critical Accounting Policies," which provides a discussion of the critical accounting policies that management believes affect its more significant judgments and estimates used in the preparation of the Company's Consolidated Financial Statements.
Other Matters
Related Party Transactions. See Note 20 to the foregoing.Consolidated Financial Statements for a discussion of our related party transactions.
Off Balance Sheet Arrangements See Note 15 to the Consolidated Financial Statements for a discussion of our off-balance sheet commitments, which discussion is incorporated herein by reference.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk isThere have been no material changes from the risk of loss arising from adverse changes in market pricesquantitative and interest rates. We may from time to time be exposed to interest rate risk inherent in our financial instruments, but are not currently subject to foreign currency or commodity price risk. We manage our exposure to these market risks through our regular operating and financing activities.
Our operations are interest rate sensitive. As overall manufactured housing demand can be adversely affected by increases in interest rates, a significant increase in wholesale or mortgage interest rates may negatively affect the ability of retailers and home buyers to secure financing. Higher interest rates could unfavorably impact our revenues, gross margins and net earnings. Our business is also sensitive to the effects of inflation, particularly with respect to raw material and transportation costs. We may not be able to offset inflation through increased selling prices.
CountryPlace is exposed toqualitative disclosures about market risk related to the accessibility and terms of long-term financing of its loans. In the past, CountryPlace accessed the asset-backed securities market to provide term financing of its chattel and non-conforming mortgage originations. At present, independent asset-backed and mortgage-backed securitization markets are not readily accessible to CountryPlace and other manufactured housing lenders. Accordingly, CountryPlace has not continued to securitize its loan originations as a means to obtain long-term funding.
We are also exposed to market risks related to our fixed rate consumer and commercial loan notes receivables, as well as our securitized financings balances. For fixed rate instruments, changes in interest rates do not change future earnings and cash flows. However, changes in interest rates could affect the fair value of these instruments. Assuming the level of these instruments as of December 30, 2017, is held constant, a 1% unfavorable change in average interest rates would adversely impact the fair value of these instruments, as follows (in thousands):
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| Change in Fair Value |
Consumer loans receivable | $ | 3,707 |
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Commercial loans receivable | $ | 172 |
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Securitized financings | $ | 1,213 |
|
In originating loans for sale, CountryPlace issues IRLCs to prospective borrowers and third-party originators. These IRLCs represent an agreement to extend credit to a loan applicant, or an agreement to purchase a loan from a third-party originator, whereby the interest rate on the loan is set prior to loan closing or sale. These IRLCs bind CountryPlace to fund the approved loan at the specified rate regardless of whether interest rates or market prices for similar loans have changed between the commitment date and the closing date. As such, outstanding IRLCs are subject to interest rate risk and related loan sale price risk during the period from the date of the IRLC through the earlier of the loan sale date or IRLC expiration date. The loan commitments generally range between 30 and 180 days; however, borrowers are not obligated to close the related loans. As a result, CountryPlace is subject to fallout risk related to IRLCs, which is realized if approved borrowers choose not to close on the loans within the terms of the IRLCs. As of December 30, 2017, CountryPlace had outstanding IRLCs with a notional amount of $10.5 million and are recorded at fair value in accordance with ASC 815. The estimated fair values of IRLCs are based on quoted market values and are recorded in other assetspreviously disclosed in the consolidated balance sheets. The fair value of IRLCs is based on the value of the underlying mortgage loan adjusted for: (i) estimated cost to complete and originate the loan and (ii) the estimated percentage for IRLCs that will result in closed mortgage loans. The initial and subsequent changes in the value of IRLCs are a component of current income. Assuming CountryPlace's level of IRLCs as of December 30, 2017 is held constant, a 1% increase in average interest rates would decrease the fair value of CountryPlace's obligations by approximately $120,000.Form 10-K.
Item 4. Controls and Procedures
(a) Disclosure Controls and Procedures
WeThe Company carried out an evaluation, under the supervision and with the participation of ourthe Company's management, including ourits President and Chief Executive Officer and Chiefits Principal Financial Officer, of the effectiveness of the design and operation of ourits disclosure controls and procedures (as defined in the Exchange Act Rules 13a-15(e) and 15d-15(e)). Based upon that evaluation, ourthe Company's President and Chief Executive Officer and Chiefits Principal Financial Officer concluded that, as of the end of the period covered in this report, ourOctober 2, 2021, its disclosure controls and procedures were effective.
(b) Changes in Internal Control over Financial Reporting
There have been no changes in ourthe Company's internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the fiscal quarter ended December 30, 2017,October 2, 2021 which have materially affected, or are reasonably likely to materially affect, ourthe Company's internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Information regarding reportable legal proceedings is contained in Part I, Item 3, Legal Proceedings, in our Form 10-K. The following describes legal proceedings, if any, that became reportable during the period ended December 30, 2017, and, if applicable, amends and restates descriptions of previously reported legal proceedings in which there have been material developments during such quarter.
We are party to certain legal proceedings that arise in the ordinary course and are incidental to our business. Certain of the claims pending against us in these proceedings allege, among other things, breach of contract, breach of express and implied warranties, construction defect, deceptive trade practices, unfair insurance practices, product liability and personal injury. Although litigation is inherently uncertain, based on past experience andSee the information currently available, management does not believe thatunder the currently pending and threatened litigation or claims will have a material adverse effect on"Legal Matters" caption in Note 15 to the Company's consolidated financial position, liquidity or results of operations. However, future events or circumstances currently unknown to management will determine whether the resolution of pending or threatened litigation or claims will ultimately have a material effect on our consolidated financial position, liquidity or results of operations in any future reporting periods.Consolidated Financial Statements, which is incorporated herein by reference.
Item 1A. Risk Factors
In addition to the other information set forth in this Report, you should carefully consider the factors discussed in Part I, Item 1A, Risk Factors, in ourthe Form 10-K, which could materially affect our business, financial condition or future results. The risks described in this Report and in ourthe Form 10-K are not the only risks facing ourthe Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
On October 27, 2020, the Company's Board of Directors approved a $100 million stock repurchase program, which was announced on a Current Report on Form 8-K filed with the Securities and Exchange Commission on October 29, 2020, and that may be used to purchase its outstanding common stock. The repurchases may be made in the open market or in privately negotiated transactions in compliance with applicable state and federal securities laws and other legal requirements. The level of repurchase activity is subject to market conditions and other investment opportunities. The repurchase program does not obligate us to acquire any particular amount of common stock and may be suspended or discontinued at any time. The repurchase program is funded using our available cash. The following table sets forth repurchases of our common stock during the second quarter of fiscal year 2022:
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Period | | Total Number of Shares Purchased | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of the Publically Announced Program | | Approximate Dollar Value of Shares That May Yet Be Purchased Under the Program (in thousands) |
July 4, 2021 to August 7, 2021 | | — | | | $ | — | | | — | | | $ | 85,717 | |
August 8, 2021 to September 4, 2021 | | — | | | — | | | — | | | 85,717 | |
September 5, 2021 to October 2, 2021 | | 30,300 | | | 250.63 | | | 30,300 | | | 78,123 | |
| | 30,300 | | | | | 30,300 | | | |
Item 5. Other Information
Item 5.02 Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers
On November 2, 2021, the Company entered into a Severance Agreement with Allison K. Aden, the Company’s Chief Financial Officer.
The Severance Agreement provides for certain payments and other benefits to be provided upon termination without Cause (as defined in the Severance Agreement). In the event of a qualifying termination, Ms. Aden will receive: (a) a severance payment equal to the sum of: (i) one year of her current base salary plus (ii) her annual target bonus for the year of termination; (b) a pro-rated bonus, for the period of time Ms. Aden was employed and worked during the fiscal year, equal to her annual target bonus amount as of the year of termination; and (c) COBRA benefits coverage for up to twelve (12) months following termination.
In addition, upon a termination without Cause (as defined in the Severance Agreement) during the period six months prior to or within twelve months following a Change in Control, Ms. Aden will be entitled to the payments and benefits described above and all outstanding equity awards will immediately vest in full, provided however, that any award subject to performance goals shall vest at the target levels of performance.
The payment of severance benefits described above is conditioned upon the delivery and non-revocation of a customary release and is subject to customary provisions regarding confidentiality of information.
A copy of the Severance Agreement is filed as Exhibit 10.1 to this report and is incorporated by reference herein.
Also on November 2, 2021, the Company entered into a Change in Control Agreement with certain officers of the Company, including Paul W. Bigbee, the Company's Chief Accounting Officer.
The Change in Control Agreement provides for certain payments and other benefits to be provided upon termination without Cause (as defined in the Change in Control Agreement) during the period six months prior to or within twelve months following a Change in Control (as defined in the Change in Control Agreement). In the event of a Change in Control and qualifying termination, the respective officer will receive: (a) a severance payment equal to the sum of: (i) one year of the officer's current base salary plus (ii) the annual target bonus for the year of termination; (b) a pro-rated bonus, for the period of time the officer was employed and worked during the fiscal year, equal to the officer’s annual target bonus amount as of the year of termination (c) all outstanding equity awards will immediately vest in full, provided however, that any award subject to performance goals shall vest at the target levels of performance; and (d) COBRA benefits coverage for up to twelve (12) months following termination.
The payment of the severance benefits is conditioned upon the officer's execution and non-revocation of a customary release and is subject to customary provisions regarding confidentiality of information.
The form of Change in Control Agreement is filed as Exhibit 10.2 to this report and is incorporated herein by reference.
Item 6. Exhibits
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Exhibit No. | | Exhibit | |
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| (1) | | |
| (2) | Asset Purchase Agreement, dated July 23, 2021, by and among Commodore Homes, LLC, The Commodore Corporation, TCC Clarion Limited Partnership, TCC Pennwest, LLC and each of the individual equityholders named therein, and Barry S. Shein, in his capacity as Sellers' representative | |
| (1) | | |
| (1) | | |
| (3) | | |
101.INS | | The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document. | |
101.SCH | | Inline XBRL Taxonomy Extension Schema Document | |
101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
104 | | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) | |
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Exhibit No. | Exhibit |
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101 | The following materials contained in this Quarterly Report on Form 10-Q for the period ended December 30, 2017 were formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Comprehensive Income, (iii) Consolidated Statements of Cash Flows and (iv) Notes to Consolidated Financial Statements |
All other items required under Part II are omitted because they are not applicable.
(1) Filed herewith.
(2) Exhibit 10.1 to Current Report on Form 8-K filed on July 26, 2021, incorporated by reference.
(3) Furnished herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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Cavco Industries, Inc. | | | |
Registrant | | | |
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Cavco Industries, Inc.Signature | | Title | Date |
Registrant | | | |
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Signature | | Title | Date |
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/s/ Joseph H. StegmayerWilliam C. Boor | | Chairman,Director, President and | February 7, 2018 |
Joseph H. Stegmayer | | Chief Executive Officer | November 5, 2021 |
William C. Boor | | (Principal Executive Officer) | |
| | | |
/s/ Daniel L. UrnessAllison K. Aden | | Executive Vice President, Treasurer and | February 7, 2018 |
Daniel L. Urness | | Chief Financial Officer & Treasurer | November 5, 2021 |
Allison K. Aden | | (Principal Financial and Accounting Officer) | |