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UNITED STATES SECURITIES & EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
| þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended March 31, 2009
OR
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 000-08822
Cavco Industries, Inc.
(Exact name of Registrant as specified in its charter)
| Delaware | 56-2405642 | |
| (State or Other Jurisdiction of Incorporation or | (I.R.S. Employer Identification No.) | |
| Organization) | ||
| 1001 North Central Avenue, Suite 800 | 85004 | |
| Phoenix, Arizona | (Zip Code) | |
| (Address of Principal Executive Offices) |
602-256-6263
(Registrant’s telephone number,
including area code)
(Registrant’s telephone number,
including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Name on each Exchange on which registered | |
| Common Stock, par value $0.01 | The NASDAQ Stock Market, LLC |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yeso Noþ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yeso Noþ
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. Yesþ Noo
Indicate by checkmark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date 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). Yeso Noo
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a small reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filero | Accelerated filerþ | Non-accelerated filero | Smaller reporting companyo | |||
| (Do not check if a smaller reporting company) |
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yeso Noþ
The aggregate market value of voting and non-voting common equity held by non-affiliates as of September 30, 2008 (based on the closing price on the NASDAQ Stock Market, LLC on September 30, 2008) was $22,583,000. Shares of Common Stock held by each officer, director and holder of 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
As of May 8, 2009, 6,506,843 shares of Registrant’s Common Stock, $.01 par value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Cavco Industries, Inc.’s definitive Proxy Statement relating to its 2009 Annual Meeting of Stockholders are incorporated by reference into Part III hereof.
CAVCO INDUSTRIES, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED MARCH 31, 2009
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED MARCH 31, 2009
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PART I
ITEM 1. BUSINESS
General
Cavco Industries, Inc., a Delaware corporation, was formed on June 30, 2003 as a successor corporation to previous Cavco entities operating since 1965. Cavco is the largest producer of manufactured homes in Arizona, based on data from Statistical Surveys, Inc., and a leading producer of park model homes and vacation cabins in the United States, having made wholesale shipments of 2,603 manufactured housing units during our fiscal year ended March 31, 2009. We are also the 9th largest producer of HUD code manufactured homes in the United States, based on 2007 total home production data published by Manufactured Home Merchandiser, an industry trade publication. Our business encompasses manufacturing operations and wholesale and retail marketing. The terms “Cavco,” “us,” “we,” “our,” the “Company,” and any other similar terms refer to Cavco Industries, Inc. and its subsidiaries, unless otherwise indicated in this Form 10-K.
Our factory-built homes are produced under various trade names and in a variety of floor plans and price ranges. We produce homes constructed to the building standards promulgated by the U.S. Department of Housing and Urban Development, or HUD, and by the International and Universal Building Codes as well as park model homes and vacation cabins. Our HUD code homes generally range in size from approximately 500 to 3,300 square feet and typically include two to five bedrooms, a living room, dining room, kitchen and two or more full bathrooms. Most of these are multi-section homes, although we also produce single-section homes. Our park model homes are less than 400 square feet in size and are purchased primarily for use as second homes, vacation homes or for retirement living and are placed in planned communities or recreational home parks. We also produce vacation cabins and commercial structures for a variety of purposes, including offices and showrooms.
We operate three manufacturing plants in the Phoenix, Arizona area and one in Seguin, Texas. Our factories range in size from 79,000 to 250,000 square feet. During May 2009, the Company initiated a plan to move its park model and vacation cabin manufacturing operations from its Specialty plant to a second production line at its Litchfield facility. This move will provide greater capabilities for the production of park models, cabins, and other specialty buildings, create improved overall operational efficiencies at the Litchfield factory, as well as reduce overhead expenses. For additional information, see Note 11 to our Consolidated Financial Statements. We construct our homes using an assembly-line process in which each section or floor is assembled in stages. Our assembly-line process is designed to be flexible enough to accommodate significant customization as requested by our customers.
We sell manufactured homes through both a network of independent retailers and through Company-owned retail outlets. As of March 31, 2009, our products were offered for sale through approximately 322 independent retail outlets in 23 states and Canada. A majority of these independent retail outlets are located in Arizona, California, Texas, New Mexico, Colorado, Utah and Nevada. As of March 31, 2009, we had a total of 6 Company-owned retail outlets, located in Arizona, New Mexico and Texas. We expect to close less than half of our remaining retail outlets during the next 12 months because they have under-performed in recent years. We do not anticipate that retail outlet closures will materially affect the operations of our manufacturing segment as these outlets do not sell a significant amount of products manufactured by us. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Industry and Company Outlook.”
Despite a protracted downturn in the manufactured housing industry, we generated income from continuing operations before income taxes of $0.3 million, $9.1 million and $17.4 million for fiscal years 2009, 2008 and 2007, respectively. We believe that our ability to maintain annual profitability from our continuing operations during the current industry downturn is attributable in significant part to efficient production, a high value product line, focused sales efforts, stringent cost control and a strong balance sheet.
Industry Overview
General.Manufactured housing provides an alternative in urban, suburban and rural areas to other forms of new low-cost housing, such as site-built housing and condominiums, and to existing housing such as pre-owned homes and apartments. According to statistics published by the Institute for Building Technology and Safety (IBTS), and the United States Department of Commerce, Bureau of the Census, for the year ended December 31, 2008, manufactured housing wholesale shipments of HUD code homes accounted for an estimated 12% of all new single-family housing starts and 15% of all new single-family homes sold.
Industry wholesale shipments of HUD code homes totaled approximately 82,000 homes in 2008 versus 96,000 homes in 2007 according to data reported by the Manufactured Housing Institute (“MHI”).
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We believe the segment of the housing market in which manufactured housing is most competitive includes consumers with household incomes under $40,000. This segment has a high representation of young single persons and young married couples, as well as seniors and retired persons. The comparatively low cost of fully-equipped manufactured housing attracts these consumers. Persons in rural areas, where fewer housing alternatives exist, and those who presently live in manufactured homes also make up a significant portion of the demand for new manufactured housing.
Protracted Industry Downturn.Since mid-1999, the manufactured housing industry has experienced a prolonged and significant downturn. This downturn has resulted in part from the fact that, beginning in 1999, consumer lenders in the sector began to tighten underwriting standards and curtail credit availability in response to higher than anticipated rates of loan defaults and significant losses upon the repossession and resale of the manufactured homes securing defaulted loans. In more recent years, the industry’s downturn was exacerbated by the aggressive financing methods utilized by developers and marketers of standard site-built homes which had the effect of diverting potential manufactured housing customers to more expensive site-built homes, the global credit crisis, and general deterioration of economic conditions. These factors have resulted in declining wholesale shipments and excess manufacturing and retail locations.
As a result of the foregoing factors, based on industry data as of the end of 2008, an estimated 68% of all industry retail locations have closed since the end of 1999 and the number of active industry manufacturing facilities has dropped by 153 plants over the same period, representing a 47% reduction. These industry conditions have adversely affected the results of operations of all of the major producers of manufactured homes, including our Company.
The principal regional markets we have targeted have also experienced a pronounced downturn. By the end of 2008, the number of manufactured housing units shipped in Arizona had declined approximately 76% from the peak in 1999. Likewise, severe declines were experienced in New Mexico and Texas, where the number of manufactured housing units shipped declined approximately 83% and 76%, respectively, by the end of 2008 from their respective peak levels in 1996 and 1998. More recently, the California manufactured housing market has suffered a significant downturn, as the number of manufactured housing units shipped has decreased 74% at the end of 2008 compared to 2005. U.S. wholesale shipments and retail sales of manufactured homes could continue to experience adverse conditions for the remainder of calendar year 2009 due to some or all of the factors described above. We expect industry sales volumes to be adversely affected until, among other factors, consumer and wholesale financing is more readily available.
Business Strategies
Our marketing strategy is to offer a line of manufactured homes that appeal to a wide range of homebuyers. Our principal focus is the mainstream market, which involves the sale of high-value homes to entry-level and move-up buyers. We also market to special niches such as sub-division developers, senior living community operations and vacation homebuyers.
Our production strategy is to develop and maintain the resources necessary to build to varied and unique customer specifications in an efficient factory production environment. This enables us to attract retailers and consumers who want the flexibility to build homes to meet their specific needs, but still seek the value created by building a home on a factory production line.
Our competitive strategy is to build homes of superior quality, offer innovative designs and floor plans, demonstrate exceptional value, and provide the engineering and technical resources to enable custom home building and to be responsive and efficient in servicing the customer after the sale. We strive to maintain a competitive advantage by reacting quickly to changes in the marketplace and to the specific needs of our retailers and consumers.
Products
Most of our homes are constructed in accordance with the National Manufactured Home Construction and Safety Standards promulgated by HUD. Approximately 62% of the homes we produced in fiscal year 2009 were HUD code homes. The remaining homes we build are primarily park model homes, which are constructed to standards approved by the American National Standards Institute, a private, non-profit organization that administers and coordinates a voluntary standardization and conformity program. We also produce modular homes, vacation cabins and commercial structures built to state and local standards.
We produce a broad range of HUD code homes under various trade names and brand names and in a variety of floor plans and price ranges. Substantially all of these homes are ranch-style homes. Our HUD code homes generally range in size from approximately 500 to 3,300 square feet. In fiscal year 2009, we produced and sold 2,603 homes, of which 1,265 were multi-section. Included in single-section production are park model homes, which are less than 400 square feet in size and are purchased primarily for use as second homes, vacation homes or retirement living and are placed in planned communities or recreational home parks.
Each home contains a living room, dining area, kitchen, one to five bedrooms and one or more bathrooms, and is equipped with central heating and hot water systems, kitchen appliances, carpeting and window treatments. Feature upgrades include fireplaces, central air conditioning, tile roofs, high ceilings, skylights, hardwood floors and cabinetry, granite countertops, and energy conservation items. We also offer a variety of structural and decorative customizations to meet the home buyer’s specifications.
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During fiscal year 2009, our average wholesale home price for a HUD code home was approximately $41,000, excluding delivery. Many of the homes we produce are sold in transactions covering both the home and the land on which it is placed. Retail sales prices of our homes, without land, generally range from $22,000 to more than $136,000, depending upon size, floor plan, features and options.
The homes we manufacture are sold under a variety of registered trademarks, including “Cavco,” “Cavco Homes,” “Sunbuilt,” “Villager,” “Sun Villa,” “Cedar Court,” “Westcourt,” “Winrock,” “Catalina,” “Cavco Gold Key Guarantee,” “Saguaro,” “Elite,” “Desert Rose,” “Sunburst,” “Cavco Cabins,” “AAA Homes,” “Litchfield Limited,” “Vantage,” “SmartBuilt” and “Cavco Home Center.”
Our manufactured homes are constructed and equipped at our manufacturing facilities. The finished home is then transported by independent trucking companies either to a retail sales center, planned community, housing development or the customer’s site. Retailers or other independent installers are responsible for placing the home on site and, in most instances, arranging for connections to utilities and providing installation and finish-out services. Although our manufactured homes are designed to be transportable, only a small percentage are ever moved from their original site after installation.
Manufacturing Operations
Our homes are constructed in plant facilities using an assembly-line process employing from 130 to 170 employees at each facility. Most of our homes are constructed in one or more sections (also known as floors or modules) on a permanently affixed steel support chassis. Each section or floor is assembled in stages beginning with the construction of the chassis, followed by the addition of other constructed and purchased components, and ending with a final quality control inspection. The efficiency of the assembly-line process and the benefits of constructing homes in a controlled factory environment enable us to produce quality homes in less time and at a lower cost per square foot than building homes on individual sites.
During fiscal year 2009, we operated three manufacturing facilities in the Phoenix, Arizona area and one in Seguin, Texas. These manufacturing facilities range from approximately 79,000 to 250,000 square feet of floor space. The production schedules for our manufacturing facilities are based on wholesale and retail orders received from buyers, which fluctuate from week to week. In general, however, our facilities are structured to operate on a one shift per day, five days per week basis, and we currently manufacture a typical home in approximately seven production days. During the fiscal quarter ended March 31, 2009, our rate of production was approximately 14 sections per day.
Manufactured housing is a regional business and the primary geographic market for a typical manufacturing facility is within a 350-mile radius. Each of our Arizona manufacturing facilities serves between 65 to 120 retailers along with a large number of one time vacation cabin purchasers. Because we produce homes to fill existing wholesale and retail orders, our manufacturing plants generally do not carry finished goods inventories, except for homes awaiting delivery.
The following table sets forth the total number of homes wholesaled from our factories and the number of manufacturing facilities which produced those homes for the fiscal years indicated:
| Year Ended March 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| Homes sold: | ||||||||||||
| Single-section | 1,338 | 1,583 | 1,528 | |||||||||
| Multi-section | 1,265 | 1,718 | 2,084 | |||||||||
| Total homes sold | 2,603 | 3,301 | 3,612 | |||||||||
| Operating manufacturing facilities at end of period | 4 | 4 | 4 | |||||||||
The principal materials used in the production of our manufactured homes include wood, wood products, aluminum, steel, gypsum wallboard, tires, fiberglass insulation, carpet, vinyl, fasteners, appliances, electrical items, windows and doors. We buy the majority of these materials from third-party manufacturers and distributors located in California, Texas and Arizona. The inability to obtain any materials used in the production of our homes, whether resulting from material shortages, destruction of supplier facilities or other events affecting production of component parts, may affect our ability to meet or maintain production requirements.
During fiscal 2009, the Company experienced generally flat pricing for materials purchased for the manufacture of homes. Prices of commodities such as aluminum, copper, and steel rose modestly. In addition materials such as carpets and vinyl products were negatively impacted by fluctuating petroleum costs, which also adversely affects delivery of all raw materials purchased by the Company.
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Our backlog of orders as of March 31, 2009 was negligible. Retailers may cancel orders prior to production without penalty. After production of a particular home has commenced, the order becomes noncancelable and the retailer is obligated to take delivery of the home. Accordingly, until production of a particular home has commenced, we do not consider our order backlog to be firm orders. Because of the seasonality of the housing market, the level of our order backlog historically declines during the winter months.
Sales and Distribution
The following table sets forth the number of homes sold by us through independent and Company-owned distribution channels during the last three fiscal years, as well as the number of independent retail outlets and Company-owned retail centers at the end of the applicable period. The distribution channels are outlined as follows:
| Year Ended March 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| Homes sold through: | ||||||||||||
| Independent retail outlets | 2,486 | 3,143 | 3,467 | |||||||||
| Company-owned retail centers | 117 | 158 | 145 | |||||||||
| Total homes sold | 2,603 | 3,301 | 3,612 | |||||||||
| Number of independent retail outlets at the end of the period | 322 | 364 | 345 | |||||||||
| Number of Company-owned retail centers at the end of the period | 6 | 7 | 7 | |||||||||
Independent Retailers.As of March 31, 2009, we had a network of 322 independent retail outlets, of which there were 108 in Arizona, 50 in Texas, 48 in California, 35 in New Mexico, 16 in Colorado, 14 in Utah, 11 in Washington, 9 in Nevada, 8 in Oklahoma, 4 in Idaho, 2 in Canada, Alaska, Maryland, Oregon, and Wisconsin and 1 in each of Illinois, Indiana, Louisiana, Michigan, Minnesota, Montana, Nebraska, Tennessee and Wyoming. As is common in the industry, our independent retailers typically sell manufactured homes produced by other manufacturers in addition to those we produce. Some independent retailers operate multiple sales outlets. Factory Direct Housing, Inc. (“FDH”) represents a group of independent retailers that affiliate to obtain improved access to inventory financing. Most FDH retailers existed as entirely independent retailers prior to their affiliation with FDH. FDH accounted for approximately 4.6%, 6.4% and 11.0% of net sales in fiscal years 2009, 2008, and 2007, respectively. No other independent retailer accounted for 10% or more of our manufacturing sales in each of the respective years in the three-year period ended March 31, 2009.
We continually seek to increase our wholesale shipments by growing sales at our existing independent retailers and by finding new independent retailers to sell our homes. We provide comprehensive sales training to retail sales associates and bring them to our manufacturing facilities for product training and to view new product designs as they are developed. These training seminars facilitate the sale of our homes by increasing the skill and knowledge of the retail sales consultants. In addition, we display our products in trade shows and support our retailers through the distribution of floor plan literature, brochures, decor boards and point of sale promotional material.
Independent retailers frequently finance a portion of their home purchases through wholesale floor plan financing arrangements. In most cases, we receive a deposit or a commitment from the retailer’s lender for each home ordered. We then manufacture the home and ship it at the retailer’s expense. Payment is due from the lender upon the acceptance by the retailer of the product. For a description of wholesale floor plan financing arrangements used by independent retailers and our obligations in connection with these arrangements, see “Financing — Wholesale Financing” below.
Company-Owned Retail Sales Centers.As of March 31, 2009, we had a total of 6 Company-owned retail centers, located in Arizona, New Mexico and Texas. Over the next 12 months, we plan to close certain Company-owned retail centers as these retail outlets have underperformed in recent years. Each of our Company-owned retail sales centers has a sales office, which is generally a factory-built structure, and a variety of model homes of various sizes, floor plans, features and prices. Customers may purchase a home from an inventory of homes maintained at the location, including a model home, or may order a home that will be built at a manufacturing facility. Our Company-owned sales centers are generally located on a main road or highway for high visibility. Model homes may be displayed in a residential setting with sidewalks and landscaping. Each sales center usually employs a manager and three or four salespersons. As of March 31, 2009, Company-owned sales centers had an average inventory of 8 new homes per location. This number of homes in inventory includes homes delivered to a consumer home site but not yet recorded as a sale. We internally finance our inventories and currently have no outstanding debt. Our Company-owned retail centers employ salespersons who are compensated through a combination of salary and commission. Retail centers do not have administrative staff, as we perform most administrative functions at our corporate headquarters.
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Warranties.We provide a limited warranty to original retail purchasers of our homes. We warrant structural components for 12 months. Nonstructural components of a cosmetic nature are warranted for 120 days, except in specific cases where state laws require longer warranty terms. Our warranty does not extend to installation and setup of the home, which is generally arranged by the retailer. Appliances, carpeting, roofing and certain other components are warranted by their original manufacturer for various lengths of time. Refer to our discussion of the Magnuson-Moss Warranty Federal Trade Commission Improvement Act under Government Regulation beginning on page 7.
Financing
Wholesale Financing.During fiscal year 2009, approximately 38% of our wholesale sales to independent retailers were purchased through wholesale floor plan financing arrangements. Under a typical floor plan financing arrangement, an independent financial institution specializing in this line of business provides the retailer with a loan for the purchase price of the home and maintains a security interest in the home as collateral. The financial institution customarily requires us, as the manufacturer of the home, to enter into a separate repurchase agreement with the financial institution under which we are obligated, upon default by the retailer and under certain other circumstances, to repurchase the financed home at declining prices over the term of the repurchase agreement (which in most cases is 18 to 24 months). The price at which we may be obligated to repurchase a home under these agreements is based upon our original invoice price plus certain administrative and shipping expenses. Our obligation under these repurchase agreements ceases upon the purchase of the home by the retail customer. The maximum amount of our contingent obligations under such repurchase agreements was approximately $18.7 million as of March 31, 2009, without reduction for the resale value of the homes.
As a result of the current credit crisis, during the third quarter of fiscal year 2009, each of the manufactured home national inventory finance companies (floor plan lenders) substantially curtailed their lending activities, and one announced its intention to exit the business. Some of our retailers have arranged or are in process of arranging to replace their floor plan financing with other sources of capital. To further support floor plan availability for our retailers, Cavco has begun to provide some of the capital used by inventory lenders to finance wholesale home purchases by retailers.
Consumer Financing.Conventional lenders provide two basic types of consumer financing in the manufactured housing industry:
| • | chattel (or home-only) loans for purchasers of a home with no real estate involved; and |
| • | real estate loans for purchasers of the home and the land on which the home is placed. |
During recent years, a number of home-only lenders have exited the market. The remaining lenders have tightened their credit standards and increased their interest rates, which has reduced the volume of new loans. In January 2002, Texas House Bill 1869 was enacted, amending the Texas Manufactured Housing Standards Act, to establish financing and acquisition procedures for retailers and consumers of manufactured homes and to provide for notification to consumers of their responsibilities before purchasing a manufactured home. The bill required, among other things, that all manufactured homes that are acquired with third-party financing in Texas, other than those placed in manufactured home rental communities or on a lot that is not titled in the name of the consumer under a deed or contract for sale, be financed with conventional financing covering both the land and home. While this legislation was subsequently repealed in September 2003, chattel financing in Texas was significantly curtailed and has not recovered.
Beginning in the late 1990s, the number of manufactured housing purchases financed with real estate loans has increased significantly. There are two types of mortgage loans: (i) conforming; and (ii) non-conforming. Conforming loans conform to requirements imposed by the Federal Housing Administration (FHA), Veteran’s Affairs (VA), Freddie Mac, and Fannie Mae. Generally, conforming loans require foundations installed in accordance with specified Federal requirements and the borrower must meet certain established criteria. Non-conforming loans are financed by a major bank or lending institution, which may not require a specific foundation type and may have more flexible criteria for the borrower.
The American Housing Rescue and Foreclosure Prevention Act (the “Act”) was enacted in 2008 to provide assistance by way of legislation for the housing industry, including the manufactured housing industry. Among other things, the Act provides for increased loan limits for chattel (home-only) loans to $69,678, up 43% from the previous limit of $48,600 set in 1992. Chattel loans have languished in recent years and the increased loan limit is meant to broaden opportunities for prospective homeowners.
The American Recovery and Reinvestment Act of 2009 includes an $8,000 tax credit for a limited period to homebuyers who have not owned a home in the previous 3 years, and is subject to other conditions. In addition to federal programs, California and certain other states have begun to adopt incentives to promote the purchase of new homes in their states. These and other regulatory changes may provide some stimulus going forward; however, given consumer sentiment about the state of the economy, we are cautious in developing expectations of any positive results from the new legislation.
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Competition
The manufactured housing industry is highly competitive at both the manufacturing and retail levels, with competition based upon several factors, including price, product features, reputation for service and quality, depth of field inventory, promotion, merchandising and the terms of retail customer financing. We compete with other producers of manufactured homes, as well as companies offering for sale homes repossessed from wholesalers or consumers. In addition, manufactured homes compete with new and existing site-built homes, as well as apartments, townhouses and condominiums.
In addition to us, there are a number of other manufacturers competing for a significant share of the manufactured housing market in the Arizona, California, New Mexico and Texas areas, including Palm Harbor Homes, Inc., Fleetwood Enterprises, Inc., Clayton Homes, Inc., Champion Enterprises, Inc. and Skyline Corporation. Based on retail sales in calendar year 2008, we believe that our business accounted for an approximate 38% share of the Arizona market area, an approximate 8% share of the California market area, an approximate 8% share of the New Mexico market area, an approximate 5% share of the Texas market area, and smaller shares of market areas in the other states in which we do business. We do not view any of our competitors as being dominant in the industry as a whole or the principal markets in which we compete, although certain of our competitors possess substantially greater financial, manufacturing, distribution and marketing resources.
Government Regulation
Our manufactured homes are subject to a number of federal, state and local laws, codes and regulations. Construction of manufactured housing is governed by the National Manufactured Housing Construction and Safety Standards Act of 1974, as amended, or the Home Construction Act. In 1976, HUD issued regulations under the Home Construction Act establishing comprehensive national construction standards. The HUD regulations, known collectively as the Federal Manufactured Home Construction and Safety Standards, cover all aspects of manufactured home construction, including structural integrity, fire safety, wind loads, thermal protection and ventilation. Such regulations preempt conflicting state and local regulations on such matters, and are subject to periodic change. Our manufacturing facilities, and the plans and specifications of the HUD code manufactured homes they produce, have been approved by a HUD-certified inspection agency. Further, an independent HUD-certified third-party inspector regularly reviews our manufactured homes for compliance with the HUD regulations during construction. Failure to comply with applicable HUD regulations could expose us to a wide variety of sanctions, including mandated closings of our manufacturing facilities. We believe our manufactured homes are in substantial compliance with all present HUD requirements. Our park model homes are not subject to HUD regulations, but we believe that our park model homes meet all present standards of the American National Standards Institute.
Manufactured and site-built homes are all typically built with wood products that contain formaldehyde resins. HUD regulates the allowable concentrations of formaldehyde in certain products used in manufactured homes and requires manufacturers to warn purchasers as to formaldehyde-associated risks. The Environmental Protection Agency, or EPA, and other governmental agencies have in the past evaluated the effects of formaldehyde. We use materials in our manufactured homes that meet HUD standards for formaldehyde emissions and believe we comply with HUD and other applicable government regulations in this regard.
The transportation of manufactured homes on highways is subject to regulation by various federal, state and local authorities. Such regulations may prescribe size and road use limitations and impose lower than normal speed limits and various other requirements.
We have leased space for our manufacturing facility in Goodyear, Arizona since 1993. The leased premises is part of what is referred to as the Phoenix-Goodyear Airport (South) Superfund Site (PGAS), which was designated as a National Priorities List, or NPL, site under the authority of the Comprehensive Environmental Response, Compensation, and Liability Act in 1983. The reason for the site’s NPL designation was because of extensive soil and groundwater contamination (trichloroethylene or TCE, chromium and cadmium) that resulted from historic manufacturing at the Goodyear Tire and Rubber Company and the United States Department of Defense.
Pursuant to a consent decree entered into with the United States Environmental Protection Agency (EPA), the Goodyear Tire and Rubber Company, is responsible for taking certain remedial actions at the PGAS site. In September 2005, the EPA completed its five-year review of the PGAS site and reported that the contaminant concentrations in groundwater at the site have been reduced, and treated groundwater from the treatment systems has met cleanup goals throughout that period of operation. Nonetheless, the groundwater still contains contaminant levels above specified cleanup goals as the remediation progresses. The EPA’s five-year review identified several issues regarding the ongoing effectiveness of the remedy and several new issues regarding possible presence of trace metals, vapor intrusion, institutional controls, ecological risks, and migration, all of which the EPA is addressing.
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Our lease specifically refers to the consent decree with the EPA and provides that as between our Landlord (now JRC Goodyear, LLC) and us, the Landlord will be responsible for any liabilities resulting from the existing contamination at the site and that the Landlord will indemnify, defend, and hold us, our directors, our officers, our employees, our agents, and our successors, harmless for such liabilities. During the sixteen years that we have conducted manufacturing operations at the Goodyear, Arizona facility, we have never received any inquiry or notice from the EPA or the Arizona Department of Environmental Quality suggesting that we may be liable for any costs associated with the remediation of the PGAS site. We do not have any underground storage tanks at our Goodyear, Arizona facility.
Our manufactured homes are subject to local zoning and housing regulations. In certain cities and counties in areas where our homes are sold, local governmental ordinances and regulations have been enacted which restrict the placement of manufactured homes on privately-owned land or which require the placement of manufactured homes in manufactured home communities. Such ordinances and regulations may adversely affect our ability to sell homes for installation in communities where they are in effect. A number of states have adopted procedures governing the installation of manufactured homes. Utility connections are subject to state and local regulations which must be complied with by the retailer or other person installing the home.
Certain warranties we issue may be subject to the Magnuson-Moss Warranty Federal Trade Commission Improvement Act, which regulates the descriptions of warranties on consumer products. In the case of warranties subject to the Magnuson-Moss Warranty Act, the Company is subject to a number of additional regulatory requirements. For example, warranties that are subject to the Act must be included in a single easy-to-read document that is generally made available prior to purchase. The Act also prohibits certain attempts to disclaim or modify implied warranties and the use of deceptive or misleading terms. A claim for a violation of the Act can be the subject of an action in federal court in which consumers may be able to recover attorneys’ fees. The description and substance of our warranties are also subject to a variety of state laws and regulations. A number of states, including Arizona and New Mexico, require manufactured home producers to post bonds to ensure the satisfaction of consumer warranty claims.
Governmental authorities have the power to enforce compliance with their 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.
Employees
As of March 31, 2009, we had approximately 660 employees. We believe that our relationship with our employees is good.
Available Information
We make available free of charge on or through our internet site,www.cavco.com, the following filings as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC: the Annual Report on Form 10-K, the Quarterly Reports on Form 10-Q, the Current Reports on Form 8-K and amendments to those Reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934.
ITEM 1A. RISK FACTORS
Our business involves a number of risks and uncertainties. You should carefully consider the following risks, together with the information provided elsewhere in this Annual Report. The risks described below are not the only ones facing us. Additional risks that are currently unknown to us or that we currently consider to be immaterial may also impair our business or adversely affect our financial condition or results of operations.
We operate in an industry that is currently experiencing a prolonged and significant downturn
Since mid-1999, the manufactured housing industry has experienced a prolonged and significant downturn. This downturn has resulted in part from the fact that, beginning in 1999, consumer lenders in the sector began to tighten underwriting standards and curtail credit availability in response to higher than anticipated rates of loan defaults and significant losses upon the repossession and resale of manufactured homes securing defaulted loans. In more recent years, the industry’s downturn was exacerbated by the aggressive financing methods utilized by developers and marketers of standard site-built homes which had the effect of diverting potential manufactured housing customers to more expensive site-built homes, the global credit crisis, and general deterioration of economic conditions. These factors have resulted in declining wholesale shipments and excess manufacturing and retail locations.
As a result of the foregoing factors, based on industry data as of the end of 2008, an estimated 68% of all industry retail locations have closed since the end of 1999 and the number of active industry manufacturing facilities has dropped by 153 plants over the same period, representing a 47% reduction.
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The availability of consumer financing for the purchase of manufactured homes continues to be constrained, as discussed below. Although it is difficult to predict future industry conditions, the current market environment tends to indicate that a sustained recovery in the manufactured housing industry is unlikely to occur in the near term.
If current industry conditions continue or get materially worse, we may be required to take steps in an attempt to mitigate the effect of unfavorable industry conditions, such as the closure of facilities or consolidation of existing operations. These steps could impair our ability to conduct our business in a manner consistent with past practice and could make it more difficult for us to expand our operations if and when industry conditions improve. Furthermore, some of these steps could lead to fixed asset impairment charges and goodwill impairment charges.
Tightened credit standards and curtailed lending activity by home-only lenders have contributed to a constrained consumer financing market
Consumers who buy our manufactured homes have historically secured retail financing from third-party lenders. The availability, terms and costs of retail financing depend on the lending practices of financial institutions, governmental policies and economic and other conditions, all of which are beyond our control. A consumer seeking to finance the purchase of a manufactured home without land will generally pay a higher interest rate and have a shorter loan maturity than a consumer seeking to finance the purchase of land and the home. In addition, home-only financing is at times more difficult to obtain than financing for site-built homes. Since 1999, home-only lenders have tightened the credit underwriting standards and increased interest rates for loans to purchase manufactured homes, which has reduced lending volumes which has negatively impacted our sales. In addition, most of the national lenders who have historically provided home-only loans have exited this sector of the industry. Conseco Finance was historically one of the largest originators of home-only loans in the manufactured housing industry. In December 2002, Conseco Inc., the parent company of Conseco Finance Corp., filed for bankruptcy protection and ceased its lending activities. In May 2004, JPMorgan Chase Bank N.A., the lender with the largest loan origination volume in the home-only financing market at that time, announced it was ceasing its manufactured housing lending activities. In March 2008, Origen Financial, Inc. (“Origen”) announced that it was suspending originations of manufactured home loans as a result of unfavorable conditions in the secondary market for its loans. Some of our retailers have utilized Origen to finance consumer loans. Another major lender, 21st Mortgage Corporation, citing unreliable and inadequate sources of funding, announced in January 2009 that it was significantly curtailing its retail lending program. Remaining retail lenders such as Triad Financial, US Bank, and CU Factory Built Lending have tightened their loan underwriting standards. If other lenders do not absorb the volume of loans previously made by these lenders, we could experience retail and manufacturing sales declines.
The availability of wholesale financing for industry retailers is limited due to a reduced number of floor plan lenders and reduced lending limits
Manufactured housing retailers generally finance their inventory purchases with wholesale floor plan financing provided by lending institutions. The availability of wholesale financing is significantly affected by the number of floor plan lenders and their lending limits. During the past seven years, a substantial number of wholesale lenders have exited the industry or curtailed their floor plan operations. Conseco Finance was historically the largest floor plan lender, previously providing about 25% of the industry’s wholesale financing. Conseco Finance discontinued approving and funding new floor plan loan requests in April 2002 and filed for bankruptcy protection in December 2002. With Conseco’s exit, Deutsche Financial Services was the largest remaining floor plan lender, providing approximately 20% of the industry’s wholesale financing. Deutsche Financial Services discontinued approving and funding new floor plan loan requests in November 2002 and proceeded to liquidate its existing floor plan receivables. In recent years, the Company’s independent retailers have relied primarily on GE Commercial Distribution Finance, Textron Financial Corporation and 21st Mortgage Corporation, national lending institutions that have specialized in providing wholesale floor plan financing to manufactured housing retailers. As a result of the current credit crisis, during the third quarter of fiscal year 2009, each of these remaining national floor plan lenders substantially curtailed their lending activities, and Textron Financial Corporation announced its intention to exit the business. We are concerned that floor plan financing providers could further reduce their levels of floor plan lending. Reduced availability of floor plan lending may affect the inventory levels of our independent retailers, the number of retail sales center locations and related wholesale demand, and may also have an adverse effect on the availability of and our access to capital on an ongoing basis.
Our operating results could be affected by geographic concentration and declining housing demand
As a participant in the homebuilding industry, we are subject to market forces beyond our control. These market forces include employment and employment growth, interest rates, land availability and development costs, apartment vacancy levels, and the health of the general economy. Unfavorable changes in any of the above factors or other issues could have an adverse effect on our sales and earnings. In addition, our sales are largely concentrated in Arizona and California, which have experienced significant declines in industry shipments in calendar years 2006, 2007, 2008 and early 2009.
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We have incurred net losses in prior periods and there can be no assurance that we will generate income in the future
Although we generated income from continuing operations during the past eight fiscal years, we have incurred net losses in prior years. Net losses in these years were attributable in substantial part to the downturn affecting the manufactured housing industry, which is discussed in detail below. The likelihood that we will generate net income in the future must be considered in light of the difficulties facing the manufactured housing industry as a whole, economic conditions, the competitive environment in which we operate and the other risks and uncertainties discussed in this Annual Report. There can be no assurance that we will generate net income in the future.
A write-off of all or part of our goodwill could adversely affect our operating results and net worth
A substantial portion of our total assets at March 31, 2009 consisted of goodwill, all of which is attributable to our manufacturing operations. In particular, goodwill accounted for approximately 38% of our total assets at March 31, 2009. Effective in fiscal year 2002, we adopted Statement of Financial Accounting Standards (“SFAS”) No. 142,Goodwill and Other Intangible Assets. As a result, we no longer amortize goodwill. Instead, we review goodwill at least annually to determine whether it has become impaired. If goodwill has become impaired, we charge the impairment as an expense in the period in which the impairment occurred. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies” and Note 1 to our Consolidated Financial Statements. Our goodwill could be impaired if developments affecting our manufacturing operations or the markets in which we produce manufactured homes lead us to conclude that the cash flows we expect to derive from our manufacturing operations will be substantially reduced. A write off of all or part of our goodwill could adversely affect our results of operations and financial condition.
The cyclical and seasonal nature of the manufactured housing industry causes our revenues and operating results to fluctuate, and we expect this cyclicality and seasonality to continue in the future
The manufactured housing industry is highly cyclical and seasonal and is influenced by many national and regional economic and demographic factors including the availability of consumer financing for homebuyers, the availability of wholesale financing for retailers, seasonality of demand, consumer confidence, interest rates, demographic and employment trends, income levels, housing demand, general economic conditions, including inflation and recessions, and the availability of suitable home sites.
As a result of the foregoing economic, demographic and other factors, our revenues and operating results fluctuate, and we expect them to continue to fluctuate in the future. Moreover, we may experience operating losses during cyclical downturns in the manufactured housing market.
Our liquidity and ability to raise capital may be limited
We may need to obtain debt or additional equity financing in the future. The type, timing and terms of the financing selected by us will depend on, among other things, our cash needs, the availability of other financing sources and prevailing conditions in the financial markets. There can be no assurance that any of these sources will be available to us at any time or that they will be available on satisfactory terms.
We have contingent repurchase obligations related to wholesale financing provided to industry retailers
In accordance with customary business practice in the manufactured housing industry, we have entered into repurchase agreements with various financial institutions and other credit sources who provide floor plan financing to industry retailers, which provide that we will be obligated, under certain circumstances, to repurchase homes sold to retailers in the event of a default by a retailer in its obligation to such credit sources. Under these agreements, we have agreed to repurchase homes at declining prices over the term of the agreement (which in most cases is 18 to 24 months). The maximum amount of our contingent obligations under such repurchase agreements was approximately $18.7 million as of March 31, 2009, without reduction for the resale value of the homes. We may be required to honor contingent repurchase obligations in the future and may incur additional expense as a consequence of these repurchase agreements.
The manufactured housing industry is highly competitive, and competition may increase the adverse effects of industry conditions
The manufactured housing industry is highly competitive. Competition at both the manufacturing and retail levels is based upon several factors, including price, product features, reputation for service and quality, merchandising, terms of retailer promotional programs and the terms of retail customer financing. Numerous companies produce manufactured homes in our markets. In addition, our homes compete with repossessed homes that are offered for sale in our markets. A number of our manufacturing competitors also have their own retail distribution systems and consumer finance and insurance operations. The ability to offer consumer finance and insurance products may provide some competitors with an advantage. In addition, there are many independent manufactured housing retail locations in most areas where we have retail operations. We believe that where wholesale floor plan financing is available, it is relatively easy for new retailers to enter into our markets as competitors. In addition, our products compete with other forms of low to moderate-cost housing, including new and existing site-built homes, apartments, townhouses and condominiums. If we are unable to compete effectively in this environment, our retail sales and wholesale shipments could be reduced.
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If we are unable to establish or maintain relationships with independent retailers who sell our homes, our sales could decline
During fiscal year 2009, approximately 96% of our wholesale shipments of manufactured homes were made to independent retail locations. As is common in the industry, independent retailers may sell homes produced by competing manufacturers. We may not be able to establish relationships with new independent retailers or maintain good relationships with independent retailers that sell our homes. Even if we do establish and maintain relationships with independent retailers, these retailers are not obligated to sell our homes exclusively, and may choose to sell our competitors’ homes instead. The independent retailers with whom we have relationships can cancel these relationships on short notice. In addition, these retailers may not remain financially solvent, as they are subject to industry, economic, demographic and seasonal trends similar to those faced by us. If we do not establish and maintain relationships with solvent independent retailers in one or more of our markets, sales in those markets could decline.
Our results of operations can be adversely affected by labor shortages and the pricing and availability of raw materials
The homebuilding industry has from time to time experienced labor shortages and other labor related issues. A number of factors may adversely affect the labor force available to us and our subcontractors in one or more of our markets including high employment levels, construction market conditions and government regulation which include laws and regulations related to workers’ health and safety, wage and hour practices and immigration. An overall labor shortage or a lack of skilled labor could cause significant increases in costs or delays in construction of homes which could have a material adverse effect upon our sales and results of operations.
Our results of operations can be affected by the pricing and availability of raw materials. Although we attempt to increase the sales prices of our homes in response to higher materials costs, such increases typically lag behind the escalation of materials costs. Sudden increases in price and lack of availability of raw materials can be caused by natural disaster or other market forces, as has occurred in recent years. Although we have not experienced any production halts, severe or prolonged shortages of some of our most important building materials, which include wood and wood products, gypsum wallboard, steel, insulation, and other petroleum-based products, have occurred. There can be no assurance that sufficient supplies of these and other raw materials will continue to be available to us.
If the manufactured housing industry is not able to secure favorable local zoning ordinances, our sales could decline and our business could be adversely affected
Manufactured housing communities and individual home placements are subject to local zoning ordinances and other local regulations relating to utility service and construction of roadways. In the past, property owners often have resisted the adoption of zoning ordinances permitting the location of manufactured homes in residential areas, which we believe has restricted the growth of the industry. Manufactured homes may not achieve widespread acceptance and localities may not adopt zoning ordinances permitting the development of manufactured home communities. If the manufactured housing industry is unable to secure favorable local zoning ordinances, our sales could decline and our business, results of operations and financial condition 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
We are dependent to a significant extent upon the efforts of our executive officers, particularly Joseph H. Stegmayer, our Chief Executive Officer, and Daniel L. Urness, our Chief Financial Officer. The loss of the services of one or more of our executive officers could impair our ability to execute our business strategy and have a material adverse effect upon our business, financial condition and results of operations. We currently have no key man life insurance for our executive officers.
Certain provisions of our organizational documents could delay or make more difficult a change in control of our Company
Certain provisions of our restated certificate of incorporation and restated bylaws could delay or make more difficult transactions involving a change of control of our Company, and may have the effect of entrenching our current management or possibly depressing the market price of our common stock. For example, our restated certificate of incorporation and restated bylaws authorize blank series preferred stock, establish a staggered board of directors and impose certain procedural and other requirements for stockholder proposals. Furthermore, the fact that income taxes could be imposed as a result of ownership changes occurring in conjunction with the distribution may have the effect of delaying or making more difficult certain transactions involving a change of control of our Company.
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Volatility of Stock Price
The price of our common stock may fluctuate widely, depending upon a number of factors, many of which are beyond our control. These factors include the perceived prospects of our business and the manufactured housing industry as a whole; differences between our actual financial and operating results and those expected by investors and analysts; changes in analysts’ recommendations or projections; changes affecting the availability of financing in the wholesale and consumer lending markets; actions or announcements by competitors; changes in the regulatory environment in which we operate; and changes in general economic or market conditions. In addition, stock markets generally experience significant price and volume volatility from time to time which may adversely affect the market price of our common stock for reasons unrelated to our performance.
Deterioration in economic conditions in general and continued turmoil in the credit markets could reduce our earnings and financial condition.
Deterioration in global economic conditions and continued turmoil in the credit markets could have a negative impact on our business. Among other things, unfavorable changes in employment levels, job growth, consumer confidence and income, and interest rates may further reduce demand for our products, which could negatively affect our business, results of operations, and financial condition. Unprecedented contraction in the credit markets and the financial services industry have occurred recently, characterized by the bankruptcy, failure or consolidation of various financial institutions and extraordinary intervention from the Federal government. These factors could have an adverse affect on the availability of financing to our customers, causing our revenues to decline.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
We own or lease and operate three manufacturing facilities in the Phoenix, Arizona area and one manufacturing plant in Seguin, Texas. During May 2009, the Company initiated a plan to move its park model and vacation cabin manufacturing operations from its Specialty plant to a second production line at its Litchfield facility. This move will provide greater capabilities for the production of park models, cabins, and other specialty buildings, create improved overall operational efficiencies at the Litchfield factory, as well as reduce overhead expenses. Except in the case of the Litchfield plant, we own the land on which these facilities are located. We also own substantially all of the machinery and equipment used at these facilities. We believe that these facilities are adequately maintained and suitable for the purposes for which they are used. We also own approximately 30 acres of land in Phoenix, Arizona, which is the intended site of a future manufacturing facility. The following table sets forth certain information with respect to our active manufacturing facilities:
| Date of | ||||||||||||
| Commencement | Owned / | Square | ||||||||||
| Location | of Operations | Leased | Feet | |||||||||
| Texas plant — Seguin, Texas | 2006 | Owned | 129,000 | |||||||||
| Litchfield plant — Phoenix, Arizona (1) | 1993 | Leased | 250,000 | |||||||||
| Durango plant — Phoenix, Arizona | 1978 | Owned | 79,000 | |||||||||
| Specialty plant — Phoenix, Arizona | 1972 | Owned | 94,000 | |||||||||
| (1) | This lease expires in February 2013. |
Our Company-owned retail centers generally range in size from one acre to five acres. Except for our Albuquerque, NM retail center, all of these locations are leased by us. Over the next 12 months, we plan to close less than one-half of our remaining Company-owned retail centers. The following table sets forth our 6 current Company-owned retail centers by location.
| Owned / | Lease Term | |||||||
| Location | Leased | Expiration | ||||||
| Mesa, AZ (1) | Leased | November 30, 2009 | ||||||
| Tucson, AZ (2) (3) | Leased | February 17, 2010 | ||||||
| Yuma, AZ (2) (3) | Leased | February 17, 2010 | ||||||
| New Braunfels, TX (1) (3) | Leased | September 30, 2009 | ||||||
| Porter, TX (1) | Leased | April 30, 2012 | ||||||
| Albuquerque, NM | Owned | |||||||
| (1) | The Company has early termination options ranging from 3 to 6 months for these leases. | |
| (2) | The Company has purchase options for these leased properties. | |
| (3) | The Company has options to renew these leases. |
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We also lease approximately 11,000 square feet of office space in Phoenix, Arizona for our corporate headquarters. Our corporate headquarters lease is scheduled to expire in 2012 but is cancelable with six months notice after August 1, 2009.
ITEM 3. LEGAL PROCEEDINGS
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 and warranty, product liability, and personal injury. Although litigation is inherently uncertain, based on past experience and the information currently available, our management does not believe that the currently pending and threatened litigation or claims will have a material adverse effect on the Company’s consolidated financial position 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
SUPPLEMENTAL ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT (See Item 10 of Part III of this Report)
The following is an alphabetical listing of our executive officers as of May 8, 2009; as such term is defined under the rules and regulations of the Securities and Exchange Commission. Officers are generally elected by the Board of Directors at its meeting immediately following our annual stockholders’ meeting, with each officer serving until a successor has been elected and qualified. There is no family relationship between these officers.
| Name | Age | Positions with Cavco or Business Experience | ||||
| Joseph H. Stegmayer | 58 | Chairman of the Board, Chief Executive Officer and President since March 2001; President of Centex Manufactured Housing Group, LLC from September 2000 to June 2003; President - Retail Operations and Chief Financial Officer of Champion Enterprises, Inc. from January 1998 to September 2000; President, Vice Chairman and Chairman of the Executive Committee of Clayton Homes, Inc. from 1993 to January 1998 | ||||
| Daniel L. Urness | 40 | Vice President, Chief Financial Officer, Treasurer since January 2006; Interim Chief Financial Officer from August 2005 to January 2006; Corporate Controller from May 2005 to August 2005; Financial Consultant from June 2002 to May 2005; Controller from May 1999 to June 2002; Manager and staff with Deloitte & Touche, LLP from September 1993 to May 1999 | ||||
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PART II
ITEM 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The Company’s common stock is traded on the NASDAQ Global Select Market under the symbol “CVCO”. The following table sets forth, for each of the periods indicated, the reported high and low closing sale prices per share on the NASDAQ for the Company’s common stock.
| Closing Sales Price | ||||||||
| High | Low | |||||||
| Year ended March 31, 2009 | ||||||||
| Fourth Quarter | $ | 26.69 | $ | 19.17 | ||||
| Third Quarter | 36.15 | 21.90 | ||||||
| Second Quarter | 37.59 | 30.68 | ||||||
| First Quarter | 40.24 | 32.73 | ||||||
| Year ended March 31, 2008 | ||||||||
| Fourth Quarter | $ | 37.62 | $ | 28.65 | ||||
| Third Quarter | 39.47 | 28.10 | ||||||
| Second Quarter | 39.98 | 33.15 | ||||||
| First Quarter | 38.64 | 33.86 | ||||||
As of May 8, 2009, the Company had 973 stockholders of record and approximately 4,490 beneficial holders of its common stock, based upon information in securities position listings by registered clearing agencies upon request of the Company’s transfer agent.
We do not expect to pay any dividends on our common stock in the foreseeable future. The payment of dividends to our stockholders is subject to the discretion of our board of directors, and various factors may prevent us from paying dividends. Such factors include our cash requirements and liquidity and the requirements of state corporate and other laws.
Equity Compensation Plan Table
Information concerning equity compensation plans is included in Part III, Item 12, in this Annual Report.
Issuer Purchases of Equity Securities
In January 2008, we announced that our Board of Directors approved a stock repurchase program, authorizing an expenditure of up to $10 million to repurchase shares of our outstanding common stock. The purchases may be made in the open market or in privately negotiated transactions in compliance with applicable securities laws and other legal requirements. The level of purchase activity is subject to market conditions and other investment opportunities. The stock repurchase program does not obligate us to acquire any particular amount of common stock and may be suspended or discontinued at any time. The stock repurchase program will be funded using our available cash and short-term investments. No repurchases have been made under this program to date.
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Performance Graph
The following graph compares the yearly change in the cumulative total stockholder return on Cavco common stock during the five fiscal years ended March 31, 2009 with the NASDAQ index composite and a peer group composed of companies with businesses in one or more of Cavco’s primary lines of business: the production and sale of manufactured homes. The companies comprising the peer group are weighted by their respective market capitalization and include the following: Cavalier Homes, Inc. Champion Enterprises, Inc., Fleetwood Enterprises, Inc., Liberty Homes, Inc. (Class A Common Stock), Nobility Homes, Inc., Palm Harbor Homes, Inc. and Skyline Corporation. The comparison assumes $100 (with reinvestment of all dividends) was invested on March 31, 2004 in Cavco common stock and in each of the foregoing indices.
CAVCO INDUSTRIES, INC.
| 3/31/2004 | 3/31/2005 | 3/31/2006 | 3/31/2007 | 3/31/2008 | 3/31/2009 | |||||||||||||||||||
CAVCO INDUSTRIES INC | 100 | $ | 131 | $ | 264 | $ | 190 | $ | 190 | $ | 128 | |||||||||||||
NASDAQ INDEX COMPOSITE | 100 | $ | 100 | $ | 118 | $ | 123 | $ | 115 | $ | 76 | |||||||||||||
PEER GROUP | 100 | $ | 86 | $ | 117 | $ | 80 | $ | 62 | $ | 13 | |||||||||||||
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ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected consolidated financial data regarding Cavco Industries, Inc. for the fiscal years indicated. The data set forth below should be read in conjunction with, and is qualified in its entirety by reference to, the information presented in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Consolidated Financial Statements and Notes thereto included elsewhere in this Annual Report.
| Year Ended March 31, | ||||||||||||||||||||
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
| (Dollars in thousands, except per share data) | ||||||||||||||||||||
Income Statement Data: | ||||||||||||||||||||
| Net sales | $ | 105,362 | $ | 141,914 | $ | 169,114 | $ | 189,503 | $ | 157,435 | ||||||||||
| Cost of sales | 94,591 | 121,538 | 138,813 | 151,143 | 127,916 | |||||||||||||||
| Gross profit | 10,771 | 20,376 | 30,301 | 38,360 | 29,519 | |||||||||||||||
| Selling, general and administrative expenses | 11,213 | 13,825 | 15,311 | 16,367 | 14,245 | |||||||||||||||
| (Loss) income from operations | (442 | ) | 6,551 | 14,990 | 21,993 | 15,274 | ||||||||||||||
| Interest income | 764 | 2,539 | 2,387 | 1,479 | 532 | |||||||||||||||
| Income from continuing operations before income taxes | 322 | 9,090 | 17,377 | 23,472 | 15,806 | |||||||||||||||
| Income tax benefit (expense) | 136 | (2,778 | ) | (5,962 | ) | (8,675 | ) | (6,229 | ) | |||||||||||
| Income from continuing operations | 458 | 6,312 | 11,415 | 14,797 | 9,577 | |||||||||||||||
| Income from discontinued retail operations | — | — | 134 | 252 | 550 | |||||||||||||||
| Net income | $ | 458 | $ | 6,312 | $ | 11,549 | $ | 15,049 | $ | 10,127 | ||||||||||
| Net income per share (basic): | ||||||||||||||||||||
| Continuing operations | $ | 0.07 | $ | 0.98 | $ | 1.79 | $ | 2.34 | $ | 1.52 | ||||||||||
| Discontinued operations | — | — | 0.02 | 0.04 | 0.09 | |||||||||||||||
| Net income | $ | 0.07 | $ | 0.98 | $ | 1.81 | $ | 2.38 | $ | 1.61 | ||||||||||
| Net income per share (diluted): | ||||||||||||||||||||
| Continuing operations | $ | 0.07 | $ | 0.95 | $ | 1.72 | $ | 2.19 | $ | 1.46 | ||||||||||
| Discontinued operations | — | — | 0.02 | 0.04 | 0.08 | |||||||||||||||
| Net income | $ | 0.07 | $ | 0.95 | $ | 1.74 | $ | 2.23 | $ | 1.54 | ||||||||||
| Weighted average shares outstanding: | ||||||||||||||||||||
| Basic | 6,487,665 | 6,427,264 | 6,363,368 | 6,318,070 | 6,288,730 | |||||||||||||||
| Diluted | 6,692,932 | 6,664,111 | 6,629,580 | 6,746,356 | 6,557,819 | |||||||||||||||
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| March 31, | ||||||||||||||||||||
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
| (In thousands, except per share data) | ||||||||||||||||||||
Balance Sheet Data: | ||||||||||||||||||||
| Cash and cash equivalents | $ | 70,557 | $ | 73,610 | $ | 12,976 | $ | 15,122 | $ | 46,457 | ||||||||||
| Short-term investments | 4,464 | — | 50,900 | 42,900 | — | |||||||||||||||
| Restricted cash | 244 | 330 | 339 | 1,223 | 1,028 | |||||||||||||||
| Accounts receivable | 6,234 | 10,093 | 8,107 | 11,568 | 7,545 | |||||||||||||||
| Inventories | 9,333 | 11,293 | 13,464 | 12,733 | 10,262 | |||||||||||||||
| Prepaid expenses and other current assets | 4,160 | 1,839 | 2,273 | 1,446 | 1,202 | |||||||||||||||
| Deferred income taxes | 3,434 | 4,033 | 3,930 | 4,040 | 3,610 | |||||||||||||||
| Total current assets | 98,426 | 101,198 | 91,989 | 89,032 | 70,104 | |||||||||||||||
| Property, plant and equipment — net | 12,859 | 12,706 | 12,802 | 12,344 | 7,472 | |||||||||||||||
| Goodwill | 67,346 | 67,346 | 67,346 | 67,346 | 67,346 | |||||||||||||||
| Total assets | $ | 178,631 | $ | 181,250 | $ | 172,137 | $ | 168,722 | $ | 144,922 | ||||||||||
| Total current liabilities | $ | 14,492 | $ | 20,152 | $ | 21,285 | $ | 32,653 | $ | 27,522 | ||||||||||
| Deferred income taxes | 16,099 | 14,747 | 12,760 | 11,040 | 9,090 | |||||||||||||||
| Total stockholders’ equity | 148,040 | 146,351 | 138,092 | 125,029 | 108,310 | |||||||||||||||
| Total liabilities and stockholders’ equity | $ | 178,631 | $ | 181,250 | $ | 172,137 | $ | 168,722 | $ | 144,922 | ||||||||||
Other Data: | ||||||||||||||||||||
| Capital expenditures — continuing operations | $ | 986 | $ | 689 | $ | 1,150 | $ | 5,795 | $ | 575 | ||||||||||
| Depreciation — continuing operations | $ | 817 | $ | 785 | $ | 692 | $ | 923 | $ | 1,053 | ||||||||||
The selected financial data set forth above includes the accounts of Cavco and its wholly-owned subsidiary, CRG Holdings, LLC.
On January 6, 2005, our Board of Directors authorized a 2-for-1 split of our common stock in the form of a 100% stock dividend. The dividend was paid on January 31, 2005 to stockholders of record as of January 18, 2005. All information presented in the selected consolidated financial data set forth above is presented as if this stock split had been completed as of the beginning of the applicable period.
The selected financial data set forth above may not be indicative of our future performance.
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Introduction
The following should be read in conjunction with the Company’s Consolidated Financial Statements and the related Notes that appear in Part IV of this Report. References to “Note” or “Notes” refer to the Notes to the Company’s Consolidated Financial Statements.
Overview
Cavco is the largest producer of manufactured homes in Arizona and the 9th largest producer of HUD code manufactured homes in the United States, based on 2007 total home production data published by Manufactured Home Merchandiser magazine. The Company is also a leading producer of park model homes and vacation cabins in the United States.
Headquartered in Phoenix, Arizona, the Company designs and produces manufactured homes which are sold to a network of retailers located primarily in the Southwestern and South Central United States. As of March 31, 2009, the Company operated three homebuilding facilities located in Arizona and one in Texas. During May 2009, the Company initiated a plan to move its park model and vacation cabin manufacturing operations from its Specialty plant to a second production line at its Litchfield facility. This move will provide greater capabilities for the production of park models, cabins, and other specialty buildings, create improved overall operational efficiencies at the Litchfield factory, as well as reduce overhead expenses. The retail segment of the Company operated six retail sales locations in Arizona, New Mexico and Texas which offer homes produced by the Company to retail customers. Management has plans to close certain of these retail locations and does not anticipate that the closure of any of our retail outlets will materially affect the operations of our manufacturing segment. Homes produced by the Company are also sold through a network of 322 independent retail outlets in 23 states and Canada.
Industry and Company Outlook
The manufactured housing industry is currently operating at levels well below the historic highs reached in the late 1990’s. According to the Manufactured Housing Institute, the industry had 82,000 wholesale home shipments in 2008 compared to a peak of 373,000 homes ten years earlier in 1998. Based on industry data as of the end of 2008, an estimated 68% of all industry retail locations have closed since the end of 1999 and the number of active industry manufacturing facilities has dropped by 153 plants over the same period, representing a 47% reduction.
Our principal regional markets have also experienced a pronounced downturn. By the end of 2008, the number of manufactured housing units shipped in Arizona had declined approximately 76% from the peak in 1999. Likewise, severe declines were experienced in New Mexico and Texas, where the number of manufactured housing units shipped declined approximately 83% and 76%, respectively, by the end of 2008 from their respective peak levels in 1996 and 1998. More recently, the California manufactured housing market has suffered a significant downturn, as the number of manufactured housing units shipped had decreased by 74% at the end of 2008 compared to 2005.
One of the major contributing factors to the contraction of the industry has been the lack of availability of retail financing. Until 1999, consumer loans for manufactured homes were readily obtainable from a variety of lenders. At that time, consumer lenders began to tighten underwriting standards and curtail credit availability in response to higher than anticipated rates of loan defaults and significant losses upon the repossession and resale of manufactured homes securing defaulted loans. Certain consumer lenders in the traditional chattel (home-only) lending sector exited the market and interest rates for these home-only loans increased. Although a portion of the home-only loans have been replaced by land/home financing that generally provides more competitive credit terms to the retail buyer of manufactured housing, the effort, time and expense associated with closing land/home transactions is greater.
In addition to the changing environment in retail lending, many of the wholesale lenders providing inventory or “floor plan” financing to retailers have since exited the industry. During 2002, Conseco Finance Corp., formerly the industry’s largest inventory and consumer lender, exited the market. Also in 2002, Deutsche Financial Services exited the manufactured housing floor plan lending business. In May 2004, JPMorgan Chase Bank N.A., one of the largest lenders in the home-only financing market at that time, announced it was ceasing its manufactured housing lending activities.
Since 2006, the site-built housing industry has experienced similar events, but to a much greater extent than has previously occurred in the manufactured home industry. The resulting credit restrictions for homebuilders and homebuyers are well documented and have had widespread effects, including further negative influences on the already restrictive manufactured housing lending environment. One of the few remaining national retail lenders specializing in our industry, Origen Financial, Inc., announced in March 2008 that it was suspending originations of manufactured home loans as a result of unfavorable conditions in the secondary market for its loans. Another major lender, 21st Mortgage Corporation, citing unreliable and inadequate sources of funding, announced in January 2009 that it was significantly curtailing its retail lending program. Remaining retail lenders such as Triad Financial, US Bank, and CU Factory Built Lending have tightened their loan underwriting standards.
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Faced with illiquid capital markets in late 2008, each of the manufactured housing sector’s remaining inventory finance lenders initiated radical changes, including one company’s announcement to cease their lending activities entirely. The continued participation of the others is undergoing modification; with one financier requiring that home manufacturers provide a significant portion of the funds it lends to finance retail inventories of that manufacturer’s products. While some manufacturers are unable or have elected not to participate in this lender’s program, Cavco’s financial capabilities have enabled us to engage in this and other special inventory financing programs for retailers. We anticipate that our involvement in financing inventory purchases of Cavco product will be quite helpful to retailers and will allow our products to have continued exposure to potential purchasers. This initiative will coincide with our efforts to expand our distribution base in all of our markets with existing and new retailers.
While we have been successful in improving market share in our core region in the current year, the market itself is depressed. The Manufactured Housing Institute recently reported that national home shipments for calendar year 2008 were down 15% for the industry as a whole. However, aided by the increased production of our Texas factory, Cavco’s comparative change was a decrease of 5%. Isolating these same statistics to both Arizona and California, the Company’s key markets, industry-wide home shipments were down 38% in 2008, while Cavco’s shipments were down 33%. The Company operated with a minimal backlog throughout fiscal year 2009 and the backlog of orders was negligible as of March 31, 2009.
Excess site-built home inventory has had an adverse impact on the contingency contract process, wherein potential homebuyers must sell their existing site-built home in order to facilitate the purchase of a new manufactured home. In addition, many on-site home builders with high inventory levels are offering sizable incentives to homebuyers, creating added competition for the factory-built housing industry. Also, competition from sales of repossessed site-built homes has negatively impacted retail sales of new manufactured homes.
Continuing reduced order rates have resulted in lower gross margins. Cavco has acted promptly to align its production levels as incoming orders have slowed, but has had limited ability to manage product pricing to maintain historical gross margins. After increasing rapidly since 2005, raw material prices flattened during fiscal 2009, but have not decreased generally.
The availability of consumer financing for the retail purchase of manufactured homes and inventory financing for the wholesale distribution chain need to be increased before marked emergence from the current lows can occur.
Meanwhile, we have intensified our efforts to identify niche market opportunities. Company-wide, our products are diverse and tailored to the needs and desires of our customers. 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 to be located. Although times are difficult, we remain optimistic about our long-term prospects because we believe that we are located in attractive geographic markets. We have an excellent and broad line of products and we maintain a conservative cost structure which enables us to build great value into our homes. The Company has worked diligently throughout this period to maintain a strong financial position. Our debt-free balance sheet and solid position in cash and cash equivalents should help us to avoid the liquidity problems faced by many other companies and enable us to act effectively as market opportunities present themselves.
Regulatory Developments
The American Housing Rescue and Foreclosure Prevention Act was enacted in 2008 to provide assistance by way of legislation for the housing industry, including the manufactured housing industry. Among other things, the Act provides for increased loan limits for chattel (home-only) loans to $69,678, up 43% from the previous limit of $48,600 set in 1992. Chattel loans have languished in recent years and the increased loan limit is meant to broaden opportunities for prospective homeowners.
The American Recovery and Reinvestment Act of 2009 includes an $8,000 tax credit for a limited period to homebuyers who have not owned a home in the previous 3 years, and is subject to other conditions. In addition to federal programs, California and certain other states have begun to adopt incentives to promote the purchase of new homes in their states. These and other regulatory changes may provide some stimulus going forward; however, given consumer concern about the state of the economy, we are cautious in developing expectations of any positive results from the new legislation.
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Results of Operations
(Dollars in thousands, except average sales price amounts)
(Dollars in thousands, except average sales price amounts)
The following table summarizes certain financial and operating data for fiscal years 2009, 2008 and 2007.
| Year Ended March 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
Statement of Operations Data: | ||||||||||||
| Net sales | ||||||||||||
| Manufacturing | $ | 101,373 | $ | 134,301 | $ | 161,242 | ||||||
| Retail | 8,807 | 12,429 | 14,807 | |||||||||
| Less: Intercompany | (4,818 | ) | (4,816 | ) | (6,935 | ) | ||||||
| Total net sales | 105,362 | 141,914 | 169,114 | |||||||||
| Cost of sales | 94,591 | 121,538 | 138,813 | |||||||||
| Gross profit | 10,771 | 20,376 | 30,301 | |||||||||
| Selling, general and administrative expenses | 11,213 | 13,825 | 15,311 | |||||||||
| (Loss) income from operations | (442 | ) | 6,551 | 14,990 | ||||||||
| Interest income | 764 | 2,539 | 2,387 | |||||||||
| Income from continuing operations before income taxes | 322 | 9,090 | 17,377 | |||||||||
| Income tax benefit (expense) | 136 | (2,778 | ) | (5,962 | ) | |||||||
| Income from continuing operations | 458 | 6,312 | 11,415 | |||||||||
| Income from discontinued retail operations | — | — | 134 | |||||||||
| Net income | $ | 458 | $ | 6,312 | $ | 11,549 | ||||||
Other Data: | ||||||||||||
| Floors sold — manufacturing | 3,917 | 5,104 | 5,884 | |||||||||
| Homes sold — manufacturing | 2,603 | 3,301 | 3,612 | |||||||||
| Homes sold — retail | 117 | 158 | 145 | |||||||||
| Capital expenditures | $ | 986 | $ | 689 | $ | 1,150 | ||||||
| Depreciation | $ | 817 | $ | 785 | $ | 692 | ||||||
Fiscal Year 2009 Compared to Fiscal Year 2008
Net Sales. Total net sales decreased 25.8% to $105,362 in fiscal year 2009 from $141,914 in fiscal year 2008.
Manufacturing net sales were lower by 24.5% to $101,373 in fiscal year 2009 from $134,301 in fiscal year 2008. The reduction in sales was primarily attributable to a reduced number of homes sold, the result of lower incoming order rates for homes. Total homes sold during fiscal year 2009 dropped 21.1% to 2,603 versus 3,301 last year. The decrease in net sales was also due to a 4.3% decrease in the average sales price per home, down $1,740 to $38,945 in fiscal year 2009 from $40,685 last year.
Retail net sales decreased by $3,622 to $8,807 for fiscal year 2009 from $12,429 last year. This decrease in retail sales was the result of lower average selling prices and a 25.9% decrease in the overall number of homes sold through Company-owned retail locations.
Gross Profit. Gross profit decreased to $10,771, which was 10.2% of net sales for fiscal year 2009 compared to $20,376 or 14.4% of net sales last year. The gross profit percentage has been challenged by lower production volume resulting in lower production efficiency and a less favorable product mix.
Selling, General and Administrative Expenses. Selling, general and administrative expenses were lower by 18.9% or $2,612 to $11,213 or 10.6% of net sales for fiscal year 2009 versus $13,825 or 9.7% of net sales last year. The decrease was primarily the result of reduced costs associated with compensation programs tied to profitability and a decrease in costs influenced by lower sales volume.
Interest Income. Interest income represents income earned on unrestricted cash and cash equivalents and short-term investments held at various times throughout the period. For a portion of the Company’s short-term investments in the prior year, interest income was earned on a tax-free basis. Our interest income decreased 69.9% to $764 for fiscal year 2009 as compared to $2,539 last year. The decrease resulted mainly from the Company’s repositioning of investible funds into U.S. Treasury money market funds and short-term bank certificates of deposit away from auction rate certificates on municipal bonds during the prior fiscal year.
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Income Taxes.The income tax benefit recognized during fiscal year 2009 is the result of two discrete items during the year; a change in the estimated blended rate to be applied to our deferred tax assets and liabilities, and a calculated true-up to our fiscal year 2008 tax return filed on December 12, 2008. The effective income tax rate was approximately 31% for fiscal year 2008, which reflects the larger proportion of tax-free interest income noted above, certain state income tax credits, and deductions provided in the American Jobs Creation Act in the prior year.
Discontinued Retail Operations.The Company has plans to dispose of certain of its retail sales centers and these operations are classified as discontinued retail operations (see Note 9).
Fiscal Year 2008 Compared to Fiscal Year 2007
Net Sales. Total net sales decreased 16.1% to $141,914 in fiscal year 2008 from $169,114 in fiscal year 2007.
Manufacturing net sales were lower by 16.7% to $134,301 in fiscal year 2008 from $161,242 in fiscal year 2007. The reduction in sales was primarily attributable to a reduced number of homes sold, the result of lower incoming order rates for homes. Total homes sold during fiscal year 2008 dropped 8.6% to 3,301 versus 3,612 during fiscal year 2007. The decrease in net sales was also due to an 8.9% decrease in the average sales price per home, down $3,956 to $40,685 in fiscal year 2008 from $44,641 in fiscal year 2007.
Retail net sales decreased by $2,378 to $12,429 for fiscal year 2008 from $14,807 for the prior year. This decrease in retail sales was the result of lower average selling prices, offset by a 9.0% increase in the overall number of homes sold.
Gross Profit. Gross profit decreased to $20,376, which was 14.4% of net sales for fiscal year 2008 compared to $30,301 or 17.9% of net sales for the prior year. The gross profit percentage in fiscal 2008 was pressured by lower production volume, a less favorable product mix, low margin results from the new Texas plant, and higher raw material costs.
Selling, General and Administrative Expenses. Selling, general and administrative expenses were lower by 9.7% or $1,486 to $13,825 or 9.7% of net sales for fiscal year 2008 versus $15,311 or 9.1% of net sales for fiscal year 2007. The decrease was primarily the result of reduced costs associated with compensation programs tied to profitability and a decrease in costs influenced by lower sales volume.
Interest Income. Interest income represents income earned on unrestricted cash and cash equivalents and short-term investments. For a portion of the Company’s short-term investments, interest income was earned on a tax-free basis. Our interest income increased 6.4% to $2,539 for fiscal year 2008 as compared to $2,387 for fiscal year 2007. The increase in interest income in fiscal year 2008 compared to the previous fiscal year resulted from the Company’s larger balance of investible funds.
Income Taxes.The effective income tax rate was approximately 31% for fiscal year 2008 and 34% for fiscal year 2007. The lower income tax rate reflects the effects of a larger proportion of tax-free interest income noted above, certain state income tax credits, and deductions provided in the American Jobs Creation Act.
Discontinued Retail Operations.The Company has plans to dispose of certain of its retail sales centers and these operations are classified as discontinued retail operations (see Note 9).
Liquidity and Capital Resources
(Dollars in thousands)
(Dollars in thousands)
We believe that cash and cash equivalents and short-term investments on hand at March 31, 2009, together with cash flow from operations, will be sufficient to fund our operations for the next twelve months and into the foreseeable future. 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 to be provided by manufacturing operations in the coming year is largely dependent on sales volume. Our manufactured homes are sold mainly through independent retailers who have historically relied on third-party lenders to provide floor plan financing for homes purchased. In addition, third-party lenders generally provide consumer financing for manufactured home purchases. Our sales depend in large part on the availability and cost of financing for manufactured home purchasers and retailers as well as our own retail locations. The availability and cost of such financing is further dependent on the number of financial institutions participating in the industry, the departure of financial institutions from the industry, the financial institutions’ lending practices, the strength of the credit markets generally, governmental policies and other conditions, all of which are beyond our control.
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During 2002, Conseco Finance Corp., formerly the industry’s largest floor plan lender, exited the market. Also in 2002, Deutsche Financial Services exited the manufactured housing floor plan lending business. In May 2004, JPMorgan Chase Bank N.A., the lender with the largest loan origination volume in the home-only financing market at that time, announced it was ceasing its manufactured housing lending activities. In March 2008, Origen Financial, Inc. announced that it was suspending originations of manufactured home loans as a result of unfavorable conditions in the secondary market for its loans. As a result of the current credit crisis, during the third quarter of fiscal year 2009, each of the remaining national floor plan lenders substantially curtailed their lending activities, and Textron Financial Corporation announced its intention to exit the business. Another floor plan lender, 21st Mortgage Corporation, citing unreliable and inadequate sources of funding, announced in January 2009 that it was significantly curtailing its retail lending program. Remaining retail lenders such as Triad Financial, US Bank, and CU Factory Built Lending have tightened their loan underwriting standards. The reduction in available financing has had an adverse effect on the manufactured housing industry and may impact the ability of our retailers to obtain financing for home purchases. To further support floor plan availability for our retailers, Cavco has begun to provide some of the capital used by inventory lenders to finance wholesale home purchases by retailers. 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 thereby characterized by shorter loan maturities and higher interest rates. Unfavorable changes in these factors and the current adverse trend in the availability and terms of financing in the industry may have a material adverse effect on our results of operations and financial condition.
Operating activities provided $1,326 of cash during fiscal year 2009 compared to providing $8,996 of cash during fiscal year 2008. Cash generated by operating activities in fiscal year 2009 was primarily derived from operating income before non-cash charges, increased deferred taxes, a decrease in accounts receivable and a decrease in inventory from lower sales levels, partially offset by increased other current assets and decreased accounts payable and accrued liabilities. Lower sales activity also resulted in reduced vendor payment volume, warranty obligations, volume rebate accruals, customer deposits, payroll and other accruals. Cash generated by operating activities in the prior year was primarily derived from operating income before non-cash charges and a decrease in inventory from lower sales levels, partially offset by increased accounts receivable and decreased accounts payable and accrued liabilities.
Investing activities required the use of $5,422 of cash during fiscal year 2009 compared to $50,211 of cash provided during fiscal year 2008. In fiscal year 2009, cash was primarily used to make purchases of $4,464 of short-term investments as well as normal recurring capital expenditures. For fiscal year 2008, cash was provided by net sales of $50,900 of short-term investments as we repositioned our liquid assets primarily into low risk US Treasury money market funds, partially offset by cash used for modest Texas plant expansion costs and normal recurring capital expenditures in all of our factories.
Financing activities provided $1,043 and $1,427 in cash in fiscal years 2009 and 2008, respectively, resulting from proceeds of issuances of common stock and related incremental tax benefits upon exercise of stock options under our stock incentive plans.
Contractual Obligations and Commitments
The following table summarizes our contractual obligations at March 31, 2009, consisting of future payments under non-cancelable operating lease agreements. For additional information related to these obligations, see Note 4 to the consolidated financial statements. This table excludes long-term obligations for which there is no definite commitment period.
| Payments Due by Period | ||||||||||||||||||||
| Less than | 1 – 3 | 4 – 5 | After 5 | |||||||||||||||||
| Total | 1 year | Years | Years | Years | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
| Commitments for future payments under noncancelable operating leases | $ | 3,252 | $ | 1,075 | $ | 2,171 | $ | 6 | $ | — | ||||||||||
The following table summarizes our contingent commitments at March 31, 2009, consisting of contingent repurchase obligations. For additional information related to these contingent obligations, see Notes 4 and 5 to the Consolidated Financial Statements and “Critical Accounting Policies” below.
| Contingent Payments Due by Period | ||||||||||||||||||||
| Less than | 1 – 3 | 4 – 5 | After 5 | |||||||||||||||||
| Total | 1 year | Years | Years | Years | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
| Repurchase obligations (1) | $ | 18,707 | $ | 13,057 | $ | 5,650 | $ | — | $ | — | ||||||||||
| (1) | For a complete description of the contingent repurchase obligation, see “Critical Accounting Policies — Reserve for Repurchase Commitments” below. Although the commitments outstanding at March 31, 2009 have a finite life, these commitments are continually replaced as we continue to sell manufactured homes to retailers under repurchase and other recourse agreements with lending institutions which have provided wholesale floor plan financing to retailers. |
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Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Management believes the following critical accounting policies, among others, affect its more significant judgments and estimates used in the preparation of its Consolidated Financial Statements.
Warranties.We provide the retail home buyer a one-year limited warranty covering defects in material or workmanship in home structure, plumbing and electrical systems. We record a liability for estimated future warranty costs relating to homes sold, based upon our assessment of historical experience factors and industry trends. Factors we use in the estimation of the warranty liability include the estimated amount of homes still under warranty including homes in retailer inventories, homes purchased by consumers still within the twelve-month warranty period, the timing in which work orders are completed, and the historical average costs incurred to service a home. We have a reserve for estimated warranties of $5.9 million and $6.6 million at March 31, 2009 and 2008, respectively. Although we maintain reserves for such claims, based on our assessments as described above, which to date have been adequate, there can be no assurance that warranty expense levels will remain at current levels or that such reserves will continue to be adequate. A large number of warranty claims exceeding our current warranty expense levels could have a material adverse effect on our results of operations.
Reserve for Repurchase Commitments.Manufactured housing companies customarily enter into repurchase and other recourse agreements with lending institutions which have provided wholesale floor plan financing to retailers. A significant portion of our sales are made to retailers pursuant to repurchase agreements with lending institutions. These agreements generally provide that we will repurchase our new products from the lending institutions in the event such product is repossessed upon a retailer’s default. The risk of loss under repurchase agreements is lessened by certain factors, including the following:
| • | sales of our manufactured homes are spread over a relatively large number of independent retailers; |
| • | the price that we are obligated to pay under such repurchase agreements declines based on predetermined amounts over the period of the agreement (generally 18 to 24 months); and |
| • | we have historically been able to resell homes repurchased from lenders. |
The Company applies FASB Interpretation No. 45,Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others, an interpretation of FASB Statements No. 5, 57, and 107 and a rescission of FASB Interpretation No. 34 (“FIN 45”) and SFAS No. 5,Accounting for Contingencies(“FAS 5”), to account for its liability for repurchase commitments. Under the provisions of FIN 45, issuance of a guarantee results in two different types of obligations: (1) a non-contingent obligation to stand ready to perform under the repurchase commitment (accounted for pursuant to FIN 45) and (2) a contingent obligation to make future payments under the conditions of the repurchase commitment (accounted for pursuant to SFAS No. 5). Management reviews retailers’ inventories to estimate the amount of inventory subject to repurchase obligation which is used to calculate (1) the fair value of the non-contingent obligation for repurchase commitments and (2) the contingent liability based on historical information available at the time. During the period in which a home is sold (inception of a repurchase commitment), the Company records the greater of these two calculations as a liability for repurchase commitments and as a reduction to sales.
(1) The Company estimates the fair value of the non-contingent portion of its manufacturer’s inventory repurchase commitment under the provisions of FIN 45 when a home is shipped to retailers whose floor plan financing includes a repurchase commitment. The fair value of the inventory repurchase agreement is determined by calculating the net present value of the difference in (a) the interest cost to carry the inventory over the maximum repurchase liability period at the prevailing floor plan note interest rate and (b) the interest cost to carry the inventory over the maximum repurchase liability period at the interest rate of a similar type loan without a manufacturer’s repurchase agreement in force.
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(2) The Company estimates the contingent obligation to make future payments under its manufacturer’s inventory repurchase commitment for the same pool of commitments as used in the fair value calculation above and records the greater of the two calculations. This SFAS No. 5 contingent obligation is estimated using historical loss factors, including the frequency of repurchases and the losses experienced by the Company for repurchased inventory.
Additionally, subsequent to the inception of the repurchase commitment, the Company evaluates the likelihood that it will be called on to perform under the inventory repurchase commitments. If it becomes probable that a retailer will default and a SFAS No. 5 loss reserve should be recorded, then such contingent liability is recorded equal to the estimated loss on repurchase. Based on identified changes in retailers’ financial conditions, the Company evaluates the probability of default for retailers who are identified at an elevated risk of default and applies a probability of default, based on historical default rates. Commensurate with this default probability evaluation, the Company reviews repurchase notifications received from floor plan sources and reviews retailer inventory for expected repurchase notifications based on various communications from the lenders and the retailers as well as for retailers who, the Company believes, are experiencing financial difficulty. The Company’s repurchase commitments for the retailers in the category of elevated risk of default are excluded from the pool of commitments used in both of the calculations at (1) and (2) above. Changes in the reserve are recorded as an adjustment to sales.
The maximum amount for which the Company was contingently liable under such agreements approximated $18.7 million at March 31, 2009, without reduction for the resale value of the homes. The Company had a reserve for repurchase commitments of $741,000 and $950,000 at March 31, 2009 and 2008, respectively. The Company incurred a repurchase reserve reduction of $179,000 during fiscal year 2009 and no repurchase reserve reductions during fiscal years 2008 and 2007, respectively.
Retailer Volume Rebates. The Company’s manufacturing operations sponsor volume rebate programs under which certain sales to retailers and builder/developers can qualify for cash rebates generally based on the level of sales attained during a twelve-month period. Volume rebates are accrued at the time of sale and are recorded as a reduction of net sales.
Impairment of Long-Lived Assets.The Company periodically evaluates the carrying value of long-lived assets to be held and used, when events and circumstances warrant such a review. The carrying value of long-lived assets is considered impaired when the anticipated undiscounted cash flow from such assets is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair market value of the long-lived assets. Fair market value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. Losses on long-lived assets to be disposed of are determined in a similar manner, except that the fair market values are based primarily on independent appraisals and preliminary or definitive contractual arrangements less costs to dispose.
Income Taxes and Deferred Tax Assets and Liabilities.Deferred tax assets and liabilities are determined based on temporary differences between the financial statement amounts and the tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. The Company periodically evaluates the deferred tax assets based on the requirements established in SFAS No. 109,Accounting for Income Taxes, which requires the recording of a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The determination of the need for or amount of any valuation allowance involves significant management judgment and is based upon the evaluation of both positive and negative evidence, including estimates of anticipated taxable profits in various jurisdictions with which the deferred tax assets are associated. Changes in events or expectations could result in significant adjustments, which could include the recording of a valuation allowance and material changes to the provision for income taxes.
Goodwill.We test goodwill annually for impairment by reporting unit and record an impairment charge if the implied fair value of a reporting unit, including goodwill, is less than its carrying value. We generally utilize either quoted market values or a discounted cash flow methodology to test for impairment of goodwill. The results of discounted cash flow methodology depend upon a number of estimates and assumptions relating to cash flows, discount rates and other matters. Accordingly, such testing is subject to certain uncertainties, which could cause the fair value of goodwill to fluctuate from period to period.
As of March 31, 2009, all of our goodwill is attributable to our manufacturing reporting unit. We performed our annual goodwill impairment analysis as of March 31, 2009. The first step under Statement of Financial Accounting Standards No. 142,Goodwill and Other Intangibles,(“SFAS 142”) is to compare the fair value of the reporting unit to the carrying value of the reporting unit. If the fair value is less than the carrying value, the second step must be completed, comparing the fair value of goodwill to the carrying value of goodwill. In assessing the fair value of the manufacturing reporting unit, the Company considered both the market and income approaches. Each approach was given equal weight in arriving at the fair value of the reporting unit. Based on this analysis, the fair value of the reporting unit, including goodwill, was deemed to be greater than its carrying value. As such, there was no need to continue to the second step under SFAS 142 and test the goodwill individually.
In the event that we are not able to achieve expected cash flow levels, or other factors indicate that goodwill is impaired, we may need to write off all or part of our goodwill, which would adversely affect our operating results and net worth. See Item 1A, “Risk Factors.”
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Other Matters
Related Party Transactions.During fiscal year 2008, the Company invested $7 million in the Gabelli U.S. Treasury Money Market Fund. GAMCO Investors, Inc. beneficially owned approximately 10% of our outstanding common shares and thus meets the definition of a principal owner under SFAS No. 57,Related Party Disclosures. The Gabelli U.S. Treasury Money Market Fund and GAMCO Investors, Inc. are either directly or indirectly under common control. Interest earned on our investment and reinvested during the fiscal years ended March 31, 2009 and 2008 were $97,000 and $37,000, respectively.
Impact of Inflation.We believe that the general inflation rate over the past several years has not had a significant impact on our sales or profitability, but can give no assurance that this trend will continue in the future. However, sudden increases in specific costs, such as the increases in material costs we have experienced since early 2004, as well as price competition, can affect our ability to increase our selling prices and adversely impact our results of operations. Therefore, we can give no assurance that inflation or the impact of rising material costs will not have a significant impact on our sales or results of operations in the future.
Impact of Accounting Statements.In September 2006, the Financial Accounting Standards Board issued SFAS No. 157,Fair Value Measurements(“SFAS 157”), which clarifies that the term fair value is intended to mean a market-based measure, not an entity-specific measure and gives the highest priority to quoted prices in active markets in determining fair value. SFAS 157 requires disclosures about (1) the extent to which companies measure assets and liabilities at fair value, (2) the methods and assumptions used to measure fair value, and (3) the effect of fair value measures on earnings. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued FASB Staff Position No. FSP FAS 157-2,Effective Date of FASB Statement No. 157that delayed the effective date of SFAS 157 to fiscal years beginning after November 15, 2008 for the majority of non-financial assets and non-financial liabilities. Therefore, effective April 1, 2008, the Company adopted SFAS 157 for financial assets and liabilities only, which had no effect on our consolidated financial position, results of operations and cash flows. Management is currently evaluating the impact, if any, SFAS 157 will have upon adoption for non-financial assets and liabilities on our results of operations and consolidated financial position.
In February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities including an amendment of FASB Statement No. 115(“SFAS 159”),which permits an entity to choose to irrevocably elect fair value on a contract-by-contract basis as the initial and subsequent measurement attribute for many financial assets and liabilities and certain other items including insurance contracts. Entities electing the fair value option would be required to recognize changes in fair value in earnings and to expense upfront cost and fees associated with the item for which the fair value option is elected. The provisions of SFAS 159 are effective for fiscal years beginning after November 15, 2007. The Company adopted SFAS 159 on April 1, 2008 but did not elect the fair value option for any of its assets or liabilities.
In December 2007, the FASB issued SFAS No. 141 (revised 2007),Business Combinations(“SFAS 141R”), and SFAS No. 160,Accounting and Reporting of Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51(“SFAS 160”), which significantly change the financial accounting and reporting of business combination transactions and noncontrolling interests in consolidated financial statements. The provisions of SFAS 141R and SFAS 160 are effective for fiscal years beginning after December 15, 2008, and early adoption is prohibited. Management is currently evaluating the impact, if any, SFAS 141R and SFAS 160 will have on its consolidated financial position, results of operations and cash flows.
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 date. 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-LOOKING STATEMENTS
This Annual Report on Form 10-K includes “forward-looking statements,” as that term is defined in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements, other than statements of historical facts, included or incorporated in this Form 10-K could be deemed forward-looking statements, particularly statements about our plans, strategies and prospects under the headings “Business”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Forward-looking statements are often characterized by the use of words such as “believes,” “estimates,” “expects,” “projects,” “may,” “will,” “intends,” “plans,” or “anticipates,” or by discussions of strategy, plans or intentions. Forward-looking statements are included, for example, in discussions regarding the manufactured housing industry and market, economic conditions and consumer confidence, our financial performance and operating results, our operational and legal risks, how we may be affected by governmental regulations and legal proceedings, the expected effect of certain risks and uncertainties on our business, financial condition and results of operations, the availability of favorable consumer and wholesale manufactured home financing, market interest rates and our investments, and the ultimate outcome of our commitments and contingencies.
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All forward-looking statements are subject to risks and uncertainties, many of which are beyond our control. As a result, our actual results or performance may differ materially from anticipated results or performance. Also, forward-looking statements are based upon management’s estimates of fair values and of future costs, using currently available information. Therefore, actual results may differ materially from those expressed or implied in those statements. Factors that could cause such differences to occur include, but are not limited to, those discussed under Item 1A, “Risk Factors,” and elsewhere in this Annual Report. We expressly disclaim any obligation to update any forward-looking statements contained in this Annual Report, whether as a result of new information, future events or otherwise. For all of these reasons, you are cautioned not to place undue reliance on any forward-looking statements included in this Annual Report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss arising from adverse changes in market prices 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. We are not currently a party to any market risk sensitive instruments that could be reasonably expected to have a material effect on our financial condition or results of operations.
Our operations are interest rate sensitive. As overall manufactured housing demand can be adversely affected by increases in interest rates, a significant increase in mortgage interest rates may negatively affect the ability of 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the Consolidated Financial Statements, the Reports thereon, the Notes thereto, and the supplementary data commencing on page F-1 of this report, which Consolidated Financial Statements, Reports, Notes and data are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 (“Exchange Act”) Rules 13a-15(e) and 15d-15(e)). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered in this report, our disclosure controls and procedures were effective.
Management’s Assessment on Internal Controls Over Financial Reporting
The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting based on the criteria in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation under the criteria in Internal Control — Integrated Framework, the Company’s management concluded that the Company’s internal control over financial reporting was effective as of March 31, 2009. For Management’s Report On Internal Control Over Financial Reporting refer to page F-2 of this report.
Changes in Internal Control over Financial Reporting
There were no significant changes in our internal controls over financial reporting identified in connection with this evaluation that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
For a description of the directors of the Company and other information called for by this Item 10, see “Election of Directors and Related Matters,” and “General-Section 16(a) Beneficial Ownership Reporting Compliance” of the Company’s Proxy Statement for the Annual Meeting of Stockholders to be held on June 30, 2009, which is incorporated herein by reference. Also see the information relating to executive officers of the Company that follows Item 4 of Part I of Part A of this Report, which is incorporated in this Item 10 by reference.
The Company has adopted a Code of Ethics that applies to all directors, officers and employees of the Company. A copy of the Company’s Code of Ethics is located on the Company’s website atwww.cavco.com or will be mailed, at no charge, upon request submitted to James P. Glew, Secretary, Cavco Industries, Inc., 1001 North Central Avenue, Suite 800, Phoenix, Arizona, 85004. If the Company makes any amendment to, or grants any waivers of, a provision of the Code of Ethics that applies to its principal executive officer, principal financial officer, principal accounting officer or controller where such amendment or waiver is required to be disclosed under applicable SEC rules, the Company intends to disclose such amendment or waiver and the reasons therefore on its Internet website atwww.cavco.com.
ITEM 11. EXECUTIVE COMPENSATION
For a description of the Company’s executive compensation, see “Election of Directors and Related Matters,”, “Compensation Discussion and Analysis” (other than the “Compensation Committee Report”) of the Company’s Proxy Statement for the Annual Meeting of Stockholders to be held on June 30, 2009, which is incorporated herein by reference.
ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
For a description of the security ownership of management and certain beneficial owners, see “Stock Ownership” of the Company’s Proxy Statement for the Annual Meeting of Stockholders to be held on June 30, 2009, which is incorporated herein by reference.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table sets forth information as of March 31, 2009, with respect to our compensation plans and individual compensation arrangements under which our equity securities were authorized for issuance to directors, officers, employees, consultants and certain other persons and entities in exchange for the provision to us of goods or services.
| Number of | Number of Securities | |||||||||||
| Securities to be | Remaining Available for | |||||||||||
| Issued Upon | Weighted-Average | Future Issuance Under | ||||||||||
| Exercise of | Exercise Price of | Equity Compensation | ||||||||||
| Outstanding Options, | Outstanding Options, | Plans (Excluding | ||||||||||
| Warrants, and | Warrants, and | Securities Reflected in | ||||||||||
| Plan Category | Rights | Rights | Column (a)) | |||||||||
| (a) | (b) | (c) | ||||||||||
| Equity compensation plans approved by stockholders | 576,079 | $ | 16.82 | 554,626 | ||||||||
| Equity compensation plans not approved by stockholders | — | — | — | |||||||||
| Total | 576,079 | $ | 16.82 | 554,626 | ||||||||
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
For a description of certain relationships and related transactions of the Company, see “Compensation Discussion and Analysis-Compensation Committee Interlocks and Insider Participation” of the Company’s Proxy Statement for the Annual Meeting of Stockholders to be held on June 30, 2009, which is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
For a description of principal accounting fees and services, see “Ratification of Appointment of Independent Auditors — Audit Fees” of the Company’s Proxy Statement for the Annual Meeting of Stockholders to be held on June 30, 2009, which is incorporated herein by reference.
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PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Financial Statements and Financial Statement Schedules
Financial Statements are listed in the Index to Consolidated Financial Statements on page F-1 of this report.
All schedules have been omitted because they are not applicable or the required information is included in the Consolidated Financial Statements or Notes thereto.
Exhibits
The documents listed below are being filed or have previously been filed on behalf of the Company and are incorporated herein by reference from the documents indicated and made a part hereof. Exhibits not identified as previously filed are filed herewith.
| Exhibit | Filed Herewith or | |||||
| Number | Exhibit | Incorporated by Reference | ||||
| 3.1 | Restated Certificate of Incorporation of Cavco | Exhibit 3.1 of the Annual Report on Form 10-K for the fiscal year ended March 31, 2004 | ||||
| 3.2 | Certificate of Amendment to Restated Certificate of Incorporation of Cavco | Exhibit 3.1 of the Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2006 | ||||
| 3.3 | Amended and Restated Bylaws of Cavco | Exhibit 3.2 of the Annual Report on Form 10-K for the fiscal year ended March 31, 2004 | ||||
| 10.1 | * | Stock Incentive Plan of Cavco | Exhibit 10.6 to the Registration Statement on Form 10/A (File No. 000-08822) filed by Cavco on April 23, 2003, as amended by Form 10/A dated May 21, 2003, Form 10/A dated May 30, 2003, Form 10/A dated June 17, 2003, and Form 10/A dated June 20, 2003 | |||
| 10.1.1 | * | Form of stock option agreement for Stock Incentive Plan | Exhibit 10.1a of the Annual Report on Form 10-K for the fiscal year ended March 31, 2005 | |||
| 10.1.2 | * | Restricted Stock Award Agreement, dated June 30, 2003, between Joseph H. Stegmayer and Cavco | Exhibit 10.4 of the Annual Report on Form 10-K for the fiscal year ended March 31, 2004 | |||
| 10.1.3 | * | Restricted Stock Award Agreement dated June 1, 2007, by and between Daniel L. Urness and Cavco | Exhibit 10.2 of the Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2007 | |||
| 10.1.4 | Form of Stock Option Agreement for Stock Incentive Plan | Exhibit 10.18 of the Annual Report on Form 10-K for the fiscal year ended March 31, 2008 | ||||
| 10.2 | * | Cavco 2005 Stock Incentive Plan | Exhibit A to the Corporation’s Definitive Proxy Statement for its 2005 Annual Meeting of Stockholders filed by the Corporation with the Securities and Exchange Commission on May 23, 2005, and incorporated by reference herein (this Exhibit is filed as an Exhibit to the Corporation’s Registration Statement on Form S-8 (No. 333-132925), filed with the Securities and Exchange Commission on April 3, 2006) | |||
| 10.2.1 | Representative Form of Restricted Stock Award Agreement for the applicable Cavco stock incentive plan | Exhibit 10.1 of the Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2007 | ||||
| 10.2.2 | Form of Stock Option Agreement for Stock Incentive Plan | Exhibit 10.18 of the Annual Report on Form 10-K for the fiscal year ended March 31, 2008 | ||||
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| Exhibit | Filed Herewith or | |||||
| Number | Exhibit | Incorporated by Reference | ||||
| 10.3 | * | Employment Agreement, dated June 30, 2003, between Joseph H. Stegmayer and Cavco | Exhibit 10.2 of the Annual Report on Form 10-K for the fiscal year ended March 31, 2004 | |||
| 10.4 | * | First Amendment to Employment Agreement, dated March 26, 2007, between Joseph H. Stegmayer and Cavco | Exhibit 10.4 of the Annual Report on Form 10-K for the fiscal year ended March 31, 2008 | |||
| 10.5 | * | Vice President and Chief Financial Officer Incentive Compensation Plan for Fiscal Year 2007 | Exhibit 10.1 of the Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2006 | |||
| 10.6 | * | Vice President and Chief Financial Officer Incentive Compensation Plan for Fiscal Year 2008 | Periodic report on Form 8-K filed on June 7, 2007 | |||
| 10.7 | * | Vice President and Chief Financial Officer Incentive Compensation Plan for Fiscal Year 2009 | Periodic report on Form 8-K filed on July 14, 2008 | |||
| 10.8 | * | Amendment to Vice President and Chief Financial Officer Incentive Compensation Plan for Fiscal Year 2009 | Periodic report on Form 8-K filed on May 14, 2009 | |||
| 10.9 | Distribution Agreement, dated May 30, 2003, among Centex, Cavco Industries, LLC, and Cavco | Exhibit 10.9 of the Annual Report on Form 10-K for the fiscal year ended March 31, 2004 | ||||
| 10.10 | Tax Sharing Agreement, dated June 30, 2003, among Centex, Centex’s Affiliates, and Cavco | Exhibit 10.10 of the Annual Report on Form 10-K for the fiscal year ended March 31, 2004 | ||||
| 21 | List of Subsidiaries of Cavco | Filed herewith | ||||
| 23 | Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm | Filed herewith | ||||
| 31.1 | Certificate of Joseph H. Stegmayer, Chief Executive Officer, pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended | Filed herewith | ||||
| 31.2 | Certificate of Daniel L. Urness, Chief Financial Officer, pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended | Filed herewith | ||||
| 32.1 | ** | Certification of Chief Executive Officer and Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | Furnished herewith | |||
| * | Management contract or compensatory plan or arrangement. | |
| ** | These certifications are not “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section. These certifications are not to be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, unless Cavco specifically incorporates them by reference. | |
| Copies of any of the exhibits referred to above will be furnished at no cost to security holders who make a written request therefore to James P. Glew, Secretary, Cavco Industries, Inc., 1001 North Central Avenue, Suite 800, Phoenix, Arizona, 85004 or via the Company website (www.cavco.com). |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
| CAVCO INDUSTRIES, INC. | ||||
| Date: May 21, 2009 | /s/ Joseph H. Stegmayer | |||
| Joseph H. Stegmayer — Chairman, | ||||
| President and Chief Executive Officer (Principal Executive Officer) | ||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Signature | Title | Date | ||
/s/ Joseph H. Stegmayer | Chairman, President and Chief Executive Officer (Principal Executive Officer) | May 21, 2009 | ||
/s/ Daniel L. Urness | Vice President, Treasurer and Chief Financial Officer (Principal Financial and Accounting Officer) | May 21, 2009 | ||
/s/ William C. Boor | Director | May 21, 2009 | ||
/s/ Steven G. Bunger | Director | May 21, 2009 | ||
/s/ David A. Greenblatt | Director | May 21, 2009 | ||
/s/ Jack Hanna | Director | May 21, 2009 |
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CAVCO INDUSTRIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| F-2 | ||||
| F-3 | ||||
| F-5 | ||||
| F-6 | ||||
| F-7 | ||||
| F-8 | ||||
| F-9 |
F-1
Table of Contents
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
To the Shareholders of Cavco Industries, Inc.,
The management of Cavco Industries, Inc. (the “Company”), is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company’s assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in conformity with U.S. generally accepted accounting principles, and that the Company’s receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, the Company’s controls and procedures may not prevent or detect misstatements. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the controls system are met. Because of the inherent limitations in all controls systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.
Management assessed the effectiveness of the Company’s internal control over financial reporting based on the criteria in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on management’s evaluation under the criteria in Internal Control — Integrated Framework, management concluded that the Company’s internal control over financial reporting was effective as of March 31, 2009.
The effectiveness of the Company’s internal control over financial reporting as of March 31, 2009, has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report which is included herein.
May 21, 2009
F-2
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Cavco Industries, Inc.
Cavco Industries, Inc.
We have audited Cavco Industries, Inc.’s internal control over financial reporting as of March 31, 2009, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Cavco Industries, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Cavco Industries, Inc. maintained, in all material respects, effective internal control over financial reporting as of March 31, 2009, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the March 31, 2009 consolidated financial statements of Cavco Industries, Inc. and subsidiaries, and our report dated May 18, 2009 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Phoenix, Arizona
May 18, 2009
May 18, 2009
F-3
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Cavco Industries, Inc.
Cavco Industries, Inc.
We have audited the accompanying consolidated balance sheets of Cavco Industries, Inc. and subsidiaries (the Company) as of March 31, 2009 and 2008, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended March 31, 2009. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Cavco Industries, Inc. and subsidiaries at March 31, 2009 and 2008, and the consolidated results of their operations and their cash flows for each of the three years in the period ended March 31, 2009, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Cavco Industries, Inc.’s internal control over financial reporting as of March 31, 2009, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated May 18, 2009 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Phoenix, Arizona
May 18, 2009
May 18, 2009
F-4
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CAVCO INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Dollars in thousands)
| March 31, | March 31, | |||||||
| 2009 | 2008 | |||||||
ASSETS | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | 70,557 | $ | 73,610 | ||||
| Short-term investments | 4,464 | — | ||||||
| Restricted cash | 244 | 330 | ||||||
| Accounts receivable | 6,234 | 10,093 | ||||||
| Inventories | 9,333 | 11,293 | ||||||
| Prepaid expenses and other current assets | 4,160 | 1,839 | ||||||
| Deferred income taxes | 3,434 | 4,033 | ||||||
| Total current assets | 98,426 | 101,198 | ||||||
| Property, plant and equipment, at cost: | ||||||||
| Land | 6,580 | 6,050 | ||||||
| Buildings and improvements | 7,355 | 7,290 | ||||||
| Machinery and equipment | 8,203 | 7,979 | ||||||
| 22,138 | 21,319 | |||||||
| Accumulated depreciation | (9,279 | ) | (8,613 | ) | ||||
| 12,859 | 12,706 | |||||||
| Goodwill | 67,346 | 67,346 | ||||||
| Total assets | $ | 178,631 | $ | 181,250 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities | ||||||||
| Accounts payable | $ | 739 | $ | 2,147 | ||||
| Accrued liabilities | 13,753 | 18,005 | ||||||
| Total current liabilities | 14,492 | 20,152 | ||||||
| Deferred income taxes | 16,099 | 14,747 | ||||||
| Commitments and contingencies | ||||||||
| Stockholders’ equity | ||||||||
| Preferred Stock, $.01 par value, 1,000,000 shares authorized; No shares issued or outstanding | — | — | ||||||
| Common Stock, $.01 par value; 20,000,000 shares authorized; Outstanding 6,506,843 and 6,452,415 shares, respectively | 65 | 65 | ||||||
| Additional paid-in capital | 126,045 | 124,814 | ||||||
| Retained earnings | 21,930 | 21,472 | ||||||
| Total stockholders’ equity | 148,040 | 146,351 | ||||||
| Total liabilities and stockholders’ equity | $ | 178,631 | $ | 181,250 | ||||
See accompanying Notes to Consolidated Financial Statements
F-5
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CAVCO INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
| Year Ended March 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| Net sales | $ | 105,362 | $ | 141,914 | $ | 169,114 | ||||||
| Cost of sales | 94,591 | 121,538 | 138,813 | |||||||||
| Gross profit | 10,771 | 20,376 | 30,301 | |||||||||
| Selling, general and administrative expenses | 11,213 | 13,825 | 15,311 | |||||||||
| (Loss) income from operations | (442 | ) | 6,551 | 14,990 | ||||||||
| Interest income | 764 | 2,539 | 2,387 | |||||||||
| Income from continuing operations before income taxes | 322 | 9,090 | 17,377 | |||||||||
| Income tax benefit (expense) | 136 | (2,778 | ) | (5,962 | ) | |||||||
| Income from continuing operations | 458 | 6,312 | 11,415 | |||||||||
| Income from discontinued retail operations net of income taxes of $0, $0 and $66, respectively | — | — | 134 | |||||||||
| Net income | $ | 458 | $ | 6,312 | $ | 11,549 | ||||||
| Net income per share (basic): | ||||||||||||
| Continuing operations | $ | 0.07 | $ | 0.98 | $ | 1.79 | ||||||
| Discontinued retail operations | — | — | 0.02 | |||||||||
| Net income | $ | 0.07 | $ | 0.98 | $ | 1.81 | ||||||
| Net income per share (diluted): | ||||||||||||
| Continuing operations | $ | 0.07 | $ | 0.95 | $ | 1.72 | ||||||
| Discontinued retail operations | — | — | 0.02 | |||||||||
| Net income | $ | 0.07 | $ | 0.95 | $ | 1.74 | ||||||
| Weighted average shares outstanding: | ||||||||||||
| Basic | 6,487,665 | 6,427,264 | 6,363,368 | |||||||||
| Diluted | 6,692,932 | 6,664,111 | 6,629,580 | |||||||||
See accompanying Notes to Consolidated Financial Statements
F-6
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CAVCO INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Dollars in thousands)
| Unamortized | Retained | |||||||||||||||||||||||
| Additional | value of | earnings | ||||||||||||||||||||||
| Common Stock | paid-in | restricted | (accumulated | |||||||||||||||||||||
| Shares | Amount | capital | stock | deficit) | Total | |||||||||||||||||||
| Balance, April 1, 2006 | 6,352,980 | $ | 64 | $ | 121,417 | $ | (63 | ) | $ | 3,611 | $ | 125,029 | ||||||||||||
| Reverse unamortized value of restricted stock upon adoption of SFAS 123(R) | — | — | (63 | ) | 63 | — | — | |||||||||||||||||
| Stock option exercises and associated tax benefits | 30,000 | — | 668 | — | — | 668 | ||||||||||||||||||
| Share-based compensation | — | — | 846 | — | — | 846 | ||||||||||||||||||
| Net income | — | — | — | — | 11,549 | 11,549 | ||||||||||||||||||
| Balance, March 31, 2007 | 6,382,980 | 64 | 122,868 | — | 15,160 | 138,092 | ||||||||||||||||||
| Stock option exercises and associated tax benefits | 69,435 | 1 | 1,534 | — | — | 1,535 | ||||||||||||||||||
| Share-based compensation | — | — | 412 | — | — | 412 | ||||||||||||||||||
| Net income | — | — | — | — | 6,312 | 6,312 | ||||||||||||||||||
| Balance, March 31, 2008 | 6,452,415 | 65 | 124,814 | — | 21,472 | 146,351 | ||||||||||||||||||
| Stock option exercises and associated tax benefits | 54,428 | — | 1,094 | — | — | 1,094 | ||||||||||||||||||
| Share-based compensation | — | — | 137 | — | — | 137 | ||||||||||||||||||
| Net income | — | — | — | — | 458 | 458 | ||||||||||||||||||
| Balance, March 31, 2009 | 6,506,843 | $ | 65 | $ | 126,045 | $ | — | $ | 21,930 | $ | 148,040 | |||||||||||||
See accompanying Notes to Consolidated Financial Statements
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CAVCO INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
| Year Ended March 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| OPERATING ACTIVITIES | ||||||||||||
| Net income | $ | 458 | $ | 6,312 | $ | 11,549 | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
| Depreciation | 817 | 785 | 692 | |||||||||
| Deferred income taxes | 1,951 | 1,884 | 1,830 | |||||||||
| Share-based compensation expense | 137 | 412 | 846 | |||||||||
| Tax benefits from option exercises | 325 | 578 | 296 | |||||||||
| Incremental tax benefits from option exercises | (274 | ) | (470 | ) | (256 | ) | ||||||
| Gain on sale of equipment | (12 | ) | — | — | ||||||||
| Changes in operating assets and liabilities: | ||||||||||||
| Restricted cash | 86 | 9 | 884 | |||||||||
| Accounts receivable | 3,859 | (1,986 | ) | 3,461 | ||||||||
| Inventories | 1,960 | 2,171 | (731 | ) | ||||||||
| Prepaid expenses and other current assets | (2,321 | ) | 434 | (827 | ) | |||||||
| Accounts payable and accrued liabilities | (5,660 | ) | (1,133 | ) | (11,368 | ) | ||||||
| Net cash provided by operating activities | 1,326 | 8,996 | 6,376 | |||||||||
| INVESTING ACTIVITIES | ||||||||||||
| Purchases of property and equipment | (986 | ) | (689 | ) | (1,150 | ) | ||||||
| Purchases of short-term investments | (4,464 | ) | (314,700 | ) | (446,000 | ) | ||||||
| Proceeds from sales of short-term investments | — | 365,600 | 438,000 | |||||||||
| Proceeds from sales of equipment | 28 | — | — | |||||||||
| Net cash (used in) provided by investing activities | (5,422 | ) | 50,211 | (9,150 | ) | |||||||
| FINANCING ACTIVITIES | ||||||||||||
| Proceeds from exercise of stock options | 769 | 957 | 372 | |||||||||
| Incremental tax benefits from option exercises | 274 | 470 | 256 | |||||||||
| Net cash provided by financing activities | 1,043 | 1,427 | 628 | |||||||||
| Net (decrease) increase in cash | (3,053 | ) | 60,634 | (2,146 | ) | |||||||
| Cash and cash equivalents at beginning of year | 73,610 | 12,976 | 15,122 | |||||||||
| Cash and cash equivalents at end of year | $ | 70,557 | $ | 73,610 | $ | 12,976 | ||||||
| Supplemental disclosures of cash flow information: | ||||||||||||
| Cash paid during the year for income taxes | $ | 45 | $ | — | $ | 4,677 | ||||||
See accompanying Notes to Consolidated Financial Statements
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Table of Contents
CAVCO INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
1. Summary of Significant Accounting Policies
Principles of Consolidation.These Consolidated Financial Statements include the accounts of Cavco Industries, Inc. and its wholly-owned subsidiaries (collectively, the “Company” or “Cavco”). All significant intercompany transactions and balances have been eliminated in consolidation. See Note 8 for information related to the Company’s business segments.
Nature of Operations.Headquartered in Phoenix, Arizona, the Company’s manufacturing segment designs and produces manufactured homes which are sold to a network of retailers located primarily in the Southwestern and South Central United States. The Company’s retail segment operates retail sales locations which offer the Company’s homes and homes of other manufacturers to retail customers.
Accounting Estimates.Preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from the estimates and assumptions used in preparation of the financial statements.
Fair Value of Financial Instruments.The Company’s financial instruments consist of cash and cash equivalents, short-term investments, accounts receivable, accounts payable and certain accrued liabilities. The carrying amounts of these instruments approximate fair value due to their nature and relative shorter maturity periods.
Revenue Recognition.Revenue from homes sold to independent retailers is generally recognized when the home is shipped, at which time title passes to the independent retailer, and collectability is reasonably assured. Homes sold to independent retailers are generally paid for prior to shipment or financed by the independent retailer through standard industry arrangements which include repurchase agreements (see Note 4). Manufacturing sales are reduced by a provision for estimated repurchase obligations based upon past experience and market conditions. Retail sales for Company locations are recognized when funding is reasonably assured, the customer has entered into a legally binding sales contract, title has transferred and the home is accepted by the customer, delivered and permanently located at the customer’s site.
Some of the Company’s independent retailers operate multiple sales outlets. Factory Direct Housing, Inc. (“FDH”) represents a group of independent retailers that affiliate to obtain improved access to inventory financing. Most FDH retailers existed as entirely independent retailers prior to their affiliation with FDH. FDH accounted for approximately 4.6%, 6.4% and 11.0% of net sales in fiscal 2009, 2008, and 2007, respectively. No other independent retailer accounted for 10% or more of our manufacturing sales during any fiscal year within the three-year period.
Cash and Cash Equivalents. Highly liquid investments with insignificant interest rate risk and original maturities of three months or less, when purchased, are classified as cash equivalents. The Company’s cash equivalents are comprised of U.S. Treasury money market funds, bank certificates of deposit, and money market funds with carrying amounts that approximate fair value due to their short-term nature.
Short-Term Investments.The Company’s short-term investments as of March 31, 2009 were comprised of certificates of deposit at multiple banking institutions. Each certificate of deposit has a principal balance less than $250 and thus the investments are within the Federal Deposit Insurance Corporation insurable limits. The carrying amounts of short-term investments approximate fair value and the Company intends to hold these investments until maturity.
Restricted Cash. Restricted cash represents deposits received from retail customers required to be held in trust accounts which the Company cannot access for general operating purposes until the sale of the home to the retail customer is completed.
Accounts Receivable.The Company extends competitive credit terms on a retailer-by-retailer basis in the normal course of business and our accounts receivable are subject to normal industry risk. The Company provides for reserves against accounts receivable for estimated losses that may result from customers’ inability to pay. Uncollectible accounts receivable have historically been insignificant and therefore the Company has no reserve for credit losses at March 31, 2009 and 2008.
Inventories.Raw material inventories are valued at the lower of cost (first-in, first-out method) or market. Finished goods and work-in-process inventories are valued at the lower of cost or market, using the specific identification method.
Property, Plant and Equipment.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: buildings and improvements 10 to 30 years, and machinery and equipment 7 to 25 years. Repairs and maintenance charges are expensed as incurred.
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Asset Impairment. The Company periodically evaluates the carrying value of long-lived assets to be held and used, when events and circumstances warrant such a review. The carrying value of a long-lived asset is considered impaired when the anticipated undiscounted cash flow from such asset is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair market value of the long-lived asset. Fair market value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. Losses on long-lived assets to be disposed of are determined in a similar manner, except that the fair market values are primarily based on independent appraisals and preliminary or definitive contractual arrangements less costs to dispose.
Goodwill.The Company accounts for goodwill in accordance with the provisions of Statement of Financial Accounting Standard No. 142,Goodwill and Other Intangibles,(“SFAS 142”). As such, the Company tests goodwill annually for impairment by reporting unit and records an impairment charge if the implied fair value of a reporting unit, including goodwill, is less than its carrying value. As of March 31, 2009 and 2008, all of the Company’s goodwill is attributable to its manufacturing reporting unit. The Company performed its annual goodwill impairment analysis as of March 31, 2009. The first step under SFAS 142 is to compare the fair value of the reporting unit to the carrying value of the reporting unit. If the fair value is less than the carrying value, the second step must be completed, comparing the fair value of goodwill to the carrying value of goodwill. In assessing the fair value of the manufacturing reporting unit, the Company considered both the market and income approaches. Within the market approach, the fair value of the reporting unit was based on multiples derived from certain financial information of selected guideline public companies deemed comparable to the reporting unit being valued. Within the income approach, the fair value of the reporting unit was based on the discounted cash flow method, which compares the present value of expected future cash flows with the carrying value of the reporting unit’s net assets. The income approach is dependent on a number of significant management assumptions, including estimated future revenue growth rates, gross margins, operating margins, capital expenditures, and discount rates. Each approach was given equal weight in arriving at the fair value of the reporting unit. Based on this analysis, the fair value of the reporting unit was deemed to be greater than the carrying value of the reporting unit as of March 31, 2009. As such, there was no need to continue to the second step under SFAS 142 and test the goodwill individually.
Warranties.The Company provides retail homebuyers or builder/developers with a twelve-month warranty for manufacturing defects from the date of sale to the retail customer. Estimated warranty costs are accrued as cost of sales at the time of sale. The warranty provision and reserves are based on estimates of the amounts necessary to settle existing and future claims on homes sold as of the balance sheet date. Factors used to calculate the warranty obligation are the estimated amount of homes still under warranty including homes in retailer inventories, homes purchased by consumers still within the twelve-month warranty period, the timing in which work orders are completed, and the historical average costs incurred to service a home.
Retailer Volume Rebates. The Company’s manufacturing operations sponsor volume rebate programs under which certain sales to retailers and builder/developers can qualify for cash rebates generally based on the level of sales attained during a twelve-month period. Volume rebates are accrued at the time of sale and are recorded as a reduction of net sales.
Reserve for Repurchase Commitment.The Company is contingently liable under terms of repurchase agreements with financial institutions providing inventory financing for retailers of its products. These arrangements, which are customary in the industry, provide for the repurchase of products sold to retailers 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 (typically 18 to 24 months) and is further reduced by the resale value of repurchased homes. The Company applies Financial Accounting Standards Board Interpretation No. 45,Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others — an interpretation of FASB Statements No. 5, 57, and 107 and a rescission of FASB Interpretation No. 34(“FIN 45”) and SFAS No. 5,Accounting for Contingencies(“SFAS 5”) to account for its liability for repurchase commitments. Under the provisions of FIN 45, during the period in which a home is sold (inception of a repurchase commitment), the Company records the greater of the estimated fair value of the non-contingent obligation or a contingent liability under the provisions of SFAS 5, based on historical information available, as a reduction to sales. Additionally, subsequent to the inception of the repurchase commitment, the Company evaluates the likelihood that it will be called on to perform under the inventory repurchase commitments. If it becomes probable that a retailer will default and a SFAS 5 loss reserve should be recorded, then such contingent liability is recorded equal to the estimated loss on repurchase. Changes in the reserve are recorded as an adjustment to sales. Following the inception of the commitment, the recorded reserve is reduced over the repurchase period in conjunction with applicable curtailment arrangements and is eliminated once the retailer sells the home.
Insurance.The Company is self-insured for a significant portion of its general and products liability, auto liability, workers’ compensation liability, health and property coverage. Between October 1, 2006, and October 1, 2008, the Company was fully insured for workers’ compensation. Insurance is maintained for catastrophic exposures and those risks required to be insured by law. Estimated self-insurance costs are accrued for incurred claims and estimated claims incurred but not yet reported. For products liability in particular, the Company has purchased stop loss insurance, which will reimburse the Company for individual claims or aggregate claims exceeding $1,000 annually. A reserve for products liability is actuarially determined and reflected in accrued liabilities in the accompanying balance sheets. The determination of claims and expenses and the appropriateness of the related liability is regularly reviewed and updated.
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Advertising.Advertising costs are expensed as incurred and were $268, $232 and $269 for the fiscal years ended March 31, 2009, 2008 and 2007, respectively.
Freight.Substantially all freight costs are reimbursed by the Company’s retailers. Sales and cost of sales include freight income and expense of $5,931, $6,233 and $6,393 for the fiscal years ended March 31, 2009, 2008 and 2007, respectively.
Income Taxes.The Company accounts for income taxes pursuant to SFAS No. 109,Accounting for Income Taxes(“SFAS 109”) and FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109(“FIN 48”) and provides for income taxes utilizing the asset and liability approach. Under this approach, deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid. 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. Deferred taxes result from differences between the financial and tax bases of the Company’s assets and liabilities and are adjusted for changes in tax rates and tax laws when changes are enacted.
The calculation of tax liabilities involves dealing with uncertainties in the application of complex tax regulations. The Company recognizes liabilities for anticipated tax audit issues based on the Company’s estimate of whether, and the extent to which, additional taxes will be due. If payment of these amounts ultimately proves to be unnecessary, the reversal of the liabilities would result in tax benefits being recognized in the period when the liabilities are no longer determined to be necessary. If the estimate of tax liabilities proves to be less than the ultimate assessment, a further charge to expense would result.
Net Income 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 share-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:
| 2009 | 2008 | 2007 | ||||||||||
| Net income | $ | 458 | $ | 6,312 | $ | 11,549 | ||||||
| Weighted average shares outstanding: | ||||||||||||
| Basic | 6,487,665 | 6,427,264 | 6,363,368 | |||||||||
| Add: Effect of dilutive stock options | 205,267 | 236,847 | 266,212 | |||||||||
| Diluted | 6,692,932 | 6,664,111 | 6,629,580 | |||||||||
| Net income per share: | ||||||||||||
| Basic | $ | 0.07 | $ | 0.98 | $ | 1.81 | ||||||
| Diluted | $ | 0.07 | $ | 0.95 | $ | 1.74 | ||||||
Anti-dilutive common stock equivalents excluded from the computation of diluted earnings per share were 7,052, 1,695 and 1,589 for the fiscal years ended March 31, 2009, 2008 and 2007, respectively.
Comprehensive Income.Total comprehensive income includes net income and other comprehensive income (loss). The Company had no other comprehensive income (loss) for the fiscal years ended March 31, 2009, 2008 and 2007. As such, net income equals total comprehensive income of $458, $6,312 and $11,549 for the fiscal years ended March 31, 2009, 2008 and 2007, respectively.
Recent Accounting Pronouncements.In September 2006, the FASB issued SFAS No. 157,Fair Value Measurements(“SFAS 157”), which clarifies that the term fair value is intended to mean a market-based measure, not an entity-specific measure and gives the highest priority to quoted prices in active markets in determining fair value. SFAS 157 requires disclosures about (1) the extent to which companies measure assets and liabilities at fair value, (2) the methods and assumptions used to measure fair value, and (3) the effect of fair value measures on earnings. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued FASB Staff Position No. FSP FAS 157-2,Effective Date of FASB Statement No. 157that delayed the effective date of SFAS 157 to fiscal years beginning after November 15, 2008 for the majority of non-financial assets and non-financial liabilities. Therefore, effective April 1, 2008, the Company adopted SFAS 157 for financial assets and liabilities only, which had no effect on our consolidated financial position, results of operations and cash flows. Management is currently evaluating the impact, if any, SFAS 157 will have upon adoption for non-financial assets and liabilities on our results of operations and consolidated financial position.
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In February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities including an amendment of FASB Statement No. 115(“SFAS 159”),which permits an entity to choose to irrevocably elect fair value on a contract-by-contract basis as the initial and subsequent measurement attribute for many financial assets and liabilities and certain other items including insurance contracts. Entities electing the fair value option would be required to recognize changes in fair value in earnings and to expense upfront cost and fees associated with the item for which the fair value option is elected. The provisions of SFAS 159 are effective for fiscal years beginning after November 15, 2007. The Company adopted SFAS 159 on April 1, 2008 but did not elect the fair value option for any of its assets or liabilities.
In December 2007, the FASB issued SFAS No. 141 (revised 2007),Business Combinations(“SFAS 141R”), and SFAS No. 160,Accounting and Reporting of Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51(“SFAS 160”), which significantly change the financial accounting and reporting of business combination transactions and noncontrolling interests in consolidated financial statements. The provisions of SFAS 141R and SFAS 160 are effective for fiscal years beginning after December 15, 2008, and early adoption is prohibited. Management is currently evaluating the impact, if any, SFAS 141R and SFAS 160 will have on its consolidated financial position, results of operations and cash flows.
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 date. 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.
2. Composition of Certain Financial Statement Captions
Inventories consist of the following:
| March 31, | ||||||||
| 2009 | 2008 | |||||||
| Raw materials | $ | 4,380 | $ | 4,753 | ||||
| Work in process | 1,570 | 2,416 | ||||||
| Finished goods | 3,383 | 4,124 | ||||||
| $ | 9,333 | $ | 11,293 | |||||
Accrued liabilities consist of the following:
| March 31, | ||||||||
| 2009 | 2008 | |||||||
| Estimated warranties | $ | 5,902 | $ | 6,619 | ||||
| Accrued insurance | 1,467 | 1,401 | ||||||
| Salaries, wages and benefits | 1,152 | 2,568 | ||||||
| Customer deposits | 899 | 1,989 | ||||||
| Accrued volume rebates | 863 | 1,588 | ||||||
| Reserve for repurchase commitments | 741 | 950 | ||||||
| Other (various) | 2,729 | 2,890 | ||||||
| $ | 13,753 | $ | 18,005 | |||||
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3. Employee Benefit Plans
The Company has a self-funded group medical plan which is administered by third party administrators. The medical plan has reinsurance coverage limiting liability for any individual employee loss to a maximum of $200. Incurred claims identified under the third-party administrator’s incident reporting system and incurred but not reported claims are accrued based on estimates that incorporate the Company’s past experience, as well as other considerations such as the nature of each claim or incident, relevant trend factors and advice from consulting actuaries when necessary. Medical claims expense was $2,692, $2,246 and $2,095 for the fiscal years ended March 31, 2009, 2008 and 2007, respectively.
The Company sponsors an employee savings plan (the “401k Plan”) that is intended to provide participating employees with additional income upon retirement. Employees may contribute up to 100% of their eligible compensation up to federal limits to the 401k Plan. The Company matches up to 50% of the first 5% of eligible income contributed by employees. Employees are immediately eligible to participate and employer matching contributions are vested progressively over a four year period. Contribution expense was $65, $126 and $232 for the fiscal years ended March 31, 2009, 2008 and 2007, respectively.
4. Commitments and Contingencies
Repurchase Contingencies — The Company is contingently liable under terms of repurchase agreements with financial institutions providing inventory financing for independent retailers of its products. These arrangements, which are customary in the industry, provide for the repurchase of products sold to retailers in the event of default by the retailer. The Company applies FASB Interpretation No. 45,Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others, an interpretation of FASB Statements No. 5, 57, and 107 and a rescission of FASB Interpretation No. 34(“FIN 45”) and SFAS No. 5,Accounting for Contingencies(“FAS 5”), to account for its liability for repurchase commitments. Under the provisions of FIN 45, issuance of a guarantee results in two different types of obligations: (1) a non-contingent obligation to stand ready to perform under the repurchase commitment (accounted for pursuant to FIN 45) and (2) a contingent obligation to make future payments under the conditions of the repurchase commitment (accounted for pursuant to SFAS No. 5). Management reviews the retailers’ inventories to estimate the amount of inventory subject to repurchase obligation which is used to calculate (1) the fair value of the non-contingent obligation for repurchase commitments and (2) the contingent liability based on historical information available at the time. During the period in which a home is sold (inception of a repurchase commitment), the Company records the greater of these two calculations as a liability for repurchase commitments and as a reduction to sales.
(1) The Company estimates the fair value of the non-contingent portion of its manufacturer’s inventory repurchase commitment under the provisions of FIN 45 when a home is shipped to retailers whose floor plan financing includes a repurchase commitment. The fair value of the inventory repurchase agreement is determined by calculating the net present value of the difference in (a) the interest cost to carry the inventory over the maximum repurchase liability period at the prevailing floor plan note interest rate and (b) the interest cost to carry the inventory over the maximum repurchase liability period at the interest rate of a similar type loan without a manufacturer’s repurchase agreement in force.
(2) The Company estimates the contingent obligation to make future payments under its manufacturer’s inventory repurchase commitment for the same pool of commitments as used in the fair value calculation above and records the greater of the two calculations. This SFAS No. 5 contingent obligation is estimated using historical loss factors, including the frequency of repurchases and the losses experienced by the Company for repurchased inventory.
Additionally, subsequent to the inception of the repurchase commitment, the Company evaluates the likelihood that it will be called on to perform under the inventory repurchase commitments. If it becomes probable that a retailer will default and a SFAS No. 5 loss reserve should be recorded, then such contingent liability is recorded equal to the estimated loss on repurchase. Based on identified changes in retailers’ financial conditions, the Company evaluates the probability of default for retailers who are identified at an elevated risk of default and applies a probability of default, based on historical default rates. Commensurate with this default probability evaluation, the Company reviews repurchase notifications received from floor plan sources and reviews retailer inventory for expected repurchase notifications based on various communications from the lenders and the retailers as well as for dealers who, the Company believes, are experiencing financial difficulty. The Company’s repurchase commitments for the retailers in the category of elevated risk of default are excluded from the pool of commitments used in both of the calculations at (1) and (2) above. Changes in the reserve are recorded as an adjustment to sales.
The maximum amount for which the Company was liable under such agreements approximated $18,707 at March 31, 2009, without reduction for the resale value of the homes. The Company had a reserve for repurchase commitments of $741 and $950 at March 31, 2009 and 2008, respectively. The Company incurred a repurchase reserve reduction of $179 during fiscal year 2009 and no repurchase reserve reductions during fiscal years 2008 and 2007, respectively.
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Leases — The Company leases certain equipment and facilities under operating leases with various renewal options. Rent expense was $1,708, $1,790 and $2,032 for fiscal years ended March 31, 2009, 2008 and 2007, respectively. Future minimum lease commitments under all noncancelable operating leases having a remaining term in excess of one year at March 31, 2009, are as follows:
| Fiscal Year | ||||
| 2010 | $ | 1,075 | ||
| 2011 | 916 | |||
| 2012 | 721 | |||
| 2013 | 534 | |||
| 2014 and thereafter | 6 | |||
| $ | 3,252 | |||
Letter of Credit — The Company maintains an $870 outstanding letter of credit with J.P. Morgan Chase Bank N.A. issued to satisfy the remaining requirements of the self-funded workers’ compensation program which concluded on September 30, 2006. There have been no draws against the letter of credit.
Legal Matters — The Company is party to certain legal proceedings that arise in the ordinary course and are incidental to its business. Certain of the claims pending against the Company in these proceedings allege, among other things, breach of contract and warranty, product liability and personal injury. Although litigation is inherently uncertain, based on past experience and the information currently available, management does not believe that the currently pending and threatened litigation or claims will have a material adverse effect on 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 the Company’s consolidated financial position, liquidity or results of operations in any future reporting periods.
5. Valuation Accounts
The following table sets forth certain valuation accounts for the fiscal years ended March 31, 2009, 2008 and 2007.
| Beginning | Ending | |||||||||||||||
| Balance | Charges | Deductions | Balance | |||||||||||||
| Reserve for repurchase commitments: | ||||||||||||||||
| Year ended March 31, 2009 | $ | 950 | (30 | ) | (179 | ) | $ | 741 | ||||||||
| Year ended March 31, 2008 | $ | 1,100 | (150 | ) | — | $ | 950 | |||||||||
| Year ended March 31, 2007 | $ | 1,500 | (400 | ) | — | $ | 1,100 | |||||||||
| Accrual for estimated warranties: | ||||||||||||||||
| Year ended March 31, 2009 | $ | 6,619 | 5,207 | (5,924 | ) | $ | 5,902 | |||||||||
| Year ended March 31, 2008 | $ | 6,590 | 7,081 | (7,052 | ) | $ | 6,619 | |||||||||
| Year ended March 31, 2007 | $ | 6,850 | 7,696 | (7,956 | ) | $ | 6,590 | |||||||||
6. Income Taxes
The provision (benefit) for income taxes for the fiscal years ended March 31, 2009, 2008 and 2007 were as follows:
| Fiscal Year | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| Current | ||||||||||||
| Federal | $ | (1,908 | ) | $ | 733 | $ | 3,511 | |||||
| State | (179 | ) | 161 | 687 | ||||||||
| Total current | (2,087 | ) | 894 | 4,198 | ||||||||
| Deferred | ||||||||||||
| Federal | 1,760 | 1,643 | 1,592 | |||||||||
| State | 191 | 241 | 238 | |||||||||
| Total deferred | 1,951 | 1,884 | 1,830 | |||||||||
| Total provision (benefit) | $ | (136 | ) | $ | 2,778 | $ | 6,028 | |||||
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A reconciliation of income taxes computed by applying the expected federal statutory income tax rates for fiscal years ended March 31, 2009, 2008 and 2007 of 34%, 34% and 35%, respectively, to income before income taxes to the total income tax provision (benefit) reported in the Consolidated Statements of Operations is as follows:
| Fiscal Year | ||||||||||||
| �� | 2009 | 2008 | 2007 | |||||||||
| Federal income tax at statutory rate | $ | 110 | $ | 3,091 | $ | 6,082 | ||||||
| State income taxes, net of federal benefit | 33 | 289 | 602 | |||||||||
| Tax exempt interest income | — | (455 | ) | (556 | ) | |||||||
| Deduction for domestic production | — | (16 | ) | (82 | ) | |||||||
| Other | (279 | ) | (131 | ) | (84 | ) | ||||||
| Total provision (benefit) for continuing operations | (136 | ) | 2,778 | 5,962 | ||||||||
| Income tax provision for discontinued operations | — | — | 66 | |||||||||
| Total income tax provision (benefit) | $ | (136 | ) | $ | 2,778 | $ | 6,028 | |||||
Net current deferred tax assets and net long-term deferred tax liabilities at March 31, 2009 and 2008 were as follows:
| March 31, | March 31, | |||||||
| 2009 | 2008 | |||||||
| Net current deferred tax assets | ||||||||
| Warranty reserves | $ | 2,225 | $ | 2,525 | ||||
| Repurchase reserves | 280 | 362 | ||||||
| Insurance reserves | 443 | 430 | ||||||
| Other (various) | 486 | 716 | ||||||
| $ | 3,434 | $ | 4,033 | |||||
| Net long-term deferred tax (liabilities) assets | ||||||||
| Goodwill | $ | (17,182 | ) | $ | (15,313 | ) | ||
| Depreciation | 181 | 280 | ||||||
| Stock based compensation | 409 | 286 | ||||||
| Net operating loss carryforward | 254 | — | ||||||
| Other | 239 | — | ||||||
| $ | (16,099 | ) | $ | (14,747 | ) | |||
The Company adopted the provisions of FIN 48 on April 1, 2007. FIN 48 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. FIN 48 also provides guidance on derecognizing, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. The adoption of FIN 48 had no significant impact on the Company’s results of operations or balance sheet for the year ended March 31, 2008 and required no adjustment to opening balance sheet accounts as of March 31, 2007.
The Company has recorded an insignificant amount of unrecognized tax benefits during the year and there would be an insignificant effect on the effective tax rate if all unrecognized tax benefits were recognized. The Company classifies interest and penalties related to unrecognized tax benefits in income tax expense. The Company has recorded an insignificant amount of interest and penalties in the statements of operations for the years ended March 31, 2009 and 2008. In addition, at March 31, 2009, the Company has Arizona, California and New Mexico state net operating loss carrryforwards that total $6,864 and that begin to expire in 2014.
Income tax returns are filed in the U.S. federal jurisdiction and in several state jurisdictions. In June 2008, the Company received a notice of examination from the Internal Revenue Service (“IRS”) for the Company’s federal income tax return for the fiscal year ended March 31, 2007. In November 2008, the Company received a letter from the IRS stating that after further review of the Company’s fiscal year 2007 tax returns, the IRS would not continue its examination at that time. The Company is no longer subject to examination by the IRS for years before fiscal year 2006. However, the Company is under audit by the Arizona Department of Revenue for the fiscal years ended March 31, 2004 through March 31, 2006, has not received any indication of required adjustments from the department, and no adjustments have been proposed. The Company is no longer subject to examinations by state tax authorities in Arizona and California for years before fiscal year 2004. 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.
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7. Stock-Based Compensation
The Company maintains stock incentive plans whereby stock option grants or awards of restricted stock may be made to certain of our officers, directors and key employees. The plans, which are stockholder approved, permit the award of up to 1,350,000 shares of the Company’s common stock, of which 554,626 shares were still available for grant at March 31, 2009. 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 vest over a three to five-year period. The stock incentive plans provide for accelerated vesting of stock options and removal of restrictions on restricted stock awards upon a change in control (as defined in the plans).
Prior to April 1, 2006, the Company accounted for stock options issued under the above plans in accordance with the recognition and measurement provisions of APB Opinion No. 25,Accounting for Stock Issued to Employees(“APB 25”), and its related interpretations, as permitted by FASB Statement No. 123,Accounting for Stock-Based Compensation(“FAS 123”). Under the disclosure-only provisions of FAS 123, as amended by FASB Statement No. 148,Accounting for Stock Based Compensation-Transition and Disclosure, no option-based compensation cost was recognized, as all options were granted with an exercise price equal to the fair value of the underlying common stock on the date of grant.
Effective April 1, 2006, the Company adopted the fair value recognition provisions of FASB Statement No. 123 — revised 2004,Share-Based Payment(“FAS 123(R)”), and SEC Staff Accounting Bulletin No. 107 (“SAB 107”), using the modified-prospective transition method. Other than restricted stock awards, no share-based compensation cost had been reflected in net income prior to the adoption of FAS 123(R) and the results for prior periods have not been restated. The recognized compensation costs during the fiscal years ended March 31, 2009, 2008 and 2007 under the modified-prospective transition method include (i) compensation cost for all share-based payments granted prior to, but not fully vested as of April 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123 and (ii) compensation cost for all share-based payments granted subsequent to April 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of FAS 123(R).
Stock option compensation expense under FAS 123(R) decreased income before income taxes by approximately $121, $394 and $778 for the fiscal years ended March 31, 2009, 2008 and 2007, respectively. Total compensation cost, including costs related to the vesting of restricted stock awards, charged against income for the fiscal years ended March 31, 2009, 2008 and 2007 was approximately $137, $412 and $846, respectively.
As of March 31, 2009, total unrecognized compensation cost related to stock options was approximately $334 and the related weighted-average period over which it is expected to be recognized is approximately 2.97 years.
The following table summarizes the option activity within the Company’s stock-based compensation plans for the fiscal year ended March 31, 2009:
| Weighted | ||||||||||||||||
| Weighted | Average | |||||||||||||||
| Average | Remaining | Aggregate | ||||||||||||||
| Number | Exercise | Contractual | Intrinsic | |||||||||||||
| of Shares | Price | Term | Value | |||||||||||||
| Outstanding at March 31, 2008 | 624,580 | $ | 16.62 | |||||||||||||
| Granted | 37,500 | 32.74 | ||||||||||||||
| Exercised | (65,376 | ) | 18.05 | |||||||||||||
| Canceled or forfeited | (20,625 | ) | 35.79 | |||||||||||||
| Outstanding at March 31, 2009 | 576,079 | $ | 16.82 | 2.32 | $ | 3,903 | ||||||||||
| Exercisable at March 31, 2009 | 538,954 | $ | 15.65 | 2.04 | $ | 4,282 | ||||||||||
The weighted-average estimated fair value of employee stock options granted during the fiscal years ended March 31, 2009, 2008 and 2007 were $11.26, $12.59 and $12.55, respectively. The total intrinsic value of options exercised during the fiscal years ended March 31, 2009, 2008 and 2007 were $1,097, $1,494 and $855, respectively.
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The Company uses the Black-Scholes-Merton option-pricing model to determine the fair value of stock options. The determination of the fair value of stock options on the date of grant using an option-pricing model is affected by the Company’s stock price as well as assumptions regarding a number of complex and subjective variables. These variables include actual and projected employee stock option exercise behaviors, the Company’s expected stock price volatility over the expected term of the awards, risk-free interest rate, and expected dividends. The fair values of options granted were estimated at the date of grant using the following weighted average assumptions:
| Fiscal Year | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| Volatility | 36.1 | % | 32.7 | % | 33.8 | % | ||||||
| Risk-free interest rate | 3.0 | % | 4.6 | % | 4.7 | % | ||||||
| Dividend yield | 0.0 | % | 0.0 | % | 0.0 | % | ||||||
| Expected option life in years | 4.45 | 4.50 | 4.25 | |||||||||
The Company estimates the expected term of options granted by using the simplified method as prescribed by SAB 107 and SEC Staff Accounting Bulletin No. 110 (“SAB 110”). The Company uses the simplified method as the Company does not have sufficient historical share option exercise data due to the limited period of time the Company’s equity shares have been publicly traded. The Company estimates the expected volatility of its common stock taking into consideration its historical stock price movement and its expected future stock price trends based on known or anticipated events. The Company bases the risk-free interest rate that it uses in the option pricing model on U.S. Treasury zero-coupon issues with remaining terms similar to the expected term on the options. The Company does not anticipate paying any cash dividends in the foreseeable future and therefore uses an expected dividend yield of zero in the option-pricing model. The Company is required to estimate future forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. The Company uses historical data to estimate pre-vesting option forfeitures and records stock-based compensation cost only for those awards that are expected to vest. The Company recognizes share-based compensation expense using the straight-line attribution method.
Restricted stock awards are valued at the closing market value of the Company’s common stock on the date of grant, and the total value of the award is expensed ratably over the service period of the employees receiving the grants. A summary of restricted stock activity within the Company’s share-based compensation plans and changes for the fiscal year ended March 31, 2009 is as follows:
| Grant-Date | ||||||||
| Shares | Fair Value | |||||||
| Nonvested at March 31, 2008 | 1,524 | $ | 35.41 | |||||
| Vested | (342 | ) | 35.09 | |||||
| Nonvested at March 31, 2009 | 1,182 | $ | 35.50 | |||||
For the fiscal years ended March 31, 2009, 2008 and 2007, the adoption of FAS 123(R) resulted in a reclassification to reduce net cash provided by operating activities with an offsetting increase in net cash provided by financing activities of $274, $470 and $256, respectively, related to incremental tax benefits from stock options exercised during the periods.
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8. Business Segment Information
The Company operates in two business segments — Manufacturing and Retail. Through its Manufacturing segment, the Company designs and manufactures homes which are sold primarily in the Southwestern and South Central United States to a network of retailers which includes Company-owned retail locations comprising the Retail segment. The Company’s Retail segment derives its revenues from home sales to individuals. The accounting policies of the segments are the same as those described in Note 1, “Summary of Significant Accounting Policies”. Retail segment results include retail profits from the sale of homes to consumers but do not include any manufacturing segment profits associated with the homes sold. Intercompany transactions between reportable operating segments are eliminated in consolidation. Substantially all depreciation and capital expenditures are related to the Manufacturing segment. Each segment’s results include corporate office costs that are directly and exclusively incurred for the segment. The following table summarizes information with respect to the Company’s business segments for the periods indicated:
| Year Ended March 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| Net sales | ||||||||||||
| Manufacturing | $ | 101,373 | $ | 134,301 | $ | 161,242 | ||||||
| Retail | 8,807 | 12,429 | 14,807 | |||||||||
| Less: Intercompany | (4,818 | ) | (4,816 | ) | (6,935 | ) | ||||||
| Total consolidated net sales | $ | 105,362 | $ | 141,914 | $ | 169,114 | ||||||
| Income (loss) from operations | ||||||||||||
| Manufacturing | $ | 3,131 | $ | 10,254 | $ | 19,373 | ||||||
| Retail | 33 | 386 | 305 | |||||||||
| Intercompany profit in inventory | 119 | 365 | 284 | |||||||||
| General corporate charges | (3,725 | ) | (4,454 | ) | (4,972 | ) | ||||||
| Total consolidated (loss) income from operations | $ | (442 | ) | $ | 6,551 | $ | 14,990 | |||||
| Total assets | ||||||||||||
| Manufacturing | $ | 96,987 | $ | 99,995 | $ | 99,833 | ||||||
| Retail | 3,071 | 3,550 | 4,424 | |||||||||
| Corporate | 78,573 | 77,705 | 67,880 | |||||||||
| Total consolidated assets | $ | 178,631 | $ | 181,250 | $ | 172,137 | ||||||
Total Corporate assets are comprised primarily of cash and cash equivalents, short-term investments and deferred taxes.
9. Discontinued Operations
The Company has plans to dispose of certain of its retail sales centers and these operations are classified as discontinued retail operations. Finished goods inventories to be liquidated in conjunction with the disposal of these retail sales centers approximated $183, $422 and $768 at March 31, 2009, 2008 and 2007, respectively. Income from discontinued retail operations for fiscal 2007 resulted from better than anticipated results from liquidating retail inventories at our closed locations. Net sales for the retail sales centers to be disposed of were $1,866, $3,221 and $5,251 for the fiscal years ended March 31, 2009, 2008 and 2007, respectively. Income from discontinued retail operations net of income taxes is presented on the Consolidated Statements of Operations.
10. Related Party Transactions
During fiscal 2008, the Company invested $7,000 in the Gabelli U.S. Treasury Money Market Fund. GAMCO Investors, Inc. beneficially owned approximately 10% of our outstanding common shares and thus meets the definition of a principal owner under FASB Statement No. 57,Related Party Disclosures. The Gabelli U.S. Treasury Money Market Fund and GAMCO Investors, Inc. are either directly or indirectly under common control. Interest earned on our investment and reinvested during the fiscal years ended March 31, 2009 and 2008 were $97 and $37, respectively.
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11. Subsequent Event
During May 2009, the Company initiated a plan to move its park model and vacation cabin manufacturing operations from its Specialty plant to a second production line at its Litchfield facility. Both of these plants are located in the metropolitan area of Phoenix, Arizona. This move will provide greater capabilities for the production of park models, cabins, and other specialty buildings, create improved overall operational efficiencies at the Litchfield factory, as well as reduce overhead expenses. The transition is planned to occur primarily during the first quarter of fiscal 2010. The costs associated with this transition are anticipated to be immaterial, and the Company does not anticipate any significant impairment charges for the Specialty facility. Cavco will continue to utilize the Specialty facility for supplemental operations supporting its other factories.
12. Quarterly Financial Data (Unaudited)
The following tables set forth certain unaudited quarterly financial information for the years ended March 31, 2009 and 2008.
| First | Second | Third | Fourth | |||||||||||||||||
| Quarter | Quarter | Quarter | Quarter | Total | ||||||||||||||||
| Fiscal year ended March 31, 2009 | ||||||||||||||||||||
| Net sales | $ | 35,509 | $ | 30,030 | $ | 25,093 | $ | 14,730 | $ | 105,362 | ||||||||||
| Gross profit | 4,188 | 3,701 | 2,653 | 229 | 10,771 | |||||||||||||||
| Net income (loss) | 853 | 518 | 110 | (1,023 | ) | 458 | ||||||||||||||
| Net income (loss) per share: | ||||||||||||||||||||
| Basic | $ | 0.13 | $ | 0.08 | $ | 0.02 | $ | (0.16 | ) | $ | 0.07 | |||||||||
| Diluted | $ | 0.13 | $ | 0.08 | $ | 0.02 | $ | (0.16 | ) | $ | 0.07 | |||||||||
| Fiscal year ended March 31, 2008 | ||||||||||||||||||||
| Net sales | $ | 37,366 | $ | 38,435 | $ | 31,909 | $ | 34,204 | $ | 141,914 | ||||||||||
| Gross profit | 5,440 | 5,548 | 4,588 | 4,800 | 20,376 | |||||||||||||||
| Net income | 1,735 | 1,909 | 1,365 | 1,303 | 6,312 | |||||||||||||||
| Net income per share: | ||||||||||||||||||||
| Basic | $ | 0.27 | $ | 0.30 | $ | 0.21 | $ | 0.20 | $ | 0.98 | ||||||||||
| Diluted | $ | 0.26 | $ | 0.29 | $ | 0.20 | $ | 0.20 | $ | 0.95 | ||||||||||
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EXHIBIT INDEX
| Exhibit | Filed Herewith or | |||||
| Number | Exhibit | Incorporated by Reference | ||||
| 3.1 | Restated Certificate of Incorporation of Cavco | Exhibit 3.1 of the Annual Report on Form 10-K for the fiscal year ended March 31, 2004 | ||||
| 3.2 | Certificate of Amendment to Restated Certificate of Incorporation of Cavco | Exhibit 3.1 of the Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2006 | ||||
| 3.3 | Amended and Restated Bylaws of Cavco | Exhibit 3.2 of the Annual Report on Form 10-K for the fiscal year ended March 31, 2004 | ||||
| 10.1 | * | Stock Incentive Plan of Cavco | Exhibit 10.6 to the Registration Statement on Form 10/A (File No. 000-08822) filed by Cavco on April 23, 2003, as amended by Form 10/A dated May 21, 2003, Form 10/A dated May 30, 2003, Form 10/A dated June 17, 2003, and Form 10/A dated June 20, 2003 | |||
| 10.1.1 | * | Form of stock option agreement for Stock Incentive Plan | Exhibit 10.1a of the Annual Report on Form 10-K for the fiscal year ended March 31, 2005 | |||
| 10.1.2 | * | Restricted Stock Award Agreement, dated June 30, 2003, between Joseph H. Stegmayer and Cavco | Exhibit 10.4 of the Annual Report on Form 10-K for the fiscal year ended March 31, 2004 | |||
| 10.1.3 | * | Restricted Stock Award Agreement dated June 1, 2007, by and between Daniel L. Urness and Cavco | Exhibit 10.2 of the Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2007 | |||
| 10.1.4 | Form of Stock Option Agreement for Stock Incentive Plan | Exhibit 10.18 of the Annual Report on Form 10-K for the fiscal year ended March 31, 2008 | ||||
| 10.2 | * | Cavco 2005 Stock Incentive Plan | Exhibit A to the Corporation’s Definitive Proxy Statement for its 2005 Annual Meeting of Stockholders filed by the Corporation with the Securities and Exchange Commission on May 23, 2005, and incorporated by reference herein (this Exhibit is filed as an Exhibit to the Corporation’s Registration Statement on Form S-8 (No. 333-132925), filed with the Securities and Exchange Commission on April 3, 2006) | |||
| 10.2.1 | Representative Form of Restricted Stock Award Agreement for the applicable Cavco stock incentive plan | Exhibit 10.1 of the Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2007 | ||||
| 10.2.2 | Form of Stock Option Agreement for Stock Incentive Plan | Exhibit 10.18 of the Annual Report on Form 10-K for the fiscal year ended March 31, 2008 | ||||
| 10.3 | * | Employment Agreement, dated June 30, 2003, between Joseph H. Stegmayer and Cavco | Exhibit 10.2 of the Annual Report on Form 10-K for the fiscal year ended March 31, 2004 | |||
| 10.4 | * | First Amendment to Employment Agreement, dated March 26, 2007, between Joseph H. Stegmayer and Cavco | Exhibit 10.4 of the Annual Report on Form 10-K for the fiscal year ended March 31, 2008 | |||
| 10.5 | * | Vice President and Chief Financial Officer Incentive Compensation Plan for Fiscal Year 2007 | Exhibit 10.1 of the Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2006 | |||
| 10.6 | * | Vice President and Chief Financial Officer Incentive Compensation Plan for Fiscal Year 2008 | Periodic report on Form 8-K filed on June 7, 2007 | |||
Table of Contents
| Exhibit | Filed Herewith or | |||||
| Number | Exhibit | Incorporated by Reference | ||||
| 10.7 | * | Vice President and Chief Financial Officer Incentive Compensation Plan for Fiscal Year 2009 | Periodic report on Form 8-K filed on July 14, 2008 | |||
| 10.8 | * | Amendment to Vice President and Chief Financial Officer Incentive Compensation Plan for Fiscal Year 2009 | Periodic report on Form 8-K filed on May 14, 2009 | |||
| 10.9 | Distribution Agreement, dated May 30, 2003, among Centex, Cavco Industries, LLC, and Cavco | Exhibit 10.9 of the Annual Report on Form 10-K for the fiscal year ended March 31, 2004 | ||||
| 10.10 | Tax Sharing Agreement, dated June 30, 2003, among Centex, Centex’s Affiliates, and Cavco | Exhibit 10.10 of the Annual Report on Form 10-K for the fiscal year ended March 31, 2004 | ||||
| 21 | List of Subsidiaries of Cavco | Filed herewith | ||||
| 23 | Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm | Filed herewith | ||||
| 31.1 | Certificate of Joseph H. Stegmayer, Chief Executive Officer, pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended | Filed herewith | ||||
| 31.2 | Certificate of Daniel L. Urness, Chief Financial Officer, pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended | Filed herewith | ||||
| 32.1 | ** | Certification of Chief Executive Officer and Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | Furnished herewith | |||
| * | Management contract or compensatory plan or arrangement. | |
| ** | These certifications are not “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section. These certifications are not to be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, unless Cavco specifically incorporates them by reference. |